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WORKSHOP RECOMMENDATIONS
“PUBLIC INVESTMENT RESTRUCTURING IN VIETNAM'S
CONTEXT OF GROWTH MODEL INNOVATION AND
ECONOMIC RESTRUCTURING”
Since implementation of reform so far, Vietnam has made great and comprehensive
achievements in the economic - social fields and officially become a middle-income country
in the world. However, the long-lasting of economic growth model by width which mainly
based on increase of investment capital, particularly low-efficient public investment, partly
made the economy face critical macroeconomic imbalances such as difference between
national savings and investment, trade deficit, budget deficit in the long term, etc. .. This is
the fundamental reason of macroeconomic instability such as high inflation, fluctuated and
unpredictable exchange rate, public debt and foreign debt gradually accessed dangerous
level, interest rate fluctuations in financial and monetary markets, decline in market belief
in macroeconomic management etc... So, economic restructuring has been an urgent
requirement in the context of the post-financial crisis and global economic downturn 2008-
2010 and our country entered a new stage of development to create the institutional
foundation and appropriate policies for rapid and sustainable development forthcoming.
One of the fundamental content of the economic restructuring process is public investment
restructuring.
The specific contents of the public investment restructuring initially required are: Firstly,
restructuring of capital for public investment, specifically (i) the proportion of capital in
total capital for public investment; (ii) the proportion of public investment over the society's
total capital investment; (iii) the relationship between public and private investment etc. ..
Secondly, restructuring of public investment in sectors: (i) which sector should be
centralized for allocation of investment (agriculture and rural development, transportation,
energy, industrial manufacturing, healthcare, education etc...); (ii) in each sector, which sub-
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sector should be focused on (e.g., in the transportation sector, we should focus on rail, road
or sea ports etc...). Thirdly, which conditions and institutions are necessary to support the
restructuring of public investment?
With the purpose of creating a forum for exchange and discussion aimed at finding strategies,
the breakthrough and implementation process of public investment restructuring in future
and even in 2011 as the National Resolution in 2011 on socio-economic development
planning stated, in the framework of the project “Supporting for advisory capacity,
verification and monitoring macroeconomic policies " funded by UNDP, the Commission
Economics of the National Assembly in collaboration with Vietnam Institute of Social
Sciences organized a workshop "Public investment restructuring in Vietnam's context of
growth model innovation and economic restructuring" in Hue city during 28-29 / 12/2010.
Mr. Ha Van Hien - Member of the Central Committee of the Communist Party of Vietnam,
member of the Standing Committee of the National Assembly, Chairman of the Economic
Committee and Mr. Nguyen Xuan Thang, Vice President of Vietnam Academy of Social
Sciences co-chaired the workshop.
There had attendance of Permanent Commission of Economy and some members of the
Economic Committee, Ethnic Council Representative and some Committees of the
National Assembly; representative of the Party Central Office, Government Office, Ministry
of Planning and Investment, Ministry of Transport, Ministry of Agriculture and Rural
Development; leaders of the People's Council, People's Committee and the Union of Thua
Thien-Hue National Assembly; delegation of MPs and representatives of the People's
Committees of provinces and cities directly under the Central Government; economic
experts, scientists from the Institute of Social Sciences of Vietnam and a number of research
institutes and universities; representatives of international organizations such as the
development program of the United Nations (UNDP), STAR Vietnam Project,
Development Authority of the United Kingdom in Vietnam and the news agencies, the
press.
In workshop, they analyzed, clarified the status of Vietnam public investment1, identified
1 At the seminar, public investment was understood as investment by the state budget capital under the provisions of
existing laws, including the state budget, credit under State guarantees, State credit capital and SOEs capital for
investment and development, and other funds managed by the State..
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the achievements and shortcomings and reasons, from which proposed the orientation of
public investment restructuring in the coming development phase under the above issues as
well as policies and measures to improve the efficiency of public investment. Report on the
results of the workshop was sent to the Party, National Assembly and the Government
agencies as well as related agencies and organizations by Economic Committee. Here are
some key recommendations synthesized from 24 papers and over 30 direct exchange
opinions and discussions at the workshop. The detailed recommendations were fully
collected in Workshop Yearbook.
Recommendation 1: In transition process of growth model, it is necessary to reduce
the proportion of public investment in society's total investment, improve the
efficiency of public investment as well as create equal opportunities for other sources
of society.
For years, Vietnam has pursued growth model primarily based on increase of investment
capital. Total social investment has continuously increased and maintained at a high level.
The rate of capital / GDP has increased from 35.4% in 2001 to 41.9% in 2010, the average
for the period 2001 to 2010 was approximately 41%, compared with 30.7% in the period
1991- 2000, it was the highest rate in East Asia and Southeast Asia2. In term of structure,
the state-owned sector still accounted for the largest proportion of the total social
investment, although the proportion of this sector had decreased from 59.1% in 2000 to
46.2% 20103 (Figure 1), accordingly, the decline was not because State restricted public
investment, but other economic areas had higher growth rates.
Although public investment over the last decade had dramatically changed the technical
2 In 2007, the ratio of investment / GDP of Vietnam was lower than China (44.2%), but much higher than
South Korea (29.4%), Thailand (26.8%), Indonesia (24.9%), Malaysia (21.9%) and the Philippines (15.3%).
Over the years, this proportion has decreased in most countries, meanwhile in Vietnam this increased sharply
and always maintained at a high level.
In term of absolute numbers, if calculating at 1994 constant prices, total social investment has increased from
VND 115 trillion in 2000 to VND 371 trillion in 2009, an annual average increase of 13.9%. In only 2010,
social investment rose 17.1% compared to 2009.
3 Estimates extracted from the appendices attached to the report to the Government at the 8th session of the
XII Congress.
