CONTENTS

Page EXECUTIVE SUMMARY Error! Bookmark not defined.

I. OVERVIEW Error! Bookmark not defined.

II. RESULTS Error! Bookmark not defined.

III. ACKNOWLEDGEMENTS Error! Bookmark not defined.

4 Details of Not Implemented Recommendations

Project Procurement-

Related Review

Loans 2754-VIE, 2961-VIE, and 3251-

VIE: Water Sector Investment

Program [Projects 1, 2, and 3]

Office of Anticorruption and Integrity October 2019

This is a redacted version of the document, which excludes information that is subject to exceptions to disclosure set forth in ADB's Access to Information Policy.

CURRENCY EQUIVALENTS (as of 30 April 2018, the report cutoff date)

Currency unit VND1.00

=

Vietnamese Dong (VND) $0.00004395

$1.00 = VND22,755

NOTES

In this report, “$” refers to United States dollars.

ABBREVIATIONS

AACT – average annual construction turnoverADB – Asian Development BankAFS – audited financial statementsBEC – bid evaluation committeeBER – bid evaluation reportCFL – credit facility letterCoFL – commitment funding letterCSC – consultant selection committeeHDPE – high-density polyethylene pipesJV – joint ventureMPI – Ministry of Planning and InvestmentOAI – Office of Anticorruption and IntegrityOCR – ordinary capital resourcesPMU – project management unitPPRR – project procurement-related reviewSAV – Audit Office of Viet NamWSC – water supply company

CONTENTS

Page EXECUTIVE SUMMARY i I. OVERVIEW 1

A. Program Background 1 B. Scope and Review Methodology 2

II. RESULTS 3 A. Project Management Strengths 3 B. Program Vulnerabilities 4

1. Procurement 4 2. Financial Management 11 3. Asset Management 13

III. RECOMMENDATIONS 15 IV. ACKNOWLEDGEMENTS 17

APPENDIX

A Three Core Principles of Project Integrity

Project Procurement-Related Reviews

Mandate:

ADB’s Anticorruption Policy requires all parties, including borrowers, beneficiaries, bidders, consultants, suppliers, contractors, and ADB staff to observe the highest ethical standards when participating in ADB-related activities. The Policy supports ADB’s obligation, under Article 14 (xi) of the Agreement Establishing the Asian Development Bank, to ensure that the proceeds of ADB financing are used only for intended purposes.

The Office of Anticorruption and Integrity (OAI) conducts project procurement-related reviews (PPRRs) or proactive project integrity risk reviews to help prevent and detect integrity violations (i.e., fraud, corruption, collusion, coercion, abuse, conflict of interest, and obstruction).

Objective:

A PPRR assesses project integrity risks through the (i) examination of processes, procedures, and documentation related to procurement, financial management, and contract implementation/management, and (ii) inspection of outputs. OAI recommends enhancements to mitigate or eliminate opportunities for integrity violations.

OAI conducts follow-up reviews on selected PPRRs to (i) assess the implementation progress of the PPRR recommendations, and (ii) assist the executing/implementing agencies and ADB in implementing any remaining recommendations.

A PPRR is neither an investigation of fraud and corruption nor an evaluation to assess development effectiveness of ADB-funded projects. It does not review project outcomes or development impact, which can only be assessed after the completion of a project.

In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

EXECUTIVE SUMMARY

The Office of Anticorruption and Integrity (OAI) of the Asian Development Bank (ADB) conducted a project procurement-related review (PPRR) of Viet Nam’s Water Sector Investment Program (Program). The main objective of the PPRR is to verify compliance with applicable agreements, policies, and guidelines, with a focus on preventing and detecting integrity violations. The PPRR team covered Projects 1 to 3 of the Program and visited 4 out of 16 water supply companies (WSCs), which are also the implementing agencies. It examined the procurement and financial management documentation of 11 of the largest civil works and consulting contracts and inspected related physical outputs. This report presents the findings and recommendations of the PPRR.

The Program is financed by loans under a multitranche financing facility (MFF) for an aggregate amount not exceeding $1 billion. ADB has approved Loans 2754-VIE, 2961-VIE and 3251-VIE to fund Projects 1, 2, and 3, respectively. The Program aims to improve efficiency and sustainability in Viet Nam’s water supply sector by addressing (i) supply–demand gaps, (ii) resource protection, (iii) storage improvement, (iv) technology improvements, (v) and health risks. It aims to benefit 15million people with improved water services.

The PPRR found that the project management units (PMUs) of the respective WSCs implemented robust controls over disbursement processes as evidenced by only two financial management findings. Further, strong collaboration between the ADB project team and the PMUs assured that major procurement and contract implementation decisions were made with adequate inputs received and proper oversight from ADB.

Nonetheless, the PPRR identified 11 high and medium risk findings that were mostly bid evaluation committee (BEC) lapses in evaluating bids. Findings that relate to the bid evaluation process diminished the integrity, fairness, and transparency of the Program. There were integrity concerns on three cases where the evaluation outcome would have changed had the bids been correctly assessed (sub-bullets i and ii). These indicated gaps in the capacity of the PMUs to undertake procurement activities. Therefore, the ADB Project team and PMUs need to pay attention to these findings and immediately apply lessons learned from this PPRR in the Program’s future procurement activities, if any. The asset inspection findings relate to two WSCs and concern the safety and health of beneficiaries, thus, also need to be promptly addressed. The high-risk findings include:

(i) Inaccurate evaluation of bidders’ financial qualifications. Across all four WSCs, thePPRR found the BEC, in evaluating bids (a) inconsistently used bidders’ financialinformation, (b) did not seek sufficient clarifications on questionable bid information, and(c) did not adequately document bid evaluation decisions. Affected contracts totaled 8out of the 11 sampled, where financial evaluation was inconsistent and/or deficient for16 winning and losing bids. The evaluation outcome would not have changed in all buttwo instances if the shortcomings had been addressed and bids had been reevaluated.Despite these findings, inspection of project outputs for the eight contracts affectedindicated that the contractors were able to fulfill their contractual obligations.

