Document of The World Bank Report No: ICR00003993 IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-46090) ON A CREDIT IN THE AMOUNT OF SDR 127.7 MILLION (US$ 190 MILLION EQUIVALENT) TO THE SOCIALIST REPUBLIC OF VIETNAM FOR THE LOCAL DEVELOPMENT INVESTMENT FUNDS PROJECT December 27, 2016 Social, Urban, Rural and Resilience Global Practice East Asia and Pacific Region CURRENCY EQUIVALENTS Currency Unit = Vietnamese Dong Effective April 30, 2009 Effective November 30, 2016 (Project Appraisal) (Project Closing) VND 17,785 = US$ 1 VND 22,665 = US$ 1 US$ 1.488 = SDR 1 US$ 1.35 = SDR 1 FISCAL YEAR January 1 – December 31 ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities AFD Agence Française de Développement CAR Capital Adequacy Ratio CIFF City Infrastructure Financing Facility CPS Country Partnership Strategy DONRE Department of Natural Resources and Environment DPI Department of Planning and Investment DPL Development Policy Loan EIA Environmental Impact Assessment EMP Environment Management Plan FA Financing Agreement FI Financial Intermediary FIL Financial Intermediary Loan FIRR Financial Internal Rate of Return FS Feasibility Study FPD Financial Sector and Private Sector Development GDP Gross Domestic Product GOV Government of Vietnam HANIF Hanoi Investment Fund HCMC Ho Chi Minh City HDP HIFU Development Project (Cr. 4329-VN) HFIC Ho Chi Minh City Finance and Investment State Owned Company HIFU Ho Chi Minh City Investment Fund for Urban Development ICB International Competitive Bidding ICR Implementation Completion and Results Report IDA International Development Association IEG Independent Evaluation Group IFC International Finance Corporation IFRS International Financial Reporting Standards IP Implementation Progress IRI Intermediate Results Indicator ISR Implementation Status and Results Report KfW Kreditanstalt für Wiederaufbau (German Development Bank) 2 LDIF Local Development Investment Fund LDIFP Local Development Investment Fund Project M&E Monitoring and Evaluation MOF Ministry of Finance MPI Ministry of Planning and Investment MTR Mid-term Review NCB National Competitive Bidding NPL Non-Performing Loans NPV Net Present Value ODA Official Development Assistance OP Operation Policy PAD Project Appraisal Document PDO Project Development Objective PDOI Project Development Objective Indicator PMU Project Management Unit PPA Project Preparation and Appraisal PPP Public Private Partnership PREM Poverty Reduction and Economic Management Unit PSD Private Sector Development Department PSP Private Sector Partner QCBS Quality and Cost-based Selection QER Quality Enhancement Review ROE Return on Equity RPF Resettlement Policy Framework SBV State Bank of Vietnam SEDP Socio-Economic Development Plan SEDS Socio-Economic Development Strategy SIL Specific Investment Loan SOCB State Owned Commercial Bank SOE State-Owned Enterprise SPV Special Purpose Vehicle TA Technical Assistance TOR Terms of Reference VAS Vietnam Accounting Standards VDB Vietnam Development Bank VND Vietnam Dong Vice President: Victoria Kwakwa Practice Senior Director Ede Ijjasz-Vasquez Country Director: Ousmane Dione Practice Manager: Abhas Kumar Jha Project Team Leader: Cuong Duc Dang ICR Team Leader: Lawrence C. Tang 3 VIETNAM LOCAL DEVELOPMENT INVESTMENT FUND PROJECT CONTENTS Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph 1. Project Context, Development Objectives and Design 2. Key Factors Affecting Implementation and Outcomes 3. Assessment of Outcomes 4. Assessment of Risk to Development Outcome 5. Assessment of Bank and Borrower Performance 6. Lessons Learned 7. Comments on Issues Raised by Borrower/Implementing Agencies Annex 1. ICR Tables and Figures Annex 2. Project Costs and Financing Annex 3. Outputs by Component Annex 4. Economic and Financial Analysis Annex 5. Bank Lending and Implementation Support/Supervision Processes Annex 6. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 7. List of Supporting Documents MAP 4 A. Basic Information VN-Local Development Country: Vietnam Project Name: Investment (LDIFP) Project ID: P094055 L/C/TF Number(s): IDA-46090 ICR Date: 12/27/2016 ICR Type: Core ICR SOCIALIST REPUBLIC Lending Instrument: FIL Borrower: OF VIETNAM Original Total XDR 127.70M Disbursed Amount: XDR 92.57M Commitment: Revised Amount: XDR 93.00M Environmental Category: FI Implementing Agencies: Ministry of Finance Cofinanciers and Other External Partners: B. Key Dates Revised / Actual Process Date Process Original Date Date(s) Concept Review: 03/01/2006 Effectiveness: 11/09/2009 07/23/2013 02/25/2014 Appraisal: 04/24/2009 Restructuring(s): 02/25/2015 06/29/2016 06/30/2016 Approval: 07/02/2009 Mid-term Review: 09/10/2012 08/20/2012 Closing: 12/31/2014 06/30/2016 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Satisfactory Risk to Development Outcome: Moderate Bank Performance: Moderately Satisfactory Borrower Performance: Moderately Satisfactory C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Moderately Quality at Entry: Government: Satisfactory Unsatisfactory Implementing Moderately Quality of Supervision: Moderately Satisfactory Agency/Agencies: Unsatisfactory 5 Overall Bank Overall Borrower Moderately Satisfactory Moderately Satisfactory Performance: Performance: C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments (if Indicators Rating Performance any) Potential Problem Project Quality at Entry No None at any time (Yes/No): (QEA): Problem Project at any Quality of Supervision Yes None time (Yes/No): (QSA): DO rating before Moderately Closing/Inactive status: Satisfactory D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Public administration- Financial Sector 100 100 Theme Code (as % of total Bank financing) City-wide Infrastructure and Service Delivery 33 33 Municipal finance 34 34 Urban Economic Development 33 33 E. Bank Staff Positions At ICR At Approval Vice President: Victoria Kwakwa James W. Adams Country Director: Ousmane Dione Klaus Rohland Practice Manager/Manager: Abhas Kumar Jha Keshav Varma Project Team Leader: Cuong Duc Dang Kamran M. Khan / Cuong Duc Dang ICR Team Leader: Lawrence C. Tang ICR Primary Author: Lawrence C. Tang F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The Project Development Objective is to improve effectiveness of Qualified Local Development Investment Funds in leveraging private sector financing for municipal infrastructure, and to strengthen their financial and technical capability, and their capability for social and environmental safeguards management, through the operation of a credit facility to support the investments of such Investment 6 Funds in eligible local development subprojects. Revised Project Development Objectives (as approved by original approving authority) N/A (a) PDO Indicator(s) Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised approval Completion or Target Values documents) Target Years Increase in total number of LDIF investments (debt and equity) per year in municipal Indicator 1 : infrastructure subprojects with private sector involvement. 63 (debt) and 2 716 (debt) and 44 Quantitative 7 (debt) (equity) over entire (equity) project duration Date achieved 12/31/2008 12/31/2014 6/30/2016 Target for increase in number of debt-financed investments was exceeded by a factor of Comments more than 11x while the target for increase in number of direct equity investments was exceeded by a factor of 22x. Increase in total amount (US$) of LDIF investment (debt and equity) per year in Indicator 2 : municipal infrastructure subprojects with private sector involvement. $260 million (debt) $489.8 million (debt) and $15 million Quantitative $14 million (debt) and $46.6 million (equity) over entire (equity) project duration Date achieved 12/31/2008 12/31/2014 6/30/2016 Target for increase in amount of debt-financed investments was exceeded by 88% while Comments the target for increase in amount of direct equity investment was exceeded by a factor of more than 3x. Increase in total amount (US$) of private capital leveraged into LDIF sponsored Indicator 3 : municipal infrastructure subprojects. $1 billion ($941.2 $300 million over million [debt] and Quantitative $18 million entire project $67.5 million duration [equity]) Date achieved 12/31/2008 12/31/2014 6/30/2016 Target for increase in total amount of private capital leveraged was exceeded by a Comments factor of more than 3.3x. Adoption of Bank-advised financial-performance metrics by qualified LDIFs: Indicator 4 : Aggregate equity investments < 50% of total LDIF's paid-in equity. Quantitative 100% 100% 100% Date achieved 12/31/2008 12/31/2014 6/30/2016 Comments Fully achieved. Adoption of Bank-advised financial-performance metrics by qualified LDIFs: LDIF's Indicator 5 : debt/equity < 6:1. 7 Quantitative 100% 100% 100% Date achieved 12/31/2008 12/31/2014 6/30/2016 Comments Fully achieved. Adoption of Bank-advised financial-performance metrics by qualified LDIFs: Total Indicator 6 : investment (debt and/or equity) in single obligor < 20% total LDIF capital (debt and equity). Quantitative 100% 100% 100% Date achieved 12/31/2008 12/31/2014 6/30/2016 Comments Fully achieved. Adoption of Bank-advised principles contained in Project Manual by qualified LDIFs: Indicator 7 : Project Preparation and Appraisal Guidelines. Qualitative 100% 100% 100% Date achieved 12/31/2008 12/31/2014 6/30/2016 Comments Fully achieved. Adoption of Bank-advised principles contained in Project Manual by qualified LDIFs: Indicator 8 : Reporting and Monitoring Guidelines. Qualitative 100% 100% 100% Date achieved 12/31/2008 12/31/2014 6/30/2016 Comments Fully achieved. (b) Intermediate Outcome Indicator(s) Original Target Actual Value Formally Values (from Achieved at Indicator Baseline Value Revised Target approval Completion or Values documents) Target Years Number of new LDIF investments (debt and direct) using LDIFP Line of Credit per Indicator 1 : year in municipal infrastructure subprojects with private sector involvement. 22 (debt) and 2 Quantitative 0 (equity) over entire 85 (debt) project duration Date achieved 12/31/2008 12/31/2014 6/30/2016 Target for number of debt-financed investments was exceeded by a factor of almost 4x Comments while the target for number of direct equity investments was not achieved. Amount (US$) of new LDIF investments (debt and direct) using LDIFP Line of Credit Indicator 2 : per year in municipal infrastructure subprojects with private sector involvement. $155 million (debt) and $15 million Quantitative 0 $126.9 million (debt) (equity) over entire project duration Date achieved 12/31/2008 12/31/2014 6/30/2016 Target for amount debt-financed investments was approximately 85% achieved while Comments the target for amount of direct equity investments was not achieved. Amount (US$) of new private capital leveraged into LDIF sponsored (using LDIFP Indicator 3 : Line of Credit) municipal infrastructure subprojects. Quantitative 0 $250 million $269 million (debt) Date achieved 12/31/2008 12/31/2014 6/30/2016 8 Comments Target for new private capital leveraged was fully achieved. Compliance with the Financial Covenants by all qualified LDIFs: LDIF ownership in Indicator 4 : project enterprise < 30% when involving LDIFP proceeds. Quantitative N/A 100% N/A Date achieved 12/31/2008 12/31/2014 6/30/2016 There were no direct equity investments financed involving LDIFP proceeds, thus this Comments indicator could not be assessed. Compliance with the Financial Covenant by all qualified LDIFs: LDIFs subprojects Indicator 5 : debt/equity < 3:1 when involving LDIFP proceeds. Quantitative N/A 100% 100% Date achieved 12/31/2008 12/31/2014 6/30/2016 Comments Fully achieved. Indicator 6 : Compliance with Project Manual's Safeguards Guidelines. Qualitative N/A 100% 100% Date achieved 12/31/2008 12/31/2014 6/30/2016 Comments Fully achieved. Indicator 7 : Compliance with Project Manual's PPA Guidelines. Qualitative N/A 100% 100% Date achieved 12/31/2008 12/31/2014 6/30/2016 Comments Fully achieved. Indicator 8 : Compliance with Project Manual's PSP Guidelines. Qualitative N/A 100% N/A Date achieved 12/31/2008 12/31/2014 6/30/2016 There were no direct equity investments financed involving LDIFP proceeds, thus this Comments indicator could not be assessed. Indicator 9 : Compliance with Project Manual's Monitoring Guidelines. Qualitative N/A 100% 100% Date achieved 12/31/2008 12/31/2014 6/30/2016 Comments Fully achieved. G. Ratings of Project Performance in ISRs Date ISR Actual Disbursements No. DO IP Archived (USD millions) 1 06/29/2010 Satisfactory Moderately Satisfactory 10.00 2 06/27/2011 Satisfactory Moderately Satisfactory 12.45 3 03/17/2012 Satisfactory Moderately Satisfactory 12.45 4 12/31/2012 Moderately Satisfactory Moderately Unsatisfactory 25.81 5 10/12/2013 Moderately Satisfactory Moderately Satisfactory 42.20 6 06/03/2014 Satisfactory Moderately Satisfactory 57.29 7 11/18/2014 Moderately Satisfactory Moderately Unsatisfactory 69.72 8 05/27/2015 Moderately Satisfactory Moderately Satisfactory 87.85 9 09/11/2015 Moderately Satisfactory Moderately Satisfactory 100.79 10 04/17/2016 Moderately Satisfactory Moderately Satisfactory 114.55 11 06/22/2016 Moderately Satisfactory Moderately Satisfactory 125.09 9 H. Restructuring (if any) ISR Ratings at Amount Board Restructuring Restructuring Disbursed at Reason for Restructuring & Key Approved PDO Date(s) Restructuring Changes Made Change DO IP in USD millions Raising of procurement thresholds 07/23/2013 MS MS 42.20 for International Competitive Bidding for works and goods Extension of closing date by 18 02/25/2014 S MS 57.29 months Triggering of Operational Policy 02/25/2015 MS MS 87.85 7.50 on Projects on International Waterways 06/29/2016 MS MS 125.09 Cancelation of SDR 30,500,000 06/30/2016 MS MS 133.89 Cancelation of SDR 4,200,000 I. Disbursement Profile 10 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal In the early 2000s, the demand for municipal infrastructure in Vietnam intensified as the country coped with rapid urbanization and high rates of economic growth. Public investment and the conventional approach of relying on official development assistance (ODA) to fund individual infrastructure projects were assessed by the Government of Vietnam (GOV) to be insufficient to meet the growing investment gap. Two developments heightened the need for policy reform: • The responsibility for municipal infrastructure was devolved to the provincial governments, which have limited budgetary resources and weak institutional capacities. • In the near to medium term, private financial markets were not sufficiently deep or broad to meet the fast growing municipal infrastructure financing demand. In 2001, the GOV instituted the Public Administration Reform Master Program, permitting provincial governments to establish Local Development Investment Funds (LDIFs) for the purpose of mobilizing capital and entering into contracts with the private sector to develop municipal infrastructure. LDIFs were authorized to operate as commercially oriented entities that leverage private capital and invest in municipal infrastructure projects offering cost recovery. The LDIF model was an important element of the GOV’s strategy to establish alternative public infrastructure financing models that involve local governments and leverage private capital. Consistent with the priorities of the GOV, the Vietnam Country Partnership Strategy (CPS) for 2007-2011 (Report No. 38236-VN, January 3, 2007), under its first pillar focused on improving the business environment, identified the development of a vibrant capital market to support the financing of infrastructure as an essential element in the reform of the financial system. The CPS asserted that “making further progress in infrastructure development requires diversifying funding sources and improving transparency in resource mobilization, notably at the local level,” which was the basis for adopting an operational strategy to support the GOV in: i) establishing a policy and regulatory framework to support the development of LDIFs; ii) developing a model LDIF vis a vis operational standards and investment efficiency; and iii) providing credit to LDIFs. The Bank provided extensive analytical and advisory activities (AAA) to support the GOV’s LDIF policy framework. A comprehensive Briefing Paper was completed in 2005 that highlighted policy and operational issues concerning the development of LDIFs in Vietnam. The recommendations from this report supported the enactment in 2007 of Decree 138 on the organization and operation of LDIFs, which represented the GOV’s first comprehensive policy guidelines governing LDIFs. Further, the GOV and the Bank adopted a two-phased approach of leveraging IDA credit to: i) alleviate the need for LDIFs to rely on short-term loans to finance long-term infrastructure investments; ii) increase the affordability of municipal infrastructure to the citizens by providing long-term financing, which was not available in Vietnam; and iii) help LDIFs establish the appropriate systems and procedures to build a track record, including guidelines for partnering with the private sector, which could form the basis for the LDIFs’ future borrowing from the market-based sources, such as bank loans or bonds. 11 In the first phase, the Ho Chi Minh City (HCMC) Investment Fund for Urban Development (HIFU) Project (HDP) was implemented with the development objective “to develop HFIC (HCMC Finance and Investment State Owned Company, formerly HIFU) as a model LDIF (in terms of 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 in financing municipal infrastructure in HCMC.” HDP became effective in the third quarter of FY08 and fully disbursed an IDA line of credit totaling US $50 million over five years of project implementation. The project financed the implementation of 12 sub-projects sponsored by HFIC with private sector investor involvement. HDP’s “Overall Outcome Rating” was assessed as Moderately Satisfactory in the ICR. However, the Independent Evaluation Group (IEG) rated the project as Unsatisfactory because of the weak available empirical evidence to support the achievement of the development objective and the determination that the results and indicator frameworks, as designed, did not robustly reflect the improvements that were expected. The implementation of the national-scale Local Development Investment Funds Project (LDIFP) comprised the second phase of the Bank’s strategy. LDIFP was prepared in parallel with HDP and the project concept note reviews for the two projects were conducted one month apart in the third quarter of FY06. The new project was intended to quickly scale up the model piloted by HFIC under HDP, which had demonstrated encouraging early results—the ratings for “Progress towards achievement of Project Development Objective” and “Overall Implementation Progress” were both assessed as Highly Satisfactory in the FY08 Implementation Status and Results Report and as Satisfactory in the FY09 Report. Beginning in 2007, the impact of a global financial crisis and a broader regional economic downturn affected Vietnam, which experienced mounting inflation and a financial and credit crisis. In this context, the GOV determined that it was important to take swift action to promote policies and initiatives that would provide fast-moving and far-reaching stimulus as well as a foundation for recovery and long-term growth. Given the positive early results from HDP and the determination that the municipal infrastructure sub-projects financed under LDIFP would have a multiplier effect on the economy, the GOV and the Bank accelerated the preparation of LDIFP, resulting in its advanced delivery in the second quarter of FY10, approximately just 16 months after the effectiveness date of HDP. 1.2 Original / Revised Project Development Objective and Key Indicators The project development objectives (PDO) were: “i) to improve the effectiveness of Qualified Local Development Investment Funds in leveraging private sector financing for municipal infrastructure, and ii) to strengthen their financial and technical capability, and their capability for social and environmental safeguards management, through the operation of a credit facility to support the investments of such Investment Funds in eligible local development sub-projects.” The outcome indicators for the first objective were the: (1) increase in total number of LDIF investments (debt and equity) per year in municipal infrastructure sub-projects with private sector involvement; (2) increase in total amount of LDIF investment (debt and equity) per year in municipal infrastructure sub-projects with private sector involvement; and (3) increase in total amount of private capital leveraged into LDIF sponsored municipal infrastructure sub-projects. 12 The outcome indicators for the second objective included the adoption of the following Bank- advised financial-performance metrics by qualified LDIFs: (4) aggregate equity investments less than 50 percent of total LDIF's paid-in equity; and (5) LDIF's debt to equity ratio less than 6:1; and (6) total investment (debt and/or equity) in single obligor less than 20 percent of total LDIF capital (debt and equity). The outcome indicators for the second objective also included the adoption of Bank-advised principles contained in Project Manual, specifically: (7) Project Preparation and Appraisal Guidelines; and (8) Reporting and Monitoring Guidelines. 1.3 Main Beneficiaries The primary beneficiaries were the 17 LDIFs that complied with the qualification criteria specified in the Project Manual. The qualification criteria were mainly drawn from the GOV’s policy guidelines governing LDIFs and were intended to ensure that participating LDIFs maintained appropriate standards with respect to organizational structure, charter capital, financial and performance reporting, and financial condition. The secondary beneficiaries of LDIFP included private sector investors in the provinces of the qualified LDIFs, which were able to access credit to finance revenue-generating municipal infrastructure sub-projects and, in the process, adopt international standards for safeguards and fiduciary management. The ultimate beneficiaries were the extensive number of end-users who directly benefited from the economic and social goods produced by the 85 sub-projects financed by LDIFP across 10 different sectors. The Project Management Unit (PMU) of MOF also benefited significantly from the technical assistance (TA) provided under Component 2. LDIFP was the first project for which MOF served as a financial intermediary (FI) for channeling investment finance to the sub-national level. The PMU rapidly develop the administrative and technical capability to comprehensively manage the operation, which engaged LDIFs and financed sub-projects nationwide. Through the resources and experience gained from implementing LDIFP, MOF also progressively improved its regulatory and oversight practices over LDIFs, as evidenced by extensive policy and institutional reforms that were achieved over the course of project implementation. 1.4 Original Components Component 1: Investment Capital – A line of credit of US $185 million was provided to MOF to on-lend to qualified LDIFs for investment in cost-recovery-oriented municipal infrastructure sub- projects in partnership with the private sector. Qualified LDIFs worked with provincial governments to identify investment needs in their respective provinces, as specified in Provincial Development Plans, which could be funded in partnership with the private sector. Following preliminary screenings of potential sub-projects to verify their operational and financial viability, the LDIFs invited private investors to participate in the sub-projects. Alternatively, sub-projects were also identified by LDIFs based on direct proposals from private investors. These proposed sub-projects were considered by LDIFs contingent on their alignment to Provincial Development Plans and on preliminary screenings to verify their operational and financial viability. The Project Manual provided: i) Project Preparation and Appraisal (PPA) guidelines on how the LDIFs' investments under the line of credit should be identified, developed, and appraised; ii) 13 Private Sector Partner (PSP) guidelines on how private sector participants should be selected in project enterprises financed by LDIFP; and iii) guidelines and requirements on safeguards, monitoring, corporate governance, and capital mobilization. Allowable sectors of municipal infrastructure included: health, education, water supply, solid waste, urban transportation, residential development, telecommunications, and infrastructure for industrial parks. Component 2: Project Implementation Support – MOF’s PMU was responsible for monitoring, regulating, and supervising the LDIFs and their performance. LDIFP extended US $5 million to support the development of MOF’s institutional capacity and to provide operational support to effectively implement LDIFP. The line of credit supported the PMU in developing its regulatory and institutional capacity, including: i) the establishment, capacity-building, and operational support of the PMU organization; ii) the monitoring and selection of qualified LDIFs; iii) the analysis of LDIF sub-project proposals; iv) the monitoring of social and environmental safeguards compliance; v) the development of information systems for managing LDIFP; and vi) the financial audit of LDIFs based on international auditing standards and LDIF accounting rules. 