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18748 April 7, 1999 Public Disclosure Authorized

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Report No. 18748-VN Product ID No. VN-SE-53452

VIETNAM MOVING FORWARD

ACHIEVEMENTS AND CHALLENGES

IN THE TRANSPORT SECTOR

April 7. 1999

East Asia Transport Sector Unit East Asia and Pacific Regional Office CURRENCY EQUIVALENT

Currency Unit = Vietnamese Dong (D) 1995: US$1.(0 = D I 1,000 1996: US$I.00 = D 11,000 1997: USS 1.00 = D 12.000

GOVERNMENT FISCAL YEAR

January I to December 31

WEIGHTS AND MEASURES

Metric System

Vice President : Jean-Michel Severino. EAPVP Countrv Director: Andrew Steer. EACVF Sector Manager : Jitendra Bajpai, EASTR Task Manager : Dieter Havlicek. Senior T ransport Economist. EASTR CONTENTS

Preface ...... iii Acknowledgments...... iv Abbreviations and Acronyms ...... v Executive Summary...... Vii

1. TRAANSPORTIN A CHANGING ENVIRONMENT...... 1 The Spatial and Structural Distribution of Economic Activity...... 1 The Policy Environment...... 5

2. OPTIMIZING RESOURCE USE AND SERVICE DELIVERY...... 12 Transport Sector Priorities to 2010 ...... , 13

3. FINANCING ROAD iMI AINTENANCE...... 27 Current Financing Arrangements ...... 28 Cost Recovery Policies ...... 31 Options for Mobilizing Maintenance Funds for the Core Network ...... 35 The Way Forward ...... , 45

4. THE ROLE OF DONORS AND THE WORLD BANK...... 46 Potential Areas of Donor Intervention ...... 47 Proposed Transport Sector Initiatives for the World Bank ...... 48

Annex 1.1: Vietnam-Summary of Status of Recommendations for Transport Sector Reform... 54 Annex 1.2: Vietnam-Selected Transport Statistics ...... 59 Annex 1.3: Summary of Projects and/or Studies in the Vietnam Transport Sector ...... 77 Annex 2.1: Transport InlfrastructureInvestment Proposals (Ministry of Transport) ...... 90 Annex 2.2:Vietnam Railways: Making the Transition ...... 95 Annex 2.3: Vietnam-Annex9.3: Por-ts Vitnamand Ports Shipping....109 an Shippint...... 10 Annex 3.1: Road User Charges Model for Vietnam...... 124 Annex 3.2: Key Tasks of Road FtundBoards ...... 128 Annex 3.3: TranisfundNew Zealand ...... 130 Annex 3.4: Workshop on Sustainable Road Maintenance Financing ..133 Bibliography ...... 137

IBRD Map No. 29633 (June 1998)

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PREFACE

The World Bank's first review of the transport sector (collaborating with the Transport Research Institute of Vietnam's Ministry of Transport) was carried out in 1992-93 and the report was published in 1994 (World Bank 1994b). It reviewed the status and role of the transport sector in Vietnam's developing market economy, recommended guidelines for spending priorities and suggested a core public investment program through 2000, discussed techniques to mobilize resources from transport activities (roads and inland waterways), reviewed the organization of the transport industry and regulatory framework in light of Vietnam's goal of moving to a market-based economy, and assessed the institutional and human resource implications of the sector's transition to a market economy. The report was widely disseminated within Vietnam's government entities and served as a reference document for the donor community and subsequent specialized transport studies. Since the review was published, there have been important developments in the transport sector. The sector benefited from the country's economic growth of the past few years and from renewed donor interest. Transport infrastructure is now being rehabilitated and modernized, with donor and some private sector assistance. Moreover, spending on maintenance has increased in key subsectors, although it is still not at a sufficient level. Still, serious weaknesses (identified in the 1994 Transport Sector Review) persist in the management and administration of thq sector, at the central, provincial and local levels. In many instances the available resources' are not used to maximum benefit. Further, the Government of Vietnam should pay more attention to improving the quality of its human resources, allocating insufficient resources to this task. In addition, policymakers inust address new challenges: the gap between rural and urban areas in terms of access to reliable and affordable transport must be reduced, and measures must be taken to avoid the impending urban gridlock in Hanoi and Ho Chi Minh City. Thus developments of the past few years must be assessed, strengths and weakniessesidentified, and corrective actions tak-en. Transport services are vital to virtually every economic sector and the efficient functioning of markets. Moreover, they are an important means of communication and a conduit for services such as health and education. 'I'hus the thrust of this sector report is to outline a framework for a well-planned, professionally managed. efficient transport system. This review builds on the findings and recommendations of the 1994 report. It assesses the progress made so far, highlights the areas that still need to be improved, suggests solutions where possible or further in-depth analysis where needed, and will hopefully serve as a reference document for the Government of Vietnam, donors, and the public at large. Finally, it explores the future role that donors and the Bank could play in the sector and their possible contribution to help the Government of Vietnam achieve its development objectives. I'v .1 cknowlecgmen:s

ACKNOWLEDGMENTS

This report was prepared in the Transport Unit of the East Asia and Placific Region of'the World Bank by a team headed by Dieter Havlicek (Senior Transport Economist), and comprising Christina Malmberg Calvo (Economist), Jitendra N. Bajpai (formerly Principal Transport Specialist), Richard Scheiner (Senior Port Engineer), Louis S. Thompson (Railway Advisor) and Wael Zakout (Environmental Engineer). Ms. Dang Tlhi Quynh Nga, Task Assistant (EACVF) provided valuable support with data collection. Messrs. Anil Bhandari (Principal Transport Specialist) and Jacques Yenny (Consultant) were peer reviewers. The assistance of the Ministry of Transport's Transport Development Strategy Institute ('T'DSI) with data collectioni is muclh appreciated. Thanks also goes to all those officials in government agencies. the donors. World Bank colleagues and others who provided the team with valuable commen-iets.Meredith Dearborn assisted with the production of the report.

The conclusions and recommendations of this report are solcly the responsibility of the World Bank and not necessarily endorsed either in part or in whole by the Government of Vietnam. ,Ibbrevictizons and .4crovmnis v

ABBREVIATIONS AND ACRONYMS

AADT Average annual daily traffic ADB Asian Development Bank APEC Asia-Pacific Economic Cooperation ASEAN Association of Southeast Asian Nations BOT Build-operate-transfer ESA Equivalent standard axle FAO Food and Agriculture Organization FDI Foreign direct investment GDP Gross domestic product GST The New Zealand equivalent of a value-added tax GTZ Gesellschaft fuirTechnische Zusammenarbeit I4DM Highway Design and Maintenance Model IDA International Development Association IRI International roughness index kg/ha Kilograms per hectare km/h Kilometers per hour ODA Official development assistance OECD Organization for Economic Cooperation and Development PIP Public Investment Program TEU Twenty-foot equivalent unit VLSS Vietnam Living Standards Survey VOCs Vehicle operating costs vpd Vehicles per day VRA Vietnam Road Administration WTO World Trade Organization

Executive Sunmun1ari: vii

EXECUTIVE SUMMARY

THE CHANGING SOCIOECONOMIC ENVIRONMENT AND TRANSPORT

Since Vietnam introduced market-based policies a decade ago, the country has undergone a marked transformation. Macroeconomic and microeconomic reforms under the Doi Moi (renovation) policy laid the foundation for vigorous econumic growth of about 9% a year in real terms. The country was gradually opened and is now linked to the global economy. Foreign trade and exchange rate and investment regimes were substantially liberalized, and exports and imports have mushroomed. Also, opening most sectors to private initiative, allowing markets to set prices, and removing distortions created by state subsidies and other policies spurred domestic growth. Notwithstanding these reforms, the country still faces formidable challenges, even in a benign global economic environment. It remains one of the poorest in the world, with a gross domestic product (GDP) of about US$300 per capita in 1996 and an estimated GDP of US$700 per capita by 2010 (not taking into account the effect of the Asian crisis). Also, the discrepancies in income distribution and growvthbetween rural and urban regions and between the north, center. and south are increasing. The urban areas will continue to attract the lion's share of economic growth; their populations are expected to more than double by the year 2010 (even more in Hanoi and Ho Chi Minh City), comprising about 33% of the country's population, compared with 20% in 1995. Most of that increase will be due to migration of the rural poor who seek better economic opportunities in the cities. Nevertheless. by 2010 the majority of the population will still live in the rural areas, in relative poverty and isolation from the main markets, social amenities and educational opportunities. If these trends are allowed to unfold, potentially destructive and unmanageable conditions could develop. Experience in developing countries and elscwhere-confirmed by empirical research- has shown that transport is a key catalyst for economic development. The World Bank's reports on poverty and industrialization in Vietnam identified affordable physical access to markets, health, education, and other amenities as central to triggering growth in rural areas. Likewise, timely and well-planned improvements in urban transport can enhance urban productivity, avoid costly mistakes in urban land development, and ensure mobility for the urban poor. The development of interurban and international transport is indispensable for integrating local and regional networks into the national and international grids and is thus crucial for the movement of goods and people domestically and the linkage of domestic with international markets. The main aim of this report is to review Vietnam's progress in developing a modern transport system that creates the environment needed for balanced economic growth; to identify viij Execul/ivL Su/mnalyi

key challenges that remain and to outline SolutionIswvhere possible or. it'lnOt, suggest whiat further work needs to be done. The report also discusses the role the donor commullity can play in helping Vietniam meet these challeng,es. H-owever. the report does not claim the status of a master plan tfor the next decade. Thlis task is best left for the comprehensive master plan study soon to be initiated by the Governmiient and a team of consultants. A synopsis of the kev issues and recommendations outlined in this report is attachled.

DEVELOPMENTSIN TIIE TRANSPORTSECTOR: ACIIIEVEMENTS, CHIALLENGES AND TIIE WAY FORWARD

Achievements

Despite its weaknesses, the deteriorated and underequipped transport sector has supported the country's economic growth. Traffic arew even faster than GDP: from 1991 to 1996 total land-based traffic (in terms of tons and passengers) on all modes rose by an average of I1 .4%0 a year for freight and 8.25% a year for passengers. Road traffic increased fastest at I 3%oa year for freight (9.2% a year for passengers). followed by rail at 11.3% a year for rail (-1.3% a year for passengers) and inland waterways at 7.50o a year (5% a year for passengers). Urban traffic also grexv, rclectin, thcse areas' economic dynamiiisnman(d role as main gatewavs for internatiorial trade. The most dramatic chances were in I lanoi and Ito Chi MllinhlCity, withl 22% annlual orowth in the central areas in 1995-96. T'hus the main streets are becoming congested and travel speeds are declining to below 20 kilometers per hour (km/h). Althoughi two-wheel vehicles are the dominant nmeans of transport (80 to 90%/o).the share of bicycles is rapidly declining, while motorcycles have emeroed as the most dominuanitmeans of transport (about 80% of central area traffic in l-lo Chi Mihll City). At the same time, public transport has almost disappeared. ThrougYhput at seaports rose by an average 11.8% a year (1990-95), reflecting the coLintry's successful rcintegration into world trade. Air traffic grcvwthe most: domestic and intcrnational air traffic more than quintupled from 1991 to 19996.while domestic passen;,er traffic alone increased tlhirteenfold.

This remarkable performance can bc explained by thrce factors. muclh of the infrastructure had substantial reserve capacity that could absorb the growth, albeit at a high cost: the Government's programrito modernize phy!sical transport assets and remove bottlenieck-s oni the main trat'iic arteries is beginn ing to pay oft' and there is cvidcnce that reformii of the sector's adminlistrationi, rem,ulatcry framework and industrial organization has produced a strong supply response from private sector transport operators.

Challenges

While the transport system, institutions, and the policy and regulatory frameworks are gradually being modernized. Vietnam still has a long way to go in establishinc an efficient system, capable of supporting economic developmeint in a way that enables all ofi society to derive maximum benefit. Based on projected socioeconomic developments, transport demand will continue its rapid growvth. Motorization is increasing at breakneck speed and bottlenecks arc forming in some higTh-twrowvthareas. Much remains to be done to restore basic infiastructure ExcIutive Sunmary ix

networks for interurban and urban transport to acceptable standards of service. Many rural areas still lack-basic year-round access to transport infrastructure and services. Policies and systems to provide for adequate road maintenancc are not yet in place. More attention needs to be paid to cost-effective network improvements, management and operational efficiency. The needs of the urban and rural poor for affordable transport are not yet met. The cost of transport is still high because of persistent inefficiencies in infrastructure and unfinished measures to establish competitive transport markets and a level playing field for all participants. But the authorities' capacity to cope with these challenges is limited, due to weak institutional performance, lack of skilled administrators, management inefficiencies, and funding constraints. The key issues confronting the sector for the next decade are thus to ensure: mobility, avoiding bottlenecks in the efficient provision of transport services, notably in urban areas: accessibility and affordability, in particular by establishing year-round access for the rural population to transport networks and markets and providing affordable transport means and services for the urban and rural poor: and sustainability, by building robust planning and system management capabilities in the public sector, providing a level playing field for the private sector and ensuring the timely and proper nmaintenanceof transport assets. These issues should be addressed as a matter of priority.

(a) Mobility Increasing motorlzation may be the most visible recent development in the sector. Motorcycles have become ubiquitous in passenger transport, replacing bicycles and public transport, and in the process overwhelming the road infrastructure, especially in urban areas. The number of passenger cars rose even more rapidly in relative terms, from about 5,400 in 1992 to about 133.000 in 1996. The number of trucks grew more slowly, from about 84,600 in 1992 to 104.700 in 1996; however. their size and load capacity increased. The number of interurban buses rose from about 36,800 in 1992 to 66,500 in 1996; most of this growth occurred in the private sector (as did trucks). As a result, the mix of bicycles, motorcycles, cars, buses, and trucks constitutes a serious hazard, and is at the root of the seemingly intractable road safety problems. The trend toward motorization is certain to be felt most acutely in cities, given steadily increasing incomes and rapidly rising migration from rural areas. At the same time the urban areas' role as markets and providers of jobs (which will increase rural-urban commuter traffic). engines of growth, transit points for interurban and interregional traffic. and gateways for international trade will increase the need for efficient transport systems. Unless urban and regional transport systems and services are prepared in the near future, the problems of low mobility, pollution, and traffic safety threaten to become unmanageable. The major cities will need to design and implement a transport strategy that provides the required transport capacity in a timely and cost-effective way and that links the demands of specific urban transport needs with their regional and international gateway functions. r EY VC111i?vSu/n/rIy111

(b) Access and Affordability

The main challenge for rural transport will be access and aff'ordability: Seventy percent of the rural population still does not have year-round access to all-weather roads and markets. For transport to support rural development the Government should aim to create by 2010 an all- weather transport network (mainly roads) for the population, including those in the mountainous areas and, given the areas' distance from main markets, centers of administration, education. health and other facilities, and the low purchasinig power of the population, transport services must be affordable. A four-pronged integrated strategy is recommended to sustain provincial and rural roads: Rehabilitate or repair roads to complement agricultural or rural development programs, develop a least-cost program of investments to provide basic access, establish appropriate institutionial arrangements for road mainitenaince and management at the local level. and establish funding mechanisms and encourage local resource mobilization (including in-kind contributions) to ensure network maintenance.

Because interactions between transport markets-rural. urban, interurban, and international-will growv. measures to increase network integration ancd complementaritv among the different modes of transport will become more important, as will the reliability and quality of service. both in rural areas and in the urban growth zones. Thus the basic interurban transport networks, in particular roads and inland waterways, must be completed and linked with the feeder networks. as well as witlh national and international distribution centers, including ports. airports. and local distribution centers.

Experience and research has shown that providing transport infrastructure without affordable transport means will not improve the rural and urban poor's access to jobs. education. markets and other necessities. Thus, the strategy should be to move people and goods at the lowcst possible cost. While the tools to be employed will depenid on the specific circumstances they should be based on policies that promote competition in or lor transport markets; the design of transport infrastructure that takes explicit account of the requirements of the poor (such as, special lanes for nonmotorized traffic); the provision of affordable public transport including carefully targeted subsidies that benefit the poor and do not hamper the economic efficiency of transport services and. where appropriate, elimination of obstacles to the provision of informal public transport.

(c) Sustainability

The institutional and organizational reforms already made must be deepened. including improving public administration and governance at all levels of government. The Ministry of Transport's capacity to oversee and regulate effectively is still weak: in particular, functions such as planning, programming and evaluation, analvzing investments and formulating policy still seem tenuous and need strengthening. Moreover, decisionmaking within the Ministry of Transport and between it and other government bodies remains slow and overly centralized, it should be delegated to the lowest appropriate level (with the corresponding responsibility to deliver results). Interministerial coordination procedures should be streamlined, to minimize the time between policy/program proposals and action. In addition, the Government of Vietnam EYecuEtivCeSummonarv Xi

should devolve responsibility by developing provincial and local capacity to plan, implement. and manage transport assets efficiently.

These reforms cannot be accomplished without the support of a strong core of competent and appropriately remunerated professionals. which has yet to be established. The present reliance on outside technical assistance is not a long-term solution; and the transfer of technical know-how usually associated with the technical assistance yields mixed results at best. Authorities and the donor community must take the development of capable institutions and human resources more seriously, making it as important as investments in infrastructure in terms of political support and financial commitment.

In addition to the need for institutional sustainability outlined above, there is an equally pressing need to consider new mechanisms and processes to ensure the physical sustainability of the transport assets. While commercial transport infrastructure, such as railways and ports normally fund their operations and maintenance requirements from their own revenues, noncommercial transport infrastructure, such as roads, relies exclusively on budget appropriations. The Government has made impressive efforts to increase its funding for operations and maintenance, despite budget constraints. Nevertheless, practically all roads are underfunded, particularly their periodic road maintenance. Provincial and district roads receive only minimal amounts of funding. Conditions will be even more critical after the roads now being rehabilitated open to greater levels of traffic and need regular and periodic maintenance.

The report estimates that, depending on network coverage, traffic growth, and the pace of rehabilitation, funding needs for maintenance could amount to US$120 million per year more by 2010 than is actually being spent on maintenance. If the underfunding is not corrected the potential losses to the Government and society could be staggering. It has been estimated for instance that it costs US$200,000 to rehabilitate 1 kilometer of paved road, but only US$60,000 to maintain that road over a period of 15 years. If the maintainable paved network in Vietnam would be preserved properly, this could translate roughly into a capital cost saving of some US$2 billion in terms of today's dollars. compared with maintenance costs for the 15-year period of about US$330 million. Further, the costs of deferred maintenance to transport operators can be even higher: Each US$1 deferred on road maintenance increases vehicle operating costs by a factor of two to three, which will ultimately be reflected in higher transport costs. The two main instruments now used to raise fimndsfrom the road sector, a fixed transport fee and tolls on some rehabilitated segments of roads, are economically inefficient and the revenues are only partly used for road maintenance. Thus if Vietnam is to reap the full benefits of its rehabilitation program and to preserve its road network. it is vital to establish now a funding system for road maintenance that is economically efficient and yields an adequate and steady flow of funds.

The Way Forward: Efficient Sector Management

A welfare maximizing transport development strategy should be based on managing the transport sector as an interdependent system rather than managing any single component independently. This implies that the choice of system components and alternative options for the use of scarce resources should be carefully weighed and the solution with the highest social xii Executive Sumimary

benefit adopted, notably: new investments versus a more productive use of existing assets: promoting competition and efficient industrial organization (including the equitization of state transport enterprises) versus restrictive forms of market regulation and industrial organization; and the benefits of regular maintenance versus a policy of deferring it.

Resource Use. The report highlights several aspects of the Government's transport development strategy for the next decade that require closer scrutiny if resource use is to be optimized. Regarding capital expenditures. the Government's priority strategy rightly emphasizes investment in basic transport infrastructure to support economic growth and international trade. But the authorities' investment proposals for the next decade exceed the available resources by a factor of two to three, even under optimistic growtll assumptions. Although the private sector could provide some additional funding, the potential is considered rather limited in view of the specific country risk involved, the generally unfavorable climate for funding public transport infrastructure, long project gestation periods and the relatively low returns to be earned on the capital invested. This report argues that substantial savings are possible without sacrificing the Government's basic objectives if the systemic approachi suggested above is applied and a core program of investments is developed. To begin with, strict adherence to the Government's strategic focus on basic transport infrastructure with high economic returns would reduce investment spending substantially in most transport subsectors. In addition, a critical review of the envisaged distribution of resources to subsectors and specific projects. as well as of the balance between capital and maintenance expenditures could yield additional savings. The report estimates that for example capital expenditures for interurban road transport could be reduced over the next decade from the envisaged US$7 billion to US$1.8-2.1 billion. Similarly, port investment could be reduced substantially if the authorities would shift from supply-oriented policies to those keyed to likely demand, combined with measures to increase the efficiency and capacity of existing port assets. A demand and efficiency oriented urban transport program could help reduce the enormous needs, estimated at US$10-14 billion for Hanoi and Ho Chin Minh City alone. By contrast, the report recommends to increase spending for rural transport (including district and provincial roads) by 40%-to about US$1 billion, subject to the implementation of parallel measures to sustain a core provincial and rural road network.

The savings potential identified above is based on rough estimates and needs to be verified by further detailed studies for each subsector. Despite numerous technical studies and 'master' plans (of varying quality), experts have yet to develop a transport plan based on the expected socioeconomic development and principles of economic efficiency, financial constraints, and environmental/social acceptability. Recognizing the need for such a plan. the Government of Vietnam requested funding from a major bilateral donor. Because the plan will determine future funding decisions, donors should be closely involved and be able to review and comments on the plan's interim findings and draft final recommendations.

Transport Markets and Enterprises. Measures to improve the functioning and organization of transport markets are equally important to optimizing resource use. Tlhe Government has already narrowed its direct control over transport in the context of its market- ExecUtive Summon?urv Xiii

based policy reforms. But the reforms in the transport sector are not yet complete. and remaining economic regulations still prevent the sector from realizing its full potential efficiency. These regulations include, for example, maximum price decrees from the State Price Committee and approved tariffs for state transport enterprises. Also, unit prices of inputs for companies bidding for public sector projects are set artificially low, distorting prices, lowering the quality of the work and, ultimately, the companies' efficiency. In addition, progress in addressing such important technical regulatory issues as safety. overloading and the damage of heavy vehicles to roads is slow. The Government should aim to remove the remaining economic restrictions within the next five-year period, so as to complete the reforms for open. competitive and efficient markets. It should also establish oversight bodies to ensure fair competition and introduce appropriate technical regulations.

The industrial organization of the transport sector should be improved as well. Although the Government has allowed private sector participation, particularly in the provision of services, public enterprises still play an important role. dominating in inland waterways, sea transport. air transport, railways, and in the provision of supporting services such as freight forwarding and insurance. MIost state enterprises in the sector are of no strategic importance to the state and should be divested (some after appropriate restructuring and unbundling). In addition, practices and rules that are biased in favor of state enterprises prevent the private sector from competing on a level playing field. Reform of the Ministry of Transport's state enterprises has made very little headway, reflecting a lack of progress at the national level. little support from other government agencies and lack of technical know-how. The Ministry has limited expertise in valuing assets, restructuring enterprises, managing staff redundancy, and ultimately, divesting its assets. Although the Ministry proposed in 1992 to corporatize or equitize most of its 300 enterprises following a government mandate, it has divested only three small companies. To carry out its mandate, the Ministry of Transport will need substantial outside assistance. Although certain transport entities considered of strategic importance, such as the railways and ports, will remain in state control, there is a need for a more businesslike approach in their management and operation. The major problem of the railway is its lack of commercial focus. For this reason, substantial investments should only be considered after the Government has reevaluated the role, scope, and organization of the railway so that it is satisfied that the enterprise will have a commercially viable future in a competitive market environment. The priority for ports should be to identify ways to reduce investment needs by optinlizing the potential of existing facilities, improving operational systems, introducing results-oriented management. training staff. and increasing the efficiency of cargo handling equipment (including the procurement of some new equipment). To accomplish this the report recommends a thorough reassessment of the ports subsector.

Institutional Strengthening. Developing the required institutions, processes. and staff will take time and must be backed by the financial commitment of the authorities (including the donor community). A critical review of the effectiveness of past and ongoing institutional strengthening programs is required. as is a review of the knowledge transfer components included in most technical assistance contracts. Unfortunately. there is no quick fix solution. The xil' Executive Sumitnanry'

current absorption problems are likely to persist for some time. Therefore, modernization plans should be less ambitious and take into account institutions' limited management capacity. Moreover, donors should strengthen their efforts to help Vietnam overcome its institutional and human resource constraints; rely more on the synergies to be gained from coordinating their assistance; be selective in their interventions and focus on key priorities critical for the long-term sustainability of the modernized transport sector.

Cost Recovery and Maintenance Financing (Operations and Maintenance). Road infrastructure maintenance requirements have become too large to be financed throughl the traditional process of annual budget allocations. This report recommends that maintenance be financed off the regular budget through the establishment of a commercially managed road fund. International experience suggests that road users who are aware that poor roads increase vehicle operating costs are willing to pay a significant fee in addition to the taxes that are already levied on fuel. provided the funds are spent for the intended purpose and users are given a voice in managing the fund. During the launch phase of the road fund, it is proposed that the initial revenue be only the amount that is currently budgeted for road maintenance. Thus the Government's general budget would not be constrained. Parallel with the rehabilitation of the road network designated for maintenance additional revenue would be raised for the fund through a gradual increase in the fuel levy between three and seven US cents (depending on network coverage, type of fuel used and other criteria). The fuel levy should be complemented by a license fee on heavy vehicles so that they pay for the damage they inflict on the roads. It is expected that despite the additional costs, the net impact on all classes of users will be positive because of the substantial savings from improved road conditions.

Establishing a road fund poses a number of institutional challenges. International experience clearly shows that road funds only work well when they have adequate oversight arrangements: strong support of both the Government and road users is essential. To explore the potential support for a road fund it is recommended the Government invite all stakeholders to a workshop to review the sector's current problems and discuss the implications of and action required to create a road fund. The Bank could help organize a workshop on sustainable road financing where participants can decide on what needs to be done and who should be responsible for initiating the efforts.

THE ROLE OF THE DONOR COM MUNITY AND TIIE WORLD BANK

Donors have been involved in rehabilitating and modernizing the transport infrastructure through lending and nonlending support. Donor commitments for transport from 1992 to 1997 were about US$1.5 billion, of which close to 90% was used to construct and rehabilitate roads and bridges (including rural and urban transport). The balance went to the railway (US$92 million), inland waterways (US$74 million), and ports (US$63 million). Assistance for urban transport has been marginal.

The donor community has pursued a broad three-prong strategy in helping the Government to develop the transport sector: rehabilitating and developing physical infrastructure; strengthening of Vietnamese project management capacities; and improving the Executive Sumnnarv xv

sector's efficiency. its management and institutions. While the achievement of physical targets has been reasonably satisfactory, a great deal still needs to be accomplished in building robust local project and sector management capacities.

Given the unfinished agenda and remaining challenges there is ample scope and continued need for donor support in key areas. The issues identified in this report are so complex and the agenda so broad that no single donor will be able to deal with them all comprehensively and effectively. Therefore the donor community, in partnership with the Government and other stakeholders, should first develop a consensus on the strategies to be applied and the priorities to be addressed before proceeding to assist the Government. To ensure that the donors' resources and technical know-how are utilized to maximum advantage it is proposed to consider forming coalitions in areas of common interest between donors, the Government and other stakeholders.

Potential Areas of Intervention It is proposed that the Government convene a meeting as soon as possible in order to establish a consensus among all stakeholders on a long-term strategy for the sector, including the donors' potential contribution, the priorities to be addressed, and a plan of action for the next five years. In establishing priorities and the action plan. administrative and political constraints, the status of the dialogue between donors and the Government of Vietnam and the Government's degree of commitment need to be taken into account. Based on the issues identified in this report and current Government and donor statements of their respective priorities potential areas of common intervention could be as follows. Mobility. Implementation of a strategy for integrated transport and urban development for Hanoi, Haiphong and Ho Chi Minh City, designed to optimize system efficiency, capacity, intermodal connectivity, affordable public transport, safety and transport management capabilities. Access and Affordability. Based on the principles of sustainability, efficiency and affordability, design and implementation of a rural transport strategy that will provide the rural population by the year 2010 with year-round access to a well managed and maintained integrated network of all-weather roads and transport services. Completion of the basic interurban networks (mainly roads and inland waterways), their linkage with feeder networks and transport nodes (such as ports, airports and local distribution centers) and implementation of state-of-the-art maintenance management systems. Sustainability. Development of competent institutions of transport management (at all levels of government) including efficient management processes and increasing the quality of the professionals in charge. Action in this area should be preceded by a critical review of the current government and donor activities in this area.

'Establishment of an economically efficient, fiscally effective and sustainable system of funding for road maintenance. xvi Executive Szt,ummuu'\

Market Efficiency

Improvements in the industrial organization and the regulatory framework governing the sector are required to increase its efficiency and competitiveness. Possible measures to be supported by the donor community include equitization of transport state enterprises, cotnmercialization of those state enterprises remaining in state ownership (such as the railways) and support in deepening transport policy reform.

Bank Transport Sector Initiatives (1999-2001)

Roads. The Bank's long experience in Africa and elsewhere gives it a comparative advantage to help introduce a comprehensive road maintenance program for the entire network. as recommended. Since long-term assistance will be needed, the best instrument would be adaptable program lending. through which successive tranches of the program could be funded, depending on the progress achieved. It could also include Bank assistance to develop a legal and institutional framework for a road fund. The Bank will continue its involvement in rural roads as a way to provide reliable and affordable access to transport networks and to help create and implement sustainable regular maintenance (and related institution building). The lending instrument would be a second rural roads project. Railway. If the Government and railway are firmly committed, the Bank would be prepared to be closely involved in its transfomiation into a modern, competitive enterprise with a commercial future. To establish the scope, content and pace of reform, the Bank could start with a Learning and Innovation Loan, which, if warranted, could be followed by coordinated funding by interested donors.

State Enterprise Equitization. The Bank wouLldbe prepared to assist (or organize assistance) the Government in developing an action and implementation plan for those transport state enterprises designated for equitization. This could be done either in the context of a broader initiative of state enterprise equitization or in the context of a sector-specific action. Urban Transport. Because the Bank recognizes the key role transport plays in promoting urban efficiency and overall growth, it has approved an urban transport project (its first in this subsector) designed to improve traffic operating conditions and safety. The initiative would be a prototype for managing traffic and a building block for a city-based, multimodal transport strategy. The follow-up project would aim to develop demand management schemes. public transport operations, mobile-source pollution control, and promote transport-linked land development practices. The Bank, along with the Government and donors. proposes to target assistance to key urban centers that can serve as pilot sites for a multimodal framework. This effort would be coordinated with the Bank's other urban activities in order to benefit from the synergy between transport, urban developmenit and environimenitalmanagement. Dialogue and cooperation wvithcity administrations as well as bilateral and multilateral donors will be pivotal. if this approach is to succeed. Execuitive Sunmmary xvii

SUMMARYOF ISSUESAND RECOMMENDATIONS

Issue Objectiv es Recoinmenidationis Agent(s) C(omilicilts Nlobility Avoid/eliminate bottlenecks I)esignand implemiienta cost- Central Govcrnmieiit 'I'he strategyshouild address in the efficient pros isionof cffective urbantransport strategy for agenicies(MOFE. issucsof providiig etficient transportservices, notably in the next decade.linking specific MPI. MOT) andlocal transportw ithin the urban urbanareas. urbantransport needs with the cities' governmicnts(citics. arcasand the linkage roles as enginesof groNAthiand gate- provincial anidlower betweeinthese areas and their ways for internationaltrade. level): donor hinterlands(that is. regional coImnmun1ity. and titeruirbantransport Ensureconnectivity betweenurban, networks). intertirbanand rural transport networks. Accessand I. Provideby 2010 an all- 1. Implementfour-pron1a integrated 1.MOFE, Ml'l. MO'I' Proposedstrategy to be Affordabilitv weathernetwork of roadsfor developmentstrategy for rural roads: and local govern- reviewedin light of pendinig the rural population. rehabilitateroads to complement nments:donor cormmu- recommendationsof rural 2. Completeand link basic rural developmentprograms: provide nitv. transportstrategy study and interurbannetworks with the basic access:create rohast local 2. MPll. MOT: donor stakeholderinput. feedernetworks and transport institutionsto managethe roads: commulity. nodes. ensurereliable funding. 3 M01'. Local 3. Ensureaffordabic transport '. CoiitintLicimplementation strategy governmententities. meansfir the poor. for basic networkrehabilitation, users/operators:donor 3. Developstrategy to move people community, aridgoods at lowestpossible cost. basedon economicefficiencN. Sustainability I. Deepeninstitutional and I. Reviesvthe effectiveiness of past Mo'r. MI'l. MOF, progressin areasof .nstitu- organizationalreforms in andongoing institutional strengthen- donors tional strengtheningand transportat all levelsof ig arid humanresource dceeloplient humanresotirce dcvelopment government. programs.including doior assistance: has beenunsatisfactorv due 2. Establisheconomicall1 scaledown transportdcvelopmenit to bias in favor ofplhysical efficient and fiscally effective programto absorptivecapacity of investments:lack of consen- funding systemfor road institutions concerned:more focused suson strategy.lack of com- maintenance. and coordinateddonor assistance. niitmentand findirig for 2 Establishoff-budget Road institutionalarid humran Maintenance Fitnid. resource development 2. Stop-gapmeasures ctirretitly being iniplemented (such astolls on newly finished roads)are economic- ally inefficient and fiscally ineffective. Resources Deploy available resources Optiiiiize produlctivityof existing National Assemiibly. for transportsector as assetsand processesbeftre commit- Prinie Minister, MPI, efficiently as possible. ting ftindsfor new investnient:criti- MOT as well aslocal cal revieu of sector aridsubsector aovernmeitg entities prioritics: developa corepriority expenditurcprogrami based on and maximizing economicefficiency. Forniulate a "realistic"transport developmentprogram. based on the principlesof ecolomic efficiency. financial constraints and eiv ironi- mentalanid social acceptability. Involve donorsclosely in planined strategystudy. Xviii E.xecutive Stll77/oort

Issue Objeclives Recomimiendations Agent(s) Comuments 1'ransporl ImiproveceiicicriC~ ot Rcmore reniainino c coniomiic rectric- National A scibl . Ex-ante intervcintionl shoUld Marketsand fniiictioniniiof marketsanid tions on prices.costs and tarilfs and Prime Minister..\MOF. be replacedb! oversight Enterprises etiterprises. establishovcrsight body to ensure MOTf body to ensurefair compe- efficient markets:implemenit appro- tition. The Ministry of priatetechnical regulations (such as Transportneeds outside on heavvvehicles. road safetv). Mo-st assistancein stateenterprise transportstate enterprises should be divestitureand comnierciali- divested:eliminiate rules andprac- zation ticespreventing level playing ficld betweenstate entcrprises and private enterprises:remaining state enterprisesand stateentities (sucil as railwxavsand ports) shouldbe man- agedas commercial enterprises and fully exposedto the market. Roleof the Improve efficiency of donor Strengthendonor coordinationand Donors.Governmeit. Donors assistance focusassistance on comparative NtOs. other advantagesof eachdonor: emphasize stakeholders needfor systemefficienicy (such as linking policy. managementarid oper- ational iniprovemenltwith funding decisions). Donors.jointlv with otherstakehold- ers.to devclopconsensuIs on strate- gics to be applied for transport development.Form -donorcoali- tions to solve specific problems (suchas rural transport:institutional development:establishment of road fund). Chupter 1. Tranisportin a Changing Environment I

1. TRANSPORT IN A CHANGING ENVIRONMENT

1.1 Since introducing market-based policies, Vietnam has increasingly become linked to the global economy. Indeed, further integration is one of the Government of Vietnam's major objectives. Thus foreign trade and exchange rate and investment regimes have been substantially liberalized over the past decade, producing vigorous export and import growth. Further, Vietnam's joining of regional and global trade groups such as the Association of Southeast Asian Nations (ASEAN), Asia-Pacific Economic Cooperation (APEC), and the World Trade Organization (WTO) will help, to remove the remaining restrictions (such as restrictions on rice exports and other nontariff barriers to trade). As other countries have learned, for these developments to be successful, competitiveness and economic efficiency must be improved substantially.

1.2 With respect to transport, the capacity and quality of freight-handling procedures, including documentation, customs procedures, and container handling, must be improved to serve the growing trade flows. Changes are most urgently needed in the country's two main export-import zones in the north, the Hanoi-Haiphong corridor, and the south, Ho Chi Minh City-Vung Tau, which handle 28% and 45%, respectively, of all external trade.

1.3 At present, only about 10% of external trade moves across Vietnam's land borders. But ongoing efforts to strengthen regional political and economic cooperation and integration could increase border trade and transit traffic significantly. Thus land and air links with neighbors should be improved, including measures to facilitate transit traffic. Also, changes will be needed in the ports that serve transit traffic.

THE SPATIAL AND STRUCTURAL DISTRIBUTION OF ECONOMIC ACTIVITY

1.4 Sharp differences emerge in the spatial distribution of economic activity. The southern region has grown consistently stronger (in terms of its contribution to GDP), the northern area has remained in second place, although its contribution to GDP fell slightly from 31 .1% in 1990 to 30.2% in 1995, and the central region remained last, with its share in GDP dropping from 20.8% to 18.9%. Moreover, within each region growth is concentrated in urban areas. For example, the southern growth triangle (Ho Chi Minh City-Bien Hoa-Vung Tau) consistently grew more rapidly than the northern and central areas. In 1994 it grew twice as fast (1 4%) as the 2 Chapter 1. Tran.sport in a C'hanging Environment

others (7%). The southern region also attracted 60% of all foreign direct investment (FDI), followed by the north.'

