VIETNAM MANAGING PUBLIC EXPENDITURE FOR POVERTY REDUCTION AND GROWTH

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2 VIETNAM MANAGING PUBLIC EXPENDITURE FOR POVERTY REDUCTION AND GROWTH PUBLIC EXPENDITURE REVIEW AND INTEGRATED FIDUCIARY ASSESSMENT VOLUME 1: CROSS SECTORAL ISSUES A Joint Document of the Socialist Republic of Vietnam and the World Bank Prepared with the Support of the Like Minded Donor Group April 2005

3 Abbreviations ADB Asian Development Bank AFD Agence Francaise de Developpement AFTA Asean Free Trade Area BEC Bid Evaluation Committees CFAAs Country Financial Accountability Assessment CIDA Canadian International Development Agency CIEM Central Institute of Economic Management CMS Cooperative Medical System CPARs Country Procurement Assessment Reports CPRGS Comprehensive Poverty Reduction and Growth Strategy DAF Development Assistance Fund DANIDA Danish International Development Agency DFID Department of International Development DMFAS Debt Management and Financial Analysis System DPP Department for Public Procurement EC European Commission ECORY Research and Consulting EVN Electricity of Vietnam FDI Foreign Direct Investment FDIC Federal Deposit Insurance Corporation GDP Gross Domestic Product GFS Government Financial Statistics GFSM Government Finance Statistics Manual GIO Government Inspection Office GSO General Statistics Office HCMC Ho Chi Minh City HCFPs Health Care Funds for the Poor HEPR-JC Hunger Eradication, Poverty Reduction and Job Creation HIV/AIDS Human Immunodeficiency Virus/Acquired Immunodeficiency Syndrome IMF International Monetary Fund IPSAS International Public Sector Accounting Standards JBIC Japan Bank for International Cooperation KFW Kreditanstalt fur Wiederaufbau LANs Local-Area Networks LMDG Like Minded Group of Donors MARD Ministry of Agriculture and Rural Development MIS Management Information System MOET Ministry of Education and Training MOF Ministry of Finance MOHA Ministry of Home Affairs MOH Ministry of Health MOLISA Ministry of Labor, Invalids and Social Affairs MPI Ministry of Planning and Investment MPDF Mekong Project Development Facility MPI Ministry of Planning and Investment MOT Ministry of Transport MTEF Medium-Term Expenditure Framework MTFF Medium-Term fiscal Framework NGO Non-Governmental Organization NMDC Netherlands Ministry Development Corporation NORAD Norwegian Royal Agency NPL Non-Performing Loans NTP National Target Programs ODA Official Development Assistant OECD Organization for Economic Cooperation and Development O&M Operation and Maintenance PAR Public Administration Reform PER-IFA Public Expenditure Review and Integrated Fiduciary Assessment PFMRP Public Finance Management Reform Project PIP Public Investment Program PMU Project Management Unit PRS Poverty Reduction Support Credit SAV State Audit of Vietnam SBD Standard Bidding Document SDC Swiss Development Cooperation SDU Service Delivery Units SEDP Socio-Economic Development Plan SIDA Swedish International Development Cooperation Agency SIO State Inspection Office SOCBs State-owned Commercial Banks SOEs State Owned Enterprises TABMIS Treasury and Budget Management Information System UCOA United Charts of Accountants UNCTAD United Nations Commission on Trade and Development UNDP United Nations Development Program USBTA United States Bilateral Trade Agreement VAT Valued Added Tax VDGs Vietnam Development Goals VDR Vietnam Development Report VEA Vietnam Economics Association VHLSS Vietnam Household Living Standards Survey VND Vietnam Dong VSS Vietnam Social Security WANs Wide-area Networks

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5 ACKNOWLEDGMENTS This Public Expenditure Review and Integrated Fiduciary Assessment (PER-IFA) was commissioned by the Prime Minister of Vietnam, H.E. Mr. Phan Van Khai and was prepared jointly by the Government of Vietnam and the World Bank with the support of the Like Minded Group of Donors (LMDG). On the Government side, overall guidance was provided by Mr. Tran Van Ta (Standing Vice Minister of Finance), Mme Le Thi Bang Tam (Vice Minister of Finance) and Mr Truong Van Doan (Vice Minister of Planning and Investment). On the World Bank side, overall guidance was provided by Mr. Homi Kharas (East Asia Chief Economist) and Mr. Klaus Rohland (Vietnam Country Director). Additional guidance was provided by Ms. Marisa Fernandez-Palacios (East Asia Operational Services Director), Ms. Barbara Nunberg (East Asia Public Sector Manager), Ms. Helen Sutch (Acting East Asia Public Sector Manager), Mr. Martin Rama (Vietnam Lead Economist) and Mr. Rakesh Nangia (Vietnam Portfolio Manager). Valuable additional guidance was provided by Dr. Graham Scott (Chief Technical Adviser, Vietnam Ministry of Finance and former Secretary of the New Zealand Treasury). The task managers and principal editors of the report were Mr Do Hoang Anh Tuan (Director of the State Budget, Ministry of Finance), Mr. Pham Dinh Cuong (Deputy Director, State Budget Department, Ministry of Finance), Ms. Tran Kim Hien (Manager, State Budget Department, Ministry of Finance), Mr. Edward Mountfield (Senior Economist, World Bank) and Mr. Nguyen Van Minh (Senior Economist, World Bank). Key contributors to specific chapters are listed below: Fiscal Trends and Sustainability Mr. Do Viet Duc Manager of State Budget Department, Ministry of Finance (MOF) Mr. Vivek Suri Senior Economist, the World Bank Mr. Nguyen Minh Tan Institute of Finance Research, Vietnam Mr. Albert de Groot ECORYS Research and Consulting, the Netherlands Trends in Composition of Public Expenditure Mr. Dao Xuan Tue Manager of State Budget Department, MOF Mr. Le Quang Thuan Institute of Finance Research, Vietnam Mr. Albert de Groot ECORYS Research and Consulting, the Netherlands Institutions for Public Expenditure Management Mr. Pham Dinh Cuong Deputy Director, State Budget Department, (MOF) Ms. Rosa Alonso I Terme Senior Public Sector Specialist, the World Bank Mr. Ed Mountfield Senior Economist, the World Bank Mr. Nguyen Van Minh Senior Economist, the World Bank Institutions for Financial Accountability and Transparency Mr. Behdad Nowroozi Senior Financial Management Specialist, the World Bank Mr. Tran Quang Thong Financial Management Specialist, the World Bank Mr. Le Viet Hung Financial Management Specialist, the World Bank i

