VIETNAM FISCAL TRANSPARENCY REVIEW:

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1 VIETNAM FISCAL TRANSPARENCY REVIEW: Analysis and Stakeholder Feedback on State Budget Information in the Public Domain Poverty Reduction and Economic Management Unit East Asia and Pacific Region March 2013

2 Vietnam Fiscal Transparency Review: Analysis and Stakeholder Feedback on State Budget Information in the Public Domain March 2013

3 Acronyms and Abbreviations AL BPBT CAO CFAA CIT CSO DMEFD DMFAS DSA EC FBC FOR FTC GFSM GIFMIS GIFT HIPC IMF IPSAS MOF MOF MPI Accounting Law Best Practices for Budget Transparency Chart of Accounts Country Financial Accountability Assessment Corporate Income Tax Civil Society Organization Debt Management and External Finance Department Debt Management and Financial Analysis System Debt Sustainability Analysis Economic Committee Finance and Budget Committee Fiscal Operation Report Fiscal Transparency Code Government Finance Statistics Manual Government Integrated Financial Management System Global Initiative on Fiscal Transparency Highly Indebted Poor Countries International Monetary Fund International Public Sector Accounting Standard Ministry of Finance Ministry of Finance Ministry of Planning and Investment MTFF NGO OBI ODA PAPI PCI PDM PEFA PFF PFM PIT ROSC SAI SAL SAV SBL SEDP SOE TABMIS TIN TSA VAT VCCI Medium-term Fiscal Framework Non-profit Government Organization Open Budget Index Official Development Assistance Public Administration Performance Index Provincial Competitiveness Index Law on Public Debt Management Public Expenditure and Financial Accountability Public Financial Funds Public Financial Management Personal Income Tax Report of Observance of Standards and Codes Supreme Audit Institution State Audit Law State Audit of Vietnam State Budget Law Social-Economic Development Plan State-Owned Enterprise Treasury and Budget Management Information System Taxpayer Identification Number Treasury Single Account Value-Added Tax Vietnam Chamber of Commerce and Industry 2 VIETNAM FISCAL TRANSPARENCY REVIEW

4 Table of Contents EXECUTIVE SUMMARY 5 INTRODUCTION: BACKGROUND AND METHODOLOGY 11 (a) Background and motivation 11 (b) Outline and methodology 13 DISCLOSURE OF AND ACCESS TO FISCAL INFORMATION IN VIETNAM 17 (a) More fiscal information available in the public domain 17 (b) Strong interest in fiscal information among key stakeholders 18 (c) Scope for improving content of official Budget documents 18 (d) Fiscal information, market confidence and macroeconomic stability 21 (e) Mid-Year Budget Updates to communicate policy changes and developments 22 (f) Publishing the Budget Proposal to further strengthen Budget quality 22 (g) Budget transparency challenges at sub-national level 23 (h) Budget transparency and development outcomes at local level 25 (i) The role of CSOs and the media in promoting Budget transparency 26 COVERAGE, COMPREHENSIVENESS AND PRESENTATION OF CORE FISCAL ISSUES 29 (a) Detailed information on budgetary activities 29 (b) Detailed economic breakdown for greater transparency 30 (c) Carry-over practices limit fiscal transparency 32 ( d) Using existing information to further strengthen supporting documents 33 LOOKING BEYOND CORE BUDGETARY ACTIVITIES 37 (a) Extra-budgetary funds 37 (b) Off-Budget capital spending 39 (c) State Owned Enterprises 39 FISCAL TRANSPARENCY REFORMS: ISSUES AND SUGGESTED DIRECTIONS 41 (a) The regulatory framework for fiscal management 42 (b) Aggregate fiscal policy transparency and credibility 48 (c) Transparency of expenditure management and reporting 55 (d) Sector and local transparency, service delivery, and accountability 58 (e) Transparency of revenue management 59 (f) Transparency of aid management 61 (g) Budget oversight and accountability 62 CONCLUSION AND SUMMARY OF RECOMMENDATIONS 65 VIETNAM FISCAL TRANSPARENCY REVIEW 3

5 REFERENCES 71 Annex A: Different approaches to reviewing Fiscal Transparency 75 Annex B: Overview of Budget Transparency Survey 83 Annex C: Good Practice on disclosure of Budget Reports 87 Annex D: Summary of Budget Tables 93 Annex E: List of Public Finance Funds 95 Annex F: Review of Fiscal Transparency provisions in the State Budget Law (2002) 97 Annex G: Legal Requirements on Public Disclosure of Fiscal Information 115 This Policy Note was prepared by Habib Rab (WB Senior Economist, Vietnam) and Bill Allan (WB Consultant and former IMF) under the overall guidance of Sudhir Shetty (WB, Sector Director PREM East Asia and Pacific), Victoria Kwakwa (WB Country Director for Vietnam) and Deepak Mishra (WB Lead Economist for Vietnam). Inputs were provided by Tony Oliffe (mapping Chart of Accounts to GFSM 2001 categories) and Dr. Le Quang Thuan (review of legal provisions for Budget disclosure). Phuong Anh Nguyen (WB Research Analyst) provided research support, Lan Phuong Nguyen (WB Program Assistant) and Linh Anh Thi Vu (WB Program Assistant) provided administrative support. The Budget Transparency Survey was administered by the Vietnam Chamber of Commerce and Industry. The Policy Note is an output under the WB Vietnam Programmatic Public Finance Review (PPFR, FY12-15). The PPFR team includes Duc Minh Pham (WB Senior Economist, Vietnam), Quang Hong Doan (WB Senior Economist, Vietnam), and Quyen Hoang Vu (WB Economist, Vietnam). AusAID support through the AusAID-World Bank Strategic Partnership in Vietnam (ABP) is gratefully acknowledged. The Policy Note was peer reviewed by Mark Ahern (WB Lead Economist, Indonesia) and Vivek Srivastava (WB Senior Economist, PREM Public Sector Group). Comments were received from Leah April (WB Senior Economist, Cambodia), Robert Gilfoyle (WB Financial Management Hub Leader in Vietnam), Thornton Matheson (IMF Senior Economist), Holger Van Eden and Yang Hyun- Jin (IMF Fiscal Affairs Department). The team is very grateful for guidance, support and comments from Mr. Vo Thanh Hung (Deputy Director General) and Mme Tran Kim Hien (Head of Division) at the State Budget Department of the Vietnam Ministry of Finance. All errors remain the authors. 4 VIETNAM FISCAL TRANSPARENCY REVIEW

6 XECUTIVE SUMMARY: EVIETNAM FISCAL TRANSPARENCY REVIEW A. Background and methodology 1. Vietnam has come far in improving fiscal transparency. Building on these gains could help strengthen macroeconomic management, improve market perceptions of risk, and increase accountability for service delivery. It is an important element of the Government s policy dialogue with Development Partners, particularly in the context of ongoing budgetary support. External reviews of PFM and fiscal transparency in Vietnam have noted important progress though highlighted considerable scope for improvement. 2. This Policy Note aims to complement ongoing PFM reviews, including the Government s Public Expenditure and Financial Accountability (PEFA) assessment, to help identify relatively low cost measures to strengthen fiscal transparency. It draws on existing diagnostic approaches to carry out a technical review on the public availability of fiscal information (section B), and the coverage, comprehensiveness and presentation of fiscal reports (sections C and D). 3. The technical review is supplemented with a survey of key stakeholders on Budget transparency in Vietnam, and available cross-country evidence on the impact of fiscal transparency. Through a combination of these, the Policy Note highlights ways the Government could enhance fiscal transparency through its ongoing PFM reform program (section E). All recommendations are summarized in table A below, and consolidated in the conclusion (section F). B. Disclosure of and access to fiscal information in Vietnam 4. Increased public availability of fiscal information in Vietnam in recent years is matched by strong interest and demand among stakeholders. The Ministry of Finance is rated highly in terms of its progress in communicating fiscal information, but the Budget transparency survey also indicates much scope to improve official Budget documents. 5. Although the media is the key channel for communicating fiscal information to the markets, they themselves have difficulty in interpreting primary Budget reports. Civil Society Organizations (CSOs) play an important role in promoting Budget literacy and transparency particularly at sub-national level. But general access to and awareness of Budget issues at sub-national level remains poor, in part because disclosing only financial information may not provide meaningful information to ordinary citizens. VIETNAM FISCAL TRANSPARENCY REVIEW 5

7 6. The Policy Note suggests a few ways to address some of these issues and improve disclosure of and access to fiscal information including: publication of a Mid-Year Budget Update; publication of the Budget Proposal when it is submitted to the National Assembly; and development of user-friendly templates to communicate Budget priorities and achievements, including on service delivery. C. Coverage, comprehensiveness and presentation of core fiscal issues 7. State Budget reports and Financial Statements in Vietnam provide detailed information currently defined within the budgetary sphere. Despite these achievements, stakeholder feedback suggests that there is much scope for improvement in Budget coverage, comprehensiveness and presentation. 8. A review of Budget reports suggests that this feedback can be explained by several factors. Firstly, there is a lack of information in public reports on the economic breakdown of spending (e.g. wages and salaries, goods and services, transfers) by administrative units. Disclosure of the economic breakdown would provide a more informative and analytical view of the Budget. Secondly, information on capital allocations in public documents is limited. With some exception, there is no information on capital spending by functions of Government or across all administrative units. As a result, it is not possible to determine from the Budget document total spending in any one sector. Finally, Vietnam has a complex system of expenditure and revenue carry-over practices, which impacts negatively on credibility and transparency of the Budget. 9. Improvements in Budget classification, and analytical presentation and reporting, can be addressed relatively easily in Vietnam as the information is available. Section C highlights practical ways of using information already available in the public domain to strengthen the analytical content and presentation on fiscal performance, budget balance, and Government debt. Stakeholders have indicated further information is needed in Budget documents on all of these elements. The Government is also working to ensure consistency in classification between the Budget Plan and Budget Implementation reports to better monitor performance of budget implementation. Further detailed recommendations on strengthening budget classification are covered in section E. D. Looking beyond core budgetary activities 10. There are a number of activities that currently fall outside of the core budgetary sphere including extrabudgetary funds, off-budget capital spending, and State Owned Enterprises but which have important fiscal implications. Whilst all of these have detailed reporting requirements, there is no consolidated analysis of their implications on Government finances. Non-inclusion of analysis of these activities into the overall Budget can distort fiscal policy decisions and limit the ability of the public to assess the full extent of the fiscal deficit, the tax burden, or the strategic allocation of resources across and within sectors. Many of these activities can and should be more fully integrated with the budget; while many aspects will take time and require capacity strengthening, action should be initiated as soon as possible to make the budget and disclosure of fiscal information as comprehensive as possible. 11. In the short to medium-term, the Policy Note suggests to at least include summary reports of off-budget activities in core Budget reports. This would enable stakeholders to have an idea on the relative scale of these activities. Further down the line, the Policy Note suggests to review existing reporting standards and requirements for off-budget activities, and update these to align them with Budget reporting requirements, including consistency with GFSM 2001 classification. 6 VIETNAM FISCAL TRANSPARENCY REVIEW

8 E. Fiscal transparency reforms: Issues and suggested directions 12. The final section of the Policy Note looks at broad elements of the Government s PFM reform program and recommends specific measures (see tables A and B) to enhance transparency by responding to issues highlighted in sections B-D of the Note. The first seven recommendations all relate primarily to the proposed revision of the State Budget Law (SBL). It is envisaged that the recommendations could be refined further by active consultation among key stakeholder groups. 13. An important focal point for the above measures will be the Government s ongoing review of the State Budget Law (SBL). On the SBL, the Note recommends to: (i) adopt the GFSM 2001 definition of overall fiscal balance; (ii) clarify the relationship between executive and oversight agencies of Government at all levels (with a particular emphasis on links between the SAV and the Finance and Budget Committee (FBC) of the National Assembly); (iii) strengthen reporting coverage and accountability of State Budget spending (particularly PFFs, sub-national reporting, and use of fees and charges); and (iv) strengthen quality and timeliness of disclosure to the public, with a greater emphasis on reporting by service delivery programs. 14. Other recommendations are not wholly dependent on regulatory reform, but clarification of the above aspects of the SBL will provide a stronger basis for their implementation. Key areas where reforms are needed and generally supported by stakeholders are to: (i) establish realistic forecasts of revenue and review policies on transfer of over-realized revenues; (ii) implement medium-term budget forecasts as a basis for smooth fiscal adjustment and setting consistent budget ceilings; (iii) develop system-generated fiscal operations reports to track the fiscal deficit as defined under GFSM-2001; (iv) develop fiscal risk analysis and include fiscal risk assessments in the budget presentation and budget reviews; (v) integrate tax expenditure reports and reviews as part of the budget presentation and policy process; (vi) put donor accounts on treasury, on account, and on reporting through TABMIS to improve fiscal reconciliation and aid management; (vii) strengthen oversight functions of the SAV at all levels of government; and (viii) engage more closely with CSOs and the media for better communication and capacity development for budget monitoring. VIETNAM FISCAL TRANSPARENCY REVIEW 7

9 Table A: Suggestions for strengthening fiscal transparency in Vietnam Issues Suggestions Timeframe 1 1. Regulatory Framework for Fiscal Management 1.1. Non-disclosure of Budget Add provision to publish Budget Proposal Proposal limits citizens participation. at the time it is submitted to the National Assembly as part of the revision of the State Budget Law (2002) Definition of fiscal balance in SBL not aligned with international standards Add a provision requiring that GFS standard be applied as the key reference point for budget analysis. Short-term Short-term 1.3. Reporting coverage and accountability of State Budget spending can be further clarified in SBL 1.4. Present legal framework does not adequately address disclosure of fiscal risks. Key factors for SBL include: consolidated reporting including extra-budgetary funds; reporting from sub-nationals for greater accountability; use of fees and charges; and carry-over practices. Include a consolidated risk statement in the budget presentation to improve transparency Current reporting does not yet Review reporting provisions in SBL, Decree provide a full picture of fiscal policy or ensure accountability. 60 (2003), Decision 192 and supporting Circulars to: promote consistency in and consolidation of reporting on and offbudgetary funds; simplify reporting; and report on service delivery Existing regulatory framework Strengthen provisions for SAV oversight lacks clarity on oversight roles of Budget Proposal, coordination between and responsibilities. SAV and the Finance and Budget Committee of the National Assembly, and the SAV s coverage of provincial budget execution Decentralization has created Review relative role of different levels of some confusion over authority government and the overall decentralization between People s Committees strategy based on international experience. A and line ministries. decentralization law could be considered. 2. Aggregate Fiscal Policy Transparency and Credibility 2.1. Classification of Budget and Map financial outcome data from the Chart Budget reports do not lend themselves to meaningful analysis Analytical content and presentation of Budget documents could be strengthened. of Accounts to GFSM 2001 categories to enable generation of quarterly Fiscal Operations Reports (FORs) with more accurate analytical presentation. Use existing information to strengthen analytical content on fiscal performance, budget balance, and Government Debt. Clarify if data is preliminary and subject to variation because of carry-over practices. Short-term to change SBL; medium-term for reporting (see 2.2) Short-term to change SBL; medium-term to implement (see 2.3 below) As per 1.3 and 1.4 above. Medium-term Medium-term Short-term Short-term 1 Time to implement reform action: Short-term: 6-12 months; medium-term: 1-3 years; long-term: more than 3 years. However, policy, and initiation of reviews and action plans in most cases should be adopted in the short-term. 8 VIETNAM FISCAL TRANSPARENCY REVIEW

10 Issues Suggestions Timeframe Consistent underestimation Provide different scenarios for oil revenue Medium-term of revenue and expenditure compromises Budget credibility and transparency. projections, and adopt a review mechanism for dealing with major variations as a result of price or other shocks. Eliminate the practice of transferring over- realized revenue to the following year and other carry-over practices. Implement multi-year forecasts with clearly stated assumptions as part of medium-term fiscal framework Omitting PFFs from Integrate summary reports on PFFs into Short-term consolidated Budget distorts Budget documents as a starting point. assessment of overall Review PFF reporting standards and Medium-term macroeconomic and fiscal requirements under Decision 192 and update situation. to align with Budget reporting requirements (consistent with GFSM 2001 classification) No consolidated analysis of Develop framework drawing out links Medium term SOEs impact on the State Budget. between the Budget and SOEs, testing impact of alternative shocks to SOE operations, and developing a set of indicators to assess risks. 3. Transparency of Expenditure Management and Reporting 3.1. Carry-over practices Review and adopt international experience Short-term prevent reliable estimates of allocations. and good practice guidelines for carry-overs, including limitations on type of expenditure and need for clear allocation of carried-over spending Content of Budget reports are difficult to interpret and communicate particularly at sub-national level Lack of consistency between classification of Budget plans and execution reports limits assessment of budget performance Coverage and comprehensiveness of inyear budget reports could be strengthened Transparency limited by lack of economic breakdown of recurrent expenditure. Review disclosure requirements under Decision 192 and GDO and develop user friendly templates for Budget and service delivery reports at sub-national level. Engage more closely with CSOs and the media for better communication and capacity development for Budget monitoring. Review classification of Budget plans and classification of Budget execution reports to better align the two across expenditure types and functions. Publish Mid-Year Budget Updates with clear communication of changes in fiscal policies, budgetary adjustments, and exogenous developments. Include tables with major economic categories of spending by administrative units to show wage bill and other economic components of cost. Medium-term Short-term Medium-Term Short-term Medium-term VIETNAM FISCAL TRANSPARENCY REVIEW 9

11 Issues Suggestions Timeframe Information on capital Include capital allocations across functional Short-term allocations is too aggregated and limits budget coverage. categories and/or across all administrative units, including at sub-national level. This would provide a more complete picture of allocations across sectors Lack of information on Include breakdown of off-budget capital Short-term off-budget capital spending complicates assessment of level and composition of capital allocations. spending in Budget document (aggregate figure already included) with sources of funding and allocations across sectors and functions. Include off-budget capital spending as part Medium-Term of deficit calculation (i.e. net incurrence of liabilities). 4. Transparency of Revenue Management 4.1. Transparency of tax expenditures The Government has reported on tax Short-term is an important element of the fiscal policy overview in the budget presentation. expenditure, although the most recent series was introduced mid-year. Consider a statement on tax expenditures in the State Budget document Some revenue items are not Provide more details for some items such as Short-term shown in sufficient detail for policy analysis or reporting. trade revenue, which currently aggregates import duty, export duty, and excises on imports. 5. Transparency of aid management 5.1. Donor accounts are not included Progressively put donor accounts on treasury, Medium-term in treasury accounting and reporting, leading to a statistical discrepancy in the fiscal accounts. on account, and on reporting through TABMIS to improve aid management and overall fiscal reconciliation. Begin with World Bank investment projects (TABMIS already started) 6. Budget oversight and accountability 6.1. Oversight roles and responsibilities need thorough review to ensure accountability Aligned with regulatory review above, carry out in-depth review of oversight functions across all levels of government. Medium to Longterm 10 VIETNAM FISCAL TRANSPARENCY REVIEW

12 I NTRODUCTION: BACKGROUND AND METHODOLOGY (a) Background and motivation 1. Vietnam has come a long way in improving transparency of fiscal policy and the State Budget since the late-nineties, when budget documents were still regarded as State secrets. As a result of fiscal management reforms, a lot of Budget data is now available in the public domain. At the same time, fiscal management in Vietnam over this period has become more complex, in part due to decentralization; a transition to market institutions; and new sources of budget financing. The Government is strengthening institutional capacity and implementing systems that will improve data collection and analysis and allow more accurate and timely communication of budget policies. Improving and maintaining standards of budget transparency is a high priority in the Government s Public Finance Management (PFM) reform program. 2 This Policy Note looks at progress to date and highlights possible measures to further strengthen fiscal transparency. 2. There is general acknowledgement that overall transparency of public policy is a priority area for governance reform in Vietnam. Despite progress, the Vietnam Development Report 2010 (VDR 2010) on Modern Institutions finds low levels of compliance with transparency provisions in various laws. 3 Several studies have shown that this has been costly for Vietnam s development. 4 VDR 2012 Market Economy for a Middle Income Vietnam argues that the marginal benefit to the Vietnamese economy from increased transparency is potentially huge. It can mitigate market inefficiencies, help reduce macroeconomic instability, and increase competitiveness. Credible and timely availability of economic data, and better communication of policy changes to the market, can help reduce market uncertainty and instability in Vietnam Prime Minister s Decision No: 450/QD-TTg On the Approval of Financial Strategy until 2020 (April 18, 2012) Section II, Paragraphs: (c) and (d); 3 (d); 5 (b); 7 (b) For example, please see Survey Report on Information Disclosure of Land Management Regulations, (November 2010), WB, DFID and DEPOCEN Vietnam Development Report (2012) Market Economy for a Middle Income Vietnam The World Bank has an ongoing Vietnam Transparency Project (VTP) to build on work done on transparency in land management to measure actual transparency, track changes over time, feed in good practices back to the provinces, and examine the causes of weak transparency, and the benefits of transparency. This will be replicated, and expanded as well to other sectors. VIETNAM FISCAL TRANSPARENCY REVIEW 11