(ii) Inaccurate evaluation of construction experience. In one WSC, the PPRR foundthat the winning bidder submitted past contracts that did not meet the requirements forcontracts of similar size and nature in relation to amount or completion dates. Thedeficiencies in the two contracts submitted by the winning bidder should have resultedin its disqualification.

ii

(iii) Insufficient independent tests for high-density polyethylene (HDPE) pipes. In acivil works contract involving one WSC, the PPRR found that the quality of HDPE pipescould not be determined because the PMU had not commissioned independentlaboratory testing for them. Subsequent to raising the finding after the PPRR team’sasset inspection, the PMU instructed the contractor to have the quality tests completed,and was awaiting the laboratory results as of end of the PPRR fieldwork.

(iv) Improper storage of construction materials. In the same contract as in (iii) above,HDPE pipes and gravel were left uncovered, exposing them to potential damage; andin an unfenced lot that is open to the general public, risking possible theft. No actualcase of theft was reported.

To prevent similar procurement issues from occurring in future contracts under this Program, BEC should strictly and thoroughly evaluate bidders’ financial capacity, experience, and eligibility following the prescribed evaluation criteria. ADB’s project team should provide guidance to the WSC and collaborate with the Viet Nam Ministry of Planning and Investment (MPI), the executing agency, to provide training on bid evaluation to existing and potential BEC members. When there are concerns on bid/proposal evaluation aspects, ADB must review bids/proposals before providing its “no-objection”.

The PMU should require the contractor to properly store construction materials and provide sufficient physical protection from theft and possible damage.

All findings and recommendations were discussed with and acknowledged by the WSCs. The lessons from this PPRR, if adopted, will strengthen the procurement, financial management, and asset management capacities of participating WSCs and will thus benefit future similar programs and projects in Viet Nam. OAI will conduct a follow-up review on the Program in due course.

OAI appreciates the courtesy and support extended to the review team and cooperation by the four WSCs, the Foreign Economic Relations Department of Viet Nam’s MPI, and ADB’s Southeast Asia Regional Department through its Viet Nam Resident Mission.

1

I. OVERVIEW

1. The Office of Anticorruption and Integrity (OAI) of the Asian Development Bank (ADB)conducted a project procurement-related review (PPRR) of the Water Sector Investment Program– Projects 1, 2, and 3 (Program) in Viet Nam from 28 May to 15 June 2018.12 This report presentsthe findings and recommendations of the PPRR.

2. The PPRR verified the Program’s compliance with applicable agreements, policies, andguidelines, including the loan agreement and applicable ADB procurement and financialmanagement policies and guidelines. The PPRR focuses on preventing and detecting integrityviolations, which may lead to increased costs (financial, environmental, and social), reducedrevenues, and misuse of ADB funds.

3. The Program’s vulnerabilities and risks in the areas of procurement, financialmanagement, and asset management were identified through the review of 11 sampled contractsawarded as of 30 April 2018.

A. Program Background

4. Table 1 summarizes the Program. The PPRR covered Projects 1 to 3 of the Program andvisited 4 out of 16 water supply companies (WSCs), which are also the implementing agencies.

Table 1: Viet Nam Water Sector Investment Program at a Glance

Project title Water Sector Investment Program – Tranche 1

Water Sector Investment Program – Tranche 2

Water Sector Investment Program – Tranche 3

Financing modality Sovereign multitranche financing facility Loan number Loan 2754-VIE Loan 2961-VIE Loan 3251-VIE Total estimated project cost

$138 million $255 million $169 million

Approval and effectivity dates

7 June 2011; 24 May 2012

7 December 2012; 18 September 2013

27 March 2015; 29 March 2016

Amount and type of ADB and non-ADB financing

OCR: $138 million OCR: $212 million Counterpart: $43 million

OCR: $142.5 million Counterpart: $26.5 million

Intended program outcome

The investment program aims to improve efficiency and sustainability in Viet Nam’s water supply sector by addressing (i) supply–demand gaps, (ii) resource protection, (iii) storage improvement, (iv) technology improvements, and (v) health risks.

Impact Sustainable provision of safe water in Viet Nam

Sustainable provision of safe water in Binh Duong, Dak Lak,

Sustainable provision of safe water in Bac Giang, Nghe An,

1 OAI was assisted by Ernst & Young, Viet Nam (collectively, the PPRR team). 2 Subsequent to issuance of the preliminary findings matrixes between 10 to 25 June 2018, feedback was received

from the water supply companies until July 2018. Additional document review and validation, and analyses were performed thereafter. The PPRR team also discussed VRM colleague’s concerns on certain aspects of the findings between July and September 2018. The findings from all water supply companies reviewed were then consolidated, grouped according to nature, and given risk ratings. The draft report was issued in June 2019 to water supply companies reviewed and ADB’s Southeast Asia Regional Department and OAI received feedback in July 2019. The revised draft was recirculated to ADB’s Southeast Asia Regional Department, and later to Controller’s Department, who provided further comments in August 2019.

2

Quang Tri and Thua Thien Hue Provinces, and Da Nang and Ho Chi Minh Cities

Quang Nam, Thai Nguyen, and Than Hoa Provinces

Outcome WSC’s operational management strengthened

Improved efficiency of participating water supply companies

Improved efficiency of participating water supply companies

ADB = Asian Development Bank, OCR = ordinary capital resources, PPRR = project procurement-related review, WSC = water supply company. Source: Asian Development Bank.

B. Scope and Review Methodology

5. The PPRR firstly determined the WSCs with the largest share of subloans across the Program’s 3 tranches. Geographical location of the top eight WSCs was then considered to cover a wide geographical spread in Program implementation, resulting in the shortlisting of four WSCs. A sample of 11 contracts was selected (see Table 2). Figures 1 and 2 depict the extent to which these 11 contracts comprised the total value of contracts awarded and total disbursements, respectively, for each of the Program’s tranches.

