Document of The World Bank FOR OFFICIAL USE ONLY Report No. 67987-VN INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A CREDIT IN THE AMOUNT OF SDR $ 45.2 MILLION (US$ 70 MILLION EQUIVALENT) TO SOCIALIST REPUBLIC OF VIETNAM FOR A THIRD CLIMATE CHANGE DEVELOPMENT POLICY OPERATION (CC DPO3) May 29, 2014 Vietnam Sustainable Development Unit Vietnam Country Management Unit East Asia and Pacific Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. VIETNAM - GOVERNMENT FISCAL YEAR January 1 – December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of April 30, 2014) Currency Unit = VND Vietnamese Dong VND 21,083 = US$ 1 US$ 1.548 = SDR 1 ABBREVIATIONS AND ACRONYMS AAA Analytical and Advisory Activities ADB Asian Development Bank AfD Agence Française de Développement Dfat Australian Department of Foreign Affairs and Trade CCA Climate Change Adaptation CDM Clean Development Mechanism CIDA Canadian International Development Agency CPS Country Partnership Strategy CTF Clean Technology Fund DANIDA Danish International Development Agency DDMFSC Department of Dyke Management, Flood and Storm Control (MARD) DFID Department for International Development DHMCC Department of Hydrometeorology and Climate Change (MONRE) DIWM Department of Irrigation Water Management (MARD) DMC Disaster Management Center (MARD) DONRE Provincial Department of Natural Resource and Environment DPL Development Policy Lending DPO Development Policy Operation DRR Disaster Risk Reduction DRM Disaster Risk Management DSENRE Department of Science, Education, Natural Resources and Environment (MPI) DWRM Department of Water Resources Management (MONRE) EE Energy Efficiency EECO Energy Efficiency and Conservation Office (MOIT) GDE General Directorate of Energy (MOIT) GDP Gross Domestic Product GEF Global Environment Facility GFDRR Global Fund for Disaster Risk Reduction GHG Greenhouse Gases GIZ German Society for International Cooperation GoV Government of Vietnam IBRD International Bank for Reconstruction and Development IDA International Development Association IFC International Finance Corporation IL Investment Lending IDMC Irrigation and Drainage Management Companies IMF International Monetary Fund IMT Irrigation Management Transfer IWRM Integrated Water Resources Management 1 JICA Japan International Cooperation Agency LDP Letter of Development Policy LWR Law on Water Resources (2012) MARD Ministry of Agriculture and Rural Development MOF Ministry of Finance MOIT Ministry of Industry and Trade MPI Ministry of Planning and Investment MONRE Ministry of Natural Resources and Environment NAMA Nationally Appropriate Mitigations Actions NAP-CC National Action Plan on Climate Change NAP-GG National Action Plan on Green Growth NAP-WRM National Action Plan on Water Resources Management NCCC National Climate Change Committee NCCS National Climate Change Strategy NPL Non-Performing Loan NTP National Target Program NTP-RCC National Target Program to Respond to Climate Change ODA Official Development Assistance OoG Office of Government PA Prior Action PCU Project Coordination Unit PER Public Expenditure Review PFM Public Financial Management PIM Participatory Irrigation Management PMR Partnership for Market Readiness PRSC Poverty Reduction Support Credit PSIA Poverty and Social Impact Analysis PSRDPO Power Sector Reform Development Policy Operation SAV State Audit of Vietnam SBV State Bank of Vietnam SEDP Socio Economic Development Plan SEDS Socio Economic Development Strategy SOE State Owned Enterprise SP-RCC Support Program to Respond to Climate Change TA Technical Assistance UNDP United Nations Development Program USAID Unite States Agency for International Development VNCLIP Vietnam Climate Change Partnership VNEEP Vietnam National Energy Efficiency Program VGGS Vietnam Green Growth Strategy WRM Water Resources Management Vice President: Axel van Trotsenberg, EAPVP Country Director: Victoria Kwakwa, EACVF Sector Director: John Roome, EASSD Sector Manager: Jennifer Sara, EASVS Task Team Leaders: Christophe Crepin, EASER Thu Thi Le Nguyen, EASVS 2 VIETNAM THIRD CLIMATE CHANGE DEVELOPMENT POLICY OPERATION The Third Climate Change Development Policy Operation was prepared by a team consisting of: Christophe Crepin (Task Team Leader, EASER), Thu Thi Le Nguyen (Co-Task Team Leader, Operations Analyst, EASVS), Cuong Hung Pham (Sr. Water Resources Management Specialist, EASVS), Ky Hong Tran (Energy Specialist, EASVS), Ngozi Blessing Obi Malife (Program Assistant, EASER), Cung Van Pham (Sr. Financial Management Specialist, EAPFM), Dzung Huy Nguyen (Sr. Disaster Risk Management Specialist, EASVS), Nina Masako Eejima (Sr. Counsel, LEGES), Huong Thi Mai Nong (Jr. Counsel, LEGES), Pierre Audinet (Sr. Energy Specialist, SEGES), Tiziana Smith (Consultant, EASER), Habib Rab (Sr. Economist, EASPR), Miguel-Santiago Oliveira (Sr. Finance Officer, CTRLN), Anjali Acharya (Sr. Environmental Specialist, EACVF), Tuan Anh Le (Social Development Specialist, EASVS), Defne Gencer (Energy Specialist, EASWE), Phuong Thu Nguyen (Team Assistant, EACVF), Toru Konishi (Senior Economist, EASIN), Ashraf Bakry El-Arini (Junior Professional Associate, EASER) Peer reviewers: Marianne Fay (Chief Economist, SDNVP), Adriana Jordanova Damianova (Lead Environmental Specialist and Program Team Leader, ECSS3), Andrea Liverani (Sr. Social Specialist, MNSSO) 3 TABLE OF CONTENTS 1. INTRODUCTION AND COUNTRY CONTEXT 7 2. MACROECONOMIC POLICY FRAMEWORK 10 2.1 RECENT ECONOMIC DEVELOPMENTS 10 2.2 IMF RELATIONS 18 3. THE GOVERNMENT’S PROGRAM 19 4. THE PROPOSED OPERATION 21 4.1 LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION 21 4.2 PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS 26 4.3 LINK TO CAS AND OTHER BANK OPERATIONS 34 4.4 CONSULTATIONS, COLLABORATION WITH DEVELOPMENT PARTNERS 37 5. OTHER DESIGN AND APPRAISAL ISSUES 38 5.1 POVERTY AND SOCIAL ASPECTS 38 5.2 ENVIRONMENTAL ASPECTS 40 5.3 PFM, DISBURSEMENT AND AUDITING ASPECTS 41 5.4 MONITORING AND EVALUATION 42 6. SUMMARY OF RISKS AND MITIGATION 44 ANNEX 1: POLICY AND RESULTS MATRIX 46 ANNEX 2: SIGNIFICANT GOV ACTIONS TAKEN TO STRENGTHEN CLIMATE CHANGE RESPONSE 51 ANNEX 3: LETTER OF DEVELOPMENT POLICY 52 ANNEX 4: IMF ASSESSMENT LETTER 55 ANNEX 5: GOVERNMENT OF VIETNAM UPDATE ON MACROECONOMIC DEVELOPMENTS IN THE FIRST FOUR MONTHS OF 2014 58 4 SUMMARY OF PROPOSED CREDIT AND PROGRAM VIETNAM THIRD CLIMATE CHANGE DEVELOPMENT POLICY OPERATION (CC DPO3) Borrower Socialist Republic of Vietnam Implementing Agency Ministry of Natural Resources and Environment Financing Data IDA Credit SDR 45.2 million (US$70.0 million equivalent) IDA terms for blend countries (25-year maturity with 5-year grace period) Operation Type Single-tranche programmatic development policy operation; Third of a series of three operations Pillars of the Operation The Program Development Objective is to support the GoV in its efforts to And Program Development address climate change by adopting policies and strengthening institutional Objective capacity to promote climate resilient and lower carbon intensity development Pillar A (Adaptation): Climate-Resilient Development by Improving the Resilience of Water Resources (Goal 1) Pillar B (Mitigation): Lower Carbon Intensity Development by Exploiting Energy Efficiency Potentials (Goal 2) Pillar C (Cross-Cutting): Cross-Cutting Climate Change Policies and Institutional Readiness to Formulate, Prioritize, Finance, Implement and Monitor Cross-Cutting Climate Change Policies (Goal 3 and 4) Result Indicators Pillar A: End-of-Program Results (CY 2015): GoV has scaled-up, prioritized and initiated implementation of key IWRM actions in the context of a new legal and organizational framework for IWRM that allows a more programmatic, integrated and adaptive approach to water resources management in support of CCA. Baseline: Insufficient legal and institutional basis for integrated water resources management needed for CCA. Targets: i) Three new high level legal IWRM instruments are operational with priority actions taken; ii) Minimum flows established for the Vu Gia-Thu Bon and Ba rivers and used to guide water allocations decisions during the dry season. Pillar B: End-of-Program Results (CY 2015): Practices to improve energy efficiency are implemented in large energy users of the industrial sector with related operating capacity increased. Baseline: i) 2010 (end of VNEEP 1) level of energy use by heavy industry; ii) No energy auditors or managers certified by the government. 5 Targets: i) 4% energy savings by heavy industries compared to baseline (forecast under business as usual scenario); ii) 100 energy auditors completed training to support energy efficiency practices in industrial sector, of which 50 fully certified and 50 doing on-job training to become fully certified; iii) 1000 energy managers certified to support energy efficiency practices in industrial sector; iv) 1000 energy efficiency plans and implementation reports of large energy end-users of the industrial sector are received by MOIT or provincial DOITs, of which 600 have been prepared by certified energy managers. Pillar C: End-of-Program Results (CY 2015): GoV has improved its planning, prioritization and financing for climate change action; Additional financial resources for climate change action are mobilized, planned according to priorities and a multi-sector allocation process and reported subsequently. Baseline: i) No agreed tool in place within the MPI SEDP process to plan and prioritize climate adaptation action; ii) No Province has disaster risk management and reduction plans in place; iii) Addressing Disaster risk hazards relies on dispersed and diverse legal frameworks; iv) No additional Financial Mechanism for allocating budget for climate change action; vi) No government unit responsible for facilitation/awareness raising on access to climate change financing. Targets: i) An Adaptation Prioritization Framework is operational within MPI SEDP annual cycles and initial implementation reflected in MPI SEDP annual guideline frameworks and budget reports; ii) Provinces have disaster risk management and reduction plans under implementation as reflected in the Government Report on Evaluation of 5 years implementation of the National Strategy for DRM; iii) A comprehensive unified legal framework to address climate hazards is operational enabling a stronger focus on DRR; iv) Additional financial resources are mobilized for climate action, planned according to priorities and a multi-sector allocation process, and reported subsequently. Overall risk rating Moderate Operation ID P131775 6 1. INTRODUCTION AND COUNTRY CONTEXT 1. The Third Climate Change Development Policy Operation (DPO3) aims to support the GoV in its efforts to address climate change by adopting policies and strengthening institutional capacity to promote climate resilient and lower carbon intensity development. It is the third of a series of three operations of an amount ofUS$70.0 million equivalent. 2. Vietnam has witnessed impressive economic growth and poverty reduction in the past 25 years. Political and economic reforms have transformed Vietnam from one of the poorest countries in the world, with per capita income below US$100, to a lower middle-income country within a quarter of a century. In 2012, Vietnam’s per capita income was estimated at US$1,7 55.1 Using a ‘basic needs’ poverty line initially agreed in 19982, the poverty headcount fell from 58 percent in the early 1990s, to 14.5 percent by 2008, and is expected to be well under 10 percent by 20143. The country has attained five of its ten original Millennium Development Goal targets and likely to attain two more by 2015. 3. Reforms in the early nineties contributed to major competitiveness gains, which enabled a structural shift from agriculture to manufacturing and services. Investments in physical capital and human resources led to increased capital and labor productivity. Vietnam’s membership of the Association of Southeast Asian Nations (ASEAN) and the World Trade Organization (WTO) in 1995 and 2007 respectively, and a series of bilateral trade agreements, promoted reforms and led to higher private and public sector investments. 4. Higher resolution projections of climate change impacts, vulnerability and sensitivity for Vietnam provide further evidence of the need for climate response . Vietnam is one of the world’s most vulnerable countries to climate variability and change . Natural disasters and sea level rise already have significant economic and human costs, with estimated losses of up to 1.5% of GDP per year to natural disasters alone.4 The 2012 Government of Vietnam (GoV) climate change and sea level scenarios project a 2-3°C mean temperature rise and a 57-73 cm sea level rise by 2100.5 The 2012 projections include provincial and sub-provincial level analysis. The scenarios are being complemented by additional research on downscaled climate impacts and analysis of vulnerability and sensitivity, in some cases to the city or province level.6 Current recent global emission trends are actually projected to lead the world to be 2°C warmer by the 2040s, causing Vietnam to encounter increased unprecedented heat extremes in the summer months, a sea level rise of 30 cm, and nearly all coral reefs projected to experience severe bleaching. Vietnam will also experience significant increased saltwater intrusion and coastal erosion, negatively impacting agricultural productivity, 1 Source: http://data.worldbank.org/indicator/NY.GDP.PCAP.CD 2 The GSO-WB poverty line was presented in the 2000 Country Economic Memorandum Attacking Poverty (World Bank, 2000) and is approximately US$1.10 (2005 PPP). It was constructed on the basis of the consumption behavior of the poor in the 1993 VLSS, and has been updated for inflation for each round of the VHLSS. 3 In September 2010, Vietnam announced a new official poverty rate of 14.2 percent. In June 2012, the World Bank and GSO, using 2012 VHLSS data, have proposed a new and higher poverty line for Vietnam that is consistent with its status as a lower-middle income country 4 In Vietnam, natural disasters include floods, storms, flash floods, landslides, inundations, drought and saltwater intrusion. GDP figures are for the period 2001-2010. Data from GoV 2011 National Climate Change Strategy 5 1980-1990 baseline, B2 scenario. MONRE 2011. Update to the Climate Change and Sea level Rise Scenarios. 6 For further details please see Analytical Underpinnings section. 7 aquaculture production, and increase the vulnerability of coastal cities.7 Studies continue to indicate that poor and vulnerable communities will be harder hit.8 5. Vietnam’s Greenhouse Gas (GHG) emissions are growing, especially from the energy sector, where there is significant potential for mitigation co-benefits. While Vietnam is not a major global GHG emitter, Vietnam’s national and per capita GHG emissions conti nue to grow. Both Vietnam’s total emissions and per capita emissions almost tripled over the past decade while the carbon intensity of GDP increased by 48%. Vietnam’s energy intensity is the highest among major East Asian economies. Under business as usual (BAU), Vietnam’s GHG emissions are expected to triple between 2010 and 2030, with the share of coal in the power generation mix expected to triple from 17% in 2010 to 58% in 2030. 9 The 2011 GoV Power Development Master Plan recognizes the need for modernization and Vietnam Projected CO2 quantifies some of the linkages between energy sector Emissions modernization, energy security, cost reductions, and avoided GHG Millions of Tons of CO2 equivalent 600 emissions. In 2012, Vietnam demonstrated its commitment to low carbon growth by adopting the national Green Growth Strategy 500 (GGS), which includes targets for GHG emissions reductions. As illustrated by the projections shown here, the GGS sets an ambitious 400 target for mitigation in Vietnam. Energy efficiency is one of the most significant contributors to Vietnam’s goal of improving 300 economic competitiveness while lowering GHG emissions. In a low- 200 carbon development scenario, energy efficiency measures, most of which have negative marginal abatement costs, have the potential to 100 reduce electricity demand by a cumulative 350,000 GW between 2015 and 2030, without a detrimental effect on the end service or 0 2010 2020 2030 product provided. With GG Strategy Under BAU 6. The GoV has demonstrated a strong commitment to, and continued increasing leadership on, climate change, adopting an approach focused on adaptation with growing efforts on mitigation. As part of a sustained momentum of climate change action, the GoV has issued significant guiding documents on climate response, including the 2011 National Climate Change Strategy (NCCS), the 2012 National Action Plan on Climate Change (NAP-CC) and the 2012 Green Growth Strategy (GGS). The GoV has also developed three strategically complementary Climate Change Programs: the Support Program to Respond to Climate Change (SP-RCC) which is the national policy and institutional reform program that follows annual policy matrixes developed jointly with development partners, is approved by the Prime Minister and guides this WB DPO series, the National Target Program (NTP) on climate change capacity building and pilots, as well as the Scientific and Technical Program (STP) on climate change information and scenario. The GoV is now about to issue the National Action Plan for the Implementation of the Green Growth Strategy (NAP-GG) while the Central Committee of the Communist Party of Vietnam, the highest policy making body of the country, has issued Resolution 24 of its XI Congress on June 3, 2013 on “Responding to Climate Change, protection of natural resources and the environment”. Moving forward, the GoV has extended the SP-RCC through CY 2016, and is developing a 2014-2015 policy matrix. The World Bank has been and will remain closely involved in the SP-RCC policy dialogue, working with other DPs. 7 World Bank (2013). Turn Down The Heat: Climate Extremes, Regional Impacts, and the Case for Resilience. 8 World Bank 2013. Turn Down the Heat II – Global Hotspots and Regional Case Studies: Southeast Asia 9 Vietnam’s Second National Communication to the UNFCCC. 8 7. The CC DPO3 supports three policy pillars and four goals which have been consistent throughout the DPO series, as outlined in Table 1. These are selected from the broader policy matrix of the national SP-RCC based on (i) GoV’s primary strategic priorities for climate response, and (ii) close complementarity with Vietnam’s socio-economic development plan as well as sector priorities of the World Bank’s Vietnam Country Partnership Strategy and portfolio. The design of the CC DPO3 has been closely coordinated with Development Partners involved in the SP-RCC, resulting in a sustained policy dialogue and synergies in technical assistance (TA) support. The ownership on all sides of this operation is therefore strong and the risk rating is moderate. At this stage, the DPO series end of program indicators are expected to be achieved by Q 1 of CY 2015. Table 1: Overview of Structure and Rationale of CC DPO 3 Pillars Pillar Rationale The water sector was chosen due to the importance and urgency of its adaptation challenges and inter-linkages with other adaptation sectors, particularly agriculture Adaptation Pillar A. and energy. There were important gaps in the GoV WRM policy.  Water Security is a specific objective of NCCS and NAP-CC  Integrated water resources management and water use efficiency are included throughout GGS Enhancing industrial EE is expected to contribute significantly to the GoV target energy savings by 2015 and can significantly mitigate projected GHG emissions Mitigation growth from the energy sector while increasing longer term competitiveness. Pillar B.  EE is a component of the GHG reduction task in NCCS and NAP-CC  EE is a priority under the GGS  The GGS targets to reduce GHG emission from energy by at least 10% by 2020 relative to 2010 Evolutions to coordinate, guide, increase and monitor efforts, including allocation of resources, for a more effective response to climate change are critically needed. Pillar C. Cross-Cutting  Improving GoV climate response financing and capacity is a target under NAP- CC and specific task under the NCCS and the GGS The GoV has been successful at mobilizing international financing for climate response, although has tended to be rather had hoc in the absence of a solid enough policy framework. There is a need to develop more transparent and effective mechanisms for mobilizing climate finance.  