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infrastructure, promoted economic growth and contributed to improve the quality of
people's living, in order to assess the efficiency of public investment, it is necessary to
consider the relationship between the capital spent and the results achieved. Capital
efficiency measure which is commonly used is capital ratio (Incremental Capital Output
Ratio - ICOR). Table 3 shows the high ICOR of Vietnam, or in other words, the investment
efficiency of Vietnam in 2000-2007 was relatively low. Meanwhile, the ICOR of the
developing countries over the equivalent period to Vietnam today was much lower (2.7
Taiwan (1981-1990), South Korea 3.2 (1981-1990), Japan 3, 2 (1961-1970), China 4.1
(1991-2003).
Important reason of not-so-high Investment efficiency of the economy was due to the
investment of the public sector did not achieve high economic efficiency as of investment
from the private sector, because the purpose of public investment was not entirely toward
profitability and economic efficiency. However, this cannot explain the inefficient
investment of the public sector. Although investment was for developing infrastructure,
developing economic - social regions in difficulty, or performing other social tasks, it is
essential to take care of economic efficiency because it was the first and most important
criteria for investment decision. Moreover, in the past 10 years, although the proportion of
investment in the industries had not changed much, the ICOR of public sector increased
rapidly, reflecting low investment quality and continuously declined. In addition, the low
efficiency of public investment also resulted from the lack of planning, scattered and
dispersed investment; funds were allocated to so many projects so the projects often lacked
capital and schedule extended, which increased investment costs and caused wasting,
created loopholes for corruption; weak management and monitoring made losses for
investment capital and quality was not assured as expectation; decision decentralization and
use of investment capital had not been so associated with monitoring, quality and investment
efficiency control, etc.
So, in the new development stage of the economy, beside the quick economic model
transformation from which primarily based on increase of investment capital to model
developed in depth, which aimed at productivity and sustainable development by
reallocation of economic resources, which should create a breakthrough in the restructuring
of public investment towards reducing the proportion of public investment in society's total
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investment, as well as enhancing the efficiency and the quality of public investment. In
addition, it is necessary to create equal opportunities for other sources of social investment
by proactively building and publishing lists of specific projects to call for the resources of
society, which aimed at investment and development under BOT, BT, PPP; creating
mechanisms to maximize social resources raised, decreasing dependence on the budget;
encouraging private sector to participate in bidding for the implementation of budget capital
projects, including ODA.
Recommendation 2: The role of public investment in the economy needs to be changed
in the direction of reducing function of "investment business", enhancing function of
"welfare" of the public investment.
In the socialist-oriented market economy, the "lead" role of State economic sectors does not
mean that the State must invest large quantities in all the fields which other economic sectors
can do. The State only concentrates public investment in a few key industries, which can
breakout and spread drastically, and can play the role of "midwife" and necessarily intervene
when there has market failure.
However, in recent years, the structure of public investment in the sectors did not clearly
show the role of "midwife" to the economy. In the period 2000-2009, investment in
economic sectors accounted for over 73% investment by the State, investment in the social
sectors which were directly related to human development (science, education and training,
health and social relief, culture, sports, personal and community service) were very humble,
decreased from 17.6% in 2000 to 15.2% in 2009. Investments in science, education and
training decreased from 8.5% in 2000 to 5.1% in 2009; health and social relief from 2.4%
in 2000-2003 to 3.2 - 3.9% of the years 2004- 2008, and decreased to 2.8% in 2009;
investment in the field of State management in recent years accounted for about 8% (Table
4 and Figure 2). Thus, public investment had mainly focused on sectors which the private
sector had the ability and willingness to invest, while investment in human resource
development had not been focused and not appropriate with context of the rapid
development of science - technology and knowledge economy. In addition, Figure 3 also
shows the structure of public investment in the sector almost had no significant change in a
decade, which also shows that we still did not use public investment as a tool to meet the
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goal of transferring economic structure in the long-term and regulating social development.
Have a deeper look into the structure of public investment in the industries, we could see
investment in high-tech industries and sectors which likely lead economic structural
transition towards modernization, did not yet meet requirements4. It was even contrary to
the fundamental principles of public investment is just to create the foundation for growth
and development, focusing investment in areas where market mechanism did not work or
worked inefficiently. So, in order to comply with the role of public investment, it is essential
to change mind of the public investment objectives towards reducing the "investment
business" function, strengthening the "welfare" of the public investment. Do not invest in
sectors where the private sector can undertake, shift the emphasis beyond the economic field
especially business, to focus on the development of infrastructure as well as other
foundation for the general development. Specifically, enhancing public investment in
infrastructure development (roads, power); investing or supporting a number of key
projects, sectors which could have spread effect in term of technology; investing in the
development and application of science and technology associated with production;
investing in education, health and social welfare to develop high level technical human
resource; improving management capacity and modernizing state management, ensuring
social security.
Recommendation 3: Strict control of public investment is an important measure to
help reduce the budget deficit, create the conditions for macroeconomic stability and
create a solid foundation for sustainable growth in the medium and long term.
Currently, our country's expenditures for investment and development are still high5. If fully
including categories of public investment (including the State budget and credit,
4 The manufacturing industries like machinery, equipment, medical instruments, precision engineering, optical
equipment, chemicals have lower growth than the average of the whole industry of State owned sector. Even
that, proportion in medical instruments, precision engineering, optical devices manufacturing industries
decreased and virtually no existence in the public sector also. Meanwhile, the mining industry grew faster than
the average rate, and took more and more proportion (Table 5). 5 Approximately one third of annual budget is spent on development investment (Table 6). In 2007, capital from budget
accounted for 9.8% of GDP, while in Indonesia it was 1.6%, Malaysia 5.8%, Philippines 1.8% (2000 figure), Thailand 3.2% ( 2004 figure), South Korea 3.7%, China 3.5% (2003 figure)
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government bonds and investment by SOEs), the proportion of state investment to GDP in
2000 was 20.2% and 17.3% in 2009 (Table 7). We can say that Government of Vietnam is
the biggest investor (as % of GDP) compared to governments in East Asia and Southeast
Asia.
