Report No: ACS5919 . Socialist Republic of Vietnam ASSESSMENT OF FINANCING FRAMEWORK FOR MUNICIPAL INFRASTRUCTURE Public Disclosure Authorized Assessment of the financing framework for municipal infrastructure in Vietnam Final Report . September 2013 Public Disclosure Authorized . EASVS EAST ASIA AND PACIFIC . Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank . Standard Disclaimer: . This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. 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All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail [email protected]. ASSESSMENT OF THE FINANCING FRAMEWORK FOR MUNICIPAL INFRASTRUCTURE IN VIETNAM FINAL REPORT Assessment of the Financing Framework for Municipal Infrastructure in Vietnam Final Report September 2013 Copyright © 2013 The International Bank for Reconstruction and Development The World Bank Group 1818 H Street, NW Washington, DC 20433, USA All rights reserved First printing: October 2013 This document is a product of the staff of the World Bank Group. The findings, interpretations, and conclusions expressed in this report are entirely those of the authors and should not be attributed in any manner to the World Bank, or its affiliated organizations, or to members of its board of executive directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. The views expressed in this publication are those of the authors and not necessarily those of the Australian Agency for International Development (Australian Government). Table of Contents Acknowledgements .................................................................................................................7 Acronyms and Abbreviations ..................................................................................................9 Executive Summary ...............................................................................................................11 I. The Municipal Infrastructure Context: Macro Considerations ...............................................17 A. Objectives and Structure of This Report ...........................................................................18 B. Vietnam’s Context – Transition and Transformation .........................................................18 C. Investment in Infrastructure – Inefficiency Concerns and the Issue of Fragmentation ......20 D. A Comprehensive Approach – Governance, Financing, and Execution .............................22 II. The Existing Municipal Infrastructure Financing Framework ................................................23 A. The Evolving Enabling Environment ................................................................................24 B. Existing Financing Instruments: Effectiveness and Constraints .........................................25 C. Key Institutional and Regulatory Gaps .............................................................................33 III. Municipal Infrastructure Financing at the Sub-national Level ...............................................35 A. Overview ..........................................................................................................................36 B. Effective Demand for Investment and Financing Gaps in the Existing Planning Context .37 C. Financing Operations and Maintenance: the Challenge of Cost Recovery ........................45 D. Utilization of Existing Financing Instruments: a Story of Variability.................................46 E. Execution at the Local Level: the Need for Strengthened Capacity ...................................48 IV. The Applicability of International Experience .......................................................................49 A. Overview ..........................................................................................................................50 B. Debt financing/Borrowing ...............................................................................................50 C. Land-based Financing ......................................................................................................51 D. Specialized Instruments/Entities to Respond to Specific Needs .........................................52 E. Sub-national PPPs ............................................................................................................56 V. The Way Forward ..................................................................................................................57 A. Revisiting a Comprehensive Approach to Municipal Infrastructure Finance .....................58 B. New Financing Instruments for Municipal Infrastructure .................................................59 ASSESSMENT OF THE FINANCING FRAMEWORK FOR MUNICIPAL INFRASTRUCTURE IN VIETNAM 3 Table of Contents C. Specific Institutional and Policy Changes Needed.............................................................68 D. Implementation Roadmap ................................................................................................70 Appendix I – Synthesis Review .............................................................................................73 Appendix II – International Experience Review ..................................................................113 References ...........................................................................................................................145 BOXES Box 1: The Nam Cuong group returned an infrastructure project .........................................48 Box 2: Possible options for a CPSCL-type national-level MDF in Vietnam ..........................53 Box 3: Adapting the FINDETER model to Vietnam’s circumstances ...................................54 Box 4: What would be needed to enable pooled financing in Vietnam? ................................55 Box 5: Adapting the Philippine model of a guarantee corporation to Vietnam .....................56 FIGURES Figure 1: Since 1990, Vietnam has seen strong growth in GDP per capita and the share of population that is urban ............................................................................................19 Figure 2: Recent growth in Vietnam has been based on factor accumulation and not productivity ..............................................................................................................20 Figure 3: GDP growth decelerated from 2006, even as investment continued to rise ................21 Figure 4: A comprehensive approach addresses governance, financing, and execution ...............22 Figure 5: Short maturity periods of less than five years dominate the Vietnamese bond market....27 Figure 6: Licensed FDI has registered large inter-annual variations, in all three provinces .........37 Figure 7: The transport and environment sanitation sectors account for more than 80 percent of HCMC’s infrastructure investment needs for the period 2011-2015 .....................38 Figure 8: HCMC faces a sizeable funding gap of 59 percent of effective demand......................38 Figure 9: The Transport and Water Supply Sectors Account for 75 Percent of Quang Nam’s Planned Infrastructure Investment Needs ..................................................................41 Figure 10: Quang Nam faces a funding gap of 34 percent of effective demand ...........................41 Figure 11: The transport sector accounts for 92 percent of Quang Ninh’s planned infrastructure investment needs .......................................................................................................43 4 ASSESSMENT OF THE FINANCING FRAMEWORK FOR MUNICIPAL INFRASTRUCTURE IN VIETNAM Table of Contents Figure 12: Quang Ninh faces a vast funding gap of around 90 percent of effective demand .......43 Figure 13: The MDF model ......................................................................................................63