Document of The WorldBank FOR OFFICIAL USEONLY ReportNo: 38504-VN PROJECTAPPRAISAL DOCUMENT ONA PROPOSEDCREDIT INTHEAMOUNT OF SDR32.8MILLION (USS50 MILLIONEQUIVALENT) TO THE SOCIALIST REPUBLIC OF VIETNAM FORA HO CHIMINHCITY INVESTMENT FUND FORURBAN(HIFU) DEVELOPMENT PROJECT May 24,2007 UrbanDevelopment Sector Unit Sustainable DevelopmentDepartment East Asia and Pacific Region This document has a restricted distribution and maybe usedbyrecipients only inthe performance o f their official duties. It contents may not otherwise be disclosed without World Bank authorization. CURRENCYEQUIVALENTS (ExchangeRateEffectiveMay31,2006) CurrencyUnit = VietnameseDong (VND) 16,025VDN = US$1 1.51US$ = SDR1 FISCALYEAR January 1 - December31 ABBREVIATIONS AND ACRONYMS AAA Analytical andAdvisory Activities AFD Agence Franqaisede D6veloppment (FranceAgency for Development) BOT BuildOperateTransfer BW BorrowingWindow CFAA CountryFinancialAccountabilityAssessment CPRGS ComprehensivePovertyReductionandGrowthStrategy CPS CountryPartnershipStrategy DA DesignatedAccount DAF DevelopmentAssistanceFund DNIF DongNai InvestmentFund DONRE DepartmentofNaturalResourcesandEnvironment DPI DepartmentofPlanningandInvestment DPL DevelopmentPolicyLending EIA EnvironmentalImpactAssessment EMP EnvironmentManagementPlan EMPF EthnicMinorityPlanningFramework ES EnvironmentalSafeguards EVN ElectricityofVietnam FI FinancialIntermediary FIL FinancialIntermediaryLoan FS FeasibilityStudy FSPP Frameworkfor SelectingPrivatePartners GDP GrossDomesticProduct GOV GovernmentofVietnam HANIF Hanoi InvestmentFund HCMC Ho Chi MinhCity HDP HIFUDevelopmentProject HIFU Ho Chi MinhCityInvestmentFundfor UrbanDevelopment ICB InternationalCompetitiveBidding IDA InternationalDevelopmentAssociation IEE InitialEnvironmentAssessment LDF Local Development Investment Fund LOC Lineo fCredit M I C MiddleIncome Country M O F MinistryofFinance FOROFFICIAL USE ONLY MPI MinistryofPlanningandInvestment N C B National Competitive Bidding NPL Non-Performing Loans ODA OfficialDevelopment Assistance OED Operations Evaluation Department OLA On-lendingLoanAgreement PC People's Committee PER Public Expenditure Review PER-FA Public Expenditure Review and Integrated Fiduciary Assessment PMO Project Management Office PMU Project Management Unit PPA Project Preparation and Appraisal PPC ProvincialPeople's Committee PPI Private Participation inInfrastructure PPP Public Private Partnership PRSC Poverty Reduction Support Credit PSP Private Sector Partner RAP Resettlement Action Plan ROE Return on Equity S I L Specific Investment Loan SOCB State OwnedCommercial Bank SOE State-Owned Enterprise SPV Special Purpose Vehicle TA Technical Assistance TAF Technical Assistance Facility TOR Terms o f Reference USTDA Unites States Trade and Development Agency VDB Vietnam Development Bank VDIC Vietnam Development Information Center VND Vietnam Dong WBTC West Bus Terminal Co. Vice President: James W. Adams Acting Country Director: MartinRama Sector Director: Keshav Varma Task Team Leader: KamranKhan This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not be otherwise disclosed without World Bank authorization. VIETNAM HIFUDevelopment Project CONTENTS Page A. STRATEGIC CONTEXT AND RATIONALE ....................................................................... 1 1. Country and Sector Issues........................................................................................................ 1 2 . Rationale for Bank involvement .............................................................................................. 3 3 . Higher level objectives to which the project contributes ......................................................... 6 B. PROJECT DESCRIPTION ...................................................................................................... 6 1 6 2 .. Lending instrument .................................................................................................................. Project development objective andkey indicators ................................................................... 6 3. Project components .................................................................................................................. 7 4 . Lessons learned andreflected inthe project design ................................................................ -8 5 . Alternatives considered andreasons for rejection.................................................................... 9 C. IMPLEMENTATION .............................................................................................................. 10 1. Partnership arrangements ....................................................................................................... 10 2 . Institutional andimplementation arrangements ..................................................................... 11 3. Monitoring and evaluation of outcomes/results ..................................................................... 11 4. Sustainability.......................................................................................................................... 12 5. Critical risks andpossible controversial aspects .................................................................... 12 6 . Loadcredit conditions and covenants .................................................................................... 14 D APPRAISAL SUMMARY . ....................................................................................................... 15 1. Economic and financial analyses .......................................................................................... -15 2 . Technical................................................................................................................................ 16 3. Fiduciary................................................................................................................................. . . 16 4 . Social...................................................................................................................................... 17 5. Environment .......................................................................................................................... -18 6. Safeguard policies .................................................................................................................... 19 7. Policy Exceptions and Readiness............................................................................................. 20 Annex 1:CountryandSector or ProgramBackground .............................................................. 21 Annex 2: Major RelatedProjectsFinancedby the Bankand/or other Agencies ...................... 30 Annex 3: ResultsFrameworkandMonitoring .............................................................................. 31 Annex 4: DetailedProjectDescription ........................................................................................... 35 Annex 5: ProjectCosts..................................................................................................................... 49 Annex 6: ImplementationArrangements ...................................................................................... 50 Annex 7: FinancialManagementandDisbursementArrangements .......................................... 52 Annex 8: ProcurementArrangements ........................................................................................... 63 Annex 9: EconomicandFinancialAnalysis ................................................................................... 70 Annex 10: SafeguardPolicyIssues ................................................................................................. 85 Annex 11:ProjectPreparationandSupervision ........................................................................... 90 Annex 12: Documentsin the ProjectFile ....................................................................................... 91 Annex 13: Statementof LoansandCredits ................................................................................... 92 Annex 14: Country at a Glance ....................................................................................................... 95 MAPCleareadby IBRD VIETNAM HO CHIMINHCITY INVESTMENT FUNDFORURBANDEVELOPMENT (HIFU) DEVELOPMENT PROJECT PROJECTAPPRAISAL DOCUMENT EAST ASIA AND PACIFIC EASUR Date: May 24,2007 TeamLeader: KamranM.Khan CountryDirector: MartinRama (Acting) Sectors: Urban Development, Finance Sector Director: KeshavVarma Themes: Municipal Finance Category: FI ProjectID: P104848 Safeguard Screening Category: Limited Impact For Loans Credits and Others: Total Bank Financing: (US$): 50 million Governmentlsub borrowers Contribution: US$30 million BorrowerDXecipient 0.5 0.5 International 50.0 50,O DevelopmentAssociation PrivateSector 30.0 30.0 Contribution Total 80.5 0.0 80.5 Borrower: SOCIALIST REPUBLIC OF VIETNAM ResponsibleAgency: H o ChiMinhCityInvestmentFundfor UrbanDevelopment(HIFU) Address: 33-39 Pasteur, District 1, Ho ChiMinhCity, Vietnam Contact Person: Ms.Ngo KimLien, General Director, HIFU Estimateddisbursements(FY/US$m) FY FYO8 FYO9 FYlO FYll FY12 Annual 5 7 15 15 8 Cumulative 5 12 27 42 50 Project implementationperiod: FY'08 FY'12 - Expectedclosing date: December 31,2012 Does the project depart from the CAS incontent or other significant respects? [ ]Yes [[XINO X ] N o Does the project require any exceptions from Bank policies? [ ] Y e s Have these been approved by Bank management? [[ ]] Y e s Y e s [[XINO IN0 Is approval for any policy exception sought from the Board? Does the project include any critical risks rated"substantial" or "high"? [XIYes [ ] N o Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ] No Project development objective: Refer PAD B.3 The project aims to develop HIFUas a model Local Development Investment FundLDIF(in terms o f internal policy and procedures for financial policy, sub-project appraisal, social and environmental safeguards, and partnershipwith the private sector) and increase private sector participationinfinancing municipal infrastructure inHCMC Project description Refer PAD B.4 The project design envisages providing lendingsupport as well as monitoring and implementation support. Bothproject components will be managedby HIFU Component 1: Investment Capital (US$ 80 million; IDAUS$ 50 million) Component 2: Technical Assistance (US$ 0.5 million; IDA US$ 0 million) Which safeguard policies are triggered, ifany? The project will nothave any large scale or irreversible adverse environmental impacts. The project triggers the World Bank Safeguards Policies on Environmental Assessment (OP/BP 4.01) and Involuntary Resettlement (OP/BP 4.12). The project i s classified as environment Category "FI". Significant, non-standard conditions, if any?: None A. STRATEGIC CONTEXT AND RATIONALE 1. Country and Sector Issues 1. The demand for municipal infrastructure in Vietnam is increasing rapidly as the country copes with rapid urbanization, decentralization and highrates o f economic growth. There is wide agreement that a significant investment gap exists vis-&vis municipal infrastructure demand. Domestic and international commentary on the investment climate in Vietnam is beginning to increasingly cite the lack of infrastructure in general and municipal infrastructure in particular as a key bottleneck to investment and economic growth. The heavy reliance on public budget i s an important reason for the slow pace o f infrastructure development. While Vietnam has utilized Official Development Assistance (ODA) very effectively over the last decade, the magnitude o f the infrastructure challenge in the fast growing Vietnamese economy makes it unlikely that the traditional approach involving one ODA-funded infrastructure investment at a time will be sufficient. Vietnam has to consider alternative models for financing infrastructure. Specifically, establishment o f infrastructure finance models which involve local institutions and leverage private capital must be an important element o f Vietnam's strategy to become a middle-income country. 2. The mismatch between the long-term financing needs o f infrastructure investment and the short-term deposits held by banks means that banks are not the ideal financing institutions for infrastructure. Vietnam's financial sector is currently dominated by five major state-owned commercial banks (SOCBs), accounting for about 80% o f the capital, lending and assets o f the banking system. Over the past decade the SOCBs have evolved from specialized policy-lending vehicles to more commercially oriented financial intermediaries. However, much more needs to be done to reform the banking sector before it can be appropriately utilized to finance urbaninfrastructure development. Infrastructure enterprises have to date not borrowed large amounts from the SOCBs, with the exception o f firms inthe transport sector. 3. Overall the market for bonds i s poised for significant development but important institutional reforms, addressing governance and transparency inparticular, are requiredto permit this potential to be realized. The national Government has beenworking to develop the government bond market. It plans to raise US$ 4 billion by 2010 to be usedmainly to finance infrastructure projects. At the provincial level, the first municipal bonds were issued by the Ho Chi Minh City (HCMC) government in 2003, in the form o f a general obligation bond, raising US$ 127 million. The rules for issuance o f municipal bonds are not yet clear, and they do not always provide the right incentives to the issuers. In particular, there i s a need to further strengthen disclosure rules for the public offerings. The stock o f sub-national government debt in Vietnam i s not currently a threat to fiscal stability, but plans for increased investment are likely to see sub-national debt increase significantly, requiringnationaloversight. 4. The challenges facing Vietnam vis-a-vis financing o f municipal infrastructure are further complicatedbythe following two important developments: 0 Vietnam i s fast transitioning towards a decentralized governance model. The responsibility for municipal infrastructure i s being devolved to the provincial governmentswhich have limitedbudgetary resources, and suffer from a combination o f weak institutional capacity and policy uncertainties which will affect the flow o f private CapitaVexpertise into municipal infrastructure development. 0 Inthe near to mediumterm the private financial markets inVietnam are unlikelyto become adequately deep or broad to meet the fast growing municipal infrastructure financing demand. While the acute demand for financing calls for immediate public sector action, measures must be taken to ensure that actions taken in the interim period take into account the risk o f private sector crowding-out in the medium to long-term. 5. The Government o f Vietnam (GOV) has actively encouraged the provincial governments to take responsibility for financing municipal infrastructure. The 2001 Public Administration Reform Master Program (for 2001-2010) lays the groundwork for putting in place the regulations on decentralization o f administrative management and fiscal functions. The two most significant components o f the emerging municipal finance framework include permission to the provincial governments to: (i) establish Local Development Investment Funds (LDIFs), and (ii) up to 30% o f their annual state budget for development borrow investments - H o Chi MinhCity (HCMC) and Hanoi are allowed to borrow up to 100% o f annual budget - through revenue or general obligation bonds. LDIFs allow the provincial governments to mobilize capital and enter into contracts with the private sector for the development o f municipal infrastructure. The reliance o f provincial governments on LDIFsis increasing very substantially as the decentralization process continues inVietnam. HIFUwas the first LDIF established in June 1996. Since then, twelve other provincial governments have established LDIFs with the approval and support o f the GOV. HIFU remains by far the most financially viable and operationally successfbl LDIFinVietnam. 6. The LDIFs are expected to operate as commercial-oriented entities, raising private capital and investing in municipal infrastructure projects which offer cost recovery. In 2004 the total charter capital o f LDIFs inVietnam was approximately US$ 300 million; in 2006 it i s estimated to be approximately $400 million, with the top-seven LDIFs investing approximately US$ 100 million per year which accounts for an investment increase o f 118% for these funds over the 2002 level. The LDIFs currently also engage in short-term borrowing on a roll-over basis from SOCBs and other SOEs. Hence, possible mismanagement o f LDIFscarries the risk o f decreasing investment efficiency inmunicipal infrastructure, increasing the contingent liabilities o f the GOV, and undermining financial market development. There is acceptance at the highest levels inthe GOV that it is critical that HIFU- the most advanced and leading LDIF- adopts an operational model which can bereplicatedinthe other LDIFs. 7. HIFUhas a strong financial position, including a very low Non-Performing Loan (NPL) ratio and excellent profitability and balance sheet strength (see Annex 9 for details). HIFU i s in the initial stages o f corporatization, and significant progress made to date vis-a-vis corporate governance includes: 0 HIFUoperates under a legally bindingCredit Statute ofthe HCMC government that mandates investment analysis to ensure cost recovery, and provides guidelines for investmentmonitoring and workouts whennecessary. 0 HIFUhas awell developed internalappraisal andinvestment monitoring system, and the decisionmakingauthority rests with HIFUstaff. 2 HIFUprices its loans at market rates, and has an excellent track record of investing incost recovery orientedinfrastructureprojects inpartnershipwiththe private sector. 0 HIFUmaintains annual audited financial statements which arebasedon the accepted accounting standards used by corporations in Vietnam. The financial statements provide reasonably reliable data on the financial performance and portfolio quality. 0 HIFU is financially self sufficient and does not require any operational budget support from the provincial government. 0 Majority o f HIFU staff are hired on private contracts, i.e., they are not provincial government employees. HIFUhas a proven track record of buildingmajor infrastructure projects - including toll roads and a major BOT project in the water sector - in HCMC which are currently operating on a financially viable basis and providing infrastructure services to HCMC residents. Finally, HIFUhas been selected based on a comprehensive qualification criteria developed to establish a model for the participation o f other LDIFs in anticipated future World Bankprograms. 8. The successful performance o f HIFUinfinancing municipal infrastructure is also a critical national priority because HCMC is the largest city in Vietnam and a major industrial and commercial center with a population o f 6 million. It is a Category 1 city reporting directly to the Central Government. The city has been in the forefront o f the transition initiated by the economic reform "Open door" and "Renovation" policies which have led to unprecedented growth for the country, particularly inthe industrial sector. The growth has been most pronounced in HCMC, which accounts for 35-40 percent o f the national GDP. The annual growth rate o f the HCMC urban population is between 5-7 percent with the population in 2020 expected to equal approximately 10 million residents. The increase in urban population and continued economic growth is putting increased pressure on the urban services o f the city. For example, it was recently reported (Vietnam News, 15 January 2007) that there has been an annual increase in the use o f public transport in HCMC o f around 20 percent. The urban areas face similar problems in other sectors such as water, education and health. It i s estimated that HCMC needs to invest approximately $3 billion annually to meet the current infrastructuredemand. 2. Rationalefor Bankinvolvement 9. The Bank's infrastructure strategy involves engagements which focus on improvement o f sector policies, provision o f public/ODA funds for critically needed municipal infrastructure, and establishment o f models which can support the increase o f private sector participationininfrastructure delivery. 10. The Bank's response to the GOV request for assistance to LDIFs included AAA and an operational program. The AAA completed in 2005 produced a detailed Briefing Paper which highlighted the relevant policy and operational issues involved in the development o f LDIFs. The AAA established the Bank as the primary advisor to the government and confirmed the commitment o f the GOV andkey provincial governments to the reform and development o f LDIFs. 3 11. The planned sequence o f World Bank Group (WBG) engagement with LDIFs will follow the below described proposed outline for the long-term development o f LDIFs. Stage I Stage II Stage 111 12. The Bank's operational engagement regarding the LDIFs involves helpingthe GOV establish national policy and regulatory framework to support the development o f LDIFs, develop a model LDIF vis-&vis operational standards and investment efficiency, and provide credit to "Qualified" LDIFs. IDA financing will be used in the initial stage o f the engagement because it can contribute to make municipal infrastructure more available and affordable to beneficiaries, Le., IDA financing is expected to address the failure of the financial market to provide long-term financing for infrastructure investment. With its financing IDA also brings technical expertise to support the operational reforms in HIFU. Finally, the Bank's operational engagement with HIFUat this stage will providea platform for other donors interested in scaling-up their financial support to LDIFs based on the lessons learned from the project. 13. The HIFUDevelopment Project (HDP) is a split operation o f the national project called Local Development InvestmentFunds Project (LDIFP). The LDIFP which focuses on national policy and targets all LDIFs is currently under preparation for an expected delivery in late FY08. The Bank has agreed to support the GOV request to proceed in FY07 with a project (HDP) focused exclusively on HIFUbecause HIFU is ready to start executing a pipeline o f projects in 2007, and HIFUManagement and the HCMC Peoples' Committee (HCMC PC) have committed to adopt the LDIF internal policy and operational reform measures which have been prepared under the LDIFP. Proceeding more rapidly with a targeted support to HIFUis in line with the incentive framework envisaged under the LDIFP. The LDIFP remains a highpriority for the Bank and the GOV because it will provide the policy and institutional framework and the necessary technical assistance which is critical to the long-term development o f HIFUand other LDIFs. 14. WBG strategic aim o f operational engagement in the particular case o f HDP is to establish a road map for the LDIFs to become independent, competent and professional infrastructure financing agencies which can leverage private capital in infrastructure without distorting the market or creating contingent liabilities for the provincial andcentral 4 government. This will require a long-term operational engagement and utilization o f multipleinstrumentsavailable to the WBG inthree stages. 15. Stage One. The provision o f a relatively small IDA credit to HIFU i s the first, modest step. The strategic approach via the IDA credit to HIFUi s to: (a) alleviate the need for HIFU to rely upon short-term borrowing to finance long-term infrastructure investments; (b) increase the affordability o f municipal infrastructure to the citizens by providing long-term financing which i s currently not available in Vietnam; and (c) help HIFUestablish the appropriate systems and procedures to builda track record, including the rules o f the game for partneringwith the private sector, which can form the basis for HLFU's future borrowing from the market via bank loans or bonds. The identified and agreed role o f IFC in this engagement i s to work with HIFU to co-finance some o f the investments which are identified inthe HDP subproject pipeline. The strengthening o f the internal systems andinstitutional capacity o f HIFUwill also solidify and further expand the corporatization o f HIFUfrom the municipal government structure. Indeed, the HCMC PC has repeatedly confirmed that improvement o f HIFU's institutional capacity will be the strongest impetus for instituting additional corporate governance reforms, i.e., the level of independence which HIFU can obtain depends upon continued improvement in HIFU's professional competence. The operational association with and provision o f technical assistance from the WBG will further improve HIFU's institutional capacity. 16. Stage Two. The issuance o f an international standard, credit-based HIFUBond will bethe most positive demonstration o fHIFU'sprofessionalcompetence. The success o fthe HDP and continued progress o f LDLFP and national policy framework will be critical to prepare HIFU(and the M O F as the regulator) for a "HIFU Bond" in the near future. The next phase o f direct operational engagement o f the WBG with HIFUwill therefore likely involve credit enhancement o f a HIFU Bond or a credit based borrowing via the Sub- national Finance Program o f WB/IFC. It has been discussed with HIFUthat during the implementation o f the HDP the task team will initiate discussions with a global credit rating agency to help prepare HIFUfor a credit rating. 17. Stage Three. The third stage o f WBG engagement with HIFU will probably be through IFC and MEGA. It is anticipated that in State Three more private players will be active inthe infrastructure finance market and HIFUwill be transitioning towards it stated long-term role involving secondary market functions, such as securitization. 18. The Bank's technical and operational approach to HIFU and LDIFs is based on substantial international experience in developing municipalhfrastructure finance systems around the world. The task team has conducted a detailed review o f all the relevant and comparable models pursuedinthe developed and developing countries. These experiences are described indetail inthe AAA report o f LDIFs.The task team has worked closely with staff in FSPSD, PREM and the IFC to explore the avenues for the Bank's operational engagement with LDIFs before finalizing the approach which i s outlined inthis PAD. The task team has also employed the Bank's knowledge tools to safeguard against possible adverse cross-sector policy impacts, particularly on financial market development (please see page 36 for details). Finally, the task team includes global experts in municipalhfrastructure finance as well as senior staff who fully understand the technical issues and have an excellent understanding o f the Vietnamese context. 5 3. Higherlevel objectivesto which the projectcontributes 19. A financially viable and sustainable HIFUwill contribute significantly to reducing the municipal infrastructure financing gap in the most economically important province in Vietnam. Establishment o f HIFUas a successful model o f a financially sound, competent andprofessionally independent institutionwill also contribute towards the development o f other LDIFs in the country. Once HIFU has gained legitimacy vis-a-vis its role o f public and ODA - it can at a later stage begin to leverage such competence towards efficiently and effectively mobilizing and managing infrastructure financing hnds - both mobilizing significant private funds, both at the project level (the existing model) and also at the funds' equity capital and on-balance sheet debt level. This in turn i s expected to bring about a significant increase inthe current level o fprivate sector capital leverage, and hence, will contribute significantly to reducingthe municipal infrastructure financing gap. 20. The Country Partnership Strategy (CPS) for Vietnam for the period 2007-2011 recognizes the development o f a vibrant capital market to support the financing o f infrastructure in particular as an essential element in the reform o f the financial system under its first pillar focused on improving the business environment. Under this pillar, it also emphasizes that making further progress in infrastructure development requires diversijjingfunding sources and improving transparency in resource mobilization, notably at the local level. In this context, the increase in private share o f total financing o f infrastructure i s one o f the selected outcomes to which the CPS is expected to contribute, notably through the development o f municipal financial markets and non-subsidized lending facilities in selected jurisdictions and HCMC in particular. The HIFU Development Project is instrumental for such results to be achieved. B. PROJECTDESCRIPTION 1. Lendinginstrument 21. The proposed instrument is a Financial Intermediary Loan (FIL) because it is the most appropriate instrument for addressing the systemic issues associated with the channeling o f funds for municipal infrastructure. The wholesale approach supported under the project makes the Specific Investment Loan (SIL) instrument less relevant. Similarly, a Development Policy Lending(DPL) would not have provided the appropriate platform for a long term engagement which i s capable of: (a) strengthening the institutional capacity o f HIFUand(b) providingthenecessary detailed operational advice to HIFU. 2. Projectdevelopmentobjectiveandkey indicators 22. The Project Development Objective is to develop HIFUas a model LDIF (interms o f internal policy and procedures for financial policy, sub-project appraisal, social and environmental safeguards, and partnership with the private sector) and increase private sector participation infinancing municipal infrastructure inHCMC. 0 Evidence that private sector participation in financing municipal infrastructure in HCMC i s improving will be measured by the increase intotal number and amount o f HIFUinvestment (debt andequity) per year inmunicipal infrastructureprojectswith private sector involvement, as well as by the improvement inthe leverage ratio (new 6 private capital / HIFU direct investment) in municipal infrastructure projects per year. 0 Evidence that HIFUperforms as a model LDIF will be measured by its continued compliance with the Financial Covenants, as well as by its adherence to the Project Preparation and Appraisal (PPA) and Private Sector Partners (PSP) selection manuals. The satisfactory adherence o f projects funded by the line o f credit to these manuals will be a major institutional development; the Bank and HIFU will also assess the extent to which they are progressively used for other HIFUinvestments, and regularly review lessons to be drawn from implementation, so as to help streamline them inHIFUportfolio. 