Mobilization of domestic and international funding is included in NCCS, NAP-CC, and GGS. 8. The DPO is a critical part of the broader World Bank Group climate change engagement strategy in Vietnam. The DPO serves as the main programmatic climate policy dialogue engagement in the World Bank Group’s wholesale approach to addressing climate change in Vietnam. It is complemented by investment and knowledge support with a growing mainstreaming of climate response in project development across the portfolio. The World Bank will remain engaged in climate change policy, institutional and financing development in Vietnam following this DPO series through AAA and policy and investment lending programs. The nature and modality of this engagement will be determined following a review of outcomes under this current DPO series, ability to agree on action oriented policy triggers with the GoV, and consolidating policy actions under the recently approved green growth action plan with the climate change policy matrix. 9 2. MACROECONOMIC POLICY FRAMEWORK 2.1 RECENT ECONOMIC DEVELOPMENTS 9. Macroeconomic stability continues to improve, underpinned by moderating inflation and strengthening external accounts. Inflation (y/y) has fallen from a peak of 23 percent in August 2011 to 6.0 percent in December 2013 and 4.4 percent in March 2014 (figure 1). Subdued credit growth and easing of food price increases contributed to this. The decline in core inflation (excluding food and energy prices) has been more gradual, down from about 14 percent in August 2011 to 5.8 percent in March 2014, reflecting a series of increases in administrative prices. Pressure on the Vietnamese dong has eased and the exchange rates in the official and unofficial markets have converged after an adjustment of one-percent to the reference rate in July 2013 (figure 2). Stronger external trade and capital account flows have enabled foreign exchange reserves to build up to an estimated US$35 billion (roughly 3 months of import cover) as officially reported by the government in the first quarter of 2014, up from 1.6 months in December of 2011 (figure 3). Acknowledgement of these positive developments by financial markets has led to a decline in the sovereign risk on Vietnam’s credit default swap (CDS) – to levels seen just before the global financial crisis in 2009 (figure 4). Figure 1: Headline inflation (y/y, %) Figure 2: VND/USD exchange rate 4 25 22,000 Monthly (RHS) 21,750 3 Year-on-year 20 21,500 21,250 2 15 21,000 1 10 20,750 Free market 20,500 0 5 Official rate (SBV) 20,250 Com. bank (mid) 20,000 -1 0 Figure 3: International Reserves (months of imports) Figure 4: Credit default swap (bp) 4.0 700 600 3.0 500 400 2.0 300 1.0 200 Sovereign spreads 100 CDS, 5 years 0.0 0 2007 2008 2009 2010 2011 2012e 2013e Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Source: SBV, GSO, IMF and WB 10 Real sector 10. Economic activity remained relatively subdued in 2013. Real GDP growth picked up from 5.5 percent in Q3 to 6.0 percent in Q4 of 2013. Overall growth is estimated to have reached 5.4 percent in 2013 and 5.0 percent in the first quarter of 2014, compared to 5.3 percent in 2012. The services sector was the main driver of growth, contributing 2.8 percentage points to overall GDP growth whilst industry and agriculture contributed another 2.1 and 0.5 percentage points respectively. 11. On the production side, activity has been relatively slow in industry and construction due to weak domestic demand and previous stockpiling of factory inventories. This seems to be coming largely from domestic enterprises catering to the domestic market, whilst foreign invested export firms are still performing relatively well. The slowing domestic sector is reflected quite clearly in the Index of Industrial Production (IIP), which grew at 5.9 percent in 2013 and 5.2 percent in the first quarter of 2014 – a higher pace than the 4.7 percent increase in 2012 but much lower than the 8 percent increase in 2010-11. 12. Demand side components of GDP have also been growing at a modest pace, except net exports, which have grown quickly. Total investment was at about 30.4 percent of GDP for the whole 2013, about 12 percentage points below the peak in 2007. The decline in domestic private investment, from 16.4 percent of GDP in 2007 to around 11.5 percent in 2013, is worrisome. Household consumption has been lackluster since the onset of the global crisis, recording an average growth rate of 4.9 percent during 2009-2013, compared to 7.6 percent average during the previous 5 years. Business closures and layoffs over the past years took their toll on the labor market. The Nielsen Consumer Confidence Index indicates a recovery in consumer confidence in 2013 in Vietnam, remaining well above the average global consumer confidence level.10 However this has not yet translated into real spending - retail and wholesale trade growth continued to moderate in in the first quarter of 2014. External sector 13. Vietnam’s export performance continues to be strong, growing at 15.4 percent in 2013, after 18.2 percent in 2012. Earnings from commodity exports are declining due to falling prices. Labor-intensive manufacturing exports such as garments, footwear and furniture continue to sustain rapid growth. But it is the high-tech sector (e.g. cell phones and parts, computers, electronics, automobile parts), which is showing the fastest growth. In 2013, exports of cell phones and accessories reached $21 billion, overtaking garments as the largest export item. 14. Import growth picked up in 2013. In 2012 lower demand for capital and intermediate goods, as well as weaker private consumption, caused imports to moderate at 6.6 percent growth. Imports grew at 16.1 percent in 2013. In particular, imports of machinery, equipment, raw materials and intermediate goods have risen faster in 2013 compared to 2012. A new cycle of investment and production may therefore be underway - offsetting to some extent the pessimism 10 The Nielsen GCCS is an online survey of over 30,000 respondents across 60 countries to measure consumer attitudes about the job market, spending intentions and changing habits (www.nielsen.com). 11 about domestic investment demand. There are some preliminary indications of a pick-up in fixed capital accumulation, which is likely to increase further in the coming year. 15. Although foreign direct investment commitments have remained steady, actual disbursements have declined relative to GDP. FDI disbursements have fallen from an average of 10.7 percent of GDP in 2007-09, to 8.4 percent in 2010-12, to an estimated 6.7 percent in the 2013. Some sectors that saw significant FDI inflows during the economic overheating of 2007- 2009 include housing, hotels and urban development. However, a shift has been underway, with a rise in FDI into manufacturing, retail and technology11. 16. Vietnam is expected to maintain trade and current account surpluses in the near- term (Figures 5 and 6). The current account recorded a surplus of 0.2 percent in 2011 and 5.8 percent in 2012. In 2013, the current account is expected to record a surplus of 6.5 percent. The capital account surplus remains sizeable owing to consistent FDI inflows and Vietnam’s continued access to concessional financing. These developments have contributed to a build-up of foreign exchange reserves, which however are still below prudential levels for an economy that is as open as Vietnam’s and that maintains a system that is close to a crawling peg exchange rate regime. SBV had to intervene in mid-2013 to stabilize the dong and gold market. This internal flight to non-VND assets still suggests some fragility in VND sentiment. Figure 5: Trade balance (USD billion) Figure 6: Balance of payments (% GDP) 140 25.0 Exports (FOB) Capital account 120 Imports (CIF) 20.0 Balance Current account 100 15.0 80 10.0 60 5.0 5.8 6.5 40 0.0 0.1 20 -5.0 -3.8 0 -6.5 -10.0 -9.0 -11.0 -20 -15.0 2008 2009 2010 2011 2012 2013 Q1-14 2007 2008 2009 2010 2011 2012e 2013e Source: GSO, SBV and WB Inflation and monetary policy 17. Inflation has fallen and remains relatively stable. Headline inflation (y/y) was at 4.4 percent in March 2014, a steep deceleration from 18.1 percent in December 2011. The decline is largely due to the easing of food prices and the effect of stabilization measures. Food price inflation, which peaked in August 2011 at 34 percent, grew by 2.9 percent in March 2014 thanks to abundant supply of agricultural products, easing international prices and reduced growth in household consumption. However, there remain some upside risks to inflation during 2013/2014 if price of administered goods and services are adjusted to market levels, since user charges for many public services (healthcare, transport and education services) remain below cost. 11 FDI reports prepared by the Ministry of Planning and Investment 12 18. Efforts by the authorities to support growth through easing monetary policy have had limited impact. Lower inflation in the past twelve months has provided the SBV the space to cut key policy rates by 800 basis points and lower the deposit rate cap on local currency accounts by 700 basis points. Most recently, on March 18, 2014, the State Bank of Vietnam cut its discount and refinancing rate by 50 basis points to 4.5 percent and 6.5 percent respectively (figure 7). Policy rates are now below the level at which they were when monetary tightening began in early 2011. Despite this, total credit to the economy from the banking system is estimated to have grown by only about 9 percent in 2013 compared to the annual target of 12 percent (figure 8). Figure 7: Key policy rates (%) Figure 8: Growth in monetary aggregates (%) 50 16.0 Total credit 14.0 40 Total liquidity 12.0 Total deposit 10.0 30 8.0 20 6.0 4.0 Discount rate 10 2.0 Refinancing rate 0.0 0 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Feb-09 Feb-10 Feb-11 Feb-12 Feb-13 Feb-14 Source: SBV 19. Low credit growth can be attributed to several factors. First, the domestic private sector remains weighed down by low business confidence, thereby moderating the demand for credit. Second, with their balance-sheets impaired by rising Non-Performing Loans (NPLs), commercial banks have been cautious in extending further credit to the real sector. Third, the banks have been focusing on addressing NPLs which has also limited their liquidity due to the need to increase reserves and provisioning. 20. Under such circumstances, any further monetary easing is likely to have only limited impact on growth, unless banking sector reforms pick up. It will add to concerns surrounding credit quality and macroeconomic stability. In order to restore the functions of the credit market and make monetary policy more effective, restructuring of the banking sector (and the associated restructuring of SOEs) continues to be an imperative. 21. Important financial sector vulnerabilities remain, creating a drag on overall economic performance. Concerns about the overall quality of the banking sector portfolio remain, and the policy response thus far to stem further deterioration of the sector’s financial health has yet to confirm its effectiveness (discussed further below). NPLs in the banking sector continue be a major concern. There are concerns regarding quality of banking data (at both aggregate and bank level) and the limited disclosure of these statistics (by banks and SBV). The SBV reported an NPL ratio of about 4 percent as of December 2013. However, there is general acknowledgement that the actual NPL ratio would be higher if international accounting standards were applied. 13 22. Vulnerabilities in the banking sector likely present significant risks to overall macroeconomic stability. There is also a strong – and as yet not quantified – link between the financial performance of SOEs and State Owned Commercial Banks. High NPLs pose macro- fiscal risks as fiscal injections may be needed for recapitalization of banks. Foreign investors can play an important role in helping with recapitalization as well as NPL resolution for the banking system, once the extent of the required recapitalization is made more precise. The Bank, together with the IMF, SBV, and MOF, will seek to close these analytical gaps to better assess these vulnerabilities. There is a general need to strengthen the crisis management framework. . Fiscal policies and developments 23. Although the government in 2010-2011 successfully reigned in the fiscal stimulus implemented in 2008-2009, it is now facing serious fiscal challenges due to slowing revenue collection. The fiscal deficit in 2013 reached 5.3 percent of GDP by government accounting standards (5.6 percent of GDP by GFSM 2001) compared to planned target of 4.8 percent of GDP .12 It has therefore overshot the indicative deficit target of 4.5 percent of GDP (2011-2015) in its fiscal strategy, adopted through Prime Minister’s Decision 958 (2012). The primary deficit is estimated to have increased from 3.5 percent of GDP in 2012 to roughly 4.2 percent in 2013. 24. A combination of slower growth and tax relief for enterprises has led to lower buoyancy of Corporate Income Tax and Value Added Tax over the past two years. CIT and VAT constitute just over half of total revenue in Vietnam. In addition to this, collection of trade taxes has fallen due to slowing imports and tariff reductions, so has revenue from land sales, which is linked to lower domestic investment. Preliminary figures show that both SOEs’ and the domestic private sector’s CIT contributions (nearly 35 percent of total revenue) declined by 2 and 7 percent respectively in 2013. Foreign invested firms’ CIT contributions on the other hand have increased by 7 percent. 25. In response to these developments, and in line with its policy to enhance public investment efficiency, the government has continued to consolidate capital spending. Total capital spending (including off-budget) is estimated to have fallen from around 11.6 percent of GDP in 2010 to an estimated 7.8 percent in 2013. A number of policy measures have been implemented over the past two years to establish more discipline over the capital budget. Attention has been focused on completing ongoing projects; new projects are agreed only in exceptional cases. 26. The growth in recurrent spending has fallen in 2012-2013, though recurrent spending on the social sectors has remained a priority in the State Budget. The government has made efforts to spend more efficiently (discussed below in the outlook section), which has contributed to a drop in recurrent spending growth in real terms from 14 percent in 2011-2012 to 3.2 percent in 2012-2013. The ratio of capital to recurrent spending has declined from 62 percent in 2010 to an estimated 40 percent in 2013. This partly reflects the relative priority 12 By Government Finance Statistics Manual 2001 standards, covered in table 1 below, the deficit is estimated to have increased from 2.8 percent of GDP in 2010 to 5.5 percent of GDP in 2013. These are preliminary figures based on the government’s first estimates of 2013 fiscal outturn. 14 accorded by the government to the social sectors. Recurrent spending on social sectors as a share of share of GDP has steadily risen since 2010 from 8.4 percent to an estimated 9.4 percent in 2013. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 27. The medium-term outlook remains favorable on balance, albeit with considerable downside risks. GDP growth in the baseline scenario is projected to rise modestly, to 5.5 percent in 2014 and 5.6 percent by 2015 (table 2.5). This assumes fiscal and monetary prudence and acceleration of structural reforms. The current account is expected to remain in surplus, although this is expected to narrow as imports pick up and exports of foreign-invested manufacturing companies start to moderate. Capital inflows are expected to pick up as investor confidence recovers, resulting in continued reserve accumulation. Table 1: Vietnam’s Key Economic Indicators13 2010 2011 2012 2013e 2014/p 2015/p Output, Employment and Prices GDP (% change previous year) 1/ 6.4 6.2 5.3 5.4 5.5 5.6 Industrial production index (% change, previous year) 8.8 7.3 4.7 5.9 6.0 6.2 Unemployment rate (%, urban areas) 4.3 3.6 3.2 3.5 3.5 3.5 Consumer price index (% change, annual average) 9.2 18.6 9.1 6.6 6.5 6.3 Fiscal Balance (% of GDP) Total revenue and grants 27.2 25.9 22.9 22.2 19.6 19.7 Total expenditure (including off-budget items) 30.0 26.9 27.7 27.8 26.0 25.7 General fiscal balance (including off-budget items) -2.8 -1.1 -4.8 -5.6 -6.4 -6.0 Foreign Trade, BOP and External Debt Trade balance (BOP definition, $US billion) -5.1 -0.5 9.8 10.6 9.8 8.5 Exports of goods, ($US billion, fob) 72 97 115 132 152 175 Imports of goods, ($US billion, cif) 85 107 114 131 153 178 Current account balance ($US billion ) -4.3 0.2 9.0 11.1 8.3 5.7 Current account balance (% GDP) -3.8 0.1 5.8 6.5 4.5 2.8 Foreign direct investment (BOP inflows, US billion) 8.0 6.5 7.2 7.4 7.6 7.7 External debt - PPG (% of GDP) 2/ 29.5 27.2 28.0 28.5 27.7 27.3 Debt service ratio (% exports of g&s) 3.3 3.8 3.3 3.2 3.2 3.2 Reserves, including gold ($US billion) 12.4 13.5 25.4 28.4 --- --- Reserves (in months of imports) 1.8 1.5 2.7 2.6 --- --- Financial Markets Credit to the economy (% change, period-end) 32.4 14.3 8.7 9.0 12.0 14.0 Short-term interest rate (3-M deposits, period-end) 14.0 14.0 9.0 6.5 6.0 --- Stock market - VN index (Jul 2000 =100) 485 352 414 505 --- --- 1/ GDP based on 2010 price; 2/ WB estimates of Public and Publicly Guaranteed External Debt Source: GSO, SBV, MOF, IMF and WB 13 Revenue and expenditure to GDP ratios in table1 are on average between 1 and 2 percentage points of GDP lower than earlier estimates because GDP figures have been rebased from 1994 to 2010. 15 28. There is likely to be limited short-term impact from the US Federal Reserve’s ongoing tapering of its expansionary monetary policy. Vietnam did not experience the same market turmoil as other emerging market economies in 2013 when initial indications were made on tapering. Nonetheless, trade links with affected emerging market economies are not insignificant. Vietnam’s exports to the ASEAN 5 account for around 15 percent of total exports. Any knock-on real economy effects in these countries would be felt by Vietnam. Any further slowdown or rebalancing towards consumption spending in China would also impact Vietnam’s exports. On the other hand, positive developments in the US and the EU (together accounting for almost 40 percent of Vietnam’s exports) should help counter some of the regional trade effects. 29. The government is faced with crucial fiscal policy choices, as it seeks to balance the twin objectives of economic expansion and macroeconomic stability. The government will continue to face revenue challenges over the medium-term. Part of it will be due to counter- cyclicality because of projected moderate growth and tax breaks to stimulate economic activity among small and medium enterprises. Though there will also be some short-term loss from cuts in the CIT rate, which over the longer-term may be offset by incremental investment. 30. To address slowing revenue, the government is working on strengthening tax administration. The revised Law on Tax Administration (November 2012) has introduced several new provisions to increase efficiency of tax administration, adopt Advance Pricing Arrangements (which should reduce loss from transfer pricing), and strengthen collections through improved tax audit and risk-based management. On tax policy, the government is expected to raise selected excise tariffs and adjust import tariffs on petroleum, and is looking at clearer requirements for SOEs to pay dividends to the State Budget 14 – at the same time it needs to broaden the tax base and reduce exemptions. 31. The government is also paying more attention on spending consolidation. For capital spending, aside from policy measures mentioned above, there are now stricter provisions on spending of revenue collected over what was planned in the original budget. Ordinarily, provinces have discretion to spend a portion of the over-realized revenue on new capital projects. However, now these receipts have to be channeled to existing appropriations and for exceptional situations only such as natural disasters. If provincial authorities raise below what was budgeted, then they have to first find financing from existing sources (e.g. Financial Reserve Fund) before they can request additional transfers from the central government. 