6 Mr. Dang Quang Huy Expert, Enterprise Finance Department, MOF Decentralization to Sub-national Government Professor Jorge Martinez Georgia State University (USA) Ms. Tran Thi Le Trinh - Deputy Director, Hanoi Financial Department, Vietnam Mr. Nguyen Doan Toan Manager of Budget Division, Hanoi Financial Department Mr. Bui Duong Nghieu Institute of Finance Research, Vietnam Delegation to Spending Units Professor Christine Wong University of Washington, USA Ms. Do Thi Thuy Hang - Deputy Director of Public Expenditure Management, MOF Ms. Nguyen Thi Minh Chau - Expert of Public Expenditure Management, MOF Mr. Soren Davidsen Governance Specialist, the World Bank Ms. Hoang Thi Thuy Nguyet Institute of Finance Research, Vietnam Public Investment Management Dr. Cao Viet Sinh, Director, Ministry of Planning and Investment (MPI) Mr. Le Dinh Quy - Deputy Director of Investment Department, MOF Ms. Do Thi Bich Expert, Investment Department, MOF Mr. Stephen Lister consultant, Mokoro Consulting, UK Mr. Nguyen Quang Thai consultant, Vietnam Economics Association (VEA) Public Procurement Management Mr. Nguyen Viet Hung, Director of Public Procurement Department, MPI Mr. Nguyen Xuan Dao, Vice Director Public Procurement Department, MPI Mr. Bui Ha - Director of Finance and Monetary Dept, MPI Ms. Hoang Minh Thoa - Deputy Director of Finance and Monetary Department, MPI Ms. Vu Quynh Le Expert of Public Procurement Department, MPI Ms. Nguyen Thi Phu Ha - Expert of Finance and Monetary Department, MPI Ms. Irina Luca Senior Procurement Specialist, the World Bank Mr. Joel Turkewitz Senior Procurement Specialist, the World Bank Mr. Giovanni Casartelli Lead Procurement Specialist, the World Bank Mr. Ahsan Ali Senior Procurement Specialist, the World Bank Mr. Nguyen Chien Thang Senior Procurement Specialist, the World Bank Ms. Phan Thi Cuc Consultant, Academy of Finance, Vietnam Mr. Dinh Viet Ninh Consultant, Electricity of Vietnam (EVN) Education Sector Expenditure Mr. Nguyen Van Ngu - Deputy Director of Finance and Planning Department, MOET Mr. Bui Hong Quang - Senior Expert of Finance and Planning Dept, MOET Ms. Dang Thi Thanh Huyen Manager, Education Management Department, MOET Mr. Peter Brooke Bannock Consulting, UK Mr. Samuel Lieberman Lead Economist, the World Bank Ms. Mai Thi Thanh Senior Education Operation Officer, the World Bank Transport Sector Expenditure Mr. Ha Khac Hao Deputy Director of Planning Department, MOT ii

