Friday, February 28 2020


Time to get serious about efficient investment

Update: July, 02/2015 - 09:47

Mori Mutsuya*

Following the National Assembly session in October 2014, there has been a lot of discussion on public debt management and the efficiency of public investment projects.

"ODA graduation", or the need for Viet Nam to rely less on development assistance, has been thoroughly discussed in connection with the issues of rising public debt and effective use of external borrowings.

As Viet Nam's largest development partner, the Japan International Cooperation Agency (JICA) would like to present some viewpoints and analyses on this issue, based on relevant data and statistics.

Firstly, there seems to be little discussion on how to reduce the budget deficit, which could be a factor in the increase in public debt. Budget deficit ratios to GDP have steadily worsened, increasing from 4.4 per cent (2011) to 6.6 per cent (2013), mainly because of a notable increase in recurrent expenditure. Such expenditure items, including salary, social security, healthcare, education, and science and technology, which constitute recurrent expenditures, should be analysed more carefully to ensure efficient and appropriate expenditure. It should also be noted that, contrary to increasing recurrent expenditure, development investment spending has decreased from 21.5 per cent of total State budget expenditure in 2010 to 17 per cent in 2015 (plan).

Next, the relationship between public debt and the government's debt repayment capacity should be thoroughly discussed. According to MOF data, the ratio of public debt to GDP increased from 51.7 per cent in 2010 to 59.6 per cent in 2014 (estimated figures). If we classify public debt into foreign and domestic debt, foreign debt increased by 76 per cent between 2010 to 2014, while domestic debt increased by more than 150 per cent. Domestic debt has exceeded foreign debt since 2013 and it is the main factor for the increase in total public debt.

When we look at the composition of the governments' domestic debt, nearly two-thirds of outstanding domestic debt is in the form of government bonds. According to Viet Nam Bond Market Association (VBMA) data, government bond issuance rapidly increased by 8.4 times between 2010 and 2014. The interest rate of government bonds is at about 5 per cent per annum in the lowest case, which is still quite high, and its average maturity is shorter than five years on average. Debt servicing for government bonds increases the government's repayment obligations and makes the budget situation more serious. Accordingly, fiscal space for new public investment is further restricted.

As the second issue on the agenda, I would like to present our view on the impacts of Japanese ODA loans on public debt and its efficiency. Outstanding Japanese ODA loans increased from US$9,139 million in 2010 to US$11,849 million in 2014, yet its share in public debt decreased from 16 per cent in 2010 to 11 per cent in 2014. Therefore, it is not accurate to say that Japanese ODA loans are the main factor in the increase of total public debt. Besides, the interest rate on Japanese ODA loans is 0.1-1.4 per cent for infrastructure, and in the case of the environment sector, and building hospitals and universities, it can go down to as low as 0.3 per cent. The maturity period is 40 years at the longest, including a 10 years' grace period, which is also a very favorable condition. By utilising Japanese ODA loans instead of government bonds, it is possible to restrict increases in the government debt imbalance and to reduce the annual debt servicing amount.

Since the repayment obligation of local government bonds will be passed to the future generations in the form of taxes, the government should consider its options of financial sources carefully. It is also necessary to fully consider exchange rate risks when obtaining foreign loans and possible options for hedging instruments.

ODA projects

Let us look at a number of Japanese ODA loans supported projects that have been completed in recent years. These include the Noi Bai International Airport Terminal 2 Project and the Nhat Tan Bridge (Viet Nam-Japan Friendship Bridge) Project in Ha Noi; and the East-West Expressway Project and the North-South Expressway Project (Ho Chi Minh – Dau Giay) in HCM City.

In addition, JICA has been carrying out construction and rehabilitation of the national road network and developing small-scale infrastructure to help poverty reduction in rural areas.

ODA projects are sometimes criticised as they require the use of contractors and technologies appointed by the donor countries. However, in case of Japanese ODA, loans under which procurement from Japanese companies and materials are required are only for projects requiring highly advanced Japanese technologies. Those projects account for only 40 per cent of total amount committed between 2010-14, while the remaining 60 per cent is without any restrictions on contractors' nationality and procurement origin.

According to JICA data, the value of contracts awarded to Vietnamese companies for Japanese ODA loans supported projects has regularly increased every year, from ¥31.2 billion in 2010 to ¥73.5 billion in 2014.

And it is not just independent Vietnamese companies, the value of contracts awarded to joint-ventures between Japanese companies and Vietnamese companies has also increased. The Noi Bai International Airport Terminal 2 Project (Taisei and VINACONEX) and the Lach Huyen Port Construction Project (road and bridge construction) (Sumitomo Mitsui and CIENCO4, Truong Son) are examples.

Through Japan-Viet Nam joint-ventures, the transfer of Japanese technologies has been carried out actively, contributing to enhancing the engineering capacity and construction management capacity of Vietnamese companies.

Thus, Japanese ODA loans have contributed to enhancing the capacity of Vietnamese companies while expanding business opportunities for them.

JICA welcomes the initiatives of the Government of Viet Nam in promulgating its medium-term public investment plan, in compliance with the new Law on Public Investment. We hope that more comprehensive and proper data-based discussion from various perspectives will be conducted so that Viet Nam can smoothly reach the goal of becoming an industrialised country. — VNS

*Mori Mutsuya, Chief Representative, JICA Viet Nam Office

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