1.5 Revised Components – N/A 1.6 Other Significant Changes As per Section H of the datasheet, the Financing Agreement (FA) was amended several times. Firstly, in July 2013, the procurement thresholds for International Competitive Bidding (ICB) were raised from US $7 million to US $10 million for works, and from US $ 1 million to US $3 million for goods as the original procurement thresholds were determined to be inappropriately low given the commercial nature of the sub-projects being implemented by private sector investors. Secondly, in February 2014, the closing date of the project was extended by 18 months, from December 31, 2014, to June 30, 2016, to provide additional time for MOF to fully disburse the IDA credit. Thirdly, a Level 1 restructuring in February 2015 triggered Operational Policy (OP) 7.50 on Projects on International Waterways. At appraisal, LDIFP did not expect LDIFs to invest in sub-projects that would involve the use of international waterways. However, Binh Duong LDIF proposed the construction of a water treatment plant that would take water from the Dong Nai River, which is a tributary of an international waterway (Saigon River). Fourthly, a Level II restructuring just before project closing canceled credit proceeds totaling SDR 34.7 million (approximately US $48.9 million or 27.2 percent of the IDA credit) because MOF was unable to fully utilize those funds. Significant changes to the Project Manual were also adopted to improve the utilization of the line of credit for investment capital under Component 1. Firstly, the sub-project eligibility criteria were revised in June 2012 to allow enterprises that were not constituted of 100 percent state-owned shares to serve as sub-project investors. Originally, eligible investors required a minimum of 50 percent private ownership. The Bank concurred to lower the threshold given that the Vietnam Corporate Law requires non-state-owned companies (even if the share of private ownership is as little as one percent) to operate under the same regulatory guidelines as purely private sector firms. Secondly, the interest rate policy for the project was revised in June 2013, setting the minimum rate as the past six months average of 5-year GOV bonds plus 1 percent. 14 Originally, the minimum rate was based on the Vietnam Development Bank (VDB) interest rate, which was supposed to approximate the 5-year GOV bond rate, plus 1 percent. The new interest rate policy increased the flexibility under LDIFP to be more responsive to market fluctuations. 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry Soundness of Background Analysis. As discussed in Section 1.1, LDIFP represented the second phase of the Bank’s operational strategy to support the LDIF sector and, as was the case for HDP, the project design was grounded on a comprehensive Briefing Paper prepared in 2005 that assessed policy and operational issues concerning the development of LDIFs in Vietnam. The linked nature of HDP and LDIFP is reflected in the similarities in their respective Project Appraisal Documents (PADs), particularly in the “Lessons learned and reflected in the Project design,” which identified common lessons regarding: i) the critical role of LDIFs in accelerating disbursements in the GOV’s ODA-financed infrastructure portfolio; ii) the need for sound analysis in the assessment of financial intermediaries, as consistent with the Bank’s guidelines on financial intermediary lending (OP 8.30); iii) the importance of having an established national policy framework underpinning the operations; and iv) the importance of government ownership. Project preparation for LDIFP coincided with the early stages of HDP implementation; hence, specific project design elements were influenced by initial lessons from HFIC’s experience in implementing HDP, including: • Improving the operating framework in the Project Manual for social and environmental safeguards to more closely align with GOV legal requirements. • Providing flexibility with respect to the type of investment financing for sub-projects (debt and direct equity) in the FA to avoid having specific targets for each type. In the case of HDP, the project committed to funding direct equity investments by HFIC using a specific modality (Special Purpose Vehicle, SPV) that was not supported by the existing policy environment in Vietnam. HDP thus needed to be restructured to remove pre- determined limits to allocate the IDA credit for loan and equity investments. • Adopting an interest rate policy that was closer in line with market conditions. However, LDIFP adopted problematic operating assumptions that substantially affected project implementation and were rooted in inadequate financial and economic analysis at the appraisal stage. Firstly, LDIFP’s disbursement projections reflected overly aggressive assumptions on the scale of sub-projects to be financed by the line of credit under Component 1. The disbursement schedule was based on targets in the results framework that projected an average investment of US $7 million per sub-project over the course of implementation. These projections drew from the assumption that the bulk of the LDIFP line of credit for investment finance would be primarily absorbed by the two major LDIFs, Ho Chi Minh City (HFIC) and Hanoi (HANIF), and secondarily by some other smaller-scaled but relatively sizeable LDIFs, such as Dong Nai and Binh Duong. The average investment assumed under LDIFP turned out to be significantly overestimated and unrealistic given that: i) the actual level of participation of HFIC and HANIF did not meet the project’s expectations; and ii) in the project results framework, PDO indicator #6 required that “Total investment (debt and/or equity) in single obligor should be less than 20% 15 total LDIF capital,” thus preventing LDIFs, with the exception of HFIC and HANIF, from financing sub-projects in the scale of US $7 million. Secondly, the extent and timing of LDIF participation was insufficiently assessed. As discussed further in Section 2.2, the level of participation from HFIC and HANIF, on which the project’s operating assumptions were anchored, did not materialize. More generally, the PAD included 13 sub-projects in the pipeline for Year 1 and 2, which were divided across seven LDIFs that were expected to qualify for LDIFP. Only one of these sub-projects was financed under LDIFP within the first two years of implementation while only two other sub-projects were eventually financed in later years. In sum, LDIFP’s disbursement assumptions were based on having a relatively small number of qualified LDIFs (approximately seven) implementing a relatively small number of sub-projects (target of 24 sub-projects) of a relatively large scale (approximately US $7 million). Each of these assumptions contrasted starkly with actual implementation results. Thirdly, macroeconomic risks were not fully accounted for at the appraisal stage. A financial and credit crisis was affecting Vietnam when LDIFP was in the final processing stages in 2009. However, the project design did not incorporate specific mitigating measures to address the potential impact of the economic downturn and credit crunch, which depressed the demand for LDIFP credit among prospective private sector investors in the first two years of implementation. Finally, the implications of the wholesale financing design on the technical capacities of project stakeholders were underestimated. The operating assumptions of LDIFP (including targets in the results framework and disbursement projections) did not fully account for new implementation challenges arising from the wholesale LDIFP model, which relied on an inexperienced MOF to serve as an FI for channeling IDA funds to many newly-established and low-capacity LDIFs, that were not relevant to the retail HDP model, where the Bank supervised and disbursed directly to HFIC. The magnitude of the capacity constraints and the steep learning curve of the PMU and LDIFs were thus underestimated, which impacted the first half of implementation. Assessment of Project Design. The PDO was closely aligned to the CPS for 2007-2011 and the project was part of a broader Bank strategy that integrated operations (HDP and LDIFP) and AAA to support LDIFs to become effective financing vehicles for municipal infrastructure development. The components of LDIFP were appropriately designed to address the PDO. Firstly, Component 1 aimed to “improve the effectiveness of Qualified Local Development Investment Funds in leveraging private sector financing for municipal infrastructure” by providing LDIFs that met clearly-defined financial and operational standards with access to investment capital through a credit facility managed by MOF. Secondly, Component 2 supported an extensive package of project implementation support activities that, together with the practical experience and lessons gained by the LDIFs over the course of implementing sub-projects financed under Component 1, were intended to comprehensively “strengthen their financial and technical capability, and their capability for social and environmental safeguards management.” The adoption by LDIFP of a Financial Intermediary Loan (FIL) as the lending instrument followed extensive internal consultations with the Financial Sector and Private Sector Development (FPD) and the Poverty Reduction and Economic Management (PREM) units as well as the International Finance Corporation (IFC). The PDO was focused on improving the 16 effectiveness and capacity of qualified LDIFs, which necessitated an open-ended, wholesale financing model for the project with MOF serving as an FI through which qualified LDIFs nationwide could access investment financing for municipal infrastructure. The FIL instrument was appropriately selected given the flexibility needed both to extend credit to LDIFs for investment financing and to provide project implementation support to the PMU. Other lending instruments were considered, however, the Specific Investment Loan (SIL) was determined to be a poor fit for the project’s wholesale financing approach while the Development Policy Loan (DPL) had limited capability to directly support the extensive capacity building, sub-project monitoring, and operational advisory activities required by the project. Adequacy of Government Commitment. The GOV was strongly committed to building the capacities of LDIFs and supporting the expansion of their investments in municipal infrastructure leveraging private sector capital. The enactment of policy guidelines on the organization and operation of LDIFs and an accounting circular governing LDIFs was prioritized by the GOV in order to satisfy key conditions for the approval of the project. The GOV also fully committed to the timely establishment of a PMU within MOF and the allocation of adequate counterpart funds to support PMU operations and finance LDIF capacity building activities. At the sub-national level, LDIFP also generated strong interest and support among provincial governments, many of which engaged MOF and the Bank even before the approval of the project to begin preparing the requirements for LDIFP qualification, which eventually led to the qualification of more LDIFs than was expected by the project, including ten qualified LDIFs by Year 2. Assessment of Risks. The risks to the PDO identified in the PAD were appropriately specified and risk mitigation measures were fully mainstreamed in the project design and anchored on the project implementation support activities under Component 2. As a result, the potential problems regarding the inadequate financial performance of LDIFs (including the mismanagement of LDIFs due to overcapitalization), the reluctance of LDIFs to mainstream the Project Manual, and poor compliance with environmental and social safeguards were generally managed in an effective manner through the adoption of strict qualification requirements and the independent monitoring of LDIF compliance to the Project Manual. The implementation risks identified in the PAD covered three key risks but did not fully cover several important issues. Firstly, the risk of slow preparation and implementation of sub-projects was underestimated as “moderate” in the PAD and did not fully account for the magnitude of the capacity constraints and the steep learning curve of the PMU and LDIFs. As noted earlier, macroeconomic risks relating to the emerging financial and credit crisis were not fully accounted for, leading to unrealistic operating assumptions. Secondly, even though LDIFP’s operating assumptions were heavily reliant on the absorption of the IDA credit by the two large and established LDIFs, the PAD did not account for the risk that the timing and extent of the participation of HFIC and HANIF would fail to meet expectations. Finally, though the enabling policy framework supporting equity investments specified in the LDIFP design had not yet been established when the project was appraised, the PAD did not identify this as a risk to implementing equity investments under the project. Overall Quality at Entry. LDIFP was an integral component of a comprehensive operational strategy to support a priority reform initiative of the GOV. The PDO was strongly aligned with 17 government strategies as well as the Bank’s CPS. Importantly, LDIFP drew on lessons from the HDP operation, helping to strengthen the operating guidelines and Project Manual. However, while LDIFP’s design utilized an appropriate lending instrument and specified components that corresponded effectively to the PDO, the aforementioned inadequacies in the financial and economic analysis at the appraisal stage compromised the operating assumptions of the project, leading to the setting of disbursement goals that ultimately proved to be unrealistic. 2.2. Implementation Component 1 – Investment Capital. US $185 million in investment capital was allocated to finance 24 sub-projects over five years. However, only US $126.9 million (68.6 percent) was disbursed under Component 1 in spite of an 18-month extension of the project closing date. As discussed in Section 2.1, the substantial underutilization of the IDA credit was rooted in the project’s problematic operating assumptions. The actual average investment for LDIFP sub- projects was US $1.5 million, which was just 21.4 percent of the average assumed in the project’s disbursement targets and proved to be too large a shortfall for the project to overcome. The difficult macroeconomic conditions that prevailed during the first two years of LDIFP implementation affected the project in several ways. • Demand and risk appetite among private investors for infrastructure investment was depressed by the prevailing credit crunch. This was a major factor behind the low rate of implementation of the sub-projects pipeline enumerated in the PAD for Years 1 and 2. • The level of participation of the two major LDIFs was constrained by the slowdown in the credit market. Although HDP was still under implementation when LDIFP became effective and did not close until the end of 2012, LDIFP’s disbursement projections relied on HFIC simultaneously accessing IDA credit from both HDP and LDIFP beginning in Year 1. The rate of HDP implementation decelerated in 2010-11 due to the economic downturn and credit crisis, thus preventing HFIC from accessing LDIFP credit until Year 4 of LDIFP implementation. Further, HANIF ultimately decided to not access LDIFP credit in spite of meeting the qualification requirements and the extensive outreach efforts of the PMU and the Bank. Following a change in management after LDIFP approval, HANIF became very conservative in expanding its investment activities, leading to a relatively stagnant loan portfolio during the LDIFP implementation period (see Annex 4). Furthermore, several key operational challenges affected the implementation of Component 1: • Capacity constraints at the PMU and among LDIFs contributed to the slow build-up in disbursements. The PMU had no prior experience in managing an ODA-funded project and performing the functions of an FI. Capacity constraints were aggravated by a 15- month delay in contracting project implementation support activities under Component 2 as the PMU faced challenges in ensuring that procurement complied with both GOV and Bank policies. In the meantime, the PMU relied heavily on the Bank’s support over 2009- 2011 to review sub-project proposals and provide technical assistance to LDIFs, most of which initially struggled to comply with the project’s appraisal, fiduciary, and safeguards requirements given their lack of experience in accessing Bank financing. • Inefficiencies in the PMU’s process for sub-project assessment slowed the approval of sub-projects. Feedback from LDIFs raised concerns about the multiple layers of review 18 within MOF, leading to redundancies and delays. Further, even though the Project Manual only required the Bank to conduct environmental safeguards prior reviews and approvals for the first sub-project prepared by each qualified LDIF, the PMU requested the Bank to conduct prior reviews and approvals of all sub-projects screened for LDIFP. This was done to ensure that sub-project proposals strictly conformed to Bank policies. • The interest rate policies adopted by the project did not provide the same flexibility that competing local commercial banks enjoyed. Even though the LDIFP interest rate policy led to average lending rates that were generally competitive with average commercial bank rates (Figure 1, Annex 1), individual branches of commercial banks enjoyed the flexibility to offer more attractive rates on a case-by-case basis to compete with other local sources of credit. Hence, it was common for private sector investors to reduce the amount funding they accessed from the LDIF and substitute credit sourced from local commercial banks. Out of 85 sub-projects that were financed by the project, 60 percent experienced reductions to the original LDIF commitments, reducing the overall level of funding accessed by qualified LDIFs from the IDA credit by 26 percent compared to the original commitments. Other factors contributed to the commitment reductions, including: i) procurement savings; and ii) overestimated sub-project cost estimates due to the inexperience of private sector investors in preparing sub-project proposals. • The lack of an enabling policy environment for the competitive selection of private sector partners as part of the establishment of a new legal entity (SPV) prevented the implementation of direct equity investments under LDIFP. Legal provisions for the competitive selection of private sector partners in the establishment of public-private partnerships (PPPs) for project enterprises, as consistent with Bank procurement guidelines and as required by the Project Manual, were not formally issued until February 2015. Therefore, the PSP guidelines in the Project Manual were not utilized. The PMU and the Bank adopted extensive interventions throughout LDIFP implementation to directly address the key operational challenges. LDIFP ultimately financed 85 sub-projects, which was more than 3.5 times the projection at appraisal, across 15 LDIFs. The average processing time to review and approve sub-projects declined significantly from 424 days in 2011 to 127 days in 2015, accelerating disbursements from Year 4 (2013) onwards (Table 2, Annex 1). • Recognizing the reduced scale of sub-projects and the lack of participation of HFIC and HANIF, the primary focus shifted to expanding the number of qualified LDIFs and building a longer pipeline of sub-projects. The PMU intensified efforts to review the compliance of LDIFs with the requirements of the project, leading to the qualification of 17 LDIFs over the course of LDIFP implementation, which was more than twice the projection at appraisal (Table 1, Annex 1). As a result, a total of 190 proposed sub- projects were formally screened to review technical, financial, and safeguards compliance. • The PMU strongly leveraged the project implementation support activities under Component 2 to increase the commitment rate beginning in 2012. Coordination among the various consultants progressively improved, leading to more efficient appraisal of sub-projects and more responsive technical support to LDIFs. The Project Manual was revised in 2012 to address technical issues and improve the Vietnamese language version. • Revisions to the FA were undertaken to broaden the range of sub-projects that could be financed under the project. The 50 percent threshold for private ownership for project 19 sponsors was relaxed in Project Manual in June 2012 to widen the potential pool of private sector investors. In February 2015, OP 7.50 on Projects on International Waterways was triggered to allow Binh Duong LDIF to finance a water treatment plant. • Capacity building activities strengthened the capability of LDIFs to adopt the requirements of the Project Manual. Six annual LDIF workshops were organized, which provided a venue for formal training sessions, policy dialogue between MOF and the LDIFs, and the development of peer-to-peer knowledge-sharing networks among LDIFs. Due to the slow rate of implementation throughout the first half of LDIFP implementation, “Overall Implementation Progress” downgraded to Moderately Unsatisfactory in the ISR following the Mid-term Review (MTR) in August 2012. The PMU and the Bank subsequently implemented specific interventions to accelerate the mobilization of the line of credit for investment finance, leading to the upgrading of the rating to Moderately Satisfactory over the balance of project implementation. • The sub-project pipeline was sub-categorized (into ready, key, core, and potential lists) starting in 2013 in order to sharpen the prioritization of potential sub-projects. • PMU staff was enhanced with representatives from the MOF Investment Management Department to speed up the review of sub-projects. This was a direct response to LDIF feedback about the multiple layers of internal review among MOF departments. • LDIDP’s interest rate policy was revised in June 2013 (from the VDB rate to the past 6 months average of 5-year GOV bonds plus 1 percent) to improve the flexibility to respond to market conditions. While the frequent failure of bond auctions starting in 2015 often compromised the timely recalculation of the new LDIFP interest rate reference, the new benchmark rate still represented an improvement over the less flexible original policy. Importantly, the LDIFP rates were assessed by the Bank’s task team to have approximated medium- and long-term market lending rates, as consistent with the guidelines of OP 8.30 on Financial Intermediary Lending (Figure 1, Annex 1) Component 2 – Project Implementation Support. Despite the 15-month delay in the selection of consultants, all the activities under Component 2 were fully implemented and were critical in accelerating implementation starting in Year 4 (2013) in the context of a more challenging and demanding operating environment than expected at appraisal. Even as the project closing date was extended by 30 percent and the volume of sub-projects ultimately financed was 3.5 times the estimate at appraisal, the TA effectively provided the PMU with the necessary support for annual LDIF qualification assessments, sub-project appraisals, financial and performance monitoring and external auditing of LDIFs, and information systems development; without requiring additional financing. The TA also supported the capacity building activities of LDIFs and provided direct assistance to LDIFs in preparing sub-project proposals and complying with safeguard and fiduciary policies. Finally, as elaborated in Section 3.5, the TA was critical in enacting broad policy and institutional reforms that have substantially improved operating environment for LDIFs in Vietnam. