Report No. 21411-VN Vietnam 2010 Entering the 21St Century Joint Report of World Bank, Asian Development Bank and United Nations Development Program (UNDP) November 29, 2000 Poverty Reduction and Economic Management Unit East Asia and Pacific Region Document of the World Bank CURRENCY EQUIVALENTS CURRENCY UNIT = DONG US$ = 14459 DONG (November 2000) ABBREVIATIONS AND ACRONYMS AFTA ASEAN Free Trade Area BOT Build-Operate-Transfer EIA Environment Impact Assessment EVN Electricity of Vietnam FDI Foreign Direct Investment GSO Government Statistics Office HDI Human Development Index HEPR Hunger Eradication and Poverty Reduction ICT Information and Communication Technology IDG International Development Goals IT Information Technology MARD Ministry of Agriculture and Rural Development MFN Most Favored Nation MOC Ministry of Construction MOET Ministry of Education and Training MOF Ministry of Finance MOH Ministry of Health MOLISA Ministry of Labor, Invalids, and Social Affairs MOT Ministry of Transport MOSTE Ministry of Science, Technology and Environment MPI Ministry of Planning and Investment NEA National Environment Agency NPL Non-Performing Loans ODA Official Development Assistance PAR Public Administration Reform PIP Public Investment Program PPI Private Participation in Infrastructure QR Quantitative Restrictions SBV State Bank of Vietnam SOCB State Owned Commercial Bank SOE State Owned Enterprise VBARD Vietnam Bank for Agriculture and Rural Development VBP Vietnam Bank for the Poor VLSS Vietnam Living Standards Survey USBTA United States Bilateral Trade Agreement GOVERNMENT FISCAL YEAR January 1 to December 31 Regional Vice President: Mr. Jemal-ud-din Kassum, EAP VP Country Director: Mr. Andrew Steer, EACVF Sector Director: Mr. Homi Kharas, EASPR Task Team Leader: Ms. Nisha Agrawal, EACVF Acknowledgements The Vietnam Development Report 2001 on "Vietnam 2010: Entering the 21st Century" is the product of partnerships in Vietnam. Part I of the Report entitled "Pillars of Development" has been produced by the World Bank, with the Asian Development Bank and United Nations Development Programme. Part II of the Report entitled "Partnerships for Development" is based on contributions from the many joint Government-donor-NGO partnership groups that exist in Vietnam, all working together to improve the developmental impact of Vietnam's resources. We would like to thank Mr. Nguyen Van Phuc (MPI) for all his help in coordinating the inputs for this Report from the Government's side. The team is also grateful for guidance from: Professor Le Dang Doanh, Director of CIEM; Mr. Nguyen Quang Thai, Vice Director of DSI; Ms. Thanh Thi Tuyet, Specialist of NERC; Ms. Dinh Thi Chinh, Projection Specialist, MPI; Mr. Nguyen Van So, Projection Specialist, MPI; Ms. Pham Chi Lan, Vice President of VCCI; Mr. Nguyen Quang Huy, Deputy Director, SBV; Mr. Nguyen Toan Thang, Director of the General Economic Dept., Party's Economic Commission; Mr. Nguyen Thang, Economist, Pricing Committee; Mr. Nguyen Van Thu, Director of Planning, MOT; and Ms. Dinh Hoang Yen, Specialist, MOT. This Overview was written by Andrew Steer, Nisha Agrawal and Carrie Turk (World Bank). The Report was prepared by a team led by Nisha Agrawal under the overall guidance of Andrew Steer and Homi Kharas (World Bank). The team is also grateful for the guidance received from John Samy (ADB), Edouard Wattez (UNDP); and for the support from DFID. Peer Reviewers: Tamar Manuelyan Atinc and Soe Lin (World Bank); Alan Johnson (DFID) and Ramesh Singh (Actionaid). Publishing and Other Support: Phung Thi Tuyet, Nguyen Thi Minh Hoa, Hoang Thanh Ha, and Tran Kim Chi (World Bank). PREFACE The Vietnam Development Report 2001 entitled "Vietnam 2010: Entering the 21st Century" is a three-volume set consisting of an Overview and two parts. Part I of the Report entitled "Pillars of Development" provides a commentary on the emerging draft Ten Year Socio-Economic Development Strategy for 2001-2010. This important document lays out the vision and the strategic directions for Vietnam during the first decade of this new millennium. It is currently in draft form and is undergoing an extensive process of consultation within the Government (at national and local levels) and the society at large. The draft will be presented to donors and discussed at the "Millennial Consultative Group Meeting" in December 2000. Part I of this Report aims to guide these discussions. It has been written by the World Bank in partnership with ADB and the UN System. Part I of the Report comments on the comprehensive development agenda laid out for the next decade. It starts with a framework for rapid growth and poverty reduction and then examines the strategies required for: (i) enterprise development; (ii) rural development; (iii) human and social development; (iv) infrastructure development; (v) environmental quality; and (vi) good governance. Since the Government is formulating a long-term development agenda, it will need to take a comprehensive approach to development and tackle all these "pillars" of development. Without progress on all fronts, Vietnam will not be able to achieve the economic and social transformation that it desires. A balanced attack across all fronts does not, however, imply that everything needs to be done at once. What is needed to prioritize actions is an identification of the bottlenecks-the hard to solve problems that are impediments to success- and to begin by attacking these first. What is also needed is that the energies of all of Vietnam's development partners are harnessed so that they are all working together in partnership to make all of Vietnam's resources-including aid resources-more effective. Part II of the Report entitled "Partnerships for Development" addresses this theme of stronger partnerships to help the Government of Vietnam to attain its vision and implement its strategy. It brings together a series of thematic notes on Vietnam's development strategy, prepared by the development partnership groups in Vietnam. These notes seek to describe and distil Vietnam's goals and the steps needed to get there. They also describe how the donor community can help Vietnam in attaining its vision. The work of the development partnerships, and the production of these notes, are indicative of an important new direction in international development cooperation, both in Vietnam and in many other countries. Around the world, there is a recognition that the old ways of working have not produced the results that had been expected. The current time in Vietnam offers international partners the opportunity to actively listen to the Government's articulation of its long-term development goals and to work together to identify and address the constraints and roadblocks that would prevent the goals being reached. Overview TABLE OF CONTENTS Overview ............................................................I I. The Economic Framework for Growth and Poverty Reduction (Chapter 1) . 3 II. Creating a Supportive Climate for Enterprise (Chapter 2) .7 III. Transforming the Rural Economy (Chapter 3) .11 IV. Enhancing Human Capacity (Chapter 4) .14 V. Providing Efficient Infrastructure Services (Chapter 5) .16 VI. Improving Environmental Quality (Chapter 6) ........................................................... 19 VII. Building Modem Governance (Chapter 7) ........................................................... 20 VIII. Support from the International Community ..................................... ...................... 24 Tables: Table 1: Macroeconomic goals for 2001-2010 -- and a comparison with the 1990s .....................3 Table 2: School Enrollment Rates by Ethnicity, 1998 ........................................................... 16 Boxes: Box 1: KEY DECISIONS: How to Benefit from Globalization .... while Managing the Costs?. 8 Box 2: KEY DECISIONS: An Equal Opportunity for the Private Sector ... or State Dominance of Key Sectors? ........................................................... 10 Box 3: KEY DECISIONS: What Path to a Knowledge-Based Economy'? ................ .................. 15 Box 4: KEY DECISIONS: "Growth Poles" ... or Balanced Growth o 18 Box 5: KEY DECISIONS: What Role for the State in a "Market-Oriented Socialist Economy" 21 Box 6: KEY DECISIONS: How to Allocate Scarce Public Expenditures? .................. ............... 22 Figures: Figure 1: Sectoral GDP Change (percentage point) ..................... ...............................4 Figure 2: Histogram of per capita expenditures, 1998 and 2010 ....................................................5 Figure 3: The Six Pillars of Comprehensive Development ..................................................... 6 OVERVIEW Overview Vietnam 2010: Entering the 21st century OVERVIEW 1. Vietnam's Socio-Economic Development Strategy for the first decade of the 21st Century is currently under preparation. The Strategy envisages a Vietnam that: * has an economy with sustainable and rapid development; * aspires to be a just and stable society with a high quality of life for all of its people; * maintains the best of Vietnamese culture and traditions; * aims to become a socialist market economy, fully integrated into the global economy, and competitive internationally; and * intends to have the characteristics of an industrialized and knowledge-based society within twenty years. 2. This vision is articulated using specific targets. Among the quality of life targets for 2010 are the following: * Eradication of hunger and hard-core poverty; * Universalization of lower secondary education for all; * Malnutrition rate of children to be reduced from a third to 15-20%; * Life expectancy to increase from 68 to 70-71 years; * Access to clean water in urban areas to rise from 65% to 90%; * Forest coverage to rise from 2Si,u to 43%. These are to be attained through rapid grovth and a change in the structure of the economy to a more modern, industrial and urban one that can create better-paving jobs: * A doubling of GDP by 2010 to be attained through economic growth of over 7% per annum; * Investment to be increased to 30% of GDP; * Exports to grow at more than twice the rate of GDP; * The share of agriculture in GDP to decline from 25% to 16-17%; industry to increase from 35% to 40-41%; and services to increase from 40% to 42-43%; * The share of rural employment to decline fronm about two-thirds to half; and * The share of urban population to increase from a quarter to a third. 3. These are ambitious goals, but appropriate. While the progress achieved over the past decade has been impressive by almost any standards, Vietnam remains a very poor country 1 Overview whose huge development potential is as yet largely untapped. While the share of the population in poverty has been cut in half over the past decade, some 30 million people, or around 37 percent of the population are estimated to live in poverty. ' Currently, around 25 million people accounting for 60 percent of the labor force are unemployed or underemployed. And each year in the coming decade, over one million people will be added to the workforce. 4. This Report explores the steps required to reach Vietnam's development goals over the coming decade. It begins (Chapter 1) with an analysis of the economic framework for equitable growth and poverty reduction for the coming ten year period. It finds that the proposed growth rates, and their linkage to savings and investment rates and to the external accounts are internally coherent, and consistent with what has been achieved in other East Asian countries at similar periods of development. But drawing upon the experience of other countries, it is clear that achieving the goals will require serious policy and institutional change across a broad array of activities. 5. Vietnam's strategy calls for not only a high "quantity" of growth, but also a high "quality". Experience around the world shows that while growth is essential to reduce poverty, similar growth rates can have very different impacts on poverty reduction. Vietnam's goal is to share the fruits of growth broadly across all segments of the population, and also to avoid the inequities, social exclusion, and environmental degradation that has often accompanied other countries' rapid economic growth. This is a difficult challenges, calling for a comprehensive approach to policy and institutional change. With this in mind, this report is organized around six development "pillars" that will need to be built - and have been identified by the Government - if the goals are to be reached. In the coming decade strong actions will be required by Government, and strong support from Vietnam's development partners, in: * Creating a Supportive Climate for Enterprise (chapter 2) * Transforming the Rural Economy (chapter 3) * Enhancing Human Capacity (chapter 4) * Providing Efficient Infrastructure Services (chapter 5) * Improving Environmental Quality (chapter 6) * Building Modern Governance (chapter 7). 6. In each of these areas, the Report draws upon the experience of other countries to recommend the steps that will be required to reach the targets set out in the strategy. Without progress on all fronts, Vietnam will not be able to achieve the economic and social transformation that it desires. A balanced attack across all fronts does not, however, imply that everything needs to be done at once. What is needed to prioritize actions is an identification of the bottlenecks-the hard to solve problems that are impediments to success-and to attack these first. Vietnam's development partners have an important role to play in helping to make all of Vietnam's resources-including ODA-more effective. This theme of stronger partnerships for Vietnam's development is the topic of Part II of this Report (entitled "Partnerships for Development"). 1 This poverty incidence is measured according to intemationally defined measures of poverty, as described in "Vietnam: Attacking Poverty" (1999). 2 Overview 7. Cutting across these development pillars are a number of large -- and difficult -- decisions that Vietnam is struggling with, and which will fundamentally affect Vietnam's development path in the coming decade. Some the most important such decisions are highlighted in Boxes in the Overview: 1. How to benefit from globalization... while managing the costs? 2. An equal opportunity for the private sector... or state dominance of key sectors? 3. What path to a knowledge-based economy? 4. "Growth poles" ...or balanced growth? 5. What role for the State in a "market-oriented socialist economy"? 6. How to allocate scarce public expenditures? I. THE ECONOMIC FRAMEWORK FOR GROWTH AND POVERTY REDUCTION 8. On the face of it Vietnam's growth targets for the 2001-2010 period appear well within reach. Over the past decade, Vietnam has scored better on most of the aggregate indicators than are targeted in the coming decade (see Table 1). In reality, however, it is likely that continuing the growth rates of the 1 990s will be more difficult, for two reasons: * First, the dramatic supply response following the sequential liberalization of agriculture, small scale services, and foreign investment is no longer available. It needs to be supplemented by an equal liberalization in the manufacturing sector, where the supply response cannot be taken for granted, but will need to be eamed through a consistent incentive frarmework. * Second, the kinds of policy changes required to promote a new round of growth - discussed in the next section - are technically, politically and socially more difficult than those of the first round of doi moi. Table 1: Macroeconomic goals for 2001-2010 - and a comparison with the 1990s Indicator Target average annual Actual average annual growth rate - 2001-10 growth rate- 1990-00 GDP 7-8 7.6 Agriculture 4 4.2 Industry 10 11.2 Services 7 7.2 GDP per capita 5.8 6.0 Export earning growth 14 20.5 Manufactured exports 18.5 28.2 Labor Force 2.4 2.8 Note: All values real growlth rates. Source: Draft Strategy and World Bank Staff estimates. 3 Overview 9. The doubling of the size of Vietnam's economy envisaged over the coming decade, will need to be accompanied by a shift in the structure of the economy. The shift envisaged in the strategy - whereby agriculture continues to decline in importance, while industry becomes the key driver - is consistent with the pattern in other successful East Asian countries at similar stages of development ( Figure 1). This shift - whereby workers gradually move out of agriculture into better paying jobs in manufacturing, and thus enabling those staying in agriculture to enjoy higher returns - is essential to further success in rapid poverty reduction. But it also raises important challenges, and introduces potential social and environmental stresses. Other countries that have paid inadequate attention to balanced growth have found that such phases have been accompanied by growing inequalities, and widening urban-rural gaps. As in other countries, long-term development in Vietnam will entail structural shifts in the economy 10.0 5.0 ] o.o - - ----__ -10.0 _ -15.0l VYam (2001.10) Chia (11.99) Ko., Rap. (1978.8) indonesa(197 7) MWAyOVA (19787) Tha9nd (1981-80) EAgriculture *Industry °Services l Figure 1: Sectoral GDP Change (percentage point) Source: Government of Vietnam and World Bank, SIMA database. 10. This issue is illustrated in Figure 2, which projects poverty reduction under two scenarios. In both scenarios overall economic growth is assumed to be 7 percent per year, but in the first the growth is assumed to be shared equitably across all areas and people. In the second scenario it is assumed that rural GDP rises at the same rate as the growth of agriculture (assumed to be 4 percent per year), while urban GDP grows at roughly the rate of the industrial sector (about 10 percent per year). Under the first scenario the number of people in poverty falls by almost 20 million over the decade, and median expenditures rise by 70 percent, while under the second, the number in poverty falls by only 12 million, (and most of those remain highly vulnerable to shocks that would push them back into poverty), and median expenditures rise only half as much--by only 34 percent. Should Vietnam be successful in achieving 7 percent growth, the actual outcome in terms of poverty reduction is likely to be between these two scenarios. Just where within this range will depend on policies chosen, and will fundamentally affect Vietnam's development trajectory, its social structure and its rural-urban drift for decades to come. 11. For all these reasons the comprehensive approach to development suggested in the Government's strategy document and explored in chapters 2 -7 of this report is so important. In this regard, also, the approach of this report picks up from last year's Vietnam Development 4 Overview Report, "Attacking Poverty", which laid out a three-fold imperative for poverty reduction. First, opportunity - access to jobs, credit, land, education etc -- must be provided. Second, measures to ensure equity - in access to services, jobs, and investments - must be implemented. Third, special actions to address vulnerability - to disease, job loss, and natural disaster - should be given priority. Last year's report ended with a recommendation that these imperatives should be factored into all of the areas now addressed in this year's report (Figure 3). In 1998, 37% of the population was under the poverty line .15 0 O Real pdr capita expenditure (VND 000'g) 10000 If growth in the next decade is equitable, many will cross the poverty line .15 t_ ........~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~..... 0 O . O Real per capita expendi'ture (VND 000's) 109000 With uneven growth, more people remain under or near the povery line .15- o 0 Real per capita expenditure (VND 00's) 10000 Figure 2: Hstogram of per capita expenditures, 1 the and 2010 1 Figure 3: The Six Pillars of Comprehensive Development Creatinz a Supportive Transformiog the Enhancing Providina Imurovinr Buildin_ Modern Climate for Enterurise Rural Econory Human Capacity Efficient Environmental Governance Infrastructure Oualitv Services - Trade Policy - Agricultural - Education - Transport - Natural - Public _ - Private Sector Intensification - Knowledge - Energy Resource Administration Private Sector Kilowledge - Energy ~~ ~~~~Management Reformn 0 Development - Agricultural I;SOE Reform .iversication . ~- Health - Water and (forestry, soil, o ~~~~- SOE Reform Diversificato Ppltion Sanitation water) - Tmnprncy & 0 -~~~~~~~~~~~ ~ Off-farm - Population Sntiowae)Accountability - Banking Reform n Industrial Employment - Targeted Pollution - Legal Systems 0 ~~~~~~~~~- Remote & Povertytio 0 Upland Area Programs Bio-diversity - articiption 4u ~~~~~~Development - Safety Nets Preservation -Anti-corruption 0 . Creating c Opportunity Ensuring Equity Reducing Vulnerabilty Overview II. CREATING A SUPPORTIVE CLIMATE FOR ENTERPRISE (CHAPTER 2) 12. Vietnam's strategy recognizes that in order to achieve the goals for the coming decade, the rate of investment will need to be raised (from the present 23% to 30%/6), and the productivity of investment will need to be raised. This raises three difficult challenges: * How to generate a climate in which investors are willing to take risks and invest; * How to raise domestic and foreign savings so that the investment can be financed; * How to tap into knowledge and technology, so that productivity of investment can be increased. 13. Fortunately, there is a set of measures-- integration into the world economy, empowering the private sector, and reforming banking and state-enterprise systems -- that will help address these challenges simultaneously. The Government has decided in principle to move resolutely to adopt these measures in the coming years. What will be necessary to create a strong response from investors and savers will be early indications of credible and effective implementation. 14. Integration Into the World Economy. Over the past decade, Vietnam has significantly opened up to international trade and investment. Exports are equivalent to 44% of GDP (compared to an average of 27% for developing countries) and the share of the non-state sector in exporting has risen from near zero at the beginning of the decade to 65% today. Nonetheless, Vietnam's trade regime today remains distorted, with effective rates of protection of over 100% in many industries. While this has encouraged investment in these highly protected industries, it has enabled these industries to stay uncompetitive, and has led to high prices for Vietnamese consumers and businesses. Businesses have to pay higher prices for steel, cement and telecommunications, thus placing them at a serious competitive disadvantage; farmers have to pay 40% more for fertilizers than farmers in other countries (while also being penalized by rice export quotas); and consumers have to pay twice as much for goods such as electric fans and motorcycles than citizens in surrounding countries. 15. Like a growing number of countries, Vietnam recognizes that the process of globalization presents both an opportunity and a challenge (see Box 1). Vietnam's decision to honor its commitments under AFTA and to sign the Bilateral Trade Agreement with the US, will have great gains for Vietnam in terms of exports, investment opportunities, acquisition of technology, and poverty reduction. Indeed, it would be wise to accelerate the implementation of commitments made under AFTA. By agreeing on a specific time-bound program of integration over the coming years, Vietnam is acting smartly. It gives potential investors a clear timeline, and thus facilitating investment preparation; and it gives those industries which may be adversely affected clear notice that they must adapt or downsize. It is vital that actions follow the announced timeline, as slippages will threaten the credibility of the entire transition. The time must be used wisely in the interim to put in place a clear and supportive social safety net for any workers who may need to shift industries, and also to build flexibility in the SOE sector. There is a serious risk, however, of investing heavily in SOEs in the near term in an effort to make them competitive when protection is reduced. 16. In our view, Vietnam's target export growth of 15% per year on average in the 2001- 2010 period is attainable if it follows through on its trade policy decisions, and implements the additional measures below. 7 Overview Box 1 KEY DECISIONS How to Benefit from Globalization .... while Managing the Costs? The Gains of Globalization. Even while the global population has grown from 1.8 billion to 6 billion over the past century, average income levels have risen six-fold. Average global per capita income today exceeds that of the nichest country at the turn of the century. And today's average life expectancy exceeds that of the lead country 100 years ago. "Globalization!' -- the worldwide circulation of goods, capital, information, technology and people - has played a central catalytic role in promoting this increased prosperity . But as the pace of integration has accelerated over the past twoI decades due to technological innovation and a worldwide movement to embrace freer markets, concems have grown that the costs of globalization -- in terms of redundancy, loss of sovereignty, and culural homogenization - also need to be thoughtfully managed. Vietnam's Integration program. It is therefore understandable that Vietnam is entering the global economy with both hopes and fears. The Government has laid out its plans to move forward with each of the three central elements of an integration strategy - freedom of trade, freedom of foreign investment, and opening to global knowledge through information and communications technology (ICI). Failure to move on all three fronts will significantly reduce the benefits to Vietnam and could even add further distortions. Thus, for example, over the past five years the failure to reduce protection while opening to foreign investment has led to a misallocation of FDI, as more than 50%/o of inflows went to industries with more that 90% effective protection rates. Announced time-bound programs of integration in all three areas provide opportunifies to address the social costs of adjustment and can help reduce resource misallocation due to distortions. Information and Communications Technology. It is in ICI that Vietnam lags farthest behind, and this will prove costly unless addressed quickly. Access to lnternet remains highly constrained with only I person in 800 enjoying access. Quick progress is possible, as illustrated by China where over the past two years the number of users has risen from 2 million to 20 million. Vietnam's plans to bring Internet access to every secondary school by the end of the upcoming decade is laudable, but probably much too slow. Intemational telephone charges - among the highest in the world - must also be brought down sharply if Vietnam is to compete. Addressing the Costs of Integration. A three-pronged strategy to deal with the costs of integration has been found useful in other countries facing similar challenges. First, phase in changes in a pre announced manner, thus allowing space for preparation and adjustment. This is Viecinim's prrent policy. Second, ensure an environment of economic growth and opportunity, thus allowing alteriative employment, for those workers needing to change jobs (as Vietnam did very successfully when it downsized its SOEs in the early 1990s). Third, take measures to address specific costs. Vietnam's Social Fund for financing redundancies is an exazmple. Measures to address potential cultural dilution should be promoted - such as investment in Vietnamese language web sites and the like. Donors should be willing to help finance such measures as part of their support for the doi moi program. 17. Encouraging the Private Sector. If investment rates are to rise as needed, we estimate that domestic private investment will need to rise from the current low level of around 7% of GDP to 12-15% of GDP for the 2001-2010 period. To date in Vietnam the climate for the private sector has been grudging rather than supportive. Here Vietnam differs markedly from China, where the private sector has been recognized as a key partner in development and poverty reduction. During the 1990s the number of private firms in China increased more than ten-fold (from 100,000 to well over I million), while private output and employment grew at average 8 Overview annual rates of 70% and 40% respectively. There are indications that the climate in Vietnam is also improving. The Enterprise Law, which has substantially simplified business start-up has led to the registration of more than 10,000 additional domestic firms in the first nine months of this year. However, domestic firms still number less than 30,000 and produce well under 10% of GDP. A major recent analysis of the private sector in China finds that changing attitudes -- of officials and bankers - towards private enterprise, are often even more important than improvements in the legal and regulatory framework. 18. The draft Strategy promises a level playing field for the private sector. This will require three sets of actions: * A shift in the social and administrative culture from one of reluctance and control towards one of active support and encouragement; * An introduction of a transparent and predictable regulatory framework, where discretionary actions on the part of officials are minimised; * Development of a financial system that allocates funds based on risk and expected return, and a clearer legal framework for land use rights and collateral arrangements. 19. Mobilizing Foreign Direct Investment. The Government rightly envisages foreign investment playing an important role in bringing investment and technology into Vietnam. During the past decade Vietnam benefited disproportionately from direct investment inflows which were on average equivalent to 5.5% of GDP (compared to an average of 0.9% for all developing countries and 1.1% for China). The Government projects a similar level of inflows for the current decade. This is possible, but not under the present environment. The large inflows of the mid-1990s must not be understood as normal. Vietnam's attractiveness has sunk in recent years as other countries have become more attractive, and the high cost of doing business in Vietnamn - in the form of delays in approvals, perceived capricious shifts in the regulatory environment, corruption, weak access to the Internet, very high telecommunications charges etc - have become evident. These perceptions can be reversed with strong action, but even so, Vietnam should realistically be aiming at inflows of $1 billion per year in the near term rather than the $2 billion envisaged. 20. Reforming Banks and State-Owned Enterprises. Vietnam's economic goals remain seriously threatened by a large number of loss-making SOEs, whose inefficiencies are enabled by a banking system that is in turn weakened by them. SOEs still absorb around half of all bank credit, while contributing no significant employment growth. By enjoying preferential access to the state banks they have delayed the introduction of modern banking methods and contributed to a large overhang of non-performing loans (estimated at $2-4 billion). 21. The Government's announcement to move forward with banking and SOE reform offers hope that this major impediment to development can be addressed. The Government's plan to equitize, divest or close one-third of the 5300 SOEs in the coming three years is an important step, which if implemeited firmly can make a very positive contribution. But even more important will be the policies adopted for the remaining SOEs. The parallel recent decision to reforn the state banking system - by separating commercial from "policy" lending, systematically addressing the problem of non-performing loans, and creating incentives for sound banking - is a central element to the solution in that it will over time prohibit the roll-over 9 Overview of bad loans. But serious banking reform will take at least five years, and will require a cultural and behavioral shift within the banking profession, as well as strong leadership from the top. In the meantime, it is vital that the SOEs be subjected to greater discipline and transparency. The Government's decision to expose some of the major SOEs to international-standard audits will help. Publishing audited accounts so that policymakers and citizens can know how public assets are being managed will help more. 22. At root there remains an internal contradiction in the draft Strategy with regard to the role of the SOE sector (see Box on Key Decision 2) that will need to be addressed if Vietnam's goals are to be reached. Associated with this is a risk that heavy investment will be channeled to the SOEs in the near term in an effort to prepare them for the competitive environment they will need to face in later years. Such investment needs to be undertaken with great care. Experience in numerous countries suggests that usually rather than preparing domestic enterprises for competition, such actions serve to build up opposition to such competition. Box 2 KEY DECISIONS An Equal Opportunity for the Private Sector ... or State Dominance of Key Sectors? As Vietnam seeks to attract high quality long term investment, it will need to provide greater clarity and consistency of the regulatory and incentive structure than in the past. The draft Ten-year Strategy document seems to provide mixed messages on this point. On the one hand it provides a strong statement that: "A11l enterprises, regardless of their ownership structure will be enicouraged to enjoy an environment of long-term development. cooperation and equal competition ".(p2O) But it also lays out a goal of SOE dominance in many key industries: "SOEs shall be the leading actors in developing production of important materials and in high- tech industries. [SOEs will be strengthened] to take control of economic groups in petroleum, electricity, coal, airlines, railways, marine transport, telecommunications, mechanics, construction materials.. fertilizers, banking, insurance and auditing. "(p 20) There are two ways in which such statements might be interpreted so as to be consistent with each other: S First, some sectors could be excluded from "equal competition" and be reserved essentially for SOE dorminance. If so, these sectors should be specified clearly as such, so as not to unrealistically raise expectations, and poison Vietnam's reputation as an attractive country for investment. The dangers of this approach are that these industries, by not having to compete, may remain at below international levels of efficiency, and thus prices would remain high and competitiveness diminished. This approach would likely also be inconsistent with WTO accession. * Second, the strategy may be to restructure and strengthen certain SOEs in key sectors now so that they will be able to compete openly on an equal footing with private investors when these industnes are fully opened later in the decade. The dangers here are that large sums of investment funds would be allocated early in the decade in an effort to make these SOEs efficient, thus preventing funds being spent elsewhere. There is also a likelihood that, even with restructuring, many SOEs would still be uncompetitive within an unprotected market. Some countries have managed to sustain a small number of competitive SOEs in key sectors, but these are the rarity in today's world. The secret to their success is that they are subjected to tough standards of transparency (including publishing audited accounts), independence of management from political interference, and the freedom to be flexible in today's highly competitive marketplace. 10 Overview III. TRANSFORMING THE RURAL ECONOMY (CHAPTER 3) 23. The coming decade will need to see dramatic changes in rural areas if Vietnam is to achieve its development goals. Raising living standards in rural areas - the home of 75% of the population and 90% of the poor - is perhaps the most difficult challenge facing Vietnam in the coming decade. Already, farm sizes, on average only 0.8 hectare, provide only part time work for most farm families, and the lack of growth of off-farm opportunities has been a major disappointment of the last decade. Like all low income agricultural countries, Vietnam needs to adopt a seemingly paradoxical stance of giving a high priority to raising agricultural productivity while recognizing that success can come only as agriculture declines as an employer of labor. In transforming the rural sector so that it helps rather than hinders the attainment of the development vision, Vietnam faces four rural imperatives: 24. Intensifying Agricultural Production. The successful growth of agricultural production (4.9% average annual growth) during the l990s was largely due to increased labor and capital inputs, which combined accounted for 87% of the growth. Land expansion accounted for 9% of the gains, and technology improvement only 4%. Vietnam's rice yields are still well below China's, offering scope for further gains, but the coming decade will need to see different drivers of growth, with a greater role for technology change and new varieties. This will require more attention to research and dissemination. Vietnam spends only 1.7% of its public agricultural budget on research in comparison with 6% in China and 10% in Malaysia and Thailand. Vietnam has good opportunity to switch public agricultural allocations from production SOEs towards research and extension. Related, it will be necessary to open up supply industries, especially seeds, to full private involvement, if yields are to be increased. 25. Diversifying Agriculture. Rice, which accounts for over 60% of agricultural land, will need to decline in relative importance if the goal to double the average agricultural product to $2000 per hectare is to be reached. Despite an official policy which supports diversification there remain local pressures to produce rice. Huge opportunities exist for higher value added crops if a more supportive climate can be provided. A possible problem with the approach established in the strategy, which sets out production targets for a whole range of products, is that farmers may be encouraged to invest in growing particular crops either through incentives such as additional land or subsidized credit or through lack of alternatives and restrictions on land use. A key question will be: how to encourage diversification without introducing new distortions? An alternative to the more directive approach followed in the recent past would be one which: * gives farners as much information (technical and market) as possible in a comprehensible form; * allows farmers access to credit at positive real interest rates; * creates a supportive physical infrastructure; * promotes the growth of agro-industry, particularly the private sector and facilitates access to international markets; and * allows farmners to make up their own minds about the most appropriate investment for their farms. Overview 26. Promoting Off-farm Employment. In every country that has successfully modernized labor has been drawn out of agriculture into higher value adding industry. Such a transition will be important in Vietnam not only to enable the industrial growth required to drive growth, but also to increase productivity and to enable agricultural wages to rise. If farmers are to enjoy the same real income gains as the population as a whole, the number of workers in agriculture will need to fall significantly over the decade. In order to cater for these workers plus the bulk of the expected increased rural workforce (thus preventing an explosive urbanization) the rural industrial picture in Vietnam will need to change dramatically. 27. Unlike China, Vietnam has little experience of rural industrialization. Promoting the private SMEs that must drive this process requires the same policies as to promote private investment in any areas (see above), but in addition will require increased investment in rural infrastructure, and in rural-urban transport. Provincial and district authorities will be key in ensuring that the refonns undertaken at the national level translate into an enabling environment for enterprise development in rural areas. Information and resources often take time to filter down to the local level and this could mean that reforms for enterprise development happen more quickly in some areas than in others. 28. Targeting Remote and Upland Areas. Special attention will be needed for the poorest areas. Rural poverty is widespread but is much more severe in some regions than in others and this is very clearly illustrated on the Vietnam Poverty Map (overleaf). In particular, high rates of poverty persist in upland, ethnic minority areas. In 12 out of 13 of the poorest provinces - those with more than 60% of the population below the poverty line - ethnic minorities represent at least half of the population. This compares with an ethnic minority share in the overall population of 15%. Although ethnic minorities have enjoyed rising expenditures and improved socioeconomic indicators, improvements in their living standards lag well behind those for the majority population. 29. Ethnic minority areas have benefited from targeted programs, but their effectiveness has clearly not been sufficient to address their persistent poverty. The current focus on "sedentarizing" ethnic minority groups could usefully be replaced by much more intensive research into agricultural options for upland farming systems. This would need to be reinforced by extension services, which are responsive to traditional knowledge and farmers' needs and which can disseminate information to non-Vietnamese speakers, and land titling measures that are more in line with ethnic community traditions, practices and systems of land use. 12 Overview VIETNAM POVERT NMAP ~~~~~~~~~~~~~~~~~~~,. % ,A N HANOI POVERTY 1EADCOUNT ku cl Ins 3 ais1 DANANG * eJx1Cf Ad j\ G 4c eo (la; E 25tc, 4f, r-a, G oLo 25 (II) HOCHIMINH CITY Note: Provisional results from Baulch and Minot (forthcoming) 13 Overview IV. ENHANCING HUMAN CAPACITY (CHAPTER 4) 30. Almost all indicators of human well-being have improved markedly throughout the 1 990s, and Vietnam has generally outperformed countries at similar income levels. For example, its net primary school enrollment rate (92 percent) and its adult literacy rate (94 percent) are amongst the highest in the developing world. Similarly its infant mortality rate (37 per 1,000) and its life expectancy (67 years) are significantly above international norms. As over the coming decade Vietnam seeks to build on this progress it will need to address some significant challenges. 31. Improving the Quality of Social Services. The emphasis in the past has been on quantitative achievements: getting kids into schools, establishing an extensive health care delivery network, and target-driven reductions in population growth. The emphasis now needs to shift to improve the quality of these services and to facilitate people to make well-informed choices. In education, quality at all levels needs improvement. The basic education curriculum needs to be modernized by moving away from a system that emphasizes the recall of memorized facts, to a modem, dynamic and flexible knowledge system that encourages creative thinking and is able to make Vietnam the knowledge-based economy that it aspires to be (Box 3). There is also an acute need to raise the quality of health care services, particularly at the commune and district levels. Technical quality of services can be improved through in-service training, supervision, and quality assurance mechanisms. Public health services need to becomne more client-friendly and adopt a culture of service. In the field of reproductive health, the Government is moving towards better preventive measures, such as counseling and information, education and communication practices, a wider choice of contraceptive methods and the improvement of staff. Improving the quality of education and healthcare will require measures to improve the training and compensation of the service providers. 32. Ensuring Equitable Access for all Groups. Despite widespread expansion in the provision of basic social services, gaps exist in the access to these services by groups differentiated by income levels, geographical location, gender and ethnicity. Social indicators are worse for the poor and for those living in upland areas. Ethnic minorities are particularly disadvantaged and vulnerable (Table 2), and gender gaps are widening in some areas. During the transition to a market-economy, some public services that had earlier been provided at local levels-such as public creches-are no longer provided, and the burden on women has increased. The adult malnutrition rate, which was the same for females and males five years ago, is now higher for females (30 percent) than for males (25 percent) - although both remain much too high. 33. During the coming decade, the Government has announced that it will give extra effort to close the gaps between the more disadvantaged groups and the others. In education, specific programs need to be developed to respond to the needs of ethnic minorities, for example through bilingual education, and to lessen the gaps in the quality of education for different regions, income, and gender groups. School feeding programs might be necessary to create incentives for poor children living in upland and remote areas to attend school. Participation of local communities, parents and children in education management and planning is critical to sustained improvements in the sector. 14 Overview Box 3 KEY DECISIONS What Path to a Knowledge-Based Economy? The 10 year Strategy lays out a vision of Vietnam "step by step moving towards a knowledge-based economy". It recognizes that in order to do so, it must develop its domestic science and technology, strengthen education and training, and develop high quality human resources to serve the requirements of industrialization and modernization. It aims to harness global knowledge and apply it to the development of all people and all sectors. Yet, at the same time, and somewhat contradictorily, it aims to "focus on some selected important heavy industrial sectors with high technology". A stated objective is to build up four sectors: information technology, biological technology, new material technology and automation technology. Another stated aim is to build two hi-tech centers in Hanoi and Ho Chi Minh City. A knowledge based economy is not necessarily the same thing as a high-tech economy. It is about the application of global knowledge to all economic activity, rather than about the development of certain high-tech industries, such as electronic hardware or software. The future prosperity of Vietnam, as of many developing countries, will require a new configuration of skills, abilities, and competencies. This will be caused by the widespread availability and use of information and communication technologies, the speed of scientific and technological advances, and accelerating global competition. Vietnam's successful integration into the global economy and its sustained success in intemational competition will depend increasingly on effective combinations of science, technology, and innovation. There is no single pattern or roadmap for technology acquisition, technology learning and industrialization. The rapid, export-led economic successes of Taiwan and Singapore was based on quite different approaches. The role of Government intervention was vastly different between Hong Kong and South Korea. For all four of these countries, however, there seem to be a number of common characteristics associated with their success which may serve as general guides to a Vietnamese science and technology strategy. These characteristics include the following: * Their industrialization was based primarily on export-led strategies; * The key decisions related to technological learning were made by the managers of enterprises; * It took 20 to 30 years to build all the technological capabilities needed to successfully exploit the innovations derived from domestic in-house research and development. Many technical and engineering skills had to be accumulated in the process. It is possible that this time could be shortened to 10 to 15 years; * Govemments developed an appropriate educational and technological infrastructure, including the provision for widespread literacy, vocational education, development of a cadre of engineers and the training and support of research scientists. Source: MPI/JNDP/UNIDO (2000). 34. Special attention to the poor is also needed in health care, where formal arrangements fail to protect the poor. The health insurance scheme only partially covers lower income groups, the exemptions system does not work properly, and out-of-pocket payments for the poor remain very large relative to their incomes. The Government's targeted program of assistance-the Hunger Eradication and Poverty Reduction (HEPR) Program--could play an important role in identifying the poor and providing targeted assistance to meet their needs, if a number of weaknesses are properly addressed. Finally, it is important to improve the effectiveness and efficiency of social 15 Overview safety nets and disaster management mechanisms in order to better protect vulnerable groups against the negative impact of individual and community risks. Ethnic minorities have less access to schooUng Table 2: School Enrollment Rates by Ethnicity, 1998 Education Level Kinh Majority Ethnic Minorities Primary 93.3 82.2 Lower Secondary 66.2 36.5 Upper Secondary 31.9 8.1 I Post Secordary 10.5 1.4 Source: Attacking Poverty (1999). 35. Improving the Level and Allocation of Public Expenditures. Public expenditure levels in basic social services in Vietnam are currently low when compared with other developing countries. Public spending on health has grown rapidly over the past five years, reaching seven percent of the budget in 1998 (about 1.4 percent of GDP), but this remains low by international standards. As a result, households finance 80 percent of total healthcare spending in Vietnam. There may be scope for reallocating public expenditures in health away from curative care-which currently absorbs 70 percent of the health budget-towards preventive care which receives just 15 percent of the budget, but the priority should be to increase the level and efficiency of spending overall. 36. In education, there is also a need to raise public spending and to improve its allocation across regions and provinces. Total education and training expenditure has grown significantly over the past five years, reaching 17 percent of total public spending (about 3.5 percent of GDP). But nearly half of total spending on primary education is financed by households, which implies an undue burden on the poor. There is little scope for the reallocation of public spending across primary, secondary and tertiary services without damaging service delivery. But there is a need to reduce existing regional variations in expenditures and quality of education by reviewing the system of budget transfer norms for allocating education funds to the provinces. V. PROVIDING EFFICIENT INFRASTRUCTURE SERVICES (CHAPTER 5) 37. Dramatic improvements in infrastructure services during the 1990s have contributed to Vietnam's growth, export performance and poverty reduction. Road freight more than doubled during the 1990s, power production tripled, and access to electricity rose from 47% to 75% of the population. But even so, Vietnam remains seriously under invested in infrastructure in comparison with other low income countries, and without continued strong investment there remains a risk that bottlenecks could choke off growth. Vietnam is also committed to bringing infrastructure to remote and disadvantaged areas, which will incur high costs while bringing high social gains. If the Government is to attain its vision for the infrastructure sector in the coming decade, a four-fold strategy is required. 16 Overview 38. Prioritize Investments Carefully. The Government's program for the coming decade rightly envisages some closing of the "infrastructure gap" between Vietnam and its neighbors. This will involve very large investments across the full range of transport, energy, water, sanitation and telecommunications sectors. In energy alone, for example, the plan requires investments of 4-5% of GDP, about twice what its East Asian neighbors spend. Plans for energy and transport combined will require investment of almost 7% of GDP, a level equivalent to the entire public investment program in the past decade. Thus, while many investments will have good returns it is vital that care be given to establishing professional systems for careful cost- benefit analysis (in which economic, social and environmental costs are all taken into account), and that less attractive investments be weeded out early. 39. Invest in Access for Disadvantaged Areas and Groups. In addition to being fundamental in promoting national economic growth, infrastructure is a vital ingredient in reducing poverty and promoting balanced growth. Vietnam has an impressive policy for bringing services to all areas of the country, but even so, over the past five years more than half of public expenditures went to the Red River delta and the Southeast, while these areas account for one- third of the population and less than one-fifth of the poor. The choice between investing in "growth poles" and underserved areas is one of the difficult issues being faced by the Government, as in other countries (Box 4). 40. Diversify the Pattern of Finance. The pattern of financing, whereby Government resources and ODA financed a large share of infrastructure growth in the 1990s will not suffice in the coming decade. The needs are much too great, and ODA donors are less willing to finance investments when private investment appears available. Two additional sources - private capital and retained eamings - will need to finance more than half of new investments if targets are to be reached. Private investors have demonstrated themselves willing to finance investments in power, telecommunications, public transport, water supply, and even sanitation, but so far virtually no deal has been concluded. Immediate steps can be taken to unlock private investments waiting in the wings. This could be followed by a clear prioritization of projects for private investment, with competitive bidding becoming the norm. Self-financing by utilities also offers great promise filling financing gaps. This will require rational pricing mechanisms, and more disciplined and transparent financial management. The Government should set targets for utilities in power, water, transportation to become commercially creditworthy in the coming few years, together with the key municipalities. 41. Improve the Management and Sustainability of Investments. The Government has recognized the considerable scope for efficiency gains from reducing waste and improving performance. In the water sector, decayed distribution networks allow pollutants to seep into the water supply and 30 percent of piped water is lost before it ever reaches customers. Water businesses lose almost 40 percent of their revenues because customers are not billed for the water they use, or because companies fail to collect. Irrigation systems deliver water unreliably due to poor operation which causes users to incur pumping costs or suffer lower yields. Reforms are needed to increase competition between private and public providers of infrastructure services, and the financial and managerial autonomy of public providers needs to be increased to provide incentives for removing these inefficiencies. 17 Overview Box 4. KEY DECISIONS "Growth Poles" ... or Balanced Growth? A Dilemma for all countries. Should public expenditures be allocated to where they are expected to have the highest impact on national economic growth? Or to areas which are relatively underserved? This is a difficult decision for any country, but especially so for Vietnam, where the remaining needs are large almost everywhere, and where the costs of bringing services to remote areas is high. Increasingly countries are realizing that while a "growth pole" strategy may be effective in projecting overall economic growth, this growth may not be very effective in reducing poverty. Vietnam has been a leader in emphasizing access to services for all its citizens, but at the same time has sought to promote "growth poles" in the three most industrialized parts of the country-the Hanoi-Haiphong corridor in the North, Danang in the Center, and Ho Chi Minh City in the South. As a result, these are the areas with the lowest poverty levels in the country (as shown in the Vietnam Poverty Map). In allocating investment resources over the past five years Vietnam gave priority to the growth poles. Thus, the South East, which accounts for 13% of the population and 3% of the poor, received 28% of public investment. The Northern Mountains, on the other hand, which accounts for 18% of the population and 28% of the poor, received 8% of the investment. This pattern is not unusual across countries, but if access targets are to be reached for the coming decade, it will need to be adjusted. The Imperative of Underserved Areas. Today 70% of the rural population still doesn't have all- weather road access to markets, and nearly half of rural dwellers still lack electricity. Investments in such basic infrastructure have been found to have high social (and often economic) returns, and the Government's ambitious plans for the coming decade to redress inequities in access to services are appropriate. The Government's new "135 program" to allocate funds to the poorest 1715 communes (out of around 10,000 communes nationwide) for small infrastructure investments is particularly notable, and deserves strong donor support. Meeting the Needs of Growth Poles. At the same time it must be recognized that the balk of private investment will be undertaken in the limited confines of Vietnam's three "growth poles", and that these have large infrastructure needs if the country is to be competitive. Within the growth poles a three-fold strategy is required. First, prioritize investments carefully, based on rates of return. Second, since these investments will benefit the relatively better off citizens in Viemam, introduce user charges and increasingly fund municipal investments through loans rather than grants. Ho Chi Minh City's recent decision to introduce waste water charges, and to borrow for large sewerage investments is good practice. Third, seek private funding for infrastructure investments where possible. 18 Overview VI. IMPROVING ENVIRONMENTAL QUALITY (CHAPTER 6) 42. The rapid pace of change in Vietnam is placing heavy stress on Vietnam's unique natural environment. The coming decade could see a further serious worsening of the environment - with irreversible consequences. Alternatively, with carefully designed policies, firmly implemented, economic growth could be used to enable an improvement rather than a destruction of the environment. The Government has recently issued a strong National Environmental Protection Strategy, that recognizes the urgency of the problem and sets out programs for action. 43. In the last 5 decades, natural forest cover has shrunk from 43% to 29% of land area, and the country is facing an acute shortage of arable land. Habitat loss has led to a rise in the number of threatened species. Cities are growing at the rate of 4.5% per year, more than triple the rural population growth rate, placing huge pressures on municipal infrastructure and services and causing problems such as unmanaged landfills, transport-related air pollution, untreated hospital and hazardous waste, and raw sewage flowing in open channels. Sedimentation, and point and non-point sources of pollution are threatening the health of rivers. And over-fishing and destruction of coral reefs and mangroves have reduced the fishing yield. Action is required across the range of "green" (loss of forest cover and forest biodiversity), "blue" (degradation of water resources, loss of wetland habitats and inadequate protection of marine and coastal areas), and "brown" (urban and industrial pollution) environmental areas. Four guiding principles are required: 44. Creating Incentives for Changing Behavior. Community empowerment, enforcement of laws and decrees, access to knowledge, and the provision of information and trade opportunities, act as incentives to induce behavioral changes necessary for environmental protection and sustainable resource use. Without such changes in behavior, the downward spiral in environmental trends in Vietnam cannot be reversed. The Government's Five Million Hectare Reforestation Program is a major management initiative to meet forest product needs in a sustainable manner, protect the environment and increase social and economic benefits. In the blue sector, the implementation of the new Law on Water Resources will help improve the management of the country's valuable water resources. In other areas, however, controlling unregulated activities and adopting protective legislation have proven difficult, because there is no clear enforcement responsibility for coastal and marine areas, wetlands and other freshwater bodies. Success in controlling and limiting industrial and urban pollution (the brown agenda) will depend on a credible enforcement and compliance mechanism that not only regulates pollution but also provides incentives to prevent pollution from occurring in the first place. 45. Involving Communities and Citizens More Fully. Experience around the world is clear that it is rarely governments that successfully lead on the front lines of environmental protection, but rather local communities, citizens groups and NGOs. The new Government strategy gives greater emphasis to "encouraging public participation", which can build upon some important and successful ongoing pilot activities, and introduce a new and effective way of doing business. In the past, little attention has been paid to local incentives and capacity building for environmental management. The main reasons cited for this are: limited environmental awareness, few environmental NGOs, and highly centralized environmental planning and management. These constraints will need to be overcome to ensure greater public participation and involvement. 19 Overview 46. Improving Institutional Effectiveness. The new Environmental Strategy correctly accords much higher priority to institutional development than earlier plans. The Ministry of Science, Technology and Environment (MOSTE), the National Environment Agency (NEA) and other government agencies with responsibility for environment are working in a weak public administration context that is neither performance-based nor outcome-oriented. Their effectiveness is currently severely limited by small budget allocations, inadequate skills, a lack of mandates at the district level, and perhaps most importantly, a lack of influence with other Ministries and agencies in Vietnam. Existing technical assistance programs have made efforts to build capacity within MOSTE and NEA, but these will need further support to make them more effective in the future. Capacity will also need to be strengthened at local levels to support more decentralized and local efforts at improving the environment. In addition to capacity-building, it will be necessary to streamline and re-organize environmental and natural resources functions as part of its broader efforts to reform the public sector. 47. Diversifying Sources of Financing for Environmental Programs. Preliminary estimates indicate that to meet the targets of the Environment Strategy, the Government will need to spend several-fold more than what it currently spends on the environment. Given the competing needs on the budget, however, it is highly unlikely that the full needs can be met from the budget alone. The first need, therefore, is to prioritize the expenditures. Second, the Government should consider a mix of financing instruments to support the implementation of the Strategy, aside from traditional ODA. These would include: increased allocation from revenue budgets in sectoral ministries, widening the use of cost recovery measures, environmental user fees and pollution charges, using environmental funds, accessing GEF resources and also tapping into emerging instruments, such as carbon trading. Finally, increased effectiveness of development aid to the environment -- in line with Government investment priorities -- can be achieved through more effective coordination and partnership. VII. BUILDING MODERN GOVERNANCE (CHAPTER 7) 48. The Ten-year Strategy recognizes that fundamental to Vietnam's transition will be the development of improved governance structures. Experience from many other countries suggests that delivering the strategic targets will involve an evolution in the role of the state (Box 5), and actions to build a modern governance structure. 49. Strengthening the Public Service. Vietnam has already started to reform its public administration into a service which can meet the demands of a more modern, market-oriented economy. But progress has been slow, and further actions are needed urgently. The Public Administration Review (PAR) completed by the Government proposes a number of reforms, beginning with the critical area of civil service reformn. It recognizes that substantive and enduring change will require major changes in human resources and in organizational practice and policy. Vietnam not only needs a strong, well-organized public administration system, but also an adequately remunerated service with a personnel policy and grading system capable of effectively implementing these changes. Equally important is that the public service be compact and coherent, with a clear mission, defined goals, and is performance-oriented and accountable. Practices, methods, systems and procedures need to be revised to foster and enhance a new working culture of excellence and of service delivery. 20 Overview Box 5 KEY DECISIONS What Role for the State in a "Market-Oriented Socialist Economy"? Recent discussions on the draft Development Strategy illustrated the daunting tasks which lie ahead for the state. 2 These include: * Managing economic integration; * Establishing institutions for a market economy; * Implementing comprehensive reforms of public administration; * Reforming the organization and operations of the political system; * Reforning the financial system; and * Overseeing wide-ranging changes in the health, education and social security systems. Can the state in Vietnam take on this challenge without shedding some of its existing tasks and while continuing to manage state investments in commercial activities? International experience shows convincingly that successful development is accompanied by adjustments in the role of the State and suggests that a two-part stategy is needed to keep the state effective.3 First, recognize the limited capacity of the public sector, and match the state's role to its ability to undertake its core tasks. Second, invest in raising the state's capabilit) by reinvigorating public institutions. Chapter 7 on "Building Modem Governance" covers many of the steps needed to achieve this in Vietnam. A careful diagnosis of the role of the state in each of the fields of development activity (the "pillars" of this report) will likely reveal areas where the state needs to do more, and areas where it could do less. Below is an example for the agriculture sector. Table 1: Matching roles and capabilities of the state in the agriculture sector What the state should do in agriculture What the state should not do in agriculture Research and extension Restrictions on farmers' decisions Rural infrastructure Restriction on domestic agricultural markets Market information Restrictions on agricultural trade Policy analysis Ownership of state farms, processing facilities and __________ _________ ______ __ __ _ trading enterprises Regulation and Inspection Agricultural production targeting Control of pests and diseases Veterinary clinical care Natural resource management Broaden participation in policy decision- making and project formulation Source: Table compiled from ADB, 2000. 2 Warner, 2000. 3 The State in a Changing World (WDR 1997) 21 Overview 50. Creating Transparent and Professional Financial Management Systems. Substantial progress has been achieved recently with the publication of the State Budget in June 1999, publication of Govemment Financial Statistics (GFS) in the IMF yearbook, improvements in accounting and auditing standards, and improvements in debt management and ODA management. Yet, these are only the first steps towards making the management of public resources transparent and accountable (Box 6). The Budget coverage is only partial and immediate steps could be taken to publish more detailed information on the public accounts. Reorganizing the Vietnamese Accounting Association would present an opportunity to form a professional body consistent with good international practice. Similarly, a Public Sector Accounting Standards Board should be set up to establish and implement public sector accounting standards. A framework needs to be put in place to ensure that public corporations act in a transparent, accountable manner and provide financial information for public scrutiny. Box 6. KEY DECISIONS How to Allocate Scarce Public Expenditures? Vietnam's needs for public spending in the coming decade greatly exceed its capacity, and difficult tradeoffs will need to be made. Lessons from other countries that could help Vietnam in making public expenditure decisions include: Improve the Flow of Budget Information. Investing in reliable and timely information on budgets and outcomes can have a hugely positive impact on the ability of policymakers to make wise decisions. In Vietnam it is especially important to improve the flow of budgetary information across Government ministries, agencies and provinces, and to expand the scope of what is made public at central, province, district and commune level. Establish a Clear System for Assessing Costs and Benefits. Well tried techniques exist for assessing economic, social and environmental costs and benefits. While some of these are used in Vietnam, there remains a need to strengthen the current system, and to derive the Government's Public Investment Program (PIP) from strategic targets and explicit cost-benefit analysis. This not only leads to better decisions, but also helps protect against politically motilvated projects. Be Careful not to Under-fund Recurrent Expenditure. Most countries pay insufficient attention to operation and maintenance expenditures, preferring higher-profile new investment. Experience is unanimous that the lack of maintenance leads to much higher costs and lower productivity. Vietnam has also suffered from this problem, and needs to introduce a specific system for linking recurrent spending allocations to earlier investment spending over a multi-year period (PER 2000). Introduce a Pro-Poor Bias. Most countries spend much more public money on better-off citizens than on the poor. Vietnam's strong emphasis on equitable development would suggest that the opposite should be the case in its budget allocation process. Good progress has been made recently, but in a number of programs the poorer segments of the population and country still receive less than better-off groups. This is due in part to weak information systems. Insisting on a pro-poor bias can help off-set any unintentional anti-poor bias. Divest Expenditures that Others Can Finance. Where the private sector is willing to finance investments at competitive prices, it makes strong sense to take the opportunity to switch public resources to other needs where public fimds are essential. For Vietnam this applies immediately in energy and communications infrastructure, but increasingly also in municipal services. 22 Overview 51. Developing Legal Systems. For the last decade, Vietnam has been engaged in building a state ruled by law, as mandated by the 1992 Constitution. Although much has been achieved, officials and development partners agree that in virtually every major sector of the legal system much yet remains to be done. Currently, there is no comprehensive strategy for developing Vietnam's legal system, and legal development has tended to proceed in an ad hoc fashion. While this piecemeal approach has been the way legal development has taken place in most countries, most other countries had the luxury of developing their systems over centuries. Vietnam, in contrast, is keen to integrate quickly into the regional and world economy and to become a modem, industrialized nation by the year 2010. This will require a well-functioning legal system to underpin this transition. A comprehensive legal development strategy needs to be designed so that Vietnam can put in place a complete, coherent and well-functioning legal system in a relatively short time. 52. Creating a Participative and Responsive Government. Government strategy documents give high priority to improving peoples' participation, access to information, and awareness of legal rights and obligations. Recent research indicates that poor people in Vietnam are hungry for a two-way flow of information: information from government to them about the nature and timing of policies and programs that affect their lives, and from them to government with a view to influencing some of these policies and programs. Access to such information channels is often felt to be limited to a few "well-connected" participants. More Widespread access would lead to a more equitable and inclusive pattern of development. 53. The Government is taking measures to address these shortcomings by implementing the Grassroots Democracy Decree, which offers a crucial and encouraging legal framework for increasing community participation at the local level. The new Law on Science and Technology is also an important step forward in providing a clearer legal framework for the operation of research-oriented associations and NGOs. A supportive legal framework also needs to be provided for associations and NGOs not involved in charity or research, and which are therefore not covered by the existing legal framework. A comprehensive and clear Law on Associations which would offer a supportive environment, balanced with appropriate State oversight functions and accountability mechanisms, is needed. To ensure that women have an equal voice, Vietnam needs to take a gender-sensitive approach to participation and encourage and support more equal participation in public life by women. This is not only right from an equity point of view but, as recent research indicates, will also promote faster development and cleaner business and government (less corruption). This can be achieved through means that ensure equal access to education (especially secondary and higher), equal access to information (including legal literacy), and facilitating greater participation of women in political and other leadership positions, especially at Provincial and lower levels. 54. Fighting Corruption. Fighting corruption is an important priority. Vietnam's leaders need to set an excellent example and must continue to show their determination to fight corruption at all levels. While there are individual steps which can help with this, such as minimizing red-tape and reforming procurement, it is important that the reasons behind corrupt behavior are understood and measures taken to address these at the same time. There is much international experience that can assist Vietnam in this task. 23 Overview VIII. SUPPORT FROM THE INTERNATIONAL COMMUNITY 55. Vietnam is embarking upon a ten-year period that will shape its development for decades to come. If it is successful in reaching the goals it has set itself it will, by the end of the decade, be well on its way to building the base for a modernizing economy. In order to reach its goals, it is choosing to turn to the global economy as a market for its products, and a source of capital, technology and ideas. It is important that the international community support it in its efforts. 56. Initernational trade and investment will be the most important contribution that the international community can bring. As Vietnam opens its own markets and follows market friendly domestic policies, it can expect its own exports to grow - from the current level of $14 billion towards the goal of $50 billion by 2010. The international community can support this process by reducing their own trade distortion -- especially non-tariff barriers and domestic subsidies. Foreign investment, likewise, will play a crucial role in introducing technology, management skills and market know-how to Vietnam. Whether the Government's hope of inflows of $2 billion per year (5.2% of projected GDP) during the next decade is reached will depend on progress in creating a clear and efficient regulatory environment. For its part the international business community needs to demonstrate strong corporate citizenship and positive "externalities" in the form of skills upgrading and technology transfer. 57. ODA needs to play a strong continuing role in the years ahead. During the 1990s, ODA inflows rose from near zero to around 1.3 billion per year. While relatively modest by the standards of other low income countries, these inflows (totaling some $6 billion for the 1990s as a whole), have played a very constructive financial and technical role across a broad range of activities, while supporting Vietnam's gradual policy and institutional renewal. International NGOs - which in aggregate have invested around $80 million annually in grant funds for poverty programs -- have also played a.highly valuable role, introducing lessons and methods from international experience, especially in poverty reduction programs. 58. Over the past two years the international community has recognized that with the large numbers of donors, programs and projects in Vietnam it was necessary to move towards a new way of doing business, if funds were to have maximum impact on poverty reduction and economic development. This recognition has been part of increased understanding globally as to what makes development cooperation effective. Strands to this thinking are: *The importance of a strategic vision: too often development interventions have been undertaken with inadequate understanding of the broader policy and institutional context. It is essential that ODA supports policy and institutional reform and never substitutes for it; *Minimizing gaps, avoiding duplication, and lowering transactions costs: too often ODA has been less effective than it could have been due to fragmentation and uncoordinated programs. Working as genuine partners can substantially improve overall cost-effectiveness, but requires changed behaviour from us all; *The need to focus on outcomes rather than inputs: traditional measures of ODA success have too often been in the form of disbursements, timelines or completions rather than impacts on the quality of life. Investment in improved monitoring and 24 Overview evaluation systems, with a focus on on-the-ground impact, is needed to help change mindsets and improve effectiveness. 59. In an effort to address these issues, the Government, donors and NGOs in Vietnam have sought to establish partnerships in key areas and sectors to facilitate discussion, design and implementation of programs. A companion volume to this report ("Partnerships for Development") is a compilation of brief notes prepared by some of these groups. In the spirit of the new approach these notes seek to link the programs supported by the international community to Vietnam's goals and strategy for the coming decade. Over time it is expected that in some sectors there will be a move on the part of some donors towards a more programmatic approach to ODA support, whereby donors are able to understand and support the Government's expenditure program in a sector, within the context of clear goals, monitorable outcomes, and institutional and policy change. It is hoped that this overall report will help us move towards this more coherent way of doing business for the benefit of the people of Vietnam. 25 PART I: PARTNERSHIPS FOR DEVELOPMENT Acknowledgements The Vietnam Development Report 2001: Vietnam 2010: Entering the 21st Century is the product of team work and partnerships in Vietnam. This volume - Partnerships for Development (which forms Part II of the overall report), brings together contributions from many of the joint Government-donor-NGO partnership groups in Vietnam, all working together to improve the developmental impact of Vietnam's resources. It could not have been produced without the co-operation, contributions and active support of a wide range of development partners, including Government staff, donors and NGOs. Vietnam 2010: Entering the 21st Century was prepared by a team led by Nisha Agrawal (World Bank). Steve Price-Thomas (World Bank) managed production of this volume, coordinated the theme notes from the Development Partnership Groups, and authored the Introduction and Overview. Andrew Steer (Country Director, Vietnam, World Bank), Homi Kharas (Director, Poverty Reduction and Economic Management, East Asia and Pacific Region, World Bank), and Maurice Dewulf (Deputy Resident Representative, UNDP, Vietnam) provided invaluable support. Peer Reviewers: Tamar Manuelyan Atinc and Soe Lin (World Bank); Alan Johnson (DFID) and Ramesh Singh (ActionAid). Publishing and Other Support: Nguyen Thi Minh Hoa, Phung Thi Tuyet and Nguyen Thuy Ngan (World Bank). PREFACE The Vietnam Development Report 2001 entitled "Vietnam 2010: Entering the 21st Century" is a three-volume set consisting of an Overview and two parts. Part I of the Report entitled "Pillars of Development" provides a commentary on the emerging draft Ten Year Socio-Economic Development Strategy for 2001-2010. This important document lays out the vision and the strategic directions for Vietnam during the first decade of this new millennium. It is currently in draft form and is undergoing an extensive process of consultation within the Government (at national and local levels) and the society at large. The draft will be presented to donors and discussed at the "Millennial Consultative Group Meeting" in December 2000. Part I of this Report aims to guide these discussions. It has been written by the World Bank in partnership with ADB and the UN System. Part I of the Report comments on the comprehensive development agenda laid out for the next decade. It starts with a framework for rapid growth and poverty reduction and then examines the strategies required for: (i) enterprise development; (ii) rural development; (iii) human and social development; (iv) infrastructure development; (v) environmental quality; and (vi) good governance. Since the Government is formulating a long-term development agenda, it will need to take a comprehensive approach to development and tackle all these "pillars" of development. Without progress on all fronts, Vietnam will not be able to achieve the economic and social transformation that it desires. A balanced attack across all fronts does not, however, imply that everything needs to be done at once. What is needed to prioritize actions is an identification of the bottlenecks-the hard to solve problems that are impediments to success- and to begin by attacking these first. What is also needed is that the energies of all of Vietnam's development partners are harnessed so that they are all working together in partnership to make all of Vietnam's resources-including aid resources-more effective. Part II of the Report entitled "Partnerships for Development" (this volume) addresses this theme of stronger partnerships to help the Government of Vietnam to attain its vision and implement its strategy. It brings together a series of thematic notes on Vietnam's development strategy, prepared by the development partnership groups in Vietnam. These notes seek to describe and distil Vietnam's goals and the steps needed to get there. They also describe how the donor community can help Vietnam in attaining its vision. The work of the development partnerships, and the production of these notes, are indicative of an important new direction in international development cooperation, both in Vietnam and in many other countries. Around the world, there is a recognition that the old ways of working have not produced the results that had been expected. The current time in Vietnam offers international partners the opportunity to actively listen to the Government's articulation of its long-term development goals and to work together to identify and address the constraints and roadblocks that would prevent the goals being reached. TABLE OF CONTENTS Introduction and Overview .................... .1 Broad Development Issues Poverty Working Group .11 Gender Strategy .18 Environment .24 Civil Society and Community Participation .30 Economic Management SOE Reform & Equitization .35 Banking Reform .40 SME Promotion and Private Sector Development .45 Human and Social Development Education.53 Health.59 Rural and Regional Development Five Million Hectare Reforestration Program .65 The Partnership to Support the Poorest Communes .71 Food Security .75 Central Provinces Initiative to Mitigate Natural Disasters in Central Vietnam .81 Participatory Provincial Partnership Tra Vinh .86 Water.91 Infrastructure Transport .97 Ho Chi Minh City Official Development Assistance Partnership (ODAP) .103 Urban Sector .107 Energy.112 Public Management and Administration Public Administration Reform .118 Legal Sector .122 Strategy Development Socio Economic Development Strategy (2001 - 2010) .127 INTRODUCTION AND OVERVIEW 1.1 Introduction 1. This volume brings together a series of notes on Vietnam's development strategy, prepared by the development partnership groups in Vietnam (Box 2). Most of the groups consist of Government and donor representatives, and many also include NGOs. All of the members of these groups are committed to support Vietnam's development efforts in their area of expertise. 2. The production of the Government's draft strategy in autumn 2000 presented an important opportunity for the partnership groups to support the government as it seeks to move from vision to action. The Theme Notes that appear in this report are the Partnership Groups' response to this challenge, and illustrate the extent to which groups are now working in partnership to help the development of Vietnam and the fight against poverty. These Theme Notes are structured around the four 'key questions' (Box 1). Box 1: The Four 'Key Questions' 1. What is the long-term vision? * A distillation of the Government's vision, as found in the 10 year strategies 2. What are the key steps needed to attain this vision? * A distillation of steps in the Govemment's plans, plus suggestions based on our knowledge and experience 3. What should the role of different partners be? * Who is doing what now? * Broadly, what assistance is required? * What are donors willing to suppon? * What would make ODA in this sector more effective? 4. What are the key monitorable indicators? 1.2 A new way of working to meet Vietnam's development needs 3. The work of the development partnerships, and the production of these notes, are indicative of an important new direction in international development cooperation both in Vietnam and in many other countries. 4. Around the world there is a recognition that the old ways of working have not produced the results that had been expected. Specific problems reducing the effectiveness of ODA have included a lack of a strategic vision; gaps, duplication and high transaction costs; and a focus on inputs rather than outcomes. Partnerships for Development -Introduction and Overview Box 2: Partnership Groups in Vietnam Broad Development Issues * Poverty Working Group * Gender Strategy * Environment * Civil Society and Community Participation * Private Sector Forum Economic Management * State Owned Enterprise Reform & Equitization * Banking Reforn * Trade Reform * Small and Medium Enterprise Development Human and Social Development * Basic Education * Health Rural and Regional Development * Forestry and the Five Million Hectare Program * The Partnership to Support the Poorest Communes * Food Security * Central Provinces Initiative to Mitigate Natural Disasters in Central Vietnam * Participatory Provincial Partnership Tra Vinh * Water * Fisheries Infrastructure * Transport * Ho Chi Minh City Official Development Assistance Partnership (ODAP) * Urban Sector * Energy Public Management and Administration * Public Administration Reform * Legal Sector Strategy Development * Socio Economic Development Strategy (2001 - 2010) Partnership 1.3 The importance of a strategic vision 5. Too often, development interventions have been undertaken with inadequate understanding of, or focus on, the broader policy and institutional context. This became dramatically evident, for example, during the East Asian financial crisis, where rapid liberalization of economic activity with inadequate attention of necessary regulatory, legal and social safeguards led to heavy costs. More simply, many donor projects have traditionally been designed with inadequate attention to the institutional and policy framework. 6. The current time in Vietnam offers international partners the opportunity to actively listen to the Government's long term development goals, and to work together to identify and address the constraints and roadblocks that would prevent the goals being reached. The preparation of 2 Partnerships for Development -Introduction and Overview the Theme Notes in this volume represents an opportunity to move in this direction. They seek to describe and distil Vietnam's goals and the steps required to get there. 1.4 Minimizing gaps, duplication and high transaction costs 7. Around the world there is now a good deal of evidence that international support for development has often been less effective than it could have been due to fragmentation and lack of real partnership. Lack of knowledge about what others are doing leads too often to duplication in some areas, and neglect of others. While specific development projects may be individually well designed, a failure to work as partners - with the Government and with international supporters - results in the whole being less than the sum of its parts. In Vietnam there is a recognition that transaction costs are too high, imposing a very heavy burden on Government, and there is scope for working together much more efficiently (Box 3). The Theme Notes in this volume, and the ongoing process through which they were produced, are a small step on the way to address these problems. Box 3: The Costs and Complexity of Aid Co-ordination A recent study of rural development assistance lists 417 ongoing projects in agriculture and rural development in Vietnam; a similar study identified 173 ongoing and 57 planned projects in the environmental sector. The costs of co-ordinating such a large number of activities is high, diverts resources from elsewhere, and can lead to a lack of synergy between projects. Internationally, a conservative estimate is that 600 projects translates into 2,400 quarterly reports a year submitted to different oversight entities, and more than 1000 annual missions to appraise, monitor and evaluate. Each mission asks to meet with key officials, and each will ask the government to comment on its report. The most common complaint voiced by officials interviewed for seven case studies of aid management in Africa was that aid imposes 'too many administrative burdens'. Sources: UNDP (1999); UNDP (2000:21); van de Walle and Johnston (1996:50) in World Bank (1999:15). 1.5 The need to focus on outcomes rather than inputs 8. When officials (both Governments and the international community) discuss development effectiveness there is often more of a focus on 'inputs' (such as schedules, disbursement rates etc.) rather than 'outputs', (how many children are educated, how many people have access to health care etc.) This is because information on inputs is much easier available than for outputs. However, this focus does not help achieve development goals. Instead, a focus on results and monitorable indicators is required. 1.6 Strands in the new way of working 9. In the past five years there have been a series of strands at the international level - all moving in the same direction. DAC introduced the International Development Goals to help encourage a greater discipline in monitoring outcomes and allocating resources wisely (Box 4). Similarly, the new international consensus for partnerships, embodied in the United Nations Development Assistance Framework (UNDAF), the Poverty Reduction Strategy Paper (PRSP) 3 Partners hips for Development -Introduction and Overview and the Comprehensive Development Framework (CDF), has at its heart the belief that effective development has partnership at its core. Box 4: The International Development Goals Reduce the proportion of people living in extreme poverty by half between 1990 and 2015; Enroll all children in primary school by 2015; Make progress towards gender equality and empowering women, by eliminating gender disparities in primary and secondary education by 2005; Reduce infant and child mortality rates by two-thirds between 1990 and 2015; Reduce maternal mortality ratios by three-quarters between 1990 and 2015; Provide access for all who need reproductive health services by 2015; and, Implement national strategies for sustainable development by 2005 so as to reverse the loss of environmental resources by 2015. Source: OECD/DAC (1996). 10. Since March 1999, the CDF has been piloted in Vietnam, in ten other countries and in West Bank and Gaza. An evaluation of the CDF pilots in mid 2000 pointed to progress on many fronts, though there is still much work to be done. The Report on Country Experience highlighted the lessons for partner organisations and countries (Box 5). Box 5: Lessons from the CDF Country Pilots 'The key consideration for all external partners is the need for greater harmonization of policies, practices, and procedures. Experience shows clearly that this cannot be achieved solely on the basis of action at the country level...all actors see this as an area that requires action at the institutional level...More specifically: The business plans of all partners should be derived from the country's strategy, or poverty reduction strategy in low-income countries.... The sector-wide approach is a promising instrument to establish effective co-ordination at the country level as well as reduce transaction costs; Steps need to be taken to help countries improve their capacity to monitor development results; The holistic approach presents challenges for all countries but is essential for focusing on greater poverty reduction; Seeking maximum synergy among programs designed to improve country capacity; Moving forward with the wider and faster application of in-country consultative group meetings; Countries will continue to be encouraged to open up the dialogue further to include all representative domestic stakeholders...'. Source: World Bank (2000b: 11). 4 Partnerships for Development -Introduction and Overview 11. As the international consensus grows, and partnerships move from engagement to deeper, broader involvement, and ultimately to full harmonisation and Sector-Wide Approaches (SWAPs), both the challenges and the potential benefits grow. SWAPs are derived from a clear vision that is owned by the country, and are owned, directed and implemented by country stakeholders; they have participation from all the main donors and civil society, and commnon implementation arrangements. At the heart of a successful SWAP is a shared understanding of answers to the four 'key questions' (Box 1). It requires having a common vision and an agreed strategy and program - it does not necessarily imply co-financing, nor the loss of individual programmes. For a SWAP to work, partners have to be committed for the long-term, and both central and sectoral bodies must be involved. Sector wide approaches can be politically difficult for partners, but as the Zambian Health Sector example (Box 6) shows, the pay off can be great. Box 6: A successful SWAP: the Zambian Health Sector From 1994 onwards, the Zambian Governnent asked donors to fund the Ministry of Health centrally, rather than individual provinces or projects, in line with the national health policy and strategy. Through this approach, the government hoped to ensure the strategy would be implemented both coherently and equitably. At first donors were sceptical, though gradually began to comply. An independent evaluation in 1997 found that 'health workers are better motivated; clinics are functioning; funds are flowing to the districts; some modicum of decentralization is in place; [and] an important part of the private sector has become formally involved.' Source: World Bank (2000a: 197). 12. Partners can be wary of embarking on the SWAP path. Governments have to be strong, as a true SWAP approach requires the government to control the sector, and to prohibit donors from operating outside the SWAP framework. This could mean that some donors choose not to engage in certain sectors at all, rather than risk not being able to monitor and control exactly how their money is spent. (World Bank 2000a: 197). However there is much positive experience. The Zambian Ministry of Health has proved that it is possible to co-ordinate a successful sector-wide programme (see Box 6); and other countries are now adopting the same approach. For example, the Ghana Ministry of Health has received support from a range of donors for their first sector- wide health sector programme. Most donors in Ghana are now moving beyond agreeing to a policy and planning framework to working with common procedures within government implementation systems; some donors are already moving funds towards a common pool (World Bank n.d:1). 5 Partnerships for Development -Introduction and Overview 1.7 The New Approach in Vietnam Box 7: Recent Partnership Milestones in Vietnam * The Monthly Donor Group Forum was launched in March 1995, and has made a major contribution to bringing together senior officials in the Govemrnment and ODA community. * The Private Sector Forumn, proposed at the 1997 CG, has played an important role in generating a better spirit of partnership in this area. * At the 1998 Mid-year CG Review Meeting in Hue in June, the Prime Minister requested donors to act in a greater spirit of partnership with each other and the Authorities. * In September 1998, a regional conference held in Hanoi, brought together several Asian countries and major donors that reinforced a shared belief in the value of partnerships. * At the December 1998 CG Meeting in Paris, a half day was devoted to the theme of partnerships and sector approaches. There was strong support for doing business differently, reflected in the Chairman's summary as follows: "Delegates also discussed a new approach to partnership in the design and implementation of development assistance, one in which the Government would be in the driver's seat, but all stakeholders would work together to develop and implement a long-term vision and strategy for Vietnam. Delegates felt that effective partnerships would raise the level of ownership of development assistance by Vietnamese agencies, enhance transparency, improve financial management, and enhance overall aid effectiveness." * In April 1999, a major seminar on Partnerships and Aid Effectiveness was held, focusing on information needs, sector program approaches and the transition towards a more comprehensive approach to development. * At the 1999 Mid-year CG Review Meeting in Hai Phong in June, it was agreed that the international community should support the Government's five-year planning exercise and develop a "shared vision" for each of the main sectors of development. * In December 1999, at the CG Meeting in Hanoi, delegates agreed to work together to support the Govemrnment formulate sectoral and cross-sectoral strategies, to be presented at the December 2000 CG, based around four 'key questions' (in Box 1). * In 2000, high-level Roundtable Consultations involving a wide range of partners have offered support to the Government in developing the ten-year Socio-Economic Development Strategy. * In autumn 2000, Partnership Groups answered the four 'key questions' in Box 1, and used them to produce the theme notes in this report. 13. In June 1998, the Prime Minister of Vietnam requested donors to act in a greater spirit of partnership. Since then, more than 20 Government-Donor partnership groups have been formed in various sectors and areas of interest, and many have broadened their membership to include Vietnamese and international NGOs. Additionally, there are also a number of NGO and donor fora, some of which may develop into formal working groups. Box 7 outlines recent partnership milestones in Vietnam; the groups themselves are listed in Box 2. 6 Partnerships for Development -Introduction and Overview Box 8: Three Successful Partnerships in Vietnam The Poverty Working Group The Poverty Working Group (PWG) was formed in February 1999, and has played a key part in building a shared understanding between Government, donors and NGOs in the way forward in fighting poverty. Members of the PWG include various government agencies, NGOs, and donor agencies. The process of working together on 'Vietnam: Attacking Poverty' (Poverty Working Group 1999) enabled issues to be explored, differences to be considered, and for consensus to be reached. The group has built a great deal of trust within and between the members, and is highly regarded throughout the development community in Vietnam. Since the production of ' Vietnam: Attacking Poverty', the Government has asked the PWG to collaborate with MOLISA to produce a comprehensive poverty reduction strategy. As part of this process, in July 2000 the PWG held a successful workshop in Sapa that made inputs to the strategy, and is now working with Govemment on poverty reduction strategies for the next five and ten years. The 5 Million Hectare Reforestation Programme In 1999, an international partnership was established in support of the Government's 5 million- hectare reforestation programme. The partnership comprises the Ministry of Agriculture and Rural Development and 15 representatives of the donor community and international organisations, and fonns a shared sector support programme for the 5MHRP on the basis of agreed policies, strategies, priorities and principles of implementation in line with international agreements. A partnership steering committee and secretariat has been established, and work is ongoing. The Ho Chi Minh City Official Development Assistance Partnership The Official Development Assistance Partnership (ODAP) in HCMC was formally established as a strategic partnership between the HCMC People's Committee and a group of key international donors in March 1999. The partnership mobilizes coordinated support from donors according to their comparative advantages, assists in overall strategy formulation, and in the implementation of the priorities for investment and institutional strengthening. The partnership improves the effectiveness of donor support through (i) providing a framework for identifying priorities for donor support to the city's development, (ii) striving for a consensus on policy reform and solutions to operational issues, (iii) facilitating project implementation, and (iv) coordinating donor knowledge and activities by sharing relevant information and enhancing access to documentation and project information. 14. The partnerships take many forms, and are changing over time. Partnerships vary from groups that have recently started a process of engagement and are exploring common ground, to those that have a jointly owned vision, a shared understanding of how to reach that vision, and work together in all aspects to achieve the vision. Thus partnerships can be shallow or deep, narrow (in terms of the range of partners or areas covered) or broad. Partnership groups in Vietnam provide good examples of different types of Partnerships. Box 8 highlights the Poverty Working Group - essentially a broad group that tackles wide ranging themes and provides substantial intellectual input to the poverty debate; the Five Million Hectare Reforestation Program, which has a substantive, focused, sector wide approach and will be a model for the new way of working, and the Ho Chi Minh City ODA partnership, which brings all key members of the international community together with the Government, mobilising coordinated support from donors according to their comparative advantage, and pooling knowledge and planning to implement the city's integrated City Development Program. 7 Partnerships for Development -Introduction and Overview 1.8 Emerging Lessons and Next Steps 15. International and Vietnamese experience shows that within partnerships where trust has built up between the partners, there is space for a wide range of views both in the process of forming the vision, and in defining strategies to reach the vision. The partnership approach is strengthened by a diversity of strategies to achieve the vision: successful partnerships do not require straightjacketed thinking. Whilst agreement is required about the overall objectives and vision, the activities of different partners can vary considerably in working towards the vision. In the same way, there is space for a diversity of approaches between partner countries. 16. Commitment, dialogue, trust and respect are the pre-requisites for making partnerships work. However, partnerships are not ends in themselves: it is essential to remain focused on development outcomes, to recognise that working in partnership can have costs, and that building consensus whilst harnessing diversity can be hard. Maintaining coherence and commitment in changing political contexts can also be tough, though international experience has shown that strong partnerships can respond flexibly to changing circumstances. Similarly, for partnerships to work, commitments have to be operationalised at all levels and by all partners: for the process to be valuable, the partnership must produce action, not rhetoric. 17. The experience of members of the partnership groups to date suggests that there are a number of key characteristics that influence the success of the groups: * Ownership: broad ownership and participation, including strong ownership by Government, makes for success and substantive results. * Commitment: groups in which all members are committed to the partnership process feel they have achieved more than groups where the commitment of some members is not as strong. However, the experience of the Poverty Working Group, among others, illustrates that commitment can be built over time as groups move from engagement around single issues to deeper partnerships. * Wide, multi-level support: in order to work well, group members need support for the partnership process from people at all levels in all their respective organisations. Without it, the opportunities for partnerships to operationalise their vision is severely constrained. * Mission: many groups have evolved from being information-sharing fora to having a deeper engagement and focus. Groups that have a clear, agreed mission and focus, built around the vision for their sector, feel they are successful and substantive. However, different sectors have different needs over time and groups are responding to this. * Funding: groups that have the funding to, for example, set up a secretariat, feel that this has been important in moving to a more partnership based way of working. * Technical Knowledge: groups whose members have specific, relevant technical knowledge that is respected by the development community feel they are able to achieve more because of this. 8 Partnerships for Development -Introduction and Overview 18. The experience of the past three years has shown that there are still challenges facing working groups and partnerships in Vietnam. These include: * Staying focused on development outcomes rather than process; * Measuring the effects of the partnership approach; * Enabling organisations that have limited capacity to engage fully in partnerships - being over-stretched can lead to 'partnership fatigue'; * Building commitment and understanding at all levels in organisations that are engaged in partnerships in Vietnam; * Deepening partnerships where appropriate; and, * Rationalising/changing partnerships where they are not meeting a development need. 19. Much has been learned since the inception of the partnership approach in Vietnam, and it is likely that the flexible, dynamic nature of the partnerships that have contributed to this report will result in progress being made towards meeting present and future challenges. 20. The international consensus for partnerships, the support of Government, the results of partnerships such as those profiled in Box 8, and the potential showcased in the theme notes in this report, suggest that the partnership approach will become more prevalent in Vietnam over the coming years. This is likely to have a number of effects on development assistance in Vietnam, including a move to more of a programme approach (a move already being pioneered by some agencies); broader coalitions in the fight against poverty; less overlap and fewer gaps between programmes; more informed planning for all partners; more efficient use of resources and, ultimately, better development outcomes for Vietnam. These possibilities are all within reach: the onus is now on the members of the development community to make them a reality. 1.9 The Theme Notes 21. Following commitments made at the December 1999 CG and the Informal CG Mid-year review meeting in Dalat in June 2000, and with a clear mandate from Government that this would be a useful for them while preparing for the Ninth Party Congress, it was agreed that Partnership Groups should produce brief theme notes answering the following 'key questions', detailed in Box 1. * What is the long-term vision? * What are the key steps needed to attain this vision? * What should the role of different partners be? * What are the key monitorable indicators? 22. During autumn 2000, Partnership Groups met to consider the four 'key questions'. Starting from the government's vision and strategy for the next five to ten years, the process resulted in the production of the theme notes that follow. These theme notes represent the views and work of the individual groups, and present an important guide to how the international community can help in realising the Government's vision in the next decade. 9 Partnerships for Development -Introduction and Overview 23. In many cases the theme notes are the start of a process, whereby partnership groups are working to ensure a more holistic approach is taken that builds on the long terrn vision; that places ownership firnly in Vietnamese hands; that promotes more strategic partnership among stakeholders; and which improves accountability for development results. Bibliography OECD/DAC (1996). Shaping the 215' Century: the Contribution of Development Co-operation. Paris. Poverty Working Group (1999). Vietnam: Attacking Poverty. Joint Report of Vietnam-Donor- NGO Poverty Working Group. Hanoi. United Nations (2000). United Nations Development Assistance Frameworkfor the Socialist Republic of Vietnam 2001-2005. Hanoi. UNDP (1999). Compendium of Environmental Projects in Vietnam -1999. Hanoi UNDP (2000). Compendium of Rural Development Assistance in Vietnam. Hanoi. Van de Walle, N. and Johnston, T.A. (1996). Improving Aid to Africa. Policy Essay No. 21. Overseas Development Council, Washington D.C. World Bank (n.d.) Ghana Health Sector Support Program: Appropriate Design of a Lending Instrument for the Sector Wide Program. Draft, Washington D.C. World Bank (1999). The Drive to Partnership: Aid Co-ordination and the World Bank. OED, Washington D.C. World Bank (2000a). World Development Report 2000/2001: Attacking Poverty. Washington D.C. World Bank (2000b). Comprehensive Development Framework: Country Experience March 1999 - July 2000. CDF Secretariat, Washington D.C. 10 Partnerships for Development - Poverty POVERTY WORKING GROUP Introduction 1. This note has four short sections. First, it summarizes the Government's long-term vision for poverty reduction by quoting the ten year comprehensive poverty reduction strategy (CPRS) and the five year HEPR plan, prepared by the Ministry of Labor, Invalids and Social Affairs (MOLISA), and the Interim Poverty Reduction Strategy (I-PRSP), prepared by the Ministry of Planning and Investment (MPI). Second, it lists the steps needed to attain this vision - some of which have been articulated in Government documents, some which are missing or unclear. Third, this note attempts to document past, current and future roles of the PWG in supporting Government to develop its poverty reduction strategy, to plan and frequently update poverty situation assessments in Vietnam; and it indicates, in a preliminary manner, how improved partnership and collaboration could increase support to the Government to achieve the targets set out in the poverty reduction strategy and 5-year plan. Finally, the note suggests a need to develop more systematic monitorable indicators for Vietnam's poverty reduction. 