Vietnam Managing Public Resources Better Public Expenditure Review 2000

Transcription

1 Public Disclosure Authorized Report No VN Vietnam Managing Public Resources Better Public Expenditure Review 2000 (In Two Volumes) Volume 1: Main Report December 13, 2000 Poverty Reduction and Economic Management Unit East Asia and Pacific Region Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank

2 Vice President Sector Director Task Manager :Jemal-ud-din Kassum : Homi Kharas : David Shand

3 Acknowledgements The Vietnam Public Expenditure Review (PER) 2000 was prepared by a joint Governmentdonor working group, with contributions by several other people, including an NGO. The initial draft of the main report was discussed at the Mid-Year Meeting of the Consultative Group in Dalat, June 22-23, The final report reflects comments received from donors and Government agencies. Throughout the process, the working group works closely with Mr. Do Hoang Tuan, Deputy Director, State Budget Department of the Ministry of Finance (MOF) and the Government team comprised of representatives from other departments of MOF, from the Ministry of Planning and Investment, from sector ministries like Ministry of Education and Training (MOET), Ministry of Health (MOH), Ministry of Agriculture and Rural Development (MARD), and Ministry of Transport (MOT). The donor team -- staff and consultants from the World Bank, IMF, UNDP, Denmark, Netherlands and the United Kingdom -- led by Mr. David Shand, worked closely with Mr. Kazi Matin (Lead Economist, Vietnam). The drafts of concept paper and the draft reports of four sectors as well as those of the cross-cutting themes were discussed in meetings where all donors as well as the NGO resource-center were invited at three different stages since November The team would like to express its gratitude to various governmnent agencies and provincial authorities for their support and cooperation throughout the PER process. The team would also like to thank Mr. Andrew Steer (Director, Vietnam Program, World Bank), Mr. Homi Kharas (Director, Poverty Reduction and Economic Management, East Asia and Pacific Region), and Ms. Barbara Nunberg (Lead Specialist in Public Sector Management, East Asia and Pacific Region), for providing ideas and advise during the preparation of the report. Team Managers: Lead Advisor: Coordinators: Mr. Nguyen Cong Nhiep, Mr. David Shand Mr. Vinaya Swaroop Mr. Do Hoang Anh Tuan, Mr. Nguyen Van Minh Members of the PER teams included the following: (i) Government Team: Mr. Nguyen Cong Nghiep, Mr. Do Hoang Anh Tuan, Ms. Truong Thai Phuong, Ms. Tran Thu Ha, Ms. Tran Kim Hien, Mr. Nguyen Truong Giang, Ms. Do Thuy Hang, Mr. Lai Van Duong, Mr. Ngo Huu Loi, Ms. Nguyen Lan Huong, Mr. Do Viet Duc, Ms. Le Thi Hong Sinh, Mr. Vu Duc Hiep (MOF); Mr. Nguyen Buu Quyen, Mr. Nguyen Tu Nhat, Mr. Trinh Nhu Phuc, Mr. Le Van Xuan (MPI); Mr. Nguyen Van Hung, Mr. Vu Xuan Cuu (MOT); Ms. Phan Ngoc Thuy (MARD) ; Mr. Vuong Doan Quan (MOET); Mr. Nguyen Nam Lien (Ministry of Health). (ii) Donor Team: Mr. David Shand (Task Manager), Mr. Vinaya Swaroop (Lead Advisor), Mr. Peter Brooke, Mr. Perran Penrose, Ms. Nguyen Nguyet Nga (Education), Mr. Anil Deolikar, Mr. Nguyen Van Minh (Health), Mr. Francesco Golleti, Ms. Mylene Kherallah, Mr. Nguyen Cong Chuc, (Agriculture), Mr. Dieter Havlichek, Ms. Nguyen Thi Thanh Hang, Ms. Duong Thi Thanh Mai (Transport), Mr. Haroon Akram Lodhi, Mr. Jaki Desai, Ms. Tran Thi Que (gender), Mr. Nguyen Dam, Mr. Brian Van Arkadie (expenditure processes and PIP), Mr. Govinda Rao (decentralization), Ms. Carolyn Turk, Mr. Vu Xuan Dao, Mr. Nguyen Dinh Huan, Mr. Bertrand de Hartingh (voluntary contributions), Mr. David Cowan, Mr. Feridoun Sarraf, Mr. Murray Petrie (fiscal sustainability and transparency).

4 Vietnam Public Expenditure Review 2000 Other participants from donors and NGOs: Mr. Torben Bellers (Danish Embassy), Mr. Alan Johnson, Mr. Peter Balacs (Dfid); Mr. Dennis de Tray, (IMF); Ms. Ellen Berends, Ms. Els Klinkert (Netherlands Embassy); Ms. Anne-Isabelle Blateau, Mr. Trinh Tien Dung, Mr. Emmanuel Cuvillier (UNDP); Mr. Pham Van Ngoc (ActionAid). Other Contributors: Mr. Christopher Shaw, Ms. Mai Thi Thanh, Mr. Christopher Gibbs, Ms. Tran Thi Minh Phuong, Ms. Nguyen Thi Mai and others. Peer Reviewers: Mr. Charles Humphreys, Mr. Kyle Peters (World Bank) Other Support: Ms. Hang Thu Nguyen, Ms. Phuong Anh Vu Tran, Ms. Giang Thi Huong Nguyen, Ms. Van Thi Hong Do, Ms. Ha Thanh Hoang, Ms. Chi Kim Tran (World Bank) Participants at Various Consultations on PER-drafts: Transport Sector: Mr. Nguyen Viet Tien, Vice Minister of MOT, Ms. Nguyen Thi Thanh Hang, Ms. Ha Khac Hao, Mr. Nguyen Van Hung, Ms. Dang Thi Hoc, Mr. Tran Ba Nghiep, Ms. Nguyen Thuy Ha (Ministry of Transport); Mr. Nguyen Van Thuc, Mr. Lai Van Duong, Ms. Nguyen Thi Nhuan, Mr. Tran Viet Hung (Ministry of Finance); Mr. Vu Van Huy, Mr. Do Quoc Binh, Mr. Trinh Nhu Phuc (Ministry of Planning and Investment); Ms. Duong Thi Thanh Mai (National Economic University); Ms. Tran Thi Que; Mr. Haroon Akram Lodhi (Netherlands), Mr. Kazi M. Matin, Mr. Nguyen Van Minh, Ms. Tran Thi Minh Phuong (World Bank); Mr. Trinh Tien Dung (UNDP), Emmanuel Cuvillier, Mr. Hoang Van Hai (UNDP Project VIE 96/028); Mr. Steve Ray (Dfid). Agriculture Sector: Mr. Cao Duc Phat, Vice Minister of MARD, Mr. Vu Van Dong, Ms. Nguyen Thi Hai (Ministry of Finance); Mr. Dao Trong Tu, Mr. Phan Duy Tam, Mr. Phan Van Quan, Ms. Phan Ngoc Thuy, Mr. Nguyen Van Than (Ministry of Agriculture & Rural Development); Ms. Le Thi Thong, Mr. Nguyen Van Doan (Ministry of Planning & Investment); Mr. David Shand, Mr. Francesco Golleti, Mr. Kazi M. Matin, Mr. Nguyen Van Minh, Mr. Vinaya Swaroop, Mr. Jaikishan Desai (World Bank); Mr. Emmanuel Cuvillier (UNDP); Mr. Hoang Van Hai (VIE 96/028); Mr. Henning Nohr, Mr. Morten Boye Hansen (Danish Embassy); Ms. Els Klinkert, Ms. Tran Thi Que (Netherlands Embassy); Mr. Steve Ray (Dfid). Health Sector: Ms. Phan Thi Cuc, Ms. Nguyen Lan Huong, Ms. Nguyen Thi Nhuan, Ms. Do Thuy Hang, Mr. Tran Viet Hung (Ministry of Finance); Mr. Nguyen Dinh Khuong, Mr. Nguyen Nam Lien, Mr. Le Van Quan, Mr. Truong Viet Dung, Mr. Nghiem Tran Dung, Mr. Nguyen Van Duy, Ms. Vuong Thi Lua (Ministry of Health); Ms. Hoang Kim Thoa, Ms. Tran Kim Nguyen (Ministry of Planning and Investment); Mr. Anil Deolalikar, Mr. Kazi M. Matin, Mr. Nguyen Van Minh (World Bank); Ms. Els Klinkert (Netherlands Embassy); Mr. Emmanuel Cuvillier (UNDP Project VIE 96/028). Education Sector: Ms. Le Thi Hong Sinh, Mr. Tran Viet Hung (Ministry of Finance); Mr. Duong Duc Lan, Mr. Vuong Doan Quan, Mr. Nguyen Dang Thin, Mr. Nguyen Duc Chinh, Mr. Kieu Duc Thanh (Ministry of Education and Training); Mr. Peter Brooke, Mr. Christopher Shaw, Mr. Nguyen Van Minh, Ms. Mai Thi Thanh (World Bank); Ms. Nguyen Thi Hue (Dfid). Budget Process: Mr. Do Hoang Anh Tuan, Mr. Pham Tuan Dat, Mr. Ngo Huu Loi, Ms. Duong Quynh Le, Mr. Tran Sy Thanh, Mr. Bui Anh Binh, Mr. Do Viet Duc, Ms. Phan Thi Cuc, Mr. Dang Van Thanh (Ministry of Finance); Mr. Le Van Xuan, Mr. Nguyen Tu Nhat (Ministry of Planning & Investment); Mr. David Shand, Mr. Kazi Matin, Mr. Nguyen Van Minh, Mr. Jaikishan Desai, Mr. Vinaya Swaroop, Mr. Peter Brooke (World Bank); Mr. Haroon Akram

5 Lodhi (Netherlands); Mr. Emmanuel Cuviller, Mr. Hoang Van Hai (VIE 96/028); Mr. Johan Fredriksson, Mr. Trinh Tien Dung, (UNDP); Mr. Dennis de Tray (IMF); Mr. Torben Bellers, Ms. Elisabeth Carlsson, Ms. Tran Thi Que; Ms. Nguyen Nu Hoai Van (Netherlands Embassy). Fiscal Sustainability & Transparency: Mr. Do Hoang Anh Tuan, Mr. Dang Van Thanh, Mr. Bui Anh Binh, Mr. Nguyen Van Nghia, Mr. Do Viet Duc, Mr. Pham Tuan Dat, Mr. Hoang Nguyen Hoc, Ms. Phamn Thi Tuat, Ms. Nguyen Thi Yen, Ms. Nguyen Anh Van (Ministry of Finance); Ms. Vu Phuong Lien (State Bank of Vietnam); Mr. Bui Duc Thu (National Assembly); Mr. David Shand, Mr. Kazi Matin, Mr. Nguyen Van Minh, (World Bank); Mr. Haroon Akram Lodhi (Netherlands); Mr. Dennis de Tray, Ms. Ha Thi Kim Nga (IMF); Mr. Emmanuel Cuviller, Mr. Johan Fredriksson (UNDP); Mr. Louise Andersen, Ms. Anette Aarestrup (Danish Embassy); Mr. Trinh Quoc Cuong (Dfid); Ms. Tran Thi Que (Netherlands Embassy).

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7 TABLE OF CONTENTS CURRENCY EQUIVALENTS... EXECUTIVE SUMMARY... CHAPTER I... 1 FISCAL SUSTAINABILITY AND TRANSPARENCY...1 Current situation... 1 Potential risks to fiscal sustainability... 2 A medium term fiscal outlook... 7 Fiscal transparency... 7 CHAPTER BUDGETING AND PUBLIC EXPENDITURE MANAGEMENT General Position Improving expenditure prioritization Review of expenditure norms Improving the public investment plan (PIP) process Improving budget implementation and monitoring Fiscal decentralization and public spending Local fees and contributions CHAPTER INTER AND INTRA-SECTORAL COMPOSITION OF EXPENDITURES 23 Coverage of the PER Data Allocation decisions Redistributive role of public expenditure Gender Issues in public expenditures Agriculture Sector Health sector Education sector I I Tables: Table 1.1: Government Budget (percent of GDP)... 1 Table 3-1-A: Budget expenditure by economic types and by sector, by central and local governm ent Table 3-1-B: Budget expenditure by economic types and by sector, by central and local overnment Table 3.2. Public Expenditures In Agriculture Table 3.3 Capital and current expenditures by agriculture sub-sector Table 3.4: Budget support to SOEs (in million VND)... 41

8 Table 3.5 Informnation on agricultural SOEs owned by the central government Table 3.6: Gross and net enrolment ratios Table 3.7: Attainment test in mathematics and language (in %) Table 3.8: Growth of public expenditure on education Table 3.9 International comparison of education expenditure Table 3.10: Sub-sectoral percent shares of education expenditure (%) Table 3.11: Regional differences in average school expenditure Table 3.12: Shares of expenditure in total expenditure (in %) Table 3.13: State transport expenditures (in %) Table 3.14: State transport spending by mode, locality and spending category (in billion VND)* Table 3.15 : Social Subsidies Boxes: Box 1.1: Fiscal Costs of SOE and Banking Reformn... 3 Box 1.2. Assessing fiscal sustainability in Vietnam... 6 Box 1.3: Recent Measures to Improve Transparency... 8 Box 2.1: The budgetary process in Vietnam Box 2.2: Better integrating the capital and recurrent budgets Box 2.3: Medium-tern planning and budgeting Box 3.1: Evaluating Public Expenditure Program Box 3.2: Broad Strategy for Future Spending Figures: Figure 3.1: Decision Tree for Evaluating Public Programs Figure 3.2. Inter-sectoral composition of public expenditures Figure 3.3: Lorenz curve for public spending on education, health and household consumption, Figure 3.4: Per capita Agric Spending vs. Per capita AG GDP by province, 1998 (VND '000) Figure 3.5: Total Public Spending on Health, Vietnam, Figure 3.6: Persons per hospital bed, selected Asian countries,

9 CURRENCY EQUIVALENTS CURRENCY UNIT = DONG US$ = DONG (November 2000) Government Fiscal Year January 1 to December 31 Abbreviations ADB AFTA AMC BOT CG DANIDA DFID FAO FDI FTE GCOP GDP GER GFS GNP GOV GSO GTD HCMC HEPR IMCs IMF IUD JICA LSMS LSS MARD MCTPC MICT MIS MOF MOH MOLISA Asian Development Bank Asian Free Trade Area Asset Management Company Build - Operation - Transfer Consultative Group Danish International Development Agency Department for International Development Food and Agriculture Organization Foreign Direct Investment Full Time Equivalent Government Committee for Organization and Personnel Gross Domestic Product Gross Enrolment Ratio Government Financial Statistics Gross National Product Government of Vietnam General Statistics Office General Taxation Department Hochiminh City Hunger Eradication and Poverty Reduction Irrigation Management Companies International Monetary Fund Intrauterine Device Japan International Cooperation Agency Living Standard Measurement Survey Lower secondary Ministry of Agriculture and Rural Development Ministry of Communication, Transport, Post and Construction Manila International Container Terminal Management Information System Ministry of Finance Ministry of Health Ministry of Labor, Invalids and Social Affairs

10 MOT MOTE MPI MTEF MVUC NCFAW NCPFP NER NFEP NGO NPL NTPE O&M ODA PER PHP PIP PPA PPC PTR SBV SDI SEC SMEs SOE SSR T.B UNDP UNICEF USS VAT VHI VHIA VHSR VICT VITRANSS VLSS VR VRA VSI VTET VWU Ministry of Transport Ministry of Education and Training Ministry of Planning and Investment Medium term expenditure framework Motor Vehicle User Charge National Committee For the Advancement of Women National Committee of Population and Family Planning Net Enrolment Ratio National Fund for Employment Promotion Non-government Organization Non-Performing Loans National Target Program on Employment Operations and Maintenance Official Development Assistant Public Expenditure Review Phillipine Pesos Public Investment Program Phillipine Ports Authority Province People's Committee Pupil Teacher Ratio State Bank of Vietnam Strategic Development Institute Securities and Exchange Commission Small and medium-scale private enterprises State-Owned Enterprise Staff Student Ratio Tuberculosis United Nations Development Programme United Nation Children's Fund Upper secondary Value Added Tax Vietnam Health Insurance Vietnam Health Insurance Authority Vietnam Health Sector Review Vietnam International Container Terminal Vietnam Transport Sector Study Vietnam Living Standards Survey Vietnam Railway Vietnam Road Administration Vietnam Social Insurance Vocational Technical Education and Training Vietnam Women's Union

11 Executive Summary EXECUTIVE SUMMARY 1. This Public Expenditure Review (PER), prepared jointly by the Government of Vietnam and donors, examines Vietnam's public expenditure policy and management and proposes ways of improving the results of its public spending program. The report examines cross-cutting issues-fiscal sustainability and transparency, expenditure management processes, fiscal decentralization-and analyzes public spending on agriculture, health, education, and transport from the perspective of growth, poverty reduction, and gender equity. 2. The report identifies six important areas requiring action: * Reversing the Government's declining revenue share in GDP and developing a medium-term fiscal outlook, * Improving budgetary data and increasing the transparency of data and information flows, * Ensuring an effective process for prioritizing public expenditures. * Enhancing "pro-poor" bias of public expenditures. * Reallocating spending within sectors to improve sector outcomes * Assessing where services can be provided by private sector to reduce budgetary burden. The report's findings reflect a situation which applies in many countries, including those at much higher levels of economic development and income than Vietnam. For a country at Vietnam's stage of development, its system of public expenditure management appears to operate well. 3. This PER represents another step in the Government's ongoing efforts to increase fiscal transparency and improve public expenditure management and policy. Time did not permit all relevant issues to be examined or policy suggestions to be made on all the issues that were analyzed. The report should therefore be seen as an important part of an ongoing process, with discussions and work continuing in the coming months. 4. The report was prepared in a participatory and consultative manner, with stakeholders participating throughout the process. Participants included not only the Ministries of Finance (MOF), Planning and Investment (MPI), Education and Training, Health, Transport, and Agriculture and Rural Development but also provincial authorities; donors, such as DFID, DANIDA, the Government of the Netherlands, the U7NDP, and the IMF; and NGOs, such as Action Aid. Consultative sessions with sector ministries and donors were held at various stages of the process, and workshops were held in Hanoi and Ho Chi Minh City. 5. The report's findings and recommendations should help the Government and donors better understand how well Vietnam's public expenditure management system encourages the effective use of public resources and ensures that inter and intra-sectoral spending is consistent with the Government's stated development objectives. The findings and recornmendations should help policymakers assess whether Vietnam can move from a project approach to a programmatic approach to foreign assistance in any of the four sectors examined, and if so how it could do so. The report could also help the Government prepare the future state budgets. i

12 Vietnam Public Expenditure Review 2000 develop the new five-year plan (including the Public Investment Program [PIP]), and revise the Budget Law. 6. For the Government, the next steps will be to adopt measures that have been well specified in the PER, initiate additional follow-up work to develop specific measures where findings warrant such work, and analyze issues not examined in this PER. For donors the next steps will be to assess the report's implications for their assistance to Vietnam and coordinate technical assistance for implementing its recommendation. CONSTRAINTS TO GROWTH AND THE CHALLENGES FACING VIETNAM 7. High growth has helped reduce poverty... In recent years Vietnam has been one of the 10 fastest-growing economies in the world, with annual growth averaging an exceptional 8.5 percent between 1992 and This high rate of growth-the result of the introduction of the economic reform process (doi moi) in the late 1980s-helped dramatically reduce poverty, which fell from 58 percent in 1992 to 37 percent in but annual growth has slowed since 1998, falling to about 5 percent in Growth in nonagricultural production and investment, especially foreign investment, has slumped, and unemployment has risen. While the downturn in growth partly reflects the effect of the regional economic crisis, insufficient competitiveness and efficiency in the Vietnamese economy has hindered the resumption of higher growth. The decline in growth makes increasing the effectiveness of public expenditure policies and management all the more important. 9. In November 1999 the Prime Minister identified several constraints on faster economic growth and poverty reduction: the poor performance by and need for fiscal support to stateowned enterprises, inadequate sectoral policies and inappropriate investment choices, the gap between policy and implementation, and the need for better targeting of public spending on the poor. This PER confirms that these problems are hampering efforts to move to sustained economic growth and poverty reduction. REVERSING DECLINING REVENUE AND DEVELOPING A MEDIUM-TERM FISCAL OUTLOOK 10. Revenues have declined... Revenue as a share of GDP has fallen by 3-4 percent of GDP. Most of the decline occurred in 1998 and 1999 and was caused by the decline in corporate income tax collections-the result of a slowing economy, flagging enterprise performance and weakness in tax administration. Given current policies the decline is projected to continue in 2000 and beyond and total expenditures have fallen. Public spending as a share of GDP has fallen by about 4 percent of GDP since While this fiscal restraint is commendable, further cuts in public spending may underrnine the Government's efforts to reduce poverty. Most of the decline in spending has been in nonwage spending in economic services, general administration, and social transfers (facilitated by the gradual reduction in the number of pensioners paid from the budget and the shifting of pension payments to the social insurance fund). 12. But spending pressures are likely to grow. Two types of spending are likely to grow in the medium terrn. First, implementation of planned reforms of state-owned enterprises and banks ii

13 Executive Summary would require additional spending of as much as 1-2 percent of GDP a year for three to four years, according to IMF estimates. This spending would comprise creating a social safety net for displaced workers and paying the interest on government bonds used to fund the restructuring of state-owned enterprise debt and the phased recapitalization of the banks. Second, the Government has increased the base wage of civil servants by 25 percent (with further real increases envisaged), to be paid in part by the downsizing of the civil service. Given unsustainably low civil service wages, these increases are clearly needed, but if civil service employment is not reduced, they may crowd out other spending. 13. Reversing the continuing decline in revenues as a share of GDP is critical for sustaining real levels of public spending in the medium term. In the past, Vietnam has maintained a prudent fiscal stance, maintaining relatively small budget deficits (typically about 1 percent of GDP, excluding on-lending) and a low level of debt/gdp. But the current fiscal situation is under pressure from the declining ratio of revenue to GDP and the growing spending pressures. Without actions to address the revenue problem and accurately assess the medium-term fiscal outlook and emerging fiscal risks, acceptable levels of public spending in key sectors may be difficult to maintain in the medium term. 14. Several actions are needed to address these problems over the medium term: - Revenues need to be increased to about percent of GDP. Doing so will require broadening the revenue base, removing discretionary exemptions and multiple rates in the VAT, and further strengthening tax administration. * Definitive estimates of the fiscal costs of state-owned enterprise and banking reform are needed, linked to annual implementation of the reform programs. * Full cost estimates of recent and future wage increases are needed, linked to planned changes in civil service employment. 15. A medium-term fiscal outlook is needed. A medium-term fiscal outlook would assess the impact of new revenue-raising policies and project total spending. It would reflect the pace of sectoral and economy-wide reforms, which determine the volume of donor support in the medium term and thus the size of public investment expenditure. The resulting forecasts of likely deficits and their financing as well as an analysis of the implications of such financing, could trigger timely action and improve the stability of budgetary resources. The medium-term fiscal outlook could also play a key role in informing the annual budget formulation process and in building a medium-term sector expenditure programs. 16. All types of fiscal risk need to be regularly assessed and reported to the Ministry of Finance. Identifying and assessing fiscal risks on a regular basis would reduce unanticipated shocks to public spending. Tight monitoring and control over approved expenditures can be undermined if fiscal risks are not also monitored. For example, in many countries, Government guarantees of loans to state enterprises and sectors or directives to state-owned banks to provide credit to state enterprises on noncommercial terms have threatened the fiscal balance. It is thus essential that contingent liabilities and other fiscal risks be reported to the MOF and assessed regularly. 17. A medium-term fiscal outlook would thus incorporate revenue policies and projections; projections of donor disbursement; analysis of all fiscal risks, and in due course a detailed medium-term public expenditure plan, broken down by sectoral programs. Given the tradition of iii

14 Vietnam Public Expenditure Review 2000 planning in Vietnam, it should be relatively easy to begin developing such programs. The medium term fiscal outlook should be published with the annual budget, and used to inform budget formulation. IMPROVING THE RECORDING AND REPORTING OF DATA AND INCREASING BUDGET TRANSPARENCY 18. Reliable and timely information on spending-and adequate access to such information-is needed to get the best results from public expenditure. Public expenditure needs to be accurately recorded and reported by different spending units, timely and reliable reports need to be generated and be accessible across spending agencies and ministries, and sufficient budgetary information needs to be published to enable businesses and citizens to understand how public resources are being deployed. Vietnam has made considerable progress in these areas in recent years. Enactment of the budget law, regular fiscal reporting and the adoption of international economic classifications, the removal of budgetary information from the secrecy law, and the publication of some of that information reflect such progress. Preparation of this joint PER in a participatory manner and its publication also reflects significant progress. Nevertheless, further improvements in reporting budgetary data and in making data accessible by government agencies and the public are required if Vietnam is to be on a par with other countries in the region. 19. The detailed data used for this PER was available in much greater details than the General Statistical Office publication of budgetary information for the first time in June The sectoral breakdown of total budget spending, which covers three-quarters of total expenditures, details spending by type (capital or recurrent, wage and wage-related, operations and maintenance) and by level of government 20. The lack of a consolidated budget makes it difficult to determine total revenues and expenditures. The PER covers recurrent and capital spending funded from the Government's own revenues, Official Development Assistance (ODA) grants not on-lent, and borrowing (domestic and external concessional ODA loans that are not on-lent). It does not cover recurrent and capital expenditures from off-budget funds or on-lent ODA funds or capital spending by state-owned enterprises, nor all spending by communes. 21. Data recording and reporting are inconsistent across ministries, and many gaps exist. The data used in this report were developed from data provided by the MOF, MPI, and individual sector ministries. Reconciling their different figures revealed several gaps in reporting and recording of budgetary data. First, where sector ministries record expenditures from ODA, they are not classified according to budget codes. Differences in estimates of capital spending by the MOF, MPI and sectoral ministries stem partly from this, and partly from differences in classifying capital and recurrent expenditures. Second, there are also classification anomalies, for example, in recurrent versus capital expenditures in the transport sector, curative versus preventive expenditures in the health sector, salary versus nonsalary expenditures in the education sector. Third, comparison of budgeted and actual spending at a disaggregated level is not possible, because budget allocations and Treasury releases are made using I I categories, while spending agencies and the MOF report expenditure using full budget classification. Fourth, reporting by state-owned enterprises is uneven. Not all large state-owned enterprises submit audited financial statements, and many smaller state-owned enterprises do not regularly report to iv