3. Projectcomponents Component1: InvestmentCapital(US$80million;IDA US$50 million) 23. A line o f credit will be provided to HIFU to invest in cost recovery oriented municipal infrastructure investments in partnership with the private sector. A Project Preparation and Appraisal (PPA) Manual governs how the HIFUinvestments under the line o f credit will be identified, developed and appraised. A Private Sector Partner (PSP) selection Manual describes the way private sector participants will be selected in Project Enterprises financed under the line o f credit. 24. HIFUwill work with the Departmentof Planning and Investment (DPI) and other departments within the provincial government to identify investment needs in HCMC, as described in HCMC master plan, which can be financed via public private partnerships. HIFUwill then work with the city departments to put inplace effective project structures and then invite private investors to participateinthe projects. 25. A pipeline o f projects has beenidentified and confirms that HIFUcan absorb the investment capital which i s being made available via the project. Two sub-projects to be financed inyear one o fproject implementation havebeen appraised. Component2: TechnicalAssistance (US$0.5 million;IDA US$ 0 million) 26. HIFU will finance the technical assistance to support the implementation of operational reforms, including: (i) support to implement the PPA manual with on-the-job chief advisor and technical specialist, as well as a social specialist and an environment specialist; (ii)support to implement the PSP manual with on-the-job chief advisor and private sector specialist; (iii)independent monitoring consultants for social and environmental safeguards policies; and (iv) Financial Audits o f HIFU to International AuditingStandards. 27. Detailed set o f Terms o f Reference (TOR) for technical assistance consultants have been prepared. The package o f TORs and the associated procurement plan has been reviewed and approved by the HCMC PC as part o f the final HDP project approval. The HCMC PC approval makes the implementation o f the procurement plan, including the utilization o f an estimated $0.5 million HIFU capital for the assigned objective o f recruiting international and local consultants in accordance with the TORs, a firm and official mandate for HIFU.In order to ensure timely mobilization o f key consultants, the mobilization o f consultants under three (3) o f the most critical TORs - including the TOR 7 for independent auditors to ensure compliance with safeguards policies - has been established as a Condition o f LoanEffectiveness. 28. The technical assistance will contribute to the institutional development o f HIFU. Specifically, it will build upon the current practices o f HIFUand develop capacity inHIFU to implement the PPA andthe PSP manuals. The long-term institutional development plans have been prepared in consultation with the Bank and are documented inthe two manuals. The capacity building o f HIFU is a part o f a broader initiative which involves AFD, USTDA, the World Bank and other donors. The Bank team has worked very closely with USTDA to scope, prepare andprovide capacity buildingtechnical assistance to HIFU. The phase one (approximately $300,000) o f the USTDA technical assistance was concluded in 2006. The planned phase I1to focus on internal operations is currently beingreviewed by USTDA management. Similarly, AFD has approved a technical assistance package o f approximately Euros 1.5 million which will provide significant technical assistance and training to HIFU and its borrowers in financial management and other operational functions. The technical assistance provided by AFD and USTDA complements the IDA credit and the associated HIFU-financed technical assistance. Further details o f the Bank's partnershipstrategy vis-&vis the development o f LDIFs is described on section C.1. 4. Lessons learnedand reflectedin the project design 29. Slow Disbursement in infrastructure portfolio. The disbursement level o f ODA- financed investment portfolio in Vietnam, notably vis-&vis infrastructure projects, has remained slow for many years. In reviewing the problems associated with slow disbursements, the Government andthe Bank agreed, inter alia, on the need to explore new models of doing business which are in line with the current decentralization process, and involve select local institutions-"islands o f competence" - which are performing in an efficient and professionalmanner. HIFUhas so far beenrelatively successful in leveraging private investment in infrastructure in HCMC and building operational infrastructure projects (e.g., toll roads and water BOTS). Moreover, HIFU involvement has helped to improve the efficiency o f projects implemented through the HCMC line departments. HIFUalso has an excellent funds disbursement record, completing projectsinsignificantly shorter time frames than traditional investment projects. The decision o f the HCMC PC to use HIFUas the lead implementing agency i s therefore fully supported by the Bank. 30. Financial Intermediary Lending. The Independent Evaluations Group (IEG) review o f Bank Line o f Credit (LOC) operations under OP 8.30 rules for Financial Intermediary lending identifiedthe need for a sound analysis o f the financial intermediaries by the Bank. The Bank has conducted a detailed due diligence o f the financial operations o f HIFU, first inthe context ofadetailed AAA which was completedinFY05, andmorerecently through a consulting assignment with an international accounting firm. The analysis confirms that HIFUhas a strong financial position. The Bank has appraised HIFU's financial viability vis-a-vis its investmentpractices: for example, it prices loans at market rates and invests in cost recovery oriented infrastructure in partnership with the private sector. Specific financial covenants governing its financial policy have also been put in place to further strengthen HIFU's financial position. Other elements o f project design which address the risks identifiedby the IEGreport include: 8 HIFUmaintains annual audited financial statements, which provide reasonably reliable data on financial performance and portfolio quality. HIFUManagement has agreed to switch to International Audit Standards. Strict and comprehensive qualification criteria have been applied to select HIFU,with a view to establish a model for the participation o f other LDIFs inBank programs under the LDIFP. A review has beenconducted to analyze HIFUprojectspipeline andits implementation track-record to confirm that HIFU has the capacity to invest and manage the IDA credit. The MOF will on-lend the funds to HIFUinVietnam Dong (VND), which will protect HIFUagainst any fluctuationinthe VND foreign exchangerate. The foreign exchange hedging cost as well as the IDA commitment fee i s fully priced in the on-lending rate charged by the MOF to HIFU as required under current Vietnamese regulations governing ODA. Inaddition, the MOF on-lending terms do not present a disadvantageous maturity mismatch for the MOF. HIFUcharges market (positive real) interest rates on its loans, and its target ROE on equity investments are based on a risk free treasury rate plus a margin. Comprehensive operational frameworks have been established in the form o f Project Preparation and Appraisal Manual and the Private Sector Participant Selection Manual. The framework has been developed in close collaboration with HIFU, Department o f Planning and Investment, Department o f Finance, and other city departments. The manuals have been reviewed and approved bythe HCMC PC. HIFUwill implement the framework with the help of international on-the-job consultant advisors and specialists, which will develop HIFU's operational capacity and further reduce project risk. 31. Link to National Policy. The Bank experience in Vietnam and around the world indicates that the results o f projects can be maximized if they are linked to andor are supported by a broader national policy framework. The HDP i s linked to a national program and a Bank strategy for engaging with LDIFs in Vietnam which has been established over a period o f 2-3 years. 32. Government Ownership. Previous Bank-financed infrastructure funds point to the importance o f a strong and consistent government ownership. The HDP i s well anchored because o f the LDIFP and the deep history o f government ownership o f the Bank- recommended LDIF reform agenda dating back to 2004. The project has been endorsedby the MOF, M P I and other relevant GOV agencies. The commitment o f the HCMC PC is also strong andit has beenconfirmed with the issuance o f the official HCMC PC Decision approving the project and the conditions relating to the internal policy o fHIFU. 5. Alternatives consideredandreasonsfor rejection 33. Establishing a National Municipal Development Fund. Creating one fund at the national level was initially considered as it was deemed to reinforce the Bank's focus on the wholesale model. However, there were concerns that a national fund: (i) not might adequately support the decentralization objectives o f the GOV which has devolved the responsibility o f financing and managing municipal infrastructure to the provincial governments; (ii) would reduce the buy-infrom Provincial People's Committee; (iii) would fail to leverage the operational track record already established by successful LDIFs such as HIFU; (iv) would result in more cumbersome decision making processes involving 9 many central government entities; and (v) i s less effective than decentralized institutions to identifyhighquality cost-recovery projects. 34. Providing a Wholesale Guarantee Facility. Providing a wholesale guarantee facility aimed at decreasing the cost and extending the maturity o f loans provided for infrastructure projects in Vietnam was considered as an alternative to directly supporting the LDIFs. However, given that the problem inVietnam i s both one o f access to long-term financing as well as that o f identification and preparation of financially viable projects, it was decided that providing long-term financing and detailed technical assistance on operational reforms to qualified LDIFs would help achieve such objective more effectively. Moreover, direct support to the LDIFs would also allow the Bank to pursue other developmental objectives such as corporate governance and social and environmental sustainability, which would be much harder to accomplish under the wholesale guarantee facility model. Accordingly, it was agreed that the wholesale guarantee facility model may bepursued at a future stage as an appropriate extension o fthe current operational approach. 35. Relying on the WB-IFC Sub-national Finance Program. This option was initially considered in coordination with IFC and was eventually disregarded because: (i) being exclusively transaction oriented, it would not provide the right entry point to provide the required long-term policy advice and technical assistance to HIFU; and (ii) more being expensive, it would most likely have affected the affordability o f the municipal infrastructures financedby the project. C. IMPLEMENTATION 1. Partnershiparrangements 36. While the project does not involve any formal co-financing, it i s very central to the engagement o f other donors. Since the LDIFs present a promising model for financing municipal infrastructure inVietnam, the donors are all very keen to work with LDIFs. The Bank's AAA on LDIFs is widely regarded as the most in-depth analytical analysis o f the policy and operational issues associated with the development o f LDIFs, and it has been shared very broadly with all interested donors. The donors are very interested inreplicating the frameworks (e.g., manuals, financial covenants, safeguards standards) which are being prepared under the HDP in their engagements with the LDIFs. The coordination on capacity building technical assistance for HIFUhas also been very strong. The HDP and the associated technical assistance very closely complements the technical assistance programs financed by United States Trade and Development Agency (USTDA) and Agence Franqaise de DCveloppement (AFD) in particular. AFD Technical Assistance Project aims to improve HIFU's internal management capacities and to improve the operating and financial management skills o f managers engaged on projects financed under AFD Credit Facility - a Euro 30 million line o f credit for HIFU targeted at health, education, housing and environment projects. USTDA has conducted a review o f the performance of HIFU's activities, which has been useful for the identification and preparation o f HDP. A follow-on capacity buildingprogram i s plannedby USTDA. Other donors have also expressed interest in engaging with HIFU and possibly other LDIFs through the platform provided by HDP and LDIFP, buildingon lessons learned from these projects. Finally, IFC has expressed a very strong interest in financing investments (subprojects) inpartnership with HIFU, and plans to review the HIFUsubproject pipeline 10 to possibly announce a formal commitment to finance 3-4 projects in year 2-3 o f HDP implementation. 2. Institutionalandimplementationarrangements 37. The implementing agency for the HDP will be HIFUas it instituteskeyoperational reforms and undertakes investments in municipal infrastructure with private sector involvement. The implementation structure mirrors the current system and role o f HIFU, with the HDP further enhancing and developing the function o fHIFU. HIFUoperates as a specialized agency within the municipal government, working with the Department o f Planning and Investment (DPI) and other line departments in the municipal government. The DPIas the planning agency for the province identifies the investment needs as well as project ideas, including those which can be financed with private sector participation. The DPI in collaboration with the HCMC PC then assigns the investment targets and project ideas to the concerned line departments. The line departments prepare the technical details o f the projects and consult with HIFUon the financial structuring with a view to involve private sector. The Department o f Finance - on behalf o f the HCMC PC - will work with HIFUto ensure that an appropriate process is used to select private sector partners and provide oversight on the financial operations o fHIFU. 38. The IDA credit will be on-lent by the MOF to HIFUin VND on terms which are stipulated in Decree 134 and detailed in MOF decision No. 3936 dated March 22, 2007. The equity or paid-in capital o f HIFU(referred to inVietnam as charter capital) i s provided by the HCMC-PC. HIFU will invest the investment capital provided under the project according to the loan conditions which restrict the investment to cost-recovery municipal infrastructure and define the sectors o f focus. The key financial covenants cover the whole financial operation o f HIFU (not restricted to IDA credit) to ensure the financial and operational viability o f HIFU as an institution. The project conditions will help to further support HIFU's qualification under Bank OP 8.30. The disbursements to HIFUwill be based on a 6-months report based system, which will require HIFUto document how the funds received based on the previous report were utilized, and describe how the hnds requested for the next periodwill be used. 3. Monitoringandevaluationof outcomes/results 39. A comprehensive monitoring system has been established in close collaboration with HIFU to monitor and evaluate the project activities and operations leading to the project objectives. The monitoring systemhas four components: 1. HIFU internal system will provide the baseline data and report on results as follows: HIFUDepartment o f Planning and Promotion will collect information on the indicators for private sector involvement and onprivate sector partner selection; and HIFU Department o f Appraisal will collect information about the progress made inimplementing the Project Preparation and Appraisal (PPA) manual. 2. Quarterly unaudited financial statements will be provided by HIFU to the Bank; Yearly audit report ofthe financial statements-prepared by an independent auditor to conduct international standard financial audits-will be provided to the Bank within six months after the end o fHIFUfiscal year. 3. Independent consultants will monitor the compliance o f each sub-project with the social and environmental safeguards requirements. 11 4. Bank Supervision Team (with support from a contract with an international accounting firm in conducting financial assessment o f HIFU)will conduct periodic reviews of un-audited quarterly as well as review o f the annual audited financial statements to ensure compliance with the financial covenants and the achievement o f operational reform milestones (subproject appraisal system and framework for the selection o fprivate sector partners). 40. Project Review. All project information will be compiled by HIFU management and discussed with the HCMC-PC and the Bank in a workshop to be held every six months. The workshop will provide an opportunity to discuss project progress and any outstanding issues, including the need to refine or adjust any project components. The operational and institutional framework (PPA and PSP manuals) will be reviewed at least once every year by HIFUand the PC and discussed with the Bank during the six monthly reviews. The manuals may be amended by a resolution o f the PC, provided the written agreement o f the Bank is obtained before the amendment is approved bythe PC. 4. Sustainability 41. The development o f LDIFs in general and HIFU in particular is an important priority for the GOV, for which it has consistently sought Bank assistance. HDP and the upcoming LDIFP should therefore be seen as a coherent and phased support to the LDIF framework for which there i s strong commitment at the central andprovincial government. This series o fprojects is also closely linked to the Bank's policy dialogue with the GOV in the context o f the Poverty Reduction Support Credit (PRSC) process, and specific central government actions aimed at improving the legal and administrative structure for LDIF operations were included in the conditions o f PRSCS. Furthermore, the project activities will be closely coordinated with the work o f the Bank's Financial and Private Sector Development team inVietnam with regardto the development o f regulatory framework for the domestic debt market andthe GOV contingent liability management. 42. The project is expected to have negligible fiscal impact on all parties involved, including HIFU, HCMC government, and the GOV. The GOV is undertaking this project under an on-lending arrangement with terms that cover the foreign exchange hedgingcost as well as the cost o f processing the loan. The loan will be repaid by HIFU.The HCMC PC does not needto provide any additional capital to HIFU, which i s fully able to cover all its operating expenses with its own income. HIFU has been operating very successfblly over the last ten years. The financial analysis demonstrates that HIFUcan recover all its operating costs (including staff salaries) and make a profit from its investments. The cost recovery orientation o f the project also provides an opportunity to HIFUto take advantage o f the project reflows as loans are repaid and HIFU exits out o f equity investments. It i s anticipated that HIFU will continue to use the operational framework which i s being established under HDP to invest the reflow proceeds. The capital investment risk will be addressed through the covenants o f this project. LDIFP will also help establish a national policy framework to fbrther reduce finance risk. 5. Critical risks and possible controversial aspects 43. Because o f the innovative nature o f the wholesale approach supported by the project, the new features introduced inthe management o f LDIF andthe lack o f operational experience in Vietnam in this regard, the project inevitably carries substantial risks. By 12 focusing on the best performing LDF (HIFU) the associated risk i s somewhat mitigated. Furthermore, a clear delineation of Bank responsibility in this Financial Intermediary (FI) operationhas been agreed upon, which mitigates the main reputationalrisksfor the Bank. Risks Risk MitigationMeasures RiskRating &Mitigation Duediligence o fHIFU'sfinancial operations for eligibility under OP8.30 concludes that current financial position o f HIFUis sound. Agreement on clear and achievable financial covenants and associated TA will help enhance HIFU's financial viability Inadequate 0 Quarterly un-audited financial statements will be providedby HIFUto the Bank; Financial Yearly audit report o fthe financial statements-prepared by an independent auditor to M Performance of conduct international standard financial audits-will be provided to the Bank after the HIFU end o f HIFUfiscal year 0 Reports-based disbursement program which will allow the Bank to monitor the use o f funds over the previous six months as well as assess the anticipated need for capital over the coming six months TA is providedunder component 2 to help implementthe manuals HIFUis reluctant 0 Progress inimplementing the PPA and PSP manuals will be reviewed twice a year S to mainstream the byHIFUand the PC inconjunction with the Bank manual 0 The manuals prepared with participation o f HIFU, Line Departments and PC Poor compliance 0 TA is providedunder component 2 to help implementthe provisions o f Annexes of with Env. and the PPA manual on Environment and Social safeguards. S Social Safeguards 0 Independent monitors will be recruited to monitor each subproject 0 Prior review o f category A projects HIFUoperations crowding out private funds is negligible inthe short-run, specific limits on HIFU crowding out the participation have been set. N private sector 0 PSP manual implemented to make the private sector participant selection transparent and efficient 0 The investment eligibility criteria i s provided inthe internal investment policy, Mismanagement which i s part o f the operational reformpackage o f HIFUas a 0 Independent audits and evaluations will monitor HIFUperformance S result o f over- 0 Clear financial covenants monitoredunder Bank supervision via an international capitalization accounting firmo n contract to the Bank 0 Identificationo f a robust project pipeline with detailed description o fprojects Slow preparation 0 The wholesale approach, combined with HIFU's excellent disbursement record, in and the project design mitigates the risk o f slow disbursements M implementation Private sector involvement is expected further to enhance HIFUperformance o fprojects The TA component i s specifically targeted at strengthening the relevant capacity. L o w capacity o f This is recognized anarea of substantialriskrequiring a sound monitoring system HIFUto implement 0 International and technical consultants to provide on-the-job advice and training to the new manuals HIFUstaffover the first 3-years ofproject implementation S 0 Six month review to review and discuss implementation progress with HIFUand the HCMCPC Delays inthe The six TORSpackage for Technical Assistance prepared and approved along with mobilization o f the Procurement Planby the HIFUBoardo f Management. Mobilization o f three key M the TA consultant a condition for effectiveness; RFPs expected to be issuedby Board approval Overall Risk S Rating RiskRating-H(Hi h Risk),S (Substantial Risk),M(Modest Risk),N(Negligibleor Low Risk) 13 6. Loadcreditconditionsandcovenants 44. CreditConditions 0 The GOV through MOF will make the IDA credit available to HIFU under subsidiary agreement which will (i) the interests o f IDA, (ii) the protect meet project objectives, and (iii) provisions for the repayment o f the principal, include interest, and applicable commitment fee associated with the IDA credit. 0 HIFU and HCMC PC through HIFU will ensure the compliance of the credit conditions by HIFUwhich include but are not limited to (i) investment o f credit proceeds in the form o f loans or equity in cost recovery oriented municipal infrastructure projects in partnership with the private sector; (ii) compliance with the provisions o f the manuals for project preparation and appraisal and private sector partner selection (iii) recruitment o f consultants to implement the project according to the five Terms o f Reference (TORs) which have been agreed with the Bank; (iv) compliance with requirements regarding environmental protection and social safeguards and ensuring the sub-project enterprises comply and implement the same; (v) maintenance o f a financial management system and records and accounts adequate to reflect expenditures in respect to the sub-projects, and provision o f reports o f the same to the Bank; (vi) provision o f financial statements which have been audited by independent auditors and are in line with international audit standards; (vii) organization o f semi-annual reviews with Bank and HCMC PC to evaluate the progress o fthe project with respect to implementation. 45. ProjectEffectivenessConditions 0 Execution o f the Subsidiary Agreement between the GOV and HIFU- copy o f the signed Subsidiary Agreement; and 0 Engagement of: (i) an independent monitoring consultant for social safeguards; (ii) an independent monitoring consultant for environmental safeguards; and (iii) a consulting firm in respect o f the implementation o f the Project Preparation and Appraisal (PPA) Manual - copies o f the contract between HIFU and such consultants and consulting firms, together with their respective TORs. 46. FinancialCovenants HIFUhas a sound financial position, and maintaining its financial viability is a critical priority o f HDP. The financial covenants o f the HDP are critical for the future development o f HIFU, as the record o f financial discipline will allow HIFUto raise capital from the market and substantially increase its investment scale. The following financial covenants havebeen agreed: 14 FINANCIAL COVENANTS' APPLICABILITY Aggregate equity investments shall not exceed 50 1 percent o f the total amount o fthe Fund's paid inequity Applies to all HIFU capital. operations 2 The Fund's debt-to-equity capitalization ratio (Le. Leverage) shall not exceed 3:1, where debt means all debt liabilities plus contingent liabilities andequity Applies to all HIFU means paid inequity capital plusretained earnings and operations reserves not allocated to cover specific liabilities. 3 LiquidAssets shall be sufficient to cover projectedFund Applies to all HIFU operating expenses over the subsequent 18 months. operations 4 Total investment (debt and/or equity) ina single obligor shall not exceed 15 percent o f total find capital A n n 1 i - a tn 011 UTCU (including debt and equity). 5 InallHIFUinvestments involving HDPproceeds, HIFU ~ will not take greater than 30% ownership (equityldirect Applies to the use o f investment) ina Project Enterprise IDA proceeds only 6 Inall HIFUinvestments involving HDPproceeds, the debt to equityratio will not exceed 3:1. Specifically, Applies to the use o f debt will not be greater than % o fthe total financing o f - IDAproceeds only the subproject D. APPRAISAL SUMMARY 1. Economicandfinancialanalyses 47. The detailed due diligence o f HIFUfinancial accounts was conducted to determine the financial viability o f HIFU as a potential Bank partner vis-&-vis a Financial Intermediary Loan. The analysis reviewed the quality o f HIFUloan portfolio, including the level o f non-performing loans and a detailed review o f randomly selected loans to determine loan rates and repayment quality. The equity investments o f HIFU were also analyzed to determine HIFU's exposure vis-Bvis industry and investment instrument. The key equity investments were identified and reviewed to determine asset quality. The Income Statement was analyzed v i s - h i s profitability and operational efficiency. Finally, the investments in portfolio companies (non-infrastructure investments) account for a significantly minor proportion of total fund assets and therefore present limit exposure to market fluctuations. The analysis confirmed that HIFU i s in a strong financial position (details are inAnnex 9). 48. The project will significantly improve the financial sustainability o f HIFU and reduce the risk it may present to financial market development due to inappropriate borrowing practices involving short-term roll-over debt. Also, the project will not add any additional cost to HCMC fiscal position but will help HCMC government to protect its 'The GOV has issued a draft decree o n Institutionand Operation o f LDIFs, which specifically addresses covenants 2 and 4. These two covenants, as stipulated above, are consistent with the Bank's technical advice to the GOV. The task team has agreed with HIFUand HCMC PCthat during implementation, covenants 2 and 4 canbe adjusted inline with the final, approved stipulation of the GOV Decree as part of the six monthly review o f all HDP conditions which is described inthis PAD. 15 investments in HIFU(in the form o f charter capital or equity) by improving the financial sustainability o f HIFU operations, and attracting private capital in the development of municipal infrastructure. 2. Technical 49. HIFU will use the IDA credit to invest in cost recovery oriented municipal infrastructure investmentsinpartnership with the private sector. A pipeline o f projects has been identified, and it confirms that HIFUcan absorb the investment capital which i s being made available via the project. Two sub-projects to be financed in year one o f project implementationhave been appraised successfully. Details o f the appraisal are inthe project files, and a summary i s provided inAnnex 4. 3. Fiduciary FinancialManagement 50. The inherent risk to the project from the financial environment is assessed as moderate and the project control risk i s assessed as low with the mitigation measures. The overall financial management risk i s assessedas Low. 51. The financial management function o f HIFU is well established, and it is adequately staffed with personnel with satisfactory competence and qualifications. The accountants have educational background in accounting (at least bachelor degree) and experience inmanaging the operations o f the Fund, The internal control procedures are in place and effectively maintained. However, improvement on Risk Management and IT systems is required which will be supported by the Technical Assistance under the project and/or in collaboration with the Technical Assistance provided by AFD and other donors. The current Accounting and Reporting system is assessed as adequate for accounting and reporting on the receipt and use o f funds from IDA, but needs further enhancement to better serve the management o f Fund's operations inthe future. These enhancements will beimplementedwith the support o fthe Technical Assistance provided under the LDIFP. 