Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 38504-VN

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 32.8 MILLION (USS50 MILLION EQUIVALENT)

TO THE

SOCIALIST REPUBLIC OF VIETNAM

FOR A

HO CHI MINH CITY INVESTMENT FUND

FOR URBAN (HIFU)

DEVELOPMENT PROJECT

May 24,2007

Urban Development Sector Unit Sustainable Development Department East Asia and Pacific Region

This document has a restricted distribution and maybe used by recipients only in the performance o f their official duties. I t contents may not otherwise be disclosed without Wor ld Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective May 3 1,2006)

AAA AFD BOT BW CFAA CPRGS CPS DA DAF DNIF DONRE DPI DPL EIA EMP EMPF ES EVN FI FIL FS FSPP GDP GOV HANIF HCMC HDP HIFU ICB IDA IEE

Currency Unit = Vietnamese Dong (VND) 16,025VDN = US$1

1.51US$ = SDR1

FISCAL YEAR January 1 - December31

ABBREVIATIONS AND ACRONYMS

Analytical and Advisory Activities Agence Franqaise de D6veloppment (France Agency for Development) Build Operate Transfer Borrowing Window Country Financial Accountability Assessment Comprehensive Poverty Reduction and Growth Strategy Country Partnership Strategy Designated Account Development Assistance Fund Dong Nai Investment Fund Department o f Natural Resources and Environment Department o f Planning and Investment Development Policy Lending Environmental Impact Assessment Environment Management Plan Ethnic Minority Planning Framework Environmental Safeguards Electricity o f Vietnam Financial Intermediary Financial Intermediary Loan Feasibility Study Framework for Selecting Private Partners Gross Domestic Product Government o f Vietnam Hanoi Investment Fund Ho Chi Minh City HIFU Development Project Ho Chi Minh City Investment Fund for Urban Development International Competitive Bidding International Development Association Initial Environment Assessment

LDF L O C M I C M O F MPI N C B NPL ODA OED OLA PC PER PER-FA P M O PMU PPA PPC PPI PPP PRSC PSP RAP ROE S I L SOCB SOE SPV TA TAF TOR USTDA VDB V D I C VND WBTC

FOR OFFICIAL USE ONLY

Local Development Investment Fund Line o f Credit Middle Income Country Ministry o f Finance Ministry o f Planning and Investment National Competitive Bidding Non-Performing Loans Off icial Development Assistance Operations Evaluation Department On-lending Loan Agreement People’s Committee Public Expenditure Review Public Expenditure Review and Integrated Fiduciary Assessment Project Management Office Project Management Unit Project Preparation and Appraisal Provincial People’s Committee Private Participation in Infrastructure Public Private Partnership Poverty Reduction Support Credit Private Sector Partner Resettlement Action Plan Return on Equity Specific Investment Loan State Owned Commercial Bank State-Owned Enterprise Special Purpose Vehicle Technical Assistance Technical Assistance Facility Terms o f Reference Unites States Trade and Development Agency Vietnam Development Bank Vietnam Development Information Center Vietnam Dong West Bus Terminal Co.

Vice President: James W. Adams

Sector Director: Keshav Varma Acting Country Director: Mart in Rama

Task Team Leader: KamranKhan

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

VIETNAM HIFU Develop men t Project

CONTENTS

Page

STRATEGIC CONTEXT AND RATIONALE ....................................................................... 1 A . 1 . 2 . 3 .

Country and Sector Issues ........................................................................................................ 1

Rationale for Bank involvement .............................................................................................. 3

Higher level objectives to which the project contributes ......................................................... 6

Lending instrument .................................................................................................................. 6

Project development objective and key indicators ................................................................... 6 3. Project components .................................................................................................................. 7

Lessons learned and reflected in the project design ................................................................ - 8

Alternatives considered and reasons for rejection .................................................................... 9

Partnership arrangements ....................................................................................................... 10

B . PROJECT DESCRIPTION ...................................................................................................... 6 1 . 2 .

4 . 5 .

C . IMPLEMENTATION .............................................................................................................. 10 1 . 2 . 3 .

Institutional and implementation arrangements ..................................................................... 11

Monitoring and evaluation o f outcomes/results ..................................................................... 11

4 . Sustainability .......................................................................................................................... 12 Critical r isks and possible controversial aspects .................................................................... 12

Loadcredit conditions and covenants .................................................................................... 14

APPRAISAL SUMMARY ....................................................................................................... 15

5 . 6 .

D . 1 . 2 . 3 . 4 . 5 . 6 . 7 .

Economic and financial analyses .......................................................................................... -15 Technical ................................................................................................................................ 16

Fiduciary ................................................................................................................................. 16

Social ...................................................................................................................................... 17 Environment .......................................................................................................................... -18

Safeguard policies .................................................................................................................... 19 Policy Exceptions and Readiness ............................................................................................. 20

. .

Annex 1: Country and Sector or Program Background .............................................................. 21

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ...................... 30

Annex 3: Results Framework and Monitoring .............................................................................. 31

Annex 4: Detailed Project Description ........................................................................................... 35

Annex 5: Project Costs ..................................................................................................................... 49

Annex 6: Implementation Arrangements ...................................................................................... 50

Annex 7: Financial Management and Disbursement Arrangements .......................................... 52

Annex 8: Procurement Arrangements ........................................................................................... 63

Annex 9: Economic and Financial Analysis ................................................................................... 70

Annex 10: Safeguard Policy Issues ................................................................................................. 85

Annex 11: Project Preparation and Supervision ........................................................................... 90

Annex 12: Documents in the Project Fi le ....................................................................................... 91

Annex 13: Statement of Loans and Credits ................................................................................... 92

Annex 14: Country at a Glance ....................................................................................................... 95

MAP Clearead by IBRD

VIETNAM

HO CHI MINH CITY INVESTMENT FUND FOR URBAN DEVELOPMENT (HIFU)

DEVELOPMENT PROJECT

PROJECT APPRAISAL DOCUMENT

EAST ASIA AND PACIFIC

EASUR

Date: M a y 24,2007 Country Director: Mart in Rama (Acting) Sector Director: Keshav Varma Project ID: P104848

Team Leader: Kamran M. Khan Sectors: Urban Development, Finance Themes: Municipal Finance Category: FI Safeguard Screening Category: L imited Impact

For Loans Credits and Others: Total Bank Financing: (US$): 50 mi l l ion Governmentlsub borrowers Contribution: U S $ 3 0 mi l l ion

BorrowerDXecipient 0.5 0.5 International 50.0 50,O

Private Sector 30.0 30.0 Development Association

Contribution Total 80.5 0.0 80.5

Borrower: SOCIALIST REPUBLIC OF VIETNAM

Responsible Agency: H o Chi Minh City Investment Fund for Urban Development (HIFU)

Address: 33-39 Pasteur, District 1, Ho Ch i Minh City, Vietnam

Contact Person: Ms. Ngo Kim Lien, General Director, HIFU

Estimated disbursements (FY/US$m) FY FYO8 FYO9 FYlO F Y l l FY12 Annual 5 7 15 15 8 Cumulative 5 12 27 42 50 Project implementation period: FY’08 - FY’12 Expected closing date: December 31,2012 Does the project depart f rom the CAS in content or other significant respects? [ ]Yes [ X ] N o Does the project require any exceptions f rom Bank policies? [ ] Y e s [ X I N O

I s approval for any policy exception sought f rom the Board? [ ] Y e s [ X I N O Have these been approved by Bank management? [ ] Y e s [ IN0

Does the project include any critical r isks rated “substantial” or “high”? [XIYes [ ] N o Does the project meet the Regional criteria for readiness for implementation? [XIYes [ ] No Project development objective: Refer PAD B.3 The project aims to develop HIFU as a model Local Development Investment Fund LDIF (in terms o f internal pol icy and procedures for financial policy, sub-project appraisal, social and environmental safeguards, and partnership with the private sector) and increase private sector participation in financing municipal infrastructure in H C M C

Project description Refer PAD B.4 The project design envisages providing lending support as well as monitoring and implementation support. Both project components wil l be managed by HIFU Component 1 : Investment Capital (US$ 80 million; IDA US$ 50 million) Component 2: Technical Assistance (US$ 0.5 million; IDA US$ 0 million) Which safeguard policies are triggered, if any? The project will not have any large scale or irreversible adverse environmental impacts. The project triggers the Wor ld Bank Safeguards Policies on Environmental Assessment (OP/BP 4.01) and Involuntary Resettlement (OP/BP 4.12). The project i s classified as environment Category “FI”. Significant, non-standard conditions, if any?: None

A. STRATEGIC CONTEXT AND RATIONALE 1. Country and Sector Issues 1. The demand for municipal infrastructure in Vietnam i s increasing rapidly as the country copes with rapid urbanization, decentralization and high rates o f economic growth. There i s wide agreement that a significant investment gap exists vis-&vis municipal infrastructure demand. Domestic and international commentary on the investment climate in Vietnam i s beginning to increasingly cite the lack o f infrastructure in general and municipal infrastructure in particular as a key bottleneck to investment and economic growth. The heavy reliance on public budget i s an important reason for the slow pace o f infrastructure development. W h i l e Vietnam has utilized Off icial Development Assistance (ODA) very effectively over the last decade, the magnitude o f the infrastructure challenge in the fast growing Vietnamese economy makes i t unlikely that the traditional approach involving one ODA-funded infrastructure investment at a time will be sufficient. Vietnam has to consider alternative models for financing infrastructure. Specifically, establishment o f infrastructure finance models which involve local institutions and leverage private capital must be an important element o f Vietnam’s strategy to become a middle-income country. 2. The mismatch between the long-term financing needs o f infrastructure investment and the short-term deposits held by banks means that banks are not the ideal financing institutions for infrastructure. Vietnam’s financial sector i s currently dominated by five major state-owned commercial banks (SOCBs), accounting for about 80% o f the capital, lending and assets o f the banking system. Over the past decade the SOCBs have evolved from specialized policy-lending vehicles to more commercially oriented financial intermediaries. However, much more needs to be done to reform the banking sector before it can be appropriately utilized to finance urban infrastructure development. Infrastructure enterprises have to date not borrowed large amounts from the SOCBs, with the exception o f f i r m s in the transport sector. 3. Overall the market for bonds i s poised for significant development but important institutional reforms, addressing governance and transparency in particular, are required to permit this potential to be realized. The national Government has been working to develop the government bond market. I t plans to raise U S $ 4 bi l l ion by 2010 to be used mainly to finance infrastructure projects. At the provincial level, the f i rst municipal bonds were issued by the Ho Chi Minh City (HCMC) government in 2003, in the form o f a general obligation bond, raising U S $ 127 million. The rules for issuance o f municipal bonds are not yet clear, and they do not always provide the right incentives to the issuers. In particular, there i s a need to further strengthen disclosure ru les for the public offerings. The stock o f sub-national government debt in Vietnam i s not currently a threat to fiscal stability, but plans for increased investment are likely to see sub-national debt increase significantly, requiring national oversight.

4. The challenges facing Vietnam vis-a-vis financing o f municipal infrastructure are further complicated by the following two important developments:

The responsibility for municipal infrastructure i s being devolved to the provincial governments which have limited budgetary resources, and suffer from a combination

0 Vietnam i s fast transitioning towards a decentralized governance model.

o f weak institutional capacity and policy uncertainties which wil l affect the f low o f private CapitaVexpertise into municipal infrastructure development.

0 In the near to medium term the private financial markets in Vietnam are unlikely to become adequately deep or broad to meet the fast growing municipal infrastructure financing demand. W h i l e the acute demand for financing calls for immediate public sector action, measures must be taken to ensure that actions taken in the interim period take into account the risk o f private sector crowding-out in the medium to long-term.

5. The Government o f Vietnam (GOV) has actively encouraged the provincial governments to take responsibility for financing municipal infrastructure. The 2001 Public Administration Reform Master Program (for 2001-2010) lays the groundwork for putting in place the regulations on decentralization o f administrative management and fiscal functions. The two most significant components o f the emerging municipal finance framework include permission to the provincial governments to: (i) establish Local Development Investment Funds (LDIFs), and (ii) borrow up to 30% o f their annual state budget for development investments - H o Chi Minh City (HCMC) and Hanoi are allowed to borrow up to 100% o f annual budget - through revenue or general obligation bonds. LDIFs allow the provincial governments to mobilize capital and enter into contracts with the private sector for the development o f municipal infrastructure. The reliance o f provincial governments o n LDIFs i s increasing very substantially as the decentralization process continues in Vietnam. HIFU was the f i rst LDIF established in June 1996. Since then, twelve other provincial governments have established LDIFs with the approval and support o f the GOV. HIFU remains by far the most financially viable and operationally successfbl LDIF in Vietnam.

6. The LDIFs are expected to operate as commercial-oriented entities, raising private capital and investing in municipal infrastructure projects which offer cost recovery. In 2004 the total charter capital o f LDIFs in Vietnam was approximately US$ 300 million; in 2006 it i s estimated to be approximately $400 million, with the top-seven LDIFs investing approximately U S $ 100 mi l l ion per year which accounts for an investment increase o f 11 8% for these funds over the 2002 level. The LDIFs currently also engage in short-term borrowing on a roll-over basis from SOCBs and other SOEs. Hence, possible mismanagement o f LDIFs carries the risk o f decreasing investment efficiency in municipal infrastructure, increasing the contingent liabilities o f the GOV, and undermining financial market development. There i s acceptance at the highest levels in the GOV that i t i s critical that HIFU - the most advanced and leading LDIF - adopts an operational model which can be replicated in the other LDIFs.

7. HIFU has a strong financial position, including a very l ow Non-Performing Loan (NPL) ratio and excellent profitability and balance sheet strength (see Annex 9 for details). HIFU i s in the initial stages o f corporatization, and significant progress made to date vis-a-vis corporate governance includes:

0 HIFU operates under a legally binding Credit Statute o f the H C M C government that mandates investment analysis to ensure cost recovery, and provides guidelines for investment monitoring and workouts when necessary.

0 HIFU has a well developed internal appraisal and investment monitoring system, and the decision making authority rests with HIFU staff.

2

HIFU prices i t s loans at market rates, and has an excellent track record o f investing in cost recovery oriented infrastructure projects in partnership with the private sector.

0 HIFU maintains annual audited financial statements which are based on the accepted accounting standards used by corporations in Vietnam. The financial statements provide reasonably reliable data on the financial performance and portfolio quality.

0 HIFU is financially self sufficient and does not require any operational budget support from the provincial government.

0 Majori ty o f HIFU staff are hired on private contracts, i.e., they are not provincial government employees.

HIFU has a proven track record o f building major infrastructure projects - including tol l roads and a major B O T project in the water sector - in H C M C which are currently operating on a financially viable basis and providing infrastructure services to H C M C residents. Finally, HIFU has been selected based on a comprehensive qualification criteria developed to establish a model for the participation o f other LDIFs in anticipated future World Bank programs.

8. The successful performance o f HIFU in financing municipal infrastructure is also a critical national priority because H C M C is the largest ci ty in Vietnam and a major industrial and commercial center with a population o f 6 million. It i s a Category 1 city reporting directly to the Central Government. The city has been in the forefront o f the transition initiated by the economic reform “Open door” and “Renovation” policies which have led to unprecedented growth for the country, particularly in the industrial sector. The growth has been most pronounced in HCMC, which accounts for 35-40 percent o f the national GDP. The annual growth rate o f the H C M C urban population is between 5-7 percent with the population in 2020 expected to equal approximately 10 mi l l ion residents. The increase in urban population and continued economic growth i s putting increased pressure on the urban services o f the city. For example, i t was recently reported (Vietnam News, 15 January 2007) that there has been an annual increase in the use o f public transport in H C M C o f around 20 percent. The urban areas face similar problems in other sectors such as water, education and health. It i s estimated that H C M C needs to invest approximately $3 bi l l ion annually to meet the current infrastructure demand.

2. Rationale for Bank involvement

9. The Bank’s infrastructure strategy involves engagements which focus on improvement o f sector policies, provision o f public/ODA funds for critically needed municipal infrastructure, and establishment o f models which can support the increase o f private sector participation in infrastructure delivery. 10. The Bank’s response to the GOV request for assistance to LDIFs included AAA and an operational program. The AAA completed in 2005 produced a detailed Briefing Paper which highlighted the relevant pol icy and operational issues involved in the development o f LDIFs. The AAA established the Bank as the primary advisor to the government and confirmed the commitment o f the GOV and key provincial governments to the reform and development o f LDIFs.

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11. follow the below described proposed outline for the long-term development o f LDIFs.

The planned sequence o f World Bank Group (WBG) engagement with LDIFs will

Stage I Stage II Stage 111

12. The Bank's operational engagement regarding the LDIFs involves helping the GOV establish national pol icy and regulatory framework to support the development o f LDIFs, develop a model LDIF vis-&vis operational standards and investment efficiency, and provide credit to "Qualified" LDIFs. IDA financing wil l be used in the init ial stage o f the engagement because i t can contribute to make municipal infrastructure more available and affordable to beneficiaries, Le., IDA financing i s expected to address the failure o f the financial market to provide long-term financing for infrastructure investment. With its financing IDA also brings technical expertise to support the operational reforms in HIFU. Finally, the Bank's operational engagement with HIFU at this stage wil l provide a platform for other donors interested in scaling-up their financial support to LDIFs based on the lessons learned from the project.

13. The HIFU Development Project (HDP) i s a split operation o f the national project called Local Development Investment Funds Project (LDIFP). The LDIFP which focuses on national pol icy and targets al l LDIFs is currently under preparation for an expected delivery in late FY08. The Bank has agreed to support the GOV request to proceed in FY07 with a project (HDP) focused exclusively on HIFU because HIFU is ready to start executing a pipeline o f projects in 2007, and HIFU Management and the H C M C Peoples' Committee (HCMC PC) have committed to adopt the LDIF internal pol icy and operational reform measures which have been prepared under the LDIFP. Proceeding more rapidly with a targeted support to HIFU i s in line with the incentive framework envisaged under the LDIFP. The LDIFP remains a high priority for the Bank and the GOV because i t wil l provide the pol icy and institutional framework and the necessary technical assistance which is critical to the long-term development o f HIFU and other LDIFs.

14. WBG strategic aim o f operational engagement in the particular case o f HDP i s to establish a road map for the LDIFs to become independent, competent and professional infrastructure financing agencies which can leverage private capital in infrastructure without distorting the market or creating contingent liabilities for the provincial and central

4

government. This wil l require a long-term operational engagement and utilization o f multiple instruments available to the WBG in three stages.

15. Stage One. The provision o f a relatively small IDA credit to HIFU i s the first, modest step. The strategic approach via the IDA credit to HIFU i s to: (a) alleviate the need for HIFU to rely upon short-term borrowing to finance long-term infrastructure investments; (b) increase the affordability o f municipal infrastructure to the citizens by providing long-term financing which i s currently not available in Vietnam; and (c) help HIFU establish the appropriate systems and procedures to build a track record, including the rules o f the game for partnering with the private sector, which can form the basis for HLFU’s future borrowing from the market v ia bank loans or bonds. The identified and agreed role o f IFC in this engagement i s to work with HIFU to co-finance some o f the investments which are identified in the H D P subproject pipeline. The strengthening o f the internal systems and institutional capacity o f HIFU will also solidify and further expand the corporatization o f HIFU from the municipal government structure. Indeed, the H C M C PC has repeatedly confirmed that improvement o f HIFU’s institutional capacity wil l be the strongest impetus for instituting additional corporate governance reforms, i.e., the level of independence which HIFU can obtain depends upon continued improvement in HIFU’s professional competence. The operational association with and provision o f technical assistance from the WBG will further improve HIFU’s institutional capacity.

16. Stage Two. The issuance o f an international standard, credit-based HIFU Bond wil l be the most positive demonstration o f HIFU’s professional competence. The success o f the H D P and continued progress o f LDLFP and national pol icy framework will be critical to prepare HIFU (and the M O F as the regulator) for a “HIFU Bond” in the near future. The next phase o f direct operational engagement o f the WBG with HIFU will therefore likely involve credit enhancement o f a HIFU Bond or a credit based borrowing via the Sub- national Finance Program o f WB/IFC. It has been discussed with HIFU that during the implementation o f the HDP the task team wil l initiate discussions with a global credit rating agency to help prepare HIFU for a credit rating.

17. Stage Three. The third stage o f WBG engagement with HIFU will probably be through IFC and MEGA. It is anticipated that in State Three more private players wil l be active in the infrastructure finance market and HIFU will be transitioning towards it stated long-term role involving secondary market functions, such as securitization.

18. The Bank’s technical and operational approach to HIFU and LDIFs is based o n substantial international experience in developing municipalhfrastructure finance systems around the world. The task team has conducted a detailed review o f a l l the relevant and comparable models pursued in the developed and developing countries. These experiences are described in detail in the AAA report o f LDIFs. The task team has worked closely with staff in FSPSD, PREM and the IFC to explore the avenues for the Bank’s operational engagement with LDIFs before finalizing the approach which i s outlined in this PAD. The task team has also employed the Bank’s knowledge tools to safeguard against possible adverse cross-sector pol icy impacts, particularly on financial market development (please see page 36 for details). Finally, the task team includes global experts in municipalhfrastructure finance as wel l as senior staff who fully understand the technical issues and have an excellent understanding o f the Vietnamese context.

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3. Higher level objectives to which the project contributes 19. A financially viable and sustainable HIFU will contribute significantly to reducing the municipal infrastructure financing gap in the most economically important province in Vietnam. Establishment o f HIFU as a successful model o f a financially sound, competent and professionally independent institution wil l also contribute towards the development o f other LDIFs in the country. Once HIFU has gained legitimacy vis-a-vis i t s role o f efficiently and effectively mobilizing and managing infrastructure financing hnds - both public and O D A - i t can at a later stage begin to leverage such competence towards mobilizing significant private funds, both at the project level (the existing model) and also at the funds’ equity capital and on-balance sheet debt level. This in turn i s expected to bring about a significant increase in the current level o f private sector capital leverage, and hence, wil l contribute significantly to reducing the municipal infrastructure financing gap.

20. The Country Partnership Strategy (CPS) for Vietnam for the period 2007-2011 recognizes the development o f a vibrant capital market to support the financing o f infrastructure in particular as an essential element in the reform o f the financial system under i t s f i rst pillar focused on improving the business environment. Under this pillar, i t also emphasizes that making further progress in infrastructure development requires diversijjing funding sources and improving transparency in resource mobilization, notably at the local level. In this context, the increase in private share o f total financing o f infrastructure i s one o f the selected outcomes to which the CPS is expected to contribute, notably through the development o f municipal financial markets and non-subsidized lending facilities in selected jurisdictions and H C M C in particular. The HIFU Development Project is instrumental for such results to be achieved.

B. PROJECT DESCRIPTION 1. Lending instrument 21. The proposed instrument is a Financial Intermediary Loan (FIL) because i t i s the most appropriate instrument for addressing the systemic issues associated with the channeling o f funds for municipal infrastructure. The wholesale approach supported under the project makes the Specific Investment Loan (SIL) instrument less relevant. Similarly, a Development Policy Lending (DPL) would not have provided the appropriate platform for a long term engagement which i s capable of: (a) strengthening the institutional capacity o f HIFU and (b) providing the necessary detailed operational advice to HIFU.

2. Project development objective and key indicators 22. The Project Development Objective is to develop HIFU as a model LDIF (in terms o f internal pol icy and procedures for financial policy, sub-project appraisal, social and environmental safeguards, and partnership with the private sector) and increase private sector participation in financing municipal infrastructure in HCMC.

0 Evidence that private sector participation in financing municipal infrastructure in H C M C i s improving wil l be measured by the increase in total number and amount o f HIFU investment (debt and equity) per year in municipal infrastructure projects with private sector involvement, as well as by the improvement in the leverage ratio (new

6

private capital / HIFU direct investment) in municipal infrastructure projects per year.

0 Evidence that HIFU performs as a model LDIF will be measured by i t s continued compliance with the Financial Covenants, as wel l as by i t s adherence to the Project Preparation and Appraisal (PPA) and Private Sector Partners (PSP) selection manuals. The satisfactory adherence o f projects funded by the line o f credit to these manuals wil l be a major institutional development; the Bank and HIFU will also assess the extent to which they are progressively used for other HIFU investments, and regularly review lessons to be drawn from implementation, so as to help streamline them in HIFU portfolio.

3. Project components Component 1: Investment Capital (US$80 million; IDA US$50 million) 23. A l ine o f credit wil l be provided to HIFU to invest in cost recovery oriented municipal infrastructure investments in partnership with the private sector. A Project Preparation and Appraisal (PPA) Manual governs how the HIFU investments under the line o f credit wil l be identified, developed and appraised. A Private Sector Partner (PSP) selection Manual describes the way private sector participants will be selected in Project Enterprises financed under the line o f credit. 24. HIFU will work with the Department o f Planning and Investment (DPI) and other departments within the provincial government to identify investment needs in HCMC, as described in H C M C master plan, which can be financed via public private partnerships. HIFU will then work with the city departments to put in place effective project structures and then invite private investors to participate in the projects.

25. A pipeline o f projects has been identified and confirms that HIFU can absorb the investment capital which i s being made available v ia the project. Two sub-projects to be financed in year one o f project implementation have been appraised.

Component 2: Technical Assistance (US$0.5 million; IDA US$ 0 million) 26. HIFU will finance the technical assistance to support the implementation o f operational reforms, including: (i) support to implement the PPA manual with on-the-job chief advisor and technical specialist, as well as a social specialist and an environment specialist; (ii)support to implement the PSP manual with on-the-job chief advisor and private sector specialist; (iii) independent monitoring consultants for social and environmental safeguards policies; and (iv) Financial Audits o f HIFU to International Auditing Standards.

27. Detailed set o f Terms o f Reference (TOR) for technical assistance consultants have been prepared. The package o f TORs and the associated procurement plan has been reviewed and approved by the H C M C PC as part o f the final H D P project approval. The H C M C PC approval makes the implementation o f the procurement plan, including the utilization o f an estimated $0.5 mi l l ion HIFU capital for the assigned objective o f recruiting international and local consultants in accordance with the TORs, a firm and official mandate for HIFU. In order to ensure timely mobilization o f key consultants, the mobilization o f consultants under three (3) o f the most critical TORs - including the TOR

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for independent auditors to ensure compliance with safeguards policies - has been established as a Condition o f Loan Effectiveness.