1. What is the long-term vision for poverty reduction? 2. The long-term vision for poverty reduction is reflected in the Government's draft 2010 CPRS, 5-year plan and I-PRSP1. Overall, the Government has shown a strong commitment to combating multi-dimensional poverty in the next decade. Goals are set not only in terms of reducing the number of poor households, and totally eliminating chronic hunger households, but also in terms of improving the poor's access to basic social services; expanding opportunities for the poor to benefit from social protection and welfare policies; goals are also set to continue providing special support to the most difficult areas. The Government documents for poverty reduction have also specified quantitative objectives which are listed in the last section as monitorable indicators. 3. This long-term vision is owned by the Government, through MOLISA and MPI. The Government has recently organized three regional workshops in the North, South, and Center of Vietnam to present and discuss this strategy widely with other related Government agencies, provincial representatives and with its development partners. The strategy was also discussed in a meeting of the Poverty Task Force on October 6, 2000. In addition, the Interim Poverty Reduction Strategy Paper (I-PRSP) has been widely discussed with line ministries, Government agencies, civil society and donors. Interestingly, MPI has also invited wider discussion from domestic as well as international NGOs which are actively involved in poverty reduction activities in Vietnam and their comments were very much welcomed by the MPI drafting team. The targets set out in the above vision have attracted the interest and support of a large number ' MoLISA has drafted the Comprehensive Poverty Reduction Strategy to 2010 as part of Government's 10-year planning process. This sets the framework for the 5-year Hunger Eradication and Poverty Reduction Plan (HEPR). The interim Poverty Reduction Strategy Paper (i-PRSP) has been drafted by MPI. This presents outlines of the macroeconomic, structural and sectoral policies and measures which Government will take over the next three years to promote growth and attack poverty. This country-owned document will serve as a basis for SAC/PRGF lending by the World Bank and IMF. Partnerships for Development - Poverty of external partners, but there are areas where there is a need for further discussion, revision and greater clarity. 4. The vision is much more comprehensive than that set out in the last HEPR program. However, there is room to improve its comprehensiveness even further. Last year, the "Vietnam: Attacking Poverty" report, produced by the PWG, was widely praised as a very good assessment of the poverty situation in Vietnam. The 'Vietnam: Attacking Poverty' report identified the multi-dimensional nature of poverty. This implies that poverty has to be dealt with from many angles, with the involvement of all parties (the State, line ministries, civil society, and external partners). The tasks are complicated, and so are the goals; these will not only include reduction in poverty rates themselves, and other material goals (access to basic social services, infrastructure, etc.) but also qualitative goals such as an increase in the poor's participation, improvements in governance and institutional arrangements which deliver programs and projects designed to help the poor; and creation of a favorable environment to make the poor more active and participative in helping themselves out of the poverty trap. One possible way to do this may be to use outputs from the Poverty Workshop, which was held in Sapa in July 2000. The Workshop provided technical input to the Government's strategy, adding missing dimensions as well as qualitative aspects of poverty into the strategy. 2. What are the key steps required to achieve this vision? 5. The Comprehensive Poverty Reduction Strategy (CPRS) will have a much more important role than ever before. It will not only be a document showing Government commitment to poverty reduction and formulating Government targeted programs to support the poor; it will be a document that effectively incorporates poverty reduction efforts between sectors and across the country; and that guides, enforces, and monitors the activities, involvement and performance of all development parties, such as line ministries, local Governments, civil society, and external partners, in the poverty reduction process. Ideally, in the longer-term the two key documents (CPRS and I-PSRP) will be converged into one document which takes advantage of the strong poverty focused but mainly targeted features of the CPRS, and the strong macro-economic linkages to poverty reduction of the I-PRSP. 6. To achieve the vision, a convenient way is to lay out in detail a series of actions, choices and principles that will guide and govern the "how to" or operational steps to achieve the goals. The current draft strategy has already started this and is progressing, especially in the I-PRSP with the linking of the macro-economic framework with poverty reduction activities. The CPRS has specified four key "principles" as follows: i) The CPRS should be more comprehensive, ensuring that basic needs in food, housing, healthcare, education, vocational training, culture and information, transport and commuriication be met, thus the tasks must be expanded; ii) The CPRS should be sustainable; iii) The CPRS should gradually apply the international standards on poverty assessment; iv) The CPRS should consolidate all available resources to make dramatic changes in poverty reduction in targeted areas, and communes that are in especially difficult circumstances, in order to improve people's lives. 7. These key principles are well chosen but, by themselves, will be insufficient to guide all steps and actions needed to attain the vision. Although the CPRS has identified 9 key policies and 7 projects to be developed and implemented in the next 10 years in order to achieve the goals, these policies and projects are basically to focus on targeting the poor communes and 12 Partnerships for Development - Poverty individuals, especially in the 5-year plan. In order to make the strategy feasible, and to realize Government commitments on creating opportunities, ensuring equity, and reducing vulnerability, a more comprehensive approach can be used. This includes targeted programs and (both macro- economic and sector) policy interventions which can often be done with no or minimal direct costs, and by different agencies (line ministries, central and local Governments). A possible next step may be to continue with the macro-economic policies, taking advantage of and improving the macro-economic section of the up-dated version of the I-PRSP, making it more specific in terms of how macro-economic policies / reforms can contribute to poverty reduction, or what needs to be done to minimize negative impacts on the poor. 8. Second, taking the Public Expenditure Review (PER) as another example. While increasing households' contribution is necessary to ensure the development, expansion and improvement of poverty reduction, the current policies of "socialization" (such as in health and education) may have regressive characteristics. A possible way to protect the poor and other vulnerable groups may be to explicitly include additional policies or additional elements of current policies to protect poor families (say, the lowest two expenditure quintiles) or vulnerable groups from a disproportionately heavy burden of paying for their children's basic education, paying for basic health services as well as paying many other taxes and contributions. This could be accomplished through follow-on work resulting from the PER and linking this to the level of household expenditures on education and health, and the assumptions made by Government about levels of cost recovery. Such follow-up work will require additional analysis of the budget processes and resource allocation norms, and preparation of future budgets based on revised norms, thereby providing an opportunity to address geographical inequalities in resource allocation for education and health. 9. Third, sectoral policies and strategies may have potential impacts and influences on poverty reduction, either positive or negative. It is therefore important that sector-related poverty issues be mentioned, and that they are detailed and concrete enough to guide the relevant line ministries in achieving poverty-focused objectives, while ensuring both implementation and monitoring of progress. In this regard, it is important to note that the current CPRS already includes several sector-related policies, such as education, and health for the poor. In addition, there are several sectoral issues or cross-cutting issues which are among key problems closely related to the poverty situation of the poor (implementation of Decree 29, participation of the poor, transparency, development of two-way information systems, etc.) A useful way to provide more support to development practitioners may be to further incorporate operational details and guidance on how to deal with these cross-cutting issues. 10. Finally, the 5-year plan does not yet include lessons from the previous plan. Over the coming year, the component parts of the previous plan need to be evaluated and the lessons learned used to influence the design and implementation of the new strategy. 11. Institutional change and capacity: Poverty reduction must involve all parties, from the Government to civil society and donors, from central to local Government, and people themselves. The clearer the roles and responsibilities of the various stakeholders, the more effective and greater coherence the coordination between them. One possible way to address this question may be to make a clear division of responsibility between central and local Government, the role of Poverty Reduction (PR) staff at local levels, and of other stakeholders, for the management and delivery of poverty reduction services. It is also helpful to make clear 13 Partnerships for Development - Poverty the role and responsibilities of line ministries and the PR institution (MOLISA) and develop effective cooperation mechanisms between them in the poverty reduction process. 12. Central PR institutions would require strengthening in terms of their capacity to coordinate the implementation, monitoring and evaluation of the CPRS in different sectors and across sectors, in particular in terms of carrying out and following up on the policy analysis activities suggested above. This would require capacity building in both quantitative and qualitative poverty analysis. It should be built upon stronger linkages between Governnent, line ministries and related agencies, Government offices, and mass organizations, and promote coordinated responsibility for implementing and financing the steps needed to reach the targets set out in the CPRS. 3. What should the role of different partners be? 13. The Poverty Working Group (PWG) was set up in 1999, initially to coordinate between Government line ministries, agencies, donors, and NGOs in an effort to produce a report to assess the poverty situation in Vietnam. The report "Vietnam: Attacking Poverty" was a product of this group and was well received by the Government and donor commu-nity. It laid foundations to build a poverty reduction strategy for Vietnam. 14. In 2000, the task of the PWG is to help the Government develop its own CPRS and 5- year action plan. In addition, as Government needs to produce an I-PRSP as a requirement from multi-lateral institutions (WB and IMF) for its access to ODA, the group also needs to comment on this document. This is an ongoing process and the PWG will meet again to plan out a set of actions that should examine the degree of coherence between externally supported programs and the Government's strategy. Therefore, the first step (already ongoing) will be for Vietnam's external partners to structure themselves to enter the debate and to respond constructively to the Government's vision. The second step is for the Government to identify prioritized areas and invite debate and discussion on these areas of the strategy. A third process step will be to map all ongoing and planned programs from the external partners onto the 2010 strategy and 5-year plan, and then to see where adjustments and revisions are needed to align the externally supported programs with the Government's strategy and plan. Finally, over the coming year the PWG will work with Government on the evaluation, implementation and modification of the strategy. 4. What are the key monitorable indicators of progress for short/medium term? 15. An important element of an effective CPRS is on assessing performance and monitoring the poverty reduction progress. There is a problem with the current drafts of the three documents as there are several poverty figures cited in the CPRS associated with different methods and poverty lines, which may cause unnecessary confusion. In the future, it would be necessary for Vietnam, on the one hand, to have only one and consistent poverty line to generate poverty figures, and on the other hand, to collect information at local and project levels, for appropriate targeting purposes. Several of the monitorable indicators have been extracted directly from the Government's strategy. These not only show the focus and emphasis of the Government's program but they provide quantitative targets that can to a certain extent be used to assess the magnitude of the program and the resource requirements. The draft targets are the following: 14 Partnerships for Development - Poverty 2005 2010 * % of poor households <10 0 * of chronic hunger households 0 0 * % of poor communes with basic infrastructure 100 100 * % poor households with full access to basic social services 75 90 16. However, this note would like to suggest that in addition to an emphasis on monitoring the system using quantitative and input indicators, a regular quality assessment of the services attained by the poor may be very helpful to address the problems of the poor getting access to quality services. It is also suggested that a detailed and more enforceable system of monitorable indicators may be incorporated in the CPRS, 5-year plan, and I-PRSP, either in the text or in an attached annex. The system of indicators would ideally be as sector specific as possible, quantitative as well as qualitative, and be broken by groups (such as income, region, gender, and ethnicity) to best support assessing and monitoring purposes. For example, access to employment (stable jobs) opportunities by the poorest, women, ethnic groups; full implementation of Degree 29; participation level (break down by groups: poorest 40%, women, ethnic minorities). One possible way to make the strategy more feasible may be to include indicators on financial requirements (commitments of the Government budget and mobilization from other sources) to achieve the above goals. For example, % of public expenditure spent on social services (such as health, education); achievement of the 20/20 commitment; % of the poorest group receiving free social services and exempted from paying fees and contributions. Inclusion of other process indicators such as the regularity of collecting data on poverty (both quantitative and qualitative data), updating poverty assessments and progress assessment reports, would be very useful. The table in the Annex outlines a selection of key recommendations for each targeted intervention of the HEPR strategy, most of which have been brought forward by the international community in its discussions with the Government over the last two years. 15 Partnerships for Development - Poverty Annex: Recommendations from the PWG for improved HEPR Policies and Programs Government Policies Recommendations from the Poverty Working Group for improved HEPR policies and programs 1. Credit for the poor * Adopt non-subsidized interest rates; * Encourage the formation of credits and savings groups of villagers; strengthen community-based savings schemes targeting women, through mass organizations but linked to formal banking system; * Link credit provision with agricultural extension and technical and managerial skills development; * Improve methods to reach poorest households (simplifying methods to access loans, improving information, etc.). 2. Health * Redirect significant funding from hospital based services to district hospitals and primary health care services and focus on health promotion and preventive health; * Provide salary incentives and training to health staff working in remote areas; * Improve coverage of health insurance and health cards, through transparent allocation mechanisms; * Improve access to family planning and reproductive health services for the poor, through a support to community-based organizations, among others. 3. Education * Ensure complete free access to primary school for poor children through exemption of construction fees, costs of books and uniforms, and insurance. Associate this policy with central transfers to poor localities in order to compensate for the related loss of revenues; . Provide mechanisms for equitable access to school for unregistered migrant children in urban areas; * Provide bilingual education to ethnic minority children; * Provide special incentives for a sufficient quantity and quality of teachers in remote areas; * Provide schoolfeeding programs andfood transfers as incentives for school attendance for the poor. 4. Ethnic minorities * Devise an integrated strategy for poverty reduction for ethnic minorities, taking into account specificities of key ethnic groups, including health, education, income earning activities, credit, participation, infrastructure, knowledge; * To increase productivity of crops growing in upland areas such as maize and cassava, provide research and extension services for these crops (and not only for rice). 5. Legal Assistance * Institutionalize community legal education on poor people's benefits, rights and entitlements; * Promote the role of mass organizations and community based groups in this area. 6. Safety Nets * See Chapter 4 of 'Pillars of Development'. 7. Housing . Expand the project to urban housing problems, to improve low income settlements. 16 Partnerships for Development - Poverty 8. Land for the poor * Reduce the emphasis on land provision to the poor, and instead put more emphasis on creating off-farm employment and improving skills in non-agricultural activities (vocational training). Projects 9. Infrastructure for * Ensure participatory selection mechanism; poorest communes * Involve community in maintenance of the project; * Ensure mobilization of contracted local resources for the construction (paid labor and materials); * Develop disaster resistant public buildings, that can provide shelter in times of disasters. 1O. Support in production * Provide a comprehensive set of incentives to promote rural enterprise development; * Broaden vocational training from technical issues to business and management issues; * Scale up the provision of agriculture, aquaculture and veterinary services and make them appropriate to upland household production methods; * Develop network of local extension workers as extension services have limited outreach. I1. sedentarization * Put less emphasis on attempts to stop and control migration, and concentrate on improving livelihoods of migrants, through assistance in production notably. 12. Culture and * Focus the project on specific information problems for the poor: (i) information improve information channels to ensure that the poor receive information about the activities of the poverty programs, their rights and entitlements, poverty related policies at the local level, and local revenues and expenditures; (ii) support information campaigns on grassroots participation. 13. Training for HEPR * Provide training to HEPR staff on participatory methods; staff * Provide gender training to HEPR staff as well as training in monitoring and evaluation techniques. 14. Bamboo bridges (no recommendations) 15. Models for sustainable poverty alleviation (no recommendations) 17 Partnerships for Development - Gender GENDER STRATEGY 1. What is the long-term vision? I. The Long Term Vision for the Joint Government Donor Gender Strategy is the social, economic and political advancement of women and gender equality in Vietnam. This will require creating an overall enabling policy environment, combined with a gender aware society, and gender sensitive institutional structures, policy making processes and practices. These will go beyond targeted women and family programmes and aim to analyse and influence macro and sectoral policies and programmes. The ultimate objective is to create a 'level playing field' whereby women and men will be in an equal position to access and utilise basic social services and factors of production, and to make the necessary social, economic and political choices and decisions on issues, policies and programmes impacting on their livelihoods and well-being. 2. This vision is owned first and foremost by the Government - through the NCFAW and CFAW network in every Ministry and Province, as well as through the VWU at central and local levels. A number of donors have also expressed their support including but not limited to: UNDP, the World Bank, the Royal Netherlands Embassy, CIDA, Danida, AusAid, Ford Foundation, ADB, UNICEF, FAO, UNIFEM, Oxfam GB, etc. 3. It is anticipated that the workshops (launching workshop 26 October 00, Second Plan of Action for the Advancement of Women (POA2) workshop 8 Nov 00, Joint Gov-Donor Working Group workshop on 1 Dec 00) will generate wider understanding of the issues and support for our work. These workshops will demonstrate the importance of addressing gender in all national and international sectoral plans and programmes, as well as the relevance of gender to all sectors. Whether there is sufficient ownership of the vision, among Government and donors alike, will be shown ultimately, among others, through whether adequate financial support will be given to the operation and strengthening of the gender policy 'machinery', and to various gender-related projects and activities. 4. The process associated with this vision consists of a series of participatory activities designed to facilitate the development and implementation of a comprehensive set of recommendations which will contribute to the social, economic and political advancement of women and gender equality in Vietnam. These recommendations will work hand in hand with the Government's 10 year strategy, in the spirit of mainstreaming gender in the National Policy and Planning Process. The recommendations will cover a broad range of sectors at all levels: thus creating an overall enabling policy environment. 5. The starting point for this process is the spirit of Government policy on gender in particular and development in general, including * report on mainstreaming gender in NSEDS (MPI-UNDP Project) * review of First Plan of Action for the Advancement of Women (POAI) * draft outline for POA2 * Strategy for the Advancement of Women to 2000 * draft outline for the Strategy for the Advancement of Women to 2010 18 Partnerships for Development - Gender * draft GoV 10 Year Strategy for Socio-Economic Development to 2010. 6. NCFAW coordinated the organisation and activities of the Joint Government Donor Gender Strategy Working Group in order to facilitate the development of the Strategy and POA2. The following steps were integral to this process: * integrate gender issues into the National Socio-Economic Development Strategy to 2010. * assessment of the implementation of POAI since 1997. * assessment of research and projects on women and gender in Vietnam since 1993 * development of the Situation Analysis Report on Women and Gender in Viet Nam, as of 2000. The purpose of this report is to assist planners to ensure that the planning process is based on a thorough analysis of the real situation of the majority of women on a day to day basis, thus ensuring the relevance of the policy recommendations in POA2. To this end, the report is based on in-depth analysis and recommendations in 4 main areas: - Employment and economic status - Education and HRD - Health and Safety - Leadership and Political Participation. 7. The report examines specific gender issues within these sectors using an analytical framework which allows planners to understand each issue through the lens of the following 'influencing factors': - relevant International Conventions, national laws and policies. - important stakeholders, and their role with respect to the issue. - poverty: e.g. how the issue impacts on poverty, how poverty impacts on the issue. - relationship to intra-household decision making processes. - gender stereotypes. * A series of 5 local level consultation workshops to better understand and represent the voice and priorities of grassroots women in different parts of the country. * A series of national and international workshops to present findings and discuss inputs to POA2 and the next 10 year Strategy for the Advancement of Women, including: - Launching workshop for the Situation Analysis, the WB Gender Assessment of Laws and Policies in VN, the WB Engendering Development Report. (26,27 Oct 00) - National Conference to present assessment of POAl (8 Nov 00) - National Workshop to plan POA2 and 10 Year Strategy (9 Nov 00) - National Workshop to discuss role and function of NCFAW/VWU (10 Nov 00) 19 Partnerships for Development - Gender - Joint Governnent Donor Workshop to discuss JGD Gender Strategy (1 Dec 00) * Based on the outcomes of the above activities the following documents will be developed: - the POA2 to 2005 - the 10 Year Strategy for the Advancement of Women to 2010 - the Joint Government Donor Gender Strategy * Government approval of POA2 and Strategy to 2010. * Implementation of POA2 and Strategy to 2010. * Monitoring and evaluation of the implementation of POA2 and Strategy to 2010. * A crucial step to mainstreaming gender will be to ensure that the policy recommendations from the above 3 documents are also cross-referenced with and ideally integrated into the relevant 'mainstream' policy documents, in particular the National Socio-Economic Development Strategy, the Poverty Reduction Strategy, as well as sector-specific strategies such as those dealing with Economic Management, Rural Development, Human Development (Education and Health), and Governance and Public Administration Reform. 2. What are the key steps needed to attain this vision? 8. The key steps will be clearly defined in the above documents, however some basic principles can be laid out at this point: 9. Policy: it will be necessary to closely examine the gender implications of all laws and policy (not just policy which explicitly states its relationship to women), according to the current discourse on gender which supports the view that all policy has a gendered impact. Likewise it will be important to look at not just national level but also international or regional agreements (e.g.: trade agreements) This analysis will suggest possible amendments to ensure that all laws and policies are gender sensitive. In the spirit of the rights based approach adopted by the UN (UNDP HDR 2000) it will also be important to position the recommendations in the broader context of the relevant UN Conventions (e.g.: Beijing + 5, CEDAW, Violence, ILO, Rights of the Child, etc.) It will also be necessary to understand the constraints to implementation of national policy and International Conventions, as this seems to be a common theme in all gender analysis in Vietnam. Strategies to overcome these constraints will have to be factored into plans and programmes. 10. Institutional change and capacity: The NCFAW - CFAW network will require strengthening in terms of their capacity to coordinate the implementation as well as monitor and evaluate the implementation of POA2 and in particular carry out and follow up on the policy analysis activities suggested above. This would require capacity building of in both quantitative and qualitative gender analysis at macro (policy), meso (institutional) and micro (grassroots) levels: e.g. collection and interpretation of sex-disaggregated statistics, gender analysis of policy planning processes as well as outcomes, 'gender budgeting. There should also be stronger linkages between VWU and NCFAW in order to capitalise on the grassroots experience of the VWU and the policy advice role of NCFAW. In that context, capacity building of especially lower levels of the Women's Union will be important. NCFAW and the Women's Union both 20 Partnerships for Development - Gender would also benefit from stronger linkages to key - line Ministries and Government Offices, and advocacy skills to ensure that their voice is heard at the highest level (Strengthen the political decision making position of NCFAW-VWU, e.g. include as part of Cabinet?) As part of this process, technical capacity within each key line Ministry and local government bodies should be strengthened - see TWG-MARD model as an example. Strengthening networks with other relevant national as well as regional or international gender advocacy groups would also be useful. 11. Activities/financing: The POA and the Joint Gov Donor Gender Strategy will provide the basis for developing specific activities and allocating the necessary financial support. In the spirit of mainstreaming it is crucial for all key line Ministries, Government offices and Mass Organisations to take responsibility for implementing and financing activities to reach the targets set out in POA2. Gender should be an integrated part of all Gov policy implementation and monitoring activities. Having said that, in extreme cases where there are major gaps there is justification for stand-alone gender policy and programmes, in this case MOF and MPI should consider establishing a separate budget for implementing POA2. Donors must also take responsibility for the above approach in their work and include gender as part of all projects in their on-going portfolio of development assistance, in addition to the necessary gender-specific projects. Donors should also endeavour to let their support be guided by the POA2 as much as possible. 12. Mode of delivery: this will be clearer once the actual Joint Gov Donor Strategy, the NSEDS to 2010, POA2 and ODA commitments have been developed and finalised, but in principle it is anticipated that key Government agencies and donors will take responsibility for implementing specific sections of the POA2 in a coordinated and timely fashion. It is hoped that the strategy will be implemented in such a way as to reach the targets set out in the POA2. It would be useful to see to what extent some of the targets of POA2 can be met through existing or pipeline 'mainstream' programmes, as well as through increased regional collaboration. 3. What should the role of different partners be? 13. At this point it is difficult to answer this question as donors have not had the opportunity to commit their support to implementing the POA2. However it is known that some gender specific projects are planned or on-going (note that these were not necessarily developed specifically to implement POA2 but may fit into that framework later) such as: * UNIFEM (Trust Fund) Combating Domestic Violence Against Women in VN * UNDP, Netherlands - Phase 2 of VIE96011 (TBD) * Netherlands - Mainstreaming gender in NIPA, HCMNAPS * TWG-MARD - series of research and other projects on gender mainstreaming in MARD * FAO/UNDP - Gender Analysis of VLSS2 14. In addition there are some regional projects * UNIFEM: Statistics, politics, technology * UNDP: Interagency Project: Cross border trafficking in Women and Children in Mekong Sub-Region 21 Partnershipsfor Development - Gender 15. Some mainstream projects have also included a gender component: * 5 million hectares * NZ, SIDA, GTZ Land projects (MARD) * World Bank-sponsored projects on Northern Mountains Poverty Reduction, and Community Based Rural Infrastructure 4. What are the key monitorable indicators? 16. There is a need to look at each issue within each Sector: 2 4.1 Employment and Economic Status * Women's income relative to men's * Distribution of women's employment across sectors and levels (formal/informal, farm/off- farm, etc) * Rate of women's unemployment * Rate of women as managers * Women's ownership-entitlement of property - including land * Women's access to credit (number and amount of loans as proportion of number of applications, sources); savings (number of savings groups established and operating sustainably, number of savings groups trained); financial management services. * Impact of women's credit/savings/income on household consumption patterns. 4.2 Education and HRD * Rate of female students completing school at different levels (primary, secondary, tertiary * Rate of female students in vocational training and higher education, by sector. * Rate of women accessing relevant agricultural extension services. * Incidence of gender stereotyping in school textbooks, (media?) 4. 3 Health and Safety * Narrowing gap between women and men's workload (hours of paid/unpaid work) * Women's access to health care services in the context of reform, privatisation. * Implications for time use for women caring for the sick including those affected by HIV- AIDS. * Women's access to reproductive health care * Men and women's access to and use of different forms of contraception (also look at age groups, unmarried) * Change in maternal mortality rate 2 all statistics for women should be compared to statistics for men, to be relevant 22 Partnerships for Development - Gender * Change in abortion rate * Rate of women affected by STDs, HIV-AIDS, through which means of transmission. * Incidence of domestic violence: reported, prosecuted or legally addressed. * Incidence of women assisted through counselling, access to shelters, legal aid 4.4 Leadership and Political Participation 17. Must have quantitative and qualitative indicators, e.g.: * Rate of women/men * Gender sensitivity of women/men * Gender analysis of outcomes of decisions: rate of women benefiting and how * Women in high level and other Executive bodies, different positions - participation of women in high level decision making processes * Women in Elected Bodies: National Assembly, People's Council, Special Committees within each of these * Gender in public expenditure: rate of women consulted or participating in decisions * Grassroots Democracy Decree: rate of women in Steering Committees overseeing the implementation of the decree; rate of women chairing and participating in public information sharing, consultation and decision making meetings undertaken under the decree. 23 Partnerships for Development - Environment ENVIRONMENT 1. The Environment Vision 1. The Government has a well-enunciated vision for environment protection and sustainable use of resources over the next ten years in the form of the National Strategy for Environment Protection, 2001-2010 (NSEP), completed in July 2000. The strategy is based on a thorough analysis of the issues through the National Environment Agency's annual state of environment reporting process and a joint Government/donor study on the lessons of a decade of aid to the environment. The strategy and the associated action plan to 2005, provide a credible policy framework for Government and international cooperation over the next five years. 2. The overall vision of the strategy is to protect and improve the environment to enhance the quality of life and health of the people and to ensure sustainable development of the country. That vision is to be addressed through three strategic objectives: * preventing and controlling pollution; * protecting, conserving, and sustainably using natural and biodiversity resources; and * improving environmental quality in urban, industrial and rural areas. 3. The operative strategies are prevention, conservation and enhancement. 4. The strategy has 13 broad "programme areas" relating to: the urban, rural and industrial environment; the key natural resources of water, air and land; the critical natural systems of forests, wetlands and coastal-marine areas and their biodiversity resources; and effective regional and sector planning. These programme areas are complemented by eight "cross-cutting themes". 5. The National Environment Action Plan, 2001-2005 (NEAP) draws down on the strategy to provide a sharper set of seven priorities relating to: sustainable industrial development; solid and hazardous wastes; water management; forest management; environment institution strengthening; environmental education; and community involvement. These programme areas are identified as having the highest priority for action. The NEAP sets out other high-priority programmes, such as more effective management of wetlands and implementation of standards for air pollution, which need to be undertaken as resources become available. 1.1 The Process of Forming the Environment Vision 6. A 1998 Directive from the Communist Party Political Bureau instructed MOSTE "to develop a National Strategy on Environrnental Protection and Sustainable Development for 2001-10". Other Ministries were instructed to also prepare ten-year strategies covering what the Government viewed as the critical fields of development. 7. The National Environmental Agency (NEA) has made every effort to draw all the main players into strategy preparation. It has managed an unprecedented consultative process entirely on the initiative of the Government. The process so far has had four phases: * a baseline study completed in 1998; 24 Partnerships for Development - Environment * internal consultation and drafting stages running through 1999; * an international review and second consultation phase with sectors and local Government in early 2000; and * final drafting and formal submission to Government in mid 2000. 2. Key steps needed for attaining the vision 8. The NSEP is clear in defining what is required for its effective implementation. This section is a summary of the NSEP implementation framework. The NSEP and NEAP are the foundation for developing environmental protection strategies for each sector, each region, and each locality. Sectors and local Governments will implement the strategy according to the priorities the NSEP specifies. 9. Under the direct leadership of the Prime Minister, MOSTE will co-operate with other ministries, branches and localities in integrating the strategy into their own policies and operations. It will be necessary to develop specific indicators of progress and targets for each programme and to delegate responsibility to each ministry, branch or locality to carry out specific activities in accordance with their capacity, functions and resources. 10. MPI will be responsible for co-ordinating with ministries, branches and localities to integrate the strategy and action plan with socio-economic strategies and the annual and long- term plans of the State. MPI and the Ministry of Finance are responsible for mobilising all the resources necessary for effective implementation of the strategy and the various regional, branch and local environmental action plans that follow from it. Furthermore, the NEAP gives details on the resources available for the Government to meet the objectives. Where Government resources are insufficient, donor support will be needed. 2.1 National Boardfor Sustainable Development 11. A National Board for Sustainable Development is being established to oversee, guide and facilitate implementation. The National Board will work to: * ensure that the NSEP programmes are included in national, sectoral, and regional socio- economic development strategic plans; * co-ordinate the implementation of NSEP programmes; and * oversee the monitoring and assessment of strategy implementation. 12. The success of the NSEP will depend on how well it is adopted by all development and natural resource management sectors. The initial step of building the environment strategy into other strategies and plans will require the full commitment of Government with support from international partners. 2.2 Integration with Ten-Year Socio-Economic Development Strategies 13. First, the goal and objectives of NSEP must appear in the national ten-year strategy for socio-economic development and the ten-year strategies of every branch of Government. All ten- year strategies are due to be finalised and approved by Government in the year 2000. This 25 Partnerships for Development - Environment restriction may not allow sufficient time for the comprehensive environmental review of all the strategies prior to final adoption. Thus, strategies submitted to Government should at least include relevant environment strategy objectives and foreshadow other environmental amendments and additions. A more thorough review will be completed in 2001. 2.3 Integration with five-year Socio-Economic Action Plans 14. The detailed planning for environment and socio-economic integration will concentrate on the five-year action plans for 2001-2005. Once again, these plans must be submitted to Government by the end of 2000, leaving insufficient time for comprehensive integration. This process will need to continue through 2001, with necessary amendments and additions being made through the usual annual review of five-year plans. 15. MPI, in association with MOSTE, will be responsible for ensuring that the NSEP/NEAP and the environment policy commitments made in the strategies of all branches are picked up and detailed in five-year plans. Normally, each plan would be developed on the basis of the socio-economic "orientations" defined by MPI. While these have already been issued for the 2001-2005 action plans currently being prepared, MPI/MOSTE will be responsible for preparing environment orientations to guide the review of plans for each branch of Government. 16. MPI will require each sector and provincial Government to prepare a comprehensive environmental action plans for the 2001-2005 period as an integrated component of their five- year development plans. This is a necessary step to ensure effective priority setting and Government budgeting for environmental and sustainable use concems within each sector and local area. These environmental action plans should be completed by the end of 2001. 17. Each of the environmental action plans should be defined as a project for Govermment budgeting purposes. International partners are needed to work with individual sectors and groups of provinces to build environment management capacity through the preparation and implementation of the environment action plans. 2.4 Preparation of Regional Environmental Action Plans 18. The NSEP calls for the preparation of environmental action plans for all economic regions. The aim is to bring together sectors and provinces to safeguard shared natural resources and systems. 19. MPI, in association with MOSTE, will be responsible for initiating the preparation of environmental action plans for the regions. MOSTE will provide a format and guidelines on the process to be followed, and MPI will ensure that the plans are prepared, including clear definition of responsibilities, by the end of 2002. MPI/MOSTE task forces should be established to draft the plans for each region. Here too, international support is required, particularly on the process aspects of involving the concerned sectors and provinces. Intemational support should be considered as additional to a specific Government budgetary allocation for the purpose. 20. MOSTE is also responsible for preparing regional Biodiversity Action Plans (BAPs) for each of Vietnam's biodiversity regions. NEA has already initiated the process in the Central Highlands biodiversity region, which has been identified as the highest priority for conservation action. The development of these regional BAPs should be closely co-ordinated with the 26 Partnershipsfor Development - Environment preparation of the regional environmental action plans, so that the two initiatives are complementary and mutually supportive. 2.5 Monitoring andAssessment of Strategy Implementation 21. Annually and every five years, MPI and MOSTE will work with the Ministry of Finance and other ministries, branches and localities to review and evaluate implementation of the NSEP/NEAP. It is expected that each of the major progranume areas will be monitored and assessed in terms of performance indicators and that this process would feed NEA's annual state of environment reporting. These performance indicators could include the number of completed strategies and action plans, implementation status of strategies and action plans, and start dates for Government-donor partnerships. 22. Each of the ministries, branches and localities will submit their appraisal of progress to the Prime Minister. The National Board for Sustainable Development will co-ordinate the monitoring and assessment process and submit an overall appraisal. This appraisal may contain recommendations to readjust and supplement the strategy and individual environmental action plans as required. 3. What should the role of different partners be? 3.1 Environment Support Group 23. The Government of Vietnam and donors share a common objective: to optimise the effectiveness of donor investment in the environment sector. The NSEP provides a framework for collaboration on programmes on environmental protection, conservation, and sustainable use of resources. The implementation arrangements for the strategy emphasise "working linkages" between the Government and donors. 24. Arrangements for the next five years include: * creation of an environment support group (ESG). This would seek to enhance information exchange, promote co-ordination and encourage ODA investments in priority programme areas through the formation of partnerships; * creation of pilot environmental partnerships to support implementation of priority NSEP programmes and components; and * the comprehensive review of the pilot partnership experience and the progressive formation of partnerships around other priority programmes of the strategy and action plan. 25. The overall objective of the ESG is to increase the effectiveness and efficiency of development aid to the environment, in line with Government policy and priorities, through an environmental partnership approach. An environment partnership is an association of several donors working together in an integrated way to assist Government in realising a priority policy commitment. 26. Specific objectives are to: * help integrate national and international investment in the environment under one policy framework; 27 Partnerships for Development - Environment * help in integrating the NSEP into the plans and programmes of all arms of Government; * channel scarce resources to the highest priority concerns, while minimising overlap and wastage; * help further define and clarify priorities and programmnes on the environment; and * strengthen the management capacity of MOSTE/NEA to promote working linkages on the environment across sectors and between different levels of Government. 27. The operation of specific partnerships will be the main driving force for the EG process. Environment partnership will be formed to mount collaborative programmes of work around high-priority issues and geographic areas. 28. The NSEP and NEAP have set a range of national priorities, some broad, others specific. These priorities now need to be expressed in terms of action programmes with their own policy objectives and project activities. Some of these programme priorities will require strong international support. 29. Drawing from those priorities and current discussions of the Government-donor environment working group, five programme areas and one geographic area have been identified around which pilot environrment partnerships will be formed or consolidated. These pilot partnerships would test the approach over the first year of the ESG. The pilot partnerships would also focus on identifying and eliminating potential gaps and overlaps within each partnership initiative. A review of the experience would guide the further development of the partnership approach. 30. The six potential pilot environment partnerships are as follows: Initial Partners Programme Area Government International Organisations 1. Environment institutional MOSTE/NEA, target sector UNDP, SIDA, CIDA, SDC, development agencies, target provincial Danida, German DSE, WWF, agencies, MPI, MOET rucN 2. Conservation and MOFI, MARD, MOSTE/NEA, Danida, SIDA, Dutch, World sustainable use of the coastal MPI Bank/GEF, ADB and marine environment 3. Cleaner production MOI, MOSTE/NEA, MPI UNEP, World Bank, UNIDO, SDC 4. Elimination of lead in petrol MOT, MOSTEINEA, MPI World Bank, USAEP, CIDA, SIDA, Dutch 5. Vietnam GEF strategy MOSTE/NEA, World Bank, UNDP, Danida, implementation Dutch, WWF, IUCN, BirdLife, FFI 6. HCMC environment HCMC DOSTE, World Bank, ADB partnership MOSTE/NEA, MOI/DOI, MOC/DOC, MPI/DPI 3.2 The immediate next steps include: 28 Partnershipsfor Development - Environment * finalisation of the ESG submission to Government; * convening of the ESG; * forming and funding of the ESG secretariat; and * launching of the pilot environment partnerships. 29 Partnerships for Development - Civil Society and Community Participation CIVIL SOCIETY AND COMMUNITY PARTICIPATION 1. Background and current situation 1. As outlined in preliminary drafts of the Government's Ten Year Strategy and Five Year Plan, Government aims at bringing in the principle of "people know, people discuss, people execute and people supervise". Thereby, the people's voice is strengthened, their access to information increased, citizen's awareness of legal rights and obligations increased, and overall governance is strengthened. Decree 29/CP on the Regulation of the Exercise of Democracy in Communes (hereafter called "Grassroots Democracy decree") offers a good legal framework for increasing community participation at the local level (Box 1). The Government is also stepping up its programs for legal dissemination and legal aid to citizens, and is integrating community participation approaches in its targeted poverty and infrastructure programs (such as Programs 133 and 135 - Box 3). Box 1: The Grassroots Democracy Decree is an important step in increasing community participation at the commune level In May 1998, the Government introduced a decree on the exercise of democracy and informnation transparency in communes as it relates to commune plans, budgets, expenditure reviews, and reviews of Commune People's Councils' and Committees' activities. It distinguishes between four different levels of participation: information sharing, consultation, participation in decision making and monitoring/supervision. 2. In pursuing its goal of enhanced governance and participation, as well as those of poverty reduction and decentralization, Government aims to strengthen partnerships with other organizations working for the benefits and needs of the people, by continuing to encourage and support the work of mass organizations. It recognizes the need to also put in place a legal and policy framework for associations and domestic NGOs, since they can be important partners as well, supporting the Government's goals of poverty reduction, decentralization and improved governance. Through Decree 35/CP (1992) on science and technology organizations, decree 177/CP (1999) on Social Funds and Charity Funds, and the Law on Science and Technology (no. 21, 2000), the beginnings of a clearer legal framework for associations in those areas have been put into place. (Box 2). 30 Partnerships for Development - Civil Society and Community Participation Box 2. The new Law on Science and Technology provides a clearer legal framework for the operation of research-oriented associations and NGOs The recently introduced law on Science and Technology (No.21/2000/QHl0 of June 9, 2000) clearly defines the roles and expectations of organizations and individuals in relation to activities concerning science and technology. For the first time, independent organizations have been granted legal status in a range of new areas, making them subject to the rights and provisions of the Law. Organizations are now accorded autonomy and self-determination in the development of ideas, planning, organizing, managing, and implementing research and development activities. Furthermore, organizations can freely undertake cooperative partnerships or joint ventures with other bodies, and may receive or contribute financial and other assistance as deemed relevant and allowable by law. The law outlines a proactive approach to increasing contact and cooperation between overseas Vietnamese and international organizations and/or individuals. Two key points of relevance to NGOs are the intention of the State to "adopt policies to attract Vietnamese intellectuals residing overseas and the world's brilliant experts to take part in scientific and technological development in Vietnam", and the openness to overseas investment in supporting development ventures in Vietnam. Overall, the new law is a positive and progressive step which will provide much needed support to NGOs currently in operation, and may also lead to a substantial increase in the emergence of independent development organizations in the coming years. Box 3: The community participation envisaged in the targeted poverty Programs 133 and 135 The National Target Program (NTP) for Hunger Eradication and Poverty Reduction (HEPR) - Program 133 in short - and Program 135 for Socio-Economic Development in Communes with Extreme Difficulties, aim to work in a decentralized way with promotion of community participation. However, reviews commissioned by UNDP in 1999 and 2000 indicate that most communities are not yet empowered to participate in decision making, management and evaluation. Their role in identification of the programs' target beneficiaries, planning for implementation and monitoring of results and expenditures is thus not yet realized, because decision making mainly takes place at provincial levels, while the programs lack the flexibility to accommodate local people's inputs. Local people have little information on *what they can expect in terms of program activities and benefits, how they can monitor the program's activities and raise complaints; women and other disadvantaged groups are often in effect excluded from community consultation meetings, and reliance on mass organizations as channels for information sharing and consultation proves problematic, since these tend to be weak in the poorest and ethnic minority areas. Proposal for utilization of a concrete participatory planning tool in the NTPs Despite the fact that the 133 and 135 programmes have requested the participation of communities in their planning and implementation processes, no clear guidelines on how to implement the principle have been introduced. At the same time, the NTPs have a great opportunity to inherit various participatory planning techniques, which have been tested through the donor-supported projects in different geographical and demographic areas. The most common technique the projects funded by donors and NGOs have introduced is Participatory Rural Appraisal (PRA). Its modification, Participatory Learning and Actions (PLA) is being widely applied, such as in the UNDP HEPR project in Quang Tri and IFAD/UNDP project in Quang Binh. Under the projects, the PRA international tool has been used to sharpen best practice in the conditions of each area in the country. For example, the UNCDF/UNDP Rural Infrastructure Development Project (RIDEF) in Quang Nam simplified the PRA tool, and the so-called focal PRA is being used under the established Local Participatory Process (LPP), which consists of nine steps from problem and project identification to implementation, monitoring and evaluation. It is proposed that the introduced participatory methods be studied for replication in the NTPs to practically implement the Grassroots Democracy Decree. 31 Partnerships for Development - Civil Society and Community Participation 2. Challenges for the future * To increase community participation, there is a need to clarify that community participation may involve more than contribution of local resources, i.e. that it includes actual involvement in decision making. A perception among authorities that poor people are able of giving meaningful inputs into decision making can be developed along with institutionalising the community participation. * Infornation is crucial: promoting greater awareness of the decree 29/CP, informing people about their rights and program opportunities, making special efforts to ensure that information reaches women, minority and vulnerable groups, ensuring officials know what information provision is expected from them and that they will be held accountable for this. Representation of women and ethnic minority people in Steering Committees need to be increased in order to reflect the diversity of interests involved. * To further to help peoples participation through the civil society, Vietnam requires a Law on Associations on NGOs, which offers a supportive environment, balanced with appropriate State oversight functions and accountability mechanisms. Simultaneously, sensitization and capacity building of government officials interacting with associations themselves, needs to be stepped up significantly, if these organizations are to fulfil their potential as partners to Government. * To make the participation of the civil society and communities effective, there is a need to build their capacities in terms of organisation, human capital, physical capital and financial resources. 3. Objectives of the Civil Society and Community Participation Working Group 3. The main purpose of the Working Group on Civil Society and Community Participation is to support enhanced people's participation in the development process in Vietnam in order to ensure the efficacy, the equity and the sustainability of investments made in this process. 4. The objectives of the Group are: 1) to support the Government of Vietnam in its efforts to increase people's participation in their own development; 2) to improve the coordination of external assistance to the nurturing of participatory methods of development planning and implementation; 3) to foster a network for leamning by doing and of information sharing about innovative new approaches to strengthen civil society and community participation in Vietnam; 4) to work towards a shared GoV/donor strategy in these areas; and, 5) to support capacity building for civil society and communities. 32 Partnerships for Development - Civil Society and Community Participation 4. Strategies and Activities a) Promoting Dialogue: The group should establish ways to open up a dialogue between Donors/INGOs and the Government Departments responsible for NGOs and commune based democracy, the indigenous NGO community and local community leaders. The group should find paths to operate on the principle of partnership. b) Coordinating Assistance: The group shall facilitate the coordination, in partnership with its various stakeholders, of the investments being made in support of an enhanced civil society and community participation in development. One way could be co-financing of workshops, training programs, research, studies or similar activities. c) Information Sharing: The group shall stimulate information sharing on lessons learned, good practice, events, projects, research, evaluations etc. within the area of enhanced civil society and community participation. The group may report on a regular basis to the government and the donor community on what is happening in the sector. The group should maintain a database on programming in the areas of civil society and community participation. d) Action committees: On concrete activities (such as workshops or studies), with an expected final product or outcome, the group may initiate and support the establishment of smaller action committees. 5. Past activities 5. The first meeting of the Group was held in February, 1999. Since then the Group has met about four times annually. The Group has started to compile an inventory of donor activities related to civil society development and community participation. It has also begun to dialogue with the Government Committee on Organization and Personnel (GCOP) about the possibility of coordinated donor assistance in support of its NGO Department and its Local Authorities Department. The first of these is involved in drafting a law on NGOs and the second is responsible for implementing the Government's Decree on the Regulation of the Exercise of Democracy in Communes. In November of last year, several members of the Group supported GCOP in hosting a three-day best practices workshop for the members of the Drafting Committee of a Law on Associations and some of its stakeholders. A meeting between INGOs, some local NGOs and donors held in June, 2000 was also supported by the group. 6. Planned/ongoing activities - Hold regular meetings, bi-monthly or needs based. - Stimulate and support other fora for dialogue between parties (LNGOs, INGOs, GOV, Donors, regional networks etc.) - Continued dialogue with the Government Committee on Organisation and Personnel (GCOP) about the possibility of coordinated donor assistance in support of a legal and policy framework through its NGO Department. 33 Partnerships for Development - Civil Society and Community Participation - Continued dialogue with the Government Committee on Organisation and Personnel (GCOP) about possible coordinated donor support to the implementation of the grassroots democracy decree through its Local Authorities. - Complete and maintain the inventory of donor activities related to civil society development and community participation. 7. Composition International and local NGOs, Bilateral and Multilateral Donors. Currently, SIDA, CIDA, UNDP, Ford Foundation, Action Aid, Asia Foundation, Oxfam GB, Swiss Agency for Development and Cooperation (SDC), New Zealand, Konrad Adenauer Foundation, CECI, the Netherlands Embassy, DFID, Embassy of Finland and the World Bank are members of the Group. Contact person up to end of 2000: Ms. Christine Johansson First Secretary Embassy of Sweden Tel: (84-4) 823-8454824/8235853-127; Fax (84-4) 8232195 Email: christinejohansson@sida.se 34 Partnerships for Development - SOE Reform and Equitization SOE REFORM & EQUITIZATION What is the Background? 1. The working group on state-owned-enterprise (SOE) reform was established to extend the work already been done by the working group on equitization; it has had only three meetings of the group, with participation by numerous donors and Government (e.g. NERC vice-chairman, MOF and MOLISA directors, etc). There has been limited NGO participation so far. The working group on equitization was established more than a year ago and has had regular meetings since then, exchanging views among donors, Government agencies and often consultants on various technical aspects of equitization. 1. What is the medium and long-term vision? 2. The Government envisages an efficient, competitive and financially healthy and growing SOE sector in its draft Socioeconomic Strategy; this covers not only utilities but also manufacturing and trading enterprises. For this purpose it is important for the SOE sector to limit its losses and its accumulation of non-repayable debt. At the same time, it will be necessary to make SOE managers more autonomous and more accountable, so that they are encouraged to take effective measures to make their enterprises more competitive and more efficient. This has become imperative in the face of Government's agreement to open up trade and investment under the ASEAN free trade arrangement (AFTA) and the United State bilateral trade agreement (USBTA) that are to be implemented over the next five to ten years. 3. SOEs account for 30 percent of GDP, 25 percent of total investment, 15 percent of non- agricultural employment and about 50 percent of outstanding domestic bank credit. Currently there are 5,300 SOEs (nearly 500 recently equitized) employing around 1.6 million people. A Government survey of enterprises in late 1997 found that around 60 percent of 5800 SOEs were not profitable and the debt-to-asset ratio of a large number of SOEs was excessive. This situation deteriorated over two years of slow growth, low domestic demand and inadequate competitiveness. This year there are signs of a strong recovery in SOE output. 4. This situation follows a significant contraction of the SOE sector over the last ten years in the number of SOEs (from 12000 in 1990 to 5300 today) and in actual SOE employment (from 2.5 to 1.6 million today). Their share of GDP and in industrial output has fallen too in the last ten years, mostly due to growth of the foreign-invested sector but also due to growth of domestic private sector, mainly of household enterprises 2. What is the strategy to achieve the vision? 5. In the words of Government's draft Socioeconomic Development Strategy (2001- 2010): "Government plans to make efforts to complete the program of rearranging, restructuring, and reforming managerial mechanisms to improve productivity in SOEs within 5 years. This includes equitizing SOEs where the state will not hold majority shares, in order to create more incentives for more efficient performance. In the equitization process, priority will be given for workers to access stocks, and at the same time to open stocks for outside domestic and foreign investors. Implementing the policy of sale, leasing or contracting of small SOEs, for which the 35 Partnerships for Development - SOE Reform and Equitization State does not need to maintain any ownership, will be part of these efforts. Merging or declaring bankrupt all ineffective SOEs, transforming SOEs into joint stock or limited liability companies, separating owners' rights and business autonomy of enterprises will be part of these efforts. Ensuring full autonomy and accountability in production and business activities for enterprises....." 6. These proposed efforts at SOE reformn in the draft Strategy are closely connected to reforms in the banking sector and to Vietnam's integration with the world economy. Reform of the banking system, which is also part of the Strategy, will require SOEs to perform efficiently in order to have continued access to bank-credit. Implementing commitments to integrate with the rest of the world through AFTA and USBTA, will require SOEs to take steps to become competitive in order to survive and thrive in the new environment. 7. To summarize, the Government's three and five year SOE reform program, that is awaiting final approval, seeks to do the following: * Diversify ownership through equitization (i.e. sale of state shares) and divestiture of SOEs (outright sale of entire SOE or free transfer of an entire SOE); * Liquidate SOEs that are classified as "ineffective" or non-viable; * Restructure large SOEs that remain in Government hands through various measures aimed at increasing autonomy, enhancing accountability, monitoring performing closely, developing pilot restructuring plans for three general corporations, and by, * assessing operational performance through "diagnostic audits" of large and troubled SOEs and taking actions on that basis. * Establish an adequate and effective social safety net for SOE workers that become redundant. 8. Diversify Ownership of SOEs. Equitizing and divesting SOEs is a major plank of the Government's strategy for SOEs. Measures aimed at enhancing effectiveness of equitization include removal of caps on shareholding of individuals and entities as well as timely announcements of details of proposed SOE-sales to allow greater participation. Government has also been piloting 'auctions" and "competitive-bid-tenders' as alternative methods of equitization in Haiphong. 9. Most of the SOEs to be covered by this component of the reform-plan will be small and medium-sized SOEs (with capital of VND 10 billion or less). To date more than 450 SOEs have completed their equitizations Of these more than 60 percent have sold more than two-thirds of their shares to non-state shareholders. 10. Liquidate non-viable SOEs. Equitizing or divesting non-viable SOEs will be difficult and hence they will have to be liquidated to avoid SOE losses and accumulation of non- repayable debt. Identifying SOEs as non-viable is often not easy. To-date the progress in this area has been very slow; this is in part because of the reluctance of SOEs to identify themselves 3Completed equitizations are defined here as those SOEs which have sold more than 51% shares to non-state shareholders, received a business license to operate under the Enterprise Law and have held the first shareholders meeting. This compares very well to the 17 that were completed by end- 1997. 36 Partnerships for Development - SOE Reform and Equitization as non-viable but in part it is also because the legal framework and the procedures for bankruptcy and liquidation are vague and unclear. There is need to streamline the framework and the procedures before liquidation can be implemented effectively. The Govermnent plans to establish an Asset Management Company (AMC) for banking reform, but its not clear whether recovery of bad debts can involve liquidations as well. The plan thus envisages a gradual rise in the number of liquidations that will be implementable in this period. 11. Restructure SOEs that remain in Government control. Most of the large SOEs under the General Corporations will remain in Government control under this three and five year SOE- reform program. For reasons of national security and special interest, large enterprises, strategic enterprises, utilities, including public service SOEs, will remain under full state ownership. However various measures are contemplated aimed at improving efficiency and competitiveness. There will be mergers where possible as well as downsizing through removal of non-core operations. Corporate governance will be improved through corporatization of enterprises, increased autonomy and accountability of managers. There will be operational reviews or "diagnostic audits" and regular monitoring of SOE performance through an improved information-system. Reforms of private sector and integration with the rest of the world will expose these enterprises to greater competition and banking reform will harden their budget- constraints. 12. Establish social safety net for SOE workers. A major concern for the Government is the potential of labor redundancies arising from equitization, liquidation and restructuring. The Government has provisions under the labor law to provide compensation for redundancy, but is considering a more generous separation package comprising a severance payment, an option for early retirement, and retraining. A Restructuring Fund has already been established using proceeds from equitization, and further streamlining of the Fund rules is in process. Government's reform plan envisages a potential redundancy of 400.000 workers over the five- year period. On average this will amount to 10 percent of the annual additions to the labor force and the total costs are unlikely to exceed USD 500 million for five years, and donors are willing to finance all of this cost. 3. What is the current and future role of different donors? 13. Donors have been providing technical assistance and advice for the formulation and initial implementation of the SOE reform plan (see Annex for details). Advisory services and technical assistance for formulating the reform program has to date focussed on the following specific areas: * assessing the current situation of SOEs and classifying them to determine measures to addressing their problems; * revising decrees on equitization, divestiture, liquidation and so on; * supporting the national Enterprise Reform Committee; * conducting operational reviews (or diagnostic audits) of large and troubled SOEs by independent consultants; * implementing SOE reform in line ministries and people's committees; * developing pilot restructuring plans for three General Corporations; and, 37 Partnerships for Development - SOE Reform and Equitization * developing a management information system to monitor SOE performance regularly. 14. Most of this assistance has been targeted at the National Enterprise Restructuring Committee, line ministries and people's committees with some going to Ministry of Finance. 15. Donors also plan to provide assistance to finance the costs of debt-restructuring of the SOE sector. This is to be done in conjunction with gradual re-capitalization of SOCBs over several years. 16. An assessment of the technical assistance that will be needed for implementing the banking reform program over the next three-to-five years is planned to be undertaken under the auspices of the working group. 4. What are the key monitorable indicators? 17. The following monitorable indicators have been proposed in different areas of reform: (a) Diversifying ownership * Share of employment and debt covered by SOEs that have been equitized/divested; * Number of equitized and divested SOEs that have sold more than 65% shares to non-state shareholders; * Number of equitized and divested SOEs where outsiders (i.e. not employees or managers) have bought more than 51% shares; and, * Total number of SOEs equitized and divested. (b) Liquidating non-viable SOEs * Share of employment and debt covered by SOEs that have been liquidated; and, * Total number of SOEs liquidated. (c) Restructuring SOEs that remain in Government control * Number of SOEs where diagnostic audits have been completed; and, * Number of SOEs that have been downsized in terms of employment. (d) Establishing social safety net for SOE workers * Number of SOE workers that have received financing from the Restructuring Fund; * Number of SOEs whose workers have received financing from the Fund; and, * Number of workers receiving early retirement package. 38 Partnerships for Development - SOE Reform and Equitization Annex: Donors' Current Support for Formulation & Implementation of Reforms Donor & Purpose (Implementing Agency) Status Grant Amount ASEM 1 European Designing Social safety net program to deal with I Completed (WB administered) labor displaced by SOE reform (CIEM in US$ 100,000 coordination with NERC) ....~~~~~~~~~~~~~~~~~. . ...... ..... ... . . ....-.. ..... .......... .................. ............ ........... .... ... . .... ..... ........... ...... ................. ... . . ......... ............. ............. ....... ..... . . ............. .... ASEM 4 European Acceleration of equitizing and restructuring SOEs in Consultants recruited. (WB administered) the Ministry of Transport. work begun US$ 439,000 . ASEM 5 European Support implementation of SOE reform in three line Recruitment of (YWB administered) ministries (industry, agriculture, and construction) consultants in process. US$ 1,470,000 and two provinces /municipalities (Hanoi and one _____ ___ _other). (NERC) ADB US$3,000,000 i Corporatization and corporate governance of SOEs Ongoing _~ I and SOE diagnostic audit - AusAid US$782,000 I Support a pilot program of divestiture of small SOEs Under implementation. & IFC US$ 180,000, in Haiphong (Haiphong People's Committee) using the auction process for equitization. Denmark .Adv'isor) ser% ices, public awareness campaign, the Completed in Jan 00. (WB administered) establishment of a MIS for SOEs, and capacity US$ 340,000 t building in NERC (NERC) Denmark Advisory services on implementation of the decree Completed in July (WB administered) on divestiture, and establishment and use of Support 2000. US$ 340,000 1 Fund for Equitization and Restructure (NERC) _ Japanese Int'l Coop "Study on Economic Development Policy in the i Phase 2- '97/'98 and Agency -- SOE part l Transition Toward a Market Oriented Economy in ! its follow-up is US$250,000 Vietnam" (MPI) ongoing. Japan PHRD Data collection and monitoring system for SOEs i Completed in June (WB administered) under SAC-preparation. It is also financing a survey 1999. US$ 218,000 of 350 SOEs (GDMSCAE, Ministry of Finance) Japan Special PHRD Diagnostic audits of selected SOEs to make Grant approved. (WB administered) recommendations (GDMSCAE, Ministry of Finance) Signing by US$ 4,120,000 for improvements. _ Government awaited Sweden SIDA I Support for implementation of SOE reform in Ho j Awaiting app administered Chi Minh City (HCMC People's Committee) US$ 1,300,000 UK (DFID) Pilot restructuring of three general corporations - Inception phase UK Pound sterling Vinatex, Vinacafe, and the Seaprodex (NERC) completed; next phase 1,800,000 under discussion US$2,145,800 ~ ~SrTengthening the C apacil) of the General Resident Advisor in US$2,145,800 { Department for the Management of State Capital and place. Assets in Enterprises", set up a MIS for SOEs (GDMSCAE, Ministry of Finance) UNDP I "Improving the Regulatory Environment for Ongoing. Expected to US$2,382,800 I Business" provides assistance to the Central Institute run to October 2001. | for Economic Management (CIEM) i AusAid US$ 250,000 Diagnostic Audits of large SOEs Ongoing Denmark US$ 200,000; CIDA US$1, 000, 000 l 39 Partnerships for Development- SME Promotion & PSD BANKING REFORM What is the background? I. This donor-government working group was formed recently and has met three times only. Prior to the formation of this group, discussions on banking among donors took place mainly through Bank-Fund briefing sessions on their discussions with the Government on the banking reform program in the context of the SAC/PRGF. The Government felt that it needed time to understand its problems, leam from external experience and develop a broad program of reform and then go to a broader group of donors to discuss its content and the need for support. Since the working group was formed, the Deputy Governor of SBV and Head of the Restructuring Committee has taken an active interest in this group and attended its sessions. The section on the vision and the strategy in banking is based on his presentation to the working group and on further work carried out at SBV and MOF on the ten-year Strategy in this area. Further work is planned by this group to assess the technical assistance needs in banking in the medium-term. 2. There are plans for this working group to expand beyond the banking sector to cover financial sector issues more generically as well. But given Government's own priorities, the initial emphasis on banking is viewed as appropriate by the working group. 1. What is the medium and long-term vision? 3. The vision is to develop a sound and stable banking system that can mobilize savings effectively and channel them to efficient investments so as to achieve rapid growth and poverty- reduction. In the words of Vietnam's draft Socioeconomic Development Strategy (2001 - 2010): 4. "Diversifying banking services -- mobilizing capital and lending; providing convenient and in-time services to all individuals and enterprises, supplying timely credit for production, business and other activities, including those in agriculture and rural areas - is the main purpose of the banking system. For this purpose, establishing a transparent, healthy and equal environment for all banking activities will be important. Supporting domestic institutions to improve their management capacity and skill in order to be able to compete with foreign partners will be necessary. Applying information technology, quickly expanding non-cash payment and automatic banking services, building a comprehensive legal framework that contains international principles and standards of banking activities, and improving supervision and inspection of the internal quality of credit institutions are among the measures that need to be taken. Solving the problem of outstanding non-perforning debts, in parallel with strengthening legal and administrative institutions on borrowers' liabilities and lender's rights will be necessary to avoid the situation of credit panic." 5. In the medium-term - say after the next five years - the vision has to be a more limited one. The banking system will be made solvent and competitive, with greater capacity for effective mobilization and allocation of resources. By then, there will be a relatively level playing field for all banks, creating greater competition and better banking services for all, especially Vietnamese firms that will face rising external competition. JSBs will have been consolidated into fewer but larger and healthier non-state banks competing for business with 40 Partnershipsfor Development- SME Promotion & PSD SOCBs that will also have become healthier and more commercially-oriented. Foreign banks and joint-ventures will also be competing in the same market. 6. To achieve this vision, many challenges will have to be met over several years. This is because Vietnamese banks - both state-owned-commercial banks (SOCBs) and non-state joint stock banks (JSBs)4 -- suffer from technical deficiencies, including poor accounting practices, inappropriate regulatory and supervisory systems, limited tradition of commercial lending, as well as non-performing loans and low profitability. Past emphasis on policy and directed lending has led to a very high share of non-performing loans in total loans of SOCBs. An inappropriate regulatory and supervisory system - one that did not focus sufficiently on risk and loan-quality -- permitted JSBs to conduct related-party lending and high-risk lending. Also staff in both SOCBs and JSBs need more training to understand and leam about commercial lending - assessment of credit-risk for existing and new loans, acquiring and using information on borrowers - as well as international accounting standards to comply with the new regulatory framework to be put in place. 2. What is the strategy to achieve this vision? 7. The Government has embarked on a five-pronged strategy to achieve this vision: address the problems cited above in order to develop a sound and stable banking system capable of delivering improved banking services needed for an industrializing economy. This will involve the following actions: * Restructure JSBs to strengthen and bring them into full compliance with new regulatory standards; * Restructure SOCBs to make them more commercially-oriented and more accountable; * Improve legal, regulatory anrd supervisory framework, including accounting; * Level the "playing-field" for all banks gradually; and, * Train staff in supervision and in commercial banking, using different arrangements. 8. Restructure JSBs. The Government plans to consolidate these 48 JSBs (52 in 1998) into a fewer number through closures and mergers, and strengthen and rehabilitate several others. This process has been going on, though slowly, since late 1998. Depositors are being fully protected in the closures and shareholders are being asked to provide the additional capital required to be in compliance with the regulations. Three JSBs have been closed, two have been merged and several others are currently subject to special control or supervision by the State Bank of Vietnam. 9. Restructuring SOCBs. Success of the SOCB restructuring plan - which is critical to the achieving the vision given its size -- will require not only the resolution of the existing stock of NPLs, but also the adoption of reforms within each SOCB, to ensure that they operate commercially and that future NPLs are minimized. Thus for reform and operational restructuring of each of the four SOCBs, ensuring the shift to commercial-orientation will be 4 Four SOCBs hold 80 percent of the system's liabilities and 48 JSBs around 15 percent and the balance by foreign and joint-venture banks. 41 Partnerships for Development- SME Promotion & PSD key. The Government and State Bank of Vietnam are in the process of preparing the detailed restructuring plan for each SOCB to achieve that objective and this is expected this year. 10. Improving legal, regulatory and supervisory framework. Prudential regulations accompanied by effective supervision of compliance with those regulations are necessary to ensure that prudent banking will be conducted in future. Numerous regulations were adopted on collateral, on foreign exchange operations, on deposit insurance, on conditions for intervening in troubled banks, capital adequacy requirements and on bank inspection (including definition of the scope and responsibilities of the SBV's Supervision Department) have already been issued. But more will be done e.g. in terms of loan-classification and loan loss provisioning to meet international standards in terms of transparency and accuracy of financial statements on banks. Strengthening of SBV supervision will be key to ensuring that banks operate prudentially. Accounting standards that reflect the true financial conditions of banks is a prerequisite for effective supervision. Supervision should be risk-based and include on-site inspections as well as off-site surveillance through accounting and auditing. To ensure this Vietnamese accounting standards need to conform with international accounting standards (IAS) so as to ensure true and accurate information on the financial conditions of banks. Specifically, banks' loan classifications and loan/loss provisioning should reflect the credit risk of loans but existing accounting rules do not do that. Further improvements in the legal framework are also planned, to facilitate resolution of troubled loans. 11. Leveling the playing-field for all banks. Government's reform program wants to increase competition among banks, but it plans to do so in a gradual and managed manner. Already, banks are now permitted to compete on the price of their loans since interest rates have been made flexible subject to a cap. Restrictions on mobilization of dong-deposits have been removed for joint-venture banks but remain for foreign banks; they are expected to be gradually reduced for foreign banks too. Restrictions on types of foreign currency lending have been removed. This gradual leveling of the playing field is motivated by the SOCB restructuring process, which will make it difficult for them to compete effectively during the next three years. This gradual leveling of the policy-environment will be important in generating competition from joint-venture banks and wholly-owned foreign banks. 3. What is the current & future role of different donors? 12. Donors have been providing technical assistance and advice for the formulation and initial implementation of the banking reform program as well as for strengthening the State Bank of Vietnam (see Annex for details). Advisory services and technical assistance for formulating the reform program has to date focussed on three specific areas: - financial assessment of JSBs and development of a plan for closure/merger; - independent audits of SOCBs and development of restructuring plans; and, - design and content of prudential regulations and the supervision system. 13. Most of this assistance has been targeted at the Bank Restructuring Committee, with some of it going directly to commercial banks. In addition, there has been funding of training for SBV in the general area of economic management as well as for supervision. 42 Partnerships for Development- SME Promotion & PSD 14. Donors also plan to provide assistance to finance the costs of bank restructuring. In particular the gradual re-capitalization of SOCBs over several years are expected to be financed by donors. 15. An assessment of the technical assistance that will be needed for implementing the banking reform program over the next three-to-five years is planned to be undertaken under the auspices of the working group. 4. What are the key monitorable indicators? 16. There has been discussion of the specifics that need to be monitored but no agreement on the appropriate indicators. (a) Improving legal, regulatory and supervisory environment * Share of loans subject to international loan classification & loan loss provisioning standards * Implementation of risk-based banking supervision * Implementation of training of SBV staff (b) Restructuring State Owned Commercial Banks * Annual milestones under each restructuring plan * Recovery Rate of NPLs * Share of policy lending by SOCBs * Share of NPLs based on independent IAS audits (c) Restructuring Joint-Stock Banks * Number of JSBs in full compliance * Capital adequacy ratios of JSBs that are not in full compliance * JSB credit to private sector as share of total JSB credit * Restructure JSBs and progressively reduce their number (d) Leveling the playing field * Share of deposits that can be mobilized in local currency Dong 43 Partnerships for Development- SME Promotion & PSD Annex: Donors' Current Support For Formulation & Implementation of Reform Donor & Purpose (Implementing Agency) Status Grant Amount ASEM I Europe Support improved transparency and financial Final Report is being (WB admin) information flows by assisting the Bank I prepared by consulting firm US$ 991,250 Restructuring Committee through support for loan (Arthur Andersen) workout teams, audits of selected joint stock Final Report is being banks, and strengthening of bank supervision prepared by consulting firm through a resident advisor, training and seminars i (Gide Loyette Nouel) (State Bank of Vietnam) ! ASEM 4 European Support diagnostic audits, due to diligence work Bid invitation for 10 selected (WB admin.) for closures, develop supervisory framework and urban joint stock banks has 1S$ 1,518 125 do operational restructuring action plans for 4 been evaluated. Award USS 1,518,125 SOCBs (State Bank of Vietnam) awaited. ADB US$900,000 Strengthening corporate governance at the Nearly completed. I Vietnam Bank for Agriculture AUSAID Diagnostic audit of Bank for Agriculture and Rural Completed. US$ 340,000 Development for (State Bank of Vietnam) Japanese PHRD Support the design and establishment of asset Report on content of US$ 1,282,400 resolution mechanisms for restructuring banks Restructuring Plans for 4 (WB admin) I (SBV) SOCBs completed by Vinstar 4 ~~~~~~~~~~~Limited Japanese PHRD Support for review of existing banks supervision Completed US$ 300,000 procedures and recommend revisions to strengthen (WB admin) supervision l German Support to the reform of the Vietnamese banking Project is being DMI11,000,000 system (State Bank of Vietnam) implemented. (GTZ admin) I Netherlands 1 -Support to independent audit of one SOCB and to i Completed study tours to learn about audit and regulatory structures in other countries (State Bank of Vietnam) | -Offer to finance twinning arrangements for one SOCB and other support to restructuring Discussion ongoing Switzerland Support to training seminar/workshops in country Ongoing US$250,000 for central bankers in foreign exchange, monetary analysis, banking etc... France Credit Line Canada Support to strengthening People's Credit Fund | ______ ______ _ - i European Union j rovision of credit line j 44 Partnershipsfor Development- SME Promotion & PSD SMALL AND MEDIUM ENTERPRISE (SME) PROMOTION AND PRIVATE SECTOR DEVELOPMENT (PSD) 1. What is the long-term vision? 1. The draft of a Socio-Economic Development Strategy (SEDS) 2001 - 2010 of the Central Committee of the Communist Party of Vietnam (SEDS) is "aimed at accelerating industrialisation and modernisation in the socialist orientation and creating a foundation for Viet Nam to become an industrialised country by 2020."5 The GDP will be doubled from 2000 to 2010.6 At the same time Viet Nam faces serious challenges in employment generation with unemployment figures at more than 7%, underemployment around 30% and an expected growth of the workforce of 11 million people over the next 10 years. Since unemployment and underemployment are major factors contributing to poverty, the creation of new jobs is crucial for the reduction of poverty. 2. In order to accomplish these aims the SEDS emphasises the importance of SMEs and private enterprises, especially in view of their widely accepted role in employment and opportunity creation for the poor. Today, SMEs generate approximately a quarter of GDP, employ around 50% of the Vietnamese labour force and are the fastest growing type of enterprise in terms of number. A flourishing private sector and a growing number of SMEs could accommodate new workers as well as labour made redundant by the ongoing reform of the State Owned Enterprises (SOEs), could be the key engine of economic growth, contribute to export growth and play a vital role in the modemisation and industrialisation of Vietnam. Therefore the Government should support the further development of the private sector and SMEs, the playing field between SOEs and private companies should be leveled, and the business environment in general be enhanced by: * simplifying the tax system, * streamlining administrative procedures, * reducing red-tape and corruption, * restructuring the banking system, * supporting measures for enterprises by strengthening already existing or, when necessary, creating additional institutions. 3. Special focus needs to be directed to SME development in rural areas where non- agricultural jobs are scarce, underemployment is high and poverty widespread. 4. Before private sector development and SME promotion were included in the SEDS, the Prime Minister's Research Commission on SME Promotion Policy (PMRC) was established in 1999 and various studies have been conducted. Some of the latest studies include: "Improving macroeconomic policy and reforming administrative procedures to promote development of small and medium enterprises in Vietnam" (1999) by MPI and United Nations Industrial Development Organisation (UNIDO), funded by the Government of Germany, and "Study on the 5 Central Committee of the Communist Party "Socio-Economic Development Strategy 2001-2010" (draft) p. I 6 Central Conmmittee of the Communist Party "Socio-Economic Development Strategy 2001-20 10" (draft) p. 6 45 Partnershipsfor Development- SME Promotion & PSD promotion of small and medium scale industrial enterprises in the Socialist Republic of Vietnam" (1999) by Ministry of Planing and Investment (MPI) and Japanese International Co- operation Agency (JICA). In addition the Private Sector Promotion Action Plan (PSPAP) was agreed upon between Vietnam and Japan, in 1999. 2. What are the key steps needed to attain this vision? 5. Since the 1992 Constitution, which recognised the right of freedom of business and equality before law for all sectors of economy, several steps have been taken by the Government in the direction of private sector and SME development. Most recently the SEDS, the PSPAP and a draft Governmental Decree on SME Promotion Policies Structure provide details how the Government plans to attain this vision. The fields of action can be clustered in the following five topics: enhancing the legal environment for SMEs; strengthening of existing and/or establishment of new institutions; easier access to capital; trade promotion and export development of SME/private enterprises; and, the image of the private sector. 2.1 Enhance legal environment for SMEs 6. In order to demonstrate clear commitment and to outline the strategy for SME promotion the Government announced its intention to promulgate a Decree on SME Promotion Policies Structure. It will provide guidelines on the support measures for private enterprises and SMEs covering areas such as encouragement policies and the set-up of support institutions. The Decree, which was originally planned to be promulgated in 2000, should be promulgated without any further delay. 7. Facilitate the establishment of new SMEs and make administration procedures simpler and more transparent. The SEDS acknowledges the problem concerning bureaucracy and complicated procedures. It is stated that "administrative reform must focus primarily on removing all bureaucratic regulations and procedures that hold back the development of productive forces and cause trouble to enterprises and people."7 8. In January 2000 the New Enterprise Law came into effect8. For the first time ever it permits non-discretionary registration of private firms, instead of Government approval, eliminates bureaucratic steps and regulates the approval of establishment of a new business, which has to be decided within 15 days of the submission of the application. This is a very important step in the right direction. However, implementation and enforcement of the New Enterprise Law is not yet consistent. Even though the Government has abolished many licensing requirements a great number of licenses still need to be obtained, depending on the field of business. Currently the Government is continuing its work to eliminate unnecessary licenses. Especially at provincial and local levels, the implementation of the New Enterprise Law needs to be further enforced, and additional instructions need to be issued by the Government. 9. Improving the situation concerning land use rights: Unclear and cumbersome procedures make it very difficult for private SMEs to acquire land. This presents a major obstacle, since access to land use rights is essential, especially to private enterprises as collateral for accessing credit. In order to improve access to land, the following steps are necessary: i) clarify and speed 7 Central Committee of the Communist Party "Socio-Economic Development Strategy 2001-2010" (draft) p. 30 8 Resulting in the establishment/registration of more than 10,000 new enterprises during this year. 46 Partnerships for Development- SME Promotion & PSD up procedures for land title allocation; ii) unify and modernise registers for land and buildings; iii) reduce heavy fees and taxes on registration; iv) provide clear, simple and fair procedures for resolving disputes. 10. Level the playing field for SOEs and private enterprises: As recommended in the SEDS, implementation of equal terms for all enterprises regardless of ownership should be carried out as soon as possible in all relevant fields, e.g. related to bidding for Government procurement, access to land and credit etc. 11. Simplify tax system: Vietnam has undertaken tax-reform, but the current system is still too complicated and non-transparent. Appropriate tax-reforms should be undertaken and aimed at i) a simplification and increased transparency of the tax system, ii) reducing tax on high- income earners to a level at/or below that of other ASEAN countries and iii) ensuring that all enterprises are treated equally regardless of ownership as suggested by SEDS.9 Table comparing Vietnamese tax rates with other ASEAN countries. Country Individual Income Tax (% Corporate Income Tax of net personal income) (% of net profits) Singapore 2-28 26 Malaysia 2-30 30 Indonesia 10-15-30 10-15-30 Philippines 1-35 35 Thailand 5-37 30 Vietnam 0-50 on foreigners 15-20-25-32 0-60 on Vietnamese __L Source: MPVUNIDO 'Improving macroeconomic policy and reforming administrative procedures o promote small and medium enterprises in Vietnam - 12. Promote electronic commerce: As in many other countries, E-commerce could play a vital role in Vietnam in the future. Currently however, especially in rural areas, lack of proper telecommunication, hardware and software, training, human skills and access to appropriate technology constitute major obstacles to the development of e-commerce especially for SME. Today only 72,000 Internet connections are registered in Vietnam. Therefore all efforts should be made by the Government to improve the current situation. 2.2 Strengthening of existing and/or establishment of new relevant institutions 13. Ministries and agencies involved in industry, planning, education and training, such as the Ministry of Industry, Ministry of Planning and Investment, Universities etc. are still geared towards support of the State Owned Enterprises (SOEs). Therefore all these organisations should shift their focus towards the private sector and SME in order to enhance the general environment. 9 Central Committee of the Communist Party "Socio-Economic Development Strategy 2001-2010" (draft), p. 21 47 Partnerships for Development- SME Promotion & PSD 14. Apart from access to capital most SME entrepreneurs consider lack of access to technical and market information, lack of skilled labour and know-how as main obstacles. Therefore concrete measures should be taken in order to enhance the business environment for SMEs by strengthening the existing organisations and/or establish new relevant organisations, if appropriate. 15. Perhaps the most important measures, which have already been agreed upon but still not implemented, include the establishment of a national SME Agency, which will co-ordinate a consistent SME development and which should be established within the next one or two years. In similar fashion at the national level a Council for Private Sector Promotion to be established will provide a forum for a regular dialog between the parties concerned. The Council - with participation from relevant organisations/institutions such as Government agencies, local authorities, business organisations/associations and representatives of private sector and SMEs - will also provide advice on private sector and SME encouragement policies and programs. 16. Taking into consideration the importance of mechanical engineering as a vital part of industrialisation and modernisation of Vietnam and enhancement of technical know-how of entrepreneurs the Government has decided to establish three Technical Assistance Centres (TACs) (in North, Central and South Vietnam). The TACs will not only concentrate on the enhancement of technical know-how but will support industrial sub-sectors such as textiles, ceramics, rubber/plastics, food processing and craft products, by providing engineering experts with experience in the specific area especially for SMEs. 17. It is furthermore necessary to establish an information system to provide data on the latest development for private enterprises by the Information Centre for Private Enterprises. On the provincial and local level the authorities should be encouraged to incorporate private sector and SME promotion into their local development plans. In addition appropriate institutions on the provincial and local level should be established or strengthened in order to support the private business environment. 18. Additional concrete measures should include a strengthened provision of Business Development Services (BDS) to assist the PS and SMEs improve their access to resources, markets, new technologies, qualified labour etc. International experience shows that a growing number of private companies are the most flexible and effective providers of BDS to the diverse and fast changing demands of the private sector. It should be noted that a number of public organisations including business associations, which provide these services already, exists in Vietnam and that they should be part of the future support to the BDS market as well. Since many SMEs are not aware of the existence of and benefits from BDS and/or are unable to pay market rates, the development of a well functioning BDS market needs to be supported by the Government and/or local authorities.10 19. In many countries business associations are playing a crucial role in identifying and advocating the needs and demands of the business community and in establishing a policy dialogue between the business community and relevant authorities. This has been acknowledged by the New Enterprise Law, which regulates, and the draft Decree on SME Promotion Policies Structure, which supports, the establishment and operation of private business associations. 10 Examples for support measures are the establishment of voucher schemes to enable SMEs to purchase Business Development Services; product development; awareness raising; market making etc. 48 Partnerships for Development- SME Promotion & PSD However the establishment of new business associations is still a cumbersome process and the Government is currently working on streamlining the regulations for the establishment of new business associations. 2.3 Easier access to capital 20. One of the major constraints for private SMEs in Viet Nam is the shortage of funds. Private SMEs are lacking long-term loans, an equity financing system and access to collateral. The strict collateral requirement by banks and the low incentives for State Owned Commercial Banks (SOCBs) to lend to SMEs and on the other hand the unwillingness of private SMEs to deal with SOCBs are serious constraints. This generates a vicious circle, which prevents many SMEs from entering the formal credit sector, and forces them to rely on informal credit. 21. The PSPAP includes more than 40 measures planned to diminish the constraints described above. It is based on three common principles i) defining Government policy to promote the private sector, ii) securing equal treatment for private enterprises vis-a-vis SOEs, and iii) granting private enterprises freedom to conduct business within the laws of Vietnam. Some of these have already been implemented such as the promulgation of the Decree on the Lending Guarantee, the Circular related to the Auction System and the Decree Liberalising Transactions involving Land Use Rights in 1999 and the establishment of the Stock Exchange Centre in 2000. 22. Others key steps to achieve further improvement in the financial environment for SMEs are the creation of a Two-step Loan Fund and a Credit Guarantee Fund. An agreement for a Two-step Loan Fund was signed between the Japan Bank for International Co-operation (JBIC) and the Government of Vietnam in 1999. It intends to provide long-term credit to SMEs through selected participating financial institutions (PFI), including joint stock commercial banks. The loan fund is now at the preparation stage for releasing the fund to those PFIs. It is expected that 70% of the beneficiaries from this fund will be private SMEs. The draft Decree for the establishment of a Credit Guarantee Fund for SMEs is also expected to be finalised this year. This Fund will further enhance financial institutions to lend to SMEs by absorbing a part of the credit risk, thus alleviating the current constraints of their insufficient collateral capacity. 23. There are also other measures proposed to be taken for further improvement of the regulatory framework on lending, mortgaging, leasing etc., and the pending banking sector reform will provide SMEs with better access to credit as well. 2.4 Trade promotion and export development of SMEs/private enterprises 24. The promulgation of three new implementing Decrees related to the New Enterprise Law in 2000 and the removal of some quantitative restrictions in import management represents a significant step forward in improving the trade and business environment for private sector development and SME support in Vietnam. Export licensing and trade management by quota is becoming less important than in the past. However some of the quotas now accessible to private enterprises need to be further opened up, and the bidding system should be more transparent. Also, special attention should be directed at the proper implementation of the new decrees, regulations and instructions of the Government. 49 Partnerships for Development- SME Promotion & PSD 25. At present, the major obstacle preventing SMEs from seizing trade opportunities is their limited experience of global trade. Fragmentary knowledge and understanding of foreign markets are some of the basic trade barriers. This applies not only for information about management accounting, technical requirements, marketing skills, import regulations and consumer preferences, but also for assessing the suitability of imported goods. Limited language skills of the entrepreneurs are also a problem. Lack of these fundamental skills could be a severe problem when Vietnam integrates in the global economy in the coming years. 26. Overcoming these difficulties requires not only an extended exposure of Vietnamese entrepreneurs to the world market, but also an intensive teaching and training of SMEs by organizing study tours, fellowships etc. in neighboring/foreign countries. 27. Beyond the information gap, the low level of competitiveness and the restricted ability to produce larger numbers of identical items of similar quality and on time are other severe trade barriers for local SMEs. Therefore, tailor-made quality management systems have to be propagated and implemented in order to enhance SMEs export opportunities. 2.5 Image of the private sector 28. The image of the private sector has to be improved in the country. The vital role of private companies for employment generation and modernisation of Viet Nam should be acknowledged and disseminated through the media and the educational system at all levels. 3. What should the role of different partners be? 29. To enhance the environment for the private sector and SMEs is a very broad task, which concerns many players. * The Government should be the facilitator in the field of private sector development by establishing the right legal framework and favourable/supportive business environment, and providing and/or channelling necessary domestic funds and foreign aid towards the market. The Ministry of Planning and Investment (MPI) is the designated Government agency to study the strategic orientation and propose proper policies for private sector development and SME promotion, also chairing the PMRC since 1998. Other important government players include the Ministry of Finance (MOF) (tax issues), the State Bank of Vietnam (access to capital), Ministry of Trade (MOT) (Trade, Import and Export), Land Administration Authority (land use rights), Ministry of Education and Training (MOET) and Ministry of Labour, War Invalids and Social Affairs (MOLISA) (training), Ministry of Science, Technology and Environment (MOSTE) and Ministry of Industry (MOI) (technology transfer) etc. On the provincial and/or local level the relevant departments of the People's Committees are the key players in the local policy field. * The business organisations/associations should play the role as the 'voice' of the private sector in the policy dialogue between the business community and the government authorities. * The commercial and non-commercial, private and public BDS providers (Vocational Training Schools, Universities, Business Schools, Co-operative Unions, Service and Information Centres, consultants etc.), and also business organisations (such as 50 Partnerships for Development- SME Promotion & PSD VCCI, UAIC, associations and clubs), are important players in the field of capacity building. * Due to the dynamic development in this field many donors, international organisations and NGOs are currently supporting PSD and SME, and others have expressed their interest to provide assistance/funding in the future. Therefore the PSD/SME Working Group is planning to carry out a survey on ongoing and future pipeline programmes/projects in the near future. 3.1 Short summary of ongoing projects and donor activities on PSD and SME * Governance, policy and legal advice: Germany, UNDP and UNIDO, Germany (GTZ); Japan. * BDS and export promotion: ADB, Canada (CIDA); Denmark; EU; Germany (CIM, DED, HWK, GTZ, UNESCAP/AAIEP, ZDH); Holland (SNV); IFC (MPDF): ILO; Italy: Sweden (SIDA); UNIDO and many NGOs. * Strengthening and building up of institutions: Germany (ZDH) * Access to capital: EU; Germany (DEG, KfW, GTZ); IFC (MPDF); Japan (JBIC); Sweden (SIDA); World Bank, ADB. 4. What are the key monitorable indicators? 30. The monitoring of the implementation of the above-mentioned key steps by the Government together with the donor community is a vital issue. Indicators should be established in all these areas: (i) an enhancement of the legal environment, (ii) strengthening/establishing relevant institutions, (iii)ensuring easier access to capital, (iv) easing import and export for SMEs and private enterprises (v) improving the image of the private sector. 