69733 Project Completion Report Vietnam: Assistance in the Regulation and Guidance for Management of Investment Funds [FIRST Project 332 / TF058327 / P106405] SECTION A: SUMMARY Instructions: This form is to be prepared by the FIRST Task Team Leader and taking into account input from the recipient and other stakeholders. Project Name: Vietnam: Assistance in the Regulation and Guidance for Management of Investment Funds Countries: Vietnam Project Number: 332 FIRST target area(s): Financial sector legal, regulatory and supervisory frameworks (S). Recipient Name: State Securities Commission (Mr. Nguyen Ngoc Canh, Director / Mr. Vu Chi Dzung, Deputy Director, International Cooperation Department) Address: No. 164, Tran Quang Khai Street, Hoan Kiem District, Hanoi, Vietnam Telephone: Fax: Email: + (84-4) 934-0763 + (84- 4) 934-0740 canhnn@ssc.gov.vn / dzungvuchi@yahoo.com Project approval date: June 23, 2006 (Contract Date) Project completion date: March 30, 2008 Financial commitment: US$ 449,100 (initial contract) + US$ 58,893 (extension) Actual expenditure: US$ 507,993 TA Provider(s): Cadogan Financial (United Kingdom) in consortium with Vietbid (Vietnam) Project Officer: James Seward, Financial Sector Specialist (EASFP) Technical Leader: Noritaka Akamatsu, Finance & Private Sector Program Manager for Vietnam (EASFP) Type of Project (Type 1, 2 or 3): 3 PCR Completion Date: June 2008 1. Project Completion Summary 1.1 The project purpose is to provide expert technical assistance to the State Securities Commission (SSC) for the development of the regulatory framework for supervising the investment funds. The main products of the work are an assessment report on the key challenges to the SSC in the supervision and regulation of investment funds, regulations and guidelines on the management and supervision of investment funds, and manuals and training on the supervision of investment fund management activities. 1.2 This project was extended both in terms of time and funding at the end of January 2008 to March 2008 to provide for a continuance of the work by the consulting team to deliver the final manuals, models for risk management, and training to the SSC staff. The originally contracted work was not completed largely due to the consultant’s additional responsiveness (beyond the terms of reference) on issues surrounding the investment fund industry. The project concluded on March 31 and the consultant has satisfactorily produced all of the final deliverables (the final deliverables, including the summary report, are available upon request or can be found in IRIS). 1 1.3 The project was considered a highly satisfactory project and the SSC stated directly that it was “the best donor supported project at the SSC to date,� which is quite impressive given the range of donor projects at the SSC. It is anticipated that this project will, through provision of advice and training to the SSC by the consultant, ultimately improve their capacity to regulate investment funds, their management companies and service providers such as custodian banks. 1.4 The project resulted in the issuance of a set of regulations by the MOF (the SSC does not have the authority to issue regulations itself as it is under the MOF) on the investment funds industry: (1) Circular 38-2007-TT-BTC governing public disclosure for securities markets including funds and fund management companies; (2) Circular 17/2007/TT-BTC which includes securities investment company prospectus requirements; (3) Regulation on organization and operation of fund management companies in connection with Decision 35/2007/QD-BTC; and (4) Regulation on the establishment and operation of securities investment funds (focusing on closed ended funds) in connection with Decision 45/2007/QD- BTC. A very encouraging development in the process of drafting and issuing the regulations is that they were all put to the public for comment, which makes a marked positive improvement over past practices. All of this regulatory work was complimented with a diagnostic assessment, guidelines and training manuals for the SSC to help in implementing the regulatory framework. In addition, three other regulations that were drafted with the help of the consultant are scheduled to be issued in 2008 by the SSC (see Section 3 below). 1.5 Beyond the regulatory framework, the SSC has now created a ‘Department of Management of Investment Funds and Fund Management Companies,’ led by a new Director with its own dedicated staff. There is thus, hopefully, a greater chance of sustainability of the project, since there the team has been expanded considerably from the original three managerial level staff. 