32. The government has introduced a number of policies to cut recurrent spending : (i) gradual reduction in subsidies and adjustment of administered prices; (ii) reduction in non- essential spending (e.g. workshops and seminars); (iii) cuts in the goods and services budget (e.g. government utility costs) by 20 percent; and (iv) generate 10 percent savings across the budget to finance salary reform costs. 33. The 2014 State Budget projects a similar deficit of 5.3 percent of GDP according to government accounting, but shows an increase to 6.4 percent of GDP according to GFSM 2001 estimates (see table 1). This difference is partly due to the projected increase in off-budget 14 The government has issued Decree No. 204/2013/ND-CP dated December 5, 2013 providing guidance on budget execution and collection of dividends from enterprises where the state has shareholding. 16 capital expenditure. Revenue projections in the 2014 State Budget are conservative, showing a 1 percent decline in total collections compared to the 2013 estimates. Overall spending in the 2014 State Budget is expected to grow at 3 percent in nominal terms from the 2013 estimated outturn, compared to an average of 16 percent growth in nominal terms in 2011-2013. But given the overall fiscal stance, there will be little fiscal space to absorb potential shocks unless some of the above structural revenue and spending efficiency measures are implemented. 34. The latest joint World Bank-International Monetary Fund Debt Sustainability Analysis (DSA) carried out in June 2013 assesses Vietnam at low risk of debt distress but there are important downside risks. Public debt (domestic and external) has increased slightly to around 56 percent of GDP in 2012 from 55 percent of GDP in 2011. Public sector debt dynamics over the medium to long-term have deteriorated somewhat compared to the 2012 DSA, largely on account of slower growth projections, lower revenue buoyancy and higher fiscal deficits. Debt sustainability indicators are projected to remain below their applicable debt thresholds. The increase to the 2013 deficit target will not change the overall rating of low level of debt distress. Figure 9: PV debt to GDP Figure 10: PV debt to export Figure 11: PV debt to revenue 60 250 350 Threshold 50 300 200 40 Extreme shock 250 30 150 200 20 150 100 100 10 Baseline 50 50 0 0 -10 0 Historical scenario -50 -20 -50 -100 2012 2017 2022 2027 2032 2012 2017 2022 2027 2032 2012 2017 2022 2027 2032 Source: IMF, WB 35. The government will need to maintain its ongoing control over spending growth and implement measures to reverse the decline in revenue collection to ensure continued debt sustainability. The DSA results hinge on a baseline macroeconomic scenario in which government over the medium-term reduces the pace of spending considerably below historical levels. Even a small increase in the pace of spending growth will lead to a rapid deterioration in debt dynamics. 36. In terms of contingent liabilities, government guarantees for external and domestic debt were at around 11 percent of GDP in 2012 (this is part of total public debt at 55 percent of GDP mentioned above). The level of guarantees increased by nearly 20 percent between 2011 and 2012. There are no major concerns at this stage, but the government is monitoring risks closely particularly because some of the guaranteed firms (mostly SOEs) are operating in sectors facing difficulties (e.g. cement, paper, electricity production); the quality of reporting from guaranteed firms is mixed; longer-term investment projects are funded by shorter-term loans guaranteed by the government; and several loan guarantees are for social projects, which have longer gestation period. For these reasons, the government is imposing tighter controls on issuance of debt guarantees and has also adopted a Medium-Term Debt Management Program. 17 37. Aside from explicit liabilities however, the baseline scenario in the DSA assumes no realization of other possible liabilities that may arise from banking or SOE-related shocks and/or reforms. Any systemic shock, recapitalization of banks by the government, or acceleration of SOE restructuring – all of which have associated fiscal costs – would contribute to a rise in debt. These costs would be beyond whatever fiscal space could be generated out of revenue increase or further efficiency gains given the current fiscal situation. 38. The medium-term macroeconomic framework has been updated and confirmed to be adequate to proceed with a Development Policy Operation (DPO). Government policy has been largely consistent with maintaining macroeconomic stability15. Interest rate cuts in the past year, although quite aggressive, have remained in line with falling inflation. The SBV’s stance to build foreign exchange reserves on the back of strong export and FDI performances, adjusting the exchange rate as necessary, also seems appropriate. There are concerns over a growing fiscal deficit with slowing revenue collection, which in turn is linked to slower growth and tax incentives to the private sector. In response the government is strengthening revenue mobilization through tax administration measures, and consolidating both capital and recurrent spending. The macroeconomic risks linked to the financial sector remain important. The SBV has taken preparatory steps to help address these, including by tackling short-run liquidity pressures, which until recently did heighten perceptions of risk in the financial sector. More work is needed to address the fundamental weaknesses in the financial sector, which is part of the Bank’s ongoing dialogue with the government. 2.2 IMF RELATIONS 39. The IMF maintains a regular policy dialogue through Article IV consultations, interim staff visits, and its resident representative office in Hanoi . It has not had a program in Vietnam since the Poverty Reduction and Growth Facility ended in April 2004 but does have a series of technical assistance support. There are a range of ongoing areas of joint work between the Bank and the Fund, which are of direct relevance to the EMCC. These include a joint work program on strengthening debt management, annual joint debt sustainability analysis, tax policy and administration reform, public expenditure management, banking sector supervision, and the Financial Sector Assessment Program (FSAP). 15 The Government of Vietnam has provided an update on macroeconomic developments in the first four months of 2014 based on recent information available to the authorities, which is attached in annex 5. 18 3. THE GOVERNMENT’S PROGRAM 40. The NCCS, NAP-CC, GGS and GG-NAP outline the GoV’s national policy priorities for climate action and serve as the basis of the national policy reform program (the SP-RCC) supported by this DPO series. The 2011 NCCS laid out an overall strategic objective for climate response that emphasizes that adaptation and GHG emission reduction need to be carried out in parallel, with the former given more priority in the immediate future. The NCCS includes 10 strategic tasks with goals for 2015 and 2020. The NAP-CC builds on the NCCS by listing specific adaptation and mitigation programs and projects for implementation by sector ministries and provinces. The GGS and the GG-NAP lay out 3 strategic tasks of (i) Reducing GHG emissions, (ii) Greening Production, and (iii) Greening Lifestyle. Closely linked to, and aligned with the GHG emission strategic objectives and tasks defined in the NCCS, the GGS defines specific targets through 2050 and provides 17 implementation solutions. Line ministries are being requested to align their sectoral strategies toward these GGS strategic tasks. For example, MARD has launched an agriculture restructuring program which highlights the reduction of inputs including water, chemical fertilizer, pesticides in order to increase climate resilience and incomes as well as co-benefit with GHG emissions reduction. MOIT leads the Vietnam Energy Efficiency Program (VNEEP) and its implementation is progressing. MOT has developed and issued for implementation the national standard on fuel consumption for car and motorcycle manufactured, assembled and imported to Vietnam. 41. The GoV’s institutional response to climate change continues to strengthen with improved inter-sector coordination under the recently established National Committee on Climate Change (NCCC). Annex 2 summarizes recent GoV actions on climate change at the national level. Within the central Government, the mandate for guiding and coordinating climate change response sits with the NCCC, which is chaired by the Prime Minister and is composed of the Deputy Prime Minister and ministers and vice ministers of other key ministries, as well as the chairs of various technical academies. The NCCC has an operational standing office in MONRE and is charged with directing the formulation of policies and institutions at strategic levels, coordinates international cooperation on climate change, and is responsible for guiding implementation priority and coordination of the National Climate Change Strategy (NCCS) and related National Action Plan on Climate Change (NAP-CC). This high level Committee met on February 19, 2014 and confirmed that he will oversee the implementation of the Vietnam Green Growth Strategy (GGS), and ensure a strategic coordination of the CCS and the GGS. The GoV issues NCCC annual reports and work plans. The SP-RCC is now overseen by the NCCC as are the NTP and National Program on Science and Technology for Climate Change. As a result, there is a growing high level platform of dialogue to address inter-sectoral coordination issues under the leadership of the Prime Minister Office. 42. To support the development of its climate action, the GoV has also been active in mobilizing climate finance, has stepped up its role in the international dialogue and is already using the State budget to finance investment projects that have climate change co-benefits The GoV has committed domestic finance to climate change response through different programs, starting with the National Target Program to Respond to Climate Change (NTP-RCC) and has been successful at mobilizing international finance. Going forward, it aims to improve the mobilization of climate finance with improvements in cohesiveness, evidence-based decision-making, alignment of the planning and budgeting process and increased transparency. The draft Climate Public Expenditure/Investment Review (CPEIR), recommends that the GoV move from an ad hoc approach in climate change spending to an integrated, targeted, and prioritized climate change response. As part of the action plan that follows the recommendations of the CPEIR, the GoV would improve its 19 planning and budgeting systems to conduct climate change response mainstreaming discussions with relevant line ministries and provinces to define climate change response strategies in each sector of the SEDP and CC-response action plans. In turn, this should allow for the integration of climate change considerations in the investment projects planning and budgeting process. All of these will be critical to improving the effectiveness of Vietnam’s climate response and access to medium term international climate finance. Vietnam has also become more active in the international climate dialogue, building on experience gained from its expanding national program and the desire to be more visible in the global discussions based on increased experience and capacity. For example, the GoV has increased visibility in the United Nations Framework Convention on Climate Change Conference process, strengthened its participation in the Partnership for Market Readiness, and has been proactive in engaging in the development of several Nationally Appropriate Mitigation Strategies (NAMAs). The GoV has extended the SP-RCC through 2016 with a policy matrix aligned with key national strategies and supporting significant policy evolutions, including a new Irrigation and Drainage Law, a revised Environmental Law, and a Hydrometeorology Law among others. The World Bank will continue to engage with the GoV on climate policy through the SP-RCC. 43. In addition to progress and leadership at the central level, the climate change agenda is also progressing at sub-national level. A number of key provinces and cities have developed provincial and city action plans and allocate budget to respond to climate change with emphasis on reduction of vulnerability to climate risks. Some provinces have set up their climate change offices under the provincial People’s Committee or Department of Natural Resources and the Environment (DONRE) to coordinate cross-cutting efforts within the province and assist local authority in planning and decision making related to climate change as well as by engaging in complementary GG action plans. 44. While the Government has made significant accomplishments in strengthening the framework for climate change action as outlined above, implementation requires increased inter-sectoral coordination and will need sustained policy, institutional and technical reforms and the continued attention of GoV’s senior leadership. Given the cross-sectoral nature of climate and green growth response, dialogue across ministries requires further strengthening beyond improvements observed since DPO 1. The GoV needs to further reflect the implementation of these priorities in the SEDP planning, budgeting, monitoring and reporting. Line ministries and Provinces have generally taken actions to mainstream adaptation responses into socio-economic development and planning to address observed impacts of climate change which have already affected adversely agricultural and aquaculture production, coastal and urban areas, water supply, etc. NCCC leadership is critical to ensuring coherence, prioritization and coordination necessary for implementing the GoV’s climate change and green growth agenda across line ministries and provinces. 20 4. THE PROPOSED OPERATION 4.1 LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION 45. The DPO program throughout the series has maintained a selective and cohesive subset of SP-RCC policy goals from DPO 1 and 3. This subset consists of four goals organized under three pillars, illustrated earlier in Table 1. Prior actions were jointly developed and agreed with the GoV and DPs involved in the SP-RCC via sector working groups led by MONRE and line ministries, including MONRE, Ministry of Agriculture and Rural Development (MARD), Ministry of Industry and Trade (MOIT), Ministry of Planning and Investment (MPI) and Ministry of Finance (MOF). The main thrust of the DPO series is summarized below. Pillar A. Adaptation 46. Pillar A: This Pillar supports an adaptive legal framework for integrated water resources management, which is considered a strategic, no-regrets adaptation option. The water sector was selected for inclusion in the DPO series in accordance with GoV priorities, the World Bank’s 2010 Strategic Directions on Climate Change in Vietnam, and for its linkages to other major sectors where increased adaptive capacity is needed, especially agriculture and hydropower. In spite of apparently abundant water resources, water security in Vietnam has become a critical issue since many river basins and aquifers are already under water stress, particularly during the dry seasons. The pressure on water security is projected to grow due to increasing water use in upstream countries, population growth, rapid urbanization, hydropower development, industrialization and pollution from fast economic growth. The agricultural sector is currently the largest water user, representing 72 percent of water us in Vietnam, but characterized by unmeasured use of water, high consumption of inputs (water, land and labor) and generally weak irrigation management. Climate change is projected to significantly further deepen these pressures by causing greater variability of rainfall, increased salinity intrusion, and a higher incidence of extreme weather.16 This amplification of extremes requires integration of various aspects of water management, including disaster risk management for droughts and floods, and managing water quality in low flow conditions. Thus, Pillar 1 focuses on supporting the Government to more fully adopt and implement the principles of integrated water resources management (IWRM) to create a resilient water resources management policy framework that can adapt to observed and projected stresses. Goal 1 - Climate-Resilient Development: Improving the Resilience of Water Resources 47. Goal 1 Background: In order to achieve the end-of-program result of an operational, IWRM-based legal and organizational framework for water resources management by 2015, Goal 1 supports a series of policy actions related to national water resources management. As recognized in the 2006 MONRE National Water Resources Strategy and the 2009 joint GoV and multi-donor Water Sector Review (WSR), the institutional and legal arrangements for water resources management in Vietnam were not clear and weak. In 2010, MONRE took action to begin reforming the water sector by preparing and submitting a National Target Program for Water Resources Management (NTP-WRM) based on the WSR, prioritizing actions for water resources management across sectors through 2020 (DPO 1 PA). Although the NTP-WRM, like several other NTPs was not approved by the National Assembly due to budget constraints, the development process and content of the NTP-WRM benefited from significant background preparatory inter- 16 2009. Water Sector Review 21 ministerial work and represented a significant step in the WRM process which led to the new Water Law and the Water NAP in a short period of time. In 2012, the National Assembly approved a new Law on Water Resources (LWR-DPO 2 PA) based on the principles of IWRM. For example, the law strengthens the management linkages between surface water, groundwater and coastal water; supports climate resilience through a strong focus on addressing saltwater intrusion and sea level rise; and mandates holistic planning as a basis for addressing water issues including climate change impact projections. In irrigation, the main use of water in the country, MARD has piloted Irrigation Management Transfer (IMT) and benchmarking of irrigation schemes to inform reforms for more efficient irrigation water management. These latter actions are paving the way to the development of the new Law on Irrigation and Drainage. Pillar B – Mitigation 48. Pillar B: The Pillar B policy program focuses on scaling up energy efficiency activities in Vietnam, contributing both to climate change mitigation and to strengthening energy security. The National Energy Development Strategy of Vietnam, approved in 2007, defined the diversification of energy resources and energy conservation technologies as the central task for the country’s industrialization and modernization, and called for energy development to be integrated with ecological environmental protection and sustainable development. The Vietnam National Energy Efficiency Program (VNEEP), approved in 2006, created a comprehensive set of activities to improve energy efficiency and conservation (EE&C) in all economic sectors and across society as a whole. The strategic vision is to reduce investment needs in the power sector, strengthen energy security, increase competiveness, control and mitigate environmental pollution in energy activities and foster sustainable socioeconomic development. At the same time, it is estimated that the energy sector will account for 80-90% of all GHG emissions in Vietnam by 2030.17 Thus, increasing energy efficiency (EE) represents a major opportunity for co-benefits between climate change mitigation and improving energy security, reducing power sector shortages and dependency on fuel imports. The second phase of VNEEP aims to achieve 5 to 8% reduction in total national energy consumption in the 2011-2015 period compared with the energy demand forecast conducted in 2005. 