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization Design. The LDIFP M&E framework built on the design of the HDP framework. In both cases, i) the PDO indicators (PDOIs) focused on monitoring the total and amount of investments in 20 municipal infrastructure sub-projects with private sector involvement undertaken by the qualified LDIFs; and ii) the Intermediate Results Indicators (IRIs) focused on monitoring the total and amount of investments undertaken by the qualified LDIFs using the project’s line of credit for investment finance as well as their compliance with the requirements of the Project Manual. The design of the LDIFP M&E framework reflected several key improvements from the HDP design: • Target values for the total and amount of investments of qualified LDIFs as measured in PDOIs #1-3 and IRIs #1-3 were specified as annual targets whereas the targets in the HDP M&E framework were vaguely framed as ranges of annual increases. • The PDOIs and IRIs included key financial performance indicators to ensure that the financial condition of qualified LDIFs could be monitored effectively. As referenced in Section 2.1, flaws in the M&E design resulted from the inadequate economic and financial analysis at appraisal. • The M&E indicators should have been more accurately calibrated to provide a more realistic and effective project evaluation framework. Target values for PDOIs #1-3 were underestimated because of the miscalculation of the extent LDIF participation in the project while target values for IRIs #1-3 were poorly estimated due to overly aggressive assumptions regarding the average scale of LDIFP investments. • The specification of PDOIs and targets #1-3 in an incremental manner (e.g., “Increase in the total number of LDIF investments per year…” with target values specified as “Plus [value]”) complicated the monitoring of these indicators. In particular, it was initially unclear whether certain indicators were to be reported on an annual incremental basis (e.g., PDOIs and IRIs #1-2) or on a cumulative basis (e.g., PDOI and IRI #3). • The M&E framework included targets for direct equity investments for IRIs #1-2 even though the legal framework that would enable the processing of direct equity investments using the PSP guidelines of the Project Manual was not established at appraisal stage. Implementation. M&E implementation encountered some early challenges as the preparation of periodic project progress reports were found to have some issues regarding quality and comprehensiveness. Eventually, M&E implementation improved and was maintained at a satisfactory level through to project closing. Utilization. M&E utilization was effective and drove the extensive interventions undertaken by the PMU and the Bank to address the project’s implementation challenges. The M&E system served as an anchor for the strong efforts to build a more extensive pipeline of sub-projects while ensuring that participating LDIFs maintained the financial standards necessary to qualify for the project. LDIFP’s M&E provided the foundation for MOF to pursue broader policy reforms to strengthen the monitoring and regulation of LDIFs, which were supported under Component 2: i) annual evaluation reports were prepared starting in 2013 to assess the financial and technical capacity of qualified LDIFs, and the quality and impacts of sub-projects; and ii) comprehensive reporting guidelines were developed starting in 2014 to facilitate MOF’s monitoring of the fiscal condition, debt and equity portfolios, and sub-project implementation of LDIFs. 2.4 Safeguard and Fiduciary Compliance 21 Environmental Safeguards (ES). LDIFP was a category FI project and OP 4.01 on Environmental Assessment was triggered at appraisal. LDIFP’s design allowed for varying levels of complexity among sub-projects; hence, ES guidelines consistent with Bank policies were integrated into the Project Manual. Proposed sub-projects were required to undergo initial environmental screenings to determine the appropriate level of environmental impact assessment (EIA). Each of the 85 sub-projects financed by LDIFP was assessed as Category B; hence, EIAs and corresponding environmental management plans (EMPs) were required to be prepared in correspondence to the magnitude of environmental impacts expected from each sub-project. OP 7.50 on Projects on International Waterways was triggered in February 2015 to accommodate the construction of Thu Dau Mot Water Supply sub-project (Project #74, Annex 3). The Bank later approved an exception to the policy following an environmental assessment that determined that the sub-project did not adversely change the quality or quantity of water flows to the riparians. Overall, compliance with ES requirements was assessed to be Moderately Satisfactory during LDIFP implementation. The design of the project required the responsibility for ES management to be shared across three levels: MOF, the qualified LDIFs, and the private sector investors. • At the sub-project level, most private sector investors were found to have adequately implemented mitigation measures, based on EMPs, to ensure environmental sanitation and safety during construction and operation. However, ES non-compliance issues were flagged for the Lam Dong Solid Waste Management sub-project (Project #37, Annex 3) requiring the PMU and the Bank to work closely with the LDIF and private sector investor to address the non-compliance. More broadly, environmental quality monitoring during construction was also inconsistent. For many small-scale sub-projects, private sector investors did not uniformly carry out environmental quality monitoring as committed in the EMPs. But for the larger scale sub-projects that posed relatively higher environmental risks, environmental quality monitoring was more consistently carried out. • At the LDIF level, the Project Manual required LDIFs to arrange for independent monitoring of EMP implementation and to prepare semi-annual ES compliance progress reports. Independent and internal monitoring continuously improved throughout project implementation; however, LDIFs did not uniformly and consistently adopt the required monitoring practices, with some not submitting their required reports in timely manner through the close of the project (e.g., Can Tho and Long An LDIFs). • At the MOF level, the PMU and the Bank introduced disbursement-linked conditions for sub-projects in 2013 to facilitate improved compliance with ES requirements. Twenty- four sub-projects were assessed to have ES requirements appropriate for the adoption of disbursement-linked conditions. These helped to improve the compliance of the private sector investors with EMP requirements and facilitated the integration of ES management into the sub-project implementation process. The PMU also progressively strengthened coordination arrangements with the environmental and social safeguards teams throughout implementation, which helped to improve ES monitoring for the project. Social Safeguards. The Bank’s Involuntary Resettlement policy (OP 4.12) was triggered by LDIFP. A resettlement policy framework (RPF) was prepared and the requirements were integrated into the Project Manual. Compliance with social safeguards requirements was consistently assessed as Satisfactory. Social safeguards management capacity improved as the project progressed. For each of the 85 sub-projects financed by LDIFP, land was already 22 available before sub-projects were proposed; hence, no land acquisition was undertaken. As specified in the Project Manual, due diligence was required to ensure that prior land acquisition was in accordance with GOV laws and the project’s resettlement policy framework. Social due diligence was conducted by independent consultants and found that all land acquired for LDIFP sub-projects fully complied with GOV laws and the Bank’s policies. Procurement. Compliance with procurement requirements was Moderately Satisfactory throughout LDIFP implementation. While improvements in procurement performance were made as project implementation progressed, there were persistent issues encountered with regard to the adequacy of procurement appraisal and record keeping among the LDIFs. At the PMU level, as detailed in Section 2.2, the key issue was the lengthy procurement process for consultant packages under Component 2. The 15-month delay in procurement contributed to the slow build-up in disbursements in the first two years of implementation. However, the procurement of the consultant packages was found to be satisfactory based on prior and post- reviews and savings of 4.9 percent were generated compared to estimated contract prices. While there were early issues with the quality and consistency of the PMU’s reporting on procurement performance, the overall quality improved starting in 2014. Importantly, the PMU facilitated the revision of the LDIFP procurement guidelines in July 2013 to raise the ICB thresholds for procurement, providing private sector investors with greater flexibility to implement sub- projects. At the LDIF level, common issues persisted among qualified LDIFs in fulfilling their procurement oversight commitments based on the Project Manual, including: i) deficiencies in the appraisal of sub-project procurement plans, including assessments of cost reasonableness; ii) inadequate record keeping; and iii) inadequate monitoring and supervision of sub-project procurement performance. These led to the implementation of procurement training and intensified TA for LDIFs in 2014, which helped to improve compliance to the preparation, submission, and appraisal of procurement plans. At the sub-project level, some private sector investors struggled to comply with procurement guidelines due to their lack of experience in implementing ODA sub-projects and their unfamiliarity with Bank procurement requirements. While procurement under LDIFP-financed sub-projects followed commercial practices (as acceptable to the Bank) that provided greater flexibility, LDIFs and investors were reluctant to pursue large-scale sub-projects requiring procurement above ICB thresholds due to fear of complex and time-consuming procurement procedures; hence, there were no LDIFP packages procured via ICB. However, a comprehensive review of LDIFP procurement reported reasonably good overall performance in terms of economy and efficiency. Procurement savings under sub-projects averaged 5.1 percent for the packages reviewed, which was similar to that obtained for Government-funded projects and some other Bank-financed projects. Procurement was also generally found to have attracted sufficient competition (average of 3.5 tenders) and to have been implemented on a timely basis. Financial Management (FM). FM consistently improved throughout implementation and was generally Satisfactory. The project consistently complied with the provisions for subsidiary loan agreements and sub-project and sub-loan agreements of the FA. The annual LDIF qualification 23 and re-qualification process was also consistently implemented in a timely and effective fashion with support from the TA under Component 2. Importantly, LDIFP supported critical institutional reforms that have strengthened MOF’s capacity to support and regulate the LDIF FM even after the conclusion of the project, which are detailed in Section 3.5 FM issues were encountered in the first two years of implementation regarding the PMU’s internal controls, monitoring of Bank Designated Accounts of LDIFs, contract and disbursement management, and upgrading of project accounting software, which resulted in the relatively low quality of audit reports and the assessment of qualified audit opinions in a number of LDIFs. These problems were flagged early on and were effectively addressed by the PMU once the project implementation support under Component 2 was mobilized. The PMU also dealt with lengthy disbursement and reimbursement processes by streamlining the process guidelines in the Project Manual in response to feedback from LDIFs. Interim financial and audited reports were prepared with acceptable quality and submitted on a timely basis from January 2014 onwards. 2.5 Post-completion Operation/Next Phase LDIFP was the second phase of the Bank’s operational strategy to support the development of LDIFs. As discussed in detail throughout Section 3, there is strong evidence to suggest that LDIFs have mainstreamed the key principles and procedures of the Project Manual into their core operating processes. Further, as detailed in Section 3.5, critical policy reforms have been enacted to institutionalize an improved operating and regulatory framework for LDIFs. Importantly, the PMU will be integrated into MOF’s Department of Debt Management and External Finance to sustain the monitoring and regulatory oversight of LDIFs. As such, there are no follow-up financing operations planned after LDIFP. Several pending TA activities remain that were not part of the original design of the project but are critical to sustain the institutionalization of reforms in LDIF accounting, financial and operational reporting, and capacity building. The Bank will explore options for follow-up TA to: • Develop a management information system for LDIF performance and financial reporting. • Update the accounting software to support revised LDIF accounting guidelines (Circular 209 of 2015) and the conversion of LDIF financial statements from Vietnam Accounting Standards (VAS) to International Financial Reporting Standards (IFRS). • Extend capacity building for LDIF monitoring and regulation, including the preparation of annual evaluation reports on LDIF financial and operational performance. Recognizing that the affordability and efficiency of public infrastructure investment at the sub- national level remains as fundamental challenge, the GOV has sought support from the Bank to establish a municipal development fund or City Infrastructure Financing Facility (CIFF) as a pilot program to facilitate the mobilization of substantial pools of capital available in the banking sector to finance the demand for sub-national infrastructure investments. The proposed project is in the early stages of project preparation and will build on the lessons from HDP and LDIFP. 3. Assessment of Outcomes 24 3.1 Relevance of Objectives, Design and Implementation Objectives. The objectives of LDIFP remain highly relevant to the development priorities of Vietnam in the context of the GOV’s current Socio-Economic Development Strategy (SEDS) for 2011-2020 and the Bank’s Vietnam CPS for 2012-16 (Report No. 65200-VN). The SEDS prioritizes structural reforms focused on environmental sustainability, social equity, and macroeconomic stability to minimize short-term vulnerability and achieve sustained long-term growth. LDIFP directly contributes to two of the three major “breakthrough areas” identified in the SEDS: improving market institutions and infrastructure development. • In its efforts to improve socialist-oriented market economy regulations to create a more competitive environment, the GOV seeks to create more favorable conditions for the private sector to expand and become the driving force of the economy. At the sub- national level, the continuing development and expansion of the role of LDIFs is key to leveraging the private sector to supplement public investment in municipal infrastructure. • The GOV seeks to restructure public investment by decentralizing management while ensuring that financing is directed to projects that undergo required procedures and are subjected to reviews of capital sources, levels, and balancing. LDIFP fully supports the decentralization of public investment, enabling private capital to be leveraged for local infrastructure development following rigorous qualification and appraisal processes. The Bank’s CPS for 2012-2016 was designed to respond to the development priorities of the GOV’s SEDS for 2011-2020. Hence, LDIFP is closely aligned with the principle of the CPS to leverage systematic and “wholesale” approaches in the Bank's delivery of financing, specifically, by using “financial intermediaries and programmatic approaches to lend to cities to meet their local infrastructure needs.” LDIFP supports Pillar 1 of the CPS on strengthening competitiveness, particularly the Outcome 1.2 on “Improved Quality and Efficiency of Infrastructure Services.” Given its open menu and demand-driven design, LDIFP also supports Pillar 2 on “sustainability” and Pillar 3 on “opportunity” by financing sub-projects in the environmental (water supply and waste treatment systems) and social (schools, hospitals, social housing) sectors. Design. The relevance of the LDIFP design is assessed to be modest. The two project components were appropriate to the PDO and key aspects of the design were well conceived: • As the Bank sought to scale up the retail model of HDP, the adoption of a wholesale approach for LDIFP was appropriate given the nationwide scope and the open-ended, demand-driven nature of the project. • The FIL lending instrument was appropriate because LDIFP’s wholesale approach required the IDA credit to be channeled to sub-national entities through an FI, which could not be comprehensively supported by a DPL or SIL. • MOF was appropriately selected as the FI given its oversight and regulatory mandate over LDIFs. Though it had no prior experience in such a role, the TA under Component 2 was well designed to support MOF’s project management. However, as discussed in Section 2.1, the LDIFP design was hampered by inadequate economic and financial analysis at appraisal. Firstly, LDIFP’s disbursement projections reflected overly aggressive assumptions on the scale of sub-projects to be financed by the line of credit for 25 investment finance under Component 1. Secondly, the extent and timing of LDIF participation was insufficiently assessed. Thirdly, macroeconomic risks were not fully accounted for at the appraisal stage. Finally, the implications of the wholesale financing design on the technical capacities of project stakeholders were underestimated. Implementation. The relevance of implementation is assessed as modest primarily because of the failure to correct the problematic operating assumptions, particularly with regard to the disbursement projections and the targets in the M&E framework. Section 2.2 detailed extensive interventions undertaken by MOF, the PMU, and the Bank to address implementation issues, including: i) intensified efforts to qualify LDIFs and extend the sub-project pipeline; ii) capacity building and TA to LDIFs; and iii) revisions to the FA that broadened the range of sub-projects that could be financed under LDIFP. Further initiatives were adopted following the MTR to accelerate disbursements, including the fine-tuning of the sub-project pipeline, the enhancement of the PMU staff, and the revision of LDIFP’s interest rate policy. However, the project did not address two fundamental factors that affected implementation from the onset. • Firstly, the absence of an enabling policy environment prevented the implementation of direct equity investments under LDIFP. The GOV legal framework for the competitive selection of private sector partners in the establishment of PPPs for project enterprises was not issued until February 2015. Hence, the PSP guidelines in the Project Manual were not utilized and the project did not achieve the M&E target of financing two direct equity investments using the line of credit for investment finance. • Secondly, the issues in the disbursement projections and the M&E targets were not revised through a project restructuring. During the MTR, discussions on project restructuring centered on the possible partial credit cancellation. Later on, during the deliberations leading to the extension of project closing date in February 2014, the revision of the M&E indicators was considered but ultimately not seriously pursued. In retrospect, a confluence of factors, including the urgent focus on addressing immediate disbursement issues and task team resource constraints, prevented the Bank from strongly pushing to restructure the project to directly address LDIFP’s fundamental design issues. 3.2 Achievement of Project Development Objectives PDO #1 – Improve the effectiveness of Qualified Local Development Investment Funds in leveraging private sector financing for municipal infrastructure (Rating: Substantial) There was strong progress achieved in PDOIs #1-3 relating to: i) annual increases in the number and amount of LDIF investments in municipal infrastructure with private sector involvement, and ii) annual increases in the total amount of private capital leveraged into municipal infrastructure investments sponsored by qualified LDIFs. Despite the underestimation of the targets when the M&E framework was designed at appraisal, the actual results achieved were consistently high and showed a steadily increasing trend throughout implementation, with the exception of 2012 when there was an exceptional spike in lending among qualified LDIFs after the GOV enforced limits to commercial lending to urgently regulate the rising levels of bad loans among commercial banks. The unusually large spread in the interest rates between commercial banks and LDIFs in 2011 (see Figure 1, Annex 1) caused a sharp but momentary escalation in 26 LDIF lending recorded in 2012. However, excluding that year, the overall growth trend in LDIF investments in municipal infrastructure with private participation was stable. The strong progress reflected in the PDOIs generally corresponds to LDIFP implementation progress as measured by the IRIs #1-3, which reflects the impact of the project’s investment finance component on driving the expansion of LDIF financing of municipal infrastructure with private sector participation. As discussed in Section 2.1, the targets for these indicators were poorly estimated; hence, LDIFP significantly exceeded IRI #1 on the number of investments using the LDIFP credit but fell short of IRIs #2-3 on the amount of investments using the LDIFP credit and the amount of new private capital leveraged into LDIFP-funded sub-projects. LDIFP sub-projects accounted for an increasing share of the overall portfolio of qualified LDIFs over the 6.5 years of project implementation (Table 3, Annex 1), indicating the significant impact of the project on PDOIs #1-3, especially from Year 4 (2013) onwards. In addition to the PDOI progress, further evidence indicates LDIFP’s impact on the effectiveness of qualified LDIFs in leveraging private sector financing for municipal infrastructure. • LDIFP produced a leverage ratio of 2.13, reflecting the strong impact of the IDA credit in leveraging private capital for municipal infrastructure investment. The US $126.9 million in LDIFP credit that financed the implementation of 85 sub-projects effectively mobilized US $269.7 million in private investment. This ratio was more than twice the average achieved by HFIC in HDP and exceeded the average for sub-projects financed by qualified LDIFs using their own charter capital (1.85). • There was a strong trend towards increased lending to private sector enterprises for municipal infrastructure investment among qualified LDIFs. The share of lending to private entities among qualified LDIFs steadily increased to 82.5 percent in 2015 from just 66.9 percent in 2012 (excluding HFIC, which is disproportionately larger than the other 16 qualified LDIFs) (Table 4, Annex 1). • Total investments made by qualified LDIFs together with private sector investors contributed substantially to the municipal infrastructure development programs of their respective local governments. Over 2013 to 2015, the investments made by qualified LDIFs accounted for approximately 13-14 percent of the annual local government budget for development (with the exception of HFIC and HANIF, which operate in Vietnam’s two primary cities and thus benefit from significantly larger and more diverse financing sources for infrastructure, including direct investments by the GOV). One dimension of PDO #1 that was not supported was the financing of direct equity investments using the LDIFP line of credit. As discussed in Section 2.2, the policy reforms enabling direct equity investments