13 3. Fiscal transparency in particular can have a critical impact in Vietnam given the public sector s relatively big role in the economy. There is growing evidence from cross-country studies, discussed later in the Note, on the important payoffs from fiscal transparency in terms of macroeconomic stability and improved service delivery. These are both high priority objectives for Vietnam in light of recent macroeconomic developments, market perceptions of risk, and rapid decentralization of Public Finance Management (PFM) authority. 4. The global economic crisis has pushed for even greater scrutiny of public expenditure in advanced and developing countries. 6 Fiscal transparency issues have received special attention in countries that receive budget support, including Vietnam, as this form of financing is subject to the country s own implementation processes and systems. 7 Two important initiatives have been launched recently in this regard. The Global Initiative on Fiscal Transparency (GIFT) 8 is a network of international, governmental and civil society bodies working on among other things, setting of global norms on fiscal transparency. The second initiative, bringing together over one hundred CSOs from fifty eight countries, is the movement on Make Budgets Public. Participating CSOs have signed the Declaration on Budget Transparency, Accountability and Participation to promote public access to Governments expenditure and revenue policies. 5. External reviews of PFM reforms and fiscal transparency in Vietnam have noted important progress though highlighted considerable scope for improvement. External assessment benchmarks were established in the 2007 Country Financial Accountability Assessment (CFAA), under the leadership of the Ministry of Finance. After important leaps in fiscal transparency in the run up to 2007, progress on transparency related recommendations in the CFAA has not kept pace with an increasingly more complex fiscal environment. 9 The CFAA is being updated in parts through a Public Expenditure and Financial Accountability (PEFA) self-assessment, which is currently ongoing. The Open Budget Index (OBI) has also carried out assessments in 2006, 2008, 2010 and Vietnam scores have been low on each assessment, albeit showing marginal improvement See for example following articles: M. Lipsky, Improving Governance Through Budget Transparency (February 22, 2012); I. Lienert, New Zealand to Legislate an Expenditure Rule, (May 14, 2012); M. Barnhart, Transparency Key to Fixing State Budget Crisis, (March 12, 2012) See for example: (i) UK House of Commons International Development Select Committee, MPs report on working effectively in fragile and conflict-affected states, (5 January, 2012) international-development-committee/news/conflict-substantive/; (ii) R. Zoellick speech at Peterson Institute, We will not lend directly to finance budgets in countries that do not publish their budgets or, in exceptional cases, at least commit to publish their budgets within twelve months, (April 6, 2011) GIFT is led by the Office of the Comptroller General of Brazil, the Philippines Department of Budget and Management, the World Bank, the IMF, and the International Budget Project. Please see Annex A and for further details In summary, the main CFAA recommendations were: (i) Continue to strengthen legislation for financial disclosure; (ii) Enhance the content of financial reports and type of reports that are disclosed; (iii) Seek a broader range of methods and improve the timeliness of disclosure; (iv) Promote awareness and participation in budget processes and scrutiny of financial performance; (v) Develop responsiveness and accountability within government to financial transparency. 12 VIETNAM FISCAL TRANSPARENCY REVIEW

14 (b) Outline and methodology 6. This Policy Note argues that fiscal transparency in Vietnam can be further enhanced at relatively little cost and with potentially big gains. It goes beyond CFAA/PEFA/OBI benchmarks, looking first in section B at the public availability of, and interest in, fiscal information from a survey conducted in March 2012 to seek stakeholder views on fiscal transparency in Vietnam. 10 These aspects suggest priorities for publication in Vietnam that could directly address OBI and other stakeholder concerns. Section B also looks at available studies on the impact of improved fiscal transparency to illustrate the links with macroeconomic management and sub-national development outcomes and to draw possible lessons for Vietnam. 7. After looking at the public availability of fiscal reports, the Note in section C turns to the coverage, comprehensiveness and presentation of core budget activities in those reports. It draws out priority issues based on stakeholder feedback on the quality and usefulness of fiscal reports available in the public domain. It suggests ways that budget classification and presentation could be strengthened with potentially little effort to improve analytical presentation and respond to specific stakeholder concerns. Section D then turns to issues that are currently not part of core budget activities in Vietnam including extrabudgetary funds, off-budget capital spending, and State Owned Enterprises but which have important fiscal implications. Analysis of these activities should be integrated with the budget process to provide a consolidated and reliable picture of Government fiscal policy impact both for internal management and external accountability. The section suggests some immediate steps, and highlights longer-term issues for separate discussion and follow-up. 8. The final section looks at suggested priorities in relation to the Government s ongoing PFM reform strategy and regulatory review. It makes specific recommendations for transparency-related reforms, with priority given to: (i) the regulatory framework and suggestions for the upcoming amendments to the State Budget Law (2001); (ii) aggregate fiscal policy transparency and credibility; (iii) transparency of expenditure management and reporting. Other areas covered include transparency of revenue management, transparency of aid management, and budget oversight and accountability. It is envisaged that the Policy Note recommendations could be refined further by active consultation among key stakeholder groups and then agreed priorities formalized in the Government s PFM reform strategy. 10 Please see Annex B for further details. The survey was administered by the Vietnam Chamber of Commerce and Industry. VIETNAM FISCAL TRANSPARENCY REVIEW 13

15 9. Existing diagnostic approaches for assessing fiscal transparency and benchmarking progress of PFM reform are used to help identify priorities. The four main PFM diagnostic tools are closely linked, as summarized in Box 1 below (and discussed further in Annex A). The analysis is not intended to replace the updating of PEFA benchmarks currently underway but to complement this work and other benchmarking diagnostics by referring to relevant sections of the FTC, PEFA, OBI and in some cases BPBT in each of the recommendations. This technical assessment is complemented by the survey findings. In addition to this, selected survey results from the Provincial Competitiveness Index and Provincial Governance and Public Administration Index are also used to inform the discussion. Box 1: PFM Diagnostics: Different Approaches, Common Objectives IMF Code of Good Practices on Fiscal Transparency (FTC): FTC started in 1998, and was updated in 2001 and It sets out good practice standards for fiscal transparency across 45 elements of a country s PFM system, grouped under four pillars: (i) clarity of roles and responsibilities for PFM; (ii) open budget processes; (iii) public availability of information; and (iv) assurances of integrity including data quality and external oversight. Performance against these is assessed by the IMF in consultation with country authorities through a Report on Observance of Standards and Codes (ROSC), which recommend PFM reforms to improve fiscal transparency. Public Expenditure and Financial Accountability (PEFA): PEFA started in It assesses performance of a country s PFM system using graded benchmarks against 31 indicators, grouped under six dimensions: (i) budget credibility; (ii) comprehensiveness and transparency; (iii) policy-based budgeting; (iv) budget implementation; (v) accounting, recording and reporting; and (vi) external scrutiny and audit. Transparency, covered under dimension (ii), looks at content and disclosure of the budget. PEFA reviews, unlike ROSCs, do not make recommendations for reform. These are addressed separately through a follow up PFM reform action plan. OECD Best Practices for Budget Transparency (BPBT): BPBT was issued in It covers similar issues to the FTC, but aims to highlight current best practice standards drawing on the experience of its membership. These best practices are designated under three pillars: (i) seven principal budget reports to be produced; (ii) specific disclosures to be included in the reports; and (iii) practices to ensure quality and integrity of reports. It focuses only on practices included in the budget, and does not cover off-budget or quasi-fiscal activities. It does not advocate standards or report on whether countries are implementing identified practices. But the OECD does carry out periodic surveys of transparency practices in selected countries. IBP Open Budget Index (OBI): OBI launched in 2006, is focused primarily on better disclosure and public participation aspects of budget transparency. OBI ratings are based on assessment against 92 questions covering: (i) the availability of eight key budget documents and the comprehensiveness of the data; and (ii) public participation and institutions of accountability. The methodology is simpler than other approaches. It focuses on issues that immediately relevant to the public, is independent, and does not rely on Government inputs. 14 VIETNAM FISCAL TRANSPARENCY REVIEW

16 Making connections: As the diagram below illustrates, these approaches all link to the pillars of fiscal transparency identified in the FTC and, in turn, each can be related to the key objectives of different stakeholders. A basis for effective internal management to meet MOF and National Assembly objectives will depend on a strong legal framework, which in turn, provides the foundation on which open systems and processes can be developed. Disclosure and accountability to the National Assembly, the public, the media, and the international markets depends on both the effectiveness of budget processes and the availability of independent oversight mechanisms. Each of the approaches summarized above emphasises different aspects of the fiscal transparency reforms and governments can apply these perspectives to help set priorities for reform in the light of all stakeholder objectives. For individual countries the rate of reform will depend on a range of issues, including local priorities, technical feasibility, political commitment and institutional capacity. Internal Management Legal Framework: FTC Quality and Integrity: (i) FTC Part IV; (ii) IBPBT Part 3; (iii) OBI Section 3; (iv) PEFA C (iv) Fiscal Transparency PFM Systems and Processes: (i) FTC Part II; (ii) OBI Section 3; (iii) PEFA. Disclosure: (i) FTC Part III; (ii) PEFA B; (iii) OBI Sections 1, 2; (iv) IBPBT Parts 1, 2. Public Disclosure and Accountability VIETNAM FISCAL TRANSPARENCY REVIEW 15

17 16 VIETNAM FISCAL TRANSPARENCY REVIEW

18 ISCLOSURE OF AND ACCESS TO FISCAL DINFORMATION IN VIETNAM (a) More fiscal information available in the public domain 10. Vietnam has made significant progress on public disclosure of budget information. The State Budget Law of 1996 provided the initial impetus for this. The State Budget of 1999 was the first ever to be made public in Vietnam. Though there was little detail, with planned spending and revenue presented at a very aggregate level and not based on international standards, this was a major milestone. Prior to this, the Government presented only a summary of the budget to the National Assembly showing gross spending, classified under productive and social expenditures Vietnam today publishes a relatively standard set of Budget documents and reports. FTC, PEFA, BPBT and OBI recommend the publication of between six and eight budget-related reports at different stages of the budget cycle. 12 Vietnam has in the last ten years substantially improved its performance in this respect and publishes at least four reports, including the approved Budget, Quarterly Budget implementation reports, End of Year Financial Statements, and External Audit Reports. Although the information in these documents does not yet reach international standards as discussed in Section D, the data is now increasingly becoming available. 12. Additional information published separately provides important fiscal information, which is not fully covered in Budget reports. The Ministry of Finance (MOF) publishes Debt Bulletins twice yearly, covering external debts and guarantees and soon to include domestic debt. The Ministry of Planning and Investment (MPI) publishes a daily Procurement Gazette, which reports on contract awards above VND 2 billion. Since the end of 2011, audited financial statements of State Owned Enterprises are published on the MOF website. Information on extra-budgetary activities is disclosed, though not consolidated in Budget documents, nor is their budgetary impact analyzed Joint IMF-World Bank Report, Vietnam: Toward Fiscal Transparency, June 1999 Please see Annex C for further details VIETNAM FISCAL TRANSPARENCY REVIEW 17

19 (b) Strong interest in fiscal information among key stakeholders 13. A survey of stakeholders was conducted to establish baseline data on their views on elements of fiscal transparency in Vietnam. It was targeted to groups that are expected to have some awareness, understanding, or interest in fiscal issues including: Government officials at national and sub-national level; institutions responsible for Budget oversight (e.g. National Assembly and State Audit); Civil Society Organizations; the private sector; research institutes and think tanks; the media; and Development Partners. The survey was administered by the Vietnam Chamber of Commerce and Industry through an online and mail-out questionnaire. Over five hundred stakeholders responded over a period of four weeks. The questions covered: (i) general awareness of and demand for budget information; (ii) ease of access to this information; and (iii) views on priority areas of improvement. Ch 1: How often respondents access Budget-related information (% of respondents) Very little 7.30% Sometimes 31.44% On a regular basis 61.26% Media reports on the budget 28% Final Accounts approved by the National Assembly 14% Ch 2: Source of Budget-related information (% of responses) Others 6% Annual State Budget document 17% Provincial or local budget documents 15% Reports on budget execution 20% Source: Budget Transparency Survey (2012) 14. The survey finds that together with increased disclosure, there is growing interest in fiscal issues among stakeholders in Vietnam. This partly reflects stakeholders targeted by the survey as noted above. Over ninety percent of respondents indicated that they access budget-related information periodically or on a regular basis (Chart 1). Over seventy percent of respondents agreed that the public availability of budget information in the past five years has greatly increased, and over half of respondents said they have become more aware of fiscal policy issues. (c) Scope for improving content of official Budget documents 15. Official Budget documents however were not a major source of information on fiscal issues for survey respondents (Chart 2). Quarterly Reports on budget implementation and the Annual State Budget documents are the top two official sources. But overall, less than one fifth of the survey responses said that Budget information was accessed through official documents, which reflects relatively low awareness, and is likely linked to how the information is presented. This is particularly the case for sub-national budget documents, which are discussed further below. The Government has made efforts to communicate 18 VIETNAM FISCAL TRANSPARENCY REVIEW

20 fiscal policies in more user friendly ways through its websites, which have become an important source of information as reflected in Chart 3 below. 100 Ch 3: Where do different stakeholders access information on the budget Government Oversight Cilvil Society Organization Enterprise Media Development Partner Others Government websites Government briefings National Assembly reports and briefings Media/press reports Research studies and reports Other Source: Budget Transparency Survey (2012) 16. The media is the biggest source of information on fiscal issues for survey respondents (Chart 3). A review of media reports from over three hundred media outlets found nearly 650 reports on fiscal issues in 2011, and close to 130 reports in the first quarter of The most popular topics reported in the media relate to aggregate fiscal issues, followed by revenue management and budget allocation (Chart 4). These are also the three most popular budget-related topics highlighted in the stakeholder survey (Chart 5). Macroeconomic issues have been at the forefront of private sector concerns in Vietnam. Predictable and regular access to accurate budget information is important for the media. 13 Lack of or poor communication can fuel speculation and distort market choices. Greater transparency on the other hand can allow the market to adjust to known policy choices. 13 Vietnam Development Report 2012: Market Economic for a Middle Income Vietnam, Chapter 4 VIETNAM FISCAL TRANSPARENCY REVIEW 19

21 Ch 4: Media reports Breakdown on Fiscal Service delivery 6% Revenue mgt 25% Oversight 7% Aid 3% Legal f/ work 3% Aggregate fiscal 33% Budget allocation 23% Public debt and guarantees 12% Ch5: Most popular Budget-related topics Budget links to SOEs 15% Budget deficit 12% Others 4% Macroeconomic 23% Gov spending 18% Gov revenue 16% Source: Budget Transparency Survey (2012) 17. The press rates the Ministry of Finance (MOF) highly in terms of communication and provision of information 14 but they also see a need for improvement in most areas of disclosure (Chart 6). Information on results is the top area for improvement. This is closely followed by need for more disclosure of fiscal policy priorities, debt and guarantees, and budget links to State Owned Enterprises, all of which are closely linked to macroeconomic issues. In the case of Local Media, 88 percent of responses also noted that Budget documents lack information on SOEs. Therefore although the amount of information disclosed, including on SOEs, is growing, analysis, presentation and communication can be improved, which is discussed further below and in Section C Ch 6: Priority Areas for Improving Disclosure (National Media) Information on results Fiscal Policies Priorities GoV. Debt and Guarantees Informations on SOEs Implementation of State Budget Budget Deficit GoV. Spending Priorities GoV. Revenue Agree and strong agree Disagree and strongly disagree Source: Budget Transparency Survey (2012) 14 Press release on MOF website following conference on Communication and Information Provision to the Press organized by the Ministry of Information and Communications. 20 VIETNAM FISCAL TRANSPARENCY REVIEW

22 (d) Fiscal information, market confidence and macroeconomic stability 18. Fiscal transparency is key to ensuring macroeconomic stability. Ready access to reliable, comprehensive, timely, understandable and internationally comparable information on fiscal activities 15 should promote fiscal discipline. Hameed (2005), 16 for example, finds that countries that are more transparent according to fiscal transparency indices based on published fiscal ROSCs have stronger fiscal positions as measured by primary balance (i.e. overall balance minus interest payments). This result holds after controlling for other variables that could also impact on fiscal discipline (e.g. level of development, trade openness, population size, population above the age of 65, and working age population). 19. Increased fiscal transparency should reduce the scope for creative accounting and hidden deficits. 17 When there is lack of transparency, Governments can make fiscal (or quasi-fiscal, by conducting fiscal operations through SOEs or other off-budget operations) adjustments to meet short-term deficit targets, but this does not reduce fiscal costs over the medium to long-term. For example, the lack of transparency over contingent liabilities in the financial sector can lead to a sudden shock when those liabilities are realized, and a drop in Government s net worth. Similarly, privatization proceeds can lead to a reduction in short-term deficit, but the impact on Government s net worth will depend on how the sale of assets impacts on the Government s balance sheet over the long-term. 20. These issues are of direct relevance to Vietnam in light of recent macroeconomic developments. Standard and Poor s downgraded Vietnam to BB- in December 2010 due to concerns over financial transparency, much of it related to Vinashin and uncertainties over Government liabilities. Even though in Vietnam the Government is not explicitly liable for SOE debt, experiences from elsewhere, including recent financial sector bailouts in Europe and the USA, show that public sector intervention may be inevitable to avert economy wide shocks. Although ratings for Vietnam have improved in line with macroeconomic stability, the most recent Fitch Ratings continue to highlight poor performance on transparency, particularly in relation to the health of SOEs Kopits, G. and Craig, J. Transparency in Government Operation, IMF Occasional Paper, No. 158 (1998) Hameed, F. (2005), Fiscal Transparency and Economic Outcomes, IMF Working Paper, WP05/225 Easterly, W. When Is Fiscal Adjustment an Illusion, Policy Research Working Paper 2109, The World Bank (May 1999) Fitch Ratings: Vietnam Full Rating Report (2012) VIETNAM FISCAL TRANSPARENCY REVIEW 21

23 (e) Mid-Year Budget Updates to communicate policy changes and developments 21. Stakeholders value in-year Budget reports published by MOF, though comprehensiveness and coverage could improve. At the moment, in-year Budget reporting is constrained by the lengthy process for consolidating sub-national data. The reports provide State level data with functional breakdown of recurrent spending, aggregate capital spending, and a detailed breakdown of revenue collection by type of revenue and taxpayer. However, there is no further breakdown by administrative units, or tier of Government. This should be addressed when the Government s Treasury and Budget Management Information System comes fully on line. 22. Publication of Mid-Year Budget Updates could help provide critical information to the market at relatively little cost. In recent years, domestic and external economic developments have led to significant changes to Budget plans, often in response to macroeconomic developments. In 2011 oil price projections of $77 a barrel in the 2011 Budget were found to be conservative at mid-year. Actual average was close to $102 per barrel, which led to 13 percent higher overall revenue collection compared to plan. This, coupled with mid-year capital spending adjustments led to a fiscal correction from a projected deficit of 5.3 percent of GDP in the Enacted Budget to an estimated of deficit of 2.7 percent of GDP. Similarly in 2012, new tax expenditures have been agreed through Resolution 13, five months into the fiscal year. Clearer reporting on such policy changes can have a positive impact on markets and macroeconomic stability. (f) Publishing the Budget Proposal to further strengthen Budget quality 23. Viet Nam could make important transparency gains by publishing the Budget Proposal when it is submitted to the National Assembly. Currently, the State Budget is published only after it is approved by the National Assembly. However, publication of the Budget Proposal can have important benefits, particularly given the level of interest outlined above. In the 2012 Open Budget Survey, Vietnam scored only 19 out of 100. This is an improvement from 2010, when Vietnam scored 14 out of 100. But it still leaves Vietnam in the bottom category (scant or no information), ranking 76th out of 100 countries surveyed. Although Vietnam meets a number of the OBI disclosure requirements on content of Budget reports, these requirements are assessed against the State Budget Proposal, not the Enacted Budget. Vietnam therefore gets the lowest score on 55 out of 92 of the questions used in the Open Budget Index. 24. Disclosing the Budget Proposal is a key element and standard requirement of Budget transparency, which can impact positively on the quality of the Budget. It is the only substantive opportunity that citizens have to influence the Government s plans to raise and allocate public resources. Civil Society Organizations can participate and contribute in at least the following ways: 20 (i) preparation of accessible summaries and guides to the Budget; (ii) Budget training for legislature, media and other CSOs; and (iii) independent analysis of Budget proposals. This can help to deepen the Budget debate through new information and analysis, focus more on public priorities, and strengthen accountability. 19 Open Budget Index 2012, Vietnam (International Budget Partnership) 20 W. Krafchik, Can Civil Society Add Value to Budget Decision-Making? A Description of Civil Society Budget Work, International Budget Project (2004) 22 VIETNAM FISCAL TRANSPARENCY REVIEW

24 Outcomes will of course depend on legislative authority over the budget and the capacity of CSOs. But opening up the process is the first step better budgets will follow over time. This may seem like a burden in terms of engaging with different non-state actors, but as seen from the experience of other countries, the potential benefits over the medium to long-term far outweigh the costs. (g) Budget transparency challenges at sub-national level 25. Despite the above achievements, access to and awareness of budget issues at sub-national level remains poor. Results from the Provincial Competitiveness Index show that stakeholders in the private sector find it difficult to access Provincial Budgets (Chart 7), though they find information on changes to tax regulations to be transparent (Chart 8). 21 The latter is likely related to efforts by the General Department of Taxes to strengthen consultations with the private sector, including through stakeholder surveys % 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Ch 7: Ability to access the provincial budgets Impossible/difficult Easy or very easy Possible 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% Ch 8: Access to information on changes in tax regulation Impossible/difficult Easy or Very Easy Possible Source: Provincial Competitiveness Index ( 26. There are detailed legal provisions for publication at all levels of government, but performance varies in light of differing levels of capacity. Sector agencies at each tier of government provide regular financial reports to the Treasury Office at that level of government. Sub-national Departments of Finance and Treasury are responsible for publication of this information. The Vietnam Provincial Governance and Public Administration Performance Index (PAPI) 2011 survey finds low levels of transparency in Communal Budgets. Chart 9 below shows that the average score on Commune Budget transparency is 1.79 out of a possible maximum of Please see World Bank Tax Reform in Vietnam: Toward a More Efficient and Equitable System, September 2011, Chapter 3, Section 9 VIETNAM FISCAL TRANSPARENCY REVIEW 23