1.6 One measure, if imperfect, of success of the project and the related regulations would be the increase in interest in entering the investment funds business and the development of the industry. Vietnam’s securities markets suffer from a lack of long term investors such as pension funds, which tend to have regular inflows of cash monthly from retirement savings. Depending on the regulatory regime of a country, such retirement savings can be invested directly into securities or other assets, or indirectly via funds into such assets, or both, and a big part of the reason why there are few pensions and other long-term savings vehicles is the lack of viable investments. The growth of the fund industry in Vietnam will offer such investment opportunities and thus, can have a substantial developmental impact. The table below provides some indication as to the increase of funds in Vietnam over the course of the project. However, it should be noted that this development has also been strongly influenced by the performance of Vietnamese stock markets and the economy in general during this period of time, both of which were strong throughout most of the contract period. Fund Market Development Statistics Number of Funds Number of Funds Fund Type (Mid-2006) (March 2008) Fund management companies 7 30 Public funds 1 3 Member funds 5 100 2 1.7 The international credit crunch and rising domestic inflation in early 2008 were having an impact, however. The VN Index fell by about 44% in the first quarter of 2008 and this may result in the stagnation and possibly shrinkage of the fund industry in the short term. However, this fall may not be entirely a bad thing as it may result in consolidating the fund industry and allow the strongest to survive. In addition, it indicates that the advice of the consultant and judgment of the SSC were wise in not issuing the regulations for open-ended funds in 2007 (when the stock markets were at their peak) and early-2008 (when the markets were in a freefall). At either time, it would have exposed many new investors in mutual funds to serious market turmoil and potentially large losses, which could have caused a serious setback for the development of the mutual fund industry in Vietnam. 2. Lessons Learned 2.1 The first lesson learned in terms of project implementation was on client ownership. The strong ownership by the SSC of this project was the key to success. Good relationships were established among all project stakeholders (i.e., SSC, World Bank, Consultant) and this was maintained throughout the project. Without this ownership and the strong, trusting, and interactive relationships among the project stakeholders, the project would not have been a success. 2.2 Another lesson was on timing. The project could have been enhanced had the project begun slightly earlier before the passage of the 2006 Securities Law. The consultant could then have reviewed the SSC’s strategic priorities first, identifying the most viable method of achieving these, and then advised on formulating the Securities Law accordingly. This was originally envisaged as part of the project, but unfortunately procurement delays occurred in project commencement and the Securities Law had been passed just before our project started. The result is that there are a number of problems with the law and a number of key principles are absent from the law related to funds. However, these may be dealt with through the issuance of amendments to the Law. 2.3 A final lesson was on the sequencing of the delivery of the assistance. We did not fully grasp the limited understanding of the SSC on funds and the project might have been able to achieve more had it, as originally anticipated, delivered training for relevant SSC personnel in understanding funds and how they work at the start of the project. The SSC demanded otherwise and we complied with the reordering of the tasks. This is one of the disadvantages of strong client ownership of technical assistance. 3. Next Steps 3.1 The following regulations are pending and were prepared by the SSC in collaboration with the consultants: (1) Operation of open ended funds [the SSC has confirmed that they do not anticipate that these will be developed until later in 2008]; (2) Operation of Securities Investment Companies [the SSC has confirmed that these have been submitted to the Ministry of Finance and should be promulgated in 2008]; and (3) Foreign portfolio investment in Vietnam [the SSC has confirmed that these have been submitted to the Ministry of Finance but it is not clear when these will be issued, other than probably in 2008]. 3.2 Otherwise, we do not envisage any immediate follow-on work to this project by the World Bank. However, the SSC has expressed interest in hands-on assistance in conducting supervisory examinations of investment funds in the future once the regulatory framework was completed in full. 3 4. Overall Project Outcome Performance Ratings Please Rate from 1 through 5 1 = Very Good (fully achieved, very few or no shortcomings) 2 = Satisfactory (largely achieved, despite a few shortcomings) 3 = Fair (only partially achieved, benefits and shortcomings finely balanced) 4 = Poor (very limited achievement, extensive shortcomings) 5 = Failure (not achieved) NA = Too Early (to be used only for goal and sustainability markings) Rating Overall Project Performance 1 FIRST Performance 2 TA Provider Performance 1 4 SECTION B: IMPLEMENTATION DETAILS 1. Background (from the Project Memorandum) 1.1 Since the Communist Party and the Government of Vietnam started implementing the Renovation Process (1986), its economy has demonstrated progress in transition from a centrally planned economy to a socialist-oriented market one. 1.2 In order to reach its economic growth targets, the establishment and stability of financial markets is one of the top priorities of Vietnam’s development strategy. The Ministry of Finance (MoF) of Vietnam, in collaboration with other government agencies, has designed the Overall Plan for Modernisation of Financial System (OPMFS), which is considered a strategic guideline for implementing the financial and monetary program over the next 10 years (2001-2010). 