15 Executive Summary the MOF. Fifth, a detailed classification of spending on social transfers is not available in a form that permits analysis of its impact. 22. More and better information is needed on the impact of public expenditures. Linking expenditures and outcomes to assess the effectiveness or efficiency of public spending is difficult even in advanced economies. Vietnam may thus need to proceed gradually in this respect. Nevertheless, many sectors have information bases that could be used to develop key performance indicators. Data will gradually need to be improved and linked with budgetary decision-making and with the development of medium-tern sectoral plans. 23. Over time, a consolidated budget statement will be needed to accurately reflect the country's fiscal situation. Such a statement would include the activities of all off-budget funds, improve budgetary reporting by communes, obtain regular reports from state-owned enterprises, and ensure better coverage of expenditures funded by ODA. 24. Adopting the following actions would help the Government improve its budgetary reporting: * Designate the Treasury as the department responsible for maintaining comprehensive central public accounts, and consider developing a fully integrated management information system within the Treasury. * Channel agency payments from ODA through the Treasury so that all transactions are recorded using the same budgetary classifications. * Adopt functional classifications in line with international practice. * Ensure that all ministries adopt a uniform classification for capital and recurrent expenditures. * Develop a detailed classification of spending on social transfers. * Require large state-owned enterprises to submit audited financial statements, to be reviewed by the Ministry of Finance and the appropriate sectoral ministry. * Develop key output and outcome measures in one or a few sectors, as a first step towards developing a comprehensive set of performance measures. 25. MOF has expressed a strong interest in implementing an integrated financial management system in the Treasury and will seek technical assistance from the World Bank to do so. Such assistance will be most productive if the Ministry also considers significantly reorganizing its functions to ensure greater coherence and focus in its policy formulation and policy implementation roles. 26. More systematic and frequent sharing of budgetary information across spending agencies is needed. The process of interagency consultations for this PER revealed that sectoral ministries lack adequate information on expenditures by provinces to exercise their policy role. Ministries also lack information on related expenditures by other ministries. 27. The system of local fees and "voluntary" contributions is nontransparent, and insufficiently accountable. The bases of these charges, which generate between 23 and 61 percent of revenues in four of the six communes studied, are so complex that households often do not understand how their payment is calculated. None of the six communes publishes a v

16 Vietnam Public Expenditure Review 2000 budget indicating what charges have been collected from households and how those funds have been spent, leading to dissatisfaction among commune residents. 28. To increase transparency and improve budgeting and decisionmaking, the Government should consider taking the following steps: * Enhance the flow of budgetary information across all government ministries, agencies and provinces. MOF should ensure appropriate involvement of sectoral ministries in reviewing provincial government expenditures in each sector, while preserving existing provincial autonomy. * Provide donors and international organization with more comprehensive information on budgetary outcomes and processes in order to increase donor understanding of Vietnam's public finances. Better infornation could also strengthen partnerships between the Government and donors, and could lead to programmatic funding by donors in different sectors. * Consider regularly publishing the sectoral breakdown for the more than 75 percent of total spending as contained in this PER, based on data on all four levels of government. MOF should also publish the annual budget and final accounts figures for each sector, including relevant intrasectoral detail. Each province, district, and commune should publish its own annual budget and final accounts. * Ensure that existing requirements for transparency in imposing commune fees and "voluntary" contributions are observed. Implementing decrees on "grassroots democracy" and annually publishing commune budgets would be one way of addressing this. CREATING EFFECTIVE PROCESSES FOR PRIORITIZING EXPENDITURES 29. The Government has succeeded in promoting economic growth and reducing poverty, including improving the equity of health and education spending. But there is considerable scope for further improving the effectiveness of public spending. Better processes are needed for prioritizing recurrent and capital spending; recurrent spending needs to account for a larger share of total spending, so that more efficient use is made of the capital stock; sectoral ministries need to play a larger role in prioritizing spending in their sectors; the system of recurrent expenditure norms needs to be simplified; local authorities need more flexibility to allocate funding to their priorities; and a formal budget process that better integrates capital and recurrent budgets is needed. 30. Prioritizing recurrent and capital spending has been difficult, for several reasons. Prioritization is carried out separately for capital spending by the MPI and for recurrent spending by the MOF. Coordination is insufficient to ensure that the recurrent budget implications of planned capital spending are fully analyzed or that appropriate balance between recurrent and capital spending is attained. The current processes in MPI for evaluating and prioritizing PIP projects need significant strengthening. There is a need to improve the evaluation criteria for projects, develop the skills of MPI staff and streamline PIP approval process. A fixed five-year PIP does not permit the prioritization of capital spending to be responsive to changes in the vi

17 Executive Summary economic situation or the availability of resources. These problems are recognized by MPI and efforts are underway to address them. 31. There is an imbalance between capital and recurrent expenditures. It is Government policy that recurrent expenditures should not increase faster than investment expenditures. As a result recurrent spending is too low, implying inefficient allocation and inadequate use of the public capital stock, For example, a significant proportion of irrigation capacity is not used because of inadequate operations and maintenance (O&M) expenditures. Routine maintenance of roads (and inland waterways) is insufficient even though it is much more expensive to rehabilitate roads once they become unusable. 32. Sector ministries play too small a role in prioritizing spending in their sectors. Sector ministries prepare five-year targets and goals, but these are not linked to an affordable expenditure plan. Each sector submits an annual plan for capital spending to the MPI and an annual plan for recurrent spending to the MOF. Because coordination among the three ministries in the finalization of these plans is inadequate, the process for prioritizing all expenditures within a sector remains fragmented. There also appears to be limited scope for evaluating expenditures and reviewing policies, because sector ministries do not receive detailed reports on actual expenditures in their sectors, especially by the provinces. 33. Given that O&M spending is insufficient to make adequate use of the capital stock in several sectors, further work is needed to determine what reallocation of recurrent spending between wage and wage-related expenses and O&M expenses may be needed. Wage and wage-related expenses do not appear to be crowding out O&M expenditures, as they do in many other countries. However, anecdotal evidence suggests that wage and wage-related expenses may be underreported, due to misclassification. Moreover, civil service wages in Vietnam are unsustainably low, and pressures for wage increases are substantial. 34. The system of recurrent expenditure norms, which guides the allocation of resources to and within sectors is complex and some norms are mutually contradictory. Actual spending and service delivery standards in provinces and communes are sometimes inconsistent with stated Government priorities. The use of population-based norms for allocating resources to schools, for example, does not take into account varying enrollment rates or adjust fully for different geographical conditions or cost disadvantages. As a result, poorer provinces and remote areas are often inadequately funded. 35. Local authorities, especially the communes, have insufficient flexibility to prioritize their own spending. Poorer provinces depend on cash transfers to meet minimum service delivery standards, but the existing transfer system is unable to meet their requirements. Districts and communes receive a share of those transfers, but they are often inadequate to meet the nonwage costs of service delivery. This limits their flexibility in responding to local needs, except to the extent that their revenues exceed budget estimates or they are able to resort to fees and voluntary contributions for a significant share of their revenue, which they allocate in line with local preferences. Consideration could be given to providing local governments with additional revenue sources 36. A formal budget process needs to be established that better integrates capital and recurrent budgets and promotes prioritization that maximizes the impact on growth and poverty reduction. Several actions would help achieve this: vii

18 Vietnam Public Expenditure Review 2000 * MPI and the MOF should improve existing mechanisms for coordinating capital and recurrent expenditure. This should involve ministries and provinces submitting integrated capital and recurrent budget requests to both the MOF and the MPI, and all parties should participate in future discussions on these budget requests. * Develop medium-term sector expenditure programs as the basis for developing annual sectoral budget requests. * Strengthen the MPI's processes for evaluating investment projects. Developing capacity, adopting more rigorous evaluation criteria, and turning the PIP into a rolling five-year expenditure plan that is adjusted each year would improve the MPIs capacity to assess the appropriateness of investment priorities. * MOF, together with the provinces and sector ministries, should review the current expenditure norms-both the budget allocation norms used to guide expenditure to sectors and the budget transfer norms goveming cash transfers to the provinces. In reviewing the latter consider adopting a new, more equitable formula-based system; and consider assigning some revenue-raising powers to lower levels of government. (The Government believes that assigning such powers would not be appropriate at this time but will undertake work to assess the pros and cons of such an action.) ENHANCING THE PRO-POOR BIAS OF PUBLIC SPENDING 37. There is considerable evidence that the Government's public expenditure program plays an important redistributive role and helps the poor. Although national safety net programs are not particularly effective, cash transfers to poorer provinces and the distribution of health and education sector spending are redistributing income. But considerable scope remains for improving the impact of public spending on the poor, particularly by better targeting social expenditures and developing alternative mechanisms for increasing income transfers to the poorest. 38. Targeting of spending on public health and education, especially on education, has improved over time, and public social expenditures are now more equally distributed than household expenditures. For example, the poorest quintile received 18 percent of total spending on public education in 1997/98 (a 2 percentage point increase over 1992/93) and 26 percent of spending on primary education (a 6 percentage point increase). 39. Cash transfers to poorer provinces are performing a useful redistributive role, and allowing these provinces to support a higher level of service delivery. In 1998 at least 41 provinces received cash transfers. Although richer provinces still spend more than poorer provinces, provincial per capita expenditures are more equally distributed across provinces than are per capita revenue collections, and they have become more equally distributed over time. Nevertheless, the fact that the size of these cash transfers is only weakly related to the depth and incidence of poverty in the provinces suggest that there is room for improve targeting. 40. To enhance the pro-poor bias of public spending, four types of actions are recommended:. Target social spending more effectively at the poor. In primary health care, for example, spending could be reallocated from certain types of curative care to preventive care. Reallocating expenditure to rural roads will also assist the poor. viii

19 Executive Summary * Improve the operation of the existing system of user fee exemption for primary schools and certain types of hospital care. The existing system does not work in a particularly pro-poor way and forces schools and clinics to fund exemptions from their own resources. The goal would be to reduce the level of out-of-pocket payments made by poor households, which appears to be very high relative to their incomes. One option would be to provide direct funding to some institutions to cover the cost of these exemptions * Examine other mechanisms for increasing income transfers to the poorest. One option might be to target income transfers to poor parents of primary school children, many of whom are funding nearly half the cost of primary schooling from their own meager resources. A program (such as that successfully adopted in Indonesia) which provides scholarships to children from poor families, could be an effective targeting mechanism. * Adopt a formula-based system for determining the amount of cash transfers to poorer provinces, in order to ensure that transfers are more closely related to their needs. Further work should be undertaken to explore the implications of alternative formulas, develop consensus around a particular formula, and then adopt it in the revised budget law. REALLOCATING SPENDING WITHIN SECTORS 41. Three of the four sectors examined suggest the need for reallocating spending to improve outcomes-education is the exception. Given the limited scope for raising total spending, reallocation is likely to be the main source of improvement in the medium term. Agriculture 42. Public expenditure on agriculture accounts for about 6 percent of the state budget and 1.3 percent of GDP. Although this is much lower than in China, India, or Thailand (which spend 8-16 percent of their budgets on agriculture), the sector growth has been one of the strongest among developing countries. 43. Given that most growth in the sector is expected to come from crop diversification and increases in yields, improving irrigation, extension, and research will be important. Irrigation currently accounts for half of agricultural expenditure, but the imbalance between capital and recurrent spending means that a significant share of irrigation facilities are not used because of inadequate O&M. Public spending on research is very small and increased its spending (the returns to which are very high worldwide) could raise agricultural productivity and enhance the international competitiveness of Vietnamese agricultural products. 44. Several reforms could improve performance in the sector: * Increase public spending on agricultural research and extension, especially in the poorest communes. Funding of this additional spending could come from reallocating state subsidies, transfers, and investments from some loss-making stateowned enterprises. ix

20 Vietnam Public Expenditure Review 2000 Health * Improve linkages between research and extension, and involve farmers and agroindustry representatives in the management of these services. * Improve irrigation service delivery and cost recovery by basing irrigation charges on water consumption and improving the collection system. * Extend pilot projects for developing water user associations. * Improve the performance of reforestation programns. 45. Public spending on health grew rapidly over the past five years, reaching 7 percent of the budget in 1998 (about 1.4 percent of GDP), although still relatively low by international standards. Nearly two-thirds of spending on health is carried out by provinces, communes, and districts. Curative care absorbs a disproportionate 70 percent of the health budget, while preventative care receives just 15 percent; another 7 percent goes to family planning. 46. Although public expenditures on health have risen rapidly since the early 1990s, households finance nearly 80 percent of total health care spending. Out-of-pocket payments for the poor are very large relative to their incomes. A fee exemption mechanism for poor patients exists, but it appears not to function well. 47. Increases in public spending on health have been accompanied by impressive gains in the health status of Vietnam's population, but there is scope for improving delivery of health services by reallocating spending. Several reforms could help improve health care delivery: * Shift from high-cost hospital based services to more cost-effective commune health centers. * Establish a national strategy for assistance to the poor with their health care costs. This may include improving the system of user fees exemption for the poor, and ensuring that it functions effectively. * Once such a strategy is in place the Government should consider raising user fees at hospitals, to reduce budgetary subsidies to hospitals. * Develop mechanisms for ensuring that provinces make their health spending patterns consistent with national health priorities and strategies. * Improve the budget transfer norms (used in determining transfers to the provinces) for health sector public spending to reduce disparities among provinces in the delivery of minimum services. * Consider expansion of the health insurance program, especially the voluntary scheme, as a means of reducing health costs to the budget. * In the longer run, rethink the role of the state in the health sector. It may make more sense for the governrment to reduce its role in the direct provision of curative, hospital-based health services and focus instead on providing high-quality preventive health services; financing health expenditures, especially for the poor; and improving regulation and monitoring of the growing private health sector. x

21 Executive Summary Education 48. Vietnam has made considerable progress in increasing educational enrollments at all levels and improving the efficiency and equity of education spending. Total education and training expenditure has grown significantly over the past five years, reaching 17 percent of total public spending (exclusive of amortization) (about 3.5 percent of GDP) in As a result, the number of teachers and the average duration of studies have risen, albeit from relatively low levels. However, additional public spending will be necessary given the likely growth in enrollments in lower secondary schools, flowing through from increased primary enrollments. Raising pupil/teacher ratios can reduce but not eliminate the need for such increases. 49. Spending on education is highly decentralized, with more than 73 percent of total spending carried out by provinces, districts, and communes. School education represents 62 percent of total spending on public education, with 36 percent of spending allocated to primary education and 18 percent to lower secondary education. This intra-sectoral allocation appears to be appropriate and should be maintained. The balance between wages and non-wage expenditure is also reasonable, although there is some evidence of misclassification of non-wage spending. Nearly half of total spending on primary education is financed by households, which implies an undue burden on the poor. 50. There is little scope for reallocating of public spending across primary, secondary, and tertiary education services without damaging service delivery. But there is a need to reduce existing regional variations in expenditures and quality by reviewing the system of budget transfer norms. 51. Several reforms could improve the effectiveness of spending on education: Transport * Consider gradually increasing spending on education from 15 percent of public expenditure to around 20 percent by * Simplify the system of allocative norms for education expenditures, and replace them with guidelines under which local management has discretion as long as educational outcomes are achieved and the budget allocation not exceeded. * Address existing regional variations by reviewing the present system of norms budget transfer for allocating education funds to the provinces. * Increase pupil/teacher ratios at all levels as enrollment rates rise. * Consider establishing a revolving fund that would leverage expenditure on school construction by lending school funds for construction. * Develop outcome indicators to assess the impact of expenditures by testing student attainment on a regular basis. 52. Public spending on transport increased significantly over the past decade, but the efficiency of the sector remains low. The poor state of the country's roads imposes economic costs on users of about $160 million a year, according to the World Bank. Problems with ports and railways exist as well. Expenditure priorities have focused on rehabilitation and modernization of transport infrastructure, especially roads xi

22 Vietnam Public Expenditure Review Nearly 11 percent of total public spending (about 2.2 percent of GDP) goes to transporta figure that is comparable to other countries-with over 90 percent going to roads. Nearly a third of road expenditure is in the growth corridors of Ho Chi Minh City (Ba Ria Vung Tau and Hanoi-Haiphong). But recurrent spending represents only about 12 percent of total road spending, and road maintenance has remained under-funded relative to capital investment. Progress in improving rural roads has been slow. 54. To address these problems, the Government will consider several reforms. * For recurrent spending, it will consider reallocating expenditures to increase road maintenance to an adequate level, possibly by establishing an earmarked road fund financed by a levy on gasoline and other charges. * It will also consider increasing spending on maintenance of inland waterways. * For capital spending, the Government will consider reallocating spending toward rural roads. It will also improve processes to ensure better quality and management of transport infrastructure projects. ASSESSING THE SCOPE FOR SHIFTING SERVICES TO THE PRIVATE SECTOR 55. Given the pressures on the budget, there is a need to reassess the scope for private delivery of services in education, health, and infrastructure. Doing so could reduce demands on the budget without reducing the services needed for growth and poverty reduction. Some growth in private services in health and education has already occurred, mainly in urban areas, but little private investment has been made in infrastructure, except in water supply. More private sector involvement will be needed if the availability of public resources is not to be a constraint to achieving Vietnam's potential. The Government may consider undertaking a detailed assessment of the scope for gradually shifting services to the private sector. 56. It may also be necessary to expedite the pace of state-owned enterprise reform particularly in the transport and agriculture sectors and especially for troubled enterprises, in order to reduce the fiscal risk borne by the Government. While state-owned enterprises no longer receive direct or cash subsidies in Vietnam, some continue to receive on implicit subsidies from the budget in the form of loans at concessionary interest rates, debt and interest forgiveness, and tax exemptions. The full extent of this support is not known. Moreover, with Vietnam's integration into AFTA and the consequent reductions in import protection, some of these stateowned enterprises are likely to begin to require cash and direct subsidies. 57. Increased private sector participation could occur through new entry of private firms and through shifting ownership by equitizing and divesting state-owned enterprises. Private sector involvement in operations (e.g. of ports and airports), need not be inconsistent with the Government's objective of retaining strategic control of these activities. As privatization proceeds, sector ministries will need to strengthen their monitoring and policymaking role to exercise this strategic control. xii

23 Executive Summary WHAT IS DOABLE IN THE SHORT AND MEDIUM TERM? 58. The attached Timetable of Next Steps sets out the possible time frame of the main recommendations of this PER on the basis of short-term or medium term. 59. Preparation of the 2001 budget provides the Government with the opportunity to institute some of the changes in spending suggested in this PER and to consider some of the suggestions for improving the budgetary process. However, some expenditure reallocations have institutional preconditions, suggesting that major expenditure reallocations may have to be phased in gradually. The development of the PIP also provides an opportunity for considering the findings and options suggested in this PER, on both expenditure allocations and improvements in PIP processes. The Government's intention to review the operation of the budget law in 2000 will also provide the opportunity for many of the recommendations on improving budgetary processes and public expenditure management to be considered. 60. The need to improve information and prioritization and to determine affordability create common institutional requirements across sectors, such as developing an aggregate medium-term fiscal plan and medium-term strategies. Developing such plans and strategies will require that the Government commit itself to a significant program of policy analysis and development and to improving the budgetary and expenditure management system. Developing this institutional capacity will take time. A shared commitment to and understanding of this process throughout the Government (including the Office of Government, MOF, MPI sectoral ministries, provincial governments, and the National Assembly) is an important precondition. 61. In considering these issues, the Government can build on the extensive consultative process already developed for this PER. Apart from the National Assembly, the provinces, and other sub-national levels of government it could also consider consulting representatives of the media and civil society wherever possible. The World Bank stands ready to provide assistance in these consultations. xiii

24 Vietnam Public Expenditure Review 2000 VIETNAM PUBLIC EXPENDITURE REVIEW-2000 TIMETABLE OF NEXT STEPS Goals Steps Time Frame 1: Adopt nfeasurespecid in PER 1. To make a. Make an inventory of all "off-budget" funds and accounts Short-term budgetary data in existence and information b. Prepare and publish annual receipts-and-expenditure Short-term more reports on all "off-budget" funds/accounts comprehensive and consistent c. Develop a proper reporting and a management- Short-to-Medium information-system for SOEs term d. Report and record aid-disbursements according to budget Short-term classification e. Record disaggregated "social transfer" expenditures to Short term permit assessment of benefits f. Designate treasury as department responsible for Medium maintaining comprehensive public accounts and implement a fully integrated MIS and an accounting system in treasury Medium g. Adopt functional classification in line with international practice (e.g. GFS type) 2. To improve a. Adopt measures to enhance flow of budgetary Short-term transparency of information among Government agencies hudgetary b. Publish annually detailed information on the budget for Short term information sectors and other categories covering more than 75% of total spending, as provided in the PER c. Publish annually, provincial budgets by sectors and Short term to categories (by the Provinces) Medium d. Post commune budgets outside commune offices Short-term e. Submit a medium-term fiscal outlook in combination with Medium the annual budget 3.Prioritization a. Require sector-ministries and provinces to submit Short term integrated capital-recurrent spending requests during budget-formulation b. Require sector ministries to assess annually the Short term xiv

25 Executive Summary Goglh effectiveness of sectoral public spending in achieving sector objectives based on reports of all spending agencies, including provinces c. Require provinces and cities to assess (maybe every two Medium or three years) the effectiveness of provincial public spending in achieving objectives of Provinces Tini Framne d. Identify one or two "pilot" sectors for developing Short term medium-term sector expenditure programs e. Develop a medium-term sector expenditure for the Medium term Education sector 4. Medium- a. Implement measures to raise revenue-collections in the Short-term Term Fiscal medium-term Sustainabiity b. Estimate cost of recent and future wage increases and Short-term assess impact on budget c. Estimate cost of planned banking and SOE reform Short-term d. Compile data on goverunent guarantees and assess likely Short-term risks Medium e. Prepare a medium-term fiscal outlook, making all assumptions explicit. 5. Enhancing a. Reallocate spending from certain type of curative care to Medium pro-poor bias of preventive care public spending b. Ensure adequate expenditures on reproductive health Short tern 6. Re-allocating a. Take steps to raise budget allocation for 0 & M expenses Short-term spending within for irrigation, road and inland waterways maintenance, Sectors agricultural extension and research activities, rural road investment b. Adopt the principle of linking irrigation user charges to Short term the volume of water-use and develop plan to implement this principle c. Implement the principle of farmers' irrigation-user- Medium charges based on actual water-use in phases d. Implement measures to improve the performance of Short term irrigation management companies (through, for example: cutting costs, water losses) xv

26 Vietnam Public Expenditure Review 2000 Goals Steps Time Frpe e. Encourage the creation of and increase the number of Short-term water user associations. f. Implement new measures to improve the "exemption Medium system" of user fees for the poor and ensure its effective functioning, once this has been done, rise user fees in hospitals so as to reduce budgetary subsidies to hospitals g. Consider expansion of the health insurance program, Medium especially the voluntary scheme, as a mean of reducing health costs to the budget, while minimizing adverse selection problem and ensuring its financial sustainability h. Review the existing systems of allocative norms for Medium education and health expenditures and adopt the new ones with a view to reducing regional disparities in education and health spending; i. Increase overall pupil teacher ratios as secondary school Medium enrollment rates rise II: Undertake work for desguifg specific measures to address problems imtired in PER 1. Prioritization a. Develop an effective process for integrating capital and Medium recurrent budget-formulation and budget-execution, so as to minimize waste of existing public capital stock b. Formulate new norms for recurrent spending (through a Medium consensual process involving sector ministries and provinces) to ensure that Govt.'s stated goals are achieved c. Consider establishment of a road fund Medium d. Assess design of a revolving fund for school Medium infrastructure improvement e. Assess the impact of agriculture SOEs on the economy, Short-term including their net contribution of the state budget 2. To enhance a. Develop & adopt mechanisms to provide adequate Short-term pro-poor bias of funding to primary schools, clinics and certain types of public spending hospitals for exempting fees for the poor b. Develop and adopt formula-based system for determining Medium the size of cash transfers to poorer provinces c. Examine alternative mechanisms for protecting the Short-termn poorest and increasing their incomes xvi

27 Executive Summary GOals Steps Time Frame d. Implement measures to enhance gender balance (by Medium enhancing girl access to primary education in regions with poor access, raising female enrolment rates in secondary education) 3. Scope for a. Initiate examination and assessment of the scope for Short-term shifting services gradual shifting the provision of some services to the to Private Sector private sector HII: Examine issues not analyzed in PER a. Conduct overall benefit incidence analysis for taxes and Short-term expenditures system b. Undertake evaluation of national targeted programs Short-term c. Develop an improved gender focus in the budget process Medium term d. Examine other issues in fiscal decentralization Short-term e. Conduct PER in four provinces Medium f. Conduct a further PER Medium xvii

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29 Chapter I - Fiscal Sustainability and Transparency CHAPTER 1 FISCAL SUSTAINABILITY AND TRANSPARENCY CURRENT SITUATION 1. 1 Vietnam has a history of fiscal prudence with relatively small budget deficits (generally less than 1 percent of GDP, excluding on-lending) and low debt (both domestic and foreign) as a share of GDP. This is reflected in the level of interest payments in the budget of about 3 percent of total expenditure. The Budget Law permits borrowing for only investment expenditures and National Assembly decision limits budget deficit to less than 5 percent of GDP However, the fiscal balance does not fully cover all government spending i.e. consolidated general government. It excludes a number of significant off-budget accounts as discussed in paragraph Significant quasi fiscal activity involving finance from the banking system to State Owned Enterprises (SOEs) is also not included. It also excludes on-lending of ODA funds to SOEs The following table summarizes key fiscal trends Table 1.1: Government Budget (percent of GDP) Government budget (percent of GDP) (Govt.'s (IMF's Budget (IMF's Est.) Est.) Est.) Revenue (excluding grants) Grants Total expenditure (excluding onlending) _ Current expenditure Overall fiscal balance (including grants, excluding onlending) _ Source: IMF-World Bank and MOF 1. 4 There has been some loosening in the Government's fiscal stance in 2000, where the overall fiscal deficit, excluding on-lending, is estimated officially as 2.8 percent of GDP (2.2 percent based on recent IMF estimates). This increase in deficit reflects mainly a civil service wage increase (0.8 percent of GDP) and the carry-over of under-spent capital expenditure allocations from 1999 as a modest fiscal stimulus The medium term fiscal position envisages overall deficits of around of 2 percent of GDP for the years However the actual size of the deficit will also depend on the pace and scope of structural reforms and the cost of those reform. 1

30 Vietnam: Public Expenditure Review 2000 POTENTIAL RISKS TO FISCAL SUSTAINABILITY 1. 6 The potential risks to fiscal sustainability faced by Vietnarn are manageable in the near term. Declining revenue and new pressures for raising expenditure suggest the need for an accurate assessment of trends and certain actions to mitigate these risks. Thus some fiscal adjustment will be required in the medium-term to ensure that the envisaged deficits are not exceeded The Government needs to develop these measures now to ensure an easy adjustment as part of its fiscal strategy 1. 7 Revenue collections as a percentage of GDP has fallen by over 4 percent of GDP over the period as indicated in Table 1.1. This erosion in revenue reflects a range of factors including reduction in economic growth, a reduction in imports, poorer SOE performance (SOE payments are a substantial part of budget revenues) and some weaknesses in tax administration Strong revenue efforts will be needed to increase revenue collections as a share of GDP- to around percent of GDP-otherwise medium term fiscal sustainability may be threatened. This increase could be achieved by broadening the revenue base, removing discretionary exemptions for VAT and further strengthening of the tax administration. Strengthening SOE profitability must be part of this revenue improvement strategy. Any future trade reform will also have revenue implications, which should be allowed for in the Governments fiscal strategy Expenditure pressures arise from at least four different sources. First, low wage rates of the civil service is being addressed An initial increase of 25 percent in 2000 is expected to be followed by further increases in future years (the 2001 budget plan currently under preparation envisages an increase of about). Unless the Government's proposal for downsizing general administration by 15 percent is implemented, these increases will squeeze out other expenditures. The Government needs to develop full cost estimates of recent and planned future wage increases, together with alternative scenarios of employment reductions to ascertain its mediumterm implications. Second, the likely costs of SOE and banking reform will contribute to the higher budget deficit for each of the next three years (see Box 1.1)1, though this should be easily financeable by prospective external donor support While capital costs of reform will be substantial, the current cost - the annual charge on the budget - will not exceed 1-2 percent of GDP a year. However, more work will be needed to pin down these estimates and build them into its medium term fiscal strategy. Because the necessary financial data to make a complete assessment of the extent of NPLs has not been available and banks are yet to fully adopt new loan classification and provisioning, current estimates could well be under-estimates. The current estimates for NPLs is around VND35 trillion. Critical details of the Government's SOE reform plans are not yet available to enable a more precise costing of the potential fiscal burden. Under tentative reform scenarios, Bank-Fund estimates that the current costs of reform could start at 0.5 percent of GDP in 2000, and average about 1 percent of GDP annually over