31. Deadlines for the successful implementation, and measures to be taken, of the Private Sector Promotion Action Plan have been already agreed upon as part of the bilateral agreement between the Governments of Japan and Vietnam. These deadlines could be used to analyse the pace of the process in the future. 32. The development of number, output and employment generation of SMEs and private companies and their sustainability can be used as indicators. 'I 11 In case the number of newly registered enterprises is taken as an indicator, it should be mentioned that many of these newly registered companies have been operating already before the promulgation of the New Enterprise Law, in the form of household enterprises. In general the current data available on SMEs cannot be considered sufficient and accurate. Therefore the General Statistics Office (GSO) of Vietnam and UNIDO are planning to establish a new system to improve the data concerning the industrial establishments including SMEs. 51 Partnerships for Development- SME Promotion & PSD 33. During the last years various surveys and research work have been conducted by different organisations, describing the views of the business community concerning the business environment. The recommendations and results of these surveys should be used in monitoring the Government's success in its continued efforts to support the development of the private sector and SMEs in Vietnam. 52 Partnerships for Development - Education EDUCATION Introduction 1. This short sector note summarizes government's goals and ongoing donor12 support to education in Vietnam. It focuses mainly on basic education and has four short sections. First, it summarizes the Government's long-term vision for the sector. Second, it examines "how" to reach this vision, and suggests some key strategic choices or realignments to reinforce the feasibility of the program. Third, it summarizes current and future roles of national and external partners, and indicates steps to reinforce partnership and collaboration. Finally, the note lists indicators and their target values for Vietnam's education sector over the next ten years. 1. What is the long-term vision for education? 2. The long-term vision for education and training of the Government's draft 2010 strategy lists multiple objectives, among them: * broad intellectual development for all citizens enabling each to participate actively, innovatively and flexibly in a fast evolving and growing economy. * specific leaming goals include: (i) independent and creative thinking; (ii) self-discipline and social responsibility; (iii) control and use of science and modern technology; (iv) teamwork and community skills and spirit; and (v) healthy and harmonious living. * improvement of the quality, effectiveness and availability of education, together with increased responsiveness to provide the manpower required for a modernized and industrialized Vietnam while, at the same time, meeting the educational aspirations of all segments of the population. * consolidation of achievements in universal primary education and literacy; expansion of physical facilities to achieve full-day primary schooling; universal lower-secondary enrolment; further development of vocational education; and creation of some high-quality education institutions that meet regional and international standards. * strengthened teaching and managerial staff in education and training; and use of information technology in education by connecting schools to the internet by 2010. 3. This broad vision for education is owned by the government -- through the Ministry of Education and Training (MOET) and its institutes. The MOET and its National Institute for Education Development presented and discussed this strategy with government agencies and with Vietnam's development partners in August 2000. Quantitative targets for different levels and types of education taken from the 2010 strategy paper are listed in section 4 (clarification on some quantitative targets would be useful -- e.g., the definition used to date by Government for 12 A commitment to improved coordination was made by participants during the Consultative Group (CG) meeting of December 1999 and repeated at the informal CG meeting in Dalat in June 2000. Guidelines for the preparation of these notes were endorsed by the Ministry of Planning and Investment and circulated to Vietnam's development partners. 53 Partnerships for Development - Education universal primary education differs from that adopted internationally. Nevertheless, these targets have attracted the interest of a large number of external partners). 4. The broad scope and wide range of goals implicit in this vision make it difficult to assess coherence and to identify and resolve inconsistencies. Greater prioritization and clarity, and in some cases revision, would make the choice of critical steps to reach the vision easier. Introducing consistency and coherence and resolving the incompatibilities and conflicts between competing goals, while retaining this broad agenda, will place strain upon the system. Several commentators, both national and external, have suggested the need for selectivity and a smaller set of core goals. Sector management is working to address these comments and to further focus the strategy. 2. What are the key steps required to achieve this vision? 5. The Government's 2010 strategy lays out some actions, choices and principles to guide and govern movement towards the vision. It specifies four key "break-though" actions: * constantly reform curriculum, teaching and training methods, and education organization. * improve the managerial capacity of the education system, making it more effective and responsive to its new role in a changing environment -- providing education services, monitoring and evaluating system performance as well as its elements. * targeting investments to: (i) create some high-quality institutions; and (ii) generalize lower- secondary education, while (iii) supporting disadvantaged areas and individuals. * mobilize more non-state resources for education through charges and fees (socialization) following the principle that the higher up the education ladder, the greater the degree of non- state resource mobilization. 6. These principles and actions are well chosen and some steps have been translated into operational targets. But there are some omissions or missing steps in the draft strategy. Additional prioritization is needed to ensure policy coherence and compatibility across all objectives and to choose which steps meet government's goals and its equity commitments in education. Six additional policy choices would make the definition of the key steps easier. 7. First, it would be useful to introduce a clear and categorical statement on the roles of the state (central/local government) and the private sector in education and training. Government's strategy welcomes private financing of the sector (both the education law and decrees on foreign- owned investment in education provide for an increased financing role for the private sector). However, in practice the attitude to private provision of educational and training is mixed. What is missing is the enabling environment that promotes private sector provision of education and training. With a clearer statement on the roles and responsibilities of the state and the non-state providers of education, several actions would become clearer. If the state passes greater responsibility to private and public sector employers to provide technical and vocational training to their workers, through alternate training/work-experience courses, in-service and related practical training (in effect asking both private and public sector business to provide vocational training for the labor force they need), then the state could focus its own efforts on providing literacy and basic education and ensuring that equity, quality and performance targets are met throughout the system. 54 Partnershipsfor Development - Education 8. Second, the choice of key steps would be clearer if the overall financing strategy for education sector gave more detail about the expected level of state, non-state partners, and beneficiaries and their families. The strategy sets targets for the proportion of the total state budget allocated to education (to rise from 15% to 20%). But a more equitable geographic distribution of state resources on education spending requires analysis and possible revision of the allocation of local taxes and levies to improve fiscal equalization across provinces. 9. Third, procedures for targeted support to priority programs and/or disadvantaged groups need to be put in place. The overall financing strategy needs to take into account levels of household expenditure on education and the assumptions made by government about cost recovery or "socialization". On the latter, the government's present strategy requires high levels of financial participation from households in basic education but does not contain a mechanism to protect the poor from a disproportionate financial burden. Relaxation of such assumptions for the poorest is needed urgently. In addition, targeting in education must go beyond the financing issues and address the need for quality education and training for ethnic minorities and the gaps in quality of education achieved by different regions, income and gender groups. 10. Fourth, further details are needed to guide choices on curriculum content, learning techniques and instructional methods. Moving away from the past approach of "static" learning (a system that relies almost exclusively on the application of memorized facts to predetermined situations), to a modem "dynamic" knowledge system (that has the flexibility to adapt to uncertainty and a continually changing environment and that includes improved, problem solving, team and communication skills) will require some relaxation of the present tightly controlled curriculum. Instructional methods in the "dynamic" knowledge system are more time-consuming and the move to the new curriculum will require streamlining curriculum content and a substantial increase in effective instructional time (extending the school day and academic year). The move to a knowledge society requires broader information flows and liberalization of internet access. 11. Fifth, to be complete, the strategy needs to develop basic performance standards for all learners, teachers and institutions, and ensure that these basic standards are met. Presently, the strategy does not define a minimum guaranteed national performance standard for every pupil in basic education. Instead, the system relies on a long tradition of excellence for a few, with very high performance targets for talented students (a tiny proportion of the total learners). It places most emphasis on monitoring inputs (norms for physical space, room size, playgrounds, etc.). The system now needs to move from monitoring inputs to outcomes, to define these outcomes in terms of an expected level of performance for the majority of learners, and to ensure that such standards are revised and updated regularly. It needs to put in place monitoring and quality assurance activities that will ensure that such standards are consistently met in all institutions. 12. Finally, as choices on the role of the State become clearer, as the roles and responsibilities of the various stakeholders are clarified, as greater coherence, focus and selectivity are introduced, then questions about the institutional structures and the related procedures will need to be answered. The strategy is currently silent on this and does not yet propose adjustments in the institutions responsible for implementing the 2010 vision. One possible choice would be to disengage the sector ministry from daily provision of education services and move responsibility for the delivery of educational services closer to the learners, thus allowing the sector ministry to concentrate on setting educational policy, standards, and 55 Partnerships for Development - Education providing quality assurance. This will require capacity building in quantitative and qualitative education analysis: e.g. collection, analysis and interpretation of geographic, income, gender, and ethnic disaggregated statistics, analysis of policy planning and budgeting processes as well as outcomes, and drawing policy implications. 3. What should the role of different partners be? 13. Donors have not yet examined their current programs or started to redirect their support to implementing the strategy. Many ongoing or planned education projects were not developed specifically to implement the government strategy, but they may fit into this framework. A summary mapping of external support programs to education and training is given as follows. Education level/type Major sources Other sources Pre-school UNICEF Some NGOs Primary EU, IDA-WB, JICA, Oxfam, Save-the-Children, Norway, UNICEF UK/DFID Secondary ADB Technical & ADB France, GTZ, Netherlands, JICA, CIDA, Vocational AusAID, Korea, Spain, Nordic countries Teacher Education ADB, IDA-WB & Belgium, Oxfam, Save-the-Children, (DFID DFID & AusAID English language programs) Higher & University IDA-WB, JICA, Canada, Netherlands and other direct AusAID/scholarships, university-to-university arrangements Research Canada, Ford Foundation, SIDA, UNDP and UNIDO 14. To date, partnership in education among donors and between the donor community and govermnent has been either (i) information exchange, or (ii) informal coordination between specific agencies. After a hiatus of two years, the "Education Forum" has been reactivated and provides a highly successful mechanism for information exchange on themes that interest its majority membership (NGOs -- minority and basic education issues). Recently, topics have been broadened and, through key presentations from government on their plans and programs, the Forum's meetings have demonstrated partnership and engaged the government in the Forum. Outside the Forum, the strategy for coordination followed by larger donors has been to avoid duplication and overlap by selecting levels/types of education or specific geographical areas. There has also been some inter-agency coordination around some donor programs. This approach has worked well, but integration of donor programs and their coherence with each other and with government's programs has been limited by the absence of a strong coordination mechanism. For such coordination to take root, the sector ministry will need to be empowered and reinforced so that such pro-active donor coordination is eventually led by government. 15. Donors acknowledge the need for increased coherence across all education programs and better alignment of external support with the government's program. Several donors are discussing strategies that would move beyond the information exchange --ably provided through the Forum-- to support a coordinating mechanism that builds upon a common set of coherent, mutually reinforcing strategies that are applied to external support programs. Actions under discussion to advance this increased partnership include: (i) an annotated inventory of externally 56 Partnerships for Development - Education funded projects/programs by level, type of education and objectives (expansion, renovation, content reform, etc.); (ii) internal review by all donors of their future programs (pipeline review); (iii) mapping of the Government's sector strategy and the donor programs onto a coherence matrix to identify mismatches, inconsistencies and conflicts; (iv) a period for donors to adjust and realign external support programs; and (v) grouping and packaging of donor activities into broad coordinated sector-support programs. 16. Themes that provide an opportunity for strengthened collaboration between partners and could contribute to increased policy coherence include: * Ethnic minorities NGOs, UNICEF, IDA-WB * Management information systems EU, NGOs, UNICEF, DFID, IDA-WB * Revisions of budget allocation norms UNDP, IDA-WB * Measurement of achievement HEP, IDA-WB, ADB, EU 17. A long-term goal for such a coordinated approach could be to move from free-standing traditional capital investment projects to programmatic support with major partners sharing information and jointly designing with Government a program of support for basic education. Several donors are currently exploring this approach (IDA, DFID, JICA, AusAID & CIDA) through a possible program of support to basic education for disadvantaged children that would consolidate universal primary education achievements and complete the move to universal primary education in difficult and resource-poor areas. 4. What are the key monitorable indicators of progress for short/medium term? 18. Several of the monitorable indicators are written into the Government's strategy. These not only show the focus and emphasis of the Governments program but they provide quantitative targets that can be used to assess the magnitude of the program and the resource requirements. Enrolment: (dis-aggregated by income, ethnic, and gender groups) 2005 2010 * 3-5 year pre-school children 58 67 % of * 5-year-children 90 98 the * primary net enrolments 95 98 official * lower secondary net enrolment 82 90 age- * upper secondary net enrolment 45 50 group * post-lower-secondary enrolment in vocational training 15 25 * technical training enrolment after upper secondary school 10 15 * number of students (higher education) per 10,000 population 140 200 Content and Quality: (dis-aggregated and national figures) * introduction of new primary curriculum in 2000/01 and trial of textbook lending 2000/02; 57 Partnerships for Development - Education * pilot trials of lower secondary curriculum 2001/02; * new (full) curriculum coverage (% of children to be taught by new curriculum) by levels; * assessment of national standards in maths and reading students and teachers; * % of children from the two lowest income quintiles that have free textbooks; * 40% of primary teachers with college qualification; * 60% lower secondary teachers with university degree; * 10% upper secondary teachers with masters degree; * 45% university teachers with masters degree and 25% with PhD degree; * % of labor force with higher, technical/voc. ed. increased to 32% (2005) & 42% (2010). Infrastructure: * one well-equipped lower secondary school in each commune; * one upper secondary school and one vocational/training center per district; * 2 new universities established in 2005 and 4 in 2010. Finance: * public spending on education increased to 20% of total expenditures; * move to per pupil budget allocation method; * increase fees to between 3% and 25% (depending on level/type of education); * linking financing responsibilities by type/level of education to different administrative structures (pre-school from local communities with some state assistance; primary free but with discretionary charges for additional services / second half of optional full school day in urban areas; districts & communes responsible for basic education infrastructure; provinces for secondary infrastructure with state aid to poorest communes); * 20-40% of lower secondary enrolments in semi-public and private schools. Partnerships and cooperation: Immediate process indicators for partnership and coordination include: (i) re-activation of "Education Forum" (completed); (ii) discussions on the government's 2010 education strategy paper (underway); (iii) formulation of a framework mechanism to increase coordination by government; (iv) use of the UPE/EFA program as an integrating theme; (v) move to programmatic external support in basic education. 58 Partnerships for Development - Health HEALTH History 1. A first "donor co-ordination" meeting was held in March 1997 after a lengthy period of preparations. The meeting gathered over one hundred persons from the Ministry of Health (MoH) and the majority of the organizations working in the health sector in Viet Nam. A few months after the meeting, in January 1998, the Minister of Health established a new department in the Ministry of Health: the "Project Coordination Department" (PCD). The PCD has been very successful in improving coordination and in organizing the International Support Group (ISG) meetings. The purpose of the meetings is to provide an informal forum for exchange of information, discussions and recommendations on health sector support between the MoH, international organizations and the donor community. The ISG-meetings started in 2000 and will be held regularly on a 3 monthly basis. Three meetings have so far taken place in accordance with the timetable. The MoH and all the participants recognized that these meetings have contributed greatly to restoring the quality of partnership and the relationships between the MoH and the donor community. 2. Before the creation of the ISG meetings, the elaboration of a Vietnam Health Sector Review brought the MoH and some of the core donors together during 1999. The Review was a joint donor-MoH activity executed by the World Bank. A working group was established to review the background reports and the draft Review. A number of meetings were held that concluded in a final "Health week" where the background documents were presented and discussed with invited experts. The Review is now being finalized in close collaboration with the MoH. The working group in health will continue to meet on a regular basis under the chairmanship of WHO; the informal approach used in the group permits discussion of all types of issues and has enhanced the dialogue with MoH, including various institutes. In addition to the working group on health, there are a number of sub-working groups on specific subjects, e.g. reproductive health, food security and safety, safe motherhood. There are also partnerships between the MOH and different organizations on specific issues; one example is the support provided by SIDA, USA Embassy and UNICEF to MoH for the preparation of a national plan for accidents and injuries prevention. 1. The long-term vision for the health sector 3. The MoH has developed a strategy for people's health care for the years 2001-2010 that has been submitted to the Prime Minister for approval. The strategy is based on an assessment of the last 10 years and looks at achievements, problems and new challenges. The new strategy recognizes the important role of health and the need to invest in health for accelerated socio- economic development and for improving the quality of life of every individual. The strategy is based on four principles: (i) equity and efficiency of the health sector, (ii) fighting against the broad social determinants of bad health, (iii) integration of traditional and modern medicine and (iv) appropriate public-private mix with the government in a position to protect the public interest. 4. The goal of the strategy is to improve the overall level of health (as indicated by health targets to be achieved) and the distribution of health among all the population (ethnic minority 59 Partnerships for Development - Health groups, women, children, poor and the elderly). This will be achieved by continuing to combat communicable diseases; preventing and managing non communicable diseases and unhealthy lifestyles; and developing equitable health care services which can provide good quality preventative and curative care to everybody at an affordable cost for the individual and the community. 5. The health targets to be achieved by 2010 are as follows: * Average life expectancy at birth will increased up to 71 years, * Maternal mortality ratio (MMR) will be reduced to 70/100 000 live births, * Infant mortality rate (IMR) will decline to 25/1000 live births, * Under five mortality rate (U5MR) will decline to about 32/1000 live births, * The rate of low birth weight births will be reduced to 6%, * The rate of under five malnutrition will be reduced to25%, * The average height of youth will reach 160 cm. 6. The strategy outlines the main policies and proposals of the government to achieve the above objectives and targets: * health financing, with a focus on the need to use different resources including the government budget, social health insurance, community's contribution. The plan is to use more effectively the govermment budget and to move to prepayment schemes in the medium term. The integration of foreign aid resources into the government budget will also be explored. * reviewing and strengthening the organization of the health sector, including developing regional general hospitals and rearranging the system of medical schools; developing human resources accordinig to the need of each level; and, improving training. * consolidating and developing PHC/community based services including the introduction of new management methods to ensure higher effectiveness (IMCI, CBM, etc.) * strengthening preventive care and health promotion in order: (i) to decrease the incidence and prevalence of diseases such as tuberculosis, EPI preventable diseases, dengue fever, HIV/AIDS, etc; (ii) to control non communicable diseases and new public health problems such as injuries, food-borne diseases, tobacco in close collaboration with other ministries and partners; (iii) to develop reproductive health and reduce the maternal mortality rate and the abortion rate. * improving curative care and putting in place an effective referral system and good management practices. This will be accompanied by standardization of equipment and technologies, essential drugs lists, improvement of the quality of diagnosis and treatments, etc. 60 Partnerships for Development - Health * developing traditional medicine and continuing the implementation of the national drug policy in order to promote the use of traditional drugs and the rational and effective use of modem drugs. * developing new technologies to catch up with other countries in the region. * finally, improving the capacity of planning and management in all areas within the health sector. 7. This strategy is owned first and foremost by the Government through the MoH, which has consulted broadly at all levels of the health sector. The UN organizations, the donor community and many NGOs expressed their support in a meeting in September 2000 when the MoH presented the strategy. 8. The strategy has been developed mainly within the MoH, however the health sector review which outlines key policy questions and a large number of discussions between the MoH and the international community has helped to shape the current strategy paper. 9. As it stands today the strategy provides a broad basis for further planning and can be seen as an orientation document for the development of the health sector. In addition to the strategy a number of sub sector strategies have also been developed in close collaboration with the international community; these include the national strategy on nutrition, the policy and strategic plan on tobacco control, the reproductive health strategy, the AIDS care plan, etc. 2. Key steps needed to achieve the objectives of the strategy 10. In the next few months the MoH will issue a detailed annual plan for 2001, and a 5 year plan. Upon release of the annual plan for 2001, which will include activities, indicators and budget, the international community will undertake coordinated efforts to support implementation. The ISG and the partnership group on health will continue to be the appropriate mechanisms for such an interaction. The process of working together should facilitate the emergence of a shared view on the solutions needed to move forward. The first Viet Nam Public Health Report, which will be prepared in the next few months, in close collaboration with WHO and some international agencies, will be an important milestone in the identification of these appropriate policies and strategies. 11. As many issues are still unresolved, more operational research will be needed involving the academic commnunity and debates need to be organized within the Government and between the Government and other partners before consensus can be reached on solutions. Issues, which need to be addressed, relate to the performance of the health sector in improving health, especially for the poor (e.g. access to, financing and quality of the health system). They also relate to the institutional arrangements needed to strengthen the MoH's role in leadership and capacity to develop and monitor policies and strategies (e.g. decentralization). 3. Role of different partners 12. It is agreed by most of the partners in the health sector that: (i) the government through the MoH and other related ministries should keep the initiative in policy setting, budgeting and implementation. 61 Partnerships for Development - Health (ii) the donors should continue to work closely with the government in supporting the development and implementation of policies and programmes, however the pace of reform should take into account the administrative capacity of the MoH. (iii)the donors should make all efforts to reduce the burden on MoH of multiple aid management procedures. (iv)coordination remains the key to success and requires stronger commitment of all parties. 13. Today, in practice most projects for the health sector seem to emerge from ad hoc missions initiated by each donor agency individually and are rarely coordinated with those of other donors or with the Government's own planning. A first major improvetnent has been the creation of a database in the MoH, which provides information on how ODA is shared between different sub-sectors/areas (see table attached). The second step could be the elaboration of an effective operational ODA programme structure for priority areas in the health sector that can serve as a base for joint discussions and planning of new projects. Within each area, donors and the MoH should work together to shift emphasis from input-related targets to outcome-oriented programming and budgeting with a strong evaluation component. This improvement in the management of ODA can bring important gains in effectiveness and efficiency. 14. The set up of the ISG under the leadership of the MoH and the revitalization of the partnership group on health create an environment which can facilitate the dialogue and increase understanding, transparency and awareness. 62 Partnerships for Development - Health Main area/programme Main donors 1. Health policy, planning, Sweden, UNFPA, WHO, ADB, World Bank, EC, management and evaluation Netherlands, UNICEF 2. Primary Health Care ADB, Australia, Belgium, EC, France, Korea, Netherlands, Sweden, UNICEF, WHO, World Bank, United States, SIDA Canada 3. Hospitals LAEA, Belgium, France, EC, Germany, Italy, Japan, Korea, Spain, USA, WHO, Luxembourg 4. Pharmaceutical and biological Belgium, Japan, Spain, Sweden, WHO products 5. Traditional Medicine Spain, WHO 6. Communicable diseases 6.01 Malaria Australia, Belgium, EC, Germany, UNICEF, WHO, World Bank 6.02 Dengue Australia, Canada, UK, WHO 6.03 Tuberculosis Netherlands, WHO, World Bank 6.04 Leprosy Belgium, WHO 6.05 Control of diarrheal UNICEF, WHO diseases 6.06 Parasitic intestinal diseases WHO 6.07 Acute respiratory infections - UNICEF, World Bank, WHO 6.08 Sexually transmitted WHO, ADB infections 6.09 HIV/AIDS Australia, EC, France, Ireland, Japan, UNDP, Norway, UNICEF, UK, USA, WHO, ADB 6.10 Immunizations Japan, UNICEF, WHO 7. Non-communicable diseases prevention and control 7.01 Cancers WHO 7.02 Cardiovascular diseases WHO 7.03 Diabetes WHO 7.04 Mental health WHO 7.20 Other WB (School based oral health programme) 63 Partnerships for Development - Health 8.01 Mother and child health Australia, EC, Japan, France, Italy, Netherlands, Sweden, UNICEF, USA, WHO, World Bank 8.02 Reproductive health EC, Japan, Netherlands, UNFPA, UNICEF, United States, WHO, ADB. 8.03 Family planning ADB, Australia, EC, Germany, UNFPA, World Bank, United States, 9. Nutrition 9.01 Anaemia UNICEF, WHO 9.02 Vitamin A Deficiency UNICEF 9.03 Iodine deficiency Australia, Belgium, UNICEF 9.04 Food supplement Australia, UNICEF, WFP 9.20 Other, nutrition EC, France, The Netherlands, UNICEF, UK 10. Aging and health WHO 11. Disability and rehabilitation Australia, Czech Rep, Germany, Luxembourg, Norway, Netherlands, WHO, MCVN-Netherlands 12. Healthy environment WHO, Korea 13. Training France, The Netherlands, Australia, WHO, EC, Sweden, Ireland, Korea 14. Study United States Note: Information compiled from a Compendium of the AMC for on-going projects at the end of 1998, DCR of the UNDP for on-going projects at the end of 1998, and Reports of provinces/institutes sent to the PCD so far. 64 Partnershipsfor Development - 5 million hectare Reforestation Program THE FIVE MILLION HECTARE REFORESTATION PROGRAM13 1. What is the long-term vision? 1.1 The Vision: 1. An environmentally sustainable rural economy comprising: (a) forests covering 43% of the country with (i) soil erosion in vulnerable watersheds, flooding and siltation rates of reservoirs substantially reduced, (ii) better balanced year round water storage for hydro-power generation, household and productive use, and (iii) valuable bio-diversity preserved; and (b) a Hill and Mountain Economy free of hunger, with substantially reduced poverty and secure and resilient livelihoods. 1.2 Its Ownership, Origin and Evolution 2. The Government of Vietnam (GOV) is in full ownership of the Five Million Hectare Program (5MHRP). The origin of the program lies with the Decree 327 Program (focussed on infrastructure, forestry and land settlement) of 1993-96. This program is modified by Decision 556 (from 1997-98) and was, as a result, re-oriented towards forest protection. The current Five Million Hectare Program (5MHRP) is focused on the following to realize the vision above: (a) the creation and more effective protection of special use forests and watershed protection forests; (b) the economic regeneration or expansion of forests to meet domestic consumption and export needs of the wood products industry; and (c) the effective development of communes with bare lands/hills to create more employment, improve incomes and reduce the pressure on forests. The vision has had comments from selected members of the Partnership, ADB and Vice-Minister Nguyen Van Dang of MARD. 2. What are the Key Steps needed to affain this vision? 3. The key issues and sub-programs, given below, constitute the key steps or "sub-visions" to attain the above vision. 2.1 Land Use Planning, Forestland Classification, Allocation and Tenure 4. To make more forestland available for sustainable production or protection and to provide appropriate tenure security for agro-forestry investments, priority would be given to land use planning and classification to identify vulnerable communes and mini-watersheds for priority protection and the preparation of realistic land use plans. This will be done after re- classifying current protection forests into a simplified category, largely be based on slope and adjusted for current levels of population pressure. The remaining areas not retained as protection forest will be classified as either suitable for agriculture or production forests. In conjunction with household allocation, production forestland could be considered for competitively-bidded long-term concessions to the private sector for commercial activities like industrial crop production. However, for production forests located in critical watersheds or riverbanks, land classification will also take into account minimum forest areas needed to be consistent with land !3 This version of the "Vision Theme Note" represents work in process. 65 Partnerships for Development - 5 million hectare Reforestation Program cover and water conservation. Community-based land use planning would be undertaken at the village/hamlet level in such a way that local officials' influence will be minimized and "true" community needs/ problems can be presented and resolved.. 5. Land allocation (the issuance of land use certificates or red books) and the assignment of related rights and obligations will be undertaken simultaneously for all types of land in each village/hamlet lacking such rights. Community based land-use planning and establishment of boundaries and, where necessary, their demarcation, will form the basis for land allocation. For organizations and households, land use certificates can be issued to them under the law. However, the issue is how do we satisfy the needs for traditional community rights? Furthermore, hurried issuance of redbooks may be counterproductive if it leads to further conflicts. Until proper community land use planning is completed, a "pre-red book" -- the present "forest registration booklet" (to be given expanded legal rights) would be issued. Stipulated land use restrictions in the forest registration application would be minimal. The capacity to undertake classification, land use planning and forestland allocation will, at the same time, be considerably strengthened. Nearly landless or landless households suffering net losses from the land allocation process will be given priority for new land available for allocation. 6. To ensure environmental sustainability in the protection of priority conservation forest areas (i.e., protection and special use forests), protection contracts for selected conservation parcels will continue to be issued for a specified period. Protection contract arrangements would typically be carried out at the community level in order to instill an element of collective responsibility and accountability for protection results. Under certain resource sustainability guidelines, Management Boards will be allowed greater flexibility to grant smallholder contractees with permission to collect limited forest products from the protected parcel. In deciding how long protection contracts are needed, account will be taken of the value of collected products from protection forestland. In addition to spelling out protection payment duration, contracts will specify the benefit sharing arrangements. For special socio-cultural reasons, and after it has been determnined that acceptable production alternatives outside the conservation area are limited, long term forestland users or residents in conservation areas can be permitted to receive "conditional red books" for their agricultural/swidden parcels or home garden/plots. Conditional red book conditions will include a statement of joint smallholders/authority protection obligations of the conservation area. An important clause will stipulate responsibilities for re-forestation interventions on vulnerable agricultural plots entering into fallow. The regulatory and administrative requirements to facilitate these changes will be provided for. 2.2 Improving the Social Status of the Forest-Dependent Farmer 7. Forest-dependent farmers can avail themselves of the forests and its products as a source of subsistence, cash income and as a social safety net during times of natural disasters and economic/market shocks or failures. In addition to environmental benefits, forest protection contracts for special use or protection forest (normally earmarked for the poorest segment of the forest dependent community) has helped in poverty alleviation by providing cash for work (forest protection and maintenance). Furthermore, successful forest protection and management programs have secondary but not inconsequential effects on the forest-dependent farmer. Successful forest regeneration nearer to farmers' holdings reduce the time needed to collect firewood and provide more non-timber forest products nearer home. This will free the farmers' 66 Partnershipsfor Development - 5 million hectare Reforestation Program time for more lucrative home and agro-forestry garden activities (fruit-trees, small livestock). Conservation activities (e.g., resource inventorying, biodiversity monitoring, fire break maintenance) can be contracted to the community as well. Hence, socio-economic impact from forest management and protection can be significant. 2.3 Sustainable Farmer Support Servicesfor Technology and Farm Income Improvement 8. To improve the technical quality of smallholder forest plantations and to improve forest- dependent farmers' income so that pressure on the forests can be reduced, effective farmer support services must be provided for the improvement of mixed forestry and agriculture systems. First, it has to be recognized that farm forestry cannot be divorced from the rest of the livelihood systems of rural families. An integrated extension approach is therefore necessary. Second, a multi-disciplinary research extension mechanism has to be established to ensure the availability of appropriate technologies that is relevant to various farmer livelihood conditions and forest dependencies. Inter-sector cooperation is required to (a) improve the technical data base (growing stock, species mix, productivity); and (b) evaluate and package available technologies in such a way that farmers can be easily convinced of their attractiveness. This includes not only economic and financial justification but socio-cultural relevance and the role of indigenous knowledge. Managed natural regeneration of production forests will be an important part of the package as will be the concept of agro-forestry gardens and marketing assistance. Third, to facilitate further technology transfer, demand-driven adaptive research trials under typical farmers' conditions (which can also permit relevant feedback and be used as monitoring and training tools) will be jointly established by the agro-forestry development/extension service, relevant research institutes, private companies and grass roots organizations. The result will be used for up-scaled extension demonstrations to promote lateral information and technology spread between communities. Fourth, the Government extension service and forest development branches at the district level will be provided with improved incentives and supplemented with assistance from contractual arrangements with the private sector to promote extension networks that will facilitate farmer-to-farmer spread. 2.4 Farmer Financing and investment support 9. Financing (for investment and livelihood needs) can be an important constraint for forest- dependent farming households even though they usually undertake low cash requiring activities for multiple-purpose use to minimize their farming risks. Where there exists an opportunity for market integration, financing of quality high value crop seeds or tree seedlings is probably one of the most likely investments they will likely find attractive to borrow for. Tied to this is the need to ensure reasonable and competitive supply sources, including that from the local community. Thus, in accessible areas, credit arrangements will be made through the operational assistance of grass roots organizations (e.g., Women's Unions) to obtain institutional credit from VBARD. In the less accessible areas, where credit does not play a role of significance, it will be necessary to package low investment and grant based forestry extension support services and combine these with reservations of emergency food support funding. The determination of credit outreach potential is best done through effective community participation starting with Land Use Planning and culminating with Commune Action Plans that contain investments incorporated into household farm plans prepared jointly with private sector, Viet Nam Bank for Agriculture and Rural Development and grass roots organizations. 67 Partnerships for Development - 5 million hectare Reforestation Program 2.5 State Forest Enterprise (SFE) Restructuring 10. SFEs have jurisdiction over about 5.0 million ha of forests. To ensure that SFEs can effectively play their role, restructuring under the guidance of Decree 187 will be needed to ensure that the spirit of the decree -- efficiency of production and business -- is properly implemented. SFE's forestlands must be surveyed and re-classified in terms of their land-use capability. On the basis of these land-use classification results - SFEs themselves will be reclassified as either: (a) Management Boards (if their predominant role is protection) or (b) business/commercial production or service enterprises. The GOV (MARD, MPI and MOF) will provide clear guidelines on how the viability of SFEs as business enterprises can be evaluated. In cases where the SFEs do not fulfil the requirements of being classified as either a forest protection board or a commercial business unit, its staff will be eligible for a fair separation compensation (taking into account the supplementary income units provided to them during their service in the SFE). Alternatively, SFE staff could be released to district/ province forest development or extension service branches. Their remobilization into the services would make it possible to revamp and improve services, especially at the district and commune level. The function, tasks and representation of Management Boards will need to be reviewed to ensure that measures will be instituted for management efficiency (including proper accounting and auditing) and representation from grass-roots organization and local area farm households. 2.6 Institutional Capacity Building from Province to Commune Levels 11. While the central ministries, especially MvARD, should continue to redefine and improve its policy, planning, legal and technical oversight roles, primary focus will be on strengthening: (a) provincial ability to plan, program, co-ordinate and monitor investment activities for forest resource development; (b) district ability to coordinate and implement support services to the smallholders within a development framework that more effectively involves the private sector and grass-roots organizations; and (c) commune capacity to prepare commune action plans and support households and private forest owners to manage and protect the allocated or assigned forests. Care will be taken to improve (i) the efficiency of allocation and use of investment funds (including the delineation of responsibilities for investments at the central, provincial and sub- provincial levels), and (ii) the monitoring and evaluation of investment results. 12. This would entail (a) some restructuring of responsibilities (absorbing SFE staff within an integrated district support service that can cater for mixed agro-forestry farming systems and small scale business development); and (b) capacity building -- with emphasis on (i) goal- oriented planning methods (including community-based consultation), (ii) the streamlining of budgeting/accounting procedures, (iii) strengthening of social, financial and economic appraisal skills; and (iv) monitoring and evaluation as well as auditing techniques. 3. What should the role of partners be? 3.1 Current Donor Sector Involvement 13. Existing donor assistance cover a wide range of activities in the Forestry sector ranging from policy support (Germany, UNDP, Netherlands, ADB, Sweden, Finland) to biodiversity conservation (Netherlands, EU, World Bank, UNDP, Denmark, Australia), inputs/tree seed (WWF, Denmark), technology (IUCN, Japan), watershed protection (ADB, Germany, FAO) and 68 Partnershipsfor Development - 5 million hectare Reforestation Program Social or Community Forestry Projects, most of which are also watershed related (Denrmark, Germany, Care, Switzerland, Finland, Sweden) and afforestation (WFP, Sweden, Germany ); and agro-forestry (Thailand). There is some overlap in terms of thematic support but not of area (locality) covered. Different initiatives for similar activities (e.g. social forestry) have given results over the past five years which show that it is not possible to generalize about development impacts at the ground (village) level because of variations in agro-ecological and socio-cultural conditions, especially in the highland areas. This provides the case for a properly decentralized approach. 3.2 A possible role for the Government - Donor Partnership 14. The Government of Vietnam (from the Central to the Sub-provincial level) has been implementing the 5MHRP for the past two years and its predecessor (the 327 program) over the prior six years. The Government - Donor Partnership, established as a result of the 1998 CG, can be grouped as follows: a) Government of Vietnam (central and decentralized layers); b) households; c) SOEs/state-controlled management institutions; d) private sector; e) donors (grant or loan providers); f) international organizations(TA providers, International NGOs). The Partnership is now moving towards the development of a sector support program. 15. The programmatic approach being considered first establishes a framework for priority policy, sub-program and institutional development, the support of which would be designed in a flexible format. Sub-programs of the 5 MHRP are evaluated for their problems and constraints. The policy and institutional measures needed to alleviate them and to facilitate implementation will be broadly agreed upon by the main stakeholders. Care will be taken to identify systemic policies and operational guidelines that are applicable to broad sub-program or project conditions rather than detailed inflexible procedures. The Government and its local partners, within the agreed guidelines for the framework, will implement the sub-programs and projects. Foreign assistance (technical and financial) will be provided within a strategic approach set over a 10-15 year period, but will be grounded on anticipated needs devised along the lines of a rolling Three Year Plan and yet be able to fit in the Government's budgetary process. The process approach would focus on result (output)-oriented monitoring (jointly with key stakeholders) of policy, activity and institutional milestones with timely waming guidance for technical/financial assistance to troubleshoot and resolve unanticipated problems during program implementation. Funding could be earmarked or contingency-based. 16. The existing form of 5MHRP lends itself quite well to the proposed approach. It is already based on a concept of projects within the umbrella of various subprograms where, in principle, beneficiaries propose projects to the authorities for funding or co-funding by the 5MHRP. Continuing its concept, the projects can be evaluated for their contribution to the agreed sub-program objectives and outputs, and their willingness to adhere to the principles of implementation in order to qualify for funding. This is basically what is taking place in a rather ad hoc fashion. It is, therefore, mainly a matter of systematically bringing the quality, effectiveness and efficiency of the existing system up to the standards for international co- financing. Furthermore, there already exist projects under the 5 MHRP that are co-funded by other national sources (local government or other national level programs). This means that provision for important linkages is already allowed for and will not be new. 69 Partnerships for Development - 5 million hectare Reforestation Program 17. Under this approach, donors and international organizations can still pursue their synergistic support, which is presently being practiced on a project level. For example, NGOs can continue to work with local grass roots organizations at the community development level while multilateral donors continue work on ensuring systemic changes in management and administration and on improving the policy and regulatory environment. Scientifically-oriented international organizations (IDRC, IUCN, WWF, ICRAF, CIFOR) could similarly work with local science institutes and with socio-cultural-oriented organizations (International NGOs) to continue their work with grass roots organizations to address the replicability issues for technology development and transfer at the farmer level. The only difference is that their participation will need to be designed on a program/sub-program basis. 3.3 Technical Assistance Focus 18. Donors and Government still have to do considerable work in coming together on a harmonized program approach. Various sub-studies will have to be carried out to prepare for such a program to cover its management and procedural framework, and its joint monitoring and evaluation requirements. A number of areas have been pre- identified for donor assistance in technical assistance. Their timely implementation will constitute important support of the programmatic approach: (a) Financial and economic assessment and monitoring of sub-programs or projects. (b) Completion of a simplified and more transparent system of forestland classification, land use planning and forest allocation. (c) Comprehensive wood-processing/commercial plantation study. (d) Establishing research-extension linkage in mixed forestry/agriculture systems. (e) Study on the impact of various natural regeneration, assisted regeneration forestry models. (f) Options for blending local/indigenous knowledge and modern/scientific approaches in forest management and agro-forestry systems development. (g) Standardization of procedures for: (i) planning, monitoring and evaluation; and (ii) budgeting and financial planning 4. What are the key monitorable indicators? 19. This section will be finalized after further discussions between GOV and the Partnership. Some possible sub-program activity indicators include: area and number of households classified and allocated; area planted or under assisted natural regeneration; area under each category of forests; extent of bare land "re-greened"; number and area of red books issued; number and area of conditional red books issued; and number and area of "pre-red book" issued. In addition, indicators will also be needed for objective levels and policy and institutional development milestones, depending on how the programmatic approach is designed. 70 Partnerships for Development - Partnership to support the poorest communes THE PARTNERSHIP TO SUPPORT THE POOREST COMMUNES 1. What is the long-term vision for support for the poorest communes? 1. The goal of Program 135 is to improve the material and non-material life of people in remote, mountainous and underprivileged communes and to create conditions for them to overcome poverty and become better integrated into the mainstream of Vietnamese life. 2. Program 135 complements the Decree on Grassroots Democracy which aims to foster the full participation of people at the local level in planning and decision making in most aspects of development that directly affect their lives. Grassroots democracy should empower people at the commune and village level to participate more fully in devolved and decentralized government. 3. Program 135 originally identified 1,715 underprivileged communes as its target. This included 1,000 communes which were to provide an initial focus. Recently, the number of communes has been revised upward to 1,878, but the goals of the program remain unchanged. If all the communes designated as poor by both CEMMA and MOLISA are identified, the total number is about 2,500, or about one in four. 2. What steps are needed to achieve the vision? 4. The Decision of the Prime Minister (No. 135/98/QD-TTg) establishing Program 135 identified five specific activities considered necessary to achieve the Program's goal: * creating employment and improving livelihoods by promoting sustainable use of natural resources and product processing in remote areas * developing rural infrastructure with particular attention to accessibility and transportation, water supplies and electrification * improving rural service centers for provision of health care, education, marketing and information exchange * training the leadership at the commune, village and hamlet level to manage better the economic and social development of their localities * relocating people from areas of extreme hardship to locations with more favorable conditions 5. Funding for Program 135 will come from the state budget (including donor contributions), bank loans and credits, and other sources, including people's savings. 6. The government began to implement Program 135 using its own resources in 1999. It invested to close gaps in basic public infrastructure in 1,200 communes in 30 provinces, investing VND508 billion of state funds (about $36 million) with an average investment per commune of VND423 million (about $30,000). In its first year the Program saw: * 2,272 small public infrastructure projects largely completed (90%), mainly in improved schools (642), basic access (629), irrigation (532), drinking water (307), electrification (121) and health centers (29) and markets 71 Partnerships for Development - Partnership to support the poorest communes * a participatory approach to local planning and decision making initiated, although infrastructure was emphasized over capacity building or participation * better-off provinces, plus some ministries and SOEs, supplement the grants provided by the central government 7. Looking ahead, the government will continue to support Prograrn 135. Donors and other partners have indicated their willingness to support significant parts of Program 135, including support for: * essential small-scale infrastructure at the commune-level and below * improved services for social and economic development * income and employment generation from agriculture and natural resources * institutionalization of participatory approaches throughout the project cycle 8. Government has also indicated that it may gather all poverty reduction programs targeted at poor communes under Program 135, including the sedentarization program of MARD. It is important to recognize that donor support is unlikely for resettlement except on a very small scale and in the most unavoidable of circumstances. 9. Additional steps needed to achieve the vision might also include: * closer integration of Programs 133 and 135 with a clearer strategy for 135 * more transparent selection of eligible communes, funds allocation, and procurement * provision of infrastructure through labor-intensive works at the commune level * budgetary support to ensure effective project operations and maintenance 3. What should be the role of the partners? 10. Several donors actively supported projects similar to Program 135 before July 1998. These included UNCDF/UNDP's Rural Infrastructure and Development Fund (RIDEF) in Quang Nam and International Fund for Agricultural Development's (IFAD)/UNDP's projects in Quang Binh and Tuyen Quang. Following the 1998 CG meeting, other donors indicated their support for Program 135 in several parts of Vietnam. (A list of provinces where donors are active is presented in the annex.) 11. Analysis of government and donor support for poor communes indicates that the potential for collaboration and cooperation is significant. However, the government and donors are not yet working within a common framework for either key program elements (e.g. local-level capacity building, institutionalization of participation throughout the program, sustainable financing, labor-intensive construction methods, unified monitoring) or budgetary support. Investments are still project-based and opportunities for mutual learning are not being taken. PAC, which could be a mechanism for finding a more coherent approach, remains mainly a forum for information exchange. Progress will require adjustments on both sides. 12. For donors: * a long-term commitment is needed to the improvement of poor communes 72 Partnerships for Development - Partnership to support the poorest communes * a path from project- to program-based support for the Government should be sought * some agency "identity" may need to be sacrificed for the sake of effectiveness * donor cooperation should be sought based on flexibility and comparative advantage * procedures and levels of financial support should begin to be standardized 13. For government: * budgetary processes must become more transparent and accountable * capacity building should become as important as provision of infrastructure * poverty targeting should be improved, including targeting within communes * program monitoring and progress reporting should be standardized and coordinated 14. Government and donors should agree on a strategy for assisting poor communes and PAC should become the forum for learning to make Program 135 more effective. 4. How will progress be measured? 15. The Prime Ministerial Decree 135 identifies the goals and objectives which are the foundation for monitoring progress: 16. first, that the goal that the number of poor households be reduced by 4-5% annually in the poorest communes by 2000 and the poverty rate in underprivileged communes be reduced to 25% by 2005 17. second, the objective that: * most communes are made accessible by road * market development is promoted * more than 70% of school-age children attend school * most social diseases are controlled * local water supplies are adequate for daily needs * most people receive training to improve their lives and livelihoods 18. To these, the following process objectives should be added: * the selection of community infrastructure investments will be participatory and demand- driven * a capacity for bottom-up monitoring and supervision of Program 135 is established. * donor support for poor communes is provided more in the form of program support, channeled to local authorities, and less in the form of project support * overall, the cost of providing, operating and maintaining basic public infrastructure is reduced and its sustainability is increased 73 Partnerships for Development - Partnership to support the poorest communes Annex 1: Summary of donor support for poor communes. Donor Operating area - provinces UNDP/UNCDF Quang Nam, Quang Tri, Yen Bai, Tra Vinh UNDP/IFAD Quang Binh, Tuyen Quang, Ha Giang ADB Quang Binh, Quang Tri, Thua Thien Hue, Kon Tum World Bank - Central Vietnam Thanh Hoa, Nghe An, Thua Thien Hue, Quang Nam, Quang Ngai, Binh Dinh, Phu Yen, Khanh Hoa, Ninh Thuan, Lam Dong, Binh Thuan, Binh Phuoc World Bank - Northem Son La, Lao Cai, Yen Bai, Phu Tho, Hoa Binh, Bac Giang Mountains Australia Quang Nam, Quang Ngai Belgium Nghe An, Ninh Thuan (Quang Ngai, Phu Yen, Khanh Hoa, Ninh Tuan, Binh Tuan in prospect) Canada Thanh Hoa, Soc Trang European Union Cao Bang, Bac Can, Lai Chau, Son La Finland Quang Tn, Thua Thien Hue, Bac Can Japan Binh Thuan New Zealand Gia Lai Norway Quang Tri Sweden MRDP provinces CIDSE Lang Son, Bac Can, Thai Nguyen, Thu Thien Hue, Soc Trang, Binh Phuoc Oxfam GB Ha Tinh, Soc Trang Note: This list applies to donor support that complements directly Program 135. The Compendium of Rural Development Assistance (UNDP 2000) provides detailed information of support in the rural sector. Annex II: PAC Membership and authorship of note. PAC is co-chaired on the government side by Vice Minister Nguyen Xuan Thao of MPI. The donor co-chair rotates. Membership of PAC is drawn on the government side from MPI, MOLISA, CEMMA, the Ministry of Finance, and MARD and on the donor side from UNDP, FAO, ADB, the World Bank, AusAID, CIDA, DFID, the EU, Finland, GTZ, JBIC, New Zealand, Norway and Sweden. NGO membership includes CIDSE and Oxfam GB. This note was drafted on behalf of the donor group by representatives from The World Bank, UNDP, DFID and Norway. It was revised by government agencies coordinated by MPI. 74 Partnerships for Development - Food Security FOOD SECURITY 1. What is the long term vision? 1. Food insecurity arises mostly from households not having sufficient income to buy food. Despite Vietnam's significant economic progress in recent years, poverty remains fairly widespread. Research into the causes of poverty indicates that these are: isolation (geographic and social); high risks (from flooding, typhoons, diseases); inadequate access to available resources (land, credit); lack of environmental sustainability; and inadequate participation at the local level in the formulation of poverty alleviation initiatives. In the present economic and social context of the country, food insecurity and poverty are the two sides of the same coin. 2. There is a second dimension to this issue: food security at the household level not only means to provide sufficient basic food, it also involves securing the absence of malnutrition of any sort, including malnutrition due to protein/energy deficiency and malnutrition caused by micro-nutrient deficiency. 3. Nutrition security is the health aspect of food security. In Vietnam, malnutrition is still widespread. Children under five years of age are among the most vulnerable and affected groups. Apart from children, women especially suffer from malnutrition. On average, more than 40 percent of all mothers are malnourished. The main causes of adult malnutrition are likely to be associated with childhood undernutrition and current insufficient dietary intake in quality and quantity. The Vietnamese diet is dominated by rice and rice alone is deficient in several important nutrients. 4. The Government of Vietnam reported to the 1996 World Food Summit that "Food Security has been and will be the national priority in Vietnam. Food Security is seen to be one of the most important factors contributing to the stabilization of the socio-economic development in the country." 5. Already in 1990/91, the Government formulated a new Socio-Economic Strategy for the period up to the year 2000 which inter alia proposed the formulation of a comprehensive national food security programme under which the "Vietnamese agriculture will have the prime objective to ensure food supplies and improve nutritional levels of the diets for the whole community, providing not only sufficient calories but also higher levels of proteins, fats and vitamins." 6. A National Food Security Programme (NFSP) has been formulated to the horizon 2000. The Government has now decided to bring the NFSP forward to the horizon 2010. The new NFSP will be included in the 5 year plan and ten year strategy of the Ministry of Agriculture, the institution mandated to monitor and promote food security in the country. Within the framework of the programme, one of the major remaining issues is the development of strategies for the establishment of more stable agricultural eco-systems and shift from the present narrowly based agricultural production focus in rural areas to an effective and inter-linked agriculture-industry- service structure that will provide local employment, thereby creating a more stable basis for access to food. Particular attention still needs to be given to the poorest and most food insecure regions of the country. The Government of Vietnam is also committed to involve all elements of civil society in the effective implementation of the NFSP. Efforts will have to be made to 75 Partnerships for Development - Food Security educate the people and raise their awareness of the significance and importance of food security. Social mass organizations (like the Farmers' Union and Women's Union) play a very important role in Vietnamese society; they will have to be called upon to give full attention and support to creating the awareness of national food security issues in society. The TWG assists the Government in this effort particularly through the main activities mentioned above. 2. What are the key steps needed to attain the vision? 7. The experience of many countries has shown that economic growth does not translate automatically into a reduction of poverty and/or food security. In FAO's experience, focused action is required to create conditions that enable poor communities and households to take advantage of development opportunities. In poor communities and marginal areas, poor infrastructure, health and nutrition, and inadequate management capacities and illiteracy may be major, if not the most important, impediments to increased production and productivity. Malnutrition impairs overall economic growth since it affects productivity and ability to become engaged in productive activities. It also increases the risk of disease. Women and children may be the most affected by malnutrition because of unequal allocation of food within the household - often as a result of cultural practices - and due to women's heavy workload and responsibility in terms of productive and domestic tasks. 8. Household food security is the prime concern of poor households. It determines production and investment choices. A knowledge of how poor households strive to achieve food security is essential to understanding their coping and risk-aversion strategies. Essential also is the knowledge of the impact of economic and financial policies on the poor and the food insecure. Safety nets should be created to reduce the negative effects of the above policies on the most vulnerable segments of the population. 9. Government technical capacity to provide policy guidance on food security measures needs to be strengthened through national and international technical assistance, training, improved information service and material support. 10. With the prevailing public service culture, this also requires that other issues be addressed, such as: * change in attitudes and mindsets of all partners to act in a more integrated and coordinated way * adjustment of governance structure to allow greater flexibility and adaptability * fostering transparency and sharing information among all partners * effective coordination and partnership at all levels * appropriate participatory monitoring and evaluation system. 3. What should the role of different partners be? 11. The main purpose of the Network's Thematic Groups is to provide an effective framework to discuss, plan and implement collaborative activities in rural development and food security and enhance the efforts of national governments to implement the commitments in the World Food Summit Plan of Action. While the specific objectives of Thematic Groups will vary 76 Partnerships for Development - Food Security depending on national priorities and the work programme, the Groups should seek to achieve two broad objectives: * to promote new projects, activities and investments in rural development and food security and enhance co-ordination at the national level; and * to share relevant information, knowledge and expertise. * creating awareness and advocating for rural development and food security issues; * contributing to the implementation of national policies, strategies and action plans; * monitoring national activities for rural development and food security; * determining needs and opportunities at the grassroots level; * formulating project proposals and identifying funding sources; * promoting the sharing of indigenous knowledge, experiences and ways of communicating best practices; * contributing to the creation and maintenance of common information systems and databases; * organizing seminars and workshops on rural development and food security issues; * promoting the participation of women and analysis of gender issues; * promoting national capacity building and training activities; and * promoting research activities. 12. The Role of the all international development partners should be: * engaging in advocacy and disseminating lessons learned and best practices * supporting the Government in its effort to adjust its policy to combat food insecurity and poverty * cooperating with the Government in capacity building activities particularly in policy analysis and policy impact on the poor and food insecure * building effective partnerships to carry out programmes and projects targeted to combat food insecurity and poverty (HEPR programme, 1715 communes, National Plan for Food Security, etc.) * Suggesting quantifiable indicators to evaluate the impact of poverty reduction activities on the living standard of the beneficiaries (e.g. impact on child malnutrition) 13. The Role of Civil Society Organizatiois (CSOs) should be: * sharing their knowledge and expertise; * engaging in advocacy and raising public awareness; * contributing to policy dialogue; * mobilizing resources; * building the capacity of civil society organizations at the local level; 77 Partnerships for Development - Food Security * disseminating lessons learned and best practices. 14. The Government should: * place in its development agenda food security and poverty as the first development goal; * include the concept of food security in its poverty strategy under preparation by MOLISA and the I-PRSP under formulation by MPI; * devote efforts to the actions needed to secure malnutrition and poverty reduction including sub-sectoral revisions and restructuring (e.g. agricultural extension system, agricultural research, nutrition education activities) * define and implement safety net schemes to support the poorest and most vulnerable groups; * build internal capacity to analyse policies and quantify their impact on the poor and food insecure; * ensure broad participation of the beneficiaries in the implementation of programme and projects. 4. What are the key monitorable indicators? 15. The key monitorable indicators should be related to the impact that pro-poor and food security policies have on the beneficiaries. Indicators should be easily measurable and related to local conditions (e.g. child malnutrition, girls scholarisation, employment rate, etc.). Policy results or impact should not be confused with outputs (how many funds distributed, how many kilometers of roads, etc.). Indicators should be set at the beginning of the activities and their values monitored throughout the programme in order to enable potential corrective measures. Collection of information of the impact of the policies should be done properly and with the cooperation of the local authorities which should be requested to comment on the proposed activities at all stages of formulation and implementation. Special attention should be given to vulnerability and its causes (food is the first item to be neglected in case of urgent needs). Indicators and evaluation activities should take into account the sustainability of the results obtained including, if applicable, a corrective value in case of result volatility. Background to the Food Security Working Group 16. The ACC Network on rural development and food security was established by the United Nations Administrative Committee on Co-ordination (ACC) in April 1997 as an innovative and flexible mechanism for inter-agency follow-up to the World Food Summit. It has been endorsed and supported by the UN Secretary-General and the Heads of 20 UN organizations. It is jointly managed by FAO and IFAD, in close co-operation with WFP. 17. The ACC Network is intended to be country-focused and demand-driven. It aims to serve as a broker between partners committed to achieving food security and reducing rural poverty. It comprises thematic groups working on rural development and food security in countries, and a 14 group of UN and civil society organizations at the international level 14 The Network's Web site http://www.fao.org/sd/rdfs provides complete background information on the Network, focal points in UN organizations, establishment of thematic groups, news and progress, etc. 78 Partnerships for Development - Food Security 18. The Network's main objectives are to: * mobilise support for government efforts to implement the World Food Summit Plan of Action; * reinforce ties between UN organizations and other stakeholders and promote complementary action in the areas of rural development and food security; * exchange and disseminate information, experiences and best practices. 19. In order to actively participate in the network and promote the food security concept in Vietnam, a technical working group on the topic was established. Thematic Group in Vietnam 20. Food security is a national priority in Vietnam, supported by a number of national programmes 5. While the Government recognises that availability and stability in food supplies are not by themselves sufficient to guarantee food security, for many years food self-sufficiency has nonetheless been seen as the key element of national food security policy. Since the early 1990s, Vietnam has achieved impressive increases in agricultural productivity and output, particularly for paddy rice, contributing to improved food availability. Yet, despite these achievements, chronic food insecurity and vulnerability persist in different parts of the country, particularly in isolated and environmentally fragile uplands, and coastal areas prone to natural disasters. The rate of malnutrition is also among the highest in the region. 21. Given the multifaceted character of food security, most of the activities and programmes currently being implemented by UN organizations in Vietnam are contributing towards the realisation of the goals in the World Food Summit Plan of Action'6. Programmes aimed at promoting rural development and poverty alleviation help to increase access to food and improve nutritional well being. Investments in agriculture, forestry, fisheries and rural infrastructure affect the availability of food and stability of supplies. Activities undertaken to reduce malnutrition, increase access to sanitation and safe water, improve food safety, and prepare for, and cope with, natural disasters, all contribute to enhanced food security. 22. The overall objectives of the group are: * actively support the Government's efforts to implement the commitments in the World Food Summit Plan of Action; * strengthen ties and build new action-oriented partnerships aimed at promoting food security in Vietnam; and * exchange information, experiences and best practices related to food security and rural development. 23. Further specific objectives are identified for actual activities as developed. The group's objectives are reviewed yearly and amended as necessary. 15 Including the National Hunger Eradication and Poverty Reduction Programme (1996-2000) and the 1,715 Poor Communes Programme (1998-2005). 16 In this regard, the "UNDAF Issue Paper on Follow-up in Vietnam to Major World Conferences" (Hanoi, September 1998) notes activities undertaken by FAO, UTNDP, WFP, UNICEF, UNIDO, the World Bank. 79 Partnerships for Development - Food Security Agenda and workprogramme 24. Given the national situation and priorities, the ACC Network thematic group in Vietnam focuses its activities on food security. These activities naturally have a strong relationship with rural development, not least since as much as 80 percent of the country's population is rural. 25. In particular, the group undertakes activities in three main areas: aj support to the development of a food insecurity and vulnerability information and mapping system (FIVIMS); b) capacity building of MARD which is responsible for the tasks previously assigned to the National Food Security Committee now dismantled; c) advocacy and knowledge sharing to increase awareness about food security issues in Vietnam. 80 Partnerships for Development - CPI Partnership CENTRAL PROVINCES INITIATIVE TO MITIGATE NATURAL DISASTERS IN CENTRAL VIETNAM THE CPI-PARTNERSHIP 1. Long-term vision of the CPI Partnership 1. In the Central Provinces of Vietnam numerous natural disasters including floods, typhoons, landslides, and other hydro-meteorological phenomena affect the region annually. Recently, after the disastrous floods of November and December 1999, all donors to Vietnam recognized that these disasters are inhibiting the sustainable socio-economic development of the region. The vision of both government and donors is that the mitigation of natural disasters in Central Vietnam will facilitate long-term, sustainable development in this poor region of the country. This vision is called the Central Provinces Initiative to Mitigate Natural Disasters in Vietnam - the CPI-Partnership. 2. The vision of natural disaster mitigation facilitating long term sustainable growth contains a number of opportunities for sustainable development: - Social development and poverty reduction through relocation of disaster prone populations, better irrigation systems, development of shifting sand agriculture, better water supply, and improved aquaculture. - Disaster preparedness and response through enhanced preparedness planning, disaster area mapping, disaster modeling, insurance, and safe coastal refuge. - Environmental and natural resources through environmental sustainability, floodplain management, and reforestation. - Administrative reform, coordination, and better governance through provincial and national disaster management planning, river basin organizations, port authorities, and river basin master planning. - Disaster proof rural and urban infrastructure through rehabilitation of structures, construction of new structures, river flow improvement, riverbank protection, salinity control structures, and coastal structures. 3. To develop this vision, a number of steps have taken place since December 1999: - A Fact-finding Mission was fielded to Central Vietnam in January 2000 to prepare Terms of Reference for a comprehensive multi-donor mission to design the Partnership - A Natural Disaster Lessons Learned Workshop was held in Da Nang City from 6 to 8 March 2000 to gather grassroots experience and to understand grassroots needs for natural disaster mitigation in Central Vietnam - A Multi-donor Mission was fielded to the Central Provinces from 4 to 19 May 2000; twenty-five national and international experts participated in the mission with the goal of defining the program and institutional framework of the Partnership 81 Partnerships for Development - CPI Partnership - A donor meeting and briefing on the Multi-donor Mission was held on 31 May 2000 to introduce the Partnership to donors - The Multi-donor Mission Report was prepared in September 2000 giving details of the Partnership 1.1 Ownership of the CPI-Partnership Vision 4. The primary owners of the vision are the Vietnamese Government, in particular the Ministry of Agriculture and Rural Development (MARD) and other Ministries concerned with disaster management, and multilateral and bilateral donors who participated in the Multi-donor Mission to the Central Provinces. Further ownership of the vision is being pursued by disseminating the Multi-donor Mission Report to all potential Central Province Initiative Partners, and by encouraging interested parties to participate in the CPI-Partnership as signatories to a CPI Partnership Memorandum of Agreement that is currently being fornulated. 1.2 Process of Creating the CPI-Partnership Vision 5. In November and December 1999, the United Nations Disaster Management Team (UN- DMT) met on an ongoing basis to coordinate relief assistance and to solicit further aid for the flood-stricken provinces of Central Vietnam. At that time, UN-DMT members introduced the idea of taking an active rather that a reactive approach to natural disasters that are recurrent in the center of the country. The UN-DMT proposed an initiative where the program focus would be on natural disaster reduction through disaster mitigation so that there would be less damage to deal with when natural disasters do occur. This vision has been further developed through discussions and information exchange at Donors' Meetings in Hanoi; at the Central Provinces Lessons Learned Workshop; during the Multi-donor Mission; and from the feedback received after the dissemination of the first draft of the Multi-donor Mission Report. 2. Key steps to attain the CPI-Partnership vision 6. A number of key steps have already been taken to actualize this vision of a natural disaster mitigation Partnership in Central Vietnam; these include a Fact-finding Mission, a Lessons Leamed Workshop, and a Multi-donor Mission. The next organizational steps to attain the vision of a natural-disaster mitigation Partnership that facilitates sustainable socio-economic development are: - The completion of the Final Mission Report and its wide dissemination - The signing of a Memorandum of Agreement by Government ministries, Government authorities, non-governmental organizations, bilateral donors, and multilateral donors - The creation of institutional capacity to develop and sustain the Central Provinces Initiative Partnership. This will most likely be a Secretariat that serves as a project clearinghouse, coordinating body, and planning organization that will ensure timely and effective implementation of the Partnership. A Steering Committee made up Ministry officials with a stake in the Partnership will direct and guide the Partnership process, and be accountable for the funding mechanisms and arrangements that are put in place for the Partnership. 82 Partnerships for Development - CPIPartnership 7. The partnership will undertake the following actions to achieve the partnership vision: - Initiate natural disaster mitigation programs selected concurrently by government and donors - Provide a focal point for information on individual donor programs and projects concerned with natural disaster mitigation - Provide a discussion and planning forum in biannual meetings between govermnent and donors - Attract funding for high priority and urgent programs and projects 3. Role of different CPI-Partners 8. From the outset of the CPI-Partnership, leadership roles have been taken by the Ministry of Agriculture and Rural Development, the Royal Netherlands Embassy, and the United Nations Development Programme. These organizations have also financed in large part the initial Partnership development missions, workshops, and other CPI-Partnership activities. In addition, these organizations - together with the Vietnam Red Cross, the International Federation of Red Cross and Red Crescent Societies, a number of development agencies, and bilateral and multilateral donors - have provided the national and international expertise necessary for appraising projects and programs that will mitigate natural disasters in Central Vietnam. 3.1 Breakdown of CPI-Partnership Responsibilities 9. The CPI Partnership is still in a formative stage. The final Multi-donor Mission Report will soon be completed and the report will be disseminated widely. Those who wish to become CPI-Partners will enter into the process by signing a Memorandum of Agreement. This Agreement will spell out the various responsibilities and roles that the different Partners will be agreeing to. In terms of program responsibility, CPI-Partners will be participating in the following development areas: 83 Partnerships for Development - CPI Partnership Donor Priority Corresponding Recommended CPI Programs Development Aid Areas Social Development and Relocation Planning and Development Poverty Reduction Irrigation and Drainage Systems Sandy Area Planning and Development Water Supply and Sanitation Aquaculture, Fisheries, and Agricultural Resources Disaster Preparedness and Disaster Preparedness Response Flood and Inundation Mapping and Modeling Natural Disaster Agriculture and Property Insurance Coastal Facilities Environmental and Natural Environmental Sustainability Resources Management Floodplain Management Reforestation Administration Reform, Provincial Disaster Management Planning Coordination, Capacity National Disaster Management Planning Building, and Governance River Basin Organizations Port Authorities River Basin Master Planning Rural and Urban Rehabilitation of Existing Reservoirs Infrastructure Construction of New Reservoirs Rural Infrastructure River Flow Capacity Improvement River Bank Erosion Protection Salinity Dams and Dikes Coastal Structures 4. Key monitorable indicators 10. To determine the success of the CPI-Partnership, it is necessary to identify and then monitor key variables that indicate if the undertaking is attaining its goals. The following are some of the input indicators that will reflect on the development of the CPI-Partnership to Mitigate Natural Disasters in Central Vietnam. - The number of partners who sign the Memorandum of Agreement; - Creation of an institutional framework that include a Steering Committee, a Secretariat, funding mechanisms, and implementation arrangements; - Programs and projects that are funded by donors; - Programs and projects that are implemented; and, - Number of communes and districts that benefit from program implementation. 11. The following are some of the output indicators that will show the effectiveness of the CPI-Partnership to mitigate natural disasters. in Central Vietnam: - Reduction in lives lost; - Reduction in property damnage; - Reduction in the number of people displaced; 84 Partnerships for Development - CPI Partnership - Reduction in crop losses; - Reduction in the loss of livelihood; - Reduction in damage to infrastructure and public buildings; - Reduction in water born disease; - Reduction in salt water intrusion; - Increase in sustainable aquaculture and agriculture; - Increase in water resource availability; - Increase in insurance coverage; and, - Increase in the number of disaster proof houses. 85 Partnerships for Development - PPP Tra Vinh PARTICIPATORY PROVINCIAL PARTNERSHIP TRA VINH 1. The Participatory Provincial Partnership Tra Vinh (PPP Tra Vinh) is an initiative of the Tra Vinh Province People's Committee (PPC Tra Vinh), Oxfam-Great Britain (Oxfam-GB), United Nations Development Program (UNDP), and the World Bank (WB). 1. History and long-term vision of the Partnership in Tra Vinh 2. According to preliminary documents underlying the Government's Socio-Economic Development Strategy 2000-2010 and its Five Year Plan 2000-2005, Government strives to achieve fast and sustainable economic growth in parallel with social equity, social progresses and environmental protection. Three ingredients in these aims are the utilization of domestic strength, optimal use of international aid, and consultation of citizens about Government plans in order to bring into full play the Government's principle "people know, people discuss, people execute and people supervise". 3. The Provincial Participatory Partnership initiative in Tra Vinh (PPP Tra Vinh) responds to this broad direction through its two core objectives: 1. to strengthen the province's capacity to manage and coordinate aid; 2. to encourage the use of information sharing and participation approaches in government as well as donor programs in the province, particularly those focused on poverty reduction. 4. PPP resulted from a workshop on aid management and coordination organized by the PPC of Tra Vinh and funded by Oxfam Great Britain in October 1996. Initially, the partnership was supported by a CIDA-seconded coordinator; from November 1998 onwards, PPP was supported by a Program Coordinator and a part-time International Adviser, guided by a First Line Manager appointed by the Provincial People's Committee (PPC) of Tra Vinh. Currently, in preparation for gradual phasing out of donor support to this Partnership, a national Coordinator remains the sole support person to the Partnership, while increasingly some responsibilities are taken over by PPC and DPI staff. The hope is that the partnership objectives can be sustained by the Province Government once external support will be ended, most likely after the third year of operation of the partnership, (December 2001). 5. Based on its two objectives, PPP Tra Vinh has the following long-term vision: - Information flows related to development programs/projects, (including those supported by foreign aid) among the province's organizations and between provincial organizations and donors/NGOs are improved. - There is effective cooperation and coordination among the provincial agencies involved in development and poverty reduction programs/projects, and between them and donor/NGO agencies; local authorities at various levels (province, district, commune) have the capability to effectively manage donors/NGO supported projects/programs; 86 Partnerships for Development - PPP Tra Vinh - Local people are adequately informed about Government and donor/NGO projects/programs which affect their lives, through pro-active information sharing by Government and donors; - Local communities and local people can actively and meaningfully take part in planning, implementing and monitoring these programs/projects in the province; 2. Activities undertaken to meet the long-term vision 6. To meet the long-term vision, PPP Tra Vinh is implementing the following sets of activities: 2.1 Support Tra Vinh in aid management and coordination, particularly as it relates to poverty reduction activities (including HEPR). 7. Continuation over the coming 5-10 year period of the strong results on poverty reduction of the past 5-7 years is of paramount importance to Government. According to preliminary Government planning documents, it would like to reduce the rate of poor people to 5% (based on Government's own poverty line) by 2005, and would like to eliminate this proportion altogether in 2010. 8. The specific activities through which PPP tries to respond to this aim include the following: - Undertaking an inventory of donor and government supported programs/projects in the province and analyzing its findings. This inventory helped the local authorities to get a good overview of the donors/NGOs currently working in the province, sectors receiving support, which are the major implementing local agencies and the geographic distribution of the programs/projects. In this way, the local authorities are able to appropriately allocate available resources among sectors and implementing agencies to obtain the highest effectiveness. They can also better steer interested new donors/NGOs to sectors and priorities that fit within the Province's poverty strategy, and that have been under resourced so far. - Organizing workshops on poverty reduction strategies and approaches (including Participatory Poverty Assessments) and participatory project management. The workshops increase the understanding of local agencies and donors/NGOs on ways in which poverty reduction strategies and programs can be improved through better prioritization, planning of actions, delineation of the specific roles of each department, improvement in information sharing and participation by local communities, through enhanced sensitivity to gender and ethnic minority issues. - Supporting the province to identify new opportunities for donor/NGO support to the Province's poverty reduction strategies by facilitation of high quality presentations by the Province to (new) donors/NGOs; and to facilitate joint activities among donors/NGOs in the province, e.g. the Action Study on Off-farm Opportunities in Tra Vinh by the Tra Vinh PPC, Mekong Project Development Facility (MPDF), UNDP and World Bank. This is very much in line with Government's plans (as elaborated in its preliminary planning documents for the next 5-10 years) to transfer laborers from 87 Partnerships for Development - PPP Tra Vinh agriculture into industry and service sectors, and to encourage business development through the implementation of one law on enterprises for all kinds of businesses. - Propose to provincial authorities, where appropriate, new or amended decisions, regulations and approaches to improve aid management and coordination, information sharing and participation. 2.2 Disseminate information to local people through various channels and forms. 9. Based on the Government's principle that "people know, people discuss, people execute and people supervise", PPP Tra Vinh supports efforts to make sure that the beneficiaries of development and poverty programs/projects in Tra Vinh have access to information on policies, programs and projects that affect their lives, can voice their needs and expectations, and can participate. This is in line with Government's wish to strengthen people's monitoring and ability to offer views and comments. It has so far focused particularly on the information side, through aiding the dissemination of information on the (local) authorities' policies, decisions, and programs, and on donor/NGO supported programs/projects. Besides strengthening the voice of local people and grass root organizations, this concerted information outreach approach can also improve the effectiveness of project/program interventions and facilitate cooperation and coordination. Information outreach is realized particularly through the Tra Vinh Public Information Center (PIC Tra Vinh), which was set up by the Tra Vinh PPC with financial support from PPP core donors. Information dissemination is carried out via local libraries, dissemination of flyers and fact sheets via various channels such as television, radio, press, community houses, etc. Collaboration with the Province's efforts to implement the Grassroots Democracy decree 29 is also sought. 2.3 Capacity buildingfor local officials. 10. In its preliminary planning documents for the next 5-10 years, Government emphasizes the need to invest many resources in human resource development and management improvement. The Partnership in Tra Vinh also has this capacity building emphasis, cutting across the other two sets of activities described above. This means capacity building related to aid management and coordination and to use of information sharing and participation approaches. PPP does this by on the job training, workshops/seminars, and study tours. 3. Role of core parties to the PPP partnership in Tra Vinh 11. As stated above, there are four core parties in PPP Tra Vinh, i.e. the PPC, Oxfam-GB, UNDP and the World Bank. On the provincial government side, the Department of Planning and Investment (DPI), Foreign Relations Board (FRB), Department of Labor, Invalid and Social Affair (DoLISA), Department of Culture and Information (DCI) and Tra Vinh Newspaper are also involved; they are, for instance, permanent supporting agencies for the Public Information Center. 12. Each partner contributes based on their comparative advantage: the PPC sets policy in the province and guides the PPP coordinator, thereby contributing to local ownership of the partnership's activities. Oxfam GB has particular strengths to offer in participatory methodologies that are also sensitive to gender and ethnic minority concerns, and in communicating grassroots level experiences and observations. UNDP and the World Bank are 88 Partnerships for Development - PPP Tra Vinh particularly strong in technical assistance, macro-level interventions and management of large- scale and/or multi-sectoral programs/projects. They are also interested in increasing local people's participation in their programs/projects in Tra Vinh in order to improve the quality of those programs/projects. 13. The salary of the PPP coordinator, operational PPP activities as well as part of the establishment and operations costs of the Public Information Center are paid by the three donors, who pool their resources. The PPC contributes by assigning its staff support PPP's objectives (first line manager of PPP coordinator, PIC staff), facilities and other in-kind contributions. 4. Main operational monitoring/success indicators 14. In order to monitor and eventually evaluate its operational performance, the PPP partners are currently formulating some indicators for success: 4.1 Aid management and coordination: - PPC regularly updates the inventory of programs/projects undertaken in Tra Vinh, and uses the data gathered to improve its aid management and coordination; - Provincial authorities are able to steer donors pro-actively to under-sourced sectors/priorities fitting within their poverty and development strategies; - Local government organizations share data & information, as well as lesson learned in management of development and HEPR programs/projects; - Donors to Tra Vinh make use of data, lessons learned etc. from other aid agencies working in the province in preparing their activities; and, - Donors/NGOs involved in PPP share information with the Provincial Government in a pro-active way on planned missions, activities, etc. 4.2 Information outreach activities: - Quantitative indicators Output indicators: * Number of public information bulletins issued; * Number of flyers and fact sheets disseminated to district/communal levels; * Number of programs with input from PPP and PIC broadcast on Tra Vinh radio and television; * Number of visits to monitor outreach. Impact indicators: * Rate of positive feedback on bulletin; * Number of visitors to PIC and rate of repeat visits; * Percentage of population in 25 target poor communes who have received flyers and fact sheets; and, 89 Partnerships for Development - PPP Tra Vinh * Number of complaints/comments received relating to implementation of govemrnent policies/programs/regulations. - Qualitative indicators: Impact indicators: * Local people know more about programs/projects in their area, policies and regulations that affect their lives; * Local people are more confident to voice their needs and expectations, in particular, to the government/donor/NGO staff; * Local government officials demonstrate greater attempts to consult local people in planning and implementing development and HEPR programs/projects; and, * Local governnent officials and programs/projects pay more intention to gender and ethnic minority issues. 4.3 Capacity buildingfor local officials: - Number of trainings provided to PPC and PIC staff relating to PIC activities; and, - PPC and PIC staff are able to take over and sustain activities in aid management and participation without external support. 5. Organizations and persons involved in drafting this note The following persons were involved in drafting this note: Mr. Huynh Van Minh, First Line Manager- Representative of the Provincial People's Committee, Participatory Provincial Partnership in Tra Vinh Mr. Le Huy Hoang, Programme Coordinator, Participatory Provincial Partnership in Tra Vinh Ms. To Thi Thuy Hang, Head of UNDP, Ho Chi Minh City Liaison Office Mr. Do Thanh Lam, Programme Coordinator, Oxfam-Great Britain Ms. Tosca Bruno-van Vijfeijken, Social Developnient Specialist, World Bank Vietnam 90 Partnerships for Development - Water WATER Introduction 1. Vietnam is experiencing a period of relatively strong economic growth based on a process of economic, social and administrative reform ("doi moi") across all sectors. The Government is promoting "modemisation", in order that Vietnam fulfils its potential. One of the keys to sustaining growth is the better management of the country's water resources. 2. Despite its relative abundance, water is an increasingly vulnerable resource in Vietnam where population and economic growth compete for water to meet food requirements and other uses. Spatial and temporal variability of rainfall and runoff are high, even though, on average, ample water is available. Vietnam experiences severe flooding at certain times and droughts at others, and watershed degradation has exacerbated these effects. 3. Rapidly rising demands for water from rural and urban sectors for agricultural, industrial and household uses, pose a formidable challenge. Much of the existing infrastructure in rural areas (irrigation, drainage, flood control) is in a state of deterioration due to neglect, war and natural disasters, and more investment is needed to rehabilitate and improve it. Water quality is decreasing as agricultural, industrial and household users vie for scarce water supplies, and the development of effective rural domestic water supplies and sanitation has barely begun. In urban areas, the demand for water is expected to double over the next 20 years. To address these challenges, government will need to accelerate reforms, and bring about closer cooperation among sector ministries and donors. 1. The vision 4. Government recognizes the challenge of the water sector and its response has been to pay closer attention to water management. Its vision for the future, formulated with the support of the Global Water Partnership, is for better and more efficient use of available water resources, managed in a more integrated and participatory way. The vision encompasses the management of water resources and the delivery of water services, especially for irrigation and drainage, and rural water supply and sanitation. 5. A new Law on Water Resources (LWR), which provides for significant reforms water resource management reforms, was passed by the National Assembly in May 1998. The LWR took more than 10 years to develop and its formulation was assisted by the World Bank. Many of the reforms set out in the LWR are now being implemented. Many donor agencies are supporting the process of change. 6. A National Rural Water Supply and Sanitation Strategy (NRWSSS) was approved by the Prime Minister in August 2000. The NRWSSS was prepared with assistance of Denmark, and promotes a demand-based approach with community participation in all project phases. 7. The LWR and NRWSSS place the major responsibility for attaining the Government's water vision with the Ministry of Agriculture and Rural Development (MARD). MARD will play a central role in the establishment of a National Water Resources Council (NWRC) and River Basin Organizations (RBOs). MARD is also increasingly involved in rural water supply 91 Partnerships for Development - Water and sanitation. In realizing the water vision, MARD will need to cooperate with other ministries responsible for water exploitation, management and protection (including the Ministries of Industry, Construction, and Environment) to achieve the necessary degree of coordination. 8. To improve delivery of water services, the government has adopted a decentralized and participatory approach. Provincial irrigation and drainage management companies have been established which are encouraged to become autonomous and self-financing. The participation of water users is being promoted through water user groups and cooperatives. The recovery of operation and maintenance costs is recognized, although subsidies are still large and service standards and performance indicators have yet to be established. To close these gaps, a process of sustained capacity building is needed based on a partnership among water users, service providers, and external support agencies. 2. Key steps 9. The LWR became effective in January 1999 and represents a major step towards attaining the vision for integrated water resources management. The LWR sets out the main elements of the reform process, and the key steps or milestones for successful implementation. 10. The new Law and its main implementing decree (17911999-ND-CP) define the scope of water resources management in Vietnam and also identify the responsibility of each agency at national and provincial level in the implementation of its articles. An important principle embodied in the LWR is that the ownership of water rests with the people of Vietnam and is to be managed by the government on their behalf. 11. Article 58 of the LWR describes the responsibility of government for the management of water resources. It specifies (among other things) that the Government, through MIARD, performs the role of water resource manager, with comprehensive and far-reaching powers. Other ministries are assigned responsibilities in implementing specific functions of water resources management. The People's Committees of the provinces and of cities are responsible for management of water resources in their own jurisdictions. 12. The LWR establishes the river basin as the primary unit of planning and management. Article 59 specifies that the National Assembly will decide on investment strategies for water resources works of national importance. The Government will approve planning of large river basins and important water projects, while MARD is responsible for approving the planning of river basins and hydraulic works systems, under delegation of the Government. 13. In Article 63, the LWR stipulates the major role of the NWRC is to advise the government on important water resources issues and to coordinate national water resources planning and management across the various ministries. One of the initial key tasks of the Council will be to commission and oversee a national water resources strategy and action plan. 14. Article 64 establishes the concept of a River Basin Organisation as the vehicle for the management of river basins. RBOs are to be established under MARD. The Government is giving priority to establishing RBOs in major river basins, including the Red River, Dong Nai and Lower Mekong River Basins. However, the exact role and functions of RBOs is not yet specified and must be established through decrees. Other important provisions of the LWR include the introduction of licensing for surface water extraction and a permit system for 92 Partnerships for Development - Water wastewater discharge. A system for licensing of groundwater exploitation already exists, although it is not widely implemented. 15. The successful implementation of the LWR and initiatives for participatory management of water services will require a number of important changes. Current institutional arrangements for water resource management reflect a vertically oriented and fragmented subsectoral approach, which does not facilitate coordination or collaboration among agencies and stakeholders. Horizontal collaboration will be introduced over time, among ministries at the national level and among provinces at the river basin level. The establishment of the NWRC and RBOs should facilitate this process. 16. The limited capacity to implement these new approaches to water management is recognized by MARD and by the Departments of Agriculture and Rural Development at the provincial level. However, it is not easy to retrain technical staff with skills in irrigation, drainage, flood control, and water supply to become water resource managers. Also, Government has yet to provide the additional financial and human resources required to establish the RBOs and implement the LWR. Nevertheless, MARD has already adopted a comprehensive strategy for capacity building in water resources management and obtained significant commitments from donor partners to help implement this strategy. 3. Partner roles 17. International donor partners are providing MARD and other ministries with substantial financial support for the water sector. The total expected assistance commitment amounts to hundreds of millions of dollars over the next five years. In addition, most donors, including the World Bank, ADB, Danida, Australia, Japan, and the Netherlands, have changed their focus from physical infrastructure development to a more balanced mix of development and resource management projects. There is increasing coordination among donors, who over the last two years have made a significant effort to improve the efficiency of available funds, and to coordinate their programs to meet the needs of the sector. The group of key water sector partners is led and coordinated by MARD and ADB. A Technical Assistance (TA) Cluster has been established which helps to coordinate the activities MARD's donor partners and their investments. The following summarizes the main roles of the various donor partners in the water resources reform process: * Legislation. One of the four decrees for the implementation of the Water Resources Law has so far been enacted. This is the general implementing decree (Decree 17911999-ND-CP). It was drafted with the assistance of the World Bank, which is also seeking support for the preparation of the remaining three decrees. * Institutional Reform. Implementation of the LWR is most advanced in the Red River Basin. ADB and the Netherlands have helped to design the RBO, an inter-ministerial body to be called the Red River Basin Commission, with a supporting office to be located in MARD. These donor partners are also supporting the legal instruments needed to establish these bodies and a strategic plan for the RBO. * Additional TA projects are now being prepared to support establishment of RBOs in the Dong Nai (ADB and the Netherlands), Mekong Delta (Australia and World Bank), and Srepok and Ca Rivers (Denmark). 