7 Ms. Nguyen Thanh Hang - Senior Expert, Planning & Investment Department, MOT Mr. Doan Canh Hoang Expert, Financial Department, MOT Mr. Simon Ellis Senior Transport Specialist, the World Bank Ms. Le Thu Hang Institute of Training and Professional Enhancement, Vietnam Mr. Pham Ngoc Thuy Hanoi Polytechnic University, Vietnam Mr. Le Than consultant, Vietnam Road Safety Project Mr. Jacques Yenny, independent consultant, USA Health Sector Expenditure Mr. Nguyen Nam Lien Vice Director, Finance & Planning Department, MOH Mr. Le Van Quan Expert, Planning and Finance, MOH Mr. Samuel Lieberman Lead Economist, the World Bank Mr. James Knowles Independent Consultant, USA Ms. Nguyen Thi Hong Ha Mediconsult, Vietnam Ms. Nguyen Khanh Phuong Institute of Health Strategy and Policy Agriculture and Rural Development Sector Expenditure Mr. Nguyen Van Than Acting Director of Finance Department, MARD Ms. Phan Ngoc Thuy Vice Director of Finance Department, MARD Mr. Pham Trung Kien - Assistant and Senior Expert of Finance Department, MARD Mr. Nguyen The Dzung Agriculture & Rural Development Specialist, World Bank Mr. Stephen Mink Lead Economist, World Bank Mr. William Cuddihy Independent Consultant, Australia Ms. Pham Thi Lan Huong Central Institute of Economic Management, Vietnam National Target Program Expenditure Mr. Bui Ha - Director of Finance and Monetary Dept, MPI Mr. Nguyen Tu Nhat Deputy Director of National Economics General Dept., MPI Ms. Hoang Minh Thoa - Deputy Director of Finance and Monetary Department, MPI Ms. Nguyen Thi Phu Ha - Expert of Finance and Monetary Department, MPI Mr. Tran Quoc Phuong Expert of National Economics General Dept., MPI Mr. Mark Minford Bannock Consulting, UK Mr. Ngo Van Minh - Deputy Director of Finance and Planning Department, MOLISA Mr. Ta Van Thieu - Manager, Finance and Planning Department, MOLISA Mr. Nguyen Huu Tu consultant, Institute of Finance Research, Vietnam Mr. Bui Quoc Bao consultant, Institute for Market and Price Research, Vietnam Peer reviewers were Mr. Bill Dorotinsky (Lead Public Sector Specialist, World Bank), Mr. David Shand (Financial Management Adviser, World Bank) and Ms. Jane Rintoul (Senior Governance Adviser, UK DFID). Other valuable contributions were provided by Ms. Keiko Sato, Ms. Carrie Turk, Mr. Rob Swinkels, Mr. Daniel Musson, Ms. Nga Nguyet Nguyen and Mr. Robin Mearns, all of the World Bank. Administrative support was provided by Ms. Gloria Elmore and Ms. Phung Thi Tuyet (World Bank). The LMDG comprises the Canadian International Development Agency (CIDA), the Danish International Development Agency (DANIDA), the Netherlands Ministry for Development Cooperation (NMDC), the Norwegian Agency for Development Cooperation (NORAD), the Swedish International Development Agency (SIDA), the iii

8 Swiss Agency for Development and Cooperation (SDC) and the UK Department for International Development (DFID). Valuable contributions were also provided by other official development assistance agencies including the Asian Development Bank (ADB), European Commission (EC), International Monetary Fund (IMF), Japan Bank for International Cooperation (JBIC) and United Nations Development Program (UNDP). iv

9 Table of Contents ACKNOWLEDGMENTS... i EXECUTIVE SUMMARY... ix 1. BACKGROUND, APPROACH AND SCOPE... 1 Background... 1 Approach... 1 Scope... 4 Recommendations on Future Public Expenditure Analysis FISCAL TRENDS AND SUSTAINABILITY Introduction and Overview Macroeconomic Performance Overview of Fiscal Performance Revenue Trends Overall expenditure trends Budget deficit, off-budget items and public debt Future evolution of government debt Strengthening Management of Public Debt and Fiscal Risks Fiscal Transparency Recommendations TRENDS IN COMPOSITION OF PUBLIC EXPENDITURE Introduction and Overview Economic Composition of Expenditure Functional Composition of Expenditure How Pro-Poor was the Composition of Public Spending? Recommendations INSTITUTIONS FOR PUBLIC EXPENDITURE MANAGEMENT Introduction and Overview Legal and Institutional Foundations for Budgeting Strengthening State Budget and Investment Planning Strengthening Budget Execution And Management Information INSTITUTIONS FOR FINANCIAL ACCOUNTABILITY AND TRANSPARENCY Introduction and Overview Accounting and Reporting Processes in the Public Sector Oversight Functions in the Public Sector Financial Reporting and Auditing in SOEs Public Oversight Action to Prevent Corruption DECENTRALIZATION TO SUBNATIONAL GOVERNMENT Introduction and Overview Structure of Government And Assignment of Expenditure Responsibilities Revenue Assignments The System of Transfers Budgetary Autonomy Transparency and Financial Accountability At Subnational Level Subnational Government Borrowing DELEGATION TO SPENDING UNITS v

10 Introduction and Overview Overview of Delegation Measures in Vietnam Implementation of Delegation to Date Initial Impacts and Risks in the Implementation of Decision Initial Impacts and Risks in the Implementation of Decree PUBLIC INVESTMENT MANAGEMENT Introduction and Overview Review of Investment Planning in Vietnam Key Issues Summary of Recommendations PUBLIC PROCUREMENT MANAGEMENT Introduction and Overview Overview of Procurement Reforms Legal and regulatory framework For Procurement Transparency and Fairness in Procurement Procurement Methods and Bidding Documents Evaluation and Award Contract Implementation Institutional Framework The Consulting sector Procurement environment Tackling Corruption in Procurement Summary of Key Recommendations APPENDICES Appendix 1.1: Vietnam Public Expenditure Review Appendix 3.1: Composition of State Budget Expenditure, Final Accounts, Appendix 3.2: Composition of State Budget Expenditure, Final Accounts, Appendix 3.2: Composition of State Budget Expenditure, Final Accounts, Appendix 3.3: Composition of State Budget Expenditure, Final Accounts, Appendix 3.3: Composition of State Budget Expenditure, Final Accounts, Appendix 3.4: Composition of State Budget Expenditure, Final Accounts, Appendix 3.4: Composition of State Budget Expenditure, Final Accounts, Appendix 3.5: Composition of State Budget Expenditure, Final Accounts, Appendix 3.6: Composition of State Budget Expenditure, Final Accounts, BOXES Box 2.1: Key Contents of Decision 192/2004/QD-TTg on Fiscal Transparency Box 3.1: Returns to New Investment versus Operation and Maintenance Spending: The Case of Large-Scale Irrigation Box 4.1: Objectives of a Medium-term Expenditure Framework Box 4.2: Preliminary Findings from the Education Sector MTEF pilot Box 4.3: Piloting of the Citizen Report Card Survey in Four Cities Box 4.4: Key Characteristics of TABMIS Box 5.1: Progress in Improving Financial Accountability and Transparency in Vietnam Box 7.1: Australia s Running Cost System for Administrative Units vi