31 Chapter I - Fiscal Sustainability and Transparency Box 1.1: Fiscal Costs of SOE and Banukbg Reform Tentative estimates of total costs are projected to total percent of GDP, comprise: The capital costs of SOE debt resolution and bank re-capitalization totaling 8 percent of GDP over four years. Debt resolution alone is expected to ct about 5.5 pement of GDP, and the asset management company (AMC) together with the reidua bank re-capitalion about 2.5 percent of GDP;, The additional interest cost of newly issued government debt for bank re-capitalization totaling 2.5 percent of GDP over the next four years, starting at 0.2 percent of GDP in 2000 and rising to 1 percent of GDP by 2003; and. The cost of severance pay to affected workers totaling 2 pement of GDP. In 2000, the capital costs of SOE and banking sector refonn would be about percent of GDP, mainly related to setting up the AMC and clearing frozen SOE loans. Total current costs (including the safety net) would amount to 0.7 percent of GDP. Under this reform scenario and with the curihnent of new SOE losses, the public sector debt dynamics would remain manageable. Currently, the level of public sector debt of Vietnam is about 65 percent of GDP (Fund-Bank estimate), including bank debt of SOEs. The government's domestic debt is very snall (3 percent of GDP), and its extemal debt is all on concessional terms. Reforming the SOE sector would result in the governmentaking on some SOE debt, which by itself would not increase the level of debt of the public sector as a whole. Public sector debt would peak at 73 percent by 2002, and begin to stabilize thereafter Third, declining revenue and higher wage bill has squeezed non-wage current expenditures. This is evident from the fact that total government expenditure has declined in relation to GDP, but investment expenditure has not given National Assembly's priority to investment expenditure. This has resulted in a backlog of operations and maintenance expenditures. Chapter 3 finds inadequate operations and maintenance funding for transport and irrigation with resulting adverse impact on service delivery. Fourth, announced Government policies in various areas suggest other demands for public expenditure for both investment and recurrent. For example, as discussed in chapter 3. * impressive enrollment results in primary education will raise demand for additional expenditure in lower secondary education; * transport master plan envisages additional recurrent and capital expenditures in that sector; * the low level of expenditures on social safety net programs call for higher expenditure in the medium-term. 2This staff calculation is based on (i) an SOE reform scenario involving about one-third of SOE, which would be closed, equitized, and divested over three years, (ii) an estimated D 35 trillion of nonperforming loans, as the basis for the SOE bank debt to be resolved by the government, which represents the main component of bank restructuring costs; and (iii) an average ratio of workers to be laid-off from these SOEs assumed at 30 percent, with two years' salary as severance pay. The cost estimates should be considered a lower bound since they do not account for nonbank debt of SOEs, which is believed to be substantial but is poorly documented. 3

32 Vietnam: Public Expenditure Review On the other hand this PER also identifies areas which might provide further resources or reduce expenditure demands on the budget. Apart from improving the performance of SOEs, as discussed above, these include * reviewing the role of the state in areas where the private sector may be able to adequately provide services; * placing more emphasis on user charges, for example in areas of hospitals (with appropriate assistance strategies for the poor), road expenditure and irrigation No comprehensive or regular financial information is available on the off-budget accounts but there are at least seven off-budget accounts in existence: * social Security Insurance Fund; * health Insurance Fund; * national Development Support Fund (to support policy-based lending); * export Support Fund (formerly the Price Stabilization Fund); * SOE Restructuring Support Fund (to cover the cost of workers made redundant by SOE reform, to resolve SOE debt, and to provide support for SOE investment); * sinking Fund (for repayment of foreign debt, on-lent by government); * re-forestation Program Lending Fund According to MOF, transactions in these accounts amount to only about one percent of GDP and most of these are self financing i.e. dependent on specific sources of revenue, and the accounts cannot go into deficit by law. Thus fiscal risk arising from these funds is limited The only exception is the National Development Support Fund, established to provide concessionary loans to priority activities, as directed by the Government. As this fund may borrow beyond its initial funding provided from the budget, there is a risk that is fund borrows excessively and its loans perform poorly. Transparency concerning the operations of this fund is therefore particularly important. Nevertheless the Government should ensure that off-budget accounts are limited as far as possible, that it has adequate information on their operations to limit any fiscal risk, that their operations are integrated as far as possible into overall budgetary decision making and that there is adequate reporting of their activities Management of contingent liabilities in the form of loan guarantees is also important. The government has provided data on explicit loan guarantees of 14 credits totaling US$345 million for the three years However, a comprehensive data base will need to be developed and updated regularly by MOF to adequately monitor these fiscal risks. Assessing Fiscal Sustainability This section highlights a few areas where the government of Vietnam needs to focus in order to develop a framework for determining sustainability of the country's current fiscal stance. The findings and recommendations are intended to assist Vietnam in developing a clearer picture of potential fiscal risks, so as to improve the effectiveness of fiscal policy. A forward 4

33 Chapter I - Fiscal Sustainability and Transparency looking process will be key to properly assessing the budgetary costs associated with envisaged structural reforms. Taking the necessary steps to make a complete assessment of fiscal sustainability might also form the basis for formulating a medium-term expenditure framework, which could be an important tool for improving expenditure management Fiscal sustainability addresses the issue of whether the current fiscal position can be maintained over the medium term without excessively raising the overall debt burden and undermining macroeconomic stability. Various models have been developed to assess fiscal sustainability, which typically involve comparing expected primary deficits (deficit before interest charges) with sustainable primary deficits. 3 If current and future policy stances, as embodied in the expected primary deficits, require untenable levels of debt-both domestic and foreign, fiscal adjustment would be necessary in order to return a country to a sustainable fiscal path. Typically, models for assessing fiscal sustainability incorporate country-specific assumptions and a sensitivity test of expected fiscal deficits to changes in policies-both directly through new revenue and expenditure measures and indirectly through other changes in macroeconomic policies and implementation of structural reforms. Moreover, fiscal sustainability would be sensitive to changes in the external environment. Fiscal sustainability in Vietnam The analysis of whether Vietnam is on a sustainable fiscal path is a backward and forward looking exercise and would need to incorporate a number of factors. First, the impact of potential changes in macroeconomic policies and in the pace, cost and scope of structural reforms must be reviewed in terms of their direct and indirect effects on fiscal performance. Second, the current and projected level and composition of revenue. and expenditure must be examined closely to see whether they are consistent with overall policy objectives such as high rates of sustained economic growth, low inflation, and broad-based poverty reduction. A third and related consideration is an assessment of the vulnerability of current fiscal policies to shocks so as to ensure overall fiscal performance is not tied excessively to factors beyond Vietnam's control, such as terms of trade shocks (e.g. oil price changes), exchange rate realigmnents, or unanticipated climatic changes. For factors that can be potentially controlled, a full appraisal would need to be made as to whether the government of Vietnam had the resources and capacity to properly forecast and manage its primary deficit (e.g. through establishing a medium-term expenditure framework and supporting systems for accounting for, monitoring, and hedging against fiscal risks, etc.) Box 1.2 sets out key issues in assessing fiscal sustainability 3 The sustainable primary deficit is defined as the deficit level that can be financed without adding to a country's overall debt burden. It would typically be examined in termns of the ratio of official debt to GDP. 5

34 Vietnam: Public Expenditure Review 2000 Box 1.2. Assessing fiscd sustainability in Vietnam On changes in macroeconomic policies and structural reforms: * Is the impact of the government's new policies and prospective reforms properly captured in the medium-term fiscal stance envisaged by the government of Vietnam, including the direct and indirect budgetawy costs associated with the (i) civil service wage increase (and possible civil service refonn), (ii) SOE reform program, (iii) state-owned commercial bank (SOCB) and joint stock bank restructuring plans, including eventual bank re-capitalisation, and (iv) trade refonn? On SOE reform, the envisaged medium-term program will still find the presence of state-owned enterprises in key sectors of the economy. As a result, the risk of fiscal burdens arising from loss-making activities will still be present, which will need to be monitored and managed closely. On trade reform, not only would any direct potential revenue impact need to be captured, (which with proposed tariffication of non-tariff barriers would be expected to be positive), but also the impact on stimulating new economic activity, and its effect on tax collections. * In formulating the medium-term fiscal stance, has the scope and likelihood of potential fiscal risks been sufficiently assessed, so as to avoid large unforeseen costs that might undermine fiscal sustainability (i.e., the size of contingent liabilities, the transfers to and uses of extra-budgetary funds, the scope of quasi-fiscal activities)? However, a more comprehensive data base will be need to be developed and updated regularly by MOF in order to monitor fiscal risks. This is a critical first step to assess the impact of these risks on fiscal sustainability. On the level and composition of revenue and expenditure and vulnerability to shocks:. Does the degree of taxation burden excessively burden any single sector or activity so as to dampen overall growth prospects? Is the overail tax base sufficiently broad and equitable so as to reduce the vulnerability of total revenue collections to large macroeconomic shocks or necessary structural reforms? How buoyant is the tax system? How effective is tax administration. How significant are tax expenditures in Vietnan? * How reliable are foreign aid inflows, and to what extent will their availability change over the medium term? * Is the level and composition of expenditure sufficient to provide high rates of sustained economic growth and broad-based poverty reduction? Are sufficient resources being devoted in the budget to maintaining new and existing physical infirastructure? Does the allocation of expenditure on human and physical capital development ensure that Vietnam will be able to remain competitive in global markets or continue to attract foreign direct investment? * In the course of developing new policies to effect growth and poverty reduction, has the risk of needing to expand existing or introduce new government programs been properly reflected in the expected fiscal stance? For example, will the development of transitional social safety nets and other social programs lead to the expansion of existing activities (eg. pensions) or introduction of new ones (e.g. unemployment insurance, workplace accident insurance, health insurance, etc.)? To what extent would these new programs be self-financing (e.g. from payroll taxes)? What is the share of discretionary spending in total expenditure (e.g. in the event that unanticipated spending pressures arise, such as from recent flooding in central Vietnam, which are expected to cost D 0.7 trillion and D 1.7 trillion in additional government expenditure in 1999 and 200.all of which is expected to be covered by domestic resources), or are budget reserves pre-committed to new or existing programs? There are three other key actions for the Government to consider: 6

35 Chapter 1 - Fiscal Sustainability and Transparency * it should devote more resources to comprehensively review its fiscal sustainability and to link this with a medium term fiscal strategy (as discussed below). * it should develop improved arrangements for the managing of fiscal risk. These could include requirements such as centralization (desirably in the MOF ) for the approval of guarantees and for transparent operations of SOEs, which fully reflect their financial results and position and the amount of any government assistance to them. This issue is further discussed below. * moving beyond this it should develop its own capacity in the MOF to manage fiscal sustainability and risk, through developing a medium term fiscal outlook. This is further discussed below. A MEDIUM TERM FISCAL OUTLOOK Fiscal sustainability is thus almost by definition a medium and long-term issue. It involves both a backward look (e.g. to determine the current financial position) and a forward look. Vietnam already has a forward look in the area of public expenditures through its Five Year Plan, and the related Public Investment Program (PIP). The Plan sets output and growth targets as determined by the National Assembly. The PIP reflects the investment expenditures assessed as needed to achieve these targets. It incorporates likely sources and amounts of funding, and also acts as a vehicle to mobilize funds from donors But this falls short of a full medium term fiscal outlook. Using the best available forecasts of economic growth, a medium-term fiscal outlook includes a full assessment of likely government revenues and expenditures, both recurrent and investment expenditures, covering over a medium term period and their expression in an aggregate medium-term fiscal plan, incorporating the government's fiscal targets. This plan would be regularly updated and rolled over annually, forming the starting point for the preparation of the annual budget. While the budget and allocations would remain on an annual basis, they are made within a medium-term framework Developing such forward looking fiscal approach is obviously not easy. In particular future uncertainty may make it difficult to forecast reliably, particularly on the revenue side. On the other hand it may be argued that it is precisely because of this uncertainty that a forward look is necessary, and that such a plan will assist in developing strategies to deal with a range of future scenarios A number of countries have found it useful to deepen this into a fiscal plan at the sectoral level, providing the basis for the development of costed sectoral plans, as discussed in Chapter 2 of this PER. The Government should therefore commence development of a medium term fiscal strategy, in the context of a medium term fiscal plan. FISCAL TRANSPARENCY Fiscal transparency is important for accountability to citizens for the use of government revenues and accountability for the quality of overall fiscal management. It is also important to 7

36 Vietnam: Public Expenditure Review 2000 donors, who obviously are not comfortable providing financial assistance, without adequate and reliable information to assess how and how well funds are being spent. External market participants are demanding more transparency in fiscal operations as a basis investment or lending. But fiscal transparency is equally important for the government itself especially for all its agencies and ministries in order to undertake effective fiscal management A 1998 joint IMF/World Bank report on fiscal transparency in Vietnam highlighted insufficient transparency in Vietnam's fiscal and quasi-fiscal operations. Since then Vietnam has made progress in improving fiscal transparency. From being a State secret, the budget is now published, albeit in a highly aggregated form. Vietnam's public finance data is now published in the IMF Government Finance Statistics GFS yearbook. There have been improvements in the fiscal information provided to international organizations and donors, and some improvements in reporting by agencies of self-raised revenues and external grants and their associated expenditures (see box 1.3). Box 1.3: Reott Measues to Improve Transparency * On June 4, 1999 published 1997 final accoumts and the 1999 budget plan by the Generl SatW i Office ((SO), in the form of a booklet that is fieely available4 This booklet contas informatlon total, investment and recurent expenditure for the state and for each of the 61 provinces,, on recent expenditure in education and in health for the state and, for eah of the 61 provinces, and! on expenditures in each ofthe 116 agencies including ministries and mass organizations;. Asked communes to post budgets by outide commune offices;.provided fiscal infonmaton to international oranizato well as to all re}evant government agencies; 5 and donors in a GFSwonsistent format as * improved fiscal management by requiring improved accounting of foreign grants and clarfication of roles in management of external deb and in debt monitorig; 6, Clarified processes for managing fees, charges and revenues raised and spent by spending agencies. 7 4 Issued Decision 225/1998/QD-TTg (Nov. 20, 1998) on fiscal publication for various state budgetary levels, spending units, state owned enterprises, and funds contributed by people; Circular No. 188/1998/TT-BTC (Dec. 30, 1998) to guide the publication of the national and provincial budget; and Circular 29/1999/TT-BTC (Mar. 19, 1999) guiding the implementation of fiscal transparency with regard to funds contributed by people. 5Issued Decision 225/1998/QD-TTg (Nov. 20, 1998) on fiscal publication for various state budgetary levels, spending units, state owned enterprises, and funds contributed by people; Decision 1581/1998/QD/BTC (Nov. 11, 1998) to guide the provision of fiscal data to external agencies. 6 Issued Decree 90/1998/ND-CP (Nov. 7, 1998) to clarify roles of govermment agencies in external debt management and in debt monitoring, and Circular 22/1999/TT-BTC (Feb. 19, 1999) to ensure that all foreign grants are accounted in the state budget according to the budget classification. Issued Decree 04/1999/ND-CP (Jan. 30, 1999) to manage fees and charges under state budget, and Circular 54/1999/TT-BTC (May 5, 1999) to guide implementation of Decree 04. 8

37 Chapter I - Fiscal Sustainability and Transparency Transparency Agenda for Government Nevertheless, Vietnam still has some distance to go to meet the minimum standards of the IMF Fiscal Transparency Code. The following issues should be addressed in the future * Increasing the amount of information in the budget and the public accounts, which are currently published in a highly aggregated form. Deepening this information is a particular priority for international donors. An important starting point would be to publish on an annual basis, the information provided to and published in this PER report. Beyond this, it would also be desirable to consolidate information already available on public expenditures at the four levels of government into one or more publications, to provide as far as possible a comprehensive national picture of Government expenditures. * Improving the comprehensiveness of the budget and public accounts - significant off budget accounts, quasi fiscal transactions and contingent liabilities are not covered. * Providing a comprehensive and detailed medium-term fiscal or economic outlook together with the annual budget, to provide context to the budget and to fiscal policies generally. Such a report would indicate key macroeconomic forecasting assumptions, macroeconomic and sectoral policies to be reflected in the budget, as well as relevant information on fiscal sustainability * Improving the classification system, which differs from the international GFS classification in some areas, including the functional classification and definition of the boundaries between the government, SOE and banking sector. * Deepening the classification system to provide more detailed information on expenditures below the functional or sub-function level, particularly at the activity or program level. Lack of such a classification limits the ability to analyze the effectiveness of government programs and their efficiency of operation. * Improving the financial reporting of SOEs, so that their financial results and position can be assessed in accordance with international accounting standards * Addressing the lack of an adequate, and by international standards, independent external audit function to provide assurance that internal controls over revenue and expenditure are operating adequately, and that published fiscal information is accurate and reliable Fiscal transparency at the level of provinces, districts and communes is equally important in terms of accountability and fiscal management. While there are clear Government requirements for the publication of budgets and public accounts at these levels, there is some evidence from this PER, as discussed in the section on fees and contributions in Chapter 2, that this is not always observed While key issues listed above have yet not been addressed, it is accepted that their implementation will take time and Government agencies are developing a timetable for their consideration and possible implementation. Some could be done immediately, such as the publication of more detailed information in the budget and public accounts. Some, such as 9

38 Vietnam: Public Expenditure Review 2000 developing a Fiscal and Economic Outlook publication would require some capacity development in the Ministries of Planning and Investment and Finance Particular priority should be given to increasing public informnation concerning the budget and public accounts. As a first step the Government plans to provide on an annual basis the information contained in this PER report. The Government also plans to consolidate existing public information on expenditures at all four levels of government into one or more publication, to provide as far as possible a comprehensive national picture of public expenditures. A first step in this direction would be for MOF publish separately the budget and final accounts figures for each of the sectoral ministries and for each provinces to publish budget and final accounts information covering its departments and lower levels of government A number of these recommendations on fiscal transparency relate closely to budget and public expenditure management issues, and are further discussed below in Chapter 2. Agenda for State-Owned Enterprises Vietnam has a substantial number of SOEs, ranging from major national enterprises to provincial enterprises and public utilities and small local undertakings. The past budgetary impact of SOEs both implicit and explicit is not fully known. Nor is the budgetary impact of the to-be-announced SOE reform program well estimated. Such factual information is crucial to future budgetary management and to assessing fiscal sustainability Financing of SOEs investment expenditures has been undertaken through the PIP, using government financing retained earnings and donor funds. The banking system has also provided medium and long term loans on a concessionary basis. With many SOEs performing poorly and operating at a loss the banks have accumulated considerable non-performing loans. As a result the envisaged banking reforms will likely entail sizeable debt restructuring tools over the medium term The Government is therefore developing, through the National Enterprise Restructuring Committee, a program of SOE reform, involving divestiture, closing and restructuring of enterprises on a more commercial basis. Although details of this program are not yet available, it is envisaged that the SOE sector will be downsized by at least one third over three years, reducing the number of SOEs from about 6,000 currently to around 3,000 in the medium term through equitization, sale and closure. Apart from appropriate safety nets for displaced workers this program will also require resolution of the SOE debt problem and more transparent procedures for equitization The SOE reform program that is being finalized will have fiscal impact in various ways. The program when implemented will require budgetary funding for redundancies and for debt restructuring. There will also be losses in SOE revenues, but this is likely to be offset by revenue from restructured and profitable enterprises, whether equitized or divested. Also many SOEs received implicit subsidies, which will no longer be required, e.g. tax exemptions. Although SOEs received no explicit subsidies from the budget to cover operating losses, some cash transfers are made from the budget to SOEs, in the form of agricultural price supports or subsidies designed to assist the producer or consumer For the future, it would be desirable for the financial relationship between the budget and SOEs to be both transparent and standardized. The present system appears to have considerable variation in terms of types and levels of charges on and exemptions for SOEs. A new approach 10

39 Chapter I - Fiscal Sustainability and Transparency would include a transparent and consistent basis for payments from SOEs to the budget, and for any budget support to SOEs. This would flow from establishing a commercially based operating framework for continuing SOEs based on clear financial targets, management autonomy to achieve these targets, transparency of any directives from the Government to management, a commercial accounting system to report performance against targets. There will also need to be appropriate capacity to monitor SOE operations in sectoral ministries and centrally in the Ministry of Finance. 11

40 Vietnam: Public Expenditure Review 2000 CHAPTER 2 BUDGETING AND PUBLIC EXPENDITURE MANAGEMENT GENERAL POSITION 2.1 There have been significant achievements in the budgeting and public expenditure management system in Vietnam in recent years. The adoption of the Budget Law in 1996, with an further revision in 1998 to establish a clearer division of responsibilities between the center and the provinces, has provided an important framework for an orderly budget system. However it is important that this framework be capable of easy amendment, so that it is not a barrier to necessary changes The preparation of the first Public Investment Program (PIP) covering the period has made the processes for determining investment expenditures more orderly and realistic. It has related proposed expenditures to assumptions about available financing, as well as acting as a means of mobilizing finance. But there have been problems concerning over-optimism on project implementation and on absorptive capacity, including too many projects being included in the PIP and lack of adequate criteria for evaluation and ranking of projects. These issues are being addressed in the new arrangements for the preparation of the PIP Overall the budgeting and public expenditure management system provides for good aggregate control of expenditures within years. There have been no significant over-runs of expenditure, release of funds has been tightly controlled and there has been no problem of expenditure arrears Because of the relative complexity of the budget system (see Box 2. 1), it is difficult from the outside to determine the way the budget process works in practice-in terms of how decisions are made, and with what information. However there is considerable anecdotal evidence which suggests that there may not be significant coordination and consultation between the different players to make the system work effectively. In particular, the role of sectoral ministries appears unclear. The lack of a computerized network through which all parties could access the same budget information further limits consultation, coordination and dissemination There is also a need for greater capacity building in the Ministry of Finance, the Ministry of Planning and Investment, relevant sectoral ministries, and in particular at provincial, district and commune level, in respect of budgeting, accounting, program and project evaluation The major issues in terms of improving the present budgeting and public expenditure management system relate to; * improving expenditure prioritization * improving monitoring of expenditures on a timely basis throughout the year 12

41 Chapter 2 - Budgeting and Public Expenditure Management Box 2.1: The budgetary process in Vietnam The budget system is relatively complex, reflecting a unitary or national budget covering the four levels of government-national, provincial, district and commune, although in practice little information on the lowest level of government is available at the center, and not all commuwe expenditures are included in the national budget. It provides for a system of top-down and bottom up coordination at each level, requiring considerble coordination and consultation between levels, It also requires significant coordination between the Ministry of Finance, responsible for the recurrent budget, and the Ministy of Planning and Investment, responsible for the investment budget. The 1996 Budget Law created the framework for the current system of financial relations between the national government and lower levels of govemment - 61 provinces, 598 districts and communes, wards and district towns. These fiscal arrangements reflect a decentralized system of service delivery within a unitary system of government, under which national authority is delegated to the lower levels of government. Thus local budgets are required to be approved by the higher level of govemnment, although there is considerable autonomy in actual implementation. The assignment of functions is well illustrated in the health sector-national hospitals are the responsibility of the Ministry of Health, provincial hospitals of the provinces, district hospitals of districts and loal health centers of the communes. Lower levels of Government may also operate their own SOEs, These include local services such as water and electricity supply, waste disposal and transportation. At each level, budget preparation and submission to the higher level, and implementaion of the budget is the responsibility of the People's Council. The secoral ministries (Agriculture and Rural Development, Education and Training, Health and Transport) are also involved in the budgetary process on their national expenditures and on provincial government expenditures. At the provincial and district level similar coordination is also required between the provincial Department of Finance and Department of Planning and Investment and provincial sectoral departments (health, education, etc). Within the sectoral ministries budget responsibility also generally involves separate finance and planning and investment departments. IMPROVING EXPENDITURE PRIORITIZATION 2. 7 The prioritization issue has a number of dimensions * a government policy favoring investment expenditures rather than recurrent expenditures This priority is reflected in the recent squeeze on recurrent expenditures, while investment expenditures have been maintained, as set out in Table 1.1 in Chapter 1. It is also incorporated in a resolution adopted by the National Assembly for the period of which stipulates that the rate of growth of recurrent expenditures at any stage during this period must not exceed the rate of growth of investment expenditures In the World Bank's view this policy encourages an imbalance between recurrent and investment expenditures and should be reviewed by the Government for at least three reasons. First, this policy can impact adversely on service delivery. With a major component of recurrent expenditures being civil service salaries (which increases with wage increases), other expenditures such as consumables and travel necessary to deliver services, may be too low. Second, this squeeze on recurrent expenditure limits maintenance expenditures, leading to 13

42 Vietnam: Public Expenditure Review 2000 deterioration of assets and higher operating costs in the longer run. In adequate maintenance expenditure is a problem in roads, inland waterways and irrigation schemes. Third, it may overlook key priorities in service delivery, particularly in the social services. For example an increased number of trained nurses and teachers may be equally important in improving service delivery in health and education as more hospital and school buildings. But a pre-determined emphasis on capital expenditures, prevents additional spreading on nurses and teachers. In short, if priorities are determined as part of the development of a medium-term sector expenditure strategy, with no bias for capital spreading, an appropriate expenditure allocation is more likely. * adequate coordination between the recurrent and investment budgets Though both MOF and MPI consider the existing institutional arrangement - where a joint MOF/MPI committee considers all major projects - adequate, there are ways in which this could be further improved. For example in discussions on major investment projects (Group A), the recurrent as well as capital costs of the project could be reviewed at the same time rather than separately. The development of a medium term fiscal framework, both at an aggregate and a sectoral level, could be also an important tool in improving this coordination. Anecdotal evidence suggest that this lack of coordination may be a particular problem in of provincial and district budgets, where such consultation between the local Department of Finance and Department of Planning and Investment may be limited. Box 2.2 Better integrating the capital and recurrent budgets By separating the capital from the recurrent budgets, govemnments frequently do not forecast the current expenditures associated with today's investment program. Recently, in one developing country a forward estimate of the investment program showed that recurrent expenditures arising from this investment program would exhaust 110 percent of the govemnment's future revenues. One simple way of strengthening this link is to ensure that the budget office is involved in reviewing the total costs of projects when they are first submitted to the planming ministry by line ministries. Yet another way to properly allow for the future cost implications of new projects is to introduce a multi-year rolling budgetary planning exercise. This unifies capital and recurrent expenditures into a single budget and projects this forward for three to five years in a medium-term expenditure framework (MTEF), so that total costs can be evaluated alongside the country's projected revenues. A number of developing countries (including Ghana and South Africa) and developed countries (Australia and New Zealand) have adopted this approach. * involvement of sectoral ministries in budget discussions, particularly on provincial expenditures, and receiving information on expenditure allocations and actual expenditures Sectoral ministries have a clear role in policy formulation and assessment in their sectors. For example the MOET formulates education policy relating to issues such as pupil-teacher ratios, education fees and contributions, assistance to disadvantaged localities through national program and so on. MOET also works with MOF to determine budget norms to guide the allocation of public education funds (as discussed in Chapter 3). It is also responsible for developing five-year sectoral strategies. Sectoral ministries have the right to be involved in all budget discussions with the provinces, and provinces are required to submit their expenditure proposals through the relevant sectoral ministry and to inform sectoral ministries of their actual spending in that sector. But in practice sectoral ministries are not fully participating in the budget 14