25 27. These results of course do not necessarily reflect a lack of disclosure on the part of Communal authorities. Disclosure requirements are guided in large part by Decision 192 and the Grassroots Democracy Ordinance (GDO). Although compliance with these requirements is mixed across sub-national authorities, on average it is reported to be high. As discussed in Section C, there are detailed Budget tables by Province available in the Budget Books and Financial Statements. 28. The PAPI results are therefore related less to the amount of information disclosed and more to how the information is presented and communicated. The PAPI results are based on the fact that only 30 percent of respondents were aware of Commune Budgets, despite disclosure. Of those that were aware, only 38 percent read it, and of those that read it, around two thirds found it to be accurate. This implies that only 8 out of 100 respondents know, read and trust the Commune Budgets Ch 9: Transparency on Communal Budget Ba Ria Vung Tau Nam Dinh Quang Tri Lang Son Quang Binh Ha Tinh Binh Phuoc Ho Chi Minh City Quang Ngai Son La Lao Cai Dak Nong Thai Nguyen Thai Binh Long An Hoa Binh Dak Lak Ha Nam Ha Noi Kon Tum Binh Duong Bac Giang Nghe An Bac Kan Tien Giang Gia Lai Dong Thap Ben Tre Quang Ninh Quang Nam Hai Phong Can Tho Khanh Hoa Kien Giang Average Thanh Hoa Da Nang Tuyen Quang Vinh Phuc Hai Duong Cao Bang Dien Bien Lai Chau Bac Ninh Ha Giang Dong Nai Binh Thuan Thua Thien Hue Lam Dong An Giang Binh Dinh Yen Bai Ninh Binh Phu Yen Hung Yen Ninh Thuan Ca Mau Phu Tho Hau Giang Soc Trang Bac Lieu Tra Vinh Tay Ninh Vinh Long Source: Provincial Governance and Public Administration Index ( 29. Addressing these challenges require some changes to disclosure requirements. Unless reports published under Decision 192 and the GDO are consolidated and presented in a user friendly way, stakeholders will continue to find it difficult to access budget related information they are most interested in. Making a lot of financial information available in a fragmented way does not meet transparency requirements. Moreover, although disclosing financial data is an important first step, it is unlikely to be particularly useful in and of itself, particularly at commune level. The impact on stakeholders is limited because the information is difficult to understand. 30. Supplementing financial information with service delivery information would enhance transparency. This is an important area for improvement as highlighted in the stakeholder survey and a key tool for accountability, particularly in a system where spending units have a fair degree of discretion in resource allocation. This may require changes to the Budgeting process itself, for example through the adoption of service delivery agreements. But as a start, it would be useful to review reporting requirements under Decision 192 and GDO. 31. With clearer reporting templates, transparency should improve further with the roll out of the Government s Treasury and Budget Management Information System (TABMIS). The integrated budgeting process in Vietnam poses challenges for consolidating reports from sub-national spending units. The current system requires budgetary units to report detailed expenditure to Treasury Departments at their level of Government, which compiles the information and reports to the higher level of Government. This leads to relatively long time lags for compiling detailed expenditure reports. TABMIS, however, will provide a common platform across all levels of Government to manage and report on public finances. 24 VIETNAM FISCAL TRANSPARENCY REVIEW

26 Though it will take time for new systems to settle, the latter will allow more timely and accurate financial reporting (h) Budget transparency and development outcomes at local level 32. This challenge is common in other countries, particularly those that have decentralized budget planning and implementation. The recently launched Budget Transparency Initiative of the World Bank is helping to pilot methods for disclosing, simplifying, and analyzing budgets at various levels. 23 Pilots in Nepal and Cameroon show that simplified templates are providing important information to higher levels of government, and the process of data gathering is building capacity at the local level for better monitoring of budget implementation at the local level. 33. There is growing evidence of links between budget transparency and development outcomes at the local level. Fukuda-Parr et al (2011) 24 find that budget transparency, as measured by OBI, has strong links to a number of health outcomes, after controlling for per capita income. However, they find that OBI sub-indices on participation in the budget process are better predictors of development outcomes than the OBI as a whole. 34. This is consistent with the point that only disclosing financial information is not sufficient to achieve results, particularly at local level. In the case of Vietnam, Chart 10a shows only limited association between PAPI scores on commune level budget transparency and public service delivery (though in reality the link is likely to be stronger because we are not controlling for commune-specific variables). The association is stronger when comparing scores on local level participation (including contribution to public projects) and public service delivery (Chart 10b). Budget data disclosure needs to be complemented by close monitoring of and reporting on service delivery, and institutions that promote citizen participation. 8 Ch 10a: Budget transparency and public service delivery at Commune level (PAPI Scores) 7 Ch 10b: Local partication and public service delivery at Commune level (PAPI Scores) Public Service Delivery Communal Budget Transparency Public Participation Public Service Delivery Source: Provincial Governance and Public Administration Index ( D. Patel, When Budget Disclosure is Not Enough, (May 2012) at blogs.worldbank.org Fukuda-Parr, S, Guyer, P, Lawson-Remer, T, Does Budget Transparency Lead to Stronger Human Development Outcomes and Commitments to Economic and Social Rights? IBP Working Paper, December 2011 VIETNAM FISCAL TRANSPARENCY REVIEW 25

27 (i) The role of CSOs and the media in promoting Budget transparency 35. The media and civil society play an increasingly important role in promoting Budget transparency. Stakeholders find that the role of CSOs is even more important at District and Commune levels than at the Centre and in Provinces in terms of promoting better understanding of the Budget (Chart 11). Over half of the survey responses either agree or strongly agree that the media and CSOs play an active role in reviewing Budgets, and that this has improved much in the past five years (Chart 12). At the same time, over eighty percent of responses found that they could be doing more Ch 11: CSOs Help Stakeholders Better Understand Budget Information? Source: Budget Transparency Survey (2012) Chart 12: CSOs and the Budget Active role Improved in the Should do more Central Provincial District Commune past 5 years? Strongly agree or agree Disagree or strongly disagree Strongly agree and agree Strongly disagree and disagree There are a number of CSOs in Vietnam involved in increasing awareness of budget issues at the local level. Some of them indicated that although the GDO has helped to ensure more budget information at local level, people are not able to interpret or use this information effectively. One international NGO has a program to promote economic literacy and budget analysis; staff indicated that the program has helped communities to engage on budget and service delivery issues, but at the time of writing not much detail on program impact was available. CSOs are putting together a network of organizations that will work on budget issues across sixteen provinces. Box 2 below provides summarizes examples compiled by the International Budget Partnership on how CSOs have helped to strengthen budget transparency and improve development outcomes in different parts of the world. 37. Media representatives indicated that, despite a lot more information now being available, many in the profession lack capacity to interpret the data. This further reinforces the need to improve the presentation and content of Budget reports, particularly as the media seems to be the main channel for people to access budget-related information. In addition, capacity development programs for journalists (and CSOs) in other countries have been very successful in helping them to distill fiscal information into a subject that is more easily understandable and relevant for the general public. 26 VIETNAM FISCAL TRANSPARENCY REVIEW

28 Box 2: Budget Transparency and Local Level Participation 25 Social Audits in Kenya: In 2005, CSO Muslims for Human Rights (MUHURI) started conducting social audits of projects under the Constituency Development Fund, which allocated $1 million per year to each MP for public investments in their constituencies. Though the CDF was regarded more effective than traditional channels, it was still plagued by poor governance and lack of accountability. The few MPs that did allow MUHURI to conduct social audits were re-elected, unlike others even though MUHURI uncovered a plethora of problems including unfinished projects, unpaid workers and misappropriation of funds. A number of CDFs that have underdone MUHURI social audits are regarded as some of the best run according to independent auditors. Despite this, access to MUHURI remains restricted. Uganda Community Monitoring of School Building Fund: In 2002, CSO Uganda Debt Network launched a network of community monitoring groups to monitor spending through the Government School Facilities Grant. The latter allocated each district around $600,000 for building schools and classrooms to accommodate the rapidly growing school enrollment rates. Communities monitor projects and hold public hearings to raise issues on the progress and quality of public works. Although local officials were initially unwilling to engage, the work of communities has led to disclosure of financial information on public notice boards, decreased teacher absenteeism and improved quality of school buildings. These have even impacted national policies on procurement and other measures to improve service delivery. Budget analysis leads to more allocation for maternal healthcare: Mexican CSO, Fundar, used budget information first published in 2002 to highlight the lack of funding for emergency obstetric care. This was causing high levels of maternal mortality in Mexico, disproportionately affecting poorer households. Fundar s analysis was used as a basis for negotiations between CSOs and senior policy makers, which in 2003 led $50 million more allocated for a national program designed to tackle maternal mortality. Fundar Centre for Research and analysis continues to monitor the use of public funds to promote democracy. 25 These examples are taken from International Budget Partnership briefs on the IBP website: (i) Opening Budgets in Mexico Helps Open Care Options for New Mothers ; (ii) School Building Fund Provides Lessons on Community Mobilization in Uganda; (iii) Social Audits in Kenya: Budget Transparency and Accountability. VIETNAM FISCAL TRANSPARENCY REVIEW 27

29 28 VIETNAM FISCAL TRANSPARENCY REVIEW

30 OVERAGE, COMPREHENSIVENESS AND CPRESENTATION OF CORE FISCAL ISSUES (a) Detailed information on budgetary activities 38. The annual State Budget and Financial Statements in Vietnam provide relatively detailed information on budgetary allocations and expenditure. Spending and revenue of central and sub-national government (Province, District, and Commune) are consolidated in the annual State Budget. Detailed breakdowns are provided by tier of Government down to District level. In summary: 26 For Central and Provincial Government, the economic classification of spending in summary tables is broken down by recurrent and capital expenditure. 27 Recurrent spending is in turn disaggregated by functional categories, 28 which are consistent with the standard Classification of the Functions of Government. The administrative breakdown for Central Government provides information on total recurrent and capital allocations, 29 though the breakdown of capital budgets by administrative unit (or details of individual projects) is not available for all Provinces. 30 The Budget provides a summary of spending plans across provinces (aggregate spending, revenue and intergovernmental transfers). 31 At District level, the State Budget document provides estimates of revenue collection, budgetary spending, and provincial transfers broken down by each district, though not down to economic, functional, or administrative categories Please see Annex D for a summary of budget tables Tables 1, 2, 4 for whole of Government, and tables 10 and 13 for Provincial Budget in 2011 Budget Doc. Table 6 for whole of Government, and table 14 for Provincial Budget in 2011 Budget Document Table 9 in 2011 Budget Document Table 15 for each Province in the 2011 Budget Document provides functional breakdown of recurrent spending and capital spending for each administrative unit in the relevant Province. Table 16 provides details on individual projects. But not all provinces provide Table 16 or the capital breakdown in Table 15. Table 9 in 2011 Budget Document Table 18 in 2011 Budget Document VIETNAM FISCAL TRANSPARENCY REVIEW 29

31 39. There is good coverage and comprehensive information on Government revenue. The Budget document provides a summary of whole of government revenue, broken down by fourteen different sources, including tax, non-tax and external grant revenue. 33 Further details for some revenue items such as trade revenue, which aggregates import duty, export duty, and excises on imports, would help clarify policy as well as facilitate mapping to relevant GFS categories. Detailed information on the base-specific revenues for excises, natural resource tax, and environmental tax would also help policy analysis and forecasting. More detailed disclosure on oil, gas, and mining receipts would be desirable, but specific analysis of resource revenue transparency is beyond the scope of this Policy Note. Provincial budget tables also have detailed breakdowns of revenue collected in each province. 34 Fifty out of sixty three provinces retain all the revenue they collect. The Budget document provides a breakdown of inter-governmental fiscal transfers, including conditional and unconditional grants. (b) Detailed economic breakdown for greater transparency 40. Despite these achievements, there is a need to further strengthen Budget coverage, comprehensiveness and presentation. Half of survey responses feel that coverage of fiscal policy priorities in Budget documents has improved, but in other areas less than half of total responses agreed that coverage is better (Chart 13). In some areas like debt, SOEs, and reporting on results, one fifth of responses disagreed that coverage has improved in the last five years Ch 13: Average Views on Areas That Have Much Improved in the Past Five Years (% of survey responses) Fiscal Policies Priorities Gov. Spending Priorities Gov. Revenue Budget Deficit Gov. Debt and Guarantees Information on SOEs Information on results Agree and strong agree Disagree and strongly disagree Source: Budget Transparency Survey (2012) 33 Table 3 in 2011 Budget Document 34 Table 12 in 2011 Budget Document 30 VIETNAM FISCAL TRANSPARENCY REVIEW

32 41. Budget presentation is also an issue not only at sub-national level as discussed earlier but also for State Budget reports. Chart 14 below shows that less than half of respondents agree that the presentation and content of the Budget is clear and easy to understand. Aside from Government revenue, at least a fifth of responses across all other areas show need for improvement on content and presentation. The issue of results and SOEs remain the top two areas of concern. SOEs are discussed further below Ch 14: Presentation and Content of Budgets Are Clear And Easy to Understand? Gov. Revenue Gov. Spending Priorities Implementation of State Budget Agree and strong agree Fiscal Policies Priorities Budget Defici Information on results Gov. Debt and Guarantees Disagree and strongly disagree Information on SOEs Source: Budget Transparency Survey (2012) 42. Some of the responses on coverage comprehensiveness, and presentation can be linked to the lack of breakdown on the economic classification of recurrent spending. Although the information is available and accounted for, Budget reports do not present information on wages and salaries, goods and services, or public transfers. Disclosure of spending by key economic category for major administrative units will give a more informative view of their budgets. However, linking spending to outcomes and results would require that a program budget classification be implemented. While results-oriented budgeting is part of the long-term plan for the MTEF, it will be some time before this can be put in place and recommendations in this area is beyond the scope of this Note. 43. Detailed economic classification is a minimum requirement for fiscal control and budget analysis, which can be addressed relatively easily in Vietnam. The existing Chart of Accounts is being used to map administrative object expenses to GFS economic categories. This is important for broad economic analysis of budget decisions, for example whether the wage bill is sustainable, or what impact nondiscretionary spending has on changes to Government policy. It will also allow more analysis of the links between Government policy and budget priorities. For example, improving the quality of health services may be a function of numbers of health workers (wages and salaries), or the supply of medicines (goods and services), or the availability of health facilities (capital). An economic classification will allow these allocations to be seen clearly. VIETNAM FISCAL TRANSPARENCY REVIEW 31

33 44. Another weakness on coverage and comprehensiveness is the presentation of capital allocations in the Budget document. Decision 192 (2004) and supporting Circulars issued in 2005 require disclosure of information on capital projects financed by the State Budget, off-budget Investment Funds, and community contributions at Commune level. 35 These are disclosed outside the Budget by administrative units responsible for individual projects. But information on capital allocations in the State Budget document is very limited. Unlike recurrent spending, there is no information on capital spending by functions of Government. The only exception is for the education sector, where there is one table with capital allocations in the sector. 36 Although there is a summary of capital allocations across administrative units in Central Government, this is not consistently covered in tables for Provincial Government. As a result, it is not possible to get from the Budget document total spending in any one sector. (c) Carry-over practices limit fiscal transparency 45. Vietnam has a complex system of carry-over practices, which impact negatively on the credibility and transparency of the Budget. There are three broad elements to this. Firstly, part of over-realized revenue, which is not spent in the fiscal year, can be carried over to the following year for capital spending or salary reform (Article 63 of State Budget Law). The level of revenue carry-over is approved by the National Assembly, but not the detailed appropriation. Secondly, administrative units have discretion to spend any savings from block grant arrangements in the following year. Although the amounts are reportedly not large, the amounts are not appropriated in the new Budget. Finally, unfinished capital works can also be carried over, but expenditure is attributed to the year that it was appropriated rather than in the year in which it is spent. For expenditure that is carried over, there is no economic or functional breakdown, which suggests that budget execution may be under-reported. 46. Whilst the use of carry-over practices is not uncommon in other countries, 37 clearer parameters are needed in Vietnam to ensure transparency (see paragraph 68 for further discussion). The first issue to consider is whether carry-over should be limited to capital projects only, rather than extending to all types of expenditure as is the case now. There may be practical reasons for delays in implementing capital projects, and may instill more discipline in spending. Secondly, carried-over expenditure should be clearly allocated in the new Budget. At the moment however it is not classified according to economic or functional categories. This is an additional impediment to getting a full or accurate picture of budget allocations across and within sectors and functions of government. Expenditures are of course accounted for and reported, but lack of information on allocations limits the transparency of the Budget. 47. This is further complicated by the lack of alignment between the classification of Budget plans and the classification of Budget execution reports. Decision 33/2008 introduced a unified Chart of Accounts for use across all of Government. The classifications of Budget plan and execution reports are consistent with the unified Chart of Accounts. But the classification of Budget plans is not entirely consistent with the classification of Budget execution reports. This is because there are different levels 35 Further details to Decision 192 (2004) for reporting on capital investment are provided in Circular 10 and 19/2005/TT-BTC (2005), covered under Section D below on the legal and regulatory framework 36 Table 4 of 2011 Budget 37 Lienert I. and Ljungman G., PFM Technical Guidance Note: Carry-Over of Budget Authority, IMF (January 2009) 32 VIETNAM FISCAL TRANSPARENCY REVIEW

34 of detail in each, which make it difficult to compare the two and monitor performance in terms of budget implementation. This as a result adds further complication on top of the carry over issue. The Ministry of Finance is reviewing this to better align the classifications of Budget plans and execution reports. 47. This is further complicated by the lack of alignment between the classification of Budget plans and the classification of Budget execution reports. Decision 33/2008 introduced a unified Chart of Accounts for use across all of Government. The classifications of Budget plan and execution reports are consistent with the unified Chart of Accounts. But the classification of Budget plans is not entirely consistent with the classification of Budget execution reports. This is because there are different levels of detail in each, which make it difficult to compare the two and monitor performance in terms of budget implementation. This as a result adds further complication on top of the carry over issue. The Ministry of Finance is reviewing this to better align the classifications of Budget plans and execution reports. (d) Using existing information to further strengthen supporting documents 48. Supporting documents for the 2012 State Budget provide more information than in the past on implementation of the previous year s Budget and policy priorities for the coming year. Section 1 of the 2012 State Budget provides a good overview of implementation of the 2011 Budget, including a discussion of: macroeconomic developments, revenue performance, implementation of spending plans, changes to policy and unexpected events. Section 2, which corresponds to a Budget statement in other countries, discusses: macroeconomic targets, major policy objectives, revenue estimates and spending plans, a summary of new policies, and financing assumptions. The statement provides a clear indication of Government priorities, and a consistent presentation of how it intends to deliver on these. 49. The Government can build on the existing information to further strengthen the transparency of the supporting documents with relatively little effort. Based on a quick review the 2012 Budget, and other publicly available information, examples of areas where additional information could easily be provided include: (i). Fiscal performance: It would be useful to complement Section 1 with information on budget outturn going back two to three years. Budget tables currently do not provide historical information, even though it is already available in the public domain. One reason may be because of complex carry-over practices, which impact on accuracy of estimates (see C (c) above). Another is the long delay in getting Final Accounts information. The Budget documents however could clarify the status of outturn estimates. Even if indicative, the information provides a rough idea of budget performance (including extent of carry-over). It helps assess current proposals, how well the Budget has performed against policy objectives, and reasons for divergence. For example information in charts 15a and 15b is taken from 2009 Final Accounts, 2010 second estimates, and 2011 first estimates. The charts show trends in revenue performance since 2007, and aggregate capital and recurrent expenditure in the last three years. VIETNAM FISCAL TRANSPARENCY REVIEW 33

35 It gives a useful snapshot of main revenue sources, and how some like trade taxes are declining as a ratio to GDP (e.g. due to a combination of tariff liberalization and falling imports), and others like personal income taxes are growing (e.g. due to introduction of new policy in 2007, better administration, and civil service wage adjustments) Ch 15a: Major Taxes (% of GDP) Corporat e income tax Personal income tax Value added tax Ch 15b: Capital and Recurrent Expenditure (% of GDP) Natural resource tax Trade taxes including imports Budget Actual Budget Actual Budget Actual Budget Capital expenditure Recurrent Expenditure Source: Staff estimates based on data published on MOF website Similarly, on the expenditure side, chart 15b above shows that despite growing capital expenditure due to fiscal stimulus policies, the ratio of capital to recurrent spending has decreased over the period. This could be related to the growth in social protection spending in response to the global crisis, or the Government s policy to increase the relative share of non-investment-related social sector spending more generally. Like information on past performance, the Budget documents also do not have outer year fiscal estimates. The issue of Budget projections more generally is discussed further in Section E. These are important to assess sustainability of current policies, and the affordability of future policies set out in the SEDP It would enhance transparency of performance against multi-year commitments, and help explain any major spending adjustments due to policy shifts or exogenous factors. (ii). Budget balance: Bringing the presentation and analysis of the overall Budget balance up to international standards is a priority in Vietnam, which is discussed further in Section E. The accuracy of the fiscal picture is also compromised by carry-over practices. In the meantime, however, Budget documents do provide an estimate of the overall balance according to the domestic definition, which is the difference between total receipts and payments including debt repayments. The Budget documents include estimates of the size of the budget deficit as well as a summary of sources of financing. The overall balance is the widely used reference point for fiscal policy analysis, but this should be and can easily be supplemented in Vietnam with alternative measures. For example, the primary balance, which is the overall balance (i.e. which should exclude debt repayments) minus interest payments, is a good indicator of fiscal effort in terms of cutting spending or strengthening revenue collection because it excludes non-discretionary interest payments. In addition to the primary balance, Budget documents could also look at the current balance, which is revenue less recurrent expenditure (i.e. GFS gross operating balance under a cash accounting system), and is 34 VIETNAM FISCAL TRANSPARENCY REVIEW