49. The World Bank is also involved in this sector through technical assistance and investment lending. This includes the strengthening of capacity at MOIT and of key stakeholders for an effective delivery of VNEEP in key industrial sectors under the Global Environment Facility (GEF) funded Clean Production and Energy Efficiency (CPEE) project. TA and investment support are also involved under the Distribution Efficiency Project (DEP) to improve the performance of Vietnam’s Power Corporations in providing quality and reliable electricity services through, demand side response and efficiency gains. Lastly, the Bank supports the development of competitive electricity markets through the Power Sector Reform DPO 3 (PSR DPO3). It is expected that through promoting greater efficiency in the sector, the Bank’s combined support to the Government under CPEE, DEP and PSRDPO3, will contribute to GHG avoidance as a result of energy efficiency gains.18 This complements IFC’s support for promoting Green Buildings and the complementary development of EE and RE lending capacity by providing dedicated capital lines and advisory services in the banking sector (subject to market conditions). 17 MPI and UNDP (2012) cited in UN Vietnam. Climate Change Fact Sheet, Feb 5, 2013 18 Despite this, it cannot be fully assumed that a more competitive market will result in reduced GHG emissions. 22 Goal 2 - Lower carbon intensity development: exploiting energy efficiency potentials 50. Goal 2 Background: In order to achieve the end of program results to strengthen EE in large energy users of the industrial sector, Goal 2 targets enhancing EE capacity and better- informed EE practices in large industrial large energy users to promote GHG emissions reduction compared to projected energy demand growth. To address barriers to EE identified during VNEEP Phase 1, the DPO series supports GoV policy actions to establish and monitor an effective regulatory framework to successfully implement the mandates and measures defined in the EE&C Law and to strengthen the results of VNEEP 1. The EE&C Law imposes obligations on large energy consuming users, called Designated Energy Users or simply “Designated Enterprises” (around 1,200 in the industrial sector, of which 300 are the major energy consumers). The obligations on enterprises are combined with building local energy efficiency skills through specialized capacity enhancing programs for the certification of energy managers and energy auditors, under overall coordination of MOIT. In the industrial sectors, the monitoring of, and support for, designated enterprises to implement effective EE plans is delegated to the provincial Departments of Industry and Trade (DOIT). The substantial goals under VNEEP and the EE&C Law have begun to be operationalized starting with the adoption of the Implementation and Sanctions Decrees of the EE&C Law (DPO1 prior action). In order to develop the necessary human resources capacity to implement EE&C Law mandates, and achieve sustainable energy savings, MOIT has issued and implemented regulations on training to ensure adequate qualifications for the certification of energy managers and energy auditors (DPO2 prior action). To provide additional guidance, MOIT has issued guidelines for energy consuming designated enterprises to prepare and submit EE plans. Pillar C – Cross-Cutting Climate Change Policies and Institutional Readiness 51. Pillar C: The policy program under Pillar C aims to increase the GoV’s capacity to strategically address climate risks and lower carbon intensity development through improved cross-cutting decision-making, planning and financing frameworks. These are key to ensure national objectives such as food, water, and energy security, while addressing the impacts of climate change and moving toward green growth in a less carbon-heavy economy. This cross-cutting pillar is also expected to contribute to increase the effectiveness of the outcomes supported under Pillar A and B. The policy program under Pillar C is expected to help guide the development of sub-national and sectoral climate change response priorities and support implementation according to nationally owned criteria. The program focuses on prioritization of adaptation actions on the basis of an adaptation prioritization framework, the synergy and coordination of climate change adaptation and disaster risk reduction efforts, the development of a legal framework for disaster risk management, inter-ministerial coordination, and the strengthening of climate finance. Goal 3 - Strengthening the Capacity and Preparedness to Formulate, Prioritize and Implement Climate Change Action Goal 3 Background: In order to achieve the end of program results, Goal 3 under Pillar C focuses on cross-cutting capacity improvement. The series of reforms under Goal 3 are expected to improve the GoV’s ability to mainstream and reflect national, sub -national and sector priorities on climate change adaptation and GHG emission reduction in the socio-economic development plans of sectors and provinces. Goal 3 builds on a series of policy actions achieved by the GoV that demonstrate advancement in leadership, coordination, and cooperation on climate change action, including the development of the NCCS and the high level dialogue leading to the development of a 23 National Forum on Disaster Risk Reduction and Climate Change Adaptation (both recognized by DPO2). Goal 4 - Strengthening the Financing Framework to Support Climate Change Action 52. Goal 4 Background: In order to achieve the end-of-program results to mobilize and plan financial resources for climate action according to priorities and a multi-sector allocation process, Goal 4 supports the GoV’s efforts in enhancing the climate financing framework. Increased needs for climate finance is reflected for example in disaster risk reduction, flood control, sea dykes improvement, water supply, mangrove and forest plantation, energy efficiency and renewable energy programs. Vietnam currently does not specifically plan and record allocation of budget for climate action beyond the budget line items on allocation for the NTP-RCC. In order to address increasing needs for financing targeting climate action, the GoV issued an Official Instruction No. 8981/VPCP-QHGT on December 10, 2010 on guiding principles related to the use of official development assistance to respond to climate change through budget support (recognized in DPO 1). A Climate Finance Task Force was subsequently established to guide decision making within MPI (recognized in DPO 2) and a Climate Finance Options Platform aimed at raising awareness on climate finance opportunities available in country and at global level, provide information on accessing and combining sources for climate action, and create new opportunities is being developed by MPI. MPI, at the request of the Prime Minister, and in coordination with MOF and MONRE, has also decided to undertake a climate public expenditure review to provide recommendations on how to best increase the efficiency and effectiveness in allocation and utilization of public resources for climate action. All combined, these evolutions confirm the GoV strategic directions towards mobilizing additional and more effective financing to address climate change. This supports the development of a Green Growth Financial Mobilization Framework that MPI plans to develop under the new National GG Action Plan, which will include market-based mechanism options and a review of fiscal instruments. Lessons Learned 53. The design of DPO3 has built on lessons from the World Bank’s global and Vietnam portfolio of budget support operations, including CC DPO 1 and 2. The task team has reviewed experiences, good practices and lessons learned from programmatic development policy lending operations, including the CC Development Policy Loans in Mexico and Indonesia as well as more recent operations in Mozambique and Morocco. Box 1 outlines how the team has applied good practice principles in DPO3. Box 1: Good Practice Principles Principle 1: Reinforce ownership  The operation is fully aligned with GoV plans and strategies, in particular the NCCS and the GGS, which underwent detailed consultation prior to promulgation.  The policy content of DPO3 is underpinned by a substantial and evolving body of analytical and advisory work on climate change led by the GoV, the World Bank and others.  The NCCC, chaired by the Deputy Prime Minister, is tasked with oversight of the SPRCC.  Implementation of DPO1&2 further evidences commitment and ownership across stakeholders.  The Letter of Sector Development Policy provides further demonstration of sustained ownership. Principle 2: Agree up front with the GoV and other financial partners on a coordinated accountability framework  The SP-RCC policy matrix provides an accountability framework for measuring progress of 24 results indicators and is annually approved by the Prime Minister.  The DPO policy matrix is an agreed subset of the SP-RCC policy matrix. WB’s involvement is fully coordinated with other SP-RCC donors and includes regular joint monitoring missions. Principle 3: Customize the accountability framework and modalities of World-Bank support to country circumstances  The accountability framework and modalities of World Bank support blend into existing SP-RCC processes and structures instead of setting up parallel ones.  The DPO policy areas are priorities defined by GoV and supportive of major national strategies. Principle 4: Choose only actions critical for achieving results as conditions of disbursement  DPO3 prior actions have been strategically selected from the SP-RCC policy matrix and are considered essential for the overall impact of the programmatic DPO series. Principle 5: Conduct transparent progress reviews conducive to predictable and performance- based financial support  Progress reviews are implemented through regular joint meetings with the GoV and SP-RCC partners during each annual cycle (rather than just once upon operation completion). Aide Memoires and action plans are jointly developed and agreed upon, with joint wrap up sessions chaired by GoV leaders. 54. The above-named lessons were incorporated into the overall design of the DPO series. More details on lessons applied to the initial design of the series are found in the DPO1 Program Document. Listed below are a few specific elements that the team has further focused on for DPO3 since DPO1 and DPO2:  MONRE, the GoV lead agency of the SP-RCC, needs administrative, monitoring, reporting, and coordination capacity to simultaneously administer the program, interact with DPs and line ministries, promote quality policy and institutional dialogue, and report on progress and results. MONRE’s capacity and leadership has significantly improved since DPO1and 2. JICA has provided full-time TA to build MONRE’s capacity for the management of the SP - RCC, which is complemented by the recipient-executed component of the VNCLIP. The SP- RCC is now led by a MONRE DDG who is also the Head of the Standing Office of the NCCC. The Program is very closely supported by a MONRE VM. The wrap up session of the October 2013 Joint Monitoring meetings was chaired by the DPM.  Support across sectors to pursue the reform agenda and inter-ministerial coordination are crucial to scale-up climate action across sectors. In this regard, targeted TA and advisory services have been and will continue to be important to support reforms. Equally important is clarity in responsibility and accountability between MONRE and line ministries (including MOF and MPI), and between sector teams and SP-RCC focal points in each line ministries in support of an integrated response to the NCCS and GGS. 25 4.2 PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS Table 3: Summary of DPO 3 Prior Actions (all 7 prior actions have been delivered) Goal 1: Climate-resilient Goal 2: Lower carbon Goal 3: Strengthening capacity and Goal 4: Strengthening development: Improving intensity: Exploiting preparedness to formulate, prioritize and the financing framework the resilience of water energy efficiency implement climate change action to support climate resources potentials change action National Action Plan on Circular guiding the Decision on the National Action Plan for Inter-ministerial Circular Water Resources implementation of Climate Change issued by Prime Minister to guide the Management approved by energy efficiency (Decision Number 1474/QD-TTg dated implementation of the Prime Minister measures in the October 5, 2012) Mechanism to manage (Decision No 182/QD- chemicals sector issued the climate change TTg dated January 23, by MOIT Minister Decision on Adaptation Prioritization financial resources 2014) (Circular No. Framework for socio-economic jointly issued by three 02/2014/TT-BCT dated development planning issued by MPI Ministers (MOF, Implementation decree of January 16, 2014) Minister (Decision No.1485/QĐ-BKHĐT MONRE, and MPI) the new Law on Water dated October 17, 2013) (Joint Circular No. Resources approved by 03/2013/TTLB- Prime Minister Law on Natural Disaster Risk Management BTNMT-BTC-BKHDT (Decision No. 201/2013 and Reduction approved by the National issued on March 5, ND-CP dated November Assembly (Law No. 33/2013/QH13 adopted 2013) 11, 2013) on June 19, 2013) Pillar A. Adaptation Goal 1 - Climate-Resilient Development: Improving the Resilience of Water Resources 55. Goal 1 DPO 3 Prior Action: The National Action Plan on Water Resources Management (NAP-WRM) as well as the Water Law Implementation Decree have been adopted by the Prime Minister (January 23, 2014 and November 11, 2013, respectively). The NTP-WRM document prepared earlier by the Government, and the 2012 LWR provide the basis for the evolutions reflected in the NAP-WRM which sets out the specific directions, priority measures, and funding for implementing IWRM through 2020. In addition to promoting climate resilience by strengthening IWRM, the NAP includes specific priority activities that directly address climate change. For example, the NAP mandates the development of scenarios including climate change, sea level rise, and changes in upstream use for prioritized basins. This information will be used in developing integrated river basin management. The Implementation Decree provides further instructions for applying new concepts in the 2012 Law on Water Resources such as water user consultations, water fees, and implementation of baseline water resources survey. These new elements fill critical gaps and are all key for operationalizing the new IWRM approach of the country. 56. Reform to Implementation and Results: GoV is committed to implementing IWRM as reflected by the planned adoption of the Implementation Decree of the LWR and the adoption of the NAP-WRM by the Prime Minister. The NAP-WRM itself presents a plan for implementation, prioritizing both policy and investment actions. It also serves as a signal of prioritized areas for additional support by DPs and for coordination. In addition, MONRE has already begun implementing the LWR by developing dry season operating processes for reservoirs in the Vu Gia-Thu Bon and Ba Rivers. Moving forward, MONRE is preparing to implement other key elements of the LWR, including the establishment of a River Basin Organization in the Sesan-Srepok river basin and issuing guidelines for establishing minimum flows in all river basins. The 26 management of water resources following the river basin approach with the new RBOs playing the coordination and monitoring role instead of province-based river management is a critical evolution to address competing needs for water in the dry season and importantly operations of reservoirs especially for flood control. The GoV will now implement the regulation for joint operation of inter- reservoirs for small hydro power in the central region while MOIT is reviewing the modalities to improve the operation of small hydro-power reservoirs with enhanced coordination with local authorities to avoid causing adverse impacts and loss of life and assets due to water discharge. Finally, MONRE has shown a commitment to the investments in data collection and analysis mandated in the LWR through support from the World Bank funded Mekong Integrated Water Resources Management Project (MKIWRMP – P124142) and the forthcoming ADB funded River Basin Water Resources Management and Development Project. An assessment of the cumulative impact and of opportunities for improved joint operation, of small-scale hydropower cascades in six river basins in northwest Vietnam was completed where projects are financed under the World Bank funded Renewable Energy Development Project. In the irrigation sector, MARD is now developing a new Irrigation and Drainage Sector Law and a series of related reforms to improve management and increase water productivity with support from the World Bank Irrigated Agriculture Improvement Project (P130014). These evolutions come in addition to the approval by the PM on October 24, 2013 (No. 142/2013/ND-CP) of the Administrative Sanction Decree on water resources and minerals which requires water users to carry out concrete measures to address adverse impacts that they cause. Example includes carrying out treatment of waste water before discharge, applying for exploitation permit etc. The levels of the sanctions have been significantly increased from several to dozen times compared with the earlier fine levels. For example, the discharge of waste water exceeding from 10 m3/ day to under 50m3/day was penalized from VND 5 – 7 million, while the new sanction level is VND30-50 million for not following discharge level as specified in the permit. The Decree to guide the implementation of the LWR, now submitted to the PM for approval after extensive consultation with stakeholders, provides detailed guidance on consultation with organization, community and individual for the exploitation and the discharge of water resources. It explicitly specifies the scope of the water related uses which require consultation, the timeframe to hold consultation and who to be consulted, procedure for consultation from circulating the documents to collecting comments and response. Baseline surveys on current status of exploitation, utilization and discharge, inventory of water resources etc… are for the first time regulated in details in the Implementation Decree with roles, responsibility and reporting lines of parties involved now defined, including Provincial People’s Committee and Line Ministries. Box 2: Achieving Goal 1 End of Program (EOP) Results EoP Results: An IWRM-based legal and organizational framework for a programmatic, integrated and adaptive approach to water resources management is operational. Connecting Prior Actions to EoP Results and Indicators: As developed in the Water NTP approved by the PM (but not by the National Assembly), (DPO1 PA), mandated in the 2012 LWR (DPO2) and the implementation decree of the LWR (DPO3) provided Vietnam with a consolidated basis for the implementation of IWRM. The NAP-WRM (DPO3) provides a roadmap and budget for the implementation of these decisions, as well as an avenue for DPs and other public and private stakeholders’ engagement. In addition to promoting IWRM, which is expected to result in greater adaptive capacity and resilience, these policy actions also call for the implementation of specific activities. The establishment of minimum flows and related operational rules in the Vu Gia –Thu Bon and Ba rivers (EoP indicator ii) as mandated in the LWR is one evidence that the GoV is acting on the provisions of the 2012 LWR. 27 Progress Towards EoP Indicators End of Program (by Q 1 CY 2015) Current Status i) Three new high level legal IWRM instruments are i) In Progress. The 2012 Water Law is now operational with priority actions taken. effective. The Implementation Decree of Water Law and the NAP-WRM have been issued by the Prime Minister. The Decree on Administrative Sanction ii) Minimum flows established for the Vu Gia-Thu was issued by the PM on October 24, 2013. Bon and Ba rivers and used to guide water ii) In Progress. The Prime Minister has issued an allocations decisions during the dry season. instruction to develop an operation manual for hydropower in the Vu-Gia Thu Bon and Ba Rivers based on minimum flows and operating rules are being developed. These are expected to be in place by end of 2014. Pillar B. Mitigation Goal 2 - Lower carbon intensity development: exploiting energy efficiency potentials 57. Goal 2 Prior Action: The Circular guiding the implementation of energy efficiency measures in the chemical sector was issued by MOIT Minister on January 16, 2014. MOIT has issued the Circular on technical measures for energy saving and efficiency in the industrial production sector with benchmark indicators and specific requirements for the chemical industry. Enterprises are required to report and implement energy efficiency solutions to meet the energy efficiency requirement provided in circular. The circular was consulted with enterprises and relevant stakeholders during its development. It will be expanded to add technical measures and requirements for other large energy consumption industries, including steel, paper, plastic and beverage. Provincial Departments of Industry and Trade and the General Directorate of Energy are tasked to monitor and provide guidance and support to enterprises for implementation of the Circular. Technical assistance is provided to support the implementation of the Circular. The regulation guides the implementation of good practice EE&C measures and investments in industrial enterprises and identifies areas for financial support in large industrial sector, with a first application to the chemical sector. Development partners (DPs) have provided expertise to MOIT for the preparation of the circular for the steel, chemical and beverage sectors, particularly studies and analyses to assess EE potential and develop plans for the adoption of efficient technologies and practices. Based on this upstream analytical work, the government has information on good international practice that will enable it to channel financial support to the most strategic and effective energy efficient technologies and industrial sectors identified. 