Due to investment from budget was actually much higher than as planned and it accounted
for a large proportion of budget public investment was one of the main reasons of high
budget deficit for many years. For example, in 2010, budget capital was expected to be VND
125.5 trillion, in reality it was more than VND180 trillion, VND 55.5 trillion (44.2%) higher
than expected, equivalent to $ 2.7 billion (about 2.7% of GDP in 2010). If the investment
had been done as schedule, budget deficit in 2010 could be about 3.5%. In addition, if we
included the investment from government bonds, the budget deficit was of up to 9.45%, the
highest level in region (Figure 4).
In order to compensate for growing public spending, we have been implementing fiscal
policy, which continued to increase revenues, from 20.5% of GDP in 2000 to around 28%
in the period 2006-2010 and the revenue growth rate was always higher than the growth rate
of GDP. The State has more and more been earning society's earnings increase that private
businesses could be able to accumulate and invest. Raising ratio from GDP to the state
budget of Vietnam has been ranked highest in the region (Table 8).
Savings - investment imbalance in the public sector, or the budget deficit, has been the direct
cause of increasing difference between savings - investment in the economy, as a result: (i)
the current account deficit and growing national debt; (ii) the interest rate remained high
made it difficult for growth and accumulated financial risks, especially in the banking
system; (iii) persistent budget deficit caused high inflation in many years; (iv) budget deficit
and high interest rate narrowed the geographical balance of both fiscal and monetary tools
in macro-economic management, that made it difficult for macroeconomic policy to respond
to shocks to the economy , or we may have to accept higher cost. Thus, high ratio of public
investment in budget would undermine the macro foundation of the economy; reduce
operating geographical balance of Government in macroeconomic management that made
the economy easily suffer from adverse shocks from the outside. Therefore, the control of
public investment capital and fiscal discipline enhancement has important implication for
macroeconomic stability and creates a solid foundation for sustainable growth in the
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medium and long term. The specific recommendations are:
• Reduce funding ratio raised from GDP to the state budget, thereby creating a more
favorable environment so that the private sector have more accumulation for investment and
development. The excess amount of revenue compared with estimates has to put into
reserve.
• Reduce the budget deficit, strictly spend as budget estimates and do not arbitrarily
increase spending more than the estimates approved by Congress.
• Restructure State budget expenditure towards reducing State expenditure/GDP
through reducing expenditure for development, besides, ensuring regular expenditure
increase, debt / total state expenditure.
• Research to build a system of criteria for determining the priority order to ensure
public investment expenditures to be limited in the resource ability and consistent with the
policy priorities of the Government in the medium and long term.
• Gradually increase the autonomy in the activities of the State Bank, eliminate
funding for the budget deficit for the purpose of macroeconomic stability.
Recommendation 4: Improve the quality capital and effectively use capital for public
investment activities raised from government bonds. This should be considered as a
key measure in restructuring public investment.
Policy of funding for public investment from government bond (VGB) since 2003 until now
was a good decision and has made important contributions to the development and
improvement of the economy's infrastructure. However, during the implementation process,
the allocation of government bond for public investment projects had some shortcomings
and existences, as following:
Firstly, government bond fund is actually a loan, State budget has to pay, but it is placed
off-budget and allocated independently to state budget expenditure estimates; that led to
duplication of development & investment capital management.
Secondly, there were many ineffective investment projects because right from the planning
stage, they lacked of a long term vision and were changed frequently. The survey,
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formulation, appraisal, construction itself of projects using government bond fund was
limited, they had not yet accurately calculated total estimated cost, deployment and
complement time, so they had to regularly adjust the goal, scale and technical standards.
Thirdly, the management, allocation and use of capital among levels were limited.
Currently, the locals have had broader decentralization, investment decisions, total
investment capital; Central synthesized and allocated capital for the local. This way of
allocation did not reach the criteria of giving priority for locals, regions in difficulty, or for
special urgent projects. So many projects not really urgent still got capital, meanwhile some
other urgent projects which could promote efficiency needed to deploy quickly got dripping
allocation of capital, affecting progress of construction.
Fourthly, the total government bond fund had a great influence on the ability to balance the
budget and borrowing and repayment ability in the medium term. Some reasons for this
phenomenon are: (i) Government constantly added VGB goals, especially in the 2008-2009
period, to implement economic stimulus package; (ii) government bond allocation
mechanism was not reasonable. Government allocated capital and ministries, branches and
localities decided the total investment, leading to that the locals submitted supplemental list
or spread investment, lacked focus, which soared demand for capital and the government
were in the passive voice when they had to meet demand for capital; (iii) in the process of
implementing projects, there had problems as price change of materials, rising labor costs
and compensation for ground clearance, long construction period, project scope adjustment
6etc...
Fifthly, due to higher demand for government bond, government bond issuance was not
closely coordinated with monetary policy to achieve the objective of lowering the interest
rate. In 2010, government bond interest rate at some point of time was higher than credit
institutions interest rate, which made it difficult for credit institutions to mobilize capital
and created pressure to raise interest rate. In addition, government bond buyers are mainly
banks, then the bonds themselves were used to discount offers at the central bank. This made
credit supply increased but only between commercial banks and the central bank and did
6 At first, total investment of the works, investment projects from VGB period 2003-2010 was VND 246 447 billion,
but now through the synthesis of the Ministry of Planning and Investment, the total adjusted investment was up to
VND 558 654 billion (Report No. 6082 / BC-BKH of the Ministry of Planning and Investment dated 31/8/2010).
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not go into production business and did not cool down interest rate in the market.
Prior to the mentioned shortcomings, in order to restructure public investment and improve
the quality of public investment through government bond funds, it is necessary to make
some specific recommendations as follows:
Government bond funds should be put into State budget balance to fully and
accurately reflect revenue and expenditure, and help tightly control public debt and
maintain national financial security.