93 Partnerships for Development - Water * ADB and the Netherlands also provide assistance to develop the functions, composition and operating protocols of the NWRC. These have been agreed, and a Prime Ministerial Decision was approved in July 2000 to establish the NWRC, whose membership has also been agreed. The first meeting of the Council is expected in late 2000. Australia is planning to provide supplementary capacity building support. * Water Resources Planning and Management. Once established, the NWRC will commission a national water resources strategy and action plan. Several donors have pledged to support this process. * A National Hydropower Plan Study being carried out by EVN with support from Sweden and Norway will assess national options for future hydropower development in the context of five river basins: Lo-Gam-Chay, Da, Ca, Se San and Dong Nai. * A study of the potential for groundwater development in the Central Highlands is under preparation with support form Japan. * In the Red River Basin, with support from ADB and the Netherlands, a licensing surface water exploitation and a wastewater discharge permit system are under development that can serve as models for use throughout Vietnam. * A National Framework for Water Resources Information to improve coordination among water agencies in data collection and processing will be supported by Australia. The project will help to improve availability and sharing of water resources data among agencies, stakeholder groups and community data users. * Capacity Building. At the national level, technical assistance will be provided to the NWRC via the TA Cluster. This will include support for capacity building from the ADB and the Netherlands and training from Australia. * Assistance will be given to MARD, the Water Resources University and key water sector institutes to implement the LWR and the National Rural Water Supply and Sanitation Strategy, including support for curriculum development related to reforms in integrated water resource management and hydrologic modelling by Denmark and coastal engineering by the Netherlands. * The World Bank and ADB have assisted the sector through several capacity building initiatives and lending operations. Implementation and management capacity has improved significantly in investment preparation, supervision, quality control and financial management. A decentralized and participatory approach has been applied to investment preparation, implementation supervision, and the delivery of irrigation and drainage services, including participatory irrigation management (PIM). * The World Bank is supporting training and capacity building to improve dam safety with grant support from Italy. The goal is to upgrade the institutional, legal, regulatory and administrative arrangements for dam safety inspections, especially for emergency cases. This is important as Vietnam has many water storage reservoirs that need attention. * Water Resources Development and Water Service Delivery. Preparation of investment strategies and projects are in progress throughout Vietnam. Institutional reform of river basin 94 Partnerships for Development - Water management, irrigation management and increased user participation will be key criteria in selection of projects under the strategies assisted by all key donors. * A water resources investment strategy for the Central Region, a geographic area that has been relatively neglected, will be prepared in 2001 by ADB and the Netherlands under the TA Cluster. The strategy will assess the impacts of a range of water investments on poverty reduction and the environment and its findings will be available to all donors to help improve coordination. Following preparation of the strategy, ADB will explore investment opportunities in the Northern Central Provinces. * With assistance from Denmark, the World Bank is helping MARD to screen river basins in Central Vietnam for possible support under its forthcoming Vietnam Water Resources Assistance Program. The Program will support river basin development and management, and irrigation and drainage investments. Through the partnership created by the TA Cluster, initiatives in Central Vietnam will be taken in a co-ordinated way. * A multi-donor initiative led by the Netherlands and UNDP has explored the needs for flood disaster prevention and mitigation in the Central Region. An investment and TA program is presently being formulated to address short, medium, and long-term needs. * Denmark has long experience in the Srepok river basin, and has committed to provide a program of sustained capacity building for water resources management within MARD and its supporting institutions over the medium term. * In the Red River Basin, a second sector project is being prepared with assistance from ADB and expected co-financing from France and the Netherlands. The project will assist water resources planning and management through the RBO, introduce a water licensing and discharge permit system, support water quality monitoring, and strengthen public awareness and education. Investment subprojects will support the rehabilitation of irrigation, drainage, and flood protection facilities, together with decentralized rural development support activities implemented with community participation. * Denmark, UK, Australia, and UNICEF will support the implementation of the NRWSSS in different regions, involving the Center for Rural Water Supply and Sanitation to revise the national investment plan for RWSS. * Other bilateral donors, including Japan and Finland, are providing support for a variety of water sector infrastructure projects that will assist in the implementation of the policies and plans, and the achievement of the goals and objectives, of the Government. 95 Partnerships for Development - Water 4. Milestones 18. Some major milestones for future progress have been developed by the water partnership donors in consultation with MARD with indicative timeframes, as follows: First meeting of NWRC Quarter 4,2000 Establishment of Central Provinces Initiative for Flood Disaster Prevention Quarter 4, 2000 and Mitigation Establishment of Red River Basin Organization Quarter 1, 2001 Establishment of NRWSSS Office within the Center of Rural Water Supply Quarter 1, 2001 and Sanitation Establishment of RBOs for Mekong Delta and Dong Nai River Basin Quarter 2, 2001 Completion of Water Resources Investment Strategies for the Central Region Quarter 3, 2001 NWRC to recommend institutional arrangements within MARD in order to Quarter 4, 2001 carry out its water resources management responsibilities under the LWR independently from its irrigation and drainage management responsibilities. NWRC will endorse a national water sector profile, a national water action Quarter 4, 2001 agenda, and a national water policy for Government approval. Completion of National Water Resources Strategy and Action Plan Quarter 1, 2002 Adoption of a National Framework for Water Resources Information Quarter 1, 2002 Establishment of RBOs for Srepok and Ca River Basins Quarter 1, 2002 Piloting of water exploitation and wastewater discharge licensing systems in Quarter 1, 2002 Red, Srepok, and Ca River Basins Policy statement for planning and managing of the Dong Nai River Basin. Quarter 1, 2002 Completion and approval of River Basin Plan for Red River Basin Quarter 2, 2002 Completion and approval of River Basin Plans for Lower Mekong, and Dong Quarter 1, 2003 Nai River Basins Completion and approval of River Basin Plans for all river basins in the Quarter 2, 2003 Central Region National implementation of water exploitation and wastewater discharge Quarter 3, 2003 licensing systems 96 Partnershipsfor Development - Transport TRANSPORT 1. What is the long-term vision? 1. After a decade-long transition period wherein government strategy in the transport sector was focused on restoration of war-damaged facilities, strengthening of core transport infrastructure and removal or reduction of various restrictive policies on market entry, pricing, choice of transport mode, etc., the transport sector has now made significant progress. Nevertheless, the productivity of the transport sector is still low, institutional reform is far from satisfactory, and prevailing poverty has not been attended to effectively. While major transport infrastructure is improved and traffic increases, critical issues emerge such as maintenance (especially of roads), rural transport, safety, urban transport, and capacity to manage the transport sector more effectively. The transport policy that will attend to diverse issues requires an agreed long-term vision and solid strategies. 2. In June 2000 the Ministry of Transport (MOT) prepared the National Transport Development Strategy up to 2020. It is currently being discussed in the approval commission organized in the Ministry of Planning and Investment (MPI). The stated vision complies with the government's overall strategy to reduce poverty while attending to growth, as is stated in the Socio-Economic Development Strategy 2001-2010 (Draft). It is comprehensive, intending to satisfy the demand of the entire society including the poor for high-quality, low-priced, safe, and environmentally sustainable services in urban, rural, mountainous, and remote island areas and border communes throughout the year. For Vietnam to become an industrialized country by 2020, the MOT states that the transport sector must take a step ahead of the other sectors to serve socio-economic development, consolidate national security and defense, serve the national industrialization and modernization process and international migration, eliminate hunger and reduce poverty, and narrow the gap between mountainous and delta areas and between rural and urban areas. 3. Consideration was given to such aspects as rationalization and prioritization of investment in infrastructure, maximum use of existing transport capacity through effective maintenance and management, integration of various modes, strengthening of connectivity between urban and rural areas, enhancement of competitiveness of the transport system and its linkages with the world, and mobilization of internal and external resources including expanded user charges. The strategy also entails synchronizing socio-economic development and national security issues. The smooth movement of people and goods in an economically, socially and environmentally sustainable manner throughout the country is its clearly stated long-term vision. This vision is further interpreted in a set of strategies and policies relative to infrastructure development, funding, institutional strengthening, administrative and organizational reforms, competitive environment, human resource development, and available new technology. 4. Whereas the overall transport sector vision has been shared among stakeholders through participatory processes undertaken during the last two years with the MOT's initiatives, further efforts are being taken to draw out and elaborate specific key points to address unresolved problems and emerging issues. A challenge now for the transport sector is to contribute more directly to poverty reduction which is a national priority and to establish a mechanism by which 97 Partnerships for Development - Transport the sector will be managed more effectively to further promote balanced regional development and growth. 2. What are the key steps needed to attain this vision? 5. The key aspects of the transport sector in Vietnamn have been studied fairly extensively. Current strategies are made much clearer than ever owing to various studies and undertakings done with the MOT's initiative and the involvement of subsector agencies and stakeholders and with support of donor communities. The environment, leading towards more rational planning and policy decisions, is improved. The MOT's ownership of the plan is stronger and a number of specific actions to achieve the transport sector vision and strategies are delineated. They are categorically summarized as follows: (1) Institutional reforms are considered as the core element in improving transport sector management. These include the accelerated equitization of state-owned transport enterprises (SOEs), creation and reform of laws and regulations for the transport sector as a whole as well as for individual subsectors, organizational reform of the ministries to delineate their respective commercial functions, clear responsibility sharing among transport agencies and between central and local governments. Slow progress in the divestiture of transport SOEs is a serious concern of the government for which a major SOE reform program, which will include the transport sector, is about to be announced. The MOT has received technical assistance to support its divestiture program. The role of the public sector in transport should change further: the Government's role should focus on establishing a framework for a level playing field for all players in the market. Meanwhile private sector involvement should be increased to a much larger extent, particularly in improving operating and commercial efficiency, as proven in many other Asian countries. (2) Critically important challenges for the transport sector include securing adequate financing for development, operation and maintenance to ensure the sustainability of the country's transport infrastructure. It concerns the insufficient allocation of funds for essential maintenance of infrastructure especially of roads, and the need for new sources of development finance. The proposed road fund earmarked for maintenance based on off-budget user charges and user involvement aims to establish a stable funding source and mechanism. The proposal, though it requires elaboration of several institutional and management aspects, is being promoted by the MOT for the government's approval. 6. The MOT is further looking into the possibility of enhancing funding capacity through expansion of user charges, strengthening of the cost-recovery principle, increased involvement of the private sector in delivering transport services and management of the ports and railway, and so on. (3) The latest MOT Master Plan's capital investment amounts to US$ 14.7 billion. While the Master Plan is prepared primarily based on the VITRANSS proposal, the increase in the investment size is largely due to the inclusion of a number of road projects from social and national security viewpoints. When US$ 2.5 billion for maintenance/minor work is added, the total budget requirement will be US$ 17.2 billion. However when the same amount of US$ 3.0 billion for ongoing/committed 98 Partnershipsfor Development - Transport projects as that carried over to the Master Plan period will be again carried over to the next plan period (after 2011), the net budget requirement including maintenance/minor work will be about US$ 14 billion or about 3% of the gross domestic product (GDP). 7. The MOT Master Plan is somewhat ambitious. Hence to avoid conflict, broad priorities as shown in Table 1 should be observed and the feasibility of projects, especially of the big ones, should be thoroughly studied. Through a more stringent examination of the priorities the Master Plan could be downsized to a more realistic level. Another potential area to reduce the cost to government is to increase private sector participation in revenue-generating subsectors such as ports, rail and aviation. Table 1: Required Funds for Capital Investment VND Billion (2001-2010) Expected ODA (2001-2010) Subsector Total % by sector 2001-05 2006-10 VND billion % to Total Inter- Road 121,420 59.2 79,583 41,837 67,998 56.0 provincial Maritime 18,357 8.9 &8,210 10,147 5,050 27.5 Transport Rail 11,080 5.4 6,144 4,936 2,602 2$.5 IW 3,819 1.9 1,820 1,999 2,340 61.3 Air 9,744 4.7 8,568 1,176 n.a. n.a. _ Subtotal 164,420 80s. 1 104325 60,095 77,990"' UVrlan tramisport 25,492 12.4 15,055 10,437 17,542 68.8 Rural transport 15,315 7.5 9,275 5,940 3,430 22.4 TOTAL 205,227 100.0 128,755 76,472 98,962 50.6 Recureint 3$,Q00 - = Source: MOT except for air which is sourced from the VITRANSS 11 Excluding air 2/ Including about VND 44,800 billion for ongoing projects 3/US$ 1.0 =VND 14,000 99 Partnerships for Development - Transport Box 1: Broad Strategy for Future Spending * About 20% of the budget envelope should be allocated to maintenance and minor improvements. * An adequate amount in the budget envelope should be allocated to the improvement of accessibility in rural (remote and mountainous) areas. Cormnunes presently inaccessible should be provided with adequate access. * Priority should be given to projects that remove bottlenecks and strengthen the network to meet traffic demand. * Strategic transport infrastructure for land, water and air transport in and between the northern, central and southern growth corridors should be improved and integrated with transport links of regional and global markets. * Urban transport should be improved to reduce congestion and support urban centers' function as engines of growth and gateways to regional and international markets. Source: Adapted from the VITRANSS Master Plan Study (4) Capacity building is attended to by the ministry more closely and seriously than ever. The ability to formulate policy, create plans/programs and implement and monitor policies is intended to be enhanced at all levels. Strengthening the capacity of the MOT and its agencies to plan and administer the transport sector includes defining the roles of agencies to make responsibilities clear and decision-making less cumbersome and more decentralized, improving the supply of information for developing and implementing plans and policies, and implementing coordinated institutional strengthening and human resource development programs. Technical standards to comply with international standards are also to be reviewed. 8. Recognizing that the MOT is in a pivotal position to formulate national transport policy, preparing planning guidelines and training of personnel at local level, monitoring sector performance, coordinating between and among ministries, building the capacity of the MOT and its attached institutions such as the TDSI need to be attended to urgently. Capacity strengthening at provincial level is equally important and is critical so much so that interventions must not be designed in isolation, particularly under the government's current move to decentralize and delegate transport infrastructure development and management responsibilities to provincial governments. The capability of domestic private sector to finance, operate and manage transport infrastructure and services is still low, resulting in unsatisfactory sector performance and slow progress in the divestiture program for transport SOEs. (5) Enhancement of partnership between the MOT and other organizations including attached agencies, the private sector, NGOs, donors, and other stakeholders is also given importance to promote the reform process and sector management. A transparent and participatory process with various partners in implementing policies has been started but still at an early stage. Some promising developments in the sector include the co-financing of the Rehabilitation of National Highway No. 1, Second Rural Transport Project, Overseas Development Assistance Partnership for Ho Chi Minh City which includes the transport sector, the process involved in preparing the 100 Partnerships for Development - Transport Transport Sector Master Plan, and so on. The opening of the VITRANSS web site is likewise expected to contribute to promoting sector coordination. The establishment or strengthening of a mechanism for dialogue with the private sector through various transport associations of ports, shippers, lighters, etc. is expected to improve services to users. 9. Whereas the capital investment plan has been worked out reasonably through past studies in consultation with subsector agencies, the key step prior to making the final decision on implementation is verifying thoroughly the projects' feasibility from economic, social, environmental, financial, and technical viewpoints. Likewise key concerns that will determine more clearly the steps to solve current institutional issues and strengthen capacities of the transport sector remain. 3. What should the role of different partners be? 10. Vietnam's entire transport sector needs improvement/development in many aspects, as has been confirmed in various studies. The improvement of the transport sector requires an integrated approach not only at the planning stage but also at the policy and project implementation level. While there are various steps for assistance by different donors, the most important is how these kinds of assistance are implemented in a coordinated manner without losing holisticity. Projects and assistance of donors should not be planned and implemented in isolation or without compliance with overall sector development strategy and priorities. Coverage of donor assistance as a whole is extensive and has contributed significantly to the sector's improvement. However, there is still room for debate whether they can be more effective through better coordination. 11. The ongoing partnership meetings chaired by the Japan International Cooperation Agency (JICA) and co-chaired by the MOT intend to clarify who is doing what now more precisely. A questionnaire has been distributed and initial responses were obtained from various donors and are being consolidated. This is the initial step. It is expected that partnership dialogues would continue in the future through periodic plenary and small-scale meetings on key issues facing Vietnam's transport sector. A lead from the MOT will enable donors to collaborate more effectively and coordinate activities more efficiently. 4. What are the key monitorable indicators? 12. Recognizing that the participatory approach in Vietnam's transport sector development is becoming more and more critical in formulating and implementing policy, plans and projects, a set of indicators that can be commonly shared and monitored by the government and stakeholders has become necessary. Plans and projects are monitorable in accordance with intended targets. However, indicators to be shared to monitor the performance of the transport sector as a whole, by subsector, by region, or by the poor as well as by relevant transport sector organizations are yet to be defined and agreed upon. Agreeing on a set of common indicators is an important area for the MOT and donors to work and cooperate on. An initial set of indicators will include the following: * complete primary and secondary transport network by 2010 101 Partnerships for Development - Transport * provide transport infrastructure and services with all-weather access to all communes by 2010. * ensure that an agreed percentage of roads is in good condition and receiving regular maintenance * ensure that an agreed percentage of road contracts are won by private contractors * establish acts/regulations for all modes * introduce a road fund within three years * reduce transport accidents and fatalities to the National Transport and Safety Review target 102 Partnerships for Development - ODAP Ho Chi Minh City OFFICIAL DEVELOPMENT ASSISTANCE PARTNERSHIP (ODAP) IN HO CHI MINH CITY 1. Long term vision of development of HCMC 1. Ho Chi Minh City achieved great success in its economic development in 1990s, and is aiming at further development in the next decade. In its draft five-year socio-economic development plan for 2001-2005, the city has set its overall objectives, which are to achieve sustainable growth at 10% per annum, to focus on production and service sectors, to develop technical and social infrastructure, and to improve economic management mechanisms to be ready for globalization and regional integration. The city aims to develop 16 key industries (especially software, telecommunications, finance & banking and exports) in order to increase the per capita GDP from 1,365 USD in 1999 to 3000 USD in 2005. There will be a shift in sectoral development: more in industrial and service sectors and less in the agricultural sector; more in the private sector and less in the public sector. Planning for infrastructure development including the transportation system, water supply, water drainage, housing, and environmental protection are considered key objectives. Promoting job opportunities will be of high priority to reduce the unemployment rate to 6% in 2005, while annual population growth will be controlled at 2%. 2. In order to realize the above-mentioned targets, the city authority has looked for different resources to mobilise 180,000 billion VND (or 12.9 billion USD). Out of this amount, resources mobilised from the government budget only account for 10%, from state enterprises for 22%, from non-state enterprises for 25%. ODA and FDI account for 22%, an increase by 14.3% in volume compared to the period of 1996-2000. During 1996-2000, 80% of the ODA provided to HCMC was spent on the water and transportation sectors, 15% for environment and 5% on health and education. It is planned that in the next five years, ODA will be attracted for infrastructure development, environment, education, health and culture, and for strengthening capacity in public management, with a proposed distribution of 40%, 30%, 15% and 15% to those sectors respectively. The questions of effective mobilisation and management of ODA projects are critical to the city authorities. The idea of setting up a partnership on ODA in HCMC developed in response to these key needs. 1.1 Background 3. The Official Development Assistance Partnership (ODAP) in HCMC is a formally established strategic partnership between the HCMC People's Committee and a group of key international donors. The idea came out from the WB's City Development Strategy (CDS) exercise in 1998 where HCMC was selected as one of the pilot case study cities. Taking into consideration that the results coming out of the CDS would form the basis for discussion on the city's development alternatives and more ODA investment projects would be provided to the city, the establishment of such a partnership would be of great benefits to city authorities. The purpose of such a partnership is to mobilize coordinated support from donors according to their comparative advantages, to assist in overall strategy formulation and in the implementation of the priorities for investment and institutional strengthening. After several discussions with the city government and donors, the Memorandum of Understanding was signed in March 1999 by 103 Partnerships for Development - ODAP Ho Chi Minh City HCMC People's Committee and the Asian Development Bank (ADB), the International Finance Corporation (IFC), the Japan Bank for International Cooperation (JBIC) - formerly OECF, the United Nations Development Programme (UNDP), and the World Bank (WB). 4. According to the MOU, the partnership is set up to improve the effectiveness of donor support through (i) providing a framework for identifying priorities for donor support to the city's development, (ii) striving for a consensus on policy reform and solutions to operational issues, (iii) facilitating project implementation, and (iv) coordinating donor knowledge and activities by sharing relevant information and enhancing access to documentation and project information. The vision of the partnership is that donors will continue to cooperate with Vietnam; ODA provided to the city will increase and that efficient ODA management will be required from the government in the cooperation between the city and donors. The partnership was planned to be carried out for two years to test the cooperation mechanism of such a new partnership in Vietnam. 2. Role of different partners 5. The activities of ODAP are carried out by the Office of the ODAP Support Team (OST), which consists of a part-time international coordinator, a full time national facilitator and an administrative assistant/translator. The OST is based in the Cooperation and Investment Promotion Division (CIPD) within the HCMC Department of Planning and Investment (DPI), which was designated by HCMC PC as the focal point for the partnership. The personnel and office running costs are financed through a common donor fund managed by UNDP, while DPI contributes an additional staff member and the office accommodation. 6. A Steering Committee (SC) was set up, consisting of representatives of the five initial donors and city authority together with MPI, to direct the actions and take necessary steps to facilitate the contributions of the donors to the city. The SC is supposed to meet at least once a year and co-chaired by HCMC and a selected donor partner. At the first meeting in November 1999, the Belgian Technical Cooperation (BTC) - formerly BADC - was approved by the SC to be a new member. NGOs expressed interest in joining the partnership and this issue was brought up during the second SC meeting, however, it was decided that the current size of the partnership be kept the same for some time before expanding to include other members. 7. Along with the SC, ODAP Working Groups will be organised and will call for meetings to discuss specific activities. Different working group meetings were carried out before three workshops with representatives of all partner members to get consensus on the workshop content, logistical arrangements, responsibilities of each member and financial contribution. In these working group meetings, the city government took the lead in organising and chairing the meeting. 8. Financial contributions to the partnership to sustain its operation come from all partner members. In the first year, financial contributions from UNDP, WB and JBIC were channeled through and managed by UNDP. Funding has been committed by ADB, WB and BTC for the second year. In addition to official contributions via the UNDP common fund, financing from members was provided to specific activities on a case-by-case basis. 9. Consultation is made with all partnership members on ODAP activities in which different roles of members are identified. For the first workshop on resettlement organised in March 2000, 104 Partnerships for Development - ODAP Ho Chi Minh City BTC was deeply involved in workshop preparation and facilitation as well as provision of funding for the workshop. In the second workshop on GIS organised in May, BTC was again involved in the preparation process and funding while ADB financed a resource person. The PC through DPI works on a day to day basis with the OST and has provided strong support for ODAP activities. At the moment, a full-time DPI staff member for the OST is provided and this assignment will be rotated to obtain maximum benefits for a wider range of DPI personnel. 3. Past achievements and planned activities 10. After the establishment of the ODAP Support Team (OST) a workplan was prepared for the activities of ODAP in the first year. Since then, the key following activities were carried out: (i) collection of project data and associated updating of the multi-donor charts and project profiles; (ii) assembly of donor agency documentation on mandates, policies, regulations and standard procedures; (iii) collaboration on the DPI management information system (MIS); (iv) organisation of two workshops on resettlement and GIS and preparation for a third forthcoming workshop; organisation of two SC meetings; (v) compilation of a single set of mutually-agreed indicators for the city; and (vi) publication of four ODAP Newsletters. Active contributions from all members have been received in all activities 11. As mentioned in the MOU, results from the CDS study will form the basis for discussing the city's development options and for identifying appropriate actions to be considered by the partnership. Although the CDS was completed and its results were expected to be considered by the city in designing its ten-year socio-economic development plan as well as to be implemented by donor members, there is still only a vague linkage between the CDS results and the five year development plan of the city. Furthermore, ODAP's involvement in this CDS exercise was very limited. 12. In addition to above achievements, the ODAP team had carried out three ODAP surveys. The first one was to assess the role of the ODAP Newsletter in promoting information sharing. The Newsletter is published once every two to three months to provide an information-sharing service for the ODAP members and for others with an interest in the affairs of HCMC and in the Vietnam urban sector in general. The second survey was conducted at DPI to look at human resources management, the function and capacity of DPI staff and to explore potential needs for capacity building in the future. The third survey was directed at ODA PMUs, related consultants and concerned City Departments to identify problems and solutions to accelerate project implementation, preparing for the third workshop in late October. This workshop is designed to identify different issues faced by different Project Management Units (PMUs) and future trainings to be provided to these PMUs for better project implementation. 13. During the second year, the form of ODAP assistance in investment programming and the associated planning methodology will need to be determined in the light of the official follow-up arrangements determined for the CDS exercise. How to provide assistance to departmental and PMU project data management will be reviewed based on findings of the third workshop. More effort will be put to refine and regularly update multi-donors charts, project databases and to initiate an analytical review of the overall investment situation in HCMC. The "development dictionary", the supplement to the Newsletter, and the research and consultancy directory are planned to be carried out. City indicators will be established in the context of a sustainable institutional arrangement, in collaboration with the HCMC Statistics Office. 105 Partnerships for Development - ODAP Ho Chi Minh City 14. It is also planned in the second year that an exit strategy be developed to prepare for DPI to take over the complete ODAP support role with reduced dependence on external assistance. Operationally, the move would be from the predominantly passive coordination and information- sharing position to a more facilitative role in planning and investment methodology and common sector programrnming between donors. 4. Success indicators and lessons learnt 15. As mentioned in the MOU, the criterion for success is that the partnership facilitates the delivery of effective support by the partners to the city. As the primary client of the partnership is the city itself, success indicators can be seen through the frank and open discussions at the SC meetings and the feedback from the city in ODA management. This has been observed in the first two SC meetings, especially in the second one, where considerable time was spent on ODAP mandates, status and ownership questions. In general, all the partners express satisfaction with the progress achieved so far. 16. Lots of delays occurred during the first six months of the partnership due to weak joint action and funding issues. In terms of the length and imprints of the steps taken in setting up ODAP, it would have been better to use a gradualist approach at the start that would have allowed an opportunity for better participation and planning when the MOU was being prepared. Similarly, following the opening of the ODAP office with the expectation of immediate giant steps, it was found that the working relationships with our host department needed almost a year to work out and formalise procedurally. Such a partnership requires progressive learning process on both sides. 17. Another big initial step which also needed a more gradualist, less aggressive approach for the ODAP implementation support was the CDS exercise. It is the intention to use results of the CDS exercise to discuss different options of city's development and to identify the main lines of action needed to be taken for consideration of the partnership, however, this turned out not to have the expected impact in guiding the ODAP activities. Instead of becoming involved in identifying development priorities and jumping straight into policy reforn, it would be more appropriate to concentrate during the first year on information-sharing and providing a forum for the members to all get together at the same time on topics of immediate, common concern. 5. Organizations and persons involved in drafting this note The following persons were involved in drafting this note: 1. Mr. Koki Hirota, Chief Representative, JBIC 2. Mr. Takao Shimokawa, Representative, JBIC 3. Mr. Maurice Dewulf, Deputy Resident Representative, UNDP 4. Ms. To Thi Thuy Hang, Head of Office, UNDP HCMC Liaison Office 5. Mr. Terry Standley, International Coordinator, ODAP Team 6. Ms. Le Dieu Anh, National Facilitator, ODAP Team 106 Partnerships for Development - Urban URBAN SECTOR 1. What is the long-term vision for the urban sector in Vietnam? 1. The three cardinal concerns of Vietnam's overall development strategy: Growth, balanced development, and poverty alleviation can be addressed through urbanisation in three key ways: * Enhancing the contribution of cities and towns to national economic growth. Currently, 75% of national output originates in urban areas. * Ensuring an efficient and effective provision of services that a growing rural economy requires. Vietnam has more than 20,000 communes, 4 cities, 82 provincial cities and 560 towns. The majority of communes lack access to the full range of services. * Creating non-farm jobs to absorb a workforce growing at the rate of 1.4 million workers per year. The ability of the economy to achieve this will determine whether the country will meet its poverty alleviation target or maintain its past achievement in poverty reduction. Table 1: The current and future status of urban development in Vietnam. Item 2000 2010 Urbanisation (Level) 23.5% 33% Urbanisation (Rate) 5% 5.5% Urban population 19 mnillion 30 million Drinking water 50% 80-85% Sewerage 35% 85-90% Solid waste 65% 100% Hanoi (i) 1.5 to 2.0 mnillion limit Ho Chi Minh 4.5 to 5 million limit Haiphong 0.75 to 1.0 million limit Other urban centres 0.5 million limit 2. The strategy presented in October 2000 by the Ministry of Construction recognises the positive relationship between urbanisation and economic development, and emphasises the need to manage urbanisation to preserve cultural and historical values, maintain ecological balance, and protect the living environment from natural and technological disasters. 3. The objective of the strategy is to gradually build a comprehensive system of well functioning urban centres that contributes to socialist development and national security. 4. The strategy envisages building a system of 6 centrally run cities, 68 provincial cities, 30 towns and 2,000 district towns. In addition, the strategy sets targets for urban services, ranging from water and sewerage, transportation, power, telephone, housing to open space. It recognises granting land rights "within a long-term time frame" as a strategic tool to spur investment in housing improvement for the urban poor. Preferential credits to the poor, basic education and 107 Partnerships for Development - Urban vocational training, improving access to informnation, building social capital, and forging public- civil society partnership are also advocated by the strategy to help the poor to break the poverty cycle. 5. Table I outlines the strategy's projected level of urbanisation in Vietnam. 2. Key steps needed to attain the vision Box 1: Four Prerequisites for Vietnam's Cities. For Vietnam's cities to attain the vision, they must be livable, competitive, bankable and efficiently managed. Livability entails: the provision of shelter for all; providing security of tenure; extending the coverage of basic services; ensuring greater equity in access to these services; addressing environmental pollution (through the provision of drainage, sewerage, sewage treatment, solid waste collection and disposal and the reduction of particulates in the air); and providing more green space for recreation and relaxation. Competitiveness requires cities to build on their comparative advantage within the nation and globally. City governments must develop medium term strategies (city development strategies) on how to capitalise on their advantages. To be Bankable, cities must be able to recover the cost, including debt repayment, of the services they provide and manage themselves in a manner that is sufficiently open and accountable to enable them to borrow for capital investments. Cities must be Efficiently Managed to achieve all of the above. This will entail moving from the previous supply-driven to a demand-driven approach, which will require much greater citizen participation. 6. Urban management should be guided by three concerns: reducing negative externalities associated with market induced development, enhancing efficiency through public-private partnership, and ensuring transparency and accountability in public/private development. Additionally, there are four pre-requisities for successful cities (Box 1). 7. The strategy raises the following issues of immediate importance: 8. City-size: The recommendation prescribing city size should be pursued with caution. International experience suggests that there is no optimal size of a city. The larger the city, the more jobs are created. Larger cities also tend to be more efficient than smaller ones. For example, labour and capital productivity in Paris are respectively 34% and 27% higher than in the whole of France. 9. Urban poverty: Based on the experience of other countries, the urban share of the total poor tends to follow closely the level of urbanisation, although it is affected by policies cities adopt. The strategy has important poverty alleviation aspects: the granting of security of tenure to trigger investment in self-built housing, enhancing access to credit and information, and vocational training. However, there is a need to detail how these measures will be implemented because current policies related to land, for example, are cumbersome and fragmnented among 108 Partnerships for Development - Urban various agencies. In this context, building partnerships should be a priority, to facilitate communication between city authorities and the poor. 10. Migration: HCM City and Hanoi respectively register 80,000 and 20,000 new arrivals each year. In HCM City, about 576,000 out of 700,000 migrants were not registered (1996). Those who are not registered are not entitled to access city services. The mobility of people and capital is the major determinant of the extent to which urbanisation can contribute to economic development. In most cases rural to urban migration is a result of increasing demand for labour in the destination cities: a policy that restricts migration may harm the economy. Box 2: Areas requiring priority attention Land: Land rights, Land transfer, registration/cadastral survey, servicing, renting and other procedural problems Co-ordination: Within the city administration and with the adjoining provinces; co-ordination is particularly needed to streamline procedures related to the issuance of permits Resource mobilisation: Rationalising land tax and tax adrninistration to remove disincentives to formalising land and property transactions, simplifying application procedures to encourage private sector participation, housing finance, cost accounting, etc. Environment: Enforcement of environmental standards; the brown and green agendas Partnership: Partnerships with the private sector, NGOs and CBOs. Information: Information exchange among principal stakeholders, making information readily available to the public. Human resources: Covering the whole range of people, from city officials to community workers. Hands-on training should complement formal training. Urban Upgrading: Urban upgrading is the least expensive form of urban development, both from financial and social points of view. It can play an important role in the transition of low-income ad hoc areas to fully serviced urban neighbourhoods. However, this requires working with communities in developing and implementing schemes. It also requires greater flexibilitv in the application of codes and standards during the transition period. Community-based development: CBD creates social capital in a community. This is particularly important for poorer communities because they have to share facilities and services that help sustain them, and make it possible for their members to engage in remunerative activities. Experience gained to date should be reviewed collectively so that cities can adopt successful practices. Urban Po : Poverty is a complex phenomenon and the major bottleneck in addressing it is the lack of recognition of its manifestations and root causes. The physical (limited access to services), economic (hurdles in pursuing remunerative activities, low-risk bearing capacity) and social (esteem, harassment, eviction, violence) dimensions of poverty require a concerted effort of all municipal departments in pursuing an approach that recognises the condition in which the poor have to survive as well as their contribution to the city economy. 11. Regional balance in development: Balanced regional development is a concern for many countries and is hinged on a number of considerations: national security, political stability, maintaining a proper person-land ratio, equity in the distribution of development benefits, etc. Urbanisation can help address this concern by providing appropriate levels of services 109 Partnerships for Development - Urban throughout the country through the hierarchy of cities and towns e.g. full service hospitals in the Class 1 cities and clinics in rural centres etc, and by developing those local resources that are demanded in the wider market. Careful analysis of the cost involved and the economic return on investment is required. 12. Urban system: The suggested hierarchy of urban centres is valid. However the position of a city in the hierarchy should be a function of its economic base, comparative advantage and the demand for services that emerge from its hinterland, rather than being predetermined. Since cities in a hierarchy perform different functions, cities will be treated differently from each other. For instance, government may wish to extend a greater degree of direct support to lower order cities to enhance the service function they perform for the rural economy. Larger cities, with their sounder economic base, may be required to be more independent of government grants. 13. Economic zones: The strategy envisages a series of Economic Zones and industrial districts, the economic feasibility of which needs to be reviewed. 14. Urban management: Cities differ in their size, economic strength and management capacity. However, key areas in urban management that are common to all cities require priority attention (Box 2). Box 3: Specific policy steps that should be considered: Greater decentralisation: Vietnam has made progress but is caught in the vicious cycle of more decentralisation being denied because of perceived, and real, lack of institutional capacity at the local level; Community/citizen consiltationlparticipazion: Participation needs to be fostered. The provision of basic tertiary infrastructure through a participatory approach could be an important first step in developing this; Increased conmiercialisationz and private sector participation in the provision of urban services. This has already developed a foothold, but the legal and regulatory aspects will need to be addressed to enable the potential efficiency gains be maximised. Sub-national financing. cities as the main source of economic growth will have to transfer revenues for the development of rural areas. However, work needs to be done to decide what levels of transfers are appropriate, and how much cities should be permitted to retain for discretionary developmental investment. Cities also need assistance to enable them to access alternative sources of finance such as bond issues, municipal devel6pment fiunds etc. More effective land administration and the development of real estate markets to enable more efficient and equitable access to land. 15. A continued process of consultation within the government and with the donor commnunity would enrich the policy debate and help the governnent and donors work effectively together. Box 3 outlines specific policy steps to be considered. With this objective, an Urban Forum where the government and the donor community could share views and ideas on issues raised by the policies should be established as a matter of priority. Given the range of issues involved, the Forum should have flexible "memberships" in terms of the level of representation and according to the relevance to individual agencies. 110 Partnerships for Development - Urban 3. What should the role of different partners be? 16. Table 2 gives an indication of current involvement. The main players are JBIC, ADB, UNDP/UNCHS and The World Bank; bilaterals also play an important role. Bilateral donors are now giving greater priority to rural areas and this may cause a reduction in support to the urban sector. In the future it appears that JBIC, ADB, UNDP/UNCHS, BTC, USAEP and SDC will continue in the sub-sectors they already support. New entrants may include USAEP (assistance with planning in Haiphong), GTZ and DFID. 17. Donors support a move from traditional project lending to programmatic lending, which would allow more effective leveraging of progressive policy developments than by investment lending. Opportunities exist for developing programs either at the sub-sectoral city level e.g. the recently produced sanitation master plan for HCMC; at the overall city level e.g. buying into a city comprehensive development strategy; or supporting a sub-sectoral initiative nationally e.g. community directed development of basic infrastructure (slum upgrading). Table 2: Current Donor Involvement Water Sanitation Solid Urban Community Capacity Land Waste Trans. Based Dev. Building Admin JBIC X X X X WB X ' X X X __ ADB X X X X UNDP , X X x AusAID X X X X X Finnish X X X X D ID C__ _ ___ _ _ _ __ _ _ DANIDA X X X X BTC X X X ; SIDA X NGOs X SDC __ = _= X X _ 4. What are the key monitorable indicators? 18. Indicators are still being developed. Examples of possible indicators include: * Number of cities adopting comprehensive development strategies; * Land administration - percentage of households with land use certificates; * Basic service (water supply, drainage etc) coverage in slums; * Extent of community participation in developing plans and projects; * Proportion of own-source revenues in city annual investment budgets 111 Partnerships for Development - Energy ENERGY 1. Increasing access to, and reliable supply of modern/commercial energy will be absolutely essential for enhancing household welfare, supporting economic growth and increasing income in Vietnam. Without efficient and adequate energy supply for households and commercial activity, it will be impossible to reduce poverty in Vietnam or achieve the target rates of growth. 1. What is the long-term vision? 2. The long-term vision and strategy for energy sector development in Vietnam are based on five basic goals. * Expand access to modem energy * Improve energy supply reliability * Ensure fiscal sustainability * Improve sector governance and regulation * Reduce health and environmental costs 3. The attainment of these goals is absolutely essential to support Vietnam's transition from a low-income, resource-rich country to a middle-income country with significantly fewer households classified as poor. A framework for energy sector development is shown below. .Essential input for businesses Ean Acs Enhances labor and capital productivity Income * ExpandAccessto \ * Macrostability (increased tax revenue and Modem Energy reduced fiscal burden) • Improve Energy * Essential for healthcareand aducation Supply Reliablility services * Essential for complementary infrastructure Capabilty • Ensuro Fisca (water supply, CO.-.rn.1L.,'iCein:z transport) * Ensure Fiscal ' Health improvements (reduced Indoor Sustalnablllty pollution) * Improve / * Energy price stability Governance and I* llumination and personal security Securty Regulation { * Environmental sustainability * Reduce Health and / Choice of energy services Environmental - Access to information (radio, TV and Empowerment Costs communication) * Increased accountability of service providers 112 Partnerships for Development - Energy The Scale of the Challenge - Assessing Energy Linkages to Poverty and Growth in Vietnam 4. To achieve the social and economic development targets of the Vietnamese Government will require total investments in the energy sector in the order of $ 2 -2.5 billion per annum. Each of the sectoral goals to support the national development targets are discussed below: 1.1 Access to Modern Energy 5. Over 60% of Vietnam's population lack access to modern/commercial energy (kerosene, electricity and cooking gas). Commercial forms of energy are key to increasing productivity, income earning capacity and welfare. The lack of access to modem energy has a large negative impact on household welfare, particularly for poorer households - there are several reasons: traditional biomass cooking fuels require time to gather and prepare, as well as causing indoor air pollution which disproportionately affects women and children; lack of electric lighting at the household and community level can reduce educational attainment and available productive work hours; reduced health care services due to lack of energy for lighting, diagnostic equipment and vaccine preservation; reduced availability of potable water supply and sewerage systems that depend on energy for pumping, system monitoring and cleaning. It is estimated that per capita consumption of modem energy would increase three-fold from its present low levels of 144 kgoe to 450 kgoe by the end of the decade. Huge investments and major policy interventions will be necessary to expand access and provide wider choice of energy supplies to the population. 1.2 Energy Supply Reliability 6. Virtually all productive income producing activity requires reliable energy. Vietnam's forecast/expected economic growth rate averaging 7% annually is based on the rapid expansion of commercial activity, and the associated employment generation. All businesses, formal or informal, large or small, rural or urban, use energy to produce and deliver their goods and services. To meet economic growth targets, energy supplies will need to grow about 13 percent faster than GDP (electricity supplies will have to grow 70 percent faster). Total end use commercial energy supply will have to increase almost threefold by 2010 (from 13 million tonnes to some 30-35 million tonnes). Electricity generation will need to double over the next decade. Petroleum demand will double to around 22-25 million tonnes per annum and natural gas use grow from negligible levels to 7.5 billion cubic meters/year. Today Vietnam not only lacks a reliable supply of energy but lack of investments in new technologies often inhibit efficient use. Transmission and distribution losses are at extremely high levels of around 18%. Pricing reforms in electricity, LPG, liquid petroleum products are necessary. Investments in supply infrastructure and upgrading of existing systems will be necessary. Oil and gas development will require not only adequate incentives for exploration and development, but large investments in downstream market development. 1.3 Fiscal Sustainability 7. The fiscal (and by-extension macroeconomic) impact of the energy sector in Vietnam cannot be overemphasized. In 1998, exported crude oil and coal accounted for 15 percent of total exports and imported petroleum products for 6 percent of total imports. Taxes on the electricity sector contributed US$ 261 million to the state budget. The fiscal impact of energy taxation and 113 Partnerships for Development - Energy subsidies in Vietnam are very substantial. Potentially large resource royalties can be obtained from the oil and gas sector through the development of better fiscal-terms for exploration and production. Energy subsidies, which are now not appropriately targeted, could also be better designed to ensure maximum impact. Investment needs for expansion need to be met without incurring excessive contingent liabilities for the government, which would increase fiscal risk. 1.4 Sector Governance and Regulation 8. Good sector governance and regulation is key to achieving the above three goals. Poor governance undermines the performance of existing sector enterprises and increases the investment risk for potential new entrants. Ineffective/poor governance and regulation affects the poor in two ways: reducing the sector's financial ability to expand and deliver services to poor households; and, leading to high-cost and inefficient operations that price the services beyond the reach of the poor. Several institutional reforms are needed in Vietnam's energy sector to increase access, increase energy supply and reliability to meet growth targets, and enhance fiscal sustainability. The long-term vision for the energy sector is to develop competitive energy markets. In the power sector the goal is to shift from a vertically integrated utility to an electricity pool interconnected to a regional grid, with private power producers accounting for 15-20 % of total generation capacity and the gradual equitization of the distribution sector. In the gas sector the goal is to shift from a gas trader to an open gas market. In petroleum products the shift would be from limited competition with a few related players to an open competitive one. The establishment of effective regulatory and coordinated policy making agencies/bodies would be an essential first step to making progress towards these goals. 1.5 Environmental and Health Impact 9. Energy production, transport, conversion and utilization are processes that can have negative environmental impacts if improperly managed. With good management practices and incentives the impact can be managed and sustainability ensured. The long-term vision for the sector is to ensure environmentally responsible production and use of energy. 10. But to achieve this long term vision will require a clearly defined policy and strategic framework if Vietnamn is to increase energy supplies to meet growth targets, develop energy resources along an environmentally sustainable and socially equitable path, ease financial constraints in the sector, and promote sustainability and efficiency. Global experience shows that building an effective energy system is one of the most difficult and challenging aspects of any reform program. Improving access will require the electricity industry to improve its efficiency in both physical and financial terms. Energy for the remote mountainous areas will require the development of renewable energy sources. Improvement in system efficiencies will require investments in upgrading the system and system operation through linking of regional grids. To meet the targets of the oil sector, it will be essential to discover 50-70 million tonnes of oil reserves every year requiring an investment of $120-170 million in exploration alone. These discoveries will be essential to maintain a minimum reserves to production ratio of 9-10 years. Besides exploration costs, the upstream investments needed will be at least 5-8 times as much and if refineries are built, this will require further investments of about $ 1.5-3 billion. Gas development will require not only additional exploration but also creation of an infrastructure and downstream market development and adequate incentives for exploration and development. Efficient gas based power and petrochemical industry can be created given the necessary 114 Partnerships for Development - Energy investments and developments in technology, and a proper pricing structure and integrated planning. Coal industry could be developed to export through integrated policies that provide exports at a competitive cost. Alternatives of exporting power from mine mouth plants could stimulate the coal industry besides alleviating its environmental impacts. One of the main drivers of progress in the coming decade will be technology. Development of new drilling techniques, deepwater exploration, enhanced oil recovery, marginal field economics, gas based petrochemicals, distributed generation, renewable energy are all areas that will shape the energy sector of the future and Vietnam will need to ensure access to the latest technology and management. And to achieve the targets projected in the long term vision of the government will require total investments in the energy sector of the order of $ 2 -2.5 billion per annum. 2. What are the key steps needed to attain the vision? 11. Clearly defined policies, implementation strategies and revolutionary institutional reforms are necessary to achieve the long-term sectoral and national goals. 2.1 Policy/Strategy Clarifications: * Financing Strategy - clarifying the relative proportions of government budgetary support, private sector and ODA financing to meet growth and investment targets. (Donors to provide a clear forward-looking view of their support) * Define the role of the private capital and private ownership in the energy sector - clarifying the areas of the energy industry where private ownership will be permitted. * Defining the future competitive industry and market structure of power and gas sub- sectors. * Strategy for natural gas development and commercialization. * Promulgation of national criteria to guide government approval of large-scale energy infrastructure investments - intended to avoid uneconomic decisions (e.g. oil refineries, gas for fertilizer, etc) * Issuance of a comprehensive energy sector policy paper (probably issued by the National Energy Policy Council or agency such as MPI) to serve as the "road-map" for legal and regulatory reforms and changes in the sector and market structure during the transition. 2.2 Tariff Policy * Agreement on power tariff principles, such as: (a) an adequate tariff level that provides efficient long-run marginal cost signals and covers reasonable financial costs; (b) regional variation in tariffs to provide appropriate operating and investment efficiency incentives (e.g. investment in low-cost distributed generation); (c) national life-line rates set at an appropriate consumption threshold. * Gas pricing policy: Establishing a natural gas price that balances supply cost and market value - negotiated initial price with indexation. 115 Partnerships for Development - Energy * Subsidy policy: Determination of a method to provide targeted subsidies for rural electrification and other social investments. * 2.3 Institutional Reforms * Regulatory agency: Decisions on functions, institutional structure and composition of regulatory agency. A combined gas and power regulatory agency should be evaluated. * Legislative framework: Finalization of Electricity Law that will establish the regulatory agency for power. * Policy Coordination Agency: Decision to create a national energy policy council/commission to ensure that developments and policies are coordinated across the different sub-sectors. Agency intended to avoid the unsustainably high economic costs that result from poor coordination. 3. What should the role of different partners be? 12. The international community can help the government achieve its long-term vision through effective partnerships. The government of Vietnam, in association with the World Bank, has taken the lead in developing a partnership with other donors in providing assistance to the government in the sector. The Bank report " Fueling Vietnam's Development: New Challenges for the Energy Sector" (1998), prepared in collaboration with the government of Vietnam, provides a framework for Bank and other donor participation in the sector. During the past year, a large number of workshops and roundtables have been held to help the government agencies develop their policies and plans for the next millennium (Table 1). Table 1 :Recent workshops/roundtables Lead Donors Private Commu Workshops/ roundtable discussions and interactive Government/ sectors/ E seminas agencies NGOs Regulation in the energy sector - February v_ _ Petroleum law and decrees- March OoG vv Institutional options in rural'electrificaition- August EVN _ Electricity law and policy roundtable- Septemnber MOI v Rural electrification implementation- August EVN/PC's Energy strategy and the long term vision- October MPI ___ Renewable energy action plan- October EVN v v Natural gas policy and regulation- October PVN _ Energy efficiency- June MOSTE Community based mini grids- August EVN I_ 116 Partnerships for Development - Energy 19. In the past five years, international donors have provided about $ 2.9 billion (JBIC $ 1, 850 million, WB $ 694 million, ADB $ 180 million, SIDA and other bilaterals about $ 150 million) for the development of the energy sector. But their strategies are changing. In the medium term, JBIC plans to focus on, besides the ongoing projects including 0-Mon thermal power project and Dai Ninh hydro, on multipurpose hydro, transmission and distribution, rural electrification and coal based power. WB is focussing its strategy on improving access (Rural Energy I and 2), improving system efficiency (System efficiency improvement and equitization project), and catalyzing private investments (IFC, PRG, PRG for hydro). ADB will concentrate in its future projects on expanding subregional networks and on catalyzing private investments to finance future sector expansion. The priorities for SIDA credits will shift to investments in distribution, transmission and generation based on renewable energy with a focus on improved energy supply to the disadvantaged areas. ADF has provided a credit for about $ 20 million for rural electrification. In addition to loans and credits, international donors plan to remain active in providing grant funds for technical assistance for improving legal/regulatory and institutional environment, energy efficiency, capacity building, sustainable energy development, training and strategic studies for structural reforms. It is clear from the medium term strategies of the donor community that there is: * a shift to a greater focus on poverty alleviation and increasing access to the remote areas, * declining interest in the direct financing of thermal power generation projects, * increased willingness to help catalyze private investments through guarantees and other credit enhancements, * a gap emerging between the investment needs of the country and support from the international donor community for direct investments in the next decade. Unlike the past five years when an average of $ 500 million per year was provided by the international community, it is estimated that in the medium term only about 15 % of the total investment needs of $ 2 billion/year will come through concessional credits from the donors. This will require a serious rethinking on the part of the government in developing its financing strategies for the energy sector in the coming decade. In the absence of adequate agency self financing and donor funding, private sector funds will have to play an increasingly important part in the growth of the energy sector. 117 Partnershipsfor Development - Public Administration Reform PUBLIC ADMINISTRATION REFORM 1. The aim of this note is to briefly review the current co-operation between the Government of Vietnam and its international partners in Public Administration Reformn (PAR). The four following "CDF Questions" will be discussed: 1) What is the long-term vision for the sector? 2) What are the key steps required for achieving the vision? 3) Who is doing what and how can we forge stronger partnerships? 4) What are the key monitorable indicators of progress for the short- and medium-term? 2. In 1998 a donor-working group on PAR was established with the aim of promoting a dialogue with the Government on policy issues emerging, among others, from the implementation of donor supported PAR projects. The number of issues arising from PAR project implementation led to a split of the working group, one arm concentrating on more technical issues and exchange of best practice, and the other arm retaining the idea of a policy dialogue. 3. In 1999 both the Government and donors started questioning more seriously the real progress of the PAR programme. Concerns were also raised over the real value of donors' contribution to the PAR process. The need for a comprehensive PAR vision and strategy to improve impact and results started to come more and more frequently as a part of discussion. As a first step key donors in the area of PAR advocated the usefulness for the Government to undertake a comprehensive review of all administrative reforms initiated by the Government since 1995 to take stock of accomplishments, issues and options for past and future reforms with a view to possibly formulating a comprehensive PAR strategy. The Government "bought into" the proposal, which was found to be addressing a priority need already identified by the Government. With UNDP as co-ordinating agency, a number of donors particularly interested in this subject - ADB, Denmark, Sweden, Germany and the Netherlands - joined in to provide technical and financial assistance to the Government. This is the background and context of the current partnership. 1. What is the long-term vision for the Public Administration Sector? 4. In 1995 The Government of Vietnam officially launched a Public Administration Reform (PAR) Programme following the resolution of the 8th Party Plenum of the 7h Congress. Despite initial key results the efforts so far have been rather sketchy. Many pilot initiatives were launched at both central and local levels based on the principle of "learning by doing" and testing on a small scale before possible replication on the national scale. 5. While the Party and the Government have been unambiguous in emphasising the need for administrative reforms as reflected in the 7th plenum and the latest sessions of the National Assembly, the outline of a tangible implementation strategy of the PAR has been fairly general. The longer-term vision on how the state administration is supposed to serve and be responsive to the people's needs in Vietnam's transition towards a more market-like economy has not yet been Partnerships for Development - Public Administration Reform clearly delineated. The lack of an overall reform strategy and the inadequate answer to the "how" questions have made the implementation task very difficult. 6. As such, the undertaking of a comprehensive PAR Review, as proposed by UNDP in 1999, came in a very timely fashion. Recognising the need for a comprehensive overview and with the renewed importance attended to PAR by the Party, Government and the National Assembly, the Government Steering Committee (GSC) on PAR was mandated to undertake the Review and assigned the task to the Secretariat of the GSC. A key objective of the PAR Review, which was carried out by the Government with support from the donor community, was to prepare a report, which would provide the basis for: a) The formulation of a Government strategy for PAR 2001 - 2010; and, b) Input to the political report to the ninth Party Congress scheduled to be held in the first quarter of 2001. 7. The global report on the PAR Review was submitted to the Prime Minister in July, 2000. This Review is the first structured and holistic step required in achieving the vision. It covers five closely related themes, namely political orientation for PAR; institutional reform; organisational restructuring; human resource management and development and public finance management. The inclusion of public finance management, which was not included in the Government's PAR programme so far, is a remarkable step forward whereby the Government now recognises that PAR and public finance management are inseparable. The five sub-reports produced by experts from Government agencies with assistance from international experts have been fed into the global report with concrete recommendations for development of a PAR strategy. 8. Based on the Government's own analysis in the PAR Review it is hoped that a vision for could be based on the following fundamental principles: * A clear indication of why PAR is needed and what higher objectives (economic, social etc) the PAR should support and be anchored to. * Public administration should focus on macro management and policy direction and refrain from deep intervention into economic and social life (steering rather than rowing). * Public administration should be serving rather than ruling. * The public administration should be based on the principles of speedy, cost-efficient, effective delivery of public services. * Administrative power should be decentralised to the lowest possible level without jeopardising uniformity, efficiency and effectiveness. * Public administration should ensure transparency to enable people to control state activities. * Public authority should be exercised according to the principle of "rule-of-law". * Public offices and officials should be responsive to people's needs and accountable for their decisions and actions. * The contingent of public servants should be professional with high moral standards. 119 Partnerships for Development - Public Administration Reform 9. This points towards a vision, which is built on improved clarity about the role of the state and the non-state sectors in a multi-sector and market-oriented economy as a prerequisite for PAR. 2. What are the key steps needed to attain the vision? 10. Global experience shows that building an effective and accountable public administration is one of the most difficult and challenging aspects of any reform program. Furthermore, the experience indicates that no country has so far succeeded in fundamentally reshaping its public administration without a clear vision and strategy for implementation. Effectiveness is strongly linked with the ability to integrate the development of the administrative system with clearly defined policy goals. 11. The first step has been the decision by the Government to embark on the design of a strategy for its future PAR efforts in the years 2001-2010. The PAR Review completed in June 2000 will serve as a platform for the development of this strategy. 12. The framework for the development of the PAR strategy is based on three parts: 1) An outline of the context of PAR (based on the PAR Review); 2) The objective, guiding principles and content of PAR 2001-2010; and, 3) A plan for implementation of the strategy. 13. The deadline for submitting the strategy is the first quarter of 2001. However, a number of additional detailed studies analysing specific PAR areas would have to be carried out. Thus the development of the strategy should be viewed from a process-oriented perspective. Based on the positive experiences from the PAR Review, UNDP has been requested by the Government to support the Strategy development and co-ordinate further donor assistance. The development of the strategy draws extensively on the approach applied in the PAR Review, where national consultants from Government agencies took the lead in carrying out the analysis supported by methodological advice from international consultants. The provision of adequate financial and technical resources from the donors and an orchestrated co-ordination of these are one of the key success elements in effectively assisting the Government in drafting the strategy. 14. At a more fundamental level a key step towards achieving the vision of an efficient public administration capable of serving a market and multi-sector economy requires a policy- setting state providing the enabling environment for the people. A public administration instrumentally serving the socio-economic development requires in concrete terms a redefinition of the role of the public administration vis-a-vis the private sector and the civil society. 3. Who is doing what and how can we forge stronger partnerships? 15. The Government attaches high priority to the PAR. On its side, the donor community has also accorded high priority to responding to the need for assistance in this area, with about twenty projects (a lot of other projects also work with PAR related issues) working primarily in the fields of institution-building, organisational restructuring and human resource development. The key donors supporting the Government in the PAR area are the ADB, UNDP, Sweden, Norway, Denmark, Germany, Holland and Switzerland. 120 Partnerships for Development - Public Administration Reform * Two conditions are vital for the establishment of a potent partnership. First of all actors in the partnership have to be committed to and commonly define the purpose of the partnership. Secondly, a clear framework and agenda should serve as a guideline for partnership actions. Both these conditions were fully met in the PAR Review. Based on the experience from the PAR Review the following factors are critical for the success of the partnership for future endeavours: l)the right timing and entry point; 2) synergy with national priorities; 3) recognition by the Government of the potential value of the exercise; 4) approaches that appeal to all stakeholders; 5) highly motivated and committed national counterparts ready to take the lead role and ownership; and, 6) a clear framework and open information sharing. * It is hoped that the PAR strategy would provide a much clearer framework in which donor assistance to the Government can be more systematically targeted. * The PAR partnership should maintain policy dialogue and close co-ordination, and establish linkages with the partnership groups on poverty alleviation and international integration. * Further methodological advice, a series of workshops, round table discussions and sub- sectoral analysis would be some concrete steps in this partnership process. 4. What are the key monitorable indicators of progress for the short- and medium-term? 16. At the general level the key indicators of progress within the field of PAR are at this stage process oriented: 1) PAR strategy finalised and approved by the Govermment in first half of 2001 clearly outlining specific areas for targeted interventions; 2) PAR partnership continued and expanded at the reform of the Government based on the approved strategy; 3) Workshops, Round-table Discussions and sub-sectoral analysis discussing how to ensure the implementation of the PAR Strategy throughout 2001; 4) PAR linked clearly to socio-economic development through political renovation and economic reform (for example implementation of enterprise law and one-stop-one-door model) in the PAR strategy with PAR being a means to sustainable human development; 5) Dialogue between PAR partnership groups and partnership groups on poverty alleviation and international integration established; and, 6) Public administration perceived as a facilitator and service provider by the people. 121 Partnerships for Development - Legal Sector LEGAL SECTOR 1. This note outlines key issues relating to partnership in the legal sector including 1) the need for partnership; 2) the partnership's vision and measurement indicators; 3) the partnership building process and key steps; and finally 4) next steps. 1. Need for partnership 2. Legal development falls among the sectors where the need for a strong partnership is felt very strongly. Firstly, because the Government is still in the early stage of implementation of the principles of the Rule of Law adopted in 1992. Impressive efforts have been made by the Government towards the goal, but much remains to be done and achieved. Secondly, law affects entirely every aspect of one's life. The quality of the legal framework and its effective, fair, and equitable implementation, through the complex law making, judiciary and other law enforcement machinery, could also greatly affect Vietnam's external relationships. This issue is particularly relevant in the area of economic integration. Thirdly, as elaborated in more detail below, the comprehensive legal system development of the country will require very large financial and human resources. Comparative perspectives and experiences of the participating partners could save valuable time and other resources, and make the development process more effective and efficient. 3. Current efforts in development of the legal/judicial system have shown a great deal of shortcomings and gaps, which need to be addressed in a strategic way, including the following: a) lack of clear law development strategy17; b) inadequate institutional process/framework for effective law implementation and enforcement, esp. in regard to quality and independence of court trails and supervision by prosecution institutions- as a result, promulgated laws have not been well enforced; c) lack of internal and external coordination strategy and action plans"'. Currently a clear strategy framework, and action plan to. better coordinate both the reform activities carried out by the Government and external assistance to the legal/judiciary sector, do not yet exist. "In every legislative term, the National Assembly sets a five-year law-making agenda, which is reviewed and updated every year, resulting in resolutions for the yearly law-making programme. This very practical approach is meaningful in meeting the most pressing needs of the country in a timely fashion , but its long-term and strategic vision and legislation priorities are not clear. Furthermore, it focuses more on law-making and does not pay equal attention to other essential elements of comprehensive legal/judiciary system development such as law implementation [enforcement], legal information and dissemination, and education and training, etc. 18 The current highly consultative law-making process, encouraging agencies and institutions at various levels to suggest law initiatives, leaves excessive room for sector and local subjectivity and contains elements of spontaneity. Coordination among state agencies in law-making and law implementation/enforcement is being constrained by lack of clarity in roles between individual sub-sectors and within them. Cross-agency drafting teams tend to be dominated by the lead agency, leaving insufficient room for the participating agencies to make their role. Furthermore, voices of ordinary and grassroots groups in the law-making and implementation process have yet to be heard in an effective manner. People's participation in law-making and implementation processes through their mass organizations such as the Women's Union, Farmers' Association, via professional associations such as VUSTE, VLA, and VEA etc., or with the presence of lay assessors as part of the judgement council in court trials, need to be expanded and reinforced. Current procedures to improve this situation tend to be inappropriate being formal, simplistic and superficial. Intemal partnerships in the legal sector therefore deserve further development. 122 Partnerships for Development - Legal Sector 2. Partnership's vision and measurement indicators 4. The positive experience in a number of other sectors, notably in respect of water resources, forestry, health, poverty alleviation, and recently in the PAR area, has shown that a partnership approach should be highly recommended for the legal sector. 5. Similar to other sectors, the vision for partnership in the legal sector could be seen as a) a government-led open process in the short run, but should be result-oriented in the long perspective; b) a forum for policy dialogue; and c) as means to target national priorities in the sector, but at the same time as an important objective of co-operation between the Government and the donor community. 6. Advantages that a real partnership could bring would include the following: a) it could facilitate the building of a common understanding leading to a joint action framework for all players, i.e. the Government and the donor community, to act jointly in order to respond to the country's priority needs and achieve its strategic goals in a satisfactory, cost-effective and timely manner; b) it could save time and other resources; c) while ensuring national ownership, it could at the same time promote the participation of each donor in national programme/activities, by streamlining and integrating external assistance of the donors into the national framework and process, ensuring sustainability and greater impact of the assistance; and finally d) it could help make donor's contribution to the country's development process more effective, visible, accountable and transparent. To arrive at the above vision, a number of partnership indicators have been identified. Key indicators of progress in this field should be, for the short term, process-oriented with some key steps and measurement benchmarks, as briefly elaborated in the table below. 7. A joint assessment mission, to be carried out after the government-led roundtable meeting in October, is tasked with defining a set of monitorable medium- and long-term indicators of progress in developing Vietnam's legal and judicial system. 3. Partnership development process and key steps 8. Since the late eighties, when the country officially started to implement and realize its renovation and open door policy, more than 15 different donors (including NGOs) have been and are still currently assisting approximately 100 activities, ranging from very small pilot activities to long-term advice on a variety of subjects, in some twelve areas of the legal and judicial system. Except for a few areas, donors have been involved in every single area of the legal development system. But all of these interventions have tended to take place in a scattered and uncoordinated fashion. 9. While the Government attaches high priority to the area of legal/judicial system development, the donor community has also accorded high priority to responding to the country's need. The efforts, so far, have however not been managed through a strategic framework, which would effectively target the priority areas. 10. An initial partnership in the legal sector started to form in the summer of 1999. The government agencies, which are charged with the role of coordinating external assistance to the legal sector recognized the difficulties they faced in facilitating this process in a systematic manner. At their end, donors tried to track what is going on in the related law areas in order to 123 Partnerships for Development - Legal Sector increase synergy and avoid unnecessary duplication and overlapping every time new programmes/projects are formulated. As a core player in co-ordination of technical assistance to Vietnam, UNDP has made systematic efforts in collecting and compiling data of various types of assistance provided to the sector, to allow easier tracking. The first UNDAF document issued in 1998 was also an attempt by the United Nations Organizations (with the World Bank) to compile and coordinate efforts in this area. In addition, two monthly donor working luncheons in 1998 and 1999 were dedicated to developments in the legal area as a means to keep all the partners informed of the current situation. 11. In the summer of 1999, the Ministry of Justice, which is assigned by the Government to coordinate external assistance to the legal sector, initiated the idea of organizing a workshop with donors active in the legal sector to review the status of cooperation. On a parallel track, three donors, the World Bank, the Asian Development Bank and the UNDP jointly initiated the idea of a comprehensive legal needs assessment to be jointly undertaken by the government and donor community, and carried out early 2000 a first mission to preliminarily assess the situation. To "kick off' the process, and for the first time, all international partners in legal development were brought together around the same table at a donor roundtable to provide their insights and comments to the proposed initiative and to "map" their existing and planned activities in seven category areas of legal development: (1) legal education and training; (2) law-making process- institution building; (3) law implementation - institution building; (4) legal information systems; (5) legal aid to the poor; (6) international economic integration; and (7) assistance in preparation of substantive law. 12. With the strong and active support of MOJ, the idea of this joint Government-led/donor supported comprehensive review, was accepted and endorsed at the highest level of the Government (PM) in late August 2000, which would seem to reflect the relevance of this endeavor. 13. We believe key reasons for such high level endorsement could be: a) the right and timely entry point; b) relevance to government priorities; c) a useful approach, and d) committed government counterparts. 14. Key steps of the process in which the partnership in the legal sector is developing, are elaborated in detail the in table below, with some measurable benchmarks. 124 Partnerships for Development - Legal Sector Table 1: The partnership development process and key steps to move ahead. Actihry Time Frame Remarks VN'S DEVELOPMENT STRATEGY N/A LEGAL AND/OR JUDICIARY SYSTEM To be fixed DEVELOPMENT STRATEGY Legal ODA co-ordination framework 9-12/2001 To be presented at the CG meeting, Dec.2001 Comprehensive Legal System Development Needs 1-9/2001 Needs to be nationally- led Analysis ... ....___._._ Legal Roundtable With Donors 11/2000 Soine financial support from donors is expected. Internal Legal Roundtable 10/2000 Second half of the month PM's endorsement of MOJ's proposal 8/2000 MOJ sent proposal to organize internal legal 8/2000 roundtable consultation to prepare for the one with the donors later on Internal Consultation Meeting With Nine Concerned 6-7/2000 High consensus of the need State Agencies to carry out analysis. Some hesitation was expressed on national ownership 24 Donor Roundtable Meeting 6/2000 Not clear donor interest or commitment of resources to the assessment Donor Debriefng Meeting With MOJ leadership 3/2000 Strong support of the highest leaders Donor Debriefing meeting with MPI's representative 3/2000 Positive assessment and _________ _ "high support Joint Donor Mission for a Preliminary Needs Dec-1999 Successful Assessment 1-2000 _ MOJ's proposal of a workshop with donors to review Mid-1999 Expected financeial support coordination of extemal assistance to the legal sector from SIDA 4. Next steps 15. As part of the Government's 10 year strategy development process, the Ministry of Justice (MOJ) has been charged with the coordination of the formulation of a strategy for legal/judicial system development as part of Vietnam's medium and longer-term comprehensive development strategy. This strategy will also serve as the basis for enhanced international legal cooperation in this important area. The Government is also strongly desirous of stepping up international cooperation in legal/judicial system development19. The joint Government and donor planned comprehensive legal system needs assessment could at the same time assist in this strategic planning and be a first step towards a framework for coordination of external assistance to the sector in future20. 19 To date there have been about 15 donorsiNGOs assisting about 100 different activities in the law developmentfield. 20 The assessment will look at the current process of legal cooperation, identify gaps to be overcome, and redefine directions for future joint works. The joint preliminary legal development needs assessment, undertaken in the period 13-28 January 2000, to help the Government take 125 Partnerships for Development - Legal Sector 16. In early June 2000, at the second donor roundtable meeting, the participants representing donors and MOJ identified and agreed the implementation plan in order to carry out the first critical step - the comprehensive needs analysis. To do this, it is timely to take the following actions: For the Government: * To ensure that the intended internal consultation roundtable convenes as planned, in order to prepare and guide the roundtable with donors scheduled for November 2000. The partnership will provide some assistance for the preparation of the meeting For the donor community. * To work with the Government to clarify the concept of "partnership" for the legal area, and define further working modalities. * The donors with the Government need to further elaborate the detailed implementation modalities of the needs assessment (inputs, technical teams, national and international technical support, etc) 17. As this is still a very young partnership, all the partners at large will continue working on it and shaping it to make it as effective as possible: 'work in progress!'. stock of ongoing and planned donor assistance, and explore possibilities for a more comprehensive government-donor approach to legal/judicial system development was the very first step in this process. While the preliminary work carried out in January only involved three donors (ADB, UNDP and World Bank), the comprehensive legal development assessment will be undertaken by a team of experts provided by a wider range of international partners active in this area together with experts from concerned state agencies. The analysis will require the active collaboration of a number of Vietnamese agencies: Ministry of Justice and its training and research institutions, Supreme People's Court, Supreme People's Procuracy, fce of the Government Office of the National Assembly, professional associations and others. 126 Partnerships for Development - Socio-Economic Development Strategy Partnership THE SOCIO ECONOMIC DEVELOPMENT STRATEGY (2001 - 2010) 1. Background 1. The Government of Viet Nam has been in the process of preparing the country's new Ten Year Socio-Economic Development Strategy for the period 2001-2010 and Five Year Development Plan 2001 - 2005 to be discussed and approved at the 9th National Party Congress tentatively scheduled for the end of the first quarter of 2001. This new development strategy will be aimed at mapping out the broad strategic directions, and the key policy and institutional reforns needed for Viet Nam to capitalize on emerging opportunities and meet emerging challenges over the coming five and ten years. Development objectives include high and sustainable economic growth, further international economic integration, industrialization and modernization, more knowledge-based development and a further substantial reduction of poverty. 2. In this context, the Minister of Planning & Investment requested in early 1999 that UNDP assist in strategic background research needed to support the Government in the formulation of the strategy as well as the co-ordination and mobilization of related inputs from the international donor community. UNDP subsequently mobilized technical and financial assistance from a number of other development partners, particularly AusAID, Swedish SIDA, and UNIDO. 3. In addition to strategic background research, a series of technical workshops and high level round table consultations with Viet Nam's key development partners was initiated to share ideas and suggestions for the new strategy, and to develop a common understanding and shared vision for the future development of Viet Nam. 4. The results of this assistance along with the sectoral strategies as prepared by the various line ministries will then be consolidated into an overall strategy paper. The drafting of this overall strategy is the responsibility of the Strategy Preparatory Group (SPG), headed by the Prime Minister. The Development Strategy Institute (DSI) of MPI acts as a facilitator and secretariat for the Strategy Preparatory Group. 5. During the latter half of 1999 and the first half of 2000, strategic policy-based research was carried out in four broad areas critical to Viet Nam's future development: * Role of State and the Market * Globalization and International Economic Integration * Rural Development and Job Creation * Science & Technology for Industrialization, Modernization and Knowledge-based Development 2. Past achievements 6. In August 1999 six research groups, combining national and international expertise, started working on strategy papers in the four key areas for which assistance had been requested. In addition to the four broad research areas outlined above, special attention was also devoted to 127 Partnerships for Development - Socio-Economic Development Strategy Partnership the social aspects of rural development, whilst a separate research group would concentrate on the financial aspects of international economic integration. The research outcomes were recorded in draft reports in early 2000, which have been extensively discussed in various rounds of technical workshops, whilst being subjected to in-depth peer reviews. Many experts, representing line ministries, national and international research institutes, multi- and bilateral donors as well as the NGO community in Vietnam, contributed to this process. In addition, the National Committee for the Advancement of Women had provided substantial inputs concerning gender aspects of the strategy. Hence the partnership, though not formally institutionalized, broadened substantially. 7. Incorporating the many suggestions received resulted in well developed drafts of the six research papers in May 2000, which formed the basis for the first high level Round Table Consultation meeting on 9 June 2000. This very unique consultation provided the first opportunity for a direct dialogue between the Strategy Preparatory Group and senior representatives of the International Donor and NGO community. The meeting, consisting of four sessions corresponding to the four research areas, was co-chaired by senior Government officials among which was Minister Tran Xuan Gia of MPI, and the heads of mission of the World Bank, ADB and the Embassies of Sweden and Australia. Ambassadors from a wide variety of countries offered their own country experiences and related suggestions in the various sessions. Furthermore, technical contributions were made by various members of the Strategy Preparation Group and relevant international organizations such as IFC, IMF and UNIDO. The Round Table was closed by Minister Gia who expressed great appreciation for the research and consultation process, whilst emphasizing the Government's desire to continue such a process for further enriching the strategy. 8. In response to the issues raised during the roundtable meeting, further research was undertaken to come up with additional practical recommendations and principles for the implementation of specific parts of the strategy related to private sector development, trade liberalization, IT development and off-farm employment generation. This research work also took into account on-going work towards the Poverty Reduction Strategy Paper and was aimed at giving more depth to the on-going consultation process. 9. In July 2000, the Government circulated the first draft of the overall strategy among party members on all levels for comments and contributions. In follow-up to MPI Minister Tran Xuan Gia's closing statement at the roundtable meeting in June, the Government also released the draft strategy paper through UNDP for consultation with the international donor community. Using established partnership systems, in particular the Monthly Donor Group Forum organized by UNDP, the donor community reviewed the draft strategy paper with the President of the Development Strategy Institute in order to develop a common understanding of the fundamental issues and strategic directions outlined in the document. 10. On 21 November, a second high level Round Table Consultation was convened with the Strategy Preparatory Group, a wide variety of senior Vietnamese officials and the international donor and NGO community. This second Round Table was led on the Government side by His Excellency Nguyen Tan Dung, First Deputy Prime Minister, His Excellency Nguyen Khanh, Former Deputy Prime Deputy Prime Minister and Head of the Political Report Preparatory Committee, Minister Tran Xuan Gia of MPI, and the heads of all of Viet Nam's key research institutes including the Prime Minister's Research and Advisory Group, the Central Institute of 128 Partnerships for Development - Socio-Economic Development Strategy Partnership Economic Management and the Development Strategy Institute. On the international side participants included Ambassadors and Aid Counselors from a wide variety of countries, Resident Heads of the ADB, World Bank and IMF, a variety of NGOs and a team of eminent international experts to facilitate the dialogue. This second Round Table Consultation was extremely rich in content and helped to further develop a more cornmon understanding of some of the more difficult issues still needing resolution in order to further define the country's strategic directions. A half-day technical session was also held between the Strategy Preparatory Group and the team of eminent international experts. 3. Current status and plans 11. The proceedings of the second Round Table Consultation will be sent to senior officials in the Party, Government and Strategy Preparatory Group to help further develop the ten year socio-economic strategy in the run-up to the Party Congress tentatively scheduled for end-March 2001. It is furthermore planned that a third high level Round Table Consultation on the strategy between the Government and the international community would take place in late February or early March 2001 just prior to the Party Congress. 4. Long term Vision 12. The subject of the partnership, being the Ten Year Socio-Economic Development Strategy, is all encompassing, and includes the participation of most if not all line ministries as well as most of the international community. As such no attempts have been made to institutionalize the partnership, but rather to create opportunities for as broad a participation in the strategy formulation process as possible. On one side using existing partnership frameworks and communication channels, on the other side through the organization of specific events in which the strategy formulation process is opened up for contributions from interested development partners. 13. This formulation process is expected to be finalized in early 2001 with the adoption of the ten year socio-economic development strategy by the Party Congress marking the start of the Strategy's implementation. As indicated above, the efforts to realize a substantive consultative strategy formulation process were first to enhance the quality of the strategy by ensuring international experiences and lessons learned in development were taken into account. Secondly, but of equal importance, is the broad consultative process aimed at developing a common understanding and shared vision among all development partners for the coming ten years, essential for a well-coordinated donor response in the implementation phase. Contact Persons: Dr. Luu Bich Ho Mr. Edouard Wattez President UN Resident Coordinator and UNDP Res. Rep. Development Strategy Institute Tel: (84-4) 942 1495 Tel: (84-4) 843-1848; Fax: (84-4) 845-2209 Email: wattez@undp.org.vn Email: dsi@fpt.vn 129 PART II: PILLARS OF DEVELOPMENT Acknowledgements The Vietnam Development Report 2001 on "Vietnam 2010: Entering the 21't Century" is the product of team work and partnerships in Vietnam. Part I of the Report entitled "Pillars of Development" has been produced by the World Bank, in partnership with the Asian Development Bank and United Nations Development Programme. Part II of the Report entitled "Partnerships for Development" is based on contributions from the many joint Govemment-donor-NGO partnership groups that exist in Vietnam, all working together to improve the developmental impact of Vietnam's resources. The team is grateful for guidance from: Professor Le Dang Doanh, Director of CIEM; Mr. Nguyen Quang Thai, Vice Director of DSI; Ms. Thanh Thi Tuyet, Specialist of NERC; Ms. Dinh Thi Chinh, Projection Specialist, MPI; Mr. Nguyen Van So, Projection Specialist, MPI; Ms. Pham Chi Lan, Vice President of VCCI; Mr. Nguyen Quang Huy, Deputy Director, SBV; Mr. Nguyen Toan Thang, Director of the General Economic Dept., Party's Economic Commission; Mr. Nguyen Thang, Economist, Pricing Committee; Mr. Nguyen Van Thu, Director of Planning, MOT; Ms. Dinh Hoang Yen, Specialist, MOT. We would also like to thank Mr. Nguyen Van Phuc (MPI) for all his help. This Report was prepared by a team led by Nisha Agrawal (World Bank). The Overview was written by Andrew Steer, Nisha Agrawal and Carrie Turk. Chapters 1 and 2 were written by Kazi Matin, Pham Minh Duc, Dinh Tuan Viet and James Beard with inputs from Loup Brefort, Thang-Long Ton, Theo Larsen, Nguyen Van Minh and Nguyen Nguyet Nga (World Bank). Chapter 3 was authored by Carrie Turk, with inputs from Chris Gibbs, Bill Cuddihy, Malcolm Bale and Nguyen Nguyet Nga (World Bank). Chapter 4 was written by Eliane Darbellay and Ernst van Koesveld (UNDP) with contributions from Patricia McCullagh (UNICEF), Pascale Brudon (WHO), Mette Davidsen and Nguyen Xuan Hong (UNFPA). Chapter 5 was written by Nisha Agrawal and Anil Malhotra, with inputs from Christina Malmberg Calvo and Sally Burningham (World Bank). Chapter 6 was written by Illango Patchamuthu, Jill Blockhus, Phuong Thi Thanh Tran, Tanvi Nagpal, Todd Johnson, Benoit Laplante (World Bank), and Kishore Rao (IUCN/SEMA). Government agencies, donors and NGOs participated in a stakeholder consultation and contributed to Chapter 6. Chapter 7 was written by M. Mahalingam (ADB) with inputs from Steve Price-Thomas and Tosca Bruno (World Bank) and Lindy Cameron (DFID). Written comments/inputs were received from Bob Baulch, Chris Shaw, Dick Meyers (World Bank); Chanpen Puckahtikom and David Cohen (IMF); Craig Leisher, Anne-Isabelle Blateau, Soren Davidsen and Tu Packard (UNDP); and Allesandro Pio (ADB). Steve Price-Thomas authored the Overview for Part H and coordinated the theme notes from the Development Partnership Groups. The report was prepared under the overall guidance of Andrew Steer (Country Director, Vietnam, World Bank) and Homi Kharas (Sector Director, Poverty Reduction and Economic Management, East Asia and Pacific Region, World Bank). We are also grateful for the advice received from John Samy (Resident Representative of the ADB, Vietnam), Edouard Wattez (Resident Coordinator for the UN System) and Robert Glofcheski (Chief Resident Economist, UNDP; Vietnam); and for the support from DFID. Peer Reviewers: Tamar Manuelyan Atinc and Soe Lin (World Bank); Alan Johnson (DFID) and Ramesh Singh (Actionaid). Publishing and Other Support: Phung Thi Tuyet, Nguyen Thi Minh Hoa, Vu Tran Phuong Anh, Do Thi Hong Van, Nguyen Thuy Ngan, Hoang Thanh Ha, and Tran Kim Chi (World Bank). PREFACE The Vietnam Development Report 2001 entitled "Vietnam 2010: Entering the 21st Century" is a three-volume set consisting of an Overview and two parts. Part I of the Report entitled "Pillars of Development" provides a commentary on the emerging draft Ten Year Socio-Economic Development Strategy for 2001-2010. This important document lays out the vision and the strategic directions for Vietnam during the first decade of this new millennium. It is currently in draft form and is undergoing an extensive process of consultation within the Government (at national and local levels) and the society at large. The draft will be presented to donors and discussed at the "Millennial Consultative Group Meeting" in December 2000. Part I of this Report aims to guide these discussions. It has been written by the World Bank in partnership with ADB and the UN System. Part I of the Report comments on the comprehensive development agenda laid out for the next decade. It starts with a framework for rapid growth and poverty reduction and then examines the strategies required for: (i) enterprise development; (ii) rural development; (iii) human and social development; (iv) infrastructure development; (v) environmental quality; and (vi) good governance. Since the Government is formulating a long-term development agenda, it will need to take a comprehensive approach to development and tackle all these "pillars" of development. Without progress on all fronts, Vietnam will not be able to achieve the economic and social transformation that it desires. A balanced attack across all fronts does not, however, imply that everything needs to be done at once. What is needed to prioritize actions is an identification of the bottlenecks-the hard to solve problems that are impediments to success- and to begin by attacking these first. What is also needed is that the energies of all of Vietnam's development partners are hamessed so that they are all working together in partnership to make all of Vietnam's resources-including aid resources-more effective. Part II of the Report entitled "Partnerships for Development" addresses this theme of stronger partnerships to help the Government of Vietnam to attain its vision and implement its strategy. It brings together a series of thematic notes on Vietnam's development strategy, prepared by the development partnership groups in Vietnam. These notes seek to describe and distil Vietnam's goals and the steps needed to get there. They also describe how the donor community can help Vietnam in attaining its vision. The work of the development partnerships, and the production of these notes, are indicative of an important new direction in international development cooperation, both in Vietnam and in many other countries. Around the world, there is a recognition that the old ways of working have not produced the results that had been expected. The current time in Vietnam offers international partners the opportunity to actively listen to the Government's articulation of its long-term development goals and to work together to identify and address the constraints and roadblocks that would prevent the goals being reached. Chapter I - Economic Framework for Growth and Poverty Reduction CHAPTER 1 ECONOMIC FRAMEWORK FOR GROWTH AND POVERTY REDUCTION Key Messages To achieve the draft Strategy's goals of growvth, employment-creation and poverty-reduction, Vietnam will have to raise both the quantity and quality of investment. (a) Goats ambitious but attainable With around 30 million people (i.e. 37 percent of population) living in poverty, around 25 million (i.e. 60 percent of labor force) either underemployed or unemployed and around I million annual additions to the workforce, doubling GDP and creating employment for 15 million people are appropriate and ambitious goals. These are also attainable goals, given the experience of Vietnam and other high performing economies. For this purpose the draft Strategy proposes total investment rate to rise from an average of 25% in the 1990s to an average of 30% of GDP in the coming decade. Export earnings are projected to grow at 14% (with manufactured exports at 18%) and industry's share in GDP to rise from 30 to 40 percent. (b) Raising the quantity or level of investment Rapid growth of domestic private investment - especially by private SMEs - will be key to reaching the target rate of total investment. Government investment is unlikely to exceed 7% of GDP a year (compared to 6% in the 1990s). SOE investment is likely to average 7% of GDP, the same as in the 1990s, given the poor fnancial performance of SOEs in manufacturing, over the last four years and the restructuring they will undergo in the next five years. Foreign investment could be anywhere between 3 and 5 percent of GDP, depending on how favorably Vietnam's investmnent environment compares to ASEAN countries and to China. Thus domestic private investment will have to rise from around 7 % of GDP in the l990s to between 11 and 13% of GDP in the coming decade. (c) Raising the quality of investment Raising the quality of investment (i.e. raising total factor productivity growth and employment for a given rate of investment) will be critical to attaining the draft Strategy's goals of growvth, job-creation and poverty- reduction. * Higher productivity. At investment rates of 30% of GDP, Vietnam's total factor productivity growth will have to be 40% higher than the average in the 1990s and any shortfall in investment will have to be compensated by even higher rates of productivity growth. Moving labor out of agriculture into the higher productivity manufacturing sector and better access to foreign technology will bring this about * Creating more jobs and higher paying jobs. Most of thejobs, as well as most of the higher paying ones, are likely to come from the manufacturing sector. Domestic private SMEs, that are generally more labor- intensive and export-oriented, are likely to undertake the investments and the labor reallocation to manufacturing and manufactured exports. Thus private SMEs' manufacturing output will have to grow by 18-25 percent a year, substantially higher than that achieved by Vietnam, but still much lower than those achieved by China in the 1990s. * Ensuring efficiency and equity of public expenditures, including investment. Improved management and screening of public investment and greater pro-poor orientation of public expenditures will be needed to ensure their best impact on growth and on poverty-reduction. (d) External Financing Requirements Domestic savings are expected to rise to finance higher investment, at least in part. However, quick-disbursing concessional assistance may be required for the first five years to complement project aid disbursements, and that would be available if the Government adopts the needed policy and institutional reforms. Chapter I - Economic Framework-for Growth and Poverty Reduction TABLE OF CONTENTS Chapter 1: Economic Framework for Growth and Poverty Reduction ........................................... 