36 a good indicator of the sustainability of Government operations. In Vietnam, the State Budget Law (Item 2, Article 8) states that in principle the Government should limit borrowing for capital expenditure and not consumption. Charts 16a and 16b are based on budget data published on the Ministry of Finance website. The deficit in 2009 (Chart 16a) was higher than forecast in the Budget, in part due to the mid-year fiscal stimulus. The deficit is gradually declining, reflecting Government efforts to consolidate spending, particularly on the capital side, as illustrated by Chart 15b above Ch 16a: Aggregate Revenue and Expenditure (% of GDP) (1.0) (3.0) (5.0) (7.0) Ch 16b: Overall, Primary and Current Balance (% of GDP) (9.0) Revenue Expenditure Budget balance Overall Primary Current Budget Source: Staff estimates based on data published on MOF website Chart 16b captures trends in primary and current balances. It shows that the Government has maintained a current surplus - all recurrent spending is covered by domestic revenue, though this is declining due to the rise in recurrent spending. The Budget has a primary deficit, widening rapidly in 2009, and falling subsequently. Interest payments in Vietnam are relatively small (7 percent of recurrent spending) - nonetheless the primary deficit did shrink by two percentage points of GDP between 2010 and 2011, which shows fiscal effort. (iii). Government debt: The Budget Transparency Survey showed stakeholder concern that Budget documents lack information on Government debt (Charts 6, 13 and 14 above). The Government through Prime Ministerial Decree has adopted debt thresholds: (i) public external debt to GDP ratio to remain below 50 percent; (ii) public debt servicing to revenue to remain below 30 percent; and (iii) external government debt servicing to exports should be under 25 percent. Other prudential measures include limiting borrowing to capital expenditure as noted above, and limiting provincial borrowing to 30 percent of the province s capital Budget (Item 3, Article 8 of State Budget Law). It would be relatively easy to report on performance against some of these thresholds based on published information (Chart 17a). Debt service to revenue information is available from the Budget Document. Public external debt to GDP and public external debt service to exports can be obtained from bi-annual Debt Bulletins. The Debt Bulletin provides data on the nominal levels of external debt stock and repayment (Chart 17b), which more than doubled in nominal terms between 2006 and 2010 due to increased borrowing over the crisis period. VIETNAM FISCAL TRANSPARENCY REVIEW 35

37 Ch 17a: Debt Thresholds (% of GDP) Ch 17b: Debt Stock and Repayment ($ m) Ext. Debt/GDP Debt Service/Revenue Ext. Debt Stock ($ m) Princ repayment Ext. Debt Service/Exports Int payment (Ext debt $ m) (Ext Debt $ m) Source: Staff estimates based on data published on MOF website 0 0 Despite useful definitions and clarifications of technical terms in the Debt Bulletin, there is considerable misunderstanding of public debt issues in Vietnam. In particular, there is confusion over how to interpret the threshold indicators. It would be useful to further clarify how the thresholds provide benchmarks to monitor liquidity and vulnerability to short-term repayment problems. Longer-term debt sustainability is a function of the Net Present Value of debt to growth, domestic revenue and exports. It is not sufficient to look only at the nominal value of debt, because sustainability depends on how the future stream of repayment obligations relate to economic developments. The IMF-World Bank Debt Sustainability Framework provides debt sustainability thresholds based on the quality of policies and institutions in a particular country The above issues could be addressed at relatively little cost and would respond directly to some of the issues that matter to stakeholders. Two other minor issues are, firstly Government has adopted some sensible fiscal rules like the debt thresholds, and other policies (e.g. the 2012 Budget calls for limiting discretionary spending from over realized revenue and early repayment of short-term debt). Discussion of these rules and how they contribute to delivering fiscal policy objectives should be presented in a consolidated section of the budget statement. The second is on the impact of new policies. Though there is a good breakdown of policy objectives in different sectors outlined in the Budget statement, discussion of the fiscal impact of big ticket items (e.g. salary reform, which raises wage base rate by nearly three times projected inflation), and new policies (e.g. Environmental Protection Tax and Non-Agricultural Land Tax) should be given more prominence. 38 Please see Joint IMF-World Bank Debt Sustainability Framework at 36 VIETNAM FISCAL TRANSPARENCY REVIEW

38 OOKING BEYOND CORE LBUDGETARY ACTIVITIES (a) Extra-budgetary funds 51. Extra-budgetary activities in Vietnam have detailed reporting requirements, 39 though coverage in Budget documents is very limited. Most extra-budgetary activities take place through three main vehicles: Public Financial Funds; Investment Funds for Infrastructure; and off-budget revenue. Extra budgetary funds are not uncommon and may be justified in specific instances. The key is to have a clear rationale on opting for implementation outside of the Budget; detailed governance and financial reporting arrangements; and adequate reporting in the Budget documents Vietnam has around twenty Public Financial Funds (PFF) focused primarily on social sector issues. 41 Two Funds make up around 95 percent of total spending through PFFs: (i) the Social Insurance Fund for pensions of civil servants that retired after 1995; and (ii) the Health Insurance Fund. There is also a PFF for proceeds from equitization of State Owned Enterprises, and others to promote business activity and capital investment. 42 PFFs are on average 14 percent of general Government expenditure (Table 1). An earlier IMF study finds that extra-budgetary funds can account for more than 40 percent of central government spending in developed and developing countries, two thirds of which are social security funds. PFFs in Vietnam have their own income stream, through earmarked taxes (e.g. land use fee channeled to the Housing and Land Development Fund), sale of assets or voluntary and mandatory contributions. Several PFFs receive subsidies from the State Budget and are managed by line ministries. 39 Decision 192 and supporting Circulars issued in 2005, which are discussed further in Section D. 40 See R. Allen and D. Radev, Managing and Controlling Extrabudgetary Funds, IMF Working Paper (December 2006) and International Budget Partnership, Guide to Transparency in Public Finances Looking Beyond the Core Budget: Extra-Budgetary Funds, (2011) 41 A full list is provided at Annex E 42 R. Allen and D. Radev, Managing and Controlling Extrabudgetary Funds, IMF Working Paper (December 2006), Table 1 VIETNAM FISCAL TRANSPARENCY REVIEW 37

39 Table 1: Spending of major Public Financial Funds (VND Billion) Public Financial Funds (PFFs) 41,905 55,265 70,361 83,125 Social Insurance Fund 33,781 44,871 54,880 64,044 Own Income 14,465 21,360 28,419 35,162 State Budget Subsidies 19,316 23,511 26,461 28,882 Health Insurance Fund 8,124 10,394 15,481 19,081 Total Budget Expenditure 336, , , ,380 PFFs (% of Budget Expenditure) Source: Ministry of Finance 53. PFFs in Vietnam seem to have some of the good practice features for management of extrabudgetary funds, though this note has not looked into the performance of individual PFFs. A more detailed review would be needed to assess the extent to which governance arrangements promote discipline, strategic allocation of resources and efficient spending. But positive features include the need for National Assembly approval before establishment of any extra-budgetary fund, and financial reporting and disclosure requirements. On the latter, Decision 192 requires disclosure of annual financial plans, fund performance, and Final Accounts approved by the National Assembly. Box 3: Good practice examples on accounting for extra-budgetary funds 43 In South Africa, the Budget and supporting documents present extensive information on extra-budgetary funds, including both a narrative discussion and quantitative estimates. The bulk of extra-budgetary funds are social security funds, such as the Road Accident Fund, the Unemployment Insurance Fund, and the Compensation Funds. The money for these items is not included in the budget, but information on their payments and receipts is included in the accompa-nying document, the Budget Review. The Office of the Auditor General of South Africa publicizes audits of all extra-budgetary funds. The reports include all charges against the Revenue Fund, including extra-budgetary funds. In India, Information highlighting key extra-budgetary funds is presented with the annual budget, though some details are excluded. In addition, the Comptroller and Auditor General release the audit reports of all extra-budgetary funds except those on secret items of expenditure. These are generally not released to the public. However, with the passage of the Right to Information Law, even this information can be requested. Extra-budgetary funds include the National Small Savings Fund; the Steel Development Fund, which is an industry-wide loan scheme that operates on commercial principles; and the Prime Minister s Relief Fund, which finances disaster relief from public donations. 43 These two examples are taken from International Budget Partnership, Guide to Transparency in Public Finances Looking Beyond the Core Budget: Extra-Budgetary Funds, (2011), pages VIETNAM FISCAL TRANSPARENCY REVIEW

40 54. Coverage of consolidated financial information on PFFs in Budget documents would significantly enhance transparency. At the moment it is difficult to include PPFs in the overall analysis of the budget because the information is fragmented. Omitting 14 percent of public spending from the analysis can distort assessment of the overall macroeconomic and fiscal situation (e.g. size of Government, fiscal deficit, tax burden), as well as the strategic allocation of resources across and within sectors (e.g. spending on social safety nets, infrastructure). Given that there is good reporting by the Funds, it would be relatively straightforward to address this by bringing financial reports in line with GFSM 2001 and preparing consolidated tables for inclusion in the State Budget. 44 (b) Off-Budget capital spending 55. Whilst there are also detailed provisions for reporting on off-budget capital spending, lack of details in budget documents compromise transparency. There are two main channels for off-budget capital spending. The first is Government Funds that issue bonds for capital projects in transportation, irrigation, education and health sectors. Budget tables for both Central and Sub-National Government provide some aggregate data on this, 45 and detailed financial accounts are submitted to the National Assembly at the end of the Fiscal Year. Secondly, capital projects are also financed through offbudget revenue (e.g. Lottery revenue, commune level community contributions), which are reported in aggregate in the Budget Document These extra-budgetary activities further complicate the ability to get a consolidated picture of capital spending discussed earlier. Information on off-budget capital investment is not disaggregated in public reports. It also further inhibits the ability to obtain an accurate picture of consolidated sector spending plans. Off-budget capital spending is estimated to have declined from 5.3 percent of GDP in 2009 to 3.4 percent of GDP in 2010 and 2.5 percent of GDP in 2011 though these figures remain fairly substantial and may increase further after final accounts. Publishing information on major projects, whether financed on or off-budget, would be an important contribution to improving transparency. (c) State Owned Enterprises 57. Transparency of State Enterprises (SOEs) and their links to the State Budget has received a lot of attention lately. SOE impact on the budget can be through: (i) direct budgetary contributions to SOEs e.g. subsidies, calls on government guarantees; (ii) direct contributions from SOEs to the budget e.g. tax payments, dividends; and (iii) quasi fiscal activities e.g. subsidized lending rates for SOEs, procuring from SOEs above market price --all of which may give rise to implicit contingent liabilities that may give rise to future fiscal imbalances. The Budget document has breakdowns of SOE tax contributions to 44 The Policy Note does not look into the details of financial reporting templates for PFFs, but this can easily looked at as part of a follow up activity. 45 In the 2011 Budget Document, some of this information can be found in summary Table 4 for Central Government and Summary Tables 10 and 13 for Provincial Government. 46 Table 5 in 2011 Budget Document VIETNAM FISCAL TRANSPARENCY REVIEW 39

41 the Budget. But, as noted in the Fiscal Transparency Survey responses, coverage of other issues is not sufficiently clear or comprehensive. This is a very challenging area to get right. Even in countries like South Africa, which do very well in meeting OBI standards on disclosure of transfers to SOEs, there is little to no detail on how these transfers are used The Government has recognized that the current regulations do not provide a sufficient basis for monitoring SOE risks, and has prioritized reform in this area. The Ministry of Finance has started to publish audited financial statements SOEs on its website. Like other non-core budget areas discussed above, there are detailed financial reporting and monitoring provisions in law for SOEs, 48 but there is no consolidated analysis on budgetary impacts. 47 International Budget Partnership and the Institute for Security Studies (N. Overy), Left in the Dark: Seeking Information on Public Financial Transfers to Eskom and other State-Owned Enterprises, (2011) 48 Decision 192 (2004), Circular 29/2005/TT-BTC on fiscal transparency of SOE, Decision 224/2006/QD-TTg on monitoring and evaluating performance of SOEs, Decision 169/2007/QD-TTg on monitoring and evaluating enterprise finances and operations 40 VIETNAM FISCAL TRANSPARENCY REVIEW

42 F 59. ISCAL TRANSPARENCY REFORMS: ISSUES AND SUGGESTED DIRECTIONS he level of fiscal transparency is influenced by the overall quality of institutions in a country. T Andreula et al (2009)49 looked at the relationship between fiscal transparency and governance indicators from Kaufmann et al to proxy institutional quality. 50 They find that stronger institutions create conditions for more fiscal transparency after controlling for other variables. Links between strong institutions and budget transparency can also be illustrated through a narrower set of PFM performance indicators drawn from a cross-section of PEFA assessments. Charts 18a and 18b show that countries that perform well on (i) accounting, reporting and recording practices; and (ii) external scrutiny and audit, have more comprehensive and transparent budgets. Strong performance on comprehensiveness and transparency are in turn associated with strong performance on policy-based budgeting and budget credibility (Charts 19a and 19b). Ch 18b: External Scrutiny and Audit and Transparency (PEFA) External Scrutiny and Audit Accounting, Reporting and Recording Ch 18a: Accounting, Reporting and Recording and Transparency (PEFA) Comprehensiveness and Transparency Comprehensiveness and Transparency Source: Converted from data available in Andreula, N., Chong, A, and Guillen, J. (2009). Institutional Quality and Fiscal Transparency. IADB Kaufmann, D, A. Kraay, and P. Zoido-Lobaton, Governance Matters IV: Governance Indicators for , World Bank Policy Research Paper 3630 (2005) VIETNAM FISCAL TRANSPARENCY REVIEW 41

43 Ch 19b: Budget Transparency and Credibility of Budget (PEFA) Budget Credibility Policy Based Budgeting Ch 19a: Budget Transparency and Policy Based Budgeting (PEFA) Comprehensiveness and Transparency Comprehensiveness and Transparency Source: Converted from data available in The fiscal transparency-oriented reforms now underway in Vietnam are based on continuing analyses of all aspects of the PFM system. A PEFA self-assessment is currently underway and the conclusions of that assessment will be an important basis for determining the next steps in the reform strategy. Drawing on recent analytical work undertaken by the World Bank in conjunction with the MOF and other agencies of the GOV, the application of fiscal transparency principles to reform are discussed in this section of the Policy Note. It starts with a review of the current fiscal management regulatory framework relative to FTC principles, and then assesses other steps needed to ensure that transparency is improved to meet the needs both of internal management and public information accountability. (a) The regulatory framework for fiscal management 61. OV has made good progress in establishing a comprehensive legal framework for fiscal G management and financial control. The State Budget Law (SBL) of 2002, which became effective in 2004, provides the main basis for regulating PFM. Other key pieces of fiscal and financial legislation include: the Law on Public Debt Management (PDM) (2009), the Accounting Law (AL) (2003), and the State Audit Law (SAL) (2005).51 These laws are supported by more detailed regulations via decrees and ministerial decisions and circulars. 62. As shown in Annex F, these laws and regulations meet many of the basic requirements of fiscal transparency set out in international codes. At a general level, the framework, particularly the SBL, addresses all four pillars of the FTC. The Annex also, however, identifies areas for potential strengthening of the framework and the need to implement these laws more effectively at all levels to achieve the GOV s transparency goals. Drawn from the Annex, potential measures to enhance the fiscal regulatory framework are discussed below. Several improvements could be made relatively quickly and have a significant impact on external assessments; others will require more institutional reform and capacity development but their initiation is seen as necessary to achieve the Government s long-term objectives of transparent and effective PFM Sub-sections 2, 3, 5, and 7 will review the transparency implications of these laws. VIETNAM FISCAL TRANSPARENCY REVIEW

44 Adopt the GFSM2001 definition of balance in the SBL 63. The fiscal deficit and its financing are defined in the SBL in administrative terms as the difference between revenues and payments, including debt repayments. This measure is not, however, a good indicator of the fiscal policy impact of the budget. The international standard GFSM2001 definition of deficit and financing is well understood within the GOV, but the SBL does not mandate use of the international definition as an integral part of the budget presentation. Addition of a simple provision in the SBL requiring that the recognized GFS standard be applied as the key reference point for analysis of the fiscal impact of the budget (as per FTC 3.2.3), would help overcome the present inconsistencies in presentation and interpretation. Such an addition would not preclude the use of the present SBL definition for administrative and general accounting purposes. 64. Work could start in the short-term to develop fiscal reports on budget execution that are based on a GFSM2001 classification. As discussed further below, much of the analytical work to develop such reports has already been done; and this work can be incorporated in the TABMIS accounting and reporting system. These reforms would improve fiscal transparency by ensuring that fiscal information is presented more effectively to promote policy analysis and accountability and would greatly strengthen government management and control of fiscal policy when analytical reporting is fully in place. Clarify relationship between executive and oversight agencies of government at all levels 65. The regulatory framework could be strengthened to define the roles of oversight agencies relative to the various executive agencies of government more clearly. Further definition of the SAV s role is needed in two main respects: (1) the SBL and SAL give most emphasis to the SAV s role in reviewing budget execution; little attention is given to scrutiny of the budget prior to its presentation to the National Assembly; and (2) the presently limited role of the SAV vis-à-vis the Finance and Budget Committee (FBC) of the National Assembly and limited access of that Committee to individual line agencies of the GOV in questioning and following up SAV recommendations. Revisions of both the SBL and SAL should include clear reference to the SAV role in both these respects. Strengthening each, however, will also require a strong commitment to a program of capacity building both in the SAV and the FBC. SAV s coverage of provincial budget execution, in particular, appears relatively weak. 66. The lack of a strong internal audit function in executive agencies, and no clear definition of internal audit in the SBL weakens the chain of accountability between executive and oversight agencies of government. Current efforts to establish internal audit in selected ministries should, however, enable the government to strengthen the SBL in this respect and begin a government wide program of capacity building in internal audit that meets generally accepted practice in this regard. Strengthen reporting coverage and accountability of State Budget spending 67. Articles 4(1) and 7(1) of the SBL make a clear statement that the State Budget comprises all levels of government and all moneys of the State; in principle this coverage includes all of general government, which is the ideal coverage for macro-economic management envisaged under the FTC. In practice, however, Section C and D show that actual coverage is far from complete and reporting on actual spending is not fully consolidated nor easily related to the appropriation authority for the budget year in which the spending occurs. VIETNAM FISCAL TRANSPARENCY REVIEW 43

45 68. A number of these issues are being taken up in implementing TABMIS, but further clarification of certain provisions of the SBL would be useful. Moreover, some changes in administrative practice appear to be required to ensure that TABMIS fulfils its PFM and transparency functions adequately. Key factors to be taken into account include the following: Money of the state (article 7.1), which rightly includes borrowing could also include grant money to ensure that all donor funds are incorporated in the financial statements of government (see further discussion of transparency of aid management under E (f) below); General government activity is also conducted through extra-budgetary Public Finance Funds (Section C (a) and Annex E) established under separate legislation to support particular purposes (such as social security). The funds report annually to the Standing Committee of the National Assembly, are audited in compliance with applicable laws, and publicly disclosed in accordance with Government regulations. As noted earlier, no consolidated overview is presented with the budget; but the Government proposes to develop appropriate regulations to ensure consolidated reporting for fiscal policy management purposes. Although compliance with reporting requirements from decentralized units is reportedly good, the quality of reporting is mixed and it is difficult to enforce timely and comprehensive reports. There are also issues of what type of information and analysis will ensure stronger accountability; Some fees and charges of line agencies are spent directly without being recorded by the State Treasury in a timely and reliable way (e.g. hospital and school fees). Best practice in this regard from a statistical and fiscal transparency viewpoint are to record all receipts in gross terms (giving a better picture of total government spending and revenue). Gross recording does not preclude the possibility of giving authority for direct spending against specific non-tax revenues under the SBL or another law. Article 63 of the SBL indicates that unspent appropriations are transferred to the financial reserve fund, the following year s budget, or to the following year s revenue. It does not clarify, however, whether spending during the year is brought to account against the final appropriation for that year, nor how revenue carried forward from one year to another is applied to the next year s appropriation. Ideally, the law should state clearly that all actual spending (cheques issued in the fiscal year) be brought to account against the budget appropriation for that year, which should lapse at year end. Any new appropriation should be shown in the following year s estimates (authority to spend either against reserve or an executive agency head). Surplus revenue simply adds to bank balances not to next year s revenue. Revenue receipts that exceed estimates provide no authority to spend; all spending should be authorized under the annual budget law or another law. 69. Many of these issues can be tackled by some revision of the SBL and regulations, including broadening the State budget fund to cover all funds of general government (that is, as a treasury single account), and by incorporating these process changes in the design and implementation of TABMIS, if not already underway. Significant effort will be required in capacity building and change management to put supportive changes in administrative practice in place. 44 VIETNAM FISCAL TRANSPARENCY REVIEW