Reorder in investment from government bond, and strengthen inspection of
management processes and use of VGB. Persistently not to approve expenditure for
the project could not prove effectiveness, prolonged execution time, causing losses
and waste in the locals. No additional new categories, no additional scope or project
objectives except that total capital adjustment were due to change of the provisions
of the law on norms and unit labor costs, raw materials.
Government bond maturity was not diversified, secondary market has not developed,
the time of issuance and maturity has not been standardized, so it has not formed
standard interest curve and market expectation about future interest rates was not
shaped. Therefore, monetary policy and fiscal policy should be more closely
coordinated to overcome limitations7.
Recommendation 5: Reform the design and improve the efficiency of the
implementation of the National Target Program (NTP) and other targeted programs
is a key solution to restructure and improve the efficiency of the public investment.
One of the five main sources of public investment is investment in targeted support
programs, including NTP and other targeted programs. State budget for this program is
allocated according to annual estimates, but in principle, it is determined for period longer
than one year, usually from 3 to 5 years. In the 2001-2005 period, there were 6 NTP and up
to 11 NTP in 2006-2010, and 15 NTP by 2011. If including these programs and other
7 Ministry of Finance needs to quickly exchange information relating to estimated revenues and VGB
issuance plan quarterly and annually to make basis for monetary policy management and liquidity stability of the system CIs.
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targeted support programs, this figure was up to 40. Some NTPs as the Poverty Reduction
Program, Clean water and rural environmental sanitation Program, Education and Training
program phase II, Employment programs etc. ... has dramatically improved people's lives
and contributed to reduce poverty and ensure social security. The contents of the NTP
supporting was fairly comprehensive such as supporting agricultural production, education,
accessing to basic services (water, electricity, legal services), housing, health, capacity
building , subsidies, or supporting ethnic.
However, the implementation of the NTP and other targeted programs has revealed some
disadvantages as follows:
There was overlap in supporting content and implementation objectives among the
programs at different levels. The investment overlap, and lack of coordination
caused great waste and did not bring efficiency as high as expected. Of the total
investment for the programs, there had a big part for construction investment.
However, due to a large number of programs and funding was outside the long-term
budget balance, so we could not classify and give accurate statistics of total
investment. Therefore, the management became more complex and created space
for subjective decision, not following the rules and criteria of the state budget
expenditures. About beneficiaries, according to the principle, beneficiaries were
supported by a project will not receive support from other projects. However, the
current benefiting criteria are made by central agencies and there had phenomenon
that a there was so varied approach of to choose beneficiaries that in some places,
beneficiaries were overlapped, while elsewhere a number of poor groups and
individuals excluded. In addition, the system selected beneficiaries did not consider
the needs of the poor, this led to programs supported the not really necessary
contents.
Thus, in order for public investment of the NTPs and other targeted programs to be more
effective, bring the greatest economic and social benefit, it is essential to review and adjust
the objectives of each program, towards specifying targets, narrowing and avoiding
duplication, spreading. Some programs had low effectiveness, unclear target; overlapping
and duplication of the content should be selected for integration with other programs.
Financial discipline should be taken more seriously to actually use the resources effectively.
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In addition, there is need of revising the criteria for selecting beneficiaries of the program,
taking into account the characteristics of the local reality and needs of the beneficiaries.
Recommendation 6: Prioritize public investment for infrastructure projects under the
development plan (both in space and time of nation, region, and province) and get
approval based on the criteria for assessing economic - society - environment
effectiveness.
Modern infrastructure system(infrastructure) plays a very important role in the development
of the economy, so most of the developed countries set priority for infrastructure
construction during the period 20 -30 years from very beginning, paving for a breakthrough
in development at later stage. Meanwhile, infrastructure is one of the knots, basic bottleneck
of Vietnam's economy today8. The quantity and quality of infrastructure currently has not
met the requirements so funding for infrastructure development needs to be so much, over
the ability of State budget9. Furthermore, the infrastructure is very diverse, often requiring
big investment for a long time, while not every project is capable of payback or can evaluate
economic effectiveness10 .In addition, infrastructure construction investment also related to
decentralization between the central budget and local, as well as the division of
responsibilities between investment and capital for maintenance of infrastructure
management.
Therefore, priority should be given to investment in infrastructure in a number of specific
directions as follows:
8 According to Director of Project Vietnam Competitiveness Initiative (VNCI) of US Agency for International
Development (USAID), Global Competitiveness Index (GCI) of the 2009-2010, Vietnam ranked 75, slipped 5 spots from 2008-2009, in which the 2nd pillar of the 12 pillars constituting GCI index is the infrastructure which ranked
94th, with 3 points in a total of 7 points. Meanwhile, a number of countries in the region such as Malaysia, Thailand
and China, their Infrastructure Index was higher than Vietnam (from 4.3 to 5 points). The survey results also showed that the distance from the plant to the center of a province, city averagely was blocked by floods, landslides
approximately 8.7 days / year, 71% companies said that their products were damaged by bad roads, causing losses
of about $ 2,300 / a company and on average, medium businesses suffer from power cut around 29.27 hours and telephone service and network out of coverage of about 8.23 hours. 9 Eurocham estimated that Vietnam needed approximately USD 70-80 billion investment in roads, rail and port infrastructure in the next 5-10 years. That figure could reach USD 120 billion when including energy infrastructure. 10 The social effectiveness is often used to justify the infrastructure which cannot be clear of economic
effectiveness, but it makes economic - social effectiveness evaluation criteria of infrastructure investment
more obscure, that makes it difficult to raise capital for infrastructure as well as monitoring the effectiveness
of the use of the capital raised.
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It is essential to organize multi-sectional advisory groups to research and determine
infrastructure development perspective in 20 years and 30-year vision, with the
cooperation and support from leading planning advisory organizations.