1 I. Economic Goals of the Ten Year Strategy ..................................................2 II. Raising The Level of Investment ..................................................3 III. Improving The Quality of Investment ..................................................8 IV. Ensuring efficiency and equity of public expenditures ................................... 13 V. External Financing Requirement in the Medium Term .................................. 14 VI. Conclusion ................................................. . 18 Chapter 2: Creating A Supportive Climate for Enterprises ................................................. 19 I. Accesing Global Markets and Technologies ................................................. 21 II. Creating a Level Playing Field for Private Sector ....................................... 25 III. Reforming State-owned-Enterprises .................................................. 29 IV. Strengthening the Banking System .................................................. 33 V. Ensuring fiscal stability ................................................. 35 VI. Conclusion ................................................. . 37 Chapter 3: Transforming the Rural Economy .................................................. 39 I. The Rural Challange ................................................. 40 II. Looking forward: Imperatives for 2001-2010 ................................................. 42 III.Other Instruments for Rural Development ............................................ 53 Chapter 4: Enhancing Human Capacity .................................................. 56 I. Targets for Human Development ................................................. 57 II. Education and Knowledge ................................................. 58 III. Health and Population ................................................. 64 IV. Targeted Anti-poverty Programs and Social Safety Nets ................................. 70 Chapter 5: Providing Efficient Infrastructure services ..................... ............................ 75 I. Past Success and Future Needs ................................................. 76 II. Priotize Infrastructure Investment Plans ................................................. 79 II. Improve Access and Reduce Vulnerability in Rural Areas ................................................ 81 III. Diversify the Sources of Financing Investment ..................... ............................ 85 IV. Improve the Sustainability and Management of Investments ............................................ 91 Chapter 6: Improving Environmental Quality ................................................. 93 I. Long-term Vision ................................................. 94 II. Creating Incentives for Changing Behavior ................................................. 97 III. Involving Communities and Citizens more fully ..................... ............................ 103 IV. Improving Institutional Effectiveness ................................................. 104 V. Priotizing Programs and Diversifying Sources of Financing ........................................... 107 Chapter 7: Building Modern Governance ................................................. 114 I. Public Administration Reform ................................................. 115 II. Better and more Transparent Public Financial Management ............................................ 119 III. Wider Access to Justice and a Level Playing Field .................................... 121 IV. More Participative and Responsive Governments ..................................... 125 V. A Government which Fights Corruption and Waste ................................................. 128 Statistical Appendix ................................................. 130 Bibliography ................................................. . 161 Chapter I - Economic Frameworkfor Growth and Poverty Reduction Tables Table 1.1: Gross Foreign Direct Investment (% of GDP, average 1991-99) .................................6 Table 1.2: Investment by Source ..................................................................6 Table 1.3: Vietnam's Productivity Performance 1990-2000 ..........................................................9 Table 1.4: The Importance of Productivity Growth .................................................................. 9 Table 1.5: World Growth, 1981-2008 (Percentage change in real GDP) .................................... 14 Table 1.6: Growth Projections if Proposed Policy-Reforms are Implemented ............................ 16 Table 1.7: External Financing Requirements (US$ billion) ........................................................ 17 Table 2.1 Shares in Non-oil Exports and total Imports ................................................................ 22 Table 2.2. Industrial Output: Growth and share in 1990-00 ........................................................ 26 Table 2.3. Composition of Vietnam's Banking System, 1990 - 2000 ......................................... 33 Table 3.1: MARD has set ambitious targets for the coming decade ............................................ 43 Table 3.2: Annual rate of growth of agricultural GDP for selected countries (%) ....................... 44 Table 4.1: Selected Education Targets ................................................................. 59 Table 4.2 Targets in health and population ................................................................. 66 Table 4.3: Strengthening the safety nets in the interest of the poor ............................................. 73 Table 5.1: Vietnam and Low-Income Country Infrastructure Indicators ..................................... 78 Table 5.2: Targets for the Provision of Urban Infrastructure, 2001-2010 .................................... 80 Table 5.3: Indicative Estimates of Capital and Maintenance Funding Requirements in the Transport Sector, 2001-2010, US$ billion (1) .............................................................. 81 Table 5.4: Actual Allocation of Public Investment by Region, 1996-2000 .................................. 82 Table 5.5: Private Energy Investments in Pipeline ................................................................. 88 Table 5.6: Summary of Key Actions to Promote PPI ................................................................. 90 Table 6.1: Current Trends in relation to GoV priorities and targets to be achieved by 2010 ....... 95 Table 6.2: Financing Options for Investing in Environmental Improvement ............................. 109 Boxes Box 1.1: High Performing Asian Countries ..................................................................4 Box 1.2: Required Growth of Domestic Private SMEs ..................................................................7 Box 1.3: Good policy and productivity growth are strongly linked ............................................. 10 Box 1.4: Recent Economic Recovery in Vietnam ................................................................. 15 Box 2.1: Growth of Domestic Private Enterprises in China ......................................................... 29 Box 2.2: Fiscal Costs of SOE and Banking Reform are Manageable .......................................... 36 Box 3.1: Agricultural research improves incomes, diets and investments in rural Guizhou ........ 45 Box 3.2: Farmers are seizing opportunities in niche markets and minor export crops ................. 47 Box 3.3: Small scale enterprises have problems finding information about markets ................... 51 Box 4.1: Income is only a part of the development story ............................................................. 57 Box 4.2: Vietnam's targets in human development are in line with the International Development Goals ................................................................. 58 Box 4.3: Bridging the Digital Divide Through Education ............................................................ 62 Chapter I - Economic Framework for Growth and Poverty Reduction Box 4.4: Learning from the Asian Tiger Experience ............................................................... 63 Box 4.5: Building people's knowledge to solve the malnutrition puzzle in Vietnam .................. 65 Box 4.6: Reproductive health ............................................................... 69 Box 4.7: Putting reproductive health in the spotlight ............................................................... 69 Box 4.8: Better poverty measurement for a better targeting of poor households ......................... 72 Box 5.1: Improving rural transport is crucial to promoting broad-based growth ......................... 82 Box 5.2: Attaining the long-term goals will require fundamental policy and institutional reforms in the energy sector ............................................................... 92 Box 6.1: Evolution of Environmental Actions ............................................................... 94 Box 6.2: Assessment of the 1991-2000 Plan ............................................................... 96 Box 6.3: The Five Million Hectare Reforestation Program .......................................................... 98 Box 6.4: Using Public Disclosure in the Philippines- The EcoWatch Program ...................... 102 Box 6.5: Existing Institutional Arrangements ............................................................... 105 Box 6.6: Effectiveness of Environmental ODA: 1985-2000 ...................................................... 108 Box 6.7: Environmental User Fee Reduces Pollution in Laguna Lake, Philippines .................. 110 Box 6.8: Forging Partnerships ............................................................... 112 Box 7.1: International Experience Points to Four pillars of Good Governance ......................... 116 Box 7.2: Public sector performance can be improved by encouraging citizen feedback ........... 118 Box 7.3: The new Enterprise Law demonstrates good practice in Vietnam ............................... 119 Box 7.4: Internationally Effective Transparency Reforms ........................................................ 120 Box 7.5: Corporate Governance initiatives in Malaysia encourage efficiency and growth ....... 124 Box 7.6: Local authorities struggle to achieve greater community participation ....................... 126 Box 7.7: The new Law on Science and Technology provides a clearer legal framework for the operation of research-oriented associations and NGOs ............................................. 127 Box 7.8: An Agenda for Action on Corruption in Vietnam ...................................................... 129 Figures Figure 1.1: Total investment as a share of GDP in selected countries ...........................................3 Figure 1.2: FDI Disbursements, 1993-2000 ................................................................5 Figure 1.3: National Savings in Selected Countries, 1998 .............................................................8 Figure 1.4: Structure of Employment in Vietnam, 1986-2000 ..................................................... 11 Figure 1.5: The Distribution of Investment by Employment Intensity ......................................... 12 Figure 2.1: Effective Rates of Protection in 1999 (%) ............................................................... 23 Figure 3.1: MARD's strategy suggests two critical challenges for the rural sector ..................... 40 Figure 3.2: Growth in real per capita expenditure by rural-urban 1993-1998 .............................. 41 Figure 3.3: Share of GDP by sector, 1990 - 1999 ............................................................... 42 Figure 3.4: Growth in household agricultural revenues, 1993 - 1998 .......................................... 48 Figure 3.5: Korea: Employment and value added per worker by sector 1980 - 1997 .................. 50 Figure 3.6: Vietnam: Employment and value added per worker by sector 1990 - 1999 .............. 50 Figure 5.1: Increase in Infrastructure Capacity 1990 - 1999 ........................................................ 77 Chapter I - Economic Framework for Growth and Poverty Reduction I. ECONOMIC GOALS OF THE TEN YEAR STRATEGY 1.1. The draft ten-year Socioeconomic Development Strategy (2001-2010) seeks to repeat Vietnam's superb performance of rapid growth, employment-creation and poverty reduction in the 1990s. This is the right objective, given that around 30 million people (i.e. 37 percent of the population) live in poverty, around 25 million (i.e. 60 percent of the labor force) are either underemployed or unemployed and around one million people are added to the workforce each year. This objective can be achieved only if bold changes in policies and institutions are adopted and implemented early on in the decade. 1.2. Attaining rapid growth, employment creation and poverty reduction will require significant changes in the structure of the economy. The draft Strategy recognizes this and wants Vietnam to develop from an economy where agriculture accounts for 24 percent of value added and 60 percent of labor force, to an "industrialized economy by 2020". The Strategy does not define what is meant by an "industrialized economy". But it would be appropriate to expect the manufacturing sector within industry to generate most of the jobs and more of the higher paying jobs. As the manufacturing sector grows in both rural and urban areas, it will attract people away from agriculture and the low-paying informal-sector jobs. Agriculture and service sector growth will continue to be important, but fewer people will be working in agriculture. And underemployment in agricultural occupations will decline and productivity of those continuing to work in agriculture will rise. 1.3. Although rapid growth will be central to reducing poverty in the coming decade, the quality andpattern of growth will also be important. This is because better quality of growth, in the sense of more evenly distributed growth across the population, will reduce poverty more even with a lower growth rate. A lower growth rate that is accompanied by sufficiently higher employment-creation with a larger share of manufacturing jobs created in rural areas, where most of the poor live, is likely to be more poverty-reducing than a higher growth rate that is less employment-creating or more urban-biased. It is therefore important for Vietnam not only to ensure a high rate of growth but also to promote a better quality and pattern of growth. 1.4. Higher job-creation can be encouraged by appropriate economy-wide policies and institutions, but more jobs in rural areas will, in addition, require a better distribution of rural- urban infrastructure and social services. Thus careful choices of location of public investment in infrastructure and provision of social services would be needed to maintain an appropriate distribution of such services. For that purpose, the public investment program (PIP) needs to be processed through professional systems of careful cost-benefit analysis (see Overview). 1.5. This chapter explores the economic framework for growth and poverty-reduction that underlies the Government's ten-year Strategy. It examines whether its investment, savings and external balance are consistent with its growth and poverty-reduction objectives and whether the projected sources of investment and savings are plausible. It also assesses whether the structural shifts are feasible and if so, under what policies they can create sufficient jobs and generate adequate total productivity growth. This chapter's assessment draws on Vietnam's past and present experience, as well as the experience of high-performing East Asian economies, during their periods of high growth and poverty-reduction. 2 Chapter I - Economic Framework for Growth and Poverty Reduction 1.6. Economic Goals are Ambitious but Attainable. The draft Strategy's goals can certainly be achieved in the next decade, if the needed reforms in economy-wide policies are adopted quickly. It seeks to double real GDP over the next decade. Industrial GDP is targeted to grow at around 10 percent a year, driven in part by faster manufacturing sector growth. Export earnings are projected to grow by 14 percent per year, with manufactured export value contributing over 60 percent of the growth in total export earnings. With labor force growth of around 2.4 percent per annum over the next ten years, the projected growth and structural change has to create sufficient employment in rural and urban areas if it is to reduce poverty significantly. 1.7. These economic goals (see Table 1 in Overview), are similar to those achieved by Vietnam in the last decade. The experience of neighboring countries also suggest that Vietnam's goal for GDP growth per capita of around 6 percent a year are similar to those achieved by South Korea, Taiwan (China), Indonesia, Malaysia, Thailand and China during their periods of rapid growth and poverty reduction (see Box 1.1). II. RAISING THE LEVEL OF INVESTMENT 1.8. The target of rapid growth with equity will require a higher level of investment and an improved quality of investment. The draft Strategy proposes the total investment rate to be 30 percent of GDP. Vietnam achieved this rate in the mid- 1 990s due to high household investment in 1993-94 and to the foreign investment boom of 1995-97. Following the decline of FDI and domestic investment in 1998 and 1999, total investment has fallen too. Figure 1.1 shows that the target rate of investment is at the high end of the range of investments that was reached in other high performing countries of the region during their periods of high growth, although still below the rate of China. Vietnam aimsfor high investment Yo 35 . .. . . . 30 .............. 25 . 20 i5 Vietnam Vietnam Vietnam China Indonesia KDreDa Malaysia Thailand Ljo w (1991-00 (1998-00) (2001.10) (1980-99) (1970-901 (1965485) (1970-90) (1970-90) inoome (1990-99) Figure 1.1: Total investment as a share of GDP in selected countries Source: Government of Vietnam and World Bank, SIMA database. 3 Chapter I - Economic Framework for Growth and Poverty Reduction Box 1.1: Figh Performing Asian Countries The transition envisaged in Vietnam's draft Strategy is consistent with what was achieved in other countries, provided appropriate policies are also implemented in Vietnam. Comparative Indicators of High-Performing Asian Countries: GDP Sectoral Shares, Annual Growth Rates, and Incidence of Poverty (%) Sectoral Share Annual Incidence of growth Country/Period rate Agriculture Industry Services GNP per Poverty Capita (% of national _ _ _ _ _ _ _ _ _ _ _ _ _ __ _ _population) 1960 1980 1960 1980 1960 1980 1965-85 South Korea Share in GDP 35.0 14.4 20.5 39.9 44.5 45.7 6.4 na na Share in 61.3 37.1 10.2 26.5 28.5 36.4 Employment 1970 1990 1970 1990 1970 199O 1965-85 Taiwan (China) Share in GDP (%) 15.5 4.2 36.8 41.2 47.7 54.6 7.3 na na Share in 39.0 14.5 34.0 47 27.0 38.5 Employment ___ 1970 1990 1970 1990 1970 1990 1970-90 1973-90 Indonesia Share in GDP(%) 44.9 19.4 18.7 39.1 36.4 41.5 4.7 58.0 15.1 Share in 66.3 55.2 10.3 13.6 23.4 31.2 Employment Malaysia 1970-90 197347 Share in GDP (%) 28.6 18.7 25.3 40.4 46.2 40.9 4.1 37.0 14.0 Share in 53.7 27.3 14.3 23.1 32.0 49.5 Employment Thailand 1970-90 1968-90 Share in GDP (%) 25.9 12.5 25.3 37.2 48.8 50.3 5.0 59.0 18.0 Share in 79.8 64.1 6.0 14.0 14.2 22.0 Employment 1980 1990 1980 1990 1980 1990 1980-90 1975-99 China ShareinGDP(%) 30.1 27.1 48.5 41.6 21.4 31.3 7.7 59.5 4.6 Share in 74.2 72.2 14.0 15.1 11.8 12.7 Employment _ Source: World Bank, World Development Report (various annual issues), East Asia: The Road to Recovery, SIMA database. The types of policies that the Governments of these countries introduced included: (i) reigning in inflation and maintaining a competitive exchange rate through prudent macroeconomic policies; (ii) investing in human capital through basic education funded by public sources; (iii) providing incentives for high savings rates with positive real interest rates, depositor protection in financial institutions and effective banking systems; (iv) freeing up the private sector and limiting price distortions; (v) providing access to and incentives for export and foreign technology absorption; (vi) avoiding taxation and other policy biases against agriculture. These policy reforms established a positive environment for savings, investment and productivity growth leading to two or three decades of high-quality growth and poverty reduction. 4 Chapter 1 - Economic Framework for Growth and Poverty Reduction 1.9. Likely Sources of Future Investment. The state budget including ODA has funded a steady portion of total investment through the 1990s, amounting to an annual average of 6 percent of GDP. This has been used to finance investments in transport, education and training, health and culture, science, technology and the environment. The ability of the budget to finance increased levels of public investment and associated recurrent spending to use those investment effectively is constrained by the likely low growth in government revenue. Also, it is difficult to see Government investment rising much in the first half of the coming decade given the fiscal costs of financing banking and SOE reform (see Chapter 2). Government investment may not rise beyond 7 percent a year for the decade, with the annual average for first half not going over 6.5 percent. 1.10. State Enterprise Investment. State enterprises have accounted for an increasing share of investment since 1990, with investment in 2000 estimated to have risen to nearly 9-10 percent of GDP. It is doubtful that SOEs, especially the manufacturing SOEs, would be able to mobilize sufficient resources to maintain these high rates of investment spending. There are two main reasons for this concern. First, for most of the 1990s, retained earnings have typically financed at least half of state enterprise investment. Financial performance of state enterprises over the last four years has been poor. Ongoing losses and low profitability have meant that state enterprises have accumulated debt and run down financial reserves. SOEs are also expected to undergo reform and restructuring in the next five years. It is therefore unlikely that state enterprise investment can rise in the first half of the decade. Second, the availability of bank credit for state enterprises is likely to be more constrained as banks switch to more commercial lending. The ability of most state enterprises in the manufacturing sector to access commercial bank credit will depend on whether reforms and restructuring makes them competitive and profitable. Without marked improvement in their efficiency, profitability, and credit worthiness, bank-financing of investment will also be limited. Total SOE investment is thus unlikely to exceed 7 percent of GDP - the annual average in the 1990s. FDI disbursements have plummeted in the lastfve years US$ mn 2500 _ 2000 1500 1000 1993 1994 1995 1996 1997 1998 1999 2000 (est.) Figure 1.2: FDI Disbursements, 1993-2000 Source: MPI and World Bank estimates. 1.11. Foreign Private Investment. Foreign investment inflows reached their peak between 1995 and 1997 when an average of around $2 billion a year was disbursed (see Figure 1.2 5 Chapter I - Economic Framework for Growth and Poverty Reduction above). Inflows fell sharply following the Asian financial crisis with a large reduction from East Asia and Japan. The draft Strategy is projecting foreign inflows of around US$2 billion in 2000 prices per year over the next decade - equivalent to around 5 percent of GDP. Vietnam's share of FDI in GDP has been exceptionally high Countries Share of GIDP (%) Low & middle income countries 0.9 High income countries 3.2 Selected countries Chile 3.5 Malaysia 3.2 Argentina 1.6 Mexico 1.2 China 1.1 Brazil 1.0 Korea, Rep. 0.8 Vietnam (1991-00) 5.4 Vietnam target (2001-10) 3 - 5 Table 1.1: Gross Foreign Direct Investment (% of GDP, average 1991-99) Source: Govemment of Vietnam and World Bank, SIMA database. 1.12. There are a number of reasons that make this a challenging target to achieve, especially over the first five years of the Strategy period. First, the target expects exceptional levels of foreign investment as a share of GDP, much higher than most countries of the world (Table 1.2 above). Second, private participation in infrastructure, including BOT, which can attract significant amounts of foreign investment, has not progressed much in Vietnam. Third, most foreign investment into exports for the US market prompted by USBTA is likely to be in light manufacturing, requiring only small amounts of capital. Foreign investment in services is likely to increase as a result of the USBTA too, i.e., telecommunications, construction, insurance, banking, health and tourism but that is not until later into the decade. Fourth, China's entry into WTO as well as recovery and reforms in East Asian countries has increased competition for Vietnam. Thus, it is not implausible that FDI of 5 percent of GDP will constitute the high end of a range of likely FDI inflows. Domestic private investment will have to rise rapidly (% of GDP) average Actual 1991-00 High case 2001-10 State budget 5.9 7.0 Investment by SOEs 7.0 7.0 FDI 5.4 3 - 5 Non state investnent 7.1 11-13 Total investment 25.4 30.0 Table 1.2: Investment by Source Source: Vietnam Government and World Bank estimates. 6 Chapter I - Economic Framework for Growth and Poverty Reduction 1.13. Domestic Private Investment. In short, the domestic private sector has to double its investment as a share of GDP if the investment target is to be met. The domestic private sector invested around 7 percent of GDP in 2000 slightly lower than the average for the 1 990s. Table 1.3 above estimates the domestic private investment that is required to meet the target, given likely values for investment from the budget, from state enterprises and from foreign investors. Depending on the level of foreign investment inflows, domestic private sector investment would need to account for between 11 and 13 percent of GDP. If such investment were not forthcoming, because policies (discussed in Chapter 2) were not sufficiently favorable, growth may have to be lower than what is proposed under the Strategy. 1.14. Stimulating growth in domestic private sector investment will be necessary if the Government is to meet the draft Strategy's targets for growth - particularly for industrial and manufacturing sector growth (see Box 1.2). Over the past decade, while rising in absolute terms, domestic private investment has fallen as a share of GDP. At the beginning of the 1990's, investment in agriculture, small scale services and housing accounted for a higher share of total investment than today. However, during the decade the importance of manufacturing grew. As the domestic private sector was largely excluded from this activity, the share of domestic private investment fell. Recovery in the domestic private sector's share of investment will require removal of impediments to greater participation. Achieving strategy goals requires high growth in the private investment in manufacturing The draft Strategy targets growth of around 10% per year for industrial GDP. This suggests that manufacturing would need to grow by around 11%, if the mining sector (dominated by oil and gas) grows in line with overall industrial growth (i.e. 10%) and construction and utilities grow at their historical rates With SOEs in manufacturing constrained from growing too rapidly in the medium term, much of the future expansion in manufacturing GDP and output will have to come from domestic private and foreign-invested enterprises. But how fast will they have to grow in order to achieve 10% growth of industrial GDP? This will depend upon the growth of the SOE and FDI sectors. Assuming that the SOE share remains constant (i.e. utilities SOEs continue to grow faster than GDP but manufacturing SOEs grow at a much slower rate), the Table below shows the required rate of growth of domestic private investment for alternative FDI growth rates. Table B.I: Value added growth in the domestic private manufacturing sector Total domestic Won- Formal domestic ___________________- __-______________. _ state private sect r Foreign invested sector grows at 15% 10% 18% Foreign invested sector grows at 10%/O 16% 26% In the past five years, value-added growth of private SMEs has averaged only 9% a year. The growth required for the Strategy involves a doubling or trebling of that growth rate. Box 1.2: Required Growth of Domestic Private SMEs Source: World Bank Staff estimates. 7 Chapter I - Economic Framework for Growth and Poverty Reduction 1.15. Mobilizing Savings for Investment Will be a Challenge. Currently, domestic savings in Vietnam amnounts to around 18 percent of GDP - compared to a target level of more than 23 percent under the draft Strategy. For reasons outlined above, state enterprise savings are likely to be lower than in the past.' Household and private sector savings will need to increase, not only to fill the gap between actual and targeted, but also to offset the shortfall in state enterprise savings. Figure 1.3 shows that Vietnam's domestic savings rate is already above the average of low income countries, which suggest further increases may be difficult. However, China's success should prompt Vietnam to try and attain higher levels of savings. Policy reforms aimed at liberalizing the investment environment for private SMEs and also strengthening the banks to attract financial savings are likely to unlock potential increases in savings. China stands out as a modelfor mobilizing savings 4S - *Chinat is 40 V 30 T la Ycmcn tndoncs O 0 * 83anlyiadcsh t I 5) Hond,ra, thil4nd 525 * V,eln.m * + Nonkol f e PP"'l SuL.Dk~ m e ~~~~~~~~~* India Paki14c lu n oia (S 5 r 0 X5 *~ T3nt3n Ob~ana Camoroan * Cotc d'lvokt i 15 e ~~~~Ncpal GuiACA 16 * ilvnyo +~~~~~~~~~~~~~~~~~~~ Albanio ;~~~~~~~~ ..8gg zrbia O. 10 94 Income Per Capita, 19A8 (S) Figure 1.3: National Savings in Selected Countries, 1998 Note: Data for Indonesia, Philippines and Tliailand for other yea-s. III. IMPROVING THE QUALITY OF INVESTMENT 1.16. The draft Strategy recognizes that Vietnam needs nDt only a higher level of investment, but also improved quality of investment, the latter promoting higher productivity growth and higher employment growth. In fact, the Strategy implicitly assumes a higher rate of total factor productivity growth and of employment growth for the next decade than was achieved before. 1.17. Total factor productivity growth will have to be higher than the average for 1990's to double GDP growth if the investment rate 30 percent of GDP. Any shortfall in the planned investment rate would require even higher productivity growth. In the first half of the 1990's, total factor productivity growth was high as shown in Table 1.3, but productivity growth slowed 'With the exception of utilities (power, water, etc) which should be able to increase self financing ratios rapidly. 8 Chapter 1 - Economic Framework for Growth and Poverty Reduction down in the latter part of the 1990's, due primarily to the emergence of excess capacity in the economy in the face of slowdown, in domestic and external demand. Productivity growth has been distappointing in recentyears dte to excess capacity Period Annual growth in total factor I ~~productivi!tv (% 1990to 1995 2.0 1990 to 2000 1.1 Table 13: Victuamn' Producti" ity Per-fiJrmin:n 1990-2000 Source: Centtr for Interniationlal Economics (1996), and World Bank estimates. 1. 18. At any rate, productivity growth in the next decade would have to be at least 40 percent higher than the average for the 1990s if the draft Strategy's growth goals are to be met.2 If investment falls short of the target of 30 percent then productivity growth must be even higher (Table 1.4). Substantial increases in produtc tivity growilh are nLe'Pedf Level of investment 1 Required annual productivity growsth (percenlt of GDP) (percent) 30__ .6 27 1.9 24 2.3 21 2.6 Table 1.4: The Irnportance or Productivity Gtrowth Source: Wor id Bank estimates based upon CIE (I 996). 1.19. Raising Productivity Growth. How can Vietnam lift its productivity performance over the next 10 years? One way is to ensure that its existing resources are used as efficiently as possible i.e. ensuring that capital, labor and land are employed in their most productive or profitable uses. Removing impediments to growth in manufacturing and higher value-added service sectors that could draw on underemployed labor in agriculture is one example of how these efficiency gains can be achieved. Not only would labor be employed more productively in manufacturing/service activities, but it is also likely that productivity in the agricultural sector 2 Though the rate of investment was lower and the growth rate higher between 1990-00, productivity growth will have to be higher in 2001-0 if the Strategy's growth target is to be met. This is because the capital stock was lower in the 1990s than in the 2000s and the same investment implied a higher rate of increase in the capital stock. The the marginal product of capital was also higher since the amount of available capital was quite low to start with. In future, while investment will be higher, the rate of growth in capital stock (which is what enters the production function) is lower compared with 1990-00 and thus TFP has to make a greater contribution to achieve the same growth rate. 9 Chapter I - Economic Frameworkfor Growth and Poverty Reduction would rise as less labor may allow more efficient combinations of land, labor and capital. The effects of this 'reallocation' across sectors and within sectors can be quite significant.3 1.20. Fostering greater openness and competition will be necessary if efficiency within Vietnam's economy is to be improved (Box 1.3). Competition provides strong incentives for producers to seek out more efficient ways of producing goods and services that use fewer resources at lower production costs. Integration with the rest of the world would be expected to enhance competition as both export and import-competing industries are exposed to the discipline of world prices. This exposure to world prices will provide strong signals as to where individuals should invest their financial and human capital. The Government also needs to encourage greater competition in domestic service sectors that are less open to foreign competition. Box 1.3: Good policy and productivity growth are strongly limked Cross country evidence on the effect of different policies on productivity growth indicates a number of key factors. * Openness. Openness provides access to better quality inputs - including new technologies embodied in capital goods - and also exposing exporters and importers to new products and processes arising from international advances in technology. By expanding the potential market size, producers may obtain bigger returns from international advances in developing or adopting new technology. * Competition. Competition spurs producers to find ways of pioducing more efficiently so they can gain a competitive edge over rivals and increase profits. Imp3rts increase competition in domestic markets which may be dominated by a few local producers. Open policies that allow investment in service industries can increase competition in the provision of key sectors such as utilities, finance and business services. * Education. Better education raises the quality of the labor force. This in tum has beneficial effects for productivity. One way this occurs is that higher education miay reduce the cost of training staff in new production techniques or in the use of new capital goods. There is also greater chance that an educated worker, who has been exposed to a broad range of ideas, might more readily find better ways of perforning their job. * Macroeconomic stability. A stable economy tends to increase the rates of return on investment and so encourages investment in new technology. Education plays an especially important role. Importantly, eviclence suggests that good policies with regard to education and competition reinforce each other. Combined good policies are more important than the sum of their individual effects: Policy combination Average TFP growth Low distortion and high education level 1.40 Low distortion and low education level 0.25 High distortion and high education level 0.00 High distortion and low education level -OAO Source: World Development Report 1991. 3One study in China estimated that the shift of agricultural labor to other activities contributed around 1 percentage point a year to GDP between 1978 and 1995 (World Bank 1996). 10 Chapter I - Economic Frameworkfor Growth and Poverty Reduction 1.21. Productivity improvements in Vietnam will also be generated if Vietnamese enterprises adopt newer technologies in their production processes. Domestic research and development (R&D) is one means of increasing the stock of technological know-how. A number of countries provide incentives for R&D by granting tax incentives for R&D expenditure and by ensuring that a company's innovation is protected by intellectual property regulation. Subsidizing basic research is another common way governments promote domestic R&D. 1.22. Aside from domestic innovation, Vietnam can access existing foreign technologies. Increased openness to trade and investment enhances access through three channels: imports of new capital and differentiated intermediate goods that embody new technology, learning by exporting, and through foreign investment. Foreign investment is believed to be the major channel of technology transfer to developing countries (Djankov and Hoekman 1999). Technology is also transferred through informal means such as copying, reverse engineering, reading technical journals, attending foreign conferences and trade fairs, and hiring foreigners with technological expertise. 1.23. International advances in information technology could have significant implications for Vietnam's productivity performance in the future. Greater decentralization of production activity is increasingly possible as communication systems improve and technical innovation allows a greater range of products to be delivered digitally. The internet has also facilitated e- commerce. Vietnamese companies therefore have greater opportunities for marketing and distributing their products to a global market and lowering production costs by taking advantage of economies of scale. Business to business e-commerce has been expanding rapidly in other countries - with many firms finding significant cost savings through better coordination of production lines and reduced inventory holding costs: However, accessing this information technology requires a competitive, efficient and low cost telecommunications sector - an area where Vietnam is clearly lagging behind international standards. The manufacturing sector has contributed little to employment generation 457 40 35 -=X;< 30 I 0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 MAaricuilture EManufacturina MServicesj Figure 1.4: Structure of Employment in Vietnam, 1986-2000 Source: MOLISA, GSO estimates. 11 Chapter I - Economic Framework for Growth and Poverty Reduction 1.24. Higher Employment Creation in Manufacturing. Employment creation has to come mainly from manufacturing in the next decade in contrast to the past decade, when the service sector accounted for nearly 70 percent of all job growth between 1990 and 2000 (see Figure 1.4 above). The informal service sector, in particular, expanded quite rapidly. Employment in services now accounts for around 25 percent of total employment compared with 14 percent at the start of the decade. The service sector is likely to continue absorbing labor over the next decade but most of it is likely to consist of relatively low-wage jobs or informal self- employment, as has been the case in other countries. 1.25. By contrast, employment in manufacturing grew little - even while manufacturing output grew steadily. This is because manufacturing investment ad output - generally a key driver of industrial employment growth - was biased towards more capital-intensive activities promoted by a highly protective trade regime (see Chapter 2 for more details). 1.26. The draft Strategy thus calls for a shift in investment and output toward labor intensive manufacturing activities in general and manufactured exports in particular. Without such a shift, no rapid and sustained employment creation will occur. The challenge will be to get state-owned enterprises (SOEs) in manufacturing to move in that same direction. Generally SOEs have revealed a preference for focusing on the domestic market and on relatively capital-intensive products where financial support and protection from foreign competition has permitted them to grow. 1.27. As in most other countries, the formal domestic private SMEs will have to carry most of the burden of reallocating labor to manufacturing. Figure 1.5 shows that private SMEs are more likely to invest in sectors with higher employment per unit value-added, in contrast to state- owned and foreign-invested enterprises in Vietnam. Thus, more investment and output by the private SME sector is likely to generate more jobs. Private SME's create more jobs titan SOE's orforeign enterprises 60% rc3sa enterprises Donsip!&te FOeginvested 70% i _DOmcStic pa.r vfttC..................... 60% i5 50%1 40% 30% 20% - 10% . 1_ 1 0% 0 t0 20 21 to 40 41 to 60 61 to s0 el to 100 101 and Average number oftmployees per billion VND of value added in Invested sector Capital so Labor intensive intensive Figure 1.5: The Distribution of Investment by Employment Intensity Source: World Bank estimates based on GSO/UNIDO survey data (UNIDO 2000). 12 Chapter I - Economic Framework for Growth and Poverty Reduction IV. ENSURING EFFICIENCY AND EQUITY OF PUBLIC EXPENDITURES 1.28. To improve the quality of public investment and its utilization, improvements in the management and equity of public spending will be critical. The recent Public Expenditure Review (PER 2000) carried out jointly by the donors and the Government highlighted the need for improved screening of public investment projects and better balancing of operations and maintenance (O&M) spending with capital spending to ensure the best impact on growth and poverty reduction. Similarly it identified measures that could improve the existing pro-poor bias in Government expenditure. 1.29. Managing Public Investment. For example, the Ministry of Planning and Investment (MPI) identified the limited capacity among planners to appraise planned investments as an important constraint in designing and implementing a PIP which is fully linked to strategic targets (PER, 2000). A number of techniques - social cost benefit analysis being one of the most valuable - could help Government to prioritize its investment spending to achieve maximum social and economic benefits. Applying this kind of technique to infrastructure investment projects is likely to generate a stronger poverty-impact than will be the case if such analysis is not done carefully. International experience demonstrates that careful social-cost-benefit analysis, based on realistic forecasts of benefits, improves projects chances of success as well as effectiveness in terms of poverty-reduction. 1.30. Even when an investment project is carefully chosen and is fully linked to strategic targets, it may not be underutilized because of imbalance between current and capital spending. This happens in part because of insufficient integration of the budgeting process for capital and current expenditures. The state and the provinces formulate their capital and current budgets separately. While there is a medium-term investment expenditure program, its recurrent expenditure implications are rarely worked out in that program. As a result, Government projects are often underused because of insufficient levels of O&M funding. For example, roads and waterways are not adequately maintained and irrigation systems are not working at full capacity because recurrent budgets for transport and for agriculture sectors are insufficient (PER 2000). 1.31. Pro-poor Orientation of Public Expenditure. There is considerable evidence that the Government's public expenditure program plays an important re-distributive role and helps the poor. Although national safety net programs are not particularly effective, cash transfers to poorer provinces and the distribution of health and education sector spending are redistributing income. But considerable scope remains for improving the impact of public spending on the poor, particularly by better targeting social expenditures and developing alternative mechanisms for increasing income transfers to the poorest. 1.32. To enhance the pro-poor bias of public spending, four types of actions maybe considered during the coming decade: * Target social spending more effectively at the poor. In primary health care, for example, spending could be reallocated from certain types of curative care to preventive care. Reallocating expenditure to rural roads will also assist the poor. * Improve the operation of the existing system of user fee exemption for primary schools and certain types of hospital care. The existing system does not work in a 13 Chapter I - Economic Framework for Growth and Poverty Reduction particularly pro-poor way and forces schools and clinics to fund exemptions from their own resources. The goal would be to reduce the level of out-of-pocket payments made by poor households, which appears to be very high relative to their incomes. One option would be to provide direct funding to some institutions to cover the cost of these exemptions. * Examine other mechanisms for increasing income transfers to the poorest. One option might be to target income transfers to poor parents of primary school children, many of whom are funding nearly half the cost of primary schooling from their own merger resources. A program (such as that successfully adopted in Indonesia) which provides scholarships to children from poor farnilies could be an effective targeting mechanism. * Adopt a formula-based system for determining the amount of cash transfers to poorer provinces, in order to ensure that transfers are more closely related to their needs. Further work should be undertaken to explore the implications of alternative formulas, develop consensus around a particular formula, and then adopt it in the revised budget law. V. EXTERNAL FINANCING REQUIREMENT IN THE MEDIUM TERM 1.33. Improving Global Environment. Vietnam's macroeconomic outlook and external financing requirements over the medium-term hinge in part on the global environment, including Asia. There are signs that the external situation will improve next year and beyond, especially in East Asia, though the recovery remains fragile (see Table 1.:5). Recovery in the East Asian "crisis economies" (except Indonesia) is projected to continue in 2001 and beyond. South Korea has shown exceptionally strong recovery and China continues tD be a stable economic anchor in the region with relatively high growth rates. The high-income economies of Singapore and Taiwan (China), are performing strongly. The external situation wig improve over the comingyears Estimate Projectios: Region 1981- 1991-98 1999 2000 2001 2002-2008 World Total 3.1 2.5 2.6 2.9 2.8 3.2 - High-income countries 3.0 2.3 2.6 2.5 2.3 2.7 - Developing countries 3.3 3.2 2.7 4.2 4.5 4.9 *East Asia and Pacific 8.1 8.5 5.5 6.2 6.2 6.3 Table 1.5: World Growth, 1981-2008 (Percentage change in real GDP) Note: East Asia and Pacific includes the Republic of Korea. Source: World Bank 1999a, Global Economic Prospects and the Developing Countries. 1.34. Nevertheless, this improving global environment is fragile for at least three reasons. First, it is important to recognize that the strength and speed of this East Asian recovery remains uneven and its continuation depends on whether reforms ini the crisis economies are sustained, 14 Chapter I - Economic Framework for Growth and Poverty Reduction and it depends on the growth prospects of Europe, Japan and the US. Second, recent instability in the Middle East has the potential to raise oil prices further and dampen expected improvement in growth rates. Third, capital flows to developing countries have not fully recovered to earlier levels due to investors' perceptions of risk. Therefore there is a downside to these global projections too. Box 1.4: Recent Economic Recovery in Vietnam GDP growth has recovered to nearly 6% in 2000. Despite floods in the Southern and Central regions and drought in the North, agriculture recorded a respectable 3.7% growth rate for the first nine months and is likely to reach 4% for the whole year. Official estimate for industrial GDP growth in 2000 is 9.9%. Industrial output growth (generally higher than GDP growth due to a rising share of lower value-added activities) increased by an estimated 15.5%. The domestic private sector's industrial output grew faster than SOEs and FIEs. Service sector is expected to grow at 4.4% for 2000. Output of key industrial sub-sectors has increased rapidly. Cement (29%), ceramic products (390,%0), electronics (30%) and garments, textiles and footwear (16-19%) contributed most to this growth. The construction sector recovered too. Strong export earnings growth in 1999 and 2000 led this recovery. The rebound in exports value started in mid-1999, with total exports growing by 23% that year, and manufactured exports (especially garmnents and footwear) growing by more than 30%. Exports are growing at around 20% in 2000, though manufactured export growth rate has slackened. High and rising oil prices contributed a good deal to this performance in export earnings. With oil prices expected to come down sometime in 2001, sustaining export earning gro%vth rates of around 20% a year is likely to be difficult. However, the country's economic recovery is still fragile in two important respects. First, growth was supported by a very strong demand stimulus mainly through expansionary fiscal and monetary policy. Last year's civil service wage increase of 250o was disbursed in the first half of 2000, and the budget deficit now stands at 2.4% of GDP. Since 1999 the State Bank of Vietnam has been loosening its monetary policy too. In 1999, domestic credit expanded by 20% and in 2000 it has been growing by more thant 30%. It is not clear how much of the recovery is driven by this demand- stimulus and how the economy will respond to a withdrawal of this stimulus next year. Second, total investment as a share of GDP has not risen to levels reached in 1997. While there is some recovery in domestic private investment, there is no sign of recovery in actual foreign investment inflows. 1.35. Medium-term macroeconomic outlook. Critical to Vietnam's medium-term outlook is whether Vietnam will adopt the policy-changes necessary to achieve the Strategy's goals in the medium and long term. If the rapid expansion of credit is reigned in, the Enterprise Law is properly implemented, USBTA is ratified and the detailed medium-term SOE and banking reform program is adopted, the ongoing recovery (see Box 1.4 above) is expected to strengthen and GDP growth is likely to rise from the current 5.8 percent to 6.5 percent in 2001. Thereafter, GDP growth will depend on vigorous and effective implementation of the multi-year reform program discussed in Chapter 2. Based on such implementation, GDP growth is projected to average around 7 percent for 2002-05 period (Table 1.6). 1.36. External Balance. The current account deficit has declined significantly from 4.9 percent of GDP in 1998 to one-fifth of a percent in 1999 as FDI fell, exports picked up and imports remained depressed. In 2000 FDI remained depressed, and both exports and imports picked up, and the current account gap rose to 1 percent of GDP. 15 Chapter 1 - Economic Fi'amework for Growth and Poverty Reduction With bold refornm, 7% growth targets are achievable Projected Est. (annual average) Item 2000 2001 2001-05 2006-10 Real growth rate (%) GDP 6.0 7.0 7.0 7.5 Agriculture 3.5 3.5 3.5 3.5 Industry 10.0 10.2 10.0 10.0 Services 4.0 6.4 6.4 7.5 Table 1.6: Growth Projections if Proposed Policy-Reforms are Implemented (Annual percentage change) Source: Actual data: Vietnamese authorities, estimates and prcjections: World Bank. 1.37. With effective imnplementation of the proposed reforms and the additional quick- disbursing assistance that would accompany such refcrms, imports can grow at a rate commensurate with rising investment and GDP growth. Exports are thus projected to grow at an average of 14 percent in nominal dollar terms over the next five years and imports at 16 percent. V.1 Concessional financing requirements 1.38. External financing needs, 2001-2005. Vietnam's overall external financing needs are projected to rise to an average of about $3.2 billion a year for the period 2001-05 (see Table 1.7). This reflects not only higher imports needed for higher investment and output that is expected, but also the need to meet rising debt obligaticins as well as a need for increased reserves. 1.39. FDI inflow is projected conservatively at an annual average of around $1 billion in the first five years, i.e., 2001-05. This assumes that the Nam Con Son basin pipeline project will start in 2001 and a positive FDI response to the USBTA to export garments, footwear and other light manufactures to the US. However, actual FDI could be higher in the early years if the two BOT projects in the power sector, currently under consideration, are approved. In the outer years, FDI inflow is assumed to increase significantly to average $2 billion a year. This is not unrealistic if Vietnam has had five years of relatively high growth, the trade and investment regime has become very open and private manufacturing has expanded. 1.40. With an existing undisbursed ODA pipeline of project aid standing at around $6 billion, there is scope for increasing annual disbursements beyond the $1.1-1.2 billion that was disbursed in 2000. If disbursements of project aid rise at an annual rate of around 10 percent, ODA disbursement from project aid could be $1.4 billion by 2005. 16 Chapter I - Economic Framework for Growth and Poverty Reduction Externalflnancing requirements wil rise Prel. Projected Act. Act. Est. (annual average) Item 1998 1999 2000 2001 2001-05 2006-10 2001-10 Financing Requirements 2.4 2.6 2.1 2.7 3.2 4.4 3.8 Currentaccountdeficit 1.2 0.1 0.3 0.6 1.1 1.7 1.4 M<amortization 1.0 1.3 1.3 1.3 1.4 1.7 1.6 O/w FDI related loans 0.4 0.6 0.7 0.8 0.7 0.7 0.7 IMF repurchases 0.1 0.0 0.0 0.0 0.1 0.0 0.0 Others (Net) 0.1 -0. 1 0.0 0.0 0.0 0.0 0.0 Reserve requirements -0.1 1.3 0.5 0.6 0.7 1.0 0.8 Financing Resources 2.4 2.6 2.1 2.7 3.2 4.4 3.8 Official grants 0.2 0.1 0.1 0.2 0.2 0.2 0.2 M&L-T disbursements 1.1 0.9 1.2 1.3 1.6 2.0 1.8 Of which: ODA 0.8 0.9 1.2 1.2 1.3 1.2 1.3 Non-concessional 0.3 0.0 0.0 0.1 0.3 0.7 0.5 Foreign direct investment .0.8 0.7 0.6 0.7 0.9 2.1 1.5 Short-term capital (net) -0.3 0.3 0.2 0.2 0.2 0.2 0.0 Arrears accumulations (net) 0.1 0.6 -8.6 .. Debt relief 0.4 0.0 8.6 .. Additional funding needs 0.0 0.0 0.0 0.3 Additionalfunding needs, 2001-05 - $1.2 billion Table 1.7: External Financing Requirements (US$ billion) Source: Actuals: Vietnamese authorities; estimates and projections: World Bank. 1.41. Quick Disbursing Assistance. However, if quick-disbursing assistance is provided - as will indeed be the case if the reform program is adopted - total ODA disbursement will be sufficiently high to meet the additional funding needed as shown in Table 1.8. This quick- disbursing assistance will finance the additional balance of payments need arising from both the opening-up of the import regime further as well as the additional import demand for inputs and capital goods. It will also finance the fiscal-cost of banking and SOE reforms (see Box 2.2 in Chapter 2 ). For the period of 2001-05, the need for quick disbursing resources is estimated at around $250 million a year or a cumulative total of $1.2 billion for 2001-05. The World Bank, the IMF, the Asian Development Bank as well as several bilateral grants are expected to finance this requirement. Japan has already taken the first step of disbursing a quick-disbursing loan of $160 million under the Miyazawa initiative in 2000 in support of the private sector. 1.42. Official Development Assistance. The donor community has been playing a supportive role in Vietnam for the past decade. It is expected to continue this role in the near future, especially in the next three years, in close partnership with Vietnam. Evidence to date has shown that ODA has been largely effective in Vietnam, both in the rehabilitation of outmoded and dilapidated infrastructure yielding high returns and earlier reforms that have created an enabling 17 Chapter I - Economic Framework for Growth and Poverty Reduction policy environment for the effective implementation of ODA, a major ingredient for aid effectiveness. 1.43. External Debt Management. Vietnam's debt and Lebt service burden is sustainable and is expected to remain so, provided Vietnam implements the policy changes discussed in Chapter 2, chooses public investment projects carefully and avoids raising the share of non-concessional borrowing excessively. The total convertible debt stock is at $11 billion by end-1999 (or 41 percent of GDP), about 70 percent of which is public or publicly guaranteed. Slightly over half of the debt is concessional and the remaining is non-concessional and mostly related to foreign direct investment. The total debt stock is projected to rise to $14 billion by the end of 2000, with most of the growth coming from concessional loans and $1.7 billion increased resulting from the recent rescheduling of non-convertible debt owed to Russia. The share of concessional debt is projected to reach about two-thirds of total debt at end-2000. The debt-service burden is estimated at an average of about 6-7 percent of exports of goods and non-factor services for 2001-05. Projected debt service ratios remain manageable and sustainable under the draft strategy's goals. VI. CONCLUSION 1.44. This chapter has laid out the broad economic challenges facing Vietnam in the coming decade and examined the Strategy's framework for generating high growth, high employment and faster poverty reduction. The Chapter argues that Vietnam's overall objective of attaining a seven percent growth rate in the coming decade and of changing the structure of the economy to becoming less dependent on agriculture and more industrialized, are ambitious but attainable. This is likely to require a more vibrant domestic private sector with the ability to generate the needed investments, exports and employment. The policy and institutional changes that are necessary to attain this are discussed in the next chapter. 18 Chapter 2- Creating a Supportive Climate Enterprises CHAPTER 2 CREATING A SUPPORTIVE CLIMATE FOR ENTERPRISES Key Messages This chapter cites the policies that were implemented in the last decade and discusses the nature of policy and institutional changes that will be required in the early years of the coming decade to meet the draft Strategy's goals of growth, employment and poverty reduction. The set of policies include: (a) Integrating into the world economy. Vietnam's exports are equivalent to 44% of GDP (compared to an average of 27% for developing countries) and the share of the non-state sector in exporting has risen from near zero at the beginning of the decade to 55% today. Nonetheless, Vietnam's trade regime remains distorted, with effective rates of protection of over 100% in mnany industries. By signing up to AFTA and USBTA, Vietnam has made commitments to gradually move to an environment of uniform and low tariff,rates. This new trade regime will encourage greater' efficiency in exporting and import competing sectors, increase productivity and give producers access to global markets and technology. (b) Encouraging the piivate sector. To date in Vietnam the climate for the private sector has been grudging rather than supportive. Though there are indications that the climate is improving, domestic firms still number less than 30,000 and produce well under 10% of GDP. Creating a level playing field for the private sector will require a shift in the social and administrative culture from one of reluctance and control towards one of active support and encouragement.. The private sector will also benefit from introduction of a transparent and predictable regulatory framework, where discretionary actions on the part of officials are minimized. (c) Reforming state owned enterprises. Vietnam's economic goals remain seriously threatened by a large number of inefficient and loss-making SOEs that absorb more than half of bank credit, without contributing to employment growth. The Government plans to reduce losses and improve performance through divestures and equitizations. SOEs that remain under Govemment control will be exposed to hard budget constraints and greater competition. These refonns will be accompanied by an adequate social safety net for redundant workers. (d) Strengthening the banking.systen. The weakness of Vietnam's banking system -,high levels of non-performing loans and inadequate management - hinders better mobilization of savings and its allocation for efficient investment opportunities. Planned reform measures include implementation of supervision under a regulatory framework, restructuring and recapitalisation of state banks - including phasing out of policy lending, closures and rehabilitation of joint-stock banks, and leveling of the playing field for all banks. (e) Ensuring fiscal stability. Stronger efforts will be needed on the revenue front to ensure fiscal stability in the medium- to long-term. With revenue as a share of GDP declining by 4 percentage points of GDP since 1996, that will be critical. The much-needed wage increases have to be accompanied by reductions in Government employment if a rising wage bill is not to crowd out social spending. 19 Chapter 2- Creating a Supportive Climate Enterprises 2.1. The preceding chapter suggested that the key ten-year macroeconomic goals are achievable provided a certain set of policies and institutional arrangements are implemented in the early years of the next decade that will promote higher quantity and quality of investment. This chapter cites the policies that were implemented in the last decade, especially those implemented over the last two years, and discusses the nature of policy and institutional changes that would have to be implemented in the next decade. 2.2. However, if these policies and institutional arrangements are not implemented effectively, or if they are slowed down and back-loaded to the second half of the decade, the Strategy's goals will not be met. Vietnam may then have to live with lower growth of GDP and exports, as well as higher unemployment and under-employment, falling further behind the other ASEAN neighbors. 2.3. The high performing economies of East Asia4 (i.e. South Korea, Taiwan-China, Malaysia, Thailand, Indonesia) have demonstrated convincingly the sort of policies that must be implemented to sustain annual per capita growth rates of 5-7 percent over several decades and generate large reductions in poverty (see Box 1.1). Greater openness to the world, more freedom for the private sector, an effective banking system and macroeconomic and fiscal stability - complemented by superb access to primary education and to infrastructure services - helped these economies to generate high rates of investment, savings, exports, employment and productivity growth. 2.4. Vietnam's draft Strategy proposes most of these policies, but it also expresses some ambivalence about those policies. It envisages greater integration with the rest of the world, a more level "playing-field" for the private sector, reform of state-owned-enterprises and banks as well as maintenance of macroeconomic stability. At the same time, the draft Strategy argues for a continued "leading role" of the state-sector, as well as for continued protection of and state investment in certain key industries. This ambivalence, if unresolved when the Strategy is finalized, could slow down the pace of implementation of the required policies. For example, it is not clear from the draft Strategy whether the leaders can express publicly, strong support for the private sector, something Vietnamese citizens need if private investment is to grow rapidly. Similarly, will the SOEs be subject to a hard-budget constraint and greater accountability of performance quickly, in order to change SOE manager's behavior for containing losses and making SOEs competitive? And will the state-owned-commercial banks be permitted to move fully into commercial lending? Unless answers to these and similar questions are unambiguously affirmative, the key ten-year goals may not be reached. 2.5. This chapter examines these issues under the following five sections: * Accessing global markets and technologies to promote exports and productivity; * Creating a level "playing field" to promote private investment; * Reforming state-owned-enterprises to minimize waste and improve competitiveness; * Strengthening banks to raise savings and fund efficient investments; * Ensuring macroeconomic stability by maintaining fiscal stability. 4See the "The East Asia Miracle" (World Bank, Oxford University Press, 1993) for details on policy and performance for these economies. 20 Chapter 2- Creating a Supportive Climate Enterprises I. ACCESING GLOBAL MARKETS AND TECHNOLOGIES 2.6. Openness to trade, investment and ideas has been critical in all countries for encouraging domestic producers to cut costs by introducing new technologies, to develop new and better products and to export. The international flow of technology will take many forms: foreign investment, foreign education, technical assistance, licensing of patented processes, knowledge transmission through labor flows, exposure to foreign goods market and the internet, as well as technology embodied in imports of capital equipment and intermediate inputs. Similarly, the effect of import competition as well as the effect of greater competition in export markets are decisive in raising productivity and in creating employment, as is evident from the experience of many East Asian countries. 2.7. Conversely, high levels of protection for long periods have held back countries. High protection permits producers to sell products at higher prices, thereby taxing Vietnamese consumers. Thus, motorbikes that sell for $2200 in Vietnam, sells for only $1000 in Thailand. The same is true of bicycles and fans. Further, when items like sugar, cement, and steel are protected through quantitative restrictions, this effectively taxes other Vietnamese producers who use them as inputs. Finally, products that are not so protected (e.g. agriculture or exports), find it difficult to attract investment, because other protected sectors are made more profitable than they would otherwise be. 2.8. The draft Strategy envisages further opening-up of trade and foreign investment under the ASEAN Free Trade Area (AFTA) and the United States bilateral trade agreement (USBTA). This will enhance Vietnam's access to global markets and to technology flows. By removing quantitative restrictions and reducing tariffs, it will improve transparency and broaden access for the Vietnamese people to imported inputs and to export markets. This will permit access to better technology, encourage greater efficiency in import-competing sectors and also promote more exports of processed agriculture and labor-intensive manufactures - all critical to the success of the ten-year Strategy. 1.1 Increased Openness in the 1990s 2.9. Vietnam has already come a long way in increasing openness. Most of the changes in trade policy required removal of restrictions and easing of access. The legal framework had to be changed but little new institutional arrangements were needed. Initial steps were taken in the late 1980s.5 Trade reforms gained momentum in the early 1990s, slowed in the middle 1990's and picked up steam again from 1998. Between 1991 and 1995, private firms were allowed to engage in foreign trade by obtaining a license, tariff exemptions were introduced for imported inputs used in the production of exports, licensing procedures were simplified, an inter-bank foreign exchange market was introduced, and quotas on exports were removed except for rice. Vietnam also signaled its commitment to integrate with the region by joining the ASEAN in 1995. 5 In 1988, the crucial step of abolishing the central government's monopoly on trade and in reducing the customs tariff was taken. In 1989, quotas were removed on all but few export and several import comnmodities, the rates of export duties were reduced, the foreign exchange system was unified, and procedures were allowed to sell to any licensed foreign trade company. 21 Chapter 2- Creating a Supportive Climate Enterprises 2.10. Since 1998 the trade regime has been opened-up further. The most significant measure was the freeing-up of trading rights for firms registered in Vietnam. These firms were allowed for the first time, to export and import goods directly without a license6. This newly-provided right for domestic firms encouraged significant participation of private firms in foreign trade. The domestic private sectors' share in the value of non-oil export rose from 12 percent in 1997 to 22 percent in mid-2000 and in import value, from 4 percent to 16 percent (see Table 2.1). Reforms have encouraged greater domestic private participation in international trade Non-oi Exports _ Total Iports 1997 Mid-2000 1997 Mid-2000 State-owned enterprises 65 46 68 57 Foreign-invested enterprises 23 32 28 27 Domestic private SMEs 12.0 22 4.0 16 Total 100 100 _ 100 100 Table 2.1 Shares in Non-oil Exports and total Imports Source: Ministry of Trade: 2.11. Several other measures were taken too. Export taxes were reduced on a number of products and quota on rice exports were removed. A rising share of quotas on garment exports to Europe (required under the rules of the European Union) have been auctioned since 1999, permitting easier and more transparent access to private garment exporters. On the import side, quantitative restrictions were removed on seven commodity groups and the maximum tariff was reduced to 50 percent (with exceptions for six items). I. 2 Trade Policy Changes in the Next Decade 2.12. Nevertheless, there remains a large unfinished agenda for trade policy changes, especially for the import regime, that would need to be addressed early in the next decade. For example, quantitative import restrictions still cover around a third of imports and the maximum import tariff of 50 percent is high. The weighted average import tariff is around 19 percent, but it masks the high degree of non-uniformity in tariffs that is implicit in the 12 tariff rates and in the cascading tariff-structure (see Figure 2.1). 2.13. Tariffs and quantitative restrictions (QRs) have raised profitability of numerous products where Vietnam is actually uncompetitive, while at the same time discouraging production (e.g. agriculture, exports and so on) where it has a strong natural competitive advantage. Estimates of effective protection, which measure the extent to which tariff-policy raises producer's profits "artificially"- through tariff on outputs that are higher than on inputs -- show why domestic prices of motorbikes, bicycles, fans, tobacco, alcohol, textiles, paper, ceramics, cement and steel 6 For import: registered domestic firms could only import products that were specified in their registration license and foreign-invested-firms could not do so until the recent revision to the Foreign Investment Law had eased those restrictions somewhat. 22 Chapter 2- Creating a Supportive Climate Enterprises are higher in Vietnam than in other countries.7 Figure 2.1 shows the level and dispersion of effective protection rates across various sub-sectors based only on tariff rates. Consumers and domestic producers pay the pricefor high levels ofprotection Tobacco, alcohol and other beverages _ - - _ _ _ 450% Manufacture of ferrous metals 256% Plastic and plastic products _ - 185% Soars and detergents - -- i _ 163% Rubber and rubber products 1 K WI ;60% Textiles. carpets and rues 2 , 132% Ceramics. glass and porcelain ___ 127% Paper and products I118% Other food stuffs 0J- T- T- r T _l5% Vegetable and fruit canning , . 100% Tea and coffee processing i z- I Cement ! - 1 Electrical and electronic products Other industry , Other metallic product Min7inU,l .] Other chemicaI products I Leather, footwear and bleaching l Agriculture T Fuels Equipment and mrchjnerl Pharmaceuticals i Wood processing and products Chemical products orcst'n Other non-metallic mincrals 0 10 20 30 40 50 60 70 80 90 100 Figure 2.1: Effective Rates of Protection in 1999 (%) Note: The above affective rates of protection exclude the effect of quantitative restrictions. If they were included in these estimates, the effective rates would have been much higher for those products. 2.14. As a result, investment has been channeled to sectors that are made highly "profitable", even though Vietnam is not competitive. For example, evidence on cumulative foreign investment inflows show that more than half of such investment went into sectors that had effective protection rates in excess of 90 percent (CIE, 1999). Agriculture, light manufacturing and manufactured exports received in general a much lower share of foreign investment to 7 Cement, sugar, steel, motorbikes, bicycles are protected more by quantitative restrictions and thus do not show up to be as highly protected in Figure 2.1 because it is based only on tariff-rates. 23 Chapter 2- Creating a Supportive Climate Enterprises Vietnam than was the case in several other countries, including China. More investment in these sectors-which are relatively labor-intensive--could have led to more rapid employment creation and poverty reduction. 2.15. Increased Foreign Competition for Vietnamese Producers. Under AFTA and USBTA Vietnamese producers will face increased foreign competition. By early 2003 quantitative import restrictions (QRs) on six products (i.e. cement, steel, paper, glass, vegetable oil and ceramic products) are expected to be removed and tariffs on 95 percent of tariff lines for ASEAN countries, reduced to 20 percent; tariffs on ASEAN imports will drop further to 5 percent by 2006. Under the USBTA, there will be cuts in p:rotection on imports into Vietnam of around 30 to 50 percent on the current tariff rates on 250 different tariff lines covering both industrial and agricultural products (Martin, 2000). In addition, a wide range of service sectors, including telecommunications, banking, insurance, distribution, tourism, accounting, architecture, engineering, computing, management consulling, education, and health services will also be opened up for foreign investment. 2.16. To benefit from these policy changes Vietnam will need to develop new and more modem institutional arrangement. Promoting rapid gr-owth of manufactured export to sophisticated markets require the development of export marketing skills and institutions to support such growth. This will be Vietnam's big challenge.. Attracting foreign investment into manufactured exports, and instituting such marketing contacts will be difficult. But unless this foreign investment is partnered with domestic private SMEs, the contacts will not transfer to the Vietnamese and sustaining high growth of manufactured exports will be difficult.8 Also, Government must establish systems that support exporters. For example, the import-duty- exemption system has to work well, so that exporters get imported inputs at world prices with the least hassle and the customs system must be effective and well-functioning. 2.17. Future WTO Accession. When Vietnam becomes a member of the World Trade Organization (WTO), as envisaged in the ten-year Strategy, more will have to be done to open up imports, foreign investment and the domestic market. Vietnam, like China, will have to: * Remove discrimination among suppliers (i.e. national treatment) in accordance with the Most Favored Nation (MFN) principle and increase overall transparency of the trade and investment regime; * Abolish most non-tariff barriers and reduce average tariffs on manufactures to 10 percent or lower, and on agricultural goods to around 20 percent; * Liberalize entry for all countries into many other service-sectors beyond the USBTA, including distribution (preventing import barriers through controls on distribution). 2.18. Given the proposed trade policy changes, there is need to plan, in at least two ways, to minimize the costs of these changes. First, greater effort must be made to ensure that further investments do not go into uncompetitive sectors between nlow and the planned opening of the 8 China's quick success with rapid manufactured export growth was made possible by easy access to Hong kong's knowledge and physical infrastructure to market manufactures anywhere in the world. Overseas Chinese also provided a lot of it through their foreign investment, which came with marketing contacts and knowledge. Hungary and Poland's pre-existing ties with Western Europe also helped them to expand manufactured exports faster than Russia and others. 24 Chapter 2- Creating a Supportive Climate Enterprises sectors, otherwise newly-invested capital stock will be rendered useless soon after they are put in place. This can be done by announcing and publishing an annual road map of changes in QRs, tariffs and foreign investment, for the next five years, making it possible for producers and investors to prepare for the changes. But even more importantly, this must be factored into the Government's five-year public investment program (PIP). Second, even if the medium-to-long term effect of planned integration efforts are likely to be favorable on employment and on poverty-reduction in the medium term, there will be transitional losses in employment that Government should already prepare to address now. II. CREATING A LEVEL PLAYING FIELD FOR PRIVATE SECTOR 2.19. To meet the draft Strategy's investment targets, total domestic private investment will need to rise to 11-13 percent of GDP. This cannot be done without significant improvement in the climate for the private sector. To date in Vietnam the climate for the private sector has been grudging rather than supportive. Here Vietnam differs markedly from China, where the private sector has been recognized openly as a key partner in the country's development. 2.20. There are indications that the climate in Vietnam is improving. The Enterprise Law, which has substantially simplified business start-up has led to the registration of more than 10,000 additional domestic firms in the first nine months of this year. However domestic private registered firms (also referred to as private small and medium sized enterprises, SMEs) still number only around 30,000 and produce under 10 percent of GDP. 11.1 Private Sector Developments in the 1990s 2.21. The de-collectivization of agriculture, together with the approval of the Domestic and Foreign Investment Laws, as also the Commercial Law in early 1990s, were extraordinarily effective in promoting growth of the private sector from a negligible base. It galvanized the energy of millions of Vietnamese individuals who diversified and expanded their agricultural production rapidly, and set up many micro-household-enterprises as well as domestic private registered SMEs. Foreign firms invested in majority-foreign-owned joint ventures or in wholly foreign-owned enterprises. Systematic data on performance of the domestic private sector is limited, but what we have suggests a significant expansion and diversification of private sector activities in the last ten years. 2.22. Private sector in industry. Apart from family farms, the private sector's biggest inroad has been in the industrial sector. Industrial output has grown at an annual average rate of 10 percent in the 1990s, with the private sector growing at a much faster rate. The private sector as a whole - household enterprises, domestic private SMEs and foreign-invested enterprises - increased its total share of industrial output from 37 percent in 1990 to 58 percent in 2000 (see Table 2.2). Most of this was due to very rapid growth of foreign-invested-enterprises in the oil and gas as well as in manufacturing. Household enterprise growth stagnated after the first half of the 1990s as the environment for domestic private SMEs was not sufficiently favorable to promote their rapid growth. Thus foreign-invested enterprises now have a much bigger share of total private industrial output than was the case in 1990. 25 Chapter 2- Creating a Supportive Climate Enterprises An unfmaorahle environment for domestic: SMEk has r'stricted iheir c wrjibrtino to industrial ilro wi/ pre. *st 1990 1995 1999 2000 Tftal Tndlustriin] Growth (%) 32 13 .S 10.4 15.5 Perc-ti of Industrial Ontlput 61.7 50.3 431.5 42.2 DOMCri;C pr.vaie(non-qnlh) 29.5 24.6 21.8 22.7 sector 1 orQir H'W5[vd 2.R 7 34. 7 13.2 Tablte 2.2. TiidustriuI Output: ( r and share in 1{o0(I .SCU{(..k: 6rJ O 2.23. The domestic private sector, especially household-enterprises, has had an important role in manufacturing. As of 1999, there were around 600,000 micro household enterprises in manufacturing, a quarter of all micro-enterprises contributing 28 percent of manufacturing value- added and 5600 private SMEs in manufacturing accounting for 10 percent of manufacturing GDP. This situation is no doubt changing as we write, especially for private registered SMEs, as more than 10,000 new firms have registered in the last nine months. 2.24. This recent growth-spurt in private SMEs owes a lot to the measures taken since 1998. In mid 1998, the revised Law on Promotion of Domestic Investment provided new incentives for the domestic private sector. This was followed by the approval and implementation of the Enterprise Law in 1999 and 2000. Together with the elimination of more than 100 different business licenses that restricted entry in different sectors, ongoing implementation of this Law is improving the policy environment for domestic private SMEs significantly. 2.25. The revision of the Foreign Investment Law and the issuance of Decree 24 in combination with the USBTA and other measures, have improved the mood of foreign investors. By permitting foreign investors to set up export-oriented enterprises through simple registration, without waiting for discretionary approvals, the Government has addressed a major investor grievance in an important area. Also, by simplifying the process for modifying corporate structures of existing foreign-invested-enterprises (i.e. for expansion and conversion to wholly foreign owned companies), by lifting restrictions on access to foreign exchange, and by permitting mortgages of land-use rights of foreign-invested-enterprises by all banks in Vietnam, the foreign investment environment has been further liberalized. II. 2 Policy Agenda for Private Sector into the Next Decade 2.26. Nevertheless, the private sector remains more constrained in Vietnam than in other countries in the region, including China. The private sector continues to face various unnecessary restrictions on entry arising from the remaining business license requirements, whose modification and rationalization are still needed. Access to and transactions in land-use- rights remain difficult despite recent changes in land law and security regulations. New 26 Chapter 2- Creating a Supportive Climate Enterprises institutional arrangements like registries, and procedures for selling foreclosed land-use rights are not in place. Access to capital and credit is also more difficult for private SMEs in part because banks are in dire financial straits and in part because lending to SOEs is viewed more favorably than lending to the private sector. But improving the climate for day-to-day operations of private investors - making interactions with the bureaucracy easier -- will necessitate deep- seated behavioral changes in the way private activity is perceived by the civil service, the dominant state owned commercial banks, and most importantly, by the political leadership. 2.27. Thus, four aspects of the business environment are of paramount importance to promote private sector development in the next decade: * Social and administrative attitudes. Negative social and administrative attitudes towards private enterprises color behavior towards those engaged in private activities. They influence individual's decisions to enter the private sector and, once entered, constrain their ability to unleash their full potential. Growing one's business and increasing its visibility through success, is seen as a risky proposition by many entrepreneurs in Vietnam, because private business has tended to be viewed negatively. * Rule-of-Law-based regulatory framework. Vague and frequently changing regulations and excessive bureaucracy increase the risk and cost of doing business and tax the resources of private entrepreneurs that would otherwise be available for investment or for management of the business and create an inhospitable business environment. Evidence points out that the bureaucratic stranglehold, exercised through discretion, is a major drag on private sector dynamism. There is need for institution-building that will gradually establish the rule of law as the basis for government-business relationships (see also Chapter 7). * Availability of financial resources. Vietnam's banking reforms aim to address the shortages and problems of availability of credit and capital for the economy. However, the impact of these reforms on the domestic private sector will remain limited if the institutional arrangements for private transactions in land-use- rights as collateral and/or as equity for joint ventures are not established quickly. * Corporate Governance. With greater freedom for the private sector must come improved corporate governance. There are at least three problems of corporate governance that will need to be addressed if the private sector is to grow in a transparent, accountable and effective manner. First, a key characteristic of the private SMEs is that their organizations are quite opaque. Not only is the ownership- structure of most of these SMEs not known but also the way decisions are made is unclear. This is not much of a problem when firms are small, but as they become bigger and owner-managers' span of control is less adequate, absence of appropriate decision-making processes will constrain their growth. Second, most SMEs now do not maintain sufficient accounts or make any public disclosure, of their accounts. Various types of restrictions and insufficient social acceptance of business success leads SMEs to misreport financial and other flows, when reporting is required. In the coming decade, it will be necessary to put in place the framework that will ensure that the corporations act in a transparent, accountable and non-monopolistic manner. 27 Chapter 2- Creating a Supportive Climate Enterprises 2.28. Improving Social and Administrative Attitude to Business. Given the many years of discrimination against private enterprises and private entreprpneurs, stronger and more frequent endorsement of private business by the Vietnarnese leadership is required, as was done in China. The recent award of "red stars" to talented young businessmen is a good initiative and should be continued and expanded. In addition, regular public exhortations by top leaders of Party and Government, to the bureaucracy to provide support to private enterprises under the law, would be extremely helpful. Stories in the media of domestic private business successes and visits by top leaders to successful private exporters would help to reinforce the value of private business in Vietnam's development. 2.29. Establishing a Rules-based-environment for the Private Sector. The next decade ,should complete the process of establishing a transparent legal and regulatory framework for the private sector, ensuring no discrimination and separating the regulators from the regulated. 2.30. Three actions are needed in the medium-term to continue establishing a transparent legal and regulatory framework. First, Government should continue to monitor carefully and implement effectively the Enterprise Law (e.g. eliminating, modifying and rationalizing the remaining business licenses in other sectors) and the Domestic Investment law, since they are the key instruments for facilitating Vietnamese private entry further. Second, the revised Foreign Investment Law and Decision 24 needs to be implemented in the spirit in which they were developed. Foreign investors should be encouraged, not discouraged from joint-ventures with private Vietnamese firms, to facilitate transfer of technology, marketing contacts and management expertise. Third, there is need to make the regulatory framework for private participation in infrastructure more transparent and predictable over the medium-term and conclude some of the build-operate-transfer (BOT) transactions in the power sector in the short- term (see Chapter 5 for why private financing of infrastructure is critical). 2.31. Predictable implementation of the various regulatory frameworks in place will be equally important if private investment is to pick up in a big way as is required by the draft Strategy. Excessive bureaucracy and discretionary implementation of policies has increased the risk and cost of doing business, diverting resources of private entrepreneurs that would otherwise be available for investment or for management. Evidence in other countries show that bureaucratic stranglehold, exercised through countless opportunities for bureaucratic discretion has been a major drag on private sector dynamism (see Chapter 7 for more on this issue of implementation). 2.32. Availability of Financial Resources for the Private Sector. Financial policies have an important impact on capital mobilization and development of enterprises. Vietnam's banking reforms aim to address the shortages and problems of availability of credit and capital for the economy. However, the impact of these reforms on the domestic private sector will continue to remain limited if the private sector continues to experience difficulties in securing access to land use rights, their potentially most valuable source of collateral. 2.33. If changes in policy address these four areas, the domestic private sector can grow as rapidly as projected in Chapter 1. In fact China has shown that private firms can grow from 100,000 to 1 million in just six years (see Box 2.1). 28 Chapter 2- Creating a Supportive Climate Enterprises Box 2.1. Growth of Domestic Private Enterprises in China The past decade has seen remarkable change in the scope of the private sector in China. The number of domestic private registered firms rose from around 100,000 in 1991 to over 1.3 million today, while employment has risen from 2 million to nearly 20 million. During the decade output from the private sector grew by 70% per year. Some of this growth was due to the conversion of SOEs and cooperatives to private enterprises, but the bulk was due to nev private investment. Particularly important was the growth and transformation of household enterprises into small and medium enterprises (SMEs). Vietnam may wish to draw upon some of the lessons deriving from China's experience. China followed a path in the 1980s and early 1990s somewhat similar to Vietnam's in the 1990s. During this period there was a robust growth of household and informal small enterprises, and a number of policy experiments supporting private sector development in a number of cities and localities. The legal framework for the private sector was clarified in 1988. spurring a growth in SMEs. Momentum for growth was added at the Fourteenth Party Congress in 1992, and in 1993, when the first "grand strategy" for a transition to a rules-based market economy. The Fifteenth Party Congress in 1997 recognized the private sector explicitly as an important component of the economy, and in 1999, private ownership and the rule of law were incorporated into the Chinese Constitution. The rapid growth of private sector employment in recent years should be a source of encouragement to Viemam, since Viemam in now positioned well to enjoy the same growth should it so choose. If the Enterprise Law and other recent measures are fully implemented, and if the planned reforms to the banking and SOE system are seen through, Vietnam will have put together a credible basis for mapid private growth. In addition, Vietnam's stock of more than 600,000 household enterprises engaged in manufacturing can provide the start-up material for many thousands of new SMEs, should they be given the encouragement to grow. However, a recent major analysis of China's private sector may point to another important lesson for Vietnam. It found that changing attitudes of officials towards the private sector is often as important as improvements in the regulatory and policy environment.9 This transition of attitudes stems most effectively from clear statements from the top leadership. Thus, for example, Deng Xiaoping's famous southem tour in September 1992, and subsequent clear statements by China's leaders appears to have played an important role in persuading both local officials and investors that China was open for business. III. REFORMING STATE-OWNED-ENTERPRISES 2.34. Reforming SOEs to reduce losses and to improve their competitiveness is central to the Strategy. Vietnam's commitments to open up trade and foreign investment under AFTA and USBTA makes serious reform of SOEs imperative. In addition, banks cannot be strengthened to mobilize and allocate savings effectively to meet the Strategy's goals, unless serious SOE-reform is implemented. 2.35. Though there is no real conflict between the Strategy's emphasis on the state-sector being the "leading sector" and effective SOE reform, if such reform is viewed as a pre-requisite to being competitive and thus a "leader" in key sectors. But SOEs may use this emphasis on "leading", to focus an expanded investment-program without completing reform and seeking 9 "China's Emerging Private Enterprises", Intemational Finance Corporation, 2000. 29 Chapter 2- Creating a Supportive Climate Enterprises protection to avoid loosing that investment. Unless SOEs are fully restructured and their management abilities and behavior altered to compete effectively in the market place, any expanded investment program is likely to repeat many of the experiences of the 1990s, i.e., create few jobs, generate little profit, accumulate high debt and build uncompetitive capital stock. ic 111.1 Progress on SOE Reform in the 1990s 2.36. The first round of SOE reforms took place during 1989-94 and the second round began after the middle of 1998. The first round reforms were effective in reducing the number of SOEs as well as their output and employment share." Over the last: ten years, the number of SOEs have fallen from around 12,000 in 1990 to around 5,300 in 2000. Most of this reduction took place by 1994, but around 450 enterprises were equitized between 1998 and now. The share of SOEs' in total industrial output fell from 62 percent to 42 percent between 1990 and 2000, and employment fell from 2.5 million to around 1.6 million. 2.37. Since 1998, Government has carried out an assessment of all the SOEs and developed a detailed SOE reform program. As of 1999, SOEs accounted for 30 percent of GDP and nearly half the bank credit. But SOE financial conditions have been deteriorating due to inefficiencies, overstaffing, and outdated technology. Official estimates show 60 percent of SOEs were loss makers or marginally profitable as of end 1997. The Government's SOE report notes that although SOEs show only small book losses, in 1997-1999, the Government provided about 2.2 percent of GDP annually in supplementary capital, subsidies, tax exemptions, debt write-offs, and preferential credits. Total SOE debt at end-1999 was officially estimated at 126 trillion dong (equivalent to almost 9 billions US$ or 32 percent of GDP), a large proportion of which is non- performing, thus contributing to a weakening of the state-owned commercial banks. Over the last two and half years, a number of actions have been taken to reform SOEs. Equitization has been accelerated over this period with 450 equitizations completed and half of them selling more than 65 percent of shares. In addition, decrees have been issued to permit outright sales of small SOEs as well as to establish a enterprise restructuring fund for redundancy payments to SOE workers affected by reform. 111.2 SOE Reform in the Next Decade 2.38. The SOE reform program proposed in the draft Strategy seeks to reduce losses, to stem accumulation of unsustainable debt and to improve competitiveness. Within the framework of "retaining large SOEs and letting go of small and medium ones", four broad types of measures are part of the medium-term program: * Diversifying ownership through equitization (i.e. sale of state shares) and divestiture of SOEs (outright sale or free transfer of an entire SOE); * Liquidating SOEs that are classified as non-viable; '0 Even in the last two years, credit and budgetary support to some General Corporations rose significantly, probably for new investment, and many of them were not competitive. " In 1990, various pieces of legislation (e.g. Company Law, Law on Domestic Private Investments and so on) permnitted household and private-sector ownership of businesses for the first time. Since then the non-state sector -- consisting of the foreign-invested-sector (i.e. wholly owned and joint-ventures), household enterprises and domestic private sector (i.e. registered enterprises) -- has grown considerably. 30 Chapter 2- Creating a Supportive Climate Enterprises * Restructuring large SOEs remaining in Government hands; * Establishing an adequate and effective social safety net for displaced SOE workers. 2.39. Divestiture and Equitization. Diversifying ownership of SOEs through equitization and divestiture, is a key plank of Vietnam's SOE reform program. In the words of the draft Strategy: "Government plans to make efforts to complete the program of rearranging, restructuring, and reforming managerial mechanisms to improve productivity in SOEs within 5 years. This includes equitizing SOEs where the state will not hold majority shares, in order to create more incentives for more efficient performance. In the equitization process, priority will be given for workers to access stocks, and at the same time to open stocks for outside domestic and foreign investors. Implementing the policy of sale, leasing or contracting of small SOEs, for which the State does not need to maintain any ownership, will be part of these efforts. ". 2.40. Most of the enterprises that are targeted for equitization and divestiture are likely to have a stock of capital of less than VND 10 billion or US$ 700,000 (only around 10 percent of targeted enterprises have capital stocks exceeding that amount). Though the pace of equitization is still too slow relative to the target, it has certainly been proceeding much faster after 1998. There have been more than 450 equitizations betweenl998 and now, as compared to 17 before then. 2.41.. Liquidations. Liquidations have made the least headway so far. This is in part due to anxiety about the social impact on workers, but in part it is also because the legal framework and procedures for liquidation remain cumbersome, making it difficult to enforce creditor rights and for the authorities to declare bankruptcies. To move faster in this area it will be necessary to streamline the legal framework for liquidations. 2.42. Restructuring large SOEs remaining in State hands. Restructuring enterprises that remain under state control is the most challenging part of the reform agenda for stemming losses, reducing accumulation of unserviceable debt and improving competitiveness. The Strategy asks for "efforts to complete the program of rearranging, restructuring, and reforming managerial mechanism and improving productivity in SOEs within 5 years. " 2.43. Getting these large SOEs to behave according to the rules of the market and restructure with a view to maximizing profits by cutting costs or raising their sales volume is not an easy task. It did not happen in the reforms of the 1990s, and the current financial condition of the SOE sector bears testimony to that. Nevertheless, for the next round of reform the Government plans to take the following measures in an effort to change behavior of SOE management: * imposing a hard-budget-constraint by enforcing a ceiling on credit-growth for all manufacturing SOEs and a sub-ceiling on a number of highly indebted SOEs as well as by asking banks to provide credit to SOEs only on commercial-criteria; * making SOEs relatively more autonomous and their management more accountable for performance; * assessing operational performance through "diagnostic audits" of 100 large and troubled SOEs and taking follow-up actions to improve competitiveness and profitability; 31 Chapter 2- Creating a Supportive Climate Enterprises * monitoring quarterly performance of another 200 or so large SOEs that are highly indebted or otherwise troubled to prevent further accumulation of non-repayable debts; * developing detailed restructuring-action-plans, on a pilot basis, for 3 General corporations (SeaProdex, Vinatex , Vinacafe covering 140 individual SOEs), using international consulting firms, and then implementing them to improve competiveness. 2.44. Hardening the budget constraint means Government must stop giving implicit and explicit subsidies to these firms, and directing credit from the banks, every time an SOE gets into trouble. The task is technically simple but politically difficult to do, as is evident from the experience of the 1990s. In the early 1990s, explicit subsidies from the budget were stopped, but were partly replaced by increased credit from the banks. Also, applying tax-rules according to the law is not easy when SOEs experience difficulties. For example, providing the various new exemptions to the Value Added Tax (VAT) when enterprises claimed problems in paying the VAT sends the wrong signal that Government's tax regulations do not have to be followed. 2.45. Restructuring enterprises is also a question of setting the right goals for managers. Enterprise management is part of Government bureaucracy, and is often required to meet non- economic objectives set by those who appoint and promote them. Profit is then only one of many objectives. Until managers of SOEs are judged on the basis of their performance on profitability and until promotions, salary and bonus increases and firings are related to that performance, genuine restructuring of SOEs will be difficult to achieve. So "diagnostic audits" may highlight the actions necessary to enhance profitability, but managers may not implement those actions as needed, if profitability is not made their primary concern by the Government. 2.46. Internationally recognized rules of transparency and public accountability should also be applicable to large SOEs remaining in state hands. Not only must Government know the actual performance of each enterprise and its financial results each year - which at present the Government does not always know due to irregular reporting of financial results - but the market should too. In other countries of this region, large SOEs keep excellent accounts, audit them annually using independent auditors and publish them to info:rm other participants in the market- place. Vietnamese SOEs should be required to perform according to those standards of transparency too. 2.47. Social Safety Nets. Liquidation, equitization and the restructuring of SOEs will inevitably entail redundancies. The draft Strategy asks to "excpand step-by-step the social safety net and insurance system and then, apply them for all workers ". Recent Government estimates about redundancies as a result of SOE reforms suggest a total of 400,000 workers over 5 years. Acceleration of SOE reforms will have to be accompanied by a strengthening of the social safety net. To this end the Government has established an Enterprise Restructuring Assistance Fund to compensate redundant workers. It is estimated that the fund may need about US$ 450 million over 5 years to deal with redundancies arising from restructuring, liquidations and equitizations. Several donors are willing to provide assistance to this fund, in the context of overall assistance to the reform program. 32 Chapter 2- Creating a Supportive Climate Enterprises IV. STRENGTHENING THE BANKING SYSTEM 2.48. Continuing the banking reforms initiated in late 1988, especially changing management behavior and establishing supervisory institutions is an integral part of Vietnam's draft Strategy. In the medium-to-long term - which is the focus of the Strategy - it seeks to create a banking system that will promote better mobilization and improved allocation of domestic savings as well as expanded banking services to support growth and employment creation. In the words of Vietnam's draft Strategy: "Diversifying banking services -- mobilizing capital and lending; providing convenient and in-time services to all individuals and enterprises, supplying timely credit for production, business and other activities, including those in agriculture and rural areas - is the main purpose of the banking system. For this purpose, establishing a transparent, healthy and equal environment for all banking activities will be important. Supporting domestic institutions to improve their management capacity and skill in order to be able to compete with foreign partners will be necessary. Applying information technology, quickly expanding non-cash payment and automatic banking services, building a comprehensive legal framework that contains international principles and standards of banking activities, and improving supervision and inspection of the internal quality of credit institutions are among the measures that need to be taken. Solving the problem of outstanding non-performing debts, in parallel with strengthening legal and administrative institutions on borrowers' liabilities and lender's rights will be necessary to avoid the situation of credit panic. " IV.1 Progress with Banking Reform in the 1990s 2.49. The first round of banking reform in Vietnam started in late 1980s and achieved important changes in form and structure of the system. The mono-bank system was replaced by a two-tier system with the first tier consisting of the four state-owned commercial banks (SOCBs) and the second, comprising of the State Bank of Vietnam (SBV), as the central banlc. Other parts of the banking system - joint stock banks (JSBs), joint venture banks, representative offices and branches of foreign banks -- came into existence after 1990, when the relevant laws permitting them were approved. By 1994 the banking system had changed considerably, in the sense that other banks began to take a rising portion of the banking assets. (see Table 2.3). Many incr'. r .'. ent.ered thLe 1wn/-.ngsector . _ __ _ _1990 I 1994 1 I 999 ~Qr9C5 4 I ! 5 0 r- 36 48 ,.=oLnt vc'ture banks 0 3 4 -. a''es and rep. offices of 0 41 103 gonei banks Table 2.35 Cuw.h os tion otN Victnam's Banking System, 1990- 2(10U0 Sources: Sa:'s c rJ 'i!.am and World Barik. 33 Chapter 2- Creating a Supportive Climate Enterprises 2.50. Over the 1990s the pace of financial deepening was limited relative to other countries. Bank credit as a share of GDP, rose from 13 to 25 percent and bank deposits as a share of GDP from 10 percent to 20 percent between 1990 and 2000. 12 There was also a significant drop in SOEs share of that credit - from 90 percent to 48 percent. As other banks entered the system, the share of the four SOCBs in total bank credit fell to 80 percent. 2.51. However, this development took place under an inadequate regulatory and supervisory framework and a weak human resource base in commercial banks. Also, most SOCB lending was directed by the Government and a good deal of JSB lending was related-party credits or done with inadequate credit risk assessments. Thus this growth of the banking system also worsened the financial condition of most commercial banks. By end 1997, non-performing loans were a significant share of total outstanding loans, putting many of these banks in jeopardy. 2.52. Since 1998 Government has taken several actions in respect of improving the regulatory framework, leveling the playing field, and restructuring JSBs, but not much in respect of SOCB restructuring. Numerous regulations were adopted on collateral, on foreign exchange operations, on conditions for intervening in troubled banks, capital adequacy requirements and on bank inspection (including definition of the scope and responsibilities of the SBV's Supervision Department). Regulations for deposit insurance have been issued and a Deposit Insurance system has been set up, all aimed at improving confidence of depositors. Also all banks are now permitted to compete with each other on the price of their loans, since interest rates have been made flexible, though still subject to a cap. Restrictions on mobilization of dong-deposits have been removed for joint-venture banks, though they remain for foreign banks. A plan for restructuring JSBs was approved in early 1999, and to-date three JSBs have been closed and two merged. Several other JSBs are currently subject to special control or special supervision by the State Bank of Vietnam. IV.2 Banking Reform in the Next Decade 2.53. The reform program, in the medium-term, is aimed at resolving the large stock of non- performing loans (NPLs) and at ensuring that in future, all banks (SOCBs and JSBs) operate prudently to limit such NPLs. For this purpose Government has developed a five-track reform program: * improve legal, regulatory and supervisory framework; * level the playing-field for all banks; * restructure JSBs; * restructure and commercialize SOCBs; and * train management and staff in commercial banking and in central bank supervision. 2.54. Improving Legal, Regulatory and Supervisory Framework. Prudential regulations accompanied by effective supervision of compliance with those regulations are necessary to ensure that prudent banking will be conducted in the future. In particular, improving loan- classification and loan loss provisioning to meet international standards in terms of transparency 12 For examnple, in China, Indonesia and the Philippines deposit/GDP ratios are 60, 50 and 43 percent respectively while credit/GDP ratios are 106, 58 and 85 percent respectively. 34 Chapter 2- Creating a Supportive Climate Enterprises and accuracy of financial statements and strengthening of SBV supervision will be key to ensuring that all banks operate prudentially. Accounting standards that reflect the true financial conditions of banks is a prerequisite for effective supervision. Supervision should be risk-based and include on-site inspections as well as off-site surveillance through accounting and auditing. To ensure this Vietnamese accounting standards need to conform with international accounting standards (IAS) so as to ensure true and accurate information on the financial conditions of banks. Specifically, banks' loan classifications and loan/loss provisioning should reflect the credit risk of loans. Existing accounting rules do not do that. Further improvements in the legal framework are also planned, to facilitate resolution of troubled loans and the sale of foreclosed collateral assets. 2.55. Leveling the Playing-field for all Banks. Government's reform program wants to increase competition among banks, but it plans to do so in a gradual and managed way. Restrictions on mobilization of dong-deposits for foreign banks are expected to be gradually reduced. The process of gradual leveling of the playing field is likely to be slow because of ongoing SOCB restructuring, which makes it difficult for them to compete effectively during the next three years. This gradual leveling of the policy-environment will be important in generating competition for all banks, especially from joint-venture banks and wholly-owned foreign banks. Under the new Foreign Investment Law, all banks in Vietnam are permitted to accept mortgages of land use rights as security for loans to foreign invested enterprises. 