report and recommendation of the president to the board of ... · the railway, because the existing...

Report and Recommendation of the President to the Board of Directors

Sri Lanka Project Number: 33307-044 October 2014

Proposed Loans for Additional Financing Socialist Republic of Viet Nam: Greater Mekong Subregion Kunming–Hai Phong Transport Corridor—Noi Bai–Lao Cai Highway Project Distribution of this document is restricted until it has been approved by the Board of Directors. Following such approval, ADB will disclose the document to the public in accordance with ADB's Public Communications Policy 2011.

CURRENCY EQUIVALENTS (as of 13 October 2014)

Currency unit – dong (D)

D1.00 = $0.000047 $1.00 = D21,195

ABBREVIATIONS ADB – Asian Development Bank EIRR – economic internal rate of return km – kilometer LAR – land acquisition and resettlement O&M – operation and maintenance OCR – ordinary capital resources PRC – People’s Republic of China SDR – special drawing right SERD – Southeast Asia Department VEC – Vietnam Expressway Corporation

NOTE

In this report, “$” refers to US dollars. Vice-President S. Groff, Operations 2 Director General J. Nugent, Southeast Asia Department (SERD) Director H. Iwasaki, Transport and Communications Division, SERD Team leader Y. Tanaka, Principal Transport Specialist, SERD Team members M. Buendia, Senior Safeguards Specialist (Resettlement), SERD S. Kawazu, Senior Counsel, Office of the General Counsel K. H. Leung, Finance Specialist, SERD J. Miller, Principal Transport Specialist, SERD

A. Velasquez, Safeguards Specialist (Environment), SERD M. Yao, Transport Specialist, SERD

Peer reviewer C. Chen, Senior Transport Specialist, South Asia Department In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS

Page

PROJECT AT A GLANCE

MAP

I. THE PROPOSAL 1

II. THE PROJECT 1

A. Rationale 1 B. Impact and Outcome 3 C. Outputs 3 D. Investment and Financing Plans 3 E. Implementation Arrangements 5

III. DUE DILIGENCE 6

A. Technical 6 B. Economic and Financial 7 C. Governance 7 D. Poverty and Social 9 E. Safeguards 9 F. Risks and Mitigating Measures 9

IV. ASSURANCES 9

V. RECOMMENDATION 10

APPENDIXES

1. Revised Design and Monitoring Framework 11

2. List of Linked Documents 15

Project Classification Information Status: Complete

PROJECT AT A GLANCE

Source: Asian Development BankThis document must only be generated in eOps. 02052014160320246837 Generated Date: 28-Nov-2014 15:21:59 PM

1. Basic Data Project Number: 33307-044Project Name Greater Mekong Subregion Kunming–Hai

Phong Transport Corridor—Noi Bai–Lao Cai Highway Project (Additional Financing)

Department/Division

SERD/SETC

Country Viet Nam, Socialist Republic of Executing Agency Vietnam Expressway CorporationBorrower Viet Nam, Socialist Republic of

2. Sector Subsector(s) ADB Financing ($ million)Transport Road transport (non-urban) 147.00

Total 147.00

3. Strategic Agenda Subcomponents Climate Change Information Inclusive economic growth (IEG)

Pillar 1: Economic opportunities, including jobs, created and expanded

Environmentally sustainable growth (ESG)

Eco-efficiency

Regional integration (RCI) Pillar 1: Cross-border infrastructure

Climate Change impact on the Project

Low

4. Drivers of Change Components Gender Equity and MainstreamingGovernance and capacity development (GCD)

Organizational development

Partnerships (PAR) Civil society organizationsImplementation

No gender elements (NGE)

5. Poverty Targeting Location ImpactProject directly targets poverty

No Regional High

6. Risk Categorization: Low.

7. Safeguard Categorization Environment: C Involuntary Resettlement: C Indigenous Peoples: C.

8. Financing

Modality and Sources Amount ($ million)

ADB 147.00 Sovereign Project loan: Asian Development Fund 30.00

Sovereign Project loan: Ordinary capital resources 117.00

Cofinancing 0.00 None 0.00

Counterpart 35.00 Government

35.00

Total 182.00

9. Effective Development CooperationUse of country procurement systems NoUse of country public financial management systems No

Ending Point Km 262+400

IC No. 19 National Highway4D (Km 254+850)

No. 18 IC Tran Hung Dao Road (Km 244+400)

IC No. 17 Provincial Highway 151(Km 233+300)

IC No. 16 National Road 279(Km 198+650)

IC No. 15 Dong An–PhongDu Thuong Road (Km 165+150)

IC No. 14 Mau A–Anh Thinh Road(Km 149+500)

IC No. 13 National Highway 37(Km 122+100)

IC No. 12 Van Phu Bridge(Km 114+700)

IC No. 11 Provincial RoadAlong Lao River (Km 98+400)

IC No. 10 National Highway 32C (Km 79+100)

IC No. 9 Ho Chi Minh Highway (Km 66+050)

IC No. 8 National Highway 2 (Km 54+600)

IC No. 7 Viet Tri City (Km 49+450)

IC No. 6 Provincial Road 305C (Km 39+500)

IC No. 5 National Highway 2C (Km 31+200)

IC No. 4 National Highway 2B (Km 25+500)

IC No. 3 Binh Xuyen Industrial Zone (Km 14+500)

IC No. 2 Duong Van Dai Town Phuc Yen (Km 8+200)

IC No. 1 Ring Road IV (Km 3+350)