Develop criteria for evaluating the economic - social - environmental efficiency of
each type of infrastructure projects as a basis for approval of the projects and sort the
investment priority order. At the same time, the projects get approved must comply
planning of infrastructure development of nation and local about space and time. This
is an important tool to gradually fix the disease of spreading and extending investment
causing so much waste.
The State plays a key role in building planning and development, site clearance,
construction investment but after that, they can cede for private sector to manage to
recover investment in others.
It is necessary to efficiently allocate capital for each type of infrastructure, specifically:
- Capital from the state budget remains to be the primary source for infrastructure in
the next 5-10 years at least. It should reduce the proportion of investment from the state
budget, although the absolute figure of expenses from State budget for infrastructure can still
increase, however, they are only for projects having strategic significance but slow recovery
of capital, no profit or negligible profit. As for ODA and government bond fund11, they are
managed by the projects so we should solve two basic problems are to select effective projects
and ensure source of repayment12.
- No allocation of state investment in which local private sectors can invest such as
commercial services, restaurants, hotel etc. Private Investment should be encouraged in
profitable infrastructure projects by allowing operators to use infrastructure or works
associated with infrastructure.
11 According to MPI, to complete projects already in the investment portfolio by VGB, in 5 years from 2011
to 2015, there is need to raise VND 315 trillion in government bond, VND 63 trillion/year on average, higher
than the total Government bond capital planned in 2010, approximately VND 7 trillion. However, starting
from the requirements of sustainable development, strengthening management of debt and debt balances and
government debt not exceeding the allowable limits to ensure national financial security, government bond
raising in 5 years 2011 - 2015 is expected to reduce to about VND 225 trillion; in which, in 2011 it was VND
45 trillion (11 trillion lower compared to 2010). It is expected that this total government bond capital only
meet about 70% of the outstanding capital to complete the projects in the current portfolio. 12 It is possible that it obtained from the revenues from infrastructure exploitation and from repayment resource
from the State budget, in which, the first revenues should be increased, due to Vietnam's public debt amounted to approximately 56.7% of GDP in 2010 and foreign debt amounted to nearly 40% of GDP.
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- Combination with non-state capital when financial demand goes further than
investment capability of state budget, however that must ensure national financial security,
repayment and balance interests between stakeholders through PPP13 along with traditional
methods such as BT, BOT etc. ...
Recommendation 7: Strengthen public investment in agriculture and rural development,
focus on developing transportation, education and training, science and technology in the
agricultural sector because this is the foundation for the sustainable development of the
economy.
In the past 10 years, agriculture - forestry and fisheries (AFF) is the production - business field
of big population of our country, however it has not get adequate investment. This can be
expressed as investment proportion for this area in public investment declined from 12.2% in
2000 to only 7-8% (2003-2008) and 6.7% (2009). Currently, investment from the state budget
for agriculture only accounts for 1.4% of GDP, lower than the average of China, India and
Thailand (8-16%) and other Southeast Asian countries (approximately 8 -9%) in the period
1990 - 1993. As a result, irrigation system lacked of expansion and degraded due to
insufficient maintenance cost. The scientific achievement applications in agriculture were
transferred to farmers not so many and broadly in scope. Most of new agricultural plant variety
and livestock must be imported. The system of agricultural extension services was still weak.
The impact of a number of programs/ projects of the State on infrastructure had less positive
impact on the efficiency of enterprises and households in the AFF sector.
Development of agriculture and rural economy is the foundation and motivation for
industrialization process and we need to have the essential measures to further strengthen
public investment and adjust the investment structure towards the following directions:
13 PPP is a type of contract between the state and private, in which the private party provides public service or
project and accepts financial risk, technique and operation of the project. In a PPP model, service users have to pay charges rather than the taxpayer. In some other PPP models, the private implements project under
contract but the state must pay for all or a part of the project cost. For infrastructure projects, the government
may provide funding in the form of a lump sum subsidies to attract private investor. The government can finance by tax exemption for ensure a stable source of income for private investors in a certain period of time.
The most important issue for PPP projects is that private investors need to have a higher margin than
government bond interest rates.
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Focus on developing rural transport; invest in science - technology, education -
training, vocational training and communication14.
Prioritize public investment in seed research, biotechnology, and transfer science -
technology to farmers.
Invest in the sectors having strength and create vertical integration to create the best
competitiveness for agricultural products. Public investment must create strong nudge
in the agricultural products having high competitiveness as rice, coffee, rubber,
seafood etc ... and create good conditions for these commodities closely linked to the
global value chain. Change the management way of public investment in agriculture,
clearly decentralize and not overlap between region and local and basis. Necessary to
have regional management agencies focusing planning and management on regional
development issues, but not administrative agencies such as local authorities.
Recommendation 8: Promote reformation of SOE sector is a condition to enhance the
efficiency of public investment.
Investment capital by SOE15 accounted for about 20-30% of the total public investment
(Table 9). With the above proportion, the low investment efficiency of SOEs was an
important reason degrading the quality and efficiency of public investment in general. While
capital and fixed assets of state-owned sector increased rapidly, accounting for over 50% of
the total capital of enterprises in the economy, the contribution to GDP of this sector tended
to decrease and currently accounts for approximately 37-39% of GDP (Table 10). If
excluding contributions from state management, national security and defense, education and
training, health aid, culture, sport etc... SOEs contributed about 27% to GDP in 2008 (Table
14 Research by the World Bank in 2003 using data from the Ministry of Agriculture and Rural
Development, Ministry of Finance and Institute of Economic Management Central, shows tha t public
investment in education has had positive impact, significantly boost agricultural production, other public investments such as irrigation, rural roads, and agricultural research also contributed to the growth of the
agricultural sector. About investment efficiency, agricultural research activities provide the greatest benefit, for each coin spending will generate approximately 11 coins in value of agricultural output. A
coin investment in telephones and education also benefit 5-7 coins at the agricultural output value.