2.56. Restructure JSBs. The Government plans to consolidate the 48 JSBs (52 in 1998) into a smaller number through closures, mergers and rehabilitation. Depositors are likely to be fully protected in the closures but shareholders are being asked to provide the additional capital for rehabilitating banks so that they are in compliance with the regulations in the next two years. The number of JSBs is expected to be reduced to around 20-25 larger and healthier JSBs. 2.57. Restructuring SOCBs. Success of the SOCB restructuring plan - which is critical to achieving the vision -- will require not only the resolution of the existing stock of NPLs, but also the adoption of reforms within each SOCB, to ensure that they operate commercially and that future NPLs are minimized. Thus reform and operational restructuring of each of the four SOCBs, to ensure that behavior of bank management shifts towards commercial-banking with no special preference for SOEs, will be key. The Government and SBV are in the process of preparing the detailed restructuring plan for each SOCB to achieve that objective and this is expected in 2000. 2.58. In order to be successful these measures will require extensive and targeted training of both SBV and commercial bank staff as well as changes in governance principles and management incentives in banks. The challenge will be to turn banks into commercially oriented entities by creating a market-oriented credit culture in management and build human capital and capacity to carry out the different reforms and implement new procedures. V. ENSURING FISCAL STABILITY 2.59. There are already considerable pressures on the fiscal balance. Revenue as a share of GDP has declined by 4 percentage points of GDP since 1996. The revenue to GDP ratio in Vietnam is lower than the average for low income countries, so there is room for increases. The introduction of the VAT has yet failed to raise revenue as was expected. At the same time there 35 Chapter 2- Creating a Supportive Climate Enterprises are new pressures on public spending. Government service wages are exceptionally low, but recent increases in wages without reducing employment has raised the wage-bill and is crowding out other spending. The fiscal costs of reform (see Box 2.2) will also add to existing spending over the medium term. Box 2.2 Fisa Costs of SOE and Banking Reform are Manageable Tentative estimates of the costs of structural reform are projected to total 12-13% of GDP. These costs comprise: ' The capital costs of SOE debt resolution and bank re-capitalization totaling 8% of GDP over four years. Debt resolution alone is expected to cost about 5.5% of GDP, and the asset management company (AMC) together with the residual bank re-capitalization about 2.5% of GDP; * The additional interest costs of newly issued goverunent debt for bank re-capitalization totaling 2.5% of GDP over the next four years, starting at 0.2% of GDP in 2000 and rising to 1% of GDP in 2003; and * The costs of severance pay to redundant workers totaling 2%/o of GDP. * In 2000, the capital costs of SOE and banking sector reform would be about 2.5 -3% of GDP, mainly related to setting up the AMC and clearing fiozen SOE loans. Total current costs (including the safety net) would amount to 0.7% of GDP. If the refonn program described in this Chapter is implemented over the next 3-5 years, and with the curtailment of new SOE losses, the public sector debt dynamics would remain manageable. Cutrently, the level of public sector debt of Vietnam is about 65% of GDI' (Fund-Bank estimate), including bank debt of SOEs. The Government's domestic debt is very small ('% of GDP), and its extemal debt is all on concessional terms. Reforming the SOE sector would result in the Government taking on some SOE debt, which by itself would not increase the level of debt of the public sector as a whole. Public sector debt would peak at 73% by 2002, and begin to stabilize thereafter. 2.60. This means that there is a need to ensure improved revenue collections and more efficient management of expenditures. New revenue measures, including improvements in the VAT, as well as better tax administration and collection will be called for. On the expenditure side, there will have to be better prioritization of spending and enhanced pro-poor bias of spending. V.1 Fiscal Reform in the 1990s 2.61. Important fiscal reforms have been implemented over the last ten years. In the first five years (1991-1995) Vietnam set up a centralized treasury system and implemented the first phase of tax reform. The Treasury gradually extended its network to all provinces and all districts, providing a strong basis for effective budget execution. The principle of only non-bank financing of budget deficit was adopted in 1993 and the iiscal deficit was brought down to a sustainable level in 1994. Vietnam's tax base was diversified during this period. Four new taxes- - turnover, profit, import-export and special consumption-- were introduced and for the first time, the non-state sector and state sector were legally subject to the same tax rates. On the expenditure side, after 1994 there were no explicit subsidies from the budget for SOEs, making it possible to spend on other priority areas. 2.62. Most of the significant fiscal reforms took place after 1997. The new Budget Law was approved in 1997 and the VAT implemented in 1999. The new Budget Law provides a legal 36 Chapter 2- Creating a Supportive Climate Enterprises framework for budget formulation, approval, execution and monitoring, defining clearly revenue and expenditure assignments to different tiers of government. In addition, the new budget classification introduced with the Budget Law has enabled reporting of public accounts in a uniform way for all agencies/localities, facilitating monitoring of budget execution and accounting. The introduction of VAT reduced the number of rates and helped to eliminate the cascading effects on producers inherent in the former turnover tax. V.2 Fiscal Agenda for the Next Decade 2.63. The policy agenda is dictated by the current fiscal situation. This year's fiscal stance is aimed at stimulating demand and supporting economic recovery. The overall deficit is expected to widen to around 3.0 percent of GDP, mostly financed from domestic non-bank and external sources. However, higher oil prices and the economic recovery are expected to yield additional revenue, effectively halting the 4 percentage points decline in revenue's share of GDP over the last four years. Government expenditure is projected to increase by about 2.5 percentage points of GDP. This constitutes a reversal on previous years that have seen expenditures decline with revenue in order to ensure near budget balance. 2.64. Improving Revenue. Strong efforts will be needed on the revenue front, to increase the ratio of non-oil revenue collections to GDP over the medium term. Otherwise medium term fiscal stability may be threatened. To secure sustainability of the budget, the Government plans to raise revenue collections by broadening the tax base, removing discretionary tax breaks, unifying VAT rates, and further strengthening tax administration. In relation to future revenue sources the impact of trade reform must be taken into account. While the initial impact of proposed tariffication of non-tariff barriers may be positive, future lowering of tariff rates and the overall impact on economic activity and its effect on the tax structure will have to be assessed. VI. CONCLUSION 2.65. If the ambivalence in the draft Strategy is not resolved and as a result Vietnam opts for a slower implementation of the reform program, the key goals of the Strategy will not be met. This may mean that the AFTA and USBTA are likely to be implemented in a halting and protracted manner. Also, many of the SOEs and General Corporations operating in less competitive sectors may not be required to restructure and become competitive quickly if banks continue to lend for non-commercial reasons. And the top leaders may not send a sufficiently strong signal to all, that private SMEs should be helped as much as possible under the law. A slow reform strategy may also make it more difficult to sustain the reforms. For example, under the current pace of reform, public revenue as a share of GDP is likely to stay depressed, and possibly fall further, making it difficult for the Government to finance the costs of banking and SOE reform on its own, which will slow reform even more. 2.66. Growth Under Slower Reform. There is thus a serious risk that continuing a slow reform program, that is not time-bound, will lead to a more permanent lower growth path. This is because in the absence of clear and firm direction in reform of banks and SOEs, trade and private investment, Vietnam cannot benefit fully from either the strong regional recovery or the higher world growth that is forecast for the decade. Efficiency of the state-enterprise sector will not improve. Banks will remain at risk for a longer period and will fail to mobilize and allocate 37 Chapter 2- Creating a Supportive Climate Enterprises savings needed to raise investment. Existing and potential exporters of manufactures and processed agriculture may not make the investments in additi,onal capacity that is needed to meet rising regional demand and to sustain the high average annual export growth rate, even though the US market is waiting to be tapped. Potential foreign investors will not get the signal they need to come to Vietnam in preference to other countries in the region. Industry and services - state-owned, foreign-invested, and private small and medium enterprises - will stagnate. With high labor force growth, rising unemployment and under-emnployment will be unavoidable and the pace of poverty reduction will slow down. 38 Chapter 3 - Transforming The Rural Economy CHAPTER 3 TRANSFORMING THE RURAL ECONOMY Key Messages Government's strategies place the agriculture and rural sector soundly at the core of their development plans. Prioritizing agrinculture and rural development is crucial to poverty reduction. Agricultural incomes rose by 60 percent between 1993 and 1998, but still 85 percent of the poor are in rural areas and 79 percent of the poor work in agriculture. Accounting for one quarter of GDP and one third of export revenues, a vibrant agriculture sector can also be a driving force for economic growth over the coming decade. Four pressing imperatives can be derived from Government strategic targets in this sector. (a) Intensifying agriculturalproduction to increase output by 4.5 percent per annum Only 4 percent of the recent growth in agricultural GDP can be explained by the application of new technology. To achieve the targeted growth in agricultural output will require greater investment in research and extension, which is currently low by international standards. 6 percent of public spending on agriculture in China is spent on research but less than 2 percent is spent on research in Vietnam. Measures which make agricultural input and output markets more competitive and efficient could also bring considerable benefits to farmers. (b) Diversifying agriculturalproduction to raise agricultural incomes and reduce vulnerability Rice is currently grown on 60% of all agricultural land in Vietnam. Diversification out of rice and into higher value commodities is central to raising agricultural productivity and incomes and will involve allowing farmers to make production decisions which maximize income. A lack of technical and market information in rural areas is restricting the potential of both farmers and entrepreneurs. (c) Creating opportunitiesfor off-farm employment in rural and urban areas to absorb labor moving out of agriculture International experience shows that agricultural productivity only rises significantly when labor is drawn out of agriculture by employment creation in other sectors. Estimates suggest that 6 million people will have to shift their employment into industrial or service sectors by 2010 in order to double value-added in agriculture to US$620 per worker. There is a very real need for a supportive environment for enterprise development which encourages the growth of labor-intensive industry in rural areas. The Enterprise Law takes this sector forward, but constraints to implementation remain at the local level. Financial sector reforms and investment in rural infrastructure are measures which will strongly support the development of a dynamic rural sector, both on and off the farm. (d) Ensuring that all regions and ethnic groups participate in and gain from the growth in the rural sector Ethnic minorities suffer multiple disadvantages which make their poverty particularly intractable. There is a pressing need for intensive research into agricultural options for upland farming systems, reinforced by extension services which are responsive to traditional knowledge. Ensuring that poor areas get a fair share of agricultural expenditure is important in pursuing equity goals. 39 Chapter 3 - Transforming The Rural Economy 3.1. The Government of Vietnam has put the rural sector at the heart of the development strategy for the coming decade. This recognizes that a, vibrant rural sector is not only fundamental to achieving poverty reduction targets, but that it can also be a powerful engine for economic growth and national development. The strategy tha.t the Government will present to the ninth Party Congress in mid-2001 outlines a vision for the rural sector in 2010 which is based on a sustainable, highly efficient, diversified and internationally competitive agricultural sector. This is complemented by rapid growth in the off-farm sector, which will create opportunities for employment and help rural households to diversify and raise incomes. This chapter discusses the rural challenge for the coming decade and identifies some of the important strategic issues which it poses (Figure 3.1). Challenges mItneratives Instruments Intensify investments in research agricultural a e x . / ~~~~~~~~~~and extension production Attackin g Povert Attacing Poverty 5 s _ _ . / ~More efficient markets Diversify into higher value crops Supportiveregulatory and new markes (framework for SME Driving economxe \development growth and\.\ national > employment o Financial reforms for rural development development Target remote and Investments in rural upland areas infastructure Figure 3.1: MARD's strategy suggests two critical challenges for the rural sector I. THE RURAL CHALLENGE 1.1 Attacking Poverty 3.2. What does it mean to be a farmer in Vietnam in 2000? For many, it means trying to meet essential needs out of tiny, fragmented plots of agricultural land - on average less than 0.2 hectare per capita. It also means having surplus labor, working on average 21 hours per week on farming, but lacking other resources to combine with the labor to increase output. In many 40 Chapter 3 - Transforming The Rural Economy instances, it means limited access to technical advice, high quality inputs such as seed, credit and markets - which in turn constrains the potential of farmers to increase production and diversify crops. 3.3. It is not surprising, then, that there is a powerful link between the agriculture sector and poverty. People living in households with heads whose primary occupation is in agriculture comprise four fifths of the poor. Even after making an allowance for underreporting of urban poverty, it is likely that in 1998 at least 8 percent of poor people lived in rural areas. In the period between 1993and 1998, per capita expenditures in rural areas rose by nearly one third. Per capita expenditures in urban areas rose at twice this rate, however (Figure 3.2). This has led to the ratio of urban to rural expenditures increasing from 1.8 to 2.2. Per capita expenditures in urban areas rose twice asfast as expenditure in rural areas 1993 -1998 6.0 -i 5.0 01993 4.9 4.0 -1998 3.1 c 3.0 -I2. .2 07 2.0 Rural Urban Figure 3.2: Growth in real per capita expenditure by rural-urban 1993-1998. Source: Vietnam: Attacking Poverty, 1999. 3.4. Growth projections in the Overview to this report show that the incidence of poverty will decline less rapidly if rural expenditures grow more slowly than urban expenditures. The strong emphasis that Government places on poverty reduction in its strategies and planning documents requires rapid, inclusive growth in the agricultural sector and in rural areas. It also requires the creation of jobs in the manufacturing and services sector, which draw people out of agriculture and raises the productivity of those still engaged in agriculture. Without these elements in a growth strategy, poverty reduction targets cannot be met. 1.2 Driving Economic Growth and National Development 3.5. International experience demonstrates the importance of a vibrant agricultural sector to economic growth. Output from the agriculture sector accounts for nearly one quarter of GDP (Figure 3.3) and 66 percent of total employment. Although these shares will decline over coming years as they have done slowly over the past decade, agriculture will remain at the core of the Vietnamese economy for the next decade. The agriculture sector also generates much of Vietnam's foreign exchange earnings: nearly 30 percent of export revenues are from agriculture (including aquaculture). Even if this share declines as the Vietnamese economy restructures over 41 Chapter 3 - Transforming The Rural Economy the coming decade, agriculture exports will still play an important role in generating the foreign exchange needed for national development. The agricultural sector produces one quarter of Vietnam's output Vietnam: Share of Output by Sect0r, 1990 - 1999 a Agricualture 50 43 l Indusiry 42 4 0 32 0 ° Service 34 45 30 -I t 0 - - 220 1 1 1990 1999 Figure 3.3: Share of GDP by sector, 1990 - 1999 Source: GSO, Socio-Economic Statistics 1975- 2000. 3.6. Investment and policy reforms in the agricultural sector which pay off in terms of increased agricultural productivity, gains in output, rising prosperity for the rural population and increased export revenues, will provide the basis and momentum for strong economic growth. Agriculture and rural development play a vital role in the CGovernment's vision for the coming decade. But so too does a growth strategy based upon concentrating scarce resources in designated growth poles (see Overview). This chapter demonstrates the need for a balanced growth strategy that is driven by the rural sector. II. LOOKING FORWARD: IMPERATIVES FOR 2001-2010 3.7. The Ministry of Agriculture and Rural Development (MARD) has drafted a strategy for the period 2001-2010 for presentation to the 9th Party Congress (MARD, 2000a and MARD, 2000b). The vision presented is one of a sustainable, highly efficient, diversified and internationally competitive agricultural sector, which builds on comparative advantages and makes use of new and high technologies. The strategy notes the need for a "vigorous push" to diversify agricultural production, based on the comparative advantages of different regions. There is recognition of the roles that the State, cooperative, household and private sector will play in the strategy. A key role is assigned for scientific research and the application of new technology. There is commitment to public investment in rural infrastructure, to policy reform and to human resource development and institutional strengthening. 3.8. The strategy acknowledges the need to develop a rural sector in which off-farm employment and rural industrialization play an increasingly important role. Targets set out in the strategy suggest that rural industry and services will be a driving force in the rural economy, growing at 10-12 percent per annum and increasing their share of rural GDP from 30 percent to 42 Chapter 3 - Transforming The Rural Economy 45-50 percent. The slower-growing (at 4.5 percent) agricultural component of GDP is forecast to reduce its share correspondingly. These figures add up to a rural GDP that is growing between 6.5 percent and 8.0 percent per annum by 2010. 3.9. Some of the key targets identified in the draft strategy are summarized in Table 3.1 Table 31: MARD has set ambitious targets for the coming decade Planned targets for Current performance 2001-2010 Annual rate of growth of 4 - 4.5% 4.3% agriculture production ,_. Annual rate of growth of rural 10 - 12% 9% (est) industryand services Average product value of US$2000 per hectare US$1000 per hectare agricultural land_ Average product value per US$1500 per laborer US$3 0 pe'r laborer agricultural laborer Share of industry, trade and 45-50% 30% services in the rural economy Infrastructure Road to (nearly) all commune 97% rural population have centers, schools, health stations access to health center and electricity 77% population use electricity Access to clean water 80% of households 29% of rural households .__ __ __ __ __ __ __ __ __75% of urban households Source: Compiled from MARD (2000a and 2000c), ADB (2000), Vietnam: Atacking Poverty (1999). 3.10. Many of the factors which will guide outcomes lie outside the institutional territory of MARD and require sound decisions to be made by other Ministries. The strategy to develop the fisheries sector - an important part of the coastal rural economy, a key foreign exchange earner and a dynamic sector in terms of developing post-production processing - is formulated by the Ministry of Fisheries, but is not properly considered in this chapter. There are also particularly strong links with the financial sector and trade reforms presented in Chapter 2. Policies and investments to develop human capital (discussed in Chapter 4) will also have an important influence. The need for strong links and consistency between urban and rural strategies is also pressing. 3.11. Out of the Government strategy fall four important strategic imperatives: * Intensifying agricultural production to increase output; * Diversifying agricultural production to raise agricultural incomes and to reduce the vulnerability that comes from depending on a single crop; * Creating opportunities for off-farm employment in rural and urban areas to absorb labor which moves out of agriculture; and, 43 Chapter 3 - Transforming The Rural Economy * Ensuring that all regions and ethnic groups participate in and gain from the growth in the rural sector. 11.1 Intensifying Agricultural Production 3.12. Agricultural GDP has grown by 4.9 percent over the last decade - a direct result of reforns, which returned responsibility for agricultural production to autonomous farming households. This has led to a rapid rise in farm incomes, wlhich grew by over 60 percent between 1993 and 1998, and which, in turn, has fuelled reductions in poverty. These increases in agricultural output over the last decade have resulted from increased inputs of labor and capital. Together these explain 87 percent of the increase in agiicultural output between 1996-1998. Increases in the area cultivated account for a further 9 percent of the gains in output. Only 4 percent of the increase can be attributed to technological improvements (ADB, 2000a). 3.13. Benefits from this growth stretch beyond the realm of the farming household. The value of agricultural exports (including aquaculture) rose from. US$1.1 billion in 1990 to US$4.3 billion in 1998. Although the share of agricultural exports in total exports has declined over the decade, agricultural and seafood exports still represent abotut 30 percent of exports in 1998. 3.14. Continued growth in agricultural output of 4-4.5 percent and doubling the average product value of agricultural land to US$2000 per hectare are ambitious targets for the next decade. Few countries have sustained growth rates of 4-5 percent per annum for twenty years (Table 3.2). In Vietnam, this is unlikely to be achievable without strong efforts to raise productivity in the farming sector. Few countries have achieved Vietnam's ambitious agricultural growth targets % Growth in Agriculture % Growth in Agriculture GDP GDP 1980-90 1990-1999 China 5.4 4.9 India 3.1 3.8 Indonesia 3.4 2.6 Philippines 1.0 1.5 Thailand 3.9 2.6 Vietnam 4.3 4.9 Table 32: Annual rate of growth of agricultural GDP for s!lected countries (%) Source: Compiled from various World Bank publications. 3.15. This involves intensifying production of existing crops which, in turn, demands the application of more capital and more technology to raise yields. The prospects for reclaiming further land for cultivation are limited, especially in thle lowland areas. It is unlikely that increasing labor inputs would lead to striking increases in output unless they were combined with other factors of production. A key instrument in meeting this imperative and in improving yields will be increased public investments in research and extension. Examples from other countries demonstrate the value of research and extension activities (see Box 3.1). 44 Chapter 3 - Transforming The Rural Economy Box 3.1: Agricultural research improves incomes, diets and Investments in rural Guizhou Anyone who doubts the impact of agricultural research on farm income and household food security (and thus poverty) should visit rural areas in Guizhou, the poorest province of China. In remote villages, on small farms set in the mountainous countryside, there has been an almost miraculous turnaround in the lives of poor people thanks to the introduction of quality protein maize. Until recently annual incomes were less than US$50 per capita and, for up to three months a year, families had %irtually no food. Then hybrids were introduced in Guizhou in 1994. Quality protein maize is higher yielding than conventional varieties, but more important, it has higher levels of two essential amino acids vital for the growth of children. Today the local people are better fed, and surplus maize has been used to produce pork, increasing food security and disposable incomes. The extra income has been used for yeld-enhancing investments such as irrigation. Having transformed the lives of 25,000 families in Guizhou, cultivation of the hybrid variety of maize is being adapted to neighboring provinces. Source: Bale 1999 in WDR 2000/2001 (World Bank, 2000b). 3.16. The Government strategy to 2010 emphasizes the need for scientific advances in the agriculture sector, but is weak on the means for passing this information on to farmers. Ultimately it is farmers who will be users of some of the products and techniques and efficient, responsive extension services can assist the adoption of this new technology. There is a need to invest more public resources in research and extension, which are likely to have a strong impact on productivity (PER, 2000a). Public spending on research is equivalent to 1.7 percent of public agricultural expenditures and is biased against training and marketing. In China, the equivalent figure is 6 percent and in Malaysia and Thailand it is around 10 percent. In Vietnam, expenditure on extension is about US$3 per farming household. This funds 2,757 extension workers who serve a farming population of 10 million households. These expenditures are inadequate for an effective research and extension system that seeks to improve productivity. Currently, 32 research institutes with 109 different centers subsist on a meager budget of about US$5.6 million. The result of this under-funding is few research results of practical value and an incentive for public research institutes to venture in search of revenues into areas properly left to private sector. 3.17. Financing Enhanced Research and Extension. How can this essential boost to research and extension services be financed? Fortuniately, there is good scope to redirect funds even within the agriculture sector. In 1999, more than one qu:arter of all state-owned enterprises were in the agricultural sector. These enterprises receive indirect subsidies in the form of soft loans, debt forgiveness, tax exemptions and preferential access to land and infrastructure. These subsidies are substantial. For example, fertilizer-importing state-owned enterprises received an interest subsidy almost equal to the total MARD expenditure on agricultural extension in 1998. About 17 percent of these state-owned enterprises are making losses and there are indications that the large losses made by a few state-owned enterprises are more than offsetting the profits made by the profitable majority (PER, 2000a). 3.18. Making extension services truly effective in promoting the intensification and diversification of agriculture will require a reorientation towards responding to farmers' needs 45 Chapter 3 - Transforning The Rural Economy rather than fulfilling production targets. Training in participatory techniques and communication skills is important. 3.19. More farmers are women than men and this has implications for the targeting of agricultural services and investments in rural areas. Although women often perform much of the agricultural work, they rarely own the land use rights. There is no provision in the Land Law or the Civil Code for including the names other than that of the household head - usually the man - on Land Use Certificates, although the new Marriage Law now requires that common property be registered jointly. There is evidence that this disadvantages women in case of divorce, separation and widowhood as well as constraining their access to formal credit - for which land is the main form of collateral. Other important considerations to promote gender equity in the agricultural sector include: involving more women in extension services and training (as extension workers and as trainees) and prioritizing interventions which make women's labor more productive. Women have heavier workloads than men, a situation which is aggravated if men migrate to find work away from the farming home. 3.20. Food crops, particularly rice, dominate agricultural output. Over 60 percent of agricultural land is planted with rice and, in 1999 rice represented 91 percent of total food production (MARD, 2000b). Rice plays a crucial role in household incomes: in 1998 44 percent of household agricultural revenue came from rice and a further 10 percent came from other food crops (Vietnam: Attacking Poverty, 1999). Rice is the mainstay of the diet, contributing 75 percent of calorific intake. Rice also represents the core of agricultural exports. MVARD estimates that rice will represent 30 percent of agricultural exports (excluding aquaculture) in 2000 (VIR, 2000). Furthermore, this is not expected to drop much in the next five years. MARD forecasts suggest that rice exports will represent one quarter of agricultural exports in 2005. Although diversification into higher value crops is a key plank of Government's strategy, rice and other food crops will clearly still play an important role over the next decade. Intensifying production in rice and other foodcrops will be important in achieving productivity goals established in the strategy. 3.21. Trends in rice yields domestically and international comparisons suggest that there is still considerable scope for expanding yields. Over the 1990's rice yields have risen by 2.8 percent per annum for the country as a whole. However, they are stagnating in the Mekong Delta, the region that produces more than half the country's total rice output. Output increases in the Mekong Delta have been driven more by increasing the area under cultivation than through yield increases. With some 29 percent of annual crop land still not irrigated (GSO, 2000) and with many irrigation systems being poorly managed, there is still scope for Vietnam to increase the productivity of its paddy land (Vietnam: Attacking Poverty, 1999). 3.22. Interventions that raise productivity in rice and food. crop production could be especially important to the poor. Rice farmers in the poorest 20 percent of the population produce four- fifths of the output from one hectare of land as does a household in the wealthiest 20 percent. 3.23. In addition to intensifying production, there could be considerable gains to farmers if input and output markets could be made more efficient. Freeing up rice export markets, as the Government has recently announced is its intention, will introduce more competition and will raise the farm-level price by allowing only the most efficient exporters to participate. Current 46 Chapter 3 - Transforming The Rural Economy restrictions on seed imports (particularly hybrid seed) have an adverse impact on farm productivity and income by limiting the spread of new technology. 3.24. The export competitiveness of Vietnam's rice in terms of quality, reliability of delivery at contract specifications, cost of production, and financing terms has been reviewed in detail by IFPRI and others (IFPRI, 1996). Generally, it is found to be mixed. While some liberalization has been permitted, state restrictions on production, processing, and marketing lower export demand and farm incomes. Despite Vietnam being a low-wage economy, export margins per ton are meagre and exporters depend on high volumes to stay competitive. Increasing rice production without restructuring milling and marketing would not be expected to improve rural welfare. 11.2 Diversifying Agricultural Production 3.25. Diversification out of rice and into higher value commodities will also be central to achievement of MARD's strategic targets. Increasing the value added per agricultural laborer is partly a question of moving some of the laborers out of farming. It is partly about increasing yields from existing crops. It is also a question of allowing farmers to make production decisions that maximize income. In some places, this might mean that farmers could be growing crops other than rice, were it not for official interference. 3.26. Backed by a strong political urge to be self-sufficient in food production, rice continues to play a dominant role in the share of agricultural GDP and agricultural exports. Despite a policy that in principle allows farmers to produce the crops of their choice, in reality farmers keen to switch from paddy farming to other crops can face restrictions and resistance from local officials. This clearly constrains the potential for farming households to invest in crops that would generate higher returns. However, there are some positive indications of change and huge opportunities. Many farmers have been innovative in filling niche markets or producing minor crops for export (Box 3.2). Box 3.2: Farmers are seizing opportunities in niche markets and minor export crops * Farmers in Vinh Phuc provinces have discovered that mushroom growing is highly profitable. About one thousand families grew 165 tonnes of mushroom last year, mainly for the Hanoi market. The provincial authorities are now encouraging more families to participate, hoping to boost output by 5,000 tonnes, much of it for export, by 2005. ^ Horticulturalists near Hanoi have tapped a lucrative market for lilies in China, and have been able to gross as much as US$70 a day per fanner from this activity. * In the first quarter of 2000, Vietnam exported 18,000 tonnes of pepper, up 156% from the previous year. The country is now the world's second largest exporter of pepper (after India) and some farmers are even cutting down coffee tiees to plant pepper. * Vietnam exported 16,200 tonnes of cashews in the first quarter of 2000, up 81% on the same period of 1999. This gave the country a 20% share of world exports, behind only India and Brazil. * Dalat is again becoming the "salad bowl" of Asia, exporting about 3000 tonnes of iceberg lettuce in refrigerated containers in 1999. The good transport infastructure, which allows the vegetables to go from being cut to reaching customers in Singapore within a week. has been important to this success. Source: Economist Intelligence Unit, July 2000. 47 Chapter 3 - Transforming The Rural Economy 3.27. For the farmer, this means a spreading of risk across a number of income sources as well as increased incomes. Revenues from non-rice production are playing an increasingly significant role in the household economy. Increased revenues in rice production accounted for only one quarter of the total increase in farning household revenues during the 1993-98 period. Increases in revenues from livestock and aquaculture contributed 37 percent of the total increase in revenues over this period (Figure 3.4). Non-rice sources of revenue are becoming increasingly imporrant 8 Growth In Agricultural Revenues, 1993-1998 I *Agro-forestry 25% g Fruit trees 6 .3 Perennial crops z X 4 20 gn% . 1°dustrialcrops E . | 29% i:3Other food crops o Livestock & 25S1% *4>Mo Rice 0 - 1993 1998 Figure 3.4: Growth in household agricultural revenues, 1993 - 1998 Source: VLSS 1993 and 1998. 3.28. The draft Government strategy emphasizes the need to increase production in a whole range of agricultural subsectors, some of which have already shown great promise. Although the strategy acknowledges the need to steer away from crops in which Vietnam has no comparative advantage, there is still an explicit commitment to support the troubled sugar industry. A key question will be: how to encourage diversification without introducing new distortions? Box 3.2 demonstrates good practice in this respect and provides a sharp contrast to the approach taken in the sugar sub-sector. The fear with the approach established in the strategy, which sets out production targets for a whole range of products, is that farmers may be encouraged to invest in growing particular crops either through incentives such as additional land or subsidized credit or through lack of alternatives and restrictions on land use. Recent experience with sugar cane production demonstrates the problems associated with pushing farmers to grow crops for which there is no sustainable, profitable market. A preferable approach would be one which: * gives farmers as much information (technical and market) as possible in a comprehensible form; * allows farmers access to credit at positive real interest rates; * creates a supportive physical infrastructure; 48 Chapter 3 - Transforming The Rural Economy * promotes the growth of agro-industry, particularly the private sector and facilitates access to international markets; and * then allows farmers to make up their own minds about the most appropriate investment for their farms. 3.29. This echoes a presentation recently made by MARD which recognizes the importance of restructuring the agricultural and rural economy "not by administrative orders, but mainly by policies impacting on market mechanism with State management". (MARD, 2000b) This approach, in turn, implies a need for public action and investment in a number of areas: * strong agricultural research and extension services; * banking sector reform; * public investment in appropriate physical infrastructure; * state-owned enterprise reform, because of their dominance in agro-industry and their absorption of domestic credit sources; and, * reforms which make markets more efficient and which allow farmers to keep more of the value they add. 11.3 Creating Opportunities for Off-farm Employment 3.30. The SME sector - a dynamic force for labor intensive rural growth in other Asian countries - has been described as the "missing sector" in Vietnam's development. In other countries, the SME sector has been valuable not only in creating employment, but also in bringing competition to the domestic market and in generating savings (Chapter 2). 3.31. Growth in rural industry and services of 10-12 percent will require a package of interventions that are discussed below. This target is fundamental to moving labor out of primary agricultural production raising the productivity of labor left within the farming sector. The MARD strategy aims to increase fivefold the average product value per agricultural laborer to US$1500 per laborer. This is a very ambitious target, which implies real structural change within the rural sector. 3.32. Experience from other countries suggests that value added per agricultural worker tends not to rise until employment in agriculture falls. In Korea, for example, employment in agriculture dropped dramatically between 1980 and 1990 and was absorbed by the industry and service sectors in both rural and urban areas. This was mirrored by a leap in the value added per agricultural laborer (Figure 3.5). 49 Chapter 3 - Transforming The Rural Economy As employment in agriculture drops ... ... value added per worker increases Korea: Employment by sector, 1980-1997 Korea: Value added per worker, 1 AWUlt 1980-1997 14000000 1 =5icest_ +3 110000000 Z; 30000hdsb 10000000' .o 3WO000IvkeA 1200M 3M~~~~~~~~~~~~~Q 20000tf 800000D >200 = 4000000 200M ~~~~~~~~~~5000 1980 199D 1991 1992 1993 1994 199S 1996 1997 9 80 S90 WI S92 II 03 S94 S9 7| Figure 3.5: Korea: Employment and value added per worker by sector 1980 - 1997 Source: World Development Indicators (World Bank, 2000c). 3.33. In Vietnam, however, employment in agriculture has stayed constant over the last decade and this is reflected by almost no improvement in the value added per agricultural laborer (Figure 3.6). Moving workers out of agriculture into the industrial and service sectors in rural and urban areas will be an important part of raising labor productivity in agriculture. With stable employment in agriculture ... value added per worker hardly changes Vietnam: Employment by sector 1990-1999 Vlelj Value added per worker. 1990-1999 _ AgnutrWe 30000. -4-~sr 2500 - MOD elco2~0n&jizy 20000- 0 .00 Se c mmroo0 - 15.00 -10.001 )000UD.4 1990 1991 19#2 1 1994 1995 1996 1997 1996 1999 Figure 3.6: Vietnam: Employment and value added per worker by sector 1990 - 1999 Source: MOLISA and GSO statistics. 3.34. Shrinking landholdings in some parts of the country and the emergence of rural landlessness in other parts emphasize the need to create more opportunities for rural households to diversify income sources off the farm. Participatory Poverty Assessments conducted last year in four parts of Vietnam reflected farmers' concerns about small landholdings and the prospect of still smaller landholdings for their children (Vietnam: Voices of the Poor, World Bank, 1999b). Proposals included in the Hunger Eradication and Poverty Reduction (HEPR) Program for 2001-2005 to find land for households who have already lost land will not address the underlying problem: one square kilometer of arable land in Vietnam supports more people than 50 Chapter 3 - Transforming The Rural Economy almost anywhere in the world. Only six countries have greater population pressure on arable land than Vietnam. 3.35. The Chinese experience shows how diversifying income sources to include off-farm employment in rural and urban areas can help to stabilize household incomes and minimize risks associated with farm employment. Figures from rural China show that rising welfare is associated with having at least one household member engaged primarily in off-farm employment and demonstrate that off-farm income is the main factor driving rising living standards in China. In the areas of rural China included in the survey, even households in the poorest decile had a chance of having at least one off-farm income-earner, suggesting that the benefits of off-farm employment had reached to low income groups (World Bank, 1997b). 3.36. In Vietnam, agro-processing accounts for two thirds of all rural industry enterprises (ADB, 2000a). Recent agriculture sector reviews note the important role which agro-processing and related industrial services could play in adding value to agricultural output and in expanding, upgrading and diversifying demand for that output (World Bank, 1998 and ADB, 2000a). It can be a dynamic sector, making a strong contribution to industrial and export development. This is a small, but rapidly-growing sector, which receives some attention in the MARD strategy. During the 1990s, food-processing has driven growth in the agro-processing sector. Value added in food processing is estimated to have grown by a yearly average of 14 percent during 1991- 1997. 3.37. Actions which are identified in the Government strategy as priorities refer to investments to increase production and processing capacities for various products - presumably in state- owned enterprises. There is little attention paid in the strategy to overcoming current marketing weaknesses or in strengthening the linkages between suppliers and processors. These have been identified as key constraints to further development and growth by recent surveys and studies. The very limited access to information about markets severely restricts the potential of these enterprises to take advantage of growing opportunities (Box 3.3). Box 3.3: Small scale enterprises have problems finding information about markets Minh Duong Tea Processing Enterprise lies on a provincial road quite near the banks of the Yellow River only a few kilometers outside Yen Bai City. It is a small family-owned firm established in 1996. It has grown since its start-up and now employs about 20 people. It produces medium-grade black tea based on purchases of leaf from local tea gardens and estates. It uses small-scale but mechanized Chinese processing equipment, supplemented by manual techniques at some stages. It is an active firm, and large trucks are frequently in and out of its yard, deliveing leaf and shipping out processed black tea. The customers are Vietnamese tea-traders, who buy the lower grades for domestic markets, and the medium grades for the export market in China. The firm's owner, though, has very little direct knowledge of tea markets and conditions overseas. He regrets tis. For example, he would like to know more about the prices, markets, and technology of Sri Lanka teas. But he does not know how to go about getting such information, despite having access to some trade journals and being a member of the Yen Bai Tea Processors' Association. Source: Vietnam: Agricultural Sector Program (ADB, 2000a). 5 1 Chcapter 3 - Transforming The Rural Economy 3.38. Ensuring an Enabling Environment at the Local Level. Many of the steps required to promote private sector development in general are covered in Chapter 2. Provincial and district authorities will be key in ensuring that the reforms undertaken at the national level translate into an enabling environment for enterprise development in rural areas. Information and resources often take time to filter down to the local level and this could mean that reforms for enterprise development happen more quickly in some areas than in others. 3.39. If local authorities remain hostile to private enterprises and to SMEs in particular, perhaps objecting to the competition they will pose to local state-owned enterprises, then progress in developing this sector will be slow. The importance of local authorities in creating a conducive environment for private enterprise development is illustrated by initiatives undertaken by some dynamic localities, which has resulted in an active private sector. One step would be to encourage rural local authorities to see the emerging private sector as a force for local development and require them to demonstrate that they have incorporated measures for promoting its development in their plans as strategies. 3.40. The Poorer and Upland Areas may Require Special Support. The new Enterprise Law had by May 2000 already resulted in the registration of more than 5000 new enterprises (compared to 600 in the entire period 1995-1998). 18 percent of these were in the agriculture or forestry sector. By August a further 3000 new enterprises had been registered but a breakdown by sector is not yet available. A provincial breakdown is available, though, and this shows great regional variations in enterprise registrations. More than half i:he new enterprises registered are in either Hanoi or Ho Chi Minh City. Thirteen out of the 61 provinces have registered fewer than 20 new enterprises. Of these, nine are in the northern uplands region and a further one is in the north central coastal region. Both these regions have high rates of poverty. 3.41. A recent survey of SME enterprises showed that the management and ownership of these enterprises are male dominated. It is possible that women face more constraints than men in raising capital because they are less likely to be named as the owner of assets used for collateral (such as land and housing). This needs to be addressed. Concerted efforts to raise educational attainment and vocational school attendance by girls in rura]L areas could promote management skills for women. 3.42. Enterprise Reforms will Make Agro-processing more Competitive. Restructuring of SOEs is discussed in detail in Chapter 2. In the rural sector, the dominance of SOEs in agro-food processing is crowding out the development of private SMEs by absorbing most of the credit available. In 1998, only 15 percent of outstanding medium and long term loans made by Vietnam Bank for Agriculture and Rural Development (VBARD) to the corporate sector was held by non- SOEs (ADB, 2000a). Measures described in Chapter 2 which would allow a more competitive, market-oriented banking system in the rural economy are needed. 11.4 Target Remote and Upland Areas 3.43. Special attention is needed for the poorest areas. RuraL poverty is widespread but is much more severe in some regions than in others. High rates of poverty persist in upland, ethnic minority areas. 12 out of the 13 poorest provinces (with the poor comprising more than 60 percent of the population) are in upland areas (see the map in the Overview) and in these 12 provinces, ethnic minorities represent at least half of the population. This compares with an 52 Chapter 3 - Transforming The Rural Economy ethnic minority share in the overall population of 15 percent. Although ethnic minorities have enjoyed rising expenditures and improved socioeconomic indicators, improvements in their living standards lag well behind those for the majority population. Ethnic minority areas have benefited from targeted programs, but their effectiveness has clearly not been sufficient to address their persistent poverty. 3.44. Ethnic minorities suffer from multiple disadvantages, which interlock to make their poverty particularly intractable (Vietnam: Attacking Poverty, 1999). An ethnic minority farner is poorer, less educated and has less access to extension, health and credit services than a Kinh farmer. An ethnic minority farmer faces particular constraints in accessing information and acquiring knowledge and skills. Ethnic minority participation in policy making and planning, even at the local level, is inadequate. Not all of these problems can be addressed from within the agriculture sector and a much more coordinated approach to alleviating ethnic minority poverty is needed. 3.45. The current focus on "sedentarising" ethnic minority groups could usefully be replaced by much more intensive research into agricultural options for upland farming systems. This would need to be reinforced by extension services which are responsive to traditional knowledge and farmers' needs and which can disseminate information to non-Vietnamese speakers. Land titling measures that are more in line with ethnic community traditions, practices and systems of land use are also needed. 3.46. Ensuring that poor areas get a fair share of agricultural expenditure is also important. Currently, public expenditure in agriculture does not actively promote equity goals (PER, 2000a). While agricultural expenditures in Quang Binh were about US$2.5 per farmer, they were more than five times this level in Ho Chi Minh City. This situation arises because richer provinces have more fiscal flexibility to supplement transfers from central Government. There could be scope to address this imbalance within the framework of increased public resources for research and extension. III. OTHER INSTRUMENTS FOR RURAL DEVELOPMENT 3.47. Policy reforms and public investments in rural finance and rural infrastructure will reinforce other instruments - investments in research and extension; more efficient agricultural input and output markets; and a more supportive regulatory framework for SME development - which seek to create opportunities in rural areas. Overall financial sector reforms and infrastructure issues are discussed in Chapters 2 and 5, but there are some issues of particular significance to rural sector development, which are discussed below. 111.1 Financial Reforms for Rural Development 3.48. Deregulation of interest rates and a reduction in directed lending are priorities. Both farm households and rural industries are credit starved. Farmers need credit to buy high-quality seeds and to invest in new techniques, new activities and new crops. Recent household survey data suggest that two thirds of loans borrowed are used for production or basic construction (GSO, 2000). Entrepreneurs in rural areas need credit to establish small businesses and expand existing businesses. In 1997, only 33 percent of rural households had loans from formal financial institutions, including the Vietnam Bank for the Poor (VBP). Participatory research indicates that 53 Chapter 3 - Transforming The Rural Economy women are less likely to access formal sector credit than men. Very few Vietnamese private- sector agro-processing enterprises have access to loans of any significant size from formal financial institutions (ADB, 2000a). 3.49. Expanding the outreach of financial institutions so tfhat more rural households and more rural enterprises can access credit will require deregulation of the interest rates and a reduction in directed lending. The recent elimination of the interest rate ceiling moves the sector in the right direction. There is a growing body of evidence from microfinance schemes working within Vietnam that rural households, even poor rural households, are able and eager to take loans at unsubsidized rates of interest and repay them. Microfinance activities can be extremely important to households with limited access to formal sector financial services, including the poor and women. 111.2 Investments in Rural Infrastructure 3.50. Public investment in infrastructure will be important in creating opportunities. Government's 10-year strategy recognizes the importance of basic rural infrastructure as a pre- requisite for rural development. The particular importance of rural transportation, electrification, irrigation and rural service centers and markets - beyond the four growth poles - are noted. The World Bank's 1998 report Advancing Rural Development showed how rural infrastructure is underdeveloped and in poor condition due to decades of war, natural disasters, fiscal constraints and lack of a maintenance culture. The Government's Program 135, decreed in 1998, begins to address the gaps and weaknesses in public infrastructure in many of Vietnam's poorest rural communities. This Program has several objectives, but provision of essential public infrastructure to underprivileged communes is its initial priority. Implementing Program 135 in a way that is consistent with the Government's Decree on Grassroots Democracy, where communes are empowered to plan and take ownership of srmall-scale projects, is well aimed. 3.51. A review of donor assisted projects indicated raites of return to rural infrastructure projects often in the 20-35 percent range, evidence of a critical bottleneck (see Chapter 5 for a fuller discussion of infrastructure issues). Based on that review, key areas for policy change and investment over the coming decade are: * improve basic access for rural people to services, markets and facilities is essential based on continuing investment in rural roads, road maintenance, waterways and transport systems; * broaden the focus of investment in irrigation on agricultural diversification and make irrigation management companies autonomous and financially self supporting; * extend electrification below the district level to communes and villages, reduce distribution losses and raise reliability; * raise the level of access to safe drinking water from the current low level of 32 percent and reduce the high level of infant mortality due to inadequate hygiene and to reduce the workload of women; * address natural disaster prevention and mitigation to reduce loss of life and economic losses estimated at more than US$50 million annually; 54 Chapter 3 - Transforming The Rural Economy * close progressively the gaps in essential public infrastructure in communes and villages in remote rural areas by empowering communities through capacity building and further decentralizing responsibility for its provision and maintenance; and, * avoid infrastructure investments in response to centrally-planned cash crop production initiatives that are not market-determined and where Vietnam has no comparative economic advantage. 55 Chapter 4 - Enhancing Human Capacity CHAPTER 4 ENHANCING HUMAN CAPACITY Key Messages Over the past decade, Vietnam has made considerable progress in human development, which is reflected in increasing incomes and the impressive reduction in poverty. The goal of the Ten Year Socio-Economic Development Strategy is to build on this achievement and to reach higher and more equitable levels of human development by 2010. Social services need to be expanded and improved further to achieve this goal. A sense of urgency, political commitment, and a stronger coDrdination of the means and objectives of the different sectoral strategies are essential. In particular, there are five cross-cutting challenges with relation to the design and provision of social services: (a) Improving the quality of social services More important than a rise in the number of service providers anr measures to increase the quality and motivation of service suppliers, particularly at commune and district levels. Client-oriented services are key: public health services should be more responsive to the needs of patients, and education should promote creative thinking to meet the demands of a moderf economy. The need to develop a comprehensive and modernized curriculum to prepare young generations of Vietnamese for the challenges of the 2 1 ' Century must also be addressed. (b) Ensuring equitable access by all groups of the population Equitable access to social services and safety nets is crucial. Accessibility is particularly important for vulnerable groups. Access to health services is hampered by high user fees, while health insurance has low coverage and the exemption system does not work properly. Goverunent's proposals to introduce prepayment mechanisms for health services marks sound progress. The collection of contributions and fees for basic education should be reviewed and accompanied by secial clauses for the poor. (c) Improving the access and the use of information and informalion technologies Information is crucial for enhancing human development. Accessibility of social services will be improved by providing information on social services and on people's entitlements to use them. Information is also a service per se, allowing people to make well informed choices, for example in family planning and reproductive health, and policy makers to target services efficiently. Finally, the use of the Internet and modem information technologies should be promoted, and librawy systems and infiastructure should be strengqhened. in order to facilitate the emergence of a knowledge-based economy. d Raising public investment in social sectors and diversfying ini'o new sources offunds Increasing public spending on social services and improving the poverty focus is crucial to ensuring higher standards of quality and coverage. In the health care secor, shifts in resource allocation between provinces as well as between different health care levels need to be explored. Alternative sources of financing for social services may be found, such as health insurance, people's contributions and private sector payments, but such arrangements must be managed to avoid an overburdening of the poor. (e) Establishing appropriate roles for the state and non-state sectors There is a need to better define the roles and responsibilities of the state and non-state sectors. While the Government has a responsibility to ensure universal basic education, private parties may play a constructive role in the provision and financing of higher education and vocational training. An important role for the state sector remains in encouraging the market to work and in ensuring and monitoring the quality and accessibility of the services provided. 56 Chapter 4 - Enhancing Human Capacity I. TARGETS FOR HUMAN DEVELOPMENT 4.1. The Government of Vietnam places human beings at the center of development, promoting human potential and the well-being of all and this is reflected in the success of the doi moi reforms and in the new Socio-Economic Development Strategy 2001-2010. This approach is in line with the human development perspective, which defines development as the process of expanding people's capabilities, the set of choices people have available, and ultimately the freedoms people enjoy to determine their overall well-being. This is particularly important for the vulnerable groups of the population and the poor regions of the country (see Box 4.1). The Human Development Index (HDI) is an attempt to measure the achievements in three key components of human development: education, health and standard of living. The annual Human Development Reports rank countries based on this composite index. Over the last ten years Vietnam has made considerable progress, and currently ranks 108th out of 174 countries.13 Box 4.1: Income is only a part of the development story Equity is a key concern of the Government and is at the center of the human development process. In Vietnam, there are significant territorial disparities in terms of human development. These disparities express themselves clearly when comparing the Human Development Indices (HDIs) of the 61 provinces in the country, which have been calculated on the basis of Vietnamese regional data (NCSSH/UNDP, 2000). Not surprisingly, the figures show that Ha Noi and Ho Chi Minh City rank highest. More remarkable is that they reach levels of human development comparable to those of successful transition economies like Poland, Estonia and Croatia. At the lower end, however, provinces like Ha Giang and Lai Chau fail to score much better than Laos, Bhutan and Nepal. A more thorough look at the results reveals that the relation between GDP per capita and HDI in each province is not always strong. An Giang and Tra Vinh in the Mekong Delta, for example, have very low HDIs when compared to average incomes, while Nam Dinh and Ha Nam in the North have comparatively high HDIs relative to average incomes. While income is a key determinant of development, it is not the sole determinant of progress in human development. This suggests that a policy that centers solely on economic growth will not be sufficient to achieve higher levels of human development and to reduce disparities across the country. Growth has to be broad-based, safeguarding equal education opportunities, health care and social safety nets. 4.2. The Government's Strategy aims to "substantially improve" Vietnam's HDI through a wide range of measures to: (i) double GDP by 2010 and lower the population growth rate from the current 1.5 percent to 1.1-1.2 percent a year; (ii) ensure that all children at the age of primary education attend school, and universal access to secondary education in the whole country; (iii) raise longevity from 68 years to 70-71 years. Fulfilling these objectives implies, ceteris paribus, that Vietnam would reach a similar HDI level as Thailand today, which ranks 76th. Since a number of other countries will improve their position as well, it is obvious that policies need to be far more rigorous to achieve this position over the next ten years. Government is taking its responsibility to bring the country further on the path to development, by setting human development targets which are very much in line with the internationally agreed development 13 Human Development Report 2000, (UNDP, 2000a). The HDI comprises GDP per capita in PPP dollars; life expectancy at birth; the combined enrolment ratio in primary, secondary and tertiary education and adult literacy. 57 Chapter 4 - Enhancing Human Capacity goals (IDGs) for 2015 (see Box 4.2). Vietnam is ahead of the schedule in meeting some of these targets, such as primary education enrolment. Box 4.2: Vietnam's targets in human development are in line with the International Development Goals 1. Reduce the proportion of people living in extreme poverty by half between 1990 and 2015; 2. Enrol all children in primary school by 2015; 3. Make progress towards gender equality and empowering women, by eliminating gender disparities in primary and secondary education by 2005; 4. Reduce infant and child mortality rates by two-thirds between 1990 and 2015; 5. Reduce maternal mortality ratios by three-quarters between 1990 and 2015; 6. Provide access for all who need reproductive health services by 2015; and, 7. Implement national strategies for sustainable development by 2005 so as to reverse the loss of environmental resources by 2015. Source: OECD/DAC 1996; IME, OECD, UN and World Bank (2Q00). 4.3. The Government is currently devising a number of long-term sectoral strategies for human development: the Education, Science and Technology and IT strategies, the Population, Reproductive Health and Health Strategies, and the targeted poverty reduction (HEPR) Strategy. While each of these strategies contain a number of strong policy messages, the sectoral strategies suffer from a lack of coherence and mutual consistency in terms of their specific policies and targets. In order to address these weaknesses, the Government could adopt a number of key common policy issues in the formulation of the different strategies. Therefore, this chapter has chosen a set of four key concerns to discuss and comment on the various Government strategies: education and knowledge (section 2); health and population (section 3) and targeted anti-poverty programs and safety nets (section 4). These cross-cutting themes are: * Quality of social services; * Equitable access by all groups of the population; * Financing (the need to raise Government spending on social sectors and to diversify sources of financing); and, * Role of different actors in service provisioning. II. EDUCATION AND KNOW'LEDGE 4.4. A key component of human development is education and knowledge. These not only directly increase people's capabilities and choices but also create human capital, which is an important engine of economic growth. In order to respond to the demands of industrialization and modernization of the country, the Government's Development Strategy formulates a broad range of objectives for education and training. Among others, it aims to: * consolidate the achievements of the illiteracy eradication and primary education universalization programme; * provide universal access to lower secondary education; 58 Chapter 4 - Enhancing Human Capacity * create an enabling environment for distance education and life-long learning; * modernize teaching methods and upgrade the quality of staff and school infrastructure; * improve the skills of the labor force, of scientific and technical workers and managerial staff as well as rural and agricultural workers. 11.1 Education Strategy 4.5. The draft Education Strategy to Year 2010 elaborates on these objectives, with special attention to disadvantaged areas and poor people. It clearly reflects Vietnam's ratification of the Convention on the Rights of the Child, which supports the rights of all children to a basic education. Table 4.1 sunmmarizes a number of targets set in the strategy. The education strategy aimsfor high levels of educational attainment 2000 Target 2010 Adult literacy rate 94% 97% Net enrolment in kindergartens (5-6 years old) 81 % 98 % Net primary enrolment 92 % 98% Primary school completion rate 66 % 85-95 % Net lower secondary enrolment 74% 90% % of lower secondary enrolment in semi-public and private schools 2040 % Net upper secondary enrolment 38% 50% % of trained working labor force 19% 42% Table 4.1: Selected Education Targets Source: MOET (2000). 4.6. While goals are clearly outlined in the strategy, the concrete policies to reach these goals are still not clearly developed. Particularly lacking is a clear and categorical statement on the role and responsibilities of the state and the non-state sectors, which would facilitate the discussion on many issues in this field. It could, for example, point out that the Government has a responsibility to ensure basic universal education, whereas private parties may play a constructive role in the provision and financing of higher education and particularly vocational training. Also, while the strategy is comprehensive in the issues raised, there are concerns about the feasibility of the broad agenda and the need for selectivity is being voiced. In the following sections, a number of observations and recommendations can be made on a number of important issues. 4.7. Equity. Gaps exist in the Government education strategy on issues related to access, universality and quality of education. In the long run, one key goal would be to have a unified and inclusive curriculum for all children, where children would study in one school system with a full integration of disadvantaged groups. In the short run though, some groups will need special attention and issues of service quality and equitable access by different geographical, income, gender and ethnic groups should be addressed. Specific programs need to be developed to respond to the specific needs of standard-quality education and training for ethnic minorities, for example through bilingual education, and to lessen the gaps in quality of education achieved by 59 Chapter 4 - Enhancing Human Capacity different regions, income, and gender groups. School feeding programs might be expedient to create incentives for poor children living in upland and remote areas to attend school. Finally, participation of local communities, parents and children in ed.ucation management and planning is critical to sustained improvements in the sector. 4.8. Quality of Education Services. Overall education quality at all levels still needs improvement. The Government strategy does not define a clear national set of service standards for basic education that can be guaranteed to every pupil or specify a minimum performance level for each school. The regular measurement of the peri-ormance of the education system against such standards would result in an improved quality of services provided. These standards should therefore reflect outputs rather than inputs of the education system. Furthermore, the basic education curriculum could be modernized by moving away from the past approach of static learning that relies almost exclusively on the recall Df memorized facts, to a modem dynamic and flexible knowledge system that encourages creative and innovative thinking and makes use of the latest information technologies. Specific efforts should be taken to ensure that the reformed curricula are indeed implemented. Finally, the strategy contains a number of measures to improve the quality of lecturing staff, but it does not identify clear standards to appraise the performance of teachers. Also the crucial issue of availability of resources to finance higher teachers' salaries and rewards for teachers in disadvantaged areas needs to receive more attention. 4.9. The quality of training and vocational education is somewhat hampered by the organization and structure of this sub-sector. Currently, technical and vocational education and training is mainly a state-driven system that suffers from fragmented management, has a large number of uncoordinated external supporters, and does not s,ystematically respond to the needs of the labor market. A better approach would be to modernize general education so that it prepares school graduates who are directly employable, and to pass greater responsibility to employers to provide short and practical technical training to their employees through in-service and related technical training. Another suggestion to meet the economy's manpower needs is to attract a higher proportion of secondary school graduates, to public or private technical, vocational training institutions, or alternate training/work-experience courses offered by employers. This raises again the need to define better the roles of the state and non-state sectors. 4.10. Financing. The Government strategy projects that Stale budget expenditure on education and training will rise from 15 percent in 2000 (3.5 percent of GDP), to 18 percent in 2005 and 20 percent in 2010. Given the ambitious targets set, it is doubtful whether the planned budget will be sufficient to cover the costs of the envisaged activities. Notably, the construction of at least one primary and one lower secondary school in each commune, the connection of all schools to the internet, and full day schooling for all pupils will already (lemand considerable funds. Aware of these budgetary constraints, the strategy recognizes the need to acquire resources from the non-state sector and households. Although the strategy proposes to increase the number of non- state schools at the post lower secondary level and to mobilize contributions for education and training from businesses, it is ambiguous on the role of private financing and provision of education and training. One step would be to strengthen and clarify the policy framework to facilitate the private sector financing of education and training. 4.11. The strategy also proposes to collect tuition fees equal to 3 - 25 percent of the education expenditure of each student, which would add to the existing costs of school attendance. However, the Government's "socialization" strategy assumes high levels of cost-recovery in 60 Chapter 4 - Enhancing Human Capacity basic education without a clear mechanism to protect the poor from a disproportionate financial burden. The current policies of socialization are regressive and would need to be revised and accompanied by special clauses for the poor. Policies to ensure equitable access to higher education are also needed. With this aim, the State might consider introducing more explicit measures to ensure access to scholarships by students from poor families. 11.2 Knowledge for Development 4.12. The increasingly outward oriented doi moi reform process was primarily based on the exploitation of natural resources and low labor costs. Experience in the region shows that this is too narrow a basis to move quickly up the value chain to perpetuate the achievements of the last decade. Vietnam runs the risk of being caught in a 'low cost labor trap'. Moreover, low labor costs are rarely a durable source of comparative advantage, as competition is fierce with the continuous emergence of new competitors (MPI/UNDP/UNIDO, 2000). The Government is aware that the key question is no longer whether to integrate into the global economy, but how best to do so. The Government's Development Strategy 2001-2010 embraces the on-going revolution in technology and science, especially in information and communication technologies (ICTs), to facilitate the emergence of a knowledge-based economy and information society. ICT indeed holds great potential for human development, provided that public policies create an enabling environment and ensure broad access, especially for the disadvantaged and remote areas. It directly widens people's choices to participate in social and political life, offers new jobs, and enlarges consumers' choices. It will also fuel international competition, putting pressure on domestic sectors to be efficient and dynamic. 4.13. There is however a huge gap to bridge. The development of the ICT is severely hampered by a weak telecommunications infrastructure and low penetration rates (see Chapter 5). These, in turn, are due to limited public awareness, knowledge and political commitment, strong regulatory controls and relatively high user fees. The Development Strategy assigns a crucial role to new technologies. Priority is given to the development of domestic capacities to become self- reliant in information, biological and new material technologies. Special emphasis is given to boosting the software industry to spearhead the modernization of the economy, attracting inward investment and generating high value-added export products, in an attempt to emulate India's phenomenal success in this area. The drafts of the Science and Technology Strategy 2001-2010, the Master Plan on Information Technology (IT) Development 2001-2005 elaborate on these issues. I1.3 Assessment of Knowledge and IT strategies 4.14. Generally, the Government documents point in the right directions of decentralization and building of a knowledge-based economy. They contain ambitious targets. A number of issues deserve special attention. First of all, completing the strategies and putting them into practice require a high sense of urgency among a wide range of Government institutions, which is not evident yet. There is still considerable ambiguity with regard to the need and desirability of moving boldly towards a knowledge-based economy. The reluctance to remove the firewalls on the internet, reduce telecommunication tariffs, and allow competition among internet service providers are cases in point. These policies hinder the overall accessibility of the internet, prevent the fast development of a modem education system using new information technologies, and risk contributing to the digital divide between rich and poor (see Box 4.3). More 61 Chapter 4 - Enhancing Human Capacity specifically, it hampers the development of e-commerce, which would enable individual SME or networks of SMEs to be the driving force in technological learning. The Government Strategy focuses too narrowly on the development of the software irLdustry and should be broadened to include e-commerce. Box 4.3: Bridging the Digital Divide Through Education Globalization and rapid technological change have made kaowledge a critical determinant of competitiveness in the world economy. Countries able to seize the opportunities created by innovations in science, communications and computing technologies may be able to gain substantial benefits from them. However, the knowledge revolution also brings with it the threat of a widening gap between developed and developing countries--with disparities in access to knowledge and information, reinforcing existing differences in capital and other resources. The exponential rise of communications technologies has also exacerbated the divide between low- and high-income countries and the differences in access to television sets, personal computers and Internet access are considerable. In this dynamic context, the acquisition, creation, adaptation and dissemination of knowledge need to be explicitly built into a country's overall development strategy by: * updating the economic incentives that give countries the flexibility to compete in capital and labor markets and have access to the knowledge revolution; * putting in place a "human infrastructure" - the knowledge and education networks and the learning communities; * establishing a dynamic national information infrastructure, to include both "pipes" and the regulatory and competitive regime; and, * creating national innovation systems through which locals can acquire global knowledge, create and adapt knowledge appropriate to local circumstances, and disseminate it to those who need it. Formal education and life-long learning are at the core of this sirategy. A country's capacity to take advantage of the knowledge economy depends on how quickly it can become a "learning economy." Leaming means not only using new technologies to access global knowledge. It also means using them to communicate with other people about innovation. In ihe "learning economy", individuals, firms and countries will be able to create wealth in proportion to their capacity to learn and share. This requires fundamental shifts in formal education systems, where the focus needs to be on teaching people how to leam, as opposed to transmitting facts. This also requires a renewed emphasis on life- long learning to foster the virtuous circle of discovery, dissemination, and emergence of shared understandings. Governments will need to select a combination of old and new technologies to respond to their educational needs and improve the quality and efficiency of teaching and learning at a reasonable and sustainable cost. The application of ICT offers a tremendous potential: * an increased access to under-served areas through distance learning; * improved quality of teaching and learning, through appropriate software aimed at providing information, tools and interactive learning; * strengthened education management systems, through connecting educational administrations and providing real time data/indicators; and . shared knowledge among policy makers and other stakeholder; through well-organized knowledge management systems. 62 Chapter 4 - Enhancing Human Capacity 4.15. State and Non-State roles. A real market for science and technology that bridges the gap between researchers, scientists, producers and entrepreneurs is largely missing. Due to the dominance of supply-led approaches, costly mismatches between supply and demand occur frequently. To remedy this weakness, more incentives and market opportunities are needed, such as trade fairs, incubators, clustering and networking. This would not only enhance interaction between the institutions, but also promote sound competition. The experience of the Asian tigers shows that the critical mass of demand pull comes from new and often clustered SMEs (see Box 4.4). In Vietnam, however, the number and quality of SMEs is still too limited to be able to bring the country up the value chain. Box 4.4: Learning from the Asian Tiger Experience Although there is no simple blueprint for a technology strategy, the following key principles can be extracted from the successful experience of the Asian tigers: * Govenmment followed sound macro-economic policies, promoted an export-oriented industrialization and invested heavily in educational and technological infrastructure. * High initial priority in investing in scientific capacities is not strictly needed for technological advance as science played virtually no role in the East Asian success. * The leaming experience of East Asia was based on competition to manufacture goods for established markets, imitation rather than innovation being the entry point (which can be illustrated by the remarkably low number of patents recorded). * The low-technology side of high technology industries should not be neglected as leapfrogging from one vintage technology to the other rarely occurs. * Privately owned SMEs, often in clusters, took the lead in technological diffusion and employment creation, substantially supported by enabling Government policies. * The relative amount of FDI was small, but it had disproportionate multiplier effects to technological learming, and TNCs often acted as demonstrators and role-models. * Openness to large international buyers is important as they serve as important sources of technology and market information, which producers very much need. * Policies that build the problem-solving and innovative qualities of the nation's human resources are essential to guarantee continuous incremental innovation. Source: MPI/UiNDP/UNIDO, 2000. 4.16. Financing. Investments in science and technology amount to less than 1 percent of GDP, and fall short of the Government target level of 2 percent of GDP. Compared to other countries, direct Government support to R&D activities is very modest at an estimated 0.2 percent of GDP per annum. In addition, the R&D budgets are severely fragmented, resulting in too small amounts for individual research projects. The total IT budget is planned to reach 2 percent of GDP by 2005. However, it must also be underlined that the effectiveness of public spending is likely to be insignificant in the absence of strong, demand-led linkages to dynamic and competitive firms. Regulatory reforms and public spending are of equal importance. 4.17. Human Resources. A knowledge-based economy presupposes a knowledge-receptive population, where workers become the generators of new ideas, and take advantage of the leapfrogging nature of IT. This should ultimately constitute Vietnam's comparative advantage in this highly competitive field. However, the existing community of scientists are between 55 and 63 Chapter 4 - Enhancing Human Capacity 60 years of age on average, often trained under the Soviet-oriented learning system and work at modest wages. Primary and secondary curricula need improvement to ensure that the future labor force has the skills to use the tools of the new economy. The software industry particularly needs IT-specialists. Although the country boasts a growing pool of low cost mathematics and engineering talents, the Government estimates that more than ten times as many programmers are needed to achieve the targets in this field. III. HEALTH AND POPULATION 4.18. Although Vietnam's GDP per capita places the countiy among the low-income countries in the world, its vital health indicators are comparable to those of middle-income countries. This was achieved thanks to an extensive health care delivery network, with a well developed primary health care system, a large supply of health workers, and well-organized national public health programs such as the Extended Program on Immunization. Nevertheless, Vietnam faces a number of serious problems: * malnutrition, particularly among children, remains high (see Box 4.5); * infectious, vector-borne and communicable diseases are still prominent, though non- communicable diseases have become the leading cause of morbidity and mortality; * new or re-emerging diseases such as tuberculosis, dengue fever, Japanese encephalitis and HIV/AIDS are on the increase. The number of officially reported cases of HIV by September 2000 was 21,000, but unofficial estimates put the figure at 160,000; and, * changes in life styles, including an increased use of motor vehicles, tobacco, alcohol and illicit drugs, lead to new health problems. Accidents are set to overtake infectious diseases as the most common cause o1 mortality, whereas the number of drug users is growing rapidly. 4.19. Probably even more important than these nation-wide problems is the considerable and growing disparities in health status between different geographical regions and between population groups. Maternal and infant mortality rates among ethnic groups are much higher than the national averages. Data on access to and utilization of health care services confirm the increased inequalities between rich and poor households. A single visit to a public hospital of national quality can cost almost a half of the annual non-food expenditures of an individual in the poorest quintile. This can be compared to a cost equivalent to only 4 percent of non-food consumption for the richest fifth of the population (PER, 2000a). Formal arrangements fail to protect the poor. The health insurance scheme hardly covers lower income groups and the exemptions system does not work properly. The latter is ineffective in reaching those groups that are meant to benefit from it, and it is weakly targeted as higher income groups obtain a level of exemption only marginally lower than the poor. The exemptions from payment for drugs, either from a public facility or private pharmacy, are almost non-existent. The user fees in health facilities and the emergence of private practitioners and drug sellers have, given the weak exemptions system, led to a very high private spending on health (80 percent of total health spending), mainly concentrated on pharmaceuticals. Consequently, almost three-quarters of the poor rely on self-diagnosis and self-medication. Reports show an irrational use of drugs and an increase of anti-microbial resistance. 64 Chapter 4 - Enhancing Human Capacity Box 4.5: Building people's knowledge to solve the malnutrition puzzle in Vietnam Over the last decade malnutrition among children has decreased only marginally, from 42% to 37 % (NIN, 1999). The persistence of child malnutrition is a serious concern of the Government, which is drafting a specific strategy for nutrition over 2001-2010. It is in fact a perplexing phenomenon: while the country has grown to become the second largest rice exporter in the world, many families, particularly those in remote and mountainous areas, still suffer from regular shortages of food. Malnutrition does not only result from a lack of food. It is mainly due to the low quality of primary child health and nutrition services provided by health facilities and schools, and most importantly to people's low capacity and knowledge on how best to provide maternal and childcare. Many initiatives have been undertaken at the local level to increase parents' understanding and awareness about child malnutrition. LTNICEF has been supporting a community-based program in pilot communes to increase nutrition knowledge for mothers, to tackle Protein-Energy Malnutrition (PEM). Selected by the communes and trained in matemal, child and nutritional care, volunteers work as 'village nutrition collaborators'. They encourage antenatal and post-natal care, growth monitoring of children, provide nutrition education, and give food demonstrations to help pass on knowledge of better feeding practices to mothers. Mothers learn how to 'color the bowl' by introducing vegetables into the diet of young children. A menu is developed by the group of mothers who are asked to bring a small amount of food in order to participate in the preparation of nutritious meals for their children. This pilot programme has been regarded as successful in transferring knowledge to mothers on how to improve child nutrition. Similar programs have been developed by other organizations, notably by the NGO-Save the Children, US (SCIUS). Its research has shown that even among the most disadvantaged families, some manage to keep their children well-nourished and healthy. In the context of programs on nutrition education and rehabilitation, best practices in nutrition and health care of such families are identified, through a process called Positive Deviance Inquiry (PDI), and recorded, in order to replicate them with other households. The programs also take a preventive approach that focuses on pregnant women's health and education: healthy mother, healthy baby. SC/US maternal health and child nutrition programs are implemented by district and commune workers, who have been trained in 'training of trainers' courses at one of the SC Living University sites. These trainers return to their districts and conmmunes to train others, while SC/US continues to provide assistance by monitoring training and programme activities. 4.20. The Health Care Strategy 2001-2010 explicitly recognizes the need to invest in health for an accelerated socio-economic development and for improving the quality of life of every individual. Its goal is to improve the overall level of health among all groups of the population, with special attention to ethnic minority groups, women, children, poor and the elderly. In line with the Government's Development Strategy, life expectancy is projected to increase to 71-72 years. The main targets of the health strategy are presented in Table 4.2, together with a number of targets from the related population strategy (see paragraphs 29-34). The new health strategy is based on four principles: * equity and efficiency of the health sector; * fight against the broad social determinants of bad health; * integration of traditional and modern medicine; * appropriate public-private mix of service provision, with the Government in a position to protect the public interest. 65 Chapter 4 - Enhancing Human Capacity The health andpopulaton strategies have ambitious targetsfor qualty of life ..________________________________________ __ 1999 2010 Total population size (in millions) 76.3 88-89 Total fertility rate 2.3 2.0 Use of modern contraceptive among married couples (%) 56 70 Infant mortality rate (per 1,000) 37 25 Maternal mortality rate (per 100,000 live births) 100 70 Abortions (per 100 live births) 52 25 Life expectancy (at birth) 68 72 Table 4.2 Targets in health and population Source: Data from goverunental sources. I11.1 Health Strategy 4.21. As it stands today, the strategy provides a broad ba,sis for further planning and can be seen as an orientation document for improving the health sector, while protecting the legacy of the past. On many accounts, the strategy is basically sound and reflects many of the discussions that took place over the last few years within the Government and between the Government and the donor community. At the same time, it should also be noted that the strategy is very ambitious, especially in light of the existing institutional arrangements. At present MOH is in charge of setting health priorities and goals, but it has little control over the extent to which public spending is oriented towards these priorities. Thus, there is clearly a need to strengthen the role of MOH to oversee and guide the further development and effective implementation of the strategy. 4.22. Prioritization and Region Specific Targets. A number of substantive issues should receive further attention in the annual and five year health plans. The first is prioritization. The strategy does not provide sufficient information on the main health priorities the Government intends to address in the next decade. Precise information on the health status of the population and particularly on regional and socio-economic disparities in health should be the basis for setting health priorities. This would also enable the Government to formulate region specific targets, which would allow for more realistic and tailored programs for disadvantaged regions, especially in the light of the significant territorial disparities in health. Furthermore, health targets related to those problems which lead to premature and avoidable mortality, such as childhood illnesses, abortion, malaria, traffic accidents, etc. would help focus on the appropriate interventions. In view of the severity of the problem, HII//AIDS needs special attention and should be addressed according to international technical and ethical standards. As it is today, the strategy will probably be very effective in deploying modern public health measures like DOTS (Directly Observed Treatments) for tuberculosis, and immunization. However, it may be less effective in undertaking health interventions of a behavioral nature, such as proper weaning and child feeding habits, reduction of smoking, prevention of non-communicable diseases, etc. 66 Chapter 4 - Enhancing Human Capacity 4.23. Quality of Health Services. The Government strategy seems to underestimate the acute need to raise the quality of services, particularly at commune and district levels. Efforts need to be undertaken to improve the technical quality of services (through in-service training, supervision, quality assurance mechanisms, etc.). This must be accompanied by measures which make public health services more client-friendly, and this requires a wide range of activities promoting professional ethics and a culture of service. More important than a rise in the number of health workers are efforts to increase the quality and motivation of health workers, together with appropriate salaries and measures to eliminate unofficial fees. 4.24. Reorganization of Health Services. Service delivery posts and provision of outreach activities need to be developed in areas where they are limited and where many of the poor live. The low utilization of commune health centers in densely populated areas should also be addressed more rigorously. This implies a review of the role and organization of commune health centers and district hospitals. These facilities should provide the bulk of the preventive and curative services, including the coverage of new public health problems and of the aging population. Complementarities between the public sector and a well-organized and regulated private sector are worth exploring. 4.25. Regulation of Pharmaceutical Sector. A priority that is largely missing in the strategy concerns the regulation of the pharmaceutical sector and the implementation of the national essential drugs policy. As noted before, scarce resources, especially of poor people, are often wasted on unnecessary or even useless drugs. There is a need to provide patients with comprehensible and reliable information on drugs and correct doses. The enforcement of the national drugs policy will further lead to a more selective, and hence more cost-effective and healthier use of drugs. 4.26. Financing. At US$27.4 per capita or 8 percent of GDP, Vietnam has one of the highest levels of total health expenditure in Asia. However per capita public health spending, including health insurance and user fees, is modest: US$5.80 in 1998, which is much below international standards. The objective to raise Government health expenditures from the current 3.5 percent to 5 percent of the State budget by 2010 could be more ambitious. All reports agree that there is a need for more resources to improve provision and access of health services to the poor, which should mostly come from the national budget. Shifts in resource allocation between provinces (by transferring centrally allocated funds from richer to poorer provinces) need to be explored. The allocation of expenditures between different health care levels also need to be reviewed. An example might be to shift public expenditure from high-cost hospital-based services to district hospital and primary health care services, which may enhance the cost-effectiveness of public spending as well as the accessibility of health care services for poor households. 4.27. A closely related matter concerns the increase in user fees for hospital services, which has been a contentious issue in the on-going discussion on health care issues. The Government strategy now clearly chooses in favor of a gradual implementation of pre-payment mechanisms, which should replace user fees in the medium to long term. This is in line with international best practices (WHO, 2000). 14 Such a system would allow hospitals to treat people according to their 14 WHO's World Health Report 2000 considers prepayment the best form of revenue collection, particularly since out-of-the-pocket payments tend to be regressive and often impede access to care. Prepayment schemes may imply both (mandatory) insurance and public financing (especially needed to protect the poor), and do not exclude forms 67 Chapter 4 - Enhancing Human Capacity needs, without burdening the poor. However, the gradual irnplementation of such a system still needs to be accompanied by special measures in favor of the poor and vulnerable groups. 111.2 Population and Reproductive Health 4.28. Throughout the last decade the interrelationship between the growth, structure and distribution of the population and sustainable human development has been a major concern of the Government. By the end of 2000 a next major step will be made through the approval of the Vietnam National Population Strategy 2001-2010. It replaces the first population strategy of 1993, which primarily focused on fertility control and family planning. Its implementation bears particular relevance to the fight against poverty, since a lower number of children and longer spacing between births increase the ability of households, including the poor, to invest more on their children. Lower morbidity and mortality associated with numerous pregnancies and childbirths further help to protect the productive capacity of mothers, especially important in poor households. Finally, better and increased use of contraceptives reduces the number of unwanted pregnancies, thereby avoiding costs of abortion as well as related health risks. 4.29. The new strategy contains three overall objectives (see targets in Table 4.3): * move towards small and healthy families by maintaining the current fertility reduction trends as documented by the 1999 Population and Housing Census; * improve the quality of life of the population, as quantified by a substantial increase in the Human Development Index (HDI); and * establish a uniform and coordinated population management system, including a civil registration system. This will improve the data availability and assist the Government in managing urbanization, migration and labor force movements. 111.3 Assessment of Population Strategy 4.30. The new population strategy is a big step forward as ,;t goes beyond the scope of the 1993 strategy, to include new paradigms of the 1994 International Conference on Population and Development (ICPD) and of the ICPD+5. The strategy includes best policies and practices of other countries, approaches population issues from a holistic perspective, incorporates reproductive health and equality issues, and is linked to broader socio-economic strategies and related strategies, such as the reproductive health strategy (see Box 4.6). It underscores the need to strengthen institutional capacity, increase resources at all levels and promote people's participation in population issues. It also recognizes the need to include a large number of partners in its implementation, from civil society, to private sector and the international community. Finally, the strategy recognizes that past fertility declines under conditions of limited method choices, poor reproductive health services and over-reliance on coercive mechanisms will not be sustainable. Instead, smaller fam:ilies and slower population growth ultimately depend on free, well-informed choices through access to high quality reproductive health care services and appropriate information. of co-payment in cases where there is clear evidence of unjustified over-utilization. The Report also notes that prepaid arrangements are institutionally more demanding than out-of-pocket payments. 68 Chapter 4 - Enhancing Human Capacity Box 4.6: Reproductive health The population strategy already touches upon reproductive health issues. In addition, the Government is currently formulating the National Strategy on Reproductive Health Care 2001-2010. This strategy also follows the recommendations of the 1994 ICPD and the ICPD+5. Its overall objective is to ensure access to high quality reproductive health services and information for all men, women and adolescents no later than 2010. It explicitly aims to bridge the existing gaps between regions and population groups regarding access and quality of services and information, by giving special attention to disadvantaged groups and areas. Furthermore, women's and infant's health is given high priority, together with appropriate care for adolescent reproductive and sexual health. To this aim, it is planned to raise per capita expenditure for reproductive health by US$0.5 over the next decade. 4.31. While the strategy is comprehensive, the incorporation of additional components also creates new challenges for its implementation. Considerable financial commitments, planning and administration efforts, and strong political will are required for successful implementation, including a further harmonization and co-ordination with other strategies. Besides, there are some issues that deserve special attention. The first concerns gender, which is prominently dealt with in the strategy. It emphasizes the need to build and improve the legal framework to ensure gender equality and equal opportunities for education and employment. Also, it rightly stresses that male participation in reproductive health, family planning, and childcare needs to be strengthened to ensure gender equality within the family. 4.32. Quality of Services. Priority will be given to raise the quality of reproductive health care and family planning services to better meet clients' demands. This should sustain the fertility reduction trend, reduce the abortion rate as well as the number of persons infected with sexually transmitted diseases (STDs), particularly HIV/AIDS. Key measures are better preventive measures, such as counseling and information, education and communication practices, which need to become available in three-quarters of service delivery points, and the improvement of staff ability to provide quality services. Also special attention will be given to sexual education at schools to improve adolescent reproductive and sexual health (see Box 4.7). Box 4.7: Putting reproductive health in the spotlight Adolescent reproductive health is a difficult issue for policy makers to handle. By many, sexuality is viewed as a sensitive topic. Too sensitive, some think, to be introduced to young people. However, in September 2000 an "Advocacy Night" was arranged at the Hanoi Opera House as part of the EC/UNFPA Reproductive Health Initiative. During that night, the young Vietnamese not only showed that they were aware of many reproductive health and sexuality issues, but also expressed the belief that keeping relevant information away from them endangered their lives. The event highlighted artwork on reproductive health done by young people, and featured performances that were adapted from essays by The Youth Theatre. The artwork and essays were the products of a contest entitled "The Future of Adolescent Reproductive Health". It was open to young people coming from northern Vietnam and received over 1,090 entries. The purpose of the advocacy evening was to show to Vietnamese policy makers that adolescents had opinions about their health and to advocate for their inclusion when reproductive health policies are fornulated. More than 180 policy makers and development workers attended the successful event. 69 Chapter 4 - Enhancing Human Capacity 4.33. Financing. The per capita expenditures for populati'on issues from the state budget is planned to be maintained at the present level of US$0.6. The expectation is that the state's contribution to the total budget will decrease from its current level of 80 percent. The Government Strategy therefore intends to collect fees fcor reproductive health and family planning services from individuals who are able to pay, and to charge organizations, social groups and individuals receiving information on reproductive health and family planning. The fees collected will be reinvested in the sector prograrns and services to improve their sustainability and to enhance social equity. IV. TARGETED ANTI-POVERTY PROGRAMS ANqD SOCIAL SAFETY NETS 4.34. Raising the standard of living for all is the third key dimension of human development. For Vietnam, poverty reduction is clearly one of the main challenges over the coming decade. The Government has set the targets to eliminate chronic hunger by 2005 and to reduce the proportion of poor households from an estimated 17 percent in 2000 to 5 percent in 2010, using the new MOLISA poverty line. While these targets seem ambitious, World Bank estimates indicate that their realization is potentially feasible, provided adequate policies are put in place. Growth is a key ingredient, hence the target of doubling GDP by 2010, but it needs to be labor- intensive and equitably distributed among the population and between urban and rural areas. In addition, targeted interventions must be put in place to respond to the specific needs of the poor and prevent a further widening in poverty gaps. To reduce poverty and improve people's livelihoods, the Government has recently been devising nev policies and programs. They are contained in three key documents, prepared by MOLISA and MPI: * The Ten Year Hunger Eradication and Poverty Reduction Strategy 2001-2010 (HEPR Strategy), which is the Government's targeted poverty reduction strategy; * The Five Year HEPR Plan, which is an action plan based on the 10 Year HEPR Strategy and contains a set of fifteen targeted policies and projects aimed at reducing poverty over the next five years; and * The Interim Poverty Reduction Strategy PFaper (I-PRSP) which adopts a comprehensive approach to poverty alleviaticn, and attempts to link poverty reduction to growth and macro, structural, sectoral, and social policies and programs. IV.1 HEPR Strategy 4.35. This section will address a few key issues related to the HEPR Strategy. The general goals of the strategy are to increase poor households' income by improved access to productive assets, public services and social safety nets. To realize these goals and to reduce poverty as planned, the strategy proposes a relatively narrow set of instruments in the form of fifteen anti- poverty targeted interventions.15 While these projects are essential components of a poverty strategy, they represent only one specific component of a cornprehensive poverty strategy, which should address key policies to create an environment conducive to poverty reduction. The HEPR Strategy must therefore be seen as a rather specific and targeted poverty reduction strategy, 15 The 15 interventions of the HEPR Strategy are the same as the targetecl projects of the HEPR Plan. Many of these interventions have already been mnning over the past years. 70 Chapter 4 - Enhancing Human Capacity which should be complemented by a more comprehensive strategy addressing issues of growth, employment creation and macro policies for poverty reduction (as is being done in the I-PRSP). 4.36. The HEPR strategy suffers from a number of important weaknesses, notably: unclear institutional arrangements and division of responsibilities between Ministries; inappropriate targeting of assistance and insufficient monitoring and evaluation; and limited participation and decentralization. It might also be argued that the set of targeted interventions in the strategy are not the most effective and suitable to reduce poverty. 4.37. Institutional Arrangements: MOLISA is the focal point for the strategy, and the day-to- day administration of the strategy is in the hands of the national HEPR office under MOLISA. However, the principle responsibility for the formulation of concrete policies and projects as well as the provision of funding lies with each line ministry, and the responsibility for implementation of HEPR policies and programs lies with provincial authorities. This fragmentation of the program's administration clearly undermines its efficiency. Three options can be suggested to improve the HEPR institutional structure: * Strengthen the position of the HEPR office by moving it to the Government Office and assign to it supervision of HEPR projects, policy development, monitoring, and training. * Keep HEPR central office in MOLISA but restrict its role to conducting targeted projects with regard to social safety nets, disaster management, monitoring as well as providing implementation guidelines, and training to HEPR staff. * Decentralize coordination and management of HEPR activities to provinces and assign the role of policy design and monitoring and evaluation to MPI, and training to MOLISA. 4.38. Targeting. The set of HEPR projects contained in the strategy are not clearly targeted to the poor. Subsidized credit programs (through VBP), which is a major component of the HEPR 1 6 programi , for example, have not always resulted in improving access for the poorest sections of society. More precisely, the strategy should include much clearer definitions of target groups and should distinguish between the particularities of different groups of poor to better respond to their needs: women, households in crisis, children in hunger, ethnic minorities (see Box 4.8). The geographic targeting of HEPR assistance also needs clarification. Over the past two years almost all (90 percent) of the assistance has been provided to the 1,000 poorest communes, that are almost exclusively located in remote, upland or border areas (UNDP, 1999). Utilizing resources in this way excludes a number of poor, lowland communes. Also, while the targeting of funds to poor communes is efficient and realistic for certain activities, such as infrastructure, a broader coverage might be desirable for other components, such as credit, education or health. 16 While the strategy contains 15 different targeted projects, 52 percent of the resources are devoted to credit, part of which is used for the subsidization of interest rates. 71 Chapter 4 - Enhancing Human Capacity Box 4.8: Better poverty measurement for a better targeting of poor households One of the main limitations of the HEPR Plan is the weak identification of HEPR beneficiaries and the inappropriate measurement of poverty at the national and local levels. One way to address these issues might be to devise a "two-level" poverty line. An extemal institution, like the General Statistical Office (GSO), would be responsible for assessing poverty and imonitoring trends at the national and provincial level, using a poverty line close to intemational standards. At the local level, IEPR staff would be responsible for identifying eligible households for direct assistance, through a different method. Instead of identifying the poor through locally managed surveys of households' income, an approach which integrates qualitative evaluation of living standards could be adopted, using an easy- to-fill-in checklist of key socio-economic indicators that measure overall welfare, While GSO would be responsible for national poverty monitoring, the monitoring of the various HEPR interventions could be assigned to MOLISA, using the information gathered at the local level by the HEPR staff. For this, a set of program performance indicators and reporting systems is crucial. In parallel to the collection of data, poverty assessments and analysis of data need to be conducted regulary by line agencies and independent institutions. Finally, the HEPR Plan should provide mechanisms to allow for independent evaluations of its implementation. 