1.3 In recent years, the securities markets have grown. These markets are under the regulation and supervision of the State Securities Committee (SSC), which is under the MoF. However, the capital markets still lack some of the legal and physical pre-requisites necessary for stable growth when compared to more developed markets. It is therefore necessary to seek TA from the international community to fill gaps in the legal and regulatory infrastructure and in the development of new products and instruments. 1.4 The securities market has been operating for about four and a half years but investment fund management is new. There is one established fund with a total capital of VND 300 billion (US$20 million), which has issued units to the public. These units are listed on the Ho Chi Minh STC (central securities market). The market presently has about 20,000 clients with a listed value of about US$240 million in equities and US$866 million in Government bonds. Liquidity has been low and the SSC believes that encouraging the development of professionally managed investment funds will encourage greater participation, especially from retail investors and will afford better investor protection for individual investors. The SSC plans to submit a draft Securities Law to the National Assembly in November 2005 (we understand that this has now been re-scheduled till the spring of 2006), which will incorporate asset management and collective investment schemes. 1.5 The pension fund sector is still embryonic and seems to be less of a priority for development than the banking sector right now; nonetheless, given the potential importance of pension funds for capital market growth, this area will receive attention in addressing the need for collective investment schemes. 1.6 There is strong interest in applying for a license to manage investment funds from Vietnam Prudential, Vietnam Manulife and Dragon Capital. These three are large companies with international experience in managing investment funds. In addition, a number of investment clubs have sprung up spontaneously and these should also be brought into the regulatory net and given legal status. 1.7 The World Bank believes the environment is right to support this development. The proposal for technical assistance, originally sent to FIRST by the State Securities Commission (SSC) in December 2004, is mainly directed at two outputs: (i) a regulatory framework to guide the establishment, management, and supervision of investment funds and (ii) investor protection and regulatory and supervisory manuals with associated training for the SSC and the investment management sector. A pre-condition for taking this proposal forward was the existence of a substantive draft of the Securities Law, which has now been produced with 5 assistance from international donors including the World Bank, Asian Development Bank and USAID and includes a chapter on investment funds management. 2. Purpose (from the Project Memorandum) 2.1 The project goal is the further development and deepening of the capital markets in Vietnam in order to stimulate diversification and broaden their attractiveness to both institutional and retail investors. 2.2 The project purpose is the development of the regulatory environment for supporting and supervising the management of investment funds based on the direction given by the proposed Securities Law in Vietnam. 3. Outputs Project Means of verifying Comments and Progress structure progress recommendations Inception Report submitted; SSC Complete report comments received Diagnostic Report submitted; SSC Complete report comments received Seminar on Report submitted; SSC Complete diagnostic comments received report Regulations Three regulations issued; Complete Three regulations yet to be Three yet to be issued promulgated but advice has been given on the drafting of all of these Reporting Published regulations Complete An analysis of data to be formats extrapolated from these reports and weaknesses of these reports has also been provided Monitoring and Two manuals provided Complete Inspection Manuals Study tour to Delivered 1 – 8 October Complete UK 2006 Study tour to Delivered 10 – 14 June Complete Thailand 2007 Stakeholder Report, attendance list Complete seminar on regulatory framework SSC training Series of training courses Complete delivered and previously reported on; final training on 26-28 February 2008 Curriculum for Delivered February 2008 Complete asset manager training Reference Delivered February 2008 Complete From CFA Institute and SII materials 6 4. Developmental Outcomes and Impact 4.1 See Section A.1.6 above. 5. Financial Summary 5.1 Given that this Trust Fund was originally administered by the FIRST Unit in London, then transferred to the World Bank, the accounting for the total expenses is complex. We do not have access to the expenses processed and budget usage prior to the handover of the Trust Fund in February 2007. Therefore, it is recommended that the FIRST Unit of the World Bank provide this table to account for all aspects of this financial summary. Originally Actual cost in approved budget US$000 US$000 Consultant fees: International consultant fees 342,800.00 373,434.74 Local consultant fees 28,100.00 16,837.50 Subtotal - Consultant fees 370,900.00 400,272.24 Travel, hotel and subsistence 63,400.00 27,958.79 Study tours 39,100.00 34,429.99 Workshops and seminars 26,000.00 7051.00 Translation and interpretation 31,000.00 23,260.50 Other costs 16,500.00 0 Subtotal 546,900.00 492,972.52 Project Management Costs (To be completed by FIRST) Fund/Bank Staff costs/administration Travel, hotel and subsistence Other costs Subtotal 23,700.00 24,832.19 Total Project Cost 570,600.00 517,804.71 6. Dissemination Please list the report(s)/deliverable(s)/output(s) that would be appropriate for dissemination. Please identify the audience for each output. 