28. The technical assistance wil l contribute to the institutional development o f HIFU. Specifically, it wil l build upon the current practices o f HIFU and develop capacity in HIFU to implement the PPA and the PSP manuals. The long-term institutional development plans have been prepared in consultation with the Bank and are documented in the two manuals. The capacity building o f HIFU is a part o f a broader initiative which involves AFD, USTDA, the World Bank and other donors. The Bank team has worked very closely with U S T D A to scope, prepare and provide capacity building technical assistance to HIFU. The phase one (approximately $300,000) o f the U S T D A technical assistance was concluded in 2006. The planned phase I1 to focus on internal operations i s currently being reviewed by USTDA management. Similarly, AFD has approved a technical assistance package o f approximately Euros 1.5 mi l l ion which wil l provide significant technical assistance and training to HIFU and its borrowers in financial management and other operational functions. The technical assistance provided by AFD and U S T D A complements the IDA credit and the associated HIFU-financed technical assistance. Further details o f the Bank’s partnership strategy vis-&vis the development o f LDIFs is described on section C. 1.

4. Lessons learned and reflected in the project design 29. Slow Disbursement in infrastructure portfolio. The disbursement level o f ODA- financed investment portfolio in Vietnam, notably vis-&vis infrastructure projects, has remained slow for many years. In reviewing the problems associated with slow disbursements, the Government and the Bank agreed, inter alia, on the need to explore new models o f doing business which are in l ine with the current decentralization process, and involve select local institutions-“islands o f competence” - which are performing in an efficient and professional manner. HIFU has so far been relatively successful in leveraging private investment in infrastructure in H C M C and building operational infrastructure projects (e.g., to l l roads and water BOTS). Moreover, HIFU involvement has helped to improve the efficiency o f projects implemented through the H C M C l ine departments. HIFU also has an excellent funds disbursement record, completing projects in significantly shorter time frames than traditional investment projects. The decision o f the H C M C PC to use HIFU as the lead implementing agency i s therefore fully supported by the Bank.

30. Financial Intermediary Lending. The Independent Evaluations Group (IEG) review o f Bank Line o f Credit (LOC) operations under OP 8.30 rules for Financial Intermediary lending identified the need for a sound analysis o f the financial intermediaries by the Bank. The Bank has conducted a detailed due diligence o f the financial operations o f HIFU, first in the context o f a detailed AAA which was completed in FY05, and more recently through a consulting assignment with an international accounting firm. The analysis confirms that HIFU has a strong financial position. The Bank has appraised HIFU’s financial viability vis-a-vis i t s investment practices: for example, i t prices loans at market rates and invests in cost recovery oriented infrastructure in partnership with the private sector. Specific financial covenants governing its financial pol icy have also been put in place to further strengthen HIFU’s financial position. Other elements o f project design which address the r isks identified by the IEG report include:

8

HIFU maintains annual audited financial statements, which provide reasonably reliable data on financial performance and portfolio quality. HIFU Management has agreed to switch to International Audit Standards. Strict and comprehensive qualification criteria have been applied to select HIFU, with a view to establish a model for the participation o f other LDIFs in Bank programs under the LDIFP. A review has been conducted to analyze HIFU projects pipeline and i t s implementation track-record to confirm that HIFU has the capacity to invest and manage the IDA credit. The MOF will on-lend the funds to HIFU in Vietnam Dong (VND), which will protect HIFU against any fluctuation in the VND foreign exchange rate. The foreign exchange hedging cost as well as the IDA commitment fee i s fully priced in the on-lending rate charged by the M O F to HIFU as required under current Vietnamese regulations governing ODA. In addition, the MOF on-lending terms do not present a disadvantageous maturity mismatch for the MOF. HIFU charges market (positive real) interest rates on its loans, and i t s target ROE on equity investments are based on a risk free treasury rate plus a margin. Comprehensive operational frameworks have been established in the form o f Project Preparation and Appraisal Manual and the Private Sector Participant Selection Manual. The framework has been developed in close collaboration with HIFU, Department o f Planning and Investment, Department o f Finance, and other c i ty departments. The manuals have been reviewed and approved by the H C M C PC. HIFU will implement the framework with the help o f international on-the-job consultant advisors and specialists, which wil l develop HIFU’s operational capacity and further reduce project risk.

31. Link to National Policy. The Bank experience in Vietnam and around the world indicates that the results o f projects can be maximized if they are linked to andor are supported by a broader national pol icy framework. The H D P i s linked to a national program and a Bank strategy for engaging with LDIFs in Vietnam which has been established over a period o f 2-3 years.

32. Government Ownership. Previous Bank-financed infrastructure funds point to the importance o f a strong and consistent government ownership. The H D P i s well anchored because o f the LDIFP and the deep history o f government ownership o f the Bank- recommended LDIF reform agenda dating back to 2004. The project has been endorsed by the MOF, M P I and other relevant GOV agencies. The commitment o f the H C M C PC i s also strong and it has been confirmed with the issuance o f the official H C M C PC Decision approving the project and the conditions relating to the internal pol icy o f HIFU.

5. Alternatives considered and reasons for rejection 33. Establishing a National Municipal Development Fund. Creating one fund at the national level was initially considered as it was deemed to reinforce the Bank’s focus on the wholesale model. However, there were concerns that a national fund: (i) might not adequately support the decentralization objectives o f the GOV which has devolved the responsibility o f financing and managing municipal infrastructure to the provincial governments; (ii) would reduce the buy-in from Provincial People’s Committee; (iii) would fai l to leverage the operational track record already established by successful LDIFs such as HIFU; (iv) would result in more cumbersome decision making processes involving

9

many central government entities; and (v) i s less effective than decentralized institutions to identify high quality cost-recovery projects.

34. Providing a Wholesale Guarantee Facility. Providing a wholesale guarantee facility aimed at decreasing the cost and extending the maturity o f loans provided for infrastructure projects in Vietnam was considered as an alternative to directly supporting the LDIFs. However, given that the problem in Vietnam i s both one o f access to long-term financing as well as that o f identification and preparation o f financially viable projects, i t was decided that providing long-term financing and detailed technical assistance on operational reforms to qualified LDIFs would help achieve such objective more effectively. Moreover, direct support to the LDIFs would also allow the Bank to pursue other developmental objectives such as corporate governance and social and environmental sustainability, which would be much harder to accomplish under the wholesale guarantee facility model. Accordingly, i t was agreed that the wholesale guarantee facility model may be pursued at a future stage as an appropriate extension o f the current operational approach.

35. Relying on the WB-IFC Sub-national Finance Program. This option was init ial ly considered in coordination with IFC and was eventually disregarded because: (i) being exclusively transaction oriented, i t would not provide the right entry point to provide the required long-term pol icy advice and technical assistance to HIFU; and (ii) being more expensive, i t would most l ikely have affected the affordability o f the municipal infrastructures financed by the project.

C. IMPLEMENTATION 1. Partnership arrangements 36. W h i l e the project does not involve any formal co-financing, i t i s very central to the engagement o f other donors. Since the LDIFs present a promising model for financing municipal infrastructure in Vietnam, the donors are al l very keen to work with LDIFs. The Bank’s AAA on LDIFs i s widely regarded as the most in-depth analytical analysis o f the policy and operational issues associated with the development o f LDIFs, and i t has been shared very broadly with al l interested donors. The donors are very interested in replicating the frameworks (e.g., manuals, financial covenants, safeguards standards) which are being prepared under the H D P in their engagements with the LDIFs. The coordination on capacity building technical assistance for HIFU has also been very strong. The HDP and the associated technical assistance very closely complements the technical assistance programs financed by United States Trade and Development Agency (USTDA) and Agence Franqaise de DCveloppement (AFD) in particular. AFD Technical Assistance Project aims to improve HIFU’s internal management capacities and to improve the operating and financial management ski l ls o f managers engaged on projects financed under AFD Credit Facility - a Euro 30 mi l l ion l ine o f credit for HIFU targeted at health, education, housing and environment projects. USTDA has conducted a review o f the performance o f HIFU’s activities, which has been usefu l for the identification and preparation o f HDP. A follow-on capacity building program i s planned by USTDA. Other donors have also expressed interest in engaging with HIFU and possibly other LDIFs through the platform provided by HDP and LDIFP, building on lessons learned from these projects. Finally, IFC has expressed a very strong interest in financing investments (subprojects) in partnership with HIFU, and plans to review the HIFU subproject pipeline

10

to possibly announce a formal commitment to finance 3-4 projects in year 2-3 o f H D P implementation.

2. Institutional and implementation arrangements

37. The implementing agency for the H D P will be HIFU as it institutes key operational reforms and undertakes investments in municipal infrastructure with private sector involvement. The implementation structure mirrors the current system and role o f HIFU, with the HDP further enhancing and developing the function o f HIFU. HIFU operates as a specialized agency within the municipal government, working with the Department o f Planning and Investment (DPI) and other l ine departments in the municipal government. The DPI as the planning agency for the province identifies the investment needs as well as project ideas, including those which can be financed with private sector participation. The DPI in collaboration with the H C M C PC then assigns the investment targets and project ideas to the concerned l ine departments. The line departments prepare the technical details o f the projects and consult with HIFU on the financial structuring with a view to involve private sector. The Department o f Finance - o n behalf o f the H C M C PC - wil l work with HIFU to ensure that an appropriate process i s used to select private sector partners and provide oversight on the financial operations o f HIFU.

38. The IDA credit will be on-lent by the MOF to HIFU in VND on terms which are stipulated in Decree 134 and detailed in MOF decision No. 3936 dated March 22, 2007. The equity or paid-in capital o f HIFU (referred to in Vietnam as charter capital) i s provided by the HCMC-PC. HIFU wil l invest the investment capital provided under the project according to the loan conditions which restrict the investment to cost-recovery municipal infrastructure and define the sectors o f focus. The key financial covenants cover the whole financial operation o f HIFU (not restricted to IDA credit) to ensure the financial and operational viability o f HIFU as an institution. The project conditions wil l help to further support HIFU’s qualification under Bank OP 8.30. The disbursements to HIFU will be based on a 6-months report based system, which wil l require HIFU to document how the funds received based on the previous report were utilized, and describe how the h n d s requested for the next period wil l be used.

3. Monitoring and evaluation of outcomes/results 39. A comprehensive monitoring system has been established in close collaboration with HIFU to monitor and evaluate the project activities and operations leading to the project objectives. The monitoring system has four components:

1. HIFU internal system will provide the baseline data and report on results as follows: HIFU Department o f Planning and Promotion wil l collect information on the indicators for private sector involvement and o n private sector partner selection; and HIFU Department o f Appraisal wil l collect information about the progress made in implementing the Project Preparation and Appraisal (PPA) manual.

2. Quarterly unaudited financial statements will be provided by HIFU to the Bank; Yearly audit report o f the financial statements-prepared by an independent auditor to conduct international standard financial audits-will be provided to the Bank within six months after the end o f HIFU fiscal year.

3. Independent consultants will monitor the compliance o f each sub-project with the social and environmental safeguards requirements.

11

4. Bank Supervision Team (with support from a contract with an international accounting firm in conducting financial assessment o f HIFU) will conduct periodic reviews of un-audited quarterly as well as review o f the annual audited financial statements to ensure compliance with the financial covenants and the achievement o f operational reform milestones (subproject appraisal system and framework for the selection o f private sector partners).

40. Project Review. All project information wil l be compiled by HIFU management and discussed with the HCMC-PC and the Bank in a workshop to be held every six months. The workshop will provide an opportunity to discuss project progress and any outstanding issues, including the need to refine or adjust any project components. The operational and institutional framework (PPA and PSP manuals) wil l be reviewed at least once every year by HIFU and the PC and discussed with the Bank during the six monthly reviews. The manuals may be amended by a resolution o f the PC, provided the written agreement o f the Bank is obtained before the amendment is approved by the PC.

4. Sustainability 41. The development o f LDIFs in general and HIFU in particular i s an important priority for the GOV, for which it has consistently sought Bank assistance. HDP and the upcoming LDIFP should therefore be seen as a coherent and phased support to the LDIF framework for which there i s strong commitment at the central and provincial government. This series o f projects i s also closely linked to the Bank’s pol icy dialogue with the GOV in the context o f the Poverty Reduction Support Credit (PRSC) process, and specific central government actions aimed at improving the legal and administrative structure for LDIF operations were included in the conditions o f PRSCS. Furthermore, the project activities wil l be closely coordinated with the work o f the Bank’s Financial and Private Sector Development team in Vietnam with regard to the development o f regulatory framework for the domestic debt market and the GOV contingent liability management.

42. The project i s expected to have negligible fiscal impact on al l parties involved, including HIFU, H C M C government, and the GOV. The GOV is undertaking this project under an on-lending arrangement with terms that cover the foreign exchange hedging cost as wel l as the cost o f processing the loan. The loan wil l be repaid by HIFU. The H C M C PC does not need to provide any additional capital to HIFU, which i s fully able to cover al l i t s operating expenses with i t s own income. HIFU has been operating very successfblly over the last ten years. The financial analysis demonstrates that HIFU can recover al l i t s operating costs (including staff salaries) and make a profi t from i t s investments. The cost recovery orientation o f the project also provides an opportunity to HIFU to take advantage o f the project reflows as loans are repaid and HIFU exits out o f equity investments. I t i s anticipated that HIFU will continue to use the operational framework which i s being established under HDP to invest the reflow proceeds. The capital investment risk wil l be addressed through the covenants o f this project. LDIFP will also help establish a national pol icy framework to fbrther reduce finance risk.

5. Critical risks and possible controversial aspects 43. Because o f the innovative nature o f the wholesale approach supported by the project, the new features introduced in the management o f LDIF and the lack o f operational experience in Vietnam in this regard, the project inevitably carries substantial risks. By

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focusing on the best performing LDF (HIFU) the associated risk i s somewhat mitigated. Furthermore, a clear delineation o f Bank responsibility in this Financial Intermediary (FI) operation has been agreed upon, which mitigates the main reputational risks for the Bank.

Risks Risk Rating & Mi t igat ion Risk Mi t igat ion Measures

Inadequate Financial Performance of HIFU

HIFU i s reluctant to mainstream the manual Poor compliance with Env. and Social Safeguards

HIFU operations crowding out the private sector

that current financial position o f HIFU i s sound. Agreement o n clear and achievable financial covenants and associated TA will help enhance HIFU’s financial viabi l i ty 0 Quarterly un-audited financial statements wil l b e provided by HIFU to the Bank; Yearly audit report o f the financial statements-prepared by an independent auditor t o conduct international standard financial audits-will be provided to the Bank after the end o f HIFU fiscal year 0 Reports-based disbursement program which wi l l al low the Bank to monitor the use o f funds over the previous six months as we l l as assess the anticipated need for capital over the coming six months

0

by HIFU and the P C in conjunction with the Bank 0

0

the PPA manual o n Environment and Social safeguards. 0

0

Due diligence o f HIFU’s financial operations for el igibi l i ty under OP8.30 concludes

TA is provided under component 2 t o help implement the manuals Progress in implementing the PPA and PSP manuals wil l b e reviewed twice a year

The manuals prepared with participation o f HIFU, Line Departments and P C TA is provided under component 2 to help implement the provisions o f Annexes of

Independent monitors wil l be recruited to monitor each subproject Prior review o f category A projects

Mismanagement o f HIFU as a result o f over- capitalization

Slow preparation and implementation o f projects

L o w capacity o f HIFU to implement the new manuals

Delays in the mobil ization o f the TA Overall Risk Rating

Risk Rating - H (Hi

crowding out private funds is negligible in the short-run, specific l i m i t s on HIFU participation have been set. 0 PSP manual implemented to make the private sector participant selection transparent and efficient 0 The investment eligibil i ty criteria i s provided in the internal investment policy, which i s part o f the operational re form package 0 Independent audits and evaluations wil l monitor HIFU performance 0 Clear financial covenants monitored under Bank supervision v ia an international accounting firm o n contract to the Bank 0 Identif ication o f a robust project pipeline with detailed description o f projects 0 The wholesale approach, combined with HIFU’s excellent disbursement record, in the project design mitigates the risk o f slow disbursements

Private sector involvement i s expected further to enhance HIFU performance

The TA component i s specifically targeted at strengthening the relevant capacity. This is recognized an area o f substantial risk requiring a sound monitoring system

0 International and technical consultants to provide on-the-job advice and training to HIFU staff over the f i rst 3-years o f project implementation 0 Six month review to review and discuss implementation progress with HIFU and the HCMC P C

The six TORS package for Technical Assistance prepared and approved along with the Procurement Plan by the HIFU Board o f Management. Mobil izat ion o f three key consultant a condition for effectiveness; RFPs expected to be issued by Board approval

h Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk)

M

S

S

N

S

M

S

M

S

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6. Loadcredit conditions and covenants

44. Credit Conditions 0 The GOV through MOF will make the IDA credit available to HIFU under

subsidiary agreement which wil l (i) protect the interests o f IDA, (ii) meet the project objectives, and (iii) include provisions for the repayment o f the principal, interest, and applicable commitment fee associated with the IDA credit. HIFU and H C M C PC through HIFU will ensure the compliance o f the credit

conditions by HIFU which include but are not limited to (i) investment o f credit proceeds in the form o f loans or equity in cost recovery oriented municipal infrastructure projects in partnership with the private sector; (ii) compliance with the provisions o f the manuals for project preparation and appraisal and private sector partner selection (iii) recruitment o f consultants to implement the project according to the five Terms o f Reference (TORs) which have been agreed with the Bank; (iv) compliance with requirements regarding environmental protection and social safeguards and ensuring the sub-project enterprises comply and implement the same; (v) maintenance o f a financial management system and records and accounts adequate to reflect expenditures in respect to the sub-projects, and provision o f reports o f the same to the Bank; (vi) provision o f financial statements which have been audited by independent auditors and are in l ine with international audit standards; (vii) organization o f semi-annual reviews with Bank and H C M C PC to evaluate the progress o f the project with respect to implementation.

45. Project Effectiveness Conditions Execution o f the Subsidiary Agreement between the GOV and HIFU - copy o f the signed Subsidiary Agreement; and Engagement of: (i) an independent monitoring consultant for social safeguards; (ii) an independent monitoring consultant for environmental safeguards; and (iii) a consulting firm in respect o f the implementation o f the Project Preparation and Appraisal (PPA) Manual - copies o f the contract between HIFU and such consultants and consulting firms, together with their respective TORs.

0

0

0

46. Financial Covenants HIFU has a sound financial position, and maintaining i t s financial viability i s a critical priority o f HDP. The financial covenants o f the HDP are critical for the future development o f HIFU, as the record o f financial discipline wil l allow HIFU to raise capital from the market and substantially increase i t s investment scale. The following financial covenants have been agreed:

14

FINANCIAL COVENANTS’ Aggregate equity investments shall not exceed 50 percent o f the total amount o f the Fund’s paid in equity capital. The Fund’s debt-to-equity capitalization ratio (Le. Leverage) shall not exceed 3:1, where debt means al l debt liabilities plus contingent liabilities and equity means paid in equity capital plus retained earnings and reserves not allocated to cover specific liabilities. Liquid Assets shall be sufficient to cover projected Fund

1

2

3

APPLICABILITY

Applies to al l HIFU operations

Applies to al l HIFU operations

Applies to al l HIFU

4

Applies to the use o f IDA proceeds only

operating expenses over the subsequent 18 months.

shall not exceed 15 percent o f total find capital (including debt and equity).

operations Total investment (debt and/or equity) in a single obligor A n n 1 i - a tn 011 UTCU

Applies to the use o f IDA proceeds only

~

5

6

-

the subproject

In al l HIFU investments involving HDP proceeds, HIFU will not take greater than 30% ownership (equityldirect investment) in a Project Enterprise In al l HIFU investments involving HDP proceeds, the debt to equity ratio wil l not exceed 3: 1. Specifically, debt wil l not be greater than % o f the total financing o f

D. APPRAISAL SUMMARY 1. Economic and financial analyses 47. The detailed due diligence o f HIFU financial accounts was conducted to determine the financial viability o f HIFU as a potential Bank partner vis-&-vis a Financial Intermediary Loan. The analysis reviewed the quality o f HIFU loan portfolio, including the level o f non-performing loans and a detailed review o f randomly selected loans to determine loan rates and repayment quality. The equity investments o f HIFU were also analyzed to determine HIFU’s exposure vis-Bvis industry and investment instrument. The key equity investments were identified and reviewed to determine asset quality. The Income Statement was analyzed v i s - h i s profitability and operational efficiency. Finally, the investments in portfolio companies (non-infrastructure investments) account for a significantly minor proportion o f total fund assets and therefore present limit exposure to market fluctuations. The analysis confirmed that HIFU i s in a strong financial position (details are in Annex 9).

48. The project wil l significantly improve the financial sustainability o f HIFU and reduce the risk i t may present to financial market development due to inappropriate borrowing practices involving short-term roll-over debt. Also, the project wil l not add any additional cost to H C M C fiscal position but will help H C M C government to protect i t s

’ The GOV has issued a draft decree o n Institution and Operation o f LDIFs, which specifically addresses covenants 2 and 4. These two covenants, as stipulated above, are consistent with the Bank’s technical advice to the GOV. The task team has agreed with HIFU and HCMC PC that during implementation, covenants 2 and 4 can be adjusted in l ine with the final, approved stipulation o f the GOV Decree as part o f the six monthly review o f a l l H D P conditions which i s described in th i s PAD.

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investments in HIFU (in the form o f charter capital or equity) by improving the financial sustainability o f HIFU operations, and attracting private capital in the development of municipal infrastructure.

2. Technical 49. HIFU will use the IDA credit to invest in cost recovery oriented municipal infrastructure investments in partnership with the private sector. A pipeline o f projects has been identified, and it confirms that HIFU can absorb the investment capital which i s being made available via the project. Two sub-projects to be financed in year one o f project implementation have been appraised successfully. Details o f the appraisal are in the project files, and a summary i s provided in Annex 4.

3. Fiduciary Financial Management

50. The inherent risk to the project from the financial environment i s assessed as moderate and the project control risk i s assessed as l o w with the mitigation measures. The overall financial management risk i s assessed as Low.

51. The financial management function o f HIFU i s wel l established, and it i s adequately staffed with personnel with satisfactory competence and qualifications. The accountants have educational background in accounting (at least bachelor degree) and experience in managing the operations o f the Fund, The internal control procedures are in place and effectively maintained. However, improvement on Risk Management and IT systems is required which wil l be supported by the Technical Assistance under the project and/or in collaboration with the Technical Assistance provided by AFD and other donors. The current Accounting and Reporting system is assessed as adequate for accounting and reporting on the receipt and use o f funds from IDA, but needs further enhancement to better serve the management o f Fund’s operations in the future. These enhancements wil l be implemented with the support o f the Technical Assistance provided under the LDIFP.

52. The financial management personnel do not have experience with IDA funded projects, in particular, disbursement procedures and IDA reporting requirements. Training on these therefore was delivered to those involved in the project financial management by the Bank Financial Management Specialist.

Procurement 53. Procurement capacity. Procurement under the proposed project would be carried out by HIFU (consultant services under component 2 self-financed by HIFU) and the private sector/public sector autonomous commercial f i r m s who would receive financing from HIFU (in the form o f loans and / or equity investment). The Bank team has done an assessment o f the procurement capacity o f HIFU and the f i rst two potential borrowers of HIFU loans, namely West Bus Terminal Co. and Hoa Binh Waste Treatment Co. Ltd. The summary o f this assessment i s provided in Annex 8. The procurement risk o f the proposed project i s rated ‘medium’. To mitigate the risk and strengthen the implementing agency’s procurement capacity, specific actions summarized in Annex 8 are proposed. These actions have been discussed and agreed with the Borrower.

16

54. Procurement Arrangements. Procurement for the proposed project would be carried out in accordance with the World Bank’s “Guidelines: Procurement Under IBRD Loans and IDA Credits ” dated M a y 2004, revised October 1, 2006; and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers ” dated M a y 2004, revised October 1, 2006, and the provisions stipulated in the Credit Agreement. General arrangements o f the project procurement, Procurement Plan and Bank review are discussed in Annex 8.

Anti-corruption

55. The main corruption risk under the project stems from the selection by HIFU o f i t s private sector partners. As one o f the key reforms supported by the project, a Private Sector Partner (PSP) selection manual has been prepared to introduce in a phased manner competitive selection o f private partners, with specific processes to deal with unsolicited proposals. Independent advisors wil l be appointed to conduct the required evaluation (see Annex 4). The project wil l also allow HIFU to take important steps towards increased disclosure as the HIFU website wil l be used to disclose the summary o f HIFU’s audited financial accounts and the l i s t o f subprojects which are being pursued by HIFU. The financial management structure provides for improved credit management policies, including requirement that al l project enterprises involved in HIFU’s equity investments provide audited financials o f their operations to HIFU. Finally, the disbursement wil l be report based, which will: (a) directly link periodic disbursements with reports verifying the appropriate use o f IDA proceeds; and (b) allow supervision flexibility to monitor and manage the disbursement for specific investments (loans or equity investments) o f HIFU.

56. HIFU i s a Local Development Investment Fund which has been audited every year. The Project introduces international standards for such audits. Furthermore, quarterly un- audited financial statements wil l be received and reviewed by the Bank. Strict Financial Covenants have been put in place to ensure that HIFU financial performance i s further strengthened, and to provide a long-term engagement point for Bank dialogue on the importance o f financial viability and increased disclosure o f financial operations. As part o f the supervision activities, the Bank will recruit and retain an international accounting firm on a long-term contract to help evaluate HIFU financial statements/operations.

4. Social 57. HDP will mostly have positive impact on the society through improving infrastructure and living environment for the Ci ty and i t s citizens. However, the project wil l also have some adverse impacts related to the need for land acquisition and involuntary resettlement. A Resettlement Policy Framework for the project has been adopted by the H C M C PC and approved by the Prime Minister. Guidelines have been included in the PPA Manual to guide HIFU and its borrowers/investment partners on how to minimize and mitigate the impacts to the people and how to prepare and implement the safeguards documents to meet the Bank’s requirements. Supervision framework has also been established to ensure compliance. These guidelines have been put in practice in the preparation o f the two proposed subprojects for the f i rst year o f implementation. Among these two subprojects only one required land acquisition (Septic tank waste treatment plan). The compensation and resettlement activities have been implemented since 2005. The background o f the remaining complaints which have not yet been resolved i s discussed in

17

the Annex 10. Satisfactory resolution o f these i s a condition for the subproject to be financed by the Line o f Credit provided under the HDP.