1.5 Agriculture's share in GDP is decreasing dramatically throughout the country. Overall, it dropped by more than 13 percentage points, from 39.4% to 26.2% (figure 1.1). The fastest decline was recorded in the central region, where agriculture was replaced by the service sector as the most important contributor to GDP. But it still contributes about one-third of GDP (down from 48% in 1990), whereas it is less than a quarter (22.9%) in the south. The fastest growing sectors nationally and in each region were construction and industry (services in the central region), although from low bases in the north and central areas (figure 1.2).

1.6 Although every region is growing, the disparities between them are increasing. The south is the fastest growing (9.5% a year), the north is second (7.7% a year), and the center is third (6.2% a year). Assuming these trends continue, the south will double its GDP in 7.6 years, the north in 9.3 years, and the center in 11.5 years (figure 1.3).

FIGURE 1.1: GDP DISTRIBUTION BY SECTOR AND REGION, 1990 AND 1995 (in % at 1989 constant prices)

1990 1995 >0 50 40 40 30 30 20 *2 10 U 2 10-. A A 10 0~~~~~~~~~~~~~~~~~~ North Central South North Ccntral South

Agriculture I-ndustr |Agricuilturc -UIndustr) l A Construction Services l l-ConstrLctioll 3(Services

See World Bank, Vietnam, IncidastrialReport on Inhustrialization and Inclustrial Policy, Report No. 14645-VN. October 1995. C'hacpter1. Transport in a (ChangingEnvironnwnt 3

FIGURE 1.2:GDP STRUCTUREBY SECTOR AND REGION, 1990 AND 1995 (in % at 1989 constant prices)

1990 1995 60 70 q0 60

40 50- 30 ~~~~~~~~~~~~~~~40 30~~~~~~~~~~~~~~~~~3 20 20 10 10 0 0 Northi CentLral SouIth North Central South

4- Agriculture - Industry 4 riculture - Inndustry Ai Construction X Services I - - - - I * ~~~~~ConstrUlctionXService's

FIGURE 1.3: AVERAGE ANNU]ALGROWTIH RATES Urban Socioeconomic Development OFGDP, BYSECTOR AND REGION, 1990-95 1.7 As noted, the country's economic (In % at 1989 constant prices) growth is almost entirely related to the industrial, construction, and service 1990 sectors, as well as the rapidly developing 30 international trade sector. These sectors 25 >< are mainly in the urban areas,' and they are Vietnam's most dynamic and 20 important generators of GDP. Thus in IS 1995 the urban sector contributed about 10 60% to GDP, meaning that only 20% of s. ' the- population- + produces 60% of GDP. And this contribution is bound to increase. 0 In fact, the contrast is even stronger. since N: rth Centr.il St)L,th N>nh Central South the bulk of economic activity occurs in the l-4--T. otal (Gl)lD -- Agrculturc Ho Chi Minh City-Bien Hoa-Vung Tau

ndistrNsI- - ConstrLcti.OI and Hlanoi-Haiphong growth triangles. -*- Services vwhereonly 5 million people reside. Similarly, external resources flow mainly to these areas. For example. as of July 1995, 56% of all FDI was concentrated in the Ho Chi

In the case of international trade, for example, the ports of Haiphong and Ho Chi Minh City handle about 73 percent of the country's exports-imports. 4 Chapter 1. Transport in a Changing Environment

Minh City area, and 26.4% in the Hanoi-P-aiphong area, leaving only 17.6% to the rest of the country. Studies have shown that the quality of transport infrastructure is an important contributor to the agglomeration benefits that attract FDI.

1.8 The geographic concentration of economic growth has been matched by the rise of economic institutions that foster it (such as, banks, tradc handlers, company acgents. and government offices).3 Unlike the experience of other countries, in Vietnam there appears to be a striking lack of specialization between the country's regions and cities. Basically, the north and the south function as two autonomous economic areas, with relatively little exchange of physical goods between the two.

Rural Socioeconomic Development

1.9 The World Bank's Poverty Assessment Report and its Report on Industrialization aInd Induistrial Policy4 describe the low level of economic activity in rural areas, the associated low per capita incomes and high poverty rate, the slower growth rate and its structural weaknesses, and the danger that these areas could fall even further behind. The reports advocate promoting broad-based economic growth: directly through regional development activities and policies that make productive use of rural labor in on- and off-farm employment, and indirectly throughl resource transfers from high-growth areas. But. such growthl must be sustainable: investments in rural areas should be governed by the same principles of economic efficiency and financial viability that are applied to high-growth areas. These investmnents should also include social safety nets for the poor, where appropriate.

1.10 The Bank reports identified investments in physical infrastructure, human resources, and institutions needed to deliver the public services that are critical to encouraging rural development. Also, the factors of production-suclh as labor and plhysical capital-must be mobile so as to spread growth and incomc to both urban and rural areas. This means that rural areas must have physical access to markets and other institutions if they are to develop. Experience in Vietnam and elsewhere has shown that all-weather roads (as well as waterways in the south) enable economic diversification, labor mobility, more productive use of farmland. and higher livin, standards. For example, the VietniamiiLivijn( Standards Survey (VLSS) founld that people who lived in rural communities near all-weathier roads were much more likely to have a

3 That is, a combination of economies of agglomeration. economies of scale, lower transport costs. etc. See also, G. Ingram,Patterns of letropolitanDevelopmiienl Ithcat Have lVe Learned?,World Banlk,Policy Research Paper No. 1841, November 1997.

4 Vietnam, Povernt'Assessrnent and StrateKy, Report No. 13442-VN, January 23, 1995; and Vietnam1, Economic Reporton Indiistrializationand InditstrialPolicy, Report No. 14645-VN, October 17, 1995. Chacpter 1. Transport in a Changing EnWiron,nent 5

permanent market in their villages, leave their villages to seek work, increase agricultural productivity, sell the surplus,5 and be served by public transport.6

THE POLICY ENVIRONMENT

1.11 Vietnam's economic success has been driven to a large extent by the macroeconomic and microeconomic reforms launched under the renovation policy (Doi Mloi) and the country's reintegration into the world economy over the past decade. The policies that removed administered prices and direct state subsidies, liberalized foreign trade, eliminated barriers to the private sector, and reformed state-owned enterprises were particularly relevant for transport.

Transport Sector Response

1.12 It is remarkable that Vietnam's deteriorated and underequipped transport infrastructure and services supported the growth and structural changes outlined above. It managed to do so partly because it had substantial capacity reserves that could absorb the growth. Also, the focus on investing in and maintaining heavily used infrastructure is beginning to pay off. Further, important reforms in the sector's administration, regulations, and industrial organization were introduced. More reforms have been prepared for the future. Annex 1.1 compares the reforms carried out with those recommended in World Bank.

1I.13 Traffic. The country's economic growth has been matched by a rapid increase in traffic, which grew even more quickly than GDP (though also from a low base). From 1991 to 1996 land-based traffic (in terms of tons and passengers) on all modes rose by an average of 11.4% a year for freight and 8.2% a year for passengers. Road traffic increased the fastest, at 13% a year for freight (9.2% a year for passengers), followed by rail at 11.3% a year (-1.3% a year for passengers) and inland waterxvays at 7.5% a year (5% a year for passengers). The modal division chaniged slightly in favor of roads, whose share increased from about 65% to 70%, while rail stayed about the same at 5%. and inland waterways fell by five percentage points, to 25%. Throughput at seaports rose by an average of 11.8% a year (1990-95), reflecting the country's successful reintegration into world trade. Haiphong and Saigon ports, the country's most important, handle 81% of seaport throughput (imports and exports), which increased by 12.4% and 10.2% a year, respectively (1990-95). Air transport grew the fastest of all, increasing more than fivefold. Domestic air traffic increased thirteenfold, reflecting the rapid growth of the two main economic growth poles, Hanoi and Ho Chi Minh City (see details in Annex 1.2 )7

The VLSS found, among other things, that the presenceand condition of roads has a significantimpact on paddy production. Paddy productivity begins to decrease at a distance of more than 3 km from a road, at the rate of 402 kilograms/hectare(kg/ha) per additionalkilometer of distancefrom the road and yields decreaseby 26 kg/ha for every additional month that the road is impassable.

6 Source: see footnote 4 on previous page.

7 In addition, domestic air traffic is heavily cross-subsidized by international air traffic. 6 C'hapter I Transport in a Changing Environment

1.14 Motorization. Motorization is the most dramatic trend in transport, despite starting at very low levels (even accounting for the country's size and population). Motorcycles have replaced bicycles and public transport. increasing from an estimated 200,000 in 1992 (equal to 2.9 motorcycles per 1,000 people) to about 4.2 million in 1996 (equal to 56 motorcycles per 1.000 people). overwhelming the road infrastructure, especially in urban areas. The number of passenger cars increased even more rapidly in relative terms, from about 5.400 in 1992 (equal to 0.08 passenger cars per 1,000 people) to about 133.000 in 1996 (equal to 1.8 per 1.000 people nationwide and 8 per 1,000 people in Ho Chi Minh City). Most (85%) were owned by public entities, reflecting private citizens' low purchasing power. Thus it is unlikely that the rapid growth will continue-at least until personal incomes grow substantially from the low (1996) per capita level of about US$300 per year. The number of trucks grew much more slowly, from about 84.600 in 1992 to 104,700 in 1996, although size and loading capacities increased. This trend is positive, because it will help control the unit cost of transport and reduce the pressure on road capacity. The number of buses (excluding three-wheel lunihros) rose from about 36.800 in 1992 to about 66.500 in 1996, most of the growth taking place in the private sector (as was the case with trucks). Thus the mix of bicycles, motorcycles, cars, buses, and trucks create grave road safety problems.

1.15 Average annual daily traffic (AADT) on roads varied considerably. dependin;, on location. The highdestvolumes--up to 21.000 four-wheel vehicles and 39,0000 motorcycles (1994-95)-were recorded on the approach roads to Ho Chi Minh City and Hanoi. These figures are more than double the amount in 1991-92. Typical AADT volumes on interurban, national, and provincial roads slated for priority rehabilitation vary betwveen2.000 and 5.000 vehicles per day (vpd). including motorcycles and bicycles. and are lower on the nonpriority network. AADT on district and rural roads is low, typically betweeni 100 and 300 vpd. Most of this traffic is bicycles and, increasingly, motorcycles, animal-drawni carts. and small homemiiadetrucks (con, non g).

1.16 Urban traffic showed the most dramatic change,. particularly in Ilanoi and Hlo Chi Minh City-22% annual growvth in central areas during 1995-96 alone. Thlus the main streets are becoming congested and travel speeds are declining (below 20 knm/h). Although two-wheel vehicles are the main mode (80% to 90% of vehicles). the share of bicycles is rapidly declining (at a rate of up to 20% a year). while motorcycles have emerged as the most dominant mode (about 80% of central area traffic itnHlo Chi Minh City). Ho Chi Minh City registered the hi(ghest number of motorcycles. with 300 per I ,000 people. compared to 200 in I-lanoi [520 in Kaohsiung, Taiwan (China) and 60 in Guangzhou, China]. 'fle popularity of personal motorized vehicles has resulted in a rapid decline in public bus use (figure 1.4). Thus the cities have switched from human-powered transport to mechanized transport. while abandoning public transport. This is a unique and undesired trend, given the ineffective use of road capacity and negative effect on congestion, road safety, the environment, and urban developmenitpatterns (box 11). Chapter 1. Transport in a Changing Environnment 7

FIGURE 1.4: TRENDS IN PASSENGERTRANSPORT USAGE 1.17 Transport Dependence AND MOTORCYCLE REGISTRATIONIN HANOI and Costs. Compared with other countries that are of similar size and have similar incomes, Vietnam

71 45 depends less on transport, except . - .(- for the two urban corridors in the 8 -AP1) ""'- . NlOIOrC\CICSnorth and- south.- From/''I _ 1993 to

-44) ' " ., / - 1996 the sector's contribution to GDP (including post and telecommunications) varied from 4.1% to 4.4%, putting it at the ") - -- ' "lower end of the range for Y.,r nonsocialist countries (between 4%

Box 1.1: TRAFFIC ACCIDENTS From 1988 to 1997 accidents increased fourfold to 19,159. Police statistics showed that fatal accidents soared by almost 235% and injuries by 400% (Annex 1.2). Accidents increased from 7.1 per 100,000 inhabitants to 24.9, fatalities rose from 3.9 to 7.4, and injuries from 8.7 to 28.4, giving Vietnam one of the highest accident rates in the world. What's more, the numbers are seriously understated because only a fraction of the accidents are recorded. Ministry of Health officials estimate that in 1996 more than 60,000 road accident casualties were treated in Hanoi and Ho Chi Minh City hospitals alone, a figure more than twice that of official numbers for the entire country. Such discrepancies stem from the fact that traffic police are not required to report all road accidents involving personal injury, and because few vehicles are insured, most accidents are settled privately. and 7%.9 In addition to the underestimation of the private sector's contribution (which is not accurately captured in official statistics), the low transport intensity may also reflect the concentration of economic activity (and thus transport) in the two major centers, and the low level of specialization (and consequently, exchange of goods) between north and south. At the same time, until 1996 the relative cost of freight transport services continued to increase faster than general prices (by a factor of 1.8 from 1991 to 1996, compared with 2.7 from 1986 to 1991). But the rise in the price of passenger transport was less (1.2 from 1991 to 1994, compared with 4.8 from 1987 to 1991). More recently, the grownthrate of freight transport costs has slowed. stalling in 1997. While it is difficult to pinpoint the cause. there may be a correlation between the slowdown in the growth of costs and the benefits of improved road infrastructure, the introduction of more productive trucks, the deregulation of prices and markets, and the

In urban areas the road network experienced congestion, as trips have been accommodated within the available capacity. But with increasing urban incomes, mobility demand continues to rise, putting even more strain on the existing transport infrastructure.

9 Source: see Transport Sector Review 1994 and Vietnam Statistical Yearhook 1996, General Statistical Office, Hanoi. 1997. S Chupter /. Trbansport in a Changing Environment

intensif'ying competition from private sector opcrators. The samc phenomenon seems to apply even more strongly to passenger transport. now dominated by private operators.](

I.18 Physical Improvements. To restore and modernize transport assets in the public domain, the Government of Vietnam has focused on the main traffic arterics serving the bulk of national and international transport demand (see Annex 1.2 for transport expenditures from 1993 to 1996). The largest component of capital and maintenance spending was on roads and bridoes (77% of the total from 1993 to 1996). which serve about 70% of the country's freight and 80% of its passenger traffic. The Government emphasized rehabilitating the main north-south trunk road (11ighway No. 1) and roads in the northern growth triangle HIanoi-Haiphong (Highways No. 5, 10. 18), and maintaining the remainder of the national road network. In addition, about 11,000 km of rural roads were rehabilitated or repaired, the local population contributed more than 50% of the cost, including in-kind contributions such as labor and rice. No major projects were undertaken in the urban transport sector, despite Public Investment Program (PIP) proposals for new roads and public transport equipment in both Hanoi and Ho Chi Minh City.

1.1 9 As for inland waterways, which are second in importance to roads, a program to rehabilitate the main corridors in the Mekong Delta will soon begin. Also, preparations to rehabilitate the main waterways in the Red River Delta will soon be finalized. For the railway, the focus has been on investments to keep the system operating, until its future role in the market ecoonomy is clarified.

1.20 The country's two main international seaports are being rehabilitated and modernized to cope with the rapid growth in international trade. In addition, minor improvements have been made to some other seaports, and preparations are under way to provide additional ports in the north and south with deeper drafts to serve the larger container and bulk ships. Finally, much needed improvements have been completed or are under way to modernize the two major international airports, Noi Bai in Hanoi and Than Son Nhat in Ho Chi Minh City.

Institutions

1.21 As part of the 1994 state sector reforms, the Ministry of Transport was reorgyanized so as to recast its mission from its previous centralist and interventionist role to one more in tune with a market economy. Thus management funlctions. such as creating and implementing policy. setting standards, planning, programming. budgeting, and auditing results, are being stressed, instead of daily micromanagernent of sector infrastructure, f'acilities, and transport services. Separate administrations were introduced for each major subsector (roads, inland waterways. the maritime sector), and each was given substantial autonomy and broad power over the centrally administered transport infrastructure. Moreover, special "Project Management Units" were formed to deal with the management of large-scale rehabilitation projects (e.g., Highway No. I). Air transport (airports and the national airline) has been removed from the Ministry of

10 Based on data supplied bv the Government Price Commnlittee. Chapter 1. Trcansport in a Chaniging Environmentn 9

Transport's purview altogether. and instead answers directly to the prime minister. With respect to urban transport, the Ministry of Transport plays only an advisory and coordinating role in the large cities.

1.22 The central management unit of the Ministry now employs only about 200 people. But despite the reorganization, its capacity to plan, program, and evaluate strategies, analyze investments; and formulate policy needs to be improved, largely because, as with other ministries. it has few experienced professionals and middle-level managers (partly because of low salaries). Also, lines of responsibility and authority still seem unclear, such as the Ministry's relationship with the Road Administration and provincial and district road authorities. Moreover, decisionmaking is still slow and overly centralized, both within the Ministry of Transport and between it and other agencies. Thus the process is uncertain, time-consuming, and rigid.

1.23 The Ministry of Transport and its units will only be able to carry out their duties effectively if they have a sufficient number of competent administrators with the required skills. Thus the Ministry's staff and their skill levels in the areas mentioned above must be strengthened. This could be accomplished by offering intensive training for existing staff and hiring additional staff who already possess the required skills. Further, decisionmaking authority should be delegated to the lowest appropriate level (as well as the responsibility for delivering results), and interministerial coordination procedures should be streamlined to reduce the time between policy or program proposals and action.

1.24 Reforming Public Enterprises. Although the Ministry of Transport reduced the number of its state enterprises in the early 1990s, it still directly controls 12 (compared with 300). including 7 construction corporations and the railway union (organized as a corporation). Other Ministry enterprises were divested to its subordinate modal units. Thus, the Vietnam Maritime Administration manages 16 companies, the Inland Waterways Administration Bureau runs 22 companies, and the Vietnam Road Administration manages 55 companies. including 6 freight transport enterprises, 1 passenger transport enterprise, 4 regional road management units, 40 subunits, and 4 ferry groups. In 1992 the Ministry of Transport proposed to corporatize or equitize most of them, except the national airline, the seaports and airports, and the three main maritime shipping companies that the Government considers to be strategically important. Also. provincial transport committees control about 300 small enterprises, such as engineering consulting firms, road construction and maintenance companies, and bus and taxi cooperatives.

1.25 But for reasons beyond those directly related to transport. the process of state enterprise divestiture has made little headway. Within the Ministry of Transport, only three small companies were equitized. even though many of its and the provincial transport committees' enterprises (such as trucking, shipping. consulting and construction companies,, and freight forwarders) would be ideal to corporatize or equitize, since they are relatively small, do not benefit from significant economies of scale, and pose little risk of social disruption (such as massive redundancies). The Government has recently decided to expedite the process. /0 Chaipter 1. Transport in a Changing Environment

1.26 The Ministry of Transport should implement the Govcrnmcnt's equitization mandate by preparing an action plan and a timetable to equitize most state enterprises that are under its or its units' authority. For example, construction companies should be among the first to be equitized, so as to allow them to compete more effectively in the market for local and international contracts. Also, doing so would create the entrepreneurial infrastructure required to move progressively from force account to contracting out. Other prime candidates are the state enterprises whose efficiency does not hinge on economies of scale and can easily be divested in smaller units, such as trucking, freight forwarding, and handling. But the Ministry of Transport lacks the required technical expertise and will need substantial outside assistance to carry out its mandate.

1.27 The companies that the Government wants to keep in the state sector should be fully commercialized and subject to the same incentives and discipline as private firms. They should have the autonomy to set prices and tariffs (subject to the safeguards mentioned below); manage their enterprises; market their services or products; operate without direct or indirect state subsidies, such as preferential access to credit or to nonmarket interest rates; and operate without state interference in employment and remuneration policies.

1.28 The Regulatory Framework. The Government has made some progress in introducing market-based principles of economic management with respect to transport regulations and the management of public transport infrastructure and services.

* It ended the process of allocating cargo to specific modes of transport.

* It liberalized tariffs for road and inland waterway freight transport.

- It devolved fare-setting and route allocation power for urban passenger transport to the provincial people's committees.

* It relaxed entry and exit controls for cargo and passenger transport, such as licensing restrictions (including for private enterprises).

* It allowed the private sector to invest in and operate transport infrastructure.

* It improved cost recovery of state transport infrastructure.

* It commercialized state transport enterprises and abolished their direct operating subsidies.

1.29 Although the above measures have substantially narrowed the Government's direct economic control over the sector, it still does not function efficiently. In particular, remaining restrictions on prices and entry conditions prevent the use of resources in accordance with the principles of a market economy. For example, there are still administered controls in the form of maximum price decrees issued by the State Price Committee. set tariffs for commercial public enterprises, and artificially low unit prices for inputs prescribed for local construction companies. These controls limit incentives and companies' efficiency. and should be replaced with Chapter 1. Transport in a Changing Environment II

legislation and oversight bodies that ensure fair competition. In urban transport the approvals required from service providers for routes, destinations, and fares should be replaced with rules facilitating service quality, efficiency, and competitiveness. Moreover, the regulations and pressure on private investors to form joint ventures with provincial companies have hampered private sector provision and should therefore be eliminated.

1.30 Efforts have also been made to address important technical regulatory issues in transport subsectors. For example, the Government of Vietnam issued decrees and rules on road safety, urban and rail traffic, and inland waterways, including specific penalties for violations. But action on other important legislation has slowed: action on a Road Act and updated laws on heavy vehicles, begun in 1994. are still pending.

1.31 Inadequate regulation of heavy vehicles and the high accident rate are major issues. Overloaded vehicles (there are no regulations on maximum permissible axle loads) cause almost all the pavement wear and structural damage to roads. Besides raising transport costs, failure to remedy this problem soon will jeopardize the roads that have already been rehabilitated. But in other areas, the regulations are too restrictive and limit vehicle productivity unnecessarily. For example, heavier vehicles should be allowed as long as they have appropriate axle configurations.

1.32 Legislation to modernize the rules of road safety is pending, but simply updating these rules will not remedy the underlying problems: inappropriate design of some road segments. poor vehicle condition, unsafe driver behavior, lax enforcement, and, above all, the broad mix of vehicles (such as the high number of old trucks and -buses mixed with the motorcycles and nonmotorized vehicles). Traffic engineering and management measures, effective enforcement, and road user education should be a high priority. Some steps have already been taken. For example, in October 1997 the Government of Vietnam created a National Committee for Traffic Safety to advise the prime minister on ways to ensure order and safety; coordinate the entities responsible at the central, provincial, and local levels; monitor policies and regularly report on its findings; and coordinate the handling of serious traffic accidents. While such a group responds to the need for an integrated response, it is too early to assess its impact on reducing accidents. It is clear, though, that few resources were made available to enforce the regulations and educate the public. Thus more needs to be done to strengthen the institutions responsible for enforcing the policies (including the police), creating and introducing educational programs. and increasing the funding for road safety measures, including physically improvincgroads and related equipment. It is hoped the traffic safety study under the Bank's First Highway Project and support by other donors, such as. the Asian Development Bank (ADB), will help devise a plan of action and mobilize funding to tackle this difficult problem. 12 Chapter2. Optinli:iingResoutrce Use and Service Delivery

2. OPTIMIZING RESOURCE USE AND SERVICE DELIVERY

2.1 The Government of Vietnam's decision to restore and modernize basic transport infrastructure and resume external borrowing substantially increased the resources available for the sector. Most of the investments, either soon to be completed or firmly committed, were based on donor support. They reflect a sound development strategy and, with some exceptions, meet international standards. Investments have focused on the restoration of basic transport infrastructure-the trunk road system, the inland waterway network, and seaports in parts of the north and south where economic growth and population density are greatest. Also, some resources were allocated to improve the rural population's access to all-weather transport and the national transport system. This development phase is ending and the Government of Vietnam is preparing its program for the next decade.

2.2 Several lessons can be drawn from the modernization program and should be addressed in future programs. First, much emphasis was placed on funding physical investments but too little on developing human resources. Thus declarations about the importance of human resources and institutional development have rarely been supported by consistent action and financial commitment. Indeed, government entities have been reluctant to allocate adequate funds for local use, and use reimbursable official development assistance (ODA) to finance human resource development. Because of the lack of suitably trained staff and weak institutional arrangements, the sector and core agencies have remained weak in planning, project preparation, coordination, implementation, sector management, and operations. As a result, reliance on external consultants has been too great, knowledge transfer to local staff has been haphazard and does not appear to yield lasting results, and the institutions have not yet developed their full capacity to absorb and manage resources efficiently.

2.3 Second, more attention should be given to increasing the production efficiency' of the transport system (that is, infrastructure, facilities, and operations), which in turn depends on the availability and motivation of highly skilled staff. For example. urban and interurban road capacity could be increased for a modest additional cost by introducing modern traffic management methods. Productivity in the two main seaports could be raised substantially by improving operational and management techniques. thus reducing the need for additional investment. Railway productivity and financial viability could be bettered by turning the railway into a commercial venture rather than spending large sums on infrastructure.

Defined as the least-cost production of goods and services of a given quality by mnaxilizing the use of capital and labor throughthe sound manaoement of enterprises, projects and programs. Chapter 2. Optimizing Resource Use and Service Delivery 13

2.4 Resolving these problems will not be easy. It is unlikely that a quick solution can be found to the human resource problem. Even if the resources were available immediately, developing the required institutions and processes takes time, as does training a substantial number of people. This constraint implies that absorption problems are likely to persist, that modernization plans should be less ambitious (considering institutions' limited management capacity), and that substantial outside technical assistance will be needed for the foreseeable future. In addition, donors should strengthen their efforts to help Vietnam overcome its human resource and institutional constraints, as these will be critical for the long-term sustainability of a modernized transport sector. Among other things, a comprehensive review of the knowledge transfer components included in most technical assistance contracts (freestanding, or linked to specific projects) will be needed.

TRANSPORT SECTOR PRIORITIES TO 2010

2.5 The Development Strategy Institute of the Ministry of Planning and Investment has prepared socioeconomic development scenarios based on various assumptions of GDP growth and other variables. Their base scenario assumes GDP growth of 9.6% a year to 2000, and 10.7% a year to 2010. The ranking of regions by growth rates is expected to remain as in 1995 (which seems realistic in view of past trends). The share of agriculture will continue to fall to 9% in the south, 10% in the north, and 17% in the center. The share of industry and construction is expected to increase most rapidly in the south, followed by the north and the center-54%, 41% and 34%, respectively-and services are expected to increase slightly in the center and north, from an already high level, and to fall in the south. Given the unstable economic environment in Asia, these predictions seem overly optimistic.2 But even if a lower growth rate is assumed, its expected spatial and sectoral distribution is unlikely to be affected, since these are mainly the products of long-term trends.

2.6 Migration was relatively low in the past, partly because of administrative barriers that restricted free movement until 1986, and partly because of traditionally strong family ties. However, it is expected that rural-urban migration will greatly increase-the urban population is projected to more than double by 2010, comprising about 33% of the population (compared with 20% in 1995). The population of Hanoi, Haiphong, and Ho Chi Minh City is expected to double or triple, depending on the underlying assumptions,3 and the percentage of urban poor is expected to increase from its present 26%.4

Recent Bank projections assume GDP growth in real terms of about 4% a year for 1999 and 2000 and of 5% a year between 2D01 and 2005. Source: World Bank, I'ietnam-Coantry Assistance Strategy of the World Rank Grouip 1999-2002, Report No. 18375-VN of August 20, 1998, Annex 7, page 1. 3 Source: Vietnam Ministry of Construction, Urban DevelopmientStrateq,% Hanoi 1996.

4 See World Bank, Vietnam, Poverty Assessment and Strategy. Report No. 13442-VN.January 1995. 14 Chapter 2. Optimizing Resource Use and Service Delivery

2.7 From 1995 to 2010, the population in the central region is forecast to gain 1.1 percentage points, the north will lose 0.7 percentage points, and the south will lose 0.4 percentage points. Regional GDP shares are expected to fall in the center by four percentage points (continuing the relative decline since 1990) and in the north by two percentage points, and to increase in the south by six percentage points. Thus existing regional disparities are expected to grow even wider.

2.8 The expected population changes and economic growth patterns will accentuate the need for a differentiated transport response. Experience shows that demand for freight transport is likely to grow more rapidly than GDP, while that for passenger transport will be in line with or slightly below GDP. Also, the expected shift in the composition of GDP toward the industry and service sectors and Vietnam's increasing integration into global markets is likely to favor shifts in the modal as well as spatial distribution of traffic (freight and passenger). Experience in other countries suggests that in this environment demand will become even more concentrated on road transport. Issues of network integration and complementarity, as well as measures to improve the reliability and quality of service will be increasingly important, particularly in the urban growth zones and for international trade. Transport policies and institutional arrangements are needed to promote transport efficiency and adaptation to changing demand patterns in infrastructure, operations, and services.

2.9 But a priority program for transport for 1999-2010 that will respond to these forces has yet to be developed. Aside from the 1996-2000 PIP of June 1996, the other official document on long-term investments is the Industrial and Infrastructure Development Master Plan for 1996- 2010 (Decision No. 519/Ttg dated August 6, 1996). Also, there are several socioeconomic development plans (in the form of decisions of the prime minister) for specific regions. And the Ministry of Transport has prepared a list of transport investment projects for 1996-2010, whose costs total an estimated US$ 18.2 billion (see tables 2.1 and 2.2 and the details in Annex 2.1).

2.10 In light of the significantly changed economic environment and future prospects, the plans should be reviewed and adapted. Moreover, questions raised by the 1994 Public Expenditure Review about transport are still valid. These include the balance of the expenditure program relative to growth potential, the level and pace of spending, its economic justification and composition, the lack of a hard budget constraint, and insufficient institutional capacity to absorb such a large program. For example, evidence indicates that resources available for capital and recurrent transport spending have fallen far short of PIP requirements, and the master plan for 1996-2010 compounds the problem. The master plan presents an even more ambitious investment program, giving inadequate attention to resource constraints or to transport's primary function of supporting growth by facilitating access to local, national, and international markets in a way that is cost-effective. Chapter 2. Optimizing Resource Use and Service Delivery 15

TABLE 2.1: MINISTRY OF TRANSPORT'STRANSPORT INFRASTRUCTUREPROPOSALS, 1996-2010 (US$ million)

Of which: Source of funding Total 1996-2000 2001-05 2006-10

Government budget 15,144 3,802 5,208 6,134 Domestic 4,020 1,135 1,417 1,468 ODA 11,124 2,667 3,791 4,666 Build-operate-transfer (BOT) 2,566 415 1,048 1,103 Others 503 116 164 223 Total 18,213 4,333 6,420 7,460

TABLE 2.2: PROPOSEDINVESTMENTS BY TRANSPORT MODE, 1996-2010 (US$ million)

Of which Transport mode Total % 1996-2000 2001-05 2006-10

Roads 7,135 39.2 1,697 2,515 2,923 Railways 1,130 6.2 268.8 398.2 463 Ports 2,788 15.2 663.2 982.8 1,142 Inland waterways 260 1.4 62 92 106 Airports 1,500 8.2 357 529 614 Urban transport 4,625 25.4 1,100 1,630 1,895 Rural transport 266 1.5 64 94 108 Shipping industry 509 2.8 121 179 209 Total 18,213 4,333 6,420 7,460

Souirce: Ministry of Transport.

2.11 The above comments also apply to the Ministry of Transport's proposals. As discussed below, the proposed level of capital spending appears unsustainable, given fiscal constraints and the administration's limited absorption capacity. Also, assistance expected from donors and the Government's assumed funding capacity appear too optimistic. Moreover, the distribution of spending by mode of transport would not strengthen the Government's policy of rural development, with 39% proposed for interurban roads, 25% for urban transport, 15% for ports, 8% for airports, 6% for railways, and less than 2% for rural transport, unless it assumes that funds for rural transport infrastructure will be transferred from the center to local entities.

2.12 Aside from the 1996-2010 master plans, more detailed plans were prepared by consultants and government entities for specific regions. To some degree, they solidify the 16 Chapter 2. Optimizing ResouirceUse and Service Delivery

Government's Industrial and Infrastructure Master Plan, but fail to consider resource constraints. Several studies have evaluated specific transport projects (such as railway or port rehabilitation),' providing useful information. But they are inconsistent because they were prepared according to different objectives and standards, stress capital investments (rather than optimizing efficiency), and vary in quality, scope, and depth of analysis.

2.13 The Government of Vietnam recognizes its need to develop a realistic, consistent, and comprehensive master plan (the plan) that is based on expected socioeconomic developments during the next decade and a more detailed five-year investment program. It should cover the entire transport system and reflect a comprehensive approach. The Government has sought funding for preparation of the above plan from the Government of Japan. Because of its importance for the future development of the sector, participation of the donor community in review of the plan and its preparation would be desirable.

2.14 Given the official master plan's lack of detail and the Ministry of Transport's tentative list of investments, it is neither feasible nor appropriate to closely review the numerous proposals for transport infrastructure here. This task would best be left to the recommended comprehensive master plan. Instead, this report will identify the financial constraints that will affect transport development and expenditure priorities, outline areas for priority action and suggest measures to increase the productivity of existing assets and new investments.

Resource Availability

2.15 The annual resources available for total public investment over the next decade were estimated at roughly 6% to 7% of annual GDP.6 In terms of sectoral allocations, the Government of Vietnam has stated that it will promote regional balance and the social sectors. Given these goals, 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% of GDP per year.7 In 1999, this amount is estimated at US$470 million (with GDP at US$26 billion).8 Assuming long-term GDP growth of between 4% and 7% in real terms per year,9 the amount available for transport investment in 2010 would be US$0.9 billion in real terms, and the total for the 12-year period would be US$7.6 billion. These amounts will obviously be affected

5 See Bibliography.

6 See World Bank, Vietnaw-Countty Assistance Strategy 1999-2002. op. cit.

Indeed, even those allocations seem highly optimistic against the background of the Asian financial crisis and the fact that the Government has already reduced the 1998 investment budget by 10% and restricted domestically funded projects.

8 Source: see footnote 6.

9 Four percent in 1999, 5% between 2000 and 2005 and 7% thereafter. Chapter 2. OptimniiingResozurce Use and Service Delivery 17

by the duration of the region-wide economic crisis and will therefore need to be adjusted accordingly.

2.16 As for current expenditures for operations and maintenance, periodic maintenance is part of the capital budget and is thus included in the above estimate. Routine maintenance was about 0.4% of GDP in 1996, which is roughly in line with requirements and international practice. Periodic maintenance, on the other hand, has been neglected in recent years. It has been assumed that in the long run maintenance funding would be organized along the lines recommended in chapter 3 of this report and that in the interim the current system would be continued.

2.17 Another way to assess the potential resource envelope fo,r transport is to look at possible donor and Government contributions. While donors supported the bulk of capital expenditures for transport in the past, this funding is unlikely to continue, given shifting donor priorities and the slower growth of ODA. A rough estimate of ODA (based on donor estimates for the ncxt five years) is about US$300 million a year. Another 10% to 15% of that amount should be provided from the national budget, to total about US$330 to US$345 million annually. "C" projects, defined as those costing about US$2 million or less, that is, 25 billion dong (D) or less, are funded entirely by the national budget and should be added to the above sum for medium-size and large capital expenditures. Assuming past spending levels continue, these are estimated at US$175 million a year. Thus the funds potentially available average US$505 million a year, or US$4.1 billion from donors and counterpart funds and US$2.1 billion for "C" projects for all 12 years. Thus unless donors reconsider their funding priorities, the Government will have to shift its policy to favor local funding of transport investments or, alternatively, reduce its transport investment plans substantially. As the above two estimates probably represent the lower and upper funding boundaries for public capital spending on transport, it would be useful to develop an expenditure plan within these limits. This plan would involve a core program for priority public infrastructure that could be fully funded, even with restricted funds. The program should be complemented by a noncore agenda of projects with lower priority that would be funded as additional public resources would be available. It is also recommended that the proposed comprehensive master plan study adopt this important distinction.

2.18 Capital expenditures above these limits would probably have to be secured through other options, such as local contributions and private sector funding. Commercial infrastructure, such as airports, pofts, and railways, should not 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. But this goal may be unrealistic, given the private sector's perception of the country's riskiness and lack of stable institutional, legal and regulatory frameworks, as well as

0 There are certain exceptions to this principle (e.g., if the enterprise has to carry out public service obligations imposed by the state or the elimination of war damage where economically justified). 18 Chapter 2. Optimizing Resource Use and Service Delivery

the generally unfavorable climate for private finance of public transport infrastructure, and the low levels of traffic and income elasticity that make such finance uneconomic for the private sector.

Priorities for Urban Transport

2.19 While urban economic expansion will be strongly correlated with national growth, its spatial form will be determined by local factors that influence the productivity of various urban centers. The Government of Vietnam is attempting to develop the three growth triangles as hubs of industrial activity. To minimize the pressure of urbanization and to preserve the city centers, it proposed creating new activity centers in the suburbs and developing existing urban nodes as satellite towns. But the resources needed for such ventures would be enormous, and the market preference for locating activities in existing urban centers remains strong.

2.20 Thus transport demand in regional centers by 2010, particularly Hanoi, Haiphong, and Ho Chi Minh City, is expected to double. Also, gains in urban residents' per capita incomes will give rise to a rapid increase in private motorized vehicles and rural migration. The motorcycle explosion will continue given the substantial imports, the official policy to expand their domestic assembly," the lack of policies to restrict use and ownership of private transport in congested areas, and few options in collective transport. Hence, traffic is bound to worsen, which translates into lost time and energy; more noise, accidents, and air pollution; and deterioration of historical buildings and urban life in general. The problem will deepen as cities expand into outlying areas that have little or no infrastructure (the ratio of road space to built area is more than 23% in central Hanoi, but only 7.6% in the periphery). Trip times and distances will increase, affecting residents' mobility; those living in outlying areas will probably be poor and depend on bicycles and public transport. Thus although congestion cannot be eliminated, the trend must be tamed, else the regional cities, which are the gateways for national trade and incubators for the growth of industries and enterprises, will lose their competitive edge.