Starting Point Km 0+000

SA No. 5 (Km 239+300)

SA No. 4 (Km 171+500)

SA No. 3 (Km 117+500)

SA No. 2 (Km 57+300)

SA No. 1 (Km 6+100)

PK - A8

PK - A7

PK - A6

PK - A5

PK - A4

PK - A3

PK - A2

PK - A1

KM 2

44+1

55

KM 2

18+0

40

KM 1

90+4

20

KM 1

50+9

00

KM 1

09+7

50

KM 8

0+00

0

KM 4

8+82

0

KM 2

6+70

0

KM 0

+000

7.60km10.45km

11.10km

34.65km

33.50km

15.65km

27.40km

7.40km

16.30km

19.30km

19.05km

5.45km

5.15km9.95km

8.30km5.70km

11.00km6.30km

4.85km3.36km

Pho Rang

Bao Ha

Pho Lu

Lao Cai

Bac Ngam

Trai Hut

Yen Bai

Phu Tho

Vinh Yen

Viet Tri

Ha Hoa

Noi Bai

HA NOI

Thac Ba Lake

He Kou

YEN BAI

LAO CAI

PHU THOVINH PHUC

PEOPLE’S

REPUBLIC

OF CHINA

National Capital

Provincial Capital

City/Town

Interchange constructed under the project

Interchange to be constructed in future

Project Highway

Extension Highway to International Border

National Road

River

Provincial Boundary

International Boundary

IC : Interchange

KM : Kilometer

PK : Package

SA: Service Area

Boundaries are not necessarily authoritative.

VIET NAM

GREATER MEKONG SUBREGION

KUNMING–HAI PHONG TRANSPORT CORRIDOR—

NOI BAI–LAO CAI HIGHWAY PROJECT

14

-0093 A

V

This map was produced by the cartography unit of the Asian Development Bank. The boundaries, colors, denominations, and any other information shown on this map do not imply, on the part of the Asian Development Bank, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries, colors, denominations, or information.

I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on proposed loans to the Socialist Republic of Viet Nam for the additional financing of the Greater Mekong Subregion Kunming–Hai Phong Transport Corridor—Noi Bai–Lao Cai Highway Project.1 2. The Noi Bai–Lao Cai Highway Project involves construction of a 244-kilometer (km) grade-separated and access-controlled highway, including 10 interchanges with toll booths and five service areas, starting at Noi Bai in a suburb of Ha Noi and ending at Lao Cai, on the border with the People’s Republic of China (PRC) in northwest Viet Nam. The Noi Bai–Yen Bai section is designed as a four-lane dual carriageway expressway and the Yen Bai–Lao Cai section is designed as a two-lane single carriageway expressway. Land for an additional two lanes has been acquired for future expansion to accommodate increasing traffic demands. Also, the project includes delivery of (i) electric, communication, and toll infrastructure, as well as highway operation and maintenance (O&M) equipment and vehicles for Vietnam Expressway Corporation (VEC); (ii) capacity building for VEC on project implementation, corporate financial management, highway O&M, and safeguard planning and implementation; and (iii) a program to raise awareness of and prevent HIV/AIDS and human and illicit drug trafficking.

II. THE PROJECT

A. Rationale

3. The Noi Bai–Lao Cai Highway is an integral section of the Greater Mekong Subregion Eastern Economic Corridor, connecting Kunming in Yunnan Province, PRC with Ha Noi and Hai Phong port in Viet Nam. The PRC is the largest trading partner of Viet Nam. Lao Cai is one of the major gateways of Viet Nam for trading with the PRC. The Government of Viet Nam accords the highest priority to the project as one of the main corridor developments for trading with the PRC. In October 2013, at the border in Lao Cai, the international cargo traffic volume was 100 trucks per day from Viet Nam to the PRC, and 150–200 trucks per day in the opposite direction. By constructing the Noi Bai–Lao Cai Highway, the Kunming–Hai Phong Transport Corridor will be completed. The distance from Kunming to Hai Phong will be 813 km after the project, while the distance from Kunming to the nearest ports in the PRC is 1,053 km. International container cargo traffic in Kunming could divert to the Kunming–Hai Phong Transport Corridor route. The completed highway will facilitate trade with the PRC, support economic growth in the northern mountains of Viet Nam, and expand business opportunities in that area. 4. The existing national roads between Noi Bai and Lao Cai are narrow, with a large number of bridges with limited capacity. Poverty in the project area is largely a result of inadequate access to economic opportunities, education, and health services caused by poor local road infrastructure. The volume of domestic cargo along the Ha Noi–Lao Cai route is not high at present. Transportation companies in Viet Nam use small and medium-sized trucks or the railway, because the existing national highways are not safe for large trucks. With completion of the Noi Bai–Lao Cai Highway, they will be allowed to use large trucks to save fuel costs and travel time, and reduce the risk of traffic accidents. There is substantial ribbon development along most of their length. The highway will reduce the cost of travel, which will encourage economic growth in the project area, provide employment for the local population, and improve access to social services.