under the requirements of the Project Manual were not adopted until very late in implementation. Though there were direct equity investments undertaken by qualified LDIFs (discussed in Annex 4), these did not follow the competitive selection process of the PSP guidelines for establishing PPPs for project enterprises. The majority of LDIF equity investments were in associates/subsidiaries and equities, rather than in project enterprises (Table 5, Annex 1). PDO #2 –Strengthen qualified LDIFs’ financial and technical capability, and their capability for social and environmental safeguards management (Rating: Substantial) 27 Qualified LDIFs fully achieved PDOIs #4-8 relating to financial performance metrics and the adoption of guidelines for project preparation and appraisal, and reporting and monitoring. There was only one exception in 2013, when Tien Giang LDIF temporarily exceeded the requirement for PDOI #6 (Total investment [debt and/or equity] in single obligor < 20% total LDIF capital). The issue was immediately addressed by the LDIF under the PMU’s supervision. With respect to IRIs #4-9, which supported PDOIs #4-8, there was full compliance to the requirements with the exception of the two indicators (IRIs #4 and #8) that related to compliance with Project Manual requirements for private sector participation in project enterprises, which could not be measured because of the absence of direct equity investments under LDIFP. In terms of safeguards and fiduciary management capacity, progressive improvements were observed in the performance of qualified LDIFs in the project based on the project’s procurement and safeguards completion reports. As discussed in Section 2.4, inconsistencies were observed among the LDIFs in terms of compliance with procurement and environmental safeguards requirements, particularly with respect to reporting requirements. However, it was encouraging that there were no instances of material non-compliance with the guidelines of the Project Manual given the lack of experience among the LDIFs and private sector investors. The strong overall achievement of the relevant PDOIs and IRIs measuring PDO #2 were driven by the PMU’s strict monitoring of LDIF compliance with the Project Manual, which detailed the guidelines for PPA, safeguards and fiduciary management, and financial and performance monitoring. The Project Manual was refined over the first two years of implementation to address feedback from participating LDIFs. Importantly, Component 2 supported extensive capacity building and TA to build up the financial and technical capabilities of LDIFs. Substantial further evidence indicates LDIFP’s impact on the capability of qualified LDIFs. • Qualified LDIFs that accessed LDIFP financing demonstrated improved capacity to facilitate faster sub-project implementation by the private sector investors. Average sub- project implementation period was reduced to 15 months for Years 3-6 (2012-16) from an average of 24 months for Years 1-2 (2010-11). • The scale and diversity of the LDIFP portfolio increased during implementation, indicating significant growth in the technical capacity of the qualified LDIFs to finance more complex municipal infrastructure investments in partnership with the private sector. The average LDIFP commitment increased by 54 percent to US $1.6 million per sub-project in Years 4-6 (2013-16) from an average of US $1.1 million per sub-project in Years 1-3 (2010-12). Further, the LDIFs financed an increasingly diverse range of sub- projects as LDIFP implementation progressed, progressing from relatively simple social infrastructure projects (e.g., health and education) to more complex transportation and environmental projects (e.g., transport infrastructure, water supply, waste treatment) requiring higher levels of technical competence for project appraisal (Table 6, Annex 1). • Observed improvements in the technical capacity of qualified LDIFs directly helped them access additional capital from various sources. Generally, provincial governments were highly encouraged by the improving performance of their respective LDIFs, leading them to infuse the LDIFs with increased charter capital to expand their investment portfolios. Qualified LDIFs (excluding HFIC) increased their charter capital by 63.4 percent, on average, compared to their baselines when they qualified for LDIFP. Qualitative evidence 28 also indicates that provinces increasingly entrusted additional capital to LDIFs to finance priority local infrastructure projects. Notably, several top-performing LDIFs (HFIC, Khanh Hoa, Lao Cai, Can Tho, Da Nang) have accessed ODA financing from other development partners, such as the French development agency (AfD), using the sub- project preparation, appraisal, and monitoring systems adopted from LDIFP. • Qualified LDIFs have mainstreamed the principles and processes of the PPA guidelines of the Project Manual into their core operating procedures based on qualitative evidence from aide memoires, PMU annual evaluation reports, and key informant interviews. Given that most of the LDIFs that participated in LDIFP qualified during implementation, the adoption of the PPA guidelines provided the impetus for them to overhaul inadequate and outdated procedures that did not conform to professional and international best practices. Thirteen LDIFs have formally modified and supplemented their operating policies and regulations to adopt the requirements of the Project Manual with respect to PPA, safeguards and fiduciary management, and organizational and corporate structure. 3.3 Efficiency The economic analysis of the PAD focused on assessing the financial viability of an initial set of five qualified and four conditionally qualified LDIFs. Due diligence of the financial accounts of the LDIFs was conducted to determine their financial viability as potential borrowers. However, the analysis at appraisal did not extend to the sub-project level, thus there was no framework and benchmarks provided for assessing the outputs and outcomes of LDIFP sub-projects. The assessment of LDIFP across three levels (project, LDIF, and sub-project) indicates that the IDA credit was substantially utilized in a reasonably cost-efficient manner. A fundamental issue for LDIFP was the inability to fully utilize project funds in spite of an 18-month extension of the project closing date, necessitating a partial credit cancellation equivalent to 27.2 percent of the IDA credit. Nonetheless, at the project level, evidence suggests that the IDA credit efficiently utilized in support of the two components of LDIFP. • In spite of the significant underutilization of funds for Component 1, extensive evidence detailed in Section 3.2 indicates that the IDA credit effectively facilitated the increased leveraging of private sector financing by qualified LDIFs. Importantly, LDIFP’s leverage ratio of 2.13 indicates a very efficient utilization of the IDA credit. • While the project implementation period was extended by 30 percent, the IDA credit proceeds under Component 2 were efficiently utilized over the extended period to meet the significantly scaled-up demands of the project (in terms of number LDIFs and number of sub-projects) and to achieve significant institutional reforms without requiring an increase in funding. The PMU effectively worked with the various consulting firms to absorb the larger workload within the original cost assumptions. • Even as the Bank task team exerted additional effort for project implementation support, including acquiescing to the PMU’s request to conduct prior reviews of all sub-project proposals (reaching 190 in total), overall supervision costs for LDIFP were kept within standard norms. The predominantly locally based task team optimized desk reviews, maintained a close engagement with the PMU, and strongly leveraged the consulting firms responsible for independent monitoring of safeguard and fiduciary management. 29 At the LDIF level, qualified LDIFs generally maintained good financial performance, including consistently good compliance with the project’s financial covenants and relevant indicators in the results framework, even as their debt portfolio grew at a rapid rate of 17.5 percent annually from 2010 to 2016. Annex 4 provides a more a detailed economic and financial analysis of qualified LDIFs, updating the analysis undertaken in the PAD. • Qualified LDIFs (excluding HFIC) showed consistent financial performance with respect to their lending operations as loan interest income grew on average from 2.9 percent as a share of total assets at baseline to 3.4 percent in 2015, which offset similar growth in loan interest expense (Table 7, Annex 1). Net interest margin was maintained at 2.5 percent of assets, on average, in 2015, reflecting an impressive performance given the sharp decline in broader market interest rates (from an average of 11 percent in 2012 to 5.5 percent in 2015) as the credit environment improved and the GOV relaxed its monetary policies. • Net profits for qualified LDIFs (excluding HFIC) grew, on average, by 8.9 percent in 2015 compared to baseline. In terms of return on assets, the average for qualified LDIFs (excluding HFIC) was lower in 2015 compared to baseline but the qualified LDIFs managed to generate stronger returns compared to commercial banks (Figure 2, Annex 1). • In the case of HFIC, loan interest income as a share of total assets decreased to 2.1 percent in 2015 compared to 2.6 percent in 2005 (which was HFIC’s baseline prior to its participation in HDP) while net interest margin declined to 0.7 percent as a share of total assets in 2015 from 1.4 percent in 2005. However, the decrease in profitability from lending operations did not reflect poorer financial performance; rather it is a result of the diversification of its portfolio towards equity investments. The size of HFIC’s equity portfolio in 2015 grew by 9.4 times compared to 2005, when equities comprised just 8.1 percent of HFIC’s investment portfolio. By 2015, equities grew to 37.8 percent of the portfolio. Equity investments drove profits before tax, which increased by 6.5 times over the 10-year period, while return on assets more than doubled to 5.4 percent in 2015. • Qualified LDIFs (excluding HFIC) have generally managed to minimize non-performing loans (NPLs) even as their debt portfolios have rapidly increased. NPLs as a share of total assets for qualified LDIFs (excluding HFIC) averaged 3.5 percent in 2015, which increased from the 0.4 percent baseline level but remains within the 5 percent ceiling specified in the Project Manual. In the case of HFIC, NPLs have been managed well at 1.8 percent of total assets in 2015. While there were occasional cases of LDIFs exceeding the NPL limit, these were typically short-term cases that were due to loans the provincial governments appointed the LDIFs to provide. The exception was Ninh Binh LDIF, which chronically exceeded the NPL limit and was thus suspended from accessing LDIFP credit. • Qualified LDIFs have remained well capitalized even as their debt portfolios grew rapidly. At baseline, the average capital adequacy ratio (CAR) was exceedingly high at 185.6 percent because of low rates of LDIF debt mobilization (Table 7, Annex 1). By 2015, the average CAR for qualified LDIFs (excluding HFIC) declined to 100.4 percent, which remains a high level that far exceeds the minimum rate of 15 percent specified in the Project Manual. In the case of HFIC, the rate declined from 111.0 percent in 2005 to a still very adequate level of 87.2 percent in 2015. 30 At the sub-project level, evidence confirms that the sub-projects financed through the IDA credit were generally implemented in a cost-efficient and timely manner with good overall quality. • Procurement savings from the project indicate that the IDA credit was expended in a cost-efficient manner. Average costs savings of 5.1 percent were realized for sub-projects financed by the project based on approved cost estimates, delivering aggregate savings of approximately US $3.4 million. In a sample of 27 sub-projects, 19 were found to have construction costs that were below conventional norms—importantly, among the eight sub-projects that exceeded the norms, seven of them were private schools that had design specifications that were more complex than those for public schools, which led to the relatively higher average construction costs. • Sub-projects financed by LDIFP were generally constructed on a timely basis. Among 78 contracts completed at closing that were reviewed in the project completion report on LDIFs’ procurement management performance, 29 contracts were completed on or before the target completion dates while 33 contracts were completed within six months of the target. This translates to a 79.5 percent rate for sub-projects to be completed within six months of the target completion dates in the contract, which is considered to be a positive result in Vietnam where extensive construction delays are very common. • The majority of the 78 completed sub-projects were assessed by the LDIFs to have been constructed with good quality (75 sub-projects, accounting for 96.2 percent) and on time with the repayment schedules (74 sub-projects, accounting for 94.9 percent). While sub-project economic analyses were not available (as most sub-projects had been operating for less than two years), there were preliminary indications of the economic and social goods produced and the satisfactory financial and operational performance of completed sub- projects. • Given its open-ended and demand-driven design, LDIFP financed a very broad range of outputs across various sectors (detailed in Annex 4). In total, the 78 completed sub- projects were estimated to have provided employment to approximately 3,700 people. • Based on preliminary financial analyses for a sample of seven sub-projects across six different sectors that had been operating between 17 and 71 months as of October 2016, only two sub-projects had fallen significantly short of their respective financial internal rate of return (FIRR) and net present value (NPV) targets from sub-project appraisal (see Table 8, Annex 1). Three of the sub-projects in the sample had significantly exceeded their FIRR targets by at least 11 percentage points and their NPV targets by at least 90 percent, while two sub-projects were relatively on-track with estimated FIRRs and NPVs that were within 1.5 percentage points and 20 percent of their targets, respectively. Importantly, each of the seven sample sub-projects was on time with repayment and had been producing the economic and social benefits expected at appraisal (see Annex 4). • Among 51 sub-projects already operational as of June 2016, the average operating capacity was 80 percent, which is very high given that most had been operating for only 6-12 months. Also, 78.6 percent of the sub-projects reported financial performance considered to be acceptable by the private sector investors. • The PMU’s final project implementation evaluation report included qualitative feedback on 25 sub-projects across 10 LDIFs from 59 respondents. Feedback from beneficiaries was uniformly positive, reflecting a high level of appreciation for the development of much needed infrastructure in underserved areas (detailed in Annex 4). 31 3.4 Justification of Overall Outcome Rating The overall outcome rating for LDIFP is Moderately Satisfactory. Efficacy in meeting both parts of the PDO is judged as substantial, reflecting the project’s impact on the extensive progress of qualified LDIFs in leveraging private sector financing for municipal infrastructure development and on supporting broad improvements in their overall technical and financial capabilities. The rating is also underpinned by the significant institutional and policy reforms that were facilitated by the project, particularly in terms of strengthening the oversight and regulatory environment for LDIF financial and operational performance. LDIFP’s objectives remain highly relevant to the current needs and priorities of the GOV and continue to be consistent with the priorities of the Bank’s current CPS for 2012-16. However, the relevance of design was modest because the inadequate economic and financial analysis at appraisal stage compromised the quality of the project’s design. Furthermore, while MOF, the PMU, and the Bank expended strong efforts to overcome the poorly defined operating parameters of the project, the inability to restructure the project to directly resolve the problematic operating parameters of the project was a critical factor behind the underutilization of the IDA credit, which led to the modest relevance of implementation. 3.5 Overarching Themes, Other Outcomes and Impacts (a) Poverty Impacts, Gender Aspects, and Social Development – N/A (b) Institutional Change/Strengthening LDIFP facilitated the achievement of significant institutional and policy reforms that went beyond the PDO. The TA activities and the lessons learned from project implementation helped MOF formulate revisions to several key LDIF regulatory policies: • Decree 37 was issued in 2013 to revise the original organizational and operating guidelines of Decree 138 of 2007. The new decree and guiding circulars updated broad aspects of the LDIF operating framework, including: legal and financial policies; scope and areas of operation; sources of operating capital; investment and lending objectives and limits; interest rate and financial ratios; and organization and staffing. • Circular 209 was issued in 2015 to amend the accounting guidelines for LDIFs from the earlier Circular 49 of 2009. The new guidelines are more appropriate to the legal and institutional character of LDIFs as commercial-oriented infrastructure investment entities. • Guidelines were issued in 2016 for the conversion of LDIF financial statements from VAS to IFRS, ensuring that LDIF financial reporting is consistent with global standards. • Comprehensive LDIF reporting guidelines, including forms and templates, were issued in 2015, enabling MOF to collect standardized data for the monitoring and regulation of the financial condition, debt and equity portfolios, and sub-project implementation of LDIFs. These reforms collectively strengthened the oversight and regulatory environment for LDIF financial and operational performance, which is essential to the long-term sustainability of the project’s achievements in terms of strengthening the effectiveness of qualified LDIFs in 32 leveraging private sector financing and their overall technical and financial capabilities. LDIFP has also helped MOF build its institutional and technical capacity to regulate and exercise oversight over LDIFs, as evidenced by the extensive policy reforms enacted and the institutionalization of M&E systems, including the development of a database for monitoring LDIF financial and operational performance and the preparation of annual evaluation reports. (c) Other Unintended Outcomes and Impacts (positive or negative) – N/A 3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops – N/A 4. Assessment of Risk to Development Outcome Overall, the risk that the development outcomes of LDIFP will not be maintained is assessed to be Moderate. There are several risks that may diminish the impact of the project. Firstly, there is a modest risk that the guidelines of the Project Manual are not institutionalized by the qualified LDIFs. With the closing of LDIFP, MOF will no longer be able to condition the compliance of LDIFs with the requirements of the Project Manual to access to investment finance. As discussed in Section 3.2, there was strong qualitative evidence that the qualified LDIFs have mainstreamed key principles and processes of the Project Manual into core operating procedures. Importantly, the annual LDIF workshops enabled LDIFs to independently build informal networks for peer- to-peer learning and the sharing of best practices, which are likely to be sustained going forward. Secondly, there is a modest risk that LDIFs may not be able to sustain a high level of financial performance. The adoption of wide-ranging reforms to strengthen the institutional framework for LDIF organizational structure and operations, accounting, and financial reporting will help to ensure the sustainability of LDIF performance. Key financial performance ratios as well as interest rate principles of LDIFP were integrated into Decree 37 of 2013, ensuring that LDIFs will continue to be monitored and regulated based on international standards. Also, the PMU’s integration into MOF’s Department of Debt Management and External Finance provides strong assurance that the enhanced monitoring and regulatory oversight of LDIFs will be maintained. Thirdly, there is a modest risk that technical assistance and capacity building programs for LDIFs will not be sustained. Several pending TA activities that were not part of the original project scope are critical for mainstreaming institutional reforms, including: i) the development of an integrated management information system for LDIF reporting, and ii) the updating of LDIF accounting software. MOF has committed to following-through on these activities and the Bank will explore options for providing follow-up TA. 5. Assessment of Bank and Borrower Performance 5.1 Bank Performance (a) Bank Performance in Ensuring Quality at Entry Bank performance is assessed to be Moderately Unsatisfactory in ensuring quality at entry. As elaborated in Section 2.1, LDIFP was prepared as a Bank strategy that integrated operations and 33 AAA to support the GOV in developing LDIFs. The PDO was defined in line with articulated government priorities and the Bank’s CPS, and the project components were highly consistent with the PDO. The selection of the lending instrument was informed by substantive internal consultations, including FPD and PREM. During project preparation, Bank engaged MOF to enact needed policy reforms and to apply lessons from HDP to strengthen the LDIFP design. However, fundamental shortcomings in the financial and economic analysis at appraisal led to the adoption of problematic operating assumptions, which compromised the project design and the specification of targets in the M&E framework. Several implementation risks were not fully accounted for at appraisal, including: i) macroeconomic risks relating to the emerging financial and credit crisis, ii) the magnitude of the capacity constraints and the steep learning curve of the PMU and LDIFs, iii) the risk of over-reliance on the participation of HFIC and HANIF, and iv) the risk that the enabling policy framework supporting equity investments specified in the LDIFP design would not be enacted on time. The quality at entry issues contributed significantly to the below-target disbursement rate and the eventual partial cancellation of the IDA credit. In retrospect, the acceleration of project approval to the first quarter of FY10 prevented the Bank from fully absorbing the lessons from HDP’s implementation challenges and did not allow it to account for the impact of the growing financial and credit crisis on LDIFP’s operating conditions, including the timing of HFIC’s participation and the robustness of the sub-project pipeline. Had the project been appraised in FY11, as originally scheduled, it is likely that the operating parameters of the project would have been defined more conservatively and appropriately. (b) Quality of Supervision The overall quality of supervision is assessed as Moderately Satisfactory. The Bank provided consistent and proactive implementation support to the PMU and the qualified LDIFs throughout project implementation. Following the slow start to the project, the Bank increased the frequency of supervision missions starting in 2012 to more closely monitor the implementation of LDIFP. The MTR served as an effective platform for comprehensively and candidly assessing project performance, which led to additional interventions to accelerate disbursements. The Bank expended US $634,000 on project implementation support and a total of 11 formal supervision missions were completed over the 6.5-year project period. Each mission produced aide memoires that comprehensively documented the key issues and challenges encountered. In addition, numerous technical missions were undertaken by individual task team members to visit LDIFs and sub-project sites in order to address urgent issues. Feedback from the PMU and qualified LDIFs, as reported in the final project implementation and evaluation report, confirmed their high levels of satisfaction with the responsiveness of the Bank’s project implementation support. Given the demand-driven nature and open menu of the project, sector specialists were engaged to support the core task team in reviewing sub-project proposals, ensuring that all sub-projects approved for financing were technically and financial feasible and conformed to the safeguards and fiduciary standards of the Bank. The Bank’s safeguard and fiduciary specialists were highly engaged in providing capacity building and technical support to participating LDIFs. Importantly, a financial sector specialist was part of the core task team from the project 34 preparation stage to ensure that the project’s FI arrangements, including interest rates and on- lending terms, were monitored regularly and in compliance with the OP 8.30. The Bank processed several restructurings and amendments to the Project Manual to facilitate project implementation and accelerate fund disbursement (see Section 1.6). While these helped to address outstanding issues, disbursement levels remained consistently below projections and 31.4 percent of the IDA credit was canceled at project closing. The inability to restructure the project to address fundamental issues in the M&E framework and disbursement assumptions was the key weakness. The option of restructuring the design was discussed during the MTR but it was not seriously pursued despite the lagging project implementation progress. (c) Justification of Rating for Overall Bank Performance Despite the Moderately Unsatisfactory performance at ensuring quality at entry, overall Bank performance is rated as Moderately Satisfactory because the quality of supervision was Moderately Satisfactory and the overall outcome rating is in the Satisfactory range. The Bank consistently provided timely and responsive implementation support to the PMU and the qualified LDIFs, which were roundly acknowledged by the project’s various stakeholders. The Bank was consistently focused on sustaining the achievement of the PDO, leading to the strong push for the enactment of extensive institutional and policy reforms by MOF to strengthen the broader operating environment for LDIFs. The quality of the Bank’s performance, however, was impaired by: i) fundamental weaknesses in the project’s operating parameters resulting from inadequacies in the financial and economic analysis at appraisal, and ii) the failure to restructure the project to directly address project design issues. 