43 Chapter 2 - Budgeting and Public Expenditure Management discussions (which may focus on aggregate expenditure issues rather than on allocation within sectors), and are either not receiving or not making an effort to obtain detailed information on actual expenditures by provinces and lower levels of Government. The current mechanism of final accounts reporting does not provide a ministry with adequately detailed information on what is actually spent in that sector by lower levels of government. The sectoral ministry is thus unable to assess whether actual spending by provinces and lower levels of Government has been consistent with the sectoral policies, and if not - whether there are sufficient grounds to change the sectoral policy. While local governments should have the independent and flexibility to respond to local conditions, their spending behaviour needs to be broadly consistent with national policy Therefore it is important to provide access by sectoral ministries to information on budget allocation and expenditures within their sector by lower levels of government, as well as to available information on expenditure outputs and outcomes. But it is important to distinguish access to information from control. The Vietnamese system of government provides considerable autonomy to provincial and other levels of government in determining their expenditures, and access to information by sectoral ministries should not change this autonomy. * the need for clearly articulated medium-term sectoral strategies which reflect reasonable assumptions about what is affordable The medium term or five-year development plans and goals which sector ministries are required to submit to the National Assembly are not tightly linked to available resources or to policy and institutional changes needed to achieve them. The development of medium-term comprehensive and costed sectoral strategies, articulating required policy and institutional changes should therefore be a medium term objective. The lack of such strategies is another factor limiting good prioritization of expenditures. Indeed, the development of such five-year sectoral strategies would be the inputs into the country's Five-Year Plan. Such a transport plan is being prepared and an education draft strategy paper covering the period is also being developed. These present an opportunity to develop realistic strategies to guide the future allocation of resources in these sectors, including facilitating better integration of recurrent and capital expenditures. Box 2.3 sets out a general approach to medium-term planning and budgeting The development of a fiscal envelope within which each sectoral strategy is developed, requires a medium term fiscal framework for the whole government budget, as discussed in chapter 1. Developing realistic sectoral strategies is a complex task, involving considerable consultation on sectoral objectives as well as costing of alternative proposals. It also requires relevant output and outcome information, which may be difficult to obtain. The need for improved information both on expenditures and their impact, to guide future expenditure decisions, is a recurring theme of this report. One difficulty in developing a medium-term sectoral strategy arises from the work of other sectoral ministries in the same sector. For example a number of ministries apart from MOET operate educational institutions, and many of these may not be fully consistent with to overall educational priorities or strategies The importance of an overall medium term fiscal framework is that it encourages or forces governments to more carefully prioritize between sectors. The importance of a medium term fiscal envelope for each sector is that it encourages or forces prioritization within the sector, but at the same time may provide the incentive to each ministry of some reasonable indication of 15

44 Vietnam: Public Expenditure Review 2000 medium-term funding within which the sector can plan its operations. A realistic sectoral strategy may also encourage donor funding to that sector Given the prior work needed for such an approach which has already been done for the education sector, it may be appropriate to use this sector as a pilot for developing a medium-term sectoral strategy. Alternatively the transport sector might be used, based on the draft transport master plan. However such an exercise would require full support and understanding by MOET or MOT, as well as by MOF and MPI and the Office of Government. It would be appropriate for Vietnam to commence work on such a medium term framework for one sector, on a pilot basis. Box 23 Medm-term planning and budgeting The medim-term plannmg and budgetary process consists of three steps * Macroeconomic and fiscal analysis. Focussing on fiscal sustainability, the budget plan is formulated within a three to five year time horizon which reflects the governmenfs fiscal targets and macroeconomic forecasts on growth and revenues. This budget plan is updated and rolled over at least every year, to form the basis for the detailod construction of the following years budget. * Expenditure policy formulation. Within the aggregate expenditure figures the government decides on new policies and sectoral spending limits over the three to five year period and discusses these in advance with the legislature. Sectoral spending limits will nornally reflect the spending policies and priorities set out in the medium term strategy adopted for each sector. They are indicative mediumtern allocations to sectors, not multi-year budget appropriations. * Detailed budget preparation. Within the broad sectoral limits and any decisions made on new policies, individual line ministries prepare their annual budgets. These budgets cover both capital and investment expenditures. The budget proposals may cover results statements concerning outputs or outcomes of the expenditures achieved in the previous year, and proposed for the ensuing year. The budget office does not need to negotiate down unrealistic demands for funding by sectoral ministries as ministries need to stay within the overall forward budget limits previously indicated to them. REVIEW OF EXPENDITURE NORMS The allocation of funds to and within sectors is guided by a complex set of expenditure norms, as discussed later in this chapter on fiscal decentralization, in Chapter 3 as well as in the health and education Annexes. The norms, which influence the allocation of expenditures within sectors, once provinces receive their aggregate allocation are referred to as budget allocation norms. For example the allocation of funds within the education sector by provinces is supposed to reflect a standard pupil teacher ratio and minimum expenditure levels per pupil are set for such items as books or equipment. These norms are in some cases inconsistent or impossible to achieve within available funding, are focussed more on inputs than results, and were in many cases determined years ago. They may therefore no longer be appropriate in terms achieving good prioritization of expenditures The Ministry of Finance together with the relevant sectoral ministries and the provinces should therefore undertake a review of allocation norrms, to ensure their continuing relevance in achieving good prioritization of expenditures. 16

45 Chapter 2 - Budgeting and Public Expenditure Management IMPROVING THE PUBLIC INVESTMENT PLAN (PIP) PROCESS In the development of the PIP there are several additional issues concerning prioritization of expenditures. The lack of clear evaluation criteria and of evaluation capacity have been referred to above. A further issue referred to is some investment decisions which have lacked economic or social justification, in some cases because decision makers have not been presented with available project evaluations. It is important that to assist their decision making, decision makers be presented with relevant technical and economic evaluations of proven investment expenditures and their suggested ranking against other proposals A further issue concerns the influence of donors on the composition of investmnent expenditure. Donor interests, which may not reflect national priorities are a problem in many developing or transitional economies. The best response to this problem is well developed and articulated government policies and priorities, set out in costed medium-term sectoral strategies, as discussed above More generally there are other ways in which the PIP process might be improved. Annex A of this PER discusses in more detail the experiences of the PIP and the lessons learned, which may be used to improve processes for the forthcoming PIP, including an assessment of these issues prepared by MPI. Illustrations given in the discussion of transport sector expenditure in chapter 3 of this report indicate the top heavy and repetitive nature of the project approval process. They also identify lack of ex post evaluation to review the extent to which projects achieved their objectives The discussion of the PIP process in this PER thus indicates a number of areas where the development and implementation of the PIP can be improved. Many of these issues are already being addressed in procedures for formulating the PIP for A key issue is avoiding over optimism about the level of costs and benefits of projects and about the capacity and time to implement them. A related point is ensuring that not too many projects are included in the PIP, or are commenced. There is also considerable scope for streamlining processes both for evaluation and implementation of projects, including encouraging donors to accept standardized processes, rather than impose their own diverse requirements. There is also a need for better ex post evaluation of results achieved from projects, to improve future decision making The PIP covers a five year period and is fixed plan except that a mid-period review was undertaken during the course of the PIP. This was a response to the regional economic crisis and resulted in changes in both the total and allocation of PIP expenditures to reflect these changed circumstances and priorities. MPI has stated that during the coming planning period it will conduct an annual review of the PIP and adjust it in the light of implementation progress and changing economic circumstances. IMPROVING BUDGET IMPLEMENTATION AND MONITORING Actual payments are made for all levels of government by local offices of the National Treasury Department (part of the Ministry of Finance) which has an office in each province or major city. In turn each provincial treasury office has sub-offices in each district. Payment information is sent from each of district treasuries daily to the provincial Treasury-by computer link in the case of 20 provinces and by telegram in the case of the others. Payment information is also sent daily from provincial treasuries to the National Treasury by computer files. This 17

46 Vietnam: Public Expenditure Review 2000 provides reasonable information for monitoring of expenditures at an aggregate level and for overall cash management. Provincial and district governments receive their payments information from the Treasury for their own monitoring purposes. Linking of the district treasuries of remaining provinces into the provincial network is planned for 2000 with a link between the National Treasury and provincial goverirnents planned for Expenditure monitoring at the level of budget items for each ministry is less satisfactory, reflecting limitations in budget preparation. Spending units find difficulty in preparing their budgets based on 23 major budget line items (as currently required by law), and in practice only 11 of these items are used. Furthermore, as actual expenditures are recorded against the full classification, it is difficult to monitor actual expenditures against budget allocations at the line item level. The expenditure information at this level is only available after the end of the year. Improvements are needed in budget preparation, particularly capacity in using the classification system, to overcome this problem There is thus often a considerable divergence between budgeted and actual expenditures. In the case of investment expenditures this may also indicate over-optimism about the ability to implement projects, as discussed above under PIP processes. At the provincial level this divergence also occurs between budget and actual expenditures at the aggregate level, as well as the composition of expenditures. This appears to reflect the considerable flexibility enjoyed by provinces in implementing the budget once it is passed, and the incentive for under-estimation of revenues by provinces, under which they may retain the additional revenue collected for further expenditure There are a number of difficulties in obtaining reliable information on details of expenditure in Vietnam, reflecting different data formats between ministries and inappropriate classification or insufficiently deep classification systems, which need improving. For example, it is difficult to reconcile differing figures for transport expenditure between MOF and MOT and MOF and MPI report differing investment expenditure figures. There are classification anomalies or limitations in a number of important expenditure areas, for example recurrent versus capital expenditure in the transport sector, curative versus preventive expenditure in the health sector and salary versus non-salary expenditures in the education sector, identified in this PER. In addition information concerning social safety net expenditures lacks a sufficiently detailed classification, making it difficult to make any policy assessment in this area To overcome these data limitations and improve budget execution and monitoring generally, the Government wishes to develop a more extensive, integrated information system, based on a national computer network and including the revenue departments (there are currently three different information systems covering revenues-the budget, treasury and tax department systems, which frequently report different revenue figures). It has indicated it will seek technical assistance and loans from the World Bank to do this In the current approach of moving gradually to expand the existing treasury system and developing communication links it is important that there be close liaison between the Budget and Treasury Departments to ensure consistency between any developments in the budget preparation system and the treasury system In the medium term the Government wishes to develop an integrated budget andfinancial management system and has indicated it will seek technical assistance from the World Bank for this. 18

47 Chapter 2 - Budgeting and Public Expenditure Management FISCAL DECENTRALIZATION AND PUBLIC SPENDING Overall 43 percent of total expenditures (1998 figures) are undertaken at sub-national level; this includes 73 percent of education expenditures and 63 percent of health expenditures. This decentralization of expenditure has shown a steady increase since 1992, when 26 percent of total expenditures were undertaken at the sub-national level The Budget Law specifies the taxes that are assigned to each level of government. However, determining the rate structure of all taxes rests with the center although provinces have some ability to influence collections by changing the base within a framework set by the center. Tax collection is undertaken by the center through the General Taxation Department (GTD). But local governments can retain all or part of collections in excess of the budget figure, creating an incentive to underestimate revenues and to encourage GTD to fully collect these taxes. This also tends to skew resources in favor of better-off provinces. Thus these taxes are assigned to lower levels only in an accounting sense - they do not represent revenue raising powers While local governments thus have little revenue raising power although they have been given the power to raise revenue from some fees, charges and tolls and to obtain voluntary contributions for the provision of particular services. The operation of these local fees and contributions which are particularly important at the commune level, is further discussed in the following section of this chapter and in Annex C The distribution of revenue collections and allocations shows that a substantial proportion of revenues collected in the richer provinces is redistributed to the poorer provinces for spending. However the issue is whether this level of revenue equalization is sufficient to offset the revenue and cost disabilities of the less well-off provinces. In addition the ability of provinces to retain some revenues in excess of budget estimates may create further inequity between provinces by advantaging provinces with greater revenues It is not clear that allocations to provinces are based on a clear assessment of needs, or that they show equity between provinces. The cash transfers made to poorer (deficit) provinces reduce any inequity but overall there is considerable variation in local, (as opposed to national) per capita expenditures between provincial provinces, with a significant correlation between per capita expenditures and provincial per capita GDP. However there has been some narrowing of the gap between richer and less well-off provinces, for example in per capita spending on health. But richer provinces still spend more per head. In part this reflects the system of allocating funds to provinces using "transfer norms", in which population based norms dominate. These take account of differing geographical conditions between provinces, but not enough to offset revenue and cost disadvantages and to take account of different need factors. Apart from the official norms other criteria may be used by MOF during the budget negotiating process. There is therefore a need to make transparent the full criteria used in allocating funds to the provinces There also appears to be considerable inequality in the provincial distribution of state investment expenditures, reflecting the fact that investment expenditures have previously been more growth than equity oriented, with significant concentration in the growth regions of Hanoi- Haiphong and Ho Chi Minh city, although there has been some re-balancing of this since the first half of The result of this system is that despite their autonomy lower levels of government lack flexibility in their expenditure patterns. Civil service salaries are a first call on funds and 19

48 Vietnam: Public Expenditure Review 2000 constitute the great bulk of expenditures. This lack of flexibility is particularly true for the less well-off provinces, which raise lesser amounts of local revenues About 4 percent of the budget is allocated to National Programs, which aim to ensure that minimum levels of expenditure are undertaken on important national priorities - for example combating AIDS, providing clean drinking water and increasing literacy. Some of the national programs are particularly important to disadvantaged groups in remote or mountainous areas. The programs are mainly implemented through local govemrnments. However the amounts involved are small and achieving the program objectives may require some increase in spending, or alternatively consolidating them into a more general program. Also to avoid substitution for local government's own expenditure there is a case for requiring matching financial contributions from local governments. It is also important to ensure that once National Program objectives are achieved that programs are discontinued. The programs should therefore be regularly reviewed to determine whether they are still necessary Discussion in the health section of this report indicates that the allocations under health national programs appear to be more or less evenly distributed across provinces with little account of the specific disease profile of a province. This may indicate that they are not well targeted There are a number of possible options in improving the system of inter-governmental fiscal relations. * in the Bank's view the government should consider assigning additional revenue powers to the provinces. These might include such locally based taxes as land and housing tax, license tax, tax on property transfers, agricultural taxes and commodities tax (amounting to about 6 percent of total revenues in 1999). Local based collection might also significantly increase their yield. This could begin with the urban provinces, before being extended to all provinces. However the government believe that it would not be appropriate to consider this at the moment. * develop a new formula based system for the budget transfer norms governing the allocation of funds to the provinces, providing for a more transparent and equitable basis. There are several possible approaches. Firstly the formula could reflect costs required to deliver a standard level of services in each region, allowing for their different level of needs in sectors such as health and education, and allowing for cost differentials. Altematively there could be a much simpler overall formnula. In either case a more equitable system of allocating investment expenditures should be considered. * reviewing the current arrangements under which provinces may retain some revenues in excess of budget estimates, for further provincial spending. * reviewing the existing National Programs, to determine whether they are appropriately targeted and to what extent some of them are still needed. Consideration could also be given to possible increases in expenditure or consolidating them into larger programs, requiring matching contributions from local governments. 20

49 Chapter 2 - Budgeting and Public Expenditure Management LOCAL FEES AND CONTRIBUTIONS Local governments, mainly at the commune level, collect certain fees and voluntary contributions for local services. These cover services such as water and electricity, educational contributions, contributions to local infrastructure, child assistance and the local militia. It is important to study the level and structure of these charges in terms of their impact on poverty and the institutional accountability arrangements. In this PER study was therefore undertaken in 6 communes covering three provinces-quang Binh, Ha Tinh and Ha Tay. VLSS and other recent studies suggest that the level of fees and contributions raised by communes is higher in these provinces than elsewhere. However the general issues are likely to be similar even in areas where lesser amounts are collected These charges comprise a significant proportion of commune revenue-ranging from 23 percent to 61 percent in the four of the six communes studied. The number and range of fees makes up a complex system of revenue raising. Specific points emerging from the study were * although they are in theory levied separately, in practice many of the charges are treated fungibly, as general revenue for the commune (or in some cases village) budget. * despite the requirements of Decree 29 none of the six communes publishes its budget or actual revenues and expenditures, indicating what charges have been collected and how they have been spent * individual taxpayers or households have difficulty in determining whether they are paying the correct amount or in querying the amount of any charge * there is provision for exemption from fees and contributions, but these are governed by complex regulations which appear to be applied differently between communes * there is therefore a need to improve transparency and accountability in both the raising and spending of these fees and contributions * poor households pay disproportionately more as some fees and contribution are levied per head The following recommendations therefore arise: * simplification, by reducing the number of separate fees and contributions * clearer criteria for exemptions from fees and contributions * for utility charges such as electricity and water, relating fees as far as possible to household consumption, to encourage efficiency of use * for other charges, restructuring the charging system so that overall the fees and contributions system becomes significantly more progressive * ensuring transparency of how individual household assessments for fees and contributions are calculated, of the total amounts raised and the way they have been spent through enforcement of Decree 29, possibly raising this to the level of an Ordinance, to ensure it is fully observed 21

50 Vietnam: Public Expenditure Review 2000 * strengthening the implementation of Decree 225, which provides a mechanism for households to raise questions about commune financial issues * establishing a mechanism for households to seek further clarification from appropriate authorities outside the commune, if these questions are not satisfactorily answered. 22

51 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures CHAPTER 3 INTER AND INTRA-SECTORAL COMPOSITION OF EXPENDITURES COVERAGE OF THE PER DATA 3.1 As reflected in the Government's final accounts 8 of actual budgetary expenditures for 1997 and 1998, the PER covers recurrent (i.e., wage and wage-related expenditures plus goods and service expenditures used for operations and maintenance) and capital expenditures that are funded by a combination of Government's own resources, grants under Official Development Assistance (ODA) and borrowing (either domestic or external concessional ODA loans). It does not cover recurrent or capital spending by ministries from "off-budget-funds" 9. This reflects the fact that Vietnam's budget is not fully comprehensive. Expenditure by communes is also excluded, except to the extent of payments made to them by higher levels of government More specifically, PER figures for Government capital expenditures do not include investments (e.g. infrastructure investments) presently funded by the General Department for Development and Investment's credit (and in the future by the National Development Support Fund) or by SOE's retained earnings or by SOEs using on-lent ODA. Thus roads constructed by the Ministry of Transport and funded by ODA are included in the capital spending shown in the PER, but power-generation projects constructed by Electricity of Vietnam (EVN) and funded by on-lent ODA are not. While capital spending by SOEs is part of in the PIP, it is not included in Government capital expenditure. ALLOCATION DECISIONS 3. 3 Both theory and international experience suggest that deciding how much to spend on different activities is the most difficult aspect of public-sector budgeting. There is no optimal (or unique) allocation of public goods and services. Beyond the "pure" public goods like national defense, fire services or street lighting, decisions on prioritizing of public expenditures require detailed assessment in each country and in all cases have a large "political" component. However, a technocratic approach under which policymakers consider explicitly the objectives of public sector provision of goods and services, the appropriate instrument for such provision, the competing claims on the budget and, the likely outputs or outcomes of alternative expenditure allocation, can be used to take better decisions. Box 3.1 below sets out a decision tree involving such an approach Expenditure allocation involves two dimensions: recurrent versus capital expenditure and the inter and intra sectoral composition of expenditures. 8 The "final accounts" of actual budgetary spending are approved by the National Assembly 11 months after the fiscal year ends. 9 As discussed in Chapter 1, the amount of expenditures through off-budget funds is not known although MOF estimate them as I percent of GDP. 23

52 Vietnam: Public Expenditure Review 2000 Recurrent Versus Capital 3. 5 In Vietnam-as is the case in a majority of developing countries-the rates of return on many nonwage operations and maintenance (O&M) activities are estimated to be quite large in several sectors. Yet the O&M budget has not been adequately funded in those sectors For example surveys indicate that almost half of the national road network is in poor to very poor condition and one quarter of the bridges have considerably reduced load bearing capacity. The situation of the provincial, district and commune networks is even worse. World Bank estimates suggest that around US$160 million annually is imposed on the economy in the form of higher vehicle operating costs. Furthermore, most of the roads are eventually rehabilitated at a cost several times than that of a proper operation and maintenance strategy. Maintenance has also been inadequate in inland waterways, which has led to siltation and loss of water depth, hampering the operation of larger vessels and increasing transport costs. In the irrigation sub-sector, consistent under-funding of O&M has led to poor maintenance and underutilization of existing capacity There is a better balance of recurrent and capital spending in the health and education sectors in Vietnam. For example, the findings from the health sector indicate that adequate funding of medical equipment and drugs has contributed significantly to improved delivery of services and better health sector outcomes in Vietnam The above findings indicate that an appropriate balance between capital and recurrent expenditures, including a well formulated non-wage operations and maintenance strategy, is important in making good use of public resources. Achieving this balance is not easy under the "dual budgeting" approach, with two separate ministries managing the recurrent and investment budgets, as is the case in Vietnam and many developing countries. In addition Vietnam has a policy under which the rate of growth of recurrent expenditure may not exceed the rate of growth of investment expenditures. In the World Bank's view this policy should be re-examined by the Government A bias towards investment as opposed to recurrent expenditures may also reflect donor priorities since donors, generally prefer to fund capital investments in most sectors. Yet having adequately trained teachers and adequate textbooks (recurrent expenditure) may be equally important to improving educational attainment as new classrooms (investment expenditure) Analysing the balance between recurrent and central expenditures in Vietnam is complicated by Vietnam's classification system being different to the international GFS classification. For example in Vietnam major repairs are generally classified as recurrent expenditure and handled in the recurrent budget, rather than classified as capital expenditure as would be the case under GFS. Thus in international comparisons Vietnam's recurrent expenditure would be overstated and capital expenditure understated, and the balance in favor of capital expenditure is even higher. However in the roads sub-sector part of major repairs are classified as capital expenditure. 24

53 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures Box 3.1: Evaluating Public Expenditure Program Evaluating public expendit programs requires a decision tee approach (as in the Figr 3.1). Such an evaluation of resource allocation within (and across) secors proceeds by asking three questions: (1) What is the rationale for public intervention? (2> What is the right istument for such intervention? (3) What arm the budgetary costs of intrvention? Figure 3.1: Decision Tree for Evaluating Publie Proams Md l e rret fa,lure (extrmlibtes, cu rren t l and cc fosiqi rredis(lbution thlsres tet Foa exam pubhc Prleisi:n ;fn tnan nraienab it w Wiagemes, Insuarmce a e area th fisals posts l [ Fennx~~~~~~~~~~~~~~itee aafurit n -cange l udofbsenct) Ideally each prigram in toe budget, toveming boenfi cir and capbe tal expep ditui should be scrutinized to detemine A program whether fertilizer subsidy may ere be is a intended reason for to benefit goverment poor intrienton. farmers. Howevry Shadn (iferallocavtedwto of publiec goods l and conie for i so(ialv quit or rexistribtion hncluding equanl oppony of acess fr basic goods and servibesr provide two posstbr e reasons for ithevention. However, some govertment expenditrmes fail test. mais For examhie b * A fegtilizer subsin programs may be intended to benefit poor frmers. However if tallonaef to all farners on an ahem basis it will also asstst riyher fanners, who erm a gweter area. It is alch possible nat somee obenficreunds will be wast poor on di ans iniste on of the substi scheme. if te-lso, price paid tarte fo tertihizer is too high, te main beneficimo may be the supplier o * In Malaysia, an increase in the number of public doctrs in a district had no effiect on infant monualitesbeasea pro ywe rowding outae private doctorsgwt ereas spending on safe water and sanitation (involving large extemalities) ha a misuaal effee d Many Goveainvts have Sa Es covertng acnivdra as diverse as beer prodnceon. air services etc, but tere io litee SntgC rewi n for "se atvitre to b d uneren by th Govemment Private selopr cacity exists to provide such product or servicesl and any social or oe wjenves may be actieved by regulasion of ptrivat sedorprovision. i Some govement progu ms can ono - be ustified in terms of dctir redhstaibution effemu. MIost transfer schemes fall under his category. The man issue hem is whede such programs r heir intended beneficiaries-he poor. In the Indian stote of Andbra Pradesh,7 the rice subsidy schemeostensibly targeted fior te poor and needy-eaches more than 65 percent of the population and COnsumes a sizeable proportion of thie stae's annual budget, leaving fewer resources for othier desirable activities such as basic healthi ansd road maintenance. Allocation between and within sectors 3). li1 Developing the state budget requires a strategic allocation of resoturces betweeni and within seetors, such as agriculture, health, education and transport. Some of these decisions involve judgements about social choice-does society value education and health care more than 25

54 Vietnam: Public Expenditure Review 2000 rural roads that improve market access for the poor? Experience suggests that applying a few simple principles can assist decision makers to focus on a few crucial tradeoffs, as set out in Box 3.1 above Looking at the functional composition of the state budget of Vietnam it appears that the government is rightly emphasizing activities where the benefits to society are likely to be higher. Figure 3.2 below shows the inter-sectoral composition of the state budget of Vietnam over the two years for which such data are available. These data indicate that the government is focusing more on the agriculture, education and training, health and transport sectors. Each of these sectors was given proportionately more resources in 1998 as compared to the previous year. Figure 3.2. Inter-sectoral composition of public expenditures Composition of the Budgetin 1997 Coinposition of the Budget in 1998 (Functional Classification) (Functional Classifiation) Agri.forestry& Agri,foestty& Ouber inigation Ttansponation ther Fshery Tmmportatcin Other 5% ID% ki~~~~dustry Ohr6 I _t 4% hiusyexestpa)tent 4% k terestpamnet Educaiion& 3% 3 % Train niecatbn& I Public Admin PubEcAdmir hn 10% H'dealth 9% D7% Science,tech. 6%~Sbsie Scienrcjech.St& Sc idui:s J~ &environ Cukure &Spons Senvnnott &spons 12% 7% 1% 4% 13% 1% 4% What is not covered, but is important to analyze at sub-sector or program level, is what these resources are actually buying in each sector (e.g., primary vs. secondary vs. tertiary education, preventive vs. curative health care vs family planning, agriculture research and extension vs. non targeted agriculture subsidies). Only at this level can an analysis be made of whether the state budget is properly targeting its expenditures to achieve growth or equity, efficiently delivering its services or providing an enabling environment to the private sector to improve growth. Examples from other developing countries confirm that allocating and spending resources on social activities does not always ensure that the intended beneficiaries receive the benefits. 26