11 Box 7.2: Introduction of Cost-recovery Pricing in Saint Paul s Hospital, Hanoi Box 7.3: Doctors Invest in Medical Equipment in Binh Duong Box 7.4: Two-tiered Education in Hanoi Box 7.5: The Unraveling of Public Provision of Health Care in China Box 7.6: Decision 139/2002 on Health Care Funds for the Poor Box 8.1: Relevant Provisions of Government Resolution N o. 8 (Decentralization) 129 Box 9.1: Costs Associated with Registry Management: An Example from the World Bank Box 9.2: Vietnam: Good Practices in Procurement Box 9.3: Examples of Specifications to Buy High Quality Computers without Indicating Trade Name or Country of Origin Box 9.4: Possible Framework for Monitoring Progress in Procurement Box 9.5: The Complaint System in the Republic of Slovenia Box 9.6: Transitional arrangements for procurement FIGURES Figure 2.1: Trends in Government Revenue and Grants Figure 2.2: Share of Different Taxes in Total Tax Revenue Figure 2.3: Trends in Government Expenditure Figure 2.4: Budget deficit Figure 2.5: Public Debt from Budget and Off-budget Items Figure 2.6: On-budget Debt and External Public Debt Figure 2.7: Implicit Interest Cost of Debt (%) Figure 2.8: Interest Payments as Share of Current Expenditure Figure 2.9: Commercial Bank Credit to SOEs Figure 2.10: DAF On-lending Figure 2.11: A Base Case Scenario for Government Debt (% GDP) Figure 2.12: Alternative Debt Scenarios Figure 3.1: Economic Classification of Public Expenditure, Figure 3.2: Recurrent Expenditure by Sector, Figure 3.3: Functional Composition of Budget Expenditure, 1997 and Figure 3.4: Trends in Key Sectors Figure 3.5: Budget Transfers and Poverty across Provinces in Figure 3.6: State Investment and Poverty Rates across Provinces Figure 6.1: Central Government Share in Budget Expenditure Figure 7.1: The Growing Role of Fees in Hospital Finance Figure 8.1: Composition of State Investment Figure 8.2: State Investment under Central and Local Management TABLES Table 2.1: Overview of Fiscal Trends ( ) Table 3.1: Targeting Effectiveness of HEPR in Table 6.1: Assignment of Expenditure Responsibilities in Vietnam Table 6.2: Revenue Sources for Provincial Governments (total and per capita) Table 6.3: Outcomes of State Budget Revenue and Expenditure Decentralization 84 Table 7.1: Implementation of Administrative Unit Delegation at Central Level vii

12 Table 7.2: Implementation of Decision 192 at Provincial Level Table 7.3: Central Ministries/Agencies Implementing Decree 10 (2003) Table 7.4: Provinces Implementing Decree 10 (December 2003) Table 7.5: Sources of Revenue in St. Paul s Hospital, Hanoi Table 8.1: Composition of Total Investment Table 8.2: Overview of the PIP List of Key Projects Table 8.3: PIP Sector Breakdown of Planned Investment Table 8.4: Public Investment Capital by Regions Table 8.5: PIP Planned Financing of Public Investment Table 8.6: Three-Year Status of PIP Implementation viii

13 EXECUTIVE SUMMARY 1. Public expenditure is one of Government s most important tools in the struggle for poverty reduction and growth. This Public Expenditure Review and Integrated Fiduciary Assessment (PER-IFA) was commissioned by the Prime Minister of Vietnam in December 2003 and conducted jointly by the Government of Vietnam, the World Bank and the Like Minded Group of Donors (LMDG) during 2004 and early Its aim is to review and assess the contribution that public expenditure has made to poverty reduction and growth in Vietnam in recent years, and to identify priorities and actions for strengthening that contribution over the coming years through better resource allocation and better public expenditure management. 2. Fiscal sustainability. Strong fiscal management is a pre-requisite for poverty reduction and growth. The Government of Vietnam has been acknowledged for its fiscal prudence, with relatively small budget deficits, a relatively small stock of debt (both domestic and foreign) and a sustainable share of public spending in GDP. Fiscal trends have been positive, both in terms of revenue collection and expenditure outturns, resulting in a sustainable fiscal balance. Nevertheless, a number of threats to fiscal sustainability exist and require attention over the coming years. The Government should restrict further off-budget bond issuance, channeling all Government borrowing through the budget. It should take urgent action to resolve the current expenditure arrears largely associated with public investment in the transport and agriculture sectors and prevent their further build up. It should strengthen arrangements for the monitoring and management of fiscal risk, starting with better recording of domestic debt and credit through the Development Assistance Fund (DAF). It should rapidly implement the plan to prepare a realistic and sustainable Medium-Term Fiscal Framework (MTFF) as part of every budget cycle. 3. Composition of public expenditure. Between 1998 and 2003, total government spending rose at the remarkable average annual rate of some 16 percent in nominal terms. This rapid growth presented the Government with an extraordinary opportunity to restructure the composition of its expenditures and better align them with its goals of poverty reduction and growth. There have been notable achievements. The shares in total capital spending and total aggregate expenditure of Education and Training and of Science and Technology have increased significantly over the review period. Successful efforts have been made to make the transfer of resources between provinces more propoor, resulting in an inter-provincial transfer and revenue sharing formula which indeed benefits poorer provinces. However, non-wage operations and maintenance expenditure fell to just 17 percent of total expenditures by 2002 while the share of capital expenditure (including major repairs) increased to over 40 percent. It is necessary now to take urgent action to address an imminent maintenance crisis and strike a better balance between ix