2.21 Because each urban area has distinct physical, economic, and historical characteristics, solutions will vary, but all will face continued rapid motorization, a phenomenon that is still at an early stage in the country. Hence, it is the right time for Vietnamese cities to initiate the following measures:

* Preserve the existing system and enhance its efficiency and safety. Given the resource and environmental constraints to expanding road capacity within cities and given deteriorating road safety, low-cost traffic engineering, management, and enforcement measures must be introduced to improve traffic operations in all large cities. These measures should become the basic "housekeeping" function and should be supported by strengthening and coordinating the work of the institutions involved, such as the traffic police, transport institutions, and

For example, annual plant capacity by 2005 for Yamaha: 100,000; Honda: 400,000; Suzuki: 20,000 and VMEP: above 40,000. Chapter 2. Optimiiing Resouirce Use and Service Delivery 19

public works. Much can be gained by introducing traffic management and engineering schemes along major corridors, at key junctions, and within inner cities. These should focus on measures favoring two-wheel vehicles (since these make up most of the traffic) and buses, as well as reducing motorized traffic (mainly four-wheel) in historic areas. Investing in such measures at this stage of development would improve the use of existing road capacity and delay or minimize expenditures for new road investments.

* Promote demand management and responsive, affordable public transport. In most cities the public bus system has collapsed (accounting for less than 3% of trips in Hanoi and Ho Chi Minh City) because of high tariffs (reflecting reduced government subsidies), dilapidated fleets, insufficient service coverage and reliability, and people's strong preference for bicycles and motorcycles. Bus routes do not cover their full operating costs. Low fuel prices (US$0.35/liter) and high vehicle occupancies have made the out-of-pocket costs of a motorcycle trip (excluding purchase and parking costs, if any) cheaper than a bus ride. Because bus fares in Ho Chi Minh City are D 1,300 to D 2,600 for about a 10-km ride, those with monthly incomes of D 500,000 would have to spend a high share on transport alone.

The need for a vibrant and affordable public transport system is well recognized, but the experiences in Hanoi and Ho Chi Minh City suggest that buses will have difficulty competing with high-mobility, low-cost, individual motorized transport modes (including bicycles, for short distances). But the situation is likely to change once congestion levels begin to severely affect travel time, particularly for long-distance commuters, and the Government introduces restrictive measures to increase the cost of ownership (vehicle tax, registration tax) or the use of private vehicles (fuel prices, parking fees, tolls, access restrictions on cars). Thus once the private cost of using personal modes is brought in line with the social cost (including the externalities of congestion, accidents, and environmental damage), a market-responsive bus system will be able to compete with individual vehicles. Experience also suggests that privately owned systems are often cheaper and more market- responsive than public systems. But if private systems are to flourish, regulations and institutional barriers will have to be relaxed (for example, entry and pricing rules, the organization of city bus companies and cooperatives), as they inhibit competitive private urban bus services. The initiatives outlined above should be supported with rigorously enforced measures that give priority to buses (such as reserved lanes and corridors) along major routes and in congested areas.

Improve transport capacity. The deficiency in transport capacity should be identified for each city, considering emerging traffic bottlenecks; regional access requirements; access and egress from ports, industries, and large commercial establishments; the need to separate through and local traffic; urban land development strategies; and policies supporting environmental and demand management objectives. Other Asian cities have found that expanding canacity by constructing road links, secondary road networks, bridges, freight and passenger terminals, land-side port access facilities, and bypass routes significantly improves the movement of passengers and goods, thus enhancing urban productivity. '() Chapter 2. Optimizing Resouirce Use and Service Delivery

* Integrate transport and land development. Since urbanization is still at an early stage, the cities can prepare to expand their transport networks by preserving the rights-of-way, land banking, effective zoning, applying standards to establish road hierarchies, devising codes to control the supply of parking, and providing for transit-oriented development (reserved bus lanes, stops, and transfer terminals). Moreover, investment in transport will be critical for attracting private capital and shaping future land development by influencing the location of industries and commercial activities. Indeed, the recently opened Saigon South Parkway Project in Ho Chi Minh City is an attempt by the city to involve the private sector.

* Enhance the mobility of the urban poor. More than 26% of urban residents are considered poor. and this figure will probably rise in large urban centers because of increased migration from rural areas. Since the urban poor often live in areas with limited access (far from job centers, roads, and transit services), they devote a great deal of time and income to commuting, and depend highly on bicycles for trips up to 5-6 km. Low mobility further reduces their productivity and income, which leads to greater crime and social tension, and the presence of squatters closer to the centers. Thus as cities expand, policies affecting low- cost bus services and road access to poor areas will be extremely important, particularly in Hanoi and Ho Chi Minh City.

2.22 Investment in roads, bridges and terminals, along with measures to improve efficiency, will be essential for regional access and efficient freight movement to and from ports, industries, and commercial establishments. The completed transport plan for Hanoi (JICA 1997) and the ongoing ODA-sponsored study in Ho Chi Minh City estimated that US$5 to US$7 billion in transport investment will be needed in each city over the next five years.

2.23 Although this amount takes into account the expected doubling or tripling of the population of the major cities, it exceeds the country's and cities' funding capabilities, even if local revenue could be increased substantially. Also, the scope for private sector funding is limited, given the small number of (taxable) four-wheel vehicles and the recent experience in other Asian cities with better potential for private sector participation. Thus the Ministry of Transport's proposed level of spending of US$4.6 billion on urban transport until 2010 is probably more realistic, although the economic justification for some of the investments (such as urban railways) appears questionable in the medium term. Still, even investments of this magnitude are unprecedented and would require substantial private sector support. Moreover, authorities must consider the limited implementation capacity of the city and central administrations. Chapter 2. Optiniiing Resozurce Use and Service Delivery 21

Priorities for Interurban and Interregional Transport

2.24 The first priority for roads and bridges should be to complete the rehabilitation recommended in 1996.'2 This calls for rehabilitating 6,000 km of national and provincial roads (including bridges and ferries) by about 2008. and another 1.000 km by 2010 if economically justified. If implemented, by 2010 about 21% of the national and provincial roads would be rehabilitated, affording the country an adequate network of north-south and east-west trunk roads, including connections with all of Vietnam's neighbors (see IBRD Map No. 29633). Since the rehabilitation is based on the country's prospective socioeconomic development, the highest road densities will be in the hubs of the north and south. Based on experience, rehabilitating about 7,000 km roads and bridges should cost US$1.8 to US$2.1 billion (compared with the Ministry of Transport's proposed overall road investments of US$7.1 billion).

2.25 In addition to rehabilitating the roads, authorities should consider expanding capacity in high-growth areas and to link primary roads with the rest of the network, other modes of transport, and main transit centers (such as ports). These would be primarily road segments with high-growth/high-density traffic (near major cities and areas of economic activity), links between cities and adjacent rural areas, and at places where interurban traffic mixes with urban traffic. To optimize resources, the priority routes and zones and the most cost-effective solution for each component must be analyzed and identified. Similarly, traffic characteristics must be analyzed to determine the mix of slow-moving traffic, motorcycles, and four-wheel motor vehicles, which reduces road capacity and increases accidents. The total cost of such a program has yet to be established.

2.26 Another issue is ensuring that the modernized infrastructure and road segments that do not yet need major rehabilitation are efficiently operated, managed, and maintained. Although these areas have been improved somewhat, the system will quickly deteriorate without a regular program of routine and periodic maintenance. For national roads the priority is to further strengthen the Vietnam Road Administration (and its subordinate units) by clarifying its responsibilities and authority, staffing it appropriately and improving the staff's management skills, and funding it adequately; establish a modern road maintenance management system; provide adequate and reliable funding for regular road maintenance; adopt, implement, and enforce appropriate regulations on heavy vehicles; and improve road safety through an integrated program of institutional strengthening, investment in road safety, education, and enforcement.

2.27 The Railway. Vietnam Railway is facing difficulties similar to other railways from formerly planned economies now making transition to a market-driven economy. It has traditionally focused on output with less concern for quality, cost, or economic justification. During this transition, Vietnam Railway and the Government are trying to disentangle

12 Scott Wilson Kirkpatrick, Study of Investment and Maintenance Strategy' for National and Provincial Roads: Fietnam, July 1996 (funded by Overseas Development Administration, United Kingdom). 22 Chapter 2. Optimizing Resource Use and Service Delivery

government and railway roles and reorganize Vietnam Railway so that it responds to market signals.

2.28 Vietnam Railway is roughly comparable in scale to most of the other smaller Asian railways (Annex 2.2, Table 1). It is relatively well operated in an engineering sense, except its labor and locomotive productivity are low, as is its average traffic density. The latter is related to the fact that Vietnam Railway's traffic tends to be concentrated in the south and north, and that water transport is a stiff competitor for long-haul, bulk traffic. Vietnam Railway's traffic fell along with the economy, and has recovered in step with it.

2.29 Until 1989 Vietnam Railway was operated as a government ministry. In 1989 it became an independent "enterprise," gaining control over decisions and assets, and establishing a system of incentive-based pay. In 1995 the Government of Vietnam accepted responsibility for infrastructure costs, and the railway was expected to cover its operating costs. In return, Vietnam Railway pays the Government 10% of its operating revenues. However, these arrangements have not stemmed the total budgetary outlays for the railway.

2.30 The railway can become more market-responsive through a mixture of commercially self- supporting services, hauling freight in the north and south, and providing "social" services, such as maintaining the continuity of the north-south line. Other services, such as lightly used branch lines, could be abandoned, and labor and locomotive productivity improved.

2.3 1 Although there may well be high-priority repairs needed in Vietnam Railway's assets, most public investment in infrastructure, plant, and equipment should be limited until government policies and objectives are clarified, a plan for restructuring Vietnam Railway is agreed, and methods developed to design and manage the reform process. Priority tasks include:

* Separating the accounting of infrastructure from that of operations.

* Separating operating accounts into passenger, freight, and nonrail.

* Developing computer-based costing models for Vietnam Railway to calculate route-specific, origin-to-destination "variable" costs for individual shipments.

* Developing a computer-based financial forecasting model for five-year forecasts of the income statement and balance sheet.

* Devising a five-year business plan for Vietnam Railway's infrastructure, passenger, freight, and nonrail operations.

* Clarifying further the relationship between Vietnam Railway and the Government of Vietnam, including introducing direct payments for social services.

2.32 * These reforms would require implementation of a set of actions by the Government of Vietnam and Vietnam Railway. The Government needs to define the Vietnam Railway's public Chapter2. Optimizing Resouirce Use and Service Delivery 23

service obligations (such as operating uneconomic lines) and commit the necessary funds. The objective would be to allow the railway to operate as a commercial enterprise with full financial and managerial autonomy (including pricing autonomy), subject to the general rules of accountability applied to all state corporations. The railway would also commit to the program outlined above. These reforms would initially require some modest funding for equipment and facilities to implement up-to-date management information and marketing systems, possibly complemented by emergency track and equipment repairs. Substantial deferrable investments should be postponed until the railway's new role has been defined, management reforms are put in place, and restructuring actions are committed. Hence, major parts of the US$1.1 billion investment proposed by the Ministry of Transport should be reviewed once comprehensive railway reform is agreed and subsequently implemented in parallel with the proposed restructuring actions. Annex 2.2 discusses the Vietnam Railway in more detail.

2.33 Ports. The country's two main ports, Haiphong and Saigon, are underproductive, often congested (in storage areas), and offer inadequate access to the land-based transport network. They are poorly located, since their only sea access is a channel (Haiphong) or river (Saigon). Also, shallow drafts limit ship size and raise shipping costs. Further, some city roads and bridges cannot efficiently handle large traffic volumes and containers. To overcome the foreseen difficulties, the following expansions are underway or planned by the Government. In the northern region, the port of Haiphong is developing a new specialized container terminal; this in addition to port facilities under construction to serve the neighboring industrial zone of Dinh Vu. In addition, plans have been prepared to substantially expand the recently completed two-berth facility at Cai Lan, in Ha Long Bay, to serve as the northern region's deep-water port. However, in view of the substantially changed economic prospects, brought about by the Asian economic crisis, further expansion of the Cai Lan facilities at this time should be carefully reviewed from an economic and financial point of view. This entails a review of the scale, scope and timing of the future expansion proposals, including a comparison with alternative options. In the central region, the existing facilities at Danang port are being expanded through the construction of a specialized container heavy-lift pier (adjacent to the Tien Sa jetties), which is slated to serve as point of entry for the materials needed for the construction of the planned industrial and port facilities of Dung Quat.'3 In the south the plan is to create a new port complex in the Vung Tau- Thi Vai area to relieve Saigon port and serve the needs of new industries (such as petroleum, petrochemicals, natural gas) that will be established in the area. In this context it is essential that, in tune with the pace of industrial development in that area, site(s) be chosen that would minimize the cost of developing the terminals, ancillary facilities, and access roads (including efficient links with Ho Chi Minh City) and provide reserve capacity.

13 The use of the Tien Sa jetties has been limited over the past three years due to continuous road construction in the area. Yet despite this reduced use of the Danang port facilities, traffic throughput increased in 1996 by some 18% above 1995. 2-4 Chapter 2. Optini Ling Resource Use and Service Delivery

2.34 The Government is also considering whether to modernize. rehabilitate, or construct several other ports (including three deep-sea ports) along the coast, which would increase port throughput by some 20% a year-from the present 25 to 28 million tons to 240 million tons by 2010 (Decision No. 519/Ttg of August 6, 1996). Such a program has been estimated by the Ministry of Transport to require a total expenditure of about US$2.5 billion for the period up to the year 2010. This outlay does not appear to take into account the potential capacity reserves of existing port assets that could be unlocked with relatively little additional investment and operational improvements. Moreover, the supporting traffic estimates are based on optimistic assumptions about Vietnam's future economic growth and international trade and have yet to incorporate the long-term implications of the Asian economic crisis. According to World Bank projections, GDP growth and international trade are expected to decline during the next five to seven years."4 These developments will inevitably affect future port throughput. Since public resources will be even more constrained in the future, port investments of the size envisaged will be unsustainable. For these reasons, it would be prudent to review the scale, scope, timing and economic and financial justification of the proposed program. If such a review is undertaken, a medium-term program could be formulated covering the next five years with focus on improving the operational and managerial performance of the existing main port facilities in the three major growth centers (i.e., Haiphong in the north, Danang in the center and Saigon/Can Tho in the south). This medium-term program is estimated to cost up to US$150 million, covering maintenance dredging; paving of operational port areas where needed; rehabilitation and/or replacement of shore cranes and other equipment; training for labor and management; modernization of information, commercial and operations management. This compares with Ministry of Transport estimates of US$500 million for the same period (including capital expenditure for new construction).

2.35 Vietnam's ports (possibly except for some parts of Ho Chi Minh City's ports) are estimated to have about five years' throughput capacity reserves without requiring major new investments. Hence, the Government should use this window of opportunity to:

* assess the likely impact of the Asian economic crisis on its projections of port traffic and its port investment program;

* review the viability of its industrial and economic development and investment plans and estimate the traffic types and volumes to be generated;

* assess the potential for increasing the throughput capacity and productivity of the existing major maritime ports (with "limited investment") through such measures as: commercializa- tion/corporatization of ports; improved operational and management systems, including the introduction of a market-based regulatory and institutional framework, allowing the ports to be managed as commercial enterprises; and

14 World Bank, Vietnanm-Cozntry Assistance Strategy of the WVorldBank Group 1999-2002, op. cit.. Annex 7. Chapter 2 Optimizing Resource Use and Service Deliverv 25

* identify intermodal transport facility requirements, including investments, time tables and cash flows, together with alternate solutions, to handle the additional traffic created by the planned industrial and economic developments.

Annex 2.3 elaborates further on specific aspects of port sector development.

Priorities for Rural Transport

2.36 To distribute resources equitably, the Government of Vietnam has generally spread rural transport programs among provinces and districts with little consideration for efficiency. A balance between equity and efficiency is required to maximize the benefit of resource use. The Government needs to define the objectives of its rural transport programs (such as to alleviate poverty, enhance agricultural productivity, and encourage off-farm opportunities by fostering rural industries). Each objective would require different strategies. The Govermnent has agreed to carry out a study that will develop a rural transport infrastructure strategy, with recommendations on expenditure priorities, policies, and institutional and financial reforms.

2.37 Despite efforts to restore rural roads, most district and communal roads are still poor and flood seasonally. The problems are related to poor planning, inadequate funding, and weak, unskilled, and understaffed local road administrations. The present practice of emergency road repair and rehabilitation, funded mainly by donors and the Government, is a stop-gap measure and does not appear to be sustainable, unless reliable planning mechanisms are introduced and road maintenance institutions are created. Funding difficulties stem from the low level of transfers (for all purposes) from the center to provincial and other local units, as well as the limited scope of these administrations to mobilize resources (in the form of local taxes, fees, or in-kind contributions)."5 The problem of resource mobilization reflects the weakness of many local administrations and the need to direct scarce resources (both skilled staff and funds) to higher priorities.

2.38 Lessons from IDA-financed rural roads projects point to several key issues that need to be addressed before substantial new resources are committed for institutional improvements:

* Institutional responsibilities for rural roads must be clearly defined. Provincial transport master plans should be coordinated with the national transport master plan, and provincial roads differentiated from district roads. Then, the national and provincial governments can allocate resources to manage, rehabilitate, and maintain rural roads.

* Rural road rehabilitation and maintenance programs should be decentralized to provincial and lower levels, and at the same time the Government of Vietnam should strengthen its

The Food and Agriculture Organization estimated, for example, that the Government would need to invest annually about US$250 million for a period of 10 years to upgrade and improve the rural road network so that agriculture and other activities could be served adequately. 26 Chapter 2. Optimi ing Resouirce Use and Service Delivery

coordinating and monitoring role.. Also, the rural transport unit under the Ministry of Transport (preferably reporting directly to a vice minister) should be expanded to coordinate and monitor programs and initiatives, establish road standards, and provide technical assistance and training to provincial governments so that they can plan, budget, and implement road projects. Further, each province should develop a comprehensive database for rural roads, which the Government should consolidate. This would help with the planning, budgeting, monitoring, and evaluation of the rural road system.

* Technical standards revised for donor-assisted projects are not applied network-wide, causing confusion between government staff and contractors, and sometimes donors. Roads built under the old standards are overdesigned and too costly. To ensure consistency and efficient resource use, the technical guidelines for rural roads, developed under the IDA-financed rural roads project, should be formalized and adopted as the standards for all rural roads.

2.39 To sustain the provincial and rural road network (including roads to remote mountainous regions) a four-prong integrated strategy is recommended (to be modified appropriately by the findings of the ongoing rural roads strategy study): rehabilitating and repairing roads in the context of agricultural or rural development programs so as to maximize developmental impact and thus social returns, launching cost-effective investments to provide a minimum standard of access for all rural communities, creating properly staffed road maintenance and management entities at the local level, and establishing funding (including in-kind contributions) and institutional mechanisms to ensure that the network will be maintained on a sustainable basis.

2.40 The Government's rural roads plan allocates US$60 million a year to upgrade the network to nearly all-weather standards. Compared with the Food and Agriculture Organization's (FAO's) estimate of US$240 million per year, this amount is low. But, as mentioned earlier, absorption capacity in rural areas is very limited-without substantial strengthening, the institutions would not be able to absorb the resources efficiently, and a large program would probably be counterproductive at this stage. Thus a solid database and the institutional capacity to rehabilitate and maintain the road network should be developed as a priority, along with a limited number of interventions. In this context, an outlay of about US$1 billion (including the Ministry of Transport's proposed investment), appears justified and feasible for the period until 2010. Chapter 3. FinancingRoad Maintenance 27

3. FINANCING ROAD MAINTENANCE

3.1 The Government of Vietnam's first priority in the transport sector is to restore and modernize roads. To this end, the PIP for the road sector focuses on improving and expanding the national network and key provincial roads. Rural road development is left primarily to district-level and community initiatives. The long-term impact and sustainability of ongoing rehabilitation and modernization efforts at all levels depends on an efficient system of road maintenance. Such a system will be effective only if it has an adequate and steady source of funds. However, road maintenance is currently underfunded in Vietnam. If this continues, road assets will erode further.

3.2 This chapter explores ways to eliminate the maintenance funding gap in a manner that is fiscally sustainable and economically efficient. It describes the Government's cost recovery policies and outlines how an adequate and steady flow of funds for maintenance can be established. It recommends creating a road maintenance fund based on a system of cost recovery. The fund should involve road users in a public-private partnership for managing the roads and securing more road funding.

3.3 It has been estimated that when a road is allowed to deteriorate, each US$1 deferred on road maintenance raises vehicle operating costs (VOCs) by about US$2 to US$3. Transport operators naturally pass on their high operating costs to road users. High VOCs are thus borne by the entire society. Transport operators are well aware of the impact of poor roads on VOCs, and in many countries they, along with other road users, have willingly paid for road maintenance, provided they were assured the money was spent on roads and the work was done efficiently.

3.4 Inadequate maintenance also has significant social costs that are particularly felt by those who suffer when roads are closed. In rural areas, where most of the population lives, roads are often impassable during the rainy season, meaning that residents are cut off from social and economic facilities, and agricultural output suffers.

3.5 Given the current lack of funding for periodic maintenance, there is a significant risk that the roads being rehabilitated at great expense will not receive the reseals they require in the coming years, and, as a result, the maintenance backlog will remain a key problem. Attempting to reduce road expenditures by putting off maintenance is always counterproductive since delays increase the backlog and, over time, cause roads to require full rehabilitation. Thus it is far less costly to prevent potholes or fill them expeditiously than to let pavement deteriorate to the point where it has to be reconstructed. For example, if maintaining a paved road over 15 years costs 28 Chapter 3. Financing Road Maintenance

about US$60,000 per km. the same road, not maintained, will cost about US$200,000 per km to rehabilitate.' Assuming the national road network currently in good and fair condition does not receive periodic maintenance, it would have to be rehabilitated eventually. The present value of the rehabilitation cost is estimated at roughly US$2 billion, which compares with a maintenance cost over the 15-year period of about US$330 million. Thus maintaining a core network is clearly the more efficient choice, and this ought to be a top priority of both policymakers and road agencies.

CURRENT FINANCING ARRANGEMENTS

3.6 Vietnam's roads are managed and financed by several agencies. The national road network is managed by the Vietnam Road Administration, which is part of the Ministry of Transport. Provincial roads are managed by 61 provincial departments of transport,2 and district and urban roads are managed by the district and urban departments of transport.3 The network of national, provincial, district, and urban roads designated by the Government of Vietnam for maintenance ("designated network") is 72,150 km (table 3.1). Special-purpose roads are managed by different entities, including the Ministry of Agriculture and Rural Development, commercial estates, and other private interests. Village and subdivision roads belong to adjacent communities, which manage them (to the extent they are managed at all). Coordination between the various agencies is weak.4

3.7 Domestic funding for road maintenance comes from three sources: the Government's general budget, revenues raised by provincial and district governments, and in-kind and cash contributions from local communities. The Ministry of Finance finances routine and recurrent maintenance ("small and medium-size repairs") on national and provincial roads, the Vietnam Road Administration (VRA) manages the funds designated for national roads and maintains about half the national road network through its four regional roads maintenance units. Provincial departments of transport maintain the other half of the national network on behalf of VRA. VRA transfers funds to the provincial departments of transport for this purpose. The Ministry of Planning and Investment finances capital expenditures, including periodic maintenance ("big repairs").

3.8 The road agencies believe, in accordance with numerous studies, that there is a significant latent rehabilitation burden hidden under Vietnam's road surfaces. Most Ministry of Planning and Investment resources designated for the road sector are countcrpart funding to donor-

I Heggie and Vickers 1998.

2 The provincial road networks vary between 39 km and i ,330 km, with an average of 300 km per province.

3 The networks of the district departments of transport are often less than 50 km. These are too small to justify in-house management capacity in each district department of transport. Innovative solutions should be sought to address the problem of scale (Robinson 1997). 4 Robinson 1997. Chapter 3. Financing Road Maintenance 29

TABLE 3.1: VIETNAM'S ROAD NETWORK BY MANAGING AGENCY, TYPE AND LENGTH, 1997 (km)

Designated network Unclassified network National Provincial District Urban Special Village Subdivision

Paved 9,160 4,640 3,610 3,210 - Gravel 5,200 7,910 17,930 - 5,450 Earth 760 4,900 14,830 - - 46,910 84,545

Subtotal 15,120 17,450 36,370 3,210 5,450 46,910 84,545

Proportion of total (%) 7 8 17 2 3 22 40 Proportion of designated (%) 21 24 50 4

Total network 209,060 Designated network 72,150

Source: Ministry of Transport, Vietnam Road Administration. supported rehabilitation and are thus not available for periodic maintenance. Although maintenance should be awarded higher priority than capital works, the network's poor condition and the fact that domestic resources can more easily be leveraged by donor funds for rehabilitation than for periodic maintenance lead to the underfunding of periodic maintenance.

3.9 Provincial and district networks are financed mainly through fiscal transfers from the Government of Vietnam. Some provinces use part of these funds to maintain the national network because the allocations from VRA are often insufficient. Districts receive their central government budget allocation for roads through the provinces. At both the district and village levels, road construction and maintenance are financed through a mix of central government transfers, land occupancy taxes, voluntary in-kind contributions (such as labor and rice), and cash contributions from farmers, the military, civil servants, retirees, and transport operators.5

3.10 The total annual allocation for maintaining the main network (national and provincial roads) in 1997 was estimated at US$77 million, of which about half went to the national roads (table 3.2). Reliable data on maintenance expenditures at the district, village, and subdivision levels are not available. It is estimated that provincial and district roads receive approximately

5 In Tien Son district, Robinson estimated that the road maintenance budget was about D 250 million, of which about half came from the province. In Yen Lac district, peasants (both men and women) contributed about 5 kg of paddy per year or the equivalent in labor. For peasant farmers this represented a contribution of about US$ 1.50 of an average per capita income of USS 160 per year. Civil servants contributed between two weeks' and one month's salary (Robinson 1997). 30 Chapter 3. Financing Road Maintenance

30% of the budget allocated to the road sector, but the breakdown among construction, rehabilitation, and maintenance is unknown.6

TABLE 3.2: ACTUAL EXPENDITURES ON ROAD MAINTENANCE

1995 1996 1997 Roads D billion US$ million D billion US$ million D billion US$ million

National 419 38 410 37 479 40 Provincial 400 36 450 41 450 38 Total 819 74 860 78 929 77

Source:Transport Development Strategy Institute.

3.11 VRA's and the provincial departments of transportation's annual expenditures on routine maintenarnce correspond to the annual budge.t allocations for this purpose. Expenditures on medium-size and large repairs, however, considerably exceed budget allocations.' There is a large discrepancy between the revenue received and actual expenditures because of an established pattern of spending future allocations. Most of the overrun occurs because planned work costs more than is anticipated. The size of the overruns carried over from one year to another was estimated between 25% and 40% of the maintenance allocation between 1994 and 1996. While this system provides flexibility, it has some problems. For example, if budget allocations stagnate or decline, or if maintenance companies demand prompt payment, the system will fail. These problems will become accentuated once private firms are more involved in maintenance. Thus it would be prudent to determine a ceiling for carryovers in order to accommodate budget variations.8

3.12 Despite real increases in the maintenance allocation to national roads, the funds available for small, medium-size and large repairs met only about 40% of the estimated requirements of the national and provincial roads in 1995, 1996, and 1997. Apart from in-kind contributions. such as ]abor from local residents, district- and lower-level roads receive no funds for regular maintenance. If the designated network were in maintainable condition, maintenance requirements are estimated at US$190 million a year (table 3.3).9

6 Scott, Wilson, Kirkpatrick 1996. It is estimated that between 1992 and 1995 the contribution of the local population for the upgrading of rural roads amounted to about US$200 million, equivalent to 52 percent of the total expenditures on rural roads (World Bank 1997).

7 Scott. Wilson, Kirkpatrick 1996.

8 United Nations Development Program 1996.

9 The default cost estimates of the road user charaes model are very close to the Vietnamese cost structure and estimated network requirements. For further detail, see Annex 3.1. Chapter3. Financing Road Maintenance 31

TABLE 3.3: MAINTENANCEFUNDING REQUIREMENTSFOR THE DESIGNATEDNETWORK (US$ million)

National Provincial District Urban Total Network

Road User Charges Model (see Annex 3.1) 80 38 47 24 190 Transport Development Strategy Institute 74 134/a 209

/a Estimated requirements for provincial, district and urban roads.

3.13 About 77% of national roads, 25% of provincial roads, and 10% of district roads are currently in good or fair condition. Maintenance requirements for these roads are approximately US$71 million, which was the equivalent budget allocated to the national and provincial roads in 1997. It is unlikely, however, these funds were allocated solely to keep the good and fair roads in stable condition. Rather, they were spread around the main road network, with priority given to emergency repairs and routine maintenance; periodic maintenance was postponed until the next year.

COST RECOVERY POLICIES

3.14 The Government levies many different charges on the country's road users. Most of these charges are general taxes covering all sectors and consumers. Very few can be considered specific road user charges. To finance the road sector, the country needs a system of cost recovery that, on the one hand, leaves intact the general taxes and fees that are destined to the general budget and that, on the other hand, establishes a set of simple and easily identifiable. specific user charges.

Existing General Taxes and Fees Imposed on Fuel and Vehicles

3.15 The price of fuel in Vietnam is regulated, and the maximum retail price is set annually. As of February 1998, this was D 4,200 (US$0.32) per liter of gasoline and D 3,500 (US$0.27) per liter of diesel (table 3.4). Besides the distribution margin and the transport fee, there are four surcharges on fuel: an import tax, a luxury tax, a special surcharge and a value-added tax.'0 While these surcharges are taxes, the distribution margin can be considered a charge for the cost of transporting fuel from the ports of entry to the retail outlets, and the transport fee a user charge. Because the Government of Vietnam wants to increase collections for the state budget., and because of the sharp drop in fuel prices in 1997 (which caused retail prices to fall far below the regulated maximum price), the special surcharge on fuel was increased in February 1998 from 15% to 30% on gasoline, and from 18% to 23% on diesel. Tax on kerosene was increased from 18% to 25%.

° If the gap between the import prices and the fixed maximumretail prices is insufficientto allow for the collectionof all taxes and fees on fuel, priorityis givento the importtax (WorldBank 1998.) 32 Chapter 3. Financing Road Mllfaintenance

TABLE 3.4: THE STRUCTURE OF FUEL PRICES

Earlv 1997 Late 1997 TDSI February 1998 Gasoline Diesel Gasoline Diesel Gasoline Diesel

Border price (dong) 2.350 3,000 1,622 1,610 1,460 1,500 Transport margin(%) 12 12 12 12 15 11 Taxes (%) Import tax 60 60 60 60 60 50 Luxury tax 15 0 15 0 35 0 Special surcharge 15 18 30 23 Transport fee (dong) 500 500 500 500 500 500 Retail price if no ceiling (dong) 4.895 5,660 3,534 3,269 3,274 3,000 Maximum retail price (dong) 4,300 3,700 4,300 3,500 4,200 3,500 Maximum surcharges (%) 183 123 218 217 224 193

Sozurce: World Bank, 1995, Transport Development Strategy Institute (TDSI), Ministry of Finance.

3.16 Fuel taxes raise two important issues: fuel is TABLE 3.5: FUEL PRICES, FIRST heavily taxed in most countries and most fuel taxes QUARTER 1997 are not road user charges. A survey of selected (US cents per liter) countries in the Organization for Economic Cooperation and Development (OECD) showed that Gasoline Diesel gross taxes on leaded gasoline from 1990 to 1991 were between 60% and 75% of the border price. Argentina 98 45 These taxes were three to five times higher than the Chile 57 38 general level of consumption taxes in these European Union levels 71 57 countries. Fuelcountries, taxes and thus retail fuel prices in ~~~~~~~~~GermanyFinland 120117 8286 many developing countries, such as China, Egypt Ghana 38 35 and Thailand, as well as Vietnam, are well below Hungary 74 65 those in most industrialized countries (table 3.5)." Japan 133 83 Jordan 42 15 3.17 Owners of four-wheel motor vehicles pay an Pakistan 462 24 annual license fee that is so low it should not be Thailand 38 35 considered a road user charge but rather payment for Russia 34 22 a service (the safety inspection). State-owned cars South Africa 46 47 pay D 30,000 and privately owned cars D 90.000 Korea, Rep. of 87 40 (US$2 and US$7). Safety inspection fees for buses United Kingdo 97 91 and trucks are also low, between D 150,000 and Vietnam 35 28 D 200.000 (US$12 to US$15). Similarly, fees for Yemen 15 5 drivers' licenses are not road user charges. Souirce: World Bank.

Heggie and Vickers 1998. Chapter 3. Financing Road Ala intenance 33

Road User Charges

3.18 Of the taxes and fees outlined above, only two are road user charges: tolls on selected roads and bridges, and the transport fee. Tolls on roads and bridges constitute a modest source of revenues for the Vietnam Road Administration. Estimated revenues from tolls in 1997 were D 113 billion (US$9.2 million). Although the amount almost doubled from 1996, it was less than 5% of the estimated maintenance needs of the designated network. Tolls will therefore have only a small impact on the financing gap for road maintenance. Further, the cost of collection consumes about 20% of the revenue. Foreign participation in the sector on build-operate-transfer (BOT) terms has occurred just once. Tolls or BOT schemes are only viable when traffic flows are high (box 3.1). Traffic flows in Vietnam are still relatively modest, and while toll roads and BOTs can be important mechanisms for financing very high-volume roads, such roads account for less than 5% of the country's national network and less than 1% of the designated network. Sustainable arrangements for financing maintenance must be established for the remaining 99% of the designated network and, eventually, for the unclassified roads.

Box 3.1: TOLL ROADS Tolls from a full-standard expressway link will generally only cover all costs when traffic volumes are at least 10,000to 15,000 vpd and growing, average toll rates for private vehicles are US$0.03 to US$0.06 per km, and the cost recovery period is 20 to 30 years. At volumes of around 5,000to 6,000 vpd, toll revenues may cover operations and maintenance costs and contribute to initial construction costs of new roads or rehabilitation and upgrading costs of existing roads. The balance must come from the road budget. Source: Heggie and Vickers ( 998).

3.19 To address the underfunding of the sector as a whole and maintenance specifically, a special transport fee of D 300 per liter of gasoline and diesel (US$0.03) was introduced in 1994. Decree No. 186/CP states that the aim is to "generate funds for the regular repair and maintenance of the transport system." The fee is thus a user charge, although not specifically for the road subsector, nor is its primary focus on maintenance. In October 1996 the fee was increased to D 500 per liter (US$0.04). It is collected by the oil companies and remitted to the Government's budget. The companies are allowed to keep a nominal fee, around 2% of revenues, to cover collection and administration costs. The Ministry of Finance decides how the funds will be used, and its taxation office is responsible for supervising the oil companies. When the transport fee was introduced, all other charges on land transport vehicles were eliminated.'2 The decree, however, states that additional charges can be collected with the prime minister's approval. Thus the Ministry of Finance can propose to the prime minister that new traffic charges be introduced.

3.20 In 1995 the transport fee brought in about US$100 million, and in 1996 and 1997, the amount collected rose to US$136 and US$161 million (table 3.6). During the same period

12 World Bank 1994. 34 Chapter 3. Financing Road Maintenance

maintenance expenditures for national and provincial roads remained at around US$77 million a year. In other words, there is no direct link between road maintenance expenditures and the transport fee or overall transport sector expenditures.'3 Therefore, the sole purpose of the traffic fee is to raise revenue.

TABLE 3.6: TRANSPORTFEE AND MAINTENANCEEXPENDITURES

1995 1996 1997

Transport fee D 300 USSO.03 D 500 USS0.05 D 500 US$O.04

Revenue D 1,100 US$100 D 1,500 US$136 D 1,937 USS16I billion million billion million billion million

Maintenance Expenditures D 819 US$74 D 860 US$78 D 929 US$77 billion million billion million billion million

Note: Maintenance expenditures include only those for national and provincial roads.

Souerce:Transport Development Strategy Institute.

3.21 The current user tariff does not charge vehicles according to the damage they inflict on the road, nor does it provide an incentive to purchase vehicles with sufficient axles to reduce pavement damage. Indeed, vehicles that cause the least damage (motorcycles, cars, light gasoline-powered vehicles, minibuses) are charged proportionately more than those that cause the most problems (heavy diesel-powered vehicles with high loads per axle). This problem could be remedied by introducing a complementary heavy vehicle fee structured to reflect equivalent standard axles (ESAs).'4

3.22 The Ministry of Transport and the road agencies are concerned about funding levels for the sector overall. The Ministry of Transport and the Ministry of Finance have proposed to the prime minister to establish a "national fund for transport development investment assistance." This fund would gain revenue from a surcharge on fuel; tolls on roads, bridges, railways, and inland waterways; vehicle license and registration fees; waterway management fees; anchorage fees; and so forth. It is unclear whether the fund would draw on the existing transport fee on fuel or would levy an additional fee. The proposal calls for allocating the annual fund revenues to assist transport investment in mountainous, remote, and poor areas and for cost-sharing to develop local transport projects in these same areas. While the purpose of the proposed fund is

'3 Many government officials indicated that between D 100 and D 300 of the traffic fee is destined for road maintenance but this seems to be rather vague assertions.

14 World Bank 1994. Chapter 3. Financing Road Maintenance 35

understandable, it is inadequate for sustaining current and future road assets. Therefore, the need remains to develop a reliable and economically efficient funding system.