46 Clarify management of service delivery programs 70. Decentralization of fiscal authority to provinces and communities under the SBL has led to some confusion of authority between provincial People s Councils and sector ministries. Several factors contribute to overlaps between levels of government and inefficiencies in sector spending: Budget revenues at local levels tend to be underestimated to gain additional support from the State budget, with the added incentive that local authorities can retain some of the excess revenues for spending on local priorities during the year; People s Councils are responsible for authorizing the sub-national budget at their level, but the Prime Minister has authority under the SBL, to require the budget to be adjusted in line with National Assembly decisions (in particular to comply with minimum national targets for education and training, science and technology, and environmental protection); and National Target Programs for key sectors (such as health and education) are budgeted separately through the relevant national sector agency and, while consolidated within the aggregate targets are not at presently disaggregated in sub-national sector reports or adequately consolidated; some, moreover, are supported by donor funds. 71. Some of these issues can be addressed by improvements in classification of transactions and improving reporting coverage as TABMIS is fully rolled out. However, given the financial management capacity weaknesses at local levels, questions of the relative role of different levels of government and the overall decentralization strategy would benefit from further review of international experience. The development of a decentralization law separate from, but complementary to, the SBL could be considered an appropriate way to address all of these complex factors. Require full disclosure of fiscal risks 72. Openness of budget operations requires that risks that may arise from government operations outside general government should be disclosed in budget statements. The present legal framework and administrative practice do not address this issue adequately. A provision in the SBL to include a consolidated risk statement in the budget presentation would significantly strengthen efforts to improve transparency of fiscal policy with regard to these risks. Further details of possible measures to ensure that such risks are taken into account are discussed under subsection E (b) below. Strengthen quality and timeliness of disclosure to the public 73. One of the strongest features of the SBL and the other fiscal laws, as shown in Annex F, is that disclosure requirements are relatively comprehensive in relation to FTC requirements and are clearly defined in the SBL and subsidiary legislation. Nonetheless, although survey respondents clearly recognized the substantial improvements that have occurred over the past five years, respondents VIETNAM FISCAL TRANSPARENCY REVIEW 45

47 identified improvement in disclosure of information on services delivered and better explanation of fiscal priorities in the budget as two high priority areas for improvement (Section C). 74. To address this, it is recommended to review disclosure requirements in the relevant legislation. Current provisions in SBL, Decree 60 (2003), Decision 192 (2004), and all the supporting are detailed but also very fragmented. This is illustrated in Chart 20 below and Annex G, which summarizes provisions in the various laws on: what reports need to be published, responsible entities, content requirements for the reports, frequency and timing of reporting, method of access, and any sanctions for non-compliance. However, without consolidation it is not possible to have a complete picture of fiscal policy, and current reporting does not necessarily ensure accountability. It is therefore recommended to review: Consistency in reporting standards between budgetary and extra budgetary entities (i.e. PFFs, extra-budgetary bond-financed infrastructure, SOEs, funds with community contributions) and gradual transition to GFSM 2001; Consolidation of budgetary and extra-budgetary financial reports; Simplification in reporting requirements and improvements in analytical presentation of financial reports across all entities; Scope for reporting on service delivery, and publication of Mid-Year Budget Updates and Citizens Budgets. 75 Finally, provisions in the SBL to define budget documents presented to the National Assembly or People s Councils as public documents and ensure their prompt publication would greatly enhance fiscal transparency in Vietnam and would also improve its public and international perception by contributing to enhanced scores on this dimension in OBI and PEFA assessments. As discussed in Section B, public has access to budget and accounts information only after approval of the National Assembly, and on the latter usually with a significant time lag. In advanced economies generally, however, the public has access to budget and accounts documents as soon as they are presented to the legislature. 46 VIETNAM FISCAL TRANSPARENCY REVIEW

48 Decree on Implementation of the State Budget Law, 60/2003/ND-CP, 6/6/2003 Circular 59/2003/TT- BTC, Guidelines and instruction to implement Decree 60/2003/ND, 06/06/2003 Chart 20: Overview of Laws, Decrees and Circulars with Fiscal Reporting provisions (Excluding Reporting on Public Debt) Law 01/2002/QH11 on the State Budget, 16/12/2002 Circular 54/2006/TT- BTC, Direct subsidies for population, 16/02/2006 Decision 192/2004/QD-TTg on Financial Publicity of the state budget at all levels, state budget draft units, organizations and capital investment projects and funds financed by state budget, state owned enterprises and funds of public contributions 16/11/2004 Circular 03/2005/TT- BTC, Financial disclosure and reporting policy of all budget levels, 06/01/2005 State Budget Plan and Final Accounts Sub-National Budget Plans and Final A/Cs Community Funds for Infrastructure Community Funds Circular 10/2005/TT- BTC, Allocation and mgt. of capital investment, 02/02/2005 Infrastructure Projects in State Budget Funds financed from State Budget Circular 21/2005/TT- BTC, Financial disclosure of spending units, 22/03/2005 Use of contributions by Spending Units Budgets and Final A/Cs of Spending Units Budgets and Final A/Cs of Subs. Org. State Owned Enterprises Circular 89/2010/TT- BTC Management and usage of public assets, 16/02/2010 Circular 19/2005/TT- BTC, Financial disclosure of state funds, 11/03/2005 Circular 29/2005/TT- BTC Annual Financial reports of the SOEs, 14/04/2005 VIETNAM FISCAL TRANSPARENCY REVIEW 47

49 (b) Aggregate fiscal policy transparency and credibility Improving fiscal policy analysis and reporting 76. An examination of available data and different analytical approaches in recent years shows two major weaknesses in the current presentation of fiscal policy and in overall budget credibility: (1) the GOV definition of budget balance differs significantly from that used by the IMF, showing a consistently lower level of deficit; and (2) actual revenue and expenditure have invariably been significantly higher than original estimates. These factors need to be addressed operationally for the budget document to be considered a fully credible reflection of the government s fiscal policy intentions. 77. Much of the confusion with regard to the budget presentation of fiscal policy arises from the use of the administrative definition of the SBL for fiscal policy analysis. The SBL deficit refers simply to the balance between receipts and payments, which in any year will be covered by gross borrowing. As already recommended above, a new provision in the SBL may be required to establish a requirement that the GFSM2001-consistent definition be used for fiscal policy analysis. For this purpose, debt principal repayments are treated as a reduction in liabilities, not as an expense. Box 4: Current definition of fiscal balance leads to misleading conclusions on debt dynamics Debt stock as per the economic literature are calculated: (1) Debt(T+1)= Debt(T)+ (Deficit) (T) Where according to GFSM 2001: (2) (Deficit) (T)= Revenue (Expenditure including Interest Payments) = Net Borrowing Requirement Whereas according to the current definition of fiscal deficit in Vietnam: (3) (Deficit) (T)= Revenue (Expenditure including Interest Payments and Amortization of Debt) = Gross Borrowing Requirement As per GOV s definition, higher amortization costs can lead to higher deficits all other things equal. This, leads to higher levels of debt stock (1), which has led some scholars to incorrectly conclude that Vietnam s debt will rise to 70-80% of GDP. However, debt transactions (proceeds from borrowing and repayment of principal) are financing (or below the line) items and not part of revenue and expenses. This gives the net borrowing amount rather than gross borrowing as per current definition. 48 VIETNAM FISCAL TRANSPARENCY REVIEW

50 78. Less than a third of responses from the Budget Transparency Survey said that the presentation of the deficit was clear and easy to understand (Chart 14 above). This was not highlighted as one of the top areas for improving disclosure, because the information is published and presented in the Budget. But as illustrated in Chart 21 below, at the moment there are multiple estimates because different agencies apply different classification standards and because of the way off-budget items are treated: (i) GOV estimate is based on balance between receipts and payments and excludes off-budget items, though includes expenditure and revenue carried forward; (ii) GOV estimate excluding principal repayments from expenses; (iii) IMF estimate based on GFSM 2001 standards; and (iv) the Bank s estimate using GFSM 2001 standards, but based on information publicly available. Ch 21: Budget Balance (% of GDP) Budget Actual Budget Actual Budget Budget Actual GOV Est GOV Est (GFS) IMF Est WB Est Source: Staff estimates based on data published on MOF website 79. For this and a number of other reasons, it is very strongly recommended that the GOV adopt a GFSM2001-consistent definition of the fiscal balance in all fiscal policy analytical documents. Box 5 summarizes key steps to be taken to adopt such a policy and move toward implementing a GFSM2001- compliant classification and fiscal reporting system. This should include all general government transactions, including extra-budgetary funds. Having said this, carry over practices discussed in section C (c) above makes it difficult to accurately estimate the overall fiscal balance because carried over expenditures and revenues are not adequately recorded against budget categories in the year they are spent and raised. Expenditure and revenue are often carried over for up to two years, but they are accounted for in the year they are appropriated. Addressing these issues, as noted above, is a priority. However, this should not preclude moving towards GFSM2001-consistent definition of the fiscal balance, which accounts for expenditure and revenue in the year they are spent and raised. VIETNAM FISCAL TRANSPARENCY REVIEW 49

51 Box 5: Transparent Reporting of the Fiscal Balance (Deficit/Surplus) Apply a statistical definition of the deficit: The FTC (3.2.3) states that the standard indicators of a government s fiscal position should be its overall balance and gross debt. As far as possible, all levels of government (that is general government) should be included in the balance and debt calculations. This standard is based on the IMF Government Finance Statistics Manual (GFSM) 2001 definitions of balance or deficit/surplus. While data for calculation of these indicators are derived from the government budget and accounts, the statistical definition is of critical importance. Debt repayments, commonly included in payments for accounting purposes, are shown below the line as reducing debt; the overall balance defined in GFSM, thus corresponds to the change in government net indebtedness in any year. Vietnam, along with a number of other countries, commonly uses the administrative/accounting presentation of total payments. While in Vietnam s case this definition is embodied in the State Budget Law as the deficit, it does not accurately reflect the deficit for fiscal policy purposes. Fiscal policy papers presented to the National Assembly and to the public along with the State Budget should therefore use only the GFSM definition in analysis of the impact of the budget on the economy. 80. Implementation of a FOR system will rely on the rollout of TABMIS. It is very important that FORs be designed as part of TABMIS implementation and that a high priority be given to full coverage of general government transactions and complete reconciliation of Treasury fiscal accounts with SBV monitored banking and financing accounts including donor accounts. Strengthening forecasting 81. The second weakness with regard to budget credibility, is that of consistent under-estimation of revenue and expenditure. Revenue mobilization and spending have, on average, been 18 and 15 percent higher than budgeted between 2009 and 2011 (Charts 22a and 22b: based on budgets versus the second and first budget estimates for 2010 and 2011 respectively, and in the final accounts for 2009). The difference in outturn rises by the time the final accounts are prepared. 52 This is due to a number of factors including oil price volatility, which affects tax and royalty earnings on oil; and fluctuations in the terms of trade shocks, which affects customs and other trade-related revenue. In addition to these, revenue forecasts are compiled based on projections made across all sixty-three Provinces. They are allowed to retain over-realized revenue in certain categories for spending at the discretion of Provincial authorities. Over realized land use fee for example can be channeled to the Housing and Land Development Fund for additional infrastructure spending identified over the course of the fiscal year. The latter incentivizes Provinces to under-estimate revenue for the coming year. Whilst conservative estimates are important to avoid over-inflated expenditure plans, which can not be sustainably financed, it is also important to have more transparency around the forecasts to strengthen budget credibility. 52 Please refer to IMF 2010 Article IV, Appendix 3, Figure 1 50 VIETNAM FISCAL TRANSPARENCY REVIEW

52 Ch 22a: Revenue outturn (% of GDP) Ch 22b: Expenditure outturn (% of GDP) Budget Budget Budget Budget Fin Acts 2nd Est 1st Est Proj Budget Fin Acts Budget 2nd Est Budget 1st Est Budget Proj Tax Non-Tax Recurrent Capital on budget Capital off budget Source: Staff estimates based on data published on MOF website 82. In light of the continuing issue of under-estimation of oil revenue, it is recommended to provide projections under different scenarios. Oil revenue constitutes around 12 percent of total revenue. Providing different scenarios combined with a strong review mechanism to adjust for major price variations provides a more transparent and reliable mechanism for dealing with these issues. In 2011, the Budget assumed $77 per barrel when actual average was $102 per barrel. The 2012 State Budget assumes $85 per barrel seems again to be fairly conservative Aside from oil revenue projections, other revenue are also consistently underestimated in the Budget. The State Budget Law allows Provincial Councils to set provincial revenue targets that are higher than those approved by the National Assembly. And as discussed earlier, Article 63 of the State Budget Law over-realized revenue can be carried over for different purposes, which may create incentives for underestimation. 84. On the expenditure side, the present practice could be regarded simply as conservative fiscal policy, but it gives an inaccurate picture of the actual spending intentions of the Government. Recurrent spending has been 5 percent higher than budget on average in the last three years, and capital spending 35 percent higher. Off-budget capital spending (on average 3.7 percent of GDP between 2009 and 2011) has on average been 32 percent higher than plan. Based on these, 2012 State Budget revenue could be 4.3 percent of GDP higher and spending 4.1 percent. These figures also do not include expenditure carried over from the previous year. 85. The transparent practices advocated in the fiscal transparency manual (FTC 2.1.2) and PEFA framework are to establish a multi-year framework in which the estimates of revenue and expenditure for each year (and in particular for the full budget year) are based on clearly stated assumptions that are open to external examination. 53 The US Energy Information Administration (EIA), for instance recently revised its estimates for the average cost of imported crude oil to around $115 per barrel in Global growth for energy demand is likely to remain moderate, but supply may be affected due to friction in the Middle East and projected production declines in Russia, Mexico and the North Sea. Even if price per barrel averaged $100 in 2012, this could mean around 18 percent higher revenue for Vietnam from crude oil alone. VIETNAM FISCAL TRANSPARENCY REVIEW 51

53 Table 2: State Budget (% of GDP) Budget 1st Est Budget Proj Revenue Tax Non-Tax Expenditure Recurrent Capital on budget Capital off-budget Budget balance Source: : Staff estimates based on data published on MOF website Realistic budgeting founded firmly on testable assumptions provides a stronger basis for effective and publicly supported fiscal policies than strategic conservative budgeting that is consistently revealed to be underestimated. The GOV is already committed to budgeting in a multi-year framework, which itself depends on realistic forecasts to encourage stable and achievable sector plans to be implemented. Fiscal risk disclosure and management 86. Beyond these factors, however, budget credibility depends on establishing public and financial market confidence that risks outside the State Budget are being managed adequately. As noted earlier, lack of a consolidated picture of the public sector balance sheet reduces transparency. Sound budgeting practices covering all general government transactions are the core of an effective PFM system. But a range of factors can materially change original budget estimates and, in unfavorable circumstances, dramatically change the fiscal balance. Internal and external financial analysts, and the general public should be aware of these risks and of the government s capacity to deal with adverse external or internal changes. International standards, therefore, give considerable emphasis to the need for emerging market countries to strengthen their capacity to assess and manage fiscal risks; and a number of emerging market countries as well as advanced economies are taking steps to address fiscal risks more effectively by strengthening risk management capacity and formally including risk assessment into the budget process. 87. Effective identification and disclosure of the range of fiscal risks identified in the FTC 54 and elaborated more recently in a 2008 IMF paper 55 are vital but often neglected parts of good transparent fiscal management. Operations of SOEs and financing of SOE debt by the banking sector (including state-owned banks) in particular is a known source of risk in Vietnam, as it is in many other countries. While reporting and analysis of individual SOEs is being improved, as noted in Section D (c) no consolidated analysis of overall fiscal risks arising from the SOE sector is yet produced. In addition to this, as discussed earlier, there are also risks associated with revenue forecasts and contingent liabilities. Sub-national authorities to date have not proved to be a major source of risk total borrowing is quite small, and limited to 30% of provincial capital budget. 54 See particularly FTC and Box 21 Statement of Fiscal Risks.e. 55 IMF (2008), Fiscal Risks Sources, Disclosure, and Management, Fiscal Affairs Department, International Monetary Fund, May, (see ). 52 VIETNAM FISCAL TRANSPARENCY REVIEW

54 88. The IMF paper stresses the importance of a clear allocation of responsibilities within the public sector for assessing and reporting fiscal risks, that the main fiscal policy agency has access to all relevant data, that the government fully disclose fiscal risk data, and that it put in place effective measures to mitigate and manage fiscal risk. Meeting these requirements in emerging market economies most often requires major institutional changes and capacity building; and thus significant resource inputs and strong political commitment over the long term. Box 6 below, drawn from the IMF 2008 paper and other sources, summarizes efforts being made to meet these requirements in several countries. Box 6: Institutional Changes for Risk Management in Selected Countries Government should give clear responsibilities for analysis and policy-setting on risk management; generally to a single agency of government. The IMF 2008 paper notes that, while special institutional units are often set up to manage specific fiscal risks, only a few of the countries reviewed had set up units responsible for managing most or all types of fiscal risk. In South Africa, for instance, a risk management unit had been established to analyze most fiscal risks (with a separate unit responsible for debt management risks). Advanced countries with well-developed institutions and strong accountability mechanisms, however, often delegate responsibilities for specific types of risk to line ministries--or sometimes to SAIs--rather than centralized agencies. Indonesia has recently taken a number of steps to strengthen its capacity to address fiscal risks by setting up a Fiscal Policy Office (FPO) with a mandate to analyze and manage fiscal risks (although debt management risks are also administered separately). The Government sought external reviews of its PFM system through participation in the IMF fiscal ROSC process, the first of which was issued in 2006, and an update issued in A PEFA Assessment was also undertaken under World Bank leadership and issued in October These reviews helped to consolidate the country reform plan and led to the ongoing reforms of risk management practices. As recorded in the 2010 fiscal ROSC update, Indonesia had built a much stronger base for central government by establishing a fully functioning FPO with a mandate for macro-fiscal forecasting and analysis to guide fiscal policy. From 2008 the FPO has prepared a fiscal risk statement that is included among the annual budget documents. Pakistan has also taken some steps to improve disclosure of fiscal risks. Since , the Economic Survey accompanying the annual budget has included annexes that give an overview of contingent liabilities and tax expenditures. 57 While these cover significant areas of fiscal risk and respond to recommendations made in fiscal ROSC assessments, the reports are not yet well integrated into fiscal policy discussions in the annual budget process. Disclosure of fiscal risk data in emerging economies, while desirable in itself, needs substantial development of institutional capacity to analyze aggregate risks and design appropriate measures to mitigate and manage these risks over the medium and long term. Some centralization of these responsibilities appears essential; line ministry capacity and incentives to manage fiscal risks is likely to be quite limited in the less advanced economies. 56 See and 57 See VIETNAM FISCAL TRANSPARENCY REVIEW 53

55 Fiscal sustainability and debt management 89. Fiscal policy credibility should also be examined and disclosed in relation to a longer-term horizon with respect to the sustainability of fiscal policy. As noted in the Fiscal Transparency Manual, fiscal policies are considered unsustainable if current policies are likely to lead to a build-up of debt to an unsustainable level. The FTC (2.1.4) recommends that the budget documentation should include an assessment of fiscal sustainability. Debt Sustainability Assessments (DSA) for Vietnam are carried out regularly with the support of the World Bank and IMF. 58 Over time, as capacity within the MOF increases, DSAs should be undertaken and disclosed as part of the budget process. 90. Management and transparency of government debt including debt guaranteed by government has been strengthened by the enactment of the PDM Law in Borrowing authority is clearly designated to the MOF and a Public Debt Strategy is being developed. The Government is working to improve the scope and comprehensiveness of reporting on debt. The main channel for reporting is the Statistical Public Debt Bulletin, which is published every six months. The PDM Law requires the bulletin to include actual borrowing and debt service payments as well as annual projections of borrowing and debt servicing flows for the central government including guarantees, sub-nationals, on-lending and total public and private external debt. Data on domestic debt and loan guarantees is reported only at an aggregate level. The ongoing debt is expected to enable the disclosure of comprehensive information on domestic and details on domestically guaranteed debt to the public as of this year. (c) Transparency of expenditure management and reporting 91. Transparency in expenditure management involves open, coordinated processes of planning, budget preparation, budget authorization, budget execution, and financial control. Open processes provide a basis for effective reporting, providing timely, reliable, and relevant financial reports to the SAV, the NA, and the public. The State Budget Law together with the Accounting Law and the Law on State Audit has provided a sound basic legal framework for these processes. There are detailed provisions covering roles and responsibilities. Establishing better analytical Fiscal Operations Reports by moving to GFSM The chart of accounts (COA) that has been revised and is embedded in TABMIS performs a crucial role in ensuring that government reports on budget execution and implementation of aggregate fiscal policy are reliable and relevant. The COA classification of expenditure and revenue is broadly consistent with GFSM 1986 standards for economic and functional classification. In principle, this provides the basis for reporting the aggregate deficit and financing fully consistently with international standards. However, as discussed in Sections D (b) and E (b) above, the analytical presentation of fiscal reports can be substantially improved by calculating the deficit according to international standards, and providing more detailed economic breakdown of expenditure. 58 See Joint IMF/World Bank Debt Sustainability Analysis 2010, which records that Vietnam remains at low risk of debt distress, although the debt indicators have deteriorated due to the negative impact of the global crisis and the increased macroeconomic risks since late VIETNAM FISCAL TRANSPARENCY REVIEW