Benefit - cost ratio of roads and electricity is 2-3.5. Regarding poverty reduction, with VND1 billion investment in agricultural research, there are 246 people out of poverty, VND 1 billion investment in
roads will help 207 people out of poverty. Investment in education, telephone and power also brings big
benefit for poverty reduction. 15 Capital of the Company derived from the state budget: from capital depreciation; profit after tax; from land,
factories not yet used, capital raised for business development; loans with the guarantee of the Government...
18
11)16.
Low investment efficiency in SOEs stemmed from many causes such as the loss and waste
of investment capital; many state-owned corporations invested in industries which did not
belong to the main business activity, leading low efficiency or loss. Many SOEs were
subsided input for production (land, resources, credit, etc…so many state-owned enterprises
mainly relied on credit and resources to expand business scale and did not focus on
technology development and improve productivity; business management skills were weak
etc ... With such a low investment efficiency, ICOR of the State sector, especially SOEs, was
much higher than of the national private sector and foreign investment sector17. Besides, due
to inefficient investment and low accumulation and savings, many SOEs had to borrow
domestically and abroad to invest18.We can say, inefficient investment of SOEs has been a
burden on the economy, increased government debt and adversely affected the
competitiveness of the economy. So SOE reform to enhance the efficiency of public
investment is one of the urgent solutions today, with the following specific recommendation:
Publicly select and appoint key officials of SOEs under the criteria have been committed in
office to increase labor productivity, capital efficiency, reduce energy consumption, materials
etc… Set up information systems and monitoring institutions, business management; perform
publicity and transparency of information to the SOEs. Rebalance the privileges of SOEs in
access to natural resources, land, information, etc... Necessary to abolish all forms of lending,
credit provision under direction, “reschedule debt” for SOEs, charges the SOE enough
according to market prices. Reduce funding from State budget for investment for the State
owned Corporations, shifting the focus of public investment outside the field of economic and
business.
16 16 In a study of Fullbright curriculum, in the stage after 2004, the state capital grew nearly 38% per year and
accounted for 48% of all fixed capital gains, but SOEs only accounted for 17% of sales growth while
employment fell sharply. 17 See recommendation 1 18 According to Review Report of the World Bank (2010), by the end of 2009, bank loans to SOEs amounted
to 33% of GDP, outstanding bonds issued by state-owned enterprises up to 3.2% of GDP. Thus, the total debt
obligations of SOEs amounted to 36.2% of GDP, and the debt must be treated as "contingent debt" obligations
of the Government. According to a report by the Government to last session of Congress, as of 30/06/2010,
equity in groups, public corporations was $ 30 billion, the value of fixed assets of 70 billion dollars, payable as
of 2009 was $ 40 billion, equivalent to 40 % of GDP, while the profit of the corporations, groups was only $ 2
billion / year, that meant they need to spend all profits for 20 years to repay.
19
Recommendation 9: Review and complete legal system of public investment, minimize
overlap and inconsistency between the laws relating to public investment, towards
promulgating the Law on Investment.
Investment activities in general, including investment of the State, has been managed in
accordance with the provisions of various legal documents such as the State Budget Law,
Investment Law, Construction Law, Procurement Law, Land Law, Law on Anti-Corruption,
Law on Thrift Practice and combat waste, etc ... However, the legal system above was not
complete, still overlapped and lacked of consistency19, shown on the following aspects:
No uniform legislation to adjust the entire investment process. The current regulations
are written in many different documents, causing difficulty to enforce, not to clarify the
difference between the laws on investment and on construction. Not clearly and strictly
define each specific task in the management of public investment such as object and
management content in Planning, investment preparation, project implementation,
capital management and use, management of project exploitation and some other issues.
No consistency in the allocation of responsibilities of the entities involved in the
management of public investment. Lack of specific remedies to ensure the order and
discipline in investment; overcome the dispersion of investment, inefficiency, waste,
loss and handle violations in investment management.
Thus, necessary to review the legislation on public investment and early promulgate Public
Investment Law, because this is the important basis for the management of investment process
19 State Budget Law specifies development investment expenditure, including construction of infrastructure
projects, is not likely to recover capital. However, the state budget law only regulate annual budget plan, there
is no provision for the long-term capital (3-5 years) according to the investment projects, not yet stipulate the
use of other state capital for public investment as government bond, ODA, ... Investment Law regulates
investment management for business purpose, in which only the state adjusted capital investment for business
purposes, not for the project out of business purposes, no possibility of repayment. Construction Law manages
activities for investment projects having works under construction, but does not include the important content
of such investment management such as investment plan, allocation and capital management through programs
and projects. Although this law provides information for the order and procedures for formulation, appraisal
and approval of investment projects on construction, but the rules are only rules. Procurement Law regulates
procurement activities to select contractors providing consultancy services, procurement, construction and
installation of the packages of projects (from 30% State capital for investment development; projects using
state funds to purchase the property), but having no regulations on established rules and procedures for the
approval of projects using state capital.
20
unified and synchronized from stage of planning programs, investment projects to the
implementation process and acceptance, and put the project into operation and use.
Some specific recommendations for public investment law project as well as process of
reviewing and revising the legal documents are:
Separate management functions of state agencies and project management functions of
the investors, avoid overlapping of functions in a number of ministries, sectors and
localities. Accordingly, the Ministries, the People's Committees of provinces form the
professional board of project management to manage the investment projects. In the
current context, Communal People Committee is not as an investor of the construction
project.
More specific provisions on the rights and obligations of person competent on
investment decision, investors, project management board, consulting organizations;
clearly defining responsibilities of investors and project management board in the
specific form of project management (such as self-management, management
consultants and investment trusts); particularly responsibilities of the investment
consulting organizations in the formulation of projects, project evaluation, investment
evaluation, investment management etc...Expand possibilities for participation of
beneficiary communities, experts and professional associations in the work of the
review, evaluation and decision of public investment projects. Define the rights and
responsibilities of the community in a supervisory role for public investment. Clearly
define the prohibited acts and sanctions strong enough to handle the violations at
different levels, contributing to the prevention of negative behaviors and making legal
basis for handling violations in public investment. On that basis, amending,
supplementing Construction Law and relevant laws to fit the scope and application
objects, do not overlap with the Public Investment Law.
