Vietnam - Putting the nation before self interest

The government is expecting a massive reduction in public investment next year. However, this will test the resolve of government bodies and local authorities.

Prime Minister Nguyen Tan Dung’s determination to tighten the management of state-funded projects has grabbed the headlines and driven the nation’s authorities to reduce public investment to tackle rampant inflation, which hit 21.9 per cent on-year last month.

With Directive 1792/CT-TTg dated October 15, 2011 on strengthening the management of investment funded by the state budget and government bonds, Dung ordered government bodies, provincial authorities and state-owned groups and corporations to review all state-financed projects for planning budget allocation.

The directive provides a raft of criteria for categorising projects to continue being funded by the state for implementation in 2012 or be transformed into other modalities including build-operate-transfer, build-transfer, public private partnership and others. Projects prioritised for state-finaning include those having been completed and put into operation before December 31, 2011 but not yet received all the planned funds, and those planned to be completed in 2012.

Only the remaining funds from the state budget, if any, will go to projects being implemented or newly approved ones depending on their urgency. For projects not entitled to further state funding, their management bodies will have to classified for transformation based on guidance issued by the Ministry of Planning and Investment (MPI).

Any authority signing off on an investment decision would be responsible for the project’s construction timeline and efficiency, the directive said. Dung also ordered the gradual restructuring of investment towards reducing state financing. Dung’s direction followed the government’s Resolution 11/NQ-CP dated February 24, 2011 designed to stabilise the macroeconomy and rein in inflation.

“With this direction, we will restore the rules on public investment and especially on decentralisation,” said MPI Vice Minister Cao Viet Sinh. By trimming public investment, in line with a tightened monetary policy, the government expects the nation’s total investment capital next year to be equivalent to 35 per cent of gross domestic product (GDP).

Public investment has played an important role in Vietnam’s economic growth. Last year, the state’s investment accounted for 33.7 per cent of the nation’s total investment capital which was equivalent to 41 per cent of GDP, according to the MPI. Most of the public investment was focused on infrastructure, education and healthcare sectors.

The MPI reported that extensive investment had been the main drive of Vietnam’s economic development during 2003-2010, responsible for 52 per cent of GDP growth, while labour contributed 19 per cent. Productivity, normally considered the primary driving force of economic growth, was just responsible for 28 per cent.

Extensive investment has brought the ratios of money supply and total credit to GDP to 130 and 110 per cent, respectively. Meanwhile, the economy’s average incremental capital output ratio (ICOR), a key measure of investment efficiency, reached 5.26 in 2010. The bigger the ICOR, the lower the investment efficiency. Sinh expected Dung’s direction to set a milestone for restructuring public investment.

“This is a measure to enhance effectiveness of public investment,” he said. Under the current mechanism, local governments can design and decide on public projects financed by the state budget. Observers have said this mechanism has encouraged local authorities to devise more projects to get weighty budgets from the central government and resulted in inefficient public investment.

“Allocating funds without an effective monitoring mechanism leads to inefficient public projects,” said Nguyen Duc Thanh, director at Vietnam Centre for Economic and Policy Research at Hanoi National University’s University of Economics. Vu Dinh Anh, an economist at the Ministry of Finance’s Institute for Price and Market Research, cited the existing investment decentralisation mechanism as “a key obstacle to reduce public investment”.

He also said local governments’ authorisation to review and list projects that needed to be completed in 2012 would make cutting public investment even more difficult because “their [localities] interests will be affected”. Nguyen Dinh Cung, deputy director of the MPI’s Central Institute of Economic Management, said it would be difficult to cut down the investment capital of uncompleted projects.

Cung also said that given the current difficulties the private sector was facing due to high interest rates and the government’s tightened monetary policy, private investors would not pay much attention to taking on those projects under the build-operate-transfer or public-private partnership models.

“In this case, local authorities and governmental bodies will try to pursue those projects. [Thus] we need the high determination of government leaders to remove this difficulty,” said Cung.

However, Sinh said with newly adopted criteria in Directive 1792/CT-TTg, public investment would be seriously monitored.

An MPI report revealed that 25,231 state-financed projects were under construction in the first half of 2011 with 26.68 per cent started during the period, higher than the 25.58 per cent rate reported last year.

Some provinces and cities have a bigger proportion of newly started projects such as Dong Thap (45 per cent), Danang (41.3 per cent), Vinh Phuc (56 per cent) and An Giang (55.8 per cent).

Furthermore, 2,813 projects have failed to meet construction deadlines. “This causes a waste of state funds and reduce the efficiency of those projects, forcing investors to increase the investment capital,” the report said.

Cung said the ultimate solution was a change in the investment management mechanism and a revision of the decentralisation policy.

“For years, our development has been significantly relying on extensive investment. Leaders of local authorities usually think investment expansion is good, but forget how to improve investment effectiveness. We must change this mindset,” said Cung.

Ngoc Linh | vir.com.vn

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