52. The financial management personnel do not have experience with IDA funded projects, in particular, disbursement procedures and IDA reporting requirements. Training on these therefore was delivered to those involved in the project financial management by the Bank Financial Management Specialist. Procurement 53. Procurement capacity. Procurement under the proposed project would be carried out by HIFU (consultant services under component 2 self-financed by HIFU) and the private sector/public sector autonomous commercial firms who would receive financing from HIFU(inthe form o f loans and / or equity investment). The Bank team has done an assessment o f the procurement capacity o f HIFU and the first two potential borrowers of HIFUloans, namelyWest BusTerminal Co. andHoaBinhWaste Treatment Co. Ltd. The summary o f this assessment i s provided inAnnex 8. The procurement risk o f the proposed project i s rated `medium'. To mitigate the risk and strengthen the implementing agency's procurement capacity, specific actions summarized in Annex 8 are proposed. These actions have beendiscussed and agreed with the Borrower. 16 54. Procurement Arrangements. Procurement for the proposed project would be carried out in accordance with the World Bank's "Guidelines: Procurement Under IBRD Loans and IDA Credits" dated May 2004, revised October 1, 2006; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers " dated May 2004, revised October 1, 2006, and the provisions stipulated in the Credit Agreement. General arrangements o f the project procurement, Procurement Plan and Bank review are discussed inAnnex 8. Anti-corruption 55. The main corruption risk under the project stems from the selection by HIFUo f its private sector partners. As one o f the key reforms supported by the project, a Private Sector Partner (PSP) selection manual has been prepared to introduce in a phased manner competitive selection o f private partners, with specific processes to deal with unsolicited proposals. Independent advisors will be appointed to conduct the required evaluation (see Annex 4). The project will also allow HIFU to take important steps towards increased disclosure as the HIFUwebsite will be used to disclose the summary o f HIFU's audited financial accounts and the list o f subprojects which are being pursued by HIFU. The financial management structure provides for improved credit management policies, including requirement that all project enterprises involved in HIFU's equity investments provide audited financials o f their operations to HIFU. Finally, the disbursement will be report based, which will: (a) directly link periodic disbursements with reports verifying the appropriate use o f IDA proceeds; and (b) allow supervision flexibility to monitor and manage the disbursement for specific investments (loans or equity investments) o fHIFU. 56. HIFUis a Local Development Investment Fundwhich has been audited every year. The Project introduces international standards for such audits. Furthermore, quarterly un- audited financial statements will be received and reviewed by the Bank. Strict Financial Covenants have been put in place to ensure that HIFU financial performance i s further strengthened, and to provide a long-term engagement point for Bank dialogue on the importance o f financial viability and increased disclosure o f financial operations. As part o f the supervision activities, the Bank will recruit and retain an international accounting firm on a long-termcontract to help evaluate HIFUfinancial statements/operations. 4. Social 57. HDP will mostly have positive impact on the society through improving infrastructure and living environment for the City and its citizens. However, the project will also have some adverse impacts related to the need for land acquisition and involuntary resettlement. A Resettlement Policy Framework for the project has been adopted by the HCMC PC and approved by the Prime Minister. Guidelines have been included in the PPA Manual to guide HIFUand its borrowers/investment partners on how to minimize and mitigate the impacts to the people and how to prepare and implement the safeguards documents to meet the Bank's requirements. Supervision framework has also been established to ensure compliance. These guidelines have been put in practice in the preparation o f the two proposed subprojects for the first year o f implementation. Among these two subprojects only one required landacquisition (Septic tank waste treatment plan). The compensation and resettlement activities have been implemented since 2005. The background o f the remaining complaints which have not yet been resolved i s discussed in 17 the Annex 10. Satisfactory resolution of these is a condition for the subproject to be financed by the Lineo f Credit provided under the HDP. 58. Taking into account the fact that there are two ethnic minority groups living in HCMC (Cham with about 5,200 persons and K h M e r with about 4,800 persons in accordance with the data o f 1999 general population census), an Ethnic Minority Planning Framework (EMPF) has been prepared. Ethnic Minority Plans will have to be developed in accordance with the project EMPF for the subprojects having any ethnic minority group in the subproject areas. There are no ethnic minorities inthe proposedtwo subprojects for the first year o f implementation. 5. Environment 59. The HDP is expected to have mostly positive environmental and public health impacts contributing to improvement o f the city's infrastructure; solid waste management, efficient and safer transport systems, andon-site sanitation services. Adverse impacts could arise through: (a) temporary pollution (air, noise, vibration, surface mn-off), excavation work, and disturbances to local transport, waterways or drainage systems, that could occur during construction; (b) wastewater discharge and disposal o f sludge from the waste treatment plants; (c) disposal o f dredged material; and (d) transportation and disposal o f solid waste inthe landfill sites. 60. Detailed guidelines on Environmental safeguards, acceptable to the Bank has been included in the PPA manual and approved by the HCMC People Committee. The Manual will be usedby HIFUstaff incarrying out environmental safeguard (ES) work to meet the requirements o f GOV and the Bank for the projects that would be financed by the line o f credit provided to HIFUthrough the project. 61. The environmental guidelines (an annex o f the PPA Manual) include a process with the following features: (a) screening that could possibly exclude areas and subprojects due to environmental siting and other potential negative impacts by using an exclusion list acceptable to the Bank; (b) EIA preparation per the GoV regulations and Bank environmental safeguard policies including an internal due diligence assessment o f EL4 reports (when already available) o f subprojects that pass the screenings and Government environmental approval; and (c) institutional arrangements for HIFUand Bank supervision as needed under the HDP o f the implementation o f environmental management plan (EMP). 62. The PPA and guideline processes were used by HIFUinpreparingand appraising two subprojects for Year One as a pilot program o f the HDP in a manner acceptable to the Bank.The PPA is being applied for the preparation o f all other subprojects HIFUexpects to finance through the line o f credit provided under the project. HIFUwill implement and continuously improve the PPA Manual with assistance from on-the-job consultants to be hiredas part o f component 2 o fthe project. 63. Due diligence assessment processes and outcomes have been implemented as an approach to ensure subproject safeguard compliance. This includes: (a) scoping new EA works in accordance with the PPA Manual; (b) assessing the adequacy o f the EA work approved by DONRE; (c) developing risk management plans to remediate the mitigation work defined in the EIA if implementation i s found insufficient; (d) obtaining borrower's 18 written commitments to HIFU to implement the risk management plan; (e) assessing borrowers institutional mechanism to carry out EIA work for A-category subprojects; and ( f ) testing the PPA Manual with HIFUusingYear One Pilot Projects. 64. Specifically for the Year one pilot program, due diligence assessmentswere carried out for the Initial Environmental Evaluation (IEE) o f the West Bus Terminal and the Environmental Impact Assessment (EIA) o f the Septic Tank Waste Treatment subprojects. As a result o fthe due diligence assessment, a riskmanagement planhasbeendeveloped for each o f the subprojects. The planswere signed between HIFUandthe borrowers. Annex 10 provides the details regardingprocesses to ensure compliance o fthese two sub-projects. 65. The potential negative impacts o f all subproject activities will be mitigated through environmental management plans (EMPs) prepared for each subproject in accordance with the environmental guideline and in compliance with OP 4.01 on EA. The EMPs will include mitigation measures, monitoring plans and institutional responsibilities connected with their implementation. Mitigation measures will be included in construction contracts. For the subprojects which have obtained from DONRE an approval to the EIA report, or environmental certificate, due diligence assessment o f the EA work will be conducted and supplemental environmental information or study will be required as necessary. 66. HIFUwill arrange for the monitoring of EMP implementationineach subproject, and will prepare semi-annual environmental compliance progress reports submitted to PC and IDA. An independent environmental safeguard monitoring consultant will be hiredto assist HIFU in this task, and also to provide guidance to the borrowers in internal supervision and reporting on the implementation o f mitigation measures as specified in the EMP. 6. Safeguardpolicies SafeguardPolicies Triggeredby the Project Yes No Environmental Assessment [OP/BP/GP 4.01) [ XI [I Natural Habitats (OP/BP 4.04) [ I [XI Pest Management (OP 4.09) [I [XI Cultural Resources (OP 4.11) [ I [XI InvoluntaryResettlement (OP/BP 4.12) [ XI [I IndigenousPeoples [OD 4.20, beingrevised as OP 4.10) [I [[XI Forests (OP/BP 4.36) [I [XI Safety o fDams (OP/BP 4.37) 11 [XI Projects inDisputed Areas (OP/BP/GP 7.60) [I [XI Projects on International Waterways (OP/BP/GP 7.50) [I [XI 67. The yedno responses in the above table refer to the safeguards expected to be triggered for most o f the sub-projects to be financed under the line o f credit. Screening mechanisms as specified in the PPA Manual will be applied to investment pipeline subprojects indetermining safeguard triggers for OP 4.04,4.09,4.10, and 4.11. 68. The safeguards screening category is S2, which means one or more safeguard policies are triggered but impacts are limited and technically/institutionally manageable. 19 The project i s determined to be an environmental screening category FI. Subprojects environmental screening categories will vary. 69. Publicconsultation. The PPA manual specifies when andhow public consultation has to take place for each sub-project. Consultation for the EIA report for the Subproject Septic tank waste treatment (A category) has been completed with the local authority (Ward People Committee Da Phuoc) and local NGO (the Father Front o f the District Binh Chanh) in accordance with the new national law on environmental protection. No public consultation on environmentalissues was required for the West Bus Terminal. 70. Public disclosure. The PPA manual specifies when and how the various safeguards documents need to be disclosed. HIFUhas confirmed the public disclosure o f the EL4 report for the Septic tank waste treatment and the Initial Environmental Examination (IEE) for the West Bus Terminal subproject inthe ward PC offices since Mar 05, 2007 as per the Bank's disclosure requirements. A copy o f the drafi Environment Guidelines and Social Safeguards Manual as a part o f the PPA Manual have been disclosed locally and sent to InfoShop in Washington D C and made available in English and Vietnamese inHanoi's Development Information Center (VDIC) on March 20,2007. 7. PolicyExceptionsandReadiness Policy Exceptions: NA Readiness: The following project elements outline the readiness o f the project: . HIFUproject pipeline is ready with 13 projects identified with detailed project descriptions. Two (2) year 1 projects have been appraised, including fill safeguards documentation, and financial analysis. Projects ready for financial close. 5 TORs package for technical assistance and the procurement plan ready and approved by HIFUManagement; mobilization o f the three key consultants under the approved TORs to take place before loan effectiveness. Project team operational -includes designated procurement and FMstaff. Manuals for Project Preparation and Appraisal (PPA) and Private Sector Participant (PSP) selection prepared with broad participation o f city departments, and formally approved by the HCMC PC for implementation by HIFU. Results framework inplace; base line available. FMarrangements setup; FMcapacity analyzed. Audit arrangements agreed with client. Counterpart fbnding confirmed with client. Resettlement Policy Framework (RPF) approved by the Prime Minister. 20 Annex 1:Country andSector or ProgramBackground VIETNAM: HIFUDevelopmentProject Municipal Infrastructure in Vietnam. Municipal infrastructure demand is increasing rapidly in Vietnam as the country copes with rapid urbanization, decentralization and high rates o f economic growth. There i s wide agreement that a significant investment gap exists vis-a-vis municipal infrastructure demand. Commentary on the investment climate in Vietnam is beginning to increasingly cite the lack o f infrastructure in general and municipal infrastructure in particular as a key bottleneck to investment and economic growth. It is unlikely that Vietnam can significantly increase public investment in infrastructure from the recent level o f 8.7-10.0% o f GDP; in order to meet the increasing demand for municipal infrastructure Vietnam will therefore have to attract private capital and increase the efficiency o f investment, which will require policy reforms and improvement in planningand management o f infrastructure assets. To date, Vietnam has neither established the appropriate investmentchannels for attractingprivate financing, nor the institutional and regulatory frameworks to involve private sector in the provision o f infrastructure. The public sector agencies have also been slow inundertakingthe necessary sector policy reforms-including tariff increases and cost recovery-to improve the quality and increase the coverage o f infrastructure delivery. The challenges facing Vietnam vis-a- vis financing o f municipal infrastructure are further complicated by the following two developments: At present, there is a severe shortage o f long-term capital inthe market ingeneral, and for municipal infrastructure inparticular, as the risks associated with municipal infrastructure investment remain prohibitively high for the private sector. In the near to medium term the private financial markets in Vietnam-which are currently at the very initial stage o f development-are unlikely to become adequately deep or broad to meet Vietnam's infrastructure financing needs. While the critical and immediate infrastructure financing needs o f the country call for immediate public sector action, measuresmust be taken to ensure that actions taken inthe interimperiodtake into account therisk ofprivate sector crowding-out inthe medium to long-term 0 Vietnam i s fast transitioning towards a decentralized governance model through a political process that has very strong political support. The responsibility for municipal infrastructure has already been devolved to the provincial governments. The provincial governments have limited budgetary resources for municipal infrastructure, and suffer from a combination o f weak institutional capacity and policy uncertainties which will affect the flow o f private capital/expertise into municipal infrastructure development The DecentralizationChallenge. Decentralizationhas increased the spendingobligations at sub-national levels. According to the developing decentralization regime in Vietnam, municipal infrastructure is primarily the responsibility o f the local governments. As decentralization has progressed, the share o f sub-national governments intotal government expenditures has risen from 26% in 1992 to 48% in2002. The estimated annual financing requirement to achieve the government's targets between 2010 and 2020 will be of the order o f US$ 377.5 million for urban water supply, US$ 280 million for wastewater collection and treatment, US$ 239.3 million for drainage (including canal rehabilitation), 21 and US$ 835.4 niitliori for loxv income h o u s ~ nin~urban areas, a t~un~cipalres~?o~zsibi~ity.~ This gives a total of US5 1.7 to 1.8 b i l ~ ~ oann~I~Ily, n or between 3.0% and 4.0% of CDP annually. This cstimare excludes required ~nvesrn~ents urban t r a n s ~ ~which are in r t ~ IXUG~ harder to ~ u a n ~butfare expected to be s ~ ~ ~ ~ c a n t . ~ y EiCMC is the largest city in Vietnam and a major ind~~strial cona~ercialcenter with a and population of 6 ~ ~ ~ l It~ ios na ,~ a t e ~ o rIy city r e p o directly ~to ~the Central ~ ~ ~ ~ o ~ ~The~ city has been in the~ forefroIit o~f the t r ~ z s ~in~tiatedby ~ ~ ~ e z t ~ ~ o ~ i the economic reform ""Open door" and '~Reno~atio~"policies which have led to ~npreccdc~~tcdgrowth for the c ~ ~ ~ npt r~~ 'r, ~ ~ cn~the~it~d~str~al This growth hasbeenmost ~ r o n o ~ t ~ c e d ~ a r l ~sector. in MCMC, xvhich accounts for 35-40 percent of the n ~ t ~ o nCDP. a ~ The annual growth rate of the HCMC urban ~ o ~ ~ ~is~betweenn5-7 percent with thc ~ o ~ u in~ 2020~ ~ o r ~ t i o ~ expected to he approx~matel~ ~ ~ i l ~rcsidcnts. The increase ixa urban pop~~ationand 10 i o n the cconornic g r o ~ t his putting increased pressure on. the urban set+es of thc city. For example, it was recently reported ~~~~e~~~~~ News, 15 January 2007) rhat there has been an annual increase in the ttsc of public t r a n ~ inoHChiIC of around 20 percent. The r~rban ~ ~ arcas face simifar problems in other sectors such as wder, ed~~atiQn hcatth. It is and estim~~ed HCMC needs to invest ~ p ~ r o ~ ~ $3~biIliont e inu~all^^ to meet the ctt~~cnt that ~ z a an i17fr~struc~~~rcden1and. ~ ~ ~ ~ ~~ ~ t ~jModel.~ Ast Vicfnam~~ u ~ u r preparcs to meet the~demand fori iticreascd ~ ~ ~ in~re~rnient,needs to also undertake me~suresto start p r e ~ a for~the ~~ r ~ s i t i oaway if ~ n n from c o n ~ e ~ s ~donor~ a~~n a ~ z c ifor~urbm ~nfrastn~cruresewiccs. o ~ n The ~iccessar~ nene bot:dS 13% Key reforms related to the planning and management o f infrastructure services can also improve the financing possibilities. In particular, ensuring cost-covering tariffs for infrastructure services, where feasible, can provide infrastructure enterprises with the possibility of self-financing usingretained earnings, and open the possibility for alternative financing sources that rely on future revenue streams. Important reforms to improve the efficiency o f infrastructure procurement and services can also help to defer the need for newinvestmentandreduce the overall financing needs. FinancialSector Development Vietnam continues to moveforward with the reform of the banking. Since the Government started accelerating the reform in 2001, the five state-owned commercial banks (SOCBs) have evolved from specialized policy lending vehicles towards increasingly commercial orientation; by improve their credit policies and procedures, accounting practices, information systems, products and services. In June 2003, the Government announced its intention to equitize the SOCBs as a step to fully commercialize them. Joint-stock Banks (JSBs) have also been consolidated to form stronger banks. Serving mostly for private businesses, some o f them have posted strong growth and are gradually gaining market share. The environment inwhich banks operate has also been improving with the removal o f interest rate ceilings and the implementation o f a national payment system and modem core banking systems at the largest banks. The SOCBs and leading JSBs are also competing to expand their ATM networks. The State Bank o f Vietnam (SBV) has promulgated numerous regulations, gradually leveling the playing field for foreign banks, setting prudential standards and reclassifying NPLs to support their resolution. A credit information center was officially set up in 1999, and a registry for secured credit transactions in 2002, both o f which are expected to improve the access to finance. As a result, both bank deposits and credits have been registering rapid growth (over 25% annually since 2002), and the banking sector assets now amount to 66% o f GDP. The improved confidence in the banking system and the local currency has been leading to gradual ded~llarization~and use o fnon-cash payment instruments. The stock market and the non-bank financial institutions have also shown phenomenal growth. During 2006, the number o f companies listed has increased by nearly fivefold4 while the market capitalization increasing by more than tenfold to surpass 22% of GDP, already well surpassing the Government's original target o f 15% by 2010. The largest enterprises including the SOCBs are only yet to come to the market. The number of securities companies has also been doubling while many are increasing their capital to undertake new business such as underwriting o f public offers. The insurance sector also has registered healthy growth till recently while increasingly faced with tough competition with banks' savings products. Development o f the capital markets and the planned liberalization o f foreign participation inthe statutory casualty insurance sector are expected to bring a renewed impetusto the sector's growth. Despite the impressive development, there are important issues left unresolved. In particular, meaningful measures are yet to be taken to develop the debt capital market. The Other factors include: higher interest rate on VND savings than foreign currency and the lack o f deposit insurance inforeign currency. 192 including 106 at HCMC STC and 86 at Hanoi STC as o fJanuary 16,2007. 23 rapid growth of the financial industry and market is also creating dangerous gaps and imbalances in the regulatory and supervisory capacity and financial infrastructures. In addition, the financial sector i s already faced with the second generation issues as Vietnam moves swiftly toward a middle income country status. Concerns are growing with the slow progress o f the restructuring and equitization o f the state-owned commercial banks (SOCBs) and enterprises (SOEs). Uncertainty surrounding hTLs, the practice o f rolling over short-term credits to generate long-term funds, the difficulty in valuation, etc. are delaying the process. The equitization is considered as essential to enhancing their efficiency and competitiveness amid the growing competition due to the WTO accession and integration into the regional and global economy. The SOCBs are responsible for nearly 70% o f all credits to the economy and are primary creditors to SOEs. Therefore, SOCBs' restructuring and equitization are linkedwith those o f SOEs. While a half o f the over 6,000 SOEs have been equitized, largest ones are left untouched, leaving the large share (85%) o f the original state enterprise assets still inthe state hands. The equitization o f Vietcombank andMekongHousing Bank has also beendelayed. The capacity building of thefinancial sector regulatory and supervisory authorities is also lagging behind the development of their respective sectors. The State Bank o f Vietnam (SBV) is only in the initial preparatory stage o f fundamental reform to become a full- fledged central bank o f a market economy. Reform and upgrading o f its bank supervision capacity can be done only as part o f the process. The Deposit Insurance o f Vietnam (DIV) has been in operation but i s lacks capacity and its responsibilities overlap with those o f the bank supervisor. The State Securities Commission (SSC) needs to urgently upgrade its capacity to guide the civilized development o f the rapidly growing securities market including the OTC market as well as the Stock Trading Centers. To do so, it needs to become able to effectively discharge the much expanded responsibilities under the new Securities Law. An investor protection fund i s yet to be established. The Insurance Department o f the MOF has only 25 staff with only very basic information and communication technology capacity to supervise the growing and diversifying indu~try.~ Vietnam continues to receive growing amount of foreign investment. In addition to a record level o f foreign direct investment, the country i s now receiving the third wave of foreign portfolio investment (FPI, amounting to $3 billion in accumulated total). Remittances are even greater than FPI while exports and tourism are booming. There is now an appreciation pressure on VND which the SBV i s strugglingto manage while at the same time trying to contain the inflationary pressures. Cross border capital flows and exchange rate are expected to be increasingly liberalized to implement Vietnam's WTO commitments. The authorities must strengthen the prudential regulation and supervision o f banks and NBFIs and strongly promote their sound risk management to mitigate risks associated with foreign exchange, interest rate, maturity mismatches, liquidity, etc. Financial market must also offer instruments to manage such risks (e.g., bond market, derivatives). It is also necessary to build a capacity to closely monitor the sector- or economy-wide risks. 24 insurance companies (eight lifes and 16non-lifes), seven insurance brokers, one reinsurer and 144 agents offering over 900 products which are growing rapidly. 24 Vietnam isfaced with a need to invest aggressively in infrastructures which require a huge amount of long-term resources estimated to be in excess of 10% of GDP through 2010 and beyond. Enhancement o f the access to finance by the poor is also a key policy objective to continue to reduce poverty. The former requires development o f the domestic bond market and mobilization of private resources to release the pressure on the currency and maturity mismatches. Yet, one common factor cutting across the two issues i s a need to strengthen policy-based financial institutions. The Vietnam Development Bank (VDB) has been established by transforming the former Development Assistance Fund.However, it i s yet to build the capacity to take on these challenges. Similarly, the Vietnam Bank for Social Policy (VBSP), Vietnam Postal Savings Corporation (VPSC) and People's Credit Funds (PCFs) all need technical assistance and training and the appropriate policy framework to carry out their functions. The reform o f the policy lendinginstitutions will have important links with the equitization o f the SOCBs. Private Investment in Infrastructure. There is great potential inVietnam for increased private investment in infrastructure. Private investment, including foreign investment, offers a virtually limitless source o f financing, and could go far to meeting the infrastructure investment agenda. As Table 1.2 below indicates, over the period 1997-2003 private participation in infrastructure (PPI) commitments amounted to about 15% o f the total infrastructure investment-or 8.5% if we exclude one US$ 1.3 billion gas field and pipeline project. Private sector participation inurban infrastructure (water, solid waste, and other development infrastructure sectors) financing has been particularly weak. Table 1.2: Private Investment in Infrastructure (Contractual Commitments in US$ million) Ports Airports Toll-roads Telecoms Water Electricity Gas 1994 10 1995 128 1996 15 205 1997 70 110 1998 38.8 1999 120.5 2000 16.3 20 2001 16.2 154 2002 20 10 16.2 480 1,300 2003 246.3 412 2004 Total 100 15 10 423 212.8 1,540.3 1,300 Source: PPI database. These figures record investments promised at the time of contracting. In some instances o f projects with multiplephases where subsequencphases did not occur actual disbursements may differ from commitments. Butinvolving the private sector inundertaking significant investments ininfrastructureis a complex and difficult task. To attract private finance, investors must expect to earn a return on the capital invested commensurate with the risks undertaken, but these needs must be balanced with the protection o f consumers from the market power o f privatized infrastructure. This balancing act must be implemented in transaction documents (legal contracts, licenses, and laws established to induce the initial investments) and in the ongoing regulatory environment established to govern the infrastructure firm's operations. To get all o f this right i s a highlycomplex affair, requiringskilled economists, accountants, 25 and lawyers, as well as carefil political guidance, The bestway o f establishing these skills would be through experience, which suggests that Vietnam should, in addition to the IPP program envisaged for electricity, seek to establish pilot projects with private participation, including management control rights, ina range o finfrastructure sectors. PolicyFrameworkfor FIL EmergingFrameworkfor MunicipalFinance. The Government o fVietnam (GOV) has actively encouraged the provincial governments to take greater responsibility for financing municipal infrastructure. The 2001 Pubic Administration ReformMaster Program (for 2001- 2010) lays the groundwork for putting in place the regulations on decentralization o f administrative management and fiscal functions. The two most significant components of the emerging municipal finance framework include permissionto the provincial governments to (i) establish Local Development Investment Funds (LDIFs), and (ii) up to 30% o f their borrow annual budget for development investments-HCMC and Hanoi are allowed to borrow up to 100% o f annual state budget through revenue or general obligation bonds. The LDIFs offer an operational and legal structure for the provincial governments to focus on infrastructure, including the ability to mobilize capital and enter into contracts with the private sector. The H o Chi Minh City Investment Fund for Urban Development (HIFU) was the first LDIF established in June 1996. Since then, twelve other provincial governments have established LDIFs with the approval and support o f the GOV. The increase in the number o f LDIFs is matched by the increase in the intensity with which provincial governments have pursued the LDIF model, as evidenced by the increase in the charter capital o f the LDIFs which increased by approximately 45% per year from 1997 to 2004 and was estimated to be approximately $400 million by the end o f 2006. The most active LDIFs are making progress in bringing the new forms o f public-private partnerships, including the more sophisticated contracting mechanisms (BOO and BOT, etc.) to Vietnam. The LDIFs can also become a valuable instrument for institutingprovincial policy reforms that support decentralization and increase the efficiency o fpublic sector management. The LDIFs can be segmented into three distinct tiers based on their operational performance. HIFUleads the field, followed by the three middle tier LDIFs. The remaining nineLDIFsare far behindthe top-4, andwill likelynotbeable to make significant progress in the near fiture without a significant effort. The critical capacity building and institutional development needs o f LDIFs are described inthe table below. 