1 The revised design and monitoring framework is in Appendix 1.

2

5. As for passenger traffic, it is estimated that 2,500–3,000 people are traveling on the Ha Noi–Lao Cai route by bus every day. The fare between Ha Noi and Lao Cai is D180,000 per passenger. The travel takes 8–10 hours. Most passengers are people from the project areas. Bus companies are willing to start bus services on the Noi Bai–Lao Cai Highway. As the travel time will be shorter, the fare can be reduced. To facilitate access to bus services, VEC is establishing bus stops near residential areas, which will benefit local people who do not own cars and thereby help meet the project’s objective of poverty reduction. Bus companies also expect that the highway will reduce the risk of traffic accidents. 6. The project was approved on 14 December 2007, and became effective on 9 March 2009 with financing $896.0 million from ADB’s ordinary capital resources (OCR) and $200.0 million equivalent from ADB’s Special Funds resources. 2 Eight civil works contracts were awarded between 24 March 2009 and 6 April 2010. The total value of the civil works contracts, including taxes and contingencies, is $840.2 million equivalent. The civil works progress as of 30 September 2014 is 97%. Cumulative loan disbursement under the civil works contracts reached $739.6 million as of 3 October 2014. VEC’s capacity in terms of project management, social and environmental safeguards, and financial management has been enhanced through project implementation. The awareness and prevention program on HIV/AIDS and human and illicit drug trafficking has been completed. 7. The project is expected to meet its outcome, but the overall performance of the project has been below satisfactory with the following aspects.3 The project implementation has been delayed by 3 years, compared to the original project implementation schedule. There has been a period of unsatisfactory compliance with certain social and environmental loan covenants. For example, payment of compensation and allowance to project-affected peoples was delayed, and income restoration programs for severely affected and vulnerable households were not in place when the civil works started. Also, VEC faced a financial risk in 2011 when it was unable to meet the covenanted financial targets in terms of its debt-to-equity ratio and debt service coverage ratio. As a result of ADB’s repeated requests and assistance, those unsatisfactory compliance issues have been fully resolved. The overall performance of the project is rated ‘on track’ for the third quarter of 2014. 8. As a result of continued price escalation since 2009 and changes to detailed designs, civil works costs are now estimated to exceed the total contract value by $191.0 million. The Government of Viet Nam has requested ADB to provide additional financing to cover the cost overrun and complete construction of the highway. An alternative option would be to reduce the project scope by terminating the civil works contracts in Yen Bai and Lao Cai provinces, and using the remaining loan funds to complete the civil works contracts in Ha Noi, Vinh Phuc, and Phu Tho provinces. However, this option would result in a deadweight loss. An incomplete highway would not generate any economic benefit for road users and the affected people in Yen Bai and Lao Cai provinces, who already moved to the relocation sites. Furthermore, completion of the remaining sections could only be achieved at a significantly higher cost given the need to re-tender the civil works contracts, and completion of the highway would likely be delayed by 2 years or more.

2 ADB. 2007. Report and Recommendation of the President to the Board of Directors: Proposed Loans to the Socialist Republic of Viet Nam for the Greater Mekong Subregion Kunming–Hai Phong Transport Corridor—Noi Bai–Lao Cai Highway Project. Manila.

3 Summary of Project Performance (accessible from the list of linked documents in Appendix 2).

3

9. With the additional financing, the project remains (i) technically feasible, economically viable, and financially sound; (ii) of high priority to the government; (iii) consistent with the project’s development objectives; and (iv) consistent with the current country partnership strategy. The project meets the criteria for additional financing. B. Impact and Outcome

10. The impact and outcome statements and indicators remain unchanged under the additional financing. The expected impact from the project will be sustainable economic growth and strengthened connectivity with the PRC in the project area and along the Kunming–Hai Phong Transport Corridor. The expected outcome will be international and local traffic using an efficient, safe, and reliable express route from Noi Bai to Lao Cai on the border with the PRC. C. Outputs

11. The additional financing is needed to cover the project cost overruns. The original outputs of the project—(i) the 244 km Noi Bai–Lao Cai Highway with requisite facilities and O&M equipment, (ii) strengthening of VEC’s institutional and financial management capacity, and (iii) a program to raise awareness of and prevent HIV/AIDS and human and illicit drug trafficking to minimize the local population’s exposure—remain unchanged. D. Investment and Financing Plans 12. The original cost estimate was $1,216.0 million (Table 1). As a result of higher costs of civil works, and land acquisition and resettlement (LAR), the project is now estimated to cost $1,441.7 million. To respond to the cost increase, ADB reallocated $112.5 million in contingency and $135.0 million in financing charges to the base cost under the original loans. Also, the government and VEC increased counterpart funds by $47.4 million to pay for the higher LAR costs and financing charges for project bonds issued to secure the counterpart funds. Nonetheless, additional financing of $182.0 million is required to complete the project. 13. The government has requested an additional loan of $117.0 million from ADB’s OCR to help finance the project. The loan will have a 30-year term, including a grace period of 7 years, straight-line repayment method, an annual interest rate determined in accordance with ADB's London interbank offered rate (LIBOR)-based lending facility, a commitment charge of 0.15% per year (the interest and other charges during construction to be capitalized in the loan), and such other terms and conditions as set forth in the draft loan and project agreements. Based on this, the average loan maturity is 18.75 years, and the maturity premium payable to ADB is 0.20% per annum. Also, the government has requested a regular term loan in various currencies equivalent to SDR10,870,000 ($16.09 million equivalent) a hard term loan in various currencies equivalent to SDR9,405,000 ($13.91 million equivalent) from ADB’s Special Funds resources to help finance the project. These loans will have a 25-year term, including a grace period of 5 years, an interest rate of 2.0% per annum, and such other terms and conditions as set forth in the draft loan and project agreements. The government provides counterpart funds of $35.0 million equivalent for the project. 14. Detailed cost estimates for the additional financing by expenditure category and detailed cost estimates by financier are included in the project administration manual.4 ADB’s additional loans will finance the whole cost overruns of the civil works contracts, including all local taxes

4 Project Administration Manual (accessible from the list of linked documents in Appendix 2).

4

and duties imposed on these, and may also finance local transportation and insurance costs.5 All financing charges are to be capitalized. Local taxes on the civil works and highway facilities are estimated at 12% of the base cost, consisting of 10% value-added taxes and 2% duties. In all, local taxes are estimated at $12.0 million equivalent. The government’s additional counterpart funds will finance the cost for the highway facilities and the additional LAR costs.