OPTIONS FOR MOBILIZING MAINTENANCE FUNDS FOR THE CORE NETWORK

3.23 There are four ways to reduce unit costs and mobilize additional revenues to meet sector needs and current expenditure requirements. First, sector productivity could be increased so as to lower overall maintenance requirements. Costs could be reduced by transferring works to maintenance contractors in the private sector. But, because this option must be pursued gradually, productivity increases and cost reductions will not be sufficient to solve the immediate, serious underfunding of road maintenance. Second, transport expenditures could be lowered. But, this is unlikely to happen in the near future, since road conditions pose a serious constraint to economic and social, development in other sectors. Third, allocations from the budget to the transport sector could be increased. But given the competition for resources among all sectors, along with the pressure to reduce the budget deficit, it is unlikely that sufficient sums will be forthcoming to fund the maintenance needed to sustain the newly rehabilitated network. Fourth. an adequate and steady source of funding for road maintenance could be generated through nonbudgetary sources. This option is explored below.

Off-Budget Financing

3.24 Strong arguments can be made in favor of financing road maintenance from road users and, in the case of local access roads, from those who benefit from road access. Indeed, all stakeholders, road users, road agencies, and the Ministry of Finance, stand to benefit substantially from the creation of a road fund."

3.25 First, poor roads raise VOCs, and experience elsewhere shows that the savings to be gained from good roads far outweigh the road user charges. Therefore, road users who benefit from good roads would be required to pay for them, just as consumers pay for services from other public utilities-a financing system that corresponds well with established principles of benefit taxation.16 Users, especially in the trucking industry, depend heavily on good roads to sustain a healthy profit margin. They would pay an amount relative to the damage they cause the roads.

3.26 Second, stable funding would enable the road agencies to more consistently plan and efficiently execute maintenance with the involvement of private contractors. For the private sector to participate in road maintenance, steady funding will be needed to provide a stable environment for bidding and contract commitments. A road fund could grant such assurance, even when the general budget is fragile. Further, stable funding plus a commitment to hire

5 Furthermore,there are argumentsfor supposingthat the welfare costs of raising the required revenuesfrom road usersare lowerthan the costs of mobilizingthem throughgeneral revenues (Heggie and Vickers 1998).

16 Sylteand Vickers, 1997. 36 Chapter 3. Financing Road Maintenance

private construction companies might also promote the emergence of a competent contracting industry and consequently more competitive bidding. In turn, this should lower unit maintenance and rehabilitation costs.

3.27 Finally, a road fund would free resources from the general budget to be used by other sectors. The Ministry of Finance thus would no longer need to cover the costs of maintaining a significant portion of the designated network. Over time, once maintenance funding has been secured, the fund could also be used to finance road rehabilitation, new road sector loans, and concession schemes by providing shadow tolls or soft loans to make up the difference between the actual costs and the loan supportable by revenue.

3.28 Thus it is recommended that the Government of Vietnam and road users consider creating a commercially managed road fund supported exclusively by user charges, mainly through a levy on fuel and a license fee on heavy vehicles. The fund should initially be dedicated to covering maintenance, rather than rehabilitation and other expenditures, until maintenance needs are met. At the same time, tolls on specific publicly funded roads should be abolished.

3.29 Road funds take various forms. Those that function best provide a regular flow of finance to support spending (often confined to maintenance), ensure that the public gets what it expects by involving road users in road management and limiting the road program to what users are willing to pay for, keep revenues separate from the Government's consolidated account, and reduce the sector's fiscal burden on the Government.

The New-Generation Road Funds

3.30 A large number of road funds set up in the 1970s and 1980s (primarily in Africa, Asia and Latin America) and in the early 1990s in Eastern Europe have poor track records. Most have rightly attracted the wrath of finance ministries and the International Monetary Fund (IMF) because they were earmarking devices. Also, they were not designed so as to increase economic efficiency, nor did they recognize road users as customers of the network or involve them in managing the funds.7

3.31 The new type of fund proposed here addresses the problems of these earlier funds, calling for road funds to be managed along commercial principles based on a "fee-for-service" concept. Commercial road funds are characterized by eight features:

* Only road user charges are used for the funds (that is, there are no earmarked taxes).

17 These "first generation" road funds are plagued with problems: funds were collected but paid into unauthorizedaccounts; funds were used to pay civil servant salaries, purchase of vehicles, constructionof houses and hotel bills; funds were "borrowed"to financecapital works on roads even though the purposeof many Funds were for maintenance (Heggie 1998). Chapter 3. Financing Road Maintenance 3 7

* Funds are managed by a representative board, with half or more members representing road users and the business community. * Board members are nominated by the constituencies they represent, and a strong chair is appointed either by the board or the minister in charge of the fund. * Financing arrangements are designed to ensure that money is not diverted from other sectors. * Funds are managed proactively by a small secretariat. * Financial regulations governing the way funds are managed are published. * Road user charges are adjusted regularly to meet agreed expenditure targets. * Regular financial and technical audits are carried out.'"

3.32 Coverage. Two important questions determine the coverage of road funds. First, which costs should be recovered from road users? The concept of fee-for-service implies that road users should at least pay for the damage caused by their vehicles. Preferably, road user charges should cover the cost of maintaining and operating the road system, that is, the variable cost of maintenance, and contribute toward fixed maintenance costs.

3.33 Cost recovery and equity imply that, to the extent possible, different types of vehicles should pay different amounts in proportion to the damage they impose. The pricing and cost- recovery elements in the road user charges model used in this report for illustration purposes determine how these costs can be shared (see Annex 3.1). The model computes vehicle use and the annual costs of maintaining (routine and periodic) the network on a sustainable basis. It assumes the network is in stable condition without any backlog of periodic maintenance. While this is not the situation in Vietnam, it is assumed that road users will not be directly responsible for clearing the current backlog. For now, the job of modernizing the country's road network should be financed from loans and the government budget. But once the rehabilitation backlog is cleared, part or all of the costs of expansion could be raised from road users."9

3.34 The second question is: what types of roads should the fund cover? Alternatives include main roads only (national and provincial roads), a core network of designated roads, just the designated road network, or part of the unclassified network as well. Since the national network represents the backbone of surface transport, it should be fully financed by the road fund. Also, since a large proportion of vehicles are in urban areas, it can be argued that these road users should retain a share of the charges collected. For example, in Lebanon, the road fund is designed to transfer 15% of total revenues to help maintain urban roads. However, it could also be argued that support for maintaining rural roads is indispensable to the Government's rural development objectives.

18 Heggie 1998.

19 The costs of eliminating the maintenance backlog can be estimated using the (HDM) model. 38 Chlapter3. Financing Road faintenance

3.35 To illustrate the numerous options of network coverage of the road fund, seven cost- sharing arrangements have been computed for Vietnam (see table 3.7 and Annex 3.1). The first three cover the entire designated network (national, provincial, district, and urban roads), but have different cost-sharing arrangements for provincial and district roads. In these three scenarios maintenance costs would total US$190 million a year, but the amount that road user charges would cover changes with each scenario-from US$110 million to US$156 million depending on the extent to which provincial and district governments cover the fixed cost of maintenance. In the next three scenarios the fund would cover only national and provincial roads with different cost-sharing arrangements for provincial roads; maintenance costs would be US$118 million. The seventh scenario is the same as the first, except that urban roads have been excluded. In this scheme, annual maintenance would cost US$156 million.

TABLE 3.7: COST-SHARING ARRANGEMENTSOF FIXED COSTS OF MAINTENANCE

National Provincial District Urban Road Fund Total Funding Requirements -(%)------(US$ million)------

Scenario I 0 20 20 100 156 190 Scenario 2 0 50 50 100 139 190 Scenario 3 0 100 100 100 110 190 Scenario 4 0 20 n.a. n.a. 112 118 Scenario 5 0 50 n.a. n.a. 104 118 Scenario 6 0 100 n.a. n.a. 92 118 Scenario 7 0 20 20 n.a. 152 156 n.a. = Not applicable.

3.36 In all scenarios it was assumed that maintenance for the national network would be fully covered by road user charges and that the total variable cost of maintenance would be covered for all the included roads. For example, scenario 1 assumes that provinces and districts contribute 20% of fixed maintenance costs and that urban councils cover 100% of fixed costs. In this case the road fund would cover US$156 million of the required US$190 million, or 82% of the costs of the designated network. If the proportion of the fixed costs paid by the provinces and districts is raised to 50%, the amount covered by the road fund would fall to US$139 million, or 73% of maintenance needs. If provinces and districts covered 100% of fixed maintenance costs, the road fund should only supply US$110 million. The provinces and districts would have to cover the balance from their own revenues or from government transfers. In the latter case (scenario 3), the provinces would have to raise US$26 million, the districts US$34 million, and the urban councils US$20 million. In all scenarios in which urban roads are included (scenarios 1-3), the urban councils would cover all fixed costs themselves. Including the urban roads costs the road fund only US$4 million, because the variable costs of the urban network are relatively low.

3.37 The board should decide which works should be financed. However, few countries finance maintenance of all designated roads fully from either from the general budget or user Chapter 3. Financing Road M1aintenance 39

charges. Instead, most share the cost of maintaining district and urban roads with local governments. Cost-sharing mechanisms have the added benefits of helping to leverage more funds for road maintenance and ensuring that local governments only carry out work that is of high priority. These decisions should be made jointly by the government and road users.

3.38 In addition to providing finances for physical works, the fund will have to cover its administrative costs, usually capped at 5%. The fund might also be expected to support a program to inform the public about its functions and that of its board (see below) and to cover policing and axle load enforcement costs and low-cost physical road safety improvements.

3.39 Proposed Road User Charges. Revenues can be raised from several places. The two user charges proposed here are a fuel tax and a license fee on heavy vehicles. These charges would be supplemented by fines collected for overloading. Toll revenues were not considered as a source of income for the road fund because current and foreseen revenues from tolls are very modest, they have high leakage rates, and they are relatively expensive to collect compared to a fuel tax. Further, if some roads are tolled, perhaps as a concession or BOT, this revenue should be used as a return on the investment and for the upkeep of ihe specific road, rather than allocated to maintain the overall network.

3.40 The above scenarios impose different cost-sharingresponsibilities TABLE3.8: REQUIREDROAD USER CHARGES on provincial, district, and urban councils. They therefore imply different road user charges (table 3.8). Fuel Levy Equivalent standard axle For example, in scenario 1, the Gasoline Diesel per vehicleunit required levy on fuel is US$0.07 per Scenario 1 0.07 0.05 98 liter of gasoline and US$0.05 per liter Scenario 2 0.07 0.04 95 of diesel. To ensure that heavy Scenario3 0.04 0.04 115 vehicles pay for the damage they Scenario 4 0.04 0.03 114 impose, an added annual fee is Scenario 5 0.04 0.03 105 charged. The fee is structured to Scenario7 0.07 0.05 97 encourage the use of multiple axles to reduce pavement damage. The required fuel levy is significantly lower in scenario 3 (US$0.04 for both gasoline and diesel), because in that scenario the provinces and districts cover 100% of fixed maintenance costs, which are considerable, particularly for district roads. In scenario 6, which covers only national and provincial roads, the required fuel levy would be even lower (US$0.04 for gasoline and US$0.03 for diesel). In scenarios 3 to 6 the heavy vehicle fee would be slightly higher than that in scenario 1.

3.41 Buildup of the Road Fund. When a new road fund is created, it is often allowed to develop gradually over three to five years. The slow buildup usually corresponds to the increase in the maintainable network due to rehabilitation. It also enables the fund's board to show results to its constituents before asking for further increases in user charges. 40 Chapter 3. Financing Road Maintenance

3.42 There are several options for gradually accumulating revenues. For example, some part of the existing fuel levy of D 500 per liter can be used, a new set of charges can be applied, or both. Whichever is chosen, nothing further should be expected from government revenues than the amount already allocated to road maintenance and rehabilitation through the budget.

3.43 The first option may reasonably propose to convert the existing budget allocations of US$77 million in 1997 to road maintenance into a levy on petrol and diesel of US$0.02 per liter. This amount would correspond to roughly half the transport fee. Reliance only on a fuel levy, however, would be inequitable because owners of small vehicles would pay relatively more than owners of larger ones considering the damage large vehicles impose on roads. Additional charges would therefore be justified. The second option involves only new charges, such as an added annual heavy vehicle fee. This fee is relatively straightforward and could be collected when owners renew their vehicle licenses. The third option, the one this report recommends, would entail combining the first two options: an initial fuel levy of US$0.02 on gasoline and diesel supplemented by a new fee on heavy vehicles. For example, assuming the fund would eventually finance the maintenance of all designated roads in good and fair condition, it would initially cover about 77% of the national network, 15% of provincial roads, and 10% of district roads (scenario 1 above). Assuming a cost-sharing arrangement of 20% of fixed costs for the provincial and district roads, the funding requirements would be US$60 million for national roads, about US$5 million for provincial roads, and US$4 million for district roads. An initial levy of US$0.02 on gasoline and diesel would cover these costs.

3.44 Exemptions. In 1996 and 1997 road use accounted from 82% to 93% of gasoline consumption and 25% to 28% of diesel consumption. It is an administrative challenge to ensure that nontransport users of fuel do not have to pay the fuel levy. Since road users consume only about one-third of diesel, this issue must be addressed. Other countries have tried to solve it in one of four ways: by offering exemptions, by coloring untaxed diesel and testing road vehicles for unauthorized use, by operating rebate schemes, or by compensating nonroad users for having to pay the fuel levy. The last approach, used in Latvia and Mozambique, seems to be the easiest to administer and may work the best in Vietnam. In Latvia, the Ministry of Finance estimates how much diesel is consumed by the railways (about 18% of sales) and then transfers that part of the diesel levy to the railways. Likewise, farmers are entitled to receive annual compensation equal to 120 liters of diesel fuel for every hectare of land under cultivation (the estimated amount of diesel used to cultivate one hectare). In Mozambique 20% of the diesel levy is paid into a special fund that provides financial support to agriculture.2 0 Similar arrangements could be worked out in Vietnam.

20 Heggie and Vickers 1998. Chapter 3. Financing Road Maintenance 41

Fund Management

3.45 Road funds can be managed in various ways, and the oversight arrangements are what distinguish those that are commercially managed from their predecessors. All road funds have oversight boards that either advise the responsible minister on the management of the road fund or manage the fund directly. When one road agency is charged with managing the entire road network, the same board can manage both the fund and the agency without creating conflicts of interest. If there are many road agencies, as in Vietnam, it is better to have a separate board that channels finances to the different agencies entitled to draw from the fund. The board's first tasks are to review the agencies' maintenance programs and determine how the funds will be allocated among them. It should also review the capital expenditure programs, as these will generate future claims on the recurrent budget. The board should propose to the Ministry of Finance how extra revenues can be raised if they are needed to meet funding shortfalls (for details on the boards in Latvia, Mozambique, and New Zealand, see Annex 3.2).

3.46 The board should appoint an executive secretary and a secretariat for the fund.2' Through its secretariat, the board would be responsible for transferring funds in a timely manner. In general, finances from the fund are disbursed for goods and services that are part of approved maintenance and rehabilitation programs. The board should further motivate the road agencies to develop more businesslike attitudes toward road management to ensure that road users get value for their money. Most boards prepare and publish audited annual accounts for the fund within three months of the end of each financial year, including a selective technical audit (box 3.2). The board should also promote greater awareness among road users of the economic impacts of good roads. To this end, boards in various countries have launched outreach campaigns through newspapers, public notices, and radio programs.

Box 3.2: TRANSPARENCY AND AUDITS Road fund accounts should be subject to independent auditing and inspection. The audit should include a full financial audit and selective technical audit. The objective would be to ensure that the fund's income from all sources is accurate and complete, and that payments are properly supported and are in line with the expenditures allowed by the legislation. Another aim is to ensure that the accounting and internal control procedures adopted by the secretariat and the records and accounts are adequate. The accounts and other financial statements of the fund must be audited annually either by the auditor general or a firm of auditors selected by the auditor general. The auditor should prepare a report for the board, stating the accuracy of the financial records. The technical audit should inspect the quality of work done and ensure it is consistent with technical specifications.

Source: Sylte and Vickers (1997).

21 It is essential to have a strong, independent secretariat to manage the day-to-day affairs of the road fund. The secretariat usually consists of no more than five professional staff. The services of the secretariat could be commissioned on a competitive basis among domestic firms. 42 Chapter 3. Financing Road Maintenance

3.47 Accountability, Composition and Nomination of the Board. It will be important to determine whether the board should be responsible to the Ministry of Finance or the Ministry of Transport. Road funds in many countries answer to the Ministry of Transport, particularly when this ministry is different from the ministry in charge of the main roads. In some countries the board of the fund reports to the Ministry of Finance or to a committee of ministers chaired by a lead ministry.

3.48 The board's size and composition has a major impact on its effectiveness. A board with few members might be very effective but fail to represent vital interests within the sector. In countries where new-generation funds have been created, boards have included 5 to 12 members (see Annex 3.3). It is their composition that makes thenmwork well, and it is strongly advised that a representative board be formed to manage the fund. Also, it is vital to lhave a strong chairperson who puts the interest of the board as his or her first priority and has sufficient status within the political community to win support for potentially controversial issues.

3.49 The public sector must be represented to provide links to the ministries involved with road maintenance and political backing for revenue collection and road spending. Ex-officio members of the board should not hold office below the level of director of a department or the equivalent. It is equally important that the private sector be fully represented, since the whole rational of the fund hinges on road users' willingness to pay more for maintenance in return for better service. The board provides them the forum to directly influence road spending and management. Experience suggests that it is much easier for the Ministry of Finance to modify road user charges when the board includes road users, particularly from the transport industry and business community, who can speak for their constituencies' priorities. Each board member is responsible for listening to and informing constituents on road-related expenditures and the level of charges that result. Finally, it is important that nongovernment board members not be appointed by the Government, but elected by their constituencies.

3.50 The private sector organizations represented typically include chambers of commerce, automobile organizations, truckers, farmers' associations, and the engineering profession. Vietnam has a chamber of commerce, and associations of transport operators have just been formed. In 1996 a passenger bus association was formed in Hanoi, and in February 1998 six of the largest taxi truck companies22 in Hanoi met to discuss the advantages of forming an association. Such associations are only just emerging since, before 1990, most transport services were operated by companies owned by the national or provincial governments. The decision about whether or not to include on the board representatives from the contracting and consulting industry should be carefully weighed, given their client relations with the road agencies. 3.51 Legal Implications. The fund and its board must have a firm legal basis to be successful. Two issues to be legally ensured are that the fLiel levy and other road user charges are paid directly into the road fund and do not pass through treasury, and a representative board is

22 These are commercially operated small trucks used for the transport of goods in cities. Chapter 3. Financing Road Maintenance 43

established to manage the fund. Two common avenues taken to set up a road fund are to employ existing legislation, either relating to financial or traffic or road law, or pass a new law. The advantages of the first is that it is comparatively straightforward, easy to implement, and experience can be gained before incorporating more permanent procedures under a new law. For these reasons it is often the preferred option. If existing legislation does not provide for establishing a fund, or at least would not provide adequately, the second option is preferred. While new legislation may provide for the most solid foundation, it can be time-consuming: a bill has to be written before the agencies concerned have any experience in managing a fund, and problems will have to be anticipated. The appropriate option for Vietnam would have to be carefully discussed by concerned agencies and stakeholders, advised by legal specialists. 3.52 Procedures for Collecting Charges. In most countries road user charges are collected under the government's existing tax-making powers, that is, road user charges are treated as if they were taxes. Increasingly, however, road funds are being set up as public utilities that can set and collect the road user charges in much the same way as the telecommunications and energy utilities often do. The specific design of an appropriate collection system would have to be carefully looked into. The key principles are: as many charges as possible should be collected under contract, including those collected by customs;23 procedures should be streamlined for transferring the revenue to the road fund; the road fund accounts should be held with commercial banks; and there should be agreed procedures for regularly adjusting tariffs. Generally, tariffs are adjusted when the board recommends tariff levels to the Ministry of Finance for inclusion in the annual or supplementary budget.24 The Road Fund's Impact on the Economy 3.53 The proposed road user charges will raise fuel prices and (initially) VOCs, potentially affecting modal choice and the general level of prices. Whether the increase is passed on to consumers as higher transport charges will depend on, among other things, the competitive situation within road transport and between road transport and other modes. Previous reviews'5 have advised that the economic impact would probably not be significant and should not cause undue concern. First, the higher charges road users will pay will be more than compensated by VOC savings from well-maintained roads. Second, consumers already bear the cost of the damage imposed by heavy vehicles to the road network. Finally, about 75% of the savings from reduced VOCs in developing and transition economies are in the form of foreign exchange.26

23 The Board will need to enter into formal contracts (or at least a memoranda of understandiing) with the collecting agencies, be they public or private sector organizations, and negotiate the fee for collecting user charges. A small percentage fee will maximize the incentive on the collecting agencies to improve procedures and minimize leakages.

24 Heggie and Vickers 1998. 25 World Bank 1994.

26 For example, in India it is estimated that VOCs could be reduced by US$4 billion a year through better road maintenance (Heggie and Vickers 1998). 44 Chapter 3. Financing Road Maintenance

3.54 It is understood that in Vietnam the various taxes imposed on fuel (import, luxury, and special surcharge) do not compound. rather each is calculated directly on the border price (see table 3.4 above). The current transport fee of D 500 is thus the last charge added to the fuel price and does not increase the retail price by more than its nominal amount. For this reason, the report recommends that half the existing transport fee (D 250) be allocated to the road fund (equal to the current expenditure on maintenance). The 1994 Transport Sector Report recommended an increase in the diesel price of D 710, which, at the time, would have constituted an increase of 28% of the pump price. The extent to which the levy on fuel and the proposed license fee on heavy vehicles will need to be increased will depend mainly on which roads and which costs the road fund will cover, and on traffic growth. The seven scenarios discussed above would imply a gradual increase in the price of gasoline of between D 270 and D 660 (8% to 20%) and D 140 to D 400 on diesel (5% to 13%) in 1998 prices. All scenarios would also require a gradual introduction of a fee on heavy vehicles.27

3.55 If it is assumed that fuel represents about half of total VOCs, these increases would translate into a rise in VOCs of 4% to 10% for gasoline-operated vehicles and 2.5% to 6.5% for diesel-operated vehicles. The proposed fee on heavy vehicles would have to be added to these figures as well.28 This amount should be compared to estimates of savings in VOCs due to reduced road roughness: a reduction from 14 International Roughness Index (IRI) to 6 IRI (filling potholes) can save between 12% and 22% in VOCs; a reduction from 14 IRI to 3 IRI can reduce VOCs by between 17% and 33%*29 3.56 It has been estimated that the share of transport costs in the total production costs of goods typically transported by road in Vietnam tends to be small, from 1% to 6%, because of the short distances transported and the concentration of production and consumption around the large cities in the north and the south. Further, numerous studies indicate that a levy on fuel related to road use will affect median household income less than sales taxes on imports, taxes on industrial goods, or uniform sales taxes. In addition, it will affect the consumer price index less than import duties and general consumption taxes, but slightly more than taxes on industrial goods.30 3.57 If the Government decides to consider establishing a road fund, a more detailed analysis of the impact of the proposed road user charges should be performed. This study should assess the effect on the producer and consumer price indices by using the weights in production and

For example, scenarios I and 6 would require an equivalent standard axle (ESA) charge of USS98 and USS105, respectively (see table 3.8 above). 28 As the vehiclefleet is renewed,most of the heavyvehicles are dieselpowered.

-9 World Bank 1994.

30 WorldBank 1994. Chapter 3. Financing Road Maintenance 45

consumption for gasoline and diesel, respectively, as well as the weights for transport services, fares for taxis (gasoline) and buses and trucks (diesel).3"

THE WAY FORWARD 3.58 This review recommends the establishment of a commercially managed road fund to finance road maintenance. International experience suggests that road users are aware that poor roads increase VOCs and that they are willing to pay a significant fee in addition to the taxes that are already levied on fuel if they can be assured that the funds will be spent on road maintenance and they are given a voice in the management of the funds. It is proposed that the road fund's initial revenue be the amount that is currently dedicated to road maintenance. This would correspond to about 50% of the existing transport fee that is imposed on gasoline and diesel. Since this amount is already allocated to road maintenance, it would not impose any additional constraint on the Government's general budget. The extent to which the fuel levy and the proposed license fee on heavy vehicles will need to increase will depend on the coverage of the road fund and the cost-sharing arrangements with the urban, provincial, and district governments, as well as the growth in traffic. The scenarios developed in this report imply a gradual increase, possibly over ten years, on the prices of gasoline of between D 270 and D 660 (8% to 20%) and diesel D 140 to D 400 on diesel (5% to 13%), all in 1998 prices. Gradually introducing a fee on heavy vehicles would also be required. These measures would have to be complemented by a special effort to control vehicle overloading. The establishment of a fund to sustainably finance road maintenance must further be complemented by a parallel investment program to improve the condition of the road network, a program to address emergency repairs, and a targeted effort to improve basic access. The net impact of introducing a road fund on producers and consumers should be positive, given the substantial savings that are expected from improved road conditions. 3.59 Finally, road funds only work well if they have the support of both the Government and road users. In order to explore further the concept of a road maintenance fund in Vietnam, it is proposed that the Government invite road users to a workshop to discuss the current predicament of the sector and the implications of a road fund. If the Government decides it would like to do so, the Bank could help organize a workshop on sustainable road financing. At the workshop it would be decided what actions need to be taken and who should be responsible for initiating those actions (see Annex 3.4 on the outcome of a workshop on sustainable road financing in Lao PDR).

31 Since the consumer price index may not capture all of the impact of an increase in fuel prices, an upper-bound measure of inflation caused by increases in the price of fuel could be calculated as well (Fay 1997). 46 Chapter 4. The Role oJ Donors andcthe IWorldBank

4. THE ROLE OF DONORS AND THE WORLD BANK

4.1 Donors have been heavily involved in modernizing Vietnam's transport infrastructure (1992-96). and their commitments reflect the emphasis they place on roads as the dominant mode of transport (box 4. 1).

Box 4.1: DONORACTIVrITr IN VIETNANI Commitments for transport from 1992 to 1997 are estimated at about USS1.5 billion. The mnostimportant donors during that period were (in order of commitments) Japan, the World Bank. and the ADB. committin- US$492. US$482 and US$320 million, respectively. Other active donors are Australia, Bel-gum, Canada, France, Germany. the Republic of Korea, the Netherlands, Taiwan (China), and the United Kingdom, with estimated commitments of about US$200 million combined. The funding from these countries (for investmiientsand teclhnical assistance) has also focused on roads, though includes minor expenditures for other subsectors. About 90% of the commitnients from the three major donors was used to rehabilitate and construct roads and bridges (includinig rural roads and urban transport), and the balance went to the railway (USS91.5 million), inland waterwavs (USS73.6 million), and ports (US$62.8 million).' During this period assistance for urban transport was marginal: aithough authorities in Hanoi and Ho Chi Minh City tried to attract private and bilateral investments for infrastructure and services (roads, bridges, bus and taxi operations), progress was insignificant. An Area Traffic Control System was introduced in Hanoi with French assistance, while a few urban taxi and bus services wverebegun under various joint-venture arrangements. A detailed overview of donor support for the transport sector is presented in Annex 1.3.

4.2 The donors' emphasis on transport after resuming lending to Vietnam wvasimportant in helping to re-establish a basic transport system to support the country's growth and reintegration into the global economy. Moreover, the transport projects also served as key instruments for building institutions, transferring technical know-how, and familiarizing government entities with international standards of project preparation and implementation. As stated elsewhere in this report, the physical rehabilitation of the transport system is not yet completed. In addition, relatively little progress has been made in improving strategic management capabilities in transport, including the development of human resources and creatiop of institutions capable of dealing competently with all aspects of transport management and administration (such as the legal framework, planning, infrastructure maintenance, and operations). Moreover, new challenges must be addressed now before they become unmanageable: ensuring adequate and efficient urban transport systems to support the country's main generators of grovwth and integrating the rural areas into the mainstream of economic development by creating reliable access and affordable transport. Thus the donors' continued presence will be needed.

With respect to roads, these amounts are underestimiated because one donor (Japan) does not include all its rural and urbanroad investmentsin the transportinfrastructure category. CLhp!er 4. Th7eRole oJ Donors uandthe WVorldBank 47

4.3 While it is still important to help finance transport investments, the scope and nature of the donor community's support should be determined by the degree of the Government's commitment to a market-based transport system and to creating a sustainable environment for efficient transport sector development. The essential elements of such a sustainable environment have been outlined in this report: establish robust policy, planning and system management capabilities at all levels of government. ensure the efficient use of public resources in transport, and establish an economically efficient and fiscally effective system of user charges for road maintenance.

4.4 The above observations suggest that it is now time for the donor community to shift from primarily project-oriented transport assistance to a strategy focused on transport system improvement. This change from project to sector-oriented lending and assistance requires that the donors and the Government agree on a priority program and action plan of institutional and policy changes. It follows that a continuous. intensive dialogue is required between the donor community and government ministries and other stakeholders to ensure the proper implementation of the program and to agree on modifications, if appropriate. Further. the donors should coordinate their assistance strategies and interventions much more than in the past. This means that once a sector strategy has been worked out and agreed on with the Government and other stakeholders, each donor's lending and technical assistance program should be shaped by that strategy. Moreover, project lending should be designed to further related elements of the sector strategy. For example, lending for road projects could be closely linked with the development of an agreed overall road investment program, improvements in related central and local institutions, regulations and effective enforcement mechanisms, and the establishment of effective and efficient maintenance and funding mechanisms.

4.5 To ensure that the donors' resources and technical know-how are used to maximum advantage, it is proposed to consider forming coalitions in areas of common interest between donors, the Government, and other stakeholders. Potential areas of donor intervention are suggested below as a way to stimulate discussion. The formulation of the final agenda will obviously depend on input from the donor community, the Government, and other stakeholders.

POTENTIAL AREAS OF DONOR INTERVENTION

4.6 It is proposed that the Government of Vietnam convene a meeting as soon as possible in order to establish a consensus among all stakeholders on a long-term strategy for the sector, including tlhe donors' potential contribution to its implementation, the priorities to be addressed. and a plan of action for the next five years. Based on the issues identified in this report and current Government and donor statements of their respective priorities. potential areas of common intervention could be:

* Mobility. Design and implement a strategy for integrated transport and urban development in Hanoi, Haiphong. and iHloChi Minh City, intended to optimize system efficiency, capacity. internodal connectivity, affordable public transport, safety. and transport management 45 C'hapter 4. The Role of Donors asndthe fll'orld Bank

capabilities. Potential donors include Japan, the World Bank, the United Kingdom, and France.

* Access and Affordability. Based on the principles of sustainability, efficiency and affordability, design and implement a rural transport strategy that, by 2010, will provide the rural population with year-round access to a well-managed and maintained integrated network of all-weather roads and transport services. Potenticaldonors include the ADB, Japan, the World Bank, and the United Kingdom.

Complete the basic interurban networks (mainly roads and inland waterways), their linkage with feeder networks and transport nodes (such as ports, airports, and local distribution centers) and implement a state-of-the-art maintenance management system. Potential donors include the ADB, Japan, the World Bank, and the Canadian International Development Agency.

* Sustainability. Develop competent institutions of transport management (at all levels of government), including efficient management processes, and increase the quality of the professionals in charge. This action should be preceded by a critical review of the current government and donor activities in this area. Potential donors include the ADB, Japan, the World Bank, and the Netherlands.

Improve the industrial organization and the regulatory framework governing the sector to increase its efficiency and competitiveness. Possible measures to be supported by the donor community include equitization of transport state enterprises, commercialization/corporatiza- tion of those state enterprises remaining in state ownership (such as the railways), and support in deepening transport policy reform. Potential donors include the ADB, the World Bank, Germany, the Canadian International Development Agency, and the United Kingdom.

Establish an economically efficient, fiscally effective, and sustainable system of funding for road maintenance. Potential donors include the ADB, Japan, the World Bank, and the United Kingdom.

PROPOSED TRANSPORT SECTOR INITIATIVESFOR TIIE WORLD BANK

In its attempts to advance policy and institutional reforms in transport, the Bank should follow a two-prong strategy: advocate competition policy, enterprise and fiscal reform and incorporate transport aspects where appropriate, while simultaneously helping the Ministry of Transport and other entities prepare implementing regulations; and advocate sector-specific reforms through transport project conditionality. The Bank Group activities proposed for the period 1999-2001 are outlined below.

Roads

4.7 Maintenance wvillbe increasingly important for preserving these assets. The Bank's extensive experience in this area gives it a comparative advantage in helping introduce a Chapter 4. The Role of Donors and the WVorldBank 49

comprehensive road maintenance program for the entire network, as outlined above. Since long- term assistance will be needed, the best instrument would be adaptable program lending, though which successive tranches of the program could be funded, depending on the progress achieved. It could also include Bank assistance to develop a legal and institutional framework for introducing a road fund.

Rural Transport

4.8 The Bank should continue its involvement in rural roads as a way to provide reliable and affordable access to transport networks and to help create and implement sustainable regular maintenance (and related institution building). This report stresses that the main priority for rural development in terms of transport is to create sustainable basic access to all-weather infrastructure and, in some cases (such as in mountainous areas) to connect isolated villages to the network. Equally important, the rural poor must have affordable transport services. The Bank's experience has shown that the best way to achieve lasting results is by involving local entities and residents in every aspect of the task; thus, the responsibility for developing and funding rural transport infrastructure should be decentralized. For example, building on existing practices in Vietnam, roads should be restored, maintained, and funded by local authorities and the people who benefit from them. This will require a package of measures (in such areas as policy and procedures, legislation, institutions, and technical infrastructure) that would truly enable local authorities to take charge, within a framework of standards and rules to ensure nationwide coordination and compatibility. To achieve sustainable results, major structural reforms are needed with the central and local authorities, and in how they interact. In its reports on poverty and industrial policy,2 the Bank identified the issues and suggested ways to address them. In this context it can have three roles: to provide resources (along with the Government of Vietnam and other donors), to disseminate best practices and advice, and to facilitate between central and local authorities. The lending instrument would be a second rural roads project.

State Enterprise Reform

4.9 The Bank would be prepared to assist (or organize assistance) the Government in developing an action and implementation plan for those transport state enterprises that the Government designates for equitization. This could be done either in the context of a broader initiative of state enterprise equitization or as a sector-specific action. Most enterprises under the Ministry of Transport and its subsidiary units (such as the Vietnam Road Administration) are ideally suited for this because they are relatively small, economies of scale are not significant, and labor redundancy is not a serious problem. A group of enterprises that could benefit greatly from equitization are the state construction (and consulting) companies active in the sector. These companies cannot compete efficiently with foreign firms because they are too small,

2 Vietnam, Poverty Assessment and Strategy, World Bank Report No. 13442-VN, January 23, 1995 and Vietnam, Economic Report on IndustrialiLation and Indutstrial Policy, World Bank Report No. 14645-VN, October 17, 1995. SO Chapter 4. The Role of Doniors and the fW'orldBanik

undercapitalized, have obsolete equipment, and are technically weak-lacking managerial and market know-how. Another group of companies that could quickly be equitized would be the transport companies managed by the Vietnam Road Administration. Drawing on its experience in Eastern Europe and Latin America, the Bank could help the Government by providing technical advice through its in-house expertise, seminars, or (reinbursable) technical assistance.

The Railway

4.10 Keeping in mind the Government's goal of improving the performance and effectiveness of the state enterprises it considers to be strategically important (and therefore remaining in state ownership), a dificient approach is suggested for the Vietnam Railway. As stated earlier, the railway will become a serious fiscal liability for the Government unless it can be turned into a commercially oriented and financially viable enterprise. This report described how to tackle this issue. The Bank would be prepared to help the Government and the railway with the commercialization process. once the Government of Vietnam and Vietnam Railway commit to reform. Bank assistance could be part of an integrated package of reform and investment measures to transform the railway into a modern, competitive enterprise with a comrnercial future. To establish the scope, content, and pace of reform. the Bank could start with a learning and innovation loan, which, if warranted, could be followed by coordinated funding from. interested donors.

Urban Transport

4.11 Because the Bank recognizes the key role transport plays in promoting urban efficiency and overall growth, an urban transport project (its first in this subsector) is currently under implementation to improve traffic operating conditions and safety in Hanoi and Ho Chi Minh cities. This initiative is a prototype for managing traffic and a building block for a city-based. multimodal transport strategy. The Bank can bring its global experience to bear on both the "hard" and "soft" requirements of the sector, which involve developing transport finance, regulations, pricing, demand management schemes, public transport operations, private services, sector planning and programming, budgeting, pollution control, and modal integration. It can also promote transport-linked land development practices. The Bank, along with the Government and other donors, proposes to target assistance to key urban centers that can serve as pilot sites for a multimodal framework. This effort would be coordinated with the Bank's other urban activities in order to benefit from the synergy between transport, urban development. and environmental management. Dialogue and cooperation with city administrations, as well as bilateral and multilateral donors will be pivotal, if this strategy is to succeed. Moreover, the Bank, with the cooperation of the International Finance Corporation and local businesses, would alert the Government to the issues that enhance or impede a competitive market environment. The means to implement this strategy would be a follow-up project to the first urban transport project and technical assistance to promote private and public sector transport services in the large cities. C'ha/pter4. The Role of Donors and the World Bank 5 1

Aspects of Implementation

4.12 The Bank will need to pay careful attention to the level of its interventions as well as to their timing and sequencing. Action on policy and institutional reforms is required both throughout the country and at the sector level, requiring close coordination and cooperation between country and sector teams in designing and executing appropriate Bank Group instruments (such as structural adjustment loans, program loans, project loans, adaptable program loans, and learning and innovation loans). For example, the success of measures to open markets and strengthen competition will rest on actions that affect the entire economy, such as introducing a competition law and transforming the Price Committee into a competition authority (or abolishing it). Similarly, action on transport state enterprises will succeed only if state enterprises are reformed. in general, and fiscal reforms sustain rural transport networks. Once these broader issues have been sorted out, it is important to ensure that measures and actions for transport have been prepared and can be included in the overall program. Independent policy actions are possible in sector-specific areas (with no or few relationships to policy issues affecting other economic sectors), such as introducing more efficient regulations on vehicle weights and dimensions and measures to improve highway safety.