58. Taking into account the fact that there are two ethnic minority groups living in H C M C (Cham with about 5,200 persons and K h M e r with about 4,800 persons in accordance with the data o f 1999 general population census), an Ethnic Minor i ty Planning Framework (EMPF) has been prepared. Ethnic Minor i ty Plans will have to be developed in accordance with the project EMPF for the subprojects having any ethnic minority group in the subproject areas. There are no ethnic minorities in the proposed two subprojects for the first year o f implementation.

5. Environment 59. The HDP i s expected to have mostly positive environmental and public health impacts contributing to improvement o f the city’s infrastructure; solid waste management, efficient and safer transport systems, and on-site sanitation services. Adverse impacts could arise through: (a) temporary pollution (air, noise, vibration, surface mn-off), excavation work, and disturbances to local transport, waterways or drainage systems, that could occur during construction; (b) wastewater discharge and disposal o f sludge from the waste treatment plants; (c) disposal o f dredged material; and (d) transportation and disposal o f solid waste in the landfi l l sites.

60. Detailed guidelines on Environmental safeguards, acceptable to the Bank has been included in the PPA manual and approved by the H C M C People Committee. The Manual wil l be used by HIFU staff in carrying out environmental safeguard (ES) work to meet the requirements o f GOV and the Bank for the projects that would be financed by the line o f credit provided to HIFU through the project.

6 1. The environmental guidelines (an annex o f the PPA Manual) include a process with the following features: (a) screening that could possibly exclude areas and subprojects due to environmental siting and other potential negative impacts by using an exclusion l i s t acceptable to the Bank; (b) EIA preparation per the GoV regulations and Bank environmental safeguard policies including an internal due diligence assessment o f EL4 reports (when already available) o f subprojects that pass the screenings and Government environmental approval; and (c) institutional arrangements for HIFU and Bank supervision as needed under the H D P o f the implementation o f environmental management plan (EMP).

62. The PPA and guideline processes were used by HIFU in preparing and appraising two subprojects for Year One as a pi lot program o f the HDP in a manner acceptable to the Bank. The PPA i s being applied for the preparation o f al l other subprojects HIFU expects to finance through the l ine o f credit provided under the project. HIFU will implement and continuously improve the PPA Manual with assistance from on-the-job consultants to be hired as part o f component 2 o f the project.

63. Due diligence assessment processes and outcomes have been implemented as an approach to ensure subproject safeguard compliance. This includes: (a) scoping new EA works in accordance with the PPA Manual; (b) assessing the adequacy o f the EA work approved by DONRE; (c) developing risk management plans to remediate the mitigation work defined in the EIA if implementation i s found insufficient; (d) obtaining borrower’s

18

written commitments to HIFU to implement the risk management plan; (e) assessing borrowers institutional mechanism to carry out EIA work for A-category subprojects; and ( f ) testing the PPA Manual with HIFU using Year One Pilot Projects.

64. Specifically for the Year one pi lot program, due diligence assessments were carried out for the Init ial Environmental Evaluation (IEE) o f the West Bus Terminal and the Environmental Impact Assessment (EIA) o f the Septic Tank Waste Treatment subprojects. As a result o f the due diligence assessment, a risk management plan has been developed for each o f the subprojects. The plans were signed between HIFU and the borrowers. Annex 10 provides the details regarding processes to ensure compliance o f these two sub-projects.

65. The potential negative impacts o f al l subproject activities wil l be mitigated through environmental management plans (EMPs) prepared for each subproject in accordance with the environmental guideline and in compliance with OP 4.01 on EA. The EMPs wil l include mitigation measures, monitoring plans and institutional responsibilities connected with their implementation. Mitigation measures wil l be included in construction contracts. For the subprojects which have obtained from DONRE an approval to the EIA report, or environmental certificate, due diligence assessment o f the EA work wil l be conducted and supplemental environmental information or study wil l be required as necessary. 66. HIFU will arrange for the monitoring o f E M P implementation in each subproject, and wil l prepare semi-annual environmental compliance progress reports submitted to PC and IDA. An independent environmental safeguard monitoring consultant wil l be hired to assist HIFU in this task, and also to provide guidance to the borrowers in internal supervision and reporting on the implementation o f mitigation measures as specified in the EMP.

6. Safeguard policies

Safeguard Policies Triggered by the Project Yes N o Environmental Assessment [OP/BP/GP 4.0 1) [ XI [I Natural Habitats (OP/BP 4.04) [ I [XI Pest Management (OP 4.09) [I [XI Cultural Resources (OP 4.11) [ I [XI Involuntary Resettlement (OP/BP 4.12) [ XI [I Indigenous Peoples [OD 4.20, being revised as OP 4.10) [[XI Forests (OP/BP 4.36) [I [XI Safety o f Dams (OP/BP 4.37) 11 [XI Projects in Disputed Areas (OP/BP/GP 7.60) [I [XI Projects on International Waterways (OP/BP/GP 7.50) [I [XI

[I

67. The yedno responses in the above table refer to the safeguards expected to be triggered for most o f the sub-projects to be financed under the l ine o f credit. Screening mechanisms as specified in the PPA Manual wil l be applied to investment pipeline subprojects in determining safeguard triggers for OP 4.04,4.09,4.10, and 4.1 1. 68. The safeguards screening category is S2, which means one or more safeguard policies are triggered but impacts are limited and technically/institutionally manageable.

19

The project i s determined to be an environmental screening category FI. Subprojects environmental screening categories wil l vary.

69. Public consultation. The PPA manual specifies when and how public consultation has to take place for each sub-project. Consultation for the EIA report for the Subproject Septic tank waste treatment (A category) has been completed with the local authority (Ward People Committee D a Phuoc) and local NGO (the Father Front o f the District Binh Chanh) in accordance with the new national law on environmental protection. N o public consultation on environmental issues was required for the West Bus Terminal.

70. The PPA manual specifies when and how the various safeguards documents need to be disclosed. HIFU has confirmed the public disclosure o f the EL4 report for the Septic tank waste treatment and the Init ial Environmental Examination (IEE) for the West Bus Terminal subproject in the ward PC offices since Mar 05, 2007 as per the Bank’s disclosure requirements. A copy o f the drafi Environment Guidelines and Social Safeguards Manual as a part o f the PPA Manual have been disclosed locally and sent to InfoShop in Washington D C and made available in English and Vietnamese in Hanoi’s Development Information Center (VDIC) on March 20,2007.

Public disclosure.

7. Policy Exceptions and Readiness Policy Exceptions: NA

Readiness: The following project elements outline the readiness o f the project: HIFU project pipeline i s ready with 13 projects identified with detailed project descriptions.

Two (2) year 1 projects have been appraised, including fill safeguards documentation, and financial analysis. Projects ready for financial close.

5 TORs package for technical assistance and the procurement plan ready and approved by HIFU Management; mobilization o f the three key consultants under the approved TORs to take place before loan effectiveness. Project team operational - includes designated procurement and FM staff. Manuals for Project Preparation and Appraisal (PPA) and Private Sector Participant (PSP) selection prepared with broad participation o f ci ty departments, and formally approved by the H C M C PC for implementation by HIFU. Results framework in place; base l ine available. FM arrangements setup; FM capacity analyzed. Audit arrangements agreed with client. Counterpart fbnding confirmed with client. Resettlement Policy Framework (RPF) approved by the Prime Minister.

.

20

Annex 1 : Country and Sector or Program Background VIETNAM: HIFU Development Project

Municipal Infrastructure in Vietnam. Municipal infrastructure demand i s increasing rapidly in Vietnam as the country copes with rapid urbanization, decentralization and high rates o f economic growth. There i s wide agreement that a significant investment gap exists vis-a-vis municipal infrastructure demand. Commentary on the investment climate in Vietnam i s beginning to increasingly cite the lack o f infrastructure in general and municipal infrastructure in particular as a key bottleneck to investment and economic growth. I t i s unlikely that Vietnam can significantly increase public investment in infrastructure from the recent level o f 8.7-10.0% o f GDP; in order to meet the increasing demand for municipal infrastructure Vietnam wil l therefore have to attract private capital and increase the efficiency o f investment, which wil l require policy reforms and improvement in planning and management o f infrastructure assets. To date, Vietnam has neither established the appropriate investment channels for attracting private financing, nor the institutional and regulatory frameworks to involve private sector in the provision o f infrastructure. The public sector agencies have also been slow in undertaking the necessary sector pol icy reforms-including tari f f increases and cost recovery-to improve the quality and increase the coverage o f infrastructure delivery. The challenges facing Vietnam vis-a- vis financing o f municipal infrastructure are further complicated by the following two developments :

At present, there i s a severe shortage o f long-term capital in the market in general, and for municipal infrastructure in particular, as the r isks associated with municipal infrastructure investment remain prohibitively high for the private sector. In the near to medium term the private financial markets in Vietnam-which are currently at the very init ial stage o f development-are unlikely to become adequately deep or broad to meet Vietnam’s infrastructure financing needs. W h i l e the critical and immediate infrastructure financing needs o f the country call for immediate public sector action, measures must be taken to ensure that actions taken in the interim period take into account the risk o f private sector crowding-out in the medium to long-term Vietnam i s fast transitioning towards a decentralized governance model through a political process that has very strong political support. The responsibility for municipal infrastructure has already been devolved to the provincial governments. The provincial governments have limited budgetary resources for municipal infrastructure, and suffer from a combination o f weak institutional capacity and pol icy uncertainties which wil l affect the f low o f private capital/expertise into municipal infrastructure development

The Decentralization Challenge. Decentralization has increased the spending obligations at sub-national levels. According to the developing decentralization regime in Vietnam, municipal infrastructure is primarily the responsibility o f the local governments. As decentralization has progressed, the share o f sub-national governments in total government expenditures has risen from 26% in 1992 to 48% in 2002. The estimated annual financing requirement to achieve the government’s targets between 2010 and 2020 wil l be of the order o f U S $ 377.5 mi l l ion for urban water supply, U S $ 280 mi l l ion for wastewater collection and treatment, U S $ 239.3 mi l l ion for drainage (including canal rehabilitation),

0

21

and US$ 835.4 niitliori for loxv income h o u s ~ n ~ in urban areas, a t~un~c ipa l res~?o~zsibi~ity.~ This gives a total o f US5 1.7 to 1.8 b i l ~ ~ o n ann~I~Ily, or between 3.0% and 4.0% o f CDP annually. This cstimare excludes required ~nvesrn~ents in urban t r a n s ~ ~ r t ~ which are I X U G ~

harder to ~ u a n ~ ~ f y but are expected to be s ~ ~ ~ ~ c a n t .

EiCMC i s the largest city in Vietnam and a major ind~~strial and cona~ercial center with a population o f 6 ~ ~ ~ l ~ o n , I t i s a ~ a t e ~ o r y I city r e p o ~ ~ ~ ~ ~ directly to the Central ~ o ~ ~ ~ ~ ~ ~ e ~ z t ~ The city has been in the forefroIit o f the t r ~ z s ~ ~ ~ o ~ i in~tiated by the economic reform ""Open door" and '~Reno~a t io~ " policies which have led to ~npreccdc~~tcd growth for the c ~ ~ ~ n t r ~ ' , p ~ r ~ ~ c ~ ~ ~ a r l ~ n the i t ~ d ~ s t r ~ a l sector. This growth has been most ~ r o n o ~ t ~ c e d in MCMC, xvhich accounts for 35-40 percent o f the n ~ t ~ o n a ~ CDP. The annual growth rate o f the HCMC urban ~ o ~ ~ ~ ~ t i o n i s between 5-7 percent with thc ~ o ~ u ~ ~ ~ ~ o r ~ in 2020 expected to he approx~matel~ 10 ~ ~ i l ~ i o n rcsidcnts. The increase ixa urban pop~~a t ion and the cconornic g r o ~ t h i s putting increased pressure on. the urban set+es o f thc city. For example, it was recently reported ~~~~e~~~~~ News, 15 January 2007) rhat there has been an annual increase i n the ttsc o f public t r a n ~ ~ o ~ in HChiIC o f around 20 percent. The r~rban arcas face simifar problems in other sectors such as wder, e d ~ ~ a t i Q n and hcatth. I t i s estim~~ed that HCMC needs to invest ~ p ~ r o ~ ~ ~ ~ z a t e i ~ $3 biIlion an nu all^^ to meet the c t t~~cn t i 17 f r ~ s t r u c ~ ~ ~ r c den1 and.

~ ~ ~ ~ ~ ~ t ~ u ~ t u r ~ ~ j ~ ~ ~ ~ i ~ ~ Model. As Vicfnam preparcs to meet the demand for iticreascd in~re~rnient, i f needs to also undertake me~sures to start p r e ~ a ~ ~ n ~ for the ~ r ~ s i t i o n away from c o n ~ e ~ s ~ o ~ ~ a ~ donor ~ n a ~ z c i n ~ for urbm ~nfrastn~crure sewiccs. The ~iccessar~

nene bot: 13%

dS

Key reforms related to the planning and management o f infrastructure services can also improve the financing possibilities. In particular, ensuring cost-covering tar i f fs for infrastructure services, where feasible, can provide infrastructure enterprises with the possibility o f self-financing using retained earnings, and open the possibility for alternative financing sources that rely on future revenue streams. Important reforms to improve the efficiency o f infrastructure procurement and services can also help to defer the need for new investment and reduce the overall financing needs.

Financial Sector Development

Vietnam continues to move forward with the reform of the banking. Since the Government started accelerating the reform in 2001, the five state-owned commercial banks (SOCBs) have evolved from specialized pol icy lending vehicles towards increasingly commercial orientation; by improve their credit policies and procedures, accounting practices, information systems, products and services. In June 2003, the Government announced i t s intention to equitize the SOCBs as a step to fully commercialize them. Joint-stock Banks (JSBs) have also been consolidated to form stronger banks. Serving mostly for private businesses, some o f them have posted strong growth and are gradually gaining market share. The environment in which banks operate has also been improving with the removal o f interest rate ceilings and the implementation o f a national payment system and modem core banking systems at the largest banks. The SOCBs and leading JSBs are also competing to expand their ATM networks. The State Bank o f Vietnam (SBV) has promulgated numerous regulations, gradually leveling the playing field for foreign banks, setting prudential standards and reclassifying NPLs to support their resolution. A credit information center was officially set up in 1999, and a registry for secured credit transactions in 2002, both o f which are expected to improve the access to finance. As a result, both bank deposits and credits have been registering rapid growth (over 25% annually since 2002), and the banking sector assets now amount to 66% o f GDP. The improved confidence in the banking system and the local currency has been leading to gradual ded~l lar izat ion~ and use o f non-cash payment instruments.

The stock market and the non-bank financial institutions have also shown phenomenal growth. During 2006, the number o f companies listed has increased by nearly fivefold4 while the market capitalization increasing by more than tenfold to surpass 22% of GDP, already wel l surpassing the Government’s original target o f 15% by 2010. The largest enterprises including the SOCBs are only yet to come to the market. The number of securities companies has also been doubling while many are increasing their capital to undertake new business such as underwriting o f public offers. The insurance sector also has registered healthy growth till recently while increasingly faced with tough competition with banks’ savings products. Development o f the capital markets and the planned liberalization o f foreign participation in the statutory casualty insurance sector are expected to bring a renewed impetus to the sector’s growth.

Despite the impressive development, there are important issues left unresolved. In particular, meaningful measures are yet to be taken to develop the debt capital market. The

Other factors include: higher interest rate on VND savings than foreign currency and the lack o f deposit

192 including 106 at HCMC STC and 86 at Hanoi STC as o f January 16,2007. insurance in foreign currency.

23

rapid growth of the financial industry and market is also creating dangerous gaps and imbalances in the regulatory and supervisory capacity and financial infrastructures. In addition, the financial sector i s already faced with the second generation issues as Vietnam moves swiftly toward a middle income country status. Concerns are growing with the slow progress o f the restructuring and equitization o f the state-owned commercial banks (SOCBs) and enterprises (SOEs). Uncertainty surrounding hTLs, the practice o f rolling over short-term credits to generate long-term funds, the dif f iculty in valuation, etc. are delaying the process. The equitization i s considered as essential to enhancing their efficiency and competitiveness amid the growing competition due to the WTO accession and integration into the regional and global economy. The SOCBs are responsible for nearly 70% o f al l credits to the economy and are primary creditors to SOEs. Therefore, SOCBs’ restructuring and equitization are linked with those o f SOEs. W h i l e a ha l f o f the over 6,000 SOEs have been equitized, largest ones are left untouched, leaving the large share (85%) o f the original state enterprise assets s t i l l in the state hands. The equitization o f Vietcombank and Mekong Housing Bank has also been delayed.

The capacity building of the financial sector regulatory and supervisory authorities is also lagging behind the development of their respective sectors. The State Bank o f Vietnam (SBV) is only in the init ial preparatory stage o f fundamental reform to become a full- fledged central bank o f a market economy. Reform and upgrading o f i t s bank supervision capacity can be done only as part o f the process. The Deposit Insurance o f Vietnam (DIV) has been in operation but i s lacks capacity and i t s responsibilities overlap with those o f the bank supervisor. The State Securities Commission (SSC) needs to urgently upgrade i ts capacity to guide the civilized development o f the rapidly growing securities market including the OTC market as well as the Stock Trading Centers. To do so, i t needs to become able to effectively discharge the much expanded responsibilities under the new Securities Law. An investor protection fund i s yet to be established. The Insurance Department o f the MOF has only 25 staff with only very basic information and communication technology capacity to supervise the growing and diversifying indu~try.~

Vietnam continues to receive growing amount of foreign investment. In addition to a record level o f foreign direct investment, the country i s now receiving the third wave of foreign portfolio investment (FPI, amounting to $3 bi l l ion in accumulated total). Remittances are even greater than FPI while exports and tourism are booming. There i s now an appreciation pressure on VND which the SBV i s struggling to manage while at the same time trying to contain the inflationary pressures. Cross border capital flows and exchange rate are expected to be increasingly liberalized to implement Vietnam’s WTO commitments. The authorities must strengthen the prudential regulation and supervision o f banks and NBFIs and strongly promote their sound risk management to mitigate risks associated with foreign exchange, interest rate, maturity mismatches, liquidity, etc. Financial market must also offer instruments to manage such r isks (e.g., bond market, derivatives). I t i s also necessary to build a capacity to closely monitor the sector- or economy-wide risks.

24 insurance companies (eight lifes and 16 non-lifes), seven insurance brokers, one reinsurer and 144 agents offering over 900 products which are growing rapidly.

24

Vietnam is faced with a need to invest aggressively in infrastructures which require a huge amount of long-term resources estimated to be in excess of 10% of GDP through 2010 and beyond. Enhancement o f the access to finance by the poor i s also a key pol icy objective to continue to reduce poverty. The former requires development o f the domestic bond market and mobilization o f private resources to release the pressure o n the currency and maturity mismatches. Yet, one common factor cutting across the two issues i s a need to strengthen policy-based financial institutions. The Vietnam Development Bank (VDB) has been established by transforming the former Development Assistance Fund. However, it i s yet to build the capacity to take on these challenges. Similarly, the Vietnam Bank for Social Policy (VBSP), Vietnam Postal Savings Corporation (VPSC) and People’s Credit Funds (PCFs) al l need technical assistance and training and the appropriate pol icy framework to carry out their functions. The reform o f the pol icy lending institutions wil l have important l i n k s with the equitization o f the SOCBs.

Private Investment in Infrastructure. There is great potential in Vietnam for increased private investment in infrastructure. Private investment, including foreign investment, offers a virtually l imi t less source o f financing, and could go far to meeting the infrastructure investment agenda. As Table 1.2 below indicates, over the period 1997-2003 private participation in infrastructure (PPI) commitments amounted to about 15% o f the total infrastructure investment-or 8.5% if we exclude one U S $ 1.3 bi l l ion gas field and pipeline project. Private sector participation in urban infrastructure (water, solid waste, and other development infrastructure sectors) financing has been particularly weak.

Table 1.2: Private Investment in Infrastructure (Contractual Commitments in US$ million)

Ports Airports Toll-roads Telecoms Water Electricity Gas 1994 10 1995 1996 1997 70 1998 1999 2000 2001 2002 20 2003

128 15 205

110

120.5 38.8

16.3 20 16.2 154

246.3 412 10 16.2 480 1,300

2004 Total 100 15 10 423 212.8 1,540.3 1,300 Source: PPI database. These figures record investments promised at the time o f contracting. In some instances o f projects with multiplephases where subsequencphases did not occur actual disbursements may differ f r o m commitments.

But involving the private sector in undertaking significant investments in infrastructure i s a complex and difficult task. To attract private finance, investors must expect to earn a return on the capital invested commensurate with the r isks undertaken, but these needs must be balanced with the protection o f consumers from the market power o f privatized infrastructure. This balancing act must be implemented in transaction documents (legal contracts, licenses, and laws established to induce the init ial investments) and in the ongoing regulatory environment established to govern the infrastructure f i rm ’s operations. To get al l o f this right i s a highly complex affair, requiring skilled economists, accountants,

25

and lawyers, as well as carefi l political guidance, The best way o f establishing these skills would be through experience, which suggests that Vietnam should, in addition to the IPP program envisaged for electricity, seek to establish pi lot projects with private participation, including management control rights, in a range o f infrastructure sectors.

Policy Framework for FIL Emerging Framework for Municipal Finance. The Government o f Vietnam (GOV) has actively encouraged the provincial governments to take greater responsibility for financing municipal infrastructure. The 2001 Pubic Administration Reform Master Program (for 2001- 2010) lays the groundwork for putting in place the regulations on decentralization o f administrative management and fiscal functions. The two most significant components o f the emerging municipal finance framework include permission to the provincial governments to (i) establish Local Development Investment Funds (LDIFs), and (ii) borrow up to 30% o f their annual budget for development investments-HCMC and Hanoi are allowed to borrow up to 100% o f annual state budget through revenue or general obligation bonds. The LDIFs offer an operational and legal structure for the provincial governments to focus on infrastructure, including the ability to mobilize capital and enter into contracts with the private sector.

The H o Chi Minh City Investment Fund for Urban Development (HIFU) was the first LDIF established in June 1996. Since then, twelve other provincial governments have established LDIFs with the approval and support o f the GOV. The increase in the number o f LDIFs is matched by the increase in the intensity with which provincial governments have pursued the LDIF model, as evidenced by the increase in the charter capital o f the LDIFs which increased by approximately 45% per year from 1997 to 2004 and was estimated to be approximately $400 mi l l ion by the end o f 2006. The most active LDIFs are making progress in bringing the new forms o f public-private partnerships, including the more sophisticated contracting mechanisms (BOO and BOT, etc.) to Vietnam. The LDIFs can also become a valuable instrument for instituting provincial pol icy reforms that support decentralization and increase the efficiency o f public sector management.

The LDIFs can be segmented into three distinct tiers based on their operational performance. HIFU leads the field, followed by the three middle tier LDIFs. The remaining nine LDIFs are far behind the top-4, and wil l l ikely not be able to make significant progress in the near fiture without a significant effort. The critical capacity building and institutional development needs o f LDIFs are described in the table below.

26

Relative Performance and Institutional Development Priorities

Performance Tier

LDlFs

Top

HIFU

Middle

Dong Nai IF Binh Duong IF HANIF

Bottom

Top 3 Development Cwporate Governance investment PolicyIRisk Mgmt. - Investment Appraisal

Needs - Financial Structuring * Cwpwate Governance *Staffing & Operational Resources * Investment PoiicyIRisk Mgmt. * Investment Appraisal *Investment PolicyIRisk Mgmt.

The most urgent priority for the GOV at this stage i s to ensure that the top-4 LDIFs, particularly HIFU, develop appropriate operational models. HIFU i s in a position to set the standards for other LDIFs, and encourage other provincial governments to use the LDIFs in an appropriate fashion. The success o f HIFU has in particular encouraged many provincial governments to establish LDIFs, and its focus on cost recovery and partnership with the private sector provides an excellent initial roadmap for other LDIFs.

The capital structure o f LDIFs requires critical attention. Specifically, the LDIFs are currently engaged in short-term borrowing on a roll-over basis. The LDIF borrowing should be directly tied to their assets, particularly their Charter Capital. I t may be prudent for LDIFs to not increase their commercial borrowing until they have undertaken the necessary reforms. The long-term business model o f LDIFs should involve the use o f equity (Charter Capital) to raise debt for investment purposes. Short-term borrowings - particularly if they are not tied to LDIF credit - can lead to short-term oriented investments which can channel LDIF capital away from long-term infrastructure development projects. Preliminary estimates indicate that approximately 80% o f al l LDIFs mobilized capital i s short-term (< 12 month tenor) with roll-over features, and approximately 20% i s medium term (>12 <60 month tenor). There i s almost no long-term debt. Inappropriate borrowing by the LDIFs can have a negative affect on the developing banking sector. I t i s essential that in the immediate future the qualified LDIFs utilize technical assistance and long-term debt from ODA program to establish a good investment and financial management record, before they start raising senior debt from the market. The development o f LDIFs will require a sustained, long-term effort. In particular, the LDIFs should f i rst establish a performance record vis-a-vis financial management and execution o f projects in partnership with the private sector, and raise debt from the market. In the later phases o f development the goal can be expanded to include raising private equity into the fbnds. As discussed above, i t is important for the LDIFs to take advantage o f IDA technical assistance and long-term financing to establish sounds systems and processes before they engage in raising debt from the market. The discussions with various private sector parties in Vietnam indicate that while the private investors are willing to engage LDIFs at the project level (as partners in project entities), they wil l be very

27

reluctant to invest directly in the LDIFs in the near-term. The involvement o f the private sector in the financing and management o f LDIFs should be an important long-term objective o f the government. The following diagram development model for the LDIFs.

Stage I Stage II

provides a possible long-term

Stage 111

LDIFs and Financial Market. There are four categories o f risk associated with government owned FIs which apply to the LDIFs. The Bank team has worked closely with the GOV and provincial governments to develop a practical risk mitigation approach which can be implemented in Vietnam. 1.

2.

3.

4.