26 Relative Performance and Institutional Development Priorities Performance Top Middle Bottom Tier DongNai IF LDlFs HIFU BinhDuong IF HANIF Top 3 Development - Cwporate Governance investmentPolicyIRiskMgmt. -InvestmentAppraisal Needs * InvestmentPoiicyIRiskMgmt. * InvestmentAppraisal *Investment PolicyIRiskMgmt. FinancialStructuring * Cwpwate Governance *Staffing& OperationalResources The most urgent priority for the GOV at this stage is to ensure that the top-4 LDIFs, particularly HIFU, develop appropriate operational models. HIFUi s ina position to set the standards for other LDIFs, andencourage other provincial governments to use the LDIFs in an appropriate fashion. The success o f HIFUhas inparticular encouraged manyprovincial governments to establish LDIFs, and its focus on cost recovery and partnership with the private sector provides an excellent initial roadmap for other LDIFs. The capital structure o f LDIFs requires critical attention. Specifically, the LDIFs are currently engaged in short-term borrowing on a roll-over basis. The LDIF borrowing should be directly tied to their assets, particularly their Charter Capital. It may be prudent for LDIFs to not increase their commercial borrowing until they have undertaken the necessary reforms. The long-term business model o f LDIFs should involve the use o f equity (Charter Capital) to raise debt for investment purposes. Short-term borrowings - particularly ifthey are not tied to LDIF credit - can lead to short-term oriented investments which can channel LDIF capital away from long-term infrastructure development projects. Preliminary estimates indicate that approximately 80% o f all LDIFs mobilized capital i s short-term (< 12 month tenor) with roll-over features, and approximately 20% i s medium term (>12 <60 month tenor). There i s almost no long-term debt. Inappropriate borrowing by the LDIFs can have a negative affect on the developing banking sector. It is essential that in the immediate future the qualified LDIFs utilize technical assistance and long-term debt from ODA program to establish a good investmentand financial management record, before they start raising senior debt from the market. The development o f LDIFs will require a sustained, long-term effort. In particular, the LDIFs should first establish a performance record vis-a-vis financial management and execution o f projects inpartnership with the private sector, and raise debt from the market. In the later phases o f development the goal can be expanded to include raising private equity into the fbnds. As discussed above, it is important for the LDIFs to take advantage o f IDA technical assistance and long-term financing to establish sounds systems and processesbefore they engage inraising debt from the market. The discussions with various private sector parties in Vietnam indicate that while the private investors are willing to engage LDIFs at the project level (as partners in project entities), they will be very 27 reluctant to invest directly in the LDIFs in the near-term. The involvement o f the private sector in the financing and management o f LDIFs should be an important long-term objective o f the government. The following diagram provides a possible long-term development model for the LDIFs. Stage I Stage II Stage 111 LDIFs and Financial Market. There are four categories of risk associated with government owned FIs which apply to the LDIFs.The Bank team has worked closely with the GOV and provincial governments to develop apractical risk mitigation approach which can be implemented inVietnam. 1. Policy Capture: Provide appropriate incentives to the LDIFs and the Provincial Governments to highlight the value o f LDIFs as important tools for addressing the growth-oriented infrastructure needs o f the cities, rather than a convenient channel for providing subsidies for politically important projects. 2. Private Sector Crowding-Out / Market Distortion: Incentivise and help develop the LDIFs to work inpartnership with the private sector. It is also very important to ensure that LDIFs do not price their investments below market. This will also require establishment o f the necessary institutional framework within the provincial government to ensure identification o f appropriate projects, and development o f LDIF capacity to prepare good, bankable projects which allow for marketpricing. 3. Mismanagement: Establish clear frameworks for financial management and operations, and ensure that capital provided to the LDIFsi s inline with their project pipeline. 4. Contingent Liabilitymarket Risk: Develop models for monitoring the debt service capacity o f LDIFs because the LDIF borrowings do carry implied government guarantees. Specifically, at a time when the market infrastructure (e.g. rating agencies) is not inplace and banking sector and capital market development is at an initial stage, inappropriate borrowing practices o f LDIFs can severely impact the financial market. 28 Strategic Frameworkfor World Bank FILs in MunicipaUInfrastructureFinance.The task team has utilized a framework prepared by the EAl? Sustainable Development Department to conduct strategic review o f the appropriateness o f pursuing FILs for municipal/infrastructure finance in Bank operations. The framework i s specifically designed to allow infrastructure task teams to review the cross-sector impact of the projects, particularly on financial market development. It also facilitates the identification o f the long-term role o f the FI, and the provision o f measures to help manage the transition of the project entity (FI) towards an appropriate long-termrole. The following tables summarize the results o fthe application o fthe framework to HDP. -0cus FI approachwith HlFU isjustified basedon the following considerations: -Traditionalengagements(SILs) Is the FI approach have had limitedsuccess infinancing necessaryto achieve infrastructure programobjectives? -There is a lackof long-termcapital in the market -Private market is not readyto directly finance programobjectives -Publicsectorco-financingisnecessarytoattractprivatecapital Financial Market --Lackof Credit enhancementis necessaryto finance infrastructure projects capacityto preparefinancially viable projects - Needforaspecializedpublicinstitutiontonegotiatewithprivatesector (PPI contracting,etc.) and attracting private capital The risk of private sector crowding-outis limited in the short-term, but may Will the FI support market becomesignificantin the long-termunless HlFUtransitionstowards a private development? marketsupport role Nationalpolicyl incentivestructuredefining the long-termrole of HIFUlother LDlFs Financialcovenantsin placeto ensure co-financingwith the private sector Project puts HlFU on track to developnew market instruments(HIFU Bonds), and improvestandardsfor infrastructurefinancing - appraisal,risk management, Framework :ocus HlFUcan continueto support sector policy reforms -Separation of investmentswhich offer cost recoveryand can be Sector Policies Can the FI structure financed by HlFU from those which require budget support contributeto sector policy -As an investor in infrastructureprojects, HlFU supports tariff rate reform? increaseto ensure sustainabilityof infrastructureassets -HIFU's disclosurepracticeswill set higher standardsfor SOEs and city departments -ImDrovedstandardsfor safeguardspractices * institutionalstructure in place to minimizethe "policy capture" risk Are the appropriate -Int'lAuditStandards:FinancialCovenants;andimplementationof Partnership conditionsin place to Project PreparationandAppraisal Manual Conditions ensure strategicclarity? Appropriatefinancial risk management structure is in place -market pricing,cost-recovery,portfolio monitoringlmanagement - Institutionalcapacityto manage social/environmentalsafeguards Co-financinglsyndicationwith privatesectorensure loan conditions Is the engagement Partnership supportinga transition Financialrisk management identifiedas key prerequisitefor growth Strategy towards an appropriate Capitalizationof HlFUtied to portfoliorisk and absorptioncapacity long-termbusiness Technicalassistanceprovided to HlFU (and MOF) to facilitate transition models? towards commercializationl corporateindependence Manualsand conditionsdesigned to help HlFUset safeguardsstandards 29 Annex 2: Major RelatedProjectsFinancedby the Bankand/or other Agencies VIETNAM: HIFUDevelopmentProject Bankfinanced Implementati Development on Progress Objective (IP) (DO) Public-private Public/Private Partnership Power N/A N/A partnership in Generation Project(P086509) infrastructure projects (Board proposed 7/08/08) (on-going) Rural finance; Vietnam Second Rural Finance S S promotion of private Project (P072601) (Board approval sector investment 5/30/02) Financial sector Financial Sector Modernization and N/A N/A modernization (on- Information Management going) (P088759) (Board proposed 9/27/07) Financial sector Second Payment System and Bank modernization; Modernization Project (P082627) broaden access to (3/10/05) finance Vietnam Guarantee Project Rural finance; Vietnam Rural Finance Project S S promotion o f private (P004847) (Board approval 5/07/96) sector investment Deterioration of Ho Chi Minh City Environmental U MS sanitation systems and Sanitation Project (Cr. 3475) institutional weakness (ongoing) Lack o f access to UrbanUpgradingProject (Cr. 3887) S S infrastructure and tenure insecurity in urban poor areas (ongoing) Lack o f access to Urban Water Supply Development MS S water supplies, Project (Cr. 4028) deterioration o f water supply systems and institutional weakness (ongoing) Other Development Agencies 30 Annex 3: ResultsFrameworkandMonitoring VIETNAM: HIFUDevelopmentProject PDO To develop HIFU as a model LDIF (in . Increase in total number o f Information will be used every six terms of internal policy and procedures HIFU investment (debt and direct) months to assess the extent to which for financial policy, sub-project HIFU is able to leverage private appraisal, social and environmental per year in municipal infrastructure safeguards, and partnership with the . projects with private sector capital through its investments. private sector) and increase private involvement sector participation in financing Increase in total amount o f municipal infrastructure inHCMC. HIFU investment (debt and direct) per year in municipal infrastructure projects with private sector involvement Improvement in the leverage ratio (new private capital / HIFU direct investment) in municipal infrastructure projects per year Evidence that HIFU performs as a model LDIF : While the information will be used 1- Compliance o f HIFU with the to ensure that projects fundedby the FinancialCovenants LOC are processed according to the 2- Percentage o f HIFU projects agreed guidelines, it will also help processed in accordance with the assess the extent to which such good PPA manual guidelines practices are adopted by HIFU for 3- Percentage o f Private Sector projects financed with non-IDA Partners o f HIFU selected using the sources PSP manual guidelines IntermediateResults ter dic ComDonent 1: HIFU uses the line Number and amounts o f new To establish benchmarks and o f crddit to finance quality municipal investments undertaken by HIFU standards for FIoperations o f similar investments with the Line o f Credit nature inVietnam 0 Portfolio quality indicators maintained Component 2: HIFU capacity to 0 Projects feasibility studies by Information will be used to assess appraise and monitor projects is HIFU and Line Departments meet the effectiveness o f the technical strengthened adequate quality standards assistance provided under the Level o f compliance o fprojects project with Environment and Social Annual review o f the Safeguards implementation o f the manuals will PSP manual i s implemented in be an opportunity to improve them a phased manner (see Annex 4 for specifics) 31 Arranpementsfor resultsmonitoring A comprehensive monitoring system has been established in close collaboration with HIFUto monitor and evaluate the project activities and operations leading to the project objectives. The monitoring system has four components: 1. HIFUinternal system will provide the baseline data and report on results as follows: HIFUDepartment of Planning andPromotion will collect information on the indicators for private sector involvement and on private sector partner selection; and HIFU Department o f Appraisal will collect information about the progress made in implementingthe PPA manual. 2. Quarterly un-audited financial statements will be provided by HIFUto the Bank; Yearly audit report o f the financial statements-prepared by an independent auditor to conduct international standard financial audits-will be provided to the Bank after the end o f HIFUfiscal year. 3. Independent consultants will monitor the compliance o f each sub-project with the social and environmental safeguards requirements. 4. Bank Supervision Team (and an on-going contract with an international accounting firm which worked with the Bank in conducting the initial financial assessment o f HIFU)will conduct periodic reviews o f un-audited quarterly as well as annual audited financial statements to ensure compliance with the financial covenants and the achievement o f operational reform milestones (subproject appraisal system and framework for the selection o fprivate sector partners). Project Review. All project information will be compiled by HIFUmanagement and discussed with the HCMC-PC andthe Bank ina workshop to beheldevery six months. The workshop will provide an opportunity to discuss project progress and any outstanding issues, including the need to refine or adjust any project components. More specifically, the operational and institutional framework (PPA and PSP manuals) will be reviewed at least once every year by HIFU and the PC and may be amended by resolution o f the PC, provided the written agreement o f the Bank i s obtained before the amendment i s approved by the PC. 32 ?e a -YN E! Z $ 9 9 2 0 e, > 9 I- Z $ .-E 3 3E gz\DoE2s 3 Annex 4: DetailedProjectDescription VIETNAM: HIFUDevelopmentProject ProjectComponents Component1:InvestmentCapital(US$80 million; IDA US$50 million) A line of credit will be provided to HIFU for it to invest in cost recovery oriented municipal infrastructure investments in partnership with the private sector. A Project Preparation and Appraisal Manual governs the way HIFU investmentsunder the line of credit will be identified, developed and appraised. A Private Sector Partner Manual describes the way private sector participants in Project Enterprises financed under the line of credit will be selected. (See component 2 for a descriptionofthe institutional changessupportedbythese manuals). HIFU will work with DPI and other departments within the provincial government to identify investmentneedsinHCMC, as describedinHCMCmasterplan, whichcanbe financedviapublic private partnerships. HIFU will then work with the city departments to put in place effective project structures and then invite private investorsto participatein the projects. The pipeline of projectsidentifiedinthe table below confirms that HIFUcan absorb the investmentcapitalwhich i s beingmade availablevia theproject. Daphuoc 7 NorthCemeteryand Crematoriaineither Ditto 4.5 2009-2010 Cuchi or Hocmon 8 Hazardous waste treatmentinPhuocHiep Ditto 25 2009-2011 9 Cornpostingplant inPhuoc Hiep Ditto 7 2009-2011 10 HighTechnology MedicalTreatment Ditto 6 2009-2010 11 INguyenDuUndergroundParking and IDitto 16 I 2009-2011 Services 12 GeneralPort Catlai Area 1New Port Ditto 30 2010-2012 13 GeneralPort Catlai Area 2 New Port Ditto 85 2010-2013 Sub-Total 177 35 These sub-projects have been reviewedby city Depts, and are consistent with the development master plan o f HCMC. A detailed appraisal o fthe two year one pilot projects i s provided below as attachment to Annex 4. The IDA credit will be made available to HIFUaccording to the proposed on-lending structure agreed between HIFU and MoF according to the Decree # 134 o f the central government on ODA management. The Bank team has reviewed the structure and confirmed that it will support the project objectives and conforms to the stipulations o f the Decree 134. The structure involves the Ministry o f Finance borrowing IDA credit from the Bank and then on-lending the hnds to HIFUunder reasonable terms which take into account the cost o f foreign exchange risk and other administrative costs. (Annexes 6 and 7 provide the details o f these implementationand disbursement arrangements respectively). The Bank has conducted a detailed financial due diligence o f the financial accounts o f HIFU through an international accounting firm and confirmed that HIFU i s in strong financial position. HIFU issues audited annual financial statements, and it engages in market-based investment practices. Specifically, HIFU loans are priced at market rate. The Bank can confirm that HIFUi s ready to carry out the hnctions o f a financial intermediary as required under Bank OP 8.30. The financial covenants o f the credit agreement will hrther reinforce the financial soundness o f HIFU operations and contribute to its institutional development as a financial intermediary. (Annex 9 provides the details o f the financial analysis o fthe project). Component2: TechnicalAssistance (US$0.5 million;IDA US$ 0.0 million) 71. HIFUwill finance the technical assistanceto support the implementation ofoperational reforms, including: (i) support to implement the PPA manual with on-the-job chief advisor and technical specialist, as well as a social specialist and an environment specialist; (ii)support to implement the PSP manual with on-the-job chief advisor and private sector specialist; (iii) independent monitoring consultants for social and environmental safeguards policies; and (iv) Financial Audits ofHIFUto InternationalAuditing Standards. 72. Detailed set o f Terms o f Reference (TOR) for technical assistance consultants have been prepared. The package o f TORs and the associated procurement plan has been reviewed and approved by the HCMC PC as part o f the final HDP project approval. The HCMC PC approval makes the implementation o f the procurement plan, including the utilization o f an estimated $0.5 million HIFU capital for the assigned objective o f recruiting international and local consultants in accordance with the TORs, a firm and official mandate for HIFU. Inorder to ensure timely mobilization o fkey consultants, the mobilization o f consultants under three (3) o f the most critical TORs - including the TOR for independent auditors to ensure compliance with safeguards policies -hasbeen established as a Condition o f LoanEffectiveness. 73. The technical assistance will contribute to the institutional development o f HIFU. Specifically, it will build upon the current practices o f HLFUand develop capacity in HIFUto implement the PPA and the PSP manuals. The long-term institutional development plans have beenpreparedinconsultationwith the Bank and are documented inthe two mainmanuals. The capacity buildingo f HIFU i s a part of a broader initiative which involves AFD, USTDA, the World Bank and other donors. The Bank team has worked very closely with USTDA to scope, prepare and provide capacity building technical assistance to HIFU. The phase one (approximately $300,000) o f the USTDA technical assistance was concluded in 2006. The 36 planned phase I1 to focus on internal operations i s currently being reviewed by USTDA management. Similarly, AFD has approved a technical assistance package o f approximately Euros 1.5 million which will provide significant technical assistance and training to HIFUand its borrowers in financial management and other operational functions. The technical assistance provided by AFD and USTDA complements the IDA credit and the associated HIFU-financed technical assistance. Further details o f the partnership strategy vis-a-vis the development o f LDIFsis described on section C.1. 74. The HDP i s focused on helping HIFUimplement those important operational reforms which are under the authority o f HIFUManagement and the HCMC PC. Broader national level policy reforms are being addressed under the LDIFP planned to be submitted for Board approval inFY08 . It should be noted that some o fthe operational reforms demonstrated under the HDP maybe adopted as nationalpolicy/MOF guidance underthe LDIFP at a later stage. 75. The Bank, HIFUand the HCMC PC will work in close co-operation inthe application, review and amendment o f the two manuals. The implementation o f the manuals will be reviewed at least once every year by HIFU and the HCMC PC, and discussed with the Bank duringthe six monthly reviews. Themanuals maybe amendedbyresolutiono fthe HCMC PC, provided the written agreement o f the Bank i s obtained before the amendment is approved by the PC. The Bank may also request or suggest amendments to the manuals to HIFUand the HCMC PC duringthe implementation o f the project. ProjectPreparationand Appraisal (PPA) Manual.HIFUhas to date successfully identified and invested in several projects. Its current project appraisal process appears to have worked reasonably well. However, HIFU has recognized that with the anticipated increase in the volume o f its business, it will require a more comprehensive and consistent process for appraising investments. In order to facilitate this, a new project preparation and appraisal systemhas been developed and agreedwith HIFUand the HCMC PC. The Project Preparation and Appraisal (PPA) Manual is a comprehensive integration o f technical, financial, environmental and social safeguard assessment and it includes the following: 0 Initial identification and exclusionary screening o fprojects 0 A sensible, simple appraisal matrix that describes the appraisal outcomes so that projects can be prioritized 0 A process by which projects are appraised by Line Departments in HCMC PC in terms o f both financial and non-financial mandates combining project and social safeguards appraisal methodologies 0 A riskappraisal methodology 0 A necessarydue diligence process 0 Links with the HIFUPrivate Sector Participant Selection Framework. 0 Monitoring, evaluation and reportingrequirements The manual is prepared for practical implementation; it uses flow charts and step by step explanation o f various processes, It will apply to all new projects funded under the HDP but i s also available to HIFU for use on other projects. A regime for its annual review and amendments o fthe Manual i s established. It covers both the appraisal o f loan funding requests where HIFU does not have a project preparation role as well as project preparation for new projects in which HIFU will invest 37 equity. It also sets out a consistent standard for project appraisal regardless o f whether or not they are unsolicitedproposals. The Manual on Project Preparation and Appraisal (PPA) will become applicable from date o f effectiveness for all projects that are not in development (that i s have not proceeded beyond project identification and screening). Since infrastructureprojects have long lead times it i s not necessary to set out a phased application other than for requirements for the development o f unsolicitedproposals. Two external consultants (a consultant with international experience on project preparation and appraisal, a consultant able to provide accessible support from Vietnam on project preparation and appraisal) will establish with HIFUand utilize a screening process for projects to ensure that projects meet HIFU criteria. They will also coordinate the range o f appraisal and preparation activities throughout the project preparation life-cycle and will assist HIFU to proactively planactivities inthe preparationand appraisal o f specific projects. They will also review the application o f the manual on specific projects so as to accurately report on activities and on areas where the application can be improved or amended and provide six monthly reports to the WB on the projects in preparation and appraisal and the application o fthe manual. An on-the-job environmental consultant will also be hiredby HIFUunder HDP funds to assist HIFU in implementing the environment guideline (Annex F). This task will include the following: 1. Environmental due diligence review o fprojectsinmunicipal infrastructure. 2. Implementation o f safeguard policies including review o f environmental safeguards documents and monitoring o f the implementation o f environmental management plans, 3. Technical input to the HIFUteam on project environmentalplanningand management, 4. On-the-job training for HIFUstaff on environmentalplanningandmanagement 5. On-the-job training for HlFU staff on the environment aspects o f project technology evaluation, 6. Implement an improved project appraisal system over a period o f 3-years to include environmental safeguards A local consultant will be hiredto provide on-the-job training andtechnical assistanceto HIFU on a part-time basis for implementation o f social safeguard policies including socio-economic screening o f the proposed projects, preparation o f TORS, evaluation o f socio-economic assessments, guiding the investorshorrowers to prepare and implement social safeguards documents, review and appraisal social safeguard documents, monitoring its implementation and reporting the results to the HCMC'PC and WB. The consultant will also help HIFU in determining the relevance and effectiveness o f project social programs including Resettlement Plans and Land Acquisition as well as in implementing the social aspects o f the Project Preparation and Appraisal Manual. Private Sector Partner (PSP) Selection M a n u a l A framework for the selection of SPS inthe Project Enterprises i s necessary to: 0 establish transparent processes that provide information and certainty to potential investors; 0 ensure the consistent application o f selection processes; and 38 meet international good practice requirements as part o f the development o f HIFU governance and operations systems. This manual has been drafted to achieve these objectives in the selection o f private sector investors who participate in the ownership o f the Project Enterprise formed to implement the project. It does not cover the procurement o f any goods or services by the Project Enterprise, which shall be done in accordance with applicable Vietnamese law. A formal Legal Opinion has been obtained from a top tier law firm inVietnam to confirm the compliance o f the manual with current Vietnamese laws andregulations. Given the current absence o f a coherent selection process and the current reliance on unsolicited proposals, the full development o f a Private Sector Participant (PSP) selection process for HIFU will be phased over three years. The process will be streamlined for maximum efficiency while meeting international good practice requirements for competitive selection by the end o f the third year after adoption o f this framework. The framework will not apply retrospectively to projects already implemented. Key components are: 0 establishing HIFUas project financier available to all bidders 0 the use o f Special Purpose Vehicle Enterprises 0 how HIFUdeals with cases where there i s no bidder response to RFP 0 an exit strategy for HIFUfrom Project Enterprises clear guidance on how Enterprises with State Owned Shares and enterprises in which HIFUalready has an investmentstake may participate as PSPs 0 a process by which unsolicited proposals are managed 0 evaluation criteria and processes that is fair, transparent and cost-effective. The PSP Manual i s closely aligned with the Project Preparation and Appraisal Manual in that both set out a means by which HIFU can rely less on unsolicited proposals and more on projects brought to a competitive market. It allows a maximum o f one year to establish the unsolicitedproposal framework and communicate this to the market. The PSP manual requires more complex reforms within HIFUand i s also related to parties not in the control o f HIFU. Thus, a phased application is established as set out below. End of Year 1 End of Year 2 End of Year 3 Application of Manual The manualappliesto Enterpriseswith HIFU participationin equip(ownership. Evaluation system for solicited Develop detailed evaluation process and Commence Operational proposals bidding rules with pilot Unsolicited Proposals Unsolicitedproposals accepted before manual Operational Operational adoptedwithout competitive selectionprocess. Manual adopted and hade known to market I Prequalification of Bidders I1Not applicable II Commence I Operational with pilot Participation of Enterprises with State All Enterprises with State Owned Shares eligible (including Only private sector Enterprises. Owned Shares in Project Enterprise SoEs) Participation of Enterprises with State No restriction No restriction Enterpriseswith State Owned Shares Owned Shares as Sub Contractors to to make available their services to all the Project Enterprises PSP bidders. Maximum equity stake Subjectto Charter and covenants Use of SPVs Not required Commence I Operational with Pilot Exit Strategy for HIFU I Indevelopment IIIOperational I Operational 39 It must be noted that the pipeline for the first year includes only loan type projects. HIFUwill thus be able to apply the PSP Selection manual to projects that it has preparedinterms o f the PPAmanual from year 2. A PSP consultant will provide HIFU with expert assistance in applying the PSP selection processes established inthe Manual to projects inthe HIFUportfolio and will review every six months the manner inwhich the manual has been applied, will identifybeneficial amendments to the manual and to provide comprehensive reports on these to HIFU, the HCMC PC and the World Bank. This consultant will ensure that the Manual is applied for projects under the HDP and will coordinate the selection activities throughout the selection process to assist HIFU,who has to manage a complex range o f stakeholders including line departments and bidders in order to manage the selection process as efficiently as possible. This consultant will also develop standard bidding documents as well as standard evaluation process documents with a view to effectively evaluate bidders, andto assist HIFUto carry out a satisfactory due diligence on all aspects o f bidders' technical and financial capacity as well as history and proven capability to meet the stringent environmental and social safeguard requirements for each project. IndependentEnvironmentaland Social Safeguard Monitoring. Independent consultants to will be hiredunder HDP to monitor the compliance with environmental and social safeguards policies. The consultants will provide the following services: 1. Independent Monitoring (Environment) Consultant: Independent consultant will be hired to monitor the performance o f the HIFUJoint Ventures /project enterprises and borrowers with respect to compliance with the environment requirements. The consultant will also highlight need for additional mitigation measures, need for capacity development within HIFUand Project Enterprises, and to adapt HIFUand Project Enterprise systems for each future development project environmental planningprocess. 