ANNEX 1 ANNEX 1.1: VIET'NAM-SUMMARY OF RECOMMENDATIONS FORZTRANSPOR'T 4 SECTOR REFORM'

Area ol Objectives lProposed MeasLires i:xecutiing Agencies Related Actionis lniplellielitation Statis . Intervenition

Public icrlelscpuiblic expciiditure Ior Raisethe capital budgetfor tiansp rt )(iMI'l; MOI Adoption olf'll' for 1996-98. focus- I'P for t996-2000 on 8JL11C 19te96 ° Expenditure transportsubstanitially, to 2.4%/oofGDP pa. on averagcand ing onipriority invcstmiienitsin infra- consideringtransport isvestilimentas Program tile recuirrenitbudget to 0.6% of (iGD)P structire and halimlaniresoLurce a htigh prioritv (arounid1/4 oi l'll'. or pa. oii average[2.71. deelopiopcnt(SAC) 2. 2'%ool Dil)P)

ChailttigCfoCLs of ptibl ic Prioritiesshotoild be givcinto roads G) NI i'; N1()1 M(O Public expeindjilLrereviexv (IPE R) to P1ER carried OLItin 1996(1\1N1) expenditurepriorities betxccn (75% of ptiblic expeiidituie). pEtis analyzedificiclicy oftbUdgct capital cxpetiditUireby modc roLngii _ and x itliiii transport mo(ldes. (8 of pulbliccxpCnil it Lire) inland cx pendit ures(SAC). in liic \\ itli recoimendai otions. xwatierw'ays(about 6% of piiblic expetlditturc) 12.35-2.361. ioL1iinCJilaillt icC expelditlure i Within transport iniodes priority itlcrcaLsed siibstaiitially. hlt periodlici shoul(dIbe onilIllailiteranlic. iniiielance still underflunded. rchabilitation and pgrading of' existing transport intirastrLc tine and I'acilities [2.361.

Ilicienlt mrnagelnelnit of piblic l'stablish Regiolnal Dcvclopmitenit OGi Ptovxiles; I.ocal No action. exccpt establishmsit t ol' expenildtitresin groxxthzoiles. ALitlioritiesto idcntiv, coordii te and Gov. I/l/s iniple mieaittranisport inlflfastructUtirc across adtiministrLative boundaries J2 691.

Improve platiti ng anid Clkarif roles and respolisiil ilities of O(z; N l'i (iov. issuedD,icree 42/Cl' on Jitiv programiimlinig oifpiblic core aIlid iinie itii istrics 12.46;2.51]. 16 19'96 i.itd Dccree 92/(1' ott expenidittlre aind project seicctioit Atu2lst 23. 1)97 clarilki .n iMul mcthtodology. roles atid respotnsihilities o I'core mitaisities(Nl'lP MOC. MOI: and SlV) anid ofiie ministries anidl's ill inallnatletielit of ilxVCstllielnt. r111( conlret Oittol.

I Nilmhers in 1.] reler to paragrapris in tihe 1994 I'SiR (i.e., I 'icb1tot.i, t;tspOrI .5cc/o, S'it7g ocot J/coo,mov ilo ctitw7Soh)I. Report No. I 2788-VN. Atigi st 8. 1994).

2 IroposedL Stiructural AdJustment (Credit. Area of Objectives ProposedNMeasures ExecutingAgencies RelatedActions filiplemlitatioln Status Intervenitioni

Decentralizeand streamliniedecisiotn- OG Mill; NIOl; NMOFAdoption of newBudgct Law. Decentralizationin marginal areas. makinigauthority betweci core and introductioniof functional and( linc miniistrywhile at the sametime economicclassification of strengtheningaccountability f2.46]. OG; MPI M;NOF expenditures(SAC).

Establishiclear andconsistenit Plresidcntpromulgated Law on0the metlhodologyfor identificationl State13udget onl April 3. 1996on the evaluationand selectionof establishmeint.implt nentation. expCenditureprograms and projects accounting. examimonimof thc State [2.501. Budgetand tasks. powersof the State agenciesat various levels vith respectto the State Budgct. New PPB (plannilg, programming. budgetinlg)systcmi not operative yet.

Improve managementof ptblic Consolidateexpenditurcs for periodic OG; MOE; Ml l seeabove No action. expenditure. maintelnanlcefromil capital budget with seeabove expenditure for routine maintcrnance in the recurrenitbudget 12.76].

Establishcloser finkan,e betwveenIIP anidannual budget 12.77].

Usersof Ellicient useof transport Introduceand enforcestricter Oi; MOT C irculiar239/TT-PC of MOT oIn Roadsand infrastructureand facilities. regulationsfor hcavy and overloaded Sept.3), 1995and Circular Inflatid road vehicles13.11-3.13]. 112/1998/TT-BGFI VT on1April 29. Waterways 1998 issuedby MOI regarding SpecialOperation Permiissioni for oversized,overloaded and unflit vehicles on roads z:

Increasediesel tax for roadvehicles OG; MOE:;N1I() Increasediescl tax to level Introtidictioniof tranlsportIcc of 50( - and inlanldwaterway operations to comparableto taxeson other dong/l of gasoline and diesel 1,500dong/l [3.27] pctrolCumllproducts (SAC) (D)ecreeNo. I 86-ClI of Dec. 7_ 1994.ameilded 1997)

Restructuretraffic feesso asto rellect OG, MOT; MOF Traffic 1oes abolished.but not the roaddamage ofdilTerent typcs of replacedby economically eflicienit heavyvehiciles 13.34: 3.51] fees.

Phaseout import dutics for trucks and OG: MOE Revision of tariff codeto reduce No action. btises13.43 distortions(SAC) Area of Ob eetives ProposedMeasures ENxecutingAgencies RelatedActions ImpleimientationiStatus I nterventioni

Resourcemobilization Allocate US$233 millioni per year (in OG; MOF PuiblicFxpenditUre Review (SAC). Allocation as of' 1996:US$64 mill. real terimis),raised froill LusCrcharcs. (all roads) to the mainitenance of national, proviincial aild district road nietwork [3.61.

Allocate aboutUS$5 million per year OG; MOE seeabove Allocation 1996:US$5.2 million (in realterns), raisedfromn inland waterwaysuser charges, lbr the Z mai ntenanceoftihe inland waterways systetii 13.501

Abolish registration fces for river craft OG; MOE; MO'I' No actionii [3.471.

Iransport Reorganization and( Reorganizationand( transforination of OG; M['l No substantiveaction; most ol' Industry translformationof transportSO)ls transiportS(Fs should be the MO'l's SOIs were tratts6erredto its . - responsibilityofla separate soldirig modal administrations(such as company(or agency).not the VRA) responsibility ol'ilnc ministryolit [4.381.

C(omimieincetraisfer of small to OG MOf' (or ne\IV E'statliisli criteria for identi hicationi Translcr of 2 state-owned imeditinitsized rVe en Ie earting forimiedholdinig o' fiirns providi ig essentiatlpublic compantiesto holding comlanies. commercialoperations and ol'selected company); services(SAC). hin rastructure facilities to nooistate sector (i nclti(le. joi it veittircs). Examples:'Irackitit cnter rises,rivcr trainsport opcrations, workshops and other ancillary operations, port and airport terminals, dredLin- enterprises14.331.

Reorganizatiotnatid Large commercialcorttpanies atid OG; MOT; MOF; MPI seeabove 15 corporationisestablished by transtormwation oftransport SOl s iilnrastrtietitrefacilities, -cit as l)ecisioni9i/Ttg March 7. 1994. t.lritiante coitipatiics, airliFC(s). rail%Nay.ports. airports to be slated for corporatization[4.27;4.31;4.371

Transportcompan ies retairled ulider OG; MOF; MlP' Istablishmetit of a Mitnistry or No action yet. stateownership siould be removed I olding Companyto exercise oiti the responsibilityol'the liiie (Govertittent'sownershlip righits in tititiistry [4.28] stareclolditigcomttanies (SAC). Area of Objectives ProposedMeasures ExecutinigAgencies RelatedActions Implementation Statis I atervclntioni

TIransportcompanies retained uLider OG; MOF (or new Amncidimlcintof Company Law; Law on ameindimienitto Corporate stateownersliip shouild be holdinigcompany); Adoption of SOF jaw (SAC) Law; and Law on ameindimienitto comimiercialized[4.26]. Private BtUsinlesson 22 June 1994: Law on1SOE on 30 April. 1996

Developmentof leasingoperations to MPI IFC recommenildationis No action facilitate accessto commercialcapital Ifr nonstateentities [4.43;4.44].

E'colnoIlic Dleregulate remaining price Abolish maximiiumiiprices in transport No action. Ilrice Commiiittee still Regulations controls andcontrols on1market servicesand activities relatedto setsmilximiiumLi prices. entry transport 14.48;4.50, No formal action taken; however, Replacesystem of quantity licensing, entry into the market is in practice suchIas restrictionson entry through open. criteria of market demand,with systemof quality licensing,suich as tests of personial.commercial, financial, legal fitness[4.52-4.55].

Initiate a comprelhenisiverevicw of OG; NOT; N111 No actioni.yet. existing forimisof transportsubsidies (direct, indirect and cross-subsidies) [4.73]. s

Governmentsubsidies which are to be OG; MOT; MPI No action yet. continuedshould only be grantedfor defined outputswhere input or general subsidiesare uliavoidable,they should he reducedover time. Mandated resourcetransfers to be discontinued [4.7 1;4.72].

Unbiasedenforceimienit of Establishan Appeals Board to oversee OG Adopt actionprogram to createa Law on Domestic lInvestmilen1ton 7 Regulatory regulationis the fair enforcemilenitof price andcntry level playing field for private and NMay,1998; Law of SOE; Law of' Inslitutionls (andother economic) regulationsin public liriris (SAC). privatebusiness. No level playiig o tranisport[4.56]. field yet (e.g.preferential credits for SOEs)

Establisha moniopoliesor fair tradinig OG Adoption of CommirercialLaw in No substantiveaction yet. oil-ice to moniitorprices fbr services progress(Governmiienlt). UNI)D legal CommliercialI aw on 23 May., 1997 and actionswith a monlopolistic reformnproject. potential [4.491. Aircaof Objectives ProposedMeasuires Executilig A-encics RldatedActions ImplementationStatus Ilnterventilon

1\1()'1' Adapt role ol'MO'I' to market MO'I' to be designatedcentral locus (0 D)egree22/CPI on March 22.1994 of' basedcconomyiv ibr transportniatters to coordinate thn (iovernment. defioningtasks. decisionsinvolving transportmacttrs powers and rcspoiishiblitiesol'State and transportplanninilg across all managementand organizational agenciesand levelsol govenment strcture on MtI 15.43-5.441.

MOT to condLueta managemlciit MOT No actioniyet. reviewvand to developa businiessplani for its Liutureactivities 15.251].:

MOI' to delegate autllority and MO'I' Decision of M('l' on 25 Feb. 1997 decisionmaking powerconcerning on decentralizationin decisioni day to day managementto lower making power on investimienltin levels of its hiierarchywhile at the transportsector. sametimite strengthen ing accouintahil- ity Ofits subordinate uinits [5.33].

MOT should increaseits elltbrtsto NIO'1' Roadand 13ridaeAssociattion inlbriut the ptiblic and to involvc it in f rcight Forwarding Association transportmatters in order to build a constitUCiIcyfor transportilatters [5.39].

I ominanresouirce developmeint MO'1'to developa strategyand MOT; MOE; Ml'l Governmiien1trequest to Batik to - A Survey on qualitv ot'tranisport program oi'action to increaseand organizetransport training staft as held to preparethe planlof ulporade skill levels in the transport assessmientworkshop. ED)1course hIllimaniresource developimicit. sectorby improvingtrai ni ng on project evaluation. Variotis other - RIedictionof uLiiqllaliltiedstall' instituitionis. personnlel anid I'andding donor initiatives. partictIlarly on levcls and meclhaniisinis train i ng in project plani tieiganid [5.52;5.56;5.571. im,plIemncllation(e.g. JK. ADB). UNDIt)l~ Annex 1.2: Vietnanm-Selectecd Transport Statistics 59

ANNEX 1.2: VIETNAM-SELECTED TRANSPORT STATISTICS'

1. Traffic

TABLE 1.1: DOMESTIc TRANSPORT OF GOODSBY RAIL, ROAD, AND INLAND WATERWAY TRANSPORT, 1990-96

Thousand Tons Million Ton-Kilometers Year Rail Road Inland Total Rail Road Inland Total waterway waterway

1990 2,341 3 i,765 16,295 50,401 847.0 1,631.0 1,749.0 4,227.0 1991 2,567 33,962 15,566 52,095 1,103.3 1.815.0 1,765.0 4.683.3 1992 2,774 40, 120 16,89-4 59,788 1,076.8 2,075.0 1,817.0 4,968.8 1993 3,187 45,970 16,797 65.954 978.0 2,437.0 2,335.0 5,750.0 1994 4,000 49.440 17,533 70,973 1,370.1 2,645.6 1,971.0 5,987.0 1995 4.515 55,952 20,051 80,518 1,750.6 2,967.8 2,248.2 6,966.6 1996 /a 4,470 62,440 22.306 89,216 1,170.0 3,238.0 2,316.0 7,324.0

/a 1996 estimated. Sozurce: General Statistical Office 1996.

TABLE 1.2: DOMESTIC TRANSPORT OF PASSENGERS BY RAIL, ROAD, AND INLAND WATERWAY TRANSPORT, 1990-96

Million Passengers Million Passenger-Kitometers Rail Road Inland Total Rail Road Inland Total waterway waterway

1990 10.4 271.5 43.6 325.5 1,913.0 8,352.3 1,014.0 11,279.3 1991 9.5 332.9 92.6 342.4 1,767.0 9,438.1 1,186.0 12,391.1 1992 8.7 388.7 92.5 489.9 1,751.7 10,620.8 1,145.0 13,517.5 1993 7.8 419.2 86.4 513.4 1,921.0 10,601.3 1,310.6 13,832.9 1994 7.9 440.6 104.1 552.6 1.796.0 11,150.0 1,412.0 14,358.0 1995 8.8 472.2 109.8 590.8 2,133.3 12,775.4 1,427.9 16,336.6 1996/a 8.9 517.9 118.0 644.8 2,360.0 14,919.0 1,460.0 18,739.0

/a 1996 estimated.

Soutrce: General Statistical Office 1996.

Statistics compiled by the Ministry of Transpoit's Transport Development Strategy Institute (TDSI). 60 Annex 1.2. Vietnam-Selected Transport Statistics

TABLE 1.3: REGIONAL PER CAPITA INCOME AND TRIP GENERATION(1995)

No. Interprovincial coefficient GDP Population GDP per Capita Trips/Person/Year by Railway and Road (at current prices, ( 000 persons) (US$) Transport D billion)

Whole country 222,840 74,154 273 2.2

1 Northern Highlands 23,398 12,687 168 0.6 2 Red River Delta 44,323 14,338 281 1.4 3 North central Coast 20,278 9,961 185 0.8 4 Southern Coastal 15,866 6,368 227 2.4 5 Central Highland 4,792 3,098 141 0.9 6 North East South 69,548 11,516 549 5.9 7 Mekong River Delta 44,635 16,186 251 2.8

Sozurce:Transport Development Strategy Institute.

TABLE 1.4: ANNUAL GOODs TRANSPORTATIONGROWTHI RATE BY TRANSPORT MODE (In %)

1990-95 1996-2000 2001-10 Transport Mode Option 1/a Option 2/a Option 1/a Option 2/a

Tons Railway 14.0 11.8 13.7 12.4 12.8 Road 12.0 10.5 11.3 11.5 12.5 Inland waterway 4.2 13.4 14.2 10.8 11.4 Ton-Kilometers Railway 15.6 13.0 13.0 12.0 12.0 Road 14.7 15.0 15.0 14.0 14.0 Inland waterway 5.1 5.0 5.0 6.0 6.0

/a Assumptions about GDP growth rate see Table 6 below.

Souirce:Transport Development Strategy Institute. Annex 1.2: Vietnam-Selected Transport Statistics 61

TABLE 1.5: ESTIMATED ANNUAL GROWTH RATES OF PASSENGER TRAFFIC BY TRANSPORT MODES 1996-2010 (In %)

1990-95 1996-2000 200 1-10 Transport Mode Option I Option 2 Option I Option 2

Passengers Railway 9.5 15.7 7.2 7.2 Road 13.9 13.6 21.0 12.6 13.5 Inland waterway 22.0 7.9 11.0 7.2 7.2 Air transport 41.0 25.0 30.0 17.0 17.0

Passenger-Kilometers Railway 2.2 3.0 3.5 4.0 4.0 Road 8.9 10.0 12.0 17.0 17.0 Inland waterway 7.7 8.0 10.0 8.0 8.0 Air transport 50.0 30.0 35.0 20.0 20.0

Note: For assumptions about GDP growth rates, see Table 1.6 below.

Souirce: Transport Development Strategy Institute.. TABLE 1.6: GOVERNMENT GDP SCENARIOS 1996-2000 AND 2001-10

1995 2000 2010 GDP Growth Rate (%) Option I Option 2 Option I Option 2 1996-2000 2001-10 No. Option. I Optionl 2 Optioni I Optiol 2

I GDP (1995 price) 222,840 350,923 359,347 969,772 906,916 9.5 10.0 10.7 9.7 AgriCuIlture,Forestry 63,219 72,351 72,351 107,080 107,104 2.8 2.8 4.0 4.0 Industry 50,912 102,339 104,623 366,293 339,732 15.0 15.4 13.6 12.5 z COInStrluCtiOn1 15,892 29,280 29,280 101,165 90,942 13.0 13.0 13.2 12.0 Service 92,817 146,953 153,093 395,234 369,138 9.6 10.5 10.4 9.2

2 GDP Structuire () 100.0 100.0 100.0 100.0 100.0 AgriCUlturc,Forestry 28.3 20.6 20.1 11.0 11.8 Industry 22.8 29.2 29.1 37.8 37.5 ConIstruction1 7.1 8.3 8.! 10.4 10.0 Service 41.8 41.9 42.6 40.8 40.7

Source: Statistical Yearbook 1996, Miniistry of Planning and Investment. Annex 1.2: Vietnam-Selected Transport Statistics 63

2. Roads

TABLE 2.1: ROAD LENGTHS BY JURISDICTION AND PAVEMENTTYPE, SEPTEMBER 1997

Jurisdiction by Management Lengths (km) Concrete AC Asphalt Gravel Laterite Earth

National Road /a 15,121 72.0 3,949.6 5,138.6 1,491.62 3,707.0 762.0 Provincial Road 17,449 22.0 668.0 3,948.0 3,041.0 4,874.0 4,896.0 District Road 36,372 53.0 3,558.0 4,976.0 12,956.0 14,829.0 Urban Road 3,211 1,246.0 1,965.0

Subtotal 72,153

Special Road 5,451 Village Road 46,910 Subdivision road 84,545

Total 209,059

/a Fifty percent of national road lengths are administrated by Provincial Transport Authorities (PTAs).

Source: Ministry of Transport, Vietnam Road Administration.

TABLE 2.2: ROAD VEHICLES, 1993-96

Vehicle Numbers Motorcycle No Year Total Car Bus Truck Other Motor Vehicle Number

1 1993 304,207 97,376 38,815 93,308 74,708 2,039,669 2 1994 320,299 106,320 42,566 99,721 71,692 3,083,624 3 1995 365,168 118,015 60,356 100,204 86,593 3,498,156 4 1996 400,585 132,767 66,452 104,710 96,656 4,158,989

Source: Ministry of Transport, Ministry of Industry.

TABLE 2.3: STRUCTURE OF TRUCKS

Total 1-4 tons 4-8 tons >8 tons

104,710 34,135 52,041 18,534 100% 32.6 49.7 17.7

Source: Ministry of Transport, Ministry of Industry. 64 Annex 1.2: Vietnamn-Selected Transport Statistics

TABLE 2.4: OWNERSHIP DISTRIBUTIONOF TRUCKS IN 1997 (In %)

Type of vehicle Private Public

Pickup/4-wheel truck 73 27 2-Axle, 6-wheel truck 64 36 3-Axle truck 46 54 4 and more Axle truck 50 50 Average 61 39

Source: Traffic Survey 1997 (BCEOM).

TABLE 2.5: OWNERSHIP DISTRIBUTION OF PASSENGER VEHICLES IN 1997 (In %)

Type of vehicle Private Public

Passenger car 15 85 Minibus 66 34 Bus 57 43

Source: Traffic Survey 1997 (BCEOM).

TABLE 2.6: NUMBER OF IMPORTED VEHICLES IN VIETNAM

Of which: Year Total Trucks Cars

1990 5,768 3,726 2,042 1991 1,407 808 599 1992 3,482 281 3,201 1993 7,825 956 6,869 1994 15,793 8,413 7,380 1995 19,775 12,223 7,752 1996 33,662 25,866 7,796 1997 (Estimated) 23,589 18,453 5,136

Source: Yearbook 1996. Annex 1.2: Vietnam-Selected Transport Statistics 65

TABLE 2.7: VIETNAM ROAD ACCIDENT STATISTICS (1988-97)

Year Accidents Fatalities Injuries Casualties

1988 4,497 2,477 5,561 8,038 1989 5,968 2,112 5,432 7,544 1990 5,565 2,087 4,668 6,755 1991 6,865 2,395 6,846 9,241 1992 8,910 2,755 9,040 11,795 1993 11,016 3,440 11,519 14,959 1994 13,118 4,533 13,056 17,589 1995 15,376 5,430 16,920 22,350 1996 19,075 5,581 21,556 27,137 1997 19,159 5,680 21,905 27,585

Soutrce:Traffic police.

3. Railways

TABLE 3.1: TOTAL NUMBER OF LOCOMOTIVESOF VIETNAM NATIONAL RAILWAY IN 1996

Total Locomotives in Operation No. Types of Locomotives Number HP Number HP

A Steam Locomotives 67 821,190 27 33,430

B Diesel Locomotives 359 338,300 331 216,700 1 Czech Locomotives 40 40,000 40 40,000 2 Belgium Locos 16 28,800 16 28,800 3 Rumanian Locos 11 12,100 10 11,000 4 US Locos (GE) 31 27,900 31 27,900 5 Indian Locos 14 18,900 14 18,900 6 Australian Locos 13 6.500 13 6,500 7 TY7E (Russian) 230 92,000 205 82,000 8 TM8EK (Russian) 4 3,200 2 1,600

Total 426 420,490 358 250,130

Source: Vietnam Railway. 66 Annex 1.2: Vietnam-Selected Transport Statistics

TABLE 3.2: RAILWAY CARS (WAGONS) UP TO DECEMBER 1996

rYPe Number

I Passenger Cars in 1,000 mm-ed gauge 778 2 Freight Cars in 1,000 mm-ed gauge 4,105 3 Passenger Cars in 1,435 mm-ed gauge 18 4 Frei-,ht Cars in 1,000 mm-ed gauge 556 5 Special Cars 50 Total 5,507

Source: Vietnam Railway.

4. Iniand Waterways

TABLE 4.1: INLAND WATERWAY TRANSPORTFLEET, 1997 (In Thousands)

Towing Barges (Cargo) Passenger Ships Ownership HP % Tons % Seats %

Total 202.0 100.0 1,462.0 100.0 162.0 100.0

North 71.5 36.9 538.0 35.1 24.0 19.8 Central 3.3 1.6 15.5 1.1 18.4 11.3 South 124.2 61.5 908.5 62.1 119.6 73.9

Source: Ministry of Transport..

5. Maritime Transport

TABLE 5.1: SHIPPING FLEET OF VIETNAM IN 1996

No Name of Company No. of Vessels % dwt %

Total 470 100.0 1,005,124 100 Of which under Vinaline 47 10.0 510,329 50.7 1 Vosco 23 4.9 277,478 27.6 2 Vitranschart 12 2.5 158,144 15.7 3 Vinaship 8 1.7 41,783 4.2 4 Vinaline 4 0.8 32,923 3.2

Source: Vinaline- 1997. Annex 1.2: Vietnam-Selected Transport Statistics 67

TABLE 5.2: AGE OF VIETNAMESE SHIPs REGISTERED BY VIRES IN DECEMBER 1996

General Cargo Ships _Tanker Ship Age (years) Number of ships % Number of ships %

Less than 5 79 17.6 3 12.5 5-10 180 40.1 4 16.7 11-15 67 14.9 1 4.2 16-20 49 10.9 6 25.0 21-25 22 5.0 5 20.8 More than 25 51 11.4 5 20.8

Total 448 100.00 24 100.00

Source: VIRES - 1996.

TABLE 5.3: CHARACTERISTICSOF SHIPPING FLEET BY TYPES OF OWNERSHIP IN 1996

Number of Cargo Ships by dwt Owner No. of 200- 500- 1,000- 2,000- 5,000- Total type owners <200 499 999 1,999 4,999 9,999 >10,000 All (dwt)

Mainly Oceangoing or Foreign Seagoing Shipping State 67 26 64 19 44 12 13 21 199 547,376 Joint venture 12 2 3 2 1 7 3 4 22 278,216 Foreign 2 1 1 2 4,792

Total 81 28 67 21 46 20 16 25 223 830,384

Mainly Coastal Shipping Local Government 60 29 83 11 26 11 3 1 164 141,678 Cooperative 6 5 13 0 0 0 0 0 18 3,480 Private 28 9 46 7 1 1 1 0 65 29,582

Total 94 43 142 18 27 12 4 1 247 174,740

All 175 71 209 39 73 32 20 26 470 1,005,125

Source:VIRES. December 1996. 68 Annex 1.2: Vietnam-Selected TransportStatistics

TABLE 5.4: VIETNAM SEAPORTS IN 1996

No Operator Number of Volume of Cargo Throughput in Ports 1995 ('000 tons)

I Ministry of Transport 10 14,514 2 Local 24 3,140 3 Other Ministries and Sectors 36 26,101

Total 70 43,755

Source: VINAMARINE.

6. Air Transport

TABLE 6.1: NUMBER OF AIRPLANES OF VIETNAM AIRLINE IN 1997

Number of Airplanes Number of Seats per No. Types of Airplane Total Airplanes in operation Airplane

I Boeing 767 4 4 204 - 248 2 Airbus 320 10 10 50- 140 3 Fokker 2 2 79 4 ATR 72 6 6 66 5 TU 134 16 3 45 - 72

Total 38 25

Source: Vietnam Airline. CHART 5.1: ORGANIZATION OF GOVERNMENT INSTITUTIONS RELATED TO THE TRANSPORT SECTOR

Government

Government Organizations Ministries of State Management on the Field Functions Committees under Ministries of State Management on the Sector Functions and Councils Government Ministry of Ministry of Ministry of Science and Ministry of Committee of Government Ministry of Ministry of Ministry of Ministry of Ministry of Planning and Government Finance Technology Internal National Traffic Oftices Transport Construction Industry Agriculture and Trade Investment Statistical and Environ- Affairs Safety Rural Development Office ment

General Transport and Traffic Police People Committees Department Communication Department Staff Departments Department of Provinces, Transport General Department for and Cities Department Management of State (Citiesunder Central Government Modal Administrations Budget and Properties only) _ Strategy and m Development Institute

Provincial Transport Notes: Authorities Direct management Managemnent on the legislation and sector functions. c0

_. CHART 5.2: ORGANIZATION OF STATE MANAGEMENT OF THE TRANSPORT SECTOR (DECEMBER 1997)

Prime Minister a Chairmenof PeopleCommittees Ministerof Transport Ministersof other Ministries, of Provincesand Cities (MOT) and Branches a PTAs DirectlySubordinate Modal Research,Training, and other PMUs (ProvincialTransport Administrations GcneralStaff Departmlenits Organizationsunder MOT (ProjectManagemenit Units under Authorities) . MOa[) I. Vietnam Maritime I. Minister's Office I TransportDevelopment and I. PMU I 2. Vietiiain Road 2. Inspection Strategyinstitute 2. PMU 18 Administration 3. Planningand Investment 2. TransportScience and Technology 3. PMU 5 3. VietnamInland Waterway 4. Financeand Accounting Institute 4. PMU My Thluan Administration a 5. Legislationand 3 EconomicsManagement Staff 5. North-South Expressway 4. VietniamRegistration 73 Transort 4. TransportStatistic Information Project Office Department 6. Science and Technology Center 6. I'MU85 rE 5. Inspectionand Quality 7. Laborand Personnel 5. l'ransportationNewspaper 7. PMU BiienDong (East Sea) Control for TransportWorks 8. InternationalRelations 6. MaritimeInstitute 8. PMU Thang Long 9. ASEAN 7. VocationalMiddle Schools 8. TransportHlealth Center 9. TransportationPLiblishing House

State State Organizations Organizations under Modal under PTAs Administrations

|LocalTI'ransport | | Companiesunder Modal GeneralCorporations (Under VietnamRailway Federation TransportCompanies GeneralCorporations |Companies | |Administrations Decision No90MG) (Underdecision 91irTG)

Notes: DirectlyManagement StateManagcillemet on the Legislationand sector fuLiction Managemeintonspecial ftinctionis Cooperationrelations Annex 1.2: Vietnam-Selected Transport Statistics 71

USER CHARGES AND FUEL CONSUMPTION

A. Users Charges 1. Import Duty on Road Vehicles and Fuel:

Fuel Percentage of CIF Border Price

Gasoline 55 Diesel (All type) 25 Fuel oil 0 Kerosene 20 Other (Avture, etc.) 20

FBU SKD CKDI CKD2 IKD

Passenger Vehicles >24 seats 50 40 12 6 3 15-24 seats 55 40 25 10 7 5-15 seats 55 45 40 20 5 <5 seats 55 50 50 30 5

Trucks Payload >20 tons 5 5-20 tons 30 20 8 4 2 <5tons 60 40 16 8 4 Tank and Reefer Vehicles 10

2 &3 Wheeled Sport Bicycles 5 Others 70

Motorcycles 60 50 45 IKDI:30 IKD2: 15 IKD3: 10

Spare parts 5-55% depending on level of assembly

Source: Ministry of Finance; Decision 1233/TC/TCT-QD 0 December 1995 and 280/TCT QD 28 May 1994.

2. Taxes Applying to Transport Businesses (Decision470, 10 September1991)

Trading in Petroleum products 1% of Market Price Trading in Vehicles/Spare parts 1-6% of Market Price Transport services: Freight 2% of Revenue Passenger 4% of Revenue Urban passenger 1% of Revenue

Source: Ministry of Finance. 72 Annex 1.2: Vietnarm-Selected Transport Statistics

3. Taxes Applying to Propertv Transfer (Circular 778/TC)

Buying, Selling, Exchanges, or Gift 3% of Value Inheritance 5% of Value

4. Traffic Fee

Collection of traffic fee on the price of fuel 500 Dong/liter

5. General Fees

For Vietnamese For Foreigners (Dong) (US$)

1. Vehicle Ownership Registration with: 4 or more wheels 150,000 40 2 or 3 wheels 50,000 15 Semitractor 100,000 30 Reissuing Certificate 50,000 15

2. Periodic technical Safety Inspection (Decision 01/VGCP, 8 February 1996)

Trucks Gross Weight >10 tons 200,000 35 Gross Weight 5-10 tons 180,000 35 Gross Weight <5 tons 170,000 30 Buses Passenger bus >40 seats 200,000 35 Passenger bus 10-40 seats 180,000 35 Passenger bus 6-9 seats 150,000 30 Passenger bus <6 seats 120,000 30 Small trucks, tractor and similar vehicles 100,000 Lambro, Motorcycle 50,000

3. Driver's License Motorcycles >70 cm3 107,000 Comprising Training 50,000 Testing 50,000 Documents 7,000 Truck, Bus (9 months for training) 1,900,000 Cars, Tourist car (6 months for training) 1,000,000 Lambro, Tractor (3 months for training) 500,000

Source: State Price Committee; Ministry of Finance. Annex 1.2: Vietnam-Selected Transport Statistics 73

6. Road and Bridge Fee on Bac Thang Long-Noibai Airport Highway (Decision number 3043/QD-DBVN, November 14, 1996) (Including Thang Long Bridge and Bac Thang Long-Noibai Airport Highway)

1. Trucks Dong/each way Gross Weight < 4 tons 20,000 Gross Weight 4-10 tons 24,000 Gross Weight over 10 tons 36,000 2. Buses Passenger Buses Tourist Bus <12 seats 12,000 12-30 seats 20,000 >30 seats 24,000 Urban Bus 8,000 3. Small Vehicles Car 12,000 Lambro, Tractor 5,000 Others, Motor Vehicles 1,000 Motor vehicle of State Employee, and Student 10,000 Dong/Month

Bridge Fee For Luong, Met, Gie Bridge, on National Highway No. 1 (Decision 3043/QD TCKT, November 14, 1996)

Dong/Each wa 1. Trucks Gross Weight < 4 tons 10,000 Gross Weight 4-10 tons 12,000 Gross Weight >10 tons 18,000 2 Buses Passenger Bus <12 seats 6,000 Passenger Bus 12-30 seats 10,000 Passenger Bus >30 seats 12,000 Urban Bus 4,000 3. Car 6,000 4. Lambro, Tractor 2,500 5. Motorcycle 500 6. Monthly Fare for State Employee 5,000 74 Annex 1.2. Vietnam-Selected Transport Statistics

Road User Fee from km 14 to km 78 of National Highway No. 6 (Decision 4559/1997/Qd BGTVT, November 28, 1997)

1. Motorcycle 1,000 Dong/Each Way 2. Monthly fare for state employee and school student 10,000 Dong/Monthly fare 3. Lambro, Tractor 4,000 4. Car 7,000 5. Buses <12 seats 10,000 12-30 seats 15,000 30-49 seats 20,000 >50 seats 25,000 6. Urban Bus 10,000 7. Trucks Gross Weight <4 tons 15,000 Gross Weight 4- 10 tons 20,000 Gross Weight 10-15 tons 30,000 Gross Weight >15 tons 50,000 8. Container Vehicle of 20 Feet 60,000 Container Vehicle of 40 Feet 100,000

Source: Ministry of Transport.

Fee of Binh bridge and National Highway No. 183 (Decision 4739/1997/QD/BGTVT, December 17, 1997); Effective January 1, 1998 1. Motorcycle 1,000 Dong/Each Wav 2. Monthly Fare for state Employee and School-student 10,000 Dong/Month 3. Lambro, Tractor 4,000 4. Car 7,000 5. Buses <12 seats 10,000 12-30 seats 15,000 30-49 seats 20,000 >50 seats 25,000 6. Trucks Gross Weight <4 tons 15,000 Gross Weight 4-10 tons 20,000 Gross Weight 10-15 tons 30,000 Gross Weight >15 tons 50,000 7. Container Vehicle of 20 feet 60,000 Container Vehicle of 40 feet 100,000 Annex 1.2: Vietnam-Selected Transport Statistics 75

Road Fee on Section of National Highway No. 21, from Phuly to Nam Dinh (-30 km long) (Effective 1 April 1998, Decision No 13/1998/Qd-BGTVT, January 21, 1998) 1. Motorcycle 1,000 Dong/one way 2. Monthly fare for state employee and school student 10,000 Dong/Month 3. Lambro, Tractor 4,000 4. Car 7,000 5. Passenger cars <12 seats 10,000 12-30 seats 15,000 30-49 seats 20,000 >50 seats 25,000 Urban bus 10,000 6. Trucks Gross Weight <4 tons 15,000 Gross Weight 4-1 0 tons 20,000 Gross Weight 10-15 tons 30,000 Gross Weight >15 tons 50,000 7. Container Vehicle of 20 Feet 60,000 Container Vehicle of 40 Feet 100,000

Source: Ministry of Transport.

B. Fuel Consumption

NATIONAL GASOLINE, DIESEL AND KEROSENE CONSUMPTION, 1993-97 (Tons)

1993 1994 1995 1996 1997

Tons Gasoline 690,000 1,052,000 1,200,000 1,200,000 1,178,000 Diesel 1,450,000 2,193,200 2,500,000 2,800,000 2,529,000 Kerosene 250,000 285,000 320,000 335,000 290,000

Liters (Millions) Gasoline 965 1,471 1,678 1,678 1,648 Diesel 1,737 2,625 2,994 3,353 3,029 Kerosene 313 356 400 419 363

Source: Vietnam Petrolimex. 76 Annex 1.2. Vietnam-Selected Transport Statistics

ANNUAL LITERS OF FUEL USED ON ROADS (Millions)

1990-92 1996 1997 Bus & Trucks Private Users Total (Estimated) (Estimated)

Gasoline 538 525 1,063 1,380 1,528.7 Diesel 507 0 507 804 860.0

Total 1,045 525 1,570 2,184 2,388.7

Source: Transport Development Strategy Institute (Estimated).