Policy Capture: Provide appropriate incentives to the LDIFs and the Provincial Governments to highlight the value o f LDIFs as important tools for addressing the growth-oriented infrastructure needs o f the cities, rather than a convenient channel for providing subsidies for politically important projects. Private Sector Crowding-Out / Market Distortion: Incentivise and help develop the LDIFs to work in partnership with the private sector. It is also very important to ensure that LDIFs do not price their investments below market. This wil l also require establishment o f the necessary institutional framework within the provincial government to ensure identification o f appropriate projects, and development o f LDIF capacity to prepare good, bankable projects which allow for market pricing. Mismanagement: Establish clear frameworks for financial management and operations, and ensure that capital provided to the LDIFs i s in l ine with their project pipeline. Contingent Liabi l i tymarket Risk: Develop models for monitoring the debt service capacity o f LDIFs because the LDIF borrowings do carry implied government guarantees. Specifically, at a time when the market infrastructure (e.g. rating agencies) is not in place and banking sector and capital market development is at an initial stage, inappropriate borrowing practices o f LDIFs can severely impact the financial market.

28

Strategic Framework for World Bank FILs in MunicipaUInfrastructure Finance. The task team has utilized a framework prepared by the EAl? Sustainable Development Department to conduct strategic review o f the appropriateness o f pursuing FILs for municipal/infrastructure finance in Bank operations. The framework i s specifically designed to allow infrastructure task teams to review the cross-sector impact of the projects, particularly on financial market development. I t also facilitates the identification o f the long-term role o f the FI, and the provision o f measures to help manage the transition o f the project entity (FI) towards an appropriate long-term role.

The following tables summarize the results o f the application o f the framework to HDP.

-0cus

Financial Market

:ocus

Sector Policies

Is the FI approach necessary to achieve program objectives?

Will the FI support market development?

Framework

Can the FI structure contribute to sector policy reform?

Partnership Conditions

Partnership Strategy

Are the appropriate conditions in place to ensure strategic clarity?

Is the engagement supporting a transition towards an appropriate long-term business models?

FI approach with HlFU is justified based on the following considerations: - Traditional engagements (SILs) have had limited success in financing infrastructure -There is a lack of long-term capital in the market - Private market is not ready to directly finance program objectives - Public sector co-financing is necessary to attract private capital - Credit enhancement is necessary to finance infrastructure projects - Lack of capacity to prepare financially viable projects - Need for a specialized public institution to negotiate with private sector (PPI contracting, etc.) and attracting private capital

The risk of private sector crowding-out is limited in the short-term, but may become significant in the long-term unless HlFU transitions towards a private market support role

National policy l incentive structure defining the long-term role of HIFUlother LDlFs

Financial covenants in place to ensure co-financing with the private sector Project puts HlFU on track to develop new market instruments (HIFU Bonds),

and improve standards for infrastructure financing - appraisal, risk management,

HlFU can continue to support sector policy reforms -Separation of investments which offer cost recovery and can be financed by HlFU from those which require budget support -As an investor in infrastructure projects, HlFU supports tariff rate increase to ensure sustainability of infrastructure assets - HIFU’s disclosure practices will set higher standards for SOEs and city departments - ImDroved standards for safeguards practices

* institutional structure in place to minimize the “policy capture” risk - Int’l Audit Standards: Financial Covenants; and implementation of Project Preparation and Appraisal Manual

-market pricing, cost-recovery, portfolio monitoringlmanagement Appropriate financial risk management structure is in place

Institutional capacity to manage social/environmental safeguards - Co-financinglsyndication with private sector ensure loan conditions Financial risk management identified as key prerequisite for growth Capitalization of HlFU tied to portfolio risk and absorption capacity Technical assistance provided to HlFU (and MOF) to facilitate transition

towards commercialization l corporate independence Manuals and conditions designed to help HlFU set safeguards standards

29

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies VIETNAM: HIFU Development Project

Bank financed

Public-private partner ship in infrastructure projects (on-going) Rural finance; promotion o f private sector investment Financial sector modernization (on- going) Financial sector modernization; broaden access to finance

Rural finance; promotion o f private sector investment Deterioration o f sanitation systems and institutional weakness (ongoing) Lack o f access to infrastructure and tenure insecurity in urban poor areas (ongoing) Lack o f access to water supplies, deterioration o f water supply systems and institutional weakness (ongoing) Other Development Agencies

Public/Private Partnership Power Generation Project (P086509) (Board proposed 7/08/08)

Vietnam Second Rural Finance Project (P072601) (Board approval 5/30/02) Financial Sector Modernization and Information Management (P088759) (Board proposed 9/27/07) Second Payment System and Bank Modernization Project (P082627) (3/10/05)

Vietnam Guarantee Project Vietnam Rural Finance Project (P004847) (Board approval 5/07/96)

Ho Chi Minh City Environmental Sanitation Project (Cr. 3475)

Urban Upgrading Project (Cr. 3887)

Urban Water Supply Development Project (Cr. 4028)

Implementati on Progress

N/A (IP)

S

N/A

S

U

S

MS

Development Objective (DO) N/A

S

N/A

S

MS

S

S

30

Annex 3: Results Framework and Monitoring

VIETNAM: HIFU Development Project

PDO

To develop HIFU as a model LDIF (in terms o f internal policy and procedures for financial policy, sub-project appraisal, social and environmental safeguards, and partnership with the private sector) and increase private sector participation in financing municipal infrastructure in HCMC.

Intermediate Results

ComDonent 1: HIFU uses the l ine o f crddit to finance quality municipal investments

Component 2: HIFU capacity to appraise and monitor projects is strengthened

. Increase in total number o f HIFU investment (debt and direct) per year in municipal infrastructure projects with private sector involvement . Increase in total amount o f HIFU investment (debt and direct) per year in municipal infrastructure projects with private sector involvement

Improvement in the leverage ratio (new private capital / HIFU direct investment) in municipal infrastructure projects per year

Evidence that HIFU performs as a model LDIF : 1- Compliance o f HIFU with the Financial Covenants 2- Percentage o f HIFU projects processed in accordance with the PPA manual guidelines 3- Percentage o f Private Sector Partners o f HIFU selected using the PSP manual guidelines

ter dic

Number and amounts o f new investments undertaken by HIFU with the L ine o f Credit 0 Portfolio quality indicators maintained 0 Projects feasibility studies by HIFU and L ine Departments meet adequate quality standards

Level o f compliance o f projects with Environment and Social Safeguards

PSP manual i s implemented in a phased manner (see Annex 4 for specifics)

Information wil l be used every six months to assess the extent to which HIFU i s able to leverage private capital through i t s investments.

While the information wil l be used to ensure that projects funded by the LOC are processed according to the agreed guidelines, i t wil l also help assess the extent to which such good practices are adopted by HIFU for projects financed with non- IDA sources

To establish benchmarks and standards for FI operations o f similar nature in Vietnam

Information wil l be used to assess the effectiveness o f the technical assistance provided under the project Annual review o f the implementation o f the manuals wil l be an opportunity to improve them

31

Arranpements for results monitoring A comprehensive monitoring system has been established in close collaboration with HIFU to monitor and evaluate the project activities and operations leading to the project objectives. The monitoring system has four components: 1. HIFU internal system will provide the baseline data and report on results as follows:

HIFU Department o f Planning and Promotion will collect information on the indicators for private sector involvement and on private sector partner selection; and HIFU Department o f Appraisal wil l collect information about the progress made in implementing the PPA manual. Quarterly un-audited financial statements wil l be provided by HIFU to the Bank; Yearly audit report o f the financial statements-prepared by an independent auditor to conduct international standard financial audits-will be provided to the Bank after the end o f HIFU fiscal year. Independent consultants wil l monitor the compliance o f each sub-project with the social and environmental safeguards requirements. Bank Supervision Team (and an on-going contract with an international accounting firm which worked with the Bank in conducting the init ial financial assessment o f HIFU) will conduct periodic reviews o f un-audited quarterly as wel l as annual audited financial statements to ensure compliance with the financial covenants and the achievement o f operational reform milestones (subproject appraisal system and framework for the selection o f private sector partners).

Project Review. All project information wil l be compiled by HIFU management and discussed with the HCMC-PC and the Bank in a workshop to be held every six months. The workshop will provide an opportunity to discuss project progress and any outstanding issues, including the need to refine or adjust any project components. More specifically, the operational and institutional framework (PPA and PSP manuals) wil l be reviewed at least once every year by HIFU and the PC and may be amended by resolution o f the PC, provided the written agreement o f the Bank i s obtained before the amendment i s approved by the PC.

2.

3.

4.

32

9

e, > 0

2 9

E!

9

?e

N

a Y -

I-

$ Z

3

3

E

.-

s E2

g

z

\Do

3E

$ Z

Annex 4: Detailed Project Description VIETNAM: HIFU Development Project

Project Components

7

8 9 10

Component 1 : Investment Capital (US$80 million; IDA US$50 million) A line o f credit will be provided to HIFU for it to invest in cost recovery oriented municipal infrastructure investments in partnership with the private sector. A Project Preparation and Appraisal Manual governs the way HIFU investments under the l ine o f credit will be identified, developed and appraised. A Private Sector Partner Manual describes the way private sector participants in Project Enterprises financed under the l ine o f credit will be selected. (See component 2 for a description o f the institutional changes supported by these manuals).

HIFU will work with DPI and other departments within the provincial government to identify investment needs in HCMC, as described in HCMC master plan, which can be financed via public private partnerships. HIFU will then work with the city departments to put in place effective project structures and then invite private investors to participate in the projects. The pipeline of projects identified in the table below confirms that HIFU can absorb the investment capital which i s being made available via the project.

Daphuoc

Cuchi or Hocmon North Cemetery and Crematoria in either Ditto 4.5 2009-2010

Hazardous waste treatment in Phuoc Hiep Ditto 25 2009-201 1 Cornposting plant in Phuoc Hiep Ditto 7 2009-201 1 High Technology Medical Treatment Ditto 6 2009-2010

11 I Nguyen Du Underground Parking and I Ditto 16 I 2009-2011

12 13

35

Services General Port Catlai Area 1 New Port Ditto 30 20 10-20 12 General Port Catlai Area 2 New Port Ditto 85 2010-2013

Sub-Total 177

These sub-projects have been reviewed by city Depts, and are consistent with the development master plan o f HCMC. A detailed appraisal o f the two year one pi lot projects i s provided below as attachment to Annex 4.

The IDA credit wil l be made available to HIFU according to the proposed on-lending structure agreed between HIFU and M o F according to the Decree # 134 o f the central government on O D A management. The Bank team has reviewed the structure and confirmed that i t wil l support the project objectives and conforms to the stipulations o f the Decree 134. The structure involves the Ministry o f Finance borrowing IDA credit from the Bank and then on-lending the hnds to HIFU under reasonable terms which take into account the cost o f foreign exchange risk and other administrative costs. (Annexes 6 and 7 provide the details o f these implementation and disbursement arrangements respectively).

The Bank has conducted a detailed financial due diligence o f the financial accounts o f HIFU through an international accounting firm and confirmed that HIFU i s in strong financial position. HIFU issues audited annual financial statements, and it engages in market-based investment practices. Specifically, HIFU loans are priced at market rate. The Bank can confirm that HIFU i s ready to carry out the hnctions o f a financial intermediary as required under Bank OP 8.30. The financial covenants o f the credit agreement will hr ther reinforce the financial soundness o f HIFU operations and contribute to i t s institutional development as a financial intermediary. (Annex 9 provides the details o f the financial analysis o f the project).

Component 2: Technical Assistance (US$0.5 million; IDA US$ 0.0 million) 7 1. HIFU will finance the technical assistance to support the implementation o f operational reforms, including: (i) support to implement the PPA manual with on-the-job chief advisor and technical specialist, as well as a social specialist and an environment specialist; (ii)support to implement the PSP manual with on-the-job chief advisor and private sector specialist; (iii) independent monitoring consultants for social and environmental safeguards policies; and (iv) Financial Audits o f HIFU to International Auditing Standards.

72. Detailed set o f Terms o f Reference (TOR) for technical assistance consultants have been prepared. The package o f TORs and the associated procurement plan has been reviewed and approved by the H C M C PC as part o f the final HDP project approval. The H C M C PC approval makes the implementation o f the procurement plan, including the utilization o f an estimated $0.5 mi l l ion HIFU capital for the assigned objective o f recruiting international and local consultants in accordance with the TORs, a firm and official mandate for HIFU. In order to ensure timely mobilization o f key consultants, the mobilization o f consultants under three (3) o f the most critical TORs - including the TOR for independent auditors to ensure compliance with safeguards policies - has been established as a Condition o f Loan Effectiveness.

73. The technical assistance wil l contribute to the institutional development o f HIFU. Specifically, i t wil l build upon the current practices o f HLFU and develop capacity in HIFU to implement the PPA and the PSP manuals. The long-term institutional development plans have been prepared in consultation with the Bank and are documented in the two main manuals. The capacity building o f HIFU i s a part o f a broader initiative which involves AFD, USTDA, the World Bank and other donors. The Bank team has worked very closely with USTDA to scope, prepare and provide capacity building technical assistance to HIFU. The phase one (approximately $300,000) o f the USTDA technical assistance was concluded in 2006. The

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planned phase I1 to focus on internal operations i s currently being reviewed by USTDA management. Similarly, AFD has approved a technical assistance package o f approximately Euros 1.5 mi l l ion which wil l provide significant technical assistance and training to HIFU and its borrowers in financial management and other operational functions. The technical assistance provided by AFD and USTDA complements the IDA credit and the associated HIFU-financed technical assistance. Further details o f the partnership strategy vis-a-vis the development o f LDIFs i s described on section C. 1.

74. The HDP i s focused on helping HIFU implement those important operational reforms which are under the authority o f HIFU Management and the H C M C PC. Broader national level pol icy reforms are being addressed under the LDIFP planned to be submitted for Board approval in FY08 . I t should be noted that some o f the operational reforms demonstrated under the H D P may be adopted as national policy/MOF guidance under the LDIFP at a later stage.

75. The Bank, HIFU and the H C M C PC wil l work in close co-operation in the application, review and amendment o f the two manuals. The implementation o f the manuals wil l be reviewed at least once every year by HIFU and the H C M C PC, and discussed with the Bank during the six monthly reviews. The manuals may be amended by resolution o f the H C M C PC, provided the written agreement o f the Bank i s obtained before the amendment i s approved by the PC. The Bank may also request or suggest amendments to the manuals to HIFU and the H C M C PC during the implementation o f the project.

Project Preparation and Appraisal (PPA) Manual. HIFU has to date successfully identified and invested in several projects. I t s current project appraisal process appears to have worked reasonably well. However, HIFU has recognized that with the anticipated increase in the volume o f its business, i t wil l require a more comprehensive and consistent process for appraising investments. In order to facilitate this, a new project preparation and appraisal system has been developed and agreed with HIFU and the H C M C PC. The Project Preparation and Appraisal (PPA) Manual is a comprehensive integration o f technical, financial, environmental and social safeguard assessment and it includes the following:

0

0

0

Ini t ial identification and exclusionary screening o f projects A sensible, simple appraisal matrix that describes the appraisal outcomes so that projects can be prioritized A process by which projects are appraised by Line Departments in H C M C PC in terms o f both financial and non-financial mandates combining project and social safeguards appraisal methodologies

A necessary due diligence process L i n k s with the HIFU Private Sector Participant Selection Framework. Monitoring, evaluation and reporting requirements

0 A risk appraisal methodology 0

0

0

The manual is prepared for practical implementation; i t uses f low charts and step by step explanation o f various processes, It wil l apply to al l new projects funded under the H D P but i s also available to HIFU for use on other projects. A regime for its annual review and amendments o f the Manual i s established.

I t covers both the appraisal o f loan funding requests where HIFU does not have a project preparation role as well as project preparation for new projects in which HIFU will invest

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equity. It also sets out a consistent standard for project appraisal regardless o f whether or not they are unsolicited proposals.

The Manual on Project Preparation and Appraisal (PPA) will become applicable from date o f effectiveness for al l projects that are not in development (that i s have not proceeded beyond project identification and screening). Since infrastructure projects have long lead times it i s not necessary to set out a phased application other than for requirements for the development o f unsolicited proposals.

Two external consultants (a consultant with international experience on project preparation and appraisal, a consultant able to provide accessible support from Vietnam on project preparation and appraisal) wil l establish with HIFU and utilize a screening process for projects to ensure that projects meet HIFU criteria. They wil l also coordinate the range o f appraisal and preparation activities throughout the project preparation life-cycle and wil l assist HIFU to proactively plan activities in the preparation and appraisal o f specific projects.

They wil l also review the application o f the manual on specific projects so as to accurately report on activities and on areas where the application can be improved or amended and provide six monthly reports to the WB on the projects in preparation and appraisal and the application o f the manual.

An on-the-job environmental consultant wil l also be hired by HIFU under HDP funds to assist HIFU in implementing the environment guideline (Annex F). This task wil l include the following:

1. Environmental due diligence review o f projects in municipal infrastructure. 2. Implementation o f safeguard policies including review o f environmental safeguards

documents and monitoring o f the implementation o f environmental management plans, 3. Technical input to the HIFU team on project environmental planning and management, 4. On-the-job training for HIFU staff on environmental planning and management 5. On-the-job training for HlFU staff on the environment aspects o f project technology

evaluation, 6. Implement an improved project appraisal system over a period o f 3-years to include

environmental safeguards

A local consultant will be hired to provide on-the-job training and technical assistance to HIFU on a part-time basis for implementation o f social safeguard policies including socio-economic screening o f the proposed projects, preparation o f TORS, evaluation o f socio-economic assessments, guiding the investorshorrowers to prepare and implement social safeguards documents, review and appraisal social safeguard documents, monitoring its implementation and reporting the results to the HCMC’PC and WB. The consultant wil l also help HIFU in determining the relevance and effectiveness o f project social programs including Resettlement Plans and Land Acquisition as well as in implementing the social aspects o f the Project Preparation and Appraisal Manual. Private Sector Partner (PSP) Selection M a n u a l A framework for the selection o f SPS in the Project Enterprises i s necessary to:

establish transparent processes that provide information and certainty to potential investors; ensure the consistent application o f selection processes; and

0

0

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meet international good practice requirements as part o f the development o f HIFU governance and operations systems.

This manual has been drafted to achieve these objectives in the selection o f private sector investors who participate in the ownership o f the Project Enterprise formed to implement the project. I t does not cover the procurement o f any goods or services by the Project Enterprise, which shall be done in accordance with applicable Vietnamese law. A formal Legal Opinion has been obtained from a top tier law firm in Vietnam to confirm the compliance o f the manual with current Vietnamese laws and regulations.

Given the current absence o f a coherent selection process and the current reliance on unsolicited proposals, the full development o f a Private Sector Participant (PSP) selection process for HIFU will be phased over three years. The process wil l be streamlined for maximum efficiency while meeting international good practice requirements for competitive selection by the end o f the third year after adoption o f this framework. The framework wil l not apply retrospectively to projects already implemented. Key components are:

0

0

0

0

0

0

establishing HIFU as project financier available to al l bidders the use o f Special Purpose Vehicle Enterprises how HIFU deals with cases where there i s no bidder response to RFP an exit strategy for HIFU from Project Enterprises clear guidance on how Enterprises with State Owned Shares and enterprises in which HIFU already has an investment stake may participate as PSPs a process by which unsolicited proposals are managed evaluation criteria and processes that i s fair, transparent and cost-effective.

The PSP Manual i s closely aligned with the Project Preparation and Appraisal Manual in that both set out a means by which HIFU can rely less on unsolicited proposals and more on projects brought to a competitive market. I t allows a maximum o f one year to establish the unsolicited proposal framework and communicate this to the market. The PSP manual requires more complex reforms within HIFU and i s also related to parties not in the control o f HIFU. Thus, a phased application is established as set out below.

End of Year 1

The manual applies to Enterprises with HIFU Application o f Manual Evaluation system for solicited Develop detailed evaluation process and proposals bidding rules Unsolicited Proposals Unsolicited proposals accepted before manual

adopted without competitive selection process.

End of Year 2 End of Year 3

participation in equip( ownership. Commence Operational with pilot Operational Operational

1 Manual adopted and hade known to market I Prequalification of Bidders I Not applicable I Commence I Operational

Participation of Enterprises with State Owned Shares in Project Enterprise

Participation of Enterprises with State Owned Shares as Sub Contractors to the Project Enterprises Maximum equity stake Use of SPVs

I with pilot Al l Enterprises with State Owned Shares eligible (including SoEs)

No restriction No restriction Enterprises with State Owned Shares to make available their services to all PSP bidders.

Not required I Commence I Operational

Only private sector Enterprises.

Subject to Charter and covenants

I with Pilot Exit Strategy for HIFU I In development I Operational I Operational

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I t must be noted that the pipeline for the f i rst year includes only loan type projects. HIFU will thus be able to apply the PSP Selection manual to projects that i t has prepared in terms o f the PPA manual from year 2.

A PSP consultant will provide HIFU with expert assistance in applying the PSP selection processes established in the Manual to projects in the HIFU portfolio and will review every six months the manner in which the manual has been applied, wil l identify beneficial amendments to the manual and to provide comprehensive reports on these to HIFU, the H C M C PC and the Wor ld Bank.

This consultant wil l ensure that the Manual i s applied for projects under the HDP and will coordinate the selection activities throughout the selection process to assist HIFU, who has to manage a complex range o f stakeholders including l ine departments and bidders in order to manage the selection process as efficiently as possible.

This consultant wil l also develop standard bidding documents as wel l as standard evaluation process documents with a view to effectively evaluate bidders, and to assist HIFU to carry out a satisfactory due diligence on al l aspects o f bidders’ technical and financial capacity as wel l as history and proven capability to meet the stringent environmental and social safeguard requirements for each project.

Independent Environmental and Social Safeguard Monitoring. Independent consultants to wil l be hired under HDP to monitor the compliance with environmental and social safeguards policies. The consultants wi l l provide the following services:

Independent Monitoring (Environment) Consultant: Independent consultant wil l be hired to monitor the performance o f the HIFU Joint Ventures /project enterprises and borrowers with respect to compliance with the environment requirements. The consultant wil l also highlight need for additional mitigation measures, need for capacity development within HIFU and Project Enterprises, and to adapt HIFU and Project Enterprise systems for each future development project environmental planning process. Independent Monitoring (Social) Consultant: Independent consultant wil l be hired to monitor the performance o f the HIFU Joint Ventures /project enterprises and borrowers with respect to compliance with the social requirements. The consultant wi l l also highlight need for additional mitigation measures, need for capacity development within HIFU and Project Enterprises, and to adapt HIFU and Project Enterprise systems for each future development project environmental planning process

1.

2.

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Attachment 1 to Annex 4 - Detailed appraisal of the two Sample Sub-Proiects

{Total Estimated Investment - $5 million) identified for vear 1. Subproject 1 -West Bus Terminal Upgrade 1. Rationale

The West Bus Terminal presently receives around 1,200 buses per day and approximately 18,000 passengers. The number o f daily passengers received during peak time (Vietnam New Year) amounts to approximately 50,000. With a wide frontage along Kinh Duong Vuong Street, the site offers high-valued commercial potential. There is an urgent need to improve the existing service facilities and in providing the general public with higher standards o f service, especially in respect to safety and health standards.

2. With large passenger and bus numbers the existing facilities are unable to efficiently handle the traffic volumes and are greatly in need o f refurbishment and redevelopment. The facilities are outdated and in their present form are unable to maximize their full commercial potential. One o f the present problems o f the site i s the regular flooding that occurs during monsoon season, with regular flooding o f the bus parking area and passenger waiting areas as the internal drainage system i s unable to drain to the existing drainage facilities along Kinh Duong Vuong Street. The duration o f flooding i s usually around 2 hours but during this time considerable inconvenience is caused to passengers and commercial operations alike. This situation is further exacerbated in that the existing drainage system i s a combined system and used for both rain water and waste water.

3. West Bus Terminal Management The West Bus Terminal i s managed and operated by the West Bus Terminal Joint Stock Company, with 51 percent o f i t s shares owned by the State and 49 percent by West Bus Terminal Company staff. The Company comprises a Board o f Directors represented by the State (3 members), and representatives from the founding shareholders and consisting o f the Dong A Bank Securities Company Limited, the Thai Binh Shoes Joint Stock Company, and a staff representative, making a total o f six board members. The chartered capital o f the Company i s VND25 billion. The general Company Charter allows it to operate the two inter- provincial bus terminals including West Bus Terminal along with other associated activities such as provision o f services within the terminal sites, tourism transportation, leasing and management o f commercial areas, freight cargo handling, car spare parts trading, and maintenance and repair services.

4. Proposed Subproject Works The proposed West Bus Terminal Upgrading building works wil l consist o f upgrading and expansion o f both the two storey departure and arrival hal l buildings, along with the ticketing office areas; upgrading and provision o f new departure area bus shelters; provision o f new arrival area bus shelters; construction o f a new staff parking building; construction of a RepairMaintenance Bus Workshop; provision o f a new fuel service station; construction o f a dining hal l and lodging facilities for drivers; provision o f new public toilet facilities; and construction o f a Security/Guard House, All structures wi l l be constructed from reinforced concrete with color bonded aluminum roofing and ceramic floor tiles.

Existing West Bus Terminal Facilities

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Due to the existing drainage/flooding problems, there will be a need to reshape the ground level o f the bus terminal site, and to replace and upgrade existing drainage facilities. For waste water sources from toilets and commercial areas, septic tanks wil l be constructed. For vehiclebus washing areas, and where lubricating oils are being used, sand tanks shall be provided to allow treatment o f washing water and lubricants and to ensure that these materials do not enter the drainage system. Water supply facilities are readily available and the present system will be rehabilitated with new pipes. The construction o f a 135 cubic meter watedstorage tank wil l be provided in order to enhance f ire protection capabilities. Within the site there i s presently an underground water source that i s utilized for vehiclebus washing, and this source wil l continued to be used for such purposes. Further deepening o f the wel l wil l be required.

In respect to electricity and power supply, the existing 63 KVA power station wil l be replaced with a 250 KVA power station. In addition, the installation o f underground cables for servicing the site wil l be required along with an outdoor lighting system within the bus parking areas and along the boundary fence for security. For fire prevention and safety, i t i s proposed to provide 7 water hydrant points and two underground water tanks with 150 cubic meters capacity and associated pumps.

Equipment, including computers, printers, and associated IT equipment, wil l be procured to support the operation and management o f the West Bus Terminal.

5. Technical Justification All the subproject components have been based on appropriate technologies that are both cost effective and technically feasible. They have been developed with consideration o f the operating company’s capacity to operate and maintain the various physical works components, while minimizing the associated operating and maintenance costs. The proposed standards for drainage improvements are compatible with existing facilities. The proposed improvements wil l greatly enhance the site and provide a much improved public facility.