Table 2: Summary of Implementing Agencies and Number of Contracts Reviewed in Respective Locations

Location Implementing Agency No. of Contracts Reviewed

Location 1 WSC 1 2 Location 2 WSC 2 2 Location 3 WSC 3 2 Location 4 WSC 4 5

6. For the sampled contracts, the PPRR (i) assessed the internal controls and capacity of the project management units (PMUs) of the four WSCs, (ii) examined the procurement processes and related documentation for all procurement stages, (iii) verified the appropriateness of Program disbursements and related financial management documentation, and (iv) inspected the progress of civil works and other assets at the Program sites.3

3 PPRR site inspections covered nine civil works contracts at various stages of completion.

3

Figure 1: Contracts Awarded versus Contracts Reviewed

Figure 2: Total Disbursements versus Sampled Disbursements

II. RESULTS

A. Project Management Strengths

7. The PMUs implemented major project decisions in consultation with the ADB projectteam.4 The PMUs put in place robust controls over fund use and monitoring, as can be gleanedfrom the PPRR’s identification of only two financial management findings.

4 In this report, ADB project team refers to ADB Southeast Asia Regional Department’s (SERD) project officer, project analyst, and other staff responsible for the Program.

113 105

32

88

38

13

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20

40

60

80

100

120

Loan 2754-VIE Loan 2961-VIE Loan 3251-VIE

Amou

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$ M

illio

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Contracts Awarded Contracts Reviewed

24

20

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16 17

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30

Loan 2754-VIE Loan 2961-VIE Loan 3251-VIE

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Total Loan/Grant Disbursements Disbursements Reviewed

4

8. Accountability and project ownership were noticeable among PMU officers and staff. Three board members from two WSCs participated in the discussion of PPRR findings by providing valuable insights on procurement and financial management practices in Viet Nam.5 They also assisted the PMUs in identifying risk mitigation measures. PMU staff addressed PPRR team queries timely and adequately.

9. Three PMUs kept project files properly and were able to timely provide original documents at the start of the PPRR fieldwork.6 One of the PMUs prepared a document summary list that showed the completeness and sequence of the procurement documents.7 This support was very helpful to the PPRR team.

B. Program Vulnerabilities

10. The PPRR identified a total of 31 findings from the review of 11 contracts. It rated each finding as high, medium, or low risk, to assist the WSC and ADB, as applicable, in prioritizing appropriate corrective action.8 The PPRR evaluated each finding with respect to how it may compromise the core principles of project integrity (integrity pillars): (i) transparency, (ii) fairness, and (iii) accountability and control. Appendix A provides an overview of each integrity pillar. This PPRR report only discusses high- and medium-risk findings. 11. This report highlights 11 findings. They comprise (i) 5 findings in procurement, (ii) 2 in financial management and disbursements, and (iii) 4 in asset management. There were two procurement findings that were subdivided due to several dimensions covered.

1. Procurement

12. The five findings on procurement indicate weaknesses among the PMUs in the evaluation of financial qualifications, bidders’ eligibility, and technical requirements.9 Two of the five findings on procurement appeared across more than one WSC and require focused guidance by and training from ADB (Table 3). Further, it is expected that WSCs ensure that lapses in bid evaluations will not be repeated in future ADB-financed contracts.

Table 3: Procurement-Related Findings

No. Finding Integrity Pillar

Compromised Number of Contracts Affected in Respective Program Locations

1 Inaccurate evaluation of bidders’ financial qualifications

Fairness Location 1 [1 contract]; Location 2 [2 contracts];

Location 3 [2 contracts]; and Location 4 [4 contracts]

5 WSC 3 and WSC 2 6 WSC 1, WSC 2, and WSC 3 7 WSC 1 8 Risks are defined as follows: (i) High: Immediate attention and prompt corrective action are required since failure to

take action could result in major adverse impact on the Program and the reputation of ADB and the Government of Viet Nam. Medium: Action is required since failure to take action could result in negative consequences on the Program and the reputation of ADB and the Government of Viet Nam. Low: The finding may not negatively impact the project and ADB’s reputation, yet any corrective actions will result in increased efficiencies.

9 The PPRR noted that two of the four visited WSCs engaged consultants to complete detailed bid evaluations, while the other two did not. In spite of this, the nature and number of procurement findings for all four WSCs in the area of bid and proposal evaluation highlight the improvements needed in these areas.

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No. Finding Integrity Pillar Compromised

Number of Contracts Affected in Respective Program Locations

2 Review of construction experience and technical requirements needs improvement

Fairness Location 3 [2 contracts]

3 Incomplete assessment of bidders’ eligibility

Fairness Location 3 [2 contracts] and Location 4 [1 contract]

4 Questionable evaluation of key experts and firm experience

Fairness Location 4 [1 contract]

5 Bid price comparison documentation needs enhancement

Transparency Location 1 [1 contract]

High-Risk Findings 13. Inaccurate evaluation of bidders’ financial qualifications. Across all four WSCs, the PPRR team observed inaccuracies in the evaluation of financial capacity of bidders in eight contracts. In two instances, correct evaluation might have changed the outcome of the bid evaluation (sub-finding c and e). The numerous findings under this category across the four WSCs indicate their need for capacity development on conducting financial capacity assessments in bid evaluations.

Table 4: Sub-findings and Number of Contracts Affected in Respective Locations

Finding: Inaccurate evaluation of bidders’ financial qualifications Ref. Sub-finding Number of Contracts Affected in

Respective Program Locations a) Inconsistencies in the bid evaluation committee’s

recalculation of available liquid assets and credit lines

Location 2 [2 contracts]

b) Insufficient information to support statement of available financial resources

Location 1 [1 contract]; Location 3 [2 contracts]; and

Location 4 [2 contracts] c) Inadequate clarification sought on qualified

auditor’s opinion Location 1 [1 contract]; Location 2 [1 contract]; Location 3 [1 contract]; and

Location 4 [2 contracts] d) Deficient bidder financial statements accepted Location 2 [2 contracts] and

Location 3 [2 contracts] e) Shortcomings in the review of ongoing contract

commitments Location 2 [2 contracts]

a) Inconsistencies in the bid evaluation committee’s recalculation of available

liquid assets and credit lines 14. In the bid evaluation of two civil works contracts, the bid evaluation committees (BECs) recalculated available liquid assets and credit lines inconsistently in their analyses of bidders’ financial capacity:

6

(i) In one contract, the BEC incorrectly disregarded the time deposits of one bidder, despite these qualifying as liquid assets.10 This, however, would not result in a change in the evaluation outcome of the bids. In another contract, the same BEC included time deposits in calculating liquid assets.11 The BEC’s inconsistent treatment diminishes the fairness of the evaluation.