14 x Vietnam Public Expenditure Review and Integrated Fiduciary Assessment capital and recurrent spending. Recurrent expenditure should take an increased share of the budget, but with strengthened and integrated planning of public pay and employment. 4. Institutions for public expenditure management. Over the past decade, Vietnam has steadily strengthened its institutions for both budget planning and budget execution at every level of Government. In particular, the 2002 State Budget Law heralds several major reforms: clarifying powers and responsibilities, strengthening the management of decentralization, promoting administrative reforms and strengthening transparency and accountability in public finance. However, further reforms are required. Efforts are required to strengthen joint working between the Finance and Planning functions at every level. The Ministry of Planning and Investment (MPI) and the Ministry of Finance (MOF) should collaborate actively with sector ministries and provinces in the preparation of Medium-Term Expenditure Frameworks (MTEFs), building on the experience and success of sectoral pilots. MOF should play a more active role in the development of the new Socio-Economic Development Plan (SEDP). Implementation of the pilot MTEFs in four sectors and four provinces should be accelerated, building on the success in the education sector. Links need to be strengthened between performance indicators and budgetary decisions, with strengthened monitoring of service delivery using citizen report cards and other techniques. Budget execution and management information will be strengthened further by the successful implementation of the Government s new Treasury and Budget Management Information System (TABMIS). However, TABMIS should be implemented so as to ensure that MPI, sector ministries and provinces are given direct access to Treasury data on execution of sector spending at every level of government. 5. Financial accountability and transparency. Experiences around the world suggest that public expenditure is unlikely to result in cost-effective service delivery without financial transparency and accountability. Vietnam has taken significant steps in improving institutions, laws and regulations and practices to ensure greater financial accountability and transparency in public expenditure. Oversight by the National Assembly and the provincial People s Councils over public finances has been increased. Public access to financial information continues to improve. Nevertheless, challenges remain. The Government should ensure independence for the State Audit of Vietnam (SAV) by converting it into an independent organization established by the National Assembly. Audit reports should be made available to the public. The Government should further rationalize the roles and responsibilities of the audit and inspection functions. Appropriate monitoring measures should be implemented to ensure that fiscal transparency and reporting regulations are properly implemented at all levels of government and by all spending units. The Government should complete its corruption diagnostic as soon as possible and ensure appropriate follow-up action. 6. Decentralization to sub-national Government. Over the past decade, Vietnam has embarked on an extensive decentralization program. The share of sub-national governments in total expenditure has increased dramatically, from 26 percent in 1992 to 48 percent in The 2002 State Budget Law represented in many ways a marked improvement over the 1996 Law in terms of the management of decentralization, further clarifying the roles and responsibilities of central and sub-national tiers of government, and giving new and real powers to the Provincial People s Councils. Nevertheless, the

15 Executive Summary xi new powers at sub-national level create an urgent need to enhance administrative capacity and to strengthen transparency and accountability institutions. Furthermore, it will be important to monitor and review the new fiscal decentralization arrangements in order to identify areas requiring adjustment and further strengthening. The Government should monitor and evaluate the impacts on public service delivery of granting provinces discretion over the public finances of districts and communes; and consider in the longer term the case for specifying revenue and expenditure assignments for districts and communes. The Government should consider the introduction of a full formula-driven system of equalization grants; and the strengthening of the conditional grants system. Current borrowing rules for subnational government should be strengthened, with all bond issuances by provinces included in the State Budget. 7. Delegation to spending units. Increased delegation to spending units is one of the key developments in public expenditure management in Vietnam in recent years. Such delegation is proceeding on parallel but separate tracks for Administrative Units (under Decision 192/2001) and for Service Delivery Units (under Decree 10/2002). These reforms are rational responses to citizens demand for more and better public services as their living standards rise; and there is evidence to suggest that they may have promoted cost reduction and service innovation in certain spending units. However, such delegation needs to be managed carefully if it is to result in better service delivery and if it is to support rather than jeopardize equity and poverty reduction. The Government should maintain the pilot status of Decision 192 and use the citizen report card approach to help monitor and evaluate the impact on citizen satisfaction of block granting in administrative units. It should consider more tightly constraining the flexibility that managers have over salaries and remunerations. With Decree 10, the Government should develop further mechanisms to protect the access of the poor and near-poor to essential social services; and should conduct continuous review and assessment of the impact of Decree 10, again using the citizen report card approach. State Budget resources for Decree 10 agencies should increasingly be tied to the purchase of specific public goods and specific services for the poor with mechanisms developed for monitoring and enforcing delivery against such contracts. 8. Public investment management. Public investment management is a critical part of public expenditure management in every country. In Vietnam, it is particularly critical to the extent that State Budget-financed investment has grown rapidly and now constitutes about 40 percent of the total State Budget. The capacity of the MPI to manage public investment has been strengthened over the past decade with the development of five year Public Investment Programs (PIPs), the third of which is now under preparation. In practice, however, the PIP is only one element in the investment allocation system in Vietnam. Although often described as a compendium of projects, it is not a comprehensive screening and approval process even for large projects. Provinces are performing an increasingly important role in public expenditures. The Government should undertake a strategic review of the allocation of responsibilities for public investment between tiers of government, as part of the implementation of the new Government Resolution 08/CP. MPI should further strengthen its capacity to guide, train, support and supervise bodies with decentralized investment authority. An investment planning manual and standard project registers should be developed and rolled out to every level of government. Analysis of recurrent costs should be built in to investment

