Water Supplyand Sanitation StrategyBuilding on a solid foundation

Prepared by Camellia Staykova (EWDWS)Task managed by Bill Kingdom (EASUR)

As Vietnam becomes richer it faces challenges in adapting its infrastructurepolicies and institutions. While the old challenges of providing basic servicesto all remain, new challenges are emerging, such as accessing new sources offinance, refining planning processes, preparing for rapid urbanization,improving the efficiency of infrastructure service providers, developingstronger institutions to encourage private finance of infrastructure or directprivate provision of infrastructure, and developing more targeted approachesto poverty alleviation.

This report on Water Supply and Sanitation Strategy - Building on aSolid Foundation is one of six volumes dealing with Vietnam's InfrastructureChallenge. Other volumes deal with Infrastructure Cross Sectoral Issues,Urban Development, Transport, Telecommunications, and Electricity.

The work for these reports was carried out between 2004 and 2006 byWorld Bank staff and consultants. The reports have been revised to takeaccount of comments made by the Government in workshops during May15-17, 2006. The comments of numerous colleagues from the World Bank,the United Kingdom's Department for International Development Bank, theAsian Development Bank, and the Japan Bank for International Cooperationare gratefully acknowledged.

Vietnam’s infrastructure challenge

iv

v

ADB Asian Development BankBOO Build-operate-ownedBOT Build-operate-transferBSP Bank for Social PolicyCAPEX Capital expenditureCERWASS Center for Rural Water Supply and SanitationCGPRS Comprehensive Growth and Poverty Reduction StrategyDAF Development Assistance FundDARD Department for Agriculture and Rural DevelopmentDOH Department of HealthDOSTE Department of Science, Technology and EnvironmentFDI Foreign Direct InvestmentGoV Government of VietnamGSO General Statistical OfficeHCMC Ho Chi Minh CityHR Human ResourceIEC Information, Education and Communication JBIC Japanese Bank for International CooperationJICA Japan International Cooperation AgencyJV Joint ventureMARD Ministry of Agriculture and Rural DevelopmentMDGs Millennium Development GoalsMoC Ministry of Construction MoF Ministry of FinanceMONRE Ministry of Natural Resources and Environment MPI Ministry of Planning and InvestmentNEA National Environmental AgencyNRW Non-revenue waterNRWSS National Rural Water Supply and Sanitation Strategy NTP National Target ProgramO&M Operation and MaintenanceOBA Output-based aidODA Official Development AssistanceOPEX Operating expenditurePC People’s CommitteePLC Public Limited CompanyPPP Public Private PartnershipRWSS Rural Water Supply and Sanitation

Abbreviations

vi

SOCB State-owned commercial banksSOE State-owned enterprisesUDC Urban Drainage CompanyURENCO Urban and Environment CompanyVBARD Vietnam Bank for Agriculture and Rural DevelopmentVBSP Vietnam Bank for Social PoliciesVDGs Vietnam Development GoalsVLSS Vietnam Living Standards SurveyVND Vietnam Dong (Currency)VUWSDP Vietnam Urban Water Supply Development Project VWSA Vietnam Water and Sanitation AssociationWHO World Health Organization WSC Water Supply companyWSP Water and Sanitation ProgramWSS Water Supply and Sanitation

Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .ixExecutive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xi

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xiCurrent Situation - By Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xiiThe Way Forward . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xvBoosting Sanitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xx Building Capacity and Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .xxi

I. Water Supply and Sanitation Policy and Institutional Framework . . . . . . . . . . .1

A. Laws and Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1B. Policies and Responsibilities - Urban . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2C. Policies and Responsibilities - Small Towns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4D. Policies and Responsibilities - Rural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5

II. Sector Structure and Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9

A. Water Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9Unility Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9Small Towns / Townslets Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11Self-Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12Local Private Sector in Rural Areas . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

B. Sanitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13Urban Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13Rural Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15

III. Water Supply and Sanitation Investment Needs and Financing . . . . . . . . . . . . .17

A. Investment Needs in Water and Sanitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17B. Sources of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

IV Sector Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

A. Water Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25Overall Performance of the Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27Water Tariffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28

Affordability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30B. Sanitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32

Table of Contents

vii

Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32Urban Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34Small Towns Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35

Rural Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35Public Subsidies in Sanitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36

V. Main Issues in Water Supply and Sanitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39The Financing Gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .39Maturity of Sector Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40Sector Performance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40Private Sector Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .43Sanitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44

VII. The Way Forward in Water Supply and Sanitation . . . . . . . . . . . . . . . . . . . . . . . .47A. Bridging the Financing Gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47B. Improved Efficiency and Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .49C. Boosting Sanitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51D. Building Capacity and Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52

Annex 1: Laws and Regulations in Vietnam Water and Sanitation Sector . . . . . . . . . . . . . . . . . . . .55Annex 2: BOT Projects and FDI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58Annex 3: WSS Providers: Successful Alternative Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59Annex 4: Sanitation in HCMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .60Annex 5: Investment in WSS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .61Annex 6 Access and Affordability of Water Supply Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .62Annex 7: Urban Water Utilities Operating Cost Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .64Annex 8: New Developments in RWSS Micro-credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .65Annex 9: Realistic Framework for Water Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .66

viii

This study was undertaken to assist the World Bank dialoguewith the GoV and other donors/partner organizations insupporting WSS reform; to guide World Bank lending and

technical assistance in the sector; and to provide a useful source ofinformation on existing studies and data.