7. Transport Expenditure

GOVERNMENTEXPENDITURE BY TRANSPORT MODE AND EXPENDITURE CATEGORY (Dong billion)

Expendi- ture 1993 1994 1995 1996 Mode Items Total Central Local Total Central Local Total Central Local Total Central Local

Roads Fixed 1.350 243 1,107 2.456 1.296 1,164 3.107.0 1.611.9 1,495.1 3,832.0 1.941.1 1.890.9 Current 350 207 143 513 331 182 653.6 464.3 189.3 701.9 491.3 210.6

Inland Fixed 105 98.5 6.5 97 93 5 181.6 166.1 15.5 220.1 200.0 20.1 waterways Current 22 20.7 1.6 36 29 7 45.3 42.6 2.7 56.9 54.0 2.9

Rail Fixed 22] 220 0.6 223 213 10 400.1 399.5 0.6 470.7 470.3 0.4 Current 16 16 0.1 22 20 2 140.0 140.0 0.0 180.2 179.8 0.4

Sea + coast Fixed 87 75 12 131 119 11 114.0 95.6 18.3 68.8 43.6 25.2 Current 43 37 6 76 75 1.1 4.7 1.8 2.9 5.9 2.5 3.4

Air Fixed 38 38 0.1 272 272 0 142.5 142.4 0.1 254.8 254.8 0.0 Current 0.2 0.2 0 0 0 0 2.0 2.0 0.0 0.1 0.1 0.0

Others Fixed 67.0 45.1 21.9 75.5 50.0 25.5 Current 6.8 4.7 2.1 6.1 3.1 3.0

Total Fixed 1.808 675 1.1.33 3.198 2,000 1.198 4.012.2 2.460.6 1.551.6 4.921.9 2.959.8 L.962.1 Current 495 341 155 661 464 197 852.4 655.4 197.0 951.2 730.8 220.4 Total 2.303 1.015 1.288 3.859 2.464 1.395 4.864.6 3.1 16.0 1.748.6 5.873.1 3690.6 2.182.5

Source: Ministry of Finance. ANNEX 1.3: SUMMARY OF PROJECTS AND/OR STUDIES IN THE VIETNAM TRANSPORT SECTOR

WORLD BANK

ImplementingPlan No. Name of Project Objective/Scope Cost F-inancing Starting Completion Implementing (or Study) Resource Date D)ate Agency

I lighway Rehiabilitation(a) Rehabilitationof two sectionsof lighway IA from Hanoi to US$158.5mi. IDA - - Ministry of Transport IProjectI Vinh (279 ki;) and from Ho Chi Minh city to Can [ho (151 kin). aild associatedresettlement of householdsand business; (b) new ferriesand rehabilitationof existing onesand improved ferry operationsat two river crossingsof My Thuan and Can Tho; (c) maintenanceequipmenit for the Regional RoadManagemenlt Unlions(RRMUs) and equipmentfor the design anidquality control of roadconstruction and maintenance;(d) institutionial strengthenin.g/reformand transferof technologycomponents that include technicalassistance and training for the RRMLJsand training for highwaypersonnel; and (e) studiesto improve the sectorand to select and preparea future roadinvestment program. 2 I lighway Rehiabiiitation(a) Rehabilitationand reconstructionof 292 Km Viih-Dong Ha US$195.6mil. Il)A - - Miistry of Tl'ranlsport ProJect11 section. icltudinig2 bridgesat Chanli Iloa and Quan llau; (b) Periodic Maintenance of selectedPriority National Roads;(c) Improvemilenitof I lazardousRoad Sections; (d) SupportPMU l; (e) SupportVietniam Road Administration and RRMUs; (J) Training; (g) DetailedDesign and EnginecrinigStudies 3 1lighway Reliabilitation (a) Rehabilitationiof sectionscrossing flood-pronieareas; (b) US$150mi. IDA - - Ministry of Transport q Project Ill Rehabilitationlol'the Can '['ho-CaMau sectionsoutil of I lo Clii Minh city; (c) periodic maintenanceby contractof key sectionsof tile nationialhigilway network and(d) constrttctioinof selected loading facilities betwccn Higilway Oneand nearby inlanid waterwaysin Mekong Delta area.

4 First Rural Transport (a) Rehabilitationl.improvemncit and mainltetianceof about5,00 US$55mil. IDA - - Ministry of Transport Project Kin of roadsand bridges in selected 15 provinces,oi' whicih3.500 Kimiwill be district road and 1.500Kim will be comIlunlialroads, (b) institutionalstrengthieniing and traininig.(c) the stuydyoffissuees i relatinlgto rural transportdevelopment *~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~- ' R ImiplemncntingPlani No. Nameoi 'lroject Objective/Scope Cost Financing Starting Completioni Implementing (or Study) Resource Date Date Agency

5 Inland Waterway and (a) Rehabilitationiand upgradingof600 Km ofprimaty inland US$73mil. Il)A 1997 InllandWaterway Bureau- Port Rehabilitationl waterwaysand ancillary facilities in the Mekong Delta and (b) Ministry ol'Transport Project rehabilitationof CanTho lPort. . 6 UJrbanTransport (a) applicationof transportsystem management measuires; (b) US$45mil. IDA Transportationland Plublic ImprovemientProject investmentin strategiclocations, and (e) improved inssitutional Works Services in Flanoi and capacity in traflic admniistration,management and regulation llo Clii Minh city 7 TransportSector - Reviewo 8 'I'ransportSector Review Update - - _ _ . > 2~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~' ASIAN DEVELOPMENT BANK

Implementing Plan No. Nameol'lroject Objective Scope Cost Financing Starting Completionl ImplemilenitingAgenlcy Resource Date Date

I Road improvemeilt Growth Rehabilitationof Road US$141mil. ADF 11/29/93 12/31/98 Highway No. Project ManagementUnit (PMU I)-Ministry ofTl'ransport

2 2nd Road niprovement Growth Improvementof National ald Rural US$i37 mil. ADF 11/21/93 12/31/01 PMUI-Ministry ofiTransport Roads 3 3rd Roadimprovemenit Institutional Improvementof National andRural US$1.3mil. JSF 08/29/96 12/16/97 PMUI-Ministry oft'ransport Strengtthening roads 4 Saigon lPort Growth Rehabilitationof Port and Provisionof US$30mil. ADF 07/21/95 06/30/98 Saigon Port Authority new equipment 5 MIS for Saigon Port Institutional Provisionof MIS Tech. assistanceto US$0.5mil. JSF 07/21/95 03/30/98 Saigon Port Aitliority Strengthenlilng SP'A 6 Institutitonl! InstitLutional Implementroad transportsubsector US$1.9 nil. Bank 11/29/93 08/31/97 Ministry of Tranisport Strengtlieninig Strengtlieiling reforms 7 2nd RoadImprovement Institutional RehabilitationofNational lighlway US$2.1mil. JSF 11/29/93 08/31/97 MNiistry ofTransport IProject Strengthening 8 Red River Waterways Institutionial Assessimprovenients ofnavigable US$0.6 nil. JSF 07/24/94 01/17/98 Vietnai lilnlaid WaterwaysAdiniilistrationl Strengtliening waterways : 9 East-WestTranlsport Regional ImproveTransport Corridor US$3mil. JSF 11/06/94 05/01/98 Ministry of'Tranisport Corridor Developosenit 10 PhnomiiPenhl Hlighway Regional Improve Subregionalhigliway US$3mil. 1SF 11/09/95 11/20/97 MPWT Development II TransportIilprovemiient Instittitionial Prep.ofa roadimprovement and US$1mil. JSF Vietnam Road Adimiinistrationi and Strategic Planninig Strengthening maintenanceprograms-

ao ,

Soa AUSTRALIA 1. List of pastand ongoingactivities in the'I'ransport Sector

Implementing I'lani No. Nameof Plroject/ Objective/Scope Cost Financing Starting Completioll Implementing Agency or study Rcsource Date Date

I My rhtimanBridge T'o constrLcta cabie-stayedbridge acrossthe Tien (iiasg $A 91,000,000 GOA: 66% 06/97 11/01(including 12 GOA: AusAID arn of the Mekongriver near My Thuan GOA: 34% montlis'defects liability GOV: Ministry of' and commissioning 'I'ransport periodTrnot 2 Bridge in 'I'ra BIi To constructani itracommuie suspensionbridge inTra $A 50,000 GOA: 100% 04/97 10/97 WVifrra My District Commune Bui, Tra My district. QuangNam province PC

II. Tentative list of transport activities planned for 1998 onward

Implementinig ['lano No. Name ol' Project/ Objective/Scope Cost Financinig Starting CompIetioln Implemletinig Agency or study Resource Date Date

I Bridgeacross the Tranhi To constructa suspensionbridge connectinig Tra Bui $A 91,000.000 GOA: 50% 06/98 06/99 WV ITra My l)istriet P'C River communeand the district road in Ira My district, Quang GOV: 50% Nam11proviicce

2 'I'ra My Rural Infrastructure To repair the district road and constructsmall- and $A 2,000.000 GOA: 100% 06/98 03/01 UNCDF/Tra My District P'C Developmenit mediulim-sizesuspensionl bridges anid walk-ing paths in 8 selectedpoorer commi1unies otfTra My district, QuangNam province BELGIUM

ImplementingPlan No. Name of Project Objective/Scope Cost Financing Starting Completion ImplementingAgency Resource Date Date

BADL Corporation in the field of transportand Delivery spareparts, training in US$2,000.000 Belgium 05/95 03/98 VINH (Vietnam Bil 103 communicationwith Vietnam Railways maintenance,technical assistance (17 trains) Transurb-CMI (Belgium)

BADL Cooperationin the filed of engineering Study of the accessibilityto the Haiphong US$1,200,000 Belgium 04/95 01/97 Haecon(B) Bil 64 advisory servicesfor the generalstudy of the port US$100,000 Vietnam TEDI (V) accesschannel of Haiphongport BADL Feasibility studyof the Caimep Accessibility study US$700,000 Belgium 03/98 (06/99) (B) Bil 017 imultiptirposeport teriniial in Vongtau-Thi Environmentalstudy US$700,000 Vietnam TEDI Sath(V) Vai area BADL Feasibility study for the improvementof the Technicaland economical study lJS$1,580,000 Belgiumi 02/96 (10/98) Mekong Secretariat Bil/06 accesschannel to the BassacRiver - Haecon (B) Bml/06 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-MOT (V)

CANADA (CIDA)

ImplementingPlan , No. Name of Project/ Objective/Scope Cost Financinig Starting Completion ImpleimentingAgency Z or study Resource Date Date

I Vietnam Inland Waterways To strengthenthe capacityof theVietnamil Inland Can$4.3mil. Can$4.3mil. 1998 2002 VietnaimiInland WaterwaysAuthority. Project WaterwaysAuthority to efficiently andeffectively Yet to be chosen(Canadian) manageand develop waterways as safe,accessible. and economicallyviablc and environmentally sustainablemodes of transport 2 Vietnam-CanadaPolicy To establishan environmentimpact assessmentand Can$0.7mil. Can$0.7mil. 1995 1999 Ministry of Transportation. ImplementationAssistance managementcapacity in the Ministry of Transport Eyperco Project (a subcontractor) StikermanElliott (Canadian)

3 Vietnam-CaniadaMaritimie To strengthenVINAMARINE's capacityfor policy Can$1.0mil. Can$1.0mil. 1995 1998 VINAMARINE Project formulation and investmentplanning as well as in ports management,maritime safetyand port TransportCanada (Canadian) manlagement. t

o c DENMARK (DANIDA)

ImplemenitinglPlanl No. Nameof'lProject Objective Scope Cost Financing Resource Starting Completion ImpiementinigAgency (or Study) Date Date

I Ferry Project Build two new ferriesand US$15mil. ODA Denniark 04/96 06/98 DANIDA-:'MU.1 (MOT) upgrade10 existing ones

FRANCE

Implementiig Plano No. Name of Project Objective Scope Cost Financing Starting Completion ImplemenitingAgency (or Study) Resource Date Date

0 NIaritime Traiisportt I Buoying Systemson1 Saigon River and Flaiphong Port 7 MF 1990 1994 VietnamilMaritime Safety Agency 1992 2 1lydrography National Ceter (suibiiarineniapping) 8.5 MF 1993 1994 llydro Victnam 1994 3 Coastalsurveillance control centers 66 MF 1994 1995 VINAMARINE 1995 4 Firefighting boats 6 MF 1995 Ministry of Interior

Railways Transport 5 Cranefor breakdownlocomotives 14 MF 1996 Vietnam Railways 6 Outline manufacturedbogics plant 40 MF 1994 04/1998 Thang l ong Co-MOT 7 Signal and Telecommuniicationssystenis oti railways 58 MF 1997 VietnamiiRailways betweeni I lanoi and Vinh 8 Repairing railways tunnielsat llai Van Pass 52 MF 1997 Vietnam Railways

RoadTransport 9 Constructionof new GianihBridge 25 MF 1992 Thaig Lolg Co., MOT 10 Rehabilitationland upgradingofAAn Duong Bridge 7.5 MF 1995 Ministry ol Transport III Upgrading andwidening of Saigon Bridge 54 MF 1995 1ICMC People'sCommittee 12 Road Materialsassembly line 14 MF 1993 Ministry of'transport 13 Upgrading of''lrang I'icn Bridge (lHue) 7.2 MF 1993 ThanigLong Co.. MOT 14 Master llan ofTranlsport in the centerotVietnam 5 MF 1995 TDSI, MOT ImplementingPlan No. Nameof Project Objective Scope Cost Financing Starting Completion ImplementingAgency (or Study) Resource Date Date

15 Regional Studiesof Transportcorridor betweenl US$1mil. MOT Thailand, Vietnam and Laos(ADB program-French 'rutst Fund) 16 Hanoi Traffic lights 24 MF 1993 1995 Hanoi People'sCommittee 1995 17 HCMC Traffic lights 15 MF 1996 HCMC People'sComm1iittee 18 Remotecontrol centerfor cartographydatabase 15 MF 1994 GeneralDept. of Land Administration (mappingproduction using satellite images) 19 Secondhand busesand studiespilot bus line 3 MF 1991 Hanoi People'sCommittee 1992 20 Firefighting trucks 28 MF 1991 Ministry of Interior 1992 1994 1996 Airports 21 Airport equipmentfor Danang and Tan Son Nhat 19 MF 1991 Civil Aviation Administration of VN InternationalAirports 1992 22 TechinicalAssistance for thenew Noi Bai International 10 MF 1995 Civil Aviation Administration oi' VN Airport 23 Meteorologicalradar for Noi Bai IntemationalAirport 10 MF 1995 Civil Aviation Administrationiof VN 24 Airport eqtiipinent for Noi Bai InternationalAirport II MF 1995 Civil Aviation Administration of VN

oi GERMANY 0

implementing Plan No. Nameof lProject/ Objective/Scope Cost Financing Starting Completion IimplemilentingAgency or study Resource Date Date

I Passengertrains Improvemilenitof quality of passengerservices on US$95.500 - - VietnamilRailway/KtW unification line Hllaoi- lo Chi Minh City; safeguardinig/inicreaseof competitiveness of Vietnami Railway

2 Rehabilitationiof 15 main- Efficient operationand adequatemainteniance of the US$11,500 - 1998 VietnamiiRailway/KtW o liie locomotives 15 rehabilitatedlocomotives Z e- 3 Worklshopprogram Dananig Improvemeintof availability of locomotivesstationed US$4,800 - - Vietnam Railway/KtW 'z in Danangthroughi improved maintenance, improvementof the safeguardingof passengerand cargotransportation volume i

4 Supply of modernrailway Availability of suflicient cranecapacity to clearthe US$5,000 - - VietnamilRailway/KIW o cranes rails in caseof accidentsand for heavyconstructioni works

5 Supportto the reform of the Supportfbr Vietnam Railway toward its preparation US$i.700 - - VietnamiiRailway/GTZ VietinamRailway asa market-orientedenterprise

6 Urban Railway Systemof Developmentol a public masstransportation concept US$2.300 - 1999 Vietnam Railway/KfW Hanoi (study) ior Hanoi City, preparationof a rail-based transportationproject on feasibility level

JAPAN (JICA)

Implementilg Plani No. Name of Project Objective Scope Cost Financing Starting Completion ImplementingAgency (or Study) Resource Date Date

I ReconstruCtiionofbridges Reconstructionornewconstrutctionof 10northernprovinces US$37mit. Japan 1995 1998 Ministry of Tranisport in the NorthernDistricts small to mediumsized bridgeson (Grant-Aid) secondaryroads 2 TransportDevelopment in 1. To formuilatea transportM/P for 20 northernprovinces Japan 1995 1998 Ministry of Transport Northernin Vietnamii Northern Part of Vietinan (M/P) 2. Identify short term developimient project 3. TransfierTechnology ImplementingPlan No. Nameof Project Objective Scope Cost Financing Starting Completion ImplementingAgency (or Stidy) Resource Date Date

3 Cai Lan Port Construction I .To formulatean optimum port plan Haiphong Japan 06/93 03/95 JICA (F/S) to 2000 in Cai Lan 2. To confirm feasibility from techno., economic,finance and environment 3. TechnicalT'ransfer 4 Railway Rehabilitation I. To designrehabilitation plans Lao Cai-Hlaiphong,Hanoi-Lang Y 382 mil. Japan 02/94 02/96 JICA Lao Cai/Cai Lan- effective Son.Hanoi-I ICMC Haiphong(F/S) 2. To designfinancially self-sustained Hanoi-LangSon (F/S) & profitable plans I lanoi-HCMC (M/P) 5 Highway No. 18 To carry out F/S aimitig at theyear Noi Bai-BacLuan Y 184mil. Japan 07/95 03/96 JICA improvement(F/S) 2015 6 New HlanoiInternational I. To formulatea developmentplan to Noi lai, Tan SonNhat, Danang Japan 11/94 02/96 JICA Airport(F/S) theyear 2015 airports 2. To conducta F/Sfor mediumterm developmentto the year2015 3. Technologytransfer 7 tJrbanTransport Plan for I. To formulatea M/P foran optimum I lanoi US$2.5mil. Japan 03/95 05/98 1lanoiPeoplc's Committcc I lanoi city (M/P) transportationsystem in Hanoi :3 2. To proposeimmediate action plans & solutions 3. To conducta F/S for selected prioritizedprojects selected from M/P 8 CoastalShipping To conducta studyhuilding an Coastalprovinces US$3mil. Japan 12/95 02/97 VN Maritime Bureaut Rehabilitation& etTectivecoastal shipping system Development(M/P) Wt

9 ConstructionofThaih Tri To conductF/S forThanhTri Bridge Ilanoi X 1.7mil. Japan 03/97 10/98 Project Management Jnit Bridge(F/S) constructionincluding its approach& Thang Long Zs southernsection of Ring roadNo. 3 in lHanoiaiming at the year2010 10 P'ortDevelopment in 1. To formulatelong term port plans Thua ThieniHue, Quang Nam. Y 3.4 mil. Japan 09196 03/98 TransportFngineerinig Centralregion (M/P. F/S) aiming at 2010 QuangNgai DesignInstitute 2. To formulateshort term developmentplans up to 20160 1 s I Can Tho Bridge 1. 'fo identify the necessityof CanThu Can Tho Y 1.6mil, Japan 03/97 09/98 Project ManagementUnit Construction(F/S) Bridge My Thuan 2. To decidethe projectscale 3. To identify the benefitof thebridge C JAPAN (OVERSEAS ECONOMIC COOPERATION FUND) o

ImpleminctilngPlan : No. Name ol'Project Objective/Scope Scope Cost Financing Starting Completioni ImplementinigAgency ZS (or Study) Resource Date Date

I National Flighway No. 5 National Highway No. 5 is the princi- (a) Civi! works for the V 20,961 mil. OECF 01/95 07/01 Ministry of Tranisport lImprovemenitProject pal arterial road in the northern construction of the first class Vietnamil,running from Hanoi to highway Hlaiphong.The purpose of the project (b) Consultinlg services is to meet the rapidly increasitig road (i) Engineering consulting k traffic by improving 91 Km of the services Highway No. 5 (the section of the (ii) Management consulting highway between l-anoi ( Km 0) and services 1: > Km 47, and Km 62 and Haiphong (Km 106)

2 National HighiwayNo. I This project involves the reliabilitation (a) Civil work for the rehabili- V 15,537mi. OEFcl 12/94 07/01 Ministry ofTrarlsport Bridge Rehabilitation or replacement of priority bridges in tation/ replacement of the Iroject the sectiontsof National l lighway No. selected bridges on the National I between Hanoi and Vitih (285 Kin) I lighway No. I between I lanoi in northerin Vietlami , IICMC and Can and Viiln, Nha Trang and Tho (150 Kin), antdIICMC and Nha HCMC. and HICMCand Can Tratig (400 Kim) in Southern Vietrilai, Tho Trheformer two sections are to be (b) Consulting Services cofinanced with the Interiatiotial Development Association (IDA) of the World Bank, and tihethird section with the Asian Dcvelopmetit Bank (ADB) 3 Secotid National Highway This project involves tile rehabilitation (a) New construction of bridges V 7.146 mil. OECF 06/97 09/02 Ministry offTranisport No. I Bridge or replacemetlt bridges il the sections oit National HlighwayNo. I Rehabilitation lProject of National Highway No. I between between Hlanoi antdLatig Son I lanoi and Bac Giang (63 Kin) in (b) Replacement of bridges on Northerin Vietnam and Dong Hia atnd National I lighway No. I Nha Trang (689 Kni) in Central betweet [)ong Ha and Nha Vietnam. The former sections is to be Trang cofinanced with the Asian Develop- (c) Consulting Services ment Bank (ADB), and the later with the lIlternational Developtnent Association (IDA) of the World Bank 4 l lai VatnTtttillel The l-lai Van Pass stretch of National (a) Civil works V 5,500 nil. OECF 12/97 09/02 Ministry of Trallsport Construiction Project Ilighway No. I located in the North of (b) Consulting Services Danang is one of the most dangerous sections of the Hlighwaybecause of its tiarrow carriageway width and nature of the terrain. The purpose of'this proj- ect is to construct highway tunnels and access roads in the Flai Van Pass sec- tion of National HighiwayNo. I. and Implementing Plan Implementing Agency No. Name of Project Objective/Scope Scope Cost Financing Starting Completion (or Study) Resource Date Date

contribute to smoother traffic flow betweenthe country's northern and southern regions and to promote eco- nomic developrnent in the Central Vietnam Vietnam National Railways 5 Hanoi-HCMC Railway The purpose of this project is to ensure (a),Construction works for the V 1,437 mil. OECF 06/95 07/01 Bridge Rehabilitation the safety and reliability of train ser- rehabilitation of 8 deteriorated Project vices on the Hanoi-HCMC Railway bridges (Cho Thuong, Chanh Line Hoa, Bach Ho, Gia Vien, Truong Xyan, Ganh, Da Rang, Song Cai) (b) Consulting Services 02/99 Vietnam National 6 HaiphongPort The purpose of this project is to meet (a) Civil Works Y 3,975 mil. OECF 10/95 Maritime Bureau Rehabilitation Project the rapidly increasing demand of cargo (b) Procurement of port handling at the Haiphong port, the equipment of main port and largest port in northern Vietnam, by Chua Ve port area improving and enhancing its facilities (c) Consulting Services 07/01 Victinam National 7 Cai Lan Port Expansion The liaiphong Port. now being rehabil- (a) civil works Y 10,273 mil. OECF 10/97 Maritime Bureau Project itated and improved under OECF (i) Construction of berths and loans, has been and will continue to yards play a key role for sustaining economic (ii) Dredging of Navigation Z activities in northern Vietnam. How- channels Z ever, its physical nature of a river port (b) Procurement of cargo does not allow large cargo vessels of handling equipment for port more than 10,000 dwt to call at the facilities port. The purpose of this project is (c) Procurement of tug boats expand the existing deep-sea port of and service boats : Cai Lan, located at about 50 Km north- (d) Consulting services . east of Haiphong. Three berths will be (i) Consulting services for port added to the existing one berth in order expansion to cventually accommodate large cargo (ii) Review of EIA and vessels which cannot call at Haiphong environmental conservation Port.. measures

Z NETHERLANDS oo

lniplmenieitingPlan No. Nameof Project Objective Scope Cost Financing Starting Completioni ImplementingAgency Z (or Stuidy) Resource Date Date

I Upgradingof Inland Waterways Ideas US$2.4mil Bilateral 09/97 08/02 MOT/STC School No. I 2 Training for stafTofdredginig Ideas US$1.5mil Bilateral 1995 1997 VINAMARINE, MOT, SI1C companiesand ports s 3 Civil Aviation Training Training on airport managemiient. US$6mil. Bilateral 1998 2000 ATC, pilot training

UNITED KINGDOM

ImplementinglPlan No. Nameof Project Objective Scope Cost Financing Startihg Completion Impleiientinlg Agency (or Study) Resource Date Date

I Study of investmenitand To recommenda 10 yearprogram of US$2, 120mil. 06/94 12/95 SWK mainitenianiceStrategy for road,bridge, and ferry improvement,to National andPlrovincial estimatethe budgetneeds tbr road Roads mainitenianceand adminiistration and to determiniethe optimumbalance betweeninvestmeints and mainltenanice on the basisof assessedexpenditure priorities underalternative multiperiod budgetscenarios 2 Bridge 'restingand To provide consultancyservices for a US$1,080mil. 12/95 06/96 Tay Wood EvaluationMethodology portl'olio of topics concernedwith the upgradingof bridgesand improving the capability ofthe Ministry of Transportto manageits bridgestock etfectively 3 -ICMCTransport Study To provide a frameworkfor tlhe US$1,325mit. 05/96 ongoing MVA developmentof the transportsector in IICMC 4 ThIL'I'hiem river crossing To examineall the options for crossing 07196 ongoing Maunsell andto recomnmendthe most appropriateone 5 Rural AccessProject Improving rural roadsin four provinces up to 1999 2004 Unknown in Central Vietnam US$10,000mil. ANNEX 2 90 Annex 2.1: Transport Infrastructure Investment Proposals (MOT)

ANNEX 2.1: TRANSPORT INFRASTRUCTURE INVESTMENT PROPOSALS (MINISTRY OF TRANSPORT)

VIETNAM : PUBLIC INVESTMENTPROGRAM FORTRANSPORT, 1996-2010

No. Name of project Construction Finance Source/Status time (USS million)

I INTERURBAN ROADS I Highway No 1 (2 lanes) 1,570 a. Phase I: 555 - Hanoi-Vinh; Ho Chi Minh City-Can Tho 1996-98 176 ODA; World Bank and section (430 km) Government budget - implementing - Ho Chi Minh City-Nha Trang section 1996-2000 141 ODA; ADB and Government (435 km) budget - implementing - 38 bridges on these two sections 1996-2000 120 ODA; Overseas Economic Cooperation Fund and Government budget - implementing - Ca Mau-Nam Can section (52 km) 1995-98 18 Government budget b. Phase 2: 726 - Vinh-Dong Ha section (291 km), over- 1997-2003 236 ODA; World Bank and haul flooded sections from Dong Ha Government budget - finish to Quang Ngai and priority highways F/S - Hanoi-Lang Son and Dong Ha-Nha 1997-2003 358 ODA; ADB and Government Trang sections (870 km) budget - finish F/S - 19 bridges on Hanoi-Lang Son and Dong 1996-2001 72 ODA; Overseas Economic Ha-Nha Trang sections Cooperation Fund and Government budget - implementing - Can Tho-Ca Mau section 1998-2003 80 ODA; World Bank c. Construction of major bridges 289 - Gianh river bridge 1995-98 18 US$13 million from Government budget and US$ 5 million loans from France - Quan Hau bridge 1997-99 16 Government budget - My Thuan bridge 1996-2001 95 ODA; Australia - Can Tho bridge 1998-2004 100 ODA or BOT - Other major bridges 1998-2005 60 Government budget Annex 2. 1: Transport Infrastructutre 91 Investment Proposals (MOT)

No. Name of project Construction Finance Source/Status time (US$ million)

2. Hai Van pass tunnel 1997-2002 185 Overseas Economic Cooperation Fund + Government budget - Phase 1 65 - Phase 2 120 3. Bac-Nam highway (north-south 1998-2010 2550 Government budget; ODA; highway) (1,800 km) Others 4. Upgrading Unified Railway 600 - Rehabilitation 8 major bridges 1996-2000 150 ODA (Overseas Economic Cooperation Fund X 11,437 billion) + Government budget - Improving route, strengthen tunnels 1996-2003 150 ODA and Government budget - Other bridges and railway infrastructure 300 11. FOCAL ECONOMIC DEVELOPMENT REGIONS 11.1 Northern Economic Development Region (Hanoi-Haiphong-Quang Ninh) 5. Highway No. 5 285 - km 47-km 62 section 1995-97 50 ODA; Taiwan; and Government budget - km 0-47 and km 62-106 sections 1996-2000 235 ODA; Overseas Economic Cooperation Fund (Y 20,961 billion); and Government budget 6. Highway No 18 190 Phase 1(37 + 81 = 118 km) 1996-2000 70 ODA; Republic of Korea and Government budget - Phase 2 after 2000 120 ODA and Government budget 7. Highway No 10 (147 km) & 5 bridges: 1996-2000 50 ODA; Overseas Economic Non Nuoc, Tan de, Quy Cao, Kien, & after 2000 160 Cooperation Fund and Da Bach Government budget - Finish feasibility study 8. Noi Bai-Ha Long Highway 1998-2010 450 Government budget + Overseas Economic Cooperation Fund + others - Phase 1 1998-2005 230 - Phase 2 2005-10 220 12. Binh bridge 1997-2002 60 ODA (Holland US$26 million, Finland US$20 million) and Government budget 13. Upgrading Haiphong port . 100 - Urgent phase (6.2 million tons/year) 1996-2000 40 ODA; Overseas Economic Cooperation Fund (Y 3,975 billion) and Government budget - Next phase (7 million tons/year) after 2000 60 ODA 92 Annex 2. 1: Transport Infrastruicture Investment Proposals (MOT)

No. Name of project Construction Finance Source/Status time (US$ million)

14. Construction of Cai Lan port 423 - Phase 1(3 berths, 3 million tons/year) 1997-2000 130 ODA (Overseas Economic Cooperation Fund US$121 million); and Government budget - Phase 2 (21 berths, 20 million tons/year) 2000-10 293 ODA and Government budget 15. Upgrading Lao Cai-Yen Vien-Ha Long 180 ODA and Government budget railway 1996-2000 20 2000-10 160 16. Upgrading Hanoi-Haiphong railway 1998-2005 100 ODA and government budget 17. Improvement of river routes in Red 110 River Delta 1996-2000 50 ODA and government budget 2000-10 60 18. Upgrading Noi Bai International 400 airport - Phase 1 (4- 5 million passengers/year) 1996-2000 100 ODA and government budget - Phase 2 (10 million passengers/year) after 2000 300 Government budget and joint venture

11.2 Central Economic Development Region (Hue-Danang-Quang Ngai) 19. Set of ports in Danang 225 - Upgrading set of ports in Danang (2 1996-2000 25 ODA and government budget million tons/year) - Construction of a new port in Lien Chieu after 2000 200 ODA, Government budget & (10 million tons/year) others 20. Construction of Chan May port 1997-2010 80 21. Set of ports in Dung Quat 260 ODA + Government budget + BOT - Phase 1 (6.5 million tons/year) 1996-2000 130 - Phase 2 (> 20 million tons/year) 2000-10 130 22. Upgrading Chu Lai airport 1997-2005 100 Government budget + ODA + before 2000 30 BOT after 2000 70

11.3 Southern Economic Development Region (Saigon-Bien Hoa-Vung Tau) 23. Saigon-Bien Hoa-Vung Tau 450 BOT expressway 1997-2000 60 2001-03 390 24. Upgrading highway No. 51 1997 65 Government budget 25. Thu Thiem tunnel 1997-2002 100 BOT 26. Set of ports in Ho Chi Minh City (10 120 ODA and government budget million tons/ year for 2000 and 30 million tons/year for 2010) 27. Set of ports: Vung Tau-Thi Vai-Go 1,120 Dau - Ben Dinh-Sao Mai (International 1997-2010 640 BOT interchange port) - Cai Mep area 1998-2010 210 Joint venture Annex 2. 1: Transport Infrastrctulre 93 Investment Proposals (MOT)

No. Name of project Construction Finance Source/Status time (US$ million)

- Thi Vai area 1996-2005 240 Joint venture - Go Dau area 1996-2000 30 Government budget 28. Phu My Port (National port) 2000-10 130 Government budget 29. Improving river routes in Cuu Long 150 River Delta 1996-2000 75 ODA; World Bank and 2000-10 75 Government budget 30. Construction of Saigon-Vung Tau 2000-10 200 ODA or BOT railway 31. Upgrading Tan Son Nhat International 500 ODA or joint venture airport - Expanding, upgrading stations 1995-2000 50 - Upgrading runways. Construction of new 2000-10 450 international passenger station 32. Construction of new airport in Long 2005-10 500 Government budget + ODA or Thanh area BOT

Ill. WEST-EAST CORRIDOR AND ASIA-TRANSAXES 33. Construction of West-East corridors 1998-2005 180 ODA, ADB (Highway Nos. 8, 9, 18B) 34. Highway linking Bangkok-Phnom 1997-2002 140 ODA (ADB US$100 million) + Penh-Ho Chi Minh City Government budget (USS80 million)

IV. OTHER REGIONS Northern 35. Lang-Hoa Lac expressway 140 Government budget - Phase 1 1996-98 60 - Phase 2 1998-2000 80 36. Cua Luc bridge 1998-2003 60 ODA or BOT

Central 37. Rehabilitation of highway linking 150 Government budget Highway No. I to Western Highland 1995-2000 50 (Highway Nos. 19, 20, 24, 26, 27, 28) 2000-10 100 38. Upgrading Highway Nos. 14-14B (Da 350 Government budget and others Nang-Tay Ninh 900 km) - Buon Me Thuat-Chon Thanh section 1997-2000 50 - Other sections 2000 300 39. Other Special and General ports (Nghi 200 Government budget & joint Son, Cua Lo, Qui Nhon. Nha Trang, 1996-2000 40 venture Cam Ranh, System of ports in Cuu 2000-10 120 Long river delta, Con Dao, Phu Quoc) 39. Vung Ang port (Including road linking 130 Funded by Lao PDR the port to Viet-Lao border) - Phase 1 1998-2000 30 - Phase 2 2000-10 100 40. Saigon-Loc Ninh railway 1998-2000 50 ODA + Government budget 94 Annex 2.1: Transport Infrasrruictzure Investment Proposals (MIOT)

No. Name of project Construction Finance Source/Status time (USS million)

V. URBAN TRANSPORT 41. Ring roads and radial axes in Hanoi 2500 - PhaseI 1997-2000 400 ODA or BOT and others - Phase2 2,100 ODA or BOT and others 42. Urban railway for Hanoi (Gia Lam- 2000-05 600 ODA or BOT Giap Bat route) 43. System of the main roads in Ho Chi 1996-2010 400 Government budget Minh City 44. Facilities, equipment for public 180 ODA or BOT and others transport - Hanoi 1996-2005 80 - Ho Chi Minh City 1996-2005 100 45. Urban railway in Ho Chi Minh City 2005-10 900 ODA or BOT 46. Strengthen urban transport manage- 1997-2000 45 ODA (World Bank) and ment in Hanoi and Ho Chi Minh government budget City.

V]. RURAL TRANSPORT 47. Project of rural transport 1997-2000 61 ODA (World Bank) and government budget 48. Mountain and rural bridges 130 - Phase I in the North 1996-98 45 JICA + government budget - Phase 2, 3 in the Central, & South 1997-2002 85 JICA + government budget - others 49. Projects under the Program of Rural 1997-2000 75 ADB development (Managed by Ministry of Agriculture & Rural Develop- ment)

VIl INDUSTRY 50. Infrastructure of Shipping Industry 509 Joint venture and government 1996-2000 104 budget 2000-10 405

Total 18,213

Source: Ministry of Transport. .4nnex 2.2: VietnamRailwavs: Making the Transition 95

ANNEX 2.2: VIETNAM RAILWAYS: MAKING THE TRANSITION

Introduction 1. Vietnam Railway is similar to most of the railways in the formerly socialist, planned economies. Vietnam Railway focused on output levels and meeting plan requirements, with less regard for quality of service, cost of operations or economic justification of investment plans. In the absence of effective competition, Vietnam Railway operated well enough physically and financially to survive, but it is not familiar with linkages among cost, quality and demand for its services. 2. In the transition to a market economy, though, Vietnam Railway and the Government of Vietnam are meeting many of the same challenges that have already appeared elsewxherein formerly socialist railways, especially the need to disentangle the Government and railway roles and the need for Vietnam Railway to be able to respond to market signals. In addition, the Government has encountered the same shortage of investment funds as the other transition economies and Vietnam Railway has paid its share of the price through undermaintenance of its tracks and, especially, bridges. Today, Vietnam Railway and the Government need to define a stable future role for the Railway and establish a source of funding for that role.

Vietnam Railway in Physical Terms 3. The Vietnam Railway network extends from the Chinese border (two connections, one- meter gauge at Lao Cai and one standard gauge at Dong Dang) to Ho Chi Minh City in the south, a total of 2,832 km, of which 2,432 km are meter gauge, 400 are standard gauge (1,435 mm) and 228 km are dual gauge, which are double-counted in the above. See attached Railway Route Map. There is no electrification. Vietnam Railway has 359 diesel locomotives (and is still carrying 67 steam locomotives on its books, though they are not actively used). It has 765 passenger coaches and 4,107 freight wagons. 4. Table 1' contains a series of comparisons of VietnamnRailway with a number of other railways. It appears to be roughly comparable in scale with most of the other smaller Asian

The meaningof VietnamRailway statistics is often not clearly defined,and the numbersare not alwaystotally consistent from one source to another, or from one annual edition to another within the same source. The numbers presented in this chapter are taken from a number of sources, particularly Vietnam Railway documents,Overseas Economic Cooperation Fund reportsand GTZ analyses.In some cases, a judgmentwas made to use a particularsource eventhough other sources couldhave producedslightly different comparisons. The numbersare usually similarenough, or the conclusionsrobust enough,that nothing of importancewould change. 96 Annex 2.2: VielncamRailwvays: laking the Transition

railwavs. with China and India being much larger. In fact, Vietnam Railway is not dramatically different from many of the smaller European railways. Overall, the size of Vietnam Railway does not present the kind of problems of sheer scale the Bank has encountered in China or India, and the potential Bank involvement could have an impact. Based on reports prepared for Gesellschaft fir Technische Zusammenarbeit (GTZ)2 and the Overseas Economic Cooperation Fund.3 the main short-term physical problems of Vietnam Railway are related to its large number of deteriorated bridges, some of which are currently under repair, with Overseas Economic Cooperation Fund assistance. Other donor pro-rams are related to typical bilateral concerns such as spare parts and communications system investments.