58. Reform to Implementation & Results: The ownership of the EE agenda is good and the World Bank is closely involved in implementation. As of November 2013, more than 900 energy efficiency plans and implementation reports of large energy end-users of the industrial sector have been submitted to MOIT or provincial DOITs and more than 650 energy managers have been certified to support energy efficiency practices in the industrial sector. The Distribution Efficiency Project (DEP - P125996) aims to support Vietnam in increasing quality and reliability of electricity services and in reducing GHG emissions, through efficiency gains and demand side response. The third component of this project on technical assistance and capacity building to Electricity Regulatory Authority of Vietnam (ERAV) and Vietnam’s Power Corporations (PCs) will build on 28 the DPO supported policy actions, especially by supporting monitoring and evaluation of energy savings and GHG avoidance achieved as a result of the project. Box 3: Achieving Goal 2 EoP Results Expected EoP Results: Practices to improve energy efficiency are implemented in large energy users of the industrial sector with related operating capacity increased Connecting Prior Actions to EoP Results: The enabling Decrees of the EE&C Law (DPO1) set the implementing details and the authority to enforce obligations on large energy users and assign MOIT the role of setting up the overall regulatory and monitoring framework, in particular for industry. With this authority, and to address lack of skills, MOIT issued and implemented regulations on training to ensure adequate qualifications for the certification of energy manager and energy auditors, and to prepare and submit EE&C action plans (DPO2). To enhance the quality of action plans and track progress to disseminate best practices, MOIT has issued regulations on EE&C measures for chemicals industry (DPO3, guidance on efficient technologies and practices to industrial and EE stakeholders) and guidelines for M&E framework will be issued soon after. Combined with other VNEEP activities, these reforms contribute to increased EE in industry and reduced carbon emissions compared to business as usual. Progress towards EoP Indicators End of Program (by Q 1 CY 2015) Current Status i) In Progress. TA will be provided to MOIT to i) 4% energy savings by heavy industries compared determine 2014 savings based on data collected and to baseline (forecast under business as usual scenario). calculations. ii) 100 energy auditors completed training to support energy efficiency practices in industrial sector, of ii) Achieved. MOIT reports that more than 160 which 50 fully certified and 50 doing on-job training individuals participated in energy audit training; of which to become fully certified. 50 energy auditors have been certified, and the rest iii) 1000 energy managers certified to support energy undertaking on-the-job training. efficiency practices in industrial sector. iii) In Progress. As of November 2013, more than 650 iv) 1000 energy efficiency plans and implementation energy managers have been certified. reports of large energy end-users of the industrial sector are received by MOIT or provincial DOITs, of iv) In Progress. As of November 2013, more than 900 which 600 have been prepared by certified energy energy efficiency plans and implementation reports of managers. large energy end-users of the industrial sector are received by MOIT or provincial DOITs. Pillar C – Cross-Cutting Climate Change Policies and Institutional Readiness to Formulate, Prioritize, Finance, Implement and Monitor Cross-Cutting Climate Change Policies Goal 3 - Cross-Cutting Strategic, Institutional, Methodological and Analytical Basis for Climate Change Action 59. Goal 3 Prior Action: The National Action Plan for Climate Change (NAP-CC) was issued by the Prime Minister on October 5, 2012. The NAP-CC is designed to implement the targets and tasks from the NCCS (DPO 2). Examples of strategic priorities in the NAP-CC include the significant scale-up of early warning systems and of responses to sea level rise through the review of impacts and the development of planning with a geographic focus on the Mekong Delta, Red River Delta and the Central coast. The NAP-CC emphasizes food and water security, forest protection, and the reduction of GHG emissions through renewable energy and energy efficiency. Strengthening institutional capacity, awareness raising and participation of all economic sectors in response to climate change is identified as priority activities in the NAP-CC. The NAP-CC includes 29 an additional list and timeline for 65 specific programs, projects, and tasks through 2020, with some already allocated funding, such as for flood control in HCMC. 60. Goal 3 Prior Action: On October 17, 2013, MPI Minister adopted an Adaptation Prioritization Framework which serves as a tool to enable the national and sub-national levels of the Government with sector line ministries and provinces to mainstream and prioritize climate change adaptation action into their Socio-Economic Development Planning (SEDP) process. The Adaptation Prioritization Framework seeks to institutionalize climate change adaptation prioritization at strategic level through its integration into the SEDP cycles. As a decision- making support tool prepared by MPI, it is designed to be applied in the planning, appraisal and budget allocation processes under the SEDP. The tool supports the planners in allocating resources for climate change adaptation by identifying and prioritizing projects on the basis of strategic climate change objectives and through an assessment of the urgency and vulnerability reduction potential. The tool was consulted with a wide range of stakeholders and tested with line ministries and provinces in 2012. Line ministries and provinces have been very supportive of the development of the tool and its implementation was included in the Guideline Framework for preparation of SEDP 2014 issued by MPI for sectors and provinces to develop their SEDP. This was followed by a series of training on the application of the tool to provinces in June and August 2013 as part of MPI’s implementation plan to support planners in preparation of annual SEDP. The World Bank is providing support for capacity building through training on issues relating to climate-resilient development, anticipatory adaptation, incorporating climate risks into design and appraisal of development investment activities. MPI will monitor implementation and provide regular reports on the use of the APRT in the context of the SEDP. 61. Goal 3 Prior Action: The Law on Natural Disaster Prevention was finalized and adopted by the National Assembly on June 19, 2013. MARD submitted the law to the GoV after comprehensive consultations with line ministries. The law strengthens the management of risks of various climatic and weather-related hazards (e.g., storm, flood, landslide, drought, saltwater intrusion, extreme cold, etc.) through a solid legal framework to guide actions and investments of various actors, including government agencies, civil society organizations, private sectors, and communities. In addition to consolidating disparate legal documents on DRRM, the Law provides strategic directions to shift the disaster planning paradigm from disaster response to disaster risk reduction, which encompasses development planning, disaster preparedness, forecasting and prevention with a climate change adaptation lens, post-disaster recovery and reconstruction. The law strengthens the DRRM institutional arrangement by requiring the establishment of a DRM agency at both national and provincial levels responsible for disaster preparedness, prevention and recovery. These agencies will also serve as an advisory body of the system of the Flood and Storm Control Committee at central and subnational levels. In addition, the Law establishes coordination and information sharing mechanisms for DRRM between government agencies at national and subnational levels and civil society organizations, and between government and international organizations. Furthermore, the Law mandates better management of budgetary resources as well as a better tracking of the expenses for DRRM, including for post-disaster management. Thus, the implementation of the Law will leverage support from DRRM/CCA from various stakeholders (including international organizations and the private sector), to strengthen capacity, improve coordination and information sharing, and improve transparency in DRRM/CCA. 62. As a follow up to a DPO 2 prior action, the GoV has demonstrated additional effort and high level commitment to further operationalize enhanced coordination between Disaster Risk Reduction and Management (DRRM) and Climate Change Adaptation (CCA). Under the 30 leadership of the Prime Minister and in the context of the NCCCC MARD and MONRE have jointly organized a High level forum on DRRM and CCA with a major event held on October 16, 2013. The purpose of the National Forum is to strengthen dialogue (including policy and technical subjects) and actions on DRR and CCA in order to: (i) enhance multi-stakeholder collaboration and coordination for DRR and CCA activities; (ii) foster an enabling environment for raising awareness, learning from experience and advocacy on DRR and CCA between stakeholders, including government agencies at national to subnational levels, non-governmental, international, and multi-lateral stakeholders, and communities; and (iii) integrate DRR and CCA into development policies, planning, and programs. The 2013 National Forum was another step forward towards enhancing coordination and partnership amongst institutions and stakeholders involved in DRRM and CCA and towards ensuring that climate and disaster data and experience are accessible and are used to inform the prioritization and implementation of development programs. Coordination between DRRM and CCA is now part of the annual work plan of the NCCC under the oversight of the Prime Minister as Chairman of the NCCC and it is understood that the GoV will hold regular high level coordination forum, and report on progress made. 63. From Reform to Implementation and Results: Goal 3 policy actions have equipped the government with tools, strategies and plans that represent a major step forward for such a novel agenda. Box 4: Achieving Goal 3 EoP Results EoP Results: Cross-cutting strategic, institutional, analytical, and methodological basis guiding the development of priority actions and targets for climate change action are in place and used to guide decision making. Connecting Prior Actions to EoP Results: The DRRM Provincial Plans (DPO1), the Coordination Platform (DPO2), and the DRM law (DPO3) are expected to significantly contribute to advance the shift to DRR linked to climate change adaptation. The provincial DRM plans mandated by the DRM strategy have been developed and the first DRM Strategy implementation report was issued in May 2013. The APRF (DPO3) will help provinces and planners allocate financing for adaptation. On a broader scale, the Climate Change Scenarios (DPO1), the NCCS (DPO2), and the NAP-CC (DPO3) provide prioritized roadmaps for climate change action moving forward. Progress towards EoP Indicators End of Program (by Q 1 of CY 2015) Current Decision Meeting i) An Adaptation Prioritization Framework is i) In Progress. operational within MPI SEDP annual cycles and initial implementation reflected in MPI SEDP annual guideline frameworks and budget reports. ii) Provinces have disaster risk management and ii) Achieved. DRM Strategy Implementation report reduction plans under implementation as reflected in issued in April 2013 documents implementation the Government Report on Evaluation of 5 years progress. implementation of the National Strategy for DRM. iii) In progress iii) Comprehensive unified legal framework to address climate hazards is operational. . 31 Goal 4 - Cross-Cutting Promotion of Financial Resources Mobilization for Climate Change Action According to Priorities and a Multi-Sector Allocation Process 64. Goal 4 Prior Action: The Inter-ministerial Circular guiding the implementation of the SP-RCC Mechanism to manage the climate change financial resources for selected investments in support of climate change adaptation and GHG emission reduction was jointly issued by three Ministers (MOF, MONRE, and MPI) on March 5, 2013. The Circular provides detailed guidance to operationalize the Financing Mechanism specified in Official Instruction No. 8981/VPCP-QHQT dated 10/12/2010. This Financing Mechanism applies only to investment projects that meet the selection criteria defined in Prime Minister's Decision No. 1719/QD-TTg dated October 4, 2011, including sector and geographic vulnerabilities and a typology of response to climate change impacts and GHG emission reduction targets. Sixty-two investment projects have been selected so far by an inter-ministerial evaluation council led by MONRE and approved by the Prime Minister for financing in the context of this mechanism. However, only 16 projects have been included in the SEDPs 2013 and 2014 given the Government’s budget constraints. Implementation of these selected projects is expected to continue to be financed in the SEDP 2015. This new and additional financing window within the GoV budget is to allow resources to be allocated to priority CC-investments, in addition to the NTP-RCC, the Science and Technology and the General Administrative budget, these covering mainly research, training, and recurrent costs related to climate change. All together, they represent a foundation of the GoV climate financing approach, although only limited amounts have been allocated in the 2014 budget (US$ 18 million). MPI, in coordination with MONRE and MOF, maintains a list of the selected projects across Line Ministries and Provinces and is expected to track and report on allocations and disbursement progress to the NCCC. The list identifies the sources and the amounts of financing of the projects (split between the share of the Financing Mechanism and local sources). The NCCC is playing a growing role in the discussion and review of the Financing Mechanism. 65. From Reform to Implementation and Results: Prior actions under goal 4 have strengthened the financing framework and contributed to the mobilization of dedicated financial resources for climate action according to priorities and a multi-sector allocation process with increased transparency and involving several LMs, and a close coordination between MONRE, MPI and MOF. Box 5: Achieving Goal 4 EoP Results EoP Results: Financial resources for climate change action are mobilized and planned according to priorities and a multi-sector allocation process and reported subsequently. Connecting Prior Actions to EoP Results: The guidelines on the Financial Mechanism issued by the PM (DPO1) provided a basis to develop an inter-ministerial approach to scale up climate finance through the creation of a dedicated additional budget for climate action guided by an inter-ministerial circular (DPO3). The Task Force on Climate Finance (DPO2) supports the GoV in raising awareness and progressively leveraging a greater diversity of financial sources for climate action, including some new work on market based mechanisms. Progress towards EoP Indicators End of Program (by Q 1 of Cy 2015) Current Status i) Additional financial resources are mobilized for i) Financial Mechanism created and first year of budget climate action, planned according to priorities and a allocated. multi-sector allocation process, and reported ii) Climate public expenditure review under subsequently implementation at the request of the Prime Minister 32 66. The design of DPO 3 has benefited from a solid and growing knowledge base. DPO 1 and DPO 2 program documents provided a detailed outline of the strategic and analytical basis for the DPO series. Table 4 summarizes the list of most relevant and recent analytical work.19 Since DPO2, it is notable that analytical work has included improving downscaling of impacts and analyzing vulnerability and sensitivity. New and interim analytical work has also become available analyzing the options and co-benefits of low carbon growth. Table 4: Linking the DPO Series with Recent Analytical and Strategic Work Prior Actions Analytical Underpinnings Pillar A: Adaptation. Climate-Resilient Development by Improving the Resilience of Water Resources (Goal 1) Prior Action A1. Adopt the 2014 Draft WB “Climate Public Expenditure/InvestmentReview”. Analyzes the current National Action Plan on Water status of climate public expenditure and institutions in Vietnam to provide recommendations Resources Management that for improvement of the alignment between planning and budgeting as well as ways to prioritizes actions and defines improve execution and reporting. responsibilities and timeline for its implementation 2012 WB “Turn Down the Heat II”. Analyzes likelihood and impacts of 4o warming globally with some specific consequences for Southeast Asia. Prior Action A2. Adopt the Implementation Decree of the 2011 WB “DPO PSIA Preliminary Research and Phase 2” Examines socially new Law on Water Resources differentiated impacts of DPO policy actions in the phase 1. Phase 2 focused on examining the pro-poor aspects of the proposed financial mechanism (Goal 4). Preliminary research informed overall DPO development. Phase 2 informed the development of the Goal 4, DPO 3 financial mechanism. 2011 WB “Gender and Climate Change 3 Things You Should Know”. Highlights the importance of gender mainstreaming, both in climate finance and Official Development Assistance. Echoed in the World Bank’s 2011 “Vietnam Country Gender Assessment.” The study informed the overall DPO development and TA for Goal 1 DPO 3 NAP TA and Goal 3 DPO 3 DRM law TA. 2013 WB “Irrigated Agriculture Management”: Analysis of irrigated agriculture management, water use and recommendations for ongoing national policy reform. Provides an update since 2009 Water Sector Review. This study emphasized the importance of performance monitoring, which will be furthered by the Goal 1 policy action. 