Table 1: Project Investment Plan

($ million)

Item

Original

Amounta

Current

Amountb

Additional

Financingc Total

A. Base Cost

1. Civil works 703.0 920.5 110.0 1,030.5

2. Mine clearance 4.0 4.0 0.0 4.0

3. Land acquisition and resettlement 100.0 154.3 10.5 164.8

4. Consulting services 25.0 24.6 0.0 24.6

5. Equipment 25.0 2.7 22.3 25.0

6. Incremental administration 7.0 7.0 0.0 7.0

Subtotal (A) 864.0 1,113.1 142.8 1,255.9

B. Contingency

130.0d 1.5 19.2

e 20.7

C. Financing Charges During

Implementation 222.0

f 145.1 20.0

g 165.1

Total (A+B+C) 1,216.0 1,259.7 182.0 1,441.7 a Included taxes and duties of $82.8 million. The tax percentage was not an excessive share of the project investment

plan. Counterpart funds should best be allocated for land acquisition and resettlement, and mine clearance works, as these activities needed to start before loan effectiveness. As the counterpart funding was $120 million (about 10% of the total project cost), all of which was required for the land acquisition and resettlement activities, ADB’s financing should cover all of the local taxes on the remaining ADB-financed project components.

b Includes taxes and duties of $101.6 million to be financed from ADB loan resources. While the original amount of the

ADF loan was $200.0 million equivalent (SDR127,373,000), it was reduced to $196.3 million as of 1 May 2014. While the original counterpart fund was estimated at $120.0 million equivalent, the government and VEC have financed $167.4 million equivalent.

c Includes taxes and duties of $12.0 million to be financed from ADB loan resources.

d Included physical contingencies computed at 11% for civil works; price contingencies computed at 0.8% on foreign

exchange costs, and at 6.5% until 2008 and 5.0% from 2009 onward on local currency costs; and provision for potential exchange rate fluctuation under the assumption of a purchasing power parity exchange rate.

e Includes a cost increase for the civil works contracts caused by price escalation and fluctuation of the exchange rate

between US dollar and Vietnamese dong, and a cost increase for the contract covering electric, communication, and tolling systems and associated facilities, caused by physical changes and price escalation.

f Including interest and commitment charges for the OCR loan and interest for the ADF loan. For the OCR loan, interest

during construction was computed at the 5-year forward London interbank offered rate plus a spread of 0.6%. Commitment charges for an ADB loan were 0.15% per year to be charged on the undisbursed loan amount.

g Includes interest and commitment charges for the OCR loan and interest for the ADF loan. For the OCR loan, interest during the 7-year grace period has been computed at the 5-year fixed swap rate plus a spread of 0.5% and a maturity premium of 0.2%.

ADF = Asian Development Fund, OCR = ordinary capital resources, VEC = Vietnam Expressway Corporation. Source: Asian Development Bank.

15. The financing plan is in Table 2. The entire OCR loan proceeds will be onlent to VEC. VEC will borrow the OCR loan from the Ministry of Finance through a subsidiary loan agreement, on terms acceptable to ADB and at ADB’s interest rate applicable to the loans plus

5 The original loans finance all of the local taxes imposed on ADB-financed civil works, consulting services, and equipment.

5

an onlending fee pursuant to the borrower’s regulations. The entire Asian Development Fund loan proceeds will be distributed to VEC as grants.

Table 2: Financing Plan

Source

Current Additional Financing Total

Amount ($ million)

Share of

Total (%) Amount ($ million)

Share of

Total (%) Amount ($ million)

Share of

Total (%)

Asian Development Bank 1,092.30 86.7 147.00 80.8 1,239.30 86.0 Ordinary capital resources (loan) 896.00 71.1 117.00 64.3 1,013.00 70.3

Special Funds resources (regular-term loan)

a 196.30 15.6 16.09 8.8 212.39 14.7

Special Funds resources (hard-term loan) 0.00 0.0 13.91 7.7 13.91 1.0

Government 5.60 0.4 35.00 19.2 40.60 2.8

Vietnam Expressway Corporation 161.80 12.9 0.00 0.0 161.80 11.2

Total 1,259.70 100.0 182.00 100.0 1,441.70 100.0 a As of 1 May 2014, the original ADF loan amount (SDR127,373,000) is equivalent to $196.3 million.

Source: Asian Development Bank.

E. Implementation Arrangements

16. VEC has overall responsibility for project implementation. VEC has established the Noi Bai–Lao Cai Expressway project management unit to manage day-to-day project implementation, and coordinate with the people’s committees of provinces affected by the project—Ha Noi City, and Vinh Phuc, Phu Tho, Yen Bai, and Lao Cai provinces—in implementing LAR activities and income restoration programs. 17. The implementation arrangements for the proposed additional financing are summarized in Table 3 and described in detail in the project administration manual (footnote 4). The original loans will be closed when the loan funds are fully disbursed for the project. The project cost overrun will be financed from the additional loans. The project management unit will continue to implement the project under the additional financing. Procurement and consultant recruitment required for the project have been completed, and there is no procurement or consultant recruitment planned under the additional financing.