5.2 Borrower Performance (a) Government Performance The overall performance of the GOV is assessed as Satisfactory. During project preparation, the GOV satisfied key conditions for approval, including the issuance of policy guidelines on LDIF organization and operation (Decree 138), and accounting (Circular 49). The GOV ensured the timely establishment of the PMU within MOF and fully disbursed the counterpart-funding requirement (US $20 million) on a timely basis to support the PMU and to fund trainings and annual LDIF workshops. As the project generated lessons and feedback from LDIFs, the GOV consistently supported MOF in strengthening of the LDIF policy framework by enacting revised decrees and circulars. Finally, the GOV ensured consistent compliance of the project with the financial covenants, safeguard and fiduciary policies, and reporting requirements of the FA. (b) Implementing Agency Performance The performance of the MOF is assessed as Moderately Satisfactory. The PMU expended tremendous efforts throughout implementation to engage LDIFs and support them to qualify for the project, which was critical in building the sub-project pipeline to compensate for the much- reduced scale of sub-projects compared to what was expected. The significantly higher number of qualified LDIFs and larger volume of sub-projects financed compared to the original targets 35 reflected the success of the PMU in broadening the range of LDIFs and communities that benefitted from the project. Importantly, LDIFP substantially achieved the PDO and the IDA credit was generally used in a cost-efficient manner. The consistent levels of LDIF compliance with the Project Manual were a function of the PMU’s strict monitoring of LDIFs and the immediate enforcement of disbursement suspensions in cases of non-compliance. The PMU also effectively leveraged the resources from Component 2 to review and formulate important revisions to the LDIF policy framework, which were enacted by the GOV late in implementation. The 15-month delay in the procurement of consulting services was a major factor behind the very low commitment rate in the first two years of implementation, as TA was not adequately in place to support the LDIFs that qualified early on. Project implementation was also affected by the lengthy sub-project review and approval process, which included the PMU’s requirement that the Bank conduct prior reviews of all sub-projects. LDIFs flagged concerns about the multiple layers of reviews and pre-approvals of sub-project proposals that were required from various MOF units, particularly early on in project implementation. To the credit of the PMU, extensive operational reforms were adopted to improve internal coordination, including the integration of technical staff from the Investment Management Department into the PMU, which ultimately led to a significant reduction in the average processing time for sub-project proposals. The inability to restructure LDIFP to directly address fundamental issues in the project’s M&E framework and disbursement assumptions was a critical issue for which the PMU and the Bank shared accountability. Furthermore, the policy guidelines governing the competitive selection of private sector partners in the establishment of PPPs for project enterprises were issued very late in implementation, which prevented the processing of direct equity investments under LDIFP. (c) Justification of Rating for Overall Borrower Performance The overall Borrower performance is assessed as Moderately Satisfactory because the quality of Government performance was Satisfactory and the quality of Implementing Agency performance was Moderately Satisfactory. The achievements of LDIFP were significant in terms of the number of qualified LDIFs that accessed investment financing through the IDA credit and the number of sub-projects that were financed with private sector participation. The capacity of MOF to fulfill its LDIF monitoring and regulatory mandate significantly improved and the GOV enacted important institutional and policy reforms that will help to sustain the gains achieved over the past decade in developing LDIFs as effective and financially viable vehicles for leveraging private capital for municipal infrastructure investment. However, project management weaknesses compromised implementation in the first two years, which contributed to the 18- month extension. MOF also failed to restructure LDIFP to address the fundamental issues in the M&E framework and the disbursement projections, thus requiring the late partial cancellation of IDA credit. Finally, the lack of an enabling policy environment for the competitive selection of private sector partners in the establishment of PPPs for project enterprises prevented the processing of direct equity investments. 6. Lessons Learned 36 The operating parameters of a wholesale FI operation must be anchored on comprehensive economic and financial analyses. It is essential that the Bank and the Borrower invest the appropriate effort and time at project preparation to ensure the quality and comprehensiveness of the demand and supply analyses underpinning fundamental aspects of project design, particularly M&E targets and disbursement projections. Importantly, project appraisal should fully consider the learning curve and hands-on experience required among the different project stakeholders at the early stages of implementation. The presence of an enabling policy environment to implement a specific type of investment under an FI operation must be a prerequisite before inclusion in the project design. As was the case in HDP, the lack of specific GOV legal guidelines prevented the implementation of direct equity investments under LDIFP. For FI operations, it is thus critical that an enabling policy environment fully supporting the project design is established (or nearly established) at appraisal. The utilization of a qualification system for determining the potential borrowers in an FI operation increases operational flexibility. A clear strength of the LDIFP design was that it was open for LDIFs to access investment financing so long as they complied with a defined set of standards for the project. This allowed more potential borrowers to qualify for the project and helped to mitigate the lag in project commitments and disbursements. The experience of LDIFP suggests that an open-ended system for qualifying the potential borrowers (instead of a restricted list of borrowers) is appropriate in the context of a wholesale FI operation where it may be difficult to determine ex ante where the demand for credit will come from and should be directed. Maintaining a strong focus on the long-term sustainability of the project outcomes is critical in the context of a wholesale FI operation. Even though the PDO focused on directly strengthening the financial and technical capacities of qualified LDIFs, the Bank and the Borrower clearly understood that institutional reforms to strengthen the broader policy environment for LDIFs were critical to ensure that LDIFs can sustain the improvements that they gained from the project. Hence, in cases where an FI operation supports the development of a new financing instrument/vehicle for public investment, it is key that the Bank supports not just the infusion of credit into the system but also long-term, catalytic institutional reforms. The implementation of a sustained capacity building and TA program for stakeholders across the various levels of a FI operation is essential. Given that participants in FI operations typically have weak technical and administrative capacities and limited experiences with Bank policies, the implementation of a sustained program to strengthen the technical, fiduciary, and safeguards capacities of project stakeholders is critical to complement the investment financing component/s of projects. The experience of LDIFP also indicates that the adoption of workshops and peer-to- peer knowledge-sharing activities are valuable in creating platforms for developing informal networks that allow the organic sharing of best practices and examples among peers. Consistent efforts must be made to assess and, if necessary, update the interest rate policies for FI operations to ensure competitiveness with market rates while maintaining compliance with OP 8.30. The active and consistent review of a project’s alignment with OP 8.30 as part of the Bank’s regular supervision is critical because of the centrality of interest rates to the mobilization 37 of credit. In supporting the development of a new financing instrument/vehicle, the establishment of an appropriate interest rate benchmark may require a period of trial and error. It is essential that: i) the project design provides flexibility for the timely updating of the interest rate policy, and ii) the Bank task team includes a financial sector specialist to oversee this issue. 7. Comments on Issues Raised by Borrower/Implementing Agencies A draft ICR was circulated for Quality Enhancement Review (QER) on October 31, 2016. Comments from MOF were received on November 30, 2016 (see Annex 6). The comments were focused on clarifying specific aspects of project implementation (Section 2.2) and on the assessment of Implementing Agency Performance (Section 5.2[b]). In response, revisions were made to integrate the points raised by MOF in Section 2 of the final ICR. Furthermore, following the feedback from MOF as well as comments that were raised during the QER, the assessment and rating of Implementing Agency Performance was revisited and updated in the final ICR. However, two particular issues raised by MOF are further qualified. Firstly, MOF asserts that MOF “made some attempts to modify the design of the Project” to address fundamental issues. These are efforts thoroughly acknowledged and accounted for throughout the final ICR, specifically in Sections 2.2 and 3.1. However, the final ICR maintains that one of the key issues that affected project implementation was the failure to restructure LDIFP to directly address fundamental issues with the M&E framework and disbursement assumptions, which arose from inadequacies in the background analysis during project preparation (as discussed in Section 2.1). Secondly, MOF asserts that the inability of LDIFP to finance direct equity investments as per the project design “does not concern the PPP policies of the government because LDIFs are not the entity to follow the PPP policies of Vietnamese government.” The final ICR maintains that the absence of an enabling policy environment prevented the implementation of direct equity investments under LDIFP. The Project Manual, which was approved by MOF, required that private sector partners that are part of the establishment of a new legal entity (SPV) for project enterprises must be competitively selected. While there were two proposed sub-projects to be financed by direct equity investments, the private sector investors were pre-selected by the LDIFs in both cases, which was not allowed under the requirements of the Project Manual. The GOV’s policy guidelines for PPPs, which legally apply to SPVs to be established by LDIFs, did not provide for the competitive selection of private sector partners until policy reforms were enacted in February 2015, which was too late in project implementation to process direct equity investments under LDIFP. 38 Annex 1. ICR Tables and Figures Figure 1 – Average Interest Rates during LDIFP Implementation (Source: State Bank of Vietnam) Figure 2 – Comparison of LDIF and Commercial Bank Returns on Assets and Equity (Source: State Bank of Vietnam) 39 Table 1 – Number of Qualified LDIFs 2010 2011 2012 2013 2014 2015-16 Number of qualified LDIFs 5 10 14 16 17 17 Table 2 – Calendar Year Distribution of Sub-projects under Component 1 Sub-projects Commitment Calendar Year Number % Share VND (billion) US $ (million) % Share 2009 1 1% 40 1.8 1% 2010 1 1% 43 1.9 2% 2011 7 8% 191 8.6 7% 2012 13 15% 249 11.2 9% 2013 24 28% 807 36.2 29% 2014 22 26% 856 38.4 30% 2015 15 18% 606 27.2 21% 2016 2 2% 38 1.7 1% TOTAL 85 100% 2,829 126.9 100% Table 3 – LDIFP Debt Investments as a % share of Overall Debt Portfolio of Qualified LDIFs Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Average (2010) (2011) (2012) (2013) (2014) (2015-16) Actual LDIFP debt investments as % share of qualified LDIF portfolio - Number of loans 2.9% 7.8% 9.5% 18.7% 17.4% 8.2% 11.5% - Amount of loans 7.7% 10.0% 14.6% 39.6% 28.4% 40.1% 27.0% - Amount of private capital leveraged 5.0% 4.0% 7.7% 23.0% 30.1% 54.0% 29.7% Projected LDIFP debt investments as % share of qualified LDIF portfolio - Number of loans 30.0% 30.0% 33.3% 35.7% 41.2% N/A 34.9% - Amount of loans 41.7% 68.2% 61.2% 59.3% 59.5% N/A 59.6% - Amount of private capital leveraged 52.6% 76.9% 72.5% 73.4% 78.6% N/A 78.6% Table 4 – Lending of Qualified LDIFs (excluding HFIC) by Type of Ownership Type of Ownership 2012 2013 2014 2015 SOE 33.1% 26.2% 21.0% 17.5% Private 66.9% 73.8% 75.9% 82.5% Table 5 – Equity Portfolio of Qualified LDIFs Types of Equity Investments 2012 2013 2014 2015 Direct Investment in Sub-project 4.2% 4.7% 6.5% 10.8% Investment in Associates & Subsidiaries 56.5% 55.5% 56.2% 56.6% Investment in Securities 39.4% 39.8% 37.3% 32.6% 40 Table 6 – Sector Distribution of LDIFP Portfolio 2009-2012 LDIFP Commitments 2013-2016 LDIFP Commitments VND US $ VND US $ Sector distribution Number % % Number % % (billion) (million) (billion) (million) Education 12 55% 288 12.9 55% 18 29% 507 22.7 22% Health care 4 18% 140 6.3 27% 6 10% 168 7.5 7% Social housing 1 5% 44 2.0 8% 4 6% 84 3.8 4% Market 2 9% 17 0.8 3% 7 11% 279 12.5 12% Transportation 0 0% 0 0 0% 9 14% 573 25.7 25% Water supply 2 9% 18 0.8 3% 7 11% 326 14.6 14% Waste treatment 0 0% 0 0 0% 2 3% 194 8.7 8% IP Infrastructure 0 0% 0 0 0% 3 5% 80 3.6 3% Port 1 5% 16 0.7 3% 0 0% 0 0 0% Electricity 0 0% 0 0 0% 4 6% 44 2.0 2% Other 0 0% 0 0 0% 3 5% 52 2.3 2% 22 523 23.5 63 2,306 103.4 Table 7 – Summary of LDIF Financial Performance Indicators LDIFs (excluding HFIC) HFIC Baseline 2015 2005 2015 Loan Interest Income / Total Assets 2.9% 3.4% 2.6% 2.1% Loan Interest Expense / Total Assets 0.4% 0.9% 1.1% 1.4% Net Interest Margin / Total Assets 2.5% 2.5% 1.4% 0.7% Net Income / Total Assets (Return on Assets) 5.4% 3.2% 2.6% 5.4% Average Profits Before Tax (VND million) 30,000 32,660 85,369 557,106 NPLs as a share of Total Assets 0.4% 3.5% 0.0% 1.8% Capital Adequacy Ratio 185.6% 100.4% 111.0% 87.2% Average Market Interest Rate 11.0% 5.5% Table 8 – Financial Analysis for Sample of Completed Sub-projects Completed Approval Total No. of FIRR NPV (VND millions) LDIF Sector Investment Months Est. at Actual Est. at Actual Sub-project Date (VND millions) Operational Appraisal (Oct 2016) Appraisal (Oct 2016) Thot Not Market Can Tho Market 10/19/2011 18,000 71 21.5% 20.0% 16,695 14,754 Be Hanh Phuc Da Nang Education 5/17/2012 39,000 51 19.8% 10.3% 31,123 947 Kindergarten Tuoi Than Tien Can Tho Education 12/12/2012 10,000 51 15.0% 37.3% 4,298 19,370 Kindergarten Resettlement area along Quang Housing 9/30/2013 72,000 30 24.3% 38.0% 15,307 29,398 An Ha - Quang Phu Road Nam Transport Ha Tinh Bus Station Ha Tinh 4/18/2014 69,000 17 15.9% 14.7% 21,634 17,343 Infra Khanh Tam Tri Hospital Health 7/8/2014 232,000 30 31.7% 13.8% 465,694 64,404 Hoa Thu Dau Mot Water Binh Water 3/1/2015 501,000 24 10.9% 22.3% 32,059 521,210 Supply System Duong Supply 41 Annex 2. Project Costs and Financing (a) Project Cost by Component (in USD Million equivalent) Appraisal Estimate Latest Estimate* Components Percentage of Appraisal (USD millions) (USD millions) Investment Capital 185.00 125.46 67.8% Project Implementation Support 5.00 4.76 95.2% Total Baseline Cost 190.00 130.22 68.54% Physical Contingencies 0.00 0.00 - Price Contingencies 0.00 0.00 - Total Project Costs 190.00 130.22 68.54% Front-end fee PPF 0.00 0.00 - Front-end fee IBRD 0.00 0.00 - Total Financing Required 190.00 130.22 68.54% Cancelled 48.59 Undisbursed 0.59 * As of September 28, 2016. (b) Financing Type of Appraisal Estimate Latest Estimate* Percentage of Source of Funds Cofinancing (USD millions) (USD millions) Appraisal Borrower Counterpart 20.00 20.00 100.00% International Development Association 190.00 130.22 68.54% (IDA) * As of September 28, 2016. 42 Annex 3. Outputs by Component Component 1 – Investment Capital LDIF Disbursement Date of Total No. Name of Sub-project LDIF Sector Commit- up to June 20, Approval Investment ment 2016 1 Le Quy Don 2 School Dong Nai 12/11/2009 Education 80 40 40 2 Phan Chu Trinh School Binh Duong 4/23/2010 Education 85 43 43 3 Dai Dia Bao Apartment Building Da Nang 1/20/2011 Social housing 203 44 44 4 Ngoi Sao 2 School Can Tho 06/01/11 Education 65 38 38 Thien Phuc Duc Driving Training & 5 Lam Dong 10/12/2011 Education 60 25 25 Assessment Center 6 Thot Not Market Can Tho 10/19/2011 Market 18 12 12 7 Hoang Sa School Quang Nam 10/19/2011 Education 65 9 9 8 Vinh Duc Hospital Quang Nam 12/7/2011 Health care 69 25 25 9 Tay Do University Can Tho 12/12/2011 Education 76 38 38 10 Hoan My Cuu Long Hospital Can Tho 1/16/2012 Health care 82 48 48 11 Ninh Hoa Water Plant Khanh Hoa 1/31/2012 Water supply 5 3 3 12 Thanh Phuoc Port Binh Duong 2/24/2012 Port 603 16 16 13 Nguyen Van Troi College Da Nang 3/23/2012 Education 48 22 22 14 Be Hanh Phuc Kindergarten Da Nang 5/17/2012 Education 39 18 18 15 An Thoi Market Can Tho 5/18/2012 Market 14 5 5 16 Tho Xuan Kindergarten Lam Dong 5/18/2012 Education 14 9 9 17 Nha Trang-Sai Gon Eye Hospital Khanh Hoa 6/12/2012 Health care 62 22 22 18 Van Ninh Water Plant Khanh Hoa 7/3/2012 Water supply 24 15 15 19 29-3 Kindergarten Da Nang 10/9/2012 Education 29 16 16 20 Ba Thien Kindergarten Lam Dong 10/24/2012 Education 47 25 25 Au Co – Bien Hoa Obstetrics and 21 Dong Nai 12/1/2012 Health care 79 45 45 Gynaecology Hospital 22 Tuoi Than Tien Kindergarten Can Tho 12/12/2012 Education 10 5 5 Dien Nam Trung Market Alley (Phase 23 Quang Nam 1/1/2013 Market 70 29 29 1) Hoang Anh Housing for low-income 24 Vinh Long 1/4/2013 Social housing 66 17 17 earners 25 Nha Trang iSCHOOL Khanh Hoa 2/21/2013 Education 71 33 33 26 Medical University Resettlement Area Can Tho 2/28/2013 Social housing 125 37 37 27 Vemedim Packaging Plant Relocation Can Tho 2/28/2013 IP infrastructure 120 25 25 28 Mai The He Kindergarten Ninh Binh 4/1/2013 Education 34 9 9 Upgrade & expansion of water supply 29 Quang Nam 4/3/2013 Water supply 241 42 42 system of Hoi An (phase 1) 30 4 electricity sub-projects Khanh Hoa 5/9/2013 Electricity 35 15 15 31 Thang Hoa Hospital Quang Nam 6/5/2013 Health care 68 31 31 32 Nguyen Khuyen school Binh Duong 6/6/2013 Education 173 70 70 33 Nam Phuoc Market Quang Nam 6/11/2013 Market 109 50 50 Dong A university – Campus II (phase 34 Da Nang 7/29/2013 Education 115 55 55 I) Gelexim Nam Phuong water supply 35 Lam Dong 8/1/2013 Water supply 81 32 20 plant 36 Dong Nai APC School Dong Nai 9/1/2013 Education 47 20 20 37 Da Lat solid waste treatment plant Lam Dong 9/1/2013 Waste treatment 168 55 55 38 Construction of sport complex Lam Dong 9/1/2013 Other 13 7 7 Transportation 39 Transport station in Da The District Lam Dong 9/1/2013 11 8 8 infrastructure Resettlement area located on An Ha - 40 Quang Nam 9/30/2013 Social housing 72 25 25 Quang Phu Road Vemedim manufacturing plant 41 Can Tho 10/4/2013 IP infrastructure 242 14 14 relocation Sai Gon – Can Tho ophthalmology 42 Can Tho 12/1/2013 Health care 114 30 30 hospital 43 Dinh Market Binh Dinh 12/1/2013 Market 25 13 13 Transportation 44 Expansion Ha Noi Highway HFIC 12/1/2013 520 177 177 infrastructure 45 Social housing for low-income earners Bac Lieu 12/1/2013 Social housing 44 10 10 Additional investment of Vinh Duc 46 Quang Nam 12/16/2013 Health care 9 3 3 General Hospital 43 Sky-line kindergarten and elementary 47 Da Nang 1/1/2014 Education 57 21 21 school branch 2 Construction of Health care centre 48 Can Tho 1/11/2014 Health care 135 23 23 stage 2 – Hoan My General Hospital Rach Rop Bridge 1 – Hiep Phuoc IP Transportation 49 HFIC 1/11/2014 160 99 99 Stage 2 infrastructure Muong Lon 1 bridge – Hiep Phuoc IP Transportation 50 HFIC 1/11/2014 169 93 93 Stage 2 infrastructure 51 Dien Duong Market Quang Nam 1/14/2014 Market 83 37 37 Transportation 52 Ha Tinh Bus Station Ha Tinh 4/18/2014 69 47 47 infrastructure 53 Polytechnic College – Campus II Da Nang 5/14/2014 Education 64 20 20 54 Automobile Tire Factory Relocation Da Nang 5/14/2014 Other 580 20 20 Transportation 55 Lao Cai Bus Station Lao Cai 5/22/2014 98 45 45 infrastructure 56 Tam Tri Hospital Khanh Hoa 7/8/2014 Health care 232 63 63 57 Cau Vong Kindergarten Binh Dinh 7/29/2014 Education 15 10 10 58 Nhon Hoa Industrial Zone Binh Dinh 8/8/2014 IP infrastructure 92 41 41 59 Truc My Private Kindergarten Bac Lieu 8/26/2014 Education 16 10 10 60 Quang Trung Landfill Site Dong Nai 9/1/2014 Waste treatment 284 139 104 61 Ong Vang Kindergarten Dong Nai 11/1/2014 Education 31 18 18 Construction of bus station at the Transportation 62 Can Tho 11/1/2014 154 69 69 urban area in the South of Can Tho infrastructure 63 Vuon Xanh Kindergarten Quang Nam 11/1/2014 Education 15 11 11 64 Water supply for Vinh Luong ward Khanh Hoa 11/1/2014 Water supply 40 10 10 Anti-overloaded electric station 110KV 65 Khanh Hoa 11/1/2014 Electricity 33 15 15 E24 E27 E28 Public transportation – bus in Nha Transportation 66 Khanh Hoa 11/1/2014 62 19 19 Trang infrastructure Bus transportation procurement in Transportation 67 Ha Tinh 11/1/2014 27 16 16 Huong Son infrastructure 68 Tri Duc Kindergarten Ha Tinh 11/1/2014 Education 40 30 30 69 Bao An Kindergarten Lam Dong 1/5/2015 Education 20 14 14 Construction of 2 new line feeders 70 Khanh Hoa 1/5/2015 Electricity 21 8 8 110kV in E Dien Khanh Improving the reliability of the power 71 supply distribution substation in Khanh Khanh Hoa 1/5/2015 Electricity 12 6 6 Hoa Province 72 Construction of Dap Pa Market Binh Dinh 1/5/2015 Market 31 20 20 73 Construction of Nam Ky Anh Market Ha Tinh 1/5/2015 Market 115 70 70 Water supply project for Southern Thu 74 Binh Duong 3/1/2015 Water supply 501 150 150 Dau