2. IndependentMonitoring (Social) Consultant: Independent consultant will be hired to monitor the performance o f the HIFU Joint Ventures /project enterprises and borrowers with respect to compliance with the social requirements. The consultant will also highlight need for additional mitigation measures, need for capacity development within HIFU and Project Enterprises, and to adapt HIFU and Project Enterprise systems for each future development project environmental planning process 40 Attachment1to Annex 4 -Detailedappraisalof the two Sample Sub-Proiects {TotalEstimatedInvestment - $5 million) identifiedfor vear 1. Subproject 1-West BusTerminalUpgrade 1. Rationale The West Bus Terminal presently receives around 1,200 buses per day and approximately 18,000 passengers. The number o f daily passengers received during peak time (Vietnam New Year) amounts to approximately 50,000. With a wide frontage along Kinh Duong Vuong Street, the site offers high-valued commercial potential. There is an urgent need to improve the existing service facilities and inproviding the general public with higher standards o f service, especially inrespect to safety andhealth standards. 2. ExistingWest BusTerminalFacilities With largepassenger and bus numbers the existing facilities are unable to efficiently handle the traffic volumes and are greatly inneed o f refurbishment and redevelopment. The facilities are outdated and intheir present form are unable to maximize their full commercial potential. One o f the present problems o f the site i s the regular flooding that occurs during monsoon season, with regular flooding o f the bus parking area and passenger waiting areas as the internal drainage system i s unable to drain to the existing drainage facilities along KinhDuong Vuong Street. The duration o f flooding i s usually around 2 hours but during this time considerable inconvenience is caused to passengers and commercial operations alike. This situation is further exacerbated inthat the existing drainage system i s a combined system and used for both rainwater and waste water. 3. West BusTerminalManagement The West Bus Terminal is managed and operated by the West Bus Terminal Joint Stock Company, with 51 percent o f its shares owned by the State and 49 percent by West Bus Terminal Company staff. The Company comprises a Board of Directors represented by the State (3 members), and representatives from the founding shareholders and consisting o f the Dong A Bank Securities Company Limited, the Thai Binh Shoes Joint Stock Company, and a staff representative, making a total o f six board members. The chartered capital o f the Company i s VND25 billion. The general Company Charter allows it to operate the two inter- provincial bus terminals including West Bus Terminal along with other associated activities such as provision o f services within the terminal sites, tourism transportation, leasing and management o f commercial areas, freight cargo handling, car spare parts trading, and maintenance and repair services. 4. ProposedSubprojectWorks The proposed West Bus Terminal Upgrading building works will consist o f upgrading and expansion o f both the two storey departure and arrival hall buildings, along with the ticketing office areas; upgrading and provision o f new departure area bus shelters; provision o f new arrival area bus shelters; construction of a new staff parking building; construction of a RepairMaintenance Bus Workshop; provision o f a new fuel service station; construction of a dining hall and lodging facilities for drivers; provision of new public toilet facilities; and construction o f a Security/Guard House, All structures will be constructed from reinforced concrete with color bonded aluminum roofing and ceramic floor tiles. 41 Dueto the existingdrainage/flooding problems, there will be a needto reshapethe ground level o f the bus terminal site, and to replace and upgrade existing drainage facilities. For waste water sources from toilets and commercial areas, septic tanks will be constructed. For vehiclebus washing areas, and where lubricating oils are being used, sand tanks shall be provided to allow treatment o f washing water and lubricants and to ensure that these materials do not enter the drainage system. Water supply facilities are readily available and the present system will be rehabilitated with new pipes. The construction o f a 135 cubic meter watedstorage tank will be provided in order to enhance fire protection capabilities. Within the site there i s presently an underground water source that i s utilized for vehiclebus washing, and this source will continued to be usedfor such purposes. Further deepening o fthe well will be required. Inrespect to electricity andpower supply, the existing 63 KVA power station will be replaced with a 250 KVA power station. Inaddition, the installation o fundergroundcables for servicing the site will be requiredalong with an outdoor lightingsystem within the bus parking areas and along the boundary fence for security. For fire prevention and safety, it i s proposed to provide 7 water hydrant points and two underground water tanks with 150 cubic meters capacity and associated pumps. Equipment, including computers, printers, and associated IT equipment, will be procured to support the operation and management o fthe West Bus Terminal. 5. TechnicalJustification All the subproject components have been based on appropriate technologies that are both cost effective and technically feasible. They have been developed with consideration o f the operating company's capacity to operate and maintain the various physical works components, while minimizing the associated operating and maintenance costs. The proposed standards for drainage improvements are compatible with existing facilities. The proposed improvements will greatly enhance the site and provide a much improved public facility. 6. Cost Estimate The total cost o f the subproject i s estimated at VND 53,106,710,268 (approximately US$3.32 million). The following table provides a breakdown o f the costs. No. I t e m Description Total Cost (VND) 1 Construction Works 41,647,380,245 2 Machinery and Equipment 2,990,175.345 3 Project Development and Implementation Costs --- 3,658,111,088 Project Design and BiddingDocuments 329,230,000 Implementation Supervision 3,145,975,535 Project CompletionActivities 182,905,553 4 Contingency Fund 4,811,043,590 Total Subproject Investment Cost 53,106,710,268 7. FinancingPlan It is proposed that the subproject will be financed through an equity investmentby the West Bus Terminal Joint Stock Company o f 30 percent o f the total investment cost, or an amount o f VND17,029,446,407 (US$ l.O6million), with a loan from HIFUfor the remaining 70 percent o f the funds o f VND36,077,263,861 (US$2.26million). The HIFUloan funds will carry an interest 42 rate o f about 10 percent over a period o f 10-12 years, including a 2 year grace period during construction. 8. ImplementationArrangements The implementation o fthe subproject will be undertaken over a two year period intwo phases, with the first phase consisting o f all civil works including site grading, drainage, water supply, power supply, sanitation facilities, and fire protection works, while the second phase will consist o f the construction and upgrade o f the service facilities, including departure and arrival areas, waiting halls, office facilities, ticketing facilities, and other support facilities. 9. OperationandMaintenance Responsibility for the operation and maintenance o f the subproject facilities will be assumedby the West Bus Terminal Joint Stock Company. While the present facilities are generally well maintained, it i s expected that routine maintenance will be regularly undertaken to minimize large scale maintenance works on the upgraded facilities. Adequate annual budget allocations should bemade to cover required routine maintenance costs. 10. Social SafeguardIssues a. Resettlement There are no land acquisition or resettlement requirements within the subproject site. The subproject site land area was allocated to the West Bus Terminal Joint Stock Company on 18 August 2005 through a decision by the HCMC People's Committee. Inrespect to commercial areas, the West Bus Terminal Joint Stock Company i s presentlyrenting a number o f kiosk areas to various bus operators/enterprises on a 6 month renewable contract basis. The Bus Company advises that they have informed the kiosk renters about the proposed upgrading works and advised them that they will be given priority in respect to renewing their respective contracts once the upgrading works have been completed. b. Environmental Aspects A summary initial environmental assessment (SIEE) has been undertaken for the subproject which showed that no significant adverse effects are anticipated and that a detailed environmental impact assessment (EIA) i s not required. The proposed upgrading works will generally enhance the existing bus terminal conditions. Flooding will be eliminated due to site grading and improved drainage facilities resultingina reduction inthe present disruption to the traveling public as well as to commercial and business activities. Improved traffic flow and parking arrangements within the terminal site will result in greater safety and convenience to the traveling public. 11. FinancialandEconomicAnalyses a. FinancialAnalysis The analysis has been undertaken to work out Financial InternalRate o f Return (FIRR) for the sub-project while analyzing its sensitivity to an increase in the investment cost, increase in operating costs, and reduction inbusiness revenues. The analysis assesses the financial viability by comparing (i) FIRRbased on incremental revenue generation with the updated average the cost o f capital for each component; and (ii) the average incremental financial revenue with the 43 average incremental financial cost. The HIFUloan funds will carry an interest rate o f about 10 percent over a period o f 10-12 years, including a 2 year grace period during construction. The sensitivity analysis conducted on the West Bus Terminal Upgrading Sub-project indicates that its current FIRR o f 12.36% will only decrease to 11.47% if the investment cost was increased by 10 percent. In fact, the FIRR of the subproject remains positive until the investment cost increases by more than 40 percent. Additionally, there exists considerable opportunity for increases inuser fees and tariffs which are currently at low base levels. An increase o f tariffs, ifandwhen enacted, willhaveminimalaffordability impactonthe transport users. b. Economic Analysis For the economic analysis and calculation o f the sub-project Economic Internal Rate o f Return (EIRR), the methodology and assumptions utilized follow standard methodology for development sub-projects. The calculation o f the EIRR also used economic opportunity cost o f capital o f 12 percent as standard for the feasibility study o f development project. The sub- project has economic efficiency with an EIRR o f 13.53 percent and an ENPV o f 12 percent equivalent o f VND 7,112 million. c. Debt Service Capability The capability for debt repayment o f West Bus Company depends on annual income of the company, loan size, repayment period, and annual interest rate. The annual income bases on the financial performance and approximated in financial analysis. The intended loan borrowing represents 70 percent o f the total sub-project investment and equals approximately VND 37,106.7 million. Three annual interest rate scenarios have been used ranging from 7 to 10 percent. Repayment period o f 10 years, with a 2 year grace period and an 8 year repayment period has been adopted. The calculations o f Debt Service Coverage Ratio (DSCR) at this lending terms has confirmed the company's capability to repay the proposed loan even with the current level of user fees and tariffs. Subproject2 -Septic TankWaste Treatment PlantinDa Phuoc,BinhChanhDistrict 1. Rationale The Hoa Binh Waste Treatment Disposal Company Limitedis jointly owned by two partners each owning 50 percent o f the total operations with initial financial contributions o f VND6,OOO million each. Employing a total o f 46 staff, the Hoa BinhWaste Disposal Company i s the only licensed company inH C M C that undertakes the de-sludging andtreatment o f septic tank waste. Since its establishment, the Company has maintained its business operations entirely on septic tank waste disposal and over time has expanded its operations into the production o f bi- products such as organic fertilizer used in agriculture production and micro-biological slurry usedinwastewater treatment processes. Prior to the closing o f its original operations site, the operational capacity o f the operations was around 250 cubic meters per day. The Hoa Binh Waste Disposal Company Limited disposal and treatment site was previously located near the HCMC Tan Son International Airport. Due to urbanization and environmental requirements, the Company was requested to relocate its operations to the outskirts o fthe City. 44 2. ProposedSubproject Description The proposed site o f the Septic Tank Waste Treatment Plant is a 9.4 hectare site located inthe D aPhuoc Solid Waste Treatment Complex inBinhChanh District, HCMC. The site i s adjacent to a 40 hectare site proposed by the HCMC Urban Sewerage Company as a sludge waste treatment plant and next to the solid waste landfilldevelopment site o f Vietnam Waste Solution Company which i s presently under development. An existing cemetery i s located near the entrance to the site. The D aPhuoc area has beendesignated as one o f the city's major locations for waste disposal in general, be it solid waste, drainage sludge, or septic tank waste. The area i s well clear o f any residential areas and i s separated from surrounding urban development by a series o f canals and a major water course. The proposed location o f the Hoa Binh Septic Tank Waste Treatment Plant within this development area i s therefore consistent with proposed planning guidelines. The proposed Septic Tank Waste Treatment development follows a separated treatment technology process where the sludge and waste water are separated and independently treated. The total fully developed capacity o f the operation i s based on a daily septic tank sludge volume o f up to 500 cubic meters per day and i s calculated on an average of 1.5 cubic meters per household and septic tank de-sludging once every 3-5 years (depending on the size o f the household septic tank). With relatively high density urban living standards within HCMC it is likely that the majority o f septic tanks would require de-sludgingonce every 3 years. The Hoa BinhWaste Disposal Company will provide the full service from household septic tank sludge collection, transportation to the disposal site, and treatment o f the septic sludge. Processing o f the septic sludge will be undertaken through proven and tested Japanese technological processes in producing organic fertilizers for agricultural uses as well as in the production o f micro biological slurry for waste water treatment systems where biological treatment processes are utilized. The treatment o f septic sludge into organic manure will be processed through a reinforced concrete receiving tank (20 meters long x 10 meters wide x3 meters deep) where the sludge is exposed to the sun, then into tanks o f 500 cubic meters capacity where the sludge and waste water are separated, and after a period o f around 5 months the sludge will be further dried in large drying beds and then composted into fertilizer. The whole process will take around 12 months with a production output o f around an equivalent o f 7 tons per day o f organic fertilizer. For the waste water, this shall be treated inreinforced concrete tanks where the sludge shall be self-destroyed with the waste water passing through regulating tanks where the water content i s regulated, then into an organic compound tank for chemical treatment, then into a tank for biological processing o f bacteria, and lastly to a sterilization tank where the waste water i s further chemically treated before discharge o f the sterilized water into the surrounding water courses. Odors will be minimized through chemical treatment at various stages o f the processing chain. The Hoa BinhWaste Disposal Company proposes to develop the treatment site intwo phases, the first phase developing a capacity o f around 300 cubic meters per day, which would meet the projected demands o f septic waste disposal inthe city over the next 5 years, or to 2012, and the second stage through expanding the overall capacity to around 500 cubic meters per day beyond 2012. The expansion o f the treatment plant would be a relatively straight forward 45 No. ItemDescription TotalCost (VND) 1 ConstructionWorks 19,324,997,978 2 Machinery and Equipment 5,499,609,675 3 Project Developmentand Implementation Costs 1,844,033.375 Project Design and Bidding Documents 1,590,720,224 Implementation Supervision 253,3 13,15 1 4 ContingencyFund 2,686,189,101 Total Overall SubprojectInvestmentCost 29,548,080,108 No. ItemDescription Total Cost (VND) 1 ConstructionWorks 8,369,138,500 2 Machinery and Equipment 5,242,448,500 3 Project Developmentand Implementation Costs -- 1,844,033,375 Project Designand Bidding Documents 1,590,720,224 Implementation Supervision 253,3 13,15 1 4 Interest During Grace Period 265,212,716 5 ContingencyFund 2,686,189,101 Total OverallSubprojectInvestmentCost (Phase 1) 18,407,022,192 5. FinancingPlan As only Phase 1 o f the subproject will be initially financed and developed, it is proposed that the subproject will be financed through an equity investmentby the Hoa Binh Waste Disposal Company Limited o f 46.6 percent o f the total Phase 1 investment cost, or an amount o f VND8,584,328,992, or approximately US$536,520 equivalent, with a loan from HIFUfor the remaining 53.4 percent of the subproject cost o f VND9,822,693,200, or approximately US$613,919. 46 6. ImplementationArrangements It is estimated that the implementation o f the first phase o f the subproject will be undertaken within a one (1) year period. 7. OperationandMaintenance Responsibility for the operation and maintenance o f the subproject facilities will be assumed by the HoaBinhWaste Disposal Company Limited. Adequate annual budget allocations should be made to cover requiredoperational costs as well as routine maintenance costs. 8. Social SafeguardIssues a. Resettlement The compensation and resettlement activities have been implemented since 2005. According to the due diligence report, there are still 1.9 out o f 9.4 ha having not yet been cleared with about 10 households waiting for their complaints to be resolved and landplots ina resettlement site to be provided. OnMarch 1,2007 HCMC-PC has instructedBinhChanh district PC to resolve the issue as soon as possible, including allocation o f land plots in a neighbor commune for the displaced people to be relocated. The interviewed displaced people were satisfied with the applied compensation and resettlement policies. Resolution o f this issue in a manner satisfactory to the Bank i s a condition for the subproject to get financing from the Line o f Credit. b. Environmental Aspects An Environmental Impact Assessment (EIA) Report of the proposed Septic Tank Waste Treatment Subproject was prepared bythe EnvironmentalManagement andEngineeringCenter and submittedto the Department o fNatural Resource and Environment (DONRE) for approval. After receiving commentdfeedback from the Appraisal Committee under DONRE, the Report (version January 2007) was finalized and approved byDONREon March 20,2007. Assessment o f the institutional mechanism o f the Hoa Binh Ltd. to carry out EA work for the Septic tank waste treatment was submittedto the Bank on March 27,2007. The Bank has found this satisfactory, provided that the Hoa Binh Ltd. will hire consultants for internal monitoring and HIFUwill get consulting service for independent environmental monitoring as part o f the TA to HIFU. 9. FinancialandEconomicAnalyses a. Financial Analysis The analysis has been undertakento work out Financial Internal Rate o f Return (FIRR) for the sub-project while analyzing its sensitivity to an increase in the investment cost, increase in operating costs, and reduction inbusiness revenues. The analysis assesses the financial viability by comparing (i) FIRRbased on incremental revenue generation with the updated average the cost o f capital for each component; and (ii) the average incremental financial revenue with the average incremental financial cost. After year 10 it i s projected that the volume o f collected sludge and produced fertilizer will attain the maximum capacity o f the first phase investment which would amount to 300 cubic 47 meters per day or 104,025 tons per year. On reaching the maximum capacity, and after 10 years, the Hoa Binh Waste Company will invest its own funds to expand the plant capacity to 500 cubic meters per day at which time the volume o f collected sludge will amount to 182,500 tons per year and fertilizer 1,916 tons per year. The HCMC People's Committee presentlypays a fee equivalent to US$6/ton for disposal o f collected sludge, while the average price o f fertilizer sold in the market i s around VND400,000/ton. Based on the projected volume o f sludge and collection fees and the price o f fertilizer, the septic tank waste treatment plant is expected to generate revenue over a ten year timeframe as shown inthe following table. The results show that Septic Tank Waste Treatment Plant Sub-project has FIRR o f 11.5% and still has financial efficiency with minimal negative impact from an increase in investment costs o f 10 percent with an FIRR o f 10.47 percent. Nevertheless, there exists considerable opportunity for increases in user charges due to there present very low base levels, and these increases would significantly improve the financial prospect o fthe sub-project. b. Economic Analysis For the economic analysis and calculation o f the sub-project Economic Internal Rate o f Return (EIRR), the methodology and assumptions utilized follow standard methodology for development sub-projects. The calculation o f the EIRR also used economic opportunity cost o f capital o f 12 percent as standard for the feasibility study o f development project. The subproject has economic efficiency, with an Economic Internal Rate o f Return (EIRR) o f 26.14 percent and an Economic Net Present Value (ENPV) o f 12 percent equivalent o f VND 23,869 million. c. Debt Service Capability The capability for debt repayment o f the Hoa Binh Waste Treatment Company Limited depends on annual income o f the company, loan size, repayment period, and annual interest rate. The annual income i s based on the financial performance and approximated in the subproject financial analysis. As the Investor i s prepared to invest 43 percent o f the total subproject cost, the loan amount represents 57 percent o f total sub-project investment or an amount o f VND 9,882,693 million. Three annual interest rate scenarios have been usedranging from 7 percent to 10 percent. Repayment period o f 10 years, with a 2 year grace period and an 8 year repayment period has been adopted. All scenarios generate high capabilities o f the Hoa BinhWaste Treatment Company Ltd.inits ability to repaythe proposed loan. 48 Annex 5: ProjectCosts VIETNAM: HIFUDevelopmentProject Local Foreign Total Project Cost ByComponent andor Activity us us us $million $million $million Investment inmunicipal infrastructure 60.0 10.0 70.0 Technical Assistance for Project Monitoring 0.3 0.2 0.5 Total Baseline Cost 60.3 10.2 70.5 Physical Contingencies 6.0 1.o 7.0 Price Contingencies 2.7 0.3 3.0 TotalProjectCosts' 69.0 11.5 80.5 Interest during construction NA NA NA Front-end Fee NA NA NA TotalFinancingRequired 69.0 11.5 80.5 'Identifiable taxes and duties are US$ 8 million, and the total project cost, net o f taxes, i s US$ 72 million. Therefore, the share o f project cost net o f taxes i s 69%. 49 Annex 6: ImplementationArrangements VIETNAM: HIFUDevelopmentProject ImplementationStructure The implementingagency for the HDP will be HIFU as it institutes key operational reforms and undertakes investments inmunicipal infrastructure inparticipation with the private sector. The implementation structure mirrors the current system and role o f HIFU, with the HDP (involving operational reform and increased investment capital) hrther enhancing and developing the h c t i o n and o f HIFU. HIFU operate as a specialized agency within the municipal government with the charge of working with the Department of Planning and Investment (DPI) and other line departments in the municipal government to finance cost- recovery oriented municipal infrastructure projects in partnership with the private sector. The DPI in its role as the planning agency for the province identifies the investment needs as well as project ideas, including those which can be financed with private sector participation. The DPI in collaboration with the HCMC PC then assigns the investment targets and project ideas to the concerned line departments. The line departments prepare the technical details o f the projects (detailed engineering designs, etc.) and consult with HIFU vis-&vis financial structuring to involve with private sector participation. The Department o f Finance - on behalf o f the HCMC PC - will work with HIFUto ensure that an appropriate process i s usedto select private sector partners andprovide oversight on the financial operations o f HIFU. HDP Project ImplementationStructure Repayment MoF ($) IDAto I I to IDA ($) On-lending I VND at 4% + WB Commitment Fee 25 yr term, 10yr niru grace period Repayment Investment of the VND Capital (booked Loan to McIF F\ as debt on BS) HIFU 4 CaDital HCMC PC Financed Projects4 Private Sector Pvt. Investors The flow o f IDA credit i s described inthe illustration above. The IDA credit will be on-lent by the MOF to HIFUin VND on terms which have already been negotiated between HIFU and 50 M O F in consultation with the Bank Task Team. The capital on-lent from MOF will be booked on the HIFU balance sheet as debt. The equity or paid-in capital o f HIFU (referred to in Vietnam as charter capital) i s provided by the HCMC PC. HIFU will invest the investment capital provided under the project according to the loan conditions which restrict the investment to cost-recovery oriented municipal infrastructure and define the sectors o f focus. The key financial covenants cover the financial operations o f HIFU(they are not restricted to IDA credits only) to ensure the financial and operational viability o f HIFUas an institution. The project conditions will help to further support HIFU's long-term qualification under Bank OP 8.30. The disbursementsto HIFUwill be made via a 6-months Report Based system, which will require HIFUto document how the h d s receivedbased on the previous periodic "Report" were utilized, and describe how the funds requested for the next period will be used inline with pthe loan conditions -please see annex 7 for details. Roles and ResDonsibilities I Role HDPImpact/Notes Provide IDA Credit to GOV $50 million IMOF On-lend VND to HIFU 25 yr, 10yr grace, 4%+WB Commitment fee, denominatedinVND Invest incost recovery oriented municipal IIHDP will strengthen the financial operations HIFU infrastructure projects; leverage private and provide capital for increased activity, capital inprojects; repay the MOF loan; including the ability to proactive prepare I maintain a sound financial position I projects and then invite private investors I Approve all HDP documentation; ensure I HDP will reduce the risk of contingent liability compliance with loan conditions; oversee associated with HIFU; strategic clarity on project progress investment planning and increasing private sector investment inmunicipal infrastructure Plan infrastructure investments inHCMC IIHDP will allow D P I to better utilize HIFUfor and identify project ideas for private sector strategic investments involving private sector investment participation Prepare project details, e.g., engineering Increasedinvestment capital will make it easier Depts. designs and FS; consult with HIFUon and faster for HIFUto structure and finance relevant projects projects for the departments Supervise project implementation; provide Demonstrate that Vietnamese institutions can WB Task strategic advice to HIFUManagement and implement projects; improve disbursement; HCMC PC; review project progress, establish development models which can help including monitoringhesults indicators Vietnam become a MIC Auditors Monitor project progress; provide reports Establisha model for transparency inmunicipal on project indicators government operations 51 Annex 7: FinancialManagementandDisbursementArrangements VIETNAM: HIFUDevelopmentProject CountryIssues The 2001 CFAA for Vietnam concluded that the public financial management system represented some level o f fiduciary risk. The 2005 PER-IFA recognized improvements in transparency and accountability arising from (i) new audit law (May 2005) which will a enhance oversight by the National Assembly and Provincial People's Councils over public finances and increase public access to information on government finances; (ii) the new decree on independent audit (March 2004) which regulates the status o f auditors and audit firms and define the value o f audit results; (iii)the accounting law (2003) which establishes the legal framework for Vietnamese Accounting Standards for public and private sectors on the basis of international standards. However, the PER-FA identifies a large agenda for improvement in public financial management. The key challenges include: (i) implementation o f the legislative frameworks which are largely in place; (ii) strengthening the effectiveness o f the State Audit o f Vietnam; (iii)streamliningthe internal control framework; (iv) buildingthe financial management capacity, particularly at the sub-national level; and (v) adopting international public sector accounting standards. Recently, corruption and collusion has been highlighted as a significant risk in some donor funded projects in Vietnam. The risks particularly relate to procurement, however the weaknesses in internal control and financial monitoring and oversight combined with capacity weaknesses increase the inherent risk in relation to mis-use o f finds for approved purposes which are accounted for through government systems andprocesses to substantial. RiskAssessment andMitigation The inherent risk to the project from the financial environment is assessed as Moderate. The project specific control risk taking into account the risk mitigation measures that are to be implementedfor the project is assessed as low. The overall financial management risk of the project is assessed as Low. Risk Risk RiskMitigation MeasuresIncorporated into RiskAfter Rating Project Design Mitigation Condition of Negotiation, Board or Effectiveness Inherent Risk Country level: Overall Moderate Capacity buildinginMTEF and budgeting, Moderate Fiscal Environment implementation and monitoring, commitment control and debt management; Performance expenditure reviews at least annually Entity andProject Moderate (i) financialauditbyindependent Annual Moderate level: Funds may not auditor for Financial Statements o fHIFU be used efficiently and including the notes on Fundand Uses o f Fund 52 Risk Risk RiskMitigation.Measures Incorporated into RiskAfter Rating Project Design Mitigation Condition of Negotiation, Board or Effectiveness economically and for under HDP, (ii) Guidance on Financial purposes intended Management o f HDP, (iii) independent consultant to monitor ,the compliance o f safeguard performance, fiduciary requirement and (iv) technical assistance o n accounting and reporting system financed by LDIFP EntityandProject L o w Training on the bank procedures and project L o w level: the P P M Umay managementbe provided to the project staffs not have necessary capacity to implement the project Overall Inherent Risk Moderate Moderate Control Risk 1. Budgeting Moderate (i) arepreparedonaquarterlybasis(ii)Low Budgets Technical assistance provided (partially) andor incooperationwithTA fromAFDtoenhance the mediudlong term planning and budgeting 2. Funds Flow L o w Fundswill flows directly from the IDAto the L o w designated accounts maintained at a commercial bank acceptable to IDA whose signatories are managementHIFU. 