55 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures Table 3-1-A: Budget expenditure by economic types and by sector, by central and local government 1997 State Budget Expenditure State Budget Expenditure Current Expenditure Total Capital of Which * Expenditure Expenditure ** Total Salaries and O&M Central Local Wages Total in Bil. VND 70,749 21,924 48,424 18,518 16,589 42,710 28,039 Agriculture, forestry & 3,712 2,709 1, ,071 1,641 irrigation Fishery Transportation 7,070 6, ,316 2,754 Industry, of which: 2,583 2, ,399 1,183 Energy Water Education & Training 9,979 2,212 7,767 4,308 2,270 2,340 7,638 Health 4, , ,308 1,489 2,839 Social Subsidies 9, ,166 4, , Culture & Sports 2,578 1,374 1, ,210 1,366 Science, technology & environment Public Administration 7,138 N/A 7,138 1,583 5,555 N/A N/A Interest payment 1,916 1,916 Others 21,079 5,652 15,028 7, Share of total by economic types, % Share in total sectoral expenditure, % Total Agriculture, forestry & irrigation Fishery Transportation Industry, of which: Energy Water Education & Training Health Social Subsidies Culture & Sports Science, Tech. & Envirmt. Gen. Public 10.1 N/A N/A N/A Administration Interest payment Other Source: Ministry of Finance Note: * not including expenditure for social support, price subsidies, additional transfers to the lower levels, interest payment and other current expenditure. ** Including data on major repair. N/A- Data not yet available 27

56 Vietnam: Public Expenditure Review 2000 Table 3-1-B: Budget expenditure by economic types and by sector, by central and local government 1998 State Budget Expenditure Current Expenditure State Budget Expenditure Total Expenditure of which Central Local Expenditure ** Total Salaries and O&M Total in Bil. VND 74,761 23,421 51,340 21,070 16,751 42,953 31,808 Agriculture, forestry & 4,591 3,493 1,099 irrigation ,577 2,014 Fishery Transportation 8,065 6,959 1, ,852 3,213 Industry, of which: 2,775 2, ,759 1,016 Energy Water Education & Training 12,750 3,551 9,199 5,544 2,653 3,393 9,357 Health 5,207 1,342 3,864 1,060 2,553 1,930 3,277 Social Subsidies 8, ,510 5, , Culture & Sports 2,745 1,448 1, ,012 1,733 Science, technology & 1, environment Public 6,741 N/A 6,741 Administration 1,743 4,998 N/A N/A Interest payment 2,050 2,050 Others 19,573 2,911 16,662 6,904 1,295 Share of total by economic types, % Share in total sectoral expenditure, % Total Agriculture, forestry & irrigation Fishery Transportation Industry, of which: Energy Water Education & Training Health Social Subsidies Culture & Sports Science, Tech. & Envirmt Gen. Public 9.0 N/A N/A N/A Administration Interest payment Other Source: Ministry of Finance Note: * not including expenditure for social support, price subsidies, additional transfers to the lower levels, interest payment and other current expenditure. ** Including data on major repair. N/A- Data not yet available 28

57 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures The four sectors, agriculture, education and training, health and transport together accounted for 42 percent of the total state budget in 1998 compared to 35 percent in A breakdown of social transfers category, which accounted for over 13 percent of the state budget in 1997 and nearly 12 percent in 1998 is not available Little information is available on the residual category "other", covering 25 percent of the 1998 budget. Though size of this residual is not exceptional compared to many countries of the region, more detailed breakdown of this item would make the analysis of public expenditure more complete and useful Tables 3.1-A, 3.1-B provides a more detailed analysis of 1997 and 1998 expenditures. REDISTRIBUTIVE ROLE OF PUBLIC EXPENDITURE Although information on the overall benefit incidence of total public spending is inadequate, there is evidence to suggest that Government's existing public expenditures play an important re-distributive role and helps the poor. However, the designated national safety net programs are not particularly effective in doing this. On the other hand, the distribution of health and education-sector spending as well as cash-transfers to poorer provinces are performing this redistributive role. There remains considerable scope for further improving the favorable impact of public spending on the poor. Better targeting of social expenditures to the poor, through reallocations within health and education sectors-as discussed later in this chapter-as well as developing alternative mechanisms for increasing income-transfers to the poorest, would help. Figure 3.3: Lorenz curve for public spending on education, health and household consumption, 1998 I degree line 850 CL S 2 X i i "_l ~~~~~~Public spending 40 on ealth E o 20 -**-Household Pro-Poor Education Health Spending~n & eduatio 3. publc 18Targeing heath o ad eduationspendng, epeeialye ueation spending, a I 0 C urnulative population(% Pro-Poor Health & Education Spending Targeting of public health and education spending, especially education spending, has improved over time and currently total public social expenditures are more equally distributed than household expenditures. For example, in education, according to VLSS 1998, the poorest quintile receive 18 percent of total public education expenditures (a two percentage point jump in 29

58 Vietnam: Public Expenditure Review /98 relative to 1992/93) and 26 percent of primary education expenditures (a six percentage point jump). Figure 3.3 shows that both health and education public spending is more equally distributed than household spending. When expenditures from national safety net programs are added to this, the distribution of total social spending (including safety nets) does not change much, because national safety-net programs (excluding pension) comprise a small share of total public spending relative to health and education spending, and its benefits are unequally distributedl. Redistributive Cash Transfers to Poor Provinces Cash transfers to poorer provinces are also performing a useful re-distributive role; supporting a higher level of service delivery than could be funded by their own available revenue. In 1998, at least 41 provinces received cash transfers. First, provincial per capita expenditures are more equally distributed across provinces than are provincial per capita revenue-collections. Second, over time (e.g. between 1994 and 1998), provincial per capita spending has become more equally distributed across provinces. Thus a substantial portion of revenues collected in the richer provinces is redistributed to the poorer provinces for spending. However, the issue is whether this level of revenue equalization is sufficient to off-set the revenue and cost disadvantages of the poorer provinces. Rich provinces spend more per capita than provinces. The fact that the size of these cash transfers are relatively weakly related to the depth and incidence of poverty in the provinces, suggest that there is room for better targeting these transfers. Overall it is not clear that there is equity in allocations between provinces. Other Discussion of Pro-poor issues in this PER More specific issues concerning the "pro-poor" emphasis in public expenditures are discussed in other parts of this PER. These conclusions are: * in health, the large share of health care spending financed by individuals or households has inherent inequities. The burden of user charges on poor households is high, and the system of exemption from some fees and charges does not appear to operate in a pro-poor way. A strategy needs to be developed to assist the poor with their health care costs, particularly if there is to be an increase in certain user fees, such as for hospitals. * in health, the high level of expenditure on curative programs is inequitable, as much of it is focussed on hospitals, which have disproportionately large numbers of users from the more affluent sections of the community. * in health, the health insurance program does not benefit many poor or rural dwellers. * in education, the greatest improvements in participation (enrolment) rates have been in the lower income groups. Regional variations in enrolment rates have also narrowed, but remain high. The level of attainment varies significantly across regions and may reflect poorer quality education in poor and remote areas. 10 The report "Attacking Poverty" shows that the household coverage of the social welfare programs are low and the distribution of these payments/transfers are very unequal with the lowest quintile receiving only 5 percent of these income-transfers (p-125) 30

59 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures * in education, the level of costs borne by parents, both directly and through fees is high, and the system of exemption from fees operates in a manner which is far from pro-poor. Higher education is restricted to those who can afford to pay. * in education, the system of budgetary transfer norms and allocation norms, used to guide the allocation of funds to and within the education sector may not be achieving an equitable allocation of resources between provinces. * in transport, slow progress in improving rural roads has particularly affected the poor. The inadequate maintenance of rural roads and of inland waterways in the delta regions has also particularly impacted on the poor. * the system of local fees and contributions, particularly important at the commune level, needs to be redesigned to have a more progressive impact overall. It appears to operate in a somewhat randomly regressive manner. * in general there appears to be considerable inequity in the provincial distribution of state investment expenditures, reflecting their concentration in the economic growth regions of Hanoi-Haiphong and HCM City. GENDER ISSUES IN PUBLIC EXPENDITURES Gender balance in both expenditure outcomes and processes is another aspect of equity in public spending. Vietnam has made great progress in providing education and health care services to all citizens, regardless of gender. However, that should not distract attention from the fact that there remain gender imbalances in Vietnamese society and in the functioning of the Vietnamese economy This PER thus attempts to examine gender outcomes in the various sectors to the extent that there is information, the need for additional intervention through public spending and the institutional environment which public spending decisions are made. Some conclusions are given below Knowledge of the institutional environment of decision making offers the possibility of corrective action. The greater transparency of public spending allocations advocated in this PER is important, because it would permit the Vietnam Women's Union (VWU) and National Committee For the Advancement of Women (NCFAW) to provide inputs into public spendingdecisions. Agriculture It is difficult to determine how agricultural expenditure and the possible changes discussed in this PER impact men and women differentially since both work side by side in agricultural production The desirability of more spending on agricultural research and extension has been raised in this PER. To promote greater efficiency and equity, there are two options worth considering. Firstly, women undertake most of the animal husbandry activities and so more research on animal husbandry-improving the genetic stock through artificial insemination, and selective breeding practices-would directly benefit women, by increasing their incomes. Secondly, and more importantly, targeting agricultural extension contacts to both men and women would be a 31

60 Vietnam: Public Expenditure Review 2000 step in the direction of promoting (information) equity. It would also promote more efficient utilization of resources, because over the past few years male migration to cities has increasingly feminized agriculture in Vietnam Finally, any moves to reduce the number of agricultural SOEs could promote greater gender equity. Women are very active in the small scale non-agricultural self-employed sector, and might well benefit from withdrawal of SOEs from activities that are particularly suited to the small scale private sector activity. Education Vietnam has made remarkable progress in raising literacy and universalizing primary education in just three decades. Primary enrolment rates do not exhibit large differences between girls and boys. Pockets of gender imbalance exist in some regions, but given the strong government commitment to universalize primary education these do not require any public intervention beyond exhorting parents to enroll all children in primary school. Although out-ofpocket costs of primary education remain significant, (which might then result in parents preferring to spend money on boys rather than girls education) there is no evidence of gender imbalance at this level of education The earlier gender-gap in lower secondary schools has closed between and and there is little difference between girls and boys enrolments, but there may be need to monitor these recent gains carefully. The opportunity costs of children's time rise dramatically beyond primary education, as children are at an age where they can begin to make meaningful contributions to house work and small contributions to household income. There would be a need to seriously consider intervention to maintain parity between girls and boys in the event of any gender gap developing Higher levels of education-upper secondary, higher, vocational, and university-exhibit larger imbalances, with lower female enrolment, but the case for public intervention gets progressively weaker as one moves up the education ladder. Low female and overall enrolment suggests that there is failure in the market for female education and that the state could undertake measures to make the financing system work better. At the highest levels of education this might involve greater access of women to loans and at upper secondary level scholarships could be a cost-effective way of intervening in this market. Health Indicators of mortality, morbidity, and nutritional status, on the whole, do not suggest parents actively discriminate between boys and girls. Health care "needs" (loosely defined) are similar for boys and girls, at least until they reach puberty. User fees at health care facilities, public and private, are not differentiated on the basis of gender so both the supply and demand side of the children's health care market do not justify gender-based public intervention. However there are several reasons for being watchful Health contact rates for boys 0 to 4 years of age are consistently higher than those for girls of the same age but morbidity differences (which define the "at risk" group for curative care) in this age group are minimal. Further analysis is needed to determine whether this difference reflects a parental preference for spending on boys health care, compared with girls. 32

61 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures Adult health "needs" are different for men and women, owing largely to the physical demands placed on women by the reproductive process. Higher levels of (self-reported) illness amongst women confirm this difference. For this reason the higher health contact rates observed for women of all ages in Vietnam should not be viewed as being necessarily advantageous to women. Nutritional deficiencies amongst adult women are evident in high rates of anemia (53 percent), Vitamin A deficiency, and poor maternal nutrition (40 percent chronically energy deficient in 1994). There is, therefore, little doubt that women are at higher risk than men of being sick In Vietnam maternal mortality is around 160 per 100,000 live births which is quite low in comparison with other countries in the region, but in the mountainous areas-the Northern Highlands and Central Highlands-it is at least twice the national figure. Utilization of antenatal services is not comprehensive (28 percent do not use), and reproductive tract infections are a major cause of maternal morbidity. Moreover, contraception mix is heavily weighted towards use of IUD which is associated with severe side effects. Partly as a result of this limited choice of contraception, an average Vietnamese woman has roughly 2.5 abortions in her life time, an inordinately high figure by any standards Thus more can be done to improve reproductive health in Vietnam. Vietnam's family planning program has been largely geared towards controlling the rate of population growth, although the focus is now shifting towards reproductive health. There is a need to assess public spending on reproductive health and utilization of these services independently of other morbidity factors Spending on family planning services has shown a marked increase in the past decade, with the share of family planning in total ODA grants and loans for health quadrupling between 1996 and National budget allocations have also increased, but there has been little change in local spending on these services. There is little separate information on reproductive health interventions, so it is difficult to determine how public spending on reproductive health meets women's needs. But it is fairly clear that there is scope for increasing public spending on this area. Transport Much of public spending in the transport sector is on public goods such as roads and inland waterways, and it is difficult to ascertain individual benefits associated with this type of spending. There are no obvious gender differences in user charges and no overt discrimination in the allocation of public spending. Nevertheless one can make some general inferences by examining the type of economic growth promoted by improvements in transport infrastructure Improvements in rural roads are likely to have proportionally larger benefits for women because women are very active in marketing farmn output. Increases in farm gate prices lead to direct increases in the cash incomes women receive from sales of farm output. While these incomes may be actually pooled with other household incomes the actual receipt of these incomes by women increases their position within the household. Increased investments in rural roads is therefore likely to benefit women more than men Another aspect of increased spending on rural roads is its significant use of labor-much of it provided by women. In some cases this may be "voluntary" contributions. In cases where wage labor is used, this may provide increased earning opportunities for women. 33

62 Vietnam: Public Expenditure Review 2000 AGRICULTURE SECTOR Vietnam's agricultural sector provides approximately one-quarter of the country's GDP, generates more than a third of its exports (in value terms) and employs over two-thirds of its labor force. Although its share has been gradually declining as farm households diversify their production, rice still accounts for almost half of the gross value of agricultural output. Other food crops account for another 15 percent, industrial crops for 16 percent and livestock for 17 percent. Agricultural production hit record levels in 1998 and 1999 and Vietnam has moved from being a net food importer in the mid 1980s to being the second largest exporter of rice in the world The Government of Vietnam (GOV) recognizes the important role of agriculture in the sustainable development of the country and as an engine for broad-based poverty reduction and income growth. In particular, it considers agricultural processing and off-farm rural service activities as a means of achieving its long-term development goals. The agricultural sector has been performing well despite the recent slow down in the national economy. The average annual growth rate in the past five years was between 4 and 5 percent, fuelled by diversification into high-value crops (e.g., coffee, cashew nuts, rubber), increases in rice productivity, and expansion of cultivated area including irrigated rice. As a consequence, agricultural income rose by 61 percent between 1993 and 1998 and was the main source of poverty reduction in rural areas. Public Spending in the Agricultural Sector Public spending in agriculture, if properly allocated and managed, can improve agricultural productivity and provide beneficial spill-over effects, inducing more private investment in the sector. Research has shown that public spending on rural roads, and agricultural research and extension is positively associated with agricultural productivity growth and poverty reduction. However if public spending in agriculture is poorly targeted, it can crowd-out private investment and lead to inefficiencies. Examples of these include subsidizing inefficient crop sub-sectors or investing in marketing or processing activities that can be effectively managed by the private sector Despite the increase in recent years, public spending on agriculture is still relatively low and accounts for roughly five to six percent of the state budget (6.3 percent in 1998). This is lower than several Asian countries such as China, India and Thailand, where the budget share for agriculture was between 8 and 16 percent in As a share of GDP, public expenditures on agriculture were 1.3 percent in The comparisons, however, do not necessarily constitute an argument for a higher level of public spending in agriculture. The performance of the agricultural sector is related not only to public expenditures in the sector, but also to public expenditures in transport, education, and health in rural areas. In spite of the comparatively low level of public expenditures in agriculture, the agriculture sector has performed well when compared to other countries in the region. With the exception of China, Vietnam's agricultural growth has been the strongest among a wide range of developing, and developed countries. Before advocating a higher level of expenditures in agriculture, it would be appropriate to see if the composition of capital and current expenditures reflects the overall objectives and priorities established by the government. 34

63 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures Table 3.2. Public Expenditures In Agriculture Public Expenditures in Agriculture (in current VND billion) 1,125 3,495 3,712 4,591 Capital Expenditures 861 2,782 2,709 3,493 Current Expenditures ,003 1,099 Public Expenditures in Agriculture (in 1994 constant VND billion) 1,358 2,884 2,567 2,855 Capital Expenditures 1,039 2,295 1,873 2,172 Current Expenditures As a percentage of the State Budget As a percentage of total GPD As a percentage of agricultural GDP 5.4% 7.2% 5.2% 6.3% 1.0% 1.6% 1.2% 1.3% 3.0% 5.6% 4.6% 4.9% Per agricultural person (in 1994 VND)! na 57,113 49,221 54,020 Per unit of agricultural labor (in 1994 VND) na 119, , ,437 Sources: Data from 1992 to 1995 are from UNDP (1996), several tables. Data from 1996 are from the World Bank (1999b) - Table 5.5 Data for 1997 and 1998 are from the Ministry of Finance The following observations can be made on the composition of public spending in agriculture. D The irrigation sub-sector accounts for 50 percent of the agricultural budget; two national programs on reforestation and land reclamation roughly account for 14 and 17 percent, respectively, and forestry services and forestation about 10 percent. The following table 3.3 sets out the position. * On average, the capital-current mix is about three to one. Irrigation receives the major share of capital expenditures (about 50 to 80 percent) whereas current expenditures are more evenly distributed between various subs-sectors with the largest share going to forestry and related services (about 20 percent). * For 1997 and 1998, current expenditures were used for goods and services (about 70 percent), salaries and wages (around 15 percent) and subsidies and transfers (around 15 percent). Little information is available on the purposes and results of these subsidies and transfers. Between 56 and 60 percent of total agricultural expenditures were spent at the central level; the rest was spent by local governments. 35

64 Vietnam: Public Expenditure Review 2000 Table 3.3 Capital and current expenditures by agriculture sub-sector (in million VND); (shares of total expenditure appear below each entry) Total Total Total Total Total Total Expenditwe Capital Current Expenditure Capital Current Expenditure Expendthure Expenditure Expenditure Total 3,712,494 2,709,279 1,003,215 4,591,435 3,492,647 1,098, % 73% 27% 100% 76% 24% Of which: Cultivation 130,725 72,758 57, , ,623 77,750 4% 2% 2% 4% 2% 2% Animal husbandry 85,448 52,669 32,749 77,416 49,143 28,272 2% 1% 1% 2% 1% 1% Veterinary activities 65,970 17,898 48,072 68,917 18,114 50,804 2% 0% 1% 2% 0% 1% Forestry and related activities 315, , , , , ,021 8% 3% 6% 8% 3% 5% Forestation 48,815 26,459 22,356 85,863 75,806 10,057 1% 1% 1% 2% 2% 0% Fixed cultivation and related activities 270, ,414 75, ,721 66, ,533 7% 5% 2% 4% 1% 3% Irrigation and related activities 1,806,371 1,651, ,259 2,469,736 2,307, ,634 49% 44% 4% 54% 50% 4% National programs on reforestation and land reclamation 642, , , , , ,126 17% 13% 4% 14% 11% 3% Services for cultivation and animal husbandry including extension service 280, ,000 Other national targeted 7,5% 9% program and expenditure 66, ,104 Source. Ministry of Finance (MOF) 1,5% 1% Regional distribution of public expenditures In 1997 and 1998, 56 to 60 percent of total agricultural expenditures were spent at the central level; the rest was spent by local authorities. For irrigation, fixed cultivation and sedentarization (re-settlement), and the two national programs on forestation and land reclamation, a higher percentage is spent at the central than the local level. However, for other sub-sectors, such as cultivation or animal husbandry, the largest share of the public expenditures is spent at the local level. 36

65 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures As Figure 3.4 demonstrates, there seems to be a positive, albeit not very strong relationship between provincial per capita agricultural GDP and provincial per capita agricultural expenditures. This may suggest that state expenditures do not significantly contribute to redistribution among the provinces to alleviate poverty. For example, in 1998 agricultural expenditures in Quang Binh were VND 35,875 per agricultural person (about $2.5 per person) whereas in Ho Chi Minh City (HCMC) agricultural expenditures were VND 187,600 per agricultural person (about $13.4 per person). This suggests that better-off provinces spend more on agriculture than poorer ones. Poor provinces, such as Quang Binh, are dependent on the state for a large share of their expenditures and resources and therefore have less control over their inter and intra-sectoral expenditures, except through voluntary contributions. Better-off provinces, such as HCMC, which generate surplus revenues above the targets set by the government, have more fiscal flexibility because they can allocate their surplus revenues according to their own priorities. This also means that the quantity and quality of agricultural and rural services vary significantly between provinces. Figure 3.4: Per capita Agric Spending vs. Per capita AG GDP by province, 1998 (VND '000) Ag Spn 100 di ng 80 pe Pe Ca 0i 20* ,000 1,500 2,000 2,500 3,000 3,500 per capita Ag GDP Data Source: Ministry of Finance Another important issue is that once the provinces receive their transfer from the state budget, the trickle down to the districts and communes is not very transparent. Even if the state government allocates more funds to poorer provinces, these funds will not necessarily reach the poorest communes or districts However, other GOV mechanisms of public expenditures are currently in place to target poverty, taking into consideration regional disparities. The HEPR (Hunger Eradication and Poverty Reduction Program) the Poorest Communes Program, the recently initiated five million hectare Reforestation Program and other programs are more comprehensive approaches to poverty issues in less favored regions, as opposed to more specific agricultural sector programs. Research and Extension Services It is widely recognized in agriculture economics literature that agricultural research and extension services are public goods. Moreover, in Vietnam there is evidence that it provides benefits to poor farmers. Vietnam also has a lot of potential to increase its crop productivity. 37

66 Vietnam: Public Expenditure Review Yet the state contributes very little to research. In the three years , MARD spending on agricultural research was about VND 80 billion, which is equivalent to 1.7 percent of the public agriculture expenditures. In comparison, China spends about 6 percent of its agricultural expenditures on research, while Malaysia and Thailand invest about 10 percent; other Asian countries spend at least 3 percent Returns to investment in agricultural research are known to be very high world-wide. Thus, one possible way of raising agricultural productivity in Vietnam and enhancing its competitiveness in world agricultural markets, is to increase investment in agricultural research There are about 30 agricultural research institutions of which about 18 are operated by MARD, and the rest by agricultural SOEs or by autonomous but state funded institutions. But each institution has a fairly narrow research focus, a small budget and staff and little coordination with other research institutions. A 1996 GOV decision to substantially re-organize the agricultural research system has been only partially implemented With regard to extension services, according to MOF total public expenditure on agricultural extension in 1998 was VND 405 billion of which MARD spent 27 billion. However reflecting classification problems, this figure is known to include expenditures on other activities and the exact amount relating to agricultural extension is unknown although it comprises the bulk of this amount. Extension services assist the adoption of improved technology by farmers. The national extension service suffers from a scarcity and poor training of staff and limited efficiency. Only 70 percent of districts have an extension station and only 30 percent of communes have an extension unit. A total of 2,757 extension workers at the province and district level serve a farming population of 10 million households. The extension budget should be increased at least to expand extension services to all districts and communes, starting from the poorest communes To achieve better results any budget increase would need to be accompanied by institutional strengthening that includes strong linkages between research and extension, a reorganization of extension services that avoids the current practice of extension staff being involved in commercial activities such as selling inputs (e.g. fertilizer) to farmers and ensures participation of farmers and agro-industry representatives in extension advisory boards. Irrigation Sub-Sector About 80 percent of the 7 million ha. of cultivated land area in Vietnam is equipped with some sort of irrigation, the majority of which is dedicated to rice. The Ministry of Agriculture and Rural Development (MARD) is responsible for primary irrigation infrastructure provision, which is then operated by local government, while local governments (provinces, districts and communes) are responsible for secondary and tertiary infrastructure. Large and medium scale irrigation works are managed by 172 Irrigation Management Companies (IMCs). MARD also directly manages three inter-provincial irrigation schemes Of the four million hectare of cultivated paddy, three million are equipped with some kind of irrigation. However, due to incomplete systems, planning or design deficiencies, deterioration, lack of water and poor operations, only 2 million hectare are actually irrigated. While total public spending on irrigation has almost doubled since 1992, the share dedicated to recurrent expenditures shrank from about 20 percent in 1992/93 to 10 percent in 1997/1998. Although about 50 percent of operation and maintenance (O&M) costs are now covered by the 38

67 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures IMCs-the expenditures of which are not included in the state budget-the allocation to cover the remaining portion of O&M costs is not enough to effectively maintain the existing systems, resulting in deteriorating infrastructure and low capacity utilization According to MARD experts, the total estimated value of irrigation works in 1994 prices was VND 60 trillion. The estimated regular O&M cost needs of the existing irrigation system are VND 1,200-1,500 billion per year. Irrigation fees collected from water users represent about VND 600 billion per year. The shortfall between irrigation O&M costs and user fees is partially covered by the budget through state subsidies to the IMCs of about VND 100 billion per year, and donor grants. But even after allowing for voluntary contributions from farmers (either in labor or in cash) to maintain and repair tertiary canals in the villages there is frequently a maintenance gap which results in deterioration of the system Irrigation fee. The basic guidelines for charging water fees were set in Decree No.112 enacted in 1984 at the rate of 3 to 8 percent of paddy yields (payable in paddy or in equivalent cash terms). The rates vary by type of irrigation and drainage system used, quality of service delivery, and by season. They are approved by each Province People's Committee and can vary quite substantially between regions. While most IMCs incur losses, some have much higher levels of cost recovery than others.' According to the MARD, the irrigation fee would have to be doubled to cover the current needed level of regular O&M costs. But financial and organizational reforms to improve cost recovery and system performance may avoid or reduce the need for an increase in the level of fees. The collection system itself needs improvement and farmers' willingness to pay would be increased by an improved quality of service. Raising the irrigation fee should only be instituted once the current collection system and quality of service are improved On the financial side, several measures could be considered. - The irrigation fee is based on the volume and type of crop production 12 rather than on the volume of water use, resulting in excessive and inefficient water usage. Basing the fee on volume of water consumed would be preferable-as has already been successfully implemented in some localities. - Commodity targets by which farmers are encouraged to grow certain crops such as paddy through increased public investment and support discourage the allocation of water to those crops with the highest returns from water use and reduce farmers' willingness to pay the fee. The need for commonly targets should be reviewed. * The water fee is collected in paddy or its equivalent in cash. The local council determines the price at which measures of rice are converted to cash and sets the price at 10 percent below the market price to encourage payment in cash. This means that the fee varies with the price of paddy rather than being determined by the supply and demand for water. It would be preferable to have payment in cash only. 1' According to a MARD official, a pumping station in Ha Giang Province was recently sold to a private company. In 1998, this company turned in substantial profits by raising the water fee and improving its collection. This could be an example to set for other IMCs which could be privatized or their management contracted out to private enterprises. 12 The water fee for other crops (such as vegetables or sugar cane) is priced at 40 percent of the fee charged for paddy production. 39