16 xii Vietnam Public Expenditure Review and Integrated Fiduciary Assessment selection, and the MTEF approach should be used as a way of balancing and ensuring consistency between recurrent and capital costs. 9. Public procurement management. Sound public procurement is a central pillar of good public expenditure management in a market-based economy. In Vietnam, the importance of procurement in public spending is rapidly rising. The value of procurement financed through the State Budget more than doubled between 1999 and 2003 from US$2.0 billion to US$4.9 billion. A significant portion of public spending occurs through the public procurement process and even modest efficiency improvements in the workings of the system could potentially yield substantial savings perhaps of the order of 1-2 percent of GDP. Over the past few years, progress has included the strengthening of the Department of Public Procurement (DPP) in MPI; and the important steps taken towards increasing transparency and standardization of public procurement, including the mandating of the creation of a Public Procurement Bulletin and of Standard Bidding Documents (SBDs) to guide procurement action. Nevertheless, important challenges remain. The Government should establish a mechanism for receiving and responding to procurement complaints. It should finalize the Procurement Ordinance/Law and submit it to the National Assembly. Procurement monitoring mechanisms should be established. An ongoing capacity building effort is required, including capacity not only in management of initial procurement but also contract supervision and enforcement. 10. Education sector expenditure. Vietnam s rapid progress with poverty reduction and economic growth was underpinned by solid progress in promoting literacy and broader human development, both before and during the reform period. During the PER- IFA review period, substantial progress has been made in increasing financing for the sector. Participation rates have increased and physical infrastructure has improved. Gaps in those participating and benefiting from education have narrowed. Nevertheless, important challenges are faced in improving the quality, equity and effectiveness of the service. Past and planned increases in education sector expenditure, combined with demographic changes in the school age population, have provided an opportunity for increased focus on service quality, equity and effectiveness. Rather than further improving Pupil-Teacher Ratios, the Government should use additional resources to prioritize the introduction of full day working more widely, reducing user charging and improving teacher qualifications and classroom infrastructure, particularly in the poorest localities. Mechanisms should be developed to ensure that at least a minimum level of budget funding reaches the frontline of service delivery for each student. The Government should consider linking improvements in teachers pay to changes in practice and performance; and should give priority to the development of tests of attainment at key stages. 11. Transport sector expenditure. Transport infrastructure makes an important contribution to both poverty reduction and growth in Vietnam. Investment in rural roads has led to all but 220 communes being connected to all weather roads. Research has shown that these investments have had a significant impact on reducing rural poverty, and particularly in the poorest areas. The quality and extent of transport infrastructure have improved, the size of the vehicle fleets has increased and the efficiency and cost with which transport services are delivered has improved. Improved efficiency and lower cost provision of logistics services has been a key factor in facilitating Vietnam s export-

17 Executive Summary xiii led growth. Nevertheless, serious concerns remain regarding inadequate maintenance expenditure in the sector. The Government should shift funds from new investment expenditure to operations and maintenance in the roads sector; and should take urgent action to strengthen commitment controls, address expenditure arrears, and ensure that investment in new roads does not reach unsustainable levels. It is also clear that the transport sector needs to attract significant private sector financing to support publicfinanced expenditures. The Government should accelerate implementation of policies and measures to attract private sector investment in transport. 12. Health sector expenditure. Vietnam s poverty reduction and growth has gone hand-in-hand with significant progress in health. Health indicators have continued to improve nationally since the early 1990s, while once high levels of fertility appear to have been brought under control. At the same time, some problems have persisted. There have been limited gains for some population segments, leading to growing inequalities. New health challenges have also appeared, including HIV/AIDS and more recently SARS and avian flu. The Government has taken steps to address some of these remaining challenges. Most dramatically, it has developed a national strategy for assisting the poor with healthcare costs (Decision 139), resulting in an increased level of health insurance coverage. The Government should encourage provinces, in implementing Decision 139, to purchase health insurance cards for the poor rather than reimburse healthcare providers directly. It should carefully monitor and evaluate implementation of Decision 139, including the methods used to identify the poor. It should proceed cautiously with implementation of Decree 10 in hospitals, with careful monitoring to ensure that public funds are not diverted to support the expansion of services for the rich. Strong and effective accreditation mechanisms should be developed; and all accredited hospitals, public or private, should be eligible to provide services to the insured, with public funding gradually shifting to the demand side for curative health care. 13. Agriculture and rural development sector expenditure. Agricultural transformation has been a vital component in Vietnam s pro-poor growth. The use of market mechanisms to provide incentives to farmers, beginning with the doi moi reforms of the 1980s, resulted in substantial agricultural sector growth. However, this growth was supported by public provision of basic infrastructure, by substantial progress in human development and by publicly financed research and extension services. In coming years, the efficient, effective and equitable provision and management of rural public services and infrastructure will play an even more important role in sustaining Vietnam s agricultural growth and rural development. To this end, the Government should reprioritize and strengthen management of public expenditure within the agriculture and rural development sector. In particular, it should improve the balance between recurrent and capital costs, particularly in irrigation, with more attention given to catching up with deferred maintenance and system completion. It should increase the budget share of agricultural research and extension services; and reduce the burden of agricultural SOEs on public expenditure. As with transport, action is needed to strengthen commitment controls and address the expenditure arrears that have built up in the sector. 14. National Target Program expenditure. In the early 1990s, Vietnam established a number of National Target Programs (NTPs) to support local governments and sector ministries to achieve national targets such as poverty reduction and economic and social