6. Cost Estimate The total cost o f the subproject i s estimated at VND 53,106,710,268 (approximately US$3.32 million). The following table provides a breakdown o f the costs.

No. I t e m Descript ion 1 Construction Works 2 Machinery and Equipment 3 Project Development and Implementation Costs

Project Design and Bidding Documents - - Implementation Supervision - Project Completion Activit ies

4 Contingency Fund To ta l Subproject Investment Cost

T o t a l Cost (VND) 41,647,380,245 2,990,175.345 3,658,111,088 329,230,000

3,145,975,535 182,905,553

4,811,043,590 53,106,710,268

7. Financing Plan

I t i s proposed that the subproject will be financed through an equity investment by the West Bus Terminal Joint Stock Company o f 30 percent o f the total investment cost, or an amount o f VND 17,029,446,407 (US$ l.O6million), with a loan from HIFU for the remaining 70 percent o f the funds o f VND36,077,263,861 (US$2.26million). The HIFU loan funds wil l carry an interest

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rate o f about 10 percent over a period o f 10-12 years, including a 2 year grace period during construction.

8. Implementation Arrangements

The implementation o f the subproject wil l be undertaken over a two year period in two phases, with the f i rst phase consisting o f al l c iv i l works including site grading, drainage, water supply, power supply, sanitation facilities, and f i re protection works, while the second phase will consist o f the construction and upgrade o f the service facilities, including departure and arrival areas, waiting halls, office facilities, ticketing facilities, and other support facilities.

9. Operation and Maintenance

Responsibility for the operation and maintenance o f the subproject facilities wil l be assumed by the West Bus Terminal Joint Stock Company. W h i l e the present facilities are generally well maintained, i t i s expected that routine maintenance will be regularly undertaken to minimize large scale maintenance works on the upgraded facilities. Adequate annual budget allocations should be made to cover required routine maintenance costs.

10. Social Safeguard Issues a. Resettlement

There are no land acquisition or resettlement requirements within the subproject site. The subproject site land area was allocated to the West Bus Terminal Joint Stock Company on 18 August 2005 through a decision by the H C M C People’s Committee. In respect to commercial areas, the West Bus Terminal Joint Stock Company i s presently renting a number o f kiosk areas to various bus operators/enterprises on a 6 month renewable contract basis. The Bus Company advises that they have informed the kiosk renters about the proposed upgrading works and advised them that they wil l be given priority in respect to renewing their respective contracts once the upgrading works have been completed.

b. Environmental Aspects

A summary initial environmental assessment (SIEE) has been undertaken for the subproject which showed that no significant adverse effects are anticipated and that a detailed environmental impact assessment (EIA) i s not required. The proposed upgrading works will generally enhance the existing bus terminal conditions. Flooding will be eliminated due to site grading and improved drainage facilities resulting in a reduction in the present disruption to the traveling public as well as to commercial and business activities. Improved traffic f low and parking arrangements within the terminal site wi l l result in greater safety and convenience to the traveling public.

11. Financial and Economic Analyses a. Financial Analysis

The analysis has been undertaken to work out Financial Internal Rate o f Return (FIRR) for the sub-project while analyzing its sensitivity to an increase in the investment cost, increase in operating costs, and reduction in business revenues. The analysis assesses the financial viability by comparing (i) the FIRR based on incremental revenue generation with the updated average cost o f capital for each component; and (ii) the average incremental financial revenue with the

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average incremental financial cost. The HIFU loan funds wil l carry an interest rate o f about 10 percent over a period o f 10-12 years, including a 2 year grace period during construction. The sensitivity analysis conducted on the West Bus Terminal Upgrading Sub-project indicates that its current FIRR o f 12.36% wil l only decrease to 11.47% if the investment cost was increased by 10 percent. In fact, the FIRR o f the subproject remains positive until the investment cost increases by more than 40 percent. Additionally, there exists considerable opportunity for increases in user fees and tariffs which are currently at l o w base levels. An increase o f tariffs, if and when enacted, wil l have minimal affordability impact on the transport users.

b. Economic Analysis

For the economic analysis and calculation o f the sub-project Economic Internal Rate o f Return (EIRR), the methodology and assumptions utilized fol low standard methodology for development sub-projects. The calculation o f the EIRR also used economic opportunity cost o f capital o f 12 percent as standard for the feasibility study o f development project. The sub- project has economic efficiency with an EIRR o f 13.53 percent and an ENPV o f 12 percent equivalent o f VND 7,112 million.

c. Debt Service Capability

The capability for debt repayment o f West Bus Company depends on annual income of the company, loan size, repayment period, and annual interest rate. The annual income bases on the financial performance and approximated in financial analysis. The intended loan borrowing represents 70 percent o f the total sub-proj ect investment and equals approximately VND 37,106.7 million. Three annual interest rate scenarios have been used ranging from 7 to 10 percent. Repayment period o f 10 years, with a 2 year grace period and an 8 year repayment period has been adopted. The calculations o f Debt Service Coverage Ratio (DSCR) at this lending terms has confirmed the company’s capability to repay the proposed loan even with the current leve l o f user fees and tariffs.

Subproject 2 - Septic Tank Waste Treatment Plant in Da Phuoc, Binh Chanh District 1. Rationale The Hoa Binh Waste Treatment Disposal Company Limited i s jo int ly owned by two partners each owning 50 percent o f the total operations with init ial financial contributions o f VND6,OOO mil l ion each. Employing a total o f 46 staff, the Hoa Binh Waste Disposal Company i s the only licensed company in H C M C that undertakes the de-sludging and treatment o f septic tank waste. Since its establishment, the Company has maintained i t s business operations entirely on septic tank waste disposal and over time has expanded i t s operations into the production o f bi- products such as organic fertilizer used in agriculture production and micro-biological slurry used in wastewater treatment processes. Prior to the closing o f its original operations site, the operational capacity o f the operations was around 250 cubic meters per day. The Hoa Binh Waste Disposal Company Limited disposal and treatment site was previously located near the H C M C Tan Son International Airport. Due to urbanization and environmental requirements, the Company was requested to relocate i t s operations to the outskirts o f the City.

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2. Proposed Subproject Description

The proposed site o f the Septic Tank Waste Treatment Plant i s a 9.4 hectare site located in the D a Phuoc Solid Waste Treatment Complex in Binh Chanh District, HCMC. The site i s adjacent to a 40 hectare site proposed by the H C M C Urban Sewerage Company as a sludge waste treatment plant and next to the solid waste landfill development site o f Vietnam Waste Solution Company which i s presently under development. An existing cemetery i s located near the entrance to the site. The D a Phuoc area has been designated as one o f the city’s major locations for waste disposal in general, be i t solid waste, drainage sludge, or septic tank waste. The area i s wel l clear o f any residential areas and i s separated from surrounding urban development by a series o f canals and a major water course. The proposed location o f the Hoa Binh Septic Tank Waste Treatment Plant within this development area i s therefore consistent with proposed planning guidelines.

The proposed Septic Tank Waste Treatment development follows a separated treatment technology process where the sludge and waste water are separated and independently treated. The total fully developed capacity o f the operation i s based on a daily septic tank sludge volume o f up to 500 cubic meters per day and i s calculated on an average o f 1.5 cubic meters per household and septic tank de-sludging once every 3-5 years (depending on the size o f the household septic tank). With relatively high density urban living standards within H C M C it is likely that the majority o f septic tanks would require de-sludging once every 3 years. The Hoa Binh Waste Disposal Company wil l provide the full service from household septic tank sludge collection, transportation to the disposal site, and treatment o f the septic sludge. Processing o f the septic sludge wil l be undertaken through proven and tested Japanese technological processes in producing organic fertilizers for agricultural uses as wel l as in the production o f micro biological slurry for waste water treatment systems where biological treatment processes are utilized.

The treatment o f septic sludge into organic manure wil l be processed through a reinforced concrete receiving tank (20 meters long x 10 meters wide x3 meters deep) where the sludge is exposed to the sun, then into tanks o f 500 cubic meters capacity where the sludge and waste water are separated, and after a period o f around 5 months the sludge wil l be further dried in large drying beds and then composted into fertilizer. The whole process wil l take around 12 months with a production output o f around an equivalent o f 7 tons per day o f organic fertilizer. For the waste water, this shall be treated in reinforced concrete tanks where the sludge shall be self-destroyed with the waste water passing through regulating tanks where the water content i s regulated, then into an organic compound tank for chemical treatment, then into a tank for biological processing o f bacteria, and lastly to a sterilization tank where the waste water i s further chemically treated before discharge o f the sterilized water into the surrounding water courses. Odors will be minimized through chemical treatment at various stages o f the processing chain. The Hoa Binh Waste Disposal Company proposes to develop the treatment site in two phases, the f i rst phase developing a capacity o f around 300 cubic meters per day, which would meet the projected demands o f septic waste disposal in the city over the next 5 years, or to 2012, and the second stage through expanding the overall capacity to around 500 cubic meters per day beyond 2012. The expansion o f the treatment plant would be a relatively straight forward

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No. 1 2 3

4

Item Description Total Cost (VND) Construction Works 19,324,997,978 Machinery and Equipment 5,499,609,675 Project Development and Implementation Costs 1,844,033.375

Project Design and Bidding Documents 1,590,720,224 Implementation Supervision 253,3 13,15 1

Contingency Fund 2,686,189,101 29,548,080,108 Total Overall Subproject Investment Cost

5. Financing Plan

As only Phase 1 o f the subproject will be initially financed and developed, i t i s proposed that the subproject will be financed through an equity investment by the Hoa Binh Waste Disposal Company Limited o f 46.6 percent o f the total Phase 1 investment cost, or an amount o f VND8,584,328,992, or approximately US$536,520 equivalent, with a loan from HIFU for the remaining 53.4 percent o f the subproject cost o f VND9,822,693,200, or approximately US$613,919.

No. 1 2 3

4 5

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Item Description Total Cost (VND) Construction Works 8,369,138,500 Machinery and Equipment 5,242,448,500 Project Development and Implementation Costs 1,844,033,375

- Project Design and Bidding Documents 1,590,720,224 - Implementation Supervision 253,3 13,15 1

Interest During Grace Period 265,212,716 Contingency Fund 2,686,189,101 Total Overall Subproject Investment Cost (Phase 1) 18,407,022,192

6. Implementation Arrangements I t is estimated that the implementation o f the f i rst phase o f the subproject wil l be undertaken within a one (1) year period.

7. Operation and Maintenance Responsibility for the operation and maintenance o f the subproject facilities wil l be assumed by the Hoa Binh Waste Disposal Company Limited. Adequate annual budget allocations should be made to cover required operational costs as well as routine maintenance costs.

8. Social Safeguard Issues a. Resettlement

The compensation and resettlement activities have been implemented since 2005. According to the due diligence report, there are s t i l l 1.9 out o f 9.4 ha having not yet been cleared with about 10 households waiting for their complaints to be resolved and land plots in a resettlement site to be provided. On March 1 , 2007 HCMC-PC has instructed Binh Chanh district PC to resolve the issue as soon as possible, including allocation o f land plots in a neighbor commune for the displaced people to be relocated. The interviewed displaced people were satisfied with the applied compensation and resettlement policies. Resolution o f this issue in a manner satisfactory to the Bank i s a condition for the subproject to get financing from the Line o f Credit.

b. Environmental Aspects

An Environmental Impact Assessment (EIA) Report o f the proposed Septic Tank Waste Treatment Subproject was prepared by the Environmental Management and Engineering Center and submitted to the Department o f Natural Resource and Environment (DONRE) for approval. After receiving commentdfeedback from the Appraisal Committee under DONRE, the Report (version January 2007) was finalized and approved by DONRE on March 20,2007.

Assessment o f the institutional mechanism o f the Hoa Binh Ltd. to carry out EA work for the Septic tank waste treatment was submitted to the Bank on March 27,2007. The Bank has found this satisfactory, provided that the Hoa Binh Ltd. will hire consultants for internal monitoring and HIFU wil l get consulting service for independent environmental monitoring as part o f the TA to HIFU.

9. Financial and Economic Analyses a. Financial Analysis

The analysis has been undertaken to work out Financial Internal Rate o f Return (FIRR) for the sub-project while analyzing i t s sensitivity to an increase in the investment cost, increase in operating costs, and reduction in business revenues. The analysis assesses the financial viability by comparing (i) the FIRR based o n incremental revenue generation with the updated average cost o f capital for each component; and (ii) the average incremental financial revenue with the average incremental financial cost.

After year 10 i t i s projected that the volume o f collected sludge and produced fertilizer wil l attain the maximum capacity o f the f i rst phase investment which would amount to 300 cubic

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meters per day or 104,025 tons per year. O n reaching the maximum capacity, and after 10 years, the Hoa Binh Waste Company will invest i t s own funds to expand the plant capacity to 500 cubic meters per day at which time the volume o f collected sludge wil l amount to 182,500 tons per year and fertilizer 1,916 tons per year. The H C M C People’s Committee presently pays a fee equivalent to US$6/ton for disposal o f collected sludge, while the average price o f fertilizer sold in the market i s around VND400,000/ton. Based on the projected volume o f sludge and collection fees and the price o f fertilizer, the septic tank waste treatment plant i s expected to generate revenue over a ten year timeframe as shown in the following table. The results show that Septic Tank Waste Treatment Plant Sub-project has FIRR o f 11.5% and s t i l l has financial efficiency with minimal negative impact from an increase in investment costs o f 10 percent with an FIRR o f 10.47 percent. Nevertheless, there exists considerable opportunity for increases in user charges due to there present very low base levels, and these increases would significantly improve the financial prospect o f the sub-proj ect.

b. Economic Analysis

For the economic analysis and calculation o f the sub-project Economic Internal Rate o f Return (EIRR), the methodology and assumptions utilized follow standard methodology for development sub-proj ects. The calculation o f the EIRR also used economic opportunity cost o f capital o f 12 percent as standard for the feasibility study o f development project. The subproject has economic efficiency, with an Economic Internal Rate o f Return (EIRR) o f 26.14 percent and an Economic Ne t Present Value (ENPV) o f 12 percent equivalent o f VND 23,869 million.

c. Debt Service Capability The capability for debt repayment o f the Hoa Binh Waste Treatment Company Limited depends on annual income o f the company, loan size, repayment period, and annual interest rate. The annual income i s based on the financial performance and approximated in the subproject financial analysis. As the Investor i s prepared to invest 43 percent o f the total subproject cost, the loan amount represents 57 percent o f total sub-project investment or an amount o f VND 9,882,693 million. Three annual interest rate scenarios have been used ranging from 7 percent to 10 percent. Repayment period o f 10 years, with a 2 year grace period and an 8 year repayment period has been adopted. All scenarios generate high capabilities o f the Hoa Binh Waste Treatment Company Ltd. in i t s ability to repay the proposed loan.

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Annex 5: Project Costs VIETNAM: HIFU Development Project

Local Foreign Total

$million $million $million Project Cost By Component andor Activity us us us

Investment in municipal infrastructure 60.0 10.0 70.0 Technical Assistance for Project Monitoring 0.3 0.2 0.5

Total Baseline Cost 60.3 10.2 70.5 Physical Contingencies 6.0 1 .o 7.0 Price Contingencies 2.7 0.3 3.0

Total Project Costs' 69.0 11.5 80.5 Interest during construction NA NA NA

Front-end Fee NA NA NA Total Financing Required 69.0 11.5 80.5

'Identifiable taxes and duties are US$ 8 mill ion, and the total project cost, net o f taxes, i s U S $ 72 mill ion. Therefore, the share o f project cost net o f taxes i s 69%.

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Annex 6: Implementation Arrangements VIETNAM: HIFU Development Project

4 CaDital HIFU

Implementation Structure The implementing agency for the HDP wil l be HIFU as it institutes key operational reforms and undertakes investments in municipal infrastructure in participation with the private sector. The implementation structure mirrors the current system and role o f HIFU, with the HDP (involving operational reform and increased investment capital) hr ther enhancing and developing the h c t i o n and o f HIFU. HIFU operate as a specialized agency within the municipal government with the charge o f working with the Department o f Planning and Investment (DPI) and other l ine departments in the municipal government to finance cost- recovery oriented municipal infrastructure projects in partnership with the private sector. The DPI in i t s role as the planning agency for the province identifies the investment needs as wel l as project ideas, including those which can be financed with private sector participation. The D P I in collaboration with the H C M C PC then assigns the investment targets and project ideas to the concerned l ine departments. The line departments prepare the technical details o f the projects (detailed engineering designs, etc.) and consult with HIFU vis-&vis financial structuring to involve with private sector participation. The Department o f Finance - on behalf o f the H C M C PC - wil l work with HIFU to ensure that an appropriate process i s used to select private sector partners and provide oversight on the financial operations o f HIFU.

HCMC PC

HDP Project Implementation Structure

Repayment MoF ($) to IDA ($) IDAto I I

On-lending VND at 4% + WB Commitment Fee

niru Repaymen of the VND Loan to Mc I 25 yr term, 10 yr

grace period Investment Capital (booked

F\ as debt on BS)

t

IF

Pvt. Investors Private Sector Financed Projects 4

The f low o f IDA credit i s described in the illustration above. The IDA credit wil l be on-lent by the MOF to HIFU in VND on terms which have already been negotiated between HIFU and

50

M O F in consultation with the Bank Task Team. The capital on-lent from MOF will be booked on the HIFU balance sheet as debt. The equity or paid-in capital o f HIFU (referred to in Vietnam as charter capital) i s provided by the H C M C PC. HIFU will invest the investment capital provided under the project according to the loan conditions which restrict the investment to cost-recovery oriented municipal infrastructure and define the sectors o f focus. The key financial covenants cover the financial operations o f HIFU (they are not restricted to IDA credits only) to ensure the financial and operational viability o f HIFU as an institution. The project conditions wil l help to further support HIFU’s long-term qualification under Bank OP 8.30. The disbursements to HIFU wil l be made via a 6-months Report Based system, which wil l require HIFU to document how the h d s received based on the previous periodic “Report” were utilized, and describe how the funds requested for the next period wil l be used in l ine with the loan conditions - please see annex 7 for details.

Role Provide IDA Credit t o GOV On-lend VND to HIFU

p MOF

HDP Impact/Notes $50 mi l l i on 25 yr, 10 yr grace, 4%+WB Commitment fee,

I HIFU

and identify project ideas for private sector investment Prepare project details, e.g., engineering designs and FS; consult with HIFU o n relevant projects Supervise project implementation; provide strategic advice to HIFU Management and HCMC PC; review project progress, including monitoringhesults indicators Moni tor project progress; provide reports o n project indicators

Depts.

WB Task

Auditors

strategic investments involving private sector participation Increased investment capital wil l make it easier and faster for HIFU to structure and finance projects for the departments Demonstrate that Vietnamese institutions can implement projects; improve disbursement; establish development models which can help Vietnam become a MIC Establish a model for transparency in municipal government operations

Roles and ResDonsibilities I

I denominated in VND I H D P will strengthen the financial operations Invest in cost recovery oriented municipal

infrastructure projects; leverage private capital in projects; repay the MOF loan;

and provide capital for increased activity, including the abi l i ty to proactive prepare I

maintain a sound financial position Approve a l l H D P documentation; ensure

I projects and then invite private investors I H D P will reduce the risk o f contingent l iabi l i ty

compliance with loan conditions; oversee project progress investment planning and increasing private I associated with HIFU; strategic clarity on

I sector investment in municipal infrastructure I H D P will al low D P I to better uti l ize HIFU for Plan infrastructure investments in HCMC

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Annex 7: Financial Management and Disbursement Arrangements

VIETNAM: HIFU Development Project

Risk

Inherent Risk Country level: Overall Fiscal Environment

Entity and Project level: Funds may not be used efficiently and

Country Issues The 2001 C F A A for Vietnam concluded that the public financial management system represented some level o f fiduciary risk. The 2005 PER-IFA recognized improvements in transparency and accountability arising from (i) a new audit law (May 2005) which will enhance oversight by the National Assembly and Provincial People’s Councils over public finances and increase public access to information on government finances; (ii) the new decree on independent audit (March 2004) which regulates the status o f auditors and audit f i r m s and define the value o f audit results; (iii) the accounting law (2003) which establishes the legal framework for Vietnamese Accounting Standards for public and private sectors on the basis of international standards.

Risk Risk Mitigation Measures Incorporated into Risk After Rating Project Design Mitigation

Condition of Negotiation, Board or Effectiveness

Moderate Capacity building in MTEF and budgeting, Moderate implementation and monitoring, commitment control and debt management; Performance expenditure reviews at least annually

Moderate (i) Annual financial audit by independent Moderate auditor for Financial Statements o f HIFU including the notes o n Fund and Uses o f Fund

However, the PER-FA identifies a large agenda for improvement in public financial management. The key challenges include: (i) implementation o f the legislative frameworks which are largely in place; (ii) strengthening the effectiveness o f the State Audit o f Vietnam; (iii) streamlining the internal control framework; (iv) building the financial management capacity, particularly at the sub-national level; and (v) adopting international public sector accounting standards.

Recently, corruption and collusion has been highlighted as a significant risk in some donor funded projects in Vietnam. The r isks particularly relate to procurement, however the weaknesses in internal control and financial monitoring and oversight combined with capacity weaknesses increase the inherent risk in relation to mis-use o f f inds for approved purposes which are accounted for through government systems and processes to substantial.

Risk Assessment and Mitigation The inherent risk to the project from the financial environment i s assessed as Moderate. The project specific control risk taking into account the risk mitigation measures that are to be implemented for the project i s assessed as low. The overall financial management risk of the project is assessed as Low.

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Risk

economically and for purposes intended

Entity and Project level: the P P M U may not have necessary capacity to implement the project Overall Inherent Risk Control Risk 1. Budgeting

2. Funds F l o w

3. Staffing

4. Accounting Policy & Procedures 5. Internal Audit

6. External Audit

7. Reporting & Monitoring

8. Information Systems

Overall Control Risk

Risk Rating

L o w

Moderate

Moderate

L o w

L o w

Moderate

Moderate

L o w

Moderate

Moderate

Moderate

Implementation arrangement

Risk Mitigation .Measures Incorporated into Project Design

under HDP, (ii) Guidance o n Financial Management o f HDP, (iii) independent consultant t o monitor ,the compliance o f safeguard performance, fiduciary requirement and (iv) technical assistance o n accounting and reporting system financed by LDIFP Training on the bank procedures and project management be provided to the project staffs

(i) Budgets are prepared o n a quarterly basis (ii) Technical assistance provided (partially) andor in cooperation with TA f r o m AFD to enhance the m e d i u d l o n g term planning and budgeting Funds wil l f lows directly f r o m the IDA to the designated accounts maintained at a commercial bank acceptable to IDA whose signatories are management HIFU. Finance staff to b e trained o n IDA procedures and project management. Accounting system for HFU’s operations wil l be improved under the LDIFP The Supervision Board function i s t o be enhanced to cover aspects o f internal controls under the TA o f LDIFP/ AFD. Internal Audit function (as function o f Supervision Board) to be set UD if determined necessarv bv the TA Annual Financial Statements o f HIFU (including the Financial Statements o f the Project as a note/part) will be audited by independent auditors with TOR acceptable to IDA (i) Upgrade o f IT system part ly self-financed and under the TA o f AFD, (ii) improvement o f the accounting and reporting system under the TA o f LDIFP Upgrade o f IT system part ly self-financed and under TA o f AFD.

Risk After Mit igation Condition o f Negotiation, Board or Effectiveness

L o w

Moderate

L o w

L o w

L o w

L o w

Moderate

L o w

Moderate

L o w

Low

H C M C People’s Committee wil l have overall responsibility for overseeing implementation o f the project, reporting to the Government o f Vietnam and fulfilling the requirements o f the World Bank. H C M C Investment Fund for Urban Development (HIFU), which was established

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in 1996 as a national financial institution, wil l be the implementing agency for the project responsible for financial management relevant to the project components. HIFU will report to H C M C PC for necessary approval. The proceeds from the Credit can be used for both lending and equity investments which meet the criteria agreed with the Bank.

Staffing of financial management function at HIFU HIFU already has an established financial fbnction that i s adequately staffed and the staff has satisfactory competence and qualifications. The accountants in HIFU have accounting educational backgrounds (at least bachelor degree) and experiences managing the activities of the fund. However, the accounting staffs do not have experiences with IDA funded projects, in particular, disbursement and financial management requirements o f IDA. Training on these was delivered to those involved in Financial Management.

Budgeting Budgeting procedures have been established at the HIFU. Financial Plans and budgets are prepared and finalized with the cooperation o f different departments (e.g., Finance and Accounting, Investment, Credit Appraisal, Planning Department) within the Fund. The HIFU’s planning department i s responsible for preparing the consolidated budget and plan, obtaining approval from the Management o f the Fund and sending to the H C M C PC for final approval. At HIFU, the planning and budgeting which i s done on a quarterly and annual basis for the short-term period (ie., under one year) was assessed as adequate though the plans and budgets for the longer term (medium and long term) are not comprehensively prepared. The analysis o f actual against budgets i s performed on a monthly basis and the overall assessment i s done at the year end, which i s considered as adequate.

I t is concluded from the financial management assessment that the current level o f budgeting and planning, short-term budget and plan is reliable, thus can be used as basis in the report based disbursement method. The longer te rm planning and budgeting wil l be enhanced with the technical assistance component provided under the AFD Credit Agreement and LDIFP.

Accounting In accordance with the permission o f the MOF, HIFU has adopted the same accounting regime employed by the Development Assistance Fund under the Decision 78/2003/QD-BTC. Decision 78 introduces (a) the accounting principles, (b) system o f accounting papers/vouchers/ receipts, (c) chart o f accounts, (d) system o f accounting books and (e) format for financial reports.

The adoption o f the DAF’s accounting policies to LDIFs in general and to HLFU in particular i s not entirely suitable. This i s mainly due to the fact that there are significant differences in the nature and scope o f operations o f DAF and LDIFs. DAF’s business i s mostly l i ke a not-for- prof i t organization while the LDIFs are playing a role o f more financially viable and commercial-oriented entities. LDIFs’ activities are more diversified including syndicated investment and lending in co-operation with other commercial banks. Due to those differences, there i s lack o f some significant regulation o f accounting policies such as equity investment, syndicated lending and taxation. HIFU therefore has designed such accounting policies for i t s

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operations which are (i) generally similar to those o f commercial banks and (ii) not “legalized” (Le. regulated) in the accounting regime issued by the MOF.