2013 ADB “Vietnam Country Water Assessment (CWA)”. Provides an update since the 2009 Water Sector Review through a rapid assessment of water uses and challenges at a national level. The Water Sector Review directly called for the Goal 1 DPO 2 policy action of the new law on Water Resources. The follow-up CWA has informed the Goal 1 DPO 3 NAP-WRM 2012 MONRE “Update to Climate Change & Sea Level Rise Scenarios” Added a refined understanding of the expected impacts on the provincial and district levels, including projections of sea level rise using the regional climate model.20 Earlier versions of the scenarios informed the overall DPO development, especially goal 1 and 3 (DRM) PAs. The latest updates. Pillar B (Mitigation): Lower Carbon Intensity Development by Exploiting Energy Efficiency Potentials (Goal 2) 19 See DPO 2 and DPO 1 PD for additional background analytical work 20 RCMs work by increasing the resolution of the Global Climate Model (GCM) in a small, limited area of interest. An RCM might cover an area the size of Western Europe, or Southern Africa - typically 5000km x 5000km. The full GCM determines the very large scale effects of changing greenhouse gas concentrations, volcanic eruptions etc. on global climate. The climate (temperature, wind etc.) calculated by the GCM is used as input at the edges of the RCM. RCMs can resolve the local impacts given small scale information about orography (land height), land use etc., giving weather and climate information at resolutions as fine as 50 or 25km. 33 Prior Action B1. Adopt the See above. Circular guiding the implementation of energy WB 2014 Draft “Low Carbon Options Assessment” Guidance on specific policy and efficiency measures in at least investment measures to implement the Green Growth Strategy, including sequencing of one key energy- intensive policy and investment measures, financing, and mainstreaming. industrial sector 2011 GoV “Power Development Master Plan 7” (PDMP 7). States GoV objectives for electricity supply and energy security and projections from 2011 to 2020. Includes focus on enhancing efficiency of electricity pricing and demand-side measures. Pillar C (Cross-Cutting): Cross-Cutting Climate Change Policies and Institutional Readiness by Capacity and Preparedness to Formulate, Prioritize, Finance, Implement and Monitor Cross-Cutting Climate Change Policies (Goal 3 and 4) Prior Action C1. Adopt the See above. National Action Plan for Climate Change 2012 MPI “Feasibility Assessment of Low Carbon Options” Provides a rapid assessment using Marginal Abatement Cost Curves to inform development of Vietnam GGS. Provides Prior Action C2. Adopt the recommendations for further work in low carbon assessment. Adaptation Prioritization Tool Prior Action C3. Adopt the Law on Natural Disaster Risk Management and Reduction 67. The body of knowledge outlined above underlines that targeted capacity building and advisory services are important. Deepening analysis to capture co-benefits is key to prioritizing policy, institutional support and investment decisions. Coordination of analytical and TA work is also critical given the fragmented and sometimes contradictory conclusions of various studies. MONRE, with support from the NCCC, is expected to continue to improve the coordination process to increase efficiency, strategic focus and complementarity of the analytical and TA support provided through different stakeholders. Implementation of the CC DPO series has been complemented by advisory services and TA aligning resources from the World Bank and partners—particularly through the VNCLIP supported by DFID, and JICA, AfD and Dfat as well as UNDP, CIDA, GIZ, the Netherlands and Danida. 4.3 LINK TO CAS AND OTHER BANK OPERATIONS 68. Through strengthening climate resilience and low-carbon development, the DPO contributes directly to Pillar II (Sustainability) of the WB FY2012-16 CPS. The CPS, which supports the GoV’s 2011-20 SEDS and 2011-15 SEDP, is organized around three pillars: (i) competitiveness; (ii) sustainability, including climate change adaptation and mitigation and DRM; and (iii) opportunity. As outlined in Table 6, the DPO supports each of the three outcomes under the sustainability pillar. Complementing the CPS pillars are three cross-cutting themes: governance, gender, and resilience. The DPO policy actions on DRRM and for water sector resilience directly support the third theme of resilience. The DPO policy dialogue has also supported the gender theme through the preliminary PSIA and the policy dialogue on mainstreaming gender in disaster risk management and in integrated water resources management. Given the strong linkages between climate change and poverty, the DPO has the potential to contribute to reduce poverty while helping the poor mitigate some climate change impacts. The reforms in water resources management and climate change-related institutional and policy framework supported by the DPO 3 can help reduce vulnerability of the poor and increase their resilience to climate-induced shocks. Climate change will 34 affect the poorest mostly due to their dependence on natural resources and ecosystem services for livelihoods and because they have less financial, institutional, and technical capacity to adapt. Climate change also impacts economic growth, thereby affecting poverty reduction efforts as changing patterns of growth may reduce the growth elasticity of poverty. Poverty affects access to resources and entitlements, and therefore increases vulnerability and sensitivity of livelihoods to climate change risks (see details in section 5.1 below). Table 5: Vietnam Climate Change DPO Support for CPS Objectives CPS Pillar II: Sustainability SEDS Goal 11: Protect and improve Quality of the environment, Proactively and Effectively Respond to Climate Change, as well as prevent and fend off Natural Disasters. CPS Outcome Relevant CPS Outcomes and WB Environment Selected CPS Milestone Contributed by CC DPO Indicators Strategy Pillars 2.1 Improved Natural Water Resources Management: DPO supports more sustainable water resources Resources Increased water productivity in management and improvements in water productivity in Management pilot areas irrigation “Green” 2.2 Strengthened Climate Change Mitigation: DPO supports enhancing energy efficiency in the industrial environmental CO 2 emissions reductions sector and a low carbon growth assessment for Vietnam. protection and compared to business as usual management scenarios associated with “Clean” investments Disaster Risk Management: DPO supports implementation and coordinating of DRM. Targeted provinces & communes 2.3 Enhanced with DRM plans Preparedness for natural hazards and Climate Change Adaptation: DPO supports adaptation in the water sector and greater climate change Coherent framework for transparency and impact through adaptation prioritization “Resilient” prioritization of climate change tool. adaptation action in key sectors available. 69. The DPO is aligned with the World Bank’s corporate and regional strategies on climate change. The DPO is linked to the World Bank Environment Strategy’s call to transform growth paths, leverage natural resources, and manage environmental risks. The DPO is also aligned with the World Bank Green Growth Flagship, which promotes efficient, clean, and resilient growth. It is consistent with EAP’s strategic directions, which include managing climate change and natural disasters. Finally, it is in conformity with the conclusions of the 2010 World Bank study on Strategic Directions on Climate Change for Vietnam and the current Climate Change and Disaster Risk Management Engagement Note. Relationship with Other Bank Operations 70. The operation is firmly based on, and supportive of, the broader World Bank operational and analytical engagement in Vietnam, which is comprised of IBRD, IDA, Clean Technology Fund (CTF), Carbon Fund (CF) and Global Environment Facility (GEF) operations as well as analytical and advisory activities (AAA). The DPO programmatic series complements ongoing and pipeline operations and serves as a platform for dialogue with the GoV, other 35 development partners and within the World Bank on climate change adaptation and GHG emission mitigation. Table 7 summarizes related World Bank lending and AAA in Vietnam. Table 6: CC DPO Series in the Context of the Vietnam World Bank Group Portfolio DPO Goal Associated Bank Lending AAA/TA 1. Climate-resilient  IL on IWRM in the Central Highlands and  VNCLIP TA for development of key development: the Mekong Delta (P113949 and P124942) water resources legislation supported by Improving the resilience  IL on urban water supply and wastewater the DPO (P126889) of water resources (P073763 and P119077)  GFDRR TA for DRM capacity building  IL and P4R on rural water supply (P077287 (P122619) and P127435)  ESW on Irrigated Agriculture Reform  IL on irrigation improvement (P130014) (P131190) 2. Lower carbon  DPO series on Vietnam Power Sector  VNCLIP and ESMAP TA for Low intensity development: Reform (P124174) Carbon Assessment (P125358) Exploiting energy  IL on Clean Production and Energy  Vietnam Energy Efficiency and efficiency potentials Efficiency (116846) Cleaner Production Financing  IL on Renewable Energy Development Program (IFC) (P103238)  Green Buildings Advisory  IL on Distribution Efficiency (P125996) Services(IFC) 3. Cross-Cutting  IL on managing natural hazards (P073361  Various GFDRR grants (P122619) Strategic, Institutional, and P118783)  GFDRR TA for Can Tho urban Methodological and climate resilience (P122619) Analytical Basis for  VNCLIP & ESMAP TA for Low Climate Change Action Carbon Assessment (P126889) 4: Cross-Cutting  Carbon finance operation linked to  InfoDev TA for Vietnam Climate Promotion of Financial renewable energy project (P110477 and Innovation Center (P129222) Resources Mobilization P103238)  TA for Partnership for Market for Climate Change  Clean Technology Fund Financing for IL on Readiness (P128726) Action According to Distribution Efficiency (P125996)  VNCLIP TA for climate finance and Priorities and a Multi- climate public expenditure review Sector Allocation Process (P126889)  PSIA on enhancing pro-poor aspects of financial mechanism (P125598)  Climate Public Expenditure and Institutional Review (P144625) 36 4.4 CONSULTATIONS, COLLABORATION WITH DEVELOPMENT PARTNERS Consultations 71. The GoV has conducted numerous consultations with stakeholders including key ministries, research institutions, civil society organizations, and development partners to discuss the policy framework and specific policy actions under the SP-RCC. Through established mechanisms for stakeholder and development partner coordination (e.g. the previous biannual Consultative Group meeting and the successor annual Vietnam Development Partnership Forum), the GoV has widened the consultations on important policy and analytical work to a broader audience, including academic communities and provinces. NGOs have been invited and are taking a more active part in the dialogue. Noteworthy consultations were held during the development of the following prior actions: the National Climate Change Strategy, the Implementation Decree of the new Law on Water Resources, the Green Growth Strategy, the Adaptation Prioritization Framework (which specifically included extensive consultations supported by the World Bank with line ministries and provinces) and the National DRRM and CCA Forum. For example, consultations for the National Action Plan on Water Resources Management, supported by the VNCLIP, included all Departments in three Regions. The twice-annual plenary meetings of the joint donor SP-RCC missions are open to, and have benefited from, the active participation of non-SP-RCC bilateral donors and civil society organizations. The Poverty and Social Impact Analysis (PSIA) in support of the social dimension of DPO has also involved large consultations. Collaboration with Other Development Partners 72. Donor collaboration and coordination remain good and include regular consultations with a widening donor community to discuss strategy, progress, and action plans. The SP-RCC is supported by Japan International Cooperation Agency (JICA), Agence Francaise de Developpment (AfD), the World Bank, Dfat and Korean Eximbank in 2013. The total SP-RCC contribution parallel to DPO3 is expected to rise to approximately $190 million USD. The Bank holds discussions with other development partners as well on alignment of climate change initiatives, funding and TA in particular within the framework of the SP-RCC. SP-RCC donors and others meet regularly to discuss and coordinate policy dialogue and to update each other on their assistance to Vietnam. Meetings usually include JICA, AfD, CIDA, Korea Eximbank, DFID, UNDP, ADB as well as Dfat, with a broader group joining for the plenary meetings. 73. Policy actions of the DPO series are a sub-set of the SP-RCC policy actions and they are common to all SP-RCC donors. Pillars and goals adopted in DPO1 are retained through DPO2 and DPO3 under the programmatic approach. Any updates to the policy reform program are discussed and agreed during joint GoV-donor consultations. The 2012 SP-RCC Policy Matrix was approved on August 15, 2012 by Prime Minister Decision 1092/QD-TTg and the 2013 Policy Matrix was approved on August 9, 2013. 74. Development partners provide coordinated advisory services, capacity building and TA. The recipient-executed component of the DfID-funded VNCLIP, which aims at building capacity for five major line ministries, is under implementation. Part of its aim is to enhance capacity in formulation, implementation, monitoring, and evaluation of climate change policy and to improve coordination amongst the line ministries. The SP-RCC policy dialogue also benefits from the work financed by specific World Bank global partnerships such as the Global Facility for Disaster Risk Reduction (GFDRR) and the Global Environment Facility (GEF). 37 5. OTHER DESIGN AND APPRAISAL ISSUES 5.1 POVERTY AND SOCIAL ASPECTS 75. Given the strong linkages between climate change and poverty, the DPO has the potential to help the poor mitigate some climate change impacts and contribute to reduce poverty. Climate change will affect the poorest mostly due to their dependence on natural resources and ecosystem services for livelihoods and because they have less financial, institutional, and technical capacity to adapt.21 Climate change directly impacts the poor through, for example, reduced agricultural yields for low-productivity farming and repeated small-scale disasters and loss of assets. This would severely impact the Mekong River Delta, which is Vietnam’s most productive agricultural area and is essential for the country’s food security. 22 Without adaptation measures to counter unprecedented increases in saltwater intrusion and changes to seasonal flows and sea level rise of the Delta’s water regime, rice production and shrimp cultivation could significantly decline, placing a burden on the poor who are already exposed to other risks posed by the Delta’s increasing population growth.23 Increases in food prices that result from the impacts of climate change would disproportionately affect poor farmers and landless peasants as they would not be able to accrue the increased production benefits that less poor farmers and landowners would. The poor often live in informal settlements (41% in 200523) that are even more vulnerable to climate change given their location (as they are often built on undesirable land that is available because of their exposure to floods, landslides, or other risks), lack of basic infrastructure, and limited access to social protection programs.24 Climate change also impacts economic growth, thereby affecting poverty reduction efforts as changing patterns of growth may reduce the growth elasticity of poverty, for example through slower agriculture growth, which is particularly efficient at reducing poverty. Even where and when it does not threaten economic growth, climate change can still threaten the objective of ending poverty because the destruction of assets and livelihoods of marginalized populations has no effect on aggregated estimates of losses because this population is so poor. Poverty affects access to resources and entitlements, and therefore increases vulnerability and sensitivity of livelihoods to climate change risks. The reforms in water resources management and climate change-related institutional and policy framework supported by the DPO 3 can help reduce vulnerability of the poor and increase their resilience to climate-induced shocks. 76. The water resources management reforms that the DPO 3 supports (implementation of the new 2012 law on WRM) have no foreseen adverse impacts on the poor at the Law level. The new Law, as a long-term strategy, aims to strengthen the management linkages between surface water, groundwater and coastal waters, to support climate resilience through a strong focus on addressing saltwater intrusion and sea level rise so as to bring about a positive imp act − at a regional level (e.g., river basin, coastal areas). However, at the micro level (community level), depending on local spatial planning, agricultural production, socioeconomic plan, and water use plan, adverse impacts might result, in an indirect manner, particularly for the poor people who are resource scare. These impacts are typically site specific and as such the scope and nature of impacts should be examined on the basis of site specific water use plan to avoid adverse impact, or where not avoidable, aim to minimize, mitigate, or compensate for the adverse impact. Following the release of the WRM Law in 2012, an Implementation Decree (Decision No. 201/2013 ND-CP dated November 11, 2013) 21 World Bank (2010). World Development Report 2010: Development and Climate Change 22 World Bank (2010). Economics of Adaptation to Climate Change: Vietnam’s Case Study. 23 World Bank (2013). Turn Down The Heat: Climate Extremes, Regional Impacts, and the Case for Resilience 24 ActionAid International and Oxfam (2012). Participatory Monitoring of Urban Poverty in Viet Nam: Five-year Synthesis Report (2008-2012) 38 has been published by the Government to guide how the Law is translated into practice. With MONRE designated as the key implementing and guiding agency, the Decree specifies how consultation should be conducted with the potentially affected population - for a site specific water use plan, to address the adverse impact. The Decree also includes a requirement for disclosure of such plan before the site specific water use plan is approved by the Government at the local level to ensure the potentially affected population, including the poor people, is consulted on the potential impact to inform the design of mitigations measures. 77. The first PSIA (PSIA-I) developed with the preparation of DPO 1 concluded that the proposed reforms are expected to have positive impacts on the poor and vulnerable groups. PSIA-I was undertaken to assess (i) poverty and social impacts of climate change in select sub- sectors; (ii) the capacity of key policy reforms under the DPO to address climate change impacts on the poor and vulnerable groups; and (iii) the general poverty and social impacts of the policy reforms on the well-being of stakeholder groups. PSIA-I aimed to improve the GoV’s understanding of how the policy reforms could contribute to building climate resilience of the poor. It contributed to transparent and informed development through policy dialogue, consultations, and collaboration with local scientific communities and civil society organizations. The initial assessment of all prior actions and triggers, based on OP 8.60 review of “likelihood of significant effects,” identified potential positive poverty and social impacts of key policies on poor and vulnerable groups. PSIA-I findings were discussed and validated with stakeholders through several workshops. There was a strong agreement with the findings of the PSIA-I and a particularly robust discussion regarding the need for more participation on climate change planning by civil society. 78. The focus of the second PSIA phase (PSIA-II) in 2012 —identified by stakeholders— has analyzed the mechanism for climate change funding with the aim to strengthen its transparency, accountability, and pro-poor aspects.25 PSIA-II assessed the needs and gaps that are still to be met to develop (pro-poor) climate change financing criteria consistent with sound public financial investment and management principles in order to develop a set of recommendations to that end, and propose some relevant monitoring indicators to capture poverty and social impacts of future climate change investments. The overarching objective of this research was to contribute to the GoV’s efforts to develop a comprehensive institutional mechanism and help leverage climate financing sources while augmenting the positive distributional impacts of the future financing. The PSIA-II findings were discussed with key policymakers, government agencies, development partners, civil society and research organizations at the stakeholder workshop. The recommendations supported the discussions on the development of the guidelines for allocating and reporting climate change financial resources (DPO3 prior action). Overall, the GoV's understanding was enhanced as to how the proposed policy reforms might help build climate resilience of the poor. And the adjustments that need to be made to ensure that the reforms do not further exacerbate the changing climate’s impact on vulnerable groups have been discussed and included in the policy dialogue. 