Mot 75 Tan An water drainage system Long An 7/15/2015 Water supply 29 21 21 76 VietAnh Kindergarten Binh Duong 9/1/2015 Education 53 19 19 77 Khanh Hoa Medical College Khanh Hoa 9/1/2015 Education 104 43 43 Construction of Nguyen Tat Thanh 78 HFIC 9/1/2015 Education 153 84 81 University Phase 2, An Phu Dong unit 79 Nguyen Du Private Kindergarten Ha Tinh 9/1/2015 Education 28 20 20 80 Hong Linh Market Ha Tinh 9/1/2015 Market 196 60 60 Social housing for low-income earners 81 Long An 9/1/2015 Social housing 28 20 20 - Lainco Water supply for Dien Thuy, Dien Son 82 Khanh Hoa 10/1/2015 Water supply 36 13 13 & Dien Phu areas Storm Drainage of Northern Cam Ranh 83 Khanh Hoa 10/1/2015 Water supply 220 58 0 Tourism Area - Phase 2 84 Nha Trang-Sai Gon Hospital Khanh Hoa 3/1/2016 Health care 141 18 0 Construction of Van Lang University – 85 Campus 3 – Phan Van Tri, Go Vap HFIC 3/1/2016 Education 350 20 20 District, HCM city Total (billion VND) 8,844 2,829 2,703 Total (million USD) 396.58 126.87 121.20 44 Component 2 – Project Implementation Support The TA activities under this component provided comprehensive project management support to the PMU and supported the development of its regulatory and institutional capacity in the following areas: i) establishment, capacity-building, and operational support of the PMU organization; ii) monitoring and selection of qualified LDIFs; iii) analysis of LDIFs’ sub- projects; iv) monitoring of social and environmental safeguards compliance; v) development of information systems for managing LDIFP; and vi) financial audits for consistent application of international auditing standards as well as for uniform implementation of new LDIF accounting rules. The project implementation support activities were fully implemented and the key outputs under each consultant package are enumerated below. • Package A01 – Set-up of and operational support for PMU organization o Report on procurement assessment of reviewed LDIFs o Project completion report on LDIFs’ procurement management performance • Package A02 – Support for information system o Development of information systems for LDIFP project management o Development of accounting software for PMU and LDIFs • Package A03 – Monitoring and qualification of LDIFs o Revised Project Manual o Report assessing the reporting system of LDIFs o Development of LDIF reporting guidelines o Guidelines for converting LDIFs’ VAS financial statements into those in accordance with IFRS principles o Report assessing LDIFs’ qualifications for the project o Periodic monitoring reports on LDIF’s adherence to Project Manual o Periodic project implementation progress reports o Annual project implementation and evaluation reports • Package A04 – Detailed analysis of pre-screened sub-projects o Portfolio of pre-screened sub-projects; o Guidelines on investment to support the improvement of LDIFs’ capacities in screening, assessment and evaluation of sub-projects o Updated portfolio of monthly screened sub-projects o Periodic report assessing and evaluating each sub-project o Periodic progress report o Periodic reports assessing the outputs of completed sub-projects • Package A05 – Monitoring of safeguards compliance of sub-projects o Periodic reports on the screening and assessment of proposed sub-projects o Semi-annual monitoring reports on social and environmental safeguards management for the funded sub-projects o Project completion report on social and environmental safeguards management for the funded sub-projects • Package A06 – External auditor for PMU and qualified LDIFs o Annual audit reports and management letters o Periodic reports on internal control systems 45 Summary of LDIFP Results Framework (Year 1-4) Year 1 (2010) Year 2 (2011) Year 3 (2012) Year 4 (2013) Unit Baseline Actual Target Actual Target Actual Target Actual Target Increase in total number of LDIF investments (debt and equity) 68 debt; 5 64 debt; 3 158 debt; 123 debt; 11 14 debt; 1 1 per year in municipal infrastructure subprojects with private Number 7 debt 10 debt 10 debt 12 debt equity equity 23 equity equity equity sector involvement Increase in total amount (US$) of LDIF investment (debt and 31.4m debt; 106.3m Amount 14 million 53.7m debt; 60.8m debt; 59m debt; 2 equity) per year in municipal infrastructure subprojects with 11.1m 24m debt 44m debt debt; 23.4m 49m debt (USD) debt 1.1m equity 9.2m equity 5m equity private sector involvement equity equity 73.8m 77.6m 182.2m 184.4m Increase in total amount (US$) of private capital leveraged into Amount (61.6m (72.8m (143.1m (173.0m 3 18 million 20m 40m 60m 80m LDIF sponsored municipal infrastructure subprojects (USD) debt; 12.2m debt; 4.8m debt; 39.1m debt; 11.4m PDO Indicators equity) equity) equity) equity) Adoption of Bank-advised financial-performance metrics by 4 qualified LDIFs: Aggregate equity investments < 50% of total Percentage 100% 100% 100% 100% 100% 100% 100% 100% 100% LDIF's paid-in equity Adoption of Bank-advised financial-performance metrics by 5 Percentage 100% 100% 100% 100% 100% 100% 100% 100% 100% qualified LDIFs: LDIF's debt/equity < 6:1 Adoption of Bank-advised financial-performance metrics by 6 qualified LDIFs: Total investment (debt and/or equity) in single Percentage 60% 100% 100% 100% 100% 100% 100% 94% 100% obligor < 20% total LDIF capital (debt and equity) Adoption of Bank-advised principles contained in Project Manual 7 Percentage N/A 100% 100% 100% 100% 100% 100% 100% 100% by qualified LDIFs: Project Preparation and Appraisal Guidelines Adoption of Bank-advised principles contained in Project Manual 8 Percentage N/A 100% 100% 100% 100% 100% 100% 100% 100% by qualified LDIFs: Reporting and Monitoring Guidelines Number of new LDIF investments (debt and direct) using LDIFP 5 debt; 1 1 Line of Credit per year in municipal infrastructure subprojects Number N/A 2 debt 3 debt 5 debt 3 debt 15 debt 4 debt 23 debt equity with private sector involvement Amount (US$) of new LDIF investments (debt and direct) using Amount 15.53m 24.05m 35m debt; 2 LDIFP Line of Credit per year in municipal infrastructure N/A 2.42m debt 10m debt 5.38m debt 30m debt 30m debt debt debt Intermediate Results Indicators (USD) 5m equity subprojects with private sector involvement Amount (US$) of new private capital leveraged into LDIF Amount 3 sponsored (using LDIFP Line of Credit) municipal infrastructure N/A 3.07m 20m 2.93m 40m 10.99m 40m 39.86m 60m (USD) subprojects Compliance with the Financial Covenants by all qualified LDIFs: 4 LDIF ownership in project enterprise < 30% when involving Percentage N/A N/A 100% N/A 100% N/A 100% N/A 100% LDIFP proceeds Compliance with the Financial Covenant by all qualified LDIFs: 5 LDIFs subprojects debt/equity < 3:1 when involving LDIFP Percentage N/A 100% 100% 100% 100% 100% 100% 100% 100% proceeds 6 Compliance with Project Manual's Safeguards Guidelines Percentage N/A 100% 100% 100% 100% 100% 100% 100% 100% 7 Compliance with Project Manual's PPA Guidelines Percentage N/A 100% 100% 100% 100% 100% 100% 100% 100% 8 Compliance with Project Manual's PSP Guidelines Percentage N/A N/A 0% N/A 0% N/A 0% N/A 100% 9 Compliance with Project Manual's Monitoring Guidelines Percentage N/A 100% 100% 100% 100% 100% 100% 100% 100% 46 Summary of LDIFP Results Framework (Year 5-6 and Cumulative Totals) Year 5 (2014) Year 6 (2015-16) CUMULATIVE TOTAL Unit Baseline Actual Target Actual Target Actuals Target Increase in total number of LDIF investments (debt and equity) 132 debt; 2 17 debt; 1 63 debt; 2 1 per year in municipal infrastructure subprojects with private Number 7 debt 171 debt N/A 716 debt equity equity equity sector involvement Increase in total amount (US$) of LDIF investment (debt and 489.8m Amount 14 million 90.9m debt; 84m debt; 146.7m 260m debt; 2 equity) per year in municipal infrastructure subprojects with N/A debt; 46.6m (USD) debt 1.7m equity 10m equity debt 15m equity private sector involvement equity 175.6m 1,008.7m Increase in total amount (US$) of private capital leveraged into Amount (175.5m 315.2m (941.2m 3 18 million 100m N/A 300m LDIF sponsored municipal infrastructure subprojects (USD) debt; 0.1m (debt) debt; 67.5m PDO Indicators equity) equity) Adoption of Bank-advised financial-performance metrics by 4 qualified LDIFs: Aggregate equity investments < 50% of total Percentage 100% 100% 100% 100% 100% 100% 100% LDIF's paid-in equity Adoption of Bank-advised financial-performance metrics by 5 Percentage 100% 100% 100% 100% 100% 100% 100% qualified LDIFs: LDIF's debt/equity < 6:1 Adoption of Bank-advised financial-performance metrics by 6 qualified LDIFs: Total investment (debt and/or equity) in single Percentage 60% 100% 100% 100% 100% 100% 100% obligor < 20% total LDIF capital (debt and equity) Adoption of Bank-advised principles contained in Project Manual 7 Percentage N/A 100% 100% 100% 100% 100% 100% by qualified LDIFs: Project Preparation and Appraisal Guidelines Adoption of Bank-advised principles contained in Project Manual 8 Percentage N/A 100% 100% 100% 100% 100% 100% by qualified LDIFs: Reporting and Monitoring Guidelines Number of new LDIF investments (debt and direct) using LDIFP 7 debt; 1 22 debt; 2 1 Line of Credit per year in municipal infrastructure subprojects Number N/A 23 debt 17 debt N/A 85 debt equity equity with private sector involvement Amount (US$) of new LDIF investments (debt and direct) using Amount 25.85m 50m debt; 53.64m 155m debt; 2 LDIFP Line of Credit per year in municipal infrastructure N/A N/A 126.87m debt Intermediate Results Indicators (USD) 10m equity debt 15 equity subprojects with private sector involvement Amount (US$) of new private capital leveraged into LDIF Amount 3 sponsored (using LDIFP Line of Credit) municipal infrastructure N/A 52.82m 90m 160.03m N/A 269.70m 250m (USD) subprojects Compliance with the Financial Covenants by all qualified LDIFs: 4 LDIF ownership in project enterprise < 30% when involving Percentage N/A N/A 100% N/A 100% N/A 100% LDIFP proceeds Compliance with the Financial Covenant by all qualified LDIFs: 5 LDIFs subprojects debt/equity < 3:1 when involving LDIFP Percentage N/A 100% 100% 100% 100% 100% 100% proceeds 6 Compliance with Project Manual's Safeguards Guidelines Percentage N/A 100% 100% 100% 100% 100% 100% 7 Compliance with Project Manual's PPA Guidelines Percentage N/A 100% 100% 100% 100% 100% 100% 8 Compliance with Project Manual's PSP Guidelines Percentage N/A N/A 100% N/A 100% N/A 100% 9 Compliance with Project Manual's Monitoring Guidelines Percentage N/A 100% 100% 100% 100% 100% 100% Notes: 1) Targets not achieved are highlighted in bold. 2) Targets and Actuals for PDO and Intermediate Results Indicators are updated from the PAD and ISRs in order to clarify the incremental manner in which these were specified in the PAD (as explained in Section 2.3). Specifically, PDOIs and IRIs #1-2 are reported here on annual incremental bases while PDOI and IRI #3 is reported on a cumulative basis. 47 Annex 4. Economic and Financial Analysis Due diligence of nine prospective LDIFs was conducted during appraisal to determine their financial viability as potential participants in the project. Six of the LDIFs that were pre- identified at appraisal ultimately qualified for LDIFP (HCMC, Hanoi, Dong Nai, Binh Duong, Da Nang, and Khanh Hoa) while an additional 11 LDIFs qualified during implementation. The PAD analysis included a review of the prospective LDIFs’ balance sheets, in order to broadly assess liquidity, capital adequacy, and the quality of their respective loan portfolios; and income statements, in order to assess profitability and operational efficiency. Utilizing the same approach, this annex assesses the progress in the overall financial condition of 16 of the qualified LDIFs of the project, excluding Thai Binh, which only qualified in the middle of 2014 and did not subsequently access credit from the project. To the extent that data was available, comparative analysis was done to examine financial and operational performance at the end of 2015 in comparison to the baseline year before the qualified LDIFs participated in the project. In the case of HFIC, the baseline year was set at 2005, which was the year before it began accessing IDA financing from HDP before transitioning to LDIFP in 2012. At the sub-project level, financial and operational analyses of the 78 completed sub-projects as of June 2016 were not available, primarily because the vast majority of the completed sub- projects had been operational for less than two years. However, this annex summarizes data on the timeliness of the implementation of the sub-projects as well as preliminary data on the financial and operational performance of a sample of seven sub-projects that had been operating for between 17 and 71 months. Balance Sheet Overall, the balance sheets of qualified LDIFs strengthened significantly over the course of LDIFP implementation. In the case of HFIC, which first accessed IDA credit through the stand- alone HDP operation in 2006, total assets increased by a factor of more than 2.8 times over the 10-year period of 2005 to 2015, resulting in an average annual increase of 10.9 percent. The increase in total assets was driven by the expansion of HFIC’s loan portfolio, which grew from 2,916 billion VND in 2005 to 3,501 billion VND in 2015, as well as the development of its investment portfolio, which was just 226 billion VND at baseline but stood at 2,126 billion VND at the end of 2015. Assets. For qualified LDIFs (excluding HFIC), aggregate total assets increased by 75 percent in 2015 compared to their respective baseline years during project implementation, resulting in an average annual increase of 14.3 percent. The increase in total assets among qualified LDIFs was primarily driven by the credit they accessed through LDIFP to provide sub-loans to private sector partners for municipal infrastructure investments. An aggregate amount of 2,356 billion VND in IDA credit was accessed by the qualified LDIFs (excluding HFIC) from the project, which accounted for approximately 41.7 percent of the aggregate increase in their total assets in 2015 compared to baseline. Liabilities. The impact of LDIFP on the expansion of the balance sheets of participating LDIFs is even clearer on the liability side. The total liabilities of qualified LDIFs (excluding HFIC) increased at an average annual rate of 8.1 percent. However, the average annual increase in liabilities from baseline to 2015 would be even larger at 27 percent with the exclusion of Hanoi, which qualified for LDIFP but did not access the IDA credit and subsequently saw a sharp 75.5 percent drop in total liabilities in 2015 compared to its baseline year of 2009 as consistent with the contraction of its loan portfolio. The considerable increase in total liabilities among qualified LDIFs was driven by the expansion of their loan portfolios by leveraging the IDA credit through the project, with the aggregate amount of credit accessed from LDIFP equivalent to 81.4 percent of total liabilities, on average, for qualified LDIFs in 2015. Owner’s Equity. In terms of owner’s equity, the infusion of charter capital by their respective provincial governments helped to drive an increase in the owner’s equity of qualified LDIFs (excluding HFIC), resulting in average annual increases of 17.1 percent compared to baseline. In aggregate, owner’s equity among qualified LDIFs (excluding HFIC) increased by 94 percent in 2015 from baseline, reflecting the clear improvement of their overall financial position and the establishment of a stronger capital base for the qualified LDIFs to continue to expand their investment portfolio after the conclusion of LDIFP. In the case of HFIC, owner’s equity grew at an average annual rate of 13.4 percent over the past 10 years, leading to 3.5 times growth in owner’s equity in 2015 compared to baseline. Balance Sheet Summary (VND millions) Total Assets Total Liabilities Owner's Equity Qualified LDIF Baseline Year Baseline 2015 Baseline 2015 Baseline 2015 HFIC 2005 3,323,600 9,349,462 1,929,600 4,439,736 1,394,000 4,909,726 Ha Noi 2009 2,489,407 3,018,869 1,278,950 312,994 1,210,457 2,705,875 Dong Nai 2009 985,095 1,536,046 578,222 331,634 406,874 1,204,412 Binh Duong 2009 732,031 1,552,298 57,243 306,576 674,788 1,245,722 Da Nang 2010 363,676 1,361,940 41,473 597,931 322,203 764,009 Long An 2011 239,527 349,099 3,900 32,648 235,627 316,451 Lam Dong 2011 445,501 709,443 19,625 162,472 425,876 546,971 Can Tho 2011 479,208 1,155,372 102,616 445,920 376,592 709,453 Quang Nam 2011 181,653 525,456 48,027 332,927 133,626 192,529 Khanh Hoa 2011 170,644 724,100 38,970 221,716 131,674 502,384 Bac Lieu 2012 118,690 150,340 2,676 20,884 116,013 129,456 Lao Cai 2012 262,712 366,260 34,019 83,235 228,693 283,024 Ninh Binh 2012 115,783 178,560 1,714 13,149 114,069 165,411 Vinh Long 2012 247,457 301,604 5,954 30,892 241,503 270,712 Binh Dinh 2013 344,025 681,203 90,403 203,319 253,622 477,884 Ha Tinh 2013 290,600 500,778 177,459 344,960 113,141 155,818 HFIC Average Annual Increase 10.9% 8.7% 13.4% Ave. Annual Incr. excl. HFIC 14.3% 8.1% 17.1% Liquidity. Overall levels of liquidity generally improved for the qualified LDIFs over the course of their participation in the project. The current ratio (equivalent to current assets divided by current liabilities) for HFIC increased significantly from 1.1 in 2005 to 9.5 in 2015. For qualified LDIFs (excluding HFIC), the average current ratio increased from 32.2 in 2005, which is already a very high level, to 59.2 in 2015. While there were seven cases where the current ratio of a qualified LDIF decreased in 2015 compared to their respective baseline years, the current ratio levels for these LDIFs remained at adequate levels that were well above the standard benchmark ratio of 2.0. The one exception was Long An, where the current ratio decreased to 0.7, indicating that the LDIF may possibly experience issues with meeting short-term debt obligations. 49 Current Assets Summary (VND millions) Cash & Current Assets Current Liabilities Current Ratio Qualified LDIF Baseline Year Baseline 2015 Baseline 2015 Baseline 2015 HFIC 2005 111,000 3,856,946 101,400 405,706 1.1 9.5 Ha Noi 2009 2,350,152 1,618,498 24,058 49,731 97.7 32.5 Dong Nai 2009 619,853 744,928 348,130 13,533 1.8 55.0 Binh Duong 2009 172,014 457,038 4,874 7,087 35.3 64.5 Da Nang 2010 223,231 738,251 40,901 77,437 5.5 9.5 Long An 2011 134,822 12,008 3,126 17,488 43.1 0.7 Lam Dong 2011 174,014 219,090 3,745 3,440 46.5 63.7 Can Tho 2011 243,209 602,989 52,038 18,666 4.7 32.3 Quang Nam 2011 99,187 298,872 2,643 6,359 37.5 47.0 Khanh Hoa 2011 122,399 167,177 3,439 4,944 35.6 33.8 Bac Lieu 2012 75,483 79,964 1,655 635 45.6 125.9 Lao Cai 2012 213,196 203,450 31,283 34,991 6.8 5.8 Ninh Binh 2012 11,366 54,617 557 3,872 20.4 14.1 Vinh Long 2012 142,271 135,760 5,292 13,394 26.9 10.1 Binh Dinh 2013 211,925 460,091 9,604 1,293 22.1 356.0 Ha Tinh 2013 281,541 292,845 5,276 7,889 53.4 37.1 Average 30.5 56.1 Average excl. HFIC 32.2 59.2 Loan Portfolio While available baseline data on the loan portfolios of qualified LDIFs is limited prior to 2012 given the uneven availability of audited financial statements (with the exception of HFIC), the trends for the three-year period of 2012 to 2015 indicate significant overall growth in the loan portfolios of qualified LDIFs. For qualified LDIFs (excluding HFIC), the average annual rate of growth was 30 percent from the baseline year of 2012 (except for Ha Tinh, for which the baseline year was 2014). There was only one case, Hanoi, where there was a substantial decrease (28.7 percent) in the overall debt stock among qualified LDIFs in 2015 compared to the 2015. Not coincidentally, Hanoi did not access IDA credit from the project and was generally not interested in building its loan portfolio during the period of LDIFP implementation. In the case of HFIC, the loan portfolio substantially grew by an annual average of 11.8 percent over the 10-year period from 2005 to 2015. In spite of the considerable expansion of the loan portfolios of qualified LDIFs in the past six years, HFIC maintains the largest loan portfolio by a significant margin, with a loan portfolio in 2015 that was larger than the aggregate portfolio of the next seven largest LDIFs. Loan Portfolio by Types of Borrower. There were clear trends in the evolving composition of the loan portfolios of the qualified LDIFs that reflected an increasing emphasis towards lending to private enterprises rather than state-owned enterprises (SOEs), as consistent with the PDO. In the case of HFIC, 53.1 percent of the loan portfolio in 2015 was allocated to borrowers with private sector ownership compared to 46.9 percent for SOEs. This was in stark contrast to 2005 where private sector lending represented only 14.5 percent of the total portfolio. For qualified LDIFs (excluding HFIC), the share of lending to private enterprises grew from 67.4 percent at baseline to 82.5 percent by 2015. 