Vietnam Railway in Operational Terms

5. Table I also contains a series of comparisons of Vietnam Railway's efficiency and productivity with the same sample of comparator railways. This table supports several significant conclusions. First, Vietnam Railway's ratio of passenger traffic to total traffic ("Ratio: passenger: pass-km/traffic unit: TU") is 56.7%. Though this is not high by comparison with the others, it does suggest that in looking at Vietnam Railway's future role the focus should be on the passenger versus freight roles: passenger markets pose different issues, especially with respect to "social" significance than do freight markets. Second, Vietnam Railway's locomotive productivity is low, suggesting either that its services are inefficiently dispatched or that it has too many locomotives. Third, Vietnam Railway's physical labor productivity is extremely low. Although low wages have permitted it to keep the ratio of wages to revenues in line with many of the others, the Railway faces a severe potential problem in the future when wages in the economy begin to rise: planning for labor reductions should begin now. Fourth, Vietnam Railway's ratio of passenger tariffs to freight rates is relatively high for a developing economy, suggesting that the typical freight-to-passenger cross-subsidy may not be as scrious as in most other developing countries. This may also be a result of the fact that Vietnam Railway's average length of haul for passengers, 227 km, is relatively long, demonstrating the absence of suburban or commuter traffic (which reduces the average length of the passenger trips, and inevitably has politically suppressed tariffs). Finally, Vietnam Railway's traffic density, at 1.13 million TU/km (TU, or Traffic Units, are the sum of ton-km plus passenger-km), is low, indicating the presence of underutilized trackage.

6. Vietnam Railway's relatively low average traffic density conceals a more fundamental point. The attached Vietnam Railway System Diagram (and its accompanying Table 2) shows the traffic density by line segment. The diagram does show line segments that have relatively little traffic, leading to low average traffic density. Much more important in understanding the role of

2 "Unterstuetzung bei der Restrukturierun, von Vietnam Railways," GTZ, January 1996. Also, Dr. Manfred Meithner, 'Kosten und Leistungsrechnung der Vietnam Railways nach Linien," 1997.

3"Final Report (Draft) for Special Assistance for Project Implementation for Hanoi-Ho Chi Minh City Railway Bridues," Overseas Economic Cooperation Fund, February 1998. Annex 2.2: VietnanmRailivavs: Making the Transition 97

Vietnam Railway, though, is the fact that the traffic density at the midpoint of the line from Hanoi to Ho Chi Minh City (Vinh-Thuan Ly and Thuan Ly-Dieu Tri) is extremely low. In fact, Vietnam Railway appears to be two railways, one in the north, another in the south. with very little traffic interchanged between them. Vietnam Railway's potential ability to integrate the country from north to south may have political significance; but, there is very little actual rail traffic moving the full distance from north to south.

7. Table 3 furnishes another indication of the essentially biregional nature of Vietnam Railway's activities. Although Table 3 shows a railway heavily concentrated in bulk commodities (as it should be), only a few commodities (fertilizers, chemicals, foodgrains, foodstuffs and general goods, totaling 13.4% of ton-km) have a long enough average length of haul to indicate that they might cross railway regional (Union) boundaries. The major commodities, coal, cement, apatite and stone all have average lengths of haul around 150 to 220 km, well less than the 700 km lengths of the regional railway organizations.

8. One of the reasons for the shortage of long-haul, north-south traffic can be seen in the attached Figures IA and I B showing freight ton-km and ton-km share by mode in Vietnam since 1980. The vast majority of Vietnam's long-haul low-value domestic freight moves by "ocean" or intracoastal water, for which the north-south bulk commodity shipments are ideally suited (and for which Vietnam Railway will probably never be fully competitive). In fact, though the freight traffic on all modes has grown, intracoastal water (average haul 2,219 km) has grown more rapidly than all others, an unusual trend in most developing countries where modal share has tended to accrue to the mode offering better service, usually trucking: clearly, intracoastal water has captured the major share of longer-haul Vietnamese bulk freight traffic.

9. Figure 2 compares Vietnam Railway's passenger and freight traffic, trucking freight and auto/bus traffic with the growth in GDP. Figure 2 shows that Vietnam Railway's freight traffic, along with truck freight traffic, has grown slightly faster than GDP, which is consistent with experience elsewhere and which indicates that its freight traffic could well be expected to grow in the future if the Railway adopts an appropriate posture vis-a-vis a market-driven transport sector.

10. Figure 2 shows by contrast that Vietnam Railway's passenger traffic nose-dived beginning in 1987 and has lagged GDP growth since 1990, with a minor upturn beginning in 1994. Figures 3A and 3B show that Vietnam Railway's share of passenger traffic has been continuously falling, with all of the growth in market share accruing to road traffic, fully consistent with experience in every other country.

11. Figures 4A and 4B put Vietnam Railway into a somewhat wider Asian smaller railway perspective. Despite the problems faced by Vietnam Railway, its freight traffic has grown more since 1990 than in any of the other smaller Asian railways, though Indonesia was close (1997-98 data not yet available). Even with its passenger losses, Vietnam Railway has held its ground in the passenger market as well as any of the comparable railways in the sample. Agreeing that all of these railways face serious challenges, it is difficult to argue that Vietnam Railway is an 9 c' Annex 2.2. Vietnam Railways: Making the Transition

exceptionally poor performer: quite the reverse, it seems likely that a market-driven Vietnam Railway might well face favorable traffic growth prospects.

Vietnam Railway in Organizational Terms

12. Until 1989 Vietnam Railway was operated as a direct government ministry with control centralized in Hanoi. Actual operations were carried out by three geographic regions called "Unions" (see System Diagram). In addition, Vietnam Railway operated a wide range of nonrail activities such as tourism, commercial services, restaurants, hotels, etc. This was, in fact, the typical socialist railway model, with a single, autarkic ministry that produced all of its outputs and most of its inputs, and provided a total support system for staff (schools, hospitals, stores, etc.).

13. In 1989, the Government and Vietnam Railway implemented an initial organizational change in which Vietnam Railway became an independent enterprise with more control over its decisions, direct assignment and control over assets used in operations, and a system of pay in which perfonnance was to be rewarded with pay incentives. In common with experience elsewhere, although this change did begin the process of focusing Vietnam Railway's efforts on transport, it did not actually produce an independent Railway, and it did not result in stable finances because the Railway did not fully have control over the major parts of either its revenue generation (tariffs) or costs (particularly labor). Vietnam Railway's losses actually grew (see discussion below) at the same time as pressure on its finances (and government fiscal resources) began to intensify.

14. In January 1995, the Government of Vietnam and Vietnam Railway entered into a new agreement in which the Government has taken over the responsibility for infrastructure costs, whereas Vietnam Railway is to be financially independent on an operating cost basis. In return, Vietnam Railway pays the Government 10% of its operating revenues The former regional organization, complete with regional "profit centers," has essentially remained unchanged. though divided into Transport versus Infrastructure for accounting purposes. Based on experience with other socialist railways, this means that most decisions are actually made in regional headquarters, with the central headquarters in Hanoi retaining most of the governmental relations, safety and regulatory functions, along with control over nonrail and social functions.

15. It is also significant to note that regional profit centers in socialist railways usually generate a great deal of useless negotiation over division of revenues of interregional traffic along with destructive and costly practices such as changing locomotives at regional boundaries, unnecessary wagon marshaling at regional boundaries, political power plays over investment budgets, etc. In this case, Vietnam may be the exception: since so little traffic actually travels across Vietnam Railway's regional boundaries, the regional structure may not make much difference, and it may reflect a rational decentralization of daily decisionmaking. Annex 2.2: Vietnam Railwavs: Making the Transition 99

Vietnam Railway in Financial Terms

16. It is difficult to make definitive statements about Vietnam Railway's finances, both because the traditional methods of bookkeeping do not lend themselves to financial analysis and because Vietnam underwent a significant period of inflation (almost a factor of 12 between 1988 and 1997). Detailed financial analyses of approximate numbers would serve no useful purpose.

17. In order to give a general indication of the results, the GTZ costing study analyzed the effect on Vietnam Railway of the infrastructure separation. According to this study, Vietnam Railway's losses were as follows:

1990 1991 1992 1993 1994 1995 (D billion) Total Revenue 143.3 277.3 394.0 469.8 607.1 798.3 Total Costs 159.1 299.4 422.9 530.4 757.0 1006.7

Deficit 15.8 22.1 28.9 60.6 149.9 208.4

18. According to Vietnam Railway reports,4 operating losses in 1995 and 1996 were zero. Given that the 1995 total costs calculated by the consultant included an infrastructure fee of D 80.9 billion, the 1995 balance is consistent with total infrastructure costs of D 289.3 billion, of which the Government assumed "responsibility" for D 208 billion.

19. Thus, the reported break-even on operating costs alone is not necessarily an improvement, but actually probably a slight deterioration in results. More ominous, Vietnam Railway reports5 that the Government actually only paid about one-third of its obligation (one- third was paid by letting Vietnam Railway keep its contribution): Vietnam Railway made up the difference by having the Operating Departments "borrow" the money from government banks (the Government is supposed to repay the principal but not the interest) and then "lend" it to the Infrastructure Departments. The net effect of the financial transfers is to permit Vietnam Railway to claim that "it is the first time in new policy, Vietnam Railway has operated non loosing [sic] money in 1995 and 1996." In fact, Vietnam Railway's net cost to the economy has not decreased, and may have actually increased when the actual cost of infrastructure management and rehabilitation is known.

Conclusions

20. If it is permitted and assisted to adapt its costs and services to the needs of the emerging Vietnamese market economy, there is almost certainly a reasonable role for Vietnam Railway to play. It is probable that this role will involve a mixture of commercially self-supporting services,

4 See "VietnamRailways on the Way to Renovation,"Vietnam Railway 1997.

L.S. Thompson interview with Nguyen Trong Bach, Deputy General Director of Vietnam Railway. 100 Annex 2.2: VietnamRailways: Making the Transition

especially freight in the north and around Ho Chi Minh City, and explicitly "social ' services such as maintaining the continuity of the north-south line. Other services, such as lightly used branch lines, might be abandoned. Certain aspects of the costs of service, particularly labor productivity, could be targeted for improvement as well. Table I showed Vietnam Railway's labor productivity to be quite low by any comparable standard. Figure 5 shows that the Railway has made some progress in improving its labor productivity, but still has not brought productivity back to earlier levels, and could easily double or triple its productivity target. The same can be said for locomotive productivity (see Table 1). Clearly there is a great deal that could be accomplished.

21. Based on the Bank's experience in other, "reforming" socialist railways, however, it is far too early to be certain of the role which the economy will eventually demand of Vietnam Railway, and neither Vietnam Railway nor the Government has a clear idea of how to proceed. Results to date of the Overseas Economic Cooperation Fund and GTZ efforts confirm that Vietnam Railway has been slow to change and to adopt commercial approaches to management, though the recent installation of a "marketing department" indicates that Vietnam Railway is beginning to be aware of the need to respond to customer demands. Unfortunately. it is not clear that the Government will give Vietnam Railway the full flexibility to respond to market demands even if it wants to do so.

22. Thus, though there is very good reason for the Bank to be willing to assist Vietnam Railway in filling its productive role in the overall transport sector, initial efforts should focus on clarification of government policy and objectives, restructuring of Vietnam Railway, and development of the management tools needed in order to design and manage the process of reform. This could be done through a minimum-cost loan (the learning and innovation loan format would be appropriate) to get the process started and see if a clearer program of reform can be agreed. If such a program can be developed, this would set the basis for a more substantial Bank involvement.

23. Such an initial program would include a series of steps. These steps were developed based on Vietnam Railway's currently stated plans, plus extension of the plans in areas that would clarify the reform process. The proposed steps are also in accord with the objectives of GTZ and the Overseas Economic Cooperation Fund if Vietnam Railway is willing to proceed.

Proposed Initial Steps

24. The current accounting separation of infrastructure from operations should be strengthened by instituting a charging system within Vietnam Railway for its operating departments. The charging system would recover from Vietnam Railway track users all costs not paid by the Government and should be based on measures of the users' infrastructure use (gross ton-km, axle load, speed, time and duration of use, etc.). The Government of Vietnam will retain the responsibility for paying for an appropriate share of infrastructure based on government policy goals related to social and environmental objectives. In order to improve the efficiency of track use, Vietnam Railway's compensating payment to the Government for infrastructure use Annex 2.2: Vietnam Railways: Making the Transition 101

should be converted from the existing charge of 10% of gross operating revenues to a system based on a fixed annual payment plus an incremental payment based on the track use by each of Vietnam Railway's operating departments. 25. Vietnam Railway's operating accounts should be divided into three parts: passenger, freight and nonrail. Vietnam Railway would calculate the contribution ('"profit and loss") for each of these accounts (and optionally in accord with freight subaccounts within these, such as "Cement" or "Coal," etc. and such appropriate passenger subaccounts as passenger services of various levels and types). "Nonrail" should include all activities that are not related to operating rail services, including real estate, manufacturing, and social activities, among others. This division of operating accounts will permit focus and management of Vietnam Railway's marketing efforts. 26. For administrative purposes, "Infrastructure" may be divided and managed at the Union level subject to Vietnam Railway-wide safety and engineering standards. Services originating and terminating wholly within one Union may also be managed ("managed" means setting service schedules and tariffs) at the Union level, though this should be approached with caution in order to avoid conflicts between services managed at the Union level and national services (passenger and freight trains crossing Union boundaries). 27. Vietnam Railway would develop costing models (computer-based) so that route-specific, origin to destination "variable" or "marginal" costs specific to particular types of traffic may be calculated. Model variables for freight should include at a minimum: origin, destination, route, commodity, shipment size, and wagon type, among other relevant variables. Model variables for passenger should include at a minimum: origin, destination, route, type of service, quality of service, and coach type, among other variables. It is possible that the models will need to be formulated separately for meter gauge versus standard (or mixed) gauge operations. Such models are readily available elsewhere in the world but would need to be adapted to Vietnam Railway's data and practices. 28. With Bank assistance, Vietnam Railway would develop a computer-based financial forecasting model that will permit five-year forecasts of the income statement, balance sheet and cash flow statement based on relevant planning variables including; traffic forecasts, tariff assumptions, productivity change plans, investment plans, financing actions, etc. 29. Using the above tools and studies of the market in Vietnam for transport (and rail) services, Vietnam Railway would develop a five-year business plan for each of its activities (infrastructure, passenger, freight and nonrail) and present the plan to the Government and to potential donors and lenders for review and discussion. The business plans could serve as the basis for financing assistance from international lenders and donors. 30. Vietnam Railway would be given freedom to institute services and tariffs in accord with its commercial judgment. If the Government wishes to require services or tariffs to be performed, then the Government would be willing to pay a subsidy to cover the costs of such services in addition to its infrastructure responsibilities. 102 Annex 2.2: Vietnam Railways: Making the Transition

TABLE 1: COMPARISONS OF RAILWAY EFFICIENCY AND PRODUCTIVITY

Employee Total Wages/ Ratio of Locomotive Wagon Ratio: Traffic Produc- Total Passenger Fares Productivity ( 000 Productivity Pass-km/ Density: tivity Revenues to Freight Rates TU per Loco + ( 000 ton-km per TU TU/km MU/MU Factor) Wagon)

Vietnam 115 0.41 0.69 8,405 417 56.7 1.13 China 487 0.14 1.04 129.053 2,975 17.0 30.05 Indonesia 441 0.15 0.54 37.367 357 75.6 3.24 Korea. Rep. of 1,204 0.56 1.12 71.052 949 68.1 13.87 Malaysia 408 0.69 2.53 20,943 336 47.3 1.49 Thailand 612 0.77 0.57 55,208 343 77.6 3.93 Philippines 92 2.43 0.14 9.112 17 98.0 0.48 India 359 0.40 0.33 81.835 891 56.7 9.20 Pakistan 230 0.55 0.24 37,588 190 78.8 2.73 Sri Lanka 186 1.38 0.14 30,569 54 95.4 2.25 Austria 381 1.57 1.04 19,064 474 41.2 4.12 France 571 1.11 1.36 19.333 415 54.6 3.24 Greece 160 3.73 0.40 7.472 29 83.2 0.77 Sweden 1,164 0.73 4.13 30,282 875 24.7 2.58

TABLE 2: VIETNAM NATIONAL RAILWAYS: TRAFFIC DENSITY BY LINE SEGMENT

km in line ton-km pass-kmn Traffic Units Traffic Units/km

Total 2,581 1,803 2,129 3,932 1.52

Union 1 1,377 974 1,192 2,166 1.57 Union 2 574 139 295 434 0.76 Union 3 630 690 642 1,332 2.11

1. Hanoi-Haiphong 102 80 112 192 1.88 2. Hanoi-Dong Dang 166 86 39 125 0.75 3. Hanoi-Quan Trieu 65 20 15 35 0.54 4. Hanoi-Lao Cai 286 383 224 607 2.12 5. Luu Xa-Kep 55 0 0.00 6. Kep-Halong 106 38 10 48 0.45 7. Hanoi-Bac Hong 44 16 7 23 0.52 8. Hanoi-Ho Chi Minh City 1,757 1,180 1,722 2,902 1.65 8.1 Hanoi-Vinh 319 335 769 1,104 3.46 8.2 Cai Giat-Ngia Dan 31 3 3 0.10 8.3 Vinh-Thuan Ly 203 12 16 28 0.14 8.4 Thuan Ly-Dieu Tri 574 139 295 434 0.76 8.5 Dieu Tri-Ho Chi Minh 630 691 642 1,333 2.12 City Annex 2.2: Vietnam Railways: AMakingthe Transition 103

TABLE 3: VIETNAM RAILWAY'S FREIGHT TRAFFIC BY COMMODITY, 1994

Commodity Tons Ton-km Revenue % ton-km Average Haul Revenue/ ('000) ('000) (D million) (km) ton-km

Coal 763,748 92,414,920 26,181 19.1 121 283 Machinery 79,291 35,878,116 9,118 2.0 452 254 Apatite 550,855 123,598,949 27,668 13.8 224 224 Fertilizers 272,000 256,259,907 43,584 6.8 942 170 Chemical 64,452 53,219,941 10,391 1.6 826 195 Cement 826,772 182,196,827 46,278 20.7 220 254 Earth Stone 744,886 105,977,736 21,034 18.6 142 198 LogandTimber 118,909 55,141,256 12,714 3.0 464 231 Food Grains 74,936 88,912,732 15,978 1.9 1,187 180 Foodstuff 80,470 126,037,969 28,997 2.0 1,566 230 General Goods 45,795 72,877,630 19,113 1.1 1,591 262 All Other/a 377,886 177,484,017 40,274 9.4 470 227

Reported Total 4,000,000 1,370,000,000 301,330 100.0 343 220

/a Calculated. 104 Annex 2.2. Vietnam Railivavs: Making the Transition

FIGURE IA: FREIGHT TON-KM IN VIETNAM

25000 .______

- Rail _Road 20000 -Inland Waterway -Intracoastal Waterway

15000

10000

5000

0

1980 1982 1984 1986 1988 1990 1992 1994 1996 Year

FIGURE 1B: MODAL FREIGHT SHARES (% OF TON-KM)

80.0......

70.0

60.0

50.0 Rail

- Road 40.0 lnland Waterway - IntracoastalWaterway

- 30.0

20.0

0.0 1980 1982 1984 1986 1988 1990 1992 1994 1996 Year Annex 2.2. Vietnam Railways: Alaking the Transition 105

FIGURE 2: VIETNAM TRAFFIC TRENDS VS. GDP

300.0

- Rail Passenger-Km Rail Ton-Km 250.0 ^ 1990=100E , , / \ ~~~~~~~~~~-dGDP: \ / \ ~~~~~~~~~~~~ORoadFreight Passengeri \ / \ ~~~~~~~~~~~*Road 150.0

100.0

50.0

0.0 1992 1994 1996 1998 1980 1982 1984 1986 1988 1990 Year

FIGURE 3A: PASSENGER TRAFFIC IN VIETNAM

16000 r

14000 1 Rail _Road

12000 Inland Waterway

10000

8000

6000

4000

2000

0 1992 1994 1996 1980 1982 1984 1986 1988 1990 Year 106 Annex 2.2: VietnamRailway's: .laking the Transition

FIGURE 3B: PASSENGER TRAFFIC SHARES (% OF PASS-KM)

90.0-,____ -__

80.0

70.0

60.0

50.0 Rail -Road

,40.0 -"Inland Waterway

30.0

20.0

10.0

0.0 1980 1982 1984 1986 1988 1990 1992 1994 1996 Year

FIGURE 4A: FREIGHT TRAFFIC TRENDS IN SMALLER ASIAN RAILWAYS

250.0 r------

Indonesia Republicof Korea Thailand- 200.0 et'a a- - Viet Nam , , _ Pakistan Sri Lanka _'Philippines 150.0

100.0 g

50.0

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 Year Annex 2.2: 1'ietnam Railways: Making the Transition 107

FIGURE 4B: PASSENGER TRAFFIC TRENDS IN SMALLER ASIAN RAILWAYS

300.0 r

Indonesia Republicof Korea 250.0 p Thailand - - Viet Nam

7 Pakistan Sri Lanka 200.0 . 'Philippines

150 0

100.0

50.0 ..-

0.0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 YEAR

FIGURE 5: EMPLOYEE PRODUCTIVITY AT VIETNAM RAILWAY

140

120

100

- 80

60

40

20

0 1986 1988 1990 1992 1994 1996 1998 Year Vietnam Railway Map Vietnam Railway System Diagram

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[ICICC (( 726 A nnex 2.3: Iietnum Ports and Shipping 109

ANNEX 2.3: VIETNAM PORTS AND SHIPPING

SUMMARY' ASSESSMENT

1. In the last two decades. Vietnam enjoyed large-scale economic growth, which in turn has led to a rapid growth in maritime trade for both imports and exports. which reached some 28 million tons in 1996. The recent recession in most of the East Asian economies (the markets for some 60% of Vietnam's exports)' brought about a decline in the affected countries' purchasing power and with it certain repercussions on Vietnam's exports. The trend regretfully continues, and future growth of Vietnam's exports /imports-and with it its maritime trade-can therefore be expected to follow the growth trends of the East Asian economies. As an indicator of the situation it may be noted (see Table 1) that the total amount of goods loaded and unloaded in the three main ports under Vinaline's authority (Haiphong. Danang and Saigon) was 12.2 million tons in 1997 as against 13.0 million tons in 1996, i.e.. less 6% (exports increased 1%, imports decreased by 9°/o-mainly: fertilizer, steel. iron and cement). Vinaline's traffic forecast for these three ports for 1998 is 13.0 million tons, i.e., same as 1996. The reduction occurred, despite the fact that the actual share of the cargo handled in containers (both imports and exports) was higher in 1997, as containerization is merely a form of packing mainly for high-value cargoes. and containerization per se will only marginally increase the total volumes of trade. In the absence of updated official 1997 statistics for the maritime ports not under Vinaline's authority, and for Vinaline's ports for 1998 it has been assumed that Vietnam's overall 1997 maritime traffic was 26.0 million tons and in 1998 will regain the 1996 level, i.e.. 28.2 million tons.

Vietnam's Port Sector Challenges

2. Vietnam's international trade requires adequate and efficient port facilities and effective operational systems and management. Inefficient port facilities create operational congestion, increase ship waiting time (leading to surcharges on freight rates for both imports and exports). and eventually cause shipping companies to use mainly old and slow vessels which in turn further lower Vietnamese ports' outputs. 3. Vietnam's ports. like many others. have to meet the twin challenges: Handling growing maritime traffic and meeting the demands of changing ship technology. Containerization, which was initially considered an imposition by industrialized countries (wanting to mechanize cargo- handling operations, reducing labor costs at the transfer points, and providing security and safety of goods) has taken root in Vietnam. In 1996 some 670,000 twenty-foot equivalent units (TEU)

I Source: Vietnam General Department of Customs. customs statistics, first nine months of 1998. I/0 Annex 2.3: VietnamPorts and Shipping

were handled in the country's three main regional ports groups: Haiphong and the northern ports-150,000, Danang and the central ports-20.000 TEU; and Saigon and the southern ports-500,000 TEU (Table 2). While older container vessels had their own on-board gear to lift containers, the third-generation vessels, with larger carrying capacities, generally do not. Vietnam's ports, as ports in many developing countries, incurred considerable expenditure (such as specialized container berths and cranes, roll-on/roll-off ramps, container yards and freight stations) to adapt to the new technology.

OPTIMIZING THE USE OF ExISTING ASSETS AND CONSTRUCTION OF ADDITIONAL PORT FACILITIES AND SYSTEMS

4. The burden of port investment in Vietnam is more onerous because of the scarcity of capital for development. Possibly with the exception of Ho Chi Minh City's main port, most Vietnamese ports have spare capacity for meeting the demand for additional traffic without large capital inputs, even if at times, because of btnching of arriving vessels, there is a certain pressure on facilities. The Vietnamese authorities should use the lull in the East Asian economic activities and establish an action plan for increasing the throughput capacities of the various ports by tapping the potential of existing facilities through: improving operational systems, including incentives for both workers (piecework) and management (port throughputs); training of port operations staff, supervisors and management; increasing control and supervision; improving organizatiori methods; synchronizing working hours of interfacing agencies (customs, immigration, health authorities railways, etc.); improving maintenance levels and availability of cargo-handling equipment and possibly procuring certain additional equipment; and maintaining the ports' operational areas (including selective dredging and minor civil works). The above activities would be instrumental in postponing substantial constructions of new facilities for at least five years. 5. Making full use of existing facilities should be paramount prior to any considerations on investing Vietnam's limited resources (even when provided by grants or bilateral assistance programs) in major expansion of port facilities. Requirements generated by increased shipbome traffic and changes in cargo packaging and handling technologies should firstly be met by optimizing the use of existing facilities and systems; secondly, by rehabilitation and minor expansion of existing facilities ; and lastly, by construction of new port facilities. The need to use scarce capital for new investment wisely requires a critical evaluation of all investment alternatives and the choice of the most appropriate option in terms of its content, scale and timing, as well as its economic and financial viability. Experience has shown that construction of new port facilities will generally take less time than the generation of the additional traffic justifying overdesigned new port facilities. Port and Vessel Operations 6. As in ports of many developing countries, the low cargo-handling rates per gang (hook)- hour or per shipday at berth in Vietnamese ports are caused by two main factors: Annex 2.3: Vietnam Ports and Shipping III

* the port: nonavailability or lack of well-maintained suitable cargo-handling equipment; and lack of trained port labor (both stevedores and shore labor), inadequate supervision, slack management and lack of incentives; and

* the vessels: lack of cargo unitization/palletization and inadequate sling loads, old vessels with difficult hatches and slow and low capacity gear.

7. There is a clear relationship between these two factors: inefficient operations (i.e., slow ports) will attract mainly old and slow working vessels; efficient operations (i.e., fast ports) will attract modern and fast-working ships but with high demurrage costs, for which even a few hours saved in turnaround time (catching a high tide) are important for profitability.

8. The expcrienced shipowner's answcr to inefficient port operations is the classic one: "avoid the port if you can; if you cannot, use your old ships." This is unfortunately the case in many of Vietnam's ports today. To prosper economically Vietnam's ports must therefore improve their quality of operations.

9. Haiphong and Ho Chi Minh City are the home ports of most of Vietnam's national fleet. Possibly because of a lack of incentives, neither the vessels nor the port management seem to consider fast turnaround of national vessels a priority. Foreign-flag vessels are able to provide "dispatch-money" and other incentives to port labor and management to achieve faster turnaround. this cannot be done by the national carriers. 10. Vinaline's statistics indicate that only 12.7% of Vietnam's total international trade was carried by national carriers, and the balance by foreign-flag vessels. That is 0.127 x 26.0 million tons in 1997 = 3.3 million tons, a turnover of four times of the national carriers' capacity of 830,384 deadweight tons (dwt). This is low by accepted standards of an average turnover of 7 to 10 times for short-haul services, as provided by Vietnam's national fleet. The capacity of the coastal shipping fleet was 174,740 dwt and handled some 2.7 to 3.0 million tons in 1996, i.e., a turnover of some 15 to 17 times the fleet's capacity, which is reasonable (see Annex 1.2, Table 5.3 and this annex, Table 1). Port Management

11. To obtain full benefits from the available port assets, each port must have its own responsive and integrated organizational structure in order to function efficiently in a competitive business environment. The management model for each port should be customized since each has its own specific physical and operational conditions relating to the port area, type of cargoes handled. alongside or at buoys, storage areas, economic hinterland and its transportation network (barges, road transport. railways). There is, however, no doubt that an unwieldy top-heavy organizational structure with lack of delegation of authority for operations or a fragmented organizational structure are not conducive to efficient management. Successful operations require a market-based regulatory environment and a largely autonomous (nonpoliticized) port management that will not be hindered by procedures of government in its day-to-day operations, 112 Annex 23: Vietnan,Ports and Shipping

and that will have delegation of authority within the organization to ensure results and accountability of line managers.

Training 12. Vietnam's ports have a shortage of qualified professional port managers, engineers and supervisors. Developments in ship equipment, and cargo packing and handling techniques are rapid, and ports' staff skills need continuous upgrading. Training and skill upgrading of port managers, supervisors and labor are thus essential for efficient operations and optimal productivity. Training is best accomplished by developing in-house training and refresher courses. Provided that it can later be practically applied, training of supervisory and managerial staff in ports outside Vietnam could be very useful.

Port Tariffs 13. With the exclusion of tariffs for container handling in Zones I (northern ports), II (central ports) and III (southern ports). port tariffs for all Vietnamese international maritime shipping ports are the same. If tariffs are to stimulate competition, which is the Government of Vietnam's present directive, each port should be allowed to set its own tariffs in accordance with its specific operational, managerial and physical conditions that create a different cost base. Tariffs are a useful tool in ensuring efficient use of port facilities by both port management and vessels. Tariffs should be fixed on the basis of "real cost" of providing the respective services, while keeping in mind, of course, the costs the traffic can bear. A port should not subsidize its services, but on the other hand it should not make the vessel pay for the port's inefficiencies, which will eventually be reflected in maritime transportation costs. The Government's role should be centered on ex-post regulatory oversight, to ensure fair treatment by ports of their users.

14. Provided that the port has brought its own house in order, port tariffs should be adjusted to penalize inefficient ships and shippers who abuse the port facilities, while the efficient ships and shippers should benefit from lower tariffs and faster turnaround times. A port should levy regular berthing charges for the time required for handling the manifested cargo at the port's normal handling rates, but steeply escalate berthing charges after such a time. Such tariff measures, when enforced without exception. including national-flag carriers, have increased operational efficiency in many ports. Establishment of Database, Management Information and Control Systems 15. Vietnam's ports must improve their management information systems in order to achieve optimum levels of operational efficiency and reduction of operational costs. The port statistics generated by the existing systems need to be improved as to their scope, detail, consistency, timeliness and accuracy. For example, a comparison of statistical information on the 1996 container traffic, prepared by three different organizations, VINAMARINE, TDSI of the Ministry of Transport and the Vietnam Sea Ports Association (VSPA) for the same group of ports, show differences of up to 30% (see Table 3, compiled from various statistics). Only meaningfully designed, regLularlycollected and processed operational and financial data will Annex 2.3: Vietnam Ports and Shipping 113

serve as a management tool for monitoring of operational and financial performance. Computerization is highly desirable even for breakbulk, general-cargo port operations and not only for capital-intensive container terminals where quick decisions have to be taken and multiple information about movement of thousands of containers has to be collected, processed and transmitted. Efficient commercial accounting and costing systems, suited to specific local conditions are an integral part of effective port management. Several useful port management information systems (PORTMIS) have been developed by various private and public agencies, which could usefully be applied by Vietnam's port administrations, though with modifications to suit local port conditions.

Containerization of Maritime Traffic 16. In 1996, the country's total dry-cargo break-bulk maritime traffic was 28.2 million tons, of which some 22% were handled in the northern ports, 70% in the southern ports and some 8% in the central ports. Of the above, some 6.2 million tons of cargo were containerized in some 670,000 TEU, of which some 150,000, 500,000 and 20,000, respectively, were handled at the northern, southern and central ports (see Table 2). The ratio of containerization was some 22% on average, with a slightly higher ratio in the southern ports; and because of the large ratio of empties exported, the average unit weight was between 9 and 10 tons/TEIJ 17. Assuming GDP growth of 7% a year, to US$700 per capita by 2010, without taking into account the effects of the Asian crisis and assuming an 1:1.5 ratio of GDP growth to traffic growth, Vietnam's total dry-cargo break-bulk maritime traffic would reach some 85 million tons by 2010. The various scenarios for assumed percentages of containerization by 2010 and different tons/TEU are shown in Table 4 and Figure 1. They indicate substantial differences in numbers of TEU to be handled, each requiring different levels of investments in infrastructure and equipment. 18. The data in Table 5 and Figure 2 indicate that the level of containerization in general are direct functions of a country's level of economic activity. Vietnam's GDP per capita is expected to reach US$700 by 2010, only some 24% of Thailand's and 60% of the Philippines' 1996 GDP per capita. Thus Vietnam still has a long way to go before it will be able to reach containerization levels comparable to those of its neighbors. It would seem prudent therefore to assume for Vietnam by 2010 a maritime break-bulk dry-cargo containerization ratio between 22 and 30% with unit weights between 10 and 12 tons/TEU, as shown in Table 4 and Figure 1. It is doubtful whether the authorities' assumptions that 50% of total dry- cargo break-bulk traffic would be containerized by 2010 could be achieved.

2 Based on information received from Saigon Port, "Container Traffic to/from Saigon Port 1989-97 (excluding Tan Cang Port)." 114 Annex 2.3: Vietnam Ports and Shipping

FIGURE 1: CONTAINERIZATION AT LEVEL OF 85 MILLION TONS OF MARITIME TRAFFIC PER YEAR

5000 4500 4000 3500 -+e-9 tons/TEU 3000 2500 ^2000 -f 12 tonslTEU 1500 -==X 15tons/TEU 1000 500 0 L. 18.7 21.3 25.5 29.5 34 38.3 42.5 22% 25% 30% 35% 40% 45% 50% 85 85 85 85 85 85 85 Volume of ContainerizedCargo at Varying Percentagesof Containerization

FIGURE 2: 1996 GDP/CAPITA AND CONTAINERIZED MARITIME TRAFFIC

12, 0 00 --- 100. 0 ----- 90.0 10,000 800 70.0 8,000 60.0 6,000 50.0 400 4,000 3

2,000 200 10.0 0 0.0 Korea Malaysia Thailand Philippines Vietnam Countries

X GDP/Capita-- Containerized Traffic

Transshipment (Hub) Port in Vietnam's Central Region

19. The Southeast Asia region's main transshipment ports (hub ports) are Hong Kong (China), Singapore and Kaohsiung (Taiwan, China); Busan (Korea), Keelung (Taiwan, China) and Bangkok (Thailand) can be considered as secondary hub ports. These ports' container traffic in 1996 and 1995 are detailed in Table 6 and Figure 3. Annex 2.3: Vietnam Ports and Shipping 115

FIGURE 3: SOUTHEAST ASIA CONTAINER TRANSSHIPMENTPORTS

LaemChabang

Bangkok(Thailand) ]1995

Keelung(Taiwan, China) w1996 ,0..

Busan(Korea)

Kaohsiung(Taiwan, China)

Singapore -

HongKong (China)

0 2,000 4,000 6.000 8,000 10,000 12,000 14,000 TEU ('000)Handled in 1995& 1996

20. The above ports started as servers for their nationally generated traffic and only with increased containerization and introduction of third- and fourth-generation container vessels (2,500 to 4,000 TEU) have they expanded their facilities to handle containerized transshipment cargoes. These ports are very efficiently managed and operated and attract the world's major shipping lines, which use their modem vessels (mother ships) to regularly serve these hubs. The profits of the shipping lines depend largely on the number of TEUs unloaded and loaded per port call and the length of in-port time. In addition the shipowner expects the hub port to offer reliable services for: bunkering, mechanical and high-tech maintenance facilities, health services, etc. 21. The Government plans to create a major transshipment facility along the Central Region coast (at Vung Ang or Chan May) capable of handling by 2010 some 55 million tons per year (4 to 5 million TEU) of transshipment traffic. This new facility would have to compete with some of the Southeast Asian hub-ports mentioned above.

22. In order to serve the planned hub-port in central Vietnam, large container vessels would have to deviate from their regular hub-to-hub route. (A deviation from the Singapore/Hong Kong-US West Coast hub-to-hub route would require 2 to 3 extra sailing days, in addition to in- port time). However, large vessels would only use Vietnam's hub-port regularly if substantial in- and-out container volumes (of, say, 500 to 800 TEU per call each way) can be ensured. This traffic would mainly have to be generated from the economic hinterland surrounding the new port, because transporting container cargo from the existing ports in the north and south to the new hub-port would involve costly additional transport and double handling and would therefore seem uneconomical. It appears unrealistic, however, to assume that the essentially rural economic hinterland of the central region will be capable over the next decade to generate the required container cargo volumes essential ftor the viability of the new port. Furthermore, maritime transshipment traffic from Lao PDR, Cambodia, northern Thailand and China is 116 A nnex 2.3: Vlietnam Ports and Shipping

negligible and likely to remain so. Therefore, it would be prudent to review carefully the viability, timing and location of the proposed hub-port.