(ii) In one contract, the BEC considered either the credit facility letter (CFL) or the commitment funding letter (CoFL)12 as documentary support of the credit lines.13 In another contract, the same BEC included both types of letters in the computation of bidders’ available financial resources.14

The same BEC also did not thoroughly scrutinize the amounts in the submitted letters in terms of whether these qualify as credit line. It did not seek clarifications from the bidder on the conditions of credit, nor on any overlaps between the amounts in CFLs and CoFLs, when issued by the same bank.15 This could have led to overstatement of the bidders’ financial resources and qualifying a bidder that would not meet the financial resources requirement.

b) Insufficient information to support statement of available financial resources

15. In four civil works contracts, the financial capacity of some bidders could not be confirmed due to insufficient information supporting their available sources of financing. The BECs that reviewed these bids did not request full documentation from the bidders to support the statement of available financial resources. Findings include:

(i) A winning bidder’s joint venture (JV) member’s 2015 and 2016 average annual construction turnover (AACT), as stated in bid Form FIN-2, did not match with the figures in its audited financial statements (AFS). In response to the BEC’s clarification request, the JV member only provided a breakdown of its 2016 AACT, but did not support this with any corresponding documents. Neither the 2015 or 2016 AACT were fully supported, but both were accepted by the BEC. The PPRR team’s review of the audited 2015 revenue amount and historical revenue trend, however, showed that AACT requirements would have been met.

(ii) For three contracts, the validity dates of credit letters submitted by winning bidders were due to expire before contract signing or were not indicated.16 In one of the

10 As defined in bid Form FIN-3, liquid assets consist of cash and cash equivalents, short-term financial instruments,

short-term available for sale-securities, marketable securities, trade receivables, short-term financing receivables, and other assets that can be converted to cash within one year.

11 Location 2: The BEC did not consider four time-deposit balances of Bidder A, a losing bidder, totaling VND8.85 billion in its bid submission for contract 1 in Location 2. In contrast, the BEC considered all bidders’ liquid assets, including time deposits, in their bid submission for contract 2.

12 CFLs establish the maximum credit amount extended to the bidder subject to bidder’s compliance with the bank’s credit terms. CoFLs allocate the bank’s funds subject to the condition that the bidder is awarded the contract.

13 Location 2: Contract 1. The CoFLs were considered in the calculation of available financial resources of the winning and two losing bidders. However, only the CFL was considered for the third losing bid.

14 Location 2: Contract 2. 15 Location 2: Contract 2, where both credit letters were considered in the computation of bidders’ available financial

resources. 16 The BEC considered the credit line that was due to expire in the evaluation of the winning bid as evidenced by its

inclusion in the appendix to the bid evaluation report.

7

contracts, the evaluation outcome would not have changed if credit lines were excluded in the BEC’s evaluation results since the bidder had adequate working capital.17 In two other contracts,18,19 the expiration dates of credit letters were not indicated; thus, their validity could not be reasonably established for bid evaluation purposes. The BECs did not require the bidders to submit credit letters with extended validity dates or to resubmit credit letters that were due to expire before contract signing.

(iii) In three contracts, the remaining unutilized balances of the bidders’ credit lines were not shown in the general credit line agreements, nor in a supplemental letter.20 The maximum credit line amounts from all credit letters were included for bid evaluation purposes. The BECs did not request information on the unutilized balances of the general lines of credit. The BEC for one contract, stated that they did not seek bidder clarifications since large banks issued the credit lines and the Program’s timeline was very tight. Absence of information on used credit line amounts and available balances risks overstatement of the available financial resources of bidders resulting in the incorrect assessment of their financial capacity.

c) Inadequate clarification sought on qualified auditor’s opinion

16. The AFS submitted by winning and losing bidders across five contracts21 contained either modified or qualified audit opinions due to the auditor’s inability to verify balances of certain current asset and liability accounts.22 The causes identified were (i) late engagement of the auditor barring its participation in year-end physical count procedures or (ii) limited access to records. 17. In one contract, exclusion of the nonverified assets would result in negative net worth to the winning bidder, which is a ground for its bid rejection.23 The BEC should have sought clarification and supporting documents to ensure that the qualified opinion on unverified assets was immaterial to the bid evaluation. For losing bidders, financial capacity of those affected bids would be weaker if questionable account balances were excluded in the evaluation. There were no indications, however, of integrity violations as the lapses were deemed to be attributable to the weak capacity of BECs in undertaking financial capacity assessments when evaluating bids.

17 Location 3: Bidder C is the winning bidder for Contract 3. The credit letters would have expired prior to contract

signing date. 18 Location 4: Bidder D is the winning bidder for Contract 5. The credit letters expired prior to the conclusion of the bid

evaluation. 19 Location 3: Bidder E is the losing bidder for Contract 6. 20 Location 3: Bidder E, losing bidder, and Bidder C, winning bidder for Contract 6; Location 4: Contract 5 and Contract

7 where Bidder D and Bidder F are the winning bidders, respectively. 21 The subject bidders and the respective contracts are: (i) Location 1: JV Member 1, member of Bidder B, winning

bidder for Contract 3; (ii) Location 2: JV Member 2, member of Bidder G, winning bidder for Contract 1; (iii) Location 3: JV Member 3, member of Bidder E, losing bidder for Contract 6; and (iv) Location 4: Bidder F, winning bidder for Contracts 7 and 8.

22 Working capital components that cannot be verified include cash, inventory, accounts receivable, and accounts payable.