50 Summary of Loan Portfolio by Types of Borrower (VND millions) State-Owned Enterprises Private Enterprises Total Qualified LDIF Baseline Year Baseline 2015 Baseline 2015 Baseline 2015 HFIC 2005 1,914,500 1,641,389 325,400 1,859,468 2,239,900 3,500,857 Ha Noi 2012 307,505 147,996 390,257 349,189 697,762 497,185 Dong Nai 2012 237,385 74,714 479,823 646,020 717,208 720,734 Binh Duong 2012 375,360 320,658 543,662 591,242 919,022 911,900 Da Nang 2012 94,162 80,872 228,202 266,680 322,364 347,552 Long An 2012 37,931 7,285 77,693 313,316 115,624 320,601 Lam Dong 2012 83,300 71,050 73,100 191,199 156,400 262,249 Can Tho 2012 10,973 7,311 226,790 350,178 237,763 357,489 Quang Nam 2012 16,755 14,850 100,496 197,846 117,251 212,696 Khanh Hoa 2012 12,607 11,557 57,200 204,220 69,807 215,777 Bac Lieu 2012 0 0 42,820 76,565 42,820 76,565 Lao Cai 2012 23,263 50,109 1,124 45,000 24,387 95,109 Ninh Binh 2012 14,798 7,474 93,219 99,224 108,017 106,698 Vinh Long 2012 0 0 98,715 102,622 98,715 102,622 Binh Dinh 2012 0 0 43,812 171,655 43,812 171,655 Ha Tinh 2014 5,000 8,720 64,432 185,294 69,432 194,014 HFIC Average % Share 85.5% 46.9% 14.5% 53.1% 100.0% 100.0% Ave. % Share excl. HFIC 32.6% 17.5% 67.4% 82.5% 100.0% 100.0% Loan Portfolio by Sector. The pattern of lending of qualified LDIFs using IDA credit accessed from LDIFP clearly influenced the changes in the composition of the overall portfolios. Education comprised the largest sector funded by the project, accounting for 28.1 percent of disbursements. In the case of HFIC, education-related sub-projects comprised 45.6 percent of aggregate disbursements under both HDP and LDIFP. As a result, the education loan portolio of HFIC increased by a factor of 3.5 times to 21.7 percent in 2015 compared to 6 percent in 2005. For qualified LDIFs (excluding HFIC), the share of education increased to 11.6 percent of the portfolio in 2015 compared to the baseline average of 9.1 percent. Transportation represented the second largest sector, accounting for 20.3 percent of disbursements. This contributed to the increased share of transportation in the portfolio of LDIFs (excluding HFIC), which was 18.8 percent in 2015 compared 12.1 percent at baseline. Finally, water and electric supply sub- projects combined to take up 13.8 percent of LDIFP disbursements, which helped to expand the share of this sector to 16.2 percent of the aggregate loan portfolios of qualified LDIFs (excluding HFIC) in 2015 from 13.8 percent in 2012. Baseline Summary of Loan Portfolio by Types of Sector (VND millions) Water/Electric Industrial & Public Qualified LDIF Year Transport Education Others Supply Residential Health HFIC 2005 739,167 201,591 828,763 223,990 134,394 111,995 Ha Noi 2012 1,286 102,923 558,177 0 0 35,376 Dong Nai 2012 0 117,380 142,324 175,898 37,435 244,171 Binh Duong 2012 233,236 143,668 252,808 19,926 137,643 131,740 Da Nang 2012 0 8,429 242,620 3,907 41,846 25,563 Long An 2012 28,818 3,500 64,369 0 11,749 7,188 Lam Dong 2012 60,244 0 13,925 10,000 31,351 40,880 Can Tho 2012 0 10,667 118,612 47,493 60,992 0 Quang Nam 2012 13,380 0 63,125 25,000 9,450 6,296 Khanh Hoa 2012 0 27,462 34,023 8,322 0 0 Bac Lieu 2012 0 15,000 27,820 0 0 0 Lao Cai 2012 2,500 20,763 0 0 0 1,124 Ninh Binh 2012 22,900 26,842 34,940 12,735 10,600 0 Vinh Long 2012 26,839 0 34,800 0 0 37,076 Binh Dinh 2012 0 40,412 3,401 0 0 0 Ha Tinh 2014 62,432 0 0 0 0 7,000 HFIC Average % Share 33.0 % 9.0% 37.0% 10.0% 6.0% 5.0% Ave. % Share excl. HFIC 12.1% 13.8% 42.5% 8.1% 9.1% 14.3% 51 2015 Summary of Loan Portfolio by Types of Sector (VND millions) Water/Electric Industrial & Qualified LDIF Year Transport Public Health Education Others Supply Residential HFIC 2015 1,228,672 0 886,258 231,562 761,041 393,324 Ha Noi 2015 0 108,736 359,249 0 0 29,200 Dong Nai 2015 139,285 154,732 105,708 58,117 63,375 199,517 Binh Duong 2015 255,450 189,368 211,367 13,245 136,783 105,687 Da Nang 2015 3,854 80,284 30,694 557 114,843 117,320 Long An 2015 193,273 10,049 57,546 1,000 32,853 25,880 Lam Dong 2015 55,000 31,800 25,050 0 45,318 105,081 Can Tho 2015 25,614 1,444 172,975 24,046 12,771 120,639 Quang Nam 2015 0 39,375 103,345 44,376 25,600 0 Khanh Hoa 2015 0 64,997 12,516 70,447 22,592 45,225 Bac Lieu 2015 4,250 0 31,088 0 8,000 33,227 Lao Cai 2015 50,000 17,249 0 0 0 27,860 Ninh Binh 2015 59,421 12,083 11,369 0 23,825 0 Vinh Long 2015 0 0 61,762 0 0 40,860 Binh Dinh 2015 0 32,953 97,244 0 9,573 31,885 Ha Tinh 2015 77,694 0 0 0 39,320 77,000 HFIC Average % Share 31.5% 0.0% 25.3% 6.6% 21.7% 11.2% Ave. % Share excl. HFIC 18.8% 16.2% 27.9% 4.6% 11.6% 20.9% Non-Performing Loans. As part of the qualification requirements of the LDIFP Project Manual, LDIFs were required to maintain non-performing loan (NPL) levels that were less than 5 percent of total assets, which is a standard benchmark for financial institutions. In the midst of rapidly expanding loan portfolios, the LDIFs that participated in the project generally managed their NPLs within the ceiling set by the Project Manual with the exception of Ninh Binh, which was hindered by chronically high NPL levels. Ninh Binh’s NPLs were the result of appointed loans that were issued by the LDIF upon the instruction of the provincial government (using its own capital, not the IDA credit) and that turned out to be bad loans. Prior to 2015, Da Nang and Long An were the only other LDIFs that were found to have exceeded the NPL ratio (both in 2013) and both were short-term cases that were immediately resolved by the following fiscal year. As was standard practice under LDIFP and in line with the FA, the PMU suspended disbursements to the LDIFs that did not meet the qualification requirements of the project until the LDIFs were able to adequately resolve the compliance problems. For 2015, four LDIFs were found to have exceeded the NPL ratio (Quang Nam, Bac Lieu, Vinh Long, and Ninh Binh) and, as of the LDIFP closing date, the PMU was continuing to work with them to resolve the NPL issues within 2016. Summary of Non-Performing Loan Ratios NPL as a share of Total Assets Qualified LDIF Baseline Year Baseline 2012 2013 2014 2015 HFIC 2005 0.0% 3.5% 2.6% 0.9% 1.8% Ha Noi 2009 1.5% 0.0% 0.0% 0.0% 0.0% Dong Nai 2009 0.0% 1.1% 1.6% 0.7% 1.3% Binh Duong 2009 0.0% 4.3% 3.3% 2.5% 1.9% Da Nang 2010 0.0% 0.0% 6.0% 0.0% 0.3% Long An 2011 0.0% 0.0% 7.2% 0.0% 0.0% Lam Dong 2011 0.0% 0.0% 0.0% 0.0% 0.0% Can Tho 2011 4.2% 0.0% 4.3% 4.3% 0.0% Quang Nam 2011 0.1% 0.0% 0.0% 4.7% 13.8% Khanh Hoa 2011 0.0% 0.0% 0.0% 0.0% 0.0% Bac Lieu 2012 0.0% 0.0% 0.0% 0.0% 11.0% Lao Cai 2012 0.0% 0.0% 0.0% 0.0% 0.0% 52 Ninh Binh 2012 0.0% 14.4% 17.9% 27.1% 12.1% Vinh Long 2012 0.0% 0.0% 3.5% 4.4% 11.0% Binh Dinh 2013 0.5% N/A 0.5% 0.0% 0.0% Ha Tinh 2013 0.0% N/A 0.0% 0.0% 1.4% Thai Binh 2014 0.0% N/A N/A 0.0% 0.0% Investment Portfolio HFIC’s investment portfolio grew rapidly over the 10-year period that it participated in HDP and LDIFP, expanding to 22.7 percent of total assets in 2015 compared to 6.8 percent in 2005. Approximately 60 percent of HFIC’s investment portfolio in 2015 consisted of investments in associates while the remaining 40 percent were investments in securities. Among the other qualified LDIFs (excluding HFIC), only six maintained substantial investment portfolios at baseline, which increased to nine LDIFs by 2015. Generally, most of these LDIFs maintained modest investment portfolios that were less than 10 percent of total assets. The exceptions were Can Tho, Lao Cai, and Vinh Long, where the investment portfolios ranged from 13 to 21 percent of total assets. Similar to the case with HFIC, investments in associates comprised the majority (56.5 percent) of the average investment portfolio of qualified LDIFs in 2015. Direct investments in sub-projects comprised 31.2 percent of the average investment portfolio while investments in securities comprised the balance 12.3 percent. Summary of Investment Portfolios (VND millions) (VND millions) Direct Investment Investment in Associates Investment in Securities Total Qualified Baseline Baseline 2015 Baseline 2015 Baseline 2015 Baseline 2015 LDIF Year HFIC 2005 0 6,242 400 1,267,355 225,900 852,245 226,300 2,125,842 Ha Noi 2012 0 0 0 0 0 0 0 0 Dong Nai 2012 0 0 74,719 4,250 0 71,011 74,719 75,261 Binh Duong 2012 0 0 129,551 142,443 0 0 129,551 142,443 Da Nang 2012 0 0 44,976 57,587 31,418 3,000 76,394 60,587 Long An 2012 0 0 0 0 300 0 300 0 Lam Dong 2012 0 0 0 0 0 0 0 0 Can Tho 2012 1,659 105,523 29,800 41,040 0 0 31,459 146,563 Quang Nam 2012 0 0 16,000 16,000 0 0 16,000 16,000 Khanh Hoa 2012 0 0 0 0 0 0 0 0 Bac Lieu 2012 0 0 0 0 0 0 0 0 Lao Cai 2012 25,136 68,398 0 0 0 0 25,136 68,398 Ninh Binh 2012 0 13,289 0 0 0 0 0 13,289 Vinh Long 2012 0 0 0 64,570 0 0 0 64,570 Binh Dinh 2012 0 0 0 0 0 0 0 0 Ha Tinh 2014 0 0 0 13,185 0 0 0 13,185 HFIC Average % Share 0.0% 0.3% 0.2% 59.6% 99.8% 40.1% 100.0% 100.0% Ave. % Share excl. HFIC 7.6% 31.2% 83.5% 56.5% 9.0% 12.3% 100.0% 100.0% Capital Adequacy Even with the rapid expansion of their loan portfolios over the course of LDIFP implementation, the qualified LDIFs broadly maintained high levels of capital adequacy that significantly exceeded the minimum requirement of 15 percent in the Project Manual, which is a standard benchmark for financial institutions. In the case of HFIC, the capital adequacy ratio (CAR) declined from 111 percent in 2005 but still remained very high at 87.2 percent in 2015. HFIC’s charter capital increased by 90.7 percent in the past 10 years while operating capital also increased by 45.6 percent. All in all, HFIC’s capital base grew significantly throughout the 10 53 years of engagement with Bank operations and, despite the rapid operational and capital expansion of qualified LDIFs in the past five years spurred by LDIFP, it remained the largest LDIF in Vietnam, with charter and operating capital levels in 2015 that were equivalent to the combined totals for the next five largest LDIFs. For qualified LDIFs (excluding HFIC), the average CAR declined from 185.6 percent at baseline to an average of 100.4 percent in 2015, which continued to represent a very high level of capitalization. The lowest CAR among the qualified LDIFs in 2015 was 53.3 percent for Ha Tinh, which was still a highly adequate level of capitalization. Furthermore, all the qualified LDIFs except for Bac Lieu and Lao Cai received infusions of charter capital from their respective provincial governments during project implementation, leading to an average increase of 66.4 percent in charter capital from baseline. Operating capital increased for all the qualified LDIFs, growing by almost 2.3 times in 2015 from baseline. Capital Adequacy Summary (VND millions) Capital Adequacy Ratio Charter Capital Operating Capital Qualified LDIF Baseline Year Baseline 2015 Baseline 2015 Baseline 2015 HFIC 2005 111.0% 87.2% 2,155,569 4,110,967 5,711,779 8,314,265 Ha Noi 2009 605.5% 179.9% 1,026,839 1,957,812 1,219,459 2,705,875 Dong Nai 2009 42.5% 148.6% 218,888 570,932 509,489 1,519,588 Binh Duong 2009 116.1% 109.8% 553,552 823,552 719,445 1,526,969 Da Nang 2010 228.0% 89.8% 284,151 461,806 322,203 1,221,964 Long An 2011 220.7% 92.6% 200,009 215,837 235,627 331,222 Lam Dong 2011 131.0% 93.5% 412,086 459,303 440,888 705,731 Can Tho 2011 138.1% 65.8% 320,913 520,913 426,984 1,135,851 Quang Nam 2011 156.2% 67.9% 120,000 136,400 175,805 514,885 Khanh Hoa 2011 262.2% 89.5% 102,569 470,875 131,674 707,813 Bac Lieu 2012 138.2% 102.2% 100,000 100,000 116,013 148,956 Lao Cai 2012 164.1% 104.9% 200,000 200,000 228,693 328,024 Ninh Binh 2012 103.9% 119.2% 106,637 145,553 114,069 174,011 Vinh Long 2012 224.5% 90.4% 208,617 258,859 241,503 287,674 Binh Dinh 2013 128.3% 99.3% 241,944 461,288 253,622 558,079 Ha Tinh 2013 124.3% 53.3% 109,304 139,304 277,841 425,296 Average excl. HFIC 185.6% 100.4% HFIC Increase from Baseline 90.7% 45.6% Ave. LDIF Increase excl. HFIC 66.4% 128.4% Income Statement The financial performance of HFIC consistently improved over the 10 years that it participated in Bank operations, beginning with HDP in 2006 and continuing with LDIFP in 2012. Profits before taxes grew to 557 billion VND in 2015, reflecting a strong average annual increase of over 20 percent in profits from 2005 to 2015. For the remaining qualified LDIFs (excluding HFIC), profitability generally improved, on average, from their respective baseline years but was constrained by the challenging macroeconomic situation in the first half of LDIFP implementation and the competitive credit environment later on. Profits before taxes grew by an annual average of 2.0 percent among the qualified LDIFs (excluding HFIC) although seven of the LDIFs saw decreases from baseline as a result of various factors detailed below. Loan Interest Income. HFIC’s interest income from loans issued grew annually by an average of 8.7 percent from 2005 to 2015, leading to an increase of 2.3 times in loan interest income over that period. However, loan interest income tapered off in the past four years given the overall 54 decline in the broader market interest rate environment during LDIFP implementation, which saw average commercial bank lending rates decline to 5.5 percent in 2015 from 11 percent in 2012 (Figure 1, Annex 1). Hence, loan interest income grew slower overall compared to interest expenses, which increased at an annual rate of 13.4 percent. As a result, the average annual increase in net interest margin was a modest 2.9 percent for HFIC over the 10-year period. For qualified LDIFs (excluding HFIC), loan interest income grew sharply by an average of 21.7 percent annually from low bases in their respective baseline years to 2015. The loan portfolios for many of the LDIFs were very small prior to their qualification to participate in LDIFP. Importantly, the pre-LDIFP portfolios of the qualified LDIFs were mainly financed by charter capital, which carried minimal interest expenses. The qualified LDIFs thus saw an acceleration in interest expenses once they started to access financing from LDIFP through the MOF credit window. The average annual growth in interest expenses during project implementation was considerably higher at 35.7 percent than the average increase loan interest income. Nonetheless, net interest margin grew on average by 18 percent annually from baseline to 2015, reflecting the strong overall expansion of the loan portfolios of the qualified LDIFs. Three LDIFs saw declines in net interest margin in 2015 compared to baseline. In the case of Can Tho, loan interest income more than doubled in 2015 from baseline but interest expenses increased at a faster rate, leading to an average annual decrease of 2.5 percent in net interest margin from 2011 to 2015. In the cases of Ninh Binh and Vinh Long, the annual declines in net interest margin were considerably larger at 4.5 percent and 22.1 percent, respectively, and were primarily driven by declines in loan interest income. Both of these LDIFs experienced challenges with NPLs during project implementation, which prevented them from effectively leveraging the IDA credit from LDIFP to expand their respective loan portfolios. Both Ninh Binh and Vinh Long each accessed LDIFP funding for only one sub-loan, each of which valued less than 18 billion VND (approximately US $800,000). Loan Interest Income Summary (VND millions) Loan Interest Income Loan Interest Expenses Net Interest Margin Qualified LDIF Baseline Year Baseline 2015 Baseline 2015 Baseline 2015 HFIC 2005 84,760 194,753 (37,701) (132,081) 47,059 62,672 Ha Noi 2009 40,200 92,801 (1,427) 0 38,774 92,801 Dong Nai 2009 32,759 60,410 (14,907) (14,607) 17,852 45,802 Binh Duong 2009 28,987 71,888 (4,086) (26,796) 24,901 45,092 Da Nang 2010 8,925 30,924 0 (14,983) 8,925 15,941 Long An 2011 9,368 23,009 (3) (74) 9,365 22,935 Lam Dong 2011 16,575 29,401 (57) (5,443) 16,518 23,958 Can Tho 2011 14,700 28,236 (598) (15,481) 14,102 12,755 Quang Nam 2011 3,615 18,134 (748) (11,495) 2,867 6,639 Khanh Hoa 2011 4,569 18,997 (789) (8,032) 3,780 10,965 Bac Lieu 2012 3,514 8,140 0 (744) 3,514 7,396 Lao Cai 2012 1,985 8,152 0 (1,771) 1,985 6,381 Ninh Binh 2012 10,688 9,645 (0) (344) 10,688 9,301 Vinh Long 2012 8,545 4,780 0 (745) 8,545 4,035 Binh Dinh 2013 172 8,258 (6,131) (2,678) (5,958) 5,580 Ha Tinh 2013 794 9,957 (3,238) (12,064) (2,444) (2,107) HFIC Average Annual Increase 8.7% 13.4% 2.9% Ave. Annual Incr. excl. HFIC 21.7% 35.7% 18.0% Other Income. With the significant expansion of its long-term investment portfolio during this period, HFIC’s other operating income sharply grew by an annual average of 45.4 percent from 55 2005 to 2015. Furthermore, other interest income from short-term deposits and investments also grew robustly for HFIC at an average annual rate of 15.9 percent. Similarly, driven by the expansion of investment portfolios of many of the qualified LDIFs (excluding HFIC), other operating income increased at an annual rate of 15.8 percent on average from their respective baseline years to 2015. Only one LDIF, Ha Tinh, experienced a substantial decline in other operating income, from 18.7 billion VND in 2013 to 2.5 billion VND in 2015. This was due to its one-time liquidation of a large investment in 2013; hence, the decrease did not signify a decline in actual operating performance. However, in contrast to HFIC, other interest income broadly declined among qualified LDIFs (excluding HFIC) because as their loan portfolios were expanding using the IDA credit from LDIFP, the LDIFs also began to utilize their charter capital more productively to finance sub- loans to private sector enterprises for municipal infrastructure investments rather than simply parking idle funds in short-term deposit and investment accounts. Hence, the qualified LDIFs reduced their placements in deposit accounts, which led to an average annual reduction of 5.6 percent in other interest income from their respective baseline years to 2015. Operating Income Summary (VND millions) Net Interest Margin Other Interest Income Other Operating Income Total Operating Income Qualified LDIF Baseline Year Baseline 2015 Baseline 2015 Baseline 2015 Baseline 2015 HFIC 2005 47,059 62,672 36,326 159,227 11,715 494,205 95,099 716,104 Ha Noi 2009 38,774 92,801 73,555 55,766 630 1,260 112,959 149,827 Dong Nai 2009 17,852 45,802 63,255 35,475 17,890 13,699 98,997 94,975 Binh Duong 2009 24,901 45,092 9,127 38,928 11,858 17,431 45,886 101,451 Da Nang 2010 8,925 15,941 13,225 22,065 692 4,098 22,842 42,103 Long An 2011 9,365 22,935 19,810 1,400 0 132 29,175 24,468 Lam Dong 2011 16,518 23,958 7,120 3,362 226 1,850 23,863 29,170 Can Tho 2011 14,102 12,755 31,686 29,949 74,442 98,124 120,230 140,828 Quang Nam 2011 2,867 6,639 12,666 11,825 105 3,384 15,638 21,848 Khanh Hoa 2011 3,780 10,965 14,659 7,058 1 2,650 18,439 20,674 Bac Lieu 2012 3,514 7,396 11,576 3,249 26 0 15,116 10,646 Lao Cai 2012 1,985 6,381 21,544 9,016 3,873 84,715 27,402 100,112 Ninh Binh 2012 10,688 9,301 2,766 2,218 345 3,228 13,800 14,747 Vinh Long 2012 8,545 4,035 21,286 8,428 18 6,831 29,849 19,294 Binh Dinh 2013 (5,958) 5,580 13,595 12,073 688 325 8,324 17,978 Ha Tinh 2013 (2,444) (2,107) 10,178 15,519 18,747 2,514 26,481 15,926 HFIC Average Annual Increase 2.9% 15.9% 45.4% 22.4% Ave. Annual Incr. excl. HFIC 18.0% -5.6% 15.8% 6.8% Operating Income and Profits. Driven primarily by the expansion of its investment portfolio, the total operating income for HFIC grew annually by an average of 22.4 percent, expanding by 7.5 times over the 10-year period to 716 billion VND in 2015 from just 95 billion at baseline. The resulting profits before taxes grew at a healthy annual rate of 20.6 percent, reflecting the strong financial performance of HFIC during its participation in two successive Bank projects. Overall, total operating income increased annually by an average of 6.8 percent for qualified LDIFs (excluding HFIC) while total operating expenses grew by 17.6 percent. As a result, average profits before taxes increased modestly by an annual average of 2.0 percent in 2015 from the respective baseline years of the qualified LDIFs (excluding HFIC). Seven of the LDIFs saw declines in profits before taxes due to a combination of decreases in interest and other operating income, and increases in interest and operating expenses. 56 • Three of the qualified LDIFs that saw declines in profitability (Long An, Bac Lieu, and Vinh Long) were those that accessed the least amount of funding from project (less than 1 billion VND each) among the 15 qualified LDIFs that accessed the IDA credit. In comparison with the other qualified LDIFs, these three LDIFs struggled to build a viable pipeline of sub-projects and also dealt with occasional issues with NPLs; hence, they did not succeed in leveraging the IDA credit to expand their loan portfolios and subsequently generate more interest income. • In the case of Ha Tinh, the decline in profitability was a function of a surge in other operating income in the baseline year of 2013 due to a one-time liquidation of a large investment, which skewed up profits before taxes for that year. If the income from the liquidation of the investment in 2013 were excluded, there would have been an increase in profits before taxes for Ha Tinh in 2015 compared to baseline. • In the cases of Can Tho, Quang Nam, and Khanh Hoa, these were LDIFs that were among the most successful in leveraging LDIFP financing to invest in municipal infrastructure with private sector participation. Each of these LDIFs tapped the IDA credit to finance at least 10 sub-projects and they each accessed an average of 316 billion VND (approximately US $14 million) in funding for sub-loans from the project. The decline in profits before taxes for these LDIFs was mainly due to sharp increases in operating expenses as each of them has had to quickly expand their staff and office facilities in order to manage rapidly expanding loan and investment operations. Hence, the decline in profitability in 2015 should be considered as part of the transition period as these LDIFs invest for future growth. Operating Profit Summary (VND millions) Total Operating Income Total Operating Expenses Profit Before Tax Qualified LDIF Baseline Year Baseline 2015 Baseline 2015 Baseline 2015 HFIC 2005 95,099 716,104 (9,730) (158,998) 85,369 557,106 Ha Noi 2009 112,959 149,827 (13,563) (18,310) 99,396 131,517 Dong Nai 2009 98,997 94,975 (17,923) (11,711) 81,074 83,264 Binh Duong 2009 45,886 101,451 (9,115) (11,748) 36,770 89,704 Da Nang 2010 22,842 42,103 (2,989) (13,580) 19,853 28,523 Long An 2011 29,175 24,468 (5,249) (6,664) 23,926 17,803 Lam Dong 2011 23,863 29,170 (9,383) (8,595) 14,481 20,575 Can Tho 2011 120,230 140,828 (62,188) (104,174) 58,041 36,654 Quang Nam 2011 15,638 21,848 (3,833) (11,646) 11,804 10,203 Khanh Hoa 2011 18,439 20,674 (5,400) (9,687) 13,039 10,986 Bac Lieu 2012 15,116 10,646 (4,053) (9,780) 11,063 865 Lao Cai 2012 27,402 100,112 (6,972) (78,647) 20,430 21,466 Ninh Binh 2012 13,800 14,747 (6,882) (4,140) 6,918 10,607 Vinh Long 2012 29,849 19,294 (5,950) (13,758) 23,899 5,535 Binh Dinh 2013 8,324 17,978 (2,167) (3,993) 6,157 13,985 Ha Tinh 2013 26,481 15,926 (3,334) (7,719) 23,146 8,207 HFIC Average Annual Increase 22.4% 32.2% 20.6% Ave. Annual Incr. excl. HFIC 6.8% 17.6% 2.0% Key Performance Indicators. With the strong growth in operating income driven primarily by the expansion of its investment portfolio, the net income of HFIC grew to 5.4 percent of total assets in 2015 compared to 2.6 percent in 2005. The robust increase in HFIC’s other operating income offset the slower growth in loan interest income, which declined to 2.1 percent of total assets from 2.6 percent in 2005. Interest margin as a share of total assets also declined by half from 1.4 percent of total assets to 0.7 percent of total assets. As discussed though, while it grew at an average annual rate of 8.7 percent over the 10-year period, the loan interest income of 57 HFIC tapered off from 2012 to 2015 in line with broad declines in market interest rates, which slowed down the growth in loan interest income relative to total assets in the latter years of LDIFP implementation. Summary of LDIFP and Commercial Bank Rates LDIFP Ave. Interest Commercial Bank Year Rates Ave. Interest Rates* 2010 11.4% 15.3% 2011 11.1 – 14.4% 17.0 – 20.0% 2012 12.0 – 14.4% 12.0 – 15.0% 2013 11.4 – 12.0% 11.5 – 13.0% 2014 8.3 – 11.4% 9.5 – 11.0% 2015 6.8 – 8.3% 9.0 – 11.0% * In practice, local branches of commercial banks have the flexibility to offer lower interest rates to attract clients. For qualified LDIFs (excluding HFIC), annual net income increased at a modest average annual rate of 2.0 percent in 2015 from their respective baseline years. While operating income grew at a healthy average annual rate of 6.8 percent, operating expenses grew even faster at 17.6 percent on average as many of the newly-established LDIFs had been building up their staffing and investing in larger offices to manage growing loan and investment portfolios. Hence, the average net income as a share of total assets for qualified LDIFs (excluding HFIC) declined to 3.2 percent in 2015 from an average of 5.4 percent at baseline. Positively, the average interest margins for qualified LDIFs (excluding HFIC) grew at the same pace as the expansion in total assets, resulting in interest margins being maintained at 2.5 percent of total assets from baseline to 2015. Even as they encountered a more competitive interest rate environment from 2012 through project closing date, the qualified LDIFs were generally successful in building up their loan portfolios by leveraging the IDA credit from LDIFP. The expansion of the loan portfolios of the qualified LDIFs (excluding HFIC) compensated for the smaller profit margins from each sub-loan, resulting in strong average annual increases in loan interest income of 21.7 percent. This drove up the average ratio of loan interest income as a share of total assets of qualified LDIFs from 2.9 percent at baseline to 3.4 percent in 2015. Summary of Key Performance Indicators Net Income / Loan Interest Income / Loan Interest Expense / Interest Margin / Total Assets Total Assets Total Assets Total Assets Qualified LDIF Baseline Year Baseline 2015 Baseline 2015 Baseline 2015 Baseline 2015 HFIC 2005 2.6% 5.4% 2.6% 2.1% 1.1% 1.4% 1.4% 0.7% Ha Noi 2009 3.0% 4.3% 1.6% 3.1% 0.1% 0.0% 1.6% 3.1% Dong Nai 2009 7.1% 5.3% 3.3% 3.9% 1.5% 1.0% 1.8% 3.0% Binh Duong 2009 4.2% 5.7% 4.0% 4.6% 0.6% 1.7% 3.4% 2.9% Da Nang 2010 4.1% 2.0% 2.5% 2.3% 0.0% 1.1% 2.5% 1.2% Long An 2011 7.5% 5.1% 3.9% 6.6% 0.0% 0.0% 3.9% 6.6% Lam Dong 2011 2.5% 2.9% 3.7% 4.1% 0.0% 0.8% 3.7% 3.4% Can Tho 2011 9.2% 2.5% 3.1% 2.4% 0.1% 1.3% 2.9% 1.1% Quang Nam 2011 4.9% 1.8% 2.0% 3.5% 0.4% 2.2% 1.6% 1.3% Khanh Hoa 2011 5.7% 1.4% 2.7% 2.6% 0.5% 1.1% 2.2% 1.5% Bac Lieu 2012 7.0% 0.5% 3.0% 5.4% 0.0% 0.5% 3.0% 4.9% Lao Cai 2012 5.8% 5.3% 0.8% 2.2% 0.0% 0.5% 0.8% 1.7% Ninh Binh 2012 4.5% 5.9% 9.2% 5.4% 0.0% 0.2% 9.2% 5.2% Vinh Long 2012 7.2% 1.7% 3.5% 1.6% 0.0% 0.2% 3.5% 1.3% Binh Dinh 2013 1.4% 2.0% 0.1% 1.2% 1.8% 0.4% -1.7% 0.8% Ha Tinh 2013 7.6% 1.5% 0.3% 2.0% 1.1% 2.4% -0.8% -0.4% Average excl. HFIC 5.4% 3.2% 2.9% 3.4% 0.4% 0.9% 2.5% 2.5% 58 Preliminary Analysis of Completed Sub-projects Sub-project Outputs. There is good preliminary evidence of the economic and social goods produced by the completed sub-projects. Given the open-ended nature of LDIFP, where the sub- project menu permitted the financing of a wide range of municipal infrastructure projects that offered cost-recovery, the project financed the construction of a significant amount of outputs across various sectors. In total, the 78 completed sub-projects were estimated to have provided employment to approximately 3,700 people at the end of 2015. • Public Health – Seven hospitals were already operational with a total of 725 hospital beds and 189 doctors. Cumulatively, 268,775 patient visits were reported in 2015. • Education – Twenty-eight schools were already operational with a total of 622 classrooms and 117 function rooms. The aggregate enrollment in school year 2015 among the 28 schools was 38,934 with 1,280 teachers employed. • Water Supply – Seven water supply plants were already operational providing approximately 228,000 households with reliable access to