Expenditure Category Amount o f Credit Allocated (million US%)

20 Category 1- Equity Investments by HIFU

The project wil l use HIFU’s current accounting system which i s assessed as adequate for accounting and reporting the receipt and use o f funds received from the IDA as wel l as other donors, The accounting regime for LDIFs will be changedimproved in the h t u r e upon the issuance o f the new Decree on the management o f the LDIFs. Technical Assistance under the LDIFP wil l be provided to the M O F to achieve those.

YO of Expenditures to be Financed

100%

Internal Controls The management o f HIFU i s responsible for ensuring that an adequate internal control framework and internal controls are in place and operating. Overall, the current internal control system i s assessed as adequate as HIFU has: (i) established clear defined Financial Management responsibilities, supervision, monitoring and reporting structures; (ii) observed the segregation o f duties; (iii) defined and documented financial processes and procedures; (iv) set up adequate management reporting including analysis o f variances and findings with monthly and quarterly reporting to the Board o f Management; and (v) set up proper procedures and documentation retention. However, there are certain areas o f the risk management processes where improvements are required: (i) development o f procedures for identification o f r isks o f concentration liquidity and market and; (ii) use o f tools and modules for risk assessment processes such as maturity analysis, re-pricing analysis, interest sensitivity model, etc. In addition, the information technology system should also be upgraded to hrther facilitate the efficient management o f the hnd’s operations.

Category 2- Loan Investments by HIFU

Technical assistance for the development o f investment policies (which includes the risk management) i s being provided by a Bank executed assignment o f which the output will be recommendations to HIFU (and other LDIFs) for improvement o f the risk management. The upgrade o f the information technology o f HIFU will also be partially self- financed and partially by the technical assistance component o f this project andor with the AFD’s project.

30 100%

TOTAL 50 100%

Eligible expenditure Eligible expenditure means equity investments and loan investment for the reasonable costs o f goods, works and services o f sub-projects which meet the criteria agreed with IDA. The subprojects must meet the criteria, as set out in the D C A and the PPA Manual vis-a-vis: (i) cost recovery; (ii) municipal infrastructure investment and (iii) being implemented in partnership o f private sector.

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Disbursement Methods The project wil l use the following disbursement methods:

0 Reimbursement - The Bank may reimburse the borrower for expenditures eligible for financing pursuant to the Loan Agreement (“eligible expenditures”) that the borrower has pre-financed from i t s own resources.

0 Advance - The Bank may advance loan proceeds into a designated account o f the borrower to finance eligible expenditures as they are incurred and for which supporting documents wil l be provided at a later date Direct Payment - The Bank may make payments, at the borrower’s request, directly to a third party (e.g., supplier, contractor, and consultant) for eligible expenditures.

0

The Disbursement Deadline Date will be four months after the Closing Date o f the project.

Supporting documentation to evidence that funds have been used for eligible expenditures under the reimbursement and advance methods are the Interim Financial Reports (IFRs). The un-audited IFRs wil l be required to be submitted to the Bank at least quarterly and wil l be reviewed by the Financial Management Specialist prior to recording o f the expenditures against the project expenditures categories by the Loans Department. Under the Direct payment method the supporting documentation i s the records o f eligible expenditures; or any other supporting documentation that the Bank may request by notice to the borrower. The format of the IFRs needs to be agreed between the representatives o f GOV and IDA at the negotiation.

Designated Accounts and Ceiling A Designated Account (DA) in USD is maintained at a commercial bank with the terms and conditions acceptable to IDA. The Ceiling o f the DA i s the 6 month forecast o f the cash f low requirements.

Application for Advances HIFU may apply for an advance in an amount up to the Ceiling less the aggregate amount of those advances previously received for which HIFU has not yet provided supporting documentation (IFRs). The advance requested wil l be based on the forecast estimate o f equity investments and loan investments which HIFU expects to disburse in the next 6 months period. HIFU wil l provide information on the expected disbursements for approved sub-projects in the quarterly IFRs required to be submitted to the Bank. Forecasts wil l be reviewed by the financial management specialist and task team for reasonableness.

Frequency of Reporting Eligible expenditures paid from the DA HIFU will report on the use o f loan proceeds advanced to the DA on a quarterly basis through unaudited interim financial reports.

Retroactive financing Retroactive financing in the aggregate amount o f US$1.5 mi l l ion will be provided for expenditures made prior to the date o f the Credit Agreement but after appraisal date, for urgently required disbursement for Equity and Loan Investments. The procurement procedures shall be in accordance with IDA Procurement Guidelines.

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Fund flow diagram The IDA Credit will be on-lent by the Government o f Vietnam to HIFU on terms and conditions acceptable to IDA. The IDA funds wil l be directly deposited to a designated account in USD at a commercial bank, acceptable to IDA, maintained and operated by HIFU. Withdrawal applications wil l be prepared by HIFU and processed through the MOF - External Financing Department. HIFU will be responsible for the f low o f funds to equity and loan investment beneficiaries and suppliers.

Fund flow from IDA to HIFU and Beneficiaries (sub-projects)

MOF/ External

I

t Commercial Bank A I

I

Beneficiaries

1. HIFU prepares Department (EFD) for verification

2. EFD verifies and notifies HIFU 3. HIFU submitted the withdrawing application to IDA 4. IDA transfers fund to the DA o f HIFU at commercial bank 5. Beneficiaries send the requests for payment to HIFU 6. HIFU instructs the Commercial Bank to make the payments 7. Commercial Bank makes payments to Beneficiaries

the withdrawing application and sends to MOF- External Finance

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Details o f Fund Flow from HIFU to Beneficiaries (Sub-projects)

Beneficiaries (sub- project holders)

(1) Beneficiaries (sub-project holders) apply for loanshnvestments from the HDP;

(2) HIFU approves the loanshnvestment proposals;

(3) Beneficiaries s i g n contracts with contractors to carrying out work;

(4) Contractors claims for reimbursement based on work completed, submitting supporting documentation to Beneficiaries;

(5) Beneficiaries review and forward reimbursement claims to HIFU (together with copies o f supporting documentation). Beneficiaries to retain the original copies o f supporting documentation;

(6) HIFU makes payment from HDP designated accounts, retaining the copies o f supporting documentation.

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Monitoring of Sub-project Financial Performance and Use of Funds

Appraisal Department (1)

Monitoring procedures by HIFU Diagram o f the credit monitoring process (for loan investment) i s as follow:

Appraisal Credit Department to ’ council (1) ’ process the loan (2) (3)

I I I I I I I

( - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - J

I I I I I

In summary, there are 3 types o f monitoring supervision implemented by HIFU for loans: 1. The appraisal procedures taken before the loan i s processed by Appraisal Department and

Appraisal Council; 2. Check documentation o f each and every claims for payments to suppliers and contractors

(of the borrowers) to ensure the loan proceeds are used for agreed purposes. This check is done by credit officer and technical expert;

3. Post disbursement inspection where credit department performs inspection to ensure: (i) the proceeds from loans have been used for the agreed purposes; and (ii) that the borrower can repay the loans. This inspection also includes review o f periodical financial statements and analysis o f financial indicatodratios.

I + Accounting and Finance Department ’

Note: The documentation required may comprise o f contract, invoices, certificate o f construction volume, etc.

Claims for payments from suppliers/contractors

Based on the result o f due diligence review by Emst and Young, and the result o f Financial Management Assessment, i t i s concluded that the procedures discussed in (2) and (3) are adequately provided while the procedures o f (1) should be improved.

For equity investment, the same monitoring procedures o f (1) and (3) are in place. However the procedures o f (2) cannot be performed due to the nature o f the disbursement process for investment whereas checking procedures cannot be performed against each and every payment. Furthermore, i t i s not clearly regulated in HIFU that the investees should submit the audited financial statements to ensure that: (i) the proceeds from equity investment are used for intended purpose and (ii) to reflect truly and fairly the financial position and performance o f investees.

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The constraints o f the current monitoring procedures o f HIFU can be enhanced by the followings which are the key elements o f the oversight and monitoring arrangements to ensure that funds are used for eligible purposes and properly accounted and reported:

HIFU adopts the Manual o f Preparation and Appraisal o f the Projects (PPA Manual) and the Manual for the Selection o f Private Sector Participants (PSP Manual) where projects are appraised, selected and monitored following guidelines and procedures and criteria agreed with the Bank; HIFU will require through the sub-project agreements the beneficiaries to maintain adequate records and to provide such financial information as HIFU requests, to carry out the sub-project with due diligence and with efficiency. HIFU will also require the right to inspect by i t se l f or jo int ly with representatives o f the Bank, the plans, operations, works, goods, services, activities and any relevant records and documents o f the sub-project; HIFU will require the sub equity investment projects to submit to HIFU the annual audited financial statements and auditor report prepared by acceptable Auditor to HIFU; An international auditing firm (as a part o f Bank supervision team) wil l conduct on a quarterly basis, a review o f the un-audited and audited financial statements and the progress manual implementation, including the confirmation o f whether the loans and equity investments are meeting the agreed sub-project criteria, specifically, are they being prepared according to PPA Manual and PSP Manual; Independent Consultant monitors the compliance o f each sub-project with the social and environmental safeguards requirements; All project information wil l be compiled by HIFU Management and discussed with the H C M C PC and the Bank in a workshop to be held every six months. The workshop will discuss project progress and any outstanding issues, including the need to refine or adjust any project component; Annual External Financial Audit whereby HIFU’s Financial Statements which include the notedparts o f Financial Statements o f the Project wil l be audited in accordance with the International Standards on Auditing.

Financial Reporting

HIFU’s current financial and management reporting i s assessed as adequate and accurate in accordance with the requirements o f Decision 78.

Quarterly Interim Financial Reports (IFRs) will be prepared by HIFU for monitoring of financial performance o f the project in a format to be agreed between the representatives o f the GOV and the IDA during loan negotiations.

HIFU wil l submit IFRs to the Bank within 45 days o f the end each quarter to the Bank. The IFRs wil l cover al l project activities and will include:

Financial reports (analyzing expenditures against budgets) IFR 1.1 o f funds requirement for the next 6 months); IFR 1.2 Detailed Six Month Financial Plan

Sources and Uses o f Funds by expenditure category (including forecast

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0 IFR2.0 Uses o f Funds by Components; IFR3.0 Statement o f Designated Account Reconciliation;

0 IFR4.0 Report o n Contract Progress (applied for Component 2: Technical Assistance only)

0 IFR5.0 Report on Procurement Monitoring (applied for Component 2: Technical Assistance only)

The IFRs are not required to be audited.

Annual Project Financial Statements: HIFU will prepare annual project financial statements which wil l be included in the notes o f HIFU’s financial statements consisting o f

A Statement o f Sources and Uses o f Funds / Cash Receipts and Payments which recognizes al l cash receipts, cash payments and cash balances controlled by the entity; and separately identify payments by third parties on behalf o f the entity. The Accounting Policies Adopted and Explanatory Notes. The explanatory notes should be presented in a systematic manner with items on the Statement o f Cash Receipts and Payments being cross referenced to any related information in the notes. Examples o f this information include a summary o f fixed assets by category o f assets, and a schedule o f credit withdrawals, listing individual withdrawal applications; and A Management Assertion that Bank funds have been expended in accordance with the intended purposes as specified in the relevant World Bank legal agreement.

0

The annual financial statements are required to be audited and submitted to the Bank within 6 months o f the end o f each financial year.

The key accounting policies are included in the HIFU project financial management guidelines. Key accounting policies include:

Vietnamese Accounting Standards are applied for the accounting for the Income and Expenses o f the Project which required the accrual basis to be applied; Interest income from IDA funds i s recorded as income o f the project thus i s reflected in the closing fund balance.

0

0

Audit Arrangements The current financial statements o f HIFU are audited by D T L Auditing Company (a local company, which i s a member o f Howarth International) in accordance with Vietnamese Standards on Auditing. The audit opinion on the recent financial statements i s unqualified. However, performance o f DTL Auditing Company has not been assessed by IDA.

External Audit. HLFU’s financial statements which include the notedparts o f Financial Statements o f the Proiect wil l be audited in accordance with international auditing standards by independent auditors and TORS acceptable to IDA. The audited financial statements and audit reports wi l l be submitted to the Bank within six months o f the end o f each financial year, and the date o f closing o f the project.

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Supervision Plan

The FM risk i s assessed as low. On this basis, the FM supervision wil l consist o f review o f the quarterly IFRs and annual financial statements and accompanying audit reports, and the results o f the supervision auditors’ reviews o f the project’s operations (including eligibility of expenditures) and financial reports. An annual on-site supervision mission to review al l aspects o f the project financial management wil l be undertaken. The on-site supervision wil l review the project’s financial management system, including but not l imited to operation o f the Designated Account, Statement o f Expenditures, internal controls, reporting and follow up of audit findings and mission’s findings. The financial management supervision wil l be conducted by IDA’S financial management specialist staff.

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Annex 8: Procurement Arrangements VIETNAM: HIFU Development Project

A. General

Bank-funded procurement for the proposed project would be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated M a y 2004, revised October 1 , 2006 (the Procurement Guidelines); and “Guidelines: Selection and Employment o f Consultants by World Bank Borrowers” dated M a y 2004, revised October 1, 2006 (the Consultant Guidelines) and the provisions stipulated in the Financing Agreement. The general description o f various items under different expenditure categories i s described below. For each contract to be financed by the IDA Credit, the different procurement methods or consultant selection methods, the need for prequalification, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the Procurement Plan. The Procurement Plan wil l be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

HIFU i s expected to invest in selected infrastructure projects under two possible forms (i) loans to private sector f i r m s and/or autonomous commercial f i r m s in public sector and (ii) equity investment in partnership with private sector f i rms. In addition, consultant services are expected to be procured by HIFU under component 2 o f the project. These consultant services are to be whol ly financed by HIFU own funds and would be procured in accordance with the national Procurement Law.

Al- Procurement under HIFU loans to private sector firms and/or autonomous commercial firms in public sector

Procurement of Works. Civ i l works to be procured under HIFU loans to private sector f i r m s and/or autonomous commercial f i rms in public sector include urbdtransport facilities such as bus/truck terminal, river port, inland depot, waste treatment facilities, workshops, etc. Procurement o f works would mainly be undertaken by respective borrowersheneficiaries o f HIFU loans using the established private sector and/or commercial practices in accordance with paragraph 3.12 o f the Bank’s Procurement Guidelines. The following private sector and commercial practices are intended to be used for the project. For small works (no specific threshold i s established but normally about less than VND1 bi l l ion or US$70,000), entities may negotiate a contract directly with a Contractor with due attention to qualifications and reputation o f contractor would be used. Alternatively, the entity may invite quotations from a minimum o f three Contractors to assure competitive prices. Such small works may also be directly constructed by the f i r m s if they have adequate construction experience, personnel and equipment capabilities (force account). For larger works, open competitive bidding (similar to the national competitive bidding o f the national Procurement Law) would be used. These practices are basically found acceptable to the Bank considering the incentive o f HIFU borrowing f i r m s in ensuring economy and efficiency o f their borrowed funds due to commercial interest rate they have to pay to HIFU. However, i t i s recommended that for large and complex works which are estimated to cost more than US$5 mi l l ion per contract, I C B method as provided in Section 11, the Bank’s Procurement Guidelines may be the most appropriate procurement method and should be used.

63

Procurement of Goods. Goods under loans from HIFU to i t s borrowers (Component 1) include equipment associated with the facilities they invest such as bus terminal equipment, driers, air compressors, generators, etc. These goods would be procured by respective sub- borrowersibeneficiaries using the established private sector and/or commercial practices in accordance with paragraph 3.12 o f the Bank’s Procurement Guidelines. The following commercial practices are intended to be used for the project. For small goods items (no specific threshold i s established but normally about less than V N D l O O mi l l ion or US$7,000), direct contracting would be used. Direct contracting may also be used for equipment o f proprietary nature or when need i s urgent. For goods items o f about less than V N D 2 bi l l ion or US$125,000 per contract, shopping would normally be used. Larger goods contracts may be procured using suitable open competitive bidding procedures. These practices are basically found acceptable. The Bank team recommends that where possible, I C B method as provided in Section 11, the Bank’s Procurement Guidelines should be used for purchase o f large single items o f goods or large quantities o f l i ke goods which can be grouped together for bulk purchasing under contracts estimated to cost more than US$1 mi l l ion each. Selection of Consultants. Consulting services under loans from HIFU to i t s borrowers include preparation and appraisal o f engineering design, procurement support, construction supervision, technical transfer, etc. These consulting services would be procured by respective HIFU loan borrowersheneficiaries using established commercial private sector and commercial practices in accordance with paragraph 3.14 o f the Bank’s Consultant Guidelines. The following commercial practices are intended to be used for the project. For small contracts (no specific threshold i s established but normally less than VND500 mi l l ion or US$30,000), single source selection (but usually based on a comparison o f qualifications o f several candidates or previous experience with the firm) would be used (to some extent, this procedure i s more or less similar to the Bank’s CQS method). For larger contracts, consultants would be selected through a competitive process similar to the Bank’s QCBS or LCS methods. It i s recommended that large assignments estimated to cost more than US$1 mi l l ion per contract should be procured through the QCBS method described in Section 11, the Bank’s Consultant Guidelines.

A-2 Procurement under HIFU Equity Investment Apart loans to private sector f i r m s and/or autonomous commercial f i r m s in public sector, HIFU would invest in selected infrastructure projects under the form o f equity investment in partnership with private sector firms. This i s an innovative operation. The selection o f such partnering f i r m s would be conducted following a competitive procedure established based on the global experience and best practice, under the Private Sector Participation (PSP) Manual prepared for the project. This procedure has been agreed with the Bank and i s described in Annex 4 o f the PAD. Procurement o f goods, works and consulting services for such projects would be done by respective newly established joint venture companies (of which HIFU is a partner) following their own procedures or commercial practices.

A-3 Procurement under component 2 o f the project Consulting services under Component 2 procured by HIFU for i t s technical assistance needs include social/environmental monitoring, preparation o f PPA manual, on-the-job advisory, training, financial auditing, etc. These consultant services are to be wholly financed by HIFU own h d s and would be procured in accordance with the national Procurement Law.

64

B. An assessment o f the procurement capacity o f HIFU and the first two f i r m s which would borrow HIFU loans (West Bus Terminal Co. and Hoa Binh Waste Treatment Co. Ltd) was carried out during the project preparation. This assessment provided the following key findings: (i) all agencies have institutional capacity in place but they have not yet arranged specific organization and staffing for project/procurement implementation; (ii) although the agencies do not appear to have prior knowledge and experience o n Bank procurement, because this is a Financial Intermediary Loan and given the Project’s specific financing arrangement, the implementing agencies are not expected to implement their procurement using the Bank’s traditional competitive methods, but mostly through commercial practices. The commercial practices intended to be used for the project are found generally acceptable; (iii) the agencies have different levels o f experience in procurement using commercial practices. HIFU has successfully participated in a multi-million U S D BOO water supply plant project and gained good experience on competitive bidding. However, -both WBTC and H B D C - lack knowledge and experience on competitive bidding, and the procurement practices they were familiar with are mainly direct contractinglsingle source selection, shopping and force account; (iv) HIFU staff generally have good qualifications and capabilities, some o f them were trained on basic Bank procurement and the national Procurement Law; and (v) To address procurement capacity deficiencies, the agencies already planned to hire consultants to assist their procurement implementation. Based on the above findings and the specific nature o f procurement work required for the project, the procurement risk for the proposed project is rated as ”medium”.

To mitigate the procurement risk and to strengthen the project procurement implementation capacities, the following key actions have been discussed and agreed with the Borrower.

0 Organization o f the implementation unit within HIFU/WBTC/HB WTC, including designation and j o b descriptions for procurement staff should be prepared. Other prospective borrowers should designate procurement staff for the HIFU loan before implementation o f their subprojects.

0 An internationally experienced consultant should be hired to prepare detailed guidancekidding documents and assist/train HIFU and relevant ci ty departments in implementing competitive selection o f private sector partners for i t s equity investment operation.

0 A procurement operational manual for guidance to HIFU borrowers should be prepared based on the experiences o f the f i rst two subprojects.

0 A procurement session should be organized during the project launching workshop to introduce the project’s specific procurement requirements with a focus on commercial practices to be used for HIFU loans. An in-depth training should be conducted for HIFU and relevant ci ty departments on detailed procedures for competitive selection o f private sector partners during project implementation.

0 Prospective HIFU borrowers should hire consultant(s) to help implement their procurement as needed.

Assessment of the apency’s capacitv to implement procurement

C. Procurement Plan The Borrower developed a detailed Procurement Plan for implementation o f Component 2 and the first two subprojects under Component 1. This plan (Attachment 2) has been discussed and agreed between the Borrower and IDA during negotiations. The Procurement Plan wil l be

65

made available in the Project’s database and in the Bank’s external website. I t wil l be updated in agreement with the Bank team at least annually or sooner if required to reflect the actual project implementation needs and improvements in institutional capacity.

D. Bank Prior-Review and Frequency of Procurement Supervision The following requirements for Bank procurement prior-review are recommended:

0 The first two contracts for procurement o f goods and works procured through open competitive bidding under the commercial practices by HIFU loan borrowers.

0 All contracts for procurement o f goods and works to be procured under International Competitive Bidding (ICB) and al l contracts for procurement o f consultants’ services to be procured under Quality and Cost Based Selection (QCBS)

Other contracts than those mentioned above shall be subject to the Bank’s post review procedures. I t i s recommended to carry out supervision missions to conduct post review o f contracts o n a frequency o f every twelve (12) months.

Attachment 1 Details of the procurement arrangements involving international competition Goods and Works and non-consulting services. L i s t o f contract Packages which wil l be procured following I C B method:

No ICB contracts are expected at the time ofproject preparation.

Consulting Services. L i s t o f Consulting Assignments with short-list o f international f i rms:

project preparation. No consulting contracts with shortlist of international f i rms are expected at the time of

66

Attachment 2: Indicative Procurement Plan for the First 18 Months

1 2 3 4 5 6 7 8 Est. Expected

Ref. Contract cost Procurement P Domestic Review Bid-Opening No. Descriptions (US%) Method Q Preference by Bank Date

West Bus Terminal Co.’s Subprojects BX-13 Yard road & 130,000 Commercial Practice No N o Prior Apr. 2008

technical (Open Competitive infrastructure Bidding)

platform (Open Competitive BX-14 Terminal & 80,000 Commercial Practice No No Post Jul. 2008

Bidding) BX-15 Other supporting 40,000 Commercial Practice No N o Post Jul. 2008

works (Open Competitive Bidding)

BX- 18 Equipment for 90,000 Commercial Practice No No Post Apr. 2008

BX-19 Equipment for 95,000 Commercial Practice No N o Post Jul. 2008 road and yard (Shopping)

terminal (Shopping)

I. GENERAL

9

Comments

Project information: Country: Vietnam Borrower: Socialist Republic o f Vietnam Project Name: HIFU Development Project Loadcredit No.: NA. Project Implementing Agencies (PIAs): HIFU, West Bus Terminal Co. (WBTC), Hoa Binh Waste Treatment Co. Ltd (HBTC) and other private sector f i rms / autonomous commercial f i r m s in the public sector Period covered by this procurement plan: 18 months

11. Goods and Works and non-consulting services.

1. Prior Review Threshold: Procurement Decisions subject to Prior Review by the Bank as stated in Appendix 1 to the Guidelines for Procurement: Refer to Section D, Annex 8 o f the PAD.

2. Special Procurement Arrangements: Selection o f private sector partners for HIFU equity investment operation shall be done following the competitive procedures described in Annex 4 o f the PAD. Works and goods contracts under Hoa Binh Waste Treatment Co.3 Subprojects are expected to be procured in advance o f the Financing Agreement signing. The expenditures under these contracts incurred after the cut-off date specified in the Financing Agreement and prior to signing o f the FA with IDA, would be eligible for retroactive financing, subject to meeting al l the specified conditions o f eligibility that would apply to expenditures incurred after the signing.

HB-1

HB-2

HB-3

HB-4

Intake tanks, 270,000 Commercial septic tanks, Practice (Open treatment works, Competitive pump station, Bidding) weighing station and access road Site leveling and 30,000 Commercial preparation Practice

(Direct Contracting)

Passive aeriation 150,000 Commercial area Practice (Open

Competitive Bidding)

Workshop and 40,000 Commercial st or age Practice

(Direct

HB-5

HB-6

I pumping/gradin I I Practice

Contracting) Water drainage 28,000 Commercial and lighting Practice system (Direct

Contracting) Lightning 5,000 Commercial protection Practice system (Direct

No

No

No Post Jun. 2007

No Post May 2007

No

No

N o

N o

N o

111. Selection of Consultants

No. Post Jul. 2007

No Post Jul. 2007

Jul. 2007 No Post

No Post Jul. 2007

No Post Jul. 2007

1. Prior Review Threshold: Selection decisions subject to Prior Review by Bank as stated in Appendix 1 to the Guidelines Selection and Employment o f Consultants: Refer to Section D, Annex 8 o f the PAD.

HB-7 I Dredging

2. Short list comprising entirely of national consultants: Because the nature and value o f consultant services required, almost consultants are expected to be national. However, there would be some international individual consultants required for Component 2.

60,000 I Commercial

3. Special Procurement Arrangements: Consultant contracts under Hoa Binh Waste Treatment Co.’s Subprojects are expected to be procured in advance o f the

I gequipment

68

I (Shopping)

Financing Agreement signing. The expenditures under these contracts incurred after the cut-off date specified in the Financing Agreement and prior to signing o f the FA with IDA, would be eligible for retroactive financing, subject to meeting a l l the specified conditions o f eligibility that would apply to expenditures incurred after the signing.

1 I 2 I 7 I 4 I s 1 h 7

Ref. No.

HIFU’s TA- 1

TA-2

TA-3.

TA-4.