56 93. For these reasons, it is strongly recommended that fiscal reports in Vietnam move to a GFSM 2001 classification. GFSM 2001 introduces a number of changes that are geared toward an eventual accrual basis accounting but can still be applied to governments that continue to operate on a cash basis (and is so applied by the many countries that are compliant with GFSM 2001 statistical reporting). GFSM 2001 operates within a balance sheet framework and allows much more emphasis to be given to analysis of changes in government assets and liabilities, which have frequently been used as instruments of fiscal policy. Lending minus repayments (public policy loans and equity injections into public corporations) were regarded as contributing to the deficit/surplus in GFSM1986 but under GFSM2001 are regarded as financing transactions. Investment and sales in non-financial assets were regarded as revenue and expenditure in GFSM1986 but are separately identified as net acquisition of non-financial assets but are still included in the calculation of the budget deficit/surplus consistent with GFSM1986. As discussed earlier, this gives a fuller picture of the Government s fiscal position than only looking at flows of revenue and expenditure. VIETNAM FISCAL TRANSPARENCY REVIEW 55

57 Box 7: Broad Overview of Relationships Between GFSM 1986 and GFSM 2001 Classification The chart below summarizes the relationship between GFSM 1986 and GFSM 2001 classification systems. 59 Some implications for Vietnam (based on summary table in 2009 Final Accounts): Revenue: This should include any over-realized revenue, and be reflected in reduced deficit. Government revenue should be recorded in the year that it is earned. Over-realized revenue is not ordinarily reflected in the following year s budget as brought forward revenue. Expense: This category excludes amortization, which is a below the line financing item calculated as part of total net borrowing. All debt transactions should be part of the latter and not part of revenue and expenses. Net acquisition of non-financial assets: This category should include all capital spending, including what is currently spent off-budget. Capital revenues, which are currently presented under total revenue, should be part of net acquisition of financial assets as it involves sale of fixed assets. Net acquisition of financial assets: This should include Government (on)-lending less repayments. Net incurrence of liabilities: This should include all Government borrowing less repayments, including infrastructure financed out of off-budget bonds. GFSM 1986 GFSM 2001 Total Revenue and Grants Excluding sales of fixed capital assets, stocks, land, and intangible Sales of fixed capital assets, stocks, land, and intangible assets Revenue Total Expenditure Current Expenditure plus capital transfers Expense Acquisition of fixed capital assets, purchases of stocks, land, and intangible assets Net Acquisition of Nonfinancial Assets Total Expenditure Total Expenditure Total change in cash, deposits, and securities held for liquidity Total net borrowing Net Acquisition of Nonfinancial Assets Net Acquisition of Nonfinancial Assets 59 IMF, Government Finance Statistics Manual 2001 Companion Material - Classification of GFSM 1986 Data to the GFSM 2001 Frameworks, Wickens, T.M. (2002) 56 VIETNAM FISCAL TRANSPARENCY REVIEW

58 94. Analysis of the budget classification in Vietnam indicates that little, if any, change is required to the government COA to enable presentation of the budget in GFSM 2001-compliant terms. 60 A separate exercise has been conducted to preliminarily map the current COA to GFSM 2001 categories. It advocates applying the mapping to financial outcome data to enable generation of quarterly Fiscal Operations Reports (FORs) and associated detailed reports that would show the fiscal impact of the budget in GFSM-compliant terms and allow timely within-year tracking of fiscal policy implementation. As TABMIS is rolled out, system-generated FORs should become feasible and fiscal policy management and its transparency could thereby be very substantial enhanced. For this to be achieved, however, an immediate emphasis needs to be given to: (i) embodying FORs in the TABMIS rollout schedule; and (ii) ensuring that all transactions, including financing transactions, are mapped to GFMIS 2001 and reported through TABMIS. 95. A process along these lines is being successfully carried out in Pakistan, and a similar effort is also underway in Ghana. Both efforts are associated with implementation of a comprehensive Government Integrated Financial Management System (GIFMIS), similar to Vietnam s TABMIS. In the case of Pakistan, the mapping exercise was substantially completed by end Significant discrepancies between deficit estimates from the expenditure and revenue accounts and financing continued to be experienced for some time largely because of debt and transfer transactions directly affecting cash balances but not being recorded in a timely way in the fiscal accounts. While some discrepancies still occur, many of the major ones have been rectified and the statistical discrepancy has been contained to a tolerable level. Progress has also been made to incorporate some World Bank projects directly in the country accounting system. Integrated Treasury and Budget Management Information System 96. Better integration of planning, budgeting, accounting is needed to achieve the reporting standards proposed under the FTC and PEFA. Progress is being made toward this end. The TABMIS program now being implemented is intended to provide a platform to integrate budgeting and accounting at all levels of government. The most immediate impact when TABMIS is rolled out across all provinces by end-2012 should be a substantial improvement in timeliness, reliability, and relevance of budget execution reports and annual financial statements. Both the FTC and PEFA emphasize the need for the accounting system to track revenues, commitments, payments, arrears, liabilities and assets. 97. Salaries and wages constitute about half of total budget expenditure. Salaries are mainly paid direct to bank accounts. Payments, however, are made by individual agencies and state treasuries throughout the country, within aggregate budget allocations controlled by the MOF. A central computerized payroll system has not been established; there are no automatic links between personnel and payroll databases. The present system appears to present significant risks. The team will explore whether there are any proposals for HR/payroll computerization. 60 Although some streamlining of the COA would be worth considering alongside ongoing reforms, particularly in relation to integrating capital and recurrent budgets and generating reliable sector financial reports. VIETNAM FISCAL TRANSPARENCY REVIEW 57

59 98. TABMIS will also provide a platform for better integration of planning and budgeting, but this will likely require longer-term implementation. Both the FTC and PEFA advocate adoption of mediumterm budgeting processes. A medium-term fiscal framework (MTFF) and sector medium-term expenditure frameworks (MTEF) are being piloted by the MOF. More effective administrative coordination of the planning and budgeting activities of MPI and MOF, however, will be required for the proposed mediumterm frameworks to be used effectively and for TABMIS to be applied to medium-term budgeting. Implementation of MTEFs also requires significant improvement in coordination of central and subnational planning and budgeting for sectors (discussed further in subsection E (d) below). 99. A cash management system is an important element of financial management and control, both to ensure timely release of funds to spending ministries and for effective management of domestic borrowing. Complete budget and accounts coverage of general government activity and control over all government bank accounts are important pre-requisites for effective cash management. These areas however have shortcomings. As noted in section E, a significant portion of revenue and spending, including donor accounts, is off-budget and these transactions are not integrated with State Treasury budget execution reports. It is proposed to consolidate all government accounts in a Treasury Single Account (TSA) though this is not yet under way Establishment of a TSA and comprehensive budget and accounts coverage will be significant improvements in fiscal transparency in themselves. They will also create a solid base for improving cash and debt management and for increasing use of country systems for ODA (see section 6 below). The TABMIS platform should facilitate implementation of these goals. (d) Sector and local transparency, service delivery, and accountability 101. Stakeholders noted that transparency, management, and accountability in the sector ministries and in sub-national government, particularly at the local level, needed strengthening. This may in part be due to capacity constraints, but also because of the rapid delegation of spending authority. Delivery of services directly to the public is mainly a local responsibility, but policies for delivery of services, such as health and education are formulated by the sector and central agencies of the national government. Transparency at and between all levels of government is thus of critical importance to achieving National Development Strategy goals Some aspects of sub-national allocation are relatively transparent. The basis for allocating resources via tax shares and transfers is clear. Transfers to provinces for capital spending are allocated with reference to expenditure norms that are determined for a stability period of 3-5 years. Norms mainly reflect population, with adjustments to reflect needs of disadvantaged provinces. Tax shares are also set for the stability period. Provinces have some discretion over functional allocation, although the central government mandates minimum allocations to central sectors (the minimum for education is 20 percent of total; that for science and environment protection are 2 and 1 percent respectively). TABMIS, when it is fully rolled out and coverage is more comprehensive, should ensure that functional allocations of spending by all levels of government are effectively consolidated for general government budget execution reports monthly, quarterly and year-end These features mean that Vietnam can be assessed as having a high score on transparency of intergovernmental relations. However, several factors as discussed above contribute to weaken the fiscal transparency at sector and local levels, and to reduce the effectiveness of policy control and accountability. Key issues are: (i) multiple budgeting with allocations split among recurrent, investment 58 VIETNAM FISCAL TRANSPARENCY REVIEW

60 and target programs; (ii) lack of and fragmented capital budget and spending data; (iii) under-estimation of revenue; and (iv) carry-over practices Overall, these factors weaken national monitoring and control of sector policies and controls over spending at provincial and local levels. TABMIS, together with elimination of carry-overs and improved revenue administration, should improve financial control and reporting on sector implementation of spending. Until then it is difficult to formulate and assess the execution of national sector policies. (e) Transparency of revenue management 105. The FTC emphasizes clear definition of obligations and complaints mechanisms in the tax laws (1.2.2), and accounting for receipts from all major sources (3.1.4) as key dimension of revenue management transparency. Another area of concern in the FTC is the extent to which tax exemptions of various kinds (collectively termed tax expenditures because revenue foregone is broadly equivalent to expenditure and such measures are often used rather than direct budgetary spending) are discussed in the annual budget. FTC advocates that statements including tax expenditure should be part of budget documentation. PEFA PI-13 sets benchmarks with regard to taxpayer obligations and liabilities and the existence and effectiveness of an appeals mechanism. No benchmark is set for tax expenditure transparency Vietnam has a relatively well developed system with clear laws on corporate income tax (CIT), personal income tax (PIT), and value added tax (VAT). Total tax collection (including social insurance contributions) exceeds 25 percent of GDP, a significantly higher proportion than other countries in the region. The main elements of legislation are reasonably clear, but there are a number of ambiguities giving rise to different interpretations and a degree of official discretion. Recent taxpayer surveys indicate that taxpayers have difficulty understanding major components of the CIT legislation and less than 40 percent of respondents found the VAT refund system easy to understand. The CIT definition of taxable income differs from the normal IFRS definition of profits; it also embodies a series of incentives for specific industries and locations that alter effective rates relative to published rates. VAT also includes a long list of exemptions Tax compliance is perceived to be a heavy burden on corporate taxpayers (World Bank Doing Business survey 2012), taking around 900 hours per year to complete the returns though much of the time is spent on social security returns administration. A complaints process is in place, but the functioning of the central unit to respond to complaints from tax payers should be strengthened. While the possibility of appeal to the courts exists, few have done so. Taxpayers have a unique Taxpayer Identification Number (TIN) used for all taxes and business licenses. It is not linked to other databases, such as social security, in part because of IT limitations. Less than 40 percent of small businesses have a business license or are registered for tax, however. The penalties for noncompliance are considered by the tax administration to be too low. A relatively small proportion of tax administration staff are engaged in tax audit Tax arrears are not perceived to be a problem, in part because of the authorities powers to freeze bank accounts or withdraw business licenses in the event of non-payment. Taxes are paid directly into treasury accounts on the day of collection, except for remote areas without direct access to banks. Tax collections from each taxpayer are reconciled with treasury records in the TABMIS on a regular basis. VIETNAM FISCAL TRANSPARENCY REVIEW 59

61 109. The Tax Reform Strategy will emphasize taxpayer education and review the approach to tax exemptions. The Prime minister s Tax Reform Strategy, supported by the World Bank s Tax Administration Modernization Project is addressing the broad issue of improving the effectiveness and transparency of the tax system, with an emphasis on operational modernization and IT development. As part of this project, a significant emphasis is being placed on taxpayer education. This is already yielding results as illustrated in Chart 23 below, and Chart 8 above, showing that most private sector respondents have found it easy to access information on tax regulations. This is in contrast to responses on Provincial Budgets (Chart 7), which most people found it difficult to access. 70 Ch 23: Ability to acquire information on changes in tax regulations (PCI 2010) Lai Chau Dong Nai Tien Giang Ca Mau Nam Dinh Dak lak Can Tho Quang Nam Tay Ninh Hung Yen Ha Nam Kien Giang Quang Binh Lang Son Thanh Hoa Tra Vinh Dien Bien Dong Thap Hai Duong Quang Ninh Quang Ngai Binh Thuan BR -VT Thai Nguyen Nghe An Hau Giang Dak nong Gia Lai Lam Dong Binh Duong Bac Lieu Phu Tho AVERAGE Thai Binh Bac Can An Giang Da Nang Quang Tri Ninh Binh Vinh Long Khanh Hoa Bac Ninh Kon Tum Long An Ben Tre Son La Vinh Phuc Hue Hoa Binh Binh Dinh Binh Phuoc Ninh Thuan Cao Bang Tuyen Quang Phu Yen Ha Tinh Yen Bai Bac Giang Soc Trang Lao Cai Ha Giang Impossible or possible but difficult Easy or very easy Source: : Staff estimates based on data published on MOF website 110. Overall revenue transparency is perceived as satisfactory, but sector-specific revenue transparency issues require further research. The Budget Transparency Survey did not record major stakeholder concerns in relation to revenue transparency. Charts 13 and 14 show that stakeholders regard presentation of revenue issues in budget reports to be clear, and do not identify it as a major area for improvement. The review of Budget documents outlined in Sections B and C finds that there is relatively good coverage and comprehensive information on domestic revenue. Though some effort is needed on disaggregation of trade and natural resource revenues. Additionally, a 2011 report by the Vietnam Chamber of Commerce and Industry found governance and transparency challenges in the oil, gas and mining sectors. Detailed research on this topic goes beyond the scope of this Policy Note. Further details for some revenue items such as trade revenue, which aggregates import duty, export duty, and excises on imports, would help clarify policy as well as facilitate mapping to relevant GFS categories. Detailed information on the basespecific revenues for excises, natural resource tax, and environmental tax would also help policy analysis and forecasting. More detailed disclosure on oil, gas, and mining receipts would be desirable, but specific analysis of resource revenue transparency is beyond the scope of this Policy Note The Government could consider including a tax expenditure statement as part of the budget presentation. Section 1 of the 2012 State Budget does cover tax holidays (rate cuts, deferred payment) granted to over three hundred thousand enterprises in 2011 to help cushion the effects of the global crisis on the domestic private sector. Tax holidays have led to an estimated reduction of VND 4,200 billion in revenue (0.62 percent of total revenue). Further tax expenditures were introduced in the second quarter of 2012 through Resolution 13, including postponing VAT obligations, reducing land rent liabilities, extending deadlines for meeting land use fee obligations. Though this was brought in mid-budget, the decision was disclosed, but not in the context of an overall fiscal policy discussion. Good practice in the FTC requires tax expenditures to be reported as part of the budget, indicating the public policy purpose 60 VIETNAM FISCAL TRANSPARENCY REVIEW

62 of each provision, its duration and intended beneficiaries. Whenever possible the impact should be quantified, which was done in the case of Resolution Rules and regulations for the management of SOE equitization proceeds have been updated in Decree 59 issued in July The proceeds are used firstly to pay for costs associated with the equitization process, including compensation for possible retrenchment of employees. Two separate Funds have been established under Decree 59. One holds equitization proceeds from State Owned Economic Groups and State Corporations, and the other holds equitization proceeds from remaining State Owned Enterprises. These resources can be used to meet equitization costs not covered by proceeds from sale of an individual enterprise, other SOE restructuring costs, and for specific projects approved by the Prime Minister. The Ministry of Finance oversees the management of these Funds, and State Enterprises need to report to the Ministry of Finance within forty five days of the end of the Fiscal Year on use of resources from these Funds. (f) Transparency of aid management 113. Aid management and harmonization of management of donor financing through country systems are key objectives of the GOV. 62 Harmonization is not simply an end in itself, however. Failure to integrate donor funds within the country PFM system is an important weakness in overall fiscal reporting. Aid is not an insignificant part of GOV public finances and donor-financed projects should be fully integrated with the government accounting and reporting system to allow timely, reliable, and comprehensive fiscal and financial reports. Integration should also include third-party payments 63 to ensure comprehensive reporting and compliance with IPSAS accounting standards At present harmonization in Vietnam is achieved primarily through greater use of budget support assistance, where donor funds are provided directly to the SBV account of the State Treasury and expenditures are then made directly through normal government procedures. Projects, however, continue to be managed by donor PMUs and disbursements and payments are recorded by donors and posted in the Debt Management and Financial Analysis System (DMFAS) operated by the Debt Management and External Finance Department (DMEFD) of the MOF. DMFAS records are periodically incorporated in the Treasury accounts. As disbursement notifications from donors can take up to 3 months to be received by the MOF, however, there is a long time lag before reconciliation can occur This situation undoubtedly contributes to the statistical discrepancy between the fiscal and the monetary accounts. Computerization of budgeting and accounting, however, offers an avenue for real time recording both domestic and foreign-financed transactions and producing reports that can meet both national and donor reporting standards. In some countries, 64 PMUs are connected to the system and 61 Please refer to Decree No. 59/2011/ND-CP on Conversion of Enterprises with 100% state-owned capital into joint-stock companies (Articles 42 and 43). 62 Linked to the 2005 Paris Declaration on Aid Effectiveness and endorsed by the GOV through the Hanoi Core Statement of That is, payments made directly from donor accounts to suppliers that do not pass through the accounting system but add to assets, and liabilities if under a loan. 64 Particularly Latin America, where some countries require all donors to use the country system for projects, but this practice has also been initiated in Pakistan and is being proposed in Ghana for World Bank projects. VIETNAM FISCAL TRANSPARENCY REVIEW 61

63 can post their transactions directly in real time including third party transactions, which also would be authorized by the project directors. A single World Bank project in the education sector is already managed through TABMIS. When it is rolled out fully, TABMIS can replicate this treatment of donorfinanced projects and thus accelerate harmonization of foreign financing with country systems. At the same time it will improve budget coverage and reconciliation of the fiscal and monetary accounts. (g) Budget oversight and accountability 116. Internal and external mechanisms to oversee the financial and fiscal operations of the executive agencies of government are crucial to the establishment of a sustainably transparent and accountable system of PFM management. These mechanisms are typically weak in developing and emerging market economies and measures to increase the strength of oversight are indicative of a commitment to long-term reform. Good practices in this area are the central topic of the fourth pillar of the FTC: Assurances of Integrity. A number of PEFA indicators are also helpful in monitoring progress toward effective oversight. OBI places most emphasis on the role of the Supreme Audit Institution (SAI) in reviewing year-end financial statements Effective oversight requires a clear chain of accountability from the executive agencies to internal oversight agencies, to external oversight agencies (primarily the SAI in Vietnam s case SAV), to the legislature (the NA), and ultimately to the people. Several weaknesses in the chain of accountability have been noted in the preceding sections and are discussed further here. Measures to strengthen the accountability chain are an essential element of long-term improvement in fiscal transparency and effective PFM in Vietnam Executive: the primary executive responsibility for transparency is to develop effective internal planning and management practices and internal controls. FTC 4.1 emphasizes the need for fiscal data to meet accepted data quality standards, particularly with reference to accounting and statistical standards (IPSAS and GFS), and reconciliation with monetary and other linked data. Considerable effort is now being made to improve reporting, reconciliation, and data quality through the TABMIS implementation. Ensuring complete coverage of general government (defined consistently with GFS standards) is the pathway both to achieve high quality data and ensure that all relevant agencies of government are subject to oversight. Inclusion of ODA in the oversight chain (see F (f) above) is necessary to achieve these objectives Internal oversight internal audit: The necessity of establishing effective internal audit is emphasized by FTC (4.2.5). The internal audit function, however, is just beginning to be established in Vietnam and relations between internal audit, the inspectorate, and external audit need further clarification and direction. Establishing internal audit was recommended strongly in the 2007 CFAA and is being piloted in several ministries. It is envisaged that a decision will be made to require internal audit to all ministries and local authorities Internal audit is primarily an executive management function that is designed to give line agency managers a review of the functioning of internal controls independently from those directly responsible for implementing these controls. Internal audit should not be directly involved in the control process and normally reports directly to the agency head, who can then take appropriate action to ensure that internal controls are functioning effectively. It is usual for internal audit findings to be made available to external audit; but it is part of the machinery of the executive agency. Promoting internal audit thus aims fundamentally at establishing better internal management capacity in executive agencies at all levels of government. 62 VIETNAM FISCAL TRANSPARENCY REVIEW