6

Table 3: Implementation Arrangements

Aspects Arrangements

Implementation period January 2015–December 2015

Estimated completion date Project completion is expected on 31 December 2015. The loan closing date is 30 June 2016.

Management

(i) Oversight body Ministry of Transport Nguyen Hong Truong, Vice Minister (chair) Phan Quoc Hieu, Vice Director General, Transport Engineering Construction and Quality Management Bureau; Nguyen Thanh Hang, Vice Director General, Planning and Investment Department; Tran Quoc Toan, Vice Director General, Infrastructure Department; Dao Thanh Thao, Vice Director General, Finance Department (members)

(ii) Executing agency VEC

(iii) Key implementing agencies Noi Bai–Lao Cai Expressway Project Management Unit

(iv) Implementation unit Huu Thu Hamlet, Kim Long Commune, Tam Duong District, Vinh Phuc Province, Viet Nam, 64 staff

Retroactive financing VEC will disburse cost overruns if the cost overruns occur before the additional loans become effective. ADB will retroactively finance eligible expenditures incurred and paid for by VEC within 12 months of signing the loan agreements, up to 20% of the additional loan amount.

Disbursement The loan proceeds will be disbursed in accordance with ADB's Loan Disbursement Handbook (2012, as amended from time to time) and detailed arrangements agreed upon between the government and ADB.

ADB = Asian Development Bank, VEC = Vietnam Expressway Corporation. Source: Asian Development Bank.

III. DUE DILIGENCE

A. Technical

18. The entire highway with 10 interchanges will be open to public traffic at the beginning of 2015. Almost all roads to be connected by the interchanges are well maintained. However, a few connecting roads are narrow and in poor condition. The local governments are widening and rehabilitating the connecting roads so that most of these works may be completed by the time the highway opens. 19. VEC established an O&M department headed by the deputy general director on 1 April 2013 and assigned 10 staff to it. The project supervision consultant has prepared an O&M manual. The department has outsourced all O&M works for VEC’s expressways to VEC Operation and Maintenance Company. The consulting services financed by Japan International Cooperation Agency under the Ho Chi Minh City Long Thanh–Dau Giay Expressway Construction Project provided short-term training for the O&M staff. 20. As local residents along the highway may not be familiar with access-controlled operation of the highway, VEC is working with the police, mass media, and local governments to carry out road safety awareness campaigns. No motorcycles, bicycles, and pedestrians are allowed to enter the right-of-way of the highway. To secure mobility of the local residents, VEC is improving frontage roads in coordination with the provincial departments of transport.

7

B. Economic and Financial

21. Traffic demand for the highway was reassessed, and the project’s economic internal rate of return (EIRR) including the additional financing was estimated by comparing the major road networks in northern Viet Nam with and without the project in the same methodology that was used at project appraisal.6 The project economic costs include (i) capital costs and resettlement costs, excluding tax and price contingency; and (ii) the highway’s O&M cost. The project’s economic benefits are lower vehicle operating costs and shorter passenger travel times, which will benefit both the highway users and traffic on the existing roads. The EIRR estimated at appraisal for the original loans in 2007 was 18.1% under a toll rate of D1,000/km for passenger cars. The government determined to set the toll rate for the highway at D1,500/km for passenger cars. The estimated EIRR for the project with additional financing under the toll rate of D1,500/km is 36.6%, indicating that the project is economically viable. The EIRR for the project with additional financing is higher than that at project appraisal in 2007, due to high vehicle operating costs and time savings as nonincremental benefits. For the time savings in particular, estimates of the passenger time cost was based on the national average wage, which has more than doubled since 2007 in real terms. Sensitivity analysis confirms the robustness of the project’s economic viability. Changes in the key variables, such as a 10% increase in O&M costs and a 10% reduction in benefits, do not impact the economic viability. 22. The estimated financial internal rate of return of the project with the additional financing is 4.65% at a toll rate of D1,500/km, which is higher than the weighted average cost of capital estimated at 1.08%.7 The financial net present value of the project with the additional financing is $1,065.6 million. The results of the financial cost–benefit analysis show that the project with the additional financing is financially viable. A sensitivity analysis is performed to investigate the impact of adverse changes in key project variables on the financial viability. The sensitivity scenarios include a 10% increase in outstanding capital expenditures, a 10% increase in operating costs, and a 10% decrease in revenue. The results from the sensitivity analysis show that the project remains financially viable in each tested scenario, with financial internal rates of return ranging from 3.70% to 4.65%. Financial net present values are still satisfactory against the downside risks. An analysis of financial projections, financial statements, and key financial performance indicators for VEC reveal that VEC will have adequate financial capacity to ensure the sustainability of the project. Overall, the results of the financial analysis indicate that revenues to be generated by the project are likely to be more than sufficient to cover O&M costs.