3. Staffing L o w Finance staff to be trained on IDA procedures Low and project management. 4. Accounting Policy Moderate Accounting system for HFU's operations will L o w &Procedures be improved under the LDIFP 5. InternalAudit Moderate The Supervision Board function i s to be Moderate enhanced to cover aspects o f internal controls under the TA o f LDIFP/ AFD. InternalAudit function (as function o f Supervision Board) to be setUD ifdeterminednecessarvbvthe TA 6. External Audit L o w Annual Financial Statements o f HIFU L o w (including the Financial Statements o f the Project as a note/part) will be audited by independent auditors with TOR acceptable to IDA 7. Reporting & Moderate (i)Upgrade o f IT systempartly self-financed Moderate Monitoring and under the TA o f AFD, (ii) improvement o f the accounting and reporting system under the TA of LDIFP 8. Information Systems Moderate Upgrade o f IT systempartly self-financed and L o w under TA o f AFD. Overall Control Risk Moderate Low Implementationarrangement HCMC People's Committee will have overall responsibilityfor overseeing implementation o f the project, reporting to the Government o f Vietnam and fulfilling the requirements o f the World Bank. HCMC Investment Fund for UrbanDevelopment (HIFU),which was established 53 in 1996 as a national financial institution, will be the implementing agency for the project responsible for financial management relevant to the project components. HIFUwill report to HCMC PC for necessary approval. The proceeds from the Credit can be used for both lending and equity investments which meet the criteria agreed with the Bank. Staffingof financialmanagementfunctionat HIFU HIFUalready has an established financial fbnction that is adequately staffed andthe staff has satisfactory competence and qualifications. The accountants in HIFU have accounting educational backgrounds (at least bachelor degree) and experiences managing the activities of the fund. However, the accounting staffs do not have experiences with IDA funded projects, in particular, disbursement and financial management requirements o f IDA. Training on these was delivered to those involved inFinancial Management. Budgeting Budgeting procedures have been established at the HIFU. Financial Plans and budgets are prepared and finalized with the cooperation o f different departments (e.g., Finance and Accounting, Investment, Credit Appraisal, PlanningDepartment) within the Fund. The HIFU's planning department i s responsible for preparing the consolidated budget and plan, obtaining approval from the Management o f the Fund and sending to the HCMC PC for final approval. At HIFU, the planning and budgeting which is done on a quarterly and annual basis for the short-term period (ie., under one year) was assessed as adequate though the plans and budgets for the longer term (medium and long term) are not comprehensively prepared. The analysis o f actual against budgets i s performed on a monthly basis andthe overall assessment i s done at the year end, which i s considered as adequate. It is concluded from the financial management assessment that the current level o f budgeting and planning, short-term budget and plan is reliable, thus can be used as basis in the report based disbursement method. The longer term planning and budgetingwill be enhanced with the technical assistancecomponent provided under the AFD Credit Agreement and LDIFP. Accounting Inaccordance withthepermissionofthe MOF,HIFUhasadoptedthesameaccountingregime employed by the Development Assistance Fund under the Decision 78/2003/QD-BTC. Decision 78 introduces (a) the accounting principles, (b) system o f accountingpapers/vouchers/ receipts, (c) chart o f accounts, (d) system o f accounting books and (e) format for financial reports. The adoption o fthe DAF's accounting policies to LDIFs ingeneral and to HLFUinparticular i s not entirely suitable. This i s mainly due to the fact that there are significant differences in the nature and scope o f operations o f DAF and LDIFs. DAF's business i s mostly like a not-for- profit organization while the LDIFs are playing a role o f more financially viable and commercial-oriented entities. LDIFs' activities are more diversified including syndicated investmentand lendinginco-operation with other commercial banks.Due to those differences, there i s lack o f some significant regulation o f accounting policies such as equity investment, syndicated lending and taxation. HIFUtherefore has designed such accounting policies for its 54 operations which are (i) generally similar to those o f commercial banks and (ii) "legalized" not (Le. regulated) inthe accountingregime issuedby the MOF. The project will use HIFU's current accounting system which i s assessed as adequate for accounting and reporting the receipt and use o f funds received from the IDA as well as other donors, The accounting regime for LDIFs will be changedimproved in the hture upon the issuance o f the new Decree on the management o f the LDIFs. Technical Assistance under the LDIFP willbeprovidedto the MOF to achieve those. InternalControls The management o f HIFU i s responsible for ensuring that an adequate internal control framework andinternal controls are inplace andoperating. Overall, the current internal control system i s assessed as adequate as HIFU has: (i)established clear defined Financial Management responsibilities, supervision, monitoring and reporting structures; (ii) observed the segregation o f duties; (iii) definedand documented financial processes and procedures; (iv) set up adequate management reporting including analysis o f variances and findings with monthly and quarterly reporting to the Board o f Management; and (v) set up proper procedures and documentation retention. However, there are certain areas o f the risk management processeswhere improvements are required: (i) development ofprocedures for identification o f risks o f concentration liquidity and market and; (ii)use o f tools and modules for risk assessment processes such as maturity analysis, re-pricing analysis, interest sensitivity model, etc. Inaddition, the information technology system should also be upgraded to hrther facilitate the efficient management o f the hnd's operations. Technical assistance for the development o f investment policies (which includes the risk management) i s being provided by a Bank executed assignment o f which the output will be recommendations to HIFU (and other LDIFs) for improvement o f the risk management. The upgrade o f the information technology o f HIFU will also be partially self- financed and partially by the technical assistance component o f this project andor with the AFD's project. Expenditure Category Amount of Credit YOof Expendituresto be Allocated (millionUS%) Financed Category 1-EquityInvestments by HIFU 20 100% Category 2- Loan Investments by HIFU 30 100% TOTAL 50 100% Eligibleexpenditure Eligible expenditure means equity investments and loan investment for the reasonable costs o f goods, works and services o f sub-projects which meet the criteria agreed with IDA. The subprojects must meet the criteria, as set out inthe D C A andthe PPA Manual vis-a-vis: (i) cost recovery; (ii) municipal infrastructure investment and (iii) implementedinpartnership o f being private sector. 55 DisbursementMethods The project will use the following disbursement methods: 0 Reimbursement - The Bank may reimburse the borrower for expenditures eligible for financing pursuant to the Loan Agreement ("eligible expenditures") that the borrower has pre-financed from its own resources. 0 Advance - The Bank may advance loan proceeds into a designated account o f the borrower to finance eligible expenditures as they are incurred and for which supporting documents will be provided at a later date 0 Direct Payment - The Bank maymakepayments, at the borrower's request, directly to a third party(e.g., supplier, contractor, and consultant) for eligible expenditures. The Disbursement Deadline Date will be four months after the Closing Date o f the project. Supporting documentation to evidence that funds have been used for eligible expenditures under the reimbursement and advance methods are the Interim Financial Reports (IFRs). The un-audited IFRs will be required to be submitted to the Bank at least quarterly and will be reviewed by the Financial Management Specialist prior to recording o f the expenditures against the project expenditures categories by the Loans Department. Under the Direct payment method the supporting documentation i s the records o f eligible expenditures; or any other supporting documentation that the Bank may request by notice to the borrower. The format of the IFRsneeds to be agreedbetween the representatives o f GOV and IDA at the negotiation. Designated Accounts and Ceiling A Designated Account (DA) in USD is maintained at a commercial bank with the terms and conditions acceptable to IDA. The Ceiling o f the DA i s the 6 month forecast o f the cash flow requirements. Applicationfor Advances HIFUmay apply for an advance inan amount up to the Ceiling less the aggregate amount of those advances previously received for which HIFU has not yet provided supporting documentation (IFRs). The advance requested will be based on the forecast estimate o f equity investments and loan investments which HIFUexpects to disburse inthe next 6 months period. HIFUwill provide information onthe expected disbursementsfor approved sub-projects inthe quarterly IFRs required to be submitted to the Bank.Forecasts will be reviewed by the financial management specialist andtask team for reasonableness. Frequencyof ReportingEligibleexpenditurespaidfromthe DA HIFUwill report on the use of loanproceeds advanced to the DA on a quarterly basis through unauditedinterimfinancial reports. Retroactivefinancing Retroactive financing in the aggregate amount o f US$1.5 million will be provided for expenditures made prior to the date o f the Credit Agreement but after appraisal date, for urgentlyrequireddisbursementfor Equity andLoanInvestments. The procurement procedures shall be inaccordance with IDA Procurement Guidelines. 56 Fundflow diagram The IDA Credit will be on-lent by the Government o f Vietnam to HIFU on terms and conditions acceptable to IDA. The IDA funds will be directly deposited to a designated account in USD at a commercial bank, acceptable to IDA, maintained and operated by HIFU. Withdrawal applications will be prepared by HIFUand processed through the MOF - External Financing Department. HIFU will be responsible for the flow o f funds to equity and loan investment beneficiaries and suppliers. Fundflow from IDAto HIFUandBeneficiaries (sub-projects) MOF/ External t I Commercial Bank A I I Beneficiaries 1. HIFU prepares the withdrawing application and sends to MOF- External Finance Department (EFD) for verification 2. EFDverifies and notifies HIFU 3. HIFUsubmittedthe withdrawing application to IDA 4. IDA transfers fundto the DA ofHIFUat commercial bank 5. Beneficiaries send the requests for payment to HIFU 6. HIFUinstructs the Commercial Bank to make the payments 7. Commercial Bankmakes payments to Beneficiaries 57 Details o fFundFlow from HIFUto Beneficiaries (Sub-projects) Beneficiaries (sub- project holders) (1) Beneficiaries (sub-project holders) apply for loanshnvestments from the HDP; (2) HIFUapproves the loanshnvestment proposals; (3) Beneficiaries sign contracts with contractors to carrying out work; (4) Contractors claims for reimbursement based on work completed, submitting supporting documentation to Beneficiaries; (5) Beneficiariesreview and forward reimbursement claims to HIFU(together with copies o f supporting documentation). Beneficiaries to retain the original copies o f supporting documentation; (6) HIFUmakes payment from HDP designated accounts, retaining the copies o f supporting documentation. 58 Monitoringof Sub-projectFinancialPerformanceandUse of Funds Monitoringprocedures by HIFU Diagram o f the credit monitoring process (for loan investment) i s as follow: Appraisal Credit Department to Department (1) 'Appraisal(1) council 'process the loan (2) (3) IIIIIII ( - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - J +IIII I I Claims for payments Accounting and Finance Department 'from suppliers/contractors Insummary, there are 3 types o fmonitoring supervision implementedbyHIFUfor loans: 1. The appraisal procedures taken before the loan is processed by Appraisal Department and Appraisal Council; 2. Check documentation o f each and every claims for payments to suppliers and contractors (of the borrowers) to ensure the loan proceeds are used for agreed purposes. This check is done by credit officer and technical expert; 3. Post disbursement inspection where credit department performs inspection to ensure: (i) the proceeds from loans have been usedfor the agreed purposes; and (ii) the borrower can that repay the loans. This inspection also includes review o f periodical financial statements and analysis o f financial indicatodratios. Note: The documentation required may comprise o f contract, invoices, certificate o f constructionvolume, etc. Based on the result o f due diligence review by Emst and Young, and the result o f Financial Management Assessment, it is concluded that the procedures discussed in (2) and (3) are adequately providedwhile the procedures o f (1) should be improved. For equity investment, the same monitoring procedures o f (1) and (3) are inplace. However the procedures o f (2) cannot be performed due to the nature o f the disbursement process for investment whereas checking procedures cannot be performed against each and every payment. Furthermore, it i s not clearly regulated in HIFU that the investees should submit the audited financial statements to ensure that: (i)the proceeds from equity investment are used for intended purpose and (ii) to reflect truly and fairly the financial position and performance o f investees. 59 The constraints o f the current monitoring procedures o f HIFU can be enhanced by the followings which are the key elements o f the oversight and monitoring arrangements to ensure that funds are used for eligible purposes and properly accounted and reported: HIFUadopts the Manual of Preparation and Appraisal of the Projects (PPA Manual) and the Manual for the Selection o f Private Sector Participants (PSP Manual) where projects are appraised, selected and monitored following guidelines and procedures and criteria agreed with the Bank; HIFU will require through the sub-project agreements the beneficiaries to maintain adequate records and to provide such financial information as HIFUrequests, to carry out the sub-project with due diligence and with efficiency. HIFUwill also requirethe right to inspect by itself or jointly with representatives o f the Bank, the plans, operations, works, goods, services, activities and any relevantrecords and documents o fthe sub-project; HIFUwill require the sub equity investment projects to submit to HIFUthe annual audited financial statements and auditor report preparedby acceptable Auditor to HIFU; An international auditing firm (as a part o f Bank supervision team) will conduct on a quarterlybasis, a review o fthe un-audited and audited financial statements and the progress manual implementation, including the confirmation o f whether the loans and equity investments are meeting the agreed sub-project criteria, specifically, are they being prepared according to PPA Manual and PSP Manual; Independent Consultant monitors the compliance o f each sub-project with the social and environmental safeguards requirements; All project information will be compiled by HIFU Management and discussed with the HCMC PC and the Bank in a workshop to be held every six months. The workshop will discuss project progress and any outstanding issues, including the need to refine or adjust any project component; Annual External Financial Audit whereby HIFU's Financial Statements which include the notedparts o f Financial Statements of the Project will be audited in accordance with the International Standards on Auditing. FinancialReporting HIFU's current financial and management reporting is assessed as adequate and accurate in accordance with the requirements o fDecision 78. Quarterly Interim Financial Reports (IFRs) will be prepared by HIFU for monitoring of financial performance of the project in a format to be agreed between the representatives o f the GOV and the IDA duringloannegotiations. HIFUwill submit IFRs to the Bank within 45 days of the end each quarter to the Bank. The IFRswill cover all project activities andwill include: Financial reports (analyzing expenditures against budgets) IFR 1.1 Sources and Uses o f Funds by expenditure category (including forecast o f funds requirement for the next 6 months); IFR 1.2 DetailedSix Month Financial Plan 60 0 IFR2.0 Uses o fFundsby Components; IFR3.0 Statement o fDesignatedAccount Reconciliation; 0 IFR4.0 Report on Contract Progress (applied for Component 2: Technical Assistance only) 0 IFR5.0 Report on Procurement Monitoring (appliedfor Component 2: Technical Assistance only) The IFRsare not requiredto be audited. Annual Project FinancialStatements: HIFUwill prepare annual project financial statements whichwill be includedinthe notes o fHIFU's financial statements consistingo f A Statement o f Sources andUses o fFunds/ CashReceipts and Payments which recognizes all cash receipts, cash payments and cash balances controlled by the entity; and separately identifypayments bythirdparties onbehalfo fthe entity. The Accounting Policies Adopted and Explanatory Notes. The explanatory notes should be presented in a systematic manner with items on the Statement o f Cash Receipts and Payments being cross referenced to any related information in the notes. Examples o f this information include a summary o f fixed assets by category o f assets, and a schedule of credit withdrawals, listing individual withdrawal applications; and 0 A Management Assertion that Bank funds have been expended in accordance with the intendedpurposes as specified inthe relevant World Bank legal agreement. The annual financial statements are required to be audited and submitted to the Bank within 6 months o fthe end of each financial year. The key accounting policies are included inthe HIFUproject financial management guidelines. Keyaccounting policies include: 0 Vietnamese Accounting Standards are applied for the accounting for the Income and Expenses o fthe Project which required the accrual basis to be applied; 0 Interest income from IDA funds i s recorded as income o f the project thus i s reflected in the closing fundbalance. Audit Arrangements The current financial statements o f HIFU are audited by D T L Auditing Company (a local company, which i s a member o f Howarth International) in accordance with Vietnamese Standards on Auditing. The audit opinion on the recent financial statements i s unqualified. However, performance of DTLAuditing Company has not beenassessedby IDA. External Audit. HLFU's financial statements which include the notedparts o f Financial Statements o f the Proiect will be audited inaccordance with international auditing standards by independent auditors and TORS acceptable to IDA. The audited financial statements and audit reports will be submittedto the Bank within six months of the end o f each financial year, and the date o f closing o f the project. 61 Supervision Plan The FMrisk i s assessed as low. On this basis, the FM supervision will consist o f review o f the quarterly IFRs and annual financial statements and accompanying audit reports, and the results o f the supervision auditors' reviews o f the project's operations (including eligibility of expenditures) and financial reports. An annual on-site supervision mission to review all aspects o f the project financial management will be undertaken. The on-site supervisionwill review the project's financial management system, including but not limited to operation o f the Designated Account, Statement o f Expenditures, internal controls, reporting and follow up of audit findings andmission's findings. The financial management supervision will be conducted byIDA'Sfinancial management specialist staff. 62 Annex 8: ProcurementArrangements VIETNAM: HIFUDevelopmentProject A. General Bank-fundedprocurement for the proposed project would be carried out inaccordance with the World Bank's "Guidelines: Procurement under IBRD Loans and IDA Credits" dated M a y 2004, revised October 1, 2006 (the Procurement Guidelines); and "Guidelines: Selection and Employment o f Consultants by World Bank Borrowers" dated May 2004, revised October 1, 2006 (the Consultant Guidelines) and the provisions stipulated in the Financing Agreement. The general description o f various items under different expenditure categories is described below. For each contract to be financed by the IDA Credit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Planwill be updated at least annually or as required to reflect the actual project implementationneeds and improvements ininstitutional capacity. HIFUis expectedto investinselected infrastructureprojectsundertwo possible forms (i) loans to private sector firms and/or autonomous commercial firms in public sector and (ii)equity investment in partnership with private sector firms. In addition, consultant services are expected to be procured by HIFUunder component 2 o f the project. These consultant services are to be wholly financed by HIFUown funds and would be procured in accordance with the national Procurement Law. Al- Procurementunder HIFUloansto privatesector firms and/or autonomous commercialfirms inpublicsector Procurementof Works. Civil works to be procured under HIFUloans to private sector firms and/or autonomous commercial firms inpublic sector include urbdtransport facilities such as bus/truck terminal, river port, inland depot, waste treatment facilities, workshops, etc. Procurement o f works would mainly be undertaken by respective borrowersheneficiaries o f HIFUloansusingthe establishedprivate sector and/or commercial practices inaccordance with paragraph 3.12 o f the Bank's Procurement Guidelines. The following private sector and commercial practices are intended to be used for the project. For small works (no specific threshold i s established but normally about less than VND1 billion or US$70,000), entities may negotiate a contract directly with a Contractor with due attention to qualifications and reputation o f contractor would be used. Alternatively, the entity may invite quotations from a minimum of three Contractors to assure competitive prices. Such small works may also be directly constructed by the firms if they have adequate construction experience, personnel and equipment capabilities (force account). For larger works, open competitive bidding (similar to the national competitive bidding o f the national Procurement Law) would be used. These practices are basically found acceptable to the Bank considering the incentive o f HIFU borrowing firms in ensuring economy and efficiency o f their borrowed funds due to commercial interest rate they have to pay to HIFU. However, it i s recommended that for large and complex works which are estimated to cost more than US$5 million per contract, ICB method as provided in Section 11, the Bank's Procurement Guidelines may be the most appropriate procurement method andshouldbe used. 63 Procurement of Goods. Goods under loans from HIFU to its borrowers (Component 1) include equipment associated with the facilities they invest such as bus terminal equipment, driers, air compressors, generators, etc. These goods would be procured by respective sub- borrowersibeneficiaries using the established private sector and/or commercial practices in accordance with paragraph 3.12 o f the Bank's Procurement Guidelines. The following commercial practices are intendedto be usedfor the project. For small goods items (no specific threshold i s established but normally about less than V N D l O O million or US$7,000), direct contracting would be used. Direct contracting may also be used for equipment o f proprietary nature or when need i s urgent. For goods items o f about less than VND2 billion or US$125,000 per contract, shopping would normally be used. Larger goods contracts may be procured using suitable open competitive bidding procedures. These practices are basically found acceptable. The Bank team recommends that where possible, ICB method as provided in Section 11, the Bank's Procurement Guidelines should be used for purchase o f large single items o f goods or large quantities o f like goods which can be grouped together for bulk purchasing under contracts estimated to cost more thanUS$1 million each. Selection of Consultants.Consulting services under loans from HIFUto its borrowers include preparationand appraisal o f engineering design, procurement support, construction supervision, technical transfer, etc. These consulting services would be procured by respective HIFU loan borrowersheneficiaries using established commercial private sector and commercial practices in accordance with paragraph 3.14 of the Bank's Consultant Guidelines. The following commercial practices are intended to be used for the project. For small contracts (no specific threshold i s established but normally less than VND500 million or US$30,000), single source selection (but usually based on a comparison o f qualifications o f several candidates or previous experience with the firm) would be used(to some extent, this procedure i s more or less similar to the Bank's CQS method). For larger contracts, consultants would be selected through a competitive process similar to the Bank's QCBS or LCS methods. It i s recommended that large assignments estimated to cost more than US$1 million per contract should be procured through the QCBS method described in Section 11, the Bank's Consultant Guidelines. A-2 Procurementunder HIFUEquityInvestment Apart loans to private sector firms and/or autonomous commercial firms inpublic sector, HIFU would invest in selected infrastructure projects under the form o f equity investment in partnership with private sector firms. This is an innovative operation. The selection o f such partnering firms would be conducted following a competitive procedure established based on the global experience and best practice, under the Private Sector Participation (PSP) Manual prepared for the project. This procedure has been agreed with the Bank and i s described in Annex 4 o f the PAD. Procurement o f goods, works and consulting services for such projects would be done by respective newly established joint venture companies (of which HIFU is a partner) following their own procedures or commercial practices. A-3 Procurementunder component2 of the project Consulting services under Component 2 procured by HIFUfor its technical assistance needs include social/environmental monitoring, preparation o f PPA manual, on-the-job advisory, training, financial auditing, etc. These consultant services are to be wholly financed by HIFU own h d s andwould beprocured inaccordance with the national Procurement Law. 64 B. Assessmentof the apency's capacitv to implementprocurement An assessment o f the procurement capacity o f HIFU and the first two firms which would borrow HIFU loans (West Bus Terminal Co. and Hoa Binh Waste Treatment Co. Ltd) was carried out during the project preparation. This assessment provided the following key findings: (i) agencies have institutional capacity in place but they have not yet arranged all specific organization and staffing for project/procurement implementation; (ii)although the agencies do not appear to have prior knowledge and experience on Bank procurement, because this is a Financial Intermediary Loan and given the Project's specific financing arrangement, the implementing agencies are not expected to implement their procurement using the Bank's traditional competitive methods, but mostly through commercial practices. The commercial practices intended to be used for the project are found generally acceptable; (iii) the agencies have different levels o f experience in procurement using commercial practices. HIFU has successfully participated in a multi-million USD BOO water supply plant project and gained good experience on competitive bidding. However, -both WBTC and HBDC - lack knowledge and experience on competitive bidding, and the procurement practices they were familiar with are mainly direct contractinglsingle source selection, shopping and force account; (iv) HIFU staff generally have good qualifications and capabilities, some o f them were trained on basic Bank procurement and the national Procurement Law; and (v) To addressprocurement capacity deficiencies, the agencies already planned to hire consultants to assist their procurement implementation. Based on the above findings and the specific nature o f procurement work required for the project, the procurement risk for the proposedproject is rated as "medium". To mitigate the procurement risk and to strengthen the project procurement implementation capacities, the following key actions have been discussed and agreed with the Borrower. 