TA-5

TA-6

West Bus

HB-13 I Technical transfer, I 3,000 I Commercial I Post I Aug. 2007 I

Description of Est. Selection Review Expected Comments Assignment Method by Proposals

cost Bank Submissi (Prior on I Post) Date

(us9 Component 2

Independent resettlement 60,000 Gov’t proc. N A Oct. 2007 Bank prior review monitoring consultant procedures TOR I (firm) qualifications only Independent 50,000 Gov’t proc. N A Oct.2007 Ditto environmental monitoring procedures consultant (firm) On the job safeguard 70,000 Gov’t proc. N A Feb.2008 Ditto advice and training for procedures HIFU (firm or individual) On the job advice and 100,000 Gov’t proc. N A Nov.2007 Ditto training for implementing procedures PSP framework (firm or individual) On the job advice and 100,000 Gov’t proc. N A Oct. 2007 Ditto training for implementing procedures project preparatiodappraisal manual (firm) Independent financial 120,000 Gov’t proc. N A Oct.2007 Ditto audit procedures

Terminal Co.’s Sub

HB- 14

69

commissioning and testing Practice (SSS) Procurement support 3,000 Commercial Post May 2007

Practice (SSS)

Annex 9: Economic and Financial Analysis VIETNAM: HIFU Development Project

FINANCIAL ANALYSIS OF HIFU

Financial Intermediary Analysis The detailed due diligence o f HIFU’s financial accounts was conducted to determine the financial viability o f HIFU as a potential Bank partner in a financial intermediary loan. The analysis reviewed the quality o f HIFU’s loan portfolio, including the level o f non- performing loans and a detailed review o f randomly selected loans to determine loan rates and repayment quality. The equity investments o f HIFU were also analyzed to determine HIFU’s exposure vis-a-vis industry and investment instrument. Again, the key equity investments were identified and reviewed to determine asset quality. Finally, the Income Statement was analyzed vis-a-vis profitability and operational efficiency. The team conducted C A M E L Analysis, key financial ratios analysis.

The analysis confirmed that HIFU i s in a strong financial position with total paid-in capital (charter capital) o f VND 1,288,224 bi l l ion and a very healthy capital adequacy ratio. Total assets have increased from VND 2,203,529 bi l l ion in 2003 to 3,323,603 bi l l ion in 2005, N e t income has increased from VND 55,433 b i l l ion in 2004 to VND 85,369 bi l l ion in 2005. The quality o f the loan portfolio i s good, with non-performing loans accounting for 0.04%. The interest rate in the random sample o f 10 loans reviewed was around lo%, which i s above the standard market rate as indicated by the SOCBs. The quality o f the investment portfolio was also very strong, with the high possibility that the current (marked to market) value o f the investments will be far higher than the values reported in the financial statements. Finally, the investment portfolio (loans and investments) i s heavily concentrated in infrastructure related investments. The interest income from lending accounts for approximately 70% o f total sources o f income. Operating and administration expenses o f the Fund are very l ow considering the size o f the current operations o f the Fund. Finally, the investments in portfolio companies (non- infrastructure investments) account for a significantly minor proportion o f total fund assets and therefore present limit exposure to market fluctuations. The detailed analysis o f HIFU’s financial position i s provided below. The detailed analysis o f HIFU’s financial position i s provided below.

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Financial Analysis o f HIFU

ASSETS Cash and current accounts with banks Loans and advances to customers(**) Long-term investments Fixed assets (net) Construction in progress Other assets

Total assets

LIABILITIES AND OWNER’S EQUITY

TOTAL LIABILITIES Customer deposits and other amounts due to customers Borrowed funds (***) Other liabilities

Total liabilities

OWNER’S EQUITY Chartered capital Foreign exchange difference Retained earnings Reserves

Total owner’s equity

Total Liabilities and Owner’s Equity

2005 2004 2003 MVDm VNDm VNDm

110,979 208,596 3 70,443 2,916,085 2,608,246 1,695,751

256,292 155,675 127,693 38,290 38,673 3,117

917 917 917 1,040 43 1 5,608

3,323,603 3,012,538 2,203,529

35,198 32,309 49,625 1,828,205 2,153,780 1,482,383

66,250 43,775 44,661

1,929,653 2,229,864 1,576,669

1,288,224 687,209 452,617 515 927 777

85,371 82,266 55,433 19,840 12,272 1 18,033

1,393,950 782,674 626,860

3,323,603 3,012,538 2,203,529

(*): Figures are extracted from the auditedjnancial statements of the Fund.

I**) Including loans from trusted funds to customers amountinp to VND 676,298m 12004: VND 673.422mL 2003: 579.752m) which HIFU does not bear credit r i s k .

I***) Including funds for trusted finds amounting to VND 777,789m (2004: 1.483,522m. 2003: 1.114.677m) as discussed in 1* *I

71

3.1.1 Loans to customers

Loans to customers include long-term and medium-term loans from the source o f (i) the chartered and mobilized capital, (ii) other banks in syndicated lending and (iii) entrusted fund. As discussed above, loans to customers which are from the participation o f other banks in syndicated loans and entrusted fund should not be recognized as assets in the balance sheet o f the Fund according to the prevailing regulation o f the SBV.

Loans to customers hold a high percentage in the total assets though this high proportion seemed to experience an up trend over the years.

Overall loan portfolio review

Medium and long-term loans to customers 1,761,217 1,272,824 1,115,999 Loans from trusted funds to customers'" 676,208 673,422 579,752 Other loans to customers 478,660 662,000

2,916,085 2,608,246 1,695,751

Transportation infrastructure 749,764 33% 576,232 30% 324,919 29% Water/ Electricity Supply 199,360 9% 210,487 11% 53,442 5% Industrial/ Residential Zone Infrastructure 837,775 37% 710,259 37% 394,131 35% Public Health 222,248 10% 202,162 10% 153,988 14% Education 126,792 6% 116,737 6% 90,742 8% Others 103,937 5% 118,947 6% 98,777 9%

2,239,877 (*) 100% 1,934,824 100% 1,115,999 100%

(*) This amount excluded loans from trusted funds to customers but included the portion of loans from the participations of other banks in syndicated lending, which can not be separated by the Fund.

- - -

Loan portfolio o f HIFU i s much concentrated on the infrastructure o f transportation, industrial, residential zone, and public health. T h i s structure o f funding i s consistent with strategic development policy o f the HCMC People's Committee.

lo Trust fund investments are fully at the risk o f the beneficiary o f the Trust (HCMC PC), subject to standard fiduciary responsibilities

72

State Owned Enterprise 1,914,486 85% 1,773,627 92% 978,227 88% Limited Liabil ity Company 12,614 1% 5,908 0% 20,329 2% Joint Stock Company 308,281 14% 155,289 8% 117,443 11% Private 4,496 0% - 0% - 0%

2,239,877 100% 1,934,824 100% 1,115,999 100% - - - The major borrowers o f HIFU are s t i l l SOEs accounted for over 85% o f total portfolio. I t i s a common practice that SOEs s t i l l play an important role in infrastructure development projects.

Non-performing loans and write-offs

Loans to customers from sources o f chartered capital, mobilized capital and other banks in . syndicated loans (net) 2,238,913 1,933,586 1,114,651

Overdue loans

%

964 1,238 1,348

0.04% 0.06% 0.12%

Provision for loan losses

As reported by HIFU, their non-performing loans only account for a minimal portion in the loan portfolio. And those non-performing loans are being collected and recovered over the 3 years.

I t i s noted that, HIFU has not implemented any loan classification and provision system. As a consequence, we could not have any information to assess the overall quality of the loan portfolio. Currently, banks in Vietnam i s to follow Decision 493/2005/QD-NHNN issued by the State Bank o f Vietnam regarding the loan classification and loan loss provision in lending activities.

In the following part, we will present the result and our comments on the review o f the sample o f 10 customers as at 3 1 December 2005 according to Decision 493.

Loan review sample

We have randomly reviewed 10 customers who operate in different industries and borrowed money from HIFU for different purposes with different contractual conditions and have significant loan balances with the Fund. It was noticed that source o f repayment o f the state directed lending was mostly from the budget o f the H C M C People’s Committee which i s reliable but might be delayed due to bureaucratic procedures o f using the state budget.

73

The reviewed 10 items covered about 70% o f total portfolio o f which we do not note down any impairment or downgrade o f the reviewed item that requires the Fund has to create additional specific provision against them.

General provision

Decision 493 requires credit institution to maintain a general provision at the rate o f 0.75% on the current loans (group 1). Should the Fund wish to apply that approach, the Fund i s required to additional book a general provision o f VNDm 16,792 in the income statement for the year ended 31 December 2005.

74

I I

i I

I

i i

Investment portfolio

%of %of %of I n vestme Investment nt value (MvNDI s;;gs shares shares

type ( ) (2004) (2005) .

Other long te rm investment 1,208 786 389 Investment in securities 126,484 154,889 255,903

127,692 155,675 256,292

% o f total assets 9% 12% 18%

2

3

4

Investment portfolio accounts for a significant part in total assets o f HIFU and increases quickly over the years. The investment portfolio is rather diversified in terms o f the types o f investment, industry and size.

Development Commercial Joint Joint Stock Bank stock Banking Viet A Joint Stock Joint Commercial Bank stock Banking City Infrastructure & Technology JV Joint Infrastructure Company stock construction

Develop and invest

Binh Chanh infrastructure construction and and technical investment JV Joint deployment o f Company stock main Project REE Refrigerator Joint Real estate

7

5 I ~ v c o m p a i y I stock I trading I Cu Chi Industrial I I Industrial zone

Jewelry JV precious stone Company trading Kenh Dong Water Joint Clean water

I zoneconstruction I Joint I infrastructure

9

10

11

6 I and investment JV I stock I trading I Gold and I Phu Nhuan Gold & I

Water JV Joint Company stock Water business

Thu Duc Housing accommodation Development JV Joint management Company stock and trading

Song Than JV Joint infrastructure Company stock trading and

Houses and

Industrial zone

Founding shareholder

8 I JVCompaiy I stock I business I Thu Duc BOO

N/A N/A N/A 28,973 * (*> (*>

Share

Share urchase

urchase

Transfer o f State hnd 6,000

Founding

76

12

13

14

15

16

Investments are recorded at original costs, normally at par value being the amounts that the Fund invested on the establishment o f jo in t stock companies, or acquiring o f shares in joint stock companies or managing the stakes o f SOE being equitized which are delegated by local People’s Committee. The investee companies operate mostly in the infkastructure development, such as water supply, construction, housing development.. .

Bach Tuyet Cotton Joint Stock Joint Cotton Share NIA NIA

1 Company stock manufacturing purchase 530 (**) **

SACOM stock Manufacturer purchase 2,047 (**) ** Telecommunic

Joint ation Cable Share NIA NIA 1

HSC Securities Joint Stock Joint Securities Founding Company stock trading shareholder 10,000 30 30 30

Joint Milk products Share NIA NIA

Joint Found NIA NIA NIA Vinamilk stock manufacturer purchase 1,833 (**) ** 0.1

MECO Joint stock stock Hospital shareholder 85 (*) * (*I

Overall, HIFU is holding shares o f companies having high market value. Please refer to the following table to compare the market value o f the portfolio o f the Fund.

(*) (**)

Unlisted firms, price i s obtained from OTC market and provided by HIFU as o f February 12,2007 Listed firm, price i s obtained from Hochiminh City Securities Market as of February 12,2007.

77

After the acquiring date, the Fund has not reflected subsequently these investments at the market price and consequently, the value o f the investment portfolio i s understated as at 31 December 2005 at least by due to information on the value o f share o f certain unlisted companies i s not available, Chartered capital and reserves

The chartered capital o f HIFU significant increased from VND 687,209m in 2004 to VND 1,288,244m, (the initial registered capital was only VND 500,000m). The increase in chartered capital i s mainly attributed by the actual cash contribution from the Ho Chi Minh City’s State Budget in the year to strengthen the financial capacity o f the Fund in order to provide financial supports to new projects in the coming period and the recapitalization o f earnings of previous years.

Capital adequacy ratio

The capital adequacy ratios o f the Bank over the years are as follows:

Chartered Capital Reserves (non-distributable)

Tota l capital

Risk Weighted Assets (RWA)

1,288,224 687,209 452,617 99,939 91,395 171,567

1,388,163 778,604 624,184

1,249,727 1,085,777 1,063,520

% total capital funds/ RWA (Capital Adequacy Ratio) 111% 72% 59%

The ratio indicates that the Fund i s well capitalized and i s potential for hrther expansion o f total assets by providing new loans or investing in new projects.

Analysis o f the income statement (extracted from the audited financial statements)2004

TOTAL INCOME Interest and similar income Interest and similar expenses

N e t interest margin Fees and commission income Fees and commission expenses Dividend income received Other operating income

TOTAL OPERATING INCOME

103,018 103,460 79,456 (3 7,129) (3 0,6 14) (25,528)

65,889 72,846 53,928 1,387 1,017 912

26,799 16,154 8,304 1,597 1,798 365

95,100 90,983 62,888

(572) (832) (621)

Employees expenses (6,330) (5,977) (4,484)

78

Depreciation, amortization and maintenance 9594) (503) (1,198) Other operating expenses (2,807) (2,239) (1,773)

TOTAL

PROFIT BEFORE TAX 85,369 82,264 55,433

In the total income o f HIFU, interest income from lending accounts for approximately 70% of total sources o f income. The next significant contribution to the income i s dividend income. There has been a steady growth in those sources o f income over years as a direct result of the growth and the good quality o f the lending and investment portfolio.

N e t interest income i s relatively high at 64% in 2005 (in 2003-2004: about 68% to 70%). This shows a very high margin o f the Fund which i s attributed by the fact that a significant hnd resources are from owner's equity which i s free o f cost.

Operating and administration expenses o f the Fund are also very l o w provided that the current size and operations o f the Fund. This i s because the Fund i s s t i l l operating under the umbrella of the People's Committee so certain operating expenses are not at the normal market condition yet. Also the staff cost o f the Fund i s st i l l in l ine with the overall salary scale applicable to public servants rather than o f commercial entities. The current salary scale o f the Fund is also far below the salary structure o f commercial banks having similar size.

Hereafter i s the summary o f key performance ratio o f the Fund as follows:

NET INCOME/TA" = ROA"

PROFIT

INTEREST INCOMEITA

6.85% 7.12% 6.17%

5.32% 6.02% 5.50%

INTEREST EXPENSEITA 1.76% 1.53% 1.77%

NET INTEREST MARGIN/TA13

PROVISION EXPENSEl4ITA

3.6% 4.2% 3.7%

NIA NIA NIA

Interest Rates I t should be noted that the traditional financing method for municipal infrastructure in Vietnam involves GOV borrowing ODA for projects and providing the proceeds to the municipal government as grants. Indeed, to date al l o f the W B ' s municipal infrastructure projects in H C M C have been financed with GOV grants. In the HDP, the H C M C government, WB and the GOV are taking the f i rst step towards rationalizing the use o f GOV subsidies for municipal infrastructure. Specifically, the project underscores the need to distinguish the infrastructure investments which require budget support from those which can offer cost recovery and can be financed with market capital under public-private partnership arrangements. As a government-

'' TA = Total average assets l2 ROA = Return on Average Assets l3 NIMiTA = (INTERST INCOME -INTEREST EXF'ENSE)/TA l4 Total provisions for bad debt

79

owned FI, the on-lending rate which HIFU receives from the GOV must be determined by the MOF strictly according to Decree 134, which provides legislated rules for determining the on- lending rates for ODA projects according to sector o f focus and other variables that are important to the government. The on-lending i s in VND. The focus o f the project design has been on the interest rate charged by HIFU in the subprojects to ensure against market distortions.

HIFU will continue to price i t s loans at market rates for infrastructure in Vietnam. Specifically, HIFU will price the loans at the l ow end o f the State-Owned Commercial Banks SOCB rates, which i s currently at 10.4%. The rate wil l be reviewed every six months by HIFU and the WB team. The current interest rate regime in Vietnam i s described in the graph and table below for reference. However, i t should be noted that for infrastructure projects the benchmark is increasingly being set by the Vietnam Development Bank.

IO-year Interest Rate Benchmarks (2006)

2.00%

0.00%

8.00%

6.00%

4.00%

2.00%

0.00% 1 0-year 1 0-year City HTPT- DAF SOCBs 10- HIFU 10-

Government Bond (VDB) 10- year year Bond year

Source: HIFU Note: Represents the SOCB and HIFU low range.

2005 I 2006 Low High I Low High Benchmark (annual rates)

5-year Government bond interest rate 8.20% 10-year Government bond interest rate 5-year City bond interest rate 1 0-year City bond interest rate HTPT- DAF (VDB) interest rate for 5 year loans HTPT- DAF (VDB) interest rate for 10 year loans SOCBs interest rate for 5 year loans SOCBs interest rate for 10 year loans HIFU interest rate for 5 year loans

8.60% 8.80% 9.00%

6.60% 7.80% 6.60% 7.80% 9.56% 11.56% 10.40% 12.40% 9.56% 12.06% 10.40% 12.90% 9.56% 12.56% 10.40% 11.40%

~HIFU interest rate for 10 year loans 9.56% 11.06% 10.40% 11.90% Source: HIFU

80

Directed Credit The IDA credit i s being provided to HIFU as a FIL to achieve the following objectives: . . .

Finance municipal infrastructure - which i s a key bottleneck to economic growth - and provide affordable infrastructure services to the public Develop alternative model for financing municipal infrastructure which do not require 100% GOV grants Reduce the risk to financial market development posed by inappropriate borrowing practices o f LDIFs, such as HIFU Implement operational reforms in HIFU geared towards improvement in project appraisal standards, financial management including international standard auditing, and appropriate due diligence for environmental and social safeguards. Ensure the financial sustainability o f HIFU by establishing clear Financial Covenants which can be implemented and monitored

I t i s understood and anticipated that the HDP will allow HIFU to establish a track record - vis-a- vis clear and consistent investments appraisal standards, good operational practices, and sound financial management. After successfully implementing HDP, HIFU will be in a position to raise capital from the market v ia bank borrowing or bonds.

.

Subsidies There are no subsidies involved in the HDP structure.

Fiscal Sustainability The HDP i s designed to ensure the financial sustainability o f HIFU by putting in place a framework for HIFU to start operating l ike a “hnd” which can utilize i t s equity (charter capital) to raise investment capital (debt) from the local market. The H D P wil l help establish appropriate project appraisal and financial management practices which wil l allow HIFU in the future to safely raise investment capital from the local market. The owner o f HIFU - the H C M C Peoples’ Committee - has been investing substantial equity in HIFU over the years. The H C M C PC therefore has a very strong incentive to ensure the financial feasibility o f HIFU. The H C M C PC has very publicly announced that development o f HIFU as a professional and competent institution capable o f financing municipal infrastructure in H C M C i s an important pillar o f the city’s long-term development strategy. The lack o f long-term capital in the Vietnamese market has resulted in the current inappropriate HIFU practice o f borrowing o f short-term capital on a roll-over basis. The HDP allows the H C M C PC and HIFU Management a chance to take advantage o f long-term IDA credit and Bank technical assistance to substantially improve the capacity o f HIFU. Specifically, the HDP provides an opportunity for the H C M C PC and HIFU Management to establish, test and perfect the internal HIFU systems for project appraisal and financial management. In short, the H C M C PC and HIFU Management are well aware o f the value o f the long-term IDA credit and the associated technical assistance associated with the project. The clients also realize that success o f H D P will allow HIFU to raise substantial capital from the local market in the h tu re and finance badly needed municipal infrastructure in HCMC. HDP wi l l have noJisca1 impact on the HCMC government. The HDP will create no additional fiscal burden on the H C M C financial position. The H C M C PC provides no operating budget to

81

HIFU, and the project requires no additional equity investment in HIFU from H C M C PC. In particular, the HDP will have no affect on the H C M C financial position vis-a-vis the following:

There wil l be no impact on H C M C PC financial position vis-a-vis incremental taxes; and the project does not provide any additional subsidies. There wil l be no increase in recurrent costs for H C M C PC or HIFU. HDP will have no impact on the H C M C PC current fiscal situation, as the project wil l not require any additional capital or operating budget from H C M C PC. There wil l also be no impact on the GOV fiscal position because the project is structured as an on-lending arrangement in which the MOF i s able to fully cover not only the cost o f foreign exchange risk, but also the IDA commitment fee and any transaction costs incurred by the MOF. HDP wil l have no negative impact on the overall level o f recurrent costs required to operate the municipal infrastructure sectors adequately and the volume o f financing provided by the Government in the recent past. Indeed, the participation o f private sector and focus on cost recovery projects will likely reduce the relative provincial government outlay in the target sectors. The availability and certainty and formal commitment o f the HFU Board o f Management to contribute an estimated $0.5 mi l l ion in counterpart funds from HIFU for technical assistance has been confirmed during project appraisal.

Summary o f the eligibility criteria for FIs The selection o f HIFU as an FI i s based on the following assessment:

a.

b. C.

d.

e.

- HIFU has demonstrated adequate profitability, capital, and portfolio quality and local collections. The financial due diligence o f HIFU was carried out by an international accounting firm, under contract to the Bank. The detailed financial analysis o f HIFU i s provided in the PAD. HIFU already provides audited financial statements, and HIFU Management has agreed to switch to international auditing standards, which can be carried out by approximately 4-5 Vietnam based international accounting f i rms. HIFU has acceptable levels o f loan collections. HIFU has the appropriate capacity, including staffing, for carrying out subproject appraisal and supervising subproject. Currently HIFU has 83 professional staff, which includes 20 staff with M B A s andor graduate degrees. At least 10 HIFU staff are fluent in English, and an additional 10 have basic conversational sk i l ls and can read and write in English. The majority o f HIFU staff i s on private employment contracts, with only about 5 senior staff maintaining city employee status. Implementation o f comprehensive manuals for project preparation and appraisal and private sector partner selection wil l ensure that al l relevant Bank pol icy requirements wil l be carried out by HIFU. The HIFU Board o f Management has also officially approved the decision to use an estimated $0.5 mi l l ion o f HIFU capital as client contribution to hire international consultants to provide on the job advice and training to HIFU staff for a 3-year period. The current borrowing practice o f HIFU requires improvement. The project wil l help HIFU establish the investment track record and appropriate financial management standard to mobilize capital via bank loans or bonds in the future. As an LDIF, HIFU i s a government-owned FI. The project i s initiating the process o f developing adequate managerial autonomy and commercially oriented governance in HIFU. This wil l require 1) provision o f incentives to the Peoples’ Committee to utilize LDIFs in the appropriate fashion and 2) development o f prerequisite capacity in the

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f.

FINANCIAL COVENANTS”

LDIFs to carry out their h c t i o n s and raise capital without undermining financial viability, and without government support. The project i s further improving the prudential policies, administrative structure, and business procedures in HIFU. This includes the implementation o f a comprehensive manual for project preparation and appraisal, and the manual for the selection o f private sector participants o f HIFU. HIFU already provides audited annual financials. HIFU Management has agreed to switch to international standard financial audits. Finally, the following Financial Covenants have been agreed to monitor and manage the financial

APPLICABILITY

4

Aggregate equity investments shall not exceed 50 percent o f the total amount o f the Fund’s paid in equity capital. The Fund’s debt-to-equity capitalization ratio (i.e. Leverage) shall not exceed 3: 1 , where debt means al l debt liabilities plus contingent liabilities and equity means paid-in capital plus retained earnings and reserves not allocated to cover specific liabilities. Liquid Assets shall be sufficient to cover projected Fund operating expenses over the subsequent 18 months. Total investment (debt and/or equity) in a single obligor

operations

Applies to al l HIFU shall not exceed 15 percent o f total fund capital nnnrot ;

Applies to al l HIFU operations

5

6

Applies to al l HIFU operations

In al l HIFU investments involving HDP proceeds, HIFU will not take greater than 30% ownership (equity/direct investment) in a Project Enterprise In al l HIFU investments involving HDP proceeds, the debt to equity ratio wil l not exceed 3: 1. Specifically, debt wil l not be greater than % o f the total financing o f the subproject

Applies to the use of IDA proceeds only

Applies to the use o f IDA proceeds only

Applies to al l HIFU

U p L a d n s (including debt and equity).

Coordination with IFC IDA and IFC have been coordinating very closely on the engagement with HIFU. The IFC had attempted to execute transactions with HIFU (senior loan) as wel l as one o f its portfolio companies (equity investment in CII). However, the transactions did not materialize for various reasons, which have lead IFC to the conclusion that HIFU requires substantial institutional development before IFC can do a direct transaction with it, IDA and IFC have therefore decided that the Bank i s better suited to undertake the init ial task o f building institutional capacity o f HIFU, establishing a supportive national pol icy and H C M C municipal government framework, and providing long-term capital for investment in partnership with private sector. The I F C will play an important role in co-financing HIFU transactions in partnership with the private sector.

The GOV has issued a draft decree o n Institution and Operation o f LDIFs, which specifically addresses covenants 2 and 4. These two covenants, as stipulated above, are consistent with the Bank’s technical advice to the GOV. The task team has agreed with HIFU and H C M C P C that during implementation, covenants 2 and 4 can be adjusted in line with the final, approved stipulation o f the GOV Decree as part o f the six monthly review o f a l l H D P conditions which i s described in this PAD.

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As discussed and agreed with IFC, the advantages o f getting IFC involved at the project level (as oppose to the HIFU level) are as follows:

IFC’s risk appetite i s better suited to the subprojects financed by HIFU rather than the financing o f HIFU itself. The financing o f HIFU involves pol icy risk, which i s better suited for IDA f inded operations. IFC’s involvement in the HIFU joint ventures will allow HIFU to establish good models for corporate governance and other operational functions o f a jo int venture. IFC’s involvement in HIFU joint ventures wil l allow HIFU to learn the principles o f good project structuring, including development o f legal contracts and negotiations with the private sector. The Bank i s better positioned to invest in HIFU which will require substantial technical assistance and very close coordination with the GOV and H C M C municipal government. IFC can be relatively more competitive in Vietnam with i t s equity products than i t s debt products. This i s because Vietnam i s an IDA country with access to very cheap financing, particularly for infrastructure projects.

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Annex 10: Safeguard Policy Issues VIETNAM: HIFU Development Project

Environmental assessment (OP 4.01) The HDP project i s classified as Category FI. The complexity o f subprojects evaluated for investment i s varied. All subprojects will pass init ial review and screening against the GoV and WB/IFC exclusion l ists. Based on the size and the nature o f the potential impact on the environment from the subproject activities financed under the HDP project, categorization wil l be determined for each o f the subproject in the investment pipeline, which has passed the review against the Government and IFC exclusion lists.