C. Governance

23. A financial management assessment of VEC concludes that VEC has sufficient financial management capacity and adequate financial management arrangements in place for project implementation. 24. ADB’s Anticorruption Policy (1998, as amended to date) was explained to and discussed with the government and VEC. The specific policy requirements and supplementary measures are described in the project administration manual. 25. In 2011, ADB’s Office of Anticorruption and Integrity undertook a review of the project’s procurement procedures, internal controls, disbursements, and financial management system in

6 Economic Analysis (accessible from the list of linked documents in Appendix 2).

7 Financial Analysis (accessible from the list of linked documents in Appendix 2).

8

consultation with ADB’s Southeast Asia Department (SERD). It also conducted an asset inspection. The procurement review report, published in October 2012, identified issues in two areas: procurement and asset inspection.8 In procurement, the key findings were (i) a lack of due diligence during prequalification of contractors and evaluation of bids, (ii) changes in bid evaluation criteria without ADB approval, (iii) flawed evaluation of bidders’ cash flow, (iv) insufficient basis in assessing compliance with bid requirements,9 and (v) inaccurate evaluation in selecting consultants. Through an asset inspection, the review concluded that the delays in project implementation were caused by contractors’ insufficient financial capacity, which may have resulted from the irregularities in procurement, and site clearance and resettlement issues. On one contract, the review found that the winning bidder did not have the required cash flow capacity as originally approved by ADB. Nevertheless, the contractor was selected as a result of modifications to the cash flow capacity criterion made by VEC after prequalification and before bidding without ADB approval.10 The procurement review recommended that ADB consider declaring misprocurement or intensify oversight to ensure that the contractor successfully delivers the desired output for the contract. 26. While the procurement review was under way in late 2011 and up to mid-2012, review missions by SERD discussed the findings with VEC, particularly with respect to the possible misprocurement case (footnote 3). After the issuance of the final procurement review report in October 2012, SERD fielded another mission in November 2012 that came up with actions to address the report’s recommendations. In considering the recommendation to declare misprocurement or intensify ADB's oversight, SERD felt that the latter was the preferred approach for the following reasons: (i) the change to the criterion was made before bidding and all invited bids were evaluated based on the same modified criterion; (ii) the use of the original criterion, which looked at bidder's working capital, had been discontinued, and by applying the new standardized cash flow capacity criterion adopted bank-wide in August 2012,11 the winning bidder was found to have sufficient cash flow capacity to carry out the works; (iii) the contract won by the winning bidder was by then in its third year, and while delay was observed at the time of procurement review, the performance of the contractor was improving; 12 and (iv) declaring misprocurement would lead to termination of the current contract by VEC, which could invite contractual disputes between the contractor and VEC. Considering these factors, in November 2012, SERD opted to permit the current contractor to continue implementing the remaining contractual works rather than declaring misprocurement. SERD also committed resources to closely oversee VEC’s contract management under all ongoing contracts and ensure that the loan proceeds would be properly utilized. In 2013–2014, quarterly review missions (instead of the normal biannual missions) were fielded. Viet Nam Resident Mission staff have also been involved in the continual monitoring of the project.

8 ADB. 2012. Project Procurement-Related Review Report Loans 2391 and 2392(SF)-VIE: GMS: Kunming–Hai Phong Transport Corridor—Noi Bai–Lao Cai Highway Project. Manila.

9 Key findings are elaborated in paras. 51–55 of footnote 8.

10 The ADB-approved bidding document had the following cash flow capacity criterion for this package: [(working capital + lines of credit) – current contract commitments] ≥ $20 million in 4.5 months. VEC modified this and added “or lines of credit ≥ $20 million in 4.5 months.” Working capital is defined as current assets minus current liabilities. With these modifications, the winning bidder, on account of its lines of credit of $40 million, qualified despite its negative working capital, which would have disqualified the contractor had the ADB-approved original criterion been used.

11 ADB’s standard bidding document was revised in August 2012 and contains a streamlined method to assess

contractors’ cash flow capacity. 12

By November 2012, the contractor had achieved a physical progress ratio of 30.4%. The work was substantially completed in June 2014, and the Highway was opened to traffic.

9

27. In parallel, SERD dedicated more resources to (i) strengthen the review of procurement and consultant recruitment under other ADB-funded projects involving VEC, and (ii) increase the procurement and anticorruption capacity of the Viet Nam transport sector executing agencies that receive large volumes of ADB assistance. The capacity building would be implemented through structured training and collaboration between the Viet Nam Resident Mission and the government’s integrity and anticorruption body, with support from ADB’s Office of Anticorruption and Integrity. 28. To safeguard the proposed additional financing, ADB will continue to exercise enhanced due diligence of contract management actions and on-site work by reviewing all contractual changes and adjustments in advance, and by fielding frequent review missions involving staff with contract management expertise. A project completion report with an expanded scope will be prepared to provide details on how the procurement review recommendations have been implemented.

D. Poverty and Social

29. The poverty reduction and social strategy envisaged at the time of the original project implementation remains unchanged.13 Social impacts and risks on the communities in general and the households physically and economically affected by the project were satisfactorily mitigated by providing employment for the civil works. The income restoration programs, which were provided the severely affected and vulnerable households with training and livelihood inputs, resulted to increase in their income. The gender aspects of the project are mainstreamed into the resettlement and income restoration activities, job opportunities during construction, and the HIV/AIDS and human trafficking awareness and prevention program. These activities are being managed and monitored by the project.

E. Safeguards

30. The additional financing is provided to bridge cost overruns of the civil works contracts within the existing project’s scale and scope. There is no additional work on safeguards. It is classified as category C for environment, involuntary resettlement, and indigenous peoples.

F. Risks and Mitigating Measures

31. The cost overruns under the original loans may occur before the additional loans become effective. VEC will then finance the cost overruns from the state budget. ADB will retroactively finance the cost overruns for up to 20% of the additional loan amount after the additional loans become effective.