Recommendation 10: Continue to adjust and renew the decentralization of investment
to improve the efficiency of public investment.
Budget allocation process mentioned above, the state capital in general and investment
decentralization in our country in recent years has clearly revealed the following
shortcomings:
21
Firstly, although the orientation of the major economic areas has had long-term economic -
social development planning, but in fact, public investment tools have not assumed the role of
promoting development of the region under the existing guidelines. Many localities aimed
towards a similar investment structure rather than forming an investment structure to promote
comparative advantages of each local.
Secondly, by radically decentralizing to the provincial People's Committee approve and decide
investment projects under jurisdiction by itself, so appearing the situation that local made
investment decisions but could not balance capital, required capital of the Central, putting
pressure on Central to capital allocation. If letting locals to automatically balance the budget
themselves, the local struggled to find ways to increase revenue, resulting in attracting
investment at all costs, exacerbating spontaneous and unplanned development in local.
Thirdly, strong decentralization of investment, but not accompanied by enhancement of
guiding, inspecting, monitoring and upholding the responsibility of person should be assigned,
so after the decentralization, State management agencies did not understand the situation . The
monitoring was not comprehensive yet, mainly focusing on the implementation stage of
investment, not focusing on investment decision stage, approval of investment projects.
Fourthly, allocation of investment capital from the state budget spreading, the average amount
of capital allocated to the project annually was low20, leading to more slow prolonged
progress, slowly putting into use, increasing investment cost. Trend of average of budget
expenditure decentralization was also unreasonable. For example, allocated to Communes
according to the average of VND 300 million / commune to pay for rural transport was not
suitable because each commune's demand and possibility of reciprocal is not the same.
Therefore, it is essential to complete the legal framework and promote efficiency of State
budget allocation and investment decentralization with the following specific
recommendations:
Research to revise State Budget Law to be consistent with management requirements
by increasing resources for local budgets to actively implement the economic social
20 In 2010, the ministries, central agencies and localities allocated budget capital for a total of 16 658 projects,
850 projects more than in 2009; the average amount of capital allocated to a project is nearly VND 7 billion;
average capital allocated to Group A projects in the Central in 2010 was approximately VND 115 billion, only
46% of in 2007.
22
mission, along with greater accountability in financial resource management
allocated by local government.
Build principles, criteria and basis for estimating the investment and development
expenditures; manage payment and settlement funds to ensure focusing investment
capital to complete the work in accordance with the medium-term financial plan and
work schedule; reduce and eventually eliminate average distribution of resources.
Clarify the responsibilities of agencies involved in investment management hierarchy
to completely overcome the state of spread and overlap investment, as well as
avoiding misbalancing capital, putting pressure of capital balance on the Central
Government.
Recommendation 11: Improve the effectiveness of supervision of public investment
projects through strengthening supervisory role of the National Assembly, People's
Council and the State Audit and monitoring mechanism of the people and social
organizations for public investment.
These weaknesses of public investment occurred at all stages of the investment process,
causing huge losses to the state budget, that was specified in the supreme control of Congress
in the 2004 and 2008, in the regular monitoring of the ethnic Council, the Commissions of the
National Assembly and the audit of the State Audit, the audit results for investment
expenditure in the period 2006-2009. Audit of projects, targeted programs, the State Audit
also proposed financial settlement to VND 4,224 billion.
This shows that, in the process of restructuring public investment, improvement of the
efficiency of monitoring and auditing projects is one of the top priorities, which should:
Enhance the role and responsibility of Congress in the supervision of public
investment. National Assembly, through the Ethnic Council and the Committees, the
delegation of the National Assembly and the members of National Assembly to
monitor the whole implementation process of investment, key projects and work,
special kind of investment of State owned corporations, from the preparation and
delivery of public investment plan, the approval of the programs, public investment
projects and implementation of programs and projects. People's Councils at all levels
should strengthen the monitoring of public investment projects locally.
23
Improve the efficiency, capacity and quality of the State Audit for public investment
operations. Specifically, necessary to strengthen capacity of construction investment
audit; expand the scope of the audit and improve auditing methods of public
investment; build audit process for construction projects in accordance with the nature
and characteristics of each type of projects; focus auditing key construction work and
projects having large capital and high risk.
Publicize information, processes, procedures, investment portfolio, clearly define
policy and constraints, sanctions if the investor fail to comply with commitments etc...
to provide information for the management agencies, social organizations and citizens
to monitor and contribute to fight against negative deeds in investment. For critical
projects, right from beginning, publicize documents as well as access to related
information for the community and the scientific organizations to have expertise to
participate in peering and counseling.
Vietnam's economy accessed 2011 and a new development stage with remarkable
achievements, but also facing many challenges in terms of quality growth, especially the
existences in public investment. These recommendations and the specific solutions given
above have been synthesized, drawn from the presentations and comments having high quality
and responsibility of scientists and economists, with the hope of being sent to the Party,
National Assembly and the Government, contributing to the process of public investment
restructuring in the context of growth model innovation and restructuring the economy in the
5 years 2011-2015 and 10 years strategy 2011-2020.
24
APPENDICES
Table1. Economic growth and social investment period 1991-2010 in
comparison with GDP (at current prices)
Period GDP
growth rate
(%)
The rate of social investment to
GDP (at current prices)
1991-1995 8,21 28,2
1996-2000 7,00 33,3
2001-2005 7,49 39,1
2006-2010* 6,90 42,7
Source: GSO. *Figure of 2010 is estimated.