23 Location 2: JV Member 2, member of Bidder G, winning bidder for Contract 1

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d) Deficient bidder financial statements accepted 18. Across nine international competitive bidding and national competitive bidding civil works contracts reviewed, the bidding documents required submission of AFS with accompanying notes to support the bidders’ financial capacity disclosures. In three cases, bidders submitted unaudited or incomplete financial statements yet the BECs did not seek bidders’ clarifications. The findings listed below pertain to losing bids, hence, there was no negative impact on the project. However, the PPRR team highlights the need for BECs to critically assess both the form and substance of financial statements submitted as these documents, among others, primarily support the financial strength of participating bidders and may result in selecting unqualified bidders in the future.

(i) In one WSC, two bidders submitted unaudited financial statements.24

(ii) In the same WSC, a bidder submitted unaudited financial statements of itself and of its subdivisions.25 Instead of bidder’s separate income statement account figures, the simple aggregate of the bidder’s and its subdivisions’ income statement accounts was indicated in its bid Form FIN-1. This resulted in the overstatement of reported revenues and profits.

(iii) In another WSC, a bidder submitted unaudited financial statements26 while the AFS of the bidder were already available.27 The same bidder attached the 2013 to 2015 AFS to its bid submission for another contract, which the BEC awarded earlier.28 The total assets, revenues, and profits for comparable years were higher in the unaudited financial statements. Further, the pages containing the balance sheets were missing in both the 2014 audited and unaudited financial statements.

e) Shortcomings in the review of ongoing contract commitments

19. In two civil works contracts, the winning bidders did not disclose ongoing contract commitments in their bid Form FIN-4.29 Based on the PPRR team’s review of audited financial statements, specifically the bidders’ asset size and AACT, the two bidders had ongoing construction contracts. The BEC did not seek clarifications from the bidders in this area, which could have given it more information that might have led to different evaluation outcomes. Despite these shortcomings, inspection of project outputs of both contracts indicated that contractors were able to fulfill their contractual obligations. 20. Inaccurate evaluation of construction experience. In two contracts under one WSC, deficiencies in the review of both winning and losing bidders’ construction experience of completed and ongoing contracts indicate that the BEC needs to review these more thoroughly. In one WSC, the contract was incorrectly awarded to the winning bidder.

24 Location 2: (i) Contract 1. Bidder H, losing bidder: JV member 4, and (ii) Contract 2. Bidder I, losing bidder, are the

subject bidders. 25 Location 2: Contract 2. Bidder J, losing bidder 26 Location 3: Contract 4: Bidder K is the losing bidder. 27 The deadline for bid submission was on 3 April 2015 while the 2013 audited FS were issued on 20 March 2014. 28 Location 3: Contract 6. 29 Location 2: The finding applies to Contracts 1 and 2, where Bidders G and L are the winning bidders, respectively.

9

21. In a civil works contract, the BEC overlooked deficiencies in information about past contracts submitted by a losing and a winning bidder.30 The losing bidder did not provide supporting certificates of acceptance of works for two contracts of similar size and nature in its bid submission. The BEC, however, appropriately determined the same losing bid to be not substantially qualified on other grounds. The winning bidder submitted a $10.5 million contract that was below the prescribed $12.4 million threshold amount. It also submitted another contract that was completed beyond the five-year allowable completion date.31 These shortcomings in contracts submitted by the winning bidder should have resulted in its disqualification. 22. In another civil works contract, a winning bidder32 accurately disclosed the amount of its participation as subcontractor in bid Form EXP-1 to comply with the bidding documents’ requirements on contracts of similar size and nature.33 However, as shown in the BER, the BEC inappropriately considered the entire amount of the contract submitted by the bidder, instead of its proportionate share as a subcontractor. Correcting this error would not have changed the evaluation outcome.

23. In both civil works contracts above, the BEC also did not assess the employer’s requirement for successful record of operation of proposed manufacturers.34 The PMU did not require the winning bidder to submit proof of compliance to this requirement subsequent to contract awarding. 24. Although not a pass-fail criterion, the BEC should have thoroughly assessed bidders’ proposed manufacturers’ experience on supplying pipes in Viet Nam.35 There was no documentation available to support the BEC’s conclusion. Medium-Risk Findings

25. Incomplete assessment of bidders’ eligibility. The PPRR noted eligibility-related findings for two national competitive bidding and one international competitive bidding civil works contracts in two WSCs. Table 5 provides a summary of the findings and respective PMUs affected.

30 Location 3: Contract 6. The losing and winning bidders are Bidders K and C, respectively. 31 A contract will be deemed to meet the requirement if it was completed within 5 years prior to the 13 March 2017 bid

submission deadline. The contract was completed in April 2011. 32 Location 3: The subject contract and winning bidder, respectively, are Contract 4 and Bidder C. 33 Section 2.4.1 – Contracts of Similar Size and Nature of the bidding documents required the bidder to provide

evidence of substantial completion of at least two contracts of similar size, nature, complexity, etc. The bidder’s participation in these contracts, to be disclosed using bid Form EXP-1, should have a combined value that exceeds $11 million.

34 Section VI – Employers’ Requirements, Item 3.1.8 – Quality Assurance (Contract 6) and Item 3.1.9 – Quality Assurance (Contract 4) prescribes that “the Contractor shall also submit evidence that the manufacturer has a long and successful record of operation together with a representative list of overseas consignments where his pipe (of similar diameter) has been placed in operation.”

35 Location 3: Contract 4. Section VI – Employer’s Requirements, Item 3.2.1 – Ductile Iron Pipes and Fittings states that the “Manufacturer has record in supplying of pipe in Viet Nam market with diameter > 1.000, length > 10 km and certified by client that met requirements.”