68 Vietnam: Public Expenditure Review On the organizational side, institutional reform is needed, so that farmers participate in and contribute to operation and management. At present there is no incentive for the farmers to pay their fee in full and there is equally no incentive for the local authorities or the IMCs to cover all their O&M costs. An efficiently functioning system would link water users rights and responsibilities with the benefits and costs of the system. One way is to have water user associations where farmers are responsible for financing, operating, and maintaining the system and where the benefits from the schemes accrue to them directly.' 3 Forestry Sub-Sector GOV programs in the forestry sub-sector relate to developing sustainable use of Vietnam's forests, which are located mainly in poor upland areas, and preventing deforestation. The last decade has seen a proliferation of policies and programs dealing with to the related issues of forestry, watershed and soil management. In 1993 the Government established the "Regreening the Barren Hills" program, covering extensive areas of the northern uplands and central highlands. This involved transferring parcels of land to householders who were then to be paid by the state for forest protection and replanting. However the program experienced implementation difficulties, with high costs in relation to the number of trees planted, although the number of trees planted was quite large A new and more ambitious program to speed up reforestation, the Five Million Ha Reforestation program, was launched in However a number of issues appear to need addressing for more effective implementation, including criteria for selecting the land to be used (given possible alternative uses in agriculture or agroforestry activities) and how to provide appropriate incentives to households for sound forestry management Careful management of this program is needed to ensure it contributes to economic growth and the reduction of poverty in the highland regions, and does not lead to unsustainable agricultural practices and environmental degradation and a widening gap between highland and lowland incomes. Contribution To Agricultural Production And Processing Activities Rural farm households provide the bulk of agricultural output, but agricultural processing and marketing activities for export are dominated by SOEs. Central and local government own over 1,400 enterprises in the agricultural sector These are involved in a variety of activities including the production and processing of sugar, rubber, coffee, tea, seeds, livestock breeds, fertilizers, etc. While these SOEs no longer receive direct subsidies from the budget, they receive indirect subsidies such as loans at concessionary interest rates, debt forgiveness, and tax exemptions. A major problem is a lack of information concerning their amounts and purposes of such indirect subsidies. Other indirect subsidies include trade restrictions on some commodities to protect local SOEs. For example, the 13 Water user organizations have already been successfully implemented in parts of Vietnam. In Tuyen Quang Province, irrigation systems are now successfully managed and maintained by a water user association that took over the responsibilities of the previously existing IMC. Similarly, a water user association project that manages the irrigation systems of North Nghe An and Son Chu, has received very high performance ratings. These schemes have been highly effective in terms of increasing farmers' productivity due to more reliable water supply, reducing maintenance costs, increasing collection of water fees, improving water use and irrigation efficiency, and decreasing subsidies required from the state. 40

69 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures sugar industry is indirectly subsidized through local policies favoring conversion of land to sugar cane production and restrictions on imported sugar which is cheaper than locally produced sugar. According to analysis by Goletti and Rich (1998), the net cost to society of the government's protection of the sugar industries is about USD 92 million per year, mainly through higher consumer prices Evidence from different studies suggests that many of the SOEs in some agriculture subsectors are loss-making and are inefficient. In the sugar sector for example, many refineries are non-competitive and are located in areas where not enough sugar is being produced, resulting in under-utilized capacity. The Government itself recognizes that in the countryside, agricultural and industrial facilities operate inefficiently (sugar companies, cement, brick making, stateowned farms) Table 3.4 shows state budget transfers to support certain SOEs. For example, fertilizer importing SOEs received an interest rate subsidy of 22 billion VND in 1998, an amount almost equal to the total MARD budget on agricultural extension in that year. Total subsidies in 1997 for the three types of SOEs shown below were higher than the state budget on agricultural research. On the other hand, SOEs are still a significant source of revenue to the state. For example, in 1998, budget revenues from agricultural SOEs amounted to almost VND 1.3 trillion. It remains to be determined, however, what is the net contribution of these SOEs-net of efficiency losses to society involved in supporting SOEs in this variety of ways, including price support to farmers. These questions need to be addressed in a future study. Table 3.4: Budget support to SOEs (in million VND) Type of Support Interest rate subsidies for food 67,400 30,250 18, Interest rate subsidies for imported fertilizer 21,687 50,160 21, Payment for maintaining national hybrid livestock and 6,000 9,000 11,000 poultry Total 95,087 89,410 50,940 Source: MOF, Department of SOEs Supporting loss-making SOEs leads to two kinds of problems: (a) SOEs do not face a hard commercial constraint, which reduces their incentives to increase efficiency; and (b) the private sector does not face a level playing field and is discouraged from investing in these areas. More specifically, state support for agro-food processing SOEs in Vietnam crowds out capital to small and medium scale rural enterprises. For example, of the Vietnam Bank for Agricultural and Rural Development's portfolio of medium and long-term loans, 85 percent is currently allocated to SOEs and only 15% to non-soes or private organizations (see ANZDEC-IFPRI, 2000) Within the central SOEs engaged in agriculture, about 17 percent were making losses in 1998 (see Table 3.5). It appears that in 1998 that large losses made by a few SOEs are more than offsetting the profits made by the majority of SOEs, with total net losses (total losses-total profits) amounting to VND 288 billion. (These figures need to be treated with some caution as it is not known on what basis they were calculated.) 41

70 Vietnam: Public Expenditure Review A common argument to support SOEs is that they help generate employment. However, SOEs in the rural sector do not seem to alleviate rural unemployment to a significant extent. Small and medium-scale private enterprises are usually more successful at absorbing rural labor and reducing rural-urban migration. According to World Bank (1998), the labor to capital ratio of a private firm is 10 times that of a SOE and a job created in a small to medium-scale private enterprise requires a capital investment of about $800 compared to $18,000 in a SOE. Table 3.5 Information on agricultural SOEs owned by the central government Unit I Total of enterprises No Number of Public enterprises No Number of Profitable enterprises No Number of self-sufficient enterprises No Number of loss-making enterprises No Workers Persons 177, , , Revenues and Profits 3.1 Revenues bill.vnd 25,129 28,437 30, Profits bill.vnd Losses bill.vnd (673) (695) (708) 4. Contribution to state budget bill.vnd 1,738 1,425 1, Turnover tax bill.vnd Profit tax bill.vnd Import-export tax bill.vnd Tax on Special commodity bill.vnd Tax on capital bill.vnd Source: MOF, Department of SOE A Set of Reform Options Notwithstanding the impressive achievements in the agricultural sector, there are changes which could be made to Vietnam's public expenditures to further improve its agriculture performance. The following paragraphs set out a set of possible priority reform actions that the government may wish to consider: Increasing public expenditures in agricultural extension and research. This increase could be reflected in the new PIP and the 2001 budget. The increased expenditure should be accompanied by mechanisms to ensure strong linkages between research and extension, and the participation of farmers and agro-industry representatives in the management of these services. In expanding extension activities initial priority should be given to the poorest communes. This expenditure could be financed by reallocating the state subsidies, transfers, and investment from some loss-making SOEs (for example some in the sugar industry). 42

71 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures A move towards improving irrigation service delivery and the rate of cost recovery. This would involve basing irrigation charges on water consumption and improving the collection system Extension of pilot projects for developing water user associations. The benefits of water user organizations in terms of water use efficiency, cost recovery, and improvement in service delivery have been proven in Vietnam and elsewhere. The provincial pilot programs of Tuyen Quang and North Nghe An and Son Chu could be extended to other areas This PER indicates areas where further information and or analysis is desirable. These include: * who are the beneficiaries of public spending in the agriculture sector, including an analysis of whether or not the intended beneficiaries-particularly those living in the remote and mountainous regions-are benefiting from irrigation, fertiliser and price support subsidies; * the impact of the agriculture SOEs on the economy including their net contribution to the state budget. HEALTH SECTOR Vietnam has made impressive progress in improving the health of its population during the last 3-4 decades and its health indicators and much better than would be expected for a country at its level of income per capita. But the analysis below suggests that both greater efficiency and equity can be achieved by policy and expenditure changes. Health Indicators in Vietnam Vietnam has achieved impressive gains in the health status of its population: * Infant Mortality. There has been a sharp decline in the infant mortality rate during the last four decades-from about 160 per 1,000 live births in 1960 to 90 in , 75 in 1983, 45 in 1989, and to 44 in and the rate may have declined further to 28.2 per for the period Vietnam's current level of infant mortality is among the lowest in the East-Asia region and comparable to countries with substantially higher levels of per capita income. However there are large rural-urban, regional and income disparities, mainly due to differences in access to health services, child nutrition, and environmental health (such as availability of safe drinking water and sanitation). * Morbidity. During the last 20 years there has been a major decline in the share of communicable diseases in morbidity, from percent of morbidity in 1976 to 27 percent in This reflects the success of communicable disease-control programs, especially the expanded program of immunization. Despite the relative decline in the incidence of infectious diseases, the latter still remain a public health problem, particularly some new or reemerging diseases, such as tuberculosis, HIV infections, dengue fever and Japanese encephalitis. Malaria remains a major public health problem in the mountainous and ethnic minority areas of the country. 43

72 Vietnam: Public Expenditure Review 2000 * Child Malnutrition. But Vietnam's performance in the area of child malnutrition has been less than impressive. Child malnutrition rates in Vietnam are among the highest in the region. A recent national survey of nutrition indicates that 39 percent of children under the age of 5 years are malnourished in terrns of weight-for-age and 34 percent are undernourished in terms of height-for-age. Principles of health service provision in a transition economy In a market economy the public sector is not the exclusive provider or financier of health services. As private health providers and drug vendors enter the market, the government needs to establish the legal framework for the private sector, setting minimum quality-of-care standards, promulgating laws and decrees that govern private and public providers, and enforcing these through a system of regular inspections and monitoring In the transition to a market economy as in Vietnam, out-of-pocket payments by households or individuals for utilizing health services typically increase sharply. This often leaves the poor in a vulnerable position, unless there are well-functioning mechanisms for exempting the poor from the increase in health-care costs. It is therefore important for the government to take on a direct role in financing health-care expenditures of the poor. Health Service Delivery in Vietnam Service Provision. Service delivery is organized along a four-tiered pyramid, with commune health centers at the bottom of the pyramid. Above these are the inter-communal polyclinics and their referral organizations (i.e. the district hospitals), both of which are run by the district health bureaus. Provincial hospitals form the second tier in the pyramid, and at the very top are central hospitals and specialty institutes, which are run directly by the Ministry of Health. One of Vietnam's major achievements over the last 30 years has been the establishment of an extensive network of commune health centers throughout the country. With 7,019 persons served by a commune health center on average, Vietnam's ratio is significantly better than that of neighboring Cambodia (15,000) and comparable to that of Thailand (6,762)-a country having four times its per capita income In the last ten years there has been an significant growth of private health services. According to VHSR, 1999, most of these providers-about 18 percent-are drug commission sellers, followed by general practitioners' clinics (16 percent), traditional medicine clinics (14 percent), private pharnacies (14 percent), and nursing homes (12 percent). Most private health facilities are located in urban areas, although many rural areas have significant numbers of private health providers as well. While the private provision of primary health services has expanded rapidly, that of secondary and tertiary health services has increased relatively little during the last 10 years. It is estimated that there are only six private hospitals in the entire country Service Utilization. Improved health outcomes do not depend on the availability of health services, but their utilization. Data from health facilities indicate that each Vietnamese has an average of 1.7 annual consultations with the public sector health services, and that the annual hospital inpatient admission rate is 68 per 1,000 persons. This public-sector contact rate of 1.7 per person compares favorably with those countries in the region. Vietnam's utilization rate is 44

73 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures lower than that of Sri Lanka, China and Singapore-all countries that have substantially higher per capita income levels-but greater than that of India, Pakistan, Cambodia and Malaysia Users of Public Health Facilities. Available data from VLSMS indicate that the users of public hospitals are largely drawn from the highest income quintiles, while commune health center users are drawn disproportionately from the poorest quintiles. For instance, in 1998, 36 percent of all public hospital users were drawn from the 20 percent of the highest income population and 61 percent were drawn from the 40 percent of the highest income population. On the other hand, the poorest quintile were heavily under-represented among hospital users relative to their share in total population, constituting only 8 percent of total hospital users Several factors are responsible for this pattern of usage. First is the urban location of the majority of hospitals, which improves geographical access to hospitals for urban dwellers, who are typically better-off than rural residents. Second, because the direct private cost of using hospital services is large, they tend to be used by higher income individuals. Third, the spread of health insurance between 1993 and 1998 may have reinforced this position, since individuals with health insurance coverage tend to be better off than those without insurance coverage and the health insurance agency largely reimburses hospital costs, but not commune health center costs. Levels of and Trends in Health Expenditure Total health expenditure-both public and private (household) -was estimated at VND 28,773 billion or VND 383,226 per capita for This is equivalent to US$27.41 per capita or 8 percent of GDP and places Vietnam among those countries in Asia that spend the most on health care. Only Malaysia, Thailand and South Korea spend more on health per capita than Vietnam Public health expenditure. The public expenditure data show an impressive increase in public spending on health over the period. Both total and per capita public spending on health increased more than two-fold in real terms representing an annual rate of growth of around percent, while health spending as a share of GDP and as a share of total government expenditure also increased, albeit at more modest rates. Such high growth rates in public spending on health reflect a high level of commitment by the government of Vietnam to the health sector But even after these increases, which come on a low base, per capita public health spending in Vietnam was only VND 80,844 ($5.78)-or 1.4 percent of GDP and 7.0 percent of total government expenditure-in 1998 (if health insurance expenditure and hospital user fees are excluded). In absolute terms, Vietnam's public health expenditure of $5.78 is less than onehalf of the $12 recommended by the World Development Report 1993 as being needed to finance an essential package of health services, including public health, for a low-income country. To achieve this level of spending, Vietnam would need to spend an additional US$468 million annually Sources of Financing. While the government is a large provider of health services in the country, its role in the financing of health expenditures is modest. In 1998, the public expenditure share in aggregate health spending was only about 20 percent, with households accounting for the remaining 80 percent. One consequence of this heavy reliance on private financing is that the poor have to bear the burden of high user charges at public health facilities. 45

74 Vietnam: Public Expenditure Review 2000 In 1998, the bulk of the public spending on health was undertaken by provincial governments, followed by the central government, health insurance and communes. Figure 3.5: Total Public Spending on Health, Vietnam, ,000 Cao 8 60,000.e q 1 " - l l S!, Fi E s E S I I ~~~~~~~~50,000' 0 ec 40,000> 4c3 30,000 c: 2> 2 ll _0,000> M T Cost-Effectiveness of Public Spending The number of public-sector service consultations and inpatient days per million of VND of public health spending (measured in constant 1994 VND) has decreased over the period , despite a recent upward trend. This decrease in productivity does not appear to reflect improved quality of contact or the impact of preventive health programs. This suggests it may be possible for Vietnam, with policy changes and expenditure reallocation, to obtain superior health outcomes without a large increase in health spending. Composition of Government Health Expenditure There are two important observations to be made on the economic composition of public spending on health. * First, capital spending appears comprises a large share of the state health budget, although this share has declined from 28 percent in 1991 to 21 percent in Nearly one-half of capital spending over the years (but rising to 82 percent in 1998) is on construction, which is again very large share in comparison to the health budgets of most developing countries. However, little information is available on the composition of this construction spending. * Second, only about 29 percent of the recurrent health budget is spent on salaries and wages, while 59 percent is spent on goods and services. In this sense, Vietnam is unlike other developing countries which spend the majority share of their recurrent health budget on salaries and wages, and have very little to spend on consumables such as medical supplies and drugs. 46

75 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures In tenns of sub-sectoral spending-preventive, curative, and family planning-two observations can be made: * First, curative care takes up a disproportionately large share of public spending on health. The curative share has hovered in the range of percent over the period , while the preventive share has had a wider range-i 1 percent to 19 percent. However, there has been an increase in the share of family planning in total public health spending -- from 3.5 percent in 1991 to 10.3 percent in * Second, the relative constancy of the curative share in total public health spending masks important changes in the curative share of central, as opposed to local government expenditures. The proportion of central health spending on curative interventions fell very sharply between 1993 and 1998-from 83.3 percent to only 31.2 percent. Correspondingly, the shares of preventive programs and family planning increased-from 6.6 percent to 22.9 percent in the case of preventive programs and 9.5 percent to 25.7 percent in the case of family planning. Indeed, over this period, central spending on hospitals and curative care declined even in nominal terms. In contrast, the proportion of local health spending on curative interventions increased from 66.7 percent in 1993 to 81.5 percent in Although budgetary data in Vietnam does not readily indicate the division of expenditures between service levels-primary, secondary and tertiary care, it appears that hospitals take up a disproportionately large share (75-87 percent) of the recurrent state health budget. This may be understated in that it excludes expenditures funded by donors user fees and health insurance. On the other hand some expenditures by hospitals are for primary care. But even allowing for this, expenditures on secondary and tertiary hospitals remains very high and the commune health center share remains low. Figure 3.6: Persons per hospital bed, selected Asian countries, m L Taiwan Korea Sri Lanka China Malaysia Philippines Bhutan Pakistan Bangladesh Hong Kong Singapore Vietnam Thailand Cambodia India Indonesia Myanmar Nepal 47

76 Vietnam: Public Expenditure Review Thus, even though the per capita availability of hospital beds in Vietnam has declined over time, it is among the highest in the region. The only countries having a lower ratio of population to hospital beds than Vietnam are Taiwan, Hong Kong, South Korea, Singapore and Sri Lanka, all of which have considerably higher GNP per capita than Vietnam. Indeed, even Malaysia, Thailand and the Philippines have higher population to hospital bed ratios. Prima facie this suggests that there may be further scope for reducing the per capita number of hospital beds in Vietnam, primarily by holding back any expansion in the aggregate supply of hospital beds This emphasis on curative expenditure is both inefficient and inequitable. It is inefficient in that preventive care interventions should have first claim on public resources in view of their substantial externalities. It is inequitable in that curative spending is focussed mainly on hospitals, which have a disproportionately large number of users from the more affluent sections of the population. Provincial Distribution of Health Expenditures Provincial per capita spending on government health varies greatly across provinces (but with the vast majority of provinces having a public spending level of VND 24,000-50,000), and is strongly related to provincial GDP per capita. This is not unexpected, as a portion of government health expenditures is financed by provinces out of their own revenue sources, allowing richer provinces to spend more. Provinces having higher levels of private spending on health per capita also have higher levels of government spending per capita. This means that government spending is not being used as a tool to reduce the inequities inherent in a large share of health-care spending being financed by individuals or households While provincial variations in per capita public spending on health have narrowed between 1991 and 1998, this trend needs to be accelerated, by reviewing the norms used in allocating state health expenditures across provinces. Public Expenditure Decision-Making Processes in Health In Vietnam, the public health budget covers four levels of government: the central and the three levels of local governments: provincial, district and commune. Since some expenditures by communes from their own resources are not included in the State budget, a comprehensive database which aggregates the four levels into a consolidated statement of sectoral expenditure is lacking. However, central, provincial and district governments account for about 90 percent of the national budget The Ministry of Finance (MOF) and the Ministry of Planning and Investment (MPI) determine the expenditure allocation with limited inputs from the Ministry of Health. (MOH). The overall level of recurrent spending on health is determined by projected growth rates of total revenue and of total recurrent expenditures (after subtracting estimated expenditures for new policies, such as increased salaries, etc.) and the share of health in total recurrent expenditures. This type of incremental budgeting pays little attention to health goals and health priorities set by MOH While MOH is in charge of setting health priorities and goals for the country it does not control or even have adequate information on the way provinces allocate their health spending. While it is not desirable that central controls by the MOH should replace provincial autonomy in expenditure decisions, it is important that mechanisms be developed to provide MOH with 48

77 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures adequate information to assess health outputs and outcomes at the local level, so that it can exercise its policy role. (This issue is discussed more generally in chapter 2 of this PER in relation to the role of sectoral ministries.) Resource allocation by norms. The overall budgetary resources allocated to the health sector are allocated on the basis of certain norms across two dimensions: functional (curative versus preventive) and sectoral (Ministry of Health, other sector ministries, and the provinces). These budget transfer norms are based either on the number of hospital beds belonging to a ministry (for curative expenditures) or on the population of the province (for both curative and preventive expenditures). These amounts are supposed to cover salaries for a centrallydetermined number of health workers in the provinces, fees and drug exemptions for the poor, and other recurrent expenses. The allocation norms vary across five geographical regions, presumably to capture variations in the unit cost of delivering services in different geographical regions. In general, the norm for curative expenditures is about 3 times as high as that for preventive expenditures, reflecting the higher unit cost of curative interventions In the annual budget allocation document sent to provinces, only an aggregate recurrent budget is provided-not its composition across sectors. Thus, provinces make their own spending decision on each sector, including health. The provinces also can spend on health out of their own revenues which is the main reason for large variations in government health expenditure per capita across provinces, as richer provinces are able to spend more than poorer provinces In addition, the provinces receive funds from the various national health programs such as the Expanded Program of Immunization, the Tuberculosis Program, etc which are designed to achieve national standards in key areas. However, according to a recent study by a group of MOH experts' 4, the allocations appear to be more or less evenly distributed across provinces without account of the specific disease profile of a province. This suggests that these programs should be reviewed to ensure they are adequately targeted. Health Financing Policies In the last decade, the government has vigorously pursued two important policies for improved financing of the health sector-greater cost recovery through higher user fees and expanding health insurance coverage User Fees. Basic health care was formerly free for all, regardless of a patient's ability to pay some or all of the cost of care. In 1989, a fee system was introduced in the three higher (district, provincial and national) levels of the health-care delivery system, requiring those patients who are able to do so to pay at least a minimal part of their health care. In 1995, the Ministry of Health issued user fee schedules for each type of consultation and each type of diagnostic test and procedure performed in clinics and hospitals. All fees are required to be paid in advance by non-insured patients and patients not eligible for fee exemption. For the most part, patients are responsible for the purchase of drugs themselves, either from a private pharmacy or a pharmacy run by the public facility on the public premises. In 1998 user fees accounted for about 7.4 percent of total public expenditures on health. There are four important observations regarding user fees 14 National Health Support Project, Sub-component 3.1.2, "Evaluation of Current Status and Impact of Some National Program", Draft Report, December

78 Vietnam: Public Expenditure Review 2000 * First, because the price schedule issued by the Ministry of Health only indicates a range of fees, provinces have discretion over the level of user fees charged, especially for technical services and laboratory tests. * Second, the user fee schedule has not been adjusted since 1995, although the general price level has increased by about 23 percent since then. Total user fee collections have grown rapidly over time, in part because of an increase in the number of patients seen at public facilities. * Third, even though user fee levels may be low, average out-of-pocket costs for public health services-particularly, public hospitals-are large, and onerous for the poor. For instance, even a single visit to a public hospital takes up 22 percent of all nonfood expenditure for a year for a typical person in the poorest quintile. A visit of standard (national average) quality would constitute 45 percent of annual non-food expenditure for an individual in the poorest quintile. In contrast, a person in the highest income quintile would pay only 4 percent of his or her nonfood expenditure on a public hospital visit of standard quality. * Fourth, although there is a formal mechanism in Vietnam for exempting certain classes of people, such as the poor, handicapped, war veterans, orphans, and individuals suffering from certain ailments (such as tuberculosis and leprosy), from user fees, it does not work well in practice. One 1996 study found virtually no correlation between fee exemptions and household income. Data from the VLSS 1998 show that exemptions from payment for drugs are non-existent in both commune health centers and public hospitals, although MOH receives reports from hospitals indicating that exemptions from user fees are granted, which include fees for drugs. The Government has agreed to conduct a review on how the exemption mechanism is working in practice Health Insurance. Formal health insurance began in Vietnam in 1993, and comprises: (i) a compulsory scheme covering primarily current and retired civil servants and employees of state and large (i.e., having more than 10 employees) private enterprises, and (ii) a voluntary scheme aimed at the remainder of the population. Premiums in the compulsory scheme are paid from a 3 percent payroll tax, which is shared by employers (two-thirds) and employees (one-third). Enrollees in the voluntary scheme pay fixed annual premia that vary across provinces and according to benefit coverage chosen. Currently health insurance covers about 12 percent of the country's population and in 1998 financed 11 percent of total public expenditures on health There are two main issues: * First, the health insurance program does not benefit many poor or rural dwellers as enrollees in the compulsory health insurance scheme are civil servants and salaried employees of state and large private enterprises, most of whom are middle-class urban residents. Thus, if the social health insurance program is to benefit the poor in Vietnam, there will need to be substantial expansion in coverage of the rural population by the voluntary insurance scheme, which is in its infancy and covers only five percent of its target population. * Second, the health insurance program has run into financial problems, in part because of uncontrolled growth of insurance reimbursements. In 1996 and 1997, many of the 50

79 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures provincial health insurance funds were overdrawn in comparison to the premiums received during that year. Although the overall financial integrity of the insurance fund was not in jeopardy, such problems are likely to recur. To avoid possible overservicing arising from consumer and provider moral hazard some limitations on reimbursement and a twenty percent co-payment requirement have been introduced. Improving Health Information The information base for analyzing the composition of public health spending and its incidence is weak. Improvements are needed in the expenditure classification system, for example between preventive and curative activities and between primary, secondary and tertiary levels. In addition to weaknesses in expenditure information, information on health service utilization and the health status of different groups in the population has been lacking until recently. The 1998 VLSS and the forthcoming National Health Survey are important developments in improving this information. However a regular system of household surveys would enable MOH to more fully monitor the impact and benefit incidence of public health expenditures A Menu of Reform Options The above analysis provides a number of reform options for the Government of Vietnam to achieve its stated policy objectives and build upon its remarkable achievements in improving the health status of its peoples. The options that the government may wish to consider are: - A shift from high-cost, hospital-based services to more cost-effective commune health centers - and clinic-based health services to improve the cost effectiveness of health spending. This current pattern of public spending is also inequitable as the larger public subsidies go to hospitals which are used more by higher income groups benefit the rich, while facilities more used by the poor, such as commune health centers, are subsidized to a very small extent by the state budget. The government may wish to further reduce public subsidies to hospitals, especially at provincial (secondary) and central (tertiary) levels. * Establishing a national strategy for assistance to the poor with their health-care costs. Available data suggest that actual out-of-pocket payments made by poor patients are very large in relation to their incomes. While a formal mechanism for exempting poor patients from user fees exists, it appears note work well in practice. The govermnent has already begun moving in this direction-the Ministry of Health, the Ministry of Labor, War Invalids and Social Affairs (MoLISA), and the Ministry of Finance have issued an inter-ministerial circular, outlining a consistent mechanism for providing free medical services to the poor. * Once such a strategy is in place, the Government should consider raising hospital fees to reduce its subsidies to hospitals. * A mechanism for ensuring that provinces make their health spending patterns consistent with national health priorities and strategies is needed. Two-thirds of the state health budget spending takes place at the local (provincial) level. The high proportion of curative as opposed to preventive expenditure in provincial government 51