64 121. The State Inspectorate, on the other hand, is much more an external reviewer of executive agency operations and is more closely linked to external audit though reporting to central agencies such as the MOF and the PM s department rather than the NA. The choice between an inspectorate service and an internal audit function is primarily about the extent to which it is feasible to improve performance by strengthening capacity at line agency level or whether continuing central direction is necessary. The question of strengthening the inspectorate should also, however, be examined in the context of strengthening external oversight through strengthening the inspectorate or building up the role of the SAV Establishing internal audit will require detailed review and long-term commitment. It will be important to look at progress in implementing internal audit in terms of (i) coverage and quality of the internal audit function, (ii) frequency and distribution of reports, and (iii) management follow-up to internal audit recommendations. As noted above, however, success in this area is highly dependent on building up internal management capacity in executive agencies throughout government Internal oversight procurement: Procurement is recognized as a high risk area for all organizations and both internal and external oversight are vital to ensure that governments procurement operations are transparent, competitive, and efficient. It is generally acknowledged that Vietnam has made good progress in terms of procurement legislation but there are many reports of irregularities in practice and a need for greater cooperation between the government, SOEs, and the private sector External oversight audit: External audit should provide a vital oversight anchor for a transparent accountable PFM system. The FTC emphasizes the necessity for public finances and policies to be scrutinized in a timely way by a national audit office (or a supreme audit institution (SAI) that is independent of the executive (4.3.1), and which reports to the legislature and the public. Vietnam s SAV performs these tasks under the authority of the State Audit Law of 2005 but lacks resources to carry out its functions in full The SAV reports on the government final accounts and consolidated financial statement around 18 months after the end of the financial year. The long delay in presenting the accounts is primarily because the accounts are presented to the SAV 14 months after year-end. TABMIS should permit this to be substantially shortened. The SAV also conducts individual audit reports that are provided to the auditee within 45 days of completion and to the NA within two months of finalizing the audit. It also does special reports on specific issues; these reports may also be made public The SAV faces capacity constraints to fulfill its mandate. Though estimates vary, annual audit covers percent of central agencies (around 70% of total spending) and more than 35 percent of provinces. It is represented in provinces through 13 regional SAVs, each of which covers several provinces. It does some performance audit, but focuses mainly on financial and regularity audit. Although the TABMIS is well underway, SAV has made only very limited use of computer aided audit techniques (CAATs) and few staff are as yet trained in systems audit An important area to explore further in the system of external audit in Vietnam is the line of accountability between the NA and the line executive agencies of government, which may lack clarity. The capacity for SAV to establish accountability between Peoples Councils and executive VIETNAM FISCAL TRANSPARENCY REVIEW 63

65 provincial and local departments at the provincial and local levels may be even more limited. The current system of external audit at the national level depends critically first on the SAV s analytical capacity and MOF s capacity to ensure that audit recommendations are followed; there are indications that both are improving. Strengthening NA s role and capacity can give added incentives for executive agencies to implement SAV recommendations External oversight the NA. The FTC requires only that the roles of the legislative, executive, and the judicial branches of government be clear. The general assumption is that the legislative branch oversees the financial operations of the executive and, as stated in the Manual on Fiscal Transparency, that an active committee of the legislature [oversees] the conduct of fiscal policy and [facilitates] civil society input into budget deliberations. A critical consideration for strengthening NA oversight is the question of giving its Finance and Budget Committee more direct access to individual line agencies of the GOV in questioning and following up SAV recommendations. At present, while the Committee is informed by the SAV reports, it plays little direct oversight role; these are taken up by the SAV and the MOF plays the key role in follow up. Capacity of the Finance and Budget Committee undoubtedly has to be increased, but the process needs to be changed significantly for NA oversight to become effective External oversight civil society and the media: Some civil society groups are actively involved in reviewing the budget and PFM process in Vietnam with some emphasis on promoting economic and budget literacy at the local level. As discussed in Sections B (f) and C (b) external scrutiny of the budget by independent groups can play a valuable role in identifying problem areas and questioning assumptions and policy. In advanced economies, universities and the media play such a role; now may be an opportune time for such activities to be more actively encouraged in Vietnam. Training of CSO and media staff, and opportunities for discussion between government agencies and civil society and media groups will help foster more understanding between government and civil society. Freedom of information legislation can also be considered. These kinds of initiative by the GOV in themselves will contribute to greater transparency. As civil society and media capacity for fiscal analysis and commentary grows, the overall transparency and effectiveness of the PFM system will continue to strengthen External oversight development partners: Development partners are in one sense part of the PFM system in that management of donor financing is part of PFM. In another sense, they also provide PFM oversight skills, and a significant portion of donor assistance is aimed at scrutinizing and improving PFM practices. Independent external scrutiny of the PFM system (through different types of externallysupported diagnostic missions) should provide a needed objective view and knowledge of experience in other countries that can be applied to strengthen the GOV s PFM system. 64 VIETNAM FISCAL TRANSPARENCY REVIEW

66 ONCLUSION AND SUMMARY COF RECOMMENDATIONS 131. This Policy Note argues that fiscal transparency in Vietnam can be further enhanced at relatively little cost and with potentially big gains. The public availability of and access to fiscal information can improve by building on the existing information base, systems and processes. This can deliver important macroeconomic, service delivery and institutional gains. Priorities identified on the basis of a review of transparency practices and results from a stakeholder survey include: (i) publication of the Budget proposal; (ii) improved analytical presentation of Budget documents through adoption of GFSM 2001 classification, including updating of methodology for calculating overall budget balance; (iii) consolidation of extra-budgetary activities in Budget reports; (iv) simplifying reporting templates particularly for sub-national level The Note acknowledges that there are important challenges to obtaining timely, reliable and accurate data. This includes the time and effort needed to consolidate fiscal information across all tiers of Government, which should be addressed through TABMIS. It also includes the complex system of carry-over practices. However, some of the steps outlined in this Note can be taken whilst acknowledging these challenges. Not doing so exacerbates transparency issues. The revision of the State Budget Law and the roll out of TABMIS provide important impetus for taking this agenda further Suggested priority areas for reform are summarized in the table below. The summary of suggestions given with the Executive Summary is again shown, together with comments regarding the relative importance of the issue and linkages between reform actions. While the list of suggestions is quite long, the first seven relate to changes in the regulatory framework, and many of the others involve actions that would follow directly from the proposed regulatory changes. The six areas for action correspond broadly to those already incorporated in the Government s PFM reform program. These suggestions could be further refined and assessed through continuing discussion with stakeholders. VIETNAM FISCAL TRANSPARENCY REVIEW 65

67 Table B Suggestions for strengthening fiscal transparency This table summarizes the suggestions for improvement across all sections of the Policy Note. They are grouped into areas that broadly correspond to the Government s PFM Reform Strategy. A timeframe for implementation is also suggested. These suggestions are for further review by the Government and it is recommended that they be taken up for discussion by stakeholders at a workshop (possibly also considering recommendations to emerge from the PEFA assessment now underway) Issues Non-disclosure of Budget Proposal limits citizens participation. Definition of fiscal balance in SBL not aligned with international standards Reporting coverage and accountability of State Budget spending can be further clarified in SBL Present legal framework does not adequately address disclosure of fiscal risks ; ; Paragraph Timeframe Suggestions for Action 65 Regulatory Framework for Fiscal Management Add provision to publish Short-term Budget Proposal at the time it is submitted to the National Assembly as part of the revision of the State Budget Law (2002). Add a provision requiring that GFS standard be applied as the key reference point for budget analysis Key factors for SBL include: consolidated reporting including extra-budgetary funds; reporting from sub-nationals for greater accountability; use of fees and charges; and carry-over practices. 72; Include a consolidated risk statement in the budget presentation to improve transparency. Short-term Short-term to change SBL; medium-term for reporting (see 2.2) Short-term to change SBL; medium-term to implement (see 2.3 below) Comment A low cost/high gain action that would immediately improve the Government transparency profile. Could be incorporated in the current review of the SBL. As above. Strengthening the legal basis for comprehensive fiscal reporting in the SBL will be necessary to establish more comprehensive reporting as discussed under 2.3 and 2.4 below Similar to 1.3 above. Implementation of effective risk analysis and disclosure statements will require a medium-to long-term effort. 65 Time to implement reform action: Short-term: 6-12 months; medium-term: 1-3 years; long-term: more than 3 years. However, policy, and initiation of reviews and action plans in most cases should be adopted in the short-term. 66 VIETNAM FISCAL TRANSPARENCY REVIEW

68 Issues Current reporting does not yet provide a full picture of fiscal policy or ensure accountability. Existing regulatory framework lacks clarity on oversight roles and responsibilities. Decentralization has created some confusion over authority between People s Committees and line ministries. Classification of Budget and Budget reports do not lend themselves to meaningful analysis. Analytical content and presentation of Budget documents could be strengthened ; 67-69; Suggestions Review reporting provisions in SBL, Decree 60 (2003), Decision 192 and supporting Circulars to: promote consistency in and consolidation of reporting on and offbudgetary funds; simplify reporting; and report on service delivery Strengthen provisions for SAV oversight of Budget Proposal, coordination between SAV and the Finance and Budget Committee of the National Assembly, and the SAV s coverage of provincial budget execution Review relative role of different levels of government and the overall decentralization strategy based on international experience. A decentralization law could be considered. Paragraph Timeframe for Action 65 As per 1.3 and 1.4 above. Medium-term Medium-term Comment The status of off-budgetary funds in terms of their relationship to general government (using GFSM 2001 guidelines) will need to be reviewed to determine the appropriate reporting treatment for each fund. Requires a substantial review of oversight mechanisms, relations between SAV and all levels of government as well as capacity strengthening for SAV and the NA Finance and Budget Committee. Independent and effective oversight is the hallmark of a transparent PFM system. Major and complex issues need to be addressed. It is suggested that a high level Government body be established to carry this forward and coordinate the needed technical studies. 2. Aggregate Fiscal Policy Transparency and Credibility 43-45; Map financial outcome data Short-term Basic mapping has been done from the Chart of Accounts and work should begin as to GFSM 2001 categories to soon as possible to generate enable generation of quarterly FORs through TABMIS. Fiscal Operations Reports These reports will provide (FORs) with more accurate a clear analytical focus to analytical presentation. track implementation of fiscal policy and moreover will help track progress in establishing a comprehensive fiscal report by monitoring and eventually eliminating the fiscal statistical discrepancy (difference between Treasury estimates of the deficit and estimates taken from financing data). FORs will become the pinnacle report to provide a clear overview of fiscal policy implementation Use existing information to strengthen analytical content on fiscal performance, budget balance, and Government Debt. Short-term Clarify if data is preliminary and subject to variation because of carry-over practices. VIETNAM FISCAL TRANSPARENCY REVIEW 67

69 Issues Consistent underestimation of revenue and expenditure compromises Budget credibility and transparency. Omitting PFFs from consolidated Budget distorts assessment of overall macroeconomic and fiscal situation. No consolidated analysis of SOEs impact on the State Budget. Carry-over practices prevent reliable estimates of allocations. Content of Budget reports are difficult to interpret and communicate particularly at sub-national level. Suggestions Provide different scenarios for oil revenue projections, and adopt a review mechanism for dealing with major variations as a result of price or other shocks. Eliminate the practice of transferring over-realized revenue to the following year and other carry-over practices. Implement multi-year forecasts with clearly stated assumptions as part of medium-term fiscal framework Integrate summary reports on PFFs into Budget documents as a starting point. Review PFF reporting standards and requirements under Decision 192 and update to align with Budget reporting requirements (consistent with GFSM 2001 classification) Develop framework drawing out links between the Budget and SOEs, testing impact of alternative shocks to SOE operations, and developing a set of indicators to assess risks. Paragraph Timeframe for Action 65 Medium-term Short-term Medium-term Medium -term Comment Realistic estimates of revenue should be used as a basis of fiscal policy to enhance credibility of the budget, and avoid strategic setting of targets and options for nontransparent and potentially inefficient spending. Incorporation of PFFs into the budget and accounts will accord with good practice standards, but will take a considerable technical effort and strong political commitment to put in place. A strong capacity-building effort is needed both to improve monitoring of individual SOEs and to assess the aggregate fiscal risk arising from SOEs (as part of an overall fiscal risk statement accompanying the budget). 3. Transparency of Expenditure Management and Reporting Review and adopt international Short-term A review of carry-over experience and good practice practices would have a guidelines for carry-overs, high-value impact both on including limitations on type transparency and management of expenditure and need for practice. Spending and clear allocation of carried-over receipts are best brought to spending. account on the year in which the transaction is recognized (cash or accrual) Review disclosure requirements under Decision 192 and GDO and develop user friendly templates for Budget and service delivery reports at subnational level. Engage more closely with CSOs and the media for better communication and capacity development for Budget monitoring. Medium-term Short-term Capacity-building and administrative reform linked with review of SBL and regulatory reform. A closer association with CSOs will help both to define user requirements and encourage local community involvement with and support of budget policies. 68 VIETNAM FISCAL TRANSPARENCY REVIEW

70 Issues Suggestions 3.3. Lack of 47 Review classification of Budget consistency between classification of Budget plans and execution reports limits assessment of budget performance. plans and classification of Budget execution reports to better align the two across expenditure types and functions Coverage and Publish Mid-Year Budget Updates with clear communication of changes in fiscal policies, budgetary adjustments, and exogenous developments Transparency limited by lack of economic breakdown of recurrent expenditure. Information on capital allocations is too aggregated and limits budget coverage. Lack of information on off-budget capital spending complicates assessment of level and composition of capital allocations Include tables with major economic categories of spending by administrative units to show wage bill and other economic components of cost. 44 Include capital allocations across functional categories and/or across all administrative units, including at sub-national level. This would provide a more complete picture of allocations across sectors Include breakdown of offbudget capital spending in Budget document (aggregate figure already included) with sources of funding and allocations across sectors and functions. Include off-budget capital spending as part of deficit calculation (i.e. net incurrence of liabilities). Paragraph Timeframe for Action 65 Medium- Term Short-term Mediumterm Short-term Short-term Medium- Term Comment The unified Chart of Accounts has helped to align the Budget plan classification with the COA and the Budget execution classification with the COA. But the Budget plan classification and Budget expenditure report classification are not yet fully aligned. Once TABMIS is fully operational it should be possible to produce timely updates and in-year reports on a quarterly and half-yearly basis, with a goal of establishing regular, comprehensive monthly reports. A goal of producing a reliable Mid-Year Budget would represent a very significant step toward fiscal transparency and effective PFM. Action on issues will involve some review of budget classification and reporting to ensure that the Budget and Treasury reports conform to good analytical practice. This review should be closely coordinated with 3.3 and 3.4 above and with fiscal reporting (FORs) VIETNAM FISCAL TRANSPARENCY REVIEW 69

71 Issues Transparency of tax expenditures is an important element of the fiscal policy overview in the budget presentation. Some revenue items are not shown in sufficient detail for policy analysis or reporting. Donor accounts are not included in treasury accounting and reporting, leading to a statistical discrepancy in the fiscal accounts. Oversight roles and responsibilities need thorough review to ensure accountability 4. Paragraph Timeframe for Suggestions Action 65 Transparency of Revenue Management 112 The Government has reported on tax expenditure, although the most recent series was introduced mid-year. Consider a statement on tax expenditures in the State Budget document. 111 Provide more details for some items such as trade revenue, which currently aggregates import duty, export duty, and excises on imports Short-term Short-term 5. Transparency of aid management Progressively put donor Medium-term accounts on treasury, on account, and on reporting through TABMIS to improve aid management and overall fiscal reconciliation. Begin with World Bank investment projects (TABMIS already started) 6. Budget oversight and accountability Aligned with regulatory review Medium to above, carry out in-depth review Long-term of oversight functions across all levels of government. Comment A start has been made in this area and it should therefore be relatively easy and be of high value to make the data available more prominently in the Budget discussions and documentation. Detailed information on the base-specific revenues for excises, natural resource tax, and environmental tax would also help policy analysis and forecasting. Implementation of this suggestion would help overall fiscal reporting and reconciliation and would represent a major step for Vietnam in fulfilling its commitments under the Paris Declaration and subsequent High-Level Forums on aid effectiveness. Strengthening national oversight mechanisms is of critical importance to achieving sustainable fiscal transparency and effective PFM. There are major capacity issues to be addressed and it is strongly recommended that an in-depth review be undertaken with international support as soon as possible. Implementation will, of course, take several years. 70 VIETNAM FISCAL TRANSPARENCY REVIEW

72 REFERENCES Allan, W., et al. (1999). Vietnam: Toward Fiscal Transparency. A Joint IMF-World Bank report. Allen, R. and Radev, D. (2006). Managing and Controlling Extra-budgetary Funds. IMF Working Paper Andreula, N., Chong, A, and Guillen, J. (2009). Institutional Quality and Fiscal Transparency. Inter-American Development Bank. Arbatli, E and Escolano, J, Fiscal Transparency, Fiscal Performance and Credit Ratings, International Monetary Fund Working Paper 12/156 Barnhart, M. (March 12, 2012). Transparency Key to Fixing State Budget Crisis. Cebotari, A. et al. (2009). Fiscal Risks Sources, Disclosure, and Management. International Monetary Fund: Fiscal Affairs Department. Cebotari, A., et al (2009) Fiscal Risks: Sources Disclosure and Management, (IMF: Washington DC). Easterly, W. (1999). When Is Fiscal Adjustment an Illusion. Policy Research Working Paper 2109, the World Bank. Fukuda-Parr, S. and Guyer, P. and Lawson-Remer, T. (2011). Does Budget Transparency Lead to Stronger Human Development Outcomes and Commitments to Economic and Social Rights? IBP Working Paper. Fukuda-Parr, S., Guyer P., and Lawson-Remer, T. (2011). Does Budget Transparency Lead to Stronger Human Development Outcomes and Commitments to Economic and Social Rights? International Budget Partnership Working Paper. Hameed, F. (2005). Fiscal Transparency and Economic Outcomes. IMF Working Paper, WP05/225. Hameed, F. (2011). In-depth research on budget transparency, participation, and accountability. Budget Transparency and Financial Market. IBP Working Paper. International Budget Partnership (2008). Social Audits in Kenya: Budget Transparency and Accountability. VIETNAM FISCAL TRANSPARENCY REVIEW 71

73 Opening Budgets in Mexico Helps Open Care Options for New Mothers. School Building Fund provides Lessons on Community Mobilization in Uganda. Open Budget Index International Budget Partnership (2010). Open Budget Index 2010 Vietnam. International Budget Partnership (2011). Guide to Transparency in Public Finances Looking Beyond the Core Budget: Extra-Budgetary Funds. International Monetary Fund and World Bank. Debt Sustainability Framework. Retrieved May 2012, from International Monetary Fund (2012). Article IV International Monetary Fund (2001). Government Finance: Statistics Manual. Washington DC. International Monetary Fund (2007). Manual on Fiscal Transparency. Washington DC: IMF, Fiscal Affairs Department. Jacobs, D., Helis, J., and Bouley, D. (2009). Budget Classification. International Monetary Fund: Fiscal Affairs Department. Jarmuzek et al. (2006). Fiscal Transparency in Transition Economies. Warsaw: Center for Social and Economic Research. Kaufmann, D., Kraay, A. and Zoido-Lobaton P. (2005). Governance Matters IV: Governance Indicators for World Bank Policy Research Paper Kharas, H. and Mishra, D. (1998). Fiscal Policy, Hidden Deficits, and Currency Crise. Kopits, G. and Craig, J. (1998). Transparency in Government Operation. IMF Occasional Paper, No Krafchik W. (2004). Can Civil Society Add Value to Budget Decision-Making? A Description of Civil Society Budget Work. International Budget Project. Lienert, I. (May 14, 2012), New Zealand to Legislate an Expenditure Rule. Lienert I. and Ljungman G., PFM Technical Guidance Note: Carry-Over of Budget Authority, IMF (January 2009) Lipsky, M. (February 22, 2012). Improving Governance Through Budget Transparency. Overy, N. (2011). Left in the Dark: Seeking Information on Public Financial Transfers to Eskom and other State- Owned Enterprises. International Budget Partnership and the Institute for Security Studies. Patel, D. When Budget Disclosure is Not Enough, (May 2012) at blogs.worldbank.org Petrie, M. (2003), Promoting Fiscal Transparency: The Complementary Roles of the IMF, Financial Markets and Civil Society. IMF Working Paper, WP03/ VIETNAM FISCAL TRANSPARENCY REVIEW

74 Primo-Braga C. and Vincelette G. (2011), Sovereign Debt and the Financial Crisis. Wahington DC: the World Bank publication. Shukla G. and Pham D. (2011). Tax Reform in Vietnam: Toward a More Efficient and Equitable System. World bank report, Chapter 3, Section 9. Socialist Republic of Vietnam (2005). Vietnam Managing Public Expenditure for Poverty Reduction and Growth. Public Expenditure Review and Integrated Fiduciary Assessment. Joint report of Social Republic of Vietnam and the World Bank. Social Republic of Vietnam (2004). Decision 192 (2004), Circular 29/2005/TT-BTC on fiscal transparency of SOE, Decision 224/2006/QD-TTg on monitoring and evaluating performance of SOEs, Decision 169/2007/QD- TTg on monitoring and evaluating enterprise finances and operations. UK House of Commons International Development Select Committee (5 January, 2012). MPs report on working effectively in fragile and conflict-affected states. Retrieved May 2012, from committees/committees-a-z/commons-select/international-development-committee/news/conflict-substantive. USAID and VCCI (2011). The Vietnam Provincial Competitiveness Index Measuring Economic Governance for Business Development. USAID/VNCI Policy Paper #16. UNDP, Provincial Governance and Public Administration Index ( Vietnam Country Financial Accountability Assessment (2008). Vietnam Development Report (2012), Market Economy for a Middle Income Vietnam. Vietnam Ministry of Finance. Communication and Information Provision to the Press. Press conference. Retrieved May 2012, from Zoellick, R. (April 6, 2011), Speech at the Peterson Institute VIETNAM FISCAL TRANSPARENCY REVIEW 73