IV. ASSURANCES

32. The government and VEC have assured ADB that implementation of the project shall conform to all applicable ADB policies including those concerning anticorruption measures, safeguards, gender, procurement, consulting services, and disbursement as described in detail in the project administration manual and loan documents. 33. The government and VEC have agreed with ADB on certain covenants for the project, which are set forth in the loan agreement and project agreement.

13

Summary Poverty Reduction and Social Strategy (accessible from the list of linked documents in Appendix 2).

10

34. The disbursement of the loans is conditional upon the government’s certification that the subsidiary loan agreement between the government and VEC shall have been duly executed and delivered, and all conditions precedent to its effectiveness are fulfilled.

V. RECOMMENDATION

35. I am satisfied that the proposed loans would comply with the Articles of Agreement of the Asian Development Bank (ADB) and recommend that the Board approve

(i) the loan of $117,000,000 to the Socialist Republic of Viet Nam for the additional financing of the Greater Mekong Subregion Kunming–Hai Phong Transport Corridor—Noi Bai–Lao Cai Highway Project, from ADB’s ordinary capital resources, with interest to be determined in accordance with ADB’s London interbank offered rate (LIBOR)-based lending facility; for a term of 30 years, including a grace period of 7 years and such other terms and conditions as are substantially in accordance with those set forth in the draft loan and project agreements presented to the Board;

(ii) the loan in various currencies equivalent to SDR10,879,000 to the Socialist Republic of Viet Nam for the additional financing of the Greater Mekong Subregion Kunming–Hai Phong Transport Corridor—Noi Bai–Lao Cai Highway Project, from ADB’s Special Funds resources (regular term), with an interest charge at the rate of 2.0% per annum; for a term of 25 years, including a grace period of 5 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan and project agreements presented to the Board; and

(iii) the loan in various currencies equivalent to SDR9,405,000 to the Socialist Republic of Viet Nam for the additional financing of the Greater Mekong Subregion Kunming–Hai Phong Transport Corridor—Noi Bai–Lao Cai Highway Project, from ADB’s Special Funds resources (hard term facility), with an interest charge at the rate of 2.0% per annum; for a term of 25 years, including a grace period of 5 years; and such other terms and conditions as are substantially in accordance with those set forth in the draft loan and project agreements presented to the Board.

Takehiko Nakao President

30 October 2014

Appendix 1 11

REVISED DESIGN AND MONITORING FRAMEWORK

Design Summary Performance Targets and

Indicators with Baselines

Data Sources and

Reporting Mechanisms

(Overall Project) Assumptions and Risks

(Overall Project) Impact

Current project

Sustainable economic growth and strengthened connectivity with the PRC in the project area and along the Kunming–Hai Phong Transport Corridor

Overall project

Unchanged

Current project

Average per capita income in Vinh Phuc, Phu Tho, Yen Bai and Lao Cai provinces reached the national average by 2016 (Baseline: $890/person in Vinh Phuc, $420/person in Phu Tho, $360/person in Yen Bai, and $360/person in Lao Cai in 2008)

Annual border trade at Lao Cai increased from $477 million in 2006 to at least $800 million in 2016 (Baseline: $110 million for export and $541 million for import in 2008)

Provincial statistical report Road traffic census

Assumptions

Streamlined cross-border operation and minimal barriers to trading and mobility Complementary government and donor projects for rural development are implemented.

Risk

Political factors increase barriers to cross-border trade.

Custom control statistics

Overall poverty incidence in the project area reduced from 51.9% in 2004 to 15% in 2016 (Baseline: 11.3% in Vinh Phuc, 16.7% in Phu Tho, 20.4% in Yen Bai, and 33.2% in Lao Cai in 2008)

Provincial statistical reports

Number of new small and medium businesses and employment for local people in project influence area increased by 70% in 2016 (Baseline: 1,501 firms in Vinh Phuc, 1,733 firms in Phu Tho, 732 firms in Yen Bai, and 802 firms in Lao Cai in 2008)

Socioeconomic and person-trip surveys

Awareness of risks for HIV/AIDS, sexually transmitted infections, illicit drugs and human trafficking improved by 2016 (Baseline: no campaign started in 2008)

Overall project

Unchanged

Monitoring by the Ministry of Health

12 Appendix 1



Data Sources and



(Overall Project) Outcome

Current project

International and local traffic using an efficient, safe, and reliable express route from Noi Bai to Lao Cai on the border with the PRC

Overall project

Unchanged

Current project

Travel time from Noi Bai to Lao Cai reduced from 7–10 hours to 3–4 hours in 2014 (Baseline: 8 hours for passenger cars, 9 hours for buses, and 12 hours for trucks in 2008)

Traffic volume: 18,000 for Noi Bai–Viet Tri section; 6,500 for Viet Tri–Yen Bai section; and 4,700 for the Yen Bai–Lao Cai section in 2014 (Baseline: 20,000–25,000 for Noi Bai–Viet Tri section; 6,000–12,000 for Viet Tri–Yen Bai section; and 3,500 for the Yen Bai–Lao Cai section in 2007)

Traffic count and travel-time surveys

Tolling data

Assumptions

Assumed economic growth rates materialize. Counterpart financing and human resources are available to carry out the project. Contiguous section Shilin–Menzi–Hekou is completed by 2009 on the PRC side. Lao Cai–Hekou border is operated based on GMS cross-border transport agreement. Access roads to the highway are improved and have adequate capacity.