4.39. Participation. The HEPR Strategy reserves a rather narrow space for the participation of people and communities and does not define clear roles for all potential actors. Planning and decision making functions are only assigned to central authorities, and people's initiatives at the grassroots level, such as savings groups, receive little attention. Specific tasks, such as information collection, awareness raising, monitoring of results, maintenance of infrastructure, delivery of certain services (such as credit), could be assigned to mass organizations, as they have a strong network at the local level. Essential to greater participation are: the need to improve two-way information sharing between Government and communities; capacity building of communities and local governments in participatory planning; and improvements in public administration and local democracy, through the implemenlation of the Grassroots Democracy Decree (see Chapter 7). 4.40. HEPR Targeted Interventions. While the HEPR stbategy clearly identifies a number of problems and weaknesses of the existing targeted poverty interventions and highlights a number of challenges in the fight against poverty, the set of fifteen targeted anti-poverty projects in the strategy do not reflect the lessons learned from the past and from international experience. In addition to the fact that many of these interventions are not clearly targeted to the poor, the logic, coherence and comprehensiveness of the set of anti-poverty activities in the strategy are not obvious: activities range from policies concerning credit, legal assistance and safety nets, to projects related to infrastructure and staff training. More importantly, the set of interventions neglects a number of key policy areas, notably: * promotion of off-farm employment creation for higher productivity and incomes; * people's participation and two-way information; * gender equality (raising gender awareness and women's involvement in community- based planning); and, * the increasing problem of urban poverty (as a separate component or a cross-cutting issue). 72 Chapter 4 - Enhancing Human Capacity 4.41. Finally, the HEPR strategy does not sufficiently take into account experiences and lessons learned both nationally and internationally, which would make its implementation more effective. The note from the Poverty Working Group in Part II of the Report outlines a selection of key recommendations for each targeted intervention of the strategy, most of which have been brought forward by the international community in its discussions with the Government. IV.2 Social Safety Nets 4.42. While the share of the Government's budget spent on social safety nets (SSN) is relatively high for a low income country, the main weakness of the system is that the majority of the beneficiaries are not the poor. The reason is that the largest share of spending on SSN is directed towards Social Security and Special Transfers, which benefit the former State sector employees and the war veterans. The only formal protection available for the poor consists of the Fund for Pre-Harvest Starvation and Disaster and to a smaller extent the Fund for Regular Relief, which receive relatively low funding from the central Government. In addition to the weak targeting and low coverage of the poor, the arnount of the grants provided under the two Funds reaching the poor is modest, as it depends on limited local budgets. Also, none of the existing safety net mechanisms addresses in an appropriate way social costs of reforms and community risks.'7 Weaknesses of the social safety net could be addressed in a nurnber of ways (Table 4.3). Table 4.3: Strengthening the safety nets in the interest of the poor Financing * Gradually shift central Government expenditure from high spending in Special & coverage Transfers towards social assistance benefiting the majority of the poor and poor provinces; * Implement fjscal reforms to mobilize and transfer resources from richer to poorer provinces; * Encourage private, community andfamily-based welfare provisioning in parallel to formal SSN; * To allow an adequate replenishing of the Disaster Relief Fud, separate it from the Pre-Harvest Starvation Fund and use it only in times of disasters. Targeting * Increase means to monitor eligibility and receipt of entitlements and improve information systems; * Boost administrative capacity at central and local levels to improve targeting and coverage of SSN, and to better interact with civil society. Community * Establish an independent Contingency Fund for community-wide problems, shocks largely funded by central transfers in poor provinces and cost-shared in less poor provinces, with decentralized decision making for fund use; * Increase effectiveness of disaster management through capacity building in management and monitoring and evaluation, and through improved coordination with international agencies. Household * Increase the use of self-targeting employment schemes linked to the construction level shocks of public infrastructure; * Emphasize savings mobilization rather than only credit provision, through provision of facilities to enable accumulation of savings by the poor. Social costs * In the context of SOE reform, improve redundancy packages, to facilitate of reforms voluntary separation from SOEs with redundant labor (see also Chapter 2). Source: MPWUNDP (2000); Preston (1999). 73 Chapter 4 - Enhancing Human Capacity 4.43. A typical example of community risks is natural disasters, which constitute a major cause of poverty and vulnerability in Vietnam. While the warning system for natural disasters is quite strong, and the delivery of emergency relief assistance to mitigate the impacts of disasters on people is relatively efficient, these could be improved (see Chapter 5). One of the most pressing need is to have an adequate disaster rehabilitation system that could restore people's livelihoods, and rehabilitate social services and infrastructure. Currently, disaster rehabilitation is managed in a rather uncoordinated way by different line ministries. After being hit by disasters, provinces receive financial assistance on an ad hoc basis. To improve the provisioning of rehabilitation assistance, a permanent Disaster Rehabilitation Fund needs to be set up, which could be supported by donors. Such a fund should be easily accessible by provinces hit by disasters, and would enable the population to better manage risks related to external and community shocks. 74 Chapter 5 - Providing Efficient Infrastructure Services CHAPTER 5 PROVIDING EFFICIENT INFRASTRUCTURE SERVICES Key Messages There have been dramatic increases in infrastructure services over the 1990's, which have contributed to Vietnan's rapid growth, international trade, and poverty reduction during this period. But Vietnam still lags behind low-income country averages in energy, transport, telecommunications and information infrastructure. If the Govermment is to attain its vision for the infrastructure sector in the coming decade, it will need to adopt a four-pronged strategy. (a) Prioritize the ambitious infrastructure investment plans for the coming decade Achieving the targets set out in sectoral strategies for transport and energy implies investment of USS3.4-3.9 billion per annum for these two sectors alone - equivalent to the size of the entire Public Investment Program (PIP) historically. This is clearly unaffordable. A core, high priority program should be identified and funded. (b) Improve access to basic infrastructure services in rural and remote areas More than half of the PIP (1996-2000) was directed to the Red River Delta and the South East. The Central Highlands and Northem Uplands - two of the poorest regions - together received about 12 percent of the PIP. This allocation does not support a balanced growth strategy. A projected urban population of 30 million people by 2010 indicates a pressing need for improved infrastructure if cities are to be "livable". But rural-urban imbalances in access to transport and energy need to be addressed. The urban 20 percent of the population consumes 86 percent of its electricity. Rural transport was allocated only 1.5% of the last transport PIP, one eighth of amount required to meet rural needs. (c) Diversify the sources offinancingfor investments Historically, international donors have financed a large share of infrastructure investments, but this is likely to decline. This will pose a funding constraint. Expanded private participation could be a source of financing and provide incentives for greater efficiency or quality of services. But a number of short-, medium-, and longer-term actions will be required to attract private participation in infrastructure in Vietnam. Appropriate pricing policies will generate more self-financing investnent by SOEs and encourage private investmnent. (d) Improve the management and suslainability of investments Investment in infrastructure generates high returns in Vietnam. But the scope for efficiency gains from reducing waste and improving performance is considerable. 20 percent of produced electricity and 30 percent of piped water is lost before reaching consumers. Improving sector and corporate governance and a stronger commitment to maintenance are urgentl) needed. 75 Chapter 5 -- Providing Efficient Infrastructure Services 5.1. Growth in infrastructure services is essential for sustainable and equitable growth of the economy. Vietnam started from a low level of these services. Though much has been achieved in the past decade, the next decade presents challenges of a (lifferent magnitude and complexity. Increasing access to, and reliable supply of, infrastructure services will be absolutely essential for enhancing household welfare, supporting economic growth and increasing income in Vietnarn. Without efficient and adequate infrastructure for households and commercial activity, it will be impossible to reduce poverty in Vietnam or achileve the target rates of growth. The financing pattern of the past, where international donors and government budget provided these financial resources, will no longer be sustainable. This will require increasing investments from private sources of finance. Mobilization of private resources - domestic and foreign - will require significant structural changes in the sector as well as major policy reforms. 5.2. The Government is currently preparing deltailed strategies and plans for infrastructure.18 These strategies and plans will be extremely important in contributing to Vietnam's overarching objective of rapid growth and poverty reduction. Inadequate service levels and quality remain serious constraints to development and competitiveness. And unequal access prevents the poor and those living in remote areas from benefiting fully from the fruits of development. I. PAST SUCCESS AND FUTURE NEEDS 5.3. Investment in infrastructure has high returns in Vietnam, as does improving the efficiency and access of infrastructure services. Despite being rich in primary energy resources, more than half the rural population in Vietnam has no access to electricity. Per capita consumption of commercial energy remains one of the lowest in the world. The transport system-notwithstanding substantial improvements in the past decade-is over-stretched, adding to costs and preventing many upland and rural areas from sharing in the benefits of Vietnam's growth. Water supply and sanitation facilities will require investments and efficiency improvements to keep up with accelerating urban population growth and industrial demands. Currently, limited competition from private providers generates few economy-wide pressures for enhancing infrastructure performance. 5.4. There have been dramatic increases in infrastructure services during the 1990s which have contributed to Vietnam's rapid growth, international trade, and poverty reduction during this period. In transport, freight carried on roads and railways more than doubled; on inland waterways grew by 70 percent; and coastal shipping grew six-fold, overtaking railways in terms of freight carried (Figure 5.1). In energy, electricity generation almost tripled and crude oil production multiplied five and a half fold. Access to electricity rose from 47 percent to 75 percent of the population, while crude oil became a major export commodity, accounting for 18 The different institutions in charge of the different sub-sectors of infrastructure-such as energy, transport, water, etc-are preparing separate strategies for each of these sub-sectors. Thus, the Ministry of Transport (MOT) is preparing the National Transport Strategy up to 2020, the Minist-y of Planning and Investment (MPI) is coordinating the energy strategy, and the Ministry of Construction (MOC) is preparing a strategy for urban development and the provision of adequate infrastructure to urban dwellers. These sub-sector strategies, however, have the common long-term goal of improving the quantity, quality, and access in the supply of infrastructure services for the Vietnamese population. 76 Chapter 5 - Providing Efficient Infrastructure Services one-fifth of the country's foreign exchange receipts. Increased public spending and institutional reforms contributed to this dramatic increase in infrastructure services. VTetnam's infrastructure has improved dramatically during the last decade Transport Output 1990 and 1999 90 82 80 21990°1999 Energy ~ ~ Mgg Ou131l90an l9 DO 70 - i 30 - 20- 10_ Roads Inland Waterways Coastal Shipping Rail Energy Output 1990 and 1999 250 Mlg 399220 200 - 150 100 50- 924 20 Electricity Generation (,000 GWh) Offshore Crude Petroleum Production (million of barrels) Figure 5.1: Increase in Infrastructure Capacity 1990 - 1999 Source: Statistical Year Book (GSO, various years). 5.5. Despite these increases in stock and services, however, Vietnam's infrastructure needs remain considerable. Its existing infrastructure stock lags behind the average for many low-income countries and is more inefficient than other countries (Table 5.1). 77 Chapter 5 - Providing Efficient Infrastructure Services ietnam's infrastructure lags behind the average for low-income coantries and its needs remain high Infrastructure Vietnkam Low Income country _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _a v e ra g e ENERGY Electricity consumption per capita kwh 203 448 Transmission &distribution losses % of output 18 12 TRANSPORT Paved roads (%) 25.1 18.3 Railways-Passenger km per PPP $ million of GDP 21,841 33,653* (for Thailand) Railways-Good transported ton-km per PPP $ 11,3 67 8,835* million of GDP (for Thailand) TELECOMMUNICATIONS Telephone mainlines per 1,000 people 26 37 Telephone mainlines per employee 2( 121 INFORMATION Daily newspapers 4 13** Radios per 1000 people 107 206 Television sets per 1000 people (a) 47 138 Mobile phones per 1000 people (a) 2 8 Fax machines per 1000 people (a) _0.3 0.9 Personal computers per 1000 people (a) 6A4 6.2 Internet hosts per 10,000 people (b) 0.00 0.31 Table 5.1: Vietnam and Low-Income Country Infrastructure Indicators * Average for low-income countries not available. **Excluding India and China. Source: World Development Indicators (World Bank, 2000b) except for (a) which are from the World Telecommunication Development Report (International Telecommunication Union, 1999), and (b) which are from the Internet Software Consortium. 5.6. In the energy sector, not only is energy consumption per capita (203 kwh) half the average for low income countries (448 kwh), but the transmission and distribution losses (at 18 percent of output) are 50 percent more than the average (12 percent). In the transport sector, while the proportion of paved roads in Vietnam (25 percent) is better than the low-income country average (18 percent), the proportion of paved roads in "less than good condition" (91 percent) is more than four times the developing country average (20 percent). Compared with Thailand, for example, the railways in Vietnam carry only two-thirds of passengers (but 30 percent more freight) per dollar of GDP. And the telecommunication system is extremely inefficient: Vietnam delivers only 70 percent of the average number of phone lines to its population (26 lines per 1000 people) as other low-income countries do (37 lines per 1000 people), but with six times as many employees per line. 5.7. The information infrastructure, which is essential for Vietnam if it to harness global knowledge for its own development, is also limited. The number of newspapers, radios, 78 Chapter 5 - Providing Efficient Infrastructure Services televisions, mobile phones and fax machines are all below developing country averages. In the new Information Technology (IT) sector, however, it is interesting to note that it is not so much in the area of "hardware" , such as personal computers, that Vietnam lags behind, but that it is the area of "software", such as access to the internet, that is the main problem. Hence, a policy environment that supports the free flow of information will be more important in this area than infrastructure investments alone. The importance of information and knowledge for Vietnam's development has already been dealt with in the Overview and Chapter 4 and the remainder of this chapter will focus on the more traditional infrastructure sectors. 5.8. Long-term Strategy for the Infrastructure Sector. If the Government is to attain its vision for the infrastructure sector in the coming decade, it will need to adopt a four-pronged strategy: 1. Prioritize the ambitious infrastructure investment plans for the coming decade; 2. Improve access to basic infrastructure services in rural and remote areas; 3. Diversify the sources of financing of investments; 4. Improve the management and sustainability of investments. II. PRIORITIZE INFRASTRUCTURE INVESTMENT PLANS 5.9. In the Ten Year Socio-Economic Strategy, the Government has laid out an ambitious agenda for the infrastructure sector. During the coming decade, Vietnam aims to invest heavily in infrastructure and to close some of the gap with other developing countries. In the power sector, it aims to utilize further its potential in hydropower, gas and coal to generate balanced power supply. The 10 Year strategy states that Vietnam aims to complete Phu My as soon as possible and build a gas-electricity-fertilizer complex. It also aims to stem the losses from electricity transmission and distribution by modernizing the national electricity distribution system. These improvements in delivery also aim to reduce the high costs of electricity and make energy more affordable in Vietnam. 5.10. The Government has ambitious plans to upgrade and improve the transport sector, including roads, railways, ports, water transport systems, and airports. In the transport sector, the Government aims to complete the upgrading of Highway 1 and the construction of the Ho Chi Minh Highway. It also aims to improve the connections to neighboring countries by strengthening the roads connections, including border roads, and building river bridges. The Government aims to upgrade the railways system and open new lines that connect with economic centers. It would also like to improve the seaport system and add to the local port network. The strategy also calls for developing water transport systems and improving seaport capacity. And in the aviation sector, the Government would like to modernize international airports and upgrade domestic ones. 5.11. The Government's strategy also aims at taking measures to make roads safer and reduce traffic accidents, by enforcing the use of safety helmets. As pointed out in Chapter 4, accidents are set to overtake infectious diseases as the most common cause of mortality in Vietnam. The Government also aims at improving the quality of the environment by phasing out the use of unleaded gasoline from July 2001 (see Chapter 6). 79 Chapter 5 - Providing Efficient Infrastructure Services 5.12. Finally, in the area of water supply and sanitation, the Urban Strategy calls for reaching international average standards by supplying enough clean drinking water for all urban and industrial areas for over 80-85 percent of the population (up ifrom 65-70 percent currently) by the end of the decade. It also calls for solving the problem of sewage and waste treatment for most of the population of cities in the coming decade. These goals will be ambitious-and costly-- given the expected rapid pace of urbanization in the coming decade (Table 5.2). Added to these, of course, are the needs for water and sanitation and other infrastructure in rural areas, as discussed in Chapter 3 earlier and Section III below). Vietnam aims to improve the provision of urban infrastructutre services to it rapidly urbanizing population Indicator 2000 2010 Urbanization (proportion of population) 24% 33% Urbanization rate (eo increase) 5% pa (I99! -2000) 5.5% pa (2001-2010) Urban population 19 million 30 million Drinking Water 65-70o 80-85% Sewerage 80-85% Solid waste 100% Table 5.2: Targets for the Provision of Urban Infrastructure, 2001-2010 Source: Ministry of Construction (2000). 5.13. But these long term plans require major investments. It is estimated that to achieve the targets projected in the long-term vision of the Government will require total investments in the energy sector of approximately US$2-2.5 billion per annum. Of this, power sector estimates average annual investments of US$1.5-2 billion, with 52-58 percent for generation and 42-28 percent for transmission and distribution. Because the sector remains relatively backward, Vietnam will have to invest 5.3-5.5 percent of GDP in energy infrastructure-more than twice what its East Asian neighbors spend. These needs will place pressure on other capital expenditures. Thus, as discussed below, financing strategies will have to mobilize a range of domestic and external resources. 5.14. The transport sectors needs are also enormous. ]For the next decade, the Vietnam National Transport Strategy Study (VITRANSS) identifies a funding requirement of US$11.6 billion, which is equivalent to about 2.5 percent of cumulative GDP (Table 5.3). This figure includes some maintenance expenditure, but not all. If we add the additional maintenance to be spent by the state the total will go up to US$14.2 billion. rhis is equivalent to 2.8 percent of cumulative GDP for the ten year period 2001-2010. Historically, Vietnam has spent about 1.8 percent of its GDP on public expenditures in the transport sector. 80 Chapter S - Providing Efficient Infrastructure Services Infrastruacture investment needs in the transport sector are rather daunting and need to be prioritized carefidly Sub-sector Capital Maintenance Total _._ ___________ .US$ billion US$ billion US$ billion Urban 2.5 0.2 2.7 Rural 1.0 0.7 1.7 Inter-urban (2) 8.1 (3) 1.7 9.8 Total 11.6 2.6 14.2 (4) Table 5.3: Indicative Estimates of Capital and Maintenance Funding Requirements in the Transport Sector, 2001-2010, US$ billion (l) (1) Public sector investment only. Additional private sector and SOE investnent requirements of equipment, vehicles, and some fied infrastructure estimated at US$39 billion for the period. (2) Road, inland water ways, rail, ports, airports. (3) Disbursements to 2010; total project costs estimated at US$ 10.3 billion (including "C" projects). (4) Equivalent to 2.8 percent of cumulative GDP (US$ 505 billion). Sources: VITRANSS Masterplan Study 2001-2020, Hanoi July 2000 (Capital expenditure). Vietnam: Moving Forward, World Bank, 1999c (Maintenance expenditure). 5.15. As discussed above, it is estimated that to achieve the targets projected in the long term vision of the Government for the energy sector will require total investments of the order of US$2.0-2.5 billion per annum. The transport sector is estimated to require an additional US$1.4 billion per annum, so that the needs of just these two sectors alone amounts of US$3.4-3.9 billion per annum. During the forthcoming decade, this would amount to an estimated 6-7 percent of GDP, which would be equal to the size of the entire public investment program historically. This is clearly unaffordable, because in infrastructure alone, there will be financing needs for other infrastructure-such as telecommunications and water and sanitation-not to mention the investment needs of all the other priority sectors, such as agriculture, health and education. If infrastructure needs are not carefully prioritized so that they fit into available financing, the danger is that some low priority investments might get financed at the expense of higher priority ones. There is also a danger that infrastructure investments will continue to rely on mobilizing "voluntary" labor contributions from the poor through the Government's socialization policy, which is a regressive way of financing infrastructure investments. II. IMPROVE ACCESS AND REDUCE VULNERABILTY IN RURAL AREAS 11.1 Improve Access in Rural and Remote Areas 5.16. Access to services of all kinds is generally worse for Vietnam's rural population, especially in poor and remote areas. 54 percent of public investment in the current plan period of 1996-2000 has been directed to the Red River Delta and the southeast Region-the location of Vietnamn's largest industrial zones and the two richest regions of Vietnam (Table 5.4). Vietnam's two poorest regions, the Northern Mountains Region and the Central Highlands, on the other hand, received a total of only 12 percent, less than a quarter of that received by the two 81 Chapter 5 - Providing Efficient Infrastructure Services richest regions. The allocation of public investment in the last PIP was skewed towards the richer regions. The allocation ofpublic investment in the last PIP was skewed towards tke richer regions Region Public Investment Contribution to Share of Share (%) Total Poverty (%) Population (%e) Northern Mountains 7.6 28 18 Region ... ....._ .. ......_. _ _ Red River Delta 26.0 15 20 North Central 9.0 18 14 Central Coast 11.7 10 11 Central Highland 4.7 5 4 South East Region 27.6 3 _ 13 MekongDelta 15.6 21 21 Total 100.0 100.0 4 _100.0 Table 5.4: Actual Allocation of Public Investment by Region.. 1996-2000 Source: Public Expenditure Review (World Bank, 2000a) and "V'ietnam: Attacking Poverty" (1999). 5.17. In the transport sector, access to infrastructure is unequal 70 percent of the rural population does not have year round access to all weather roads and markets. Poor linkages between rural and urban areas and inadequate intra-rural connections discourage industrialization of the countryside. Linking towns to their hinterlands will produce two-way markets for agricultural and manufactured products and will promote the spread of industrialization and employment creation to rural areas (Box 5.1). Box 5.1: Improving rural transport is crucial to promoting broad-based growth With the renewed national emphasis on rural development andi poverty reduction, the Ministry of Transport (MOT) is beginning to give high priority to the rural transport sub-sector. In early 1999, it formed a Committee headed by a Vice-Minister to guide its rural transport development strategy (DFID/MOT, 2000). Key elements of this strategy are: * The first priority is to provide all-weather road access from commune centers to District Headquarters (defined as Basic Access Roads or BAR) to improve access to and delivery of economic, social and administrative services; * Central resources for rural roads will be targeted at poor commaunes to stimulate economic activities and employment opportunities; * "The population does the majority, the Government supports." This emphasizes that the development and maintenance of the rural transport system will continue to be financed largely through people's contributions. both financial and their labor, complemented by funds that are managed within the Provinces, including locally collected and retained revenues; * Concem about the problems of maintaining rural roads. Source: Rural Transport Strategy Study (DFID and Ministry of Trnsport, 2000). 82 Chapter 5 - Providing Efficient Infrastructure Services 5.18. As yet, however, there are no clear estimates of the financing needs of the rural sector and no plan for how these needs will be met. Estimates of financing needs range from US$90 million per year in the VITRANSS report (JICA, MOT, and TDSI, 2000) to US$144 million per year for the next 10 years (DFID/MOT, 2000). In addition, about US$70 million per year (not included in the road fund proposed for the designated network) would be required for the maintenance of the rural roads. For these needs to be met, there will need to be a substantially larger allocation for rural transport in the coming decade from the public investment program (PIP), than there has been in the last PIP. In Table 5.3 (which is based on the lower estimate of rural transport needs) it is estimated that the rural sector will require 12 percent of the total funding requirements of the transport sector. In comparison, in the last PIP, rural transport was allocated only 1.5 percent of the transport PIP, and the remaining had to be financed directly by local governments and communities. Given the high priority that the Government is now placing on providing basic access roads to all, the burden sharing between central government, local governments and local communities needs to be examined. 5.19. The provision of infrastructure services-not only infrastructure-to those in remote and rural areas is of even greater importance. The Report "Vietnam: Attacking Poverty" found that although villages seem generally well-served by the road and waterway network, access to transport services was more problematic. Over 12 percent of Vietnam's population live in villages which have no access to motorized transport (either public transport or privately hired vehicles). There is a strong inverse relationship between living standards and access to transport services: individuals without access to transport services are nearly five times more likely to be found in the poorest quintile than in the richest quintile. The people who live in villages without access to motorized transport are more than one and a half times more likely to be poor than those living in villages with such access. A strong policy implication of these findings is that it may be more important to concentrate on providing-and creating an enabling environment for the private sector to provide-transport services rather than transport infrastructure alone to poor areas. 5.20. In the energy sector as well, access is unequally distributed-50 percent of rural residents have no access to electricity whereas only 3 percent of urban dwellers suffer this fate. In 1997, about 30 million Vietnamese had no access to electricity. Rural consumers use one-fifth as much electricity as urban consumers and pay almost twice as much per unit. The urban 20 percent of Vietnam's population consumes 86 percent of its electricity. The Government recognizes that without an aggressive expansion in rural electrification, these rural-urban disparities will likely exacerbate social tensions and drag down economic growth. 5.21. The Government has drawn up an ambitious rural electrification program that envisages providing electricity to all communes in the plains and reaching 60 percent of rural households by 2010. But the costs of such investments will be high, and several pricing and management issues must be resolved before this program can be implemented ("Fueling Vietnam's Development, World Bank, 1999d). 11.1 Reduce Vulnerability to Natural Disasters 5.22. Vietnam's traditional vulnerability to natural disasters (mostly typhoons and floods) appears to be worsening. A hundred-year flood has occurred in each of the past four years. The flood affected two main areas: (i) the Mekong Delta; and (ii) Central Vietnam. The Red River 83 Chapter 5 - Providing Efficient Infrastructure Services Delta has also been flooded in the past. The floods and typhoons have taken many lives every year and destroyed infrastructure such as roads, power and communication lines and government buildings and private houses. The floods also damaged hundred of thousands of hectares of crops and killed thousands of livestock. In monetary terms, the damage could be in the range of hundreds of millions of dollars each year. 5.23. The increase of frequency and intensity of the natural disasters could be attributed to: (i) global warming which is affecting weather patterns around the globe; (ii) change in land use patterns in the main watershed; and (iii) man-made structures (especially in transport and irrigation/drainage/flood protection sectors) which changed the natural flow of flood water. 5.24. The Government-in partnership with donors-- is preparing a comprehensive program to prevent, respond to and mitigate effects of natural disasters in Central Vietnam. This program aims to: (i) reduce vulnerability to natural disasters; (ii) improve Government capacity for early warning and response to natural disasters; (iii) respond quickly in case of a major natural disasters. 5.25. To attain these objectives, interventions will be needed in three main areas: (i) Non-structural Measures. These measures include disaster preparedness and response systems; integrated catchment planning and development; review of building codes to make structures sounder and to provide safe havens; provision of insurance against natural disasters, including crop insurance; and, improved agricultural research and extension. The Government will need to improve its capability in early warning, monitoring, and forecasting of typhoons, tropical storms and landslide hazards as well as overall database management and information dissemination. Meteorological data must be linked to hydrological models to assist decision makers at local and national levels and flood maps must become tools for integrated local land use decision making. Vietnam's already good emergency response capacity could be strengthened further. (ii) Structural Measures. These measures include watershed protection and management through reforestation; watershed structures and their management, including reservoirs; floodplain structures, including dykes, irrigation and drainage structures; dredging and river control measures; salinity dams and dykes; sandy area development; and, provision of safe harbors. (iii)A Disaster Rehabilitation Fund. This fund could be available on an as-needed basis, to be mobilized quickly at the time of a natural disaster emergency. It could be used to finance essential reconstruction of public infrastructure such as bridges, roads, schools, health centers, and power and telephone lines. It could also be used to provide income support and employment to families that have lost lives or livelihoods, or whose vulnerability has been heightened, because of natural disasters (see Chapter 4 also). 5.26. Institutional Arrangements. The implementation of a multi-sectoral effort such as the one described above would require a coordinated effort from several ministries at the national 84 Chapter 5 - Providing Efficient Infrastructure Services level and close involvement of local authorities. Several ministries would need to be involved in this effort, including: the Ministry of Agriculture and Rural Development (MARD), the Ministry of Science, Technology and Environment (MOSTE), the Ministry of Construction (MOC), the Ministry of Transport (MOT), and the Ministry of Planning and Investment (MPI). 5.27. Several donors have already expressed interest in supporting the design and implementation of such a comprehensive program to prevent disasters and to deal with their effects. This effort needs to build on the findings of the recent multi-donor mission on natural disasters prevention and mitigation in Central Vietnam. III. DIVERSIFY THE SOURCES OF FINANCING INVESTMENTS 5.28. Availability of adequate financing will provide the major constraint to infrastructure development in the next decade. The annual resources available for total public investment over the next decade are estimated at roughly 6-7 percent of annual GDP. In terms of sectoral allocations, the Government of Vietnam has stated that in the future, it will promote agricultural and rural development and the social sectors. In addition, it will need to give priority to public administration reform (including civil service reform) (Chapter 7) and the financial costs of structural reforms, including banking reforms and social safety nets (Chapter 2). Given these competing needs, it appears unlikely that, compared with past budgets, transport will receive a greater allocation than its historical share of about one-quarter of public investment, or about 1.8 percent of GDP per annum. Hence, if Vietnam continues to invest according to historical proportions, the spending on transport would equal US$9.1 billion for the ten year period and there would be a gap between what is considered essential investment and available resources of 1 percentage point of cumulative GDP, equivalent to a shortfall of US$5.1 billion for the 10-year period. 5.29. There is a clear need, both to prioritize the infrastructure investment program, as well as to look for new and diversified sources of funding to fund the high priority, core program. Given the existing needs for infrastructure services, and the high rates of retum on these investments, continued investment in infrastructure is of course warranted. But the greatest constraint is financing. There are four possible sources of funding infrastructure investments: (i) the government budget; (ii) ODA; (iii) self-financing from infrastructure SOEs; and (iv) private participation in infrastructure (PPI), largely FDI. In the coming decade, much greater reliance will need to be placed on self-financing and PPI rather than on budgetary resources and ODA. We discussed above how budgetary resources are limited and must satisfy many competing demands. It is unlikely, therefore, that a larger share of the budget will be devoted to infrastructure needs than has been the case historically. It is also unlikely that more resources will be available from ODA than has been the case historically. 111.1 Limited and Declining ODA Financing 5.30. Historically, international donors have financed a large share of infrastructure investments, but this is likely to decline in the future. In the energy sector, for example, in the past five years, international donors have provided about US$2.9 billion (JBIC US$1.9 billion, the World Bank US$694 million, ADB US$180 million, SIDA and other bilaterals about US$150 million) for the development of the energy sector. But their strategies are changing. 85 Chapter 5 -- Providing Efficient Infrastructure Services 5.31. In the medium term, JBIC plans to focus on, besides the ongoing projects including 0- Mon thermal power project and Dai Ninh hydro, on multipurpose hydro, transmission and distribution, rural electrification and coal based power. The World Bank is focussing its strategy on improving access (Rural Energy 1 and 2), improving system efficiency (System efficiency improvement and equitization project), and catalyzing private investments (through partial risk guarantees). ADB will focus its efforts on improving efficiency, both technical and institutional, in the generation and transmission subsectors. ADB 'will also continue to support the Government's efforts to: (i) improve the legal and regulatory framework of the sector; (ii) attract the much needed private capital necessary to finance future sector expansion; and (iii) the expansion of the sub-regional networks. The priorities for SIDA credits will shift to investments in distribution, transmission and generation based on renewable energy with a focus on improved energy supply to the disadvantaged areas. ADF has provided a credit for about US$20 million for rural electrification. In addition to loans and credits, internatilonal donors plan to remain active in providing grant funds for technical assistance for improving legal/regulatory and institutional environment, energy efficiency, capacity building, sustainable energy development, training and strategic studies for structural reforms. 5.32. It is clear from the medium term strategies of the donor community that there is: * a shift to a greater focus on poverty alleviation and increasing access to the remote areas; * declining interest in the direct financing of thermal power generation projects and other infrastructure projects that the private sector is willing to finance; * increased willingness to help catalyze private investments through guarantees and other credit enhancements; * a gap emerging between the investment needs of the country and support from the international donor community for direct investm-ents in the next decade. 5.33. In the energy sector, for example, unlike the past five years when an average of US$500 million per year was provided by the international community for energy investments, it is estimated that in the medium term only about 15 percent of the total investment needs of US$2 billion/year will come through concessional credits from the donors. This will require a serious rethinking on the part of the Government in developing its financing strategies for the energy sector and for the infrastructure sector more generally in the coming decade. In the absence of adequate donor funding, Government will need to seek diversified sources of finances starting with a move to rational tariffs so that SOE's can provide a greater share of their needs from retained earnings. 111.2 Getting the Prices Right 5.34. Appropriate pricing policies will generate more self-financing investment by infrastructure SOEs as well as encourage private investment in infrastructure (see section III.3 below). It will increase the efficiency of service delivery, and make up for funding shortfalls in government agencies' delivery of services. In Vietnam, getting prices to cover costs will lead to higher tariffs for transport, energy, and water. This will come, however, with vastly improved quality and availability of service. Maintaining prices at below cost-recovery levels has resulted in poor quality service and lower access for the poor. 86 Chapter 5 - Providing Efficient Infrastructure Services 5.35. In no infrastructure service in Vietnam do tariffs meet the long-run marginal cost (LRMC) of supply. In many cases, regulated tariffs cannot cover even routine operation and maintenance costs. Thus, dependency on the state budget or on credit allocations is high. Mechanisms now in place for cost recovery range from direct user charges in the case of electricity, telecommunications and water supply, and annualfees for irrigation water supply and for vehicle registration; to indirect methods, such as fuel tax surcharges for highways. 5.36. Price ceilings imposed by the State Price Committee do not allow water companies to cover routine operations and maintenance costs. In water supply, tariffs in Vietnam are low by regional standards. Domestic and SOE rates in Hanoi, for example, although increased by 4,900 percent since 1988, are only US$0.05 and US$0.11 per cubic meter of water compared to the estimated LRMC of US$0.26 per cubic meter. Currently, many of the poor who lack clean running water are compelled to pay nearly twenty times as much for bottled water. An average tariff level of US$0.43 per cubic meter would allow Hanoi to finance 20 percent of its future investment costs in 2002, as well as cover its operations and maintenance costs. 5.37. In the energy sector, electricity prices are below the long-run marginal cost of producing power. Average tariffs for electricity, for example, are only 5.2 cents per kilowatt hour (kwhr) yet the long-run marginal cost (LRMC) of power provision is estimated at about 7.5-8.0 cents per kwhr. It will also help to put the Electricity of Vietnam (EVN) on sounder financial footing. Prices hikes may be particularly desirable in urban areas where consumers pay one-half to one- third what rural users pay and consume 10-20 times as much energy. Cheap electricity means less conservation and more waste. With increased tariffs to equal the LRMC in the next few years, EVN is expected to finance 30 percent of its investment needs. 5.38. User charges play a limited role in the roads sector. Revenues for a road maintenance fund can be raised from several places. The report "Vietnam: Moving Forward" (World Bank, 1999) proposes two user charges: a fuel tax and a license fee on heavy vehicles. These charges would be supplemented by fines collected for overloading. Depending on how much of the designated network is to be covered by the user charge system, this would require an increase of the fuel tax for road users of between 3 and 7 US cents per liter. Non-road users would be exempt from the tax. The financial and economic benefits road users would enjoy from well maintained roads are estimated at US$160 million per year. 5.39. Other public transport infrastructure (e.g. railway tracks and inland waterways) lacks funding for regular maintenance as well. However, a rough estimate of the amount of funding required is about US 70 million per year (i.e. US$0.7 billion for the entire period). In addition, urban and rural roads are estimated to require another US$90 million per year (i.e. US$0.9 billion for the entire period). Thus, the entire public expenditure requirement for maintenance for the ten year period has been estimated at US$2.6 billion. Actual expenditure is estimated to cover between 50-60 percent of requirements. Maintenance of such commercial public transport entities as railway equipment and ports is also under funded. However, since these entities by law are required to be financially self supporting for some of their assets, it is their responsibility to raise the necessary funds. 5.40. All tariff increases must be implemented with attention to issues of equity and fairness. This means that those who use infrastructure most heavily must be made to bear the majority of the burden for financing its maintenance and operation. Trucks and other heavy 87 Chapter 5 - Providing Efficient Infrastructure Services vehicles should pay for the damage they cause to roads. Urban residents and industrial users should bear the burden of higher use of electricity and water. Finally, tariff setting should be done according to predictable criteria in consultation with local providers and users. 111.3 Increase Private Participation in Infrastructure 5.41. Expanded private participation is essential to meet Vietnam's need for infrastructure services for two reasons. First, as discussed above, oth.er sources of financing-such as budgetary resources, ODA, and self-financing--will not be able to meet all the demands for infrastructure services in rural and urban areas. Energy, urban water and telecommunications have excellent prospects for funding from private/foreign sources and these sources need to be explored more urgently and aggressively. Second, and this is discussed below, there is little competition in infrastructure sectors, which has weakened incentives for greater efficiency or quality of services. 5.42. There is no reason why commercial infrastructure, such as airports, ports, railways, should rely exclusively on public funding, but should primarily operate as commercial enterprises, charging users at levels that allow cost recovery. With respect to private finance, the Ministry of Transport hopes to attract up to US$5 billion to modernize airports, construct bridges and seaports, and expand the railway and urban infrastructure (Moving Forward, World Bank, 1999c). But this goal may be unrealistic, given the private sector's perception of the country's riskiness and the lack of stable institutional, legal and regulatory frameworks. Unless the general climate for private finance and provision of infrastructure is urgently improved, infrastructure needs might become a bottleneck for Vietnam's goals of doubling its GDP in the next decade and eradicating hard-core poverty. Vietnam needs to urgently unlock private investments that are aWready waiting in the wings Sector Project Details Total Private Sector Investment (USS million) _(Rough Estimates) Gas Sector __ Nam Con Son Gas field 3 billion cubic meters 1, 800 development per year --of which Offshore gas pipeline 400 km (490) Power Sector Phu-My 2.2 BOT (CCGT) 700 MW 400 Phu My 3 (Power) 600 MW 400 Wartsila 150 MW 120 Total 2,720 Table 5.5: Private Energy Investments in Pipeline Source: World Bank staff estimates. 5.43. Vietnam needs to urgently unlock private investmrents that are already waiting in the wings. As a starting point, the Government needs to make a serious attempt to unlock private investments which are already waiting in the wings (Table '5.5 above). This means that quick 88 Chapter S - Providing Efficient Infrastructure Services decisions have to made on the terms and conditions of projects that are in advanced stage of negotiation and waiting to go. Second, all efforts should be made to improve the regulatory framework and reform infrastructure prices and tariffs. This will not only create a more favorable climate for greater private participation in infrastructure but also permit higher self- financing ratios for utility SOEs. Decentralizing of taxing and spending authority to local areas according to the 1996 Budget Law will also help to reduce localities' dependence on the central budget, increase accountability, mobilize more resources for local development program, and raise the efficiency of how these resources are spent. 5.44. A number of short-, medium-, and longer-term actions will be required to attract private participation in infrastructure in Vietnam . A recent review, done jointly with the Government of Vietnam, examined the environment for private participation in infrastructure (PPI) and made recommendations for improving this environment (World Bank, 1999e). The major recommendations of the PPI Review are summarized in Table 5.6. 5.45. Clear regulatory frameworks are an essential prerequisite. Different categories of infrastructure require different regulatory frameworks for private participation. The first category contains firms that lend themselves naturally to competitive market structures without price regulation. All that is required for these markets to function competitively is the clear allocation of property rights (for example, rights of cellular operators to scarce radio spectrums), and sanctions on collusive behavior by firms. The second category contains firms which are competitive but require more Government regulation. Some form of interim price regulation may be needed in this case. Even with multiple providers, effective competition has to rely on a degree of Government regulation. In the third category, industry characteristics such as economies of scale or "contiguity" of network economies make it inefficient to have multiple firms operating in the same market. This is true for urban piped water systems, waste collection, power transmission, and basic port and rail services. The best practice in these sectors is to create concession areas, identify service responsibilities, and then auction off the rights to a concession for a fixed period of years. Across all sectors, it is important that the Government establishes objective and autonomous regulatory agencies to protect the public interest, monitor infrastructure provision, set tariffs on a stable, legal basis, and ensure a fair market environment for infrastructure provision. This means that within Government, regulatory, ownership, and service provision functions need to be allocated to independent bureaucratic entities to avoid conflicts of interest. In the energy sector, policy and regulatory matters should be separate from commercial petroleum operations, and separate bodies should be established for the regulation of upstream and downstream gas operations (the latter perhaps to be combined with downstream electricity regulation). Deregulation, on the other hand, could produce dynamic results in the urban transport sector where Provincial People's Committees tightly control routes and fares. Deregulation of long distance telephone services will help to reduce high rates for international calls. 89 Chapter 5 - Providing Efficient Infrastructure Services A number of short-, medium-, and longer-term actions wil be rcquired to attract private pacipation in infrastructure in Vietnam Short-Term Actions j Medium-Tern Actions Longer-Term Actions Cross-Sectoral * Amend laws impacting * Rationalize (Government * Enact laws for PPI Issues PPI projects bodies responsible for PPI and to establish * Upgrade BOT Group to * Develop system for independent PPI Center monitoring off-balance regulators in each sheet risks of PPI projects infrastructure sector * Sector regulatory , frameworks in place , Power * Undertake study of * Restructure sector by ' Move towards optimal market structure separating generation and competitive markets and strategy for future distribution fro 'n Equitize a number reform transmission of generating and * Conclude pending . Begin divesting distribution facilities transactions distribution conmpanies ^ Implement tariff increases starting with a pilot * Pass Electricity Law and transaction. establish independent * Rationalize regional regulation cross-subsidies : Water and * Develop clear policies * Develop and implement * Conclude pilot Sanitation aimed at market reforms policy of tariff reforms ' lease or concession * Develop plan for phasing projects tariffs to cost recovery levels * Conclude Bihn Water BOT ,__ Telecommuni- * Change BCCs into joint * Liberalize entry into all o * Equitize some or cations ventures, concessions or sub-sectors all of VNPT's core licensed operations * Separate post; from businesses , telecoms : Airports * Develop strategy for * Consider concessioning * Conclude several decentralizing control to terminal operations or transactions of key encourage regional airside services airports development and PPI __ Railways * Further commercialize * Separate non-integral * Initiate separate operating units services from ccre concessions for * Develop action plan for operations rolling stock rail sector private sector operations and participation strategy and infrastructure ________________ ________________ __ services Ports * Decentralize and :* Pursue concessioning of l * Invite private deregulate tariffs to terminal operations or ' sector to develop encourage competition and equitization of existing new facilities only eliminate cross- facilities after full capacity of subsidization existing facilities has been revealed through private operations and '____________ ,____ _____ _____ __ _ _investm ent Table 5.6: Summary of Key Actions to Promote PPI Source: Private Solutions for Infrastructure (World Bank, 1999e). 90 Chapter 5 - Providing Efficient Infrastructure Services IV. IMPROVE THE SUSTAINABILITY AND MANAGEMENT OF INVESTMENTS 5.46. The scope for efficiency gains from reducing waste and improving performance is considerable. Twenty percent of produced electricity is lost before it can reach consumers, twice as much as in some countries. In the water sector, decayed distribution networks allow pollutants to seep into the water supply and 30 percent of piped water is lost before it ever reaches customers. Water businesses lose almost 40 percent of their revenues because customers are not billed for the water they use, or because companies fail to collect. Irrigation systems deliver water unreliably due to poor operations, which causes users to incur higher pumping costs or suffer lower yields. 5.47. Maintenance expenditures on roads are still inadequate to keep them in good repair. Vehicle operating costs are nearly twice as high in Vietnam as in countries with well-maintained roads. Each US$1 deferred on road maintenance increases vehicle operating costs by US$2-3. In rural areas, only a trickle of central funding is available at the local level. Poor maintenance and navigation aids for inland waterways reduce the productivity of boats by 40 percent or more. Recurrent expenditures on waterways are only half of what is estimated to be needed. Finally, ports ship around 15 million tons of freight per year but could carry three times that amount if ship-handling and access to land transport were improved. 5.48. Inadequate competition between private and public providers of infrastructure services, and insufficient financial and managerial autonomy for public providers, gives little incentives to remove these inefficiencies. Public companies are often asked to deliver below cost, prohibited from adjusting prices, and sometimes required to be employers of last resort. Also, users of infrastructure-actual and potential-are not well positioned to make their demands known. Inadequate local participation, and prices which do not reflect costs, make it difficult to assess demand. Most detrimental of all to efficiency, however, are price controls and the absence of competition from the private sector in all infrastructure services. 5.49. Improving Sector and Corporate Governance. Privatization or equitization of existing assets provides scope for introduction of more efficient management and operations and introduction of new technologies, in addition to providing an avenue for raising additional funds. The process has started with the introduction of Independent Power Producers (IPP's) and Build, Operate, Transfer (BOT) projects in power and transport- for new investments and in equitization in the power distribution sector. In the World-Bank supported Systems Efficiency Improvement and Equitization Project, EVN has included the equitization of three districts. These need to accelerated over the next decade. 5.50. In a strategy of mixed, public-private provision of infrastructure such as the one Vietnam is following, the Government needs to improve the effectiveness of public providers as well. This will not only generate resources for self-financing of investment, but also improve the efficiency of service delivery. Vietnam must open up more sectors for private investment and develop regulatory frameworks. Currently, public infrastructure services are provided by two types of public organizations: * Government service agencies organized nationally like the Vietnam Roads Administration and the Vietnam Inland Waterways Administration (VIWA), or locally, like Irrigation Management Companies, or Provincial and District Transport Departments, which receive their funding from the state budget; or by 91 Chapter 5 - Providing Efficient Infrastructure Services * public utility-type organizations - state-owned enterprises -- which are either nationally organized and administered, such as the Electricity Authority of Vietnam (EVN), General Department of Posts and Telecommunications (GDPT) and the Vietnam National Maritime Bureau (Vinamarine); or local government-owned, like urban water supply and sanitation companies, which are revenue-earning and exercise some autonomy over their management and operations. 5.51. Public providers of infrastructure services need a greater degree of independence and associated accountability then they have currently. While the Government should set clear policies and goals for infrastructure provision and provide regulatory supervision, it should leave detailed planning and implementation of delivery of services to providers. State companies should be run along commercial principles, not become holding bins for underemployed labor, as so many infrastructure SOEs now are. Firms' access to credit must be on commercial terms. This is a complex agenda, but attaining the vision laid out i:i the Government's infrastructure strategies will require the right mix of policies, prices, and institutional reforms, as described in Box 5.2 for the energy sector. Box 5.2: Attaining the long-term goals will require fundamental policy aud institutional reforms in the energy sector Policy and Sector Structure * Defining the future competitive industry and market structure of power and gas sub-sectors; * Clarifying the role of private capital and private ownership in the energy sector; * Financing Strategy - clarifying the relative proportions of government budgetary support, private sector and ODA financing to meet growth and investment targets; * Promulgation of national criteria to guide government approval of large-scale energy infrastructure investments - intended to avoid uneconomic decisions (e.g. oil refineries, gas for fertilizer, etc); * Issuance of a comprehensive energy sector policy paper to serve as the "road-map" for legal and regulatory reforms and changes in the sector and market structure during the transition. Tariff Policy * Agreement on power tariff principles, such as: (a) an adequate tariff level that provides efficient long-run marginal cost signals and covers reasonable financial costs; (b) regional variation in tariffs to provide appropriate operating and investment efficiency incentives; (c) national life- line rates set at appropriate consumption threshold; * Establishing a natural gas price that balances supply cost and market value; * Subsidy policy: Determination of method to provide targeted subsidies for rural electrification and other social investments. Institutional Reform * Creation of a regulatory agency: Decisions on functions, institutional structure and composition of regulatory agency. A combined gas and power regulatory agency should be evaluated; * Legislative framework: Finalization of Electricity and downstream gas Law that will establish the regulatory agency for gas and power; * Policy Coordination Agency: Decision to create a national er.ergy policy council! commission to ensure that developments and policies are coordinated across the different sub-sectors to avoid the unsustainably high economic costs that result from poor coordination. 92 Chapter 6- Improving Environment Quality CHAPTER 6 IMPROVING ENVIRONMENTAL QUALITY Key Messages Serious natural resource management problems like degradation of forests, wetlands and coral reefs, and trade in endangered species threaten Vietnam's unique biodiversity. Natural forest cover has shrunk to 29% of the land area and the number of threatened species has risen. Over-fishing and mangrove destruction have reduced fishing yields. Rapid urban population growth is putting municipal infrastructure and services under stress and has resulted in many environmental problems. The Government's vision for 2010 is to prevent and control pollution, to protect, conserve and sustainably use natural and biodiversity resources, and to improve environmental quality in urban, rural and industrial areas. This raises four important challenges: (a) Creating incenti esfor changing behavior Community empowerment, enforcement of laws and decrees, access to knowledge, and the provision of information and trade opportunities, act as incentives to induce behavioral changes necessary for envirom,nental protection and sustainable resource use. (b) Involving communities and citizens morefully Government plans give high priority to encouraging public participation. This high level attention should start a process to ensure means for greater local accountability and increased community participation. A number of good pilot projects in community-based management - in both the green and brown sectors - provide promising approaches to improve environmental conditions. (c) Improving institutional effectiveness Government agencies with responsibility for environmental protection are relatively young and operate in a weak public administration context. A number of problems - of which a lack of influence over other agencies is the most critical - severely constrain implementation of sound policies on the ground. While donors and government are actively seeking to strengthen environmental agencies, it is also important to mainstream environment into other sectoral ministries and agencies. (d) Diversi.fing sources offinancing for implementing priorityprograms Government plans are ambitious and the strategy is unaffordable if public funds are the only source of funding. A core workplan should be identified from the many desirable activities proposed in the Strategy. Even then, expenditure requirements will demand that sources of financing for environmental protection will have to be diversified by implementing user charges, making environmental funds effective and improving SOE environmental practice. 93 Chapter 6 - Improving Environment Quality I. LONG-TERM VISION 6.1. The Government of Vietnam's 10 year National Environmental Protection Strategy (NSEP) recognizes that there is a rapid deterioration in environmental quality and natural resources. In the last five decades, natural forest cover has shrunk from 43 percent to 29 percent of land area, and the country is facing an acute shortage of arable land. Habitat loss has led to a rise in the number of threatened species."9 High rates of rural under-employment, also linked to land shortages, and an emphasis on industrialization, have contributed to migration to cities. Cities are growing at the rate of 4.5percent per year, more than triple the rural population growth rate. Burgeoning urban populations are overwhelming municipal infrastructure and services and causing environmental problems such as unmanaged landfills, transport-related air pollution, untreated hospital and hazardous waste, and raw sewage flowing in open channels. Sedimentation, and point and non-point sources of pollution are threatening the health of rivers. Over-fishing and destruction of coral reefs and mangroves have reduced the fishing yield. 6.2. In response to evidence of serious environmental degradation, the Government of Vietnam embarked on a process of integrated environment and development planning (see Box 6.1). Various international institutions and official development assistance (ODA) projects have supported these strategic planning initiatives, which have laid the groundwork for the recent National Strategy for Environmental Protection (NSEP) for 2001-2010, and an Action Plan for the first five years. Box 6.1: Evolution of Environmental Actions * 1985: draft National Conservation Strategy (NCS) * 1991: National Plan for Environment and Sustainable Development (NPESD) for 1991-2000 * 1994: Law on Environmental Protection which led to the creatioi of institutions such as the Ministry of Science, Technology and the Environment (MoSTE), and the National Environment Agency (NEA) since the early 1990s. * 1995: Biodiversity Action Plan (BAP). 6.3. The 10 year NSEP and Action Plan, henceforth referred to as "the Government Strategy" and "Action Plan", aim to chart a path of economic growth that is compatible with environmental protection and improvement. Environmental degradation puts the poor at much greater risk than their better-off counterparts, in urban and rural environments, in forests and coastal areas, highlands and lowlands. The Government's overall commitment to sustainable development places the poor at the center of its Strategy, and the main challenge of the next decade will be to improve livelihoods while simultaneously protecting the environment. Opportunities to improve the living environment of the poor go hand-in-hand witlh broadening livelihood options, providing safety nets and most fundamentally, improving heallh and safety. " Red Book 2000 data show that Vietnam ranks 18th among the top 20 countries with largest number of threatened mammal species and bird species respectively, and 6th among the top 20 countries in terms of threatened reptile species (IUCN Red List of Threatened Species, 2000). This ranking is high given that the other top 20 countries listed are many times larger (in terms of surface area) or are island nations. 94 Chapter 6 - Improving Environment Quality Table 6.1: Current Trends in relation to Government priorities and targets to be achieved by 2010 2000 Trenlds .-_2010 TArget evernment PMorlw Broipn Sector indiJuarial TrLnd. _ Pu o * 82% of worst polluters are located in residential aeas (1) * Cleaner production applied to reduce raw aterlasfa wer * 90% of the factories established befbre 1995 have no w and energy consunipron by 10-2 5% treatrmnt facilities (2) * NO -I W,0 industral hawdous wastc colleted and teawd * Pollut,on load from industry reduced by lOY feomnrent levels :Lrbhan 1rern,& Urban Environmental Trends * 65-70% population bave access to lean wvater (3) * 80-85% population with aCcess to cklan water * 2(1-nu' " IVp .. JnIn ser. .d by :Xwcrage s) sienis irn Hlr,oi. * 80-85% access to sewerage systems Haiphong and HCMC (3) * 80-90% municipal wasfteohectedin urban areas * 490%o of the solid waste generated is firm the four major cities. (4) * 80-100% clas i and 11 cines ha%e landfillb Collection efficiency for Hanoi and HCMC are 50% and S0°h respectively (3) * Within natdonal statnards * Ar p,1;u o-in level exceeds standards by 245 trme, 1 )* Usc oturlejded gasoline tromJuly20 * Dust, lead, noise pollution from trsportion sources are most serious and continue to increase (5) _ CoveGms nt PdNrWes: GrW4 SdPr Forest Cover Trends Forest Targets * Forest coverage 29%/o in 1999 (2) coprpwed to 26% in 1'7X() (t, * Forest doverage isat tog 40% (note 33% in 1976 and 43% in 1 945 i Hf I * 5 nml,on ha planted by 20 10 * Annual loss declined (ha/year): 350,000 (during * -0 - I ON5) i 5) to 120-150,000 (1998) (2) * Forest plantation inu:, Jd h,ha..Cs l'.I('l'M I 191X0I ti/ 0Q.0(IX (1998) (2) ___________________________ L.j'id LI'c T,rerkt.~~ * Ban-en land 134 nillion ha or 40% (1990) reduced to 10.6 million * 50% * inb r.aaadsnif dO d land ha or 32% (: '*i'5 * )-1 00° regeneration of depleted upland forest * "Problemsoils'ate 19 nIil;n hL t or 50oofplainareas) Potential soil erosion 50-4500 tonib/yer (5, Protccted areas and Wildlife Trends * 22 mlion hectres of protecd area acount or 7% of landarea * l0% of oalld,4aeap1rx 't t' (1998) (5) * BAP implemcnted fully and updated * 28% mammunals, 10% birds, 2l'- sinphibians and repiules are l nsk * Regional BAPs prepared and implemented in 1995(2) * lIlcgi trrdr ir wiLI.tl,: in r a.:hrn nn the rise(noftpgres available) (2) GoerWrnt i B Ca#eLat inldnd Suri3,.. 'A .jci TrLm.d, * Organic pollution rising in large rivers and are at risk of * Wae quality in rajor frUe W c s Wit nat eutrophication - Nitrogen and Phosphates ooncetations 4-200 stadads times higher than standards (2) * National standards approved by 2002 for sustainW]use of * Increased pollution in coastal areas and estuaries - No. of water resources and n er basin protecton parameter exceeding standards has inreased from 6 (1997) to 12 (1998) (5) Coaisul anrd Nt-inc Re,yur.cb Trcrnds Cotal Marine Beamou re cot'g * 10837 species of maine plants and animals are at risk * Natiol system of I 5 mnarne protected areas established * Coastal wetlands decreased at 6% annually (avage over the past * 64 wetland aipasrocd five years) (7) * Rate of mantrv and weand loss reduced by 10% and * In-short catch per fishing unit reduced, beuse of over-fshing 90% reaeeively and destructive methods, ton/boat 16.7 in 1996; 15.3 in 1997 and * OV-shore fishing program implemrented 13.8 in 1998 (7) , . .,* eted Costal Zor M lg _tp d (1). (2). (3), (4). (5), (6) and (7): see Endnote of the Chapr fbr referennce 95 Chapter 6 - Improving Environment Quality 6.4. The three main objectives of the Governnent Strategy are to prevent and control pollution, to protect, conserve and sustainably use natural and biodiversity resources, and to improve environmental quality in urban, rural and industrial areas. The Strategy was developed through a three-year process that involved a wide range of ministries, provincial authorities, research institutes, NGOs, bilateral and multilateral organizalions, and other stakeholders. The process also included specific discussions about priorities, and potential components of the Action Plan. The Strategy identifies 13 critical program areas and eight cross-cutting themes. From among them, seven priorities have emerged. Four priorities relate to improving environmental quality in the industrial, urban, water resources and forestry sectors, and the other three are cross-cutting themes that relate to institutional capacity and human resources development, education and awareness, and community participation. Priorities and targets of NSEP are compared with current trends and summarized in Table 6.1 above. 11.1 Challenges to Attaining the Vision 6.5. By identifying its long-term vision and defining a Strategy and Action Plan, Government has taken an important step in setting a credible policy framewvork for environmental investment by national and international organizations and the private sector. In doing so, it is building on the assessment of the plan for the last decade (see Box 6.2). T'he vision of economic growth and environmental improvement requires that critical issues be addressed. This section focuses on four key challenges that could influence results on the ground in the near tenn, and impact changes in the longer term: * Creating incentives for changing behavior; * Involving communities and citizens more fully; * Improving institutional effectiveness; and * Diversifying financing sources for implementing priority programs. Box 6.2: Assessment of the 1991-2000 Plan A recent intersectoral review of the National Plan for Environmeni: and Sustainable Development (1991-2000) facilitated by the NEA showed that unsatisfactory progress has been made in the following areas: * Integrated environmental planning for resource development; * Sustainable development strategies at the sectoral level; * Environmental monitoring and analysis; * Education, training and environmental awareness; * Urban development planning and population control; * Integrated watershed management; * Integrated coastal zone management and planning; * Preservation of biodiversity. 96 Chapter 6 - Improving Environment Quality II. CREATING INCENTIVES FOR CHANGING BEHAVIOR 6.6. Community empowerment, enforcement of laws and decrees, access to knowledge, and the provision of information and trade opportunities, act as incentives to induce behavioral changes necessary for environmental protection and sustainable resource use. Without such changes in behavior, the downward spiral in environmental trends in Vietnam cannot be reversed. 11.1. "Green" Issues 6.7. Improving Community Participation in Natural Resource Management. Integrated watershed management and community forest management approaches are increasingly used for biodiversity conservation and natural resource management. The former approach has the additional benefit of providing a holistic approach to the multi-purpose use of highland areas through improved agriculture, sustainable forestry and water resource management. DANEDA, ADB and GTZ have been actively working with local communities on integrated watershed management; and a growing number of national and international organizations are working on projects related to community forest management. Both approaches focus on improving livelihoods and seeing natural resource management in the context of social and economic development. 6.8. Although, lessons from the field indicate that community forest management can be an effective way of meeting conservation objectives, formal support for this method has been incomplete. The Strategy repeatedly stresses the need to promote collaborative/community management of forests and protected areas, and the Action Plan has set a target for development of required legal guidelines for community involvement by 2001. It is hoped that forthcoming management regulations for Special-use Forests will make legal provisions for community involvement in protected areas management. 6.9. Improving Forest Management. The Government is seeking ways to halt deforestation and ensure successful rehabilitation efforts. Underlying causes of deforestation and degradation in Vietnam include rural poverty (see Chapter 3), insufficient arable land, limited and inappropriate institutional capacity20 to protect forests, and land tenure policies.2' Immediate causes of forest loss include: population expansion in forest areas, fuelwood collection, logging22 and harvesting of wood and non-wood forest products, fires and development activities such as the construction of roads, dams or high voltage power, and for the provision of new lands for agriculture and human settlement in the heavily populated deltas. A further complication is that employees of State Forestry Enterprises (SFE) are often allowed to farm areas of productive land 20 The capacity of MARD and provincial and district forest services to manage and protect public forest is limited. Legal, policy and regulatory frameworks are complex, low numbers of trained field personnel and scarce funds are serious constraints. 21 Land tenure - The absence of an appropriate system of land use planning and land allocation in forest areas has constrained the ability of local populations to exercise authority and responsibility for managing forest land. In many cases, forests are treated as open access resources (particularly by immigrant groups), and consequently they suffer degradation. There is also a lack of dialogue between government officials and ethnic minorities about "local" perceptions of land tenure. 22 Logging by SFEs (averages 300,000-450,000 cubic meters/year in natural production forests) and and illegal cutting by various groups (estimated to be between 500,000 and 1 million cubic meters/year), have resulted in the loss of large areas of forest. 97 Chapter 6 - Improving Environment Quality in the forest in order to supplement their livelihood. This practice encourages steady encroachment and conversion of forest to agriculture. 6.10. To fight encroachment problems, incentives have bee,n granted in the form of long-term land use rights over forest areas at the household and. community level. This process, encompassed in the Five Million Hectare Reforestation Program, is described briefly in Box 6.3 and the partnership process is highlighted in Part II. Further incentives to turn damaging logging practices into sound forest management will be created with the implementation of the Forest Certification Program and the SFE reform process. Box 6.3: The Five Million Hectare Reforestation Program The Five Million Hectare Reforestation Program is a major management initiative, approved in July 1998 and directed at meeting forest product needs in a sustainable manner, protecting the environment and increasing social and economic benefits. * Key objectives of the program include protecting and efficiently using existing forests. * Forest cover will be increased by natural forest regeneration and extensive planting efforts, including planting industrial crops and fruit trees. * Guiding principles of the program include: decentralization. local participation, coordination and integration of reforestation activities and more efficient use o&rscarce government resources. * The program will take an operational program approach to improve policy and the institutional environment in the forestry sector. 6.11. Improving the Management of Protected Areas. Apart from the 11 national parks, there is no central government funding available for biodiversity conservation activities at the remaining 79 Special-use Forests that have been decreed by the Government of Vietnam. The only funding available is for reforestation activities under Decision 661. Further, there are a number of institutional and management issues surrounding the current protected areas network that need attention. First, biodiversity and different forest lend types are unequally represented and there are vast areas of degraded, non-forest land within the current protected areas network. Second, accurate information concerning protected areas - precise reserve boundaries, names, and legal status - is not available. Third, the integrity of protected areas is suffering due to the fact that certain areas have been encroached upon and therefore are no longer effective as protection areas. Fourth, the legal framework is now outdated in relation to protected area management, and management approaches for most protected areas need updating. 6.12. The Government recognizes that a coherent approach is needed for the management of protected areas. The Ministry of Agriculture and Rural Development (MARD) proposes an increase in the area of Special-use Forests from 1.3 million to 2 million hectares, which would significantly expand the coverage of protected areas. The UN System, DANIDA, GTZ, WWF, IUCN, and Birdlife-International are supporting the Forest Protection Department and Forest Inventory and Planning Institute with capacity building, knowledge management and dissemination initiatives through Creating Protected Areas for Resource Conservation (PARC), Expanding the Protected Areas Network in Vietnam for the 21st Century, and Strengthening Protected Area Management (SPAM). 98 Chapter 6 - Improving Environment Quality 6.13. Stemming Wildlife and Rare Plant Trade. Since most protected areas are under-staffed and under-funded, poaching for the lucrative trade in wildlife species is widespread. Habitat loss and hunting have resulted in 16 different primate species, 4 very large mammals23 and 25 bird species becoming threatened. In addition, at least 2,300 plant species are harvested for food, medicine, construction, textile production and water-proofing. An increasing volume of these plant and animal species are bartered and traded to neighboring countries, especially China and Thailand. Being a signatory of CITES, the Government must work more closely with its neighbors to stem trade in rare plants and wildlife. Awareness raising is being used to combat the wildlife trade. TRAFFIC24 is assisting MARD to strengthen Vietnam's commitment as a signatory to the Convention on International Trade in Endangered Species (CITES) by supporting several capacity building efforts. 11.2. "Blue" Issues 6.14. Water Resources Management. One of the keys to sustaining growth is the better management of the country's water resources. Despite its relative abundance, water is an increasingly vulnerable resource in Vietnam where population and economic growth compete for water to meet food requirements and other uses. Rapidly rising demands for water from rural and urban sectors for agricultural, industrial and household uses, pose a formidable challenge. Much of the existing infrastructure in rural areas (irrigation, drainage, flood control) has deteriorated and water quality is decreasing. In urban areas, the demand for water is expected to double over the next 20 years. To address these challenges, government will need to accelerate reforms, and bring about closer cooperation among sector ministries and donors. 6.15. The Government recognizes the challenge of the water sector and its response has been to pay closer attention to water management. A new Law on Water Resources (LWR), which provides for significant water resource management reforms, was passed by the National Assembly in May 1998. The LWR took more than 10 years to develop. Many of the reforms set out in the LWR are now being implemented and many donor agencies are supporting the process of change. 6.16. To improve delivery of water services, the government has adopted a decentralized and participatory approach. Provincial irrigation and drainage management companies have been established which are encouraged to become autonomous and self-financing. The participation of water users is being promoted through water user groups and cooperatives. The recovery of operation and maintenance costs is recognized, although subsidies are still large and service standards and performance indicators have yet to be established. Further progress will be needed in these areas, including a process of sustained capacity building. 6.17. The successful implementation of the LWR and initiatives for participatory management of water services will require a number of important changes. Current institutional arrangements for water resource management reflect a vertically oriented and fragmented subsectoral approach, which does not facilitate coordination or collaboration among agencies and stakeholders. Horizontal collaboration will be introduced over time, among ministries at the 23 Large mammals include gaur, banteng, tiger and Asian elephant. 24 TRAFFIC, a joint program of IUCN and WWF, aims to help ensure that trade in wild plants and animals is not a threat to the conservation of nature. The TRAFFIC network works in cooperation with the Secretariat of CITES. 99 Chapter 6 - Improving Environment Quality national level and among provinces at the river basin level. The establishment of the National Water Resources Council and River Basin Organizations should facilitate this process. 6.18. Inadequate Definition of Marine and Coastal Prctected Areas. Vietnam has a 3,200 km long coastline that supports growing urban populations together with many agricultural and fishing communities that rely on valuable coastal wetlands ;and coral reefs. Industrial and urban development, fisheries, agriculture, forestry, mineral exploitation, shipping and tourism are some of the key activities that use and affect coastal and marine environment services and resources. 6.19. Fisheries are increasingly important to the economy, and much of the growth in this sector has been in unregulated activities. Over-fishing and destructive fishing practices are common, and are contributing to reduced productivity. A fisheries master plan was completed in 1990 with assistance from DANIDA. In addition there has been a Prime Ministerial Decree for the Protection of Fisheries and a decision banning darnaging fishing methods. In 1997, preferential taxation was granted for off-shore exploitation of marine products to reduce pressure on marine resources in near-shore areas. Such incentives should be reviewed regularly to assess their positive and negative impacts. DANIDA and NORAD are currently working with the Ministry of Fisheries to develop a national Fisheries law. 6.20. With assistance from the ADB, the Government is developing a national strategy for coastal and marine environmental management, which is expected to establish a system of marine protected areas (MPAs). A greater role is envisaged for community-based resource management activities. A pilot project with international assistance is being planned in Hon Mun (Khan Hoa Province) to test alternative management approaches and to provide training of key stakeholders. 6.21. However, a good deal of work still needs to be done. Coastal zone management requires integrated planning and management -- both relatively new approaches in Vietnam. According to the UNDP/MPI Study on the Effectiveness of Aid to the Environment Sector, national laws and regulations on marine conservation are rarely understood or applied at the provincial level. In the case of offshore polluters, fines are not assessed based on the actual damage caused. The conflict between production targets, especially in the case of shrimp farming and other aquaculture activities, and conservation goals is a stark one. 6.22. Wetland Habitats. Vietnam has 40 types of wetland habitats,25 with considerable economic and ecological value. The Mekong Delta, covering 3.9 million hectares, fulfils an important role in regional and global biodiversity.26 Unfortunately, this extraordinary diversity is at risk -- five large waterbird species27 have been extinct as breeding birds in the Mekong Delta in the last 30 years, largely as a result of habitat loss. The coastal zone of the Red River Delta supports a large inshore fishery, which is dependant on the maintenance of the ecological integrity of mangrove forests, inter-tidal areas and other associated habitats. The inter-tidal areas have been identified to be of international importance as feeding and roosting areas for several 25 Including Melaleuca forests, seasonally inundated grasslands and swamps, lakes, mangroves, paddyfields, estuarine habitats, mudilats and aquacultural ponds, with a huge netwiork of interconnecting river channels and canals. 26 Over 200 bird species and 260 species of fish are known from the Mekong delta, together with numerous species of shellfish, amphibians and reptiles. It is an important breeding area and migration route for waterbirds. 27 The five species include: Black-necked Stork, Spot-billed Pelican, Milky Stork, Greater Adjutant, and Giant Ibis. 100 Chapter 6 - Improving Environment Quality globally threatened bird species. Covering an area of 866,000 hectares, the Red River Delta is one of the most densely populated areas in the world. The delta is intensively exploited, and the livelihoods of many people are highly dependent on ecological features of wetlands. 28 6.23. Based on the level of threat, the conservation importance of wetlands, and the under- representation of wetlands in the protected areas system of Vietnam, there is an urgent need for the identification of key wetland sites, in order to ensure their conservation and sustainable use. 6.24. Defining and Managing Wetland Protected Areas. A lack of information, and overlapping and unclear responsibilities, are the two main reasons for poor management of wetlands and rapidly declining wetland habitats (which are being lost at higher rates than other natural systems). The existing information on wetlands is dated because a national level inventory has not been undertaken since the late 1980s. NEA is mandated to produce a candidate list of Ramsar sites, while the management responsibility for wetlands rests with MARD. 6.25. Out of a total wetland area of some 3.9 million ha, protected areas cover only 62,083 ha or 1.6 %. 29 There is no comprehensive national system of wetland protected areas, and significant areas of seasonally inundated grasslands and freshwater sites are poorly represented. To enhance Vietnam's commitments under the Convention of Biological Diversity and the Ramsar Convention, the Government has begun compiling a list of proposed freshwater protected areas and drafting a wetlands management strategy. 11.3. "Brown" Issues 6.26. Recognizing a shift in the country's industrial structure, the NSEP has identified greening of the industrial sector as a priority. The attainment of this objective depends on credible enforcement and compliance mechanisms that regulate pollution and provide incentives to prevent pollution from occurring. Environmental management of small and medium enterprises is particularly troublesome, given their size and numbers and the relative inability of the enforcement mechanism to trace them. 6.27. Improving the Effectiveness of Existing Instruments. Although Vietnam has sound environmental laws and procedures to curb pollution, they are poorly enforced. While laws empower MoSTE with enforcement authority and its staff can inspect firms for compliance with standards and decrees, typically, MoSTE and its provincial offices (DoSTE) lack the necessary resources, manpower, and equipment to perform their duties systematically. Reliable plant- specific emissions and discharges data are virtually non-existent and the general level of compliance with standards is not well known.30 28 It is clear that the species within these ecosystems are poorly known and many species remained un-named. However, a recent effort to address this issue was abandoned because of the Govermnent's decision not to allow the temporary export and identification of systematic collections[o]. 29 Of these areas, 43% is coastal mangrove and mudflat and 56% is Melaleuca forest, seasonally inundated grassland and swamp. 30 A recent analysis by the Hanoi Environment Committee indicates that 124 out of 300 medium and large sized factories had emissions that exceeded standards. 101 Chapter 6 - Improving Environment Quality 6.28. Under the present commnand and control approach, industries must comply with specific regulatory environmental standards prescribed by MoSTE.3' Despite the fact that Vietnamese Standards allow for the adaptation of standards according to the specific industrial sectors, their use is uniform, and the same standards are applied irrespective of activity. Given that there are wide variations in industrial production processes, levels of abatement effort and costs vary widely across sectors, compliance with a uniform standard may be out of reach for one industrial sector (even upon exercising reasonable pollution control effort), while simultaneously being attainable by another sector. Simply establishing standards does not ensure that polluters will initiate efforts to control pollution; there must be strong incentives to make the investments necessary for cleaner production Global experience suggests that Vietnam should shift its standard setting approach to target priority pollutants that are most harmful to the environment and hurman health, and whose removal has significant and immediate benefits. 6.29. Adding Incentives: Expanding the Choice of Instruments. All around the world, efforts are underway to complement the command and control approach with economic instruments such as pollution fees (see Section V), and the use of public disclosure. Plant managers respond to economic incentives, and will reduce discharges only if they expect the additional cost of doing so to be less than the penalties imposed on them. Such penalties may include fines, closure, or pollution charges, but also social pressure from communities that are affected by the pollution. In many developing countries environmental protection legislation often requires amendment to enable the use of economic instruments. However, this does not appear to be the case in Vietnam as both the Law and the Decree (175/CP) on Environmental Protection allow the use of economic instruments. MoSTE should take advantage of this and formulate the necessary policy and institutional framework for the immediate application of such instruments. 6.30. Public disclosure of enviromnental information, including tne pollution control performance of selected industries, can be a powerful environmental management tool. It empowers communities and local government with knowledge, and encourages public participation in the environmental protection process. There are many examples (see Box 6.4) wherein public disclosure has resulted in improved reduction of pollution of target industries. Box 6A: Using Public Disclosure in the Philippines- The Eco Watch Program Following the PROPER example set in Indonesia, the Department of Environment and Natural Resources in the Philippines created EcoWatch. In April 1997, EcoWatch published its initial accounting of 52 factories in the Manila area. The graphic summary showed that 48 plants irankedred or black, indicating a 92 percent rate of non-compliance. The compliant or blue firms were congratulated in a public ceremony. The non-compliant finns were notified fnd gisven a substantial period to reduce pollution. Although no firms reached the very good or world class rating. following full public disclosure in November 1998, blue ratings jumped Firom 8% in April 1997 to 58% in November 1998, and red ratings declined sharply. Other counmries like Mexico and Colombia are designing similar public disclosure systems. 3" Industrial air emission standards are defined in Vietnamese Standards 5939-1995. Ambient air quality standards are defined in Vietnamese Standards 5937-1995 and 5938-1995. Surface, coastal, and ground water quality standards are defined in Vietnamese Standards 5942-1995, 5943-1995, and 5944-1995 respectively. 102 Chapter 6 - Improving Environment Quality 6.31. Providing support for conversion to cleaner production technologies is another way of greening the industrial sector. In selected cases, this can be a cheaper alternative to the fornal regulation methods which require monitoring, data analysis, and sometimes the use of court action - all of which are time consuming and expensive ways of ensuring compliance. III. INVOLVING COMMUNITIES AND CITIZENS MORE FULLY 6.32. Government plans give high priority to "encouraging public participation." This high- level attention should initiate a process of greater local government accountability and increased community participation. The Strategy could do more to recognize that investments in environmental management can actually support income generation. The real and perceived opportunity costs of promoting industrial growth or agricultural intensification must be evaluated more thoroughly. In the interim, however, programs that promote income generation, invest in health and social protection while simultaneously protecting natural resources or reverse environmental degradation should be nurtured. Programs such as FINNIDA's revolving funds for sanitation, the World Bank's phuong level environmental pilots in urban Haiphong or GTZ's Social Forestry Development Project in Song Da, and the Vietnam-Sweden Mountain Rural Development Project (MRDP) should be examined for valuable lessons. In the past, little attention has been paid to incentives and capacity building for environmental management at the community level. The main reasons for this are the following: * limited environmental awareness; * few environmental non-governmental organizations; and * highly centralized environmental planning and management. 6.33. In addition, a highly centralized structure that pre-empts local agenda-setting, and an incentive structure that discourages both enforcement and compliance, are also to blame. These two reasons are elaborated elsewhere in this chapter. 6.34. Building Environmental Awareness. The Strategy assigns high priority to environmental education at the primary, secondary, and tertiary levels. Teacher training is also a part of the plan. The draft Strategy proposes that four percent of total environmental expenditures be invested in environmental education and community-driven programs. New environmental education curricula are being developed. The expenditures, however, will have positive impacts only if there is a greater role for community organizations in determining priorities in the environmental management process. To accomplish this goal, the Action Plan should focus on ways to build local government-community partnerships in which the people would determine their own priorities and assume some responsibility in the implementation of local-level plans and programs for environmental improvement. 6.35. Facilitating Environmental NGOs. The Strategy mentions hamessing existing mass organizations in the implementation of the Action Plan, but could do more to acknowledge the potential contributions of community organizations and the private sector, that are outside the influence of the govermment structure. Non-governmental organizations that specialize in environmental monitoring, education and advocacy would need independence in order to be effective in furthering the environmental agenda. Further, environmental monitoring and reporting by credible organizations outside the state structure would also put pressure on the 103 Chapter 6- Improving Environment Quality SMEs and the nascent private sector to pay greater attention to environmental impacts. Pilot level activities, facilitated by NGOs, can introduce new ideas and approaches in communities where the local government organizations have failed to bringr about the desired changes. 6.36. Engaging Local Communities. There is growing recognition of the idea that "local people know best what is happening in their environment." [n the past three years, community- based land use planning and forest management has developed significantly, through the intervention of donor-assisted projects. The Action Plan has established that a Decree providing guidelines for the formation and operations of community environmental groups will be issued in 2001. Under the current land law, there is no provision for forest land to be allocated to communities, so all of the community forestry work is done as pilots. 6.37. The Strategy recognizes a limited role for commrunities in environmental monitoring. And it has been pre-determined that selected communities will be trained to monitor water quality. These communities will need to learn how to report the results of the water quality monitoring to enable local agencies to take remedial actions. In essence, local communities must be able to apply adequate pressure for cleanup of their resouirces and use the local DoSTE as a partner in this process. This is especially true if the community is downstream from a pollution source. IV. IMPROVING INSTITUTIONAL EFFECTIVENESS 6.38. The previous 10 year plan did not adequately address institutional capacity, but the new Strategy, correctly accords high priority to institutional development. The roles of the key agencies are summarized in Box 6.5. 6.39. Effectiveness of Existing Institutional Arrangements. MoSTE and NEA are young agencies, working in a weak public administration context that is neither performance-based nor outcome-oriented (see Chapter 7 for more on public administration reform). Their effectiveness is severely limited by small budget allocations, inadequate skills, a lack of mandates at district level, and perhaps, most importantly, a lack of influence with other Ministries and agencies in Vietnarn. Existing technical assistance programs,32 have made efforts to build capacity within MoSTE and NEA, and have established the foundation for the proposed upgrading and re- organizing of NEA to a General Department of Environment. 6.40. To worsen the problem of weak national institutions, the legal framework is inconsistent in assigning environmental management responsibility. At least 14 ministries and 10 state committees/general departments have responsibility for environmental and natural resource management functions. Ministries and agencies are highly segmented, with limited cooperation among them. There are significant functional overlaps, making coordination time consuming and resource intensive, and accountability difficult. In addition to capacity-building, GoV needs to give priority to streamlining and re-organizing environmental and natural resources functions and agencies as part of its broader efforts to reform the public sector. 32 SIDA-supported Strengthening Environmental Management Authority (SEMA) Technical Assistance and the Canadian supported Vietnam Canada Enviromnent Program (VCEP). The SEMA project has made efforts to strengthen capacity in 6 DoSTEs in addition to the NEA and MoSTE, while the Vietnam-Canada Environmental Project, funded by CIDA, is working with 7 DoSTEs. 104 Chapter 6 - Improving Environment Quality Box 6.5: Existing Institutional Arrangements * Ministry of Science, Technology and Enviromnent (MoSTE) is the principal government agency responsible for envirornental protection. * National Environmental Agency (NEA) was established in 1993 as an executive department for environment within MoSTE. NEA is headed by a Director General assisted by two deputies and has nine divisions: Education, Training and Information, Database Mfanagement, EIA, Inspection, International Relations, Monitoring, Pollution Control, Policy and Legislation and Nature Conservation. * Department of Science, Technology and Environment (DoSTE) At the provincial level, DoSTEs have been established in all 61 provinces, and as of 1995, enviromnental management divisions are part of DoSTE offices. * Environment Units. In the line ministries, these units are responsible for environmental matters within the sector. * Department of Science, Education and Envirownent (DSEE) within MPI, oversees environment sector issues, and is the MPI counterpart to MoSTE and NEA. MPI's Development Strategic Institute takes primary responsibility for the preparation of regional plans. * Ministry of Agriculture and Rural Development (MARD). Different departments have natural resource management responsibilities in agriculture, forestry and water resources. * Ministry of Construction (MoC) is responsible for spatial planning and building water supply and sanitation facilities. * Ministry of Fisheries (MoFI) is responsible for marine resources management and conservation. * General Departnent of Land Administration (GDLA) oversees land-use planning and management. * Hydrometeorological Services (HMS) is a ministerial level agency responsible for water quality, precipitation! climate change and ozone protection activities. ^ National Center for Natural Sciences and Technology and a network of research institutes in the line ministries serve as a technical advisor on environmental issues. 6.41. Mainstreaming Environment in Sectoral Ministries and Agencies. Since 1991, much work has gone into integrated environment and development planning. However, this planning has not translated into the desired results because environment continues to be accorded low priority by different ministries, and the planning process remains very sector-specific. To further enhance integration and avoid this problem, the Government Strategy has recommended that each ministry should strengthen/establish ministry-level environment management units that are responsible for ensuring that Strategic priorities are incorporated in sector-specific plans, work programs and budgets. Industrial development, transport, mining, hydropower and agricultural production have emerged as priority sectors. A SDC-UNDP supported project assists MPI in incorporating environmental aspects into the planning and investment process. This project has three pilot programs in three provinces and will produce tools to help planers to screen environmental aspects of investment projects. 6.42. Presently, some ministries have a Department of Science and Technology that is responsible for environmental matters, while some have attached environmental protection 105 Chapter 6- Improving Environment Quality responsibilities to functional units. These institutional arrangements should be reviewed to ensure that mainstreaming does occur effectively. The Action Plan target is to have all units established by 2002. In addition, a formal accountability mechanism (in the form of environmental score cards) could be put in place to ensure that effective reporting on and integration of environment into the particular sector occurs. 6.43. Decentralizing Decision-making. The Strategy expresses a clear commitment to upgrade and strengthen the institutional arrangements and human capacity for environmental management at the provincial level. It is expected that the provincial DoSTEs will be reorganized. The provincial environment authority should. have clearly established lines of accountability for environmental protection, and sufficient budgets to carry out monitoring and enforcement. 6.44. Provincial and district-level environmental departments have little power to influence planning and investment at the local level, or to influence action by solid waste and sanitation companies. Similar to mainstreaming environment into development policy at the national level, institutions need to see that provincial sector development plans integrate environmental concerns. The newly created post of District Environment Officers can be critical in mainstreaming environmental concerns into investment plans, and ensuring that DoSTE evaluations, objections, and licensing processes are upheld. It is critical that these officers be well trained, technically proficient, and respected by colleagues in other departments. 6.45. At the district level, efforts should be made to strengthen the local govermnent capacity, changing from a sole provider to an enabler and facilitator of environmental services. Some service provision should be contracted out and local governments should take on the responsibility of performance and service quality monitoring. Lang Son and Danang are using private contractors for waste collection and septage removal from households, who also collect the relevant service charge. 6.46. Making Environmental Impact Assessment a more Effective Tool. Recent analyses reveal significant shortcoming in the environmental imrpact assessment (EHA) process in Vietnam. The scope and application of EIA process should be expanded to integrate environmental and social dimensions of policies, programs, and projects. EIAs should be used as a tool for analyzing investment alternatives, rather than as a step to receive an investment license. They can also become a mechanism for encouraging wider public participation in investment planning and decision making. NEA/MoSTE should be encouraged to promote public participation, consultation and disclosure of all ELAs as part of their review process. 6.47. Currently, MoSTE's environmental review process focuses on the private sector and large ODA, FDI and joint venture projects.33 MoSTE has little to no influence over other Ministries, yet these Ministries are involved in projects that often have significant environmental impacts. Further, DoSTEs are often responsible for the oversight of environmental management plans and the monitoring and mitigation functions outlined in these, and despite capacity building efforts, local expertise for the preparation and review, and implementation of EIA 33 There are four levels of EIA approval in Vietnam: Large projects that are of national importance are approved by the National Assembly; the next level of approval is granted by MoSTl,; projects with limited regional impact and more limited budgets and social/environmental impacts are approved by the Provincial Peoples Committees, while still others are approved by line ministries. 106 Chapter 6 - Improving Environment Quality documents remains weak. This is especially true in data collection and analysis both at the preparation stage and also for monitoring environmental impacts. All possible efforts should be made to encourage a greater role for entities outside the government to be involved in the preparation of EIA reports, and in supervision of their implementation. This will help build capacity in universities, environmental non-governmental organizations, consultants and within the private sector. V. PRIORITIZING PROGRAMS AND DIVERSIFYING SOURCES OF FINANCING 6.48. The Government Strategy proposes that one percent of GDP should be spent on environmental protection during the period 2001-2005. A first step in bringing realism to the environmental targets outlined in the Government's Strategy is to look at environmental expenditures and achievements in the most recent period (such as the current five year plan). A rudimentary analysis of current environmental expenditures indicates that the Government will need to allocate several times more than what it currently spends in order to meet the Strategy targets, and this is unlikely given the competing priorities and tight budgetary situation. Therefore, it is better to target affordable and prioritized outcomes, and then see that financing is made available to meet these targets. For example, provision of water supply, sewerage, drainage and solid waste management in urban areas over the next 10 years is estimated to cost US$ 5 billion, and it is not clear how these needs will be financed, or whether they are fully captured within the Strategy targets. The Action Plan is making a first attempt at setting financing needs, and has identified 20 priority projects that need to be implemented 6.49. The Government of Vietnam should consider a mix of financing instruments to support the implementation of Strategy priorities, aside from traditional ODA. These would include: increased allocation from budgets in sectoral ministries, widening the use of cost recovery measures, environmental user fees and pollution charges, using specialized environmental funds, accessing GEF resources and also tapping into emerging instruments such as carbon trading. 6.50. ODA-- the Backbone of Environmental Investments To-date. Official Development Assistance (ODA) in the form of grants, credits and loans accounted for much of the investment in environmental improvement in Vietnam. Between 1996 and 2000, over US$ 560 million of ODA34 was committed by several donors to support natural resources management (75 percent of total), urban environmental improvement, industrial pollution management, and capacity building activities. ODA effectiveness is summarized in Box 6.6. 34 A Study of Aid to the Environment Sector in Vietnam, MPI and UNDP, November 1999 (Chapter 5; Trends in ODA). 