18 xiv Vietnam Public Expenditure Review and Integrated Fiduciary Assessment development. Since 2001, these programs, including the Hunger Eradication and Poverty Reduction and Job Creation Program (HEPR-JC), Program 135 (P135) and programs in the areas of Health, Water, Education and Culture, have grown into an important instrument for economic development and poverty reduction. Spending on NTPs has grown rapidly and has contributed in important ways to the achievement of key development and poverty alleviation goals. The Government should continue to use NTPs as a complement to mainstream funding and given Vietnam s rapid fiscal decentralization should consider growing them as a share of public spending to enhance central Government s ability to ensure delivery of national targets. However, Government should rationalize NTPs and strengthen their coordination both with each other with main programs. It should strengthen mechanisms to ensure that NTPs deliver against national targets, including establishing clearer annual performance agreements based around specific and measurable outputs and outcomes. Fiduciary controls for NTPs, though not as weak as is sometimes claimed, should be strengthened. There should be increased local consultation and participation in NTP management and planning. 15. Using public expenditure analysis. Periodic assessment of recent public expenditure and its management is a crucial part of a sound planning and budgeting process. Such assessments are part of the planning and budgeting cycle in most developed countries. As the first chapter of the report describes, this PER-IFA is the result of a year-long partnership and dialog, not only between Government and donors but also between the different ministries within Government. For the first time, the Government has taken a leading role in such a public expenditure analysis exercise. The Government should incorporate the analysis and recommendations of the PER-IFA (summarized in Appendix 1.2) into the SEDP and forthcoming budgets and should monitor implementation closely. It should take steps to further enhance the capacity and status of public expenditure analysis, not only in MOF and MPI but across Government. It is recommended that the Prime Minister should commission a further PER-IFA, to be completed within the next three years, again led by Government and produced in partnership with donors. In addition, annual updates should be conducted on a smaller scale. 16. The following table summarizes the main recommendations of the PER-IFA.

19 Executive Summary xv Vietnam Public Expenditure Review and Integrated Fiduciary Assessment Table of Recommendations Issue/Sector (numbers correspond to chapters) 1: Public Expenditure Review 2. Fiscal sustainability Recommendations 1. Reflect the analysis and recommendations of the PER-IFA in the forthcoming SEDP and forthcoming budgets and monitor implementation closely. 2. Further enhance the capacity and status of public expenditure analysis teams within the Ministry of Finance, Ministry of Planning and Investment, sector ministries and provinces. 3. Lead a further PER-IFA within the next three years, again working in partnership with the World Bank and other donors; and conduct annual updates on a smaller scale. 1. Rapidly implement the plan to prepare a realistic and sustainable Medium-Term Fiscal Framework as part of every budget cycle. 2. Defend the share of revenues in GDP at its current target of percent, with ongoing efforts to strengthen tax policy and administration. 3. Clarify and rationalize assignment of responsibility for management of debt and strengthen arrangements for the monitoring and management of other fiscal risks. 4. Keep the budget deficit (measured net of amortization) below 3 percent of GDP. 5. Restrict further off-budget bond issuance, channeling all Government borrowing in future through the budget. 6. Take urgent action to resolve the current expenditure arrears (particularly in the transport and agriculture sectors) and prevent their further build up. 7. Align fiscal reporting with IMF GFS standards. Time Frame Completed by end 2007 Annually from 2005 From Composition of 1. Strike a better balance between capital and recurrent expenditure, with emphasis on composition, quality and

20 xvi Vietnam Public Expenditure Review and Integrated Fiduciary Assessment Issue/Sector (numbers correspond to chapters) public expenditure 4. Public expenditure management Recommendations sustainability rather than quantity. (In the World Bank s view, the Government should end the policy of increasing capital expenditure faster than recurrent expenditure.) 2. Create an enabling environment for private investment, including choosing options for increasing private finance in the provision of public infrastructure where cost-effective; and reducing state transfers to SOEs. 3. Ensure recurrent expenditure takes an increased share of the budget; and ensure that increases in the level of wages and salaries do not end up squeezing out other operations and maintenance. 4. Strengthen and integrate planning of pay and employment reform. Wage increases need to be financed through implementation of a clearer strategy to shift non-core government employment to the private sector. 5. Bring the functional and economic allocation of expenditure closer into line with national and sector-level strategies. This effort should be based on the policy analysis in the aggregate MTFF and sector and province-level MTEFs, rather than on arbitrary and inflexible rules on budget shares for priority sectors. 6. Use new MOLISA and GSO poverty data to assess whether resources are allocated in line with targets to reduce poverty and promote growth; and further investigate how allocations are benefiting various sub-groups of the population. 1. Expand budget coverage to comply with internationally-accepted norms. In particular, budgets should include all fees and contributions, and all government debt, including on-lending and the currently off-budget bonds. Budgets should also include as detailed as possible an estimation of guaranteed debts and other contingent liabilities. 2. Encourage donors to accelerate their work on harmonization; and to channel aid through the State Treasury and ensure that all such aid is recorded on budget. 3. Give the recently established Inter-Ministerial Working Group on Medium-Term Expenditure Planning elevated status; and accelerate implementation of the pilot MTFF and pilot MTEFs in four sectors and four provinces. 4. In developing the new Treasury and Budget Management Information System, take steps to ensure this Time Frame As soon as data is available