Maritime and Ports Subsector Planning

23. The development of detailed maritime and port subsector plans within the framework of an overall transport sector plan is essential for establishing investment priorities and avoiding overcapacity. Lack of subsector plans often leads to unnecessary duplication of facilities. Overall subsector port coordination is essential for Vietnam where maritime and port activities are controlled by different authorities. While long-term master plans with development and investment perspectives for, say, 10 to 20 years should be available for Vietnam's maritime and port subsectors, there is also a need to continuously review and update these plans to ensure that short-term developments are reflected in the long-term plans. Only detailed feasibility studies (economic, financial and technical) in accordance with internationally accepted standards should be the basis for investments in the maritime and port subsectors. Moreover, planning for additional container traffic facilities needs intermodal coordination as it requires complementary investments in shipping, ports, railways and road sectors. Priority Tasks

24. Vietnam's ports (possibly except for some parts of Ho Chi Minh City's ports) have at least five years throughput capacity reserves without requiring major new investments. The Government should use this time to:

* assess the likely impact of the Asian economic crisis on its projections of port traffic and its port investment program;

* review the viability of its industrial and economic development and investment plans and estimate the traffic types and volumes to be generated;

* assess the potential for increasing the throughput capacity and productivity of the existing main maritime ports (with "limited investment") through such measures as: commercialization/corporatization of ports; improved operational and management systems, including the introduction of a market-based regulatory and institutional framework, allowing the ports to be managed as commercial enterprises; and

* identify intermodal transport network requirements, including investments, timetables and cash flows, together with alternative solutions, to handle the additional traffic created by the planned industrial and economic developments. Annex 2.3: V'ietnamPorts and Shipping 117

TABLE 1: VINALINE'S PRODUCTIONAND TRADINc RECORD

Output Un-t 1996 1997 1997 (%) 199618 1998 (P0an)

ShiPPing Sector Tran sported cargo ton 4,888,247 5,971,281 115 122 6,500,000 ton-km 16,675,472 21,145,255 110 127 23,000,000

ton-km 15,490,973 19,826,944 147 128 21,000,000

Transport expro Ude ool ton 3,082,694 3,073,180 89 99 1,200,000

Domesticaooytransported CargO ton 871,114 1,276,472 135 147 1,300,000 ton-km 1,184,499 1,318,311 123 93I 2,000,000

Seaport Sector Output ton 12,962,934 12,181,993 102 94 13,000,000 Of which Exportboods ton 3,836,585 3,863,965 90 101 47300,000 Import -oods tOn 6,387,067 5,784,175 107 91 6,000,000 Domestic -oods tOn 2,739,273 2,533,853 108 93 2,700,000 COntainergoods TEU 254,944 286,000 92 112 320,000

Financial Record Total tUrnOVer DOng 1,772,986 1,997.551 109 113) 2,150,000 State bUd-et D million 197,744 153.995 90 78 Total profits D million 155,425 141,340 81 91

Source: Vietnam National Shipping Lines. 118 Annex 2.3. Vietnam Ports and Shipping

TABLE 2: MARITIME PORT STATISTICS AND COMMENTS ON PRODUCTIVITY

1995 1996 No. of Cargo handled ('000 tons Containers No. of Cargo ha.idled ('000 tons) Containers Port ship calls Total Imports Exports (TEU) ship calls Total Imports Exports (TEU)

Northern Ports Total 2.263 5.860 4.784 1.076 117.600 2,308 6,391 5.124 1,267 149,650 Haipihong 1,152 4.515 4.022 493 117,600 i,194 4.809 4,151 658 149,100 %oftotal 51 77 84 46 100 52 75 81 52 99.7 NgheTinh 356 310 251 59 00 397 462 367 34 500 %of total 16 5 5 5 00 17 7 7 3 0.3

Central Ports Total 1385 1.888 1.450 438 13.400 1.476 2.092 1,472 620 19,651 Danang 295 830 681 149 7.700 350 848 644 204 9.102 % of total 21 44 47 34 57 24 40 44 33 46 Nha 1Trang 279 243 308 35 - 289 426 362 64 1.863 % of total 20 18 21 8 00 20 20 25 10 9.5 Qui Nhon 376 447 246 201 4.200 412 554 308 246 8.500 % of total 27 24 17 46 31 28 26 21 40 43

Southern Ports Total 3.390 17,204 12,547 4.657 388,387 3.870 19.728 13.828 5.901 484.111 Saigon 1,379 7,212 4,903 2,308 76,987 1.435 7,340 3.798 2,692 106.000 Tan Cang 533 2,978 1.648 1.330 287,700 646 3.604 1.766 1,838 360,000 Total Saigon 2,399 11.953 7.556 4.396 388,387 2,592 13,211 6,818 5,228 483,911 % oftotal 71 69 60 94 100 67 67 49 88 99.9 Annex 2.3: Vietnam Ports and Shipping 119

TABLE 3: STATISTICS FOR 1996 CONTAINERTRAFFIC (TEU)

Northern Ports For Haiphong, tables by TDSI of MOT show 110,000 For Nghe Tinh, the same tables show 9,660 119,660 For Haiphong, tables by VINAMARINE show 149,000 For Nghe Tinh, the same tables show no data 9,660 158,660 For Haiphong, tables by VSPA show 149,100 For Nghe Tinh, the same tables show 500 149,600

Central Ports For Danang, tables by TDSI of MOT show 8,371 For Quy Nhon, the same tables show 7,800 For Nha Trang, the same tables show 1,148 17,319 For Danang, tables by VINAMARINE show 7,731 For Quy Nhon, the same tables show no data 6,512 For Nha Trang, the same tables show no data 1,148 15,391 For Danang, tables by VSPA show 9,102 For Quy Nhon, the same tables show 8,500 For Nha Trang, the same tables show 1,863 19,465

Southern Ports For Saigon, tables by TDSI of MOT show 55,844 For Tan Cang, the same tables show 350,000 For Ben Nghe, the same tables show 20;000 425,844 For Saigon, tables by VINAMARINE show 100,000 For Tan Cang, the same tables show 351,832 For Ben Nghe, the same tables show 110,000 561,832 For Saigon, tables by VSPA show 106,000 For Tan Cang, the same tables show 360,000 For Ben Nghe, the same tables show 17,911 483,911

Total 1996 Container Traffic as per statistics published by: TDSI of MOT 563,823 VINAMARINE 735,883 VSPA 652,976

Source: Transport Development Strategy Institute of the Ministry of Transport; VINAMARINE; Vietnam Sea Ports Association, 1997 Yearbook. 120 Annex 2.3: Vietnam Ports and Shipping

TABLE 4: LEVEL OF CONTAINERIZATION

Breakbulk Percentage Containerized TEU (000) (million tons) containerized (million tons) 9.0 tons/TEU 10.0 tons/TEU 12.Ctons/TEU 15.0tons/TEU

85 22 18.7 2,080 1,870 1.560 1,250 85 25 21.3 2,370 2,130 1,780 1,420 85 30 25.5 2,830 2,550 2,130 1,700 85 35 29.5 3,280 2,950 2,460 1,970 85 40 34.0 3,780 3,400 2,830 2.670 85 45 38.3 4,260 3,830 3.190 2,550 85 50 42.5 4,720 4,250 3,540 2,830

TABLE 5: REGIONAL COUNTRIES' ECONOMICAL INDICATORS AND CONTAINER TRAFFIC

Average GNP/ Containerized Countrv'a Population GNP/capita capita growth maritime traffic TEU Tons/TEU (1996 million) (1996 (US$) (1995/96, %) (1996. million tons)/b (1996, million) (1996)

Korea 46 10,540 5.6 93.0 5.37 17.3 Malaysia 21 4,680 5.8 44.9 2.51 17.9 Thailand 60 3,005 4.4 22.8 2.05 11.1 Philippines 72 1,165 4.5 37.2 2.21 16.8 Vietnam 75 300 7.3 6.2 0.67 9.3

/a Souirce:International Monetary Fund. /b Soutrce: Containerization International Yearbook 1998. Annex 2.3: VIietnamPorts and Shipping 121

TABLE 6: SOUTHEAST ASIA REGION'S TRANSSHIPMENT (HUB) PORTS

Port/Country World TEU ('000) Ranking /a 1996 1995

Hong Kong (China) 1 13,460 12,550 Singapore 2 12,944 11,845 Kaohsiung (Taiwan, China) 3 5,063 5,232 Busan (Korea) 5 4,725 4,503 Keelung (Taiwan, China) 11 2,320 2,170 Bangkok (Thailand) 28 1,233 1,433

Laem Chabang 41 820 530

/a Source: Containerization International Yearbook 1998. en x w 4 4 -.It 124 Annex 3. 1. Road User Charges Modelfor Vietnam

ANNEX 3.1: ROAD USER CHARGES MODEL FOR VIETNAM

1. The pricing and cost-recovery elements in the road user charges model used here assess overall maintenance needs and how these costs can be shared among road users. The model computes the vehicle utilization and the annual costs of maintaining (routine and periodic) the network. Fixed costs are independent of the traffic and the variable costs are a function of the traffic and axle loading. The model assumes that the network is in stable condition without any backlog of periodic maintenance. While this is clearly not the situation in Vietnam. it is assumed that road users will not be directly responsible for clearing the current backlog. (The costs of eliminating the maintenance backlog can be estimated using the HDM model.)

2. To maximize net economic benefits, road user charges should be set equal to the short- run marginal cost; that is, to the cost of the resources consumed when using the road network. Short-run marginal costs have two components: (a) the damage done to the road surface by the passage of vehicles (i.e., the variable cost) and (b) the additional costs that each road user imposes on other road users and on the rest of society (i.e., the cost of congestion and other externalities). However, less than half the costs of operating and maintaining the road network vary with traffic (the remaining costs being fixed) and roads in Vietnam do not experience persistent road congestion except for the roads in and around the main cities. Prices set equal to short-run marginal costs will therefore result in large financial deficits.

3. A levy on fuel will capture both the variable and fixed cost of the damage imposed by motorcycles, cars and light trucks. The model, however, clearly shows that heavy vehicles at present do not cover the cost of the damage the inflict on the road pavement. The levy on diesel is insufficient even to cover the variable cost of the damage heavy vehicles impose on the road pavement. Heavy vehicle fees are often recommended as a means to capture the costs imposed on the roads by trucks as diesel levies alone would have to be very high to adequately capture all these costs. A heavy vehicle fee would thus contribute to more equitably allocate the true costs of road damage.

4. The road user charges proposed here are essentially two: (a) a levy on gasoline and diesel; and (b) a fee on heavy vehicles. Further, it is proposed that the road fund revenues would cover: (a) the total costs of operating and maintaining the national roads; (b) short-run marginal costs and some proportion of the fixed costs of maintaining the provincial and district roads; and (c) only the short-run marginal cost of the urban roads, given the relatively higher potential for raising local sources of revenue in urban areas. The balance of the required expenditures in urban and rural areas would be financed through local or other forms of revenues, e.g.. central-local fiscal transfers. Annex 3.1 Road User Charges MVfodelforVietnaam 125

5. In addition to financing maintenance works, the Fund will provide for the administrative cost of the fund itself (and. in the future, the repayment of any loans which it takes out.) It might further be reasonably expected to support: (a) an outreach program to inform the public of the work of the board, (b) policing and axle load enforcement costs, and (c) physical road safety improvements.

6. For illustration purposes, seven scenarios have been calculated, reflecting different levels of coverage and cost-sharing arrangements (see Table 3.7 in the main text). In all cases are the full costs of maintaining the national roads covered. Scenarios 1-3 cover the entire designated network of national, provincial, district and urban roads and has an annual requirement of US$190 million. Scenarios 4-6 cover only the main network of national and provincial roads with network requirements of US$118 million. Scenarios 1-3 have different cost-sharing arrangements for the fixed costs of provincial and district roads. The same applies in scenarios 4-6 for provincial roads. The seventh scenario is the same as the first except for the exclusion of urban roads. Each scenario calls for a specific fuel levy and heavy vehicle fee. The required levies and fees have been calculated for each scenario (see Table 3.8 in the main text). The summary tables of scenarios 1 and 6, the most inclusive and restrictive cases are given below, more specifically:

- network length, needs and financing;

- user revenues by vehicle category; and

* unit user charges per vehicle category(current and optimal).

7. The number of options regarding which works to be financed and from where the revenue should be raised are clearly infinite and in no way should the proposed be read as the only one or even recommended model to be followed exactly. For example, on the expenditure side, the proposed scenario does not include any rehabilitation, safety and enforcement program or cost- sharing arrangements for undesignated roads. Further it is assumed that the rehabilitation program would continue to be financed, as presently, through the consolidated budget and that undesignated roads will cared for by the communities they serve. On the revenue side, the scenarios include only the imposition of a fuel levy and a heavy vehicle fee. Directing international transit fees and fines for overloading into the road fund account would be appropriate. Transit fees are low in Vietnam as border traffic is modest but would definitely qualify as road user charges. The revenue from the fines from overloading can be expected to fall significantly once the stricter enforcement is implemented. Finally, this annex has not considered toll revenues as a potential source of income for the road fund (see chapter 3 of main text).

Solurce:Heggie and Archondo-Callao. 1997. 126 Annex 3. 1: Road User Charges ModelJbr Vietnam

RESULTS SUMMARY-SCENARIO 1

Needs and Financing

YearMvAinenca Needs ProposedFiniancine Table Maintenance Vehicle Anntial Maintenance PeriodicMaintenance Investmaents User Local Road Road Length Utilization Fixed Variable Total Fixed Variable Total and Others Total Charges Revenues Total Network Type (kin) (M veh-km/yr) (US$ mnilion/year) (USSmiillionivear) (SMiyr) ($M/yr) (SM/5r) (SMI/r) (SM/yr) NatioitalRoads Paved 9.160 2.478 9.16 0.42 9.58 31.14 14.95 46.09 Gravel 5.200 332 2.60 2.91 5.5i 4.73 2.22 6.95 Earth 760 14 0.19 0.24 0.43 0.00 0.00 0.00 Total 15.120 2.824 11.95 3.57 15.52 35.87 17 16 53.03 0.00 79.75 79.75 0.00 79.75 Provincialand Paved 8,249 903 8.25 0.20 8.45 17.50 12.89 30.39 District Roads Gravel 25,847 891 6.46 5.23 11.69 23.50 5.38 28.88 Earth 19,725 180 2.47 1.72 4.18 0.00 0.00 0.00 Total 53.821 1,975 17.18 7.14 24.32 41.00 18.27 59.27 0.00 85.39 71.95 111.63 83.59 Urban Roads Paved 3,211 4.258 3.21 0.38 3.59 16.76 4.03 20.79 Gravel 0 0 0.00 0.00 0.00 0.00 0.00 0.00 Earth 0 0 0.00 0.00 0.00 0.00 0.00 0.00 Total 3.211 4.258 | 3.21 0.38 3.59 16.76 4.03 20.799 0.00 24.38 4.41 19.97 24.38 All Roads Paved 20,620 7,639 20.62 1.00 21.62 65.40 31.87 97.27 Gravel 31.047 1,224 9.06 8.14 17.201 28.22 7.60 35.82 Earth 20.485 194 2.66 1.96 4.61 0.00 0.00 0.00 Total 72.152 9.057 |3234 11.09 43.43 93.62 39.47 133.09 000 189.52 156.12 31.60 |1I87.72

User Revenues

CuirrentTotal RoadUser RevenuLes Optimal Total Road User Reventles Proposed - - - ] Axle Axle Finanicing Number Vehicle Loading Standard Loading Standard Loading Table of Utilization lpactIm FtIel License License Fuiel License License User Vehicles veh-kmn/vr ESA-kmn/yr Levy Fee Fee Total Levy Fee Fee Total Charees Vehicle Type (veh) (irillion) | (million) (US5 million/year) (USSnmillion/year) (US5Mivr) CarGasoline 92,937 1.524 0 4.88 0.00 0.00 4.88 8.99 0.00 0.00 8.99 Car Diesel 39,830 637 0 2.55 0.00 0.00 2,55 3.28 0.00 0.00 3.28 Motorcycle Gasoline 4,158,989 20.795 0 24,95 0.00 0.00 24.95 45.99 0.00 0.00 45.99 Taxi Diesel 0 0 0 0.00 0.00 0.00 0,00 0.00 0.00 0.00 0.00 Utility 96.656 967 1 3.87 0.00 0.00 3.87 4.97 0.00 0.00 4.97 LightTrtick 23.300 699 70 4.19 0.00 0.00 4.19 5.39 0.00 0.00 5.39 Meditim TrLick 70.000 2.100 2.625 16.80 0.00 0.00 16.80 21.61 0.00 8.51 30.12 HeavyTruck 15.000 600 1.800 6.00 0.00 0.00 6.00 7.72 0.00 4.38 12.09 ArticulatedTruick 10.000 450 2.250 6.30 0.00 0.00 6.30 8.10 0.00 4.86 12.97 Bts 53.152, 2.392 1 1,196 23.92 0.00 0.00 23.92 30.77 0.00 0.00 30.77 Total 1 400.8751 30,164 ; 7.942 93.46 0.00 0.00 93.46 136.82 0.00 17.75 154.57 156.12

Nare: Thereare 4.2 million motorcyclesanid 400.875 other motorizedvehicles.

Unit User Charges

Current Unit Road UserCharges Optimal Uilit Road User Charges Axle Axle Stantdard Loading Standard Loading Fuel License License Fuel License License Levv Fee Fee Total Levy Fee Fee Total Vehicle Type (c/ vela-kmn) (cl veh-km) Car Gasolinc 0.32 0.00 0.00 0.32 0.59 0.00 0.00 0.59 Car Diesel 0.40 0.00 0.00 0 40 0.51 0.00 0.00 0.51 Motorcvcle Gasoline 0.12 0.00 0.00 0.12 0.22 0.00 0.00 0.22 Taxi Diesel 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 UJtilitv 0.40 0.00 0.00 0.40 0.51 0.00 0.00 0.51 Light Truck 0.60 0.00 0.00 0.60 0.77 0.00 0.00 0.77 Medium Truck 0.80 0.00 0.00 0.80 1.03 0.00 0.41 1.43 Heavy Truck 1.00 0.00 0.00 1.00 1.29 0.00 0.73 2.02 Articullated Truck 1.40 0.00 0.00 1.40 1.80 0.00 1.08 2.88 uBLIS 1.00 0.00 0.00 1.00 1.29 0.00 0.00 1.29 [Total 6.04 0.00 0.00 6.04 8.01 0.00 2.21 10.23 Annex 3.1: Road UIser Charges Modelfor Vietnam 127

RESULTS SUMMARY-SCENARIO 6

Needs and Financinig

F77 : Yearly AgencvNeeds ProposedFinancineTable _ _- Mainternance Vehicle Anntial Mainteniance| PeriodicMaintenanice Investments User Local Road Road Length JUtilization Fixed Variable Total Fixed Variable Total and Otliers Total Charges Revenues Total Network Type (kin) (M veh-kmn/vr) (US$ nillion/vear) (US$ million/year) ($M/yrl (SM/yr) l$M/vrt (SM/yr) (ISM/r) NationalRoads Paved 4.160 2.47762 9.16 042 958 31.14 14.95 46.09 Giavel 5.200 332.15 2.60 '.91 5.51 4 73 222 6 95 Earit 760 13.87 0.19 0.24 0.43 0.00 0.00 0.00 Total 15.120 2.823 64 11.95 3.57 1552 35.87 17.16 53.03 11.20 79.75 79.75 0.00 79.75 ProNincialand Paved 4.638 507 861 4.64 0.11 4.75 9.84 7.25 17.09 District Roads Gravel 7.915 399894 1 98 2 01 3.99 7.20 2.56 9.76 Eatilh 1.896 44.676 0161 0.43 1.04 0.00 0.00 0.00 Total 17.449 952.431 7.23 2.55 9 77 17.03 9.81 26.85 0.00 38.42 | 12.36 24.26 36.62 UrbanRoads Paved 0 0 0.00 0.00 0.00 0.00 0.00 0.00 Gravel 0 0 0.00 0.00 0.00 0.00 0.00 0.00 Earth 0 0 0.00 0 00 0.00 0.00 0.00 0.00 Total ( 0 0.00 0.00 0.00 0 00 0.00 0.00 0.00 0.00 0.00 0.00 0 00 All Roads Paved 13.798 2.985.481 13.8) 0.53 14.33 40 98 2 20 63.18 Gravel 13.115 732.044 4.58 4.92 9.50 11.92 4.78 16.71 Earth 5.656 58.546 0.80 0.67 1.47 0.00 0.00 0.00 Total 2.S69 3.776.071 19 18 6 11 25.29 52.90 26.98 79.88 11.20 118.17 92 11 24.26 116.37

User Revenues

CurrentTotal RoadUser Revenues OptimnalTotal RoadUser Revenues Proposed Axle Axle Finanicing Number Vehicle Loading Standard Loading Standard Loading Table of Utilization lmpact Fuiel License License Fuiel License License User Vehicles velh-km/yr ESA-kmtyr Levy Fee Fee Total Levx Fee Fee Total Charges Vehicle Tvpe (vell) (million) (inillion) (US$nillion/year) IUSS nillion/year) (USSM/vr) CarGasoline 92.937 1,524.1668 0.15241668 488 0.00 0.00 4.88 4.48 0.00 0.00 4.48 CarDiesel 339830 637.28 0.063728 255 0.00 0.00 2.55 1.83 0.00 0.00 1.83 MotorcycleGasoline 4.158.989 23.794.945 0 24.95 0.00 0.00 2495 2291 0.00 0.00 22.91 TaxiDiesel 0 0 0 0 00 0.00 0.00 0.00 0.00 0 00 0 00 0.00 Utility 96.656 966.56 0.96656 3 87 0.00 0.00 3.87 2.77 0.00 0.00 2.77 UgLigtTrUck | 33.300 699 69.9 4 19 000 0.00 4.19 3.01 0.00 0.00 3.01 NMediumTruick 70.000 2100 2625 16.80 000 0.00 16.80 12.05 0.00 9.15 21.20 lleavyTnick 15.000 600 1800 600 0.00 0.00 6.00 4.30 000 4 71 9.01 ArticulatedTruck 1|.000 450 2.250 6 30 0.00 0.00 6.30 4.52 0 00 5.23 9.75 |IBOIS | -'3.t57N2.39184 1 195092| 23 92 0.00 0.00 23.92 17 16 0 00 0.00 1716 _ _ Total | 4Co.875j 30.161 7,942 9346 0.00 0.00 93.46 73.02 000 19.09 92.11 92.11

Note:There are 4.2 million nrotorcyclesand 400.875 otlier motorizedv ehicles.

Unit User Charges

Current Unit Road User Charges Optimal Unit Road User Charges Axle i Axle Standard Loading Standard Loading Fuel Licetnse License Fuel License License Levy Fee Fee Total Levy Fee Fee Total Vehicle Type (c/ veh-kms) (c/ veh-km) Car Gasoline (0.32 0.00 0.00 0.32 0.29 0.00 0.00 0.29 Car Diesel 1.40 0.00 0.00 0.40 0.29 0.00 0.00 0.29 MotorcycleGasoline 0.12 0.00 0.00 0.12 0.11 0.00 0.00 0.11 Taxi Diesel 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Utilitv 0.40 0.00 0.00 0.40 0.29 0.00 0.00 0.29 Light Truck 0.60 0.00 0.00 0.60 0.43 0.00 0.00 0.43 Medium Truck O80 0.00 0.00 0.80 0.57 0.00 0.44 1.01 HeavyTruck 1.00 0.00 0.00 1.00 072 0.00 0.78 1.50 Articulated Truck 1.40 0.00 0.00 140 1.00 0.00 1.16 2.17 Bus 1.00 0.00 0.00 1.00 0.72 0.00 0.00 0.72 lotal 6.04 0.00 0.00 6.04 4.42 0.00 2.38 6.80 128 Annex 32: Key Tasks oJRoad Fznd Boards

ANNEX 3.2: KEY TASKS OF ROAD FUND BOARDS

1. Road Fund Boards, just like road funds, come in all shapes and forms. The main tasks of most Roads Boards are to (a) win public support for more road spending; (b) determine which types of expenditures the road fund can finance; (c) limit road spending to what users are willing to pay; and (d) ensure that road users get value for money. Examples of key tasks of Road Fund Boards in Latvia, Malawi and New Zealand are given below:

2. Latvia. The State Road Fund is managed by the State Road Fund Division within the Road Administration and is overseen by the State Road Fund Advisory Board. The detailed functions of the board are to:

* Review general strategies for revenues and expenditures, together with the proposed annual expenditure program;

* Periodically review collection of the revenues attributable to the road fund;

* Review the planning and use of funds allocated to municipalities;

* Inform the public on the work of the road fund; and

* Report to the Minister on all matters reviewed by the board.

3. Malawi. The National Road Fund is managed by a subcommittee of the Board to the National Roads Authority. The main functions of the Board in relation to the road fund are to raise funds to ensure that public roads are maintained and rehabilitated at all times. The detailed functions of the subcommittee are to:

* Review the annual roads programs prepared by the roads agencies and consolidate them into a national roads program and submit it for approval to the Minister;

* Decide the allocation of financial resources required by road agencies for the maintenance, rehabilitation and development of public roads;

* Recommend to the Minister appropriate levels of road user charges, fines, penalties, levies or any other sums to be collected under the Act and paid into the road fund;

* Disburse money or authorize the payment of money to contractors only after it has been certified in writing that the work has been carried out to the required standard; and Annex 3.2. Key Tasks of Road Fznd Boards 129

* Prepare, publish and submit to the Minister, audited annual accounts for the fund and also submit, at such intervals as the Minister shall give to them in writing, reports and financial statements regarding operations of the Authority, the board and the fund.

4. New Zealand: The Land Transport Fund was originally managed by the National Roads Board. The principal task of the Board is to allocate resources to achieve a safe and efficient road system. The detailed functions of the board include:

Approve and purchase a national road program that prioritizes funding consistently on the basis of expected national benefits for a given cost;

* Pursue efficiency in delivering roads and alternatives to roads through contestability and through promoting enhanced administrative and technical systems/processes;

* Establish contracts with road controlling authorities and regional councils for the delivery of their respective programs;

* Audit all road controlling authorities and regional councils on a timely basis to provide assurance as to the efficient and effective utilization of resources allocated; and

* Establish the process for evaluating and funding efficient alternatives to the provision or maintenance of roads.

Source: Heggie and Vickers, 1998. 130 Annex 3.3: TransfrincdNewv Zealcand

ANNEX 3.3: TRANSFUND NEW ZEALAND

1. The original road fund in New Zealand was established in 1953. In 1989 the road fund was renamed the Land Transport Fund and the management of the fund was transferred to Transit New Zealand which had been set up in 1989. Transit New Zealand is responsible for management of the trunk roads (about 10% of the overall road network). However, since the road fund was used to finance Transit New Zealand's road program, as well as those of the Regional Councils and District Councils, there was thought to be a conflict of interest. Therefore, on July 1, 1996, the Transit New Zealand Amendment Act came into effect and created a new agency called Transfund New Zealand (Transfund). Management of the road fund was made separate from Transit New Zealand and placed under the jurisdiction of a separate management board.

2. Transfund's board has five members: (a) two representing Transit New Zealand (either employees or members of the Transit New Zealand Authority); (b) one representing local government; (c) one representing road users; and (d) one rcpresenting othcr aspects of the public interest. Members are appointed by the governor-general on the recommendation of the Minister. The Chairman is appointed by the governor-general from among the existing members of the board.

3. The revenue for the road fund comes from: (a) a fuel excise added to the price of gasoline; (b) weight-distance charges paid by diesel vehicles; (c) motor vehicle registration fees; (d) interest earned on the road fund account; (e) revenues earned from sale of surplus property; and (f) refund of GST (the New Zealand equivalent of the value-added tax).

* The fuel excise in 1996 was set at about US$0.065 per liter (the total excise tax on gasoline was US$0.21 per liter) and is expected to generate about US$204 million. The funds are collected by the New Zealand Customs, which is paid about US$414,000 to cover its costs (i.e., about 0.2% of revenue). Evasion is negligible.

* Weight-distance charges were expected to generate about US$293 million in 1996. The collection is managed by a unit within the Land Transport Safety Authority at a cost of about US$10 million (including US$5 million spent on enforcement). A number of agencies sell the weight-distance certificates, including the New Zealand Post (approximately 50%), British Petroleum gas stations, Vehicle Testing New Zealand, Vehicle Inspection New Zealand, New Zealand Automobile Association, and AMI Insurance. Evasion accounts for about 12% of revenues (9.4% heavy vehicles and 2.8% light vehicles, respectively) and legal avoidance for about 7% of net revenues. Annex 3.3: Transfi1ndNew Zealand 131

* Motor Vehicle Registration Fees were expected to generate about US$104 million in 1996. The collection is managed by the Land Transport Safety Authority at a cost of about US$19.3 million (i.e., nearly 19%). Similar agencies scll the registration certificates, namely New Zealand Post, Vehicle Testing New Zealand, Vehicle Inspection New Zealand, the Automobile Association and AMI Insurance. The extent of evasion is unknown.

* Interest and sale of surplus property are minor items.

* Reimbursement of GST is at a rate of 1/9 of the expenditures made out of the Land Transport Fund to compensate for payment of GST on all revenues received by the road fund.

4. The main objective of the board is to "allocate resources to achieve a safe and efficient road system." In this connection, its key functions are to:

* approve and purchase a national road program from the various road agencies, including capital projects;

* approve the competitive pricing procedures applicable to the road program;

* audit the performance of Transit New Zealand and Local Authorities against their respective road programs,

* provide advice and assistance to Local Authorities in relation to the new Transfund Act.

5. Transfund has 25 staff, including a General Manager who is appointed by the board. The General Manager appoints all staff. They include five programming and contracts staff, nine audit staff and nine staff in seven regional offices.

6. The key changes in the setup of Transfund are the new management structure and the removal of the need for separate decisions on the funding level and the expenditure program. The Government still sets the charges that determine the inflows to the road fund, but no longer determines the outflow. Once the costs of the Police and the Land Transport Safety Authority have been met, the balance of the revenues are available for use by Transfund without any further controls. In other words, the charges are still being collected "as if' they were taxes, but Transfund is now wholly responsible for what happens to the resulting revenues.

7. The specific responsibilities of Transfund are to:

* prepare the Annual National Land Transport Plan;

* recommend to Government income and expenditure levels needed to support the Plan;

* advise in general on the suitability of the Land Transport system;

* fund the approved projects within the Plan; 132 Annex 3.3: TransfUndNew Zealand

* make payments to road agencies to finance the approved projects.

8. The National Land Transport Plan is thus the basic building block for Transfund's short- and long-term activities. It is built up from bids submitted by Transit New Zealand and the Local Authorities. The bids are subject to checks on the reasonableness and appropriateness of supporting benefit/cost calculations, before projects are ranked in order of priority. Maintenance is accorded highest priority, with other projects ranked in order until all available funds are utilized (the current cutoff benefit/cost ratio is 4).

9. Maintenance requirements are based on a combination of professional judgment and the outcome of a Road Assessment Maintenance Management System (RAMM). Road authority requests are vetted on an ongoing basis by Transfund staff and the Review and Audit Division carries out audits every three years to ensure that minimum maintenance standards and service levels are being maintained by each road authority. To further refine the method of allocating maintenance funds, a project has recently been launched to determine the best way of estimating optimal maintenance funding levels for the different road authorities.

10. The Review and Audit Division carries out systematic reviews and appraisals of activities wholly or partly funded from the road fund. It reports through the chief executive officer to the board and, in exceptional circumstances, may report directly to the chairman. One of the conditions for providing funds to the road authorities is that they provide all the information and cooperation necessary to enable the division to review and audit the correct application of these funds. The aim of the audits is to ensure that the funds have been used in an efficient and effective manner. The division monitors outputs in relation to stated performance measures and tests compliance with agreed plans. The latter include TNZ's Statement of Intent, the Land Transport Programs prepared by the Local Authorities and the policies and decisions of Transfund.

11. The division visits the regional offices of Transit Ne'w Zealand and the Local Authorities at appropriate intervals and reviews their internal systems (including accounting and related systems) to confirm that they are being operated correctly and in conformity with the various Acts and policies of Transfund. The division carries out its role under the standards for internal auditing laid down by the New Zealand Institute of Internal Auditors. Technical and economic audits are made on a regular planned basis about every five years, while procedural audits are made every three years. The purpose of the procedural audits is to assess the accuracy of the financial assistance claims made by the road authorities and the extent to which the road authorities are complying with Transfund's policies with regard to the custody, recording and utilization of road fund resources.

Source: Heggie and Vickers 1998. Annex 3.4: Workshop on Sustainable 133 Road Maintenance Financing

ANNEX 3.4: WORKSHOP ON SUSTAINABLE ROAD MAINTENANCE FINANCING

1. A workshop on sustainable road maintenance financing was held in Vientiane, Lao PDR, in February 1998. The objectives of the workshop were twofold. First to examine whether more systematic consultation with road users would improve road management and, second, whether there was a need to establish a road maintenance fund and, if so, how it should be managed.

2. The morning of each day was devoted to presentations by foreign resource persons who had been invited to share their country's experience on road management and finance. The afternoon sessions were spent in small breakout groups discussing the morning presentations and commenting on what lessons might be relevant to Lao PDR, whether any of the reforms would be applicable and should be adopted and, if so, in what form.

3. The workshop was well-attended and attracted over 100 delegates. They included representatives from key government ministries [including the Ministry of Communication, Transport Post and Construction and Ministry of Finance], several Provincial Governors and Vice Governors, the international donor community, the Chamber of Commerce and Industry, the road transport industry, contractors and other sections of civil society. Foreign resource persons from the World Bank, Transit New Zealand, the Zambia Roads Board, and the Latvian Road Fund Administration shared their experience with involvement of road users in road management and achieving sustainable financing of road maintenance.

4. During the workshop it became clear what a high degree of consistency there was between the experiences of a developing county like Zambia in Africa, a transition economy like Latvia (formerly part of the Soviet Union) and an industrialized country like New Zealand. All suffered from poor road management, all suffered from a shortage of resources and all had opted for a more commercial approach to road management and establishing a road fund.

5. The leaders of each afternoon discussion group (there were six of them and the Governors and Vice Governors formed a seventh group on the second day), reported back to the workshop at the end of each day. There was a high degree of consensus among the various discussion groups. All pointed in the same direction. They saw great merit in involving the road users more closely in discussions about road management and they felt strongly that better arrangements were needed to ensure that the road network, particularly newly built roads and those that had been recently rehabilitated, were properly maintained. They wanted to avoid the costly process of having to repeatedly rebuild the road network because of lack of maintenance. Their specific 134 Annex 3.4: WVorkshopon Sustainable RoacdAlainlenance Financing conclusions with regards to the involvement of road users in road maintenance fiuldirng and management were as follows:

* There was a definite need to improve consultations with road users. This would not only strengthen road management and improve the setting of priorities, but would also encourage road users to behave in a more responsible manner, particularly in relation to overloading. Government should help the road transport industry to organize itself into a road transport association for the purposes of carrying out such consultations.

* The government should establish a road fund with the primary objective of financing maintenance. It should start on a modest basis and concentrate initially on the core national road network (perhaps even part of this network) and should operate on a pilot basis until it had shown that it worked effectively and was supported by the public. It could then be expanded to cover the whole of the core national network and selected provincial roads over a period of about two years.

* The road fund would derive its revenue from vehicle license fees and a new levy added to the price of fuel. The new levy would be designed to ensure that no additional funds were taken away from the consolidated fund. A method should be devised to ensure that important nonroad user groups, for example farmers and fishermen, did not have to pay the levy on diesel fuel. Government should also take steps to introduce an international transit fee payable by all vehicles entering Laos from other countries. The fee should be paid in foreign exchange and the local currency equivalent should be paid into the road fund.

* The road fund should be managed by an Advisory Board, perhaps reporting to the Prime Minister's Office. The Board should be chaired by the Minister of Communication, Transport Post and Construction (or his nominee) and the Vice Chairman should be the Minister of Finance (or his nominee). The overall size of the Board should be about 10 persons. Six should initially represent government and four should represent civil society. However, the long-term intention should be to have six persons representing civil society. The workshop was adamant (this from a Provincial Governor) that the Board should not include parliamentarians, members of the military or contractors.

* Day-to-day management of the road fuind would be carried out by a small division established within the Ministry of Communication, Transport Post and Construction. The head of the division would be appointed by the Board and other staff would be either seconded from the Ministry of Communication, Transport Post and Construction, from other ministries, or recruited by the head of division (particularly the accountants). The division is not expected to have more than five technical staff. The costs of the division would be charged against the road fund.

6. The foreign resource persons to the seminar, and the World Bank's Roads Advisor, all strongly advised against charging tolls on existing roads. Their view was that the net revenue from tolls would only make a significant contribution to maintenance costs when traffic volumes Annex 3.4: Workshop on Sustainable 135 Road Maintenance Financing

were above 2,500 vehicles per day. The traffic on roads in Lao PDR are closer to 300 vehicles per day.

7. As a follow-up to the workshop, the Minister of Communication, Transport Post and Construction requested ministry staff to prepare a draft decree to set up the proposed road fund. The decree will outline the detailed operating modalities for the road fund, including the charges to be levied, the initial roads to be covered, how the works will be planned and financed from the road fund, the arrangements for monitoring the effectiveness the fund and expanding coverage to other roads, the composition of the board and the detailed arrangements for day-to-day management of the road fund. Once the draft has been completed, the Ministiy of Communication, Transport Post and Construction will organize a small workshop to again consult the Governors and road users on the proposed detailed arrangements for the road fund. The draft will be amended to take account of the results of the workshop and the Minister of Communication, Transport Post and Construction will then bring it to Cabinet with a view to getting it approved by the Cabinet and published as a Cabinet Decree under the signature of the Prime Minister.

Bibliography 137

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(Chapters 1 and 2)

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Regional Technical Assistance to Promote Subregional Cooperation among Cambodia. Chinia,Lao PDR, Myanmar, Thailand and Vietnam Padeco Co. Ltd. ADB July 1995

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(Chapter 3)

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Vietnam Public Expenditure Review. Volume 1: Main Report. UNDP 1996

Vietnam Transport Sector. Servinigan Economy in Transition. World Bank World Bank 1994

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