A manual on Project Preparation and Appraisal (PPA Manual), including a detailed guideline o n Environmental safeguards acceptable to IDA, has been developed and approved by the H C M C People Committee. The manual and annexes: 0 clearly lay out the steps where environmental assessment and supervision are undertaken

during the project cycle; review Environmental Safeguard (ES) requirements o f GOV and the Bank; identify the discrepancies ES between GOV and Bank requirements, and when there are discrepancies, identifies proper approaches to best comply with the Bank ES requirements; clarify ES activities, including due diligence assessment for the subprojects with EA government approval prior to the lending from HIFU,

0 describe when and who has to do what to meet the ES requirements; and 0 guide the assessment o f the borrower’s institutional mechanism to carry out EA work for

category A subprojects.

The PPA Manual clearly defines the procedure and responsibility o f the EA work as integrated in the sub-project preparation and supervision process, The Environmental guideline included in annexes o f the PPA Manual specify how to carry out environmental assessment (EA) work at each stage during the project cycle. The approach described in the manual follows a due diligence assessment which includes: carrying out new EA works in accordance with the Manual which provides guidance to meet the requirements o f Government regulations and the Bank safeguard policies; assessing the adequacy o f the EA work which have been approved by DONRE and developing a risk management plan if the EA work i s not sufficient; borrower’s written commitments to HIFU to implement the r isk management plan; and assessing the borrower’s institutional mechanism to carry out EA work for A-category subprojects.

The PPA Manual wi l l be used by HIFU staff in carrying out environmental safeguard (ES) work to meet the requirements o f GOV and IDA. The Environmental Guideline o f the Manual was used by HIFU in appraising two subprojects for Year One as a pi lot program o f the HDP, in a manner acceptable to IDA. It wil l also be applied for the preparation o f the other subprojects in the investment pipeline for the following years. HIFU will implement the Manual with assistance from on-the-job consultants who will be hired as part o f component 2 o f the project.

Environmental appraisal o f the two year 1 pilot subprojects: For the two year 1 pi lot subprojects, a due diligence assessment has been carried out for the Initial environmental assessment (IEE) o f the West Bus Terminal (B-category sub-proj ect)and

85

the Environmental Impact Assessment (EIA) of the Septic Tank Waste Treatment (A-category subproject).

Summary of major environmental impacts of the two pi lot subprojects in Year One: K e y environmental issues during construction work under the two subprojects are noise and dust pollution, traffic congestion, transportation and disposal o f waste construction materials, transportation o f filling soils. Major environmental impacts during the operation phase are related to the operations o f the waste treatment plant include odor and pathogenic bacteria, insects and bugs vermin, collection truck leakage, vehicle exhaust fimes, ground water pollution from pipe and tank leaks during the treatment process and surface water pollution from runoff, effluent discharge from treatment facilities. Other impacts could be related to the management of waste generated at the bus terminal.

The two sub-projects wil l help address current environmental sanitation problems and i s expected to have a positive impact on existing environmental and social conditions. The design standards will ensure that effluents from wastewater at the bus terminal be connected to the city’s sewer. Discharge from the septic tank waste treatment plant i s expected to comply with the requirements for water quality o f the receiving bodies. Better solid waste management would also contribute to improved environmental conditions o f the cities.

Nevertheless, improper transportation and disposal o f the construction materials and the wastes would impose noise and dust pollution. Inadequate design o f the disposal site would have long- term soil pollution and lead to hygiene consequences. Poor O & M o f the septic tank waste treatment plant would cause serious environmental problems in the surrounding areas, especially the residential areas and the canals supplying water for agriculture and aquaculture activities.

Environmental Management Plan (EMP): For the Septic tank waste treatment subproject, categorized as a category I1 (Vietnamese categorization) project, an Environmental Management Plan was developed in the EIA. However the due diligence assessment has found it inadequate. As a result, HIFU has requested an Environmental Management Program be provided in adequate detail to indicate how the mitigation plans described in the EIA will be implemented for each project phase.

For the West Bus Terminal, no EMP was required although commitments to environmental compliance were made before DONRE environmental certificate was issued. The application for the environmental certificate, however, did not specify the resources for the implementation.

At a request from IDA, a risk management plan has been developed for each o f the subprojects. Those plans will be signed between HIFU and the borrowers as a M O U prior to the disbursement o f HIFU funds to the borrower. The MOU clarifies that by receiving the HIFU funds the borrower is signing on a commitment to implement the Plan,

In addition, as guided by the PPA Manual HIFU will arrange monitoring o f the implementation o f the EMP and risk management plan in each o f the two subprojects and will prepare semi- annual environmental compliance progress reports to be submitted to PC and IDA. An independent environmental safeguard monitoring consultant wi l l be hired to assist HIFU in this task, and also to provide guidance to the borrowers in internal supervision and reporting on the implementation o f mitigation measures as specified in the EMP and risk management plan.

Assessment of the institutional mechanism o f the Hoa Binh Ltd. to carry out EA work for the Septic tank waste treatment was submitted to the Bank on March 27, 2007. The Bank has found

86

this satisfactory, provided that the Hoa Binh Ltd. hire consultants for internal monitoring and HIFU hire consulting services for independent environmental monitoring as part o f the TA to HIFU.

Ensuring GoV environmental certzfzcation: An approval for the EIA report for the Septic tank waste treatment facility were received from the H C M C DONRE on March 20, 2007. According to the Decree 80/2006/ND-CP dated August 09, 2006 “Guideline on the implementation of the National Law on Environmental protection ”, an Environmental certificate for the West Bus Terminal subproject, which i s classified as a type I11 i s a condition for the HIFU loan disbursement to the borrower.

Cultural Resources (OP 4.11) For the subprojects to be financed by the l ine o f credit, careful design to avoid possible vista or damage to historic and cultural sites, and proper construction supervision will be needed during project implementation, particularly excavation and dredging works, to check for possible buried artifacts. As far as the two year 1 sub-projects are concerned, cultural property does not exist in their respective locations.

Natural habitat (OP 4.04) For the subprojects to be financed by the l ine o f credit, exclusion l i s t wil l be used in environmental screening to make sure that the project will not finance adverse impacts or conversion o f critical natural habitats. N o natural habitat i s involved in the two year 1 subprojects.

Pest management (OP 4.09) The use o f any chemicals listed in the Government restriction wil l be subjected to the exclusion from H D P finance. OP 4.09 i s not triggered for the two year 1 subprojects.

Involuntary Resettlement (OP/BP 4.1 2) A Resettlement Policy Framework (RPF) for HDP has been prepared to ensure that affected people can restore the losses and living standards as pre-project level. This framework has been adopted by HCMC-PC and was [approved] by the Prime Minister. All compensation and resettlement activities, occurred under the project, wil l need to follow the approved RPF.

The Social Safeguards Manual (Annex G o f the Project Preparation and Appraisal Manual) includes provisions for HIFU and its borrowers, investment partners to minimize and mitigate the impacts to the people and to prepare and implement the safeguards documents to meet the Bank’s requirements. In particular, the respective responsibilities o f the HIFU and investorshorrowers are spelled-out in the manual. HCMC-PC wil l have to approve prepared Resettlement Plans (RPs) in accordance with the approved RPF for al l subprojects requiring land acquisition except for the ones where the investors can negotiate and agree with the affected people on the buying-selling basis without involvement o f the local authorities. For subproject where the land was cleared before, a confirmation report i s required. If there are st i l l some remaining issues, a due diligence report should be provided to identify the problems and clarify how they wil l be resolved. Satisfactory resolution o f outstanding issues i s a condition for the borrower to receive HIFU funds from HDP.

87

Supervision framework has also been established to ensure the compliance. Under component 2 o f the project, HIFU will hire independent consultants to monitor compensation and resettlement activities to help HIFU in ensuring the project objectives are met.

For the two year 1 subprojects, only one relates to land acquisition (Septic tank waste treatment plan), where the compensation and resettlement activities have been implemented since 2005. According to the due diligence report, there are s t i l l 1.9 out o f 9.4 ha having not yet been cleared with about 10 households waiting for their complaints to be resolved and land plots in a resettlement site to be provided. Most o f the complaints relate to the issue o f identification of land use right to define the land category to be compensated. The interviewed displaced people were satisfied with the applied compensation and resettlement policies. O n March 1, 2007 HCMC-PC has instructed Binh Chanh district PC to resolve the issues as soon as possible, including allocation o f land plots in a neighbor commune for the displaced people to be relocated.. Resolution o f this issue in a manner satisfactory to the Bank i s a condition for the subproject to get financing by HIFU under the HDP.

Indigenous Peoples (OP/BP 4.10) There are no ethnic minorities in the proposed two subprojects for the first year o f implementation. However, taking into account the fact that there are two ethnic minority groups living in H C M C (Cham with about 5,200 persons and KhMer with about 4,800 persons in accordance with the data o f 1999 general population census), an Ethnic Minor i ty Planning Framework (EMPF) has been prepared. The EMPF was approved by HCMC-PC.

Ethnic Minor i ty Plans will have to be developed in accordance with the project EMPF for the subprojects having any ethnic minority group in the subproject areas. All monitoring and reporting arrangements for resettlement activities wil l be applied to Ethnic Minor i ty Plan implementation.

PPA manual implementation advisors with international experience and local social consultants will be hired by HIFU to help deal with social safeguard policies compliance and i t s management for the f i rs t three years o f the project implementation.

Public consultation. The PPA manual specifies when and how public consultations have to take place for each sub-project. EIA report for the Subproject Septic tank waste treatment (A category) has been consulted with the local authority (Ward People Committee D a Phuoc) and local NGO (the Father Front o f the District Binh Chanh) in accordance with the new national law on environmental protection. No objections to the project or environmental concerns other than those about emission and odor from the operation o f the Septic tank waste treatment and that has been incorporated in the final EIA report. Public consultation on environmental issues was not required for the West Bus Terminal. HIFU and local resettlement related agencies have been consulted intensively during preparation o f RPF and social safeguards manual. A consultation mechanism has been developed to be applied during resettlement plan (RP) preparation and implementation to ensure the needs and wishes o f al l related stakeholders, especially potentially affected people be reflected. The R P s will detail the plan for consultation including the procedures, methodologies and subjects o f consultation. The RPs wil l also describe grievance redress mechanism with the steps and procedures for grievance filing as wel l as the responsible institutions and timeframe for receiving and addressing the grievances.

88

Public disclosure. The PPA manual specifies when and how the various safeguards documents need to be disclosed. HIFU has confirmed the public disclosure o f the EIA report for the Septic tank waste treatment and the Init ial Environmental Examination (IEE) for the West Bus Terminal subproject in the ward People committee offices since March 05, 2007 as per the Bank’s disclosure requirements. A copy o f the draft Environment guidelines and Social safeguards manual (Annexes F and G o f the PPA Manual), as wel l as the RPF and the EMPF have been disclosed locally and sent to InfoShop in Washington D C and made available in English and Vietnamese in Hanoi’s Development Information Center (VDIC) on March 20, 2007.

Institutional capacity assessment and strengthening: HIFU has the institutional arrangement to manage investments, and i t s departments have clear understanding o f the requirements for implementing the Government and the Bank safeguard policies during a subproject appraisal, investment and monitoring phases, though World Bank policies on involuntary resettlement are quite new for them. HIFU has staff that has training in environmental management and work experience on land acquisition and resettlement policies. They have gained familiarity with environmental assessment and compensation, resettlement tasks through other HIFU projects. To assist HIFU in improving its staff skills on environmental and social safeguard management, on-the-job training consultants wil l be hired during the f i rst three years under component 2 o f the project to help HIFU implement safeguard policies including review o f environmental assessment and social safeguards documents, preparation of TORS, and monitoring o f the implementation o f environmental management and resettlement plans. In addition, independent monitors wil l be recruited to monitor the performance of safeguard compliance within the specific subprojects. These monitoring reports wi l l assist HIFU in focusing efforts to improve project due diligence procedures.

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Annex 11: Project Preparation and Supervision VIETNAM: VN - HIFU Development Project

Planned Actual P C N Date January 2007 January 2007 Init ial PID to PIC April 2007 April 2007 Init ial ISDS to PIC March 2007 April 2007 Appraisal April 2007 April 2007 Negotiations M a y 2007 M a y 2007 Board/RVP approval June 2007 Planned date o f effectiveness September 2007 Planned date o f mid-term review Planned closing date December 2012

K e y institutions responsible for preparation o f the project: H o Chi Minh City People’s Committee H o Chi Minh City Investment Fund for Urban Development (HIFU)

Bank staff and consultants who worked on the project included: Name Title Unit Kamran Khan Sr. Infrastructure Finance Specialist, TTL EASOP Cuong Duc Dang Senior Operations Officer EASUR Isabel D. Mutambe Program Assistant EASUR Giang Thi Huong Nguyen Program Assistant EACVF Wil l iam Dachs Senior Infrastructure Specialist FEU Cung Van Pham Financial Management Specialist EAPCO K ien Trung Tran Senior Procurement Specialist EAPCO Hoa Thi Mong Pham Senior Operations Officer EASSD Phuong Thi Thanh Tran Senior Environmental Specialist EASEN Luc Lecuit Senior Operations Officer EAPCO Joseph F. Wells Safeguards Due Diligence Specialist Consultant Hoi-Chan Nguyen Senior Counsel LEGEA Tri Pham Senior Auditor IADDR Alan Carroll Peer Reviewer LCSQE Ellis Juan Peer Reviewer IEF Anthony Pellegrini Peer Reviewer External Advisor

Bank funds expended to date on project preparation: 1. Bank resources:$243,778 2. Trust fimds: $0.0 3. Total: $243,778

Estimated Approval and Supervision costs: 1. Remaining costs to approval: $0.0 2. Estimated annual supervision cost: $65,000

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Annex 12: Documents in the Project File VIETNAM: HIFU Development Project

1. Social Safeguard Manual

2. Resettlement Policy Framework

3, Ethnic Minor i ty Planning Framework

4. Environmental Safeguard Manual

5. Project Paper - LDIF-Splitting Operations Memo

6. Project Concept Note (HDP)

7. QER Minutes (HDP)

8. Project Concept Note (LDIFP) 9. Project Preparation and Appraisal (PPA) Manual

10. Private Sector Partner (PSP) Selection Manual

1 1. Financial Analysis o f HIFU Conducted by E&Y

12. Detailed Appraisal o f the 2 year-1 Pilot Projects

13. Detailed Description o f the Subprojects in the HIFU Project Pipeline

14. Approved TOR o f the USTDA Phase I1 Technical Assistance to HIFU

15. Approved AFD Technical Assistance Plan for HIFU

16. Credit Statute o f HIFU

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Annex 13: Statement of Loans and Credits VIETNAM: VN- HIFU Development Project

Difference between expected and actual

disbursements Original Amount in US$ Millions

Proiect ID FY Pumose IBRD IDA SF GEF Cancel. Undisb. Orin. Frm. Rev’d

P101608

PO82295

PO85071

PO84871 PO79663

PO79344

PO77287 PO75407

PO73361 PO88362

PO85260 PO85080

PO82627

PO82604

PO80074

PO74688 PO74414

PO73763

PO66051

PO59663

PO65898

PO70197

PO44803

PO75399

PO71019

PO73305 PO59936

PO72601

PO66396

PO73778

PO51838

PO42927

P 0 5 2 0 3 7

2007

2007

2006 2006

2006

2006 2006

2006

2006

2005

2005

2005

2005

2005

2005 2005

2005

2005

2005

2004 2004

2004

2003

2003

2003

2002

2002

2002 2002

2002

2002

2001

2001

VN-Avian & Human Influenza Control &Prep VN-COASTAL CITIES ENVMT SANIT.

Customs Modernization

VN-TRANS & DISTRIB 2

VN-Mekong Regional Health Support Proj VN -1CT Development

VN-RRD RWSS

VN-RT3

VN -Natural Disaster Risk Mngt Project

VN-Avian Influenza Emergency Recovery Pr

VN-EFA Support Program

VN-ROAD SAFETY

Payment System and Bank Modernization 2 VN-HIV/AIDS Prevention Project

VN-GEF-RURAL ENERGY 2

VN-RURAL ENERGY 2 VN - GEF Forest Sector Development Proj

VN-WATER SUPPLY DEV.

VN - Forest Sector Development Project

VN-ROAD NETWORK IMPROVT

VIETNAM WATER RESOURCES ASSISTANCE VN-URBAN UPGRADING

VN-PRIMARY EDUC FOR DISADVANTAGED CHILRE

Public Financial Management Reform Proj .

ENERGY VN-Regional Blood Transfusion Centers

VN -Northem Mountains Poverty Reduction

VN - Rural Finance I1 Project

EQUITIZATION & RENEWAB

VN-GEF-System Energy Equitization- Renewal

DEVELOPMENT

VN-GEF DEMAND SIDE MGMT &

VN-SYSTEM ENERGY,

VN-PRIMARY TEACHER

VN-MEKONG TRANSPORTELOOD PROT. VN-HCMC ENVMTL SANIT.

0.00 20.00

0.00 124.70

0.00 65.90 0.00 200.00

0.00 70.00 0.00 93.72 0.00 45.87

0.00 106.25

0.00 86.00

0.00 5.00

0.00 50.00

0.00 31.73

0.00 105.00

0.00 0.00 0.00 0.00 0.00 220.00 0.00 0.00

0.00 112.64

0.00 39.50 0.00 225.26 0.00 157.80

0.00 222.47

0.00 138.76

0.00 54.33

0.00 0.00

0.00 38.20 0.00 110.00

0.00 200.00

0.00 225.00

0.00 0.00

0.00 19.84

0.00 110.00

0.00 166.34

92

0.00

0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00

0.00

0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00 0.00

0.00

0.00

0.00 0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

5.00 0.00

0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00

0.00

0.00

0.00

5.25 0.00

9.00 0.00 0.00

0.00 0.00

0.00 0.00

0.00

5.50

0.00 0.00

0.00 0.00

4.50

0.00

0.00

0.00

0.00 20.30

0.00 126.01

0.00 66.58 0.00 199.90

0.00 70.29 0.00 87.20 0.00 45.75

0.00 108.92 0.00 79.20

0.00 2.10

0.00 32.13

0.00 29.26

0.00 99.57

0.00 26.96 0.00 4.95

0.00 217.36 0.00 8.50

0.00 109.56

0.00 48.69

0.00 210.82 0.00 149.25

0.00 200.93 0.00 156.52

0.00 50.54

0.00 2.80

0.00 37.57

0.00 26.25

0.00 20.46 0.00 187.02

0.00 3.52

0.00 9.94

0.00 52.67

0.00 148.92

0.00

0.00 -0.25

12.56

-1.83 1.27

2.72

5.00

-6.57 1.88

0.00 5.3 1

39.50

-1.56

0.20 52.53

2.37 6.98

6.02

102.26

28.20

5.20

43.19

36.49

1.47

26.32

-3.48

-67.40

145.63

3.52

6.75

35.65

94.44

0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00

0.00 0.00

25.67

0.00 0.00

0.00 0.50

0.00 0.73

0.00 0.00

0.00 -1.24

-0.63

0.00

0.00 0.00

0.00 62.58

0.00

4.96

0.53

85.86

PO62748 2001 VN - COMMUNITY BASED RURAL 0.00 102.78 0.00 0.00 0.00 48.53 25.51 0.00

PO42568 2000 VN - COASTAL WetlProt Dev 0.00 31.80 0.00 0.00 0.00 3.73 1.81 1.81 INFRA.

PO04845 1999 VN - MEKONG DELTA WATER 0.00 101.80 0.00 0.00 0.00 28.51 23.55 -9.01

PO51553 1999 VN-3 CITIES SANITATION 0.00 80.50 0.00 0.00 7.40 26.26 27.58 22.23

PO04828 1999 VN-HIGHER EDUC. 0.00 83.30 0.00 0.00 0.00 16.41 9.83 10.45

PO45628 1998 VN-TRANSMISSION & DISTR 0.00 199.00 0.00 0.00 39.69 36.60 67.92 3.24

Total: 0.00 3,643.49 0.00 29.25 47.09 2,800.48 740.57 207.68

93

VIETNAM STATEMENT OF IFC’s

Held and Disbursed Portfolio In Millions o f U S Dollars

Committed Disbursed

IFC IFC FY Auoroval Comuanv Loan Equity Quasi Partic. Loan Equity Quasi Partic.

2003

2002

2002 2002

2005

1998 1997

2004

2005

2001

2006

2003 2004

2005 2006

2002

2003

ACB-Vietnam

CyberSoft

Dragon Capital F-V Hospital

Khai Vy MFL Vinh Phat

Nghi Son Cement

Olam Paul Maitland

RMIT Vietnam

SABCO Sacombank

Sacombank Sacombank

Sacombank

VEIL

VEIL

0.00 0.00 0.00

5.00

6.00 0.13

10.09

20.00

7.20

7.25

20.00 0.00

0.00 0.00

0.00 0.00 0.00

5.02

0.06 0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

2.77 2.3 1 2.05

3.05 0.00

7.41 2007 VEIL 0.00 6.15

Total portfolio: 75.67 28.82 6.05 1.88 45.92 28.82 6.05 1.88

0.00 0.00 1.05

3.00 0.00

0.00 0.00 0.00 0.00

0.00

0.00 0.00 0.00 0.00 0.00

2.00

0.00 0.00

0.00 0.00 0.00 0.00 0.00 0.00 1.88

0.00 0.00

0.00 0.00 0.00

0.00 0.00

0.00

0.00 0.00 0.00

0.00 0.00 0.00 5.00

0.00 0.13

10.09

20.00

7.20

3.50 0.00

0.00 0.00

0.00 0.00 0.00

0.00

0.00

5.02 0.06

0.00 0.00 0.00

0.00 0.00 0.00 0.00

0.00

0.00 2.77

2.31 2.05

3.05

0.00 7.41

6.15

0.00 0.00 1.05 3.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00 0.00 0.00 0.00

2.00

0.00 0.00

0.00

0.00 0.00 0.00

0.00 0.00

1.88

0.00

0.00 0.00 0.00

0.00 0.00

0.00

0.00 0.00

0.00 0.00

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

2000 MFL-AA 0.00 0.00 0.00 0.00 2006 CCS-Asia 0.02 0.00 0.00 0.00

2000 Interflour 0.01 0.00 0.00 0.01 2006 CII-Vietnam 0.00 0.00 0.00 0.00

2000 MFL Mondial 0.00 0.00 0.00 0.00

2002 F-V Hospital 0.00 0.00 0.00 0.00 1999 MFL Minh Minh 0.00 0.00 0.00 0.00 1999 MFL Chau Giang 0.00 0.00 0.00 0.00

Total pending commitment: 0.03 0.00 0.00 0.01

94

Annex 14: Country at a Glance

VIETNAM: VN- HIFU Development Project

POVERTY and SOCIAL Vietnam

2005 Population, mid-year (millions) 83.0

GNI(At1asrnathod. US$ billions) 514

Average annual growth, 1999.05

GNiparcapita (Atlasmathod, US$) 820

Population (%, 11 Lab0 r force (%) 2.1

M o s t recent est imate ( l a tes t year avai lable, 1909-05)

Poverty (% of population balo wnationalpo varty line) 29 Woan population (%of fotaipopuiatlon) 26 Lifa axpectancyat birth (pars) 70 Infant mortality(per /000iiva births) n Childmainutrition (%ofchildrenundar5) 28 Access to animprovadwatarsourca(%ofpopulation) 85 Literacy(%ofpopuiation age S+ 90 Gross primaryanrollmant oof school-agepopulation) 98

Mala 0 1 Famala 94

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1985 1995

GDP (US$ blilions) 14.1 20.7 Gross capital formation/GDP ., 27.1 Exports of goods and sarvicasiGDP .. 32.8 Gross domestic savingdGDP .. 8.0 Gross national savingslGDP .. s .2

Current account balancaiGDP -3.8 -B.5 lntarast pa)rments/GDP 0.0 0.4 Total dabtiGDP 0.4 P2.8

Present valueof dabt1GDP Present value of dabtlagorts

Total debt sarvicaiaxports .. 4.7

1985-95 1995-05 2004 (average annual gro Mh) GDP 8.5 6.9 7.7 GDP percapita 4.3 5.8 8.6 Exports of goods and sewices 25.2 15.8 27.9

East A8ia a Low- Pacl f lc i ncome

1885 2,353 1627 580 3,067 1364

0.9 19 13 2.3

41 30 70 59 29 80 15 39

79 75 91 62 115 D4 18 ID in 99

2004 2005

45.2 52.4 35.8 86.4 28.3 322

-3.8 0 7

39.4 2.6

34.1 50.4

2005 2005-09

8.4 7.5 7.4 8.4 '6.0 15.0

)evelopment diamond'

Life expectancy

GNI Gross par primafi

anrollmant capita

Access to improvadwatarsourca

-Vietnam - Lo wincoma group

Economlc ratios'

I Trade

I 1

I Indebtedness

-Vietnam Lowincoma group

STRUCTURE o f the ECONOMY

(%of GDP) Agriculture Industry

Services

Household final consumption axpanditura General gov't final consumption aganditura imports of goods andsarvicas

Manufacturing

(avarageannualgronth) Agriculture Industry

Services

Household final consumption axpenditura Ganaral gov't final consumption axpanditura Gross capital formation Imports of goods and services

Manufactunng

1985 1995

40.2 27.2 27.4 28.8 20.5 '6.0 32.5 44.1

.. 73.8

.. 8.2

.. 419

1985-95 1995.05

3.5 4.1 7.3 D.0 4.3 110 8.4 5.7

.. 5.2

.. 3.8 25.8 9.8 24.2 8.5

2004

218 40.1 20.3 38.2

65.3 8.4

73.6

2004

3.5 0.2 0.1 7.5

7.1 7.8 0.5

25.2

2005

2005

Growth o f cap l ta l and GDP ('A)

W 01 02 03 W 05

-GCF -GDP

jGrowth o f expor t8 and Impor t s ('A)

w 01 02 03 M 05

Nota: 2005data are praliminaryastimatas. This tabla was producadfrom the Davalopmant Economics LDB database. 'The diamonds showfour kayindicators in the country(in bold) compared with its incomagroupavaraga. If data are missing, thadiamondwili

be incomDlata.

95

1 8 5

%7

990

Currunt accoirrif balancn -933

265 269

......................... " .............................................................................. tnliarioo (a) v -

. ______- ~ -. .................................... ;Export and import two18 (US$ milt.)

1.M coo I

*-

c - I - - --- iCurrsnt account btilancs to G D P ('At

MAP SECTION