Risks

Toll revenue is lower than expected because of low traffic demand. Human and illicit drug trafficking and prevalence of HIV/AIDS increase because of the highway.

Ten percent of road container freight originating in Kunming going to ports in the PRC divert to the Kunming–Hai Phong Transport Corridor (Baseline: no data available in 2008)

Custom control data at Lao Cai cross-border facilities Interviews with freight forwarders in Kunming and Hai Phong Port Authority

Less than five fatalities per billion vehicle-km on the highway during 2012–2021 (Baseline: 18 fatalities for Noi Bai–Viet Tri section; 6 fatalities for Viet Tri–Yen Bai section; and 6 fatalities for the Yen Bai–Lao Cai section in 2008)

Accident statistics from Ministry of Transport

Operation of more than 30 long-distance buses on the highway in a day and local bus service availability in all the districts of project influence area (Baseline: from Ha Noi, 49 buses to Yen Bai, 31 buses to Lao Cai, 0 buses to Kunming in operation per day in 2009)

Interviews with bus companies

Development of international free-trade zone and industrial parks along the project highway (Baseline: Lao Cai free-trade zone under construction in 2008)

Economic and industrial statistics from Ministry of Planning and Investment

Expansion of the expressway network under VEC-managed projects (Baseline: 349 km expressway under construction in 2009)

Business plan and financial statement of VEC

No increase of HIV/AIDS cases in the project area (Baseline: 3,631 cases in Vinh Phuc, 8,195 cases in Phu Tho, 2,646 cases in Yen Bai,


Appendix 1 13



Data Sources and



(Overall Project)

and 549 cases in Lao Cai in 2009)

Overall project

Unchanged

Outputs

Output 1

Current project

The 244 km of Noi Bai–Lao Cai Highway, with 10 grade-separated interchanges and five service areas, is constructed to a high standard and operational Overall project

Unchanged

Current project

Travel distance from Noi Bai to Lao Cai reduced from 298 km to 255 km in 2014

Highway capacity: increased by 80,000 vehicles per day on Noi Bai–Yen Bai section; and by 20,000 vehicles per day on Yen Bai–Lao Cai section by 2014 Transportation cost reduced by 20% for trips along the highway in 2014

Environment at project site protected and adverse environmental impacts mitigated

Quality of life restored to at least the same level as before land acquisition

Highway O&M systems and facilities installed

Road safety enhanced by raising awareness among local people

Overall project

Unchanged

Project completion report Transport cost survey Resettlement monitoring by VEC and an independent organization Environmental monitoring reports

Assumptions

Detailed highway design and detailed measurement survey for land acquisition and resettlement are completed as scheduled. Procurement of civil works is completed as scheduled. Provincial governments carry out land acquisition and compensation, and income restoration program in accordance with the REMDP. Environmental management plan is implemented by contractors.

Health authorities carry out health campaigns.

Output 2

Current project

Institutional and financial management capacity of VEC strengthened

Overall project

Unchanged

Current project

Capacity of VEC in project management, procurement, environmental impact assessment and monitoring, resettlement, corporate finance, and highway O&M

Sufficient net revenue stream to cover debt service on annualized basis

Overall project

Unchanged

Organization structure of VEC, number of directors and experts in VEC Financial statement of VEC

Risks

Late completion of procurement and/or resettlement delays the start of construction. Contractors fail to perform as required. Inadequate attention or funding given to EMP, health plan, and income restoration program.

Output 3

Current project

Program on HIV/AIDS, human

Current project

Risks for HIV/AIDS, human and illicit drug trafficking mitigated


14 Appendix 1



Data Sources and



(Overall Project)

and illicit drug trafficking minimizes local population’s exposure to these issues

Overall project

Unchanged

Overall project

Unchanged

Activities with Milestones (Overall Project) Inputs

Loan

ADB $1,092.3 million (current) $147.0 million (additional) $1,239.3 million (overall)

Government $5.6 million (current) $35.0 million (additional) $40.6 million (overall)

VEC

$161.8 million (current) $0.0 million (additional) $161.8 million (overall)

1.1 All land acquisition and resettlement activities are completed by June 2014.

1.2 Livelihood development and income restoration programs started at all the project sites by October 2013.

1.3 The civil works are completed by December 2014. 1.4 Procurement of equipment for highway operation and maintenance is

completed by December 2014. 2. Project supervision consulting services started in November 2009 and

completed in December 2014 3. HIV, illicit drugs, and human trafficking prevention program started in

February 2010 and completed in October 2013

ADB = Asian Development Bank, EMP = environmental management plan, GMS = Greater Mekong Subregion, km = kilometer, O&M = operation and maintenance, PRC = People’s Republic of China, REMDP = resettlement and ethnic minority development plan, VEC = Vietnam Expressway Corporation. Source: Asian Development Bank.

Appendix 2 15

LIST OF LINKED DOCUMENTS

http://adb.org/Documents/RRPs/?id=33307-044-3 1. Loan Agreement (Ordinary Operations)

2. Loan Agreement (Special Operations)

3. Amended and Restated Project Agreement

4. Sector Assessment (Summary): Transport

5. Project Administration Manual

6. Summary of Project Performance

7. Contribution to the ADB Results Framework

8. Development Coordination

9. Financial Analysis

10. Economic Analysis

11. Country Economic Indicators

12. Summary Poverty Reduction and Social Strategy

13. Risk Assessment and Risk Management Plan