80 Vietnam: Public Expenditure Review 2000 health expenditures is symptomatic of this general problem of provincial expenditure allocations not reflecting practices established at the national level. * Expansion of the health insurance program, especially the voluntary scheme should also be considered as a means of reducing health costs to the budget * There is also a need to use public spending as a policy tool for reducing interprovincial disparities in private health-care spending and access to health care. Currently, government health expenditure reinforces, rather than compensates for, provincial disparities in private health spending. It should be possible for the central government to reduce these disparities by adjusting the formula (transfer norms) covering health expenditures, used by the center in determining transfers to the provinces * In the longer run (next 5-10 years), the government may want to rethink its roles in the health sector. It may make more sense for the government to reduce its role in the direct provision of curative, hospital-based health services, and focus on (i) provision of high-quality preventive health services, (ii) greater financing of health expenditures, especially for the poor, and (iii) improving regulation and monitoring of the growing private sector in health. Education Provision in Vietnam EDUCATION SECTOR There are four levels of schooling in Vietnam, pre-primary, primary (five years from age 6), lower secondary (four years), and upper secondary (three years). Vocational education is offered in a variety of institutions, and is available after primary and lower secondary. Higher education is offered in colleges and universities, offering respectively three and four year courses The Ministry of Education and Training (MOET) has policy responsibility for the education sector and also manages higher and some vocational institutions: Provinces manage secondary schools, and districts and communes primary schools and pre-primary facilities. A small, but increasing element is in semi-public schools where government provides the facilities, but parents meet the operating costs including salaries. The private sector remains a small provider. Some specialized educational institutions are operated by other sectoral ministries. Education Achievements Vietnam has quite rapidly achieved better education for its citizens and has made considerable progress in increasing enrolments and improving the efficiency and equity of education expenditures. In the past decade net enrolments have improved significantly, drop out and repetition rates have fallen, gender balance has improved and the balance of public sector spending has shifted more towards the early grades and thus the poor. The government's education policy objectives and targets are quite realistic and achievable. Nevertheless there are issues needing to be addressed. For example, in terms of educational quality, the school day is short, there is little information on the quality of educational outcomes, there are considerable regional variations in expenditures and results and low teachers salaries are a continuing concern. 52

81 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures Enrolments: Vietnam has high enrolment ratios compared to countries of a similar level of economic development. Table 3.6 shows the evolution of participation ratios. The primary Gross Enrolment Ratio (GER) declined as less over age children enter school, while the Net Enrolment Ratio has risen.1 5 The post primary enrolment ratios have risen substantially. At the lower secondary level Vietnam also has a relatively high GER, indicating a strong effort to enroll children in a basic cycle of nine years of education. There is a fairly even balance between male and female enrolments in primary and lower secondary education, and girls' participation in upper secondary education is increasing as the improved gender balance at the lower levels feeds through. The greatest increases in participation rates have been among lower income groups, although remaining higher overall amongst the wealthier groups. Regional variations in enrolment have narrowed but remain large Dropout and repetition rates are also falling and the transition rates between the primary, lower secondary and upper secondary levels have been rising, with a consequent rapid growth in post primary numbers. Clearly this development creates future expenditure pressures, as discussed below. Table 3.6: Gross and net enrolment ratios Gross Enrolment Ratio Primary Lower Secondary Upper Secondary 9 36 Net Enrolment Ratio Primary Lower Secondary Upper Secondary 7 29 Source: Ministry of Education and Training Quality of education/education outcomes. A number of sample studies of student attainment have been carried out in recent years. The results of one such test are shown in Table Gross Enrolment Ratio is the ratio of all children, including children over school age, in school at a given level to the relevant school age population; Net Enrolment ratio is the share of school age children enrolled in school, excluding over age children. 53

82 Vietnam: Public Expenditure Review 2000 Table 3.7: Attainment test in mathematics and language (in %) At Giade 3 At GrAde 5 Male Female I Male f0esake 1. Mathematics Hanoi Yen Bai Thanh Hoa Quang Nam Vinh Long Vietnamese Language Hanoi Yen Bai Thanh Hoa Quang Nam Vinh Long Source: Monitoring Vietnamese and Mathematics Phase 1 Report These results suggest that (a) the level of attainment outside major cities like Hanoi is poor and (b) the attainment results vary considerably across regions. Unfortunately, there seems to have been no systematic follow up to any of these measures and therefore no data are available to demonstrate whether levels of attainment are improving or falling. Levels of and trends in public education spending During the last decade education spending has increased significantly. The number of teachers has grown considerably and investment levels have increased. Total education and training expenditure (recurrent and capital) currently amounts to about 17 percent of total public expenditure (excluding amortization). Recurrent expenditure on education is about 19 per cent of discretionary recurrent expenditure (total recurrent expenditure less interest payments). The government has set a target of 15 per cent of total public expenditure (including expenditure on amortization) for the education sector by However, the draft policy statement prepared by MOET for submission to the National Assembly perceives a need for this to increase to 20 per cent by Table 3.8: Growth of public expenditure on education Year q98 Percentage Education Expenditure of GDP Percentage Education Expenditure of Total Public expenditure (excluding amortization) Source: Calculation based on MOF data The share of education expenditure in GDP rose significantly between 1992 and from 2.3 to 3.5 percent. Table 3.9 shows Vietnam to be spending a lower share than the average for developing countries, but it is also likely that the average duration of studies in Vietnam is also shorter. However there are many factors which influence the share of national output 54

83 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures allocated to education. For example some countries have longer compulsory education cycles than others, and wages and salaries are higher in some countries than in others in relation to per capita output. Table 3.9 International comparison of education expenditure Primary Seconday Education Share in total Share of sciool GER GER Expendire spending edution in as % GDP 1091-:95 edncatin.idget 1. Industrial countries Other developing countries Hong Kong, China Malaysia Republic of Korea Thailand Philippines n/a India SriLanka Vietnam Source: UNDP Human Development Report; World Bank World Development Report Another ratio for international comparison is the average expenditure per pupil in relation to per capita GDP. In 1998 the figures in Vietnam for in primary, lower secondary and upper secondary levels were 6.8, 8, and 15 per cent respectively of per capita GDP. In East Asia in 1990 the average expenditure per primary pupil was 8 per cent, with Korea reaching 12 per cent and Malaysia 15 per cent Taking into account the underlying growth in student numbers from demographic pressures, increasing participation rate, as well as needed quality improvements such as increasing total instruction time and raising teachers' real salaries, it is likely that the share of national output allocated to education will have to increase. An appropriate target over the next five years could be to raise the share of education in GDP to 4 per cent, or as a percentage of public expenditure to move towards the upper end of the broad percent range as indicated by international comparisons. Composition of Educational Spending Sub-sectoral allocations. Primary education takes up about 36 percent of total education and training expenditure, and lower secondary about 18 percent: basic education therefore accounts for 54 percent of education and training expenditure. When upper secondary education expenditures are added, total school education accounts for over 62 percent of the total education budget. Training expenditures account for the remainder. 55

84 Vietnam: Public Expenditure Review 2000 Table 3.10: Sub-sectoral percent shares of education expenditure (%) * Pre-school Primary Lower secondary Upper secondary Vocational Higher Other Total Source: Ministry of Finance In general, Vietnam's fiscal effort on education, as well as its education expenditure composition are in line with international comparisons, particularly when associated with school enrolment ratios. There may be relatively little room for reallocation between sub-sectors, and additional funding will depend on overall economic and revenue growth, and efficiency measures within the education sector Composition of school education expenditures. It is normal in education sectors, particularly at the lower levels, for expenditures to be dominated by salaries, because education is a very labor intensive industry. Developing countries typically spend over 95 percent of their primary education, and 60 to 80 percent of upper secondary recurrent budgets, on salary costs. Although Vietnam appears to have maintained a reasonable level of non-salary expenditure in the recurrent budget this may be misleading because of the inappropriate classification of some expenditure items (e.g. contract salaries as non-salary expenditure). In practice there is evidence of very low non-salary expenditures at the local level in many provinces It is widely accepted in Vietnam that teachers' salaries are still low. This has led to several problems including short teaching hours and of teachers supplementing their income through private tuition or through various entrepreneurial activities. Indeed, average teachers' salaries expressed as a multiple of GDP per capita, have been low relative to other countries. The government has recently raised the basic minimum wage by 25 percent from VND 144,000 per month to VND 180,000. This will raise the ratio of salary to GDP per capita to nearer the international average The composition of non-salary recurrent expenditure is also important. Vietnam has maintained significant self funded capital expenditure levels, unlike many countries at a similar level of economic development which depend entirely on foreign aid for capital expenditures. Nevertheless, there is an acute shortage of classrooms and major maintenance requirements throughout the system. Equity of Resource Allocation Transfer Norms. In determining the overall allocation of funds to the provinces, there are few norms used which relate specifically to the education sector. The education component is a result of negotiations between MOF and MOET and the provinces, but is primarily based on population and unrelated to the number of actual students. Apart from official norms other criteria may be used. For example, based on funding availability, MOF in 1997 and 1998 also 56

85 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures decided that for education there should be a certain ratio of salary to non-salary expenditure for all provinces (set at 80:20 for 1998). This had the effect of adjusting the education allocation for all provinces, generally resulting in greater equality between the provinces Allocative norms. The allocation of funding within the education sector is based in part on a large number of norms. For the education sector these norms set guidelines on pupil teacher ratios (PTRs), class sizes, and on the ratio of salary to non-salary spending. In practice, some are of a mandatory nature and a few appear to be more advisory in nature. In some cases the different norms potentially conflict and are not mutually achievable within overall resource constraints. Guidelines on target expenditures per pupil in the five geographic regions are issued, but no data are collected to determine whether actual expenditures reflect the guidelines From the points of view of efficiency, effectiveness and equity, the present norm based resource distribution system-both transfer and allocative norms, may not be achieving the government's education objectives. The population based formula clearly aims to distribute resources equitably, but as discussed below this may not be achieved A recent review 6 of how budgetary resources cascaded through the education system showed how decisions about the mix of resources may be affected by the allocative mechanisms used at the different levels of government rather than conscious decisions about what mix will produce the best service. In particular, staff related costs are treated at each level in the cascade as fixed by the current and planned number of teachers. Investment expenditure is subject to a separate, parallel, and sometimes unrelated allocative process from recurrent expenditure. As a result, other important expenditure such as teaching and learning materials, teacher aids, furniture and equipment and building maintenance are treated as residual items and are highly vulnerable to overall resource constraints Geographical distribution. There is significant variation between and within provinces in the share of school age children in the total population. Thus, a resource transfer formula based on population will tend not to provide an equal level of funding per student resource in the absence of adjustment factors to fully compensate for those variations. This is confirmed in Table 3.11, where wide variations in average budgeted expenditure per pupil are seen between and within the provinces, with little clear correlation with per capita GDP There are a few positive aspects of the population-based assessment of spending need currently applied by the center in budget negotiations with provinces. It is relatively simple for the Ministry of Finance to operate and calculate. It also leaves greater freedom to make expenditure decisions at the local level and in principle resources are available to fund development and improvement expenditure in areas with low participation in order to encourage greater participation. On the other hand, the per capita norm creates some potentially perverse incentives. In particular, higher pupil numbers do not attract additional resources so there is no incentive to increase enrolments, both of which may be seen as unfair by managers. 16 Education Financing Study: Primary Education in Vietnam, A DFID Report, September

86 Vietnam: Public Expenditure Review 2000 Table 3.11: Regional differences in average school expenditure Province Per capita GDP Averagexpendirs (i '00O NT)) ('000 VND~) Primary Junior Secondary SenirS Red River Delta 4, North East 2, North West 2, North Central Coast 2, South Central Coast 2, Central Highlands 3, North East South 8, Mekong River Delta 3, Source: Calculation based on MOF data To deliver an acceptable level of service across the country the following changes seem appropriate: * Simplifying and changing the role of the norms, making them guidelines, with local management having discretion as long as educational outcomes are achieved and budget allocations are not exceeded. As such, ex-post analysis of expenditure in relation to educational outcomes rather than ex ante expenditure norms would become the focus. * Possibly providing funding on the basis of a core or minimum cost per student which reaches each school level throughout the country. Separate funds could be allocated for attracting new students, tackling local problems of access and participation and enhancing service quality. These separate elements should have a pro-poor bias-relating them to provincial GDP per capita may be appropriate. Setting minimum expenditure per student on non-salary expenditures and maintenance would also be appropriate Incidence ofpublic expenditure. The analysis of VLSS data suggests that there has been a shift towards the poor in the benefits from public expenditure on education since 1992, though benefits at post primary levels continue to favor the better-off. Not only have participation rates of the wealthy and the poor moved closer across all grades but the balance of subsidy has shifted towards lower grades where participation by the poor is strongest. Further improvements can be expected as the pupils in the lower levels containing larger numbers of students from poor families, eventually move through the system-but provided policies to improve access to higher grades of education by the poor continue Cost sharing with parents. A high proportion of the total cost of education at all levels is born by parents through a variety of charges, or directly in meeting costs such as textbooks. However the government meets a greater share of basic education expenditures and a lesser share of expenditure at other levels, as shown in the following table In addition, it is well known that many teachers provide supplementary education on an infornal basis for parents who pay. Over 11 per cent of total expenditure per primary child appears to be accounted for by private tuition charges, with richer households paying on average twice that percentage. In many provinces some semi-public places are occupied by those children 58

87 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures who fail graduation tests. Furthermore, post primary level fees are used by some schools to supplement teachers' salaries While there is provision for exemption from charges, the incidence of exemptions is still limited and far from pro-poor, with exemptions spread over all consumption quintiles (VLSS, 1993 and 1998). Further narrowing the participation gap will be hindered unless measures are taken to enhance the ability or incentive to waive charges for the less well-off The higher education and vocational sub-sectors have also seen a rise in cost sharing with parents. In common with higher education institutions, TVET schools generate additional revenues through privately paying students, contract training and sales of goods and services. Some schools earn over 75 percent of their operating expenditures in this way. A significant proportion of fees goes to supplementing teachers' salaries. Fees are charged for all short courses, and are paid by employers or students themselves. In addition students are expected to provide their own books and learning materials. Table 3.12: Shares of expenditure in total expenditure (in %) Primary Public Subsidies Tuition fees Direct costs to parents Lower Secondary Public Subsidies Tuition fees 9 7 Direct costs to parents Upper Secondary Public Subsidies Tuition fees Direct costs to parents Higher and Vocational Public Subsidies Tuition fees 9 18 Direct costs to parents LSMS data show that in practice higher education is restricted to those who can afford to pay. In some technical training institutions fees are charged according to ability of students to pay and in others students are awarded grants according to academic performance. Other schools charge all students a flat fee. Expenditure in universities and colleges on scholarships (for which financial need is one criterion) was in 1998 equivalent to 15 per cent of fee income, but the impact of scholarships on access of the poor to higher education appears to be slight. Efficiency and Effectiveness of Resource Use Measures which reduce unit costs can make education more accessible to poor people. Education budgets are dominated by staff related costs, more so at the lower levels of the system. The two critical variables which influence the unit cost per pupil are the average salary of a teacher, and the number of pupils taught by each teacher (PTR). From the point of view of educational outcomes, the issues revolve around how the budgetary variables and outcomes 59

88 Vietnam: Public Expenditure Review 2000 relate. Is the teacher remuneration structure consistent with incentives to teach well; are classes too large or not large enough; is the curriculum too extensive, or too narrow? Salaries. The average teacher salary across any given location-region, province, commune, school-is the first critical variable. The variations in average expenditure per pupil across regions suggest that there may be a variation in the average expenditure per teacher. The government is currently considering the school teacher remuneration structure, and in doing so will need to relate any changes to the effect on averages expenditures in regional budgets. Some local discretion in respect of average salary would be appropriate. At the higher levels of education the degree of salary supplementation from outside sources is considerable, and needs to be taken into account when developing a remuneration policy Pupil teacher ratio (PTR). Pupil teacher ratios are one of the most difficult (and neglected) aspects of education management, but they arc at the heart of resource allocation issues. There is always a trade-off between the number of pupils per teacher, and the availability of resources to finance non-salary items essential for learning and good teaching. Where resources are severely limited, as in Vietnam, management of the PTR is a critical factor Internationally, PTRs-where they have been fairly high-decline slowly as resources become available. However, countries with low PTRs have high salary shares in their budgets, often accompanied by problems of financing other learning inputs. At the primary education level in Vietnam there is more or less one teacher per class: in other words the PTR is roughly the same as the pupil class ratio. This is because teachers teach all subjects. At lower secondary level in 1998 the ratio was 1.45 teachers for every class, and upper secondary was 1.6. In other words, post-primary PTRs are curriculum driven, as well as being influenced by total enrolments in each school Overall the picture in Vietnam is one of increasing PTRs at post primary levels and relatively static ratios at the primary level. This tendency for PTRs to increase in secondary education likely reflects rapid enrolment growth outstripping teacher availability. MOET policy is to train secondary teachers to teach more than one subject which will also cause the PTR. to rise More efficient utilization of staff has helped enrolment growth in higher education in that both teaching hours and class sizes have increased. But there is scope to rationalize resources used in some areas of vocational and higher education in where pupil teacher ratios continue to be low and establishments are small and inefficient Quality of Teaching and Teacher Motivation: Teacher salaries need to be set at a level which encourages teachers not to seek other work. New salary structures and increases in the general level of salaries should be related as far as possible to improved competence and work practices Infrastructure: Infrastructure costs are reduced by the short-school day, which provides two shifts per day at schools. In spite of the levels of investment spending there are clear sign that infrastructure is failing to keep pace with the increased participation in education. VLSS shows high percentages of classrooms in poor condition, but with considerable variation between regions. One way of obtaining additional leverage from construction funds could be to provide such capital funds on a repayable basis to schools and communities. This would involve establishing a revolving fund administered by each province. The initial Fund contribution would 60

89 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures be replenished by regular re-payments from the school or community, providing funds to be relent on an ongoing basis for further construction spending. An Agenda of Reform Options The main objective of this sectoral analysis is to help the govermnent in better achieving its national policy objectives. To this end, the following reform options should be considered: a. To achieve the develop of the education sector planned by the Govermmenthere may be a need to gradually increase public education spending over the period to 2005 to around 4 percent of GDP (from the current 3.5 percent level) or to move education expenditures as a percentage of public expenditure from the current level of 15 percent to around 20 percent. The additional resources could be used to improve salaries fund higher participation in secondary and higher grades flowing through from the increased primary enrolments, and to improve service quality at all levels. b. There is little scope to shift resources between education sub-sectors without damaging service levels. It is necessary to ensure that the higher salary levels do not squeeze out non-salary and investment expenditures c. Existing regional variations need to be addressed by reviewing the present system of norms. Allocative norms should become more advisory in nature. Funding for students in the system should take account of geographic factors such as sparse population. In doing so a minimum amount of funding per student could be guaranteed. Separate funding for developmental and improvement expenditure should reflect a pro-poor bias (provincial GDP per capita is a good measure for this). An element of this latter component of funding could include a fund for measures to attract and retain new pupils. Such a more equitable base of funding would enable more and better targeted waiving of fees at the local level. d. There is scope for increasing pupil/teacher ratios at all levels. This would help in restraining the cost of govermnent's (desirably) ambitious education policies. Methods of achieving higher ratios at post primary levels include increasing the number of subjects a teacher can teach, and the number of hours taught. The opportunity could be taken when increasing teacher salaries to relate increases to improved competence and to better working practices. e. There may be scope for leveraging expenditure on school infrastructure through establishing a revolvingfund under which schools or communities would be lent funds for construction. Repayments would be used on an ongoing basis to fund further construction. f. Testing student attainment-external objective tests of pupil skills-on a sample basis, is important. This outcome information is vital to effective policy development and planning through building up a time series have. For example existing information suggests considerable variations between regions in education attainment and the need to ensure greater evenness in educational quality. The focus could be both on output (students served) and attainment (level and usefulness of skills achieved). Analysis of links between expenditure allocations and educational outcomes will assist in better allocation of education expenditures. 61

90 Vietnam: Public Expenditure Review 2000 The Current Transport Infrastructure TRANSPORT SECTOR Due to Vietnam's geographical features, and concentration of population and economic activity, the transport network is quite concentrated and traffic density is highest in and around the urban centers in the northern and southern delta areas Roads: Roads are by far the most important transport mode. The country has a extensive road network of over 209,000 km, comprising national roads, provincial district, commune and village roads. With a road density of 0.3 km/sq.km, Vietnam's coverage equals that of the more developed ASEAN countries of Thailand, Philippines and Brunei. However in terms of quality, Vietnam's road network is not so good. Surveys indicate that almost half of the national road network is in poor to very poor condition. Moreover, close to one quarter of the bridges have reduced bearing capacity and need to be rehabilitated or replaced. The situation of the provincial, district and commune roads is even worse. Earth roads account for the bulk of rural roads, some of which become impassable during the rainy season. In addition more than 600 communes have no road access to district centers Water transport. In the northern and southern deltas of the country, inland waterways play an important role as a low cost mode of transportation for bulk commodities such as coal, building materials and rice and for the rural population generally. About one quarter of the country's total land freight is transported by inland waterways, which are complementary to road transport. There are about 41,000 km of inland waterways for informal and small scale commercial transport but of these, only about 10 percent are of sufficient depth to allow industrial type transport vessels of 50 dwt or more. Maintenance has been inadequate which has resulted in siltation and loss of water depth. In turn, this has hampered the utilization of large vessels and has led to increased transport costs, particularly to the rural poor Railways. Vietnam Railways (VR) operates a network of 2,832 km from Lao Cai at the Chinese border and Haiphong in the north to HCMC in the south. The bulk of the railway infrastructure and rolling stock have deteriorated and are in need of replacement/repair. The main short term problem is the large number of deteriorated bridges, some of which are now being repaired with assistance from Japan. VR's share of total land traffic in 1998 was about five percent for freight (17 percent in ton-km) and 1.3 percent for passengers (12.5 percent in passenger km). The provision and upkeep of the rail infrastructure is funded from the budget while VR is responsible for rail operations Sea Ports. Vietnam has seven national sea ports administered by MOT, 20 municipal and provincial sea ports, administered by localities and a number of ports that are operated by other ministries, including the navy. The most important ports are Haiphong, Da Nang and HCMC which in 1997 handled almost 50 percent of all port throughput. Shallow water depths, long access channels (Haiphong and HCMC), narrow port areas, outdated equipment and poor management have all contributed to low port productivity, high operating costs and under utilization of capacity From 1994 to 1999, traffic on all land transport modes rose by an average of 10 percent a year for freight and over three percent for passengers. Among the different modes maritime freight traffic increased at a rate of over 25 percent per year, inland waterways at 20 percent per year (7.5 percent for passengers), road transport at close to 10 percent (7.2 percent for 62

91 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures passengers) and rail transport roughly three percent for both freight and passengers. Throughput of the country's seaports rose by an average 15 percent per year from 1995 to 1999, reflecting the Vietnam's successful re-integration into world trade. Sector performance Low transport productivity: Notwithstanding recent progress, the efficiency of the transport sector remains quite low. The potential for transport cost reductions is considerable, provided management and operations are improved and infrastructure and equipment continues to be modernized In the road sub-sector, the average speed is between 20 to 25 km per hour for freight and 30 km per hour for passengers. The average carrying capacity of a truck is also relatively low, truck sizes being limited by road conditions which increases unit costs. The poor state of roads causes additional economic costs to users estimated by the World Bank at up $160 million annually. In addition inadequate maintenance means that roads eventually have to be rehabilitated at much higher cost A similar picture emerges for sea-ports. The country's two main port complexes of Haiphong and HCM operate at low capacity, are often congested in storage areas and are poorly connected with the land transport network. Shallow drafts limit ship size and thus raise shipping costs. The present system of national/regional tariffs and the cross-subsidization of the national shipping line by foreign shipping hamper desirable competition between ports. Absence of a result oriented and accountable management exacerbates the situation. All these factors contribute to lower port productivity, thereby reducing Vietnam's international competitiveness. According to a recent survey Vietnam's ports are among the highest cost ports in the Southeast Asian region. For example, transporting of a twenty foot container from Tokyo to one of the three economic zones in Vietnam can cost up to US $1,000 more than the cost of transportation to Manila or Bangkok Vietnam Railways is roughly comparable to most of the other smaller railways in the region. Although well run in an engineering sense, VR's labor and locomotive productivity are among the lowest in the region, as is its average traffic density In inland waterways the backlog of dredging and lack of navigation aids to permit night navigation has reduced the size and speed and thus the productivity of inland waterway vessels. Government Objectives and Priorities The rehabilitation and modernization of the country's dilapidated transport infrastructure has correctly been the main policy objective of the Government's Public Investment Program (PIP) Priority was assigned to transport infrastructure in the three strategic economic zones of (i) Hanoi-Haiphong corridor in the north; (ii) Da Nang in the center; and (iii) HCMC- Vung Tau corridor in the south. Other priorities included creation of links with neighboring countries; integration of transport systems, including port development to facilitate international trade; and development of urban infrastructure and public transport services to reduce congestion. 7 World Bank, Country Frarnework Report on Private Participation in Infrastructure: The Case of Vietnam,

92 Vietnam: Public Expenditure Review These objectives were ambitious and their realization required a large investment program. It soon became obvious that this development program could not be implemented during the plan period and had to be broken down into more manageable subprograms which could then be implemented over a period of years. During , the main emphasis was on upgrading the trunk roads and other basic infrastructure in the growth triangles of northern, central and southern regions. In 1997 these regions generated about 75 percent of the country's GDP, attracted more than 80 percent of foreign direct investment and accounted for 75 percent of the country's exports/imports, so this prioritization reflected an emphasis on economic growth and efficiency. Some provincial or rural projects justified more on equity grounds, had to be deferred Thus progress in improving the nation's rural roads network has been slow and is a reflection of the resource constraints faced by the Government-both central and local. Some areas in the Mekong Delta, the North Central Coast and other regions are still completely inaccessible by road. Despite the resource constraint, the Government, with the active assistance of the local population, has managed to improve about 11,000 km of rural roads, although in many cases insufficient attention has been paid to quality. To address this and other related issues, the Government (assisted by the donor community) is finalizing a comprehensive rural roads strategy. It is likely that significant increases in investment in rural transport will be proposed in the PIP for the period. Recent ODA funding for local entities has been used for large A-type projects in agriculture and rural development, in which transport infrastructure repair comprises a large or even dominant role. However, the amount of this expenditure in rural roads is not separately reported, or known to MOT Investment in the railway system has so far been small and is focussed in keeping the system operating safely. Urban transport improvement has received little funding so far. Levels of and trends in state transport spending The importance that the GOV attaches to the modernization of the nation's transport infrastructure is reflected in the State's overall expenditure patterns for the sector. There has been a marked shift of public resources in both nominal and real terms towards transport since the early nineties and both capital and recurrent expenditures in transport have increased faster than in other sectors, as set out in table The increase from 1993 to 1994 reflects the increased flow of ODA into Vietnam and the priority attached by both donors and GOV to rehabilitating the basic transport infrastructure. The split of total transport expenditure between central and local spending units shifted slightly in favor of local spending entities. About 85 percent of all transport expenditure is capital expenditure. More than one half of 1997 and 1998 capital expenditure by the central level was funded by ODA while that of the local entities was mainly funded by the Government's own funds and contributions by the people. 64