clean water. • Social Housing – Four housing projects had been completed and a total of 1,196 flats of affordable housing had been produced and turned over. • Miscellaneous sectors – Other sub-projects that had been completed include: eight public markets, seven electric supply projects, two bus stations, one port ancillary facility, and one wastewater treatment plant. Beneficiary Feedback. In the absence of available economic analyses assessing economic rates of return for all completed sub-projects, the PMU’s final project implementation evaluation report included qualitative feedback on 25 completed sub-projects across 10 LDIFs from 59 respondents. Feedback from beneficiaries was uniformly positive, reflecting a strong appreciation for the development of much needed municipal infrastructure that provided services in underserved areas. • Public Health – Among patients, satisfaction was very positive regarding the high quality and affordability of the services provided. Doctors also welcomed the good salaries paid by the hospitals and the opportunity to serve patients in underserved areas. • Education – Parents, students, and teachers expressed strong satisfaction with the modern learning curriculum and facilities at the new schools built through LDIFP. Most were English language schools, which were in high demand in the communities. School fees were considered to be reasonable given the high quality of the curriculum and facilities. Before the construction of these schools, parents would need to spend more to send their children to major cities, like HCMC, in order to enroll in schools of comparable quality. • Water Supply – There were very high levels of satisfaction due to the improved coverage and better quality of water that beneficiaries received from the water supply projects. Water tariffs were considered to be affordable given the improved quality of service. Financial Analyses for Sub-project Sample. Based on a sample of seven sub-projects that had been operating for between 17 and 71 months as of October 2016 and for which preliminary financial analyses were available, there was promising evidence showing that most sub-projects were meeting financial performance targets that were set during sub-project appraisal. The sample includes sub-projects from six different LDIFs along with six different sectors. For five 59 of the sub-projects, the targets for financial internal rate of return (FIRR) and net present value (NPV) were estimated to have been exceeded or generally on-track. Three of the sub-projects (Tuoi Than Tien Kindergarten in Can Tho, Resettlement Area in Quang Nam, and Thu Dau Mot Water Supply System in Binh Duong) demonstrated exceptional performance, significantly exceeding their FIRR targets by more than 11 percentage points and their NPV by more than 90 percent. Two of the sub-projects (Thot Not Market in Can Tho and Ha Tinh Bus Station) were generally meeting expectations, with estimated FIRRs and NPVs that were within reasonable range of the targets. Only two sub-projects from the sample were failing to meet financial return targets as of October 2016. In the case of Be Hanh Phuc Kindergarten, the new school has helped to alleviate the shortage of pre-school facilities in Hai Chau district in Da Nang province. Nonetheless, there was a slow build-up in demand in the first two years of operation, leading to the utilization of just 44 percent of the designed capacity of the school in 2014. However, after suffering net losses in the first two years of operation, the kindergarten turned a profit in 2014 and improved financial and operating performance was forecasted, leading to expected improvements in the FIRR and NPV in coming years. For the Tam Tri Hospital in Kanh Hoa province, the facility was designed and built to provide high quality medical services that meet International Patient Service (IPS) standards. The hospital was expected to meet the demands of the growing expatriate community and foreign tourists of Nha Trang city, which is one of the premier international tourist destinations of Vietnam. The growth in demand has been slower than expected and the hospital operated at 60 percent of the designed capacity in 2015. However, as the hospital gradually established its reputation in the first two years of operation, the private investors remain confident that the financial returns will improve and meet long-term goals. Total No. of FIRR NPV (VND millions) Completed Approval LDIF Sector Investment Months At As of At As of Sub-project Date (VND millions) Operational Appraisal Oct 2016 Appraisal Oct 2016 Thot Not Market Can Tho Market 10/19/2011 18,000 71 21.5% 20.0% 16,695 14,754 Be Hanh Phuc Da Nang Education 5/17/2012 39,000 51 19.8% 10.3% 31,123 947 Kindergarten Tuoi Than Tien Can Tho Education 12/12/2012 10,000 51 15.0% 37.3% 4,298 19,370 Kindergarten Resettlement Area along Quang Housing 9/30/2013 72,000 30 24.3% 38.0% 15,307 29,398 An Ha - Quang Phu Road Nam Transport Ha Tinh Bus Station Ha Tinh 4/18/2014 69,000 17 15.9% 14.7% 21,634 17,343 Infra Khanh Tam Tri Hospital Health 7/8/2014 232,000 30 31.7% 13.8% 465,694 64,404 Hoa Thu Dau Mot Water Binh Water 3/1/2015 501,000 24 10.9% 22.3% 32,059 521,210 Supply System Duong Supply Importantly, for each of the seven sub-projects in the sample, the private investors were on time with their repayment schedules for the loans they accessed from the various LDIFs. Furthermore, the respective private sector investors and LDIFs assessed each sub-project to be on-track in achieving the economic impact projected during appraisal. The sub-projects have generated strong impact on local employment and have addressed identified market shortages and needs in their respective sectors. 60 Completed Summary of Economic Benefits LDIF Sector Sub-project Before Sub-project Implementation After Sub-project Implementation - Overcrowding caused market stalls to spill over - Roadside trading has been eliminated. to the roadside, creating pedestrian and traffic - Upgraded market with improved environmental hazards. hygiene has stimulated local development in the - Poor environmental hygiene conditions in the neighborhood and facilitated trading with Thot Not Market Can Tho Market market. neighboring provinces (Kien Giang, An Giang, and Dong Thap). - Employment generation: 20 local employees and traders of 514 kiosks/stalls - Overcrowded public kindergartens in Hai Chau - Expanded pre-school capacity has reduced District, with only 33 kindergartens to service pressure on public kindergartens. approximately 13,000 pre-school children - Provision of high quality education service to 300 Be Hanh Phuc Da Nang Education (density of 40-50 children/class). children with 14 classrooms, one library, and two Kindergarten function rooms. - Employment generation: 50 local employees (including 37 teachers) - Overcrowded public kindergartens in An Hoa - Expanded capacity for pre-school education has Ward, Ninh Kieu District due to increasing reduced pressure on public kindergartens. Tuoi Than Tien demand from growing urban population. - Provision of high quality education for 420 Can Tho Education Kindergarten children with 12 classrooms. - Employment generation: 49 local employees (including teachers and support staff) - Insufficient supply of affordable housing in An - Available public land resources utilized to serve Phu district. local residents’ demand for affordable housing. Resettlement area Quang - Project site with sandy soil. - Increase in land price, from VND 240 million per along An Ha - Housing Nam 250 sqm. land lot at sub-project appraisal to VND Quang Phu Road 400 million per lot as of October 2016. - Employment generation: 114 local employees - Insufficient pubic transport services to meet the - Establishment of a relocated central public bus needs of the province despite the proliferation of station consolidating the various smaller bus bus transport companies and bus stations (7 stations and located more strategically close to stations before sub-project implementation) in the primary regional transport corridor, as Ha Tinh Bus Transport response to growing regional urbanization, consistent with the urban development of the Ha Tinh Station Infra industrialization, and tourism development. province. - Deteriorating central public bus station with - Average of 410 visits per day, as per October insufficient capacity and inappropriate location in 2016. a densely urbanized neighborhood at the central - Employment generation: 65 local employees district of the city. - Lack of hospital beds and doctors in the area, - Establishment of a new hospital with 15 patient with only 5.2 doctors per 10,000 people rooms and 60 hospital beds, providing improved (compared to target ratio of 8 doctors per 10,000 community-based healthcare and reducing people). pressure on the overcrowded public hospital. Khanh - Provision of high quality medical care with Tam Tri Hospital Health Hoa 28,940 patient visits, 2,190 pregnant women receiving antenatal care, and 82 births attended by skilled health personnel in 2015. - Employment generation: 65 local employees (including 12 doctors and 38 nurses) - Insufficient water supply sources to meet the - Upgraded water plant that meets the demand for demand of the Nam Thu Dau Mot, with the clean water for the district and neighboring areas, Thu Dau Mot Binh Water previous system experiencing shortages vs. increasing the capacity of the water supply system Water Supply Duong Supply designed capacity. by 45,000 cubic meters per day (+33%) and System supplying clean water to 686,200 residents, 29 industrial zones, and 8 industrial complexes. Preliminary Summary of Sub-project Performance. Generally, the majority of the 78 completed sub-projects as of June 2016 provided preliminary indications of good financial and operational performance. Fifty-four sub-projects (69.2 percent) were completed on or before the target contract completion dates. In terms of financial performance, 56 sub-projects were operational 61 for more than three months as of June 2016, of which 78.6 percent reported financial performance that was considered to be acceptable by the private sector investors (i.e., profits were either meeting or exceeding target profits, or were assessed to be temporarily below target). In terms of operational performance, among the 51 sub-projects that were already operational as of June 2016, the average operating capacity was approximately 80 percent, which was a very high rate given that many had been operating for only 6-12 months. Summary of Completed Sub-projects Implementation as per Operational Profitability Operating Contract Completion Date Capacity No. LDIF / Sub-project Meets / Temporarily Does not Operating Did not Met (as of Exceeds below target meet target for under meet deadline June 2016) target profit profit profit 3 months deadline Binh Duong 1 Phan Chu Trinh School x x (*) 2 Thanh Phuoc Port x x (*) 3 Nguyen Khuyen school x x 88% Water supply project for Southern Thu 4 x x 100% Dau Mot, expansion 45.000m3/day 5 Viet Anh Kindergarten x x 88% Dong Nai 6 Le Quy Don 2 School x x 100% Au Co – Bien Hoa Obstetrics and 7 x x 10% Gynaecology Hospital 8 Dong Nai APC School x x 82% 9 Ong Vang Kindergarten x x 61% Da Nang 10 Dai Dia Bao Apartment Building x x (*) 11 Nguyen Van Troi College x x 41% 12 Be Hanh Phuc Kindergarten x x 44% 13 29-3 Kindergarten x x 75% 14 Dong A university – Campus II (phase I) x x (**) 15 Polytechnic College – Campus II x x 54% 16 Automobile Tire Factory Relocation x x (**) Sky-line kindergarten and elementary 17 x x 49% school (branch 2) Can Tho 18 Ngoi Sao 2 School x x 45% 19 Thot Not Market x x 100% 20 Tay Do University x x 80% 21 Hoan My Cuu Long Hospital x x 100% Construction of Health care centre stage 22 x x (**) 2 – Hoan My General Hospital 23 An Thoi Market x x 90% 24 Tuoi Than Tien Kindergarten x x 100% 25 Medical University Resettlement Area x x 80% 26 Vemedim Packaging Plant Relocation x x (**) Vemedim veterinary drugs and biological 27 x x (**) products manufacturing plant relocation Sai Gon – Can Tho ophthalmology 28 x x (**) hospital Construction of bus station at the urban 29 x x (**) area in the South of Can Tho Lam Dong Thien Phuc Duc Driving Training and 30 x x 100% Assessment Center 31 Tho Xuan Kindergarten x x 100% 32 Ba Thien Kindergarten x x 100% 33 Gelexim Nam Phuong water supply plant x x (**) 34 Da Lat solid waste treatment plant x x 100% 35 Bao An Kindergarten x x (**) 36 Construction of sport complex x x (**) 37 Transport station in Da Teh District x x (**) Quang Nam 62 38 Hoang Sa School x x 9% 39 Vinh Duc Hospital x x 100% Additional investment of Vinh Duc 45 x x (**) General Hospital 40 Dien Nam Trung Market Alley (Phase 1) x x 100% Upgrade and expansion of water supply 41 x x 100% system of Hoi An City (phase 1) 42 Nam Phuoc Market x x (**) 43 Thang Hoa Hospital x x 100% Resettlement area located along An Ha - 44 x x 100% Quang Phu Road 46 Dien Duong Market x x (**) 47 Vuon Xanh Kindergarten x x 65% Khanh Hoa 48 Ninh Hoa Water Plant x x 100% 49 Nha Trang-Sai Gon Eye Hospital x x 11% 50 Van Ninh Water Plant x x 100% 51 Nha Trang iSCHOOL x x 90% 52 4 electricity sub-projects x x 100% Construction of 02 new line feeders 53 x x (**) 110kV in E Dien Khanh Anti-overloaded electric station 110KV 56 x x 60% E24 E27 E28 – Khanh Hoa Improving the reliability of the power 58 supply distribution substation in Khanh x x 100% Hoa Province 54 Tam Tri Hospital x x 100% 55 Water supply for Vinh Luong ward x x 100% 57 Public transportation – bus in Nha Trang x x 80% Water supply for Dien Thuy, Dien Son 59 x x (**) and Dien Phu areas Ninh Binh 60 Mai The He Kindergarten x x 100% Vinh Long Hoang Anh Housing for low-income 61 x x (*) earners Binh Dinh 62 Dinh Market x x 125% 63 Cau Vong Kindergarten x x 26% 64 Nhon Hoa Industrial Zone x x 90% 65 Construction of Dap Da Market x x 100% HFIC 66 Expansion Ha Noi Highway x x (**) Rach Rop Bridge 1 – Hiep Phuoc IP 67 x x (**) infrastructure stage 2)1 Muong Lon 1 bridge – Hiep Phuoc IP 68 x x (**) Infrastructure stage 2 Construction of Nguyen Tat Thanh 69 x x (**) University phase 2, An Phu Dong unit Bac Lieu 70 Truc My Private Kindergarten x x 25% Ha Tinh 71 Ha Tinh Bus Station x x 100% Bus transportation procurement in 72 x x 95% Huong Son - Ha Tinh 73 Tri Duc Kindergarten x x 53% 74 Construction of Nam Ky Anh market x x 60% 75 Nguyen Du Private Kindergarten x x (**) 76 Hong Linh Market x x (**) Lao Cai 77 Lao Cai Bus Station x x 60% Long An Social housing for low-income earners - 78 x x (**) Lainco Total 30 14 12 22 54 24 79% (*) No data as the investor has not provided yet or the repayment has been made in full. (**) No data as the sub-project has been newly completed and gone into operation within 3 months. 63 Annex 5. Bank Lending and Implementation Support/Supervision Processes (a) Task Team members Responsibility/ Names Title Unit Specialty Lending Noritaka Akamatsu Lead Financial Economist EASFP - HIS Phillip Brylski Country Sector Coordinator EASEN-HIS Alan Coulthart Lead Municipal Engineer EASIN - HIS Cuong Duc Dang Sr Urban Spec. GSU08 Vinh Quoc Duong Consultant EASVS - HIS Hani Halawani Investment Officer COCD2-DIV - HIS Kamran M. Khan Program Manager EASSD - HIS Task Team Leader Hung Viet Le Sr Financial Management Specia EAPDE Hoi-Chan Nguyen Consultant OPSVP Hoa Thi Mong Pham Senior Social Development Spec GSU02 Martin G. Rama Chief Economist SARCE Kien Trung Tran Senior Procurement Specialist GGO08 Giang Thi Huong Nguyen Sr Program Asst. EACVF Chaohua Zhang Lead Social Development Specia GSU06 Supervision/ICR Kamran M. Khan Program Manager EASSD - HIS Task Team Leader Cuong Duc Dang Sr Urban Spec. GSU08 Task Team Leader Hisham A. Abdo Kahin Manager, Operations SACIN Dean A. Cira Lead Urban Specialist GSU09 Huong Lan Dao Senior Health Specialist GHN02 Ekapon Jivasantikarn HQ Consultant ST GFM02 Tuan Anh Le Social Development Specialist GSU02 Thanh Thi Mai Senior Education Specialist GED01 Huy Toan Ngo E T Consultant EASVS - HIS Giang Thi Huong Nguyen Sr Program Asst. EACVF Ninh Quang Nguyen Program Analyst EACVF Vinh Quang Nguyen Sr Water & Sanitation Spec. GWA02 Hoa Thi Mong Pham Senior Social Development Spec GSU02 Tran Thi Thanh Phuong Senior Environmental Specialis EASVS - HIS Kalpana Seethepalli Senior Financial Sector Econom GFM02 Mai Thi Phuong Tran Sr Financial Management Specia GGO20 Van Anh Thi Tran Sr Transport. Spec. GTI02 Kien Trung Tran Senior Procurement Specialist GGO08 Hung Tien Van Senior Energy Specialist GEE02 (b) Staff Time and Cost Staff Time and Cost (Bank Budget Only) USD Thousands Stage of Project Cycle No. of staff weeks (including travel and consultant costs) Lending FY06 10.01 81,791.62 FY07 2.01 16,947.17 FY08 26.72 154,005.57 FY09 20.27 111,143.67 Total: 59.01 363,888.03 Supervision/ICR 64 FY10 23.00 64,594.56 FY11 18.02 60,609.18 FY12 21.45 65,009.84 FY13 31.63 88,112.50 FY14 36.33 94,282.51 FY15 43.21 120,540.10 FY16 26.50 113,555.13 FY17 7.62 26,884.17 Total: 207.76 633,588.07 65 Annex 6. Summary of Borrower's ICR and/or Comments on Draft ICR (Quality Enhancement Review Draft – October 28, 2016) First of all, I am highly appreciate your work in preparing this report and I agree with the overall assessment in this document. However, there are some points in the section 2.2 and 5.2.b for the implementing agency performance as MOF is assessed as Moderately Unsatisfactory that requires reconsideration. Particularly, the assessment is based on the four issues including: (i) 15-month delay in the procurement of consulting services; (ii) lengthy sub-project review and approval process given the concerns from LDIFs regarding multiple MOF units’ process; (iii) not pushing the restructure of project to address the M&E targets and disbursement lag; (iv) lack of policy guidelines to establish the PPP scheme applied by LDIFs. The PMU under MOF would like to emphasize the issues relating these above mentions as follows: Firstly, the 15-month delay in the procurement of WB consulting services is resulted from both subjective and objective reasons; for which the objective factors are the driven ones with the difference in procurement policy of Vietnam and WB. Accordingly, there were two separate procurement processes given the two policies. MOF has made every effort and demanded the cooperation from WB to harmonize the difference, reduce the time and assure procurement quality. Secondly, the lengthy sub-project approval process is the expected outcome as the application from Project Manual produced from TA phase. In the essence of a strict sub-project review and approval can only be given to individual sub-project instead of a list of projects, the intensive review among departments of MOF is required. The project was designed based on HDP model, however, HFIC is the fund which has the biggest size and the most comprehensive operating system among all LDIFs. Whereas, majority of funds participating in the Project are new with limited capacity and experience in borrowing from WB; thus, MOF demands for WB’s pre- review in such cases. Furthermore, the assessing criteria of WB including procurement process and environmental and social safety are relatively complicated and vague; as such WB’s review is necessary for the MOF to make decision. Thirdly, the report claims that MOF did not push to restructure the LDIFP to directly address fundamental issues in the Project design. However, I would clarify that MOF has made some attempts to modify the design of the Project in some following aspects: (i) Amend the Decree 138/2007/ND-CP on organization and development of LDIFs; (ii) Promulgate 3 Circulars instructing the fund’s financial management, standardized charter and accounting policy. The consultants have thoroughly reviewed and revised the Project Manual to provide updating guidelines to LDIFs. As well as that the PMU has worked on the Manual to address issues including: (i) raise the procurement threshold for International Competitive Bidding (ICB); (ii) extend the closing date or the Project to 18 months to provide additional time for MOF to fully disburse the IDA credit; (iii) restructure the Operational Policy 7.50 on projects on International Waterways; (iv) allow enterprises that were not constituted of 100 percent state-owned shares to serve as sub-project investors; (v) revise the interest rate policy for the Project. As a result, the LDIFP has improved the disbursement progress and commitment in the last 3 years. Lastly, regarding the direct investment from LDIFs, the Project has received 2 investment proposals yet could not be implement given the strict criterion in the Project Manual, which 66 regulate both the selection process of private partner via auction and the limitation of the amount of equity to invest in the Project. These obstacles reduce the role of LDIFs in controlling the Project. Therefore, LDIFs are not ready to make loan investment according to all the requirement of the Project. This issue does not concern the PPP policies of the government because LDIFs are not the entity to follow the PPP policies of Vietnamese government. I understand that the first two years’ result is not of satisfaction, affecting the overall Project assessment and leave lessons for other projects with similar structure. However, the reason for this unsatisfaction is not because of the implementation and control of MOF, but other objective factors stated above. Also, I believe the report should assess the impacts concerning the unexpected obstacles in economic environment of Vietnam and global context during implementation comparing to the Project design period. Thus, it would be significant to have re- assessment of Project implementers considering the above mention issues. 67 Annex 7. List of Supporting Documents Amendment to Financing Agreement – Extension of Closing Date, Local Development Investment Fund Project (Credit Number 4609-VN), International Development Association, February 25, 2014. Amendment to Financing Agreement – Raising of Procurement Thresholds, Local Development Investment Fund Project (Credit Number 4609-VN), International Development Association, July 23, 2013. Amendment to Financing Agreement – Triggering of OP 7.50 on Projects on International Waterways, Local Development Investment Fund Project (Credit Number 4609-VN), International Development Association, February, 2015. Annual Report of Completed Sub-projects, Ministry of Finance, Government of Vietnam, 2013-2015. Assessment Report on Impact of the Adjustment of On-lending Interest Rate based on Government Bonds’ Rate, Ministry of Finance, Government of Vietnam, January 2014. Financing Agreement between Socialist Republic of Vietnam and International Development Association – Credit Number 4609-VN (Local Development Investment Fund Project), August 12, 2009. Guidelines for Converting LDIFs’ VAS Financial Statements in Accordance with IFRS Principles, Ministry of Finance, Government of Vietnam, November 2015. Implementation Completion and Results Report – Ho Chi Minh City Investment Fund for Urban Development Project, World Bank, Report No. : ICR0000594, June 2013. Implementation Status and Results Reports – Local Development Investment Fund Project, World Bank, 2010-2016. Independent Evaluation Group ICR Review – Ho Chi Minh City Investment Fund for Urban Development Project, World Bank, June 2014. Local Development Investment Funds in Vietnam, Briefing Paper, World Bank, October 2005. Making The Whole Greater Than The Sum Of The Parts: A Review Of Fiscal Decentralization In Vietnam, World Bank, October 2014. Notification of Partial Cancellation of Credit Proceeds, Local Development Investment Fund Project (Credit Number 4609-VN), International Development Association, June 29 and 30, 2016. Project Appraisal Document – Ho Chi Minh City Investment Fund for Urban Development Project, World Bank, Report No. 38504-VN, May 24, 2007. Project Appraisal Document – Local Development Investment Funds Project, World Bank, Report No. 48298-VN, May 22, 2009. Project Completion Report – Support to PMU for Monitoring Environmental and Social Safeguards, Ministry of Finance, Government of Vietnam, June 2016. Project Implementation and Evaluation Report, Ministry of Finance, Government of Vietnam, August 2016. 68 Project Manual – Local Development Investment Funds Project, Ministry of Finance, Government of Vietnam, 2012. Report on LDIF’s Procurement Management Performance, Ministry of Finance, Government of Vietnam, May 2016. 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