0 Organization o f the implementation unit within HIFU/WBTC/HBWTC, including designation and job descriptions for procurement staff should be prepared. Other prospective borrowers should designate procurement staff for the HIFU loan before implementationo f their subprojects. 0 An internationally experienced consultant should be hired to prepare detailed guidancekidding documents and assist/train HIFU and relevant city departments in implementing competitive selection of private sector partners for its equity investment operation. 0 A procurement operational manual for guidance to HIFUborrowers should be prepared based on the experiences o fthe first two subprojects. 0 A procurement session should be organized during the project launching workshop to introduce the project's specific procurement requirements with a focus on commercial practices to be used for HIFUloans. An in-depthtraining should be conducted for HIFU and relevant city departments on detailed procedures for competitive selection o f private sector partners duringproject implementation. 0 Prospective HIFU borrowers should hire consultant(s) to help implement their procurement as needed. C. ProcurementPlan The Borrower developed a detailed Procurement Plan for implementation o f Component 2 and the first two subprojects under Component 1. This plan(Attachment 2) has been discussed and agreed between the Borrower and IDA during negotiations. The Procurement Plan will be 65 made available inthe Project's database and inthe Bank's external website. It will be updated in agreement with the Bank team at least annually or sooner if required to reflect the actual project implementationneeds and improvements ininstitutional capacity. D. BankPrior-ReviewandFrequencyof ProcurementSupervision The following requirements for Bank procurementprior-review are recommended: 0 The first two contracts for procurement o f goods and works procured through open competitive biddingunder the commercial practices by HIFUloanborrowers. 0 All contracts for procurement o f goods and works to be procured under International Competitive Bidding (ICB) and all contracts for procurement o f consultants' services to be procured under Quality and Cost Based Selection (QCBS) Other contracts than those mentioned above shall be subject to the Bank's post review procedures. It i s recommended to carry out supervision missions to conduct post review o f contracts on a frequency o f every twelve (12) months. Attachment 1 Detailsof the procurementarrangementsinvolvinginternationalcompetition Goods andWorks andnon-consultingservices. List o f contract Packages which will be procured following ICB method: No ICB contracts are expected at the time ofproject preparation. ConsultingServices. List o f Consulting Assignments with short-list o f international firms: No consulting contracts with shortlist of internationalfirms are expected at the time of project preparation. 66 Attachment 2: IndicativeProcurementPlanfor the First 18 Months I. GENERAL Projectinformation: Country: Vietnam Borrower: Socialist Republic o f Vietnam Project Name: HIFUDevelopment Project Loadcredit No.: NA. Project Implementing Agencies (PIAs): HIFU, West Bus Terminal Co. (WBTC), Hoa Binh Waste Treatment Co. Ltd (HBTC) and other private sector firms / autonomous commercial firms inthe public sector Period covered by this procurementplan: 18 months 11.Goods andWorks andnon-consultingservices. 1. Prior Review Threshold: Procurement Decisions subject to Prior Review by the Bank as stated in Appendix 1 to the Guidelines for Procurement: Refer to Section D, Annex 8 of the PAD. 2. Special Procurement Arrangements: Selection o f private sector partners for HIFU equity investment operation shall be done following the competitive procedures described in Annex 4 o f the PAD. Works and goods contracts under Hoa Binh Waste Treatment Co.3 Subprojects are expected to be procured in advance o f the Financing Agreement signing. The expenditures under these contracts incurred after the cut-off date specified inthe Financing Agreement and prior to signing o f the FA with IDA, would be eligible for retroactive financing, subject to meeting all the specified conditions o f eligibility that would apply to expenditures incurred after the signing. 1 2 3 4 5 6 7 8 9 Est. Expected Ref. Contract cost Procurement P Domestic Review Bid-Opening Comments No. Descriptions (US%) Method Q Preference by Bank Date West BusTerminalCo.'s Subprojects BX-13 Yardroad& 130,000 CommercialPractice No No Prior Apr. 2008 technical (OpenCompetitive infrastructure Bidding) BX-14 Terminal & 80,000 CommercialPractice No No Post Jul. 2008 platform (OpenCompetitive Bidding) BX-15 Other supporting 40,000 CommercialPractice No No Post Jul. 2008 works (OpenCompetitive Bidding) BX-18 Equipment for 90,000 CommercialPractice No No Post Apr. 2008 roadandyard (Shopping) BX-19 Equipment for 95,000 CommercialPractice No No Post Jul. 2008 terminal (Shopping) HB-1 Intake tanks, 270,000 Commercial septic tanks, Practice(Open treatment works, Competitive pump station, Bidding) weighing station and accessroad HB-2 Site leveling and 30,000 Commercial preparation Practice (Direct Contracting) HB-3 Passive aeriation 150,000 Commercial area Practice(Open Competitive Bidding) HB-4 Workshop and 40,000 Commercial storage Practice (Direct Contracting) HB-5 Water drainage 28,000 Commercial No No Post Jun. 2007 and lighting Practice system (Direct Contracting) HB-6 Lightning 5,000 Commercial No No Post May 2007 protection Practice system (Direct HB-7 I II pumping/gradin I Dredging 60,000 ICommercial No No. Post Jul. 2007 I I Practice gequipment (Shopping) No No Post Jul. 2007 No No Post Jul. 2007 No No Post Jul. 2007 No No Post Jul. 2007 111.Selectionof Consultants 1. Prior ReviewThreshold:Selection decisions subject to PriorReviewby Bank as stated in Appendix 1 to the Guidelines Selection and Employment o f Consultants: Refer to Section D, Annex 8 o f the PAD. 2. Short list comprising entirely of nationalconsultants: Because the nature and value of consultant services required, almost consultants are expected to be national. However, there would be some international individual consultants required for Component 2. 3. Special Procurement Arrangements: Consultant contracts under Hoa Binh Waste Treatment Co.'s Subprojects are expected to be procured in advance o f the 68 Financing Agreement signing. The expenditures under these contracts incurred after the cut-off date specified in the Financing Agreement and prior to signing o f the FA with IDA, would be eligible for retroactive financing, subject to meeting all the specified conditions o f eligibility that would apply to expenditures incurred after the signing. 1 I 2 I 7 I 4 I s 1 h 7 Ref. No. Descriptionof Est. Selection Review Expected Comments Assignment Method by Proposals (us9 cost Bank Submissi (Prior on I Post) Date HIFU'sComponent2 TA-1 Independentresettlement 60,000 Gov't proc. N A Oct. 2007 Bank prior review monitoring consultant procedures TOR I (firm) qualifications only TA-2 Independent 50,000 Gov't proc. N A Oct.2007 Ditto environmentalmonitoring procedures consultant (firm) TA-3. Onthejob safeguard 70,000 Gov't proc. N A Feb.2008 Ditto advice and training for procedures HIFU (firmor individual) TA-4. Onthejob advice and 100,000 Gov't proc. N A Nov.2007 Ditto training for implementing procedures PSP framework (firm or individual) TA-5 On thejob advice and 100,000 Gov't proc. N A Oct. 2007 Ditto training for implementing procedures project preparatiodappraisal manual(firm) TA-6 Independentfinancial 120,000 Gov't proc. N A Oct.2007 Ditto audit procedures West BusTerminalCo.'s Sub HB-13 ITechnical transfer, I 3,000 I Commercial I Post IAug. 2007 I commissioningand testing Practice(SSS) HB-14 Procurementsupport 3,000 Commercial Post May 2007 Practice(SSS) 69 Annex 9: Economicand FinancialAnalysis VIETNAM: HIFUDevelopmentProject FINANCIALANALYSIS OFHIFU FinancialIntermediaryAnalysis The detailed due diligence o f HIFU's financial accounts was conducted to determine the financial viability o f HIFU as a potential Bank partner in a financial intermediary loan. The analysis reviewed the quality o f HIFU's loan portfolio, including the level o f non- performing loans and a detailed review o f randomly selected loans to determine loan rates and repayment quality. The equity investments o f HIFUwere also analyzed to determine HIFU's exposure vis-a-vis industry and investment instrument. Again, the key equity investments were identified and reviewed to determine asset quality. Finally, the Income Statement was analyzed vis-a-vis profitability and operational efficiency. The team conducted CAMEL Analysis, key financial ratios analysis. The analysis confirmed that HIFU i s in a strong financial position with total paid-in capital (charter capital) o f VND 1,288,224 billion and a very healthy capital adequacy ratio. Total assets have increased from VND 2,203,529 billion in 2003 to 3,323,603 billion in 2005, Net income has increased from VND 55,433 billion in 2004 to VND 85,369 billion in 2005. The quality of the loan portfolio is good, with non-performing loans accounting for 0.04%. The interest rate in the random sample o f 10 loans reviewed was around lo%, which i s above the standard market rate as indicatedby the SOCBs. The quality o f the investment portfolio was also very strong, with the highpossibility that the current (marked to market) value o f the investments will be far higher than the values reported in the financial statements. Finally, the investment portfolio (loans and investments) i s heavily concentrated in infrastructure related investments. The interest income from lending accounts for approximately 70% o f total sources o f income. Operating and administration expenses o f the Fund are very low considering the size o f the current operations of the Fund. Finally, the investments inportfolio companies (non- infrastructure investments) account for a significantly minor proportion o f total fund assets and therefore present limit exposure to market fluctuations. The detailed analysis o f HIFU's financial position is provided below. The detailed analysis of HIFU's financial position i s providedbelow. 70 Financial Analysis o f HIFU 2005 2004 2003 MVDm VNDm VNDm ASSETS Cash and current accounts with banks 110,979 208,596 370,443 Loans and advances to customers(**) 2,916,085 2,608,246 1,695,751 Long-term investments 256,292 155,675 127,693 Fixedassets (net) 38,290 38,673 3,117 Constructioninprogress 917 917 917 Other assets 1,040 431 5,608 Totalassets 3,323,603 3,012,538 2,203,529 LIABILITIESAND OWNER'S EQUITY TOTAL LIABILITIES Customer deposits and other amounts due to customers 35,198 32,309 49,625 Borrowed funds (***) 1,828,205 2,153,780 1,482,383 Other liabilities 66,250 43,775 44,661 Totalliabilities 1,929,653 2,229,864 1,576,669 OWNER'S EQUITY Chartered capital 1,288,224 687,209 452,617 Foreign exchange difference 515 927 777 Retainedearnings 85,371 82,266 55,433 Reserves 19,840 12,272 118,033 Totalowner's equity 1,393,950 782,674 626,860 TotalLiabilitiesand Owner's Equity 3,323,603 3,012,538 2,203,529 (*):Figures areextractedfrom theauditedjnancial statements of theFund. I**) Including loans from trusted funds to customers amountinp to VND 676,298m 12004: VND 673.422mL 2003: 579.752m) which HIFUdoes not bear credit risk. I***) Including funds for trusted finds amounting to VND 777,789m (2004: 1.483,522m.2003: 1.114.677m) as discussed in 1**I 71 3.1.1 Loans to customers Loans to customers include long-term and medium-term loans from the source of (i) the chartered and mobilized capital, (ii) banks in syndicated lendingand (iii) other entrusted fund. As discussed above, loans to customers which are from the participation of other banks in syndicated loans and entrusted fund should not be recognized as assets in the balance sheet o f the Fundaccording to the prevailing regulation o f the SBV. Loans to customers hold a highpercentage inthe total assets though this highproportion seemedto experience an up trend over the years. Overall loanportfolio review Medium and long-term loans to customers 1,761,217 1,272,824 1,115,999 Loans from trustedfunds to customers'" 676,208 673,422 579,752 Other loans to customers 478,660 662,000 2,916,085 2,608,246 1,695,751 Transportation infrastructure 749,764 33% 576,232 30% 324,919 29% Water/ Electricity Supply 199,360 9% 210,487 11% 53,442 5% Industrial/ Residential Zone Infrastructure 837,775 37% 710,259 37% 394,131 35% Public Health 222,248 10% 202,162 10% 153,988 14% Education 126,792 6% 116,737 6% 90,742 8% Others 103,937 5% 118,947 6% 98,777 9% 2,239,877 (*) 100% 1,934,824 - - - 100% 1,115,999 100% (*) This amount excluded loansfrom trustedfunds to customers but included theportion of loansfrom the participations of other banks in syndicated lending, which can not be separated by the Fund. Loan portfolio of HIFU is much concentrated on the infrastructure o f transportation, industrial, residential zone, and public health. This structure of funding i s consistent with strategic development policy o f the HCMC People's Committee. loTrust fund investmentsare fully at the riskofthe beneficiaryofthe Trust (HCMC PC), subject to standardfiduciaryresponsibilities 72 State Owned Enterprise 1,914,486 85% 1,773,627 92% 978,227 88% LimitedLiability Company 12,614 1% 5,908 0% 20,329 2% Joint Stock Company 308,281 14% 155,289 8% 117,443 11% Private 4,496 0% - 0% - 0% 2,239,877 - - - 100% 1,934,824 100% 1,115,999 100% The major borrowers o f HIFUare still SOEs accounted for over 85% o f total portfolio. It i s a common practice that SOEs still play an important role in infrastructure development projects. Non-performing loans and write-offs Loans to customers from sources o f chartered capital, mobilized capital and other banks in . syndicated loans (net) 2,238,913 1,933,586 1,114,651 Overdue loans 964 1,238 1,348 % 0.04% 0.06% 0.12% Provision for loan losses As reported by HIFU,their non-performing loans only account for a minimal portion in the loan portfolio. And those non-performing loans are being collected and recovered over the 3 years. It is noted that, HIFUhas not implemented any loan classification and provision system. As a consequence, we could not have any information to assess the overall quality of the loan portfolio. Currently, banks in Vietnam i s to follow Decision 493/2005/QD-NHNN issued by the State Bank o f Vietnam regarding the loan classification and loan loss provision inlending activities. Inthe following part, we will present the result and our comments on the review of the sample o f 10 customers as at 31December 2005 accordingto Decision 493. Loan review sample We have randomly reviewed 10 customers who operate in different industries and borrowed money from HIFU for different purposes with different contractual conditions and have significant loan balances with the Fund. Itwas noticed that source o f repayment of the state directed lending was mostly from the budget o f the HCMC People's Committee which i s reliable but mightbe delayed due to bureaucratic procedures o f using the statebudget. 73 The reviewed 10 items covered about 70% o f total portfolio o f which we do not note down any impairment or downgrade o f the reviewed item that requires the Fund has to create additional specific provision against them. General provision Decision 493 requires credit institution to maintain a general provision at the rate of 0.75% on the current loans (group 1). Should the Fund wish to apply that approach, the Fundis required to additional book a general provision of VNDm 16,792 inthe income statement for the year ended 31 December 2005. 74 I I i i II i Investment portfolio Other long terminvestment 1,208 786 389 Investment insecurities 126,484 154,889 255,903 127,692 155,675 256,292 % of total assets 9% 12% 18% Investment portfolio accounts for a significant part intotal assets o f HIFUand increases quickly over the years. The investment portfolio is rather diversified interms o f the types of investment, industryand size. Investme Investment %of %of %of (MvNDI nt value s;;gs shares shares type ( ) (2004) (2005). Development Commercial Joint Joint Share Stock Bank stock Banking urchase Viet A Joint Stock Joint Share 2 Commercial Bank stock Banking urchase City Infrastructure & Technology JV Joint Infrastructure 3 Company stock construction Develop and invest BinhChanh infrastructure constructionand and technical investment JV Joint deployment of 4 Company stock mainProject REERefrigerator Joint Real estate 5 III~ v c o m p a i y stock trading Cu Chi Industrial III II Industrialzone Joint I infrastructure 6 and investment JV II zoneconstruction stock PhuNhuan Gold & II II trading Gold and Jewelry JV precious stone 7 Company trading KenhDong Water Joint Clean water 8 II JVCompaiy I stock I business ThuDuc BOO Water JV Joint Founding N/A N/A N/A 9 Company stock Water business shareholder 28,973 (*> (*> * Houses and ThuDuc Housing accommodation Development JV Joint management Transfer o f 10 Company stock and trading State hnd 6,000 Industrialzone Song Than JV Joint infrastructure Founding 11 Company stock trading and 76 BachTuyet Cotton Joint Stock Joint Cotton Share NIA NIA 12 Company stock manufacturing purchase 530 (**) ** 1 Telecommunic Joint ation Cable Share NIA NIA 13 SACOM stock Manufacturer purchase 2,047 (**) ** 1 HSC Securities Joint Stock Joint Securities Founding 14 Company stock trading shareholder 10,000 30 30 30 Joint Milkproducts Share NIA NIA 15 Vinamilk stock manufacturer purchase 1,833 (**) ** 0.1 Joint Found NIA NIA NIA 16 MECO Joint stock stock Hospital shareholder 85 (*) (*I * Investments are recorded at original costs, normally at par value beingthe amounts that the Fund invested on the establishment ofjoint stock companies, or acquiring o f shares injoint stock companies or managing the stakes o f SOE being equitized which are delegated by local People's Committee. The investee companies operate mostly inthe infkastructure development, such as water supply, construction, housingdevelopment.. . Overall, HIFUis holding shares o f companies having highmarket value. Please refer to the following table to compare the market value o f the portfolio o fthe Fund. (*) Unlistedfirms, price is obtainedfrom OTC marketandprovidedby HIFUas of February12,2007 (**) Listedfirm, price is obtained from HochiminhCity Securities Marketas of February 12,2007. 77 After the acquiring date, the Fundhas not reflected subsequentlythese investments at the market price and consequently, the value o f the investment portfolio i s understated as at 31 December 2005 at least by due to information on the value of share of certain unlisted companies i s not available, Chartered capital and reserves The chartered capital o f HIFU significant increased from VND 687,209m in 2004 to VND 1,288,244m, (the initial registered capital was only VND 500,000m). The increase in chartered capital i s mainly attributed by the actual cash contribution from the Ho Chi Minh City's State Budget in the year to strengthen the financial capacity o f the Fund in order to provide financial supports to new projects in the coming period and the recapitalization o f earnings of previous years. Capital adequacy ratio The capital adequacy ratios o fthe Bankover the years are as follows: Chartered Capital 1,288,224 687,209 452,617 Reserves (non-distributable) 99,939 91,395 171,567 Total capital 1,388,163 778,604 624,184 Risk Weighted Assets (RWA) 1,249,727 1,085,777 1,063,520 % total capital funds/ RWA (Capital Adequacy Ratio) 111% 72% 59% The ratio indicates that the Fundi s well capitalized and i s potential for hrther expansion of total assetsbyproviding new loans or investing innew projects. Analysis o fthe income statement (extracted from the audited financial statements)2004 TOTAL INCOME Interest and similar income 103,018 103,460 79,456 Interest and similar expenses (37,129) (30,6 14) (25,528) Net interest margin 65,889 72,846 53,928 Fees and commission income 1,387 1,017 912 Fees and commission expenses (572) (832) (621) Dividend income received 26,799 16,154 8,304 Other operating income 1,597 1,798 365 TOTAL OPERATINGINCOME 95,100 90,983 62,888 Employees expenses (6,330) (5,977) (4,484) 78 Depreciation, amortization and maintenance 9594) (503) (1,198) Other operating expenses (2,807) (2,239) (1,773) TOTAL PROFIT BEFORE TAX 85,369 82,264 55,433 Inthe total income ofHIFU,interest income from lending accounts for approximately 70% of total sources o f income. The next significant contribution to the income i s dividend income. There has been a steady growth in those sources o f income over years as a direct result of the growth and the good qualityo f the lendingand investmentportfolio. Net interest income i s relatively high at 64% in 2005 (in 2003-2004: about 68% to 70%). This shows a very high margin o f the Fund which i s attributed by the fact that a significant hnd resources are from owner's equity which i s free o f cost. Operating and administration expenses o f the Fund are also very low provided that the current size and operations o f the Fund. This i s because the Fundi s still operating under the umbrella of the People's Committee so certain operating expenses are not at the normal market condition yet. Also the staff cost o f the Fund i s still in line with the overall salary scale applicable to public servants rather than o f commercial entities. The current salary scale of the Fundis also far below the salary structure o f commercialbanks having similar size. Hereafter i s the summary o f key performance ratio o f the Fundas follows: NET INCOME/TA" =ROA" 6.85% 7.12% 6.17% PROFIT INTERESTINCOMEITA 5.32% 6.02% 5.50% INTERESTEXPENSEITA 1.76% 1.53% 1.77% NET INTERESTMARGIN/TA13 3.6% 4.2% 3.7% PROVISIONEXPENSEl4ITA NIA NIA NIA Interest Rates It should be noted that the traditional financing method for municipal infrastructure inVietnam involves GOV borrowing ODA for projects and providing the proceeds to the municipal government as grants. Indeed, to date all o f the WB's municipal infrastructure projects inHCMC have been financed with GOV grants. In the HDP, the HCMC government, WB and the GOV are taking the first step towards rationalizing the use o f GOV subsidies for municipal infrastructure. Specifically, the project underscores the need to distinguish the infrastructure investments which require budget support from those which can offer cost recovery and can be financed with market capital under public-private partnership arrangements. As a government- ''TA= Total averageassets l2ROA = Returnon AverageAssets l3NIMiTA = (INTERST INCOME-INTEREST EXF'ENSE)/TA l4Total provisionsfor baddebt 79 owned FI, the on-lending rate which HIFUreceives from the GOV must be determined by the MOF strictly according to Decree 134, which provides legislated rules for determining the on- lendingrates for ODAprojects accordingto sector of focus and other variables that are important to the government. The on-lending i s in VND. The focus o f the project design has been on the interest rate charged by HIFUinthe subprojects to ensure against market distortions. HIFUwill continue to price its loans at market rates for infrastructureinVietnam. Specifically, HIFUwill price the loans at the low end of the State-Owned Commercial Banks SOCB rates, which i s currently at 10.4%. The rate will be reviewed every six months by HIFUand the WB team. The current interest rate regime in Vietnam i s described in the graph and table below for reference. However, it should be noted that for infrastructure projects the benchmark is increasingly being set by the VietnamDevelopment Bank. IO-year Interest Rate Benchmarks (2006) 2.00% 0.00% 8.00% 6.00% 4.00% 2.00% 0.00% 10-year 10-year City HTPT-DAF SOCBs 10- HIFU 10- Government Bond (VDB) 10- year year Bond year Source: HIFU Note: Represents the SOCB and HIFUlow range. Benchmark (annual rates) 2005 I 2006 Low High I Low High 5-year Government bond interest rate 8.20% 10-year Governmentbond interest rate 8.60% 5-year City bond interest rate 8.80% 10-year City bond interest rate 9.00% HTPT- DAF(VDB) interest rate for 5 year loans 6.60% 7.80% HTPT- DAF(VDB) interest rate for 10year loans 6.60% 7.80% SOCBs interest rate for 5 year loans 9.56% 11.56% 10.40% 12.40% SOCBs interest rate for 10 year loans 9.56% 12.06% 10.40% 12.90% HIFUinterest rate for 5 year loans 9.56% 12.56% 10.40% 11.40% ~HIFUinterestrate for 10year loans 9.56% 11.06% 10.40% 11.90% Source: HIFU 80 DirectedCredit The IDA credit is beingprovidedto HIFUas a FILto achieve the following objectives: . Finance municipal infrastructure - which i s a key bottleneck to economic growth - and provide affordable infrastructure services to the public ... Develop alternative model for financing municipal infrastructure which do not require 100% GOV grants Reduce the risk to financial market development posed by inappropriate borrowing practices o f LDIFs, such as HIFU Implement operational reforms in HIFU geared towards improvement in project appraisal standards, financial management including international standard auditing, and appropriate due diligence for environmental and social safeguards. Ensure the financial sustainability of HIFUby establishing clear Financial Covenants which can be implemented andmonitored It is understood and anticipated that the HDPwill allow HIFUto establish a track record - vis-a- vis clear and consistent investments appraisal standards, good operational practices, and sound financial management. After successfully implementing HDP, HIFUwill be in a position to raise capital from the market via bank borrowing or bonds. Subsidies There are no subsidiesinvolved inthe HDP structure. Fiscal Sustainability The HDP is designed to ensure the financial sustainability o f HIFU by putting in place a framework for HIFUto start operating like a "hnd" which can utilize its equity (charter capital) to raise investment capital (debt) from the local market. The HDP will help establish appropriate project appraisal and financial management practices which will allow HIFU in the future to safely raise investment capital from the local market. The owner o f HIFU- the HCMC Peoples' Committee - has been investing substantial equity in HIFU over the years. The HCMC PC therefore has a very strong incentive to ensure the financial feasibility o f HIFU. The HCMC PC has very publicly announced that development o f HIFU as a professional and competent institution capable o f financing municipal infrastructure in HCMC i s an important pillar o f the city's long-term development strategy. The lack of long-term capital in the Vietnamese market has resulted in the current inappropriate HIFUpractice o f borrowing o f short-term capital on a roll-over basis. The HDP allows the HCMC PC and HIFU Management a chance to take advantage o f long-term IDA credit and Bank technical assistance to substantially improve the capacity o f HIFU. Specifically, the HDP provides an opportunity for the HCMC PC and HIFU Management to establish, test and perfect the internal HIFU systems for project appraisal and financial management. In short, the HCMC PC and HIFU Management are well aware o f the value o f the long-term IDA credit and the associated technical assistance associated with the project. The clients also realize that success o f HDP will allow HIFUto raise substantial capital from the local market inthe hture and finance badly neededmunicipal infrastructure inHCMC. HDP will have noJisca1 impact on the HCMC government. The HDP will create no additional fiscal burden on the HCMC financial position. The HCMC PC provides no operating budget to 81 HIFU, and the project requires no additional equity investment inHIFUfrom HCMC PC. In particular, the HDPwill have no affect on the HCMC financial position vis-a-vis the following: There will be no impact on HCMC PC financial position vis-a-vis incremental taxes; and the project does not provide any additional subsidies. Therewill be no increase inrecurrent costs for HCMC PC or HIFU. HDP will have no impact on the HCMC PC current fiscal situation, as the project will not require any additional capital or operating budget from HCMC PC. There will also be no impact on the GOV fiscal position because the project is structured as an on-lending arrangement in which the MOF i s able to fully cover not only the cost o f foreign exchange risk, but also the IDAcommitment fee and any transaction costs incurredbythe MOF. HDP will have no negative impact on the overall level o f recurrent costs requiredto operate the municipal infrastructure sectors adequately and the volume o f financing provided by the Government in the recent past. Indeed, the participation o f private sector and focus on cost recovery projects will likely reduce the relative provincial government outlay in the target sectors. The availability and certainty and formal commitment o f the HFUBoard o f Management to contribute an estimated $0.5 million in counterpart funds from HIFUfor technical assistance has been confirmed duringproject appraisal. Summary of the eligibility criteria for FIs The selection o fHIFUas anFIis basedon the following assessment: - a. HIFU has demonstrated adequate profitability, capital, and portfolio quality and local collections. The financial due diligence o f HIFU was carried out by an international accounting firm, under contract to the Bank. The detailed financial analysis o f HIFUi s provided in the PAD. HIFU already provides audited financial statements, and HIFU Management has agreed to switch to international auditing standards, which can be carried out by approximately 4-5 Vietnam based international accounting firms. b. HIFUhas acceptable levels o floancollections. C. HIFU has the appropriate capacity, including staffing, for carrying out subproject appraisal and supervising subproject. Currently HIFU has 83 professional staff, which includes 20 staff with MBAs andor graduate degrees. At least 10 HIFUstaff are fluent inEnglish,and anadditional 10havebasic conversational skills and canreadandwrite in English. The majority o f HIFUstaff i s on private employment contracts, with only about 5 senior staff maintaining city employee status. Implementation o f comprehensive manuals for project preparation and appraisal and private sector partner selection will ensure that all relevant Bank policy requirements will be carried out by HIFU. The HIFU Board o f Management has also officially approved the decision to use an estimated $0.5 million o f HIFUcapital as client