79. Ensuring gender equality is a specific strategic objective under the National Climate Change Strategy (NCCS) but gender mainstreaming in climate change response is still a challenge. There is a growing analytical basis for mainstreaming gender in climate change response in Vietnam, including works by the World Bank and other Development Partners. In addition, the legal basis, particularly the Law on Gender Equality (2006) has provided an entry point for analysis of gender and gender action plan for geographical areas, and sectors that are potentially affected by 25 For the purpose of the PSIA, the use of climate change funding is considered pro-poor if the ultimate outcomes of the public spending benefit the poor. 39 the climate change. However, there is an overall inconsistence in awareness and actions towards gender equality at the moment when it comes to implementation particularly the lack of guidance on gender mainstreaming that is expected to be specific for site-specific program/projects. The PSIA 1 and 2 (done under DPO 1 and 2) suggested, for example, that women were more adversely affected in water resources management and disaster risk management, particularly in geographical area where women play a dominating role and participation in irrigation management, and/or protecting their children/family (in the context of disaster). Lack of guidance on how gender analysis is done and how an action plan could be prepared for these specific areas appears as a gap in the policy implementation process which makes gender mainstreaming effort a challenge. Also, recently, as an example at policy level, on gender and disaster risk management, the new Law on Disaster Risk Management includes an article mandating gender mainstreaming in all DRM plans. However, gender mainstreaming was not included at all in the ordinance that guides how gender mainstreaming is implemented. At the community level, there is also still a lack of guidance on gender analysis and gender action plan that should be specifically prepared to facilitate gender mainstreaming under government’s DRM projects. 80. To address those gaps and challenges, plan is being prepared, and efforts will be made to promote the gender mainstreaming effort, particularly in areas the PSIA has informed, and the DPO 3 focuses, namely water resources management, disaster risk management, and energy efficiency. At the moment, in the area of disaster risk management, gender analysis and gender action plans have been completed, including M&E indicators (through the on-going VN-Haz) to support gender mainstreaming. On water and cross-cutting climate issues, the TA for the NAP-WRM included an analysis of gender and water issues and provided specific recommendations for mainstreaming gender into the NAP-WRM. The knowledge product (Mainstreaming Gender in Water Resources Management in EAP) – a case study for Vietnam, will also be used to expand the analysis at the community level to develop gender action plan to enable practical gender mainstreaming. On energy efficiency, the forthcoming TA under DEP will include analytic work on the poverty and gender aspects of power distribution efficiency, which are expected to inform the World Bank’s continuing support to the GoV on energy efficiency. The overall approach to gender mainstreaming that DPO 3 adopted is to take advantages of knowledge/works that the Bank and other donors have done, to do some additional work to fill the gaps and address challenges identified to move fast and to recommend a plan of action for gender mainstreaming (sector and site specific) as part of the NCCS. The gender work under the on-going VN-Haz (prepared during project preparation) will be used a case study to exemplify and replicated in other area, including water resources management (adaptation), and energy efficiency (mitigation). 5.2 ENVIRONMENTAL ASPECTS 81. The operation is considered to have significant positive effects on the environment. Climate change heavily impacts environmental sustainability, so the enhanced climate resilience sought by this operation represents a significant positive environmental effect. 82. Areas of policy intervention to be supported under this project are likely to have specific positive effects on environment under DPO 1 and 2. Specific positive effects include:  Improvements in governance of water resources. The principal intent of these measures is to ensure better water management during periods of increasing uncertainty about water flows, precipitation and trends in salinization. These measures will ultimately be beneficial 40 for all uses of water (including conservation), as policies come into place to more rationally and transparently manage this increasingly scarce resource.  Promotion of energy efficiency policy measures. These measures will also have positive environmental impacts by reducing energy consumption relative to business-as-usual scenarios. This in turn will result in relative decreases of pollution emissions from power generation and energy use. Renewable energies and biofuels, which do have environmental implications, are not targeted under the reforms of this project. Under the World Bank’s First Public Implementation Reform Development Policy Loan, a Strategic Environmental Assessment of the Power Sector was carried out as a policy action. This Strategic Environmental Assessment is being used to develop new master plans to minimize environmental impacts.  Promotion of low carbon growth strategy. This umbrella strategy encompasses energy efficiency, but also considers a range of policy measures to reduce the country’s carbon emissions. Such measures will ultimately benefit the environment by reducing overall energy use beyond what it would have been otherwise. 5.3 PFM, DISBURSEMENT AND AUDITING ASPECTS 83. Public Financial Management. Vietnam’s PFM environment is considered adequate to support this operation. The most recent Country Financial Accountability Assessment conducted in 2007 concluded that ‘the financial management risk to proper use, control and repor ting of funds that are managed through the Vietnam’s PFM systems is assessed as moderate’. The Government has maintained strong ownership of the PFM reform agenda and continues to lead a coordinated reform program in consultation with the donor community. A Strategy for Finance Development of Vietnam for the period 2011-2020 has been approved. The approved State Budget is published on the MOF website just before the start of the Fiscal Year. It includes information on: aggregate revenue and spending; budget financing; planned spending by government function; and domestic revenue sources. MOF publishes quarterly budget execution reports, which include information on spending at central, provincial, and district level, and estimated revenue collection. Audited financial statements are published eighteen months after the end of the Fiscal Year. Progress has been made to implement a range of PFM reforms emanating from the CFAA recommendations (notably in the areas of public debt management, external oversight, fiscal transparency, and the roll-out of the Treasury and Budget Management Information System). However key legislative reforms, such as the revision of the State Budget Law and the State Audit Law are still pending. While the financial management and accountability systems of the government have improved, the risks arising from weak implementation and compliance remain. The quality and extent of independent audit oversight can be further strengthened by updating the audit strategies and methodologies of the SAV to align with international practices, and through the development of an effective internal audit function, which currently is only at an embryonic stage in Vietnam. A number of DPs are providing support to the SAV for the implementation of its strategy to 2020, including the Bank, which is providing technical assistance to modernize the SAV’s audit standards and methodologies in the area of financial and compliance audits. 84. Foreign Exchange Environment. An IMF safeguards assessment has not been conducted in Vietnam. This assessment would provide information about the foreign exchange control environment of the SBV and integrity of financial information. The SBV is subject to auditing by SAV on an annual basis, however under the current laws the audited financial statements and audit 41 reports of SBV are not made public. Notwithstanding these factors, the Association understands, following recent discussions with the IMF, that there are no serious concerns with the SBV’s foreign exchange control environment. 85. Flow of funds and auditing. To address the potential residual fiduciary risks related to the foreign exchange environment, the Recipient will maintain a dedicated foreign currency deposit account (DA) at SBV in US dollars for the proceeds of the Credit, and will report on the funds flow of the dedicated deposit account. The government will, if deemed necessary by the Association, allow an independent external audit of the dedicated foreign currency deposit account (DA). 86. Disbursement. The proposed Credit will follow the Association’s disbursement procedures for development policy lending operations. The Credit proceeds will be disbursed against satisfactory implementation of the Program and not tied to any specific purchases, and no procurement requirements will be needed. Various measures have been taken to ensure that the overall fiduciary policies and institutions are adequate to proceed with support from the Association and other development partners. The Recipient will open and maintain a dedicated DA in US dollars for the Recipient’s use once the Credit is approved by the Board and becomes effective. The dedicated DA will form part of the country’s official foreign reserves. The Recipient shall ensure that upon the deposit of the Credit into said account, an equivalent amount in Vietnamese Dong is credited in the Recipient’s budget management system to be used for budget expenditures in a manner acceptable to the Association. If the proceeds of the Credit are used for ineligible purposes as defined in the Financing Agreement, the Association will require the Recipient to refund the amount directly to the Association. Amounts refunded to IDA shall be cancelled. The administration of this Credit will be the responsibility of MOF. 87. Reporting. The Recipient will report to the Association on the amounts deposited in the foreign currency account and credited to the budget management system and on the timing of such deposits and credits. The Recipient will forward the report within one month of receiving the letter from the WB advising of the deposit, and the report will include: (i) statement of the exact sum received into the dedicated DA and the timing of such receipts; (ii) confirmation to the WB that all withdrawals are for eligible expenditures; (iii) confirm to the WB details of the Treasury account to which the Vietnamese Dong equivalent of the Credit proceeds will be credited, the credited amount, and their timing, and (iv) a report on receipts and disbursements for the dedicated DA. 5.4 MONITORING AND EVALUATION 88. The management of the DPO is fully aligned with Vietnamese government structures of the SP-RCC, and is common to JICA, AfD, Dfat and Korea Eximbank. Implementing the SP- RCC, and therefore the DPO, is under the supervision of the NCCC, which is the highest-level body overseeing the country’s climate change agenda. With this management structure of the climate change agenda, the policy and institutional reform program under SP-RCC and the DPO series is subject to a broader scope of coordination with more strategic directions for cross-sector and regional response to climate change. This oversight of the NCCC should ensure increased synergy of outcomes and impacts of the policy program at the end of the DPO series. 89. MONRE leads the SP-RCC and collaborates with line ministries participating in the program to coordinate the policy dialogue and provide overall accountability under the DPO series, including monitoring and evaluating quality, progress, and effectiveness of the SP-RCC. MONRE coordinates with other line ministries and stakeholders in formulating and confirming the 42 SP-RCC policy matrix of each SP-RCC cycle, based on goals, objectives and expected results. MONRE undertakes regular reviews of the achievements of the program as well propose improvements in consultation with line ministries. MONRE reports to the Prime Minister and to the NCCC on behalf of participating ministries on implementation progress and results achieved so far. As owner of the program, MONRE advocates for and facilitate coordination of technical assistance that relate to the SP-RCC. DPs, rrecognizing both the importance and the challenges of monitoring a multi-sector policy development agenda under the SP-RCC, have provided capacity-building measures, for example the TA financed by JICA and the World Bank at MONRE (and in each of the four other ministries involved in the DPO), to assist the GoV in strengthening the quality of the monitoring and evaluation system. 90. The SP-RCC National Program Coordination Unit (PCU) serves as the key entity to conduct monitoring and supervision, and assists the line ministries in synthesizing and reporting on results. The PCU within MONRE is assigned as the focal point for implementing the SP-RCC and therefore the World Bank DPO. The PCU is directed by the Deputy Director General of DHMCC and staffed with officials from ICD, DHMCC and other full-time contracted experts. MONRE co-chairs the SP-RCC technical meetings with line ministries and development partners at least two times a year. The SP-RCC’s M&E reports are prepared by PCU in coordination with participating line ministries and submitted to MONRE management, who then reports to the NCCC. These reports mainly focus on progress toward delivery of the policy actions as per agreed upon indicators. The PCU also shares the reports with development partners to keep them informed of the implementation progress of the policy program. The Government has established a network of climate change focal points in the line ministries that follow, coordinate and report on the status of sector-specific climate change policy actions and benchmarks. Official communication related to policy actions between MONRE and participating ministries is made at Vice Minister level via normal internal reporting lines. JICA has made available a full time technical advisor to the PCU. 91. Line ministries are responsible for the delivery of selected policy actions under the DPO. They lead sector technical discussion and take part in discussions during joint technical and evaluation mission carried out between the GoV and DPs. They propose the selection of and report progress on achievement of their respective sector policy actions. Reporting is made to MONRE as owner of the program for consolidation and further reporting to the NCCC. The World Bank has fulfilled its supervisory and monitoring role to review progress, as well as needed adjustments. Following completion of the three operations, the World Bank will assess the program outcomes in a final Implementation Completion Report. The World Bank will continue to participate in supervision, technical assistance, and monitoring according to the SP-RCC cycle until the closing date of the operation. 43 6. SUMMARY OF RISKS AND MITIGATION 92. Several risks have been identified which are addressed by a combined set of mitigation measures as presented below. The operation overall risk rating is moderate. a. Macroeconomic.  Risk 1: Although macroeconomic stability has been largely restored through stabilization measures, a few critical risks remain: (i) foreign exchange reserves, despite a steep recent rise, are at relatively low levels, covering just under 3 months of imports; (ii) private sector demand remains sluggish and highly susceptible to any further negative news; (iii) the authorities could adopt expansionary monetary and public expenditure policies to offset weak private sector demand; (iv) the momentum on structural reforms could further slowdown, putting GDP growth on a lower trajectory and undercutting fiscal sustainability; (v) and, the banking sector remains subject to sudden shifts in depositor confidence and to further deterioration of balance sheets of the more fragile banks.  Risk 2: The government is facing fiscal challenges due to slowing revenue collection, which will likely persist over the medium-term due to counter- cyclicality and tax breaks to stimulate economic activity. Fiscal space to absorb potential shocks or fund a large restructuring agenda has diminished.  Risk 3: Delayed and weak implementation of structural reforms undercuts the country’s competitiveness and is a source of risk for potential growth. The government remains committed to a triple restructuring agenda – SOEs, financial sector and public investment – but implementation has been tentative and slow. On SOEs, there is a general concern on the lack of decisive change. There are concerns over the quality and credibility of restructuring plans being drawn up by GCs and SEGs. On banking sector reforms, there are concerns about the effectiveness of some of the current solutions proposed. Mitigation: Mitigation measures include closer monitoring of macroeconomic developments, and increased dialogue with the authorities in collaboration with the IMF to ensure steadfast implementation of reforms already announced and to prepare for new ones. To address fiscal challenges the Bank is supporting tax administration reforms, and the government is implementing policies to consolidate capital spending, increase efficiency of recurrent spending, and significantly reduce overall spending growth. On structural reforms, the recently completed Financial Sector Assessment Program (FSAP) by the World Bank and IMF provides a comprehensive roadmap for financial sector reform. The Economic Management and Competitiveness DPO series is part of the risk mitigation strategy as it focuses on the above structural reforms. 44 b. Policies Risk 3: Complexity and novelty of the development of some aspects of climate policies at home can lead to a possible reduction of the political momentum if limited progress on a global agreement on climate change. Mitigation: The policy matrix is kept focused with TA provided in support of the program reform agenda in the selected ministries involved. Analyses and advisory services inform and enhance the quality of the policy formulation dialogue with a focus on no regret options. Global knowledge and experiences are shared with the GoV. c. Institutions Risk 4: There are institutional limitations due to difficulty to build effective capacity to carry inter-sector dialogue. MONRE as lead agency still faces some challenges to ensure effective inter-sector coordination. Mitigation: Advisory services inform and enhance the quality of the institutional dialogue across sectors with the Bank and other DPs bringing convening power. The scaled-up involvement of the NCCC with increased oversight by DPM in the past 12 months does facilitate institutional effectiveness and inter-sector dialogue. d. Implementation and sustainability Risk 5: Delayed and limitations to the delivery of rapid results on the ground due to slow implementation of policies or mobilization of the financing needed. Mitigation: The DPO is supporting the development of a stronger environment for climate action implementation and financing by the GoV and partners. The DPO and the Bank’s lending portfolio are designed to link implementation and policy dialogue. Close support with monitoring and evaluation and an ex-post review will help ensure operational achievement. 