6.1 None of the consultant reports are necessarily confidential and the regulations issued by the SSC are public documents. However, in our judgment, because the consultant reports were designed to lead to the issuance of regulations and those regulations were issued to the public for comment, it may not be necessary or relevant to release the project reports. In effect, the dissemination on the regulatory framework for investment funds is being done by the SSC directly via the public consultation process before the regulations are issued. The rest of the materials produced are essentially for internal consumption and use by the SSC, not the public, and their release is inappropriate as they may cause doubts in the public’s mind as to the capabilities of the SSC to supervise investment funds (because many of the documents point to SSC weaknesses and training needs). 7 SECTION C: PROJECT IMPLEMENTATION ASSESSMENT Instructions: This form is to be prepared out by the FIRST Task Team Leader. Please provide a rating and reasons/comments for the rating below. Please Rate from 1 through 5: 1 = Very Good (fully achieved, very few or no shortcomings) 2 = Satisfactory (largely achieved, despite a few shortcomings) 3 = Fair (only partially achieved, benefits and shortcomings finely balanced) 4 = Poor (very limited achievement, extensive shortcomings) 5 = Failure (not achieved) NA = Too Early (to be used only for goal and sustainability markings) Rating Overall project evaluation: 1 Comments: As the SSC stated in its evaluation, “The SSC was totally satisfied with the outcomes of this project. The project was launched at the time when the SSC was in the process of drafting regulations on FM, FMC, and others related. Therefore, the activities of this project are very helpful for us during our drafting process.� The results of the project speak for themselves – the issuance of the core regulations for investment funds and the foundations for the remaining missing elements of the regulatory framework (which were not issued due to market-related reasons, not the project). As was mentioned in Section A.1.3 above, it is anticipated that this project will ultimately improve the SSC’s capacity to regulate investment funds, their management companies and service providers such as custodian banks. This is very important given that there are now few long-term investment vehicles in Vietnam and thus, the growth of the fund industry in Vietnam will offer such investment opportunities and is likely to have a long-term, substantial developmental impact. Rating Implementation Plan: 1 Comments: The implementation of the consultant recommendations can be viewed as being followed through the issuance of regulations supported by the project. The project was designed to assist the SSC develop the regulatory framework for investment funds and three of the key regulations were issued. The other three regulations supported under this project have been drafted, but have been postponed in their issuance because of negative market conditions on the recommendation of the consultant and judgment of the SSC (as detailed in Section A.1.7 above). Rating Training: 2 Comments: All training under the project was delivered and included new curriculum for training on investment fund regulations, study tours to the United Kingdom and Thailand, and seminars for the SSC and key stakeholders. In addition, monitoring and inspection manuals were provided to the SSC, as were reference materials on various topics. 8 Rating Outputs (including delivery): 2 Comments: All outputs were delivered to the satisfaction of the client (see Recipient’s feedback below). As the SSC states, “The SSC was satisfied with comments and outputs of the international consultant� and “the SSC has issued 3 regulations on FMC, FM and Securities investment company with the support of the international consultant.� It is clear from the feedback provided by the SSC and based on our oversight of the project, the one main missing element that impacted the quality of the outputs was the lack of hands-on supervisory experience in investment funds by the consultant. However, in my view, this type of experience is even more relevant for a possible phase 2 of the project – implementation of the regulations. This is where actual supervisory experience becomes essential and will be extremely valuable to the SSC in learning how to enforce its new regulatory framework provided for under this project. Rating Activities (including efficiency and timeliness): 1 Comments: All activities were achieved. Please refer to Appendix A for the recipient feedback 9 Appendix A Recipient Staff Feedback NOTE: Recipient Feedback provided by the State Securities Commission International Cooperation Department on June 27, 2008. SECTION A: PROJECT ASSESSMENT Ratings Assessment ratings are required at each level of the project’s structure shown below, taking into account the aspects listed above. Guide 1 = Very Good (fully achieved, very few or no shortcomings) 2 = Satisfactory (largely achieved, despite a few shortcomings) 3 = Fair (only partially achieved, benefits and shortcomings finely balanced) 4 = Poor (very limited achievement, extensive shortcomings) F = Failure (not achieved) X = Too Early (to be used only for Goal and Sustainability markings) Project assessment Rating Recipient/WB/IMF Comments Purpose – The project’s purpose is Very good SSC totally satisfied with the to develop regulatory environment for outcomes of this project. The project supporting and supervising the asset was launched at the time when the management of investment funds SSC was in the process of drafting based on the direction given by the regulations on FM, FMC, and others proposed Securities Law in Vietnam. related. Therefore, the activities of this project are very helpful for us during our drafting process. Outputs – 1. Assessment report on the key Very good The SSC was satisfied with comments challenges to the SSC in the and outputs of the international supervision and regulation of consultant. The international investment funds consultant for this TA has good experiences of a lecturer. But, she has 2. Manuals and guidance Very good no experience of a regulator in the materials for supervision of field of Fund management. So her investment fund management comments on our draft regulation on activities and on custodial FM, FMC, etc. sometimes did not activities by the SSC match our regulatory needs. 3. Recommendations on the Satisfactory SSC’s regulatory strategy and investment incentives to encourage the growth of investment funds 10 4. Regulations and guidelines on Satisfactory the management of investment funds Activities Satisfactory Because SSC is now developing all regulations and legal documents relating to securities and securities market, we need more inputs from consultants who have worked for a regulator as SSC. They could share with us their regulatory experiences. Sustainability Very good No comments Project Benefits Very good The project helped us a lot during our drafting of the regulations related to FM, FMC. We received many valuable comments from the international consultant. Expected Outcomes Very good SSC has issued 3 regulations on FMC, FM and Securities investment company with the supports of the international consultant. 11 SECTION B: FEEDBACK ON FIRST PERFORMANCE Feedback relating to the project should provide information to ensure that FIRST is aware of its strengths and weaknesses and continuously learns from its projects to improve its efficiency and effectiveness. Consideration should be given to the following aspects: ‰ Project application/approval - Speed, lack of complexity/bureaucracy, professionalism, technical knowledge, value added, match of project design/consultant TORs with TA needs. ‰ Procurement of consultant – Speed, lack of complexity/bureaucracy, effectiveness (e.g., consultants’ skills/task match) ‰ Project monitoring/completion – Timeliness, balance (between to little/too much), effectiveness (e.g., issues identified/followed-up), technical knowledge, value added, lack of complexity/bureaucracy ‰ How might FIRST’s performance be improved? Comments Comments in general should be limited to a maximum of 200 words: 1. Project application/approval: This step takes a long time. Therefore, if the project is approved, sometimes the outcomes of the project were not really matched with the timeline. 2. Procurement of consultant: The quality of international consultant is good. But the time/ procedure to choose consultant takes a long time. 3. Project monitoring/completion: Effective. 4. How might FIRST’s performance be improved: The First MU need to be more active and do contact regularly with the recipient to exchange information for each other. Rating * Performance Rating Guide 1 = Very good performance, very few or no shortcomings 2 = Satisfactory performance, despite a few shortcomings 3 = Fair performance, benefits and shortcomings finely balanced 4 = Poor performance, extensive shortcomings FIRST Performance Recipient/WB/IMF rating Overall assessment of Satisfactory performance 12 SECTION C: FEEDBACK ON TA PROVIDER PERFORMANCE In addition to general comments about the performance of the TA Provider in implementing the Project, please provide a rating and reasons for rating, taking into account the following criteria: ‰ Knowledge of subject matter ‰ Professionalism ‰ Timeliness/ability to meet deadlines ‰ Responsiveness to needs ‰ Adaptability of advice to local situation ‰ Communications (including conciseness of advice/reports) ‰ Effectiveness/practicality of advice/ assistance ‰ Ability to generate confidence in advice ‰ Ability to work as a team (where relevant) ‰ Project management Comments Comments in general should be limited to a maximum of 200 words: The project is very effective, making good contribution to the process of developing the regulations of fund management companies. Experience and good recommendations of the consultant were appreciated by people who were involved in the drafting process and recommendations were included in the draft regulations. The project management was quite effective that result in the good outcomes of the project. This project was responsive to the actual needs of the SSC in drafting the fund management regulations. Rating Guide 1 = Very good performance, very few or no shortcomings 2 = Satisfactory performance, despite a few shortcomings 3 = Fair performance, benefits and shortcomings finely balanced 4 = Poor performance, extensive shortcomings TA Provider performance Recipient/WB/IMF Rating Overall assessment of Very good performance 13