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76 ANNEX A: DIFFERENT APPROACHES TO REVIEWING FISCAL TRANSPARENCY 1. Fiscal transparency, defined by Kopits and Craig (1998) as openness [by governments] toward the public at large about government structure and functions, fiscal policy intentions, public sector accounts, and projections, is now generally accepted as an essential element of public governance and economic management. The IMF Code of Good Practices on Fiscal Transparency (hereafter, fiscal transparency code or FTC), developed and published in 1998, was envisaged as a guide to good fiscal practice that would directly strengthen in-country PFM systems and the international financial architecture, as part of a wider international Standards and Codes Initiative 66 following the Asian financial crisis of the late 1990s. The original explanatory Manual on Fiscal Transparency was published in the same year. Both the FTC and the Manual were revised in Good practice standards under the FTC cover all fiscal and financial management processes under four pillars: clarity of roles and responsibilities for PFM within government; open budget processes; public availability of information; and finally, assurances of integrity, covering issues of data quality as well as the existence of and quality of external scrutiny of PFM information. The FTC is a general guide for all countries to put open PFM systems and procedures in place; and technical assistance was to be provided to developing and emerging market countries to help build their capacity to implement the recommended practices. Implementing the FTC 3. The IMF promoted implementation of the FTC particularly in developing and emerging market economies through quite intensive technical missions that prepared Reports on Observance of Standards and Codes (ROSCs) for fiscal transparency in consultation with country authorities. The process was voluntary and ROSCs were published only if the country authorities agreed. It was anticipated that markets would respond positively to recorded improvements in fiscal transparency through reduced sovereign borrowing costs and that a self-sustaining process would be initiated Twelve areas of significance to Bank and IMF work and the international financial architecture that were endorsed by the IMF, the World Bank, and other standard-setting bodies including the Basel Committee on Banking Supervision, and the Financial Action Task Force (see 67 See Petrie (2003) VIETNAM FISCAL TRANSPARENCY REVIEW 75

77 4. While the logic of the FTC and its coverage of PFM practices were broadly accepted, implementation proved more complex and more demanding of resources than originally envisaged. As will be discussed below, evidence drawn from completed ROSCs suggests that markets do respond positively to improvements in fiscal transparency, but many other factors are also important and the strength of response for most countries has been insufficient to transform their PFM systems rapidly. Countries and development partners have found that overcoming the many in-country constraints is a long-term process. Some of the technical standards (such as Government Finance Statistics Manual 2001 (GFSM 2001) for fiscal statistics reporting, and International Public Sector Accounting Standards (IPSAS)) that countries should move toward to achieve a reasonable standard of fiscal transparency practice themselves require very significant inputs of investment in computer systems and technical training. Moreover, changing long-established practices associated with legacy systems itself takes time and sustained commitment by both country authorities and DPs providing the required technical assistance. 5. Shortly after the promulgation of the FTC, other international agencies and Civil Society Organizations (CSOs) developed approaches embodying these principles to help assess progress in strengthening country PFM systems. While broadly consistent with the FTC principles and coverage, different emphases and diagnostic frameworks were applied to meet a wider range of objectives. 6. For developing and emerging market countries, the most important developments along these lines have been the Public Expenditure and Financial Accountability (PEFA) framework by the PEFA Secretariat, based in the World Bank, under direction of the Bank and other partner international institutions, 68 and increasing involvement of CSOs in budget analysis and promotion of open budgeting. In this latter regard, the Open Budget Index (OBI) produced by the International Budget Project (now Partnership) (IBP) formed in 1997 within the Center on Budget and Policy Priorities based in Washington DC is of particular importance. Each of these approaches is discussed in the following sections below. 7. For advanced economies, the OECD also elected to develop a modified framework and approach following issuance of the FTC although OECD countries were all member countries of the IMF and, in principle, subscribed to the FTC. 69 The OECD Best Practices for Budget Transparency covers similar issues to the FTC, but aims to indicate current best practice standards drawing on the experience of its membership. These practices are designated under three pillars: 1. Principal budget reports to be produced; 2. Specific disclosures to be included in the reports; and 3. Practices to ensure quality and integrity of reports. Best Practices focuses on practices included in the budget; it does not deal with off-budget or quasi-fiscal activities. 68 The PEFA program was founded in December 2001 as a multi-donor partnership between the World Bank, the European Commission, the UK s Department for International Development, the Swiss State Secretariat for Economic Affairs, the French Ministry of Foreign Affairs, the Royal Norwegian Ministry of Foreign Affairs, and the International Monetary Fund. The framework was developed by the PEFA partners in collaboration with OECD/DAC. A Steering Committee comprising representatives of the PEFA partners manages the program, while the Secretariat, located in the World Bank headquarter offices, implements the PEFA activities. 69 Fiscal ROSCs were completed also in a significant number of advanced economies, including Canada, the United States, the Netherlands, France, Italy, Greece, and Portugal. 76 VIETNAM FISCAL TRANSPARENCY REVIEW

78 The OECD does not advocate standards nor directly report on the extent to which member countries implement the identified practices. It does, however, carry out periodic surveys of budget practices in member countries and, in conjunction with the World Bank and other international agencies (the Collaborative Africa Budget Reform Initiative (CABRI), and the Inter-American Development Bank), makes data available on OECD countries and a number of countries from Asia, Africa, and Latin America on the OECD website. 70 The OECD may also agree with individual countries to review budget practices. 71 The PEFA Framework 8. The PEFA framework, as defined in the June 2005 draft (with limited recent revisions), has become an accepted standard format for assessment by the World Bank and many other DPs as a guide to their aid strategies for developing country partners. PEFA was built on previous efforts by the Bank to improve assessment of effectiveness of PFM institutional projects and of fiduciary risks arising from these and development lending in general. CFAAs, together with basic indicators developed for the Highly Indebted Poor Countries (HIPC) debt forgiveness initiative and the FTC, were the main points of technical reference in developing the PEFA framework. CFAAs were aimed both at strengthening country systems and providing safeguards against misuse of Bank funds. They have now largely been superseded by the PEFA assessments. 9. The framework differs from ROSCs in a number of ways. While it includes some elements of transparency, gives clear performance benchmarks, and covers much the same technical dimensions as the FTC, 72 its primary objectives are to provide evidence-based ordinal ratings of performance of country PFM systems in terms of 31 performance indicators (3 of which relate to donor activities). The 28 country system indicators are grouped under 6 high-level (or core) indicator sets that relate to a broad dimension of the PFM system: credibility of the budget; comprehensiveness and transparency; policybased budgeting; predictability and control in budget execution; accounting recording and reporting; and external scrutiny and audit. These ratings provide a measure of the current level of achievement of the system against clearly defined benchmarks. An important point of the methodology is that it aims only to provide an objective snapshot of the PFM system not a recipe for reform. Measurement of the current status of a PFM dimension has no necessary implications for its relative importance and few for detailed remedial measures. Detailed analysis of risks and development of a PFM reform strategy are rightly seen as separate exercises from assessment. In contrast, Fiscal ROSCs as initially applied by IMF staff were deliberately non-quantitative. 73 They were primarily designed to describe the strengths and 70 Latest data available is from 2007/8 (see ,00.html ) 71 For instance, see Blöndal, J. (2010), Budgeting in the Philippines, OECD Journal on Budgeting, 2010/2 72 The 28 country system indicators have 1 to 4 dimensions, each of which can be rated from A (high) to D (low) according to a clearly defined set of descriptive or quantitative data. For multi-dimensional ratings an overall indicator score is calculated by one of two clearly defined methods.m1: weakest-link, where dimensions are perceived as interdependent and a low score for one dimension limits the overall score to that level plus (e.g., D+); and M2, a calibrated average score, if the dimensions are thought to be more independent. 73 Quantitative indices can and have been derived from ROSC texts (see discussion of the benefits of transparency below) and, for several years, Oxford Analytica applied the FTC and the Monetary and Financial Policies Code to derive quantitative indicators of fiscal and monetary transparency to help guide the Californian pension fund, CalPERS, investment in emerging markets. Since 2007 fiscal ROSCs have included a summary table providing a 4-level rating (observed/largely observed/largely not observed/not observed) of country performance against each of the 45 elements in the Code. VIETNAM FISCAL TRANSPARENCY REVIEW 77

79 weaknesses of country systems against each element of the code, and in a staff commentary section, identify those weaknesses that need to be addressed to strengthen fiscal transparency and suggest priority areas for improvement. 10. Each of these approaches has weaknesses and strengths. The ROSCs do not sufficiently address country capacity constraints or a realistic timeframe for addressing weaknesses; consultation with other stakeholders has been limited; dissemination of ROSC results has been limited; and follow-up to IMF staff recommendations was largely left to country authorities and support from other DPs. However, the broader qualitative coverage of ROSCs gives considerable scope for a comprehensive review of transparency weaknesses and linkages between elements of PFM systems. 11. The quantitative rating approach of PEFA has had considerable appeal to aid agencies (and possibly to financial analysts) and has become the most widely accepted standard format for assessment by the World Bank and many other DPs to guide aid strategies for developing country partners. Quantitative performance indicators (PIs), however, can be misinterpreted as representing PFM outcomes. For instance, the outcome of improved budget credibility is purportedly measured by PEFA PIs 1-4 based on comparison of original budget data with actual outcomes (PI 1-3) and data on stock and monitoring of expenditure payment arrears. Aside from the issue of interpreting the factors that lead to variations during budget implementation, if a budget is not comprehensive does not include all relevant central and general government data and not well-presented in analytical terms, it is not credible irrespective of the credibility PEFA scores. Issues of comprehensiveness and analytical presentation are covered to some extent in other PIs (for example 6, 7, and 10), but in the case of PI s 6 and 10, the benchmarks are set at a modest level and A scores are attained too easily, giving little incentive for countries to improve in these areas which are also key indicators of transparency. 12. The PEFA framework requires a report that includes a summary assessment of performance and impact of key weaknesses as well as a detailed description of evidence relating to each performance indicator and its subcomponents. It also requires a background on the country s economic situation, budgetary outcomes, and legal and institutional framework, as well as a description of recent and current reforms and key institutional factors. In principle, this report allows PIs to be put in the context of country PFM reform and provide a base for the country authorities to strengthen their reform efforts. The report is not, however, permitted to include reform recommendations or to include a judgment on the adequacy of the government reform program. 13. This separation of factual assessment from formulation of reform priorities was intended to encourage country authorities to seek objective assessments and to focus as much as possible on compilation and discussion of the factual evidence. To some extent this has happened. In practice, however, country authorities and development partners dialogue has tended to focus on PI scores; with the former tending to be defensive on evidence suggesting low scores. Individual PI scores have also tended to be given undue emphasis, and often given the status of outcomes for DP monitoring and evaluation of projects, rather than simply as indicators to be used in evaluating broader outcomes. PIs also now tend to be taken out of their detailed country context and used in cross-country comparisons. Such comparisons are of doubtful value; PIs serve a much more useful purpose for internal tracking of progress of particular aspects of PFM reform for individual countries and as part of a comprehensive country-led PFM reform strategy. 78 VIETNAM FISCAL TRANSPARENCY REVIEW

80 14. Both the FTC and PEFA are of fundamental importance to countries wishing to undertake PFM reform and, properly used, they are complementary. 74 The IMF and the World Bank, as well as the countries undertaking ROSCs or PEFAs, have, however, been concerned with excessive demands on resources by undertaking both fiscal ROSCs and PEFA assessments. Most external assessments are now PEFA rather than ROSC, and many countries (like Vietnam) are first undertaking self-assessments, often with technical assistance from a development partner. Reference to the FTC by the country authorities, as is currently being done for Vietnam, can broaden the analysis available from the PEFA and help develop a strong, country-led PFM reform strategy. CSOs and fiscal transparency 15. CSOs such as Transparency International and the IBP have, from the early 1990 s, advocated more transparency by developing country governments. Development of the FTC, however, provided a stronger analytical vehicle to specify the nature of fiscal disclosure that governments should provide and citizens should expect. The IBP, in particular, was aware of the IMF work on fiscal transparency at an early stage and was broadly supportive of the FTC and Manual. 75 It used elements of the IMF code in developing its own framework, though its approach differs significantly from the FTC by placing most emphasis on better disclosure and more public participation. Its now biennial Open Budget Survey questionnaire is used by associated local civil society groups to assess budget openness and compile OBI scores for individual countries. Consistent with the overall emphasis on public participation, the 2010 OBS includes an expanded set of questions on whether the legislature provides opportunity for public presence and participation. OBI ratings are based on assessment against 92 questions covering: 1. the availability of eight key budget documents and the comprehensiveness of the data; and 2. public participation and institutions of accountability focusing on the legislature and the supreme audit institution. The 2010 OBI, based on the survey results covered 94 countries. In 2010, Vietnam s OBI score was only 14 out of 100, an improvement over 3 in 2006 and 10 in 2008, but lower than any other country in the region. 16. The OBI methodology focuses on issues that are immediately relevant to average members of the public, is independent, and does not rely on inputs provided officially. But because it relies on relatively limited resources and the ratings are subject to limited overview (by two in-country peer reviewers), the results are more open to question; governments are, however, allowed to correct factual errors and provide missing information. 76 By the same token, however, the OBI questions are directed at very significant budget disclosures that are generally seen as fundamental to fiscal transparency. Weakness in these areas is both easily discernible and, in principle, relatively easily remedied once it is drawn to the attention of the authorities. 17. Openness to independent assessment of process, practice, and disclosure is completely supported by the FTC, particularly by the fourth pillar, Assurance of Integrity. From this point of view, the involvement of CSOs in promoting fiscal transparency should be encouraged by all governments. On the other side, some level of debate over CSO-led ratings should also be tolerated by the CSOs. 74 Each of these frameworks is now being reviewed in the light of several reviews of their similarities and differences 75 See Petrie (2003) 76 In the case of Vietnam, an unofficial OBI survey for 2010 carried out under World Bank auspices gave a higher rating than the published OBI. The OBS allows biennial cross-country comparisons of progress in an increasing number of countries; but precisely for this reason it is critical that quality control of the survey results should be strengthened. VIETNAM FISCAL TRANSPARENCY REVIEW 79

81 18. More broadly, the key stakeholders need to develop a more harmonized approach to assessing the status of country PFM systems and strengthening fiscal transparency. At an international level, the Bretton Woods Institutions, other development partners, and civil society are investigating ways to harmonize the different diagnostic frameworks and approaches to improving fiscal management that have been described above. The Global Initiative on Fiscal Transparency (GIFT) discussed below is an important recent effort to improve international cooperation. Equally important, however, individual countries need to examine how best to apply the available tools to their own country circumstances. The work currently underway in Vietnam is aimed directly at improving stakeholder dialogue over fiscal transparency issues and will complement efforts at the international level. The Global Initiative on Fiscal Transparency 19. GIFT was initiated July 2011 as one of three key programs for accelerating progress in government transparency and accountability. The other two are the International Aid Transparency Initiative (IATI), associated with the 4th High Level Forum on Aid Effectiveness held in Busan in late 2011, and the Open Government Partnership (OGP) initiated by the US and Brazil in July Aid transparency and budget transparency are seen as being intimately linked: full budget transparency in developing countries requires aid transparency; and strengthening and using country PFM systems has long been advocated as an essential component of the 2005 Paris Declaration goals of increasing aid effectiveness GIFT is a network of national and international agencies that aims to promote continuous improvements on fiscal transparency, participation, and accountability in countries around the world. 78 Its Lead Stewards are the Office of the Comptroller General of Brazil, the Philippines Department of Budget and Management, the World Bank, the IMF, and the IBP. A wide range of international, governmental, and civil society bodies are also involved as Stewards of the program, which is being developed through four Working Groups engaged in the following areas: Aligning Incentives; Advancing Global Norms (AGN); Technical Assistance and Capacity Building; and Harnessing New Technologies. 21. Work on global norms by the AGN working group aims to unify and broaden the standards set under the FTC, PEFA, OBI, IPSASB, INTOSAI and the OECD (with representatives of the relevant agencies included as Stewards). The AGN group is currently developing high level Principles of Transparency, Participation, and Accountability, to sit above all the existing normative instruments. The aims are to: Unify the current architecture and improve the alignment of the existing set of instruments. Highlight areas where there are significant gaps in the coverage of the current set of instruments; these areas may include: a. How legislatures should be organised and resourced, and the key functions and activities they should perform in holding the executive to account for the management of fiscal activities and public resources. b. Mechanisms of direct external and civil society engagement in the management of public resources. 77 See for a description of the links among these initiatives 78 See 80 VIETNAM FISCAL TRANSPARENCY REVIEW

82 c. Detailed transparency around the delivery of public services and the performance of public agencies in achieving social and other policy objectives. d. The interface between fiscal policy and environmental issues. 22. The Principles, when finalized, are intended to provide an agreed basis for more detailed development of Standards (the second level of the normative architecture) and Assessments (the third level of the architecture). The intention is that GIFT will go on to work at the second and third levels; and it may also foster the development of country-level multi-stakeholder initiatives to promote transparency and accountability at the country-level. 23. Efforts to improve transparency and PFM at individual country level must of course continue using currently available and broadly accepted standards and assessment tools. These efforts should be harmonized as much as possible with the global program. Developments at each level can be mutually supportive. On the one hand, the stakeholder discussion of PFM strengthening and transparency priorities to be undertaken in Vietnam can directly inform the GIFT workshops on incentives, use of new technologies, and capacity-building needs, as well as giving an individual country perspective on appropriate norms. On the other, streamlining of normative guidance on all aspects of PFM reform will be very helpful at the country level. VIETNAM FISCAL TRANSPARENCY REVIEW 81

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84 ANNEX B: OVERVIEW OF BUDGET TRANSPARENCY SURVEY The Vietnam Chamber of Commerce and Industry (VCCI) helped to carry out a brief survey on views of major stakeholders on the current status of budget transparency in Vietnam and priority actions that could help further improve the availability, timeliness and quality of budget information. The objectives of the survey were to help to assess: (i) (ii) (iii) The general awareness of, and demand for, budget information among key stakeholders. The extent to which budget information is available in an accessible and useful manner to major stakeholders. Priority areas for improving budget transparency based on stakeholder demands. 2. The survey questionnaire was divided into four parts, and aimed to look at the following issues: (i) (ii) (iii) (iv) Part A: Details on the respondent. The survey will be anonymous but respondents should specify their background so as to allow analysis by stakeholder group. Part B: Awareness of, and demand for, budget information. This section should help assess the level of understanding and interest of stakeholders in budget information. Part C: Access to information. This section should help how easy it is to access budget information, including publication method, timeliness, predictability, and presentation. It will also look at how easy it is to communicate views on the budget. Part D: Stakeholder views on strengthening budget transparency, in particular: presentation and content of budget documents, budget implementation, and budget oversight. 3. The survey was targeted to stakeholders that would ordinarily be expected to have some awareness, understanding or interest in fiscal issues. These included: 79 Based on VCCI report to the World Bank on Budget Transparency Survey VIETNAM FISCAL TRANSPARENCY REVIEW 83

85 (i) (ii) (iii) (iv) (v) (vi) (vii) Government officials at national and sub-national level who are involve in preparing or implementing budgets; National Assembly, Provincial Councils, and the State Audit of Vietnam who provide oversight of budget plans and implementation; Civil Society Organizations that monitor budget implementation and public service delivery; Private sector companies, banks and ratings agencies that monitor macro-fiscal developments to inform their activities; Research institutes and think tanks that carry out research and analysis on fiscal and service delivery issues; Media agencies that report on budget developments; Development Partners that analyze the national budget and fiscal developments to inform their aid programs. 4. The list of sample was taken from the following: (i) (ii) (iii) Individuals from State and Provincial agencies collected from available lists in VCCI databases. Individuals from enterprises based on the database of the General Taxation. Individuals from international organizations in Vietnam, representatives of donors, civil society organizations, and financial experts based on VCCI and WB databases. 5. Questionnaires were sent out to individuals by hard copy and . Individuals have the option of returning hard copies by mail, , fax, or filling out the questionnaire online at vn and Nearly 1,600 questionnaires were sent out starting 7 March Researchers followed by phone to check whether questionnaires were received and to answer any questions relating to the survey. In cases where respondents did not receive the questionnaire, telephone interviews were conducted. 6. Between 7 and 28 March 2012, a total of 513 responses were received. Nearly 60 percent was via , 25 percent via hard copy (including telephone interview) and the rest through the website. 7. The research team at VCCI established data entry software for the s and mail-out responses (hard copies). The imported data and the data available on the website were then converted to Microsoft Excel file and analyzed using STATA. All the findings from sampling, data entry to the results on Excel and final results after STATA analysis were shared with WB to receive support in extracting the necessary information. All the data was submitted to WB. 8. Respondents from enterprises and state agencies made up the largest number. This was followed by the Media, oversight agencies (National Assembly, Provincial Councils, State agencies, State Audit of Vietnam), development organizations, national and international non-governmental organizations and others (independent experts and self-employed) (See Figure 1). 84 VIETNAM FISCAL TRANSPARENCY REVIEW

86 Fig. 1: Response by stakeholder groups Development Partner 4.57% Media 9.98% Others 7.69% Government 32.64% Enterprise 32.85% NGOs 4.16% Oversight 8.11% 9. Most of the respondents were between 30 and 49 years old (50.68 percent of total respondents). The majority of respondents had at least an undergraduate degree. Fig. 2: Age breakdown of respondents Fig. 3: Educ background of respondents % over % under % Undergr aduate 58.02% Post - Graduate 35.86% High School 5.27% Secondary 0.84% 10. In terms of lessons, the questionnaire could have been simpler and this is a technical area that most people are not familiar with. The survey was conducted within a short timeframe, which allowed little time for follow up. However there was generally strong interest and respondents were cooperative. The response rate was higher than initially expected. VIETNAM FISCAL TRANSPARENCY REVIEW 85