107 Chapter 6 - Improving Environment Quality Box 6.6: Effectiveness of Environmental ODA: 1985-2000 A study on aid to the environment sector in Vietnam (October. 1999) -- MPI, UNDP and IUCN came to the following conclusions: * ODA's impact has been most visible in institutional and policy development, but many fundamental challenges remain unresolved; * Benefits on-the-ground are not fully evident because of the long-term nature of environmental recovery; * Too much emphasis was put on production and not enough on sustainable natural resources management, thus squandering opportunities to build environtmental safeguards in natural resources management; ^ Little attention has been paid to urban environmental management and industrial pollution prevention; * Lower priority was assigned to regions containing high levels of Vietnam's remaining biodiversity stock; * Local ownership should be hanessed and deepened if ODA ussistance is to be sustained; * Diversify recipients to include more national agencies and decentralized units so as to internalize capacity building efforts. V.I. Supplementing ODA Support with Other Financing Options 6.51. In estimating a budget for improving environmental management, it is essential to identify the sources and means of revenue generation and financing beyond ODA support. Financing options suitable for Vietnam are summarized in Table 6.2. The Action Plan indicates that guidelines will be issued in 2003 for a polluter pay system and greater cost recovery for environmental utilities, however, these financing tools are a precondition to achieving most of the environmental targets. As Vietnam's private sector continues to grow, it must play a key role in financing environmental investments, while budgetary and ODA support will be needed for regulatory activities, public awareness, and environmental r esource protection. The role of state owned enterprises (SOE) (industrial and natural resource extraction) will be a critical issue during the transition to a more market-oriented economy. 6.52. Making Polluters Pay. As mentioned in the earlier section, the Law on Environmental Protection provides opportunities for the implementation of Polluter Pays Principle (PPP) in Vietnam. If applied, firms would be required to prevent or control pollution or face penalties based on their pollution discharges and waste management practices. Profitable firms could afford this, but not those highly-polluting firms that are unprofitable, like many SOEs. Therefore, the implementation of PPP should first be piloted in a sector where enterprises are profitable and at the same time experiencing environmental problems, or in a geographical region where environmental problems are acute. 108 Chapter 6 - Improving Environment Quality Table 6.2: Financing Options for Investing in Environmental Improvement Domain Activity f vest Sources of Financing Public/State * Policy making * Recurrent costs * Government budget * Regulatory capacity * Capital investments in * ODA financing * Education and buildings and services * Private Foundations awareness * Supporting * Public goods environmental * Protected area externalities management * Reforestation * Services for poor Utilities * Water supply and * Capital investments * ODA, government (Services/ waste management * Operation and budget, private sector Infrastructure) facilities in maintenance participation municipalities * Cost-recovery through user charges ._______________ _ * performance grants Manufacturing * Cleaner production * Capital investment * Frivate capital and Private * End of pipe treatment * Operation and borrowings maintenance ^ Environmental Fund * Earnings * Pollution charges * Performnance grants Manufacturing * Cleaner production * Capital investment * Environmental SOEs * End of pipe treatment * Operation and improvements financed maintenance as part of SOE restructuring * Pollution charges Household * Services at individual * Capital investment * User fees and conmmunity level * Operation and * Community funds maintenance * Govermnent budget * ODA financing Global * Supporting global * Capital investment * GEF objectives * Operation and * ODA Maintenance * Government budget 6.53. Pollution Levies are needed in Vietnam to provide an incentive for enterprises to reduce their pollution, and to raise revenue for investments in industrial pollution control. These levies should be high enough so that it pays to invest in cleaner production rather than continue paying the fines themselves. (See Box 6.7 for an example of user fees in the Philippines) 109 Chapter 6 - Improving Environment Quality Box 6.7: Environmental User Fee Reduces Pollution in Laguna Lake, Philippines To complement the existing regulatory system, a pollution charge system -- Environrnental User Fee (EUF) - was established in the Philippines in 1997. EUF serves as an economic incentive to protect water quality in the lake. The fee, set at a level higher than the cost of abatement, has two components: a fixed fee to cover the administrative cost of permitting, and a variable fee based on pollution load. The basic fee is set at P5/kg BOD if the concentration level is within the standard. However, this increased six-fold (to P30/kg BOD) when standards are exceeded. This is in addition to pertinent fines and penalties imposed by law. The first phase of implementation has shown that economic incentives do encourage firms to go beyond compliance, to generate less and recycle their wastewater, and to employ more cost- effective reduction measures. Firms Covered 109 293 520 Fees Collected P 6.2 M P16 M Pl 1.8 M BOD Reduction 54M kg 4.7M kg TBD Source: Philippines Environment Monitor 2000, (World Bank 20'00d). 6.54. User Charges. Raising funds from the general municipal budget is a typical way of financing sewerage and drainage investments in developing countries. However, experience shows that in order for such investments to be fully utilized, operation and maintenance (O&M) expenditures need to be covered by a regular source of funding.35 User charges were first introduced in Vietnam in the mid-90s, when Danang city levied a surcharge on water supply to cover O&M costs. This system was followed by Haiphong, in the context of the World Bank financed project, which is levying a surcharge of 200 Dong/rn3 to the existing water supply tariff of 2000 Dong/m3 to cover sanitation and sewerage services provided by the city's Urban Environment Company. Ho Chi Minh will be the next city to introduce user charges in Vietnamn. All major cities have instituted garbage collection fee to partly cover costs of solid waste collection. The implementation of user charges is also enabling the outsourcing of environmental services to private contractors. Lang Son is the first town to pioneer private sector participation, where the private company collects garbage and also 25 percent of the O&M costs, while the balance 75 percent is covered by the local budget. The use of user charges should be further expanded to ensure the long-term sustainability of drainage and sanitation investments in Vietnam, initially to cover operation and maintenance expenditures, and eventually future capital investments. 6.55. Environment Funds. Where a functioning credit market is absent or immature as the case is in Vietnam, a case can be made for the establishment of an environmental fund to finance pollution prevention or pollution control investments (as the NSEP has done). In Vietnam, three 35 In the late 1980s and early 1990s, large Chinese cities such as Shanghai, Beijing, and Tianjin began investing urban sanitation projects. To help ensure efficient operation and improved cost recovery, municipal governments in these cities created autonomous wastewater companies and establishecl tariffs to finance O&M of sewerage and sanitation facilities. Led by these cities, the central government in China established nationwide tariffs for wastewater collection and treatment. 110 Chapter 6- Improving Environment Quality pilot scale funds36 have been established to support industrial pollution control activities. The question of a single fund versus multiple funds should be carefully examined, as mushrooming of funds could be counter-productive in the longer-term by promoting inconsistent eligibility criteria and lending conditions. It is important that environmental fund and environmental levies are integrated to the national fiscal framework to avoid policy distortions. The Fund should be professionally managed, preferably by a financial intermediary, and should not be viewed as an extension to the budgetary process or managed by the bureaucracy.37 A key criteria for funding should be the financial viability of the enterprise. With experience, the activities of such a fund should be expanded to finance investments in municipal wastewater and solid waste management and also extend assistance for selected conservation activities. 6.56. Financing environmental clean-up of SOEs: In Vietnam, SOEs are poorly regulated and pose significant environmental hazards. Of the SOEs, 40 percent are not profitable, and another 20 percent have unstable financial performance (see Chapter 2 for more details). Most of the SOEs use old or obsolete technology, that is partly or largely responsible for the heavy pollution loads. They have no savings to finance environmental investments and they are unlikely to attract credit from lending institutions. Providing financial support for environmental pollution investment to an unprofitable SOE may reduce pollution in the short term, but may result in more pollution in the long term by keeping the enterprise open longer than otherwise had it not been subsidized nor provided with environmental credits. SOEs are under excessive bureaucratic control, and there are few incentives for managers of even the profitable enterprises to invest in environmental clean-up. Improving the environmental management of SOEs should be an integral part of their restructuring. 6.57. For the near-term it is anticipated that ODA will support capital investments and capacity building efforts in the public and state domain, while private capital and user charges can be mobilized for utility operations. One of the important recommendations of the donor effectiveness study was to ensure improved coordination not only among Government agencies but also between different donor activities. In support of this, Government and donors have proposed to set-up an Environment Support Group to better coordinate and facilitate environmental assistance and have identified five pilot partnerships that respond to the NSEP priorities, which are elaborated in the next section. V.2. Opportunities for Partnership and Collaboration 6.58. The Government Strategy provides a framework for collaboration on programs in environmental protection, conservation, and sustainable use of natural resources. MoSTE and the donor community have proposed an Environment Support Group (ESG - see Box 6.8), as a partnership vehicle, to help foster the implementation of the NSEP and Action Plan. Emerging, from the Action Plan and the dialogue between government and the donors, are the following five priority program areas. 36 Ho Chi Minh City Fund, Hanoi Environment Fund and VINACOAL Fund were established in the past two years and offer preferential loans to enterprises (large and SMEs) to reduce pollution. 37 Thailand Enviromnent Fund and Polish Environment Fund offer contrasting examples. The former is ineffective because of its bureaucratic style of management, laden with cumbersome procedures making it difficult for a beneficiary to receive assistance. The latter has embraced private management culture which is responsible for its very impressive results with loan recoveries accounting for nearly half its revenue stream, and has a diverse poztfolio of beneficiaries. C'hapter 6 - Improving Environment Quality * Environmental Policy and Institutional Development; * Coastal and Marine Environment Management; * Cleaner Production; * Unleaded Gasoline; and * GEF Strategy Implementation. Box 6.8: Forging Partnerships Over the past three years a number of support groups and around 20 partnerships have been instituted between the government and donors for variety of activities. The most noteworthy are the International Support Group (ISG) for MARD and the Partnership Support for the 5 Million Hectare Reforestation Program. The main objective of the ISG for Environment, which builds on similar experiences, is to enhance the effectiveness and efficiency of development aid to the environment, in line with government policy and priorities, and through a partnership approach. Unlike other ISGs, the ESG will be both cross-sectoral and multi-agency. Specific ESG objectives include the following: * Integrate naEional and intemational investment in the environrrLent under a single policy framework; * Integrate the National Environment Protection Strategy into the plans and programs of all levels of govemment; * Channel scarce resources to the highest priorities, while minimizing overlap and wastage; * Further define and clarify priorities and programs on the environment; and * Strengthen the management capacity of MoSTE/NEA to promote working linkages on the environment across sectors and between different levels of government. 6.59. All of the above are on-going activities or identified as critical gaps in the implementation of the previous 10 year plan. More importantly this approach would promote much-needed coherence among different donor activities in each of the program areas and also enable the re-direction of resources where there is overlap. The priority pilots also give an opportunity to attempt resolution to the key challenges detailed in the earlier section. It is anticipated that each pilot will address all or some of the challenges and provide feedback to the partners, especially the Government, on emerging lessons and future directions. These pilot programs supported by multiple stakeholders are a promising way forward. 6.60. Monitoring Indicators. Four types of monitoring indicators are needed to fulfill this vision. First, the government should begin to identify indicators that are outcome and performance based, rather than the current input-based (or target style) of indicators. The second set of indicators would come from the set of specific sector ministry scorecards on environmental integration referred to in the earlier section on mainstreaming environment into influential government institutions. Another set of indicators would be to monitor the effectiveness of ODA assistance to the environmental sector, perhaps through strengthening the National Environmental Information System. A final set of indictors could be developed by taking the indicators developed in the NSEP38 and Action Plan and measuring progress towards "NSEP produced an exhaustive list of indicators which could be used as an operational monitoring tool. 112 Chapter 6 - Improving Environment Quality achievement of these indicators in the annual State of the Environment report produced by MoSTE. End note: (1) JICA (2000), Draft Final Report, Master Plan Study for Industrial Pollution Prevention in Vietnam, p S-2-15. (2) MoSTE/NEA (2000), National Strategy for Environmental Protection, Draft. (3) World Bank 91999f) A Tale of Two Cities in Vietnam. (4) Dang Ngoc Tung (1999) Paper presented at the National Workshop on Sustainable Industrial Development, Hanoi, June 10-11. (5) NORAD/UNEP/NEA (2000), State of the Environment, Vietnam, Draft. (6) World Bank (1995) Vietnam Environment Program and Policy Priorities for a Socialist Economy in Transition, p (7) ADB (2000b) Coastal and Marine Environmental Management in the East Asia Sea, Phase Two, Project 5712- REG. 113 Chapter 7 - Building Modern Governance CHAPTER 7 BUILDING MODERN GOVERN9ANCE Key Messages In order to ensure that government works more effectively, particularly for the poor, the Government of Vietnam recognizes that it needs to focus on reform of the institutional structures and systems which facilitate this. Good progress has been made, but Government and donors together need to do further work to prioritize areas of future focus, specify the results that an improved system is trying to deliver, and analyze the constraints which currently prevent this from happening. The five key outcomes to which the Govemment might aspire are: a) A stronger, more efficient Public Service which is capable of implementing policy and delivering better services to the people at all levels In order to deliver the vision for 2010, Vietnam's Civil Service must become dynamic, responsive and efficient. It needs to promote a culture of excellence and an ability to set and keep to standards. The Government needs to draw up an effective change managemenl strategy to drive through the Public Administration Reform needed to deliver better government for all. b) Better and more transparent public fnancial management Implementation of the Public Expenditure Review is an important step towards being able to raise, allocate and account for resources better. The public sector needs to change the way it takes and communicates decisions, with a clear move to infornation sharing and openness, moving to international standards of transparency. c) Wider access o justice and a levelplaying field The government needs to sustain the momentum that has built up in developing a legal system. To have the rule of law at the foundation of society and to make justice available to all citizens, Govermment and its partners need to work on a comprehensive strategy which makes justice, safety and security available to all, and places the rule of law at the foundation of society. Legal certainty and due process will provide a more attractive environment for small and large business. d) More participative and responsive government, particularly at local levels The Government aims to fully implement President Ho Chi Minh's principle that 'people know, people discuss, people execute and people supervise'. Much progress has been made, including the promulgation of the Grassroots Democracy Decree and the Law on Science and Technology. The challenge now is to deepen and strengthen this progress. Local governments need to make clear how they intend to operationalise these policies, and Govermment as a whole needs a plan to ensure that local governmeat has the capacity to handle this greater participation and potential demand for more responsive services. e) A government which fights corruption and waste at all levels Fighting corruption is an important priority. Vietnam's leaders need to set an excellent example and must continue to show their determination to fight corruption at all levels. While there are individual steps which can help with this, such as minimizing red-tape and reforming procurement, it is important that the reasons behind corrupt behavior are understood and measures taken to address these at the same time. There is much international experience that can assist Vietnam in this task. 114 Chapter 7 -Building Modern Governance 7.1. The vision of the Government of Vietnam is for a country that is governed by the rule of law, has efficient governance institutions at all levels and ensures a fair, equitable society for all Vietnamese citizens, while ensuring national security and being compatible with the needs of a more market-oriented economy. 7.2. Vietnam is at the beginning of a long process to achieve this goal. Better governance is not just an end in itself, but also the means to better results for the country as a whole and for its people. Although the broad policies have been articulated, more work is needed by both government and donors to define operational strategies which will deliver them. In particular, there is a need to make explicit the links between reform activities (such as training and capacity building) and the improved services to the people which these reform activities are intended to support. The strategies need to define the constraints to improved services, define solutions in operational terms and clarify responsibilities for action. The vision that has been laid out is an ambitious one. In order to achieve the vision, Vietnam seeks to carry out broad ranging reform of the public administration and related areas. This chapter examines some of the policy options, instruments and implications of carrying out such reform. However, this is only a beginning: further work will be needed to make this effective in operational terms. I. PUBLIC ADMINISTRATION REFORM 7.3. Public Administrative Reform refers to the process of reform of government. Making it work is a long and difficult task, but it critical that during this time we keep in mind the aims of this reform. Public Administrative Reform not only aspires to deliver a better and more efficient public service, but one which is capable of implementing policy and delivering better services to the people. 7.4. Vietnam has already started to reform the public administration into a service which can efficiently meets the demands placed on it in the 21St century. Recent achievements include simplification of administrative procedures in ministries and agencies at both central and local levels; restructuring of ministries through mergers; a clearer definition of roles and functions; and the introduction of more transparent personnel procedures. Legislation on civil servants and public servants was promulgated in 1998. A computerized, personnel system includes information on central government staff, and is being expanded to include provincial staff. 7.5. The Public Administration Reform (PAR) Review recently completed by the government proposes future reforms, many of which are broader in scope than pure PAR. The PAR Review is built on four pillars, namely institutional reforms; organizational reforms; human resource reforms; and, public finance reforms, The PAR review recommends, inter alia: * new provisions requiring public comments on draft laws and regulations before promulgation; * new provisions that laws and other official instruments will only take effect after being published in the Official Gazette; * replacing discretionary licensing with registration and making information on registrations public (following the pattern of the recent decree on registration of secured transactions); * improving legislative drafting; 115 Chapter 7 -Building Modern Governance * providing for codification and indexing of all laws and other official instruments; * requiring compulsory publication of court judgements; * streamlining aspects of the corporate regulatory framework; * forming a clear distinction between roles, respon.sibilities and finances of agencies under the Prime Minister; other ministries; agencies under sector ministries; People's Councils; People's Committees; and non-state organisations; * professionalizing the civil service, including ramionalising salaries, training, with recruitment and promotion grounded on merit; and, * wide-ranging financial management reforms at both national and sub-national levels of government. 7.6. Principles are emerging from global experience that ':an help Vietnam as it tackles the challenge of implementing such broad ranging reform (Box 7.1). The progress that has already been made can be built on, so that the structure and form of t:he public service is dictated by the needs of the strategy and vision. Box 7.1: International Experience Points to Four pillars of Good Governance Govemance can be defined as the manner in which power is exercised in the management of a country's social and economic resources for development. Good govemance thus involves all the thxee sectors - the state, private sector and civil society. The interplay between these three groups of stakeholders is critical for achieving balanced socio-economic development and nation building. It is premised on the universally applicable four pillars of good governance, namely: Transparency - entails the free flow of low cost information that is understandable, reliable and timely; Accountabiity- the obligation to give answers and explanations conceming one's actions and performances, to those with a right to require such answers and explanations; Predicabilita - refers to the rule of law and results primarily frora laws and regulations that are clear, known in advance and uniformly and effectively enforced; Participation - where every citizen has a voice in the decision making process, including the poor and the vulnerable. Source: ADB (1999). 7.7. Reforming the Civil Service. In undertaking PAR, substantive and enduring change cannot be realized without radical changes in human resources and in organizational practice and policy. Vietnam not only needs a strong, well organized public administration, but also an adequately remunerated service with a personnel policy and grading system capable of effectively implementing these changes. An essential component of PAR is to focus on the critical training needs of civil servants, moving towards a performance oriented system driven with energy and determination. The Government has prioritized a reduction in the size of the civil service. Achieving this will be facilitated by the new computerized personnel system that is 116 Chapter 7-Building Modern Governance now coming on-stream. This entails greatly increasing the capacity of the National Institute of Public Administration to address the required skills and administrative competencies sufficiently. 7.8. Equally important is that the public service be compact and coherent, with a clear mission and defined goals. Practices, methods, systems and procedures need to be revised to foster and enhance a new working culture of excellence. There is the potential for inter- and intra- agency synergy to become a distinct feature of a restructured administrative management system. Ensuring that local administration is fully empowered and strengthened to serve the needs of society at local levels requires greater decentralization, leading to a more rational allocation of both functional and financial authority between central and local levels. 7.9. Ensuring Excellence and Setting Standards. The emphasis on reforms by Government so far has been on formal administrative systems and institutional reforms, with little in the way of service delivery initiatives. Focusing on the needs of people who are the beneficiaries of the public service and ensuring that service delivery is efficient and timely, would help address this. Many countries have introduced service standards. These should be stipulated in line with public expectations of efficient and friendly service that is reliable, credible, accessible and timely. An important initiative, therefore, is to set and publicize service standards for those important services provided by agencies both at central and local levels, not only to improve quality of services, but to increase accountability and transparency in the civil service. 7.10. These service standards would provide full and accurate information about where and how services could be obtained, service delivery time, forms/particulars required for a service, cost/charges if any and other useful information. This information should be displayed prominently at the agencies and disseminated through simple brochures and pamphlets. It would be highly beneficial to implement these changes initially in some selected, high profile public services such as for immigration, customs, driving licenses, citizen registration, postal services, public utilities and some specific municipal services. These changes should be implemented intensively to create an impact and begin changing attitudes in service delivery. By doing so, it not only improves the quality of services provided by the Government agencies but, equally important, it enhances the elements of transparency and accountability in these agencies. 7.11. International experience has shown how a 'scorecard' approach, where citizens formally rate the quality of service provided by Government bodies, can help improve public sector performance in many countries (Box 7.2). 7.12. Clearly Forming and Implementing Policies. Policy co-ordination and policy implementation present critical challenges. At the central policy-making level, policy measures must be both consistent and coherent. Having formulated such policies, they need to be implemented effectively, in line with underlying decisions. The role of central agencies and, in particular, the Office of the Government is pivotal to policy measures, as well as to ensuring that there is a proper mechanism for strengthened policy co-ordination, timely decision-taking and effective implementation of all government decisions. 7.13. How to Carry out Reform - The Change Management Strategy. Managing the change of PAR is as important as the reform itself in order to ensure its smooth implementation and fully reap the benefits of reform. To achieve this, it is essential to develop a clear, widely owned vision and strategy for the Public Service - only then can the necessary synergies, impetus and momentum for the implementation of PAR be generated. This strategy is now being developed 117 Chapter 7 -Building Modern Governance by the Government. Continuing political will and commitment is required, based on the broad consensus that change is both desirable and achievable. Fundamental changes to the public administration in Vietnam are a major long-term undertaking, as administrative reform is a continuous journey. Unlike most programs and projects with a sectoral focus, major changes in public administration are by their nature cross-sectoral and rnulti-disciplinary in nature. Hence, the ultimate authority for such major changes and reform in public administration lies at the highest levels of Government. Box 7.2: Public sector performance can be improved by encouraging citizen feedback Client and citizen surveys that incorporate feedback from citizens have helped to improve public sector performance in many countries. The scorecard method pioneered by Sam Paul in Bangalore, India, embodies this approach. It entails periodic citizen evaluations of local municipalities and their accounts of public services, bribery and extortion. Evidence exists that public agencies in Bangalore have taken concrete steps to improve service delivery. In Mendoza, Argentina, citizens have participated in craftinS transparent rules related to public procurement. A number of localities throughout the world ::aave embraced simnilar participatory processes. As part of its pioneering system of participatory budgeting, Porto Alegre, Brazil, holds citywide assemblies where expenditure priorities for education, health, transport development, taxation, city organization, and urban development are discussed. The assemnblies then elect members to a citywide participatory budgeting council, which decides the city's investment plan. Preliminary evidence shows that more roads have been paved and the number of students enrolled in primary and secondary school has doubled. Increasingly, voice- and transparency- enhancing reforms are being furthered via the Internet revolution. In Chile, just during the past year, the share of the tax paying population filing tax returns over the Internet increased from 5 to 30%. Furthernore, the combination of the latest statistical, computing and Internet technology is also promoting greater accountability in political elections, as witnessed recently in the extremely efficient, accurate and speedy counts in Argentina, Chile and Mexico, in sharp contrast with elections in a number of other couitries. Source: The Quality of Growth (World Bank, 2000e). 7.14. International experience shows that institutional reform is rarely internally driven; requiring implementing ministries and agencies to initiate their own reform often proves not only to be a slow process but a self defeating task. Reform initiatives need to be planned and driven by suitably resourced task forces. The Enterprise Law Tas:k Force has shown how such an approach can be successful in Vietnam (Box 7.3). This has been successful in removing unnecessary impediments and in creating a more conducive climate for business registration. The involvement of a broad cross-section of stakeholders minimizes the risk of changes being directed to meet the needs of narrow vested interests. If these reforms were left to the respective agencies, such changes may have never taken place. 7.15. In Vietnam, PAR is mainly being implemented through the issue of regulations and decrees, which are used to convey Government directives on the implementation of the new administrative improvement programmes to all public sector agencies and civil servants. However, for greater clarity and for more effective implementation, the decrees should be accompanied by clear implementation guidelines, and be reinforced by training as an integral part of the process of change. 118 Chapter 7 -Building Modern Governance Box 7.3: The new Enterprise Law demonstrates good practice in Vietnam Over a period of 24 months, the Enterprise Law Task Force undertook diagnostic work and designed the proposed new law, while steering the process forward and building consensus. Its success was due in part to: * Extensive consultations during formulation, facilitated by earlier support that provided experience, developed relationships, and allowed in-depth assessment of needs and what external agencies and experts could deliver; * Strong commitment to the project. Benefits from earlier assistance were recognized and a clear vision developed as to how the project could assist ongoing work. Motivated staff were a key factor; * The project was driven by needs, and designed to support capacity to undertake the day-to-day activities. Thus, counterpart support was always available, and the project added minimal additional administrative burdens. Flexibility in design, and good working relations with the funding agency and experts, maximized opportunities to adjust inputs in line with changing priorities and opportunities; * An innovative mix of domestic and international experts provided cost efficient results; * Wide-ranging consultations -especially with the business community - and applied studies on constraints and impacts of proposals, were critical in building support for reform. Consultations are also expected to facilitate implementation; and, * The task-force was pro-active in seeking cooperation from the media to raise public awareness of key issues and constraints, and to build support for reform. Source: CIEM1UNDP (2000). 7.16. The challenging question of the resources required for effective PAR also needs to be addressed. Most developing countries that have embarked on public administration reform have, in the early planning and design stages, set up high level Steering Committees supported by dedicated and fully resourced units of full-time, qualified staff. Vietnam has a complex reform agenda, yet the resources allocated are inadequate to undertake such an enormous task. Thus, as the PAR review recognized, there is a real need to strengthen the capacity of the PAR Govemment Steering Committee (GSC) with full time specialists to enable it to carry out its next phase of reform more effectively. 7.17. Sustainable reform programs require clear targets and continuous effort to provide credibility to the change process. Incremental and continuous improvements, coupled with strong political will, will be factors determining the success of these reforms. II. BETTER AND MORE TRANSPARENT PUBLIC FINANCIAL MANAGEMENT 7.18. Transparency is rooted at the heart of the Vietnamese constitution, in the fundamental principle of 'people know, people discuss, people execute and people supervise' being reaffirmed in the vision and strategy for the period 2001-2010. Against this backdrop, achieving the vision will require changes in the way decisions in the public sector are taken and 119 Chapter 7-Building Modern Governance communicated, with a gradual shift in behavior towards infonnation sharing and openness. Real progress has been made in the recent past, including: * publication of the state budget in June 1999; * publication of Government Financial Statistics (GFS) data in the IMF Government Finance Statistics yearbook; * the development of new manuals on audit standardls and procedures; * improvements in external debt management, and fiscal information provided to international organisations and donors; * improvements in reporting by agencies of self raised revenues, external grants and their associated expenditures; and, * the drafting of new accounting standards (95 percent in compliance with the International Accounting Standards), targeted for approval and implementation in 2002. 7.19. This progress provides a basis on which to build. In the area of public financial management, the recommendations of the Public Expenditure Review (World Bank, 2000a) present an important opportunity. As the budgetary system allocates financial resources according to the goals of society, the need to improve the budgetary data and information flows is imperative. Some of these measures could be undertaken inumediately, such as the publication of more detailed information in the budget and public accounts. For example, as a start, the Ministry of Finance (MOF) could publish separately the budget and final accounts figures for sectoral ministries, and each province could publish budget and final accounts information covering its departments and other units. International experience suggests a broad range of transparency reforms could improve financial management and other areas of governance (Box 7.4). Box 7.4: Internationally Effective Transparency Reforms Transparency is a very important issue for better governmnce in a number of areas, but particularly in the area of public financial management. Broad inteational experience suggests a range of transparency reforms which apply to this and other areas: * Ensuring public access to government information (freedom of information); * Requiring certain types of government meetings to be open to public observation; * Conducting public hearings and referenda on drafts, decrees, regulations and laws; * Publishing judicial and legislative decisions and keeping a registry; * Ensuring freedom of the press by prohibiting censorship, discouraging use by public officials of libel and defamation laws as a means for intimidating journalists, and encouraging diversity of media ownership; * Involving civil society to monitor its performance in areas such as anticorruption and large scale public procurements bidding; and, * Utilizing the new web-based tools on the intemet for transparency, disclosure, public participation and dissemination. Source: The Quality of Growth (World Bank, 2000e). 120 Chapter 7 -Building Modern Governance 7.20. Production of a fiscal and economic outlook publication would strengthen the nation's macro economic planning and management mechanism, though this would require strengthening capacity in the Ministry of Planning and Investment (MPI) and MOF. There has been considerable improvement of the institutional framework for audit centered on the State Auditor General's Office (SAGO) with a new audit ordinance currently under consideration by the Standing Committee of the National Assembly. Like all state audit organizations, SAGO's independence and ultimate answerability to the National Assembly is important to safeguard the prudent management of the public purse. 7.21. The existing duplication in the monitoring of budget expenditures by the State Treasury, State Budget Department and the Public Expenditure Management Department of the Ministry of Finance will need to be addressed, with responsibilities being clarified to avoid excessive checking of budget compliance. Accounting requirements and reporting systems need to be simplified, focusing more on the analysis of spending trends and exceptions. Reorganizing the Vietnamese Accounting Association would present an opportunity to form a professional body consistent with good international practice. Similarly, a Public Sector Accounting Standards Board should be set up to establish and implement public sector accounting standards. At the same time, there is a need for training of accountants, auditors, and accounting professors to be greatly expanded. III. WIDER ACCESS TO JUSTICE AND A LEVEL PLAYING FIELD 111.1 Ensuring Wider Access to Justice 7.22. 'The justice system' is a broad concept which incorporates formal and informal legal systems as well as the role of the police and the penal system. Lack of access to this system is a common concern of poor people in many parts of the world. The section below focuses largely on the narrower issues of reform of the legal system. However, experience shows that attempts to tackle the individual elements of a justice system frequently creates new bottlenecks elsewhere. It is important, therefore, that Government and donors consider legal reform in the broader context of access to justice. 7.23. For a little more than a decade, Vietnam has been engaged in the endeavor of building a state ruled by law, as mandated by the 1992 Constitution. A great deal has been achieved since 1992 in the development of a legal system: many laws have been passed, courts and legal aid centers established, court houses built, standards set for judges, lawyers educated, prosecutors and law enforcement officials trained, legal information systems developed, programs to disseminate legal information to the public instituted, and legal education and professional training institutions created and/or greatly expanded and improved. Complementing Vietnam's own heavy investments in developing its legal system, the international donor community has also provided substantial assistance to all of the main components of the legal and judicial system. Although much has been achieved, officials and donors agree that in virtually every major sector of the legal system, much remains to be done yet. 7.24. Currently, there is no comprehensive overall strategy for development of Vietnam's justice system in its totality. Rather, legal development strategy has been ad hoc and piecemeal. Donor efforts also are uncoordinated and fragmented. Given the early stage of Vietnam's legal 121 Chapter 7 -Building Modern Governance system development, this is understandable, especially since different components of the legal system are managed by different agencies both vertically and horizontally. In addition, although a number of the key players in the legal system at the cenbtal level are Government agencies-- such as, the Ministry of Justice, the Ministry of Public Security, the legal departrnents of various other ministries, the Office of the Government, and, of course, the Government itself--others are not agencies of the Government--such as the Supreme People's Court, the Supreme People's Procuracy, the Office of the National Assembly, the Standing Committee of the National Assembly, and the National Assembly itself. 7.25. Legal development in most countries has taken place in a piecemeal manner rather than pursuant to a comprehensive, well-coordinated plan. Most mature legal systems, however, have developed over centuries, but Vietnam is keen to integrate quickly into the world and regional economic systems and to become a modern, industrialized nation by the year 2010. Therefore, a comprehensive, long-term, legal system development strategy would help to ensure that a complete, coherent, and well-functioning legal system is put into place in a relatively short time. There are six major needs and directions that need to be focussed on in developing a good legal system. The addressing of these six legal areas would make a major contribution to the development of a good legal framework for Vietnam. 7.26. Firstly, the legal framework for the development of civil society and the economy, including international economic integration, needs to be improved. Good progress has been made though challenges remain. Priority objectives include drafting/amending laws to facilitate Vietnam's integration into the international economy and to improve the competitive position of Vietnamese enterprises; tax reform; and, unifying business registration rules. 7.27. Secondly, legal information systems need to be strengthened to increase transparency by making all laws, treaties and regulations easily accessible to the public. The principle that communicating laws is as important as passing them needs to be established, together with the predictability of legal consequences, which is essential for the efficient functioning of society and the economy. A single means of finding and communicatin, all relevant laws and rules is also required. Some countries, (such as Singapore and Malaysia), require all rules to be published in the Official Gazette before they can be legally enforced, regardless of what form the rules are issued in. 7.28. Thirdly, legal institutions need to be provided or improved to implement and enforce the law. Much has been achieved although great challenges remain in the area of implementation. Specific measures required include: ensuring the absolute independence of courts and practicing lawyers; the enhancement of the power and prestige of courts and lawyers; improving arbitration and court procedures; providing training to lawyers, judges and law enforcement officers; establishment of centralized computerized registers; and, reviewing the powers of state agencies. 7.29. Fourthly, law-making processes and institutions need to be streamlined and improved. Further improvements in this area would promote economic development and help realize the vision. Priorities for action include: institutionalizing consultation mechanisms and periods; improving law drafting, review and passing procedures; codifying changes in a manual; requiring all new legal documents to cross reference to existing documents; and providing 122 Chapter 7 -Building Modern Governance training for National Assembly staff and lawmakers on WTO, the US-VN BTA and other international instruments. 7.30. Fifthly, legal professional education, training and re-training is required. Of paramount importance is the need for a pool of well-trained lawyers, judges, prosecutors, judgement enforcement officers, police officers, and other law enforcement officials and regulators. Actions needed include: the revision of the basic law curriculum and methods to make it more relevant to the challenges of the 21st Century; training and retraining at all levels; and, the development of appropriate training facilities and methodologies for all staff engaged with the law. 7.31. Finally, the issue of legal aid and access to justice for the poor needs to be addressed. The rule of law requires that there be equal access to the legal system for all. Legal aid centers have been established in 57 out of the 61 provinces and cities, and this is a great step forward, although many poor people still have problems accessing criminal law. One important step would be to set up a state public defender's office to defend poor people in criminal cases. Lawyers in such an office would need equal status with the procuracy and prosecutors. Such an approach has been undertaken in Cambodia. 111.2 Creating a Level Playing Field 7.32. Vietnam has taken important steps to shift from a centrally planned economy to a socialist oriented market economy in which the private sector will play an increasing role. In line with this policy, Vietnam's 1992 Constitution recognizes the freedom of business and equality before the law for all sectors of economy, and states: "The aim of the State's economic policy is to make the people rich and the country strong by releasing all the productive potential and developing all the latent possibilities of all components of the economy - the State sector, the collective sector, the private individual sector, the private capitalist sector and the State capitalist sector in various forms. " 7.33. The Evolving Roles of The State and Private Sector. Despite this intention, there remains a lack of clarity in the respective roles of the state, the private sector, and the non-state sectors. The Government's intervention into the market is extensive. Complicated administrative procedures and excessive regulations create opportunities for power abuse and corruption. A large number of governmental regulations of all levels have been issued to guide the implementation of laws and ordinances. These regulations, however, are often inconsistent with the laws and their interpretation and application vary throughout the country. Also regulations are frequently changed while accessibility of legal documents and dissemination about the changes is weak. This situation risks eroding the confidence of both domestic and foreign investors in the State and creates a risky environment for long term productive investments. 7.34. A related issue, which is hampering the growth of the private sector in Vietnam, is the different treatment that private businesses receive as compared to their competitors in the other sectors- the collective and state sectors. The reality is that there is a gap between the policy of equality of all businesses before the law and the existing practice. The legal framework also treats domestic and foreign businesses differently. Rather than a unified enterprise law, there are five different laws regulating business activities of different sectors of the economy: the SOE Law; the Enterprise Law, to be applied to private businesses and households; the Law on Co- 123 Chapter 7 -Building Modern Governance operatives, to be applied to collective businesses; the FDI Law, to be applied to foreign invested enterprises; and the Law on the Promotion of Domestic Investment, to be applied to domestic investors. 7.35. Clear and timely policy measures are needed to rectify the above issues. There is a greater need now for a fundamental shift in the public service from a traditional bureaucratic one to a proactive, modem management mode of operations, where the role of Government in the economy progressively changes from one of active intervention to that of active support. Thus, the private sector should be envisaged to become the engine of economic growth, while the public sector plays the supportive role of planner, pacesetter and facilitator of national development. The need for this shift in roles and attitudes is reflected in the attitudes of international business. The Global Competitiveness Year 2001) Report released recently by the World Economic Forum ranks Vietnam at 53rd position out of a list of 59 countries. Vietnam's lack of competitiveness is closely related to the civil service's inability to provide a supportive rather than controlling climate for private enterprise. 7.36. Coupled with greater freedom for the private sector must come improved corporate governance responsibility. In the coming years, it will be essertial to put in place the framework that will ensure that the corporations act in a transparent, accountable and non-monopolistic manner. Improved dialogue between the Governmnent and private sector can help. Box 7.5: Corporate Governance initiatives in Malaysia encourage efficiency and growth Objective: The policy stresses the importance of cooperation between the public and private sectors in order to ensure economic growth and national development in tandem in pursuit of shared national goals. Policy Implementation: At the highest level the Prime Minister chairs the Malaysia Business Council once a year, with key representation from private sector industry groups. Consultative Panels: are also established at key Ministries and Agencies at Federal and State levels which meet at least twice a year. Membership - The Consultative Panel is chaired by the head of the Ministry with the deputy chairman elected amongst the private sector members. Members of the Panel comprise of specified officers from the Ministry and representatives chosen from the chambers of commerce and industry, business councils, industries, and social, professional and other related councils. Terms of reference: > Improvement of rules, regulations and administrative procedure governing the activities of the private sector; ' The determination of criteria for transparent decision making and the reduction of discretionary powers; and, b The efficient, effective and timely delivery of services to the private sector. Annual Dialogue: Each ministry must hold an anmual dialogue session chaired by the Minister to enable an open discussion with the private sector on specific government policies, programmes and activities affecting the private sector and the feedback obtained must be used to improve the performance of each ministry. Results: Increased efficiency and greater economic growth. Source: MAMPU (1994). 124 Chapter 7 -Building Modern Governance 7.37. There is a need for frequent policy dialogue between the government agencies and the business community to address issues and problems to improve further the investment and business climate in Vietnam. Such initiatives are important as demonstrated by many of the South East and East Asian countries, where this synergy has enabled them to forge a common understanding in line with the interest of the developmental needs of the country. One such initiative, which has been successful in spearheading economic growth is the Malaysian Incorporated policy (Box 7.5 above). Vietnam's Private Sector Forum is another good example of such dialogue in action. IV. MORE PARTICIPATIVE AND RESPONSIVE GOVERNMENTS 7.38. As outlined in preliminary drafts of the Government's Ten Year Strategy, Government aims at bringing into full play President Ho Chi Minh's principle that "people know, people discuss, people execute and people supervise". Government planning documents state that the people's voice will thereby be strengthened, their access to information increased, and citizens' awareness of legal rights and obligations improved and overall governance strengthened. Full implementation of this principle is an admirable ambition, but there are some constraints which may make this more difficult to implement. The Government needs to design a strategy to address the resource and capacity constraints which are in danger of preventing local governments and local people from taking on such an important role. 7.39. Qualitative research undertaken in 1999 found that Vietnam's poor people are hungry for two-way flows of information: information from government to them about the nature and timing of policies and programs that affect their lives, and from them to government with a view to influencing some of these policies and programs (Vietnam: Attacking Poverty, 1999). Access to such information channels was felt to be limited to a few "well-connected" participants. More equitable access would lead to a more equitable and inclusive pattern of development. 7.40. The Government is taking measures to address these shortcomings by: * Institutionalising grassroots participation: The Government's introduction of Decree 29/CP on the Regulation of the Exercise of Democracy in Communes (the "Grassroots Democracy decree") in 1998 offers a crucial and encouraging legal framework for increasing community participation at the local level. It is important that its implementation be co-ordinated with local government reforms also planned or undertaken by Government, especially the role and functioning of district and commune People's Councils and Committees. * Stepping up legal dissemination and legal aid: The Government is stepping up its programs for legal dissemination and legal aid to citizens. The recently established Department for Legal Aid to the Poor in the Ministry of Justice, mass organizations, networks of volunteer members of the Bar Association, and NGOs have started to set up legal aid clinics and consultation centers, run legal dissemination workshops at the commune level and disseminate leaflets and legal manuals to local people and leaders. 125 Chapter 7 - Building Modern Governance * Integrating community participation approaches into poverty programs: Government is aiming to integrate community paiticipation approaches in its targeted poverty and infrastructure programs (such as Programs 133 on Hunger Eradication and Poverty Reduction, and Program 135 on Support to Especially Poor Communes), although this has met with some initial constraints (Box 7.6). * Creating an enabling environment for civil society: In pursuing its goals of enhanced governance, decentralisation and participation, as well as poverty reduction, Government aims to strengthen partnerships with other organizations working for the benefits and needs of the people, by continuing to encourage and support the work of mass organizations. It recognises the need to also put in place a legal and policy framework for associations and domestic NGOs other than the mass organizations, since they can be important additio:nal partners. Box 7.6: Local authorities struggle to achieve greater commumity participation The Hunger Eradication and Poverty Reduction (HEPR) Program (Program 133 in short) and Program 135 for Socio-Econornic Development in Communes with Extreme Difficulties (the '1715 poor communes Program"), aim to work in a decentralized way while promoting community participation. However, reviews indicate that most communities are not yet empowered to participate in decision maing, management and evaluation. Their role in the ide:atification of the programs' target beneficiaries, planning for implementation and monitoring of results and expenditures is not yet realized, because decision making mainly takes place at provincial levels and the programs lack the flexibility to accommodate local people's inputs. Local people have little information on what they can expect in terms of program activities and benefits; how they can monitor the program's activities and raise complaints; women and other disadvantaged groups are often in effect excluded from community consultation meetings; and reliance on mass organizations as channels for information sharing and consultation is problematic, since these tend to be wtak in the poorest and ethmic minority areas. Source: UNDP (1999) and UNDP (2000b). 7.41. Achieving Community Participation. While the above developments are very encouraging, challenging steps remain. To realize full community participation, Government leaders need to understand that community participation involves more than contribution of local resources, i.e. that it includes actual involvement in decision making. The perception among many local authorities that poor people may be incapable of giving meaningful inputs into decision making is largely unfounded, as many governments elsewhere are learning that the poor themselves often have good ideas and solutions. In seeking to implement the Grassroots Democracy decree more fully, the Government will need to pay attention to: * The crucial importance of information. This means promoting greater awareness of the decree among local officials and citizens alike -- through media and information campaigns; informing people about their rights and program opportunities; making special efforts to ensure that information reaches women, minority and vulnerable groups; and ensuring officials know what information provision is expected of them and that they will be held accountable for this. The contribution of mass organizations, NGOs and grassroots associations and Community-Based Organizations (CBOs) (such as savings and credit groups, water user associations, 126 Chapter 7 -Building Modern Governance parent-teacher associations, farmers' interest groups) in better information provision and consultation needs to be greatly encouraged. * Consultation methods need to ensure that communication is truly two-way, with careful feedback of views and priorities expressed to higher administrative levels. * The inclusion of women and ethnic minority people in Steering Committees needs to be increased in order to reflect the diversity of interests involved. In addition, the Grassroots Democracy decree specifies that "household heads" will participate in commune decision-making. Since this tends to automatically exclude women in most cases, the decree needs to be amended to allow for "household representatives". * Up-front capacity building of local (especially commune) officials on the meaning and mechanisms of the Grassroots Democracy decree will need to underpin all of the above. 7.42. In order to benefit fully from the energy of citizens' groups in Vietnamn's development, associations and NGOs not involved in charity or research - which are not covered by the emerging legal framework as described in Box 7.7 - need a comprehensive and clear Law on Associations, which offers a supportive environment balanced with appropriate State oversight functions and accountability mechanisms. Simultaneously, sensitization and capacity building of govemrnment officials interacting with associations and NGOs, as well as of civil associations themselves, needs to be stepped up significantly if these organizations are to fulfil their potential as partners to Government. Box 7.7: The new Law on Science and Technology provides a clearer legal framework for the operation of research-oriented associations and NGOs The recently introduced law on Science and Technology (No.21/2000/QHIO of June 9, 2000) clearly defines the roles and expectations of organizations and individuals in relation to activities concerning science and technology. For the first time, independent organizations have been granted legal status in a range of new areas, making them subject to the right and provisions of the Law. Organizations are now accorded autonomy and self-determination in the development of ideas, planning, organizing, managing, and implementing research and development activities. Furthermore, organizations can freely undertake cooperative partnerships or joint ventures with other bodies, and may receive or contribute financial and other assistance as deemed relevant and allowable by law. The Law outlines a proactive approach to increasing contact and cooperation between overseas Vietnamese and intemational organizations and/or individuals. Two key points of relevance to NGOs is the intention of the State to 'adopt policies to attract Vietnamese intellectuals residing overseas and the world's brilliant experts to take part in scientific and technological development in Vietnam", and the openness to overseas investment in supporting development ventures in Vietnam. Overall, the new Law is a positive and progressive step which will provide much needed support to NGOs currently in operation, and may also lead to a substantial increase in the emergence of independent development organizations in the coming years. Source: Documented discussions with local NGOs. 7.43. To ensure that women have an equal voice in Vietnam's development, Vietnam has to take a gender-sensitive approach to participation. While Vietnam has enshrined gender equality 127 Chapter 7 - Building Modern Governance admirably in its Constitution and laws, the poor social and (sometimes) economic status of women relative to men, and women's high workload relative to men, limit women's ability to influence decisions in their communities, at local government level and at the national level. While women are relatively well represented in the National Assembly (26 percent), their representation is much lower (ranging from 5-20 percent) at all lower levels of government and in the Party structures. A more equal participation in public tife by women and men is not only right from an equity point of view: global research finds it is associated with cleaner business and government (less corruption) and better governance (Engendering Development, World Bank, 2000f). This can be achieved through measures that ensure equal access to education (especially secondary and higher), and equal access to information (including legal literacy). V. A GOVERNMENT WHICH FIGHTS CORRUPTION AND WASTE 7.44. The Government and Party are rightly focused on the need to fight corruption and waste, which forms a key part of the ten-year vision. It was widely reported that nearly one third of Vietnarn's public investment expenditure in 1998 - equivalent to 5 percent of GDP - was squandered without result and the Government is committed to tackling the problem. 7.45. The fight against corruption was a major theme of the Sixth Party Plenum in October 1998. A number of ordinances and decrees have been passed addressing corruption, such as the Ordinance against Corruption (March 1998) and related implementing regulations. In 1998, the Prime Minister established a "hot-line" to receive business complaints and several ministries now have units for tackling grievances and corruption (in addition. to the General State Inspectorate). Two legislators in the National Assembly recently dismissed. for "wrongdoing" were the latest casualties in a campaign to root out corruption and mismanagement in the Vietnam Communist Party (VCP). The Party launched an anti-corruption campaign in May 2000 but implementation results have been limited. In August 2000, the VCP chief directed new members to declare how they obtained property before taking up high-ranking party posts in an attempt to ensure a corruption free leadership. 7.46. Promulgation of the Civil Code in 1998 provided the public with avenues to redress complaints and for mediation in disputes with government administrators. Decree 225 on Democracy at the Grassroots Level has encouraged a sense of citizen involvement in the reform process. The decree has been supplemented by three regulations: (no. 29 on Commune level in spring 1998; no. 71 of Sept 1998 on democracy in State organizations; no. 07 of 13 Feb 1999 on Democracy in SOEs). Further measures are needed to consolidate work so far (Box 7.8). 128 Chapter 7 - Building Modern Governance Box 7.8: An Agenda for Action on Corruption in Vietnam International experience suggests that implementation of the following policies may be appropriate in Vietnam: Broad based measures that reduce waste and corruption: * Minimizing red-tape and arbitrary discretion, through greatly reducing activities for which government permission is required, and the steps required to get permits; * Increasing disclosure, by greatly increasing the information that is in the public domain; * Engaging the people in the anti-corruption strategy by harnessing citizen's groups to fight corruption; * Reforming procurement, through publishing information abut winning tenders and strengthening procurement laws, possibly through the UNCITRAL model; * Strengthening human resource management and public administration reform; and, * DevelopIng the legal framework. Specifwc anti-corruption measures: * Demonstrating top leadership: international experience shows that the example and determnination of top leadership can make or break anti-corruption programs; * Diagnosing corruption: the problems need to be pinpointed in order to be acted upon. A ratings survey of government bodies could identify problem areas; * Strengthening institutions and instruments to tackle corruption: a body with clear responsibility for the fight against corruption should be established - examples of good practice include the Hong Kong anti-corruption agency, and Ombudsmen's offices in several countries. The effectiveness of existing measures (such as hotlines) needs to be assessed; and, * Targeting case studies - in other countries, highlighting success in fighting corruption has helped develop momentum for new practices. Source: Vietnam: Combating Corruption (World Bank, 2000g). 129 VDR 2001 - Statistical Appendix STATISTICAL APPENDIX Population and Employment Table I Population Table 2 Population by sex, by sector and by province Table 3 Total employment by sector National Account Table 2.1 GDP by industrial origin and by economic sector in current prices Table 2.2 A GDP by industrial origin and by economic sector in constant prices Table 2.2 B GDP by industrial origin -- growth :rate Table 2.3 A GDP deflator Table 2.3 B Change in GDP deflator Table 2.4 National accounts: sources and uses Balance of Payments Table 3.1 Balance of payments Table 3.2 Merchandise exports by commodities Table 3.3 Merchandise imports by commodities Monetary Survey Table 4.1 Monetary survey Budget Table 5.1 Summary of budget operations Table 5.2 A Government revenue Table 5.2 B Govermnent revenue: percentage share Table 5.3 Functional classification of current expenditure Table 5.4 Economic classification of current expenditure Table 5.5 Government budget: capital expenditure Table 5.6 Debt stock and debt services Prices Table 6.1 A Growth rate of retail prices, by month Table 6.1 B Retail price index, by month Table 6.2 A Price index by commodity groups Table 6.2 B Price index by commodity groups: monthly growth rates Agriculture Table 7.1 Agriculture production Table 7.2 Industrial crop production and yields Industry Table 8.1 Industrial production and number of state enterprises Table 8.2 Major industrial products 130 VDR 2001 - Statistical Appendix Table 1.1: POPULATION Population Growth By Sex By Area Year (mid-year) Rate Male Female Urban Rural (000 persons) (%) (000 persons) 1975 48,0300 1976 49,160 2.35 23,597 25,563 10,127 39,033 1977 50,237 2.19 24,197 26,039 10,116 40,114 1978 51,337 2.19 24,813 26,524 10,105 41,226 1979 52,462 2.i9 25,444 27,018 10,094 42,368 1980 53,630 2.23 26,047 27,583 10,295 43,335 1981 54,824 2.23 26,665 28,159 10,499 44,324 1982 56,045 2.23 27,297 28,747 10,708 45,336 1983 57,292 2.23 27,944 29,348 10,921 46,371 1984 58,568 2.23 28,607 29,961 11,138 47,429 1985 59,872 2.23 29,285 30,587 11,360 48,512 1986 61,109 2.07 29,912 31,197 11,817 49,292 1987 62,452 2.20 30,611 31,841 12,271 50,181 1988 63,727 2.04 31,450 32,277 12,662 51,065 1989 64,774 1.64 31,589 33,185 12,919 50,801 1990 rev. est. 65,846 1.65 32,138 33,708 13,203 51,604 1991 rev. est. 66,935 1.65 32,586 34,349 13,450 52,545 1992 rev. est. 68.042 1.65 33,150 34,892 13,024 53,994 1993 rev. est. 69,168 1.65 33,764 35,404 13,306 54,845 1994 rev. est. 70,313 1.65 34,314 36,502 13,711 56,366 1995 rev. est. 71,476 1.65 34,882 36,594 14,085 56,381 1996 rev. est. 72,658_ _ 1.65 35,601 37,057 14,546 57,105 1997 rev. est. 73,860 1.65 36,332 37,523 15,140 57,709 1998 rev. est. 75,082 1.65 36,951 38,162 15,398 58,692 1999 census 76,325 1.65 37,519 38,806 17,917 58,048 Note: Population by sex and by area may not add to the grand total due to the possible exclusion of the armed force and migrant workers. For'1989-1998, population by area is based on legal residency, and may not include the armed forces. The 1999 population census provides revisions in the total population for this year, and the 1999 census required further revisions for the previous years which are not yet available from the GSO. In the interim, the figures for 1990-98 are re-estimated by extrapolation by Bank staff and are included here in italic. Source: Census, April 1999. General Statistical Office, Statistical Yearbooks 1994-1998 131 VDR 2001 - Statistical Appendix Table 1.2: POPULATION BY SEX, BY SECTOR, AND BY PROVINCE 1999 Popuilation (000 Persons) Region/Province Total Male Female Urban Rural H a N oi - H ai Phong:............f_j ................................ Ha Noi ___262137-1335 ,3 ,3 Hai Phong ___1,673 825 8 848 568 - 1,105 Sub-Total 4,345 2,162 2,183 2,107 2,238 Northern Mountains: Ha Giang 603 298 34509 552 Tuyen Quang 675 334 341 75 601 Cao Bang 41240 ___251 54 437 Lang Son 705 350 355 12 573 Lai Chau 589 297 291 72 517 Lao Cai ___595 297 298 102 493 Yen Bai 680 339 341 133 546 Bac Can 275 138 138 40 235 Thbai nguyen 1,046 521 525 219 827 Son La ___881 442 439 113 769 Hoa Binh 758 36382 105 653 Vinh Phuc 1,092 532 50 ill 981 PhuTh 1,262 619 - 4 179 1,083 Bac ninh 941 457 484 88 853 Bac Giang 1,9 78755 1,109 . ... 1,38 Quang Ninh 1,004 513 4 492 443 561 Sub-Total 13,089 6,4i91 -6583,4-84 - 11,062 Red RvrDelta: _ f_2 Ha Tay 2,387 1,163 124191 2,196 Hai Duong 1,650 7783228 1,422 Hung Yen 1,069 9 516 553 93 976 Thai Binh 1,786 853 933 131,682 Nam Dinh 1,888 919 969 234 1,654 Ha Nam 792 384 407 48 743 Ninh Binh 884 43 5 1371 Sub-Total 10,456 5,6 5,390 1,010 9,444 North Central Coast: __ Thbanh Hoa - 3,468 1,694 1,773 318 3,149 Nghe An 2,858 1,407 1,451 292 -2,567 Ha Tinh - 1,269 623 646 113 1,156 QuangBinh ~~~~~~~~~~~794 39 0 6708 Quang Tri 573 282 291 135 439 Sub-Total 8,962 4 4,398 4,562 944 8,01 9 132 VDR 2001 - Statistical Appendix Table 1.2: POPULATION BY SEX, BY SECTOR, AND BY PROV1INCE (cont'd) 1999 Population (000 Persons) Region/Province Total Male Female Urban Rural South Central Coast: Thua Thien -Hue 1,045 515 530 288 757 Quang Nam 1-372 664 709 1,959 1,177 Da Nang 684 336 348 538 ___146 Quang Ngai 1,190 580 610 131 1,059 Binh Dinh 1,461 709 752 351 1,110 Phu Yen 787 390 397 149 638 Khanh Hoa 1,031 510 521 375 656 Ninh Thuan 503 248 255 119 384 Binh Thuan 1,047 522 525 246 802 Sub-Total 9,120 4,474 4,647 4,156 6,729 Central Highlands: Gia Lai 972 491 481 242 730 Kon Turn 314 158 156 101 213 Dac Lac 1,776 903 874 355 1,421 Lam Dong ~~~~~~996 534285611 Suib-Total 4,058 2,055 2,003 1,083 2,975 Ho Chi Minh City and Environs Ho Chi Minh City 5,037.0 2,424 2,613 4,205 832 Binh Duong 716.0 __ 346 370 233 4 483 Tay Ninh 9' 65.06 470 491 125 841 Binh Phuoc 654.0 333 321 99 555 Dong Nai 1,990.0 993 997 607 1,383 Baria -Vung Tau 801.0 ____ 400 401 333 468. Sub-Total 10,163 4,966 5,193 5,602 4,562 Mekong Delta: __ Long An 1,306 604 666 215 1,091 Dong Thap 1,565 768 797 227 1,338 An Giang 2,049 1,009 ~ 1,040 403 1,646 Tien Giang 1,605 _ __ 777 __828 213 1,391 Ben Tre 1,297 627 669 110 1,187 Vinh Long 1,0 10 ~ 490 520 145 865 Tra Vinh 966 481 484 125 841 Can Tho 1,811 889 922 385 _ 1,426 Soc Trang 1,174 572 602 210 964 Kien Giang 1,494 737 78301,164 Bac Lieu 736 361 376 181 556 Ca Mau 1,118 552 566 208 910 Sub-Total 16,131 7,867 8,228 2,752 13,379 Grand Total 76,324 37,519 38,805 172917 58,.408 Note: Population by sex and by area may not add to the grand total due to the possible exclusion of the armed force and migrant workers. For 1989-1998, population by area is based on legal residency, and may not include the armed forces. Source: Census, April 1999. General Statistical Office 133 VDR 2001 - Statistical Appendix Table 1.3: TOTAL EMPLOYMENT 13Y SECTOR (in thousand of persons) Rev Prel. 1994 1995 1996 1997 1998 1999 Total Employed Labor Force 33,664 34,590 35,792 36,994 37,877 38,546 State 2,928 3,053 3,138 3,267 3,383 3,370 Non-state 30,736 31,537 32,654 33,727 34,494 35,176 State Sector Employment 2,928 3,053 3,138 3,267 3,383 3,370 Central 1,232 1,281 1,300 1,359 1,376 1,376 Local 1,696 1,772 1,838 1,908 1,979 1,994 Employment by Sector Industry 3,366 3,435 3,501 3,503 3,656 3,674 Construction 960 996 975 977 980 982 Agriculture, forestry & fisheries 23,565 24,122 24,775 25,443 26,070 26,591 Transportation 556 781 856 856 is . . . .~~~~~~ ........ ___,,.. ._.......... ...... _ .-. ......._. .Hotels &Tourism 458 507 518 519 Trade and Supply 2,137 2,040 2,311 2,825 Science, Education & Training 984 1,011 1,034 1,040 Culture, Arts, and Sports 91 94 96 96 Health & social welfare 271 279 293 296 Finance, Insurance, Banking 122 126 125 126 State Management 297 393 409 411 Others 857 807 899 904 Note: Figures are rounded. Source: General Statistical Office, Statistical Yearbooks 1996-1999 134 VDR 2001 - Statistical Appendix Table 2.1: GDP BY INDUSTRIAL ORIGIN AND BY ECONOMIC SECTOR IN CURRENT PRICES (Billions of Dong) Rev Rev 1994 1995 1996 1997 1998 1999 Total 170,258 228,892 272,036 313,623 361,016 399,942 State 70,267 91,977 108,634 126,970 144,406 157,994 Non-State 99,991 136,915 163,402 186,653 216,610 241,948 Agriculture, Forestry 48,865 62,219 75,514 80,826 93,072 101,723 -- State 2,210 2,664 3,424 3,582 3,961 4.,698 --Non-State 46,655 59,555 72,090 7,244 89,111 97,025 Industry -Total 40,481 65,820 80,877 100,595 -17,299 137,959 -- State 33,558 33,097 39,228 48,282 55,508 63,996 --Non-State 16,923 32,723 41,649 52,313 61,791 73,963 Industry 37,535 50,028 63,111 80,072 96,441 116,193 Construction 12,946 15,792 17,766 20,523 20,858 21,764 Services -- Total 70,912 100,853 115,645 132,202 150,645 160,260 -- State 34,499 56,216 65,982 75,060 84,937 90,053 -- Non-State 36,413 44,637 49,663 57,142 65,708 70,207 Transport & Commnunications 6,924 9,177 10,390 12,418 14,076 15,305 Trade 23,072 37,491 43,125 48,914 55,783 59,322 Banking & Insurance 3,450 4,604 5,148 5,444 6,274 6,768 Public Adm., Medical, Education 18,270 20,218 22,833 26,1 5 30,033 32,219 Rent, NGO, Tourism & Others 19,196 29,363 34,149 39,311 44,479 46,646 Source: General Statistical Office, Statistical Yearbooks 1975-2000 135 VDR 2001 - Statistical Appendix Table 2.2: GDP BY INDUSTRIAL ORIGIN AND BY ECONOMIC SECTOR IN CONSTANT PRICES (Billion s of Dong) Rev Rev 1994 1995 1996 1997 1998 1999 Total 170,258 195,567 213,833 231,264 244,596 256,269 State 70,267 78,267 87,208 95,638 100,879 105,286 Non-State 99,991 117,300 126,625 135,626 143,717 150,983 Agriculture, Forestry 48,865 51,319 53,578 55,895 57,866 60,892 Industry - Total 50,481 58,550 67,016 75,474 81,764 88,047 Industry 37,535 43,960 '50,078 56,619 63,003 68,836 Construction 12,946 14,590 16,938 18,855 18,761 19,211 Services - Total 70,912 85,698 93,239 99,895 104,966 107,330 Transport & Communications 6,924 7,851 8,429 9,178 9,536 9,976 Trade 23,072 33,595 :36,866 39,422 41,170 41,953 Banking & Insurance 3,450 3,940 4,388 4,578 4,843 5,006 Public Adm., Medical, Education 18,270 17,040 18,304 19,270 20,354 20,927 Rent, NGO, Tourism 19,196 23,272 25,252 27,447 -29,063 29,468 Source: General Statistical Office, Statistical Yearbooks 1975-2000 136 VDR 2001 - Statistical Appendix Table 2.2B: GDP BY INDUSTRILU ORIGIN - GROWTH RATE (Billions of Dong in Constant 1994 Prices) Rev Rev 1994 1995 1996 1997 1998 1999 Total 8.8% 9.5% 9.3% 8.2% 5.8% 4.8% State 13.5% 9.4% 11.4% 9.7% 5.% 44 Non-State 6.% 17.3% 7.9% 7.1% 6.0% 5.1% Agriculture, Forestry 3.9% 4.4% 4.4% 4.7% 3.4% 3.4% Industry -Total 14.0% 13.6% 14.5% 12.6% 8.3% 7.7% Industry 12.9% 13.2% 14.2% 13.8% 12.1% 12.1% Construction 19.4% 12.7% 16.1% 11.3% -05 2.4% Services -- Total 10.2% 10.2% 8.8% 7.1% 5.1% 2.3% Transport & Communications 7.0% 9.7% 7.4% 8.9% 3.9% 4.6% Tade 9.0% 11.8% 9.7% 6.9% 4.4% - 1.9% Banking & Insurance 2~2.8 14.2% 11.4% 43 .% 34 Public Adm., Medical, Educ-ation 13.2% 9.3% 7.4% 5.3% 5.6% 2.8% Rent, NGO, Tourism 8.3% ~~~~~8.4% 8.5% 8.7o/ 59 1.4% Source: General Statistical Office, Statistical Yearbooks 1975-2000 137 VDR 2001 - Statistical Appendix Table 2.3A: GDP DEFLATOR (1994=100) Rev Rev 1994 1995 1996 1997 1998 1999 Total 100.0 117.0 127.2 135.6 147.6 156.1 State 100.0 117.5 124.6 132.8 143.1 150.1 Non-State 100.0 11i6.7 1.0 0 137.6 150.7 160.2 Agriculture, Forestry 100.0 121.2 140.9 144.6 160.8 167.1 Industry-Total 100.0 112.4 120.7 133.3 143.5 156.7 Industry 100.0 113.8 126.0 141.4 153.1 168.8 Construction 100.0 108.2 104.9 108.8 111.2 113.3 Services -- Total 100.0 117.7 124.0 132.3 143.5 149.3 Transport & Communications 100.0 116.9 123.3 135.3 147.6 153.4 Trade 100.0 111.6 117.0 124.1 135.5 141.4 Banking&Insurance 100.0 116.9 117.3 118.9 129.5 135.2 Public Adm., Medical, Education 100.0 118.7 124.7 135.5 147.6 154.0 Rent, NGO, Tourism 100.0 126.2 135.2 143.2 13.0 158.3 Source: General Statistical Office, Statistical Yearbooks 1975-2000 138 VDR 2001 - Statistical Appendix Table 2.3B: CHANGE IN GDP DEFLATOR (in percent) Rev Rev 1994 1995 1996 1997 1998 1999 Total 14.5% 17.0% 8.7% 6.6% 8.8% 5.7% Agriculture, Forestry 15.3% 21.2% 16.3% 2.6% 11.2% 3.9% Industry - Total 12.2% 12.4% 7.4% 10.4% 7.6% 9.2% Industry 13.2% 13.8% 10.7% 12.2% 8.2% 10.3% Construction 7.4% 8.2% -3.1% 3.8% 2.1% 1.9% Services -- Total 14.3% 17.7% 5.4% 6.7% 8.4% 4.0% Transport & Communications 7.2% 16.9% 5.5% 9.8% 9.1% 3.9% Trade 20.6% 11.6% 4.8% 6.1% 9.2% 4.4% Banking & Insurance 21.2% 16.9% 0.4% 1.4% 8.9% 4.4% Public Adm., Medical, Education 12.1% 18.7% 5.1% 8.6% 8.9% 4.3% Rent, NGO, Tourism 10.8% 26.2% 7.2% 5.9% 6.9% 3.4% Source: General Statistical Office, Statistical Yearbooks 1975-2000 139 VDR 2001 - Statistical Appendix Table 2.4: NATIONAL ACCOUNTS: SOURCES AND USES (at 1994 price) Rev Rev 1995 1996 1997 1998 1999 Sources 213,444 234,016 249,016 265,126 265,494 - GDP 195,567 213,833 231,264 244,676 256,269 - Trade Balance 17,877 20,183 17,752 20,530 9,225 Uses 213,444 234,016 249,016 265,126 265,494 - Total Consumption 158,893 173,072 182,975 190,923 194,350 - Gross Capital Formation 53,249 60,826 66,529 74,931 72,678 - Statistical Discrepancy 1,302 118 -488 -728 -1,534 Source: General Statistical Office, Statistical Yearbooks 1975-2000 140 VDR 2001 - Statistical Appendix Table 3.1: BALANCE OF PAYMENTS (US$ million) Rev. Rev. Rev. Prel. Prel. 1994 1995 1996 1997 1998 1999 Exports, Total 4,054 5,198 7,330 9,145 9,365 11,520 Imports, Total (f.o.b) -5,250 -7,543 -10,483 -10,460 -10,453 -10,780 Trade Balance -1,196 -2,345 -3,153 -1,358 -1,088 740 Services and Transfers 11 417 704 -327 -114 -678 Interest Payments -221 -360 -500 -478 -556 629 Private Remittances 170 474 1,046 712 951 1,008 Official Transfers 135 150 150 175 198 125 Others 95 680 1,400 82 480 1,084 Current Account Balance -1,185 -1,928 -2,449 -1,642 -1,202 62 Capital Account Balance 897 1,762 2,105 1,688 680 582 Disbursements 272 443 772 1,022 1,120 944 Scheduled Amortizations -547 -733 -729 -804 -1,050 1,317 Short Term Loans (Net) 124 -184 224 -534 -190 255 Direct Foreign Investment 1,048 2,236 1,838 2,003 800 700 Errors and Omissions -121 -32 65 -50 -2 70 Overall Balance 409 -199 -278 -4 -525 768 Financing: 409 199 278 4 525 -768 Change in NFA (excl. IMv) -292 -439 -441 -265 63 -1,284 IMF Credit (Net) 175 92 178 -54 -78 -32 Debt Rescheduling 0 0 0 0 413 0 Change in Arrears 526 546 541 323 127 548 Memorandum Item: Dong per US$ 10,978 11,100 11,500 12,938 13,980 14,008 Note: Figures are rounded. Source: Data provided by the Vietnamese authorities and Bank staff estimates. 141 VDR 2001 - Statistical Appendix Table 3.2: MERCHANDISE EXPORTS BY COMMODITY (US$ million) 1994 1995 1996 1997 1998 Total Exports 4,054 5,198 7,330 9,145 9,365 Rice 429 549 855 870 1,024 Quantity (000 tons) 1,950 2,052 3,003 3,553 3,749 Unit Value (US$/ton) 220 268 285 245 273 Petroleum 866 1,024 1,346 1,413 1,232 Quantity (000 tons) 6,942 7,652 8,705 9,574 12,145 Unit Value (US$/ton) 125 134 155 148 101 Coal 75 81 115 111 102 Quantity (000 tons) 2,319 2,800 3,647 3,449 3,161 Unit Value (US$/ton) 32 29 32 32 32 Rubber 133 181 163 191 127 Quantity (000 tons) 129 130 122 195 191 Unit Value (US$/ton) 1,031 1,392 1,336 981 665 Tea 16 33 29 48 51 Quantity (000 tons) 17 25 21 32 33 Unit Value (US$/ton) 905 1,30 1,397 1,506 1,545 Coffee 328 495 337 491 594 Quantity (000 tons) 177 200 239 389 382 Unit Value (US$/ton) 1,853 2,475 1,410 1,261 1,555 Cashew Nut 59 130 130 133 117 Quantity (000 tons) 57 120 130 33 16 Unit Value (US$/ton) 1,030 1,000 1,000 4,100 7,313 Black Pepper 17 63 64 Quantity (000 tons) 20 1 8 25 23 15 Unit Value (US$/ton) 850 - - 2,727 4,267 Marine Products 551 620 651 781 858 Vegetable & Fruits 68 53 Textiles and Garments 550 800 1,150 1,349 1,450 Footwear 530 965 1,032 Handicraft & fine arts 121 111 Source: General Statistical Office, Statistical Yearbooks 1975-2000, General Department of Customs 142 VDR 2001 - Statistical Appendix Table 3.3: MAJOR IMPORTS BY COMMODITY (US$ millions) Rev 1994 1995 1996 1997 1998 1999 Total Imports (c.i.f.) 5,245 7,543 10,483 10,460 10,350 11,622 Petroleum 696 856 1079 1,094 827 1,054 Quantity (000 tons) 4,550 4,969 5803 5,947 6,830 7,403 Unit Value (US$/ton) 153 172 186 184 121 142 Fertilizers 247 339 643 425 477 464 Quantity (000 tons) 1,495 1,471 2919 2,458 3,554 3,782 Unit Value (US$/ton) 165 230 220 173 134 123 Steel 211 - 651 529 524 587 Quantity (000 tons) 725 - 1548 1,401 1,735 2,264 Unit Value (US$/ton) 291 421 377 302 259 Machines and Spare Parts 1,815 2,761 - 1,777 2,052 2,052 Others * Cotton Textiles 55 96 - 159 175 175 Quantity (Mil. meters) 34 49 - 77 130 130 *Raw Cotton 43 77 - 110 92 91 Quantity (000 tons) 24 35 - 74 68 77 * Wheat 52 60 - 48 67 29 Quantity (000 tons) 300 226 - 166 271 143 *Carand Trucks ... i34 221 6 136 130 89 Quantity (number) 14,350 19,549 25866 13,975 17,202 17,202 * Sugar 39 61 - - 32 7 Quantity (000 tons) 124 147 - - 123 43 *MSG 44 32 - 27 15 7 Quantity (000 tons) 42 23 - 20 12 9 * Motorbikes 347 460 434 242 351 399 Quantity (number) 284 404 472 220 368 509 * Pharmaceuticals 140 114 66 52 57 Quantity Source. General Statistical Office, Statistical Yearbooks 1975-2000, General Department of Customs 143 VDR 2001 - Statistical Appendix Table 4.1: MONETARY SURVEY ACCOUNT 1996 1997 1998 1999 (VND million) Dec Dec Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Net Foreign Assets 14,249 20,997 31,403 33,494 37,173 36,641 38,818 41,828 42,673 44,267 46,775 49,771 53,273 54,927 61,613 Foreign assets 31,227 37,916 47,857 49,322 52,082 51,330 52,929 55,103 55,811 57,491 59,613 62,692 66,457 68,207 74,658 Foreign liabilities 16,977 16,919 16,453 15,828 14,908 14,690 14,111 13,275 13,138 13,224 12,838 12,921 13,184 13,281 13,045 Net Domestic Assets 50,429 60,563 69,172 68,251 68,980 82,726 89,571 89,068 82,542 83,191 83,327 83,252 82,790 83,708 89,559 Net claims on government 4,428 4,400 6,677 6,480 6,612 6,829 6,009 6,001 4,597 4,875 4,588 4,078 2,160 1,491 2,933 Claims to the economy* 75,897 83,562 83,067 77,945 78,317 78,739 79,174 80,631 82,217 86,626 Claims on state enterprises 26,809__30,980 37,705 37,297 37,961 __ Claims on other sectors 24,085 31,429 34,944 34,969 35,335 _______ ______ ______ Other items net (4,894) (6,245) (9,615) (10,494) (10,928) (11,745) (12f,770-) (12~,59-2) (12,267) (12,447) (12,438) (12,042) (11,626) (10,026) (8,526) Total Liquidity 64,678 81,560 101,116 101,746 106,154 107,621 109,609 112,303 112,947 115,009 117,662 120,981 124,455 128,608 142,646 Dong liquidity 51,519 62,869 76,188 76,184 78,838 80,388 82,054 83,438 83,097 84,846 87,173 88,719 90,970 94,426 105,447 Currency outside banks 22,639 25,101 26,965 26,963 28,401 26,503 27,526 27,099 25,734 26,509 27,162 27,000 28,523 32,616 41,547 Demand deposits 10,800 14,871 18,241 16,685 16,342 19,133 18,995 19,695 20,100 20,703 21,618 22,825 22,993 23,512 25,600 Time/saving deposits 12,445 15,194 20,091 21,209 22,500 23,886 25,241 25980.6 26,683 27,068 28,159 28,636 29,427 29,026 29,076 Deposit substitute 5,635 7,703 10,890 11,327 11,595 10,867 10,292 10,664 10,581 10,566 10,234 10,259 10,027 9,272 9,224 Foreign currency deposits 13,159 18,691 24,928 25,562 27,316 27,233 27,555 28,865 29,850 30,164 30,489 32,262 33,485 34,182 37,198 Percentage Change from Previous Month ACCOUNT 1996 1997 1998 1999 (percent) Dec Dec Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Net Foreign Assets - 47.4 49.6 6.7 11.0 (1.4) 5.9 7.8 2.0 3.7 5.7 6.4 7.0 3.1 12.2 Foreign assets - 21.4 26.2 3.1 5.6 (1.4) 3.1 4.1 1.3 3.0 3.7 5.2 6.0 2.6 9.5 Foreign liaboi'l"itis - (0.3) (2.8) (3.8) (5.8) (.) (3.9) (5.9) (1,.0) 0.7 (2.9) 0.6 __ 2.0 ___0.7 (1.8) Net Domestic Assets - 20.1 14.2 (1.3) 1.1 19.9 8.3 (0.6) (7.3) ___0.8 0.2 (0.1I) -(0.6) 1.1 7.0 Net claims on govemment - (0.6) 51.8 -.(3.0) 2.0 3.3 (12.0) (0. 1) (23.4) 60 (.) ( 1. 1) (47.0) (30.9) 96.7 Claims to the economy* Io__1. 1 (0.6) (6.2) 0.5 0.5 0.6 1.8 2.0 5.4- --Clai-ms on state enterprises - 15.6 21.7 (1.1) 1.8 Claims on other sectors 30.5 11.2 0.1 1.0 Other items net 27.6 54.0 9.1 4.1 7.5 8.7 (1.4) (2.6) 1.5 (0. 1) (3.2) (3.5) (13.8) (15.0) Total Liquidity 26.1 24.0 0.6 4.3 1.4 1.8 2.5 0.6 1.8 2.3 2.8 2.9 3.3 10.9 Dong liquidity - 22.0 21.2 (0.0) 3.5 2.0 2.1 1.7 (0.4) 2.1 2.7 1.8 2.5 3.8 11.7 Currency outside banks 10.9 7.4 (0.0) 5.3 (6.7) 39 (1.6) (5.0) 3.0 2.5 (0.6) 5.6 14.4 27.4 Demand deposits 37.7 22.7 (8.5) -(2.1) - 17.1 (0.7) 3.7 2.1 3.0 4.4 5.6 0.7 2.3 8. Time/saving deposits -22.1 32.2 5.6 6.1 6.2 - 5.7 2.9 2.7 - 1.4 4.0 17 28-(1.4) - 0.2 Dpstsubstitute 3. 414 4.0 2.4 (6.3) (5.3) 3.6 (0.8) (0. 1) (3.1) 0.2 (2.3) (7.5) (0.5) Foreign currency deposits 42.0 33.4 2.5 6.9 (0.3) 1.2 4.8 3.4 1.1 1.1 5.8 3.8 2.1 8.8 Source: State Bank of Vietnam. The data includes 4 SOCB and 24 JSCB Note: * since Mar 1999, a new account called "Claims to the economy' is recorded instead of "claims on state enterprises' and "claims on other sectors" **the figures are rounded 1 44 VDR 2001 - Statistical Appendix Table 5.1: SUMMARY OF BUDGETARY OPERATIONS 1998 1999 1995 1996 1997 Prel. Est. 53,370 62,387 66,252 68,600 69,500 Revenue and Grants Tax Revenue (non-SOEs) ___ _ 23,375 28,101 28,074 32,069 33,925 Tax and Transfers from SOEs 21,938 25,887 27,549 27,267 27,285 Other Non-Tax Revenue 6,437 6,856 8,043 7,314 6,390 Grants 1,620 1,543 2,586 1,950 1,900 Current Expenditure (exc. Interest) 39,615 44,559 49,351 49,563 48,498 Wages and Salaries 14,450 16,798 21,580 23,580 23,874 Subsidies 265 306 369 270 270 Other 24,900 27,455 27,455 25,736 23,346 Of which: Operation and Maintenance 1,450 1,710 1,980 2,200 2,500 Capital Expenditure 12,079 15,630 19,482 19,760 23,000 Contingency - - 0 1,176 500 Overall Balance (before Interest) 1,676 2,198 -2,581 -1,899 -2,498 Interest (Scheduled) 4,177 4,107 2,166 Interest (Paid) 2,895 2,700 1,916 2,004 2,483 Overall Balance (Accrual Basis) -2,501 -1,909 -4,747 -1,899 -2,498 Overall Balance (Cash Basis) -1,219 -502 -4,497 -3,903 -4,981 1,219 502 4,497 3,903 4,981 Financing Foreign Loans (Net) -1,490 -50 2,108 3,268 2,000 Utilization 1,470 2,400 0 5,941 5,033 - Short-Term - - - - Medium- and Long-Term - - 0 Amortization 2,960 2,450 0 2,673 3,033 Domestic Loans (Net) 2,709 552 2,389 635 2,981 State Bank (Net) - - 0 Government Securities (Net) 2___ ,709 _ 552 _2,389 _ _635, 2981 - Gross Issue - Amortization Arrears Revenue and Grants 23.9 22.9 21.1 19.0 17.4 Tax Revenue 10.5 10.3 9.0 8.9 8.5 Transfers from State Enterprises a/ 9.8 9.5 8.8 7.5 6.8 Other Non-Tax Revenue 2.9 2.5 2.6 2.0 1_.6 Grants 0.7 0.6 0.8 0.5 0.5 Current Expenditure (exc. Interest) 17.8 16.4 15.7 13.7 12.1 Wages and Salaries 6.5 6.2 6.9 6.5 6.0 Subsidies 0.1 0.1 0.1 0.1 0.1 145 VDR 2001 - Statistical Appendix Other 11.2 10.1 8.8 7.1 5.8 of which: Operation and Maintenance 0.7 0.6 0.6 0.6 0.6 Capital Expenditure 5.4 5.7 6.2 5.5 5.8 Overall Primary Balance 0.8 0.0 0.0 0.3 0.1 Interest (Scheduled) 1.9 1.5 0.7 0.0 0.0 Interest (Paid) 1.3 1.0 0.6 0.6 0.6 Contingency 0.0 0.0 0.0 0.3 0.1 Overall Balance (Accrual Basis) -1.1 -0.7 -1.5 -0.5 -0.6 Overall Balance (Cash Basis) -0.5 -0.2 -1.4 -1.1 -1.2 Financing 0.5 0.2 1.4 1.1 1.2 Foreign Grants and Loans (Net) -0.7 0.0 0.7 0.9 0.5 Domestic Loans (Net) 1.2 0.2 0.8 0.2 0.7 State Bank (Net) 0.0 0.0 0.0 0.0 0.0 Government Securities (Net) 1.2 0.2 0.8 0.2 0.7 Arrears Memo Item: GDP 228,892 272,036 313,623 361,468 399,942 Note: a/ Transfers include all taxes, operating surplus, depreciaticin allowances, and capital user fees. b/ For 1986-88, figures include amortization. c/ For 1986-88, gross amortization. Source: Ministry of Finance and General Statistical Office, and Bank staff estimate 146 VDR 2001 - Statistical Appendix Table 5.2A: GOVIERNMIENT REVENUE Est. 1998 Plan. 1999 1995 1996 1997 I. State Enterprises: 21,938 25,887 27,549 27,267 27,285 A. Taxes: 20,311 25,080 27,549 -27,267 27,285 a. Profit Tax 5,997 7,761 9,218 8,464 9328 b. Turnover Tax a! 5,832 7,450 7,457 8,199 6267 c. Special Consumption Tax (Excises) 2,520 3,200 3,220 3,402 3205 d. Natural Resources Tax 2,369 3,081 3,375 3,216 4057 e. License Tax 9 1 0 1 7 1 7 1 7 f. Capital User Charge 1,322 1,505 1,450 1,387 1303 g. Other Taxes 2,262 2,073 2,812 2,582 3108 B. Transfers 1,627 807 a. Operating Surplus - - - - - b. Depreciation Allowance 1,627 807 - - - HI. Non-State Sector: 7,971 10,005 10,729 11,086 10,725 A. Agricultural Tax 1,552 1,902 1,697 1,952 = 1825- B. Non-Agricultural Tax: 6,419 8,103 9,032 9,134 8,900 a. Turnover Tax a! 2,017 2,612 3,054 2,955 2800 b. Profits Tax 1,443 1,850 2,136 2,216 2508 c. Personal Income Tax 520 1,354 1,482 1,779 1510 d. License Tax 198 258 340 341 348 e. Commodities Tax 7 0 0 f. Wholesale Tax g. Slaughter Tax 92 110 114 123 h. Land Tax 313 380 333 30329 i. Other 1,829 1,539 1,573 1,417 1439 M. External Trade: 13,273 15,105 13,546 16,535 19600 A. Import and Export Duties 13,273 15,105 13,546 14,835 14500 B. VAT of Import 4000 C. Surtaxes on Import --1,700 1100 IV. Joint Ventures 2,131 2,992 3,799 4,448 3600 V. Other Revenue 6,437 6,856 8,043 7,314 6390' VI. Grants 1,620 1,543 2,586 1,950 1900 Total Revenue (inc. Grants) 53,370 62,387 66,252 68,600 69,500 Source: Ministry of Finance. Note: a! from 1999 VAT 14 7 VDR 2001 - Statistical Appendix Table 5.2B: GOVERNMENT REVENUE: P'ERCENTAGE SHARE 1995 1996 1997 Est. 1998 Est. 1999 I. State Enterprises 9.8 9.5 8.8 7.5 6.8 - Taxes: 9.1 9.2 8.8 7.5 6.8 -- Profit Tax 2.7 2.9 2.9 2.3 2.3 -- Turnover Tax 2.6 2.7 2.4 2.3 1.6 -- Special Consumption Tax (Excises) 1.1 1.2 1.0 0.9 0.8 Natural Resources Tax 1.1 1.1 1.1 0.9 1.0 - License Tax 0.0 0.0 0.0 0.0 0.0 -- Capital User Charge 0.6 0.6 0.5 0.4 0.3 -- Other Taxes 1.0 0.8 0.9 0.7 0.8 - Transfers: 0.7 0.3 0.0 0.0 0.0 -- Operating Surplus -- Depreciation Allowance 0.7 0.3 - II. Non-State Sector: 3.6 3.7 3.4 3.5 2.7 - Agricultural Tax 0 0.7 0.7 0.5 0.5 0.5 - Non-Agricultural Tax 2.9 3.0 2.9 2.5 2.2 HI. External Trade: 6.0 5.6 4.3 4.6 4.9 - Import and Export Duties 6.0 5.6 4.3 4.1 3.6 - VAT of imports - Surtax of Import 0.0 0.0 0.0 0.5 0.3 IV. Joint Ventures 1.0 1.1 1.2 1.2 0.9 V. Other Revenue 2.9 2.5 2.6 2.0 1.6 VI. Grants 0.7 0.6 0.8 0.5 0.5 Total Revenue (inc. Grants) 23.9 22.9 21.1 19.0 17.4 Memo Item: GDP (Billions of Dong) b/ 228,892 272,036 313,623 361,468 399,942 I. State Enterprises 41.1 41.5 40.2 39.7 39.3 - Taxes 38.1 43.2 41.6 39.7 39.3 --Profit Tax 11.2 12.4 13.9 12.3 13.4 -- Turnover Tax 10.9 11.9 11.3 12.0 9.0 -- Special Consumption Tax (Excises) 4.7 :5.1 4.9 5.0 4.6 --Natural Resources Tax 4.4 4.9 5.1 4.7 5.8 --Licence Tax 0.0 0.0 0.0 0.0 0.0 -- Other Taxes 4.2 :3.3 4.2 3.8 4.5 - Transfers 3.0 L.3 0.0 0.0 0.0 -- Operating Surplus 0.0 - -- Depreciation Allowance 3.0 1.3 - -- Capital User Fee 0.0 0.0 0.0 0.0 - 0.0 II. Non-State Sector: 14.9 16.0 16.2 16.2 15.4 - Agricultural Tax 2.9 3.0 2.6 2.8 2.6 - Non-Agricultural Tax 12.0 13.0 13.6 13.3 12.8 m. External Trade: 24.9 24.2 20.4 24.1 28.2 - Import and Export Duties 24.9 24.2 20.4 21.6 20.9 - VAT of imports 5.8 - Surtax on Imports 0.0 0.0 0.0 2.5 1.6 IV. Joint Ventures 4.0 4.8 5.7 6.5 5.2 V. Other Revenue 12.1 11.0 12.1 10.7 9.2 VI. Grants 3.0 2.5 3.9 2.8 2.7 Source: Ministry of Finance and General Statistical Office. 148 VDR 2001 - Statistical Appendix Table 5.3: FUNCTIONAL CLASSIFICATION OF CURRENT EXPENDITURE 1998 1999 1995 1996 1997 Prel. Est. General Administrative Service 5,683 6,354 7,138 5,350 4,830 Economic Services 4,004 4,192 4,473 5,620 4,770 Social Service 18,249 20,317 23,708 24,849 24,710 - Education ~~~~~~ ~~~~4,722 5,500 7,150 7,750 7,900 - ealt 2-8 ,6 ,3 ,4 ,1 - ensions, Soial Re ,82 8,191 9,179 9,290 8920 - Other 3,758 3,865 4,346 ___4,966 4,980 Interest due 4,177 - Interest Paid 2,895 2,700 1,916 2,004 2,483 Others (inc. Subsidies and excl. Contingency 11,679 13,696 14,032 13,744 13,180 Total Current Expenditure: -Cash Basis, incl. Interest 42,510 47,259 51,267 51,567 49,973 -CsBasis, exci. Inte-re-st 39,615 44,559 49,351 49,563 47,490 General Administrative Service 2.5 2.3 2.3 1.5 1.2 Economic Services 1.7 1.5 1.4 1.6 ___ 1.2 Social Service 8.0 7.5 7.6 6.9 6.2 -Education 2.1 2.0 2.3 2.1 2.0 -Health 1.0 1.0 1.0 0.8 0.7 Interest due _ _ _ __1.8 _ _ _ _ _ Interest Pad1.3 1.0 0.6 0.6 0.6 Other (inc. Subsidies) ____5.1 5.0 4.5 3.8 3.3 Total Current Expenditure mciT~. I-nterest 186 7. 16.3 143 12.5 exc. Ineet1. 64 15.7 1.7 11.9 Memo Item: GDP a! 228,892 272,036 313,623 361,468 399,942 (Billions Dong) Source: Ministry of Finance and General Statistical Office and Bank staff estimate 1 49 VDR 2001 - Statistical Appendix Table 5.4: ECONOMIC CLASSIFICATION OF CURRENT EXPENDITURE Prel. Est. 1995 1996 1997 1998 1999 Wage and Salaries 14,450 16,798 21,580 23580 23874 Subsidies 265 :306 369 270 270 Food Procurement - - Production Exports - - - Interest due 4,177 4,[07 ___ Interest paid 2,895 2,700 1,916 2004 2483 Other 24,900 27,455 26,947 25736 23346 Working Capital for SOEs 302 Administrative Expenses 3,555 5,572 4,555 3756 3746 Medical and Social Benefits 3,195 3,876 3,117 2870 2552 Education and Scholarship 2,420 3,0)86 3,763 3867 3931 Operation and Maintenance 1,450 1,710 1,980 2200 2500 Residual b/ _ _ 13,978 13,211 14,287 13043 10617 Total Current Expenditure (Cash basis; exc. Contingency; 5542,510 47,59 151567 49973 ( Inc. Interest) Wage and Salaries 6.3 6.2 6.9 6.5 6.0 Subsidies 0.1 0.1 0.1 0.1 0.1 Food Procurement Interest due Interest paid 1.3 1.0 0.6 0.6 0.6 Other: 10.9 10.1 8.6 7.1 5.8 of which: Working Capital for SOEs 0.1 0.0 0.0 0.0 0.0 Administrative Expenses 1.6 2.0 1.5 1.0 0.9 Medical and Social Benefits 1.4 1.4 1.0 0.8 0.6 Education and Scholarship 1.1 1.1 1.2 1.1 1.0 Operation and Maintenance 0.6 0.6 0.6 0.6 0.6 Total Current Expenditure 18.6 17.4 16.3 14.3 12.5 (Cash basis; exc. Cont.; Inc. Interest) Current Expenditures (exc. Interest) 17.3 _ 16.4 15.7 13.7 11.9 Memo Item: GDP c/ 228,892 272,036 313,623 361,468 399,942 (Billions Dong) Note: a/ Figures for 1992 are estimated using the 1993 appropriat- shares. b/ Including spending on security and national defense and others not elsewhere classified. Source: Ministry of Finance and General Statistical Office, and Bank staff estimate 150 VDR 2001 - Statistical Appendix Table 5.5: GOVERNMENT BUDGET: CAPITAL EXPENDITURE Prel Prel. Est. 1995 1996 1997 1998 1999 Industry and Construction 1,408 825 1651 2169 1800 Agriculture andEForestry 830 1100 1968 1811 4180 Irrigation 1,516 1355 1557 1392 2489 Transportation & Communications 3,631 3711 4943 5666 5784 Commerce and Services 152 120 247 678 838 Non-Productive Sector a/ 3,228 3820 4150 4556 3968 Contingency Fund b/0 - - Other ___ ____1,314 4699 3524 3488 3896 Unallocated* 0 - - Total Capital Expenditure ___12,079 15,630 19,482 19,760 23,000 Industry and Construction 0.6 0.3 0.5 0.6 0.5 Agriculture and Forestry 0.4 0.4 0.6 0.5 1.0 Irrigation ___0.7 0.5 0.5 0.4 0.6 Transportation & Communications ____1.6 1.4 1.6 1.6 1.4 Commerce and Services 0.1 0.0 0.1 0.2 0.2 Non-Productive Sector a! 1.4 1.4 1.3 1.3 1.0 Contingency Fund b/ 0.0 Other __0.6 1.7 1.1 1.0 1.0 Unallocated Total Capital Expenditure 5.4 5.7 6.2 5.5 5.8 Memo Item: GDP c/ 222,840 272,036 313,623 361,468 399,942 Note: a! Includes education, health, culture, finance and government. bI Stockpiling of key commodities and materials. Source: Ministry of Finance and General Statistical Office, and Bank staff estimate 151 VDR 2001 - Statistical Appendix Table 5.6. DEBT STOCK AND DEBT SERVICES Act Prel. Est. Proj. Item 1998 1999 2000 2005 b/ b/ c/ Total debt outstanding and disbursed (TDO) (US$ billion) a/ 10.8 11.0 14.0 19.4 Public 7.3 7.8 10.8 17.2 Multilateral 2.0 2.3 2.6 4.5 Bilateral 5.3 5.5 8.2 12.7 Concessional c/ 3.7 4.0 6.7 11.2 Non-concessional d/ 1.7 1.5 1.5 1.5 Debt from foreign direct investmnent 3.5 3.2 3.2 2.2 Debt and debt service indicators (%) Debt Service/XGS 15.3% 14.4% 12.1% 6.8% Debt Service/GDP 7.1% 7.0% 6.6% 4.6% Note: a. Includes future disbursements. b. Convertible debt only. c. For 2000 onwards, includes the rescheduled non-convertible Russian debt. d. Suppliers' credits, financial institutions, exports credits, arid other private creditors. Source: World Bank estimates, based on information provided by the government. 152 VDR 2001 - Statistical Appendix Table 6.1A: GROWTH RATE OF RETAIL PRICES, BY MONTH Month/Year 1994 1995 1996 1997 1998 1999 January 1.8% 3.8% 0.9% 0.8% 1.6% 1.7% February 3.7% 3.4% 2.5 1%_ 2% _19 %_ _ March -0.4% 0.2% 0.8% -0.5% -0.8% -0.7% April 0.3% 1.0% 0.1% -0.6% 1.6% -0.6% May 0.6% 1.8% -0.5% -0.5% 1.5% -0.4% June 0.9% 0.8% -0.5% 0.1% 0.0% -0.3% July 0.2% 0.0% -0.7% 0.2% -0.5% -0.4% August 0.9% 0.3% -0.4% 0.1% 1.1% -0.4% September 1.6% 0.5% 0.3% 0.6% 1.0% -0.6% October 1.3% 0.1% 0.1% 0.3% 0.3% -1.0% November 1.7% 0.1% 0.9% 0.3% 0.1% 0.4% December 1.1% 03% 1.0% 1.0% 0.8% 0.5% Source: General Statistical Office, Statistical Yearbooks 1996-1999 Table 6.1B: RETAIL PRICE INDEX, BY MONTH (Jan 1994=100) Month/Year 1994 1995 1996 1997 1998 1999 January 100.0 112.2 120.8 124.4 128.4 137.6 February 99.6 112.4 121.8 123.7 127.3 136.6 March 99.9 113.5 121.9 123.0 129.4 135.8 April 100.5 115.5 121.3 122.4 131.3 135.3 May 101.4 116.4 120.7 122.5 131.3 134.8 June 101.6 116.4 119.9 122.7 130.7 134.3 July 102.6 116.8 119.4 122.9 132.1 133.8 August 104.2 117.3 119.8 123.6 133.4 133.0 September 105.5 117.5 119.9 124.0 133.8 131.6 October 107.3 117.6 121.0 124.4 133.9 132.2 November 108.5 117.9 122.2 125.6 135.0 132.8 December 108.5 117.9 122.2 125.6 135.0 132.8 Annual Index: 103.3 115.9 120.9 123.7 131.8 134.2 (Jan 1994=100) Annual Growth Rate --- 12.2% 4.3% 2.3% 6.5% . 1.8% Dec/Dec Growth Rate --- 8.6% 3.6% 2.8% 7.5% -1.6% Source: General Statistical Office, Statistical Yearbooks 1975-2000 and Bank staff estimate 153 VDR 2001 - Statistical Appendix TABLE 6.2A: PRICE INDEX BY COMMODITY GROUPS: Monthly growth Rates GOODS and SERVICES Dec-97 Dec-98 Jan-99 Feb-99 Mar-99 Apr-99 May-99 Jun-99 Jul-99 Aug-99 Sep-99 Oct-99 Nov-99 Dec-99 General Index 100 0.8 1.7 1.9 -0.7 -0.6 -0.4 -0.3 -0.4 -0.4 -0.6 -1.0 0.4 0.5 I Food & foodstuff 100 1.3 1.9 2.3 -0.9 -1.1 -0.5 -0.7 -0.6 -0.7 -1.0 -1.7 0.7 0.4 L.I of which: Food 100 1.7 2.4 1.5 -1.7 -2.3 -1.8 -2.9 -1.4 -1.3 -1.2 -2.2 1.7 1.3 L.2 Foodstuff 100 1.4 1.7 3.2 -0.8 -0.6 0.3 0.5 -0.4 -0.7 -1.1 -1.8 0.2 0.1 II Beverage & Tobacco 100 0.3 1.4 1.2 -0.7 -0.2 0.3 -0.3 -0.1 0.3 0.2 0.0 0.3 0.2 III Gannent, hats, footwear 100 0.3 0.9 1.5 -0.2 0.0 -0.7 0.3 0.0 0.1 -0.2 -0.2 -0.2 0.6 IV Accommodation & construction 100 -0.5 0.2 -0.2 -0.2 -0.1 0.3 0.6 0.4 0.2 0.4 0.4 0.0 0.5 materials V Household Utensils 100 -0.3 2.0 1.0 -0.4 0.0 -0.2 0.4 0.1 -0.2 0.0 0.1 0.3 0.4 VI Healthcare, pharmaceutical 100 0.0 1.6 0.9 0.0 0.2 -0.4 0.2 1.1 0.8 -0.2 -0.5 -0.5 0.9 items VII Means of Transport, 100 0.3 1.2 1.6 -0.5 -0.2 -0.4 -0.2 -0.1 0.1 0.1 -0.3 -0.2 0.5 Telecommunication VIII Educational Items 100 0.0 0.3 1.4 0.0 0.5 -0.6 1.0 0.5 0.0 0.3 0.1 -0.2 0.5 IX Cultural and Recreation Items 100 0.6 1.0 1.0 -0.1 0.0 -0.7 0.8 -0.4 0.0 -0.5 0.6 0.1 -0.1 X Goods and other services 100 1.2 0.6 1.3 -0.4 0.2 0.8 -0.2 -0.2 -0.2 0.4 -0.1 0.0 0.9 Gold 100 0.0 0.7 0.3 0.2 -0.9 -0.6 -2.4 -3.4 -2.2 -0.3 5.2 2.6 1.0 US Dollar 100 -0.4 -0.2 -0.2 0.2 0.1 0.1 0.0 0.2 0.2 0.1 0.5 0.0 0.1 154 VDR 2001 - Statistical Appendix TABLE 6.2B: PRICE INDEX BY COMMODITY GROUPS: (December 1997=100) GOODS and SERVICES Dec-97 Dec-98 Jan-99 Feb-99 Mar-99 Apr-99 May-99 Jun-99 Jul-99 Aug-99 Sep-99 Oct-99 Sep-99 Oct-99 General Index 100 100.8 102.5 104.5 103.7 103.1 102.7 102.4 102.0 101.6 101.0 100.0 100.4 100.9 I Food & foodstuff 100 101.3 103.2 105.6 104.6 103.5 103.0 102.3 101.6 100.9 99.9 98.2 98.9 99.3 Jl ofwhich: Food 100 101.7 104.1 105.7 103.9 101.5 99.7 96.8 95.4 94.2 93.1 91.0 92.6 93.8 1.2 Foodstuff 100 101.4 103.1 106.4 105.6 104.9 105.3 105.8 105.4 104.6 103.5 101.6 101.8 101.9 II Beverage & Tobacco 100 100.3 101.7 102.9 102.2 102.0 102.3 102.0 101.9 102.2 102.4 102.4 102.7 102.9 III Garment, hats, footwear 100 100.3 101.2 102.7 102.5 102.5 101.8 102.1 102.1 102.2 102.0 101.8 101.6 102.2 IV Accomnmodation & construction 100 99.5 99.7 99.5 99.3 99.2 99.5 100.1 100.5 100.7 101.1 101.5 101.5 102.0 materials V Household Utensils 100 99.7 101.7 102.7 102.3 102.3 102.1 102.5 102.6 102.4 102.4 102.5 102.8 103.2 VI Healthcare, pharmaceutical 100 100.0 101.6 102.5 102.5 102.7 102.3 102.5 103.6 104.5 104.3 103.7 103.2 104.1 items VIIMeansofTranspor, 100 100.3 101.5 103.1 102.6 102.4 102.0 101.8 101.7 101.8 101.9 101.6 101.4 101.9 Telecommunication VIII Educational Items 100 100.0 100.3 101.7 10i.7 102.2 101.6102.6 103.1 103.1 103.4 103.5 103.3 103.9 IX Cultural and Recreation Items 100 100.6 101.6 102.6 102.5 102.5 101.8 102.6 102.2 102.2 101.7 102.3 102.4 102.3 XGoodsandotherservices 100 101.2 101.8 103.1 102.7 102.9 103.7 103.5 103.3 103.1 103.5 103.4 103.4 104.4 Gold 100 100.0 100.7 101.0 101.2 100.3 99.7 97.3 94.0 91.9 91.6 96.4 98.9 99.9 US Dollar 100 99.6 99.4 99.2 99.4 99.5 99.6 99.6 99.8 100.0 100.1 100.6 100.6 100.7 Source: General Statistical Office, Statistical Yearbooks 1975-2000 155 VDR 2001 - Statistical Appendix Table 7.1: AGRICULTURAL PRODUCTION Rev Prel (constant 1994 prices) 1994 1995 1996 1997 1998 1999 Gross Output 76,998 82,370 86,489 92,530 96,103 102,933 Crop Cultivation 61,660 66,183 69,620 74493 77,298 82,946 Food Crops 40,653 42,110 44,654 46,953 49,050 52,738 Industrial Crops 10,299 12,149 12,806 14,550 15,042 14,762 Livestock 12,999 13,629 14,347 1'i,465 16,204 17,337 Services 2,339 2,558 2,522 2,572 2,601 2,650 Food grains a/ 26,199 27,571 29,218 30,618 31,854 34,254 Paddy 23,528 24,964 26,397 27,646 29,146 31,394 Other 2,670 2,607 2,821 2,916 2,708 2,860 Memorandum Items: Rice Cultivated Area 7,809 7972 8,218 8,330 8,587 8,868 (000 ha) b/ Food grain Output 369 382 399 412 422 447 per Capita (kg) Note: a/ Paddy equivalent. Source: General Statistical Office, Statistical Yearbooks 1975-2000 156 VDR 2001 - Statistical Appendix Table 7.2: INDUSTRIAL CROP PRODUCTION AND YIELDS 1994 1995 1996 1997 Rev. 1998 Prel.1999 Production (000 metric tons) __ Cotton 8.7 12.8 11.2 14 22 21.4 Jute 12.8 14.8 15.0 22.3 14.6 9.1 Rush 69.1 75.1 55.0 80.9 69.9 58.8 Sugarcane 7,750.1 10,711 11,372 11,428 13,844 17,840 Peanuts 294.4 334.4 357.7 352.9 386 319 Soybeans 124.5 125.5 113.8 113 146.7 144.7 Tobacco 21.7 25.8 23.5 27.2 33.3 35.3 Tea 42.0 40.2 46.8 52.2 56.6 64.7 Coffee 180.0 218.0 320.1 420.5 109.3 486.8 Rubber 128.8 122.7 142.5 186.5 - 193.5 214.8 Coconut 1,178 1,165 1,131 1,318 1,106 1,134 Area Cultivated (000 ha) Cotton 13.2 17.5 15.0 15.2 23.8 22.4 Jute 6.6 7.4 8.0 12.4 6.7 4.1 Rush 10.9 10.4 9.1 11.1 9.8 9.3 Sugarcane 166.6 224.8 237.0 257 283 351 Peanuts 248.2 260.0 262.7 254 269 248 Soybeans 132.0 121.1 110.3 106.4 129.4 129.2 Tobacco 24.5 27.7 23.9 26.3 - 32.4 32.5 Tea 67.3 66.7 74.8 78.6 77.4 84.6 Coffee 123.0 186.4 254.2 340.3 370.6 397.4 Rubber 258.4 278.4 254.2 347.5 382 394.3 Coconut 182.5 172.9 181.1 169.9 163.4 167.8 Average Yield (metric ton/ha) Cotton 0.7 0.7 0.7 0.9 0.9 1.0 Jute 1.9 2.0 1.9 1.8 2.2 2.2 Rush 6.3 7.2 6.0 7.3 7.1 6.3 Sugarcane 46.5 47.6 48.0 44.5 48.9 50.8 Peanuts 1.2 1.3 1.4 1.4 1.4 1.3 Soybeans 0.9 1.0 1.0 1.1 1.1 1.1 Tobacco 0.9 0.9 1.0 1.0 1.0 1.1 Tea 0.6 0.6 0.6 0.7 0.7 0.8 Coffee 1.5 1.2 1.3 1.2 0.3 1.2 Rubber 0.5 0.4 0.6 0.5 0.5 0.5 Coconut 6.5 6.7 6.2 7.8 6.8 6.8 Source: General Statistical Office, Statistical Yearbooks 1996-19975-2000 157 VDR 2001 - Statistical Appendix Table 8.1: INDUSTRIAL PRODUICTION AND NUMBER OF INDUSTRIAL ENTERPRISES Item 1995 1996 1997 1998 Rev.999 Gross Industrial Production 103,375 118,097 134,420 151,223 166,965 State sector 51,991 58,166 64,474 69,463 72,604 Central 33,920 38,411 42,216 45,677 47,986 Local 18,071 19,755 22,258 23,785 24,618 Non-state sector 25,451 28,369 31,068 33,402 36,242 Collectives 650 684 751 859 Private, Households and Mixed 24,801 27,685 30,317 32,544 Foreign-Invested sector 25,933 31,562 38,878 48,359 58,119 Key Industries Coal 1,677 1,930 2,229 2,138 1,670 Oil and Gas ' 10,845 12,467 14,329 16,869 20,066 Metal ores 236 283 172 200 197 Stones and other mining 1,162 1,288 1,674 1,911 2,141 Food and beverage 27,008 30,887 34,015 36,496 39,392 Cigarettes and tobacco 3,997 4,196 4,400 4,895 4,960 Textile products 6,176 6,374 7,261 8,366 9,289 Garment 2,950 .3,400 4,325 1,667 5,031 Lether tanning and processing 3,570 4,469 6,614 7,083 7,999 Wood and wood products 3,306 3,199 3,146 2,956 2,824 Paper and paper products 1,947 2,294 2,644 3,178 3,526 Printing and publishing 1,510 1,515 1,621 1,868 2,061 Chemicals 5,086 6,283 7,223 8,144 8,979 Rubber products and plastic 2,272 2,760 3,528 4,418 5,310 Non-Metallic products 9,220 10,121 12,223 13,745 15,279 Metalic production 3,428 4,086 4,000 4,080 4,378 Metallic products 2,332 2,941 3,559 4,210 4,783 Machinery and equipment 1,345 1,560 1,674 2,050 2,429 Computer and office equipment 28 40 38 228 301 Electric and electronic equipments 1,088 1,342 1,650 2,308 2,860 Radio, TV and telecom 2,065 2,079 3,278 3,478 3,571 Production & repairing motor vehicles 1,460 1,375 1,629 1,668 1,843 Production & repairing other transport means 1,893 1,982 1,815 3,379 3,870 Furnitures 1,970 2,265 2,564 2,815 3,102 Recycles products 89 123 133 161 173 Electricity and gas 5443.8 6537.8 7596.5 8519.7 9346.1 Water - 750.7 803.6 847.2 920.3 993.9 Number of Industrial Enterprises _______ Total 615374 626,129 617,805 592,948 State owned 1958 1,879 1,843 1,821 Domestic non-state 612,977 623,710 615,296 590,246 Foreign invested 439 540 666 881 Source: General Statistical Office, Statistical Yearbooks 1975-2000 158 VDR 2001 - Statistical Appendix Table 8.2: MAJOR INUSTRIAL PRODUCTS Product Unit 1994 1995 1996 1997 1998 Rev. 1999 Energy__ _ _ _ _ _ _ _ Electricity M.k . 12473 14,665 16,962 1923 21,694 2_3,806' ~gt_ate 12,473 14,665 16,949 19,182 21,681 23,781 -Non-State - - 13 5 13 25 C~oal _____M.Ton.s __6_ 8 10 1 1 12 9 - State .6 8 10 I1~~ 129 - Non ~ ~ ~~~~- 0 00 CrdeOiltae Mil. Tons 7 8 9 10 12.5 15 -State 7 8 _ _ 9 10 13 15 -Non-State - - - - ~. . ........0 0 Rawi Material___ Steel 000 Tons 280 470 868 978 1,077 1,224 - State ~~~~ ~~~~ ~~~~~280 398 505 486 504 566 -Non-State - 72 365 492 573 658 Chromium ~~~~~~~~000 Tons 6 25 37 5 1 59 55 -State 6 21 31 2 32 -Non-State - 4 6 30 36 32 Tin (sticks) Tons ~~ ~~~~~~~0 1,862 2,805 2,7 230 236 -State ___0 1,862 2,805 2,800 2,260 2,275 -Non-State - - - - 60 - 61 _fi Manfa_cturingGod 'Metalworking Machine Tools Pieces 1,358 1,358 1,099 1,196 565 544 -State 1,358 1,358 1,099 1,196 565 544 iiNn-tae ----0 0 Diesel M6otor Pieces 3,371 4,217 7,838 6,761 6,883 8,090 -State 3,371 4,217 7,838 6,771 6,371 7,553 - Non-tate - - - - 512 537 Electric Rotating Engines Pieces 28,789 29,390 35,575 38,116 41,172 38,794 *State 28,109 28,181 34,148 37,000 40,000 37,769 -Non-tae680 1,209 1,427 1,116 1,172 1,025 Transformners Pieces 5,881 6,186 6,910 6,549 7,817 10,276 -State 28,109 28,181 4,368 7,453 -Non-State 680 1,2093,4 283 Water Pumip_s for Agri Pieces 632 547 435 563 3,082 3,210 - State 632-547 435 563 2,403 2,510 - Non-Stat'e -- 679 700 Rice Mill Equipment Pieces 2,067 2,043 2,167 12,413 13,909 14,121 - State ~~~~ ~~~~ ~~~~~191 105 141 12,394 13,909 14,121 -.Non-State 1,876 1,938 2,026 19 0 _ 0 Chemical Fertilizers 000 Tons 841 931 965 982 978 -- ,120 - State ~~~~ ~~~~ ~~~~~841 931 962 981 972 972 -Non-State - - 3 1 6 148 Insecticides-OOOTon 14 16 20.0 Bicycle Tires 000 Pieces 9,821 ~~~~~6,703 8,656 10,4 695 1,6 - State 7,470 8,295 6,823 8,464 11,761 12,541 -No-n-Stat 2,351 1,408 1,833 1,781 5,184 5,420 Bicycle Tubes 000 Pieces 10,800 11,917 12,588 14,044 22,167 23,670 -State 10,740 11,781 12,488 14,001 17,405 18,520 -Non-State 60 136 100 43 4,762 5,150 15 9 VDR 2001 - Statistical Appendix Table 8.2: MAJOR INDUSTRIAL PROD1UCTS (Continued) Product Unit 1994 1995 1996 1997 1998 Rev. 1999 Cement 000 Tons 6,371 5,828 6,585 8,019 9,738 10,381 - State 5,371 5,828 6,529 7,139 7,735 8,092 - Non-State - - 56 44 2,003 2,289 Bricks Mil. Pieces 5,413 6,892 7,11.9 7,262 7,697 8,030 - State 604 1,121 1,522 1,746 1,936 2,895 - Non-State 4,809 5,771 5,597 5,506 5,761 5,135 Consumer Goods Glass and Glass Products 000 Tons 38 77 93 66 105 109 - State 21 24 20 16 9 9 - Non-State 16 53 73 50 96 100 Porcelain Mil. Pieces 152 187 232 172 182 188 - State 19 18 17 17 16 17 - Non-State 173 169 215 154 166 171 Sawn Wood 000 m3 1,573 1,606 1,398 1,184 2,705 2,558 - State 526 500 341 242 1,012 932 - Non-State 1,047 1,106 1,014 942 1,693 1,626 PaperandPaperProducts 000Tons 154 216 220 263 311 338 - State 130 178 176 193 222 251 - Non-State 24 38 44 70 89 87 Salt 000 Tons 470 689 709 743 867 918 - State 93 174 137 148 200 222 - Non-State 377 515 572 595 667 696 Sugar 000 Tons 364 517 636 649 736 932 - State 99 117 178 221 257 503 - Non-State 265 400 458 428 479 429 Beer Mil. Liters 366 465 533 581 670 648 - State 356 314 581 392 448 464 - Non-State 10 151 168 189 222 184 Cigarettes Mil. Packets 1,948 2,147 2,165 2,123 2,195 2,129 - State 1,645 2,116 2,147 2,102 2,178 2,122 -Non-State 3 31 13 21 17 7 Tea 000 Tons 31 24 33 45 53 53 - State 23 13 18 24 26 26 -Non-State 10 11 15 21 27 27 Fish Sauce Mil. Liters 141 149 167 170 164 170 - State 48 56 55 41 34 38 - Non-State 93 93 112 129 130 132 Textile Fibers 000 Tons 50 59 65 68 69 74 -State 50 51 53 62 64 68 - Non-State 0 8 4 6 5 6 Cotton Fabrics Mil. Meters 251 263 285 298 315 317 - State 161 150 152 153 148 187 - Non-State 0 113 133 145 167 130 Soap 000 Tons 97 129 167 213 229 231 - State 90 93 98 119 26 25 - Non-State 7 36 69 94 203 206 Source: General Statistical Office, Statistical Yearbooks 1975-2000 160 VDR 2001 - Bibliography Bibliography Asian Development Bank (1999), "Vietnam: Greater Stability through Good Governance - Key Issues for Consideration ". 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