When is Vietnam ready to "graduate" ODA capital?

Vietnam should prepare for exit strategy from ODA. Photo: S.T.

The risk of “trapping” ODA

A recent report by the Ministry of Planning and Investment shows that the total number of foreign loans signed between 2016 and 2017 reached $US 9,988 million, of which ODA accounted for $US 6.781 billion. This is a low-interest loan, with a long loan term of 25-40 years and a reasonable grace period (from 5-10 years). ODA funds help Vietnam access important financial resources, help transfer knowledge, innovation, innovation and leverage, catalysts to mobilize other sources of capital, especially domestic capital. This funding also helps Vietnam to reach a broader range of partners, diversify partners, increase government’s power and options in negotiating, and reduce risk if it depends too much on domestic borrowing when interest rates rise.

However, in addition to the positive side, ODA and preferential loans reveal certain limitations. According to the Ministry of Planning and Investment, the interest rate of ODA loans is on the upward trend and if Vietnam does not consider carefully, it could fall into the trap of ODA and preferential loans when interest rates and loan repayments are higher than commercial rates on the domestic capital market.

According to the MPI, some preferential loans are subject to technical and technological constraints and contractor selection, which makes the actual cost of borrowing much higher than for competitive bidding. In addition, the risk of adverse effects of exchange rate fluctuations, especially the appreciation of the currency and incentives against the Dong that could increase the debt repayment and increase public debt. The capacity to absorb foreign aid from specific sectors, localities and projects is limited. Foreign loan projects must be extended, prolonged implementation time, delayed effectiveness.

Currently, Viet Nam is receiving ODA loans and preferential loans from international organizations, including the World Bank (WB), the Asian Development Bank (ADB), the International Fund for Agricultural Development (IFAD)... of which the WB, ADB loans account for a large proportion.

A situation of using ODA loans pointed out by the Ministry of Planning and Investment shows that the increase of investment capital is many times higher than the initial approval of projects, especially the urban railway projects. Typical projects include Cat Linh - Ha Dong (Ha Noi) Ben Thanh - Suoi Tien (HCMC), Urban Railway (Nhon - Hanoi) up to tens of thousands of billion. In particular, pointing out the limitations of China's preferential loans, the Ministry of Planning and Investment said it was conditional loans (appointing contractors for Chinese enterprises) and had poor borrowing conditions. Some projects using Chinese loans, contractors and equipment are often slow in progress, do not meet quality, increase total investment and effect the result of investment... The Ministry of Planning and Investment said that in the coming time, “functional agencies should examine and review the borrowing of preferential credit capital of China.”

Willing to say “no” to inefficient projects

The inadequacies of using ODA loans are also reflected in recent times when some localities have rejected this source of preferential loans.

Recently, Tra Vinh province sent an official letter to the Ministry of Planning and Investment to refuse to use the Korean ODA loan for “Tra Vinh Water Supply Project” due to the inability to allocate local budget, there is no budget for hiring consultants to re-evaluate the pre-feasibility study report of the project with an amount of approximately 11 billion vnd, according to the suggestion of the Korea Export-Import Bank. This project was approved in January 2011. It is worth noting that, along with the refusal of ODA for this project, Tra Vinh province also said that during the negotiation with South Korea, it promoted the call for investment to develop business and socio-economic development of the province and have found suitable and competent investors to implement the project. Prior to that, in 2015, Da Nang was also boldly refusing to source this capital from Japan with the expansion of Tien Sa port phase 2.

Supporting the decision of Tra Vinh, economist Le Dang Doanh said that the idea of immediate ODA should be removed as “free money”. “The good thing about Tra Vinh is that instead of borrowing ODA from overseas, the province has found a way to raise capital from the state and the people. In my opinion, this is a valuable experience to be considered and promoted. In the near future, there should be a Law on the public and private partnership (PPP), in particular BOT, BT,” Mr. Doanh said.

Many people comment that in the near future, Vietnam can not withdraw from these source of funds because they are still an important source of capital for development investment. However, refusal of ODA is one of the signals that localities have initially been prepared to do for the withdrawal of ODA from Vietnam and what they can do with their own resources should be utilized and promoted. Socialization is a way for Vietnam to gradually get ready to “graduate” from ODA capital, preferential loans.

According to Can Van Luc experts, the refusal of ODA capital by Tra Vinh is a breakthrough, it shows that they have looked more closely for projects with foreign loans in general and ODA in particular and were ready to say “no” with ineffective projects. This is also a new approach even with foreign investment. ODA plays an important role in Viet Nam, however, it is necessary to improve the effectiveness of this funding. In particular, when calling for investment funds for projects, “it is necessary to calculate if these projects are more effectively delivered to private actors than ODA loans or not.”

In this regard, in the new orientation on attracting and using foreign loans of the Government, the Ministry of Planning and Investment said that ODA loans and preferential loans should only account for 30-50% of total investment The role of capital is the catalyst for other capital. Priority should be given to the use of projects that directly promote the growth associated with sustainable development, especially those capable of generating foreign exchange earnings in the medium and long term, such as handling basic bottlenecks in infrastructure, intelligent agriculture, stimulating export activities ... Accordingly, it is necessary to restrict the use of foreign loans to finance domestic procurement because it increases public debt but does not improve the capacity of national debt repayment. The greatest benefit of foreign borrowing is the availability of foreign currency for access to technology, investment assets and advanced professional knowledge. Therefore, in the context of Vietnam's need to prepare for exit strategies from ODA capital, ODA should be considered as a temporary foreign currency mobilization channel.

According to the Ministry of Planning and Investment, in the long term, we need to have strategies to access those elements without ODA, that is, Vietnam needs to focus on building the domestic capital market, accessing the foreign capital market and improve the quality of human resources in the country to approach the international level.