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Table 5: Sub-findings and Number of Contracts Affected in Respective Locations

Finding: Incomplete assessment of bidders’ eligibility Ref. Sub-finding Number of Contracts Affected in

Respective Program Locations a) Conflict of interest and sanctions list checking

not performed Location 3 [2 contracts]

b) Undetected bidder’s nondisclosure of government ownership

Location 3 [1 contract] and Location 4 [1 contract]

a) Conflict of interest and sanctions list checking not performed for

subcontractors or suppliers 26. In two civil works contracts, the BER noted that the BEC reviewed only the nationality of proposed subcontractors or suppliers.36 It did not perform conflict of interest checking or vetted bidders’ against ADB’s complete sanctions list.37,38 Clauses (g), (h), and (j) of the Letter of Bid specifically extends compliance with eligibility requirements to subcontractors and suppliers.

b) Undetected bidder’s nondisclosure of government ownership

27. In two instances, BECs made inaccurate assessments of bidders’ government ownership as part of the eligibility evaluation. In the first instance, the losing bidder appropriately indicated government ownership in bid Forms ELI-1 and ELI-2, but the BEC still inaccurately stated in the BER that the bidder was not a state-owned entity.39 In the second instance, the losing bidder’s business registration certificate showed 12.4% state ownership. The letter of bid and bid Forms ELI-1 and ELI-2 in this case were silent on government ownership.40 The BEC assessed the bidder to be compliant with eligibility requirements.41 The BEC overlooked the bidders’ state ownership and did not consider it in the bid evaluation. The evaluation outcome would not have changed if the above findings were corrected. 28. Questionable evaluation of key experts and firm experience. In a consultancy contract,42 revalidation of the consultant selection committee (CSC) shortlisting record, technical proposal evaluation minutes, and related narrative comments identified deficiencies in the evaluation documentation, as detailed below:

36 Location 3: The contracts affected were Contracts 6 and 4. Section 3 – Evaluation and Qualification Criteria, para.

2.1 Eligibility along with bid Forms ELI-1, ELI-2, and Letter of Bid requires bidders and its subcontractors/suppliers to comply with nationality, conflict of interest, and ADB eligibility requirements.

37 In its 26 June 2018 feedback to the preliminary PPRR findings and recommendations matrix, the PMU explained that said aspects of bid evaluation were considered. However, the results were not reflected in the BER.

38 In its 18 July 2019 feedback, ADB’s Urban Development and Water Division, SERD explained that it conducts the sanctions list checking on bidders to mitigate the risk of WSCs not completing the same mandatory checks during the bid evaluation process.

39 Location 3: Contract 6. JV Members 3 and 5, having 71.38% and 54.5% state ownership, are the members of the joint venture entity and losing bidder.

40 Location 4: Bidder C is the losing bidder. 41 Based on WSC 4’s 6 July 2018 e-mail feedback, their bid evaluation showed that the losing bidder was (i) legally

and financially autonomous, (ii) operated under commercial law, and (iii) was not a dependent agency of the Employer. Considering the urgency of the Program, the PMU considered government ownership to be a minor deviation that may be clarified later on if the bidder was considered for contract awarding. There was no record of the PMU seeking clarification on this finding from the contractor prior or subsequent to contract awarding.

42 Location 4: Contract 9

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(i) The CSC described its assessment of the winning proposal in very general terms compared to its evaluation of experts of unsuccessful proposals, which were more detailed. For example, the strengths and weaknesses of the unsuccessful firms’ proposed consultants were clearly laid out in the narrative comments on the technical proposals. Similar discussion was missing for the winning proposal.

(ii) The CSC provided almost identical descriptions of strengths and weaknesses for two National Procurement Engineers. Apparently, the international experience is a strength but this was copy-pasted in both strengths and weaknesses sections of the evaluation documentation.43

(iii) The CSC considered a Deputy Project Manager’s experience working with international consulting firms to be valid in the assessment of experience section of the evaluation report, yet it also indicated that the expert did not have international experience as a weakness.44

(iv) The PPRR assessed the winning firm’s proposed pipe engineers as lacking relevant experience.45 The previous role as construction supervisor presented by the firm’s personnel did not clearly indicate practical application in the pipe engineering field. The PMU explained that it conducted a parallel review of the qualifications, which included scrutiny of proposed experts’ experience, with its consultant whose services was funded with ADB loan.

29. Bid price comparison documentation needs enhancement. In a consultancy contract, support staff costs indicated by participating firms in their financial proposals were not reflected in their technical proposals and in the bid price comparison table.46 The template provided for the technical proposal did not contain a line item to capture support staff information. This resulted in the disconnect in cost components between the technical and financial proposals.47 The evaluation outcome would not have changed if all costs were accounted for since the winning proposal would still be the first-ranked.48 30. The review also noted that contract negotiations reversed the deduction for support staff costs leading to a higher contract price. This reversal was not described in the minutes of contract negotiations diminishing the transparency of the process. The PMU acknowledged these findings and committed to improving documentation of price evaluation narratives and minutes of contract negotiations.

2. Financial Management

31. The PPRR made two findings on financial management that may lead to Program losses if not addressed. Table 6 summarizes the findings, and further details are provided in the findings and recommendations matrixes of the respective PMUs.

43 This finding applies to the review of the technical proposal submitted by losing firm Bidder M. The proposed experts

were Expert 1 and Expert 2. 44 This finding applies to the review of the technical proposal submitted by losing firm Bidder N. The proposed expert

was Expert 3 45 Bidder F is the winning bidder. 46 Location 1: Contract 10. 47 Support staff costs not reflected in the technical proposal amounted to $62,300. 48 Bidder O is the winning consultant, proposing a fee of $1,916,979 excluding taxes and deduction for staff support

costs.

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Table 6: Financial Management-Related Findings

No. Finding Integrity Pillar Compromised

Number of Contracts Affected in Respective Program Locations

1 Overpayment by ADB because of state audit disallowance of expenditures

Accountability and Control

Location 3 [1 contract]

2 Periodic imprest fund account reconciliations not performed

Accountability and Control

Location 2 [2 contracts]

Medium-Risk Findings

32. Overpayment by ADB because of state audit disallowance of expenditures. The audit of the Audit Office of Viet Nam (SAV) determined ineligible expenditures totaling VND1,057,818,40049 in one of the contracts.50 As the contract is admeasurement in nature, costs were adjusted to bring specific bill of quantity items to actual amounts and/or quantities used. The PMU did not share the SAV audit report with the PPRR team for examination due to confidentiality. In particular, the SAV audit report covers other projects not funded by ADB.51 The Provincial People’s Committee52 formalized the cost adjustment to the contractor’s billing and to the government’s share. As a result, ADB’s share of eligible expenses should have been changed as shown in Table 7.