21 Executive Summary xvii Issue/Sector (numbers correspond to chapters) Recommendations Time Frame provides timely, accurate and immediately accessible data to MPI and provincial planning departments on project financial execution. 5. Financial accountability and transparency 5. Continue to explore options for selected merger of planning and finance functions at subnational and sectoral level. 6. To strengthen MOF-MPI joint working, MPI should become an active partner with MOF, sector ministries and provinces in the preparation of MTEFs; and MOF should play a major role in the development of the new SEDP. 7. Strengthen the links between performance indicators and budgetary decision. 8. Strengthen the monitoring of service delivery, using the citizen report card approach; and encourage civil society organizations to become more actively involved in service delivery monitoring at the local level. 9. Consider options for further reform of the transfer norms used to determine public expenditure needs in the budget transfer/revenue sharing formula; and issue guidance making clearer that the remaining physical norms are indicative and not mandatory. 10. The new TABMIS system should be implemented so as to ensure that sector ministries are given direct access to State Treasury data on execution of sector spending at every level of government. 11. Monitor and evaluate the impact of single annual allocations and of greater budgetary flexibility to ensure that it results in an improvement and not deterioration in the composition of expenditure, outputs and services provided. 12. Refine and formally adopt the new Unified Chart of Accounts, and implement as part of TABMIS. 13. Continue to give sustained attention to change management, organizational readiness and training as TABMIS implementation moves forward. 1. Move progressively towards adopting International Public Sector Accounting Standards (IPSAS) and International Auditing Standards

22 xviii Vietnam Public Expenditure Review and Integrated Fiduciary Assessment Issue/Sector (numbers correspond to chapters) 6. Decentralization to subnational government Recommendations 2. Establish an effective public accounts oversight function at the National Assembly, perhaps by strengthening the capacity of the Economic and Budgetary Committee. 3. Ensure independence for SAV by converting it into an independent organization established by the National Assembly. 4. Improve the transparency of the oversight process by making audit reports available to the public, and promote demand for accountability by encouraging media and public debate on public financial management issues. 5. Further rationalize the roles and responsibilities of the audit and inspection functions: for example, consider establishing internal audit functions, initially at ministerial level, to gradually replace the present inspection function at each ministry. 6. Ensure application of improved accounting and auditing standards to large SOEs (General Corporations). 7. Draft a combined law for SOEs and non-soe enterprises so that they are all subject to the same requirements; strengthen the internal audit function in SOEs; and establish a professional association of internal auditors. 8. Continue systematic monitoring of publicity of budgets and accounts at sub-national level, and also encourage provinces and districts to monitor how many schools, health providers and other spending units publish their budgets and accounts. 9. Publish an annual report with detailed and consistent data on public spending in each province. 10. Produce each year a Budget White Paper explaining in an accessible way the contents of the Budget and its links to national development goals and strategies. 11. Complete the corruption review as soon as possible and ensure appropriate follow-up action. 1. Monitor and evaluate the impacts on public service delivery of granting provincial discretion over the public finances of districts and communes; and consider in the longer term the case for specifying specific revenue and expenditure assignments for districts and communes. Time Frame Annually from 2005 Annually from 2006 budget

23 Executive Summary xix Issue/Sector (numbers correspond to chapters) Recommendations Time Frame 2. Enhance administrative capacity at the local level of government by implementing programs to upgrade and maintain critical levels of technical and administrative capacities at the district and commune levels. 3. Consider the need in the longer term to introduce explicit expenditure assignments for districts and communes, and the need to allow for asymmetric assignments below the province level. 4. Issue regulations to strengthen collaboration and coordination among agencies at different levels of government that share a particular expenditure responsibility; and to facilitate contracting with the private sector. 5. Study the feasibility of increasing revenue autonomy at the provincial level in the medium term. 6. Explore ways to improve the apportionment of shared taxes between central and provincial governments. 7. Monitor and evaluate how the flexible, unwritten approach to revenue assignments for districts and communes is performing. (In the World Bank s view, the Government might then mandate more explicit revenue assignment at local levels as part of any further revisions to the State Budget Law.) 8. Consider augmenting the existing system of transfers with clearer revenue norms, based on stronger revenue forecasting capacity; and by introducing explicit norms for capital expenditure. 9. Consider introduction of a full formula driven system of equalization grants. 10. Consider strengthening of the conditional grant system, both for recurrent and capital spending. 11. Consider developing a new inter-governmental fiscal system, whereby full autonomy to approve subnational budgets will rest with People s Councils of corresponding level. 12. Delegate more authority to subnational governments in determining their own expenditure norms within a range set by the center. 13. Strengthen the current borrowing rules for sub-national government in particular, the specification of debt limit rules; and ensure the inclusion of all bond issuance by provinces in the State Budget