45 ANNEX 1: POLICY AND RESULTS MATRIX Prior Actions DPO 1 (FY 2012 Board / DPO 2 (FY 2013 Board / DPO 3 (FY 2014 Board / Program Results Delivery) Delivery) Delivery) Indicators Prior Action delivered Prior Actions delivered Prior Actions delivered Pillar A (Adaptation): Climate-Resilient Development by Improving the Resilience of Water Resources (Goal 1) Developed a National Develop the New Law on Adopt the National Action Target Program for water Water Resources Plan on Water Resources Expected end-of- resources management Indicator: New Law on Management that program results (CY based on the Water Water Resources adopted prioritizes actions and 2015) Sector Review by National Assembly defines responsibilities and Indicator: MONRE has (Law Number timeline for its GoV has scaled-up, furnished to MPI a letter 17/2012/QH13 dated implementation prioritized and initiated dated July 28, 2010 June 21, 2012 on water Indicator: The Recipient, implementation of key submitting for Prime resources) through Prime Minister, IWRM actions in the Minister Approval a (MONRE/DWRM) has issued Decision context of the new legal National Target Program Number 182/QD-TTg dated and organizational for Water Resources January 23, 2014 adopting framework for IWRM Management based on a national action plan for that allows a more the Water Sector Review. the period 2014-2020 on programmatic, integrated (Letter No 2786/BTNMT- improvement of water and adaptive approach to KH, July 28, 2010) resources management, water resources (MONRE/DWRM) protection and utilization, management in support which plan prioritizes of CCA actions and defines responsibilities and Result Indicators timeline for its implementation. Baseline: (MONRE/DWRM) Insufficient legal and institutional basis for Adopt the Implementation integrated water Decree of the new Law on resources management Water Resources needed for CCA Indicator: The Recipient, through its government, Targets: has issued Decree Number i) Three new high level 201/2013/ND-CP dated legal IWRM instruments November 27, 2013 are operational with guiding the priority actions taken implementation of some of ii) Minimum flows the provisions of the Law established for the Vu Number 17/2012/QH13 Gia-Thu Bon and Ba rivers 46 dated June 21, 2012 on and used to guide water water resources. allocations decisions (MONRE/DWRM) during the dry season Prior Actions DPO 1 (FY 2012 Board / DPO 2 (FY 2013 Board / DPO 3 (FY 2014 Board / Program Results Delivery) Delivery) Delivery) Indicators Prior Action delivered Prior Actions delivered Prior Actions delivered Pillar B (Mitigation): Lower Carbon Intensity Development by Exploiting Energy Efficiency Potentials (Goal 2) Submitted the Decrees to Adopt regulations Adopt the Circular guiding Expected end-of- implement and to enforce establishing qualifications the implementation of program results (CY the Law on Energy and certification of energy energy efficiency measures 2015) Efficiency and auditors and energy in at least one key energy- Conservation managers intensive industrial sector Practices to improve Indicator: The Prime Indicator: MOIT Circular Indicator: The Recipient, energy efficiency are Minister has issued on qualifications and through its Ministry of implemented in large Decree Number certification of energy Industry and Trade, has energy users of the 21/2011/ND-CP dated auditors and energy issued Circular Number industrial sector with March 29, 2011 guiding managers issued by MOIT 02/2014/TT-BCT dated related operating the implementation of the Minister (Circular No. January 16, 2014 guiding capacity increased Law on Energy Efficiency 39/2011/TT-BCT dated 28 the implementation of and Conservation, and has October 2011) energy efficiency Result Indicators received for approval a (MOIT/EECO) measures in its industrial draft Decree on manufacturing including Baseline: administrative sanctions the chemical sector. i) 2010 (end of VNEEP 1) in the field of energy (MOIT/EECO) level of energy use by saving and efficiency. heavy industry (6,701 (Letter 1522/TTr-BCT, kToe BAU per JICA's "A February 23, 2011) Study on National Energy (MOIT/EECO) Master Plan)ii) No energy auditors or managers certified by the government Targets: i) 4% energy savings by heavy industries compared to baseline (forecast under business as usual scenario) ii) 100 energy auditors completed training to support energy efficiency practices in industrial sector, of which 50 fully certified and 50 doing on- job training to become 47 fully certified iii) 1000 energy managers certified to support energy efficiency practices in industrial sector iv) 1000 energy efficiency plans and implementation reports of large energy end-users of the industrial sector are received by MOIT or provincial DOITs, of which 600 have been prepared by certified energy managers. Prior Actions DPO 1 (FY 2012 Board / DPO 2 (FY 2013 Board / DPO 3 (FY 2014 Board / Program Results Delivery) Delivery) Delivery) Indicators Prior Action delivered Prior Actions delivered Prior Actions delivered Pillar C (Cross-Cutting): Cross-Cutting Climate Change Policies and Institutional Readiness to Formulate, Prioritize, Finance, Implement and Monitor Cross-Cutting Climate Change Policies (Goal 3 and 4) Goal 3: Cross-Cutting Strategic, Institutional, Methodological and Analytical Basis for Climate Change Action Updated provincial level Develop National Climate Adopt the National Action Expected end-of-program climate change scenarios Change Strategy guiding Plan for Climate Change results (CY 2015) GoV actions on climate Indicator: The Recipient, Indicator: MONRE has change through Prime Minister, GoV has improved its finalized a Report on Indicator: Decision on has issued Decision planning, prioritization Updated Climate Change National Climate Strategy Number 1474/QD-TTg and financing for climate Scenarios dated 2011 issued by Prime Minister dated October 5, 2012, change action updating the Recipient’s (Decision Number adopting its national climate change scenarios 2139/QD-TTg dated action plan for climate Result Indicators with an improved December 5, 2011) change for the period of methodology (MONRE/DHMCC) 2012 to 2020 Baseline: (MONRE/DHMCC) i) No agreed tool in place within the MPI SEDP Adopt the Adaptation process to plan and Developed provincial Authorize the Prioritization Framework prioritize climate disaster risk management plans for all provinces establishment of the Indicator: The Recipient, adaptation action Indicator: The Prime National Coordination through its Ministry of ii) No Province has Minister issued Official Platform for Disaster Risk Planning and Investment, disaster risk management Instruction Number Reduction and Climate has issued Decision and reduction plans in 1820/TTg-KTN dated Change Adaptation Number 1485/QD-BKHDT place September 29, 2009 Indicator : Decision on the dated October 17, 2013 iii) Addressing Disaster endorsing the establishment of the adopting a climate change risk hazards relies on Implementation Plan of National Coordination adaptation prioritization dispersed and diverse 48 the National Strategy for Platform for Disaster Risk framework for socio- legal frameworks Natural Disaster Reduction and Climate economic development iv) Disaster Risk Reduction Prevention, Response, and Change Adaptation issued planning and Climate Change Mitigation to 2020 which by the Office of the (MPI/DSENRE) Adaptation are related is a consolidation of 63 Government (Decision and coordinated on an ad Provincial Disaster Action Number 6853/VPCP- hoc basis between GoV Plans and evidence of QHQT dated September 4, agencies, development their development 2012) Adopt the Law on Natural partners, research (Instruction Number (MARD/DWR, Disaster Risk institutes and NGOs 1820/TTg-KTN dated MONRE/DHMCC) Management and September 29, 2009) Reduction Targets: (MARD/DMC) Indicators: The Recipient, i) An Adaptation through its National Prioritization Framework Assembly, has enacted is operational within MPI Law Number SEDP annual cycles and 33/2013/QH13 dated June initial implementation 19, 2013 on natural reflected in MPI SEDP disaster risk management annual guideline and reduction frameworks and budget (MARD/DWR) reports ii) Provinces have disaster risk management and reduction plans under implementation as reflected in the Government Report on Evaluation of 5 years implementation of the National Strategy for DRM iii) A comprehensive unified legal framework to address climate hazards is operational enabling a stronger focus on DRR. DPO 1 (FY 2012 Board / DPO 2 (FY 2013 Board / DPO 3 (FY 2014 Board / Delivery) Delivery) Delivery) Program Results Indicators Prior Action delivered Prior Actions delivered Prior Actions delivered Goal 4: Cross-Cutting Promotion of Financial Resources Mobilization for Climate Change Action According to Priorities and a Multi-Sector Allocation Process Approved guiding Develop institutional Establish implementation principles related to the mechanism to promote guidelines for allocation Expected end-of-program Financial Mechanism for climate financing sources and reporting of financial results (CY2015) using ODA for climate Indicator: Decision resources directed at financing through budget establishing a long term climate change action Additional financial support task force on Climate consistent with PM resources for climate Finance to guide decision Decision 8981/VPCP- change action are Indicator: The Prime making within MPI issued QHQT dated December mobilized, planned Minister issued Official by MPI Minister (Decision 10, 2010 on the Financing according to priorities and 49 Instruction Number Number 505/QD-BKHDT Mechanism a multi-sector allocation 8981/VPCP-QHQT dated dated April 25, 2012) Indicator: The Recipient, process and reported December 10, 2010 (MPI/ DSENRE) through its Ministry of subsequently outlining the guiding Natural Resources and principles relating to the Environment, Ministry of Results Indicators use of official Finance, and Ministry of development assistance Planning and Investment, Baseline: to respond to climate has issued Joint-Circular i) No additional Financial change through budget Number 03/2013/TTLT- Mechanism for allocating support (Instruction BTNMT-BTC-BKHDT dated budget for climate change Number 8981/VPCP- March 5, 2013 action QHQT dated December establishing ii) No government unit 10, 2010) implementation responsible for (MOF, MONRE) guidelines for the Support facilitation/awareness Program to Respond to raising on access to Climate Change financial climate change financing resources management mechanism for the Targets: climate change actions i) Additional financial consistent with Prime resources are mobilized Minister’s Instruction for climate action, Number 8981/VPCP- planned according to QHQT dated December priorities and a multi- 10, 2010 sector allocation process, (MONRE/MOF/MPI) and reported subsequently 50 ANNEX 2: SIGNIFICANT GoV ACTIONS TAKEN TO STRENGTHEN CLIMATE CHANGE RESPONSE Initiative Year Period Description and Status To achieve the VGGS’s goals and tasks, the GGAP includes the following contents: 1) Restructuring and improving the institutions to encourage economic sectors consuming energy and natural resources more 2014 efficiently and highly added values; 2) Studying and applying advanced National Action Plan on 2014- (expect technologies for more efficient use of natural resources, GHG emission Green Growth (GGAP) 2020 ed) reduction and effective response to climate change. 3) Improving people’s living conditions through generating more jobs in sectors of green industry, agriculture and services as well as building green infrastructure and creating environmental friendly life style. Summarizes the Party’s latest evaluation of the state of climate change Communist Party response and protection of natural resources and provides guiding policies Resolution on 2013-20 on, and directions for, climate change and for enhancement of Responding to Climate 2013 vision to environment and natural resources protection. Includes objectives, focal Change and Protection 2050 tasks, and main solutions. The Party and the National Assembly are of Natural Resources tasked with overseeing the implementation of the Resolution. Consists of an annual policy matrix developed jointly by GoV and DPs Support Program to forming a partnership program. SP-RCC policy matrix for 2014-15 aims Respond to Climate 2012 2013-16 to align with NCCS and the GGS in support of a close implementation Change (SP-RCC) coordination of both strategies and actions plans. The NCCC now oversees the implementation of the SP-RCC. Sets goals for sustainable economic growth; based on 3 pillars: (i) GHG Emission Reduction, (ii) Greening Production, and (iii) Greening 2012-30 Vietnam Green Growth Lifestyle & Consumption. An Inter-ministerial Coordinating Board is to 2012 vision to Strategy (GGS) be established under the NCCC to oversee implementation. MPI is 2050 assigned to lead implementation in close coordination with Line Ministries. National Action Plan to Outlines priority tasks for climate-change mitigation and adaptation, Respond to Climate 2012 2012-20 builds on the NCCS. The NAP-CC tasks specific ministries with Change (NAP-CC) implementation under the supervision of the NCCC. Establishes guiding principles and specific objectives for climate change National Climate 2011-20 action; emphasizes adaptation, mitigation, and roles of public and private Change Strategy 2011 vision to sector and civil society. The NCCS tasks the NCCC with assisting the (NCCS) 2050 Prime Minister to oversee implementation. Part of the national program for science and technology, the program aims Science and Technology to (i) understand the scientific nature of climate change, (ii) propose 2011- Program to Support the 2011 directions for technology, policy and measure for adaptation and 2015 NTP-RCC mitigation, and (iii) identify scientific foundation for integration of climate change into the development strategies. Capacity building and awareness program to integrate climate change National Target action into sector strategies, programs, and plans; directed primarily at Program to Respond to 2008 2009-15 research and capacity-building to inform priorities; emphasis on Climate Change adaptation. The NCCS is tasked to oversee the implementation of the (NTP-RCC) NTP-RCC. National Strategy for Brings together resources to implement disaster risk reduction, response Natural Disaster 2007- 2007 and mitigation in order to minimize the losses of human life and Prevention, Response 2020 properties, the damage of natural resources and cultural heritages. and Mitigation to 2020 51 ANNEX 3: LETTER OF DEVELOPMENT POLICY 52 53 54 ANNEX 4: IMF ASSESSMENT LETTER VIITNAl\1- ASSESSUENT LETTER FOR THE WORLD BANK Febmary 14, 2014 Rtttnt Dtvtlopmt nts nnd Outlook1 1. Gro"1h has stabiliz•d and inflation has •ased. Real GDP grew 5.4 percent in 2013, significantly below histot·ical rates. Growth is projected around 5\1, percent in 2014, supported by continued strong foreign direc.t inve~tment flows and manufactur·ing expotts, while the domestic economy is forecnst to rem.•in subdued owing to stmctural impediments from a WMk banking sector and inefficient state owned enterprises (SOEs). Headline inflntion fell to 5\1, percent in early 2014, and mny ri~e marginnlly with further administered price adj11~tments . The current account balance registered a strong stuplus again in 2013, but short-term capital outflows, partly reflecting residents moving out of local currency, impeded gross intemational resetve accumulation (expected around 2 months of impotis at December 2013). A slight narrowing of the surplus is projected for the coming year. 2. Risks to the outlook art mainly on the downside. Slow progress in banking system and SOE refotm could prolong sub-par growth and create self-reinforcing adverse feedback, possibly resulting in large contingent liabilities for the public sector, bringing public debt to unsustainable leveb. Futther delays in f1scal consolidation could pressw·e interest rates and the exchange rate and jeopardize deb\ sustainability. Protracted global economic and f1nancial volatility could lead to a weakening of an already low level of reserves in the absence of exchange rate flexibility. Mncrotconomk Policits 3. Hscal policy should rtluru to a consolidation path. The. 2014 budget deficit is expected to t'ise to around 6\t, percent of ODP (GFSM 200 I) due to tax cuts and weak revenues, despite a reduction in spending and a public wage and hiring freeze. With the deficit deteriorating, public debt is projected to rise to 59 perc.ent ofGDP at end 2014. The authorities should aim to restore fiscal space to maintain matroeconomic and debt sustainability, and to provide room to address bank and SOE restructuring, essential for nnderpinning more robust sustainable growth. This would require restraining the deficit in 2014 to below budgeted levels, with further COI!Solidation in the medium-term. Fiscal consolidation should rely mainly on revenue enhancing measures. 1 Tbe 20U Ankle rv collsult:itio!l was cox.luded by tM IMP* s executive Bo31d o!l i'Ull@ 24, 2013. 55 2 4. Monetary polky should mnain on hold in the near ttrm. Policy was loosened in the middle of last year reflecting declining inflation and weakness in the domestic economy. Conditions for tiu1her ea~g could arise.if inflation pressures continue declining and fiscal policy is tightened, but a cautious approach is warranted given the likely muted growth intpac.t of fmther inter·e~t rate. reduc.tions, due to intpair·e.d bank and corp¢rate balance sheets, and in light ofthe recent experience with capital outflows. Greater exchange rate flexibility would help absorb shocks and provide room for reserve accumulation over the medium term. 5. Banking sector reform continues to present an important challenge. Systemic liquidity concerns have been reduced, and the authorities have established the Vietnan1Asset Management Company 0JAMC) in an attempt to address non-performing loans (NPLs). Efforts have also been made to r·e~tmc.ture banks and gradually open the sector to more foreign participation. However, the VAMC cun·ently provides banks only with the means to access liquidity support and time.to meet provisioning requirements, while foroearance continues and unsafe lending practic.es are being encow·aged. 6. Banking reforms are a priori!)' to minimize macroeconomic and financial risk and raise grotnb potential. The official (adjusted) NPL ratio seems to have ;tabilized around 8 percent, but the tme number is likely much higher. The capital adequacy ratio is officially reported to be 2 points above the minim1 un of 9 percent, but the implementation of tighter regulations and adjustments for the impact of multiple gearing and loan-financed capital would likely bring it below the regulatory minimum. The authorities are. begimling to develop an action plan ba.ed on reconunendatious from the recent Financial Sector Assessment. The foms should be first to move decisively on bank diagnostic assessments, and then to develop different options for resolving NPLs, recapitalizing viable banks and facilitating the orderly exit of non-viable banks, strengthening the VAMC, and intproving supe1visioo, financial r.afety nets, and crisis management systems. 7. SOE refonns need to be accelerated. There has been progress in the legal framework for SOE refomu, but implementation remains a challenge. Over the past year, important decisions have been taken to improve oversight and management, divest non-core assets, and intprove information disclosure.. Ne.vertheless, the. pace of actual reform has been slow and there. are significant legal and proc.edural challenges which ;till need to be. overc.ome. 56 3 Table 1. Selected Economic Indicators. 2009-1411 ,.. "L ,.,. Pto'«tions ." 2010 20U 2012 20U 2015 """"" Re:.I GOP(perceM ch.:lnge) « •• 6.2 S2 , S.7 ., .. .. .. .. Prices (percent chango) CPl (period IIYt ragel CPl (end of pc-Jiod) Core int'.'ltion {end of period) GDPd cfbtot .. <2 9.2 ID 9.• 12. 1 1&1 I&I t-1.3 21.3 9.1 9< •• •• ... lo.9 ,. 6.l 6.3 u .. 6.2 .. Gen~~n~l gowmm«~t fi:n.:..ncos (in pen:ent of GOP) 2/ Re.oti"W.IC .111'1d gr.ant= 0 ( to.h'dr Oil t CYel'lue " " .. "'' , ••• ,.,. ,. 27.3 , .. 2<9 ,.. ,. >2.9 >2.1 19.6 22 19.7 f:xpenciilun: f::wpe~c Nee acqlisitiOfl of nonfil'l:mcial .ass~ 31.6 19.3 12.3 •• 192 ,., 2<9 IU u .... 2<15 .. ... 12 1J 1. . .. 25.1 19.7 ... 108 Ncl lendirls f•l/b0rrov,;f9(•) 3/ P\bk and publicly guwo¥~tted debt (end of period) ••• 4<9 ·U , ss• ·2.8 St.6 41.6 ~s.1 S9.2 . .1 Mont y • nd