Table 7: Recomputed ADB Share (in million VND)

PPRR Team Recomputation

Particulars Total Invoice Amount ADB Share Government

Share Revised

ADB Share (90.90%)

Excess ADB Share

Before adjustment

228,454 207,665 20,789 - -

After adjustment

227,397 207,665 19,732 206,704a 962a

a Recomputed amount of ADB share and excess charged using the exchange rates on 30 April 2019 is $9,083,875 and $42,257, respectively. The actual US dollar value of the refund will be converted at refund processing date. 33. Consequently, ADB’s percentage share was higher at 91.32%, or 0.42% over the approved rate of 90.90%.53 ADB should be refunded for the overpayment.

49 This amount is equivalent to $46,487, converted using currency equivalents as of 30 April 2018, the report cut-off

date. 50 Location 3: Contract 6. 51 Verification of the SAV audit report would have allowed the PPRR team to establish the propriety of audit procedures

performed, as well as the reasonableness and accuracy of the disallowance. This was a contravention of the right to inspect relevant records of the Loan Agreement (23 May 2013) and Project Agreement (23 May 2013), respectively, under Section 4.04 and Section 2.10.

52 The Location 3 Provincial People’s Committee Decision No. 965/QD-UBND dated 12 April 2018. 53 Loan Agreement between Socialist Republic of Viet Nam and Asian Development Bank (23 May 2013), Attachment

to Schedule 3 set out the approved percentage of ADB financing for the respective cost categories and implementing agencies.

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34. Periodic imprest fund account reconciliations not performed. The PMU for one WSC did not perform periodic reconciliations of the imprest fund account.54,55 Project advances received under the loan are used to make some payments to contractors. The PMU’s reconciliation of imprest fund balances should be performed following ADB’s Loan Disbursement Handbook (2017, as amended from time to time).56

35. The PPRR noted that the PMU had difficulty using the English version of the imprest account reconciliation statement template provided in the ADB’s Loan Disbursement Handbook. ADB has since published a Vietnamese translation of the Loan Disbursement Handbook that the PMU should refer to for better understanding. However, all disbursement forms, including the imprest fund account reconciliations, are required to be prepared in English and submitted to ADB.57 ADB Controller’s Department (CTL) indicated that, in cooperation with the Viet Nam Resident Mission (VRM) disbursement unit, it has been providing capacity building to WSCs through disbursement seminars.

3. Asset Management

36. The PPRR team inspected (i) above-the-ground Program assets, (ii) batching plants and warehousing facilities, and (iii) general site safety at the construction sites. Overall, contractors had completed works in accordance with designs and specifications. Shortcomings noted for visited WSCs highlighted areas for stronger consultant supervision. Table 8 summarizes the four high- and medium-risk findings. Further details are provided in the findings and recommendations matrixes of the respective PMUs.

Table 8: Asset Management-Related Findings

No. Finding Integrity Pillar Compromised

Number of Contracts Affected in Respective Program Locations

1 Insufficient independent tests for high-density polyethylene pipes

Accountability and Control

Location 2 [1 contract]

2 Improper storage of construction materials

Accountability and Control

Location 2 [1 contract]

3 Incomplete information and signoffs in onsite construction records

Accountability and Control

Location 2 [2 contracts]

4 Unclear physical and financial progress

Accountability and Control

Location 4 [1 contract]

High-Risk Findings

37. Insufficient independent tests for high-density polyethylene (HDPE) pipes. Contract specifications require construction materials, such as HDPE water pipes, to comply with the standards of TCVN 7305-2:2008 (ISO 4427-2:2007) for pipes and related components for conveying water for human consumption. Independent laboratory testing of pipes provides 54 The term imprest fund account has been replaced with Advance Account in the latest version of the ADB Loan

Disbursement Handbook (2017, as amended from time to time). 55 WSC 2 56 In particular, ADB Loan Agreement para. 8.3 emphasizes that the borrower, executing agency, and or implementing

agency “must have adequate administrative and accounting capacity to establish sufficient internal control, accounting, and auditing procedures to ensure efficient use and operation of” the imprest fund procedure.

57 The ADB Loan Disbursement Handbook, Section 7.6, footnote 1 prescribes that supporting documents, such as advance account reconciliation statements, should be translated in English if written in the local language.

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objective means of establishing compliance with the standards. In one contract examined,58 only the pressure test for HDPE pipes was completed, among several other required tests.59 The quality of HDPE pipes could not be ascertained in the absence of laboratory tests for other pipe specifications.

38. Improper storage of construction materials. HDPE water distribution pipes and gravel were left uncovered in an open lot adjacent to the construction site, as shown in Figure 3.60 Prolonged exposure to the elements without adequate protective cover risked potential damage to the pipes and gravel; and leaving them in an unfenced lot risked possible theft.

Figure 3: Improperly Stored Construction Materials

Observed in Location 2, Contract 2

Source: OAI PPRR team Medium-Risk Findings

39. Incomplete information and signoffs in onsite construction records. The contract agreement61 and the Ministry of Construction of Viet Nam62 require specific data to be reflected in the onsite construction and quality records to facilitate detailed work progress monitoring.63 Based on the data captured, any critical issues are identified and escalated to the PMU, and the contractor and the supervision consultant prepare their monthly progress reports.

40. The PPRR team randomly selected construction and quality records for one WSC and observed incomplete data and/or missing signatures of a supervision consultant representative

58 Location 2: Contract 2. 59 The standard requires an independent laboratory test to be performed on HDPE pipes prior to installation. The

criteria to be tested include: (i) outside diameter, (ii) thickness of pipe wall, (iii) plastic rating, and (iv) internal pressure bar, among others.