contribution to hire international consultants to provide on thejob advice andtraining to HIFUstaff for a 3-year period. d. The current borrowing practice o f HIFU requires improvement. The project will help HIFU establish the investment track record and appropriate financial management standardto mobilize capital via bankloans or bonds inthe future. e. As an LDIF, HIFUi s a government-owned FI. The project i s initiating the process o f developing adequate managerial autonomy and commercially oriented governance in HIFU. This will require 1) provision of incentives to the Peoples' Committee to utilize LDIFs in the appropriate fashion and 2) development of prerequisite capacity in the 82 LDIFs to carry out their hctions and raise capital without undermining financial viability, and without government support. f. The project is further improving the prudential policies, administrative structure, and business procedures in HIFU. This includes the implementation o f a comprehensive manual for project preparation and appraisal, and the manual for the selection o f private sector participants o f HIFU. HIFU already provides audited annual financials. HIFU Management has agreed to switch to international standard financial audits. Finally, the following Financial Covenants have been agreed to monitor and manage the financial FINANCIAL COVENANTS" APPLICABILITY Aggregate equity investments shall not exceed 50 percent o f the total amount o fthe Fund's paidinequity Applies to all HIFU capital. operations The Fund's debt-to-equity capitalization ratio (i.e. Leverage) shall not exceed 3: 1,where debt means all debt liabilities pluscontingent liabilities andequity Applies to all HIFU means paid-in capital plus retainedearnings andreserves operations not allocated to cover specific liabilities. LiquidAssets shallbe sufficient to cover projectedFund Applies to all HIFU operating expenses over the subsequent 18 months. operations 4 Total investment (debt and/or equity) ina single obligor shall not exceed 15 percent o f total fund capital Applies to all HIFU (including debt and equity). nnnrot; U p L a d n s 5 InallHIFUinvestmentsinvolving HDPproceeds, HIFU will not take greater than30% ownership (equity/direct Applies to the use of investment) ina Project Enterprise IDAproceeds only 6 InallHIFUinvestments involving HDPproceeds, the debt to equityratio will not exceed 3:1. Specifically, Applies to the use o f debt will not be greater than % o fthe total financing o f IDAproceeds only the subproject Coordinationwith IFC IDA and IFC have beencoordinating very closely on the engagement with HIFU. The IFC had attempted to execute transactions with HIFU (senior loan) as well as one o f its portfolio companies (equity investment in CII). However, the transactions did not materialize for various reasons, which have lead IFC to the conclusion that HIFU requires substantial institutional development before IFC can do a direct transaction with it, IDA and IFC have therefore decided that the Bank i s better suited to undertake the initial task o f building institutional capacity o f HIFU, establishing a supportive national policy and HCMC municipal government framework, and providing long-term capital for investment in partnershipwith private sector. The IFC will play an important role in co-financing HIFUtransactions in partnershipwith the private sector. The GOV has issued a draft decree on Institutionand Operation o f LDIFs, which specifically addresses covenants 2 and 4. These two covenants, as stipulatedabove, are consistent with the Bank's technical advice to the GOV. The task team has agreed with HIFUand H C M C PC that during implementation, covenants 2 and 4 can be adjusted in line with the final, approved stipulation o f the GOV Decree as part o f the six monthly review of all HDP conditions which i s described inthis PAD. 83 As discussed and agreed with IFC, the advantages o fgetting IFC involved at the project level (as oppose to the HIFUlevel) are as follows: IFC's risk appetite i s better suited to the subprojects financed by HIFU rather than the financing o f HIFUitself. The financing o f HIFUinvolves policy risk, which i s better suited for IDA finded operations. IFC's involvement inthe HIFUjoint ventures will allow HIFUto establish good models for corporate governance and other operational functions o f ajoint venture. IFC's involvement in HIFUjoint ventures will allow HIFUto learn the principles o f good project structuring, including development o f legal contracts and negotiations with the private sector. The Bank i s better positioned to invest in HIFU which will require substantial technical assistance and very close coordination with the GOV and HCMC municipal government. IFC can be relatively more competitive in Vietnam with its equity products than its debt products. This i s because Vietnam i s an IDA country with access to very cheap financing, particularly for infrastructureprojects. 84 Annex 10: SafeguardPolicyIssues VIETNAM: HIFUDevelopmentProject Environmentalassessment(OP 4.01) The HDP project is classified as Category FI. The complexity o f subprojects evaluated for investment is varied. All subprojects will pass initialreview and screening against the GoV and WB/IFC exclusion lists. Based on the size and the nature o f the potential impact on the environment from the subproject activities financed under the HDP project, categorization will be determined for each o f the subproject inthe investment pipeline, which has passed the review against the Government and IFC exclusion lists. A manual on Project Preparation and Appraisal (PPA Manual), including a detailed guideline on Environmental safeguards acceptable to IDA, has been developed and approved by the HCMC People Committee. The manual and annexes: 0 clearly lay out the steps where environmental assessment and supervision are undertaken duringthe project cycle; review Environmental Safeguard (ES) requirements o f GOV and the Bank; identify the discrepancies ES between GOV and Bank requirements, and when there are discrepancies, identifies proper approaches to best comply with the Bank ES requirements; clarify ES activities, including due diligence assessment for the subprojects with EA government approval prior to the lendingfrom HIFU, 0 describe when and who has to do what to meet the ES requirements; and 0 guide the assessment o f the borrower's institutional mechanism to carry out EA work for category A subprojects. The PPA Manual clearly defines the procedure andresponsibility o fthe EAwork as integrated in the sub-project preparation and supervision process, The Environmental guideline included in annexes o f the PPA Manual specify how to carry out environmental assessment (EA) work at each stage during the project cycle. The approach described in the manual follows a due diligence assessment which includes: carrying out new EA works inaccordance with the Manual which provides guidance to meet the requirements o f Government regulations and the Bank safeguard policies; assessing the adequacy o f the EA work which have been approved by DONRE and developing a risk management plan if the EA work is not sufficient; borrower's written commitments to HIFU to implement the risk management plan; and assessing the borrower's institutional mechanism to carry out EAwork for A-category subprojects. The PPA Manual will be used by HIFUstaff incarrying out environmental safeguard (ES) work to meet the requirements o f GOV and IDA. The Environmental Guideline o f the Manual was usedby HIFUin appraising two subprojects for Year One as a pilot program o f the HDP, in a manner acceptable to IDA. It will also be applied for the preparation o f the other subprojects in the investmentpipeline for the following years. HIFUwill implement the Manualwith assistance from on-the-job consultants who will be hired as part o f component 2 o fthe project. Environmental appraisal o f the two year 1pilot subprojects: For the two year 1 pilot subprojects, a due diligence assessment has been carried out for the Initial environmental assessment (IEE) o f the West Bus Terminal (B-category sub-project)and 85 the Environmental Impact Assessment (EIA) of the Septic Tank Waste Treatment (A-category subproject). Summary of major environmental impacts of the two pilot subprojects in Year One: Key environmental issues during construction work under the two subprojects are noise and dust pollution, traffic congestion, transportation and disposal o f waste construction materials, transportation o f filling soils. Major environmental impacts during the operation phase are related to the operations o f the waste treatment plant include odor and pathogenic bacteria, insects and bugs vermin, collection truck leakage, vehicle exhaust fimes, ground water pollution from pipe and tank leaks during the treatment process and surface water pollution from runoff, effluent discharge from treatment facilities. Other impacts could be related to the management of waste generated at the bus terminal. The two sub-projects will help address current environmental sanitation problems and is expected to have a positive impact on existing environmental and social conditions. The design standards will ensure that effluents from wastewater at the bus terminal be connected to the city's sewer. Discharge from the septic tank waste treatment plant i s expected to comply with the requirements for water quality o f the receiving bodies. Better solid waste management would also contribute to improved environmental conditions o fthe cities. Nevertheless, improper transportation and disposal o f the construction materials and the wastes would impose noise and dust pollution. Inadequate design o f the disposal site would have long- term soil pollution and lead to hygiene consequences. Poor O&M o f the septic tank waste treatment plant would cause serious environmental problems inthe surrounding areas, especially the residential areas and the canals supplyingwater for agriculture andaquaculture activities. Environmental Management Plan (EMP): For the Septic tank waste treatment subproject, categorized as a category I1 (Vietnamese categorization) project, an Environmental Management Planwas developed inthe EIA. However the due diligence assessment has found it inadequate. As a result, HIFU has requested an Environmental Management Program be provided in adequate detail to indicate how the mitigation plans described inthe EIA will be implemented for each project phase. For the West Bus Terminal, no EMP was required although commitments to environmental compliance were made before DONRE environmental certificate was issued. The application for the environmental certificate, however, didnot specify the resources for the implementation. At a request from IDA, a risk management planhas been developed for each o f the subprojects. Those plans will be signedbetween HIFUand the borrowers as a M O Uprior to the disbursement o f HIFU funds to the borrower. The MOU clarifies that by receiving the HIFU funds the borrower is signing on a commitment to implement the Plan, Inaddition, as guidedby the PPA Manual HIFUwill arrange monitoring of the implementation o f the EMP and risk management plan in each o f the two subprojects and will prepare semi- annual environmental compliance progress reports to be submitted to PC and IDA. An independent environmental safeguard monitoring consultant will be hiredto assist HIFUin this task, and also to provide guidance to the borrowers in internal supervision and reporting on the implementationo fmitigation measures as specified inthe EMP and riskmanagement plan. Assessment of the institutional mechanism o f the Hoa Binh Ltd. to carry out EA work for the Septic tank waste treatment was submitted to the Bank on March 27, 2007. The Bank has found 86 this satisfactory, provided that the Hoa Binh Ltd. hire consultants for internal monitoring and HIFUhire consulting services for independent environmental monitoring as part of the TA to HIFU. Ensuring GoV environmental certzfzcation: An approval for the EIA report for the Septic tank waste treatment facility were received from the HCMC DONRE on March 20, 2007. According to the Decree 80/2006/ND-CP dated August 09, 2006 "Guideline on the implementation of the National Law on Environmental protection ", an Environmental certificate for the West Bus Terminal subproject, which i s classified as a type I11 i s a condition for the HIFU loan disbursementto the borrower. CulturalResources (OP4.11) For the subprojects to be financed by the line o f credit, careful design to avoid possible vista or damage to historic and cultural sites, and proper construction supervision will be neededduring project implementation, particularly excavation and dredgingworks, to check for possible buried artifacts. As far as the two year 1 sub-projects are concerned, cultural property does not exist in their respective locations. Naturalhabitat(OP 4.04) For the subprojects to be financed by the line o f credit, exclusion list will be used in environmental screening to make sure that the project will not finance adverse impacts or conversion o f critical natural habitats. No natural habitat i s involved in the two year 1 subprojects. Pest management(OP 4.09) The use o f any chemicals listed inthe Government restriction will be subjected to the exclusion from HDP finance. OP 4.09 i s not triggered for the two year 1subprojects. InvoluntaryResettlement(OP/BP4.12) A Resettlement Policy Framework (RPF) for HDP has been prepared to ensure that affected people can restore the losses and living standards as pre-project level. This framework has been adopted by HCMC-PC and was [approved] by the Prime Minister. All compensation and resettlement activities, occurred under the project, will needto follow the approved RPF. The Social Safeguards Manual (Annex G o f the Project Preparation and Appraisal Manual) includes provisions for HIFU and its borrowers, investment partners to minimize and mitigate the impacts to the people and to prepare and implement the safeguards documents to meet the Bank's requirements. In particular, the respective responsibilities o f the HIFU and investorshorrowers are spelled-out in the manual. HCMC-PC will have to approve prepared Resettlement Plans (RPs) inaccordance with the approved RPF for all subprojects requiring land acquisition except for the ones where the investors can negotiate and agree with the affected people on the buying-selling basis without involvement o f the local authorities. For subproject where the land was cleared before, a confirmation report is required. If there are still some remaining issues, a due diligence report should be provided to identify the problems and clarify how they will be resolved. Satisfactory resolution o f outstanding issues i s a condition for the borrower to receive HIFUfunds from HDP. 87 Supervision framework has also been established to ensure the compliance. Under component 2 o f the project, HIFUwill hire independent consultants to monitor compensation and resettlement activities to help HIFUinensuringthe project objectives are met. For the two year 1 subprojects, only one relates to land acquisition (Septic tank waste treatment plan), where the compensation and resettlement activities have been implemented since 2005. According to the due diligence report, there are still 1.9 out o f 9.4 ha having not yet beencleared with about 10 households waiting for their complaints to be resolved and land plots in a resettlement site to be provided. Most o f the complaints relate to the issue o f identification of land use right to define the land category to be compensated. The interviewed displaced people were satisfied with the applied compensation and resettlement policies. On March 1, 2007 HCMC-PC has instructed Binh Chanh district PC to resolve the issues as soon as possible, including allocation o f land plots in a neighbor commune for the displaced people to be relocated.. Resolution o f this issue in a manner satisfactory to the Bank i s a condition for the subproject to get financing byHIFUunder the HDP. IndigenousPeoples(OP/BP4.10) There are no ethnic minorities in the proposed two subprojects for the first year o f implementation. However, taking into account the fact that there are two ethnic minority groups living in HCMC (Cham with about 5,200 persons and KhMer with about 4,800 persons in accordance with the data o f 1999 general population census), an Ethnic Minority Planning Framework (EMPF) has beenprepared. The EMPFwas approved by HCMC-PC. Ethnic Minority Plans will have to be developed in accordance with the project EMPF for the subprojects having any ethnic minority group in the subproject areas. All monitoring and reporting arrangements for resettlement activities will be applied to Ethnic Minority Plan implementation. PPA manual implementation advisors with international experience and local social consultants will be hired by HIFU to help deal with social safeguard policies compliance and its management for the first three years o f the project implementation. Publicconsultation. The PPA manual specifies when and how public consultations have to take place for each sub-project. EIA report for the Subproject Septic tank waste treatment (A category) has been consulted with the local authority (Ward People Committee D a Phuoc) and local NGO (the Father Front o f the District BinhChanh) inaccordance with the new national law on environmental protection. No objections to the project or environmental concerns other than those about emission and odor from the operation o f the Septic tank waste treatment and that has been incorporated in the final EIA report. Public consultation on environmental issues was not required for the West Bus Terminal. HIFU and local resettlement related agencies have been consulted intensively during preparation o f RPF and social safeguards manual. A consultation mechanism has been developed to be applied during resettlement plan (RP) preparation and implementation to ensure the needs and wishes o f all related stakeholders, especially potentially affected people be reflected. The RPs will detail the plan for consultation including the procedures, methodologies and subjects o f consultation. The RPs will also describe grievance redress mechanism with the steps and procedures for grievance filing as well as the responsible institutions andtimeframe for receiving and addressing the grievances. 88 Publicdisclosure. The PPAmanual specifies when and how the various safeguards documents need to be disclosed. HIFUhas confirmed the public disclosure o f the EIA report for the Septic tank waste treatment and the Initial Environmental Examination (IEE) for the West Bus Terminal subproject in the ward People committee offices since March 05, 2007 as per the Bank's disclosure requirements. A copy o f the draft Environment guidelines and Social safeguards manual (Annexes F and G o f the PPA Manual), as well as the RPF and the EMPF have been disclosed locally and sent to InfoShop in Washington D C and made available in English and Vietnamese in Hanoi's Development Information Center (VDIC) on March 20, 2007. Institutionalcapacityassessmentandstrengthening: HIFUhas the institutional arrangement to manage investments, and its departments have clear understanding o f the requirements for implementing the Government and the Bank safeguard policies during a subproject appraisal, investment and monitoring phases, though World Bank policies on involuntary resettlement are quite new for them. HIFUhas staff that has training in environmental management and work experience on land acquisition and resettlement policies. They have gained familiarity with environmental assessment and compensation, resettlement tasks through other HIFUprojects. To assist HIFUinimproving its staff skills on environmental and social safeguard management, on-the-job training consultants will be hired during the first three years under component 2 o f the project to help HIFU implement safeguard policies including review o f environmental assessment and social safeguards documents, preparation of TORS, and monitoring o f the implementation o f environmental management and resettlement plans. In addition, independent monitors will be recruited to monitor the performance of safeguard compliance within the specific subprojects. These monitoring reports will assist HIFU infocusing efforts to improveproject due diligence procedures. 89 Annex 11: ProjectPreparationand Supervision VIETNAM: VN - HIFUDevelopmentProject Planned Actual PCNDate January 2007 January 2007 InitialPID to PIC April 2007 April 2007 Initial ISDS to PIC March 2007 April 2007 Appraisal April 2007 April 2007 Negotiations May 2007 May 2007 Board/RVP approval June 2007 Planned date o f effectiveness September 2007 Planneddate o fmid-termreview Plannedclosing date December 2012 Key institutions responsible for preparationo fthe project: H o Chi MinhCity People's Committee H o Chi MinhCity InvestmentFundfor Urban Development (HIFU) Bankstaffand consultants who worked onthe project included: Name Title Unit Kamran Khan Sr. InfrastructureFinance Specialist, TTL EASOP Cuong Duc Dang Senior Operations Officer EASUR Isabel D.Mutambe Program Assistant EASUR GiangThi HuongNguyen Program Assistant EACVF William Dachs Senior InfrastructureSpecialist FEU Cung Van Pham Financial Management Specialist EAPCO KienTrungTran Senior Procurement Specialist EAPCO Hoa Thi Mong Pham Senior Operations Officer EASSD Phuong Thi Thanh Tran Senior Environmental Specialist EASEN Luc Lecuit Senior Operations Officer EAPCO Joseph F. Wells Safeguards DueDiligence Specialist Consultant Hoi-Chan Nguyen Senior Counsel LEGEA Tri Pham Senior Auditor IADDR Alan Carroll Peer Reviewer LCSQE Ellis Juan Peer Reviewer IEF AnthonyPellegrini Peer Reviewer External Advisor Bankfunds expended to date onproject preparation: 1. Bank resources:$243,778 2. Trust fimds: $0.0 3. Total: $243,778 EstimatedApproval and Supervision costs: 1. Remainingcosts to approval: $0.0 2. Estimatedannual supervision cost: $65,000 90 Annex 12: Documentsinthe ProjectFile VIETNAM: HIFUDevelopmentProject 1. Social Safeguard Manual 2. Resettlement Policy Framework 3, Ethnic Minority PlanningFramework 4. Environmental Safeguard Manual 5. Project Paper - LDIF-Splitting Operations Memo 6. Project Concept Note (HDP) 7. QERMinutes (HDP) 8. Project Concept Note (LDIFP) 9. Project Preparation and Appraisal (PPA) Manual 10. Private Sector Partner (PSP) Selection Manual 11. FinancialAnalysis ofHIFUConducted byE&Y 12. Detailed Appraisal o fthe 2 year-1 Pilot Projects 13. Detailed Description o fthe Subprojects inthe HIFUProject Pipeline 14. Approved TOR o fthe USTDA Phase I1Technical Assistance to HIFU 15. Approved AFD Technical Assistance Plan for HIFU 16. Credit Statute o f HIFU 91 Annex 13: Statementof Loans andCredits VIETNAM: VN- HIFUDevelopmentProject Differencebetween expectedand actual Original Amount in US$Millions disbursements Proiect ID FY Pumose IBRD IDA SF GEF Cancel. Undisb. Orin. Frm.Rev'd P101608 2007 VN-Avian & HumanInfluenzaControl 0.00 20.00 0.00 0.00 0.00 20.30 0.00 0.00 &Prep PO82295 2007 VN-COASTAL CITIES ENVMT SANIT. 0.00 124.70 0.00 5.00 0.00 126.01 0.00 0.00 PO85071 2006 CustomsModernization 0.00 65.90 0.00 0.00 0.00 66.58 -0.25 0.00 PO84871 2006 VN-TRANS & DISTRIB 2 0.00 200.00 0.00 0.00 0.00 199.90 12.56 0.00 PO79663 2006 VN-Mekong Regional HealthSupportProj 0.00 70.00 0.00 0.00 0.00 70.29 -1.83 0.00 PO79344 2006 VN-1CT Development 0.00 93.72 0.00 0.00 0.00 87.20 1.27 0.00 PO77287 2006 VN-RRD RWSS 0.00 45.87 0.00 0.00 0.00 45.75 2.72 0.00 PO75407 2006 VN-RT3 0.00 106.25 0.00 0.00 0.00 108.92 5.00 0.00 PO73361 2006 VN -Natural Disaster RiskMngt Project 0.00 86.00 0.00 0.00 0.00 79.20 -6.57 0.00 PO88362 2005 VN-Avian Influenza Emergency Recovery 0.00 5.00 0.00 0.00 0.00 2.10 1.88 0.00 Pr PO85260 2005 VN-EFA SupportProgram 0.00 50.00 0.00 0.00 0.00 32.13 0.00 0.00 PO85080 2005 VN-ROAD SAFETY 0.00 31.73 0.00 0.00 0.00 29.26 5.3 1 0.00 PO82627 2005 PaymentSystemand BankModernization 0.00 105.00 0.00 0.00 0.00 99.57 39.50 25.67 2 PO82604 2005 VN-HIV/AIDS Prevention Project 0.00 0.00 0.00 0.00 0.00 26.96 -1.56 0.00 PO80074 2005 VN-GEF-RURAL ENERGY 2 0.00 0.00 0.00 5.25 0.00 4.95 0.20 0.00 PO74688 2005 VN-RURAL ENERGY 2 0.00 220.00 0.00 0.00 0.00 217.36 52.53 0.00 PO74414 2005 VN GEFForest Sector DevelopmentProj - 0.00 0.00 0.00 9.00 0.00 8.50 2.37 0.50 PO73763 2005 VN-WATER SUPPLY DEV. 0.00 112.64 0.00 0.00 0.00 109.56 6.98 0.00 PO66051 2005 VN Forest Sector DevelopmentProject - 0.00 39.50 0.00 0.00 0.00 48.69 6.02 0.73 PO59663 2004 VN-ROADNETWORK IMPROVT 0.00 225.26 0.00 0.00 0.00 210.82 102.26 0.00 PO65898 2004 VIETNAM WATER RESOURCES 0.00 157.80 0.00 0.00 0.00 149.25 28.20 0.00 ASSISTANCE PO70197 2004 VN-URBAN UPGRADING 0.00 222.47 0.00 0.00 0.00 200.93 5.20 0.00 PO44803 2003 VN-PRIMARY EDUC FOR 0.00 138.76 0.00 0.00 0.00 156.52 43.19 -1.24 DISADVANTAGED CHILRE PO75399 2003 Public FinancialManagementReform 0.00 54.33 0.00 0.00 0.00 50.54 36.49 -0.63 Proj. PO71019 2003 VN-GEF DEMAND SIDE MGMT & 0.00 0.00 0.00 5.50 0.00 2.80 1.47 0.00 ENERGY PO73305 2002 VN-Regional BloodTransfusionCenters 0.00 38.20 0.00 0.00 0.00 37.57 26.32 0.00 PO59936 2002 VN -Northem MountainsPoverty 0.00 110.00 0.00 0.00 0.00 26.25 -3.48 0.00 Reduction PO72601 2002 VN RuralFinanceI1Project - 0.00 200.00 0.00 0.00 0.00 20.46 -67.40 0.00 PO66396 2002 VN-SYSTEM ENERGY, 0.00 225.00 0.00 0.00 0.00 187.02 145.63 62.58 EQUITIZATION & RENEWAB PO73778 2002 VN-GEF-SystemEnergyEquitization- 0.00 0.00 0.00 4.50 0.00 3.52 3.52 0.00 Renewal PO51838 2002 VN-PRIMARY TEACHER 0.00 19.84 0.00 0.00 0.00 9.94 6.75 4.96 DEVELOPMENT PO42927 2001 VN-MEKONG TRANSPORTELOOD 0.00 110.00 0.00 0.00 0.00 52.67 35.65 0.53 PROT. P052037 2001 VN-HCMC ENVMTL SANIT. 0.00 166.34 0.00 0.00 0.00 148.92 94.44 85.86 92 PO62748 2001 VN COMMUNITY BASED RURAL - 0.00 102.78 0.00 0.00 0.00 48.53 25.51 0.00 INFRA. PO42568 2000 VN COASTAL WetlProt Dev - 0.00 31.80 0.00 0.00 0.00 3.73 1.81 1.81 PO04845 1999 VN MEKONG DELTA WATER - 0.00 101.80 0.00 0.00 0.00 28.51 23.55 -9.01 PO51553 1999 VN-3 CITIES SANITATION 0.00 80.50 0.00 0.00 7.40 26.26 27.58 22.23 PO04828 1999 VN-HIGHER EDUC. 0.00 83.30 0.00 0.00 0.00 16.41 9.83 10.45 PO45628 1998 VN-TRANSMISSION & DISTR 0.00 199.00 0.00 0.00 39.69 36.60 67.92 3.24 Total: 0.00 3,643.49 0.00 29.25 47.09 2,800.48 740.57 207.68 93 VIETNAM STATEMENT OF IFC's HeldandDisbursedPortfolio InMillionsofUSDollars Committed Disbursed IFC IFC FY Auoroval Comuanv Loan Equity Quasi Partic. Loan Equity Quasi Partic. 2003 ACB-Vietnam 0.00 5.02 0.00 0.00 0.00 5.02 0.00 0.00 2002 CyberSoft 0.00 0.06 0.00 0.00 0.00 0.06 0.00 0.00 2002 DragonCapital 0.00 0.00 1.05 0.00 0.00 0.00 1.05 0.00 2002 F-V Hospital 5.00 0.00 3.00 0.00 5.00 0.00 3.00 0.00 2005 Khai Vy 6.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 1998 MFLVinh Phat 0.13 0.00 0.00 0.00 0.13 0.00 0.00 0.00 1997 Nghi SonCement 10.09 0.00 0.00 1.88 10.09 0.00 0.00 1.88 2004 Olam 20.00 0.00 0.00 0.00 20.00 0.00 0.00 0.00 2005 PaulMaitland 7.20 0.00 0.00 0.00 7.20 0.00 0.00 0.00 2001 RMIT Vietnam 7.25 0.00 0.00 0.00 3.50 0.00 0.00 0.00 2006 SABCO 20.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2003 Sacombank 0.00 2.77 0.00 0.00 0.00 2.77 0.00 0.00 2004 Sacombank 0.00 2.3 1 0.00 0.00 0.00 2.31 0.00 0.00 2005 Sacombank 0.00 2.05 0.00 0.00 0.00 2.05 0.00 0.00 2006 Sacombank 0.00 3.05 0.00 0.00 0.00 3.05 0.00 0.00 2002 VEIL 0.00 0.00 2.00 0.00 0.00 0.00 2.00 0.00 2003 VEIL 0.00 7.41 0.00 0.00 0.00 7.41 0.00 0.00 2007 VEIL 0.00 6.15 0.00 0.00 0.00 6.15 0.00 0.00 Total portfolio: 75.67 28.82 6.05 1.88 45.92 28.82 6.05 1.88 Approvals Pending Commitment FY Approval Company Loan Equity Quasi Partic. 2000 MFL-AA 0.00 0.00 0.00 0.00 2006 CCS-Asia 0.02 0.00 0.00 0.00 2000 Interflour 0.01 0.00 0.00 0.01 2006 CII-Vietnam 0.00 0.00 0.00 0.00 2000 MFLMondial 0.00 0.00 0.00 0.00 2002 F-V Hospital 0.00 0.00 0.00 0.00 1999 MFLMinhMinh 0.00 0.00 0.00 0.00 1999 MFLChau Giang 0.00 0.00 0.00 0.00 Total pendingcommitment: 0.03 0.00 0.00 0.01 94 Annex 14: Country at a Glance VIETNAM: VN- HIFUDevelopmentProject A8ia a East POVERTY and SOCIAL Low- Vietnam Paclflc income )evelopment diamond' 2005 Population, mid-year(millions) 83.0 1885 2,353 GNiparcapita (Atlasmathod, US$) 820 1627 580 Lifeexpectancy GNI(At1asrnathod. US$billions) 514 3,067 1364 Average annual growth, 1999.05 Population(%, 11 0.9 19 Lab0rforce (%) 2.1 13 2.3 GNI Gross par primafi M o s t recent estimate (latest year available, 1909-05) capita anrollmant Poverty (% of populationbalownationalpo vartyline) 29 Woan population (%of fotaipopuiatlon) 26 41 30 Lifa axpectancyat birth (pars) 70 70 59 Infant mortality(per /000iiva births) n 29 80 Childmainutrition(%ofchildrenundar5) 28 15 39 Access to improvadwatarsourca Access to animprovadwatarsourca(%ofpopulation) 85 79 75 Literacy(%ofpopuiation age S+ 90 91 62 Gross primaryanrollmant oof school-agepopulation) 98 115 D4 -Vietnam Mala 0 1 18 ID -Lowincoma group Famala 94 in 99 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1985 1995 2004 2005 Economlc ratios' GDP (US$ blilions) 14.1 20.7 45.2 52.4 Gross capitalformation/GDP ., 27.1 35.8 Exportsof goods andsarvicasiGDP 32.8 86.4 Trade Gross domestic savingdGDP .... 8.0 28.3 I Gross nationalsavingslGDP .. s.2 322 Currentaccount balancaiGDP -3.8 -B.5 -3.8 lntarast pa)rments/GDP 0.0 0.4 07 Total dabtiGDP 0.4 P2.8 39.4 Total debtsarvicaiaxports .. 4.7 2.6 Present valueof dabt1GDP 34.1 I 1 Present valueof dabtlagorts 50.4 I Indebtedness 1985-95 1995-05 2004 2005 2005-09 (averageannualgroMh) GDP 8.5 6.9 7.7 8.4 7.5 -Vietnam GDP percapita 4.3 5.8 8.6 7.4 8.4 Lowincoma group Exportsof goods andsewices 25.2 15.8 27.9 '6.0 15.0 STRUCTURE of the ECONOMY 1985 1995 2004 2005 Growth of capltal and GDP ('A) (%of GDP) Agriculture 40.2 27.2 218 Industry 27.4 28.8 40.1 Manufacturing 20.5 '6.0 20.3 Services 32.5 44.1 38.2 Household final consumptionaxpanditura .. 73.8 65.3 W 01 02 03 W 05 Generalgov't final consumptionaganditura 8.2 8.4 -GCF -GDP imports of goods andsarvicas .... 419 73.6 1985-95 1995.05 2004 2005 (avarageannualgronth) jGrowth of export8 and Imports ('A) Agriculture 3.5 4.1 3.5 Industry 7.3 D.0 0.2 Manufactunng 4.3 110 0.1 Services 8.4 5.7 7.5 Householdfinal consumption axpenditura .. 5.2 7.1 Ganaralgov't final consumptionaxpanditura .. 3.8 7.8 w 01 02 03 M 05 Gross capitalformation 25.8 9.8 0.5 Imports of goods and services 24.2 8.5 25.2 Nota:2005data are praliminaryastimatas. This tablawas producadfrom the Davalopmant Economics LDB database. 'The diamonds showfour kayindicators inthe country(in bold)compared with its incomagroupavaraga. If dataare missing,thadiamondwili be incomDlata. 95 ......................... tnliarioo (a) " .............................................................................. v - 1 8 5 .;Export ______-and -. .................................... ~ import two18 (US$ milt.) %7 1.Mcoo I 990 *- --- iCurrsnt account btilancs to GDP ('At - - - I c Curruntaccoirrif balancn -933 265 269 MAP SECTION