93 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures Table 3.13: State transport expenditures (in %) Capital Expenditure/Total Transport/State Capital Expenditure. Capital and Recurrent Expenditure: Transport/State Local Transport Expenditure: Share of total expenditure Transport Capital and Recurrent Expenditure as percent of GDP Source: Ministry of Finance It should be noted that the following analysis is based on expenditure information from MOF and is not consistent with information held by MOT. The expenditure figures from MOT are significantly higher than those reported by MOF, indicating the use of different data formats by the two ministries. In addition not all state transport expenditure, particularly that undertaken by other ministries such as MARD, can be easily identified in the budget. Table 3.14: State transport spending by mode, locality and spending category (in billion VND)* Mode Exp categoy Tol Cel ocal Tota Lq wal Total centl Lo A1H Roads Capital 2,456 1,296 1,164 5,219 2,879 2,340 5,955 3,308 2,647 Current Total 2,969 1,627 1,346 5,887 3,303 2,584 6,769 3,790 2,980 Inland Capital Water Current Total Rail Capital Current Total Sea & Capital Coast Current Total Air Capital Current ] Total Other Capital N/A. n.a. n.a Current Total Grand Capital 3,198 2,000 1,198 5,760 3,316 2,444 6,803 4,052 2,751 Total Current , Total 3,859 2,464 1,395 6,669 3,938 2,731 7,901 4,738 3,163 Source: Ministry of Finance. * This does not include expenditure by communes from their own revenues Sub-sectoral allocation. Consistent with its stated objectives and strategies for implementation, the Government has given priority to the rehabilitation and modernization of the 65

94 Vietnam: Public Expenditure Review 2000 country's trunk road network. Roads have received the bulk of transport funding, accounting for 94 percent of total transport spending in 1998, up from 74 percent in Spending on rail infrastructure accounted for about 5 percent of total spending in each of the years of The other sub sectors- inland waterways, sea and coast, air, received between 2 and 3 percent of total transport expenditure. However, this may not show the full picture in that some transport SOEs may receive also investment funding from the banking system, as well as the budget. The extent of any such borrowing is not known With the exception of spending on inland waterways (and possibly rural roads, as discussed later) it appears that the sub-sector allocation is appropriate in relation to the role these modes play in the transport sector. Inland waterways as the second most important mode of transport still appear under-funded, despite the increases between 1994 and Maintenance expenditure, at about 2 million VND per network km is too low to permit regular dredging and other maintenance work, let alone reduce the accumulated maintenance dredging. Improving inland waterways in the northern and southern deltas would be the fastest and most cost effective means of support for the poor rural delta regions Allocation by regions. In terms of local transport expenditures by the provinces, roughly 20 percent of the total was spent in the southern growth area HCMC-Ba Ria Vung Tau, and some 10 percent in the northern growth corridor Hanoi-Haiphong. The majority of the remaining provinces spent between one and two percent each. Roads received the bulk of the budget even in those provinces where waterway transport dominates. A few preliminary observations can be made. - The economic growth areas spend less on local transport in proportion to their revenue generating power while many of the poorer provinces spend more. This may be an indicator that the revenue transfer mechanisms between Government entities (central and provincial) are functioning in that poorer provinces/districts receive funds to undertake higher spending. However, growth areas also benefited most from central Government transport expenditure in the form of spending on large "A" type projects. - Second, there is a tendency to distribute funds equitably across "deficit" provinces, reflecting some emphasis on equity as well as economic growth or efficiency criteria. Current Expenditure Expenditure on roads accounts for about 80 percent of total current expenditure in the transport sector, and in 1998 was about 482 billion dong (MOF figures). It appears that periodic maintenance for national roads covers less than two thirds of the requirement. There is lack of information on current expenditure at the local level, but it appears that many district and commune roads are not regularly maintained A number of studies of the Vietnamese road sub-sector have shown that there is potential for savings of public funds through better cost recovery in the road sector which would also increase efficiency. The principle that road users should pay for the use of the road provided by the state and their maintenance is accepted by the Government and partially applied in the form of tolls charged for the maintenance of specific rehabilitated or new roads. In addition the Government charges a transport fee in the form of a surcharge of 500 dong per liter of gasoline, but it is not specifically allocated to road maintenance and does not guarantee the proper 66

95 Chapter 3 -Inter and Intra-Sectoral Composition ofexpenditures maintenance of the road network. The present toll system is inefficient, costly and covers only a small amount of the road network MOT is therefore considering to submit to Government a proposal based on the principle that the road user should pay for the maintenance of the road network and have a voice in the administration and use of the funds. The proposed instrument is a levy on gasoline (similar to the one already in place) that would replace the existing tolls and whose proceeds would flow into a separate road maintenance fund (as is done in the Philippines and is under consideration in Laos), jointly managed by the Government and the representatives of the road users. The fund would be built up gradually so as to minimize economic dislocation. Initially the Government would transfer from the budget to the road fund the resources it now allocates for road maintenance and the road levy would supplement these resources. In the final stage the road fund would be entirely funded by the levy on road users and eliminate the need for transfers from the budget. The net impact on consumers and producers of introducing a road fund should be positive, given the substantial net savings that are expected from improved road conditions. It has been estimated that the budget required for road maintenance would need to be on the order of US$ million per year if Vietnam's roads were maintained properly There is a range of ways in which such a fund might be structural in terms of which roads and which costs might be covered, which are set out in the Transport Annex of this report. The government should consider this proposal as a way of ensuring future adequate maintenance of the road network. Improving the Quality and Management of Transport Infrastructure Projects Based on the work for this PER as well other recent work done in the transport sector in Vietnam, there are a number of ways in which recognized problems in this area may be addressed. - Projects should be ranked in order of priority (aided by the economic rate of return criteria) in the PIP. This implies that Type A projects to be included in the PIP should be well evaluated before being submitted for PIP inclusion. In view of the capacity constraints, Category B and C projects could be subject to a simplified evaluation methodology, but there should be a clear rank ordering. * Line ministries and localities should be given-by MOF and MPI-an estimate of the likely funding available over a longer period (a desirable period would be five years but a three-year period could be more realistic) which would help these agencies to formulate investment programs based on the likely resource constraints. * All publicly funded projects need to be better coordinated between different government entities-national, provincial and local-before they are included in the PIP. Coordination of projects between the center and sub-national entities is unsatisfactory at present. There also needs to be better horizontal coordination between ministries. For instance, MOT has responsibility for all transport planning matters but is rarely consulted on projects of other line ministries (such as a port project or rural roads project). Similarly, district or provincial planning entities are rarely consulted about or concerned with plans and projects of neighboring local governments. 67

96 Vietnam: Public Expenditure Review 2000 * Capital and current expenditure planning should he better integrated and be subject to the same planning cycles. For example, within MOT a five year road maintenance program should be formulated at the sarne time as its PIP proposals. This would enable MOT planners to take into account the tradeoffs between current and capital expenditure and to avoid the present bias for capital expenditure. This would also assist in ensuring that projects are not proposed unless adequate operations and maintenance funding is likely to be available. This also needs to be complemented by better coordination between MOF and MPI in the development of the recurrent and development budgets. * The skills of individuals responsible for the planning and programming process at the central and local levels should be upgraded This requires both increased funding and the development of training programs. Poorly prepared projects lead to inferior output and ultimately to a much higher cost. A fraction of this cost could be spent in upgrading the skills of those who are responsible for project preparation as well as those who select them. Finally specific funding allocations are need for project preparation costs. * Planning and programming should avoid over optimism. Both about stated benefits of projects and capacity for implementation. Full account needs to be taken of limitations on absorptive capacity. This requires a change in "mind-set" by officials. * The project approval process could be streamlined by removing unnecessary layers in the process. The current project approval process is top heavy and repetitive and different funding agencies (including donors) have different requirements. One possible remedy is that once the PIP is approved line ministries and local entities would be responsible and accountable for project implementation without the need to pass all projects through further detailed processes of review and approval. Differing funding and review agencies should also work together to harmonize their requirements. * MPI should consider expanding its program monitoring beyond expenditure control to monitor the efficiency of implementation as well as outcomes. The line ministry and the local entities should do the same at the project level. This information could be compiled into a periodic implementation progress report (e.g. annual) which should also flag implementation issues that might have arisen or possible future risks, and be submitted to the Prime Minister for review. Moreover, procedures should be developed to ensure that the lessons learned are systematically incorporated in ongoing programs/projects and future plans. Independent audit of all large projects and a sample of smaller (B and C) projects of the center and localities should also be undertaken. The Evolving Role of the Private Sector in Transport Vietnam is in transition from a command economy to a more market based model and the public/private mix in the transport sector is still evolving. This has major public expenditure implications. On the one hand, divestiture/equitization of public enterprises will result in an initial reduction in revenue (payments to the budget from SOEs) that is likely to be replaced by higher tax revenues in the long run. On the other, the sectoral claims on the state's resources for 68

97 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures subsidies and investment capital will also be reduced. However the current overall budgetary impact of transport SOEs is not known, nor is the potential impact of divestitures There appears to be scope to re-balance the public/private mix in transport to reduce the transport sector's demands on state resources and increase economic efficiency by reducing operating costs, while preserving the role of the state as regulator and guardian of public interests Vietnam's transport sector has undergone significant changes since the move to a more market based economy. For example, in 1998 about 98 percent of the freight, 94 percent of passenger road vehicles and 71 percent of inland waterway vessels were operated by non-state entities. In contrast air, rail and sea transport remain dominated by public enterprises and private sector participation is negligible This situation is partly a reflection of market realities and partly due to the slow process of transformation. After the barriers to private ownership were removed, the private sector has quickly taken hold in markets with low entry barriers such as truck and bus operations in road transport and small vessels in inland waterway transport. While the Government has decided to divest the majority of its transport SOEs, only a few have been divested to date. There are a number of reasons for this slow progress including (i) incomplete or inappropriate legal framework; (ii) lack of experience in the divestiture process; (iii) lack of interest and financing capacity in the private sector and (iv) concern about the social consequences of redundancy and lack of social safety nets. Major cities such as HCMC, Hanoi and Haiphong have been able to divest a number of their enterprises, but little progress seems to have been made in the provinces. However it is expected that the divestiture process will accelerate over the next year as the minister has given it highest priority. In addition, as discussed in Chapter 1, the Government is about to announce a major program for SOE reform, which will include the transport sector The Government has decided to retain in state ownership, the country's basic transport infrastructure and the related enterprises, which it considers of strategic importance (e.g. ports, airports, sea transport). But at the same time the Government's aim is to improve the functioning and efficiency of these transport modes. The challenge is to ensure that the principle of economic efficiency is applied in the management of transport enterprises regardless of ownership and industrial organization. This means that the Government could consider: (i) expediting the divestiture of non-strategic enterprises; (ii) holding the SOEs remaining in the state sector to the same standards, incentives and disciplines of the marketplace as private sector companies; (iii) ensuring that transport markets are not hampered by restrictive regulations or practices and focussing the role of the Government on establishing a regulatory framework that fosters efficient markets and fair competition between all market participants If the GOV objective is to exercise overall control of perceived strategic activities-such as sea or air transport, ports and airports-this may be achieved by continuing government ownership, but with some operations contracted out to private interests, who operate the service on a commercial basis. This would help improve the efficiency of these activities. For example provided Vietnam's sea ports are allowed to compete with each other, private operation or BOT type arrangements could be considered by the Government, particularly when considering new investments for port modernization, rehabilitation and expansion. Examples of this possibility in Vietnam are the small Baria-Serese port complex and the Thuon Dong container port near 69

98 Vietnam: Public Expenditure Review 2000 HCMC. The Government may thus wish to gradually involve the private sector in operating and maintaining ports In those SOEs where the Government wishes to retain both ownership and operation, it should consider establishing a performance framework for their operation. This would include performance targets (financial and service targets), and management autonomy and accountability in achieving these targets. Payment for any social obligations would be negotiated with the SOE management and paid from the budget Funding requirements for road rehabilitation, modernization and maintenance are a heavy burden on the state budget in Vietnam and only part of these requirements can be funded through the budget. The Government has therefore offered a number of roads to the private sector for funding and operation. So far only a few small domestic contractors are involved in BOT schemes for small bridges and highway sections, for which they have the right to collect tolls. However foreign enterprises have been reluctant to invest in road infrastructure in Vietnam due to low traffic levels and ability of users to pay, lack of an enforceable legal framework and the risks thus involved, high up front costs and the relatively low (risk adjusted) returns to be earned. Only one local/foreign partnership (between a Taiwanese company and the city of HCMC) has materialized so far in the form of a 17.8 km tolled highway between Tan Thuan Export Processing Zone and highway No. 1. Future Expenditure Strategy In conjunction with the preparation of the PIP a transport master plan, covering all inter-urban transport, plus separate but related strategies for rural roads and urban transport are being formulated. The master plan addresses the proposed ranking of major projects and sets out a broad strategy for future transport spending over a ten year period. Full cost estimates are incorporated in all these proposed strategies This strategy set out in Box 3.2 is broadly appropriate, but much depends on the available level of future funding. It is unrealistic to assume that there can be a substantial increase in state budget funding for transport and therefore much will need to come from ODA. It is also important that the Government not overcommit itself to, or overestimate its ability to implement a range of large projects Given likely limitation of resources, it is suggested that the Government should consider the following options to maximize use of the limited transport budget. * Consider an increased role for private operation in the transport sector * Accelerate the reform of SOEs, including divestiture where appropriate, and develop a commercial performance framework for those SOEs to continue in government ownership. * Consider the establishment of a earmarked road fund to provide for user charges in the form of a gasoline levy to fund future road maintenance * Consider increasing levels of maintenance for inland waterways * Consider increasing expenditures on the construction and maintenance of rural roads. 70

99 Chapter 3 - Inter and Intra-Sectoral Composition ofexpenditures * Improve budgets and management processes to ensure better quality and management of transport infrastructure projects. Box 3.2: Broad Stratgy for Future Speuding Abo 20 percen of the budget envelope should be allocated to maintenance and minor improvements. About percent of the budget envelope should be allocated to improvement of accessibiity in rural (remote and mountainous) areas. Communes which are presently inaccessible should be provided with adequate acess. Priority should be given, to proets ta remove taff bottlenecks and stengtn the network to meet traffic demand. Strategic transport infrastrucre for land, water and ai transport in and between the north, center and south growith dors shod be imroved and integrated with tasport links to the region and global makets. Urban transport should be improved so as to reduce cowngesion and to support the urban celters' function as engines of growth and gateways to regional and intemationai markets. Source: Adapted from VITRANSS Master Plan Study. Final Draft, July Introduction SOCIAL SAFETY NET EXPENDITURES Safety net programs encompass a wide array of public interventions aimed at raising the economic well-being of the poor and protecting them from adverse outcomes. Cash and in-kind transfers, price subsidies, public works, and credit-based income programs are all examples of public interventions whose objective is raising standards of living. Pension schemes, health insurance and other types of social insurance are examples of programs that prevent large declines in income and well-being The term "safety nets" itself is not uniquely defined but broadly speaking programs can be classified as either of the social assistance type (assistance to raise well-being) or the social insurance type (to prevent large declines in well-being) There is a wide mix of social assistance and social insurance programs in Vietnam. The Contingency Fund for Pre-Harvest Starvation and Disaster Relief and the Social Assistance Fund for Regular Relief are two social assistance programs that provide assistance to those who are either unable to provide for themselves or require temporary assistance on account of unforeseen adversity. A third "social subsidy" program is the Social Guarantee Fund which provides income transfers to those who contributed to the re-unification efforts. This Fund is not and is not intended to be a need based program, although many of the recipients may be poor Total spending on these "social subsidies" made up 13.2 percent of the budget in 1997 and 11.9 percent in For a country at Vietnan's level of economic development that is impressive. But not all expenditures classified as social subsidies are "safety net" expenditures. On the other hand there are a significant number of social safety net programs not included in the "social subsidies" item in the budget. These include elements of the Hunger Eradication and 71

100 Vietnam: Public Expenditure Review 2000 Poverty Reduction Program (HEPR) and National Target Program on Employment (NTPE) as well as the Vietnam social and health insurance schemes, discussed later in this section. Table 3.15: Social Subsidies (Unit: in million VND) No. EWEJ: e Payment to Social Insurance and Health Insurance schemes 5,184,244 5,334,714 and other assistance for pre-1995 pensioners 2 Expenditure for Social Guarantee and Protection Centers 2,724,338 2,376,483 3 Direct transfers and other expenditures for Social Guarantee 1,463,774 1,726,473 and Protection Total 9,372,356 8,712,585 (Excluding expenditure by communes out of transfers from central governmento communes and their own revenue) Source: Ministry of Finance The two main social insurance programs - the Vietnam Social Insurance scheme, and the Vietnam Health Insurance scheme, constitute important sources of social protection. Both are operated through off-budget funds. These are very young programs (both started in 1995) and their coverage beyond the formal wage economy is very limited. But both programs intend to expand their coverage into rural areas and the non-wage sectors and in the medium to long term they will be important components of the country's social protection system There are several other safety net programs that command attention. These are development programs under the Hunger Eradication and Poverty Reduction Program (HERP), credit-based employment initiatives under the National Target Program on Employment (NTPE) and rural public works which aim to raise incomes of the poor. Some elements of these programs are more geared towards general development assistance and income growth, but most have some focus on poverty alleviation Assessing public spending on safety net programs involves reviewing program objectives, targeting of beneficiaries, the incentives beneficiaries face, distortionary costs introduced by program interventions, costs of administering the programs, and alternative delivery mechanisms. The information and resource requirements of such a comprehensive analysis are beyond the scope of this review This section identifies a range of social safety net programs in Vietnam, which are discussed in more detail below. However it has not been possible because of limitations in the expenditure classification systems to obtain expenditure figures on all these programs, and thus to make an assessment of Vietnam's expenditure on social safety nets. Social Protection Fund for Regular Relief This is a mix of regular and temporary social assistance transfers, funded by the central government with additional funds provided by local authorities. Regular monthly benefits are provided to three groups of beneficiaries who are considered to be unable to assist themselves. These are the elderly who are poor and live alone and have no other source of support, orphan, and civilians who are disabled. A subset of these beneficiaries is also placed in Social Protection Centers. Temporary benefits are provided to a small set of homeless people. Beyond these two 72

101 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures types of benefits, the Fund also provides assistance to rehabilitation programs dealing with the "social evils" of drug abuse, prostitution, and HIV/AIDs, and some other types of supplementary assistance for schooling expenses and health care The elderly and disabled groups together account for around three quarters of all beneficiaries, with orphans accounting for another 24 percent. The elderly are most likely to receive assistance, but it is worth noting that the number of elderly receiving assistance make up only about 1 percent of the elderly in Vietnam; for the vast of the elderly majority the extended family is the main source of support. At the same time, the lower benefit grant rate (the percent of those eligible who receive benefits) for the disabled reflects the fact that a large proportion of them receive assistance from the Social Guarantee Fund As the primary (regular) component of the official safety net programs, the Social Protection Fund for Regular Relief is extremely limited, both in its coverage and in the size of individual payments. Average transfers are barely adequate to meet basic food needs, and in 1998 only 20 percent of the eligible population was covered by the Fund' 8. This represents only about 0.2 percent of the total population. At the same time the number of beneficiaries has grown by 41 percent in 3 years. Available data do not permit any assessment of the extent to which ineligible beneficiaries receive payments, although this may occur in better off provinces. However, there is considerable variation in payments across communes and provinces. Some wealthier communes may also pay higher benefits. But all communes must meet the minimum standards set by the government As the recently completed study on safety nets by ILO concludes, "In effect, the Social Protection Fund for Regular Relief is in a state of dynamic tension over beneficiary numbers. Government policy appears to be to keep numbers at low levels. However, the communes keep identifying large numbers of people who appear to be eligible for benefits under the existing criteria laid down by the government" (p. 56). In response to this the govermment has tried to limit the number of beneficiaries by clarifying criteria, providing guidelines for prioritizing, and fixing financial allocations. At the same time, though, increasing pressure from the communes and improved financial conditions have permitted greater allocations to the Fund It appears that there is a need for a specialized agency, or specialized personnel to administer the fund and evaluate its performance. At the current level of funding, however, the higher administrative costs would probably not be justifiable. Contingency Fund for Pre-Harvest Starvation and Disaster Relief This is the primary safety net program which covers the majority of the population. It has two components, covering natural disasters and "pre-harvest starvation" Natural disasters, such as floods, typhoons, droughts, etc. are fairly frequent occurrences in Viet Nam. The Contingency Fund aims to mitigate some of the hardship caused by these periodic natural disasters, by compensating family members for the loss of life and property. Each disaster-related death is compensated by a payment of 1 million Dong. With property damage there is partial compensation based on damage assessments undertaken by local authorities, but subject to availability of funds. Compensation for other types of losses due to 18 "Statistics on Social Safety Nets in Vietnam"-Labor and Social Affairs Publishing House, November

102 Vietnam: Public Expenditure Review 2000 flood damage to land and crops is less likely, though concessional development loans might be made available through other sources Obviously, total expenditures on disaster relief vary with the 'extent of disasters. For example, in 1996, total expenditures were 71, 270 million Dong, but in 1997 and 1998 they were more than 5 times as much at 400, 000 million and 364, 910 million Dong respectively. Much of this expenditure is from the state budget The "pre-harvest starvation" element of the Contingency Fund mainly covers grants to families at risk of starvation in the pre-harvest period, though it also covers some food aid given to poor families for the Tet festival. About one half of all who seek assistance for this element of the program are granted assistance. The amount of assistance varies from one commune (and province) to another, but the average level of the grant seems to be around 50,000 Dong. The low coverage of the "pre-harvest starvation" element and the very small amount of assistance limit the ability of the program to provide meaningful protection to the rural population Other than administrative convenience, it is not clear why these two quite different aspects of income variability are addressed in the same program. A separation would assist to further development of specialized administrative capacity, since (disaster) damage assessment is quite different from the targeting and beneficiary-needs skill requirements of more typical social assistance programs. Development Assistance Programs under HEPR The Hunger Eradication and Poverty Reduction Program encompasses a range of policy and program initiatives aimed at reducing poverty and increasing incomes. There are nine program components: * construction of basic commune infrastructure * promotion of agricultural and off-farm production and employment * credit for the poor * health care for the poor * education for the poor * extension services for agro-forestry and fishing * training of HEPR staff * sedenterization, (re-settlement) internal migration, and new economic zones * assistance to ethnic minorities The Ministries of Education, Health, Agriculture, and Labor and Social Welfare, are involved in this effort as are other organizations such as the Vietnam Bank for Agriculture and Rural Development, Vietnam Bank for the Poor, Vietnam Women's Union, and the Committee for the Ethnic Minority and Mountainous Areas The focus of the HEPR program is poverty eradication, and in a sense all program components contribute towards this goal. Some of these components, however, are more generalized development initiatives which, while certainly helping the poor, may not always 74

103 Chapter 3 - Inter and Intra-Sectoral Composition of Expenditures viewed as part of safety net programs. For example, non-targeted agricultural services (promotion and extension), environmental efforts aimed at re-greening mountainous areas, land allocation policy, and prevention of drug abuse all have a broader development focus. But it can be argued that as they aim to prevent people falling into poverty they are appropriately part of social safety nets. On the other hand, the more targeted HEPR programs, such as subsidized credit, fee exemptions for education and health are clear candidates for inclusion in the safety net category. In a similar vein employment oriented programs that mitigate the effects of restructuring of state owned enterprises or create employment via public works also form part of the government's effort to provide protection to those with inadequate incomes and those who are most likely to suffer downturns in income One of the major component of the HEPR has been provision of collateral-free, subsidized loans to the poor for income-generating activities. Implementation at the commune level, by People's Committee officials, permits closer monitoring of activities. However, there are concerns about the adequacy of targeting of the poor, and the long term sustainability of the income-generating activities for which funds are borrowed. GSO data suggest that only 20 percent of all loans from the Vietnam Bank for the Poor were allocated to the poorest 40 percent of households, while the better off 40 percent of households received 30 percent of all loans. Female-headed households were also less likely to receive loans. There appears to be excessive reliance on credit-based programs, without due attention to skills training and other technical assistance. Recent studies suggest that the efficacy of the credit-based approach needs to be evaluated. National Target Program on Employment The National Target Program on Employment (NTPE) is a key component of the government's effort at increasing employment during the transition to a market economy. Initiated in 1998, the program aims, in the short term, to create 1.3 to 1.4 million jobs annually, reduce urban unemployment from 6 percent to 5 percent (by the year 2000), and reduce rural underemployment from 30 percent to 25 percent This is a general employment-oriented program financed by the National Fund for Employment Promotion (NFEP) and it works primarily by providing subsidized credit for selfemployment in small scale enterprises such as handicrafts and agro-processing. The program also supports Centres for Employment Service which provide skill training to job seekers, and serve as bases for matching them with potential employers Roughly two-thirds of the funds from NFEP are allocated to rural areas, and to the extent that animal husbandry activities and small scale handicrafts account for two-thirds of total allocations, the program probably benefits women more than men, because women tend to more involved in these activities The NTPE's role as a safety net for the poorest is limited because credit provision is based on viable proposals, on the borrowers being credit worthy and on seed money from the borrower (almost equal to the borrowed sum). At the same time, the fact that there is preferential lending to women, the poorest groups, and the unemployed - provided the project proposal demonstrates employment creation potential -makes it reasonable to include this program in the '9 This section draws heavily on the recently completed ILO study on labor markets and National Target Program on Employment and the Hunger Eradication and Poverty Reduction Program (ILO, 2000). 75

104 Vietnam. Public Expenditure Review 2000 safety net category. But it would be worth focussing greater attention in the NTPE on skill training, and this could be more targeted to poor households and women. Social Insurance The two main social insurance programs in Vietnam are the Vietnam Social Insurance (VSI) scheme and the Vietnam Health Insurance (VHI) scheme. These are relatively new programs, though VIS builds on an earlier social security scheme that covered state employees and the armed forces. Current coverage of both programs is largely restricted to the formal wageincome sector, though efforts are underway to extend them to the much larger self-employed sector. In addition to these two programs, there are other small-scale pension and insurance schemes that operate at the commune level. Since the focus of this report is more on social assistance and less on social insurance, attention is restricted to the two main insurance programs Vietnam Social Insurance Scheme. (VSI) A new self-financing social insurance system was established in Vietnam in It covers the civil service, armed forces, employees of state institutions and SOEs, Vietnamese staff in joint ventures and employees in non-state enterprises with 10 or more workers.20 In 1998, there were 3.2 million contributors to the new scheme, and according to MOLISA these make up roughly 14 percent of the labor force The scheme covers sickness, maternity, employment injury, retirement, and survivorship. A brief summary of the coverage provided is as follows: * Sickness benefits, equal to 75 percent of insurable earnings and ranging from days a year depending on type of occupation and length of insurance. * Maternity benefits, for 4-6 months based on 100 percent of insurable earnings. * Employment injury and occupational disease benefits based on minimum wages, with benefits up to 1.6 months, along with death and funeral benefits where appropriate. * Retirement pensions are paid at the rate of 45 percent of average eamings for 15 years, thereafter rising at the rate of 2 percent up to a maximum of 75 percent, subject to contributions having been paid for at least 20 years. The pensionable age for at least 20 years women is 55 as against 60 for men Employers pay 15 percent of basic salaries, of which 10 percent is allocated to pension insurance and 5 percent to sickness, maternity, and employment injury benefits. Employees contribute 5 percent which goes towards pension insurance The scheme is a small beginning in the government's objective of providing comprehensive social security protection for the entire population. In the past few years considerable technical assistance has been provided to assist MOLISA in developing a Social Security Act, which would set out a more comprehensive system of coverage. This work is scheduled to be finalized in This new scheme builds on the earlier scheme, which covered only State (government staff and SOE personnel) employees, and Armed Force personnel, but was an extension of the State employment system and had to rely on the budget to meet deficits: the state is still responsible for pensions arising before