Table 2. Compare GDP growth and investment capital growth in the period
2000-2009 (%, at 1994 constant prices)
Growth rate of GDP
per year
(%)
Growth rate of
investment capital
per year (%)
The whole economy 7,3 13,9
+ State sector 6,4 11,0
+ Non-state sector 7,4 15,0
+ FDI sector 9,9 19,8
Source: GSO, Yearbook 2005, 2009
Table 3. ICOR period 2000-2007 according to capital investment.
ICOR
The whole economy 5,2
+ State sector 7,8
+ Non-state sector 3,2
+ FDI sector 5,2
Source: Bui Trinh’s calculation (2009) and GSO
25
Table 4. Public investment structure in the field of economic, social and
state management (%, constant prices)
000 002 003 004 005 006 007 008 2009
Economic 77,1 82,7 76,7 74,5 75 73,9 76,3 74,8 77,1
Social 17,6 14,3 19,7 19,1 18,6 19 16,1 16,5 15,2
State management 5,2 3 3,6 6,3 6,4 7,1 7,5 8,7 7,7
Source: GSO, Yearbook 2005, 2007, 2009
Table 5. Growth index and proportion of a number of industries in total
industrial output value of state-owned economic sector 2000-2009 (%, at
constant 1994 prices)
2000 2005 2009
Proportion Increased
compared to
2000
Proportion Increased
compared to
2000
Proportion
State sector industry 100 170,2 100 180,1 100
- Mining 4,19 221,7 5,46 247,8 5,76
- Processing 81,42 161,8 77,41 168,5 76,17
Including
+ Machinery
manufacture 1,60 110,7 1,04 153,8 1,37
+ Manufacture of
electrical equipment 2,14 271,3 3,41 336,8 4,00
+ Manufacture of
medical instruments,
precision engineering,
optical devices
0,10 59,2 0,04 1,1 0,00
+ Manufacture of
chemicals 8,04 139,5 6,59 134,4 6,00
+ Metal production 2,87 226,7 3,82 188,8 3,01
Source: GSO, Yearbook 2005, 2009
26
Table 6. State budget trade deficit 2005-2010
Expenditure
2005
2006
2007
2008
2009
Predicted
2010
Total expenditure
(VND thousand billion) 229,1 308,1 380,8 452,8 584,7 637,2
Investment and
development expenses 34,6 28,7 27,4 26,4 29,4 28,2
Regular expenses 65,4 52,6 53,8 55,7 54,8 61,8
Budget deficit
(VND thousand billion) 40,7 48,6 64,6 67,7 115,9 116,1
Budget deficit ratio
(% GDP)
4,86
4,99
5,65
4,56
6,99
5,95
Source: Ministry of Planning and Investment from the article "Restructure and improve the efficiency of state
investment - an urgent requirement of economic restructuring" by Dr. Nguyen Dinh Cung (Institute of Economic
Management Central)
Table 7. State investment capital in comparison with GDP (VND thousand
billion, current prices)
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
State investment
capital
89,4 102,0 114,7 126,6 139,8 161,6 185,1 198,0 209,0 287,5
Compared to
GDP (%)
20,2 21,2 21,4 20,6 19,5 19,3 19,0 17,3 14,1 17,3
Source: GSO, Yearbook 2009, page 84, 108
27
Table 8. Budget revenues and expenditures to GDP 1995- 2008 period of
some East Asian and South East Asian countries (%)
Budget revenues Budget expenditure
1995 2000 2008 1995 2000 2008
Vietnam 21,9 10,5 27,7 23,8 24,7 29,4
Indonesia 17,7 14,7 19,8 14,7 15,8 19,9
Malaysia 22,9 17,4 21,6 22,1 22,9 18,8
Philippines 18,9 15,3 10,0 18,2 19,3 16,8
Thailand 18,6 15,1 17,0 15,4 17,3 17,4
Korea 18,3 23,5 24,5 15,8 18,9 22,8
China 10,3 13,5 20,4 12,2
(1996)
16,3 20,8
Source: ADB (2009), Key Indicators for Asia and the Pacific 2009, Manila 2010, Pg. 258-260
Table 9. Capital structure of Public investment (%, current prices)
Source: GSO, Yearbook 2009, the 2010 data is estimation, taken from the appendices attached to the
report of the Government at the 8th session of the XII Congress
Year Capital from State budget Credit investment capital under the
state plan
SOEs’ capital
2000 43,6 31,1 25,3
2001 44,7 28,2 27,1
2002 43,8 30,4 25,8
2003 45,0 30,8 24,2
2004 49,5 25,5 25,0
2005 54,4 22,3 23,3
2006 54,1 14,5 31,4
2007 54,2 15,4 30,4
2008 61,8 13,5 24,7
2009 64,3 14,1 21,6
2010 67,2 14,9 17,9
28
Table 10. GDP structure by economic sectors.
2001 2002 2003 2004 2005 2006 2007 2008 2009
State economic sector 38.40 38.38 39.08 39.10 38.40 37.39 35.93 35.54 35.13
Non-state economic sector 47.84 47.86 46.45 45.77 45.61 45.63 46.11 46.03 46.54
FDI economic sector 13.76 13.76 14.47 15.13 15.99 16.98 17.96 18.43 18.33
Source: GSO
Table 11. Estimation of the contribution of the state-owned enterprises in
GDP
Year
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
% GDP
30,95
30,32
30,35
30,31
30,42
30,74
31,29
31,33
29,46
28,15
27,17
Source: article by Dr. Le Dang Doanh (Conference Proceedings
29
Figure 1. Investment capital structure of the whole society, period 2001-
2010
Source: Calculated from data of GSO and Ministry of Finance
Figure 2. State budget capital for sectors (VND thousand billions, 1994
constant prices)
Source: GSO, Yearbook 2005, 2007, 2009
30
Figure 3. Public investment structure by sector 2000-2009 (%, 1994
constant prices)
Source: GSO, Yearbook 2005, 2006, 2009
Figure 4. Vietnam trade deficit in comparison with some other countries in
region.
Source: article by Dr.. Nguyen Dinh Cung (Conference Proceedings)
31
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