60 Location 2: Contract 2. 61 Contracts 1 and 2 are the affected civil works contracts in Location 2. 62 Article No.10 of Decree No. 26/2016 of the Ministry of Construction of Viet Nam. 63 The information required by the contract includes the following: (i) progress of the project; (ii) issues at the site; (iii)

quality assurance documents; (iv) relevant construction activities at the site, etc. Additionally, Decree No. 26/2016, mandates detailed information on: (i) site conditions, quantity of onsite workers and equipment, and daily tasks in the site; (ii) incidents, occupational accidents, and other issues and remedial measures during construction, (iii) construction and supervision contractor’s proposals; and (iv) relevant parties’ proposals to tackle construction issues.

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evidencing their review of said documents.64 This compromised the reliability and completeness of data captured in Program monitoring records. Consequently, any significant implementation issues were at risk of not being escalated for appropriate action in a timely manner. 41. Unclear physical and financial progress. The progress report for one contract did not disclose the actual physical and financial progress of the sampled contract in percentage terms.65 Although there was photo evidence of ongoing civil works, the PMU and ADB project team cannot perform comprehensive analyses of actual versus planned work completion and disbursements. These data also provide context on the measurement of contractors’ performance and financial capacity.

III. RECOMMENDATIONS 42. To improve the quality of procurement, financial management, and asset management in future contracts under the Program, the PPRR team recommends that

(i) the BEC and CSC, as appropriate:

(a) Strictly and thoroughly evaluate bidders’ financial capacity, experience, and eligibility following the prescribed evaluation and qualification criteria. The BEC and CSC should carefully review submitted bid forms against supporting documents and seek clarifications from bidders for discrepancies and/or deficiencies noted, especially, for first-ranked bidders. The BEC and CSC should sufficiently document evaluation results, including the basis for procurement decisions made (e.g., a decision to not seek clarifications from bidders), in the evaluation report and supplement these by evaluation tables and appendixes (paras. 13 to 28).

(b) Request supporting documents from bidders (e.g., invoices, past contracts, completion certificates, etc.) for AACT figures and include a summary of correspondences received in the BER (para. 15).

(c) Consider the significance of the items that cause qualified or modified audit opinions, in the context of bid FIN forms, seek clarifications from the bidders for questionable account balances, and document the results in the BER. Seek ADB’s guidance, as needed (paras. 16 to 17).

(d) Verify that participating companies or individuals are not included in ADB’s complete sanctions list, check for conflict of interest, and document the results in the BER (para. 26).

(e) Ensure that its members or any involved consultants adequately document in the shortlisting report the rationale/justification for not considering participating firms’ project experience (para. 28).

(f) Appropriately reflect all items considered in the evaluation of bid prices in the evaluation narrative and/or supporting tables (paras. 29-30).

64 Onsite records were examined during the visit of construction sites in Location 2 for Contracts 1 and 2. 65 Location 4: Contract 5 is the subject civil works contract.

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(ii) the PMU:

(a) Includes in the request for proposals clear instructions to the participating firms to present the support staff-related information in the technical proposal, when applicable (para. 29).

(b) Provides adequate justification in the contract negotiation minutes and supporting documentation for discrepancy(ies) between evaluated consultant’s fee and negotiated contract price, if any (para. 30).

(c) Prepares the Advance Account Reconciliation Statement as part of the withdrawal applications submission package following the prescribed ADB format (paras. 34 to 35).

(d) Monitor the independent test results covering all the test requirements, document completion of tests in the monthly progress reports, and provide test results to ADB for reference and validation (para. 37).

(e) Instructs the contractor to establish and document a policy on construction materials protection and storage, and records maintenance. The policy should cover materials handling, protection against damage and theft, the appropriate forms on tracking of materials movement, and responsible contractor personnel. On sampling basis, monitor compliance with this policy and document results in the monthly progress reports (para. 38).

(f) Issues a memo to (i) contractors to promptly provide complete and required information in construction records and quality documents, and (ii) the construction supervision consultant to indicate their completion of review of these documents through formal sign-offs (paras. 39 to 40).

(g) Submits to ADB the succeeding monthly progress reports reflecting the difference between the actual physical and financial progress versus the planned progress of the contract (para. 41).

(iii) the ADB’s:

(a) Project team compares the amount in the BER for the winning firm or bidder with the amount in the signed contract (paras. 29 to 30).

(b) Project team to provide to the PMUs ADB’s standard request proposal template that captures non-key personnel information (e.g., support staff) (paras. 29 to 30).

(c) Project team collaborates with the Ministry of Planning and Investment (MPI), PMUs, and PPFD to provide training on bid evaluation to existing and potential BEC and CSC members within the next six months, and every time a new BEC/CSC is formed, to ensure consistency and appropriateness of the evaluation (paras. 13 to 30).

(d) Project team must review bids/proposals (for prior review contracts) when there are concerns on bid/proposal evaluation aspects, before providing ADB’s “no objection,” and document the review and comments in the electronic Procurement Approval Forms (paras. 13 to 30).

(e) Project team, in collaboration with CTL, seeks refund to ADB before 31 December 2019 of VND962 million or $42,257 equivalent from the WSC with respect to the overpayment of ADB’s share of ineligible expenses (paras. 32 to 33).

(f) Validates completion of independent tests on all key assets through review of submitted test report results (para. 37).

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IV. ACKNOWLEDGEMENTS 43. The PPRR team acknowledges and thanks the officers and staff of the WSCs, the construction supervision consultants, and the MPI for their cooperation and assistance during the PPRR. Three WSCs were notably receptive of the PPRR findings and recommendations.66 The PPRR team also appreciates the support received from ADB’s Southeast Asia Department and its Urban Development and Water Division and VRM in the planning and execution of the PPRR. OAI remains available to discuss matters in this report or issues that may affect the integrity of Program implementation.

66 The subject WSCs are WSC 1, 2, and 3.

Appendix A

Three Core Principles of Project Integrity or Integrity Pillars

TRANSPARENCY FAIRNESS ACCOUNTABILITY AND

CONTROL

Proper documentation of key

decisions

Objective and reliable

bidding process and

requirements optimizing

competition

Accurate and timely project

accounting and reporting

Public disclosure of project

information

Eligible expenditures and

timely payments

Protection of confidential

information

Impartial evaluation

Credible complaints

mechanism

Adherence to contract

provisions on project delivery

Adequate project oversight

and management