ODA capital incentive trap
The Ministry of Planning and Investment warns that ODA loans are starting to show their limitations, such as gradually increasing interest rates. If not carefully considered, one could fall into the “ODA and preferential loan” trap when loan interest rates and capital arrangement fees are higher than commercial loan interest rates in the domestic capital market.
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| The Cat Linh - Ha Dong urban railway project (Hanoi) increased from VND 8,769 billion to more than VND 47,000 billion. |
Consider preferential credit capital from China
Specifically, the report of the Ministry of Planning and Investment shows that some preferential loans are accompanied by binding conditions on techniques, technology, and contractor selection, which can make the actual loan cost much higher than competitive bidding.
Not to mention the risks due to the adverse impact of exchange rate fluctuations. The capacity to absorb foreign aid of industries, localities and specific projects is still limited. Foreign loan projects all have to be extended, the implementation period is prolonged, and the effectiveness is slow.
Therefore, in the past, there have been many projects that had to adjust their investment capital to increase many times compared to the initial approval, the most common being urban railway projects. For example, the Hanoi urban railway construction project, line 2, Nam Thanh Long - Tran Hung Dao section increased from nearly 20,000 billion VND to about 52,000 billion VND and after appraisal was reduced to nearly 33,569 billion VND; the Ho Chi Minh City urban railway construction project, line 1, Ben Thanh - Suoi Tien section increased from more than 17,000 billion VND to more than 47,000 billion VND. Similarly, the Cat Linh - Ha Dong urban railway project (Hanoi) increased from 8,769 billion VND to more than 47,000 billion VND; the Nhon - Hanoi railway station urban railway project, borrowed from France and ADB, increased from 783 million euros to more than 1.17 billion euros...
In particular, the report of the Ministry of Planning and Investment also pointed out the shortcomings of ODA capital from bilateral partners, typically loans from China. China's preferential loans for Vietnam are similar to export credit loans, are conditional loans (designating contracts to Chinese enterprises) and are less preferential than ODA from other donors.
According to the Ministry of Planning and Investment, Chinese loans come with conditions of an interest rate of about 3%/year, a commitment fee of 0.5%, a management fee of 0.5%, a loan term of 15 years, a grace period of 5 years and are provided through the Export-Import Bank of China (China Eximbank). Thus, preferential credits are only suitable for projects with direct revenue and the ability to repay debts. As for projects using Chinese loans, contractors and equipment, progress is often slow, quality is not guaranteed, total investment increases... affecting investment efficiency. The Ministry of Planning and Investment recommends: "In the coming time, competent agencies need to consider and weigh borrowing preferential credit capital from China."
According to Associate Professor Dr. Pham Van Hung, Southern Institute of Transport Science and Technology, it is clear that the ODA loan policy, which was thought to be cheap and “popcorn with popcorn”, has contributed significantly to killing Vietnam’s heavy industry in steel, mechanics, construction materials, etc. Similar to ODA capital from China, Chinese steel has also flooded the Vietnamese market. “Vietnamese steel producers cannot compete, we have lost right at home from ODA agreements, which has lost opportunities for domestic enterprises and the industry,” Associate Professor Dr. Pham Van Hung commented.
Including additional fees, ODA loan interest is up to 13 - 14%
According to experts, the above report is a form of signal from the Ministry of Planning and Investment that localities should no longer rely on ODA. In reality, many donors come directly to localities, and only after reaching an agreement in principle do they return to work with the Ministry of Planning and Investment. "This puts a lot of pressure on the Ministry of Planning and Investment," Associate Professor, Dr. Pham Van Hung commented, and said that it is necessary to consider solutions to withdraw bilateral ODA loan projects with state protection, which have disadvantageous constraints.
However, public investment expert, Dr. Do Thien Anh Tuan (Fulbright University Vietnam) does not agree with the "withdrawal" but what is necessary is to rectify the policy of attracting ODA capital. According to Mr. Tuan's calculations, the ODA loan interest rate is currently from 1 - 3%, but if converted from non-commercial costs such as commitment fees, management fees, capital adjustment fees, relationship fees... the cost that the economy has to bear from ODA capital is extremely expensive, up to 10%, even 13 - 14%. Mr. Tuan emphasized that if we also take into account the loss of domestic industries at home and the loss of market development opportunities for enterprises, this loss cannot be calculated in numbers.
With that approach, there are three issues that, according to Mr. Tuan, need to change the policy of encouraging funding in localities. First, the local leader who signs the ODA loan to implement the project in the locality must take responsibility even after retirement. Second, the lending unit should not be allowed to impose non-financial constraints such as who to buy technology from when using the loan, which labor force to use, etc. Because the lender is ultimately the creditor, not the shareholder of a project. Third, the supervising consultant must have a deposit contract with the bank to be jointly responsible if the project they advise exceeds the allowed capital. "The consultant must be responsible for its financial capacity, must be responsible for its own weaknesses, especially when consulting on bilateral loan projects," Dr. Tuan stated his opinion.
The total ODA capital and preferential loans signed by Vietnam in the period of 2016 - 2017 reached 9.198 billion USD. Of which, ODA loans were 6.781 billion USD, preferential loans were 2.2 billion USD, and non-refundable aid was 216.8 million USD. In particular, ODA loans have low interest rates, long loan terms, usually from 25 - 40 years, and reasonable grace periods (5 - 10 years).