The report is organized as follows: The Executive Summaryoutlining the key issues for the sector and proposing a way ahead.Chapter I sets the scene by describing the policy and institutionalframework of water supply and sanitation sector in Vietnam. ChapterII describes the sector structure and provision of services, Chapter IIIgoes into the details of sector financing and investment needs withChapter IV analyzing the sector performance. Chapters V and VIinclude the summary of the issues facing water supply and sanitationin Vietnam and recommended actions.

Preface

ix

Introduction

Since 1990 Vietnam has achieved the remarkablegrowth rate of 7.4% p.a.1 , making it the world'seighth fastest growing economy. This growthhas been particularly well converted into povertyreduction. From 1990- 2005 $1 per day povertyfell from 58% -to just 8%; a rate second only toChina2. Still, Vietnam is not a rich country andthe productivity and well-being of its populationremain below their potential. Slow progress onstate-owned enterprise reform, as well ascontinued weaknesses in the lending decisionsby state-owned commercial banks andgovernment lending institutions may lead tocapital misallocation and weaken long-termgrowth.

At the end of 2005, it is estimated that about73.2% of the population in Vietnam isconcentrated in rural areas. Vietnam is urbanizingrapidly, albeit slower than other East Asiancountries but urbanization pressures will place aparticular strain on the country, especially infinancing infrastructure. Such pressures might bereduced if there is a rapid improvement of wellbeing in rural areas (including better water andsanitation services)4.

In the water and sanitation sector the level ofaccess to services is mixed. According to the

Vietnam Household Living Standards Survey(VHLSS 2004) rural access to water supply andsanitation in 2004 is, respectively, 48% and 16%.The corresponding access rates in urban areasare 82% water and 76% for sanitation. As acountry water coverage rose from 26% to 57%over the period 1993-2004 whilst thecorresponding figures for sanitation saw anincrease from 10% to 31%. However otherstudies have indicated lower levels of access5.

Investment needs to meet the Vietnam MDGsin both rural and urban water and sanitation by2020 are tentatively estimated at $600 millionannually - which is roughly 4 times the annualinvestment in the last 10 years. This pastinvestment, particularly in the urban sector, hasbeen predominantly from ODA (nearly 85% ofthe $1 billion invested). Given that donors areunlikely to massively increase their support forthe water supply and sanitation sector inVietnam, it is clear that that the financing gap willhave to be funded from within the country -either from government, or through borrowing inthe capital markets. The latter would be fundedby surpluses generated from higher user fees, andincreasing efficiency of service providers.

The challenges faced by Vietnam to meet theVietnam MDGs in water supply and sanitationare not unlike those to be found in most

Executive Summary

1. Source: General Statistics Office (GSO) figures2. Source: WDI (April, 2005)3. Source: Vietnam Growth and Reduction of Poverty, annual progress report of 2004-2005, Hanoi November 20054. Taking stock 2003. Consultative Group Meeting, December 20035. Figures from Vietnam MDG Report, April 2004 show figures of rural water & sanitation at 40% and 11.5%

respectively, and urban water & sanitation at 76% and 68% respectively. WHO-UNICEF Joint Monitoring Program(JMP) gives rural access to water supply and sanitation in 2002 is, respectively, 68% and 26%. The correspondingaccess rates in urban areas are 93% water and 84% sanitation.

xi

developing countries. Investment needs arehuge, compared to the revenue base. Low tariffsmake it impossible to expand services usinginternally generated funds. This is oftenexacerbated by low efficiency and weak technicaland managerial capacity. Efficiency andcustomer responsiveness are further reduced bythe limited incentives for management andowners. Service provision is dominated by thepublic sector leading to overlapping roles andresponsibilities, multiple objectives and poorfocus on service delivery. Inappropriate designstandards are used leading to higher capitalcosts, and adverse impact on tariffs andaffordability. Sanitation is considered a privategood requiring support to mobilize, and thusmaximize the benefits to accrue from a newwater supply.

However, compared to other developingcountries, the Vietnamese sector is dynamic andrapidly changing and there are many positiveaspects on which to build a sound future for WSSin the country.

Commercial practices in the urban sector rivalthe best in the world. Collection rates are above95% with collection periods typically being lessthan 30 days, whilst the recent Circular 104 isputting upward pressures on tariffs. Thisprovides a sound foundation from which tomobilize investment capital for furtherexpansion, and to fund adequate maintenanceand rehabilitation. All water companies alreadycover their operating costs from user fees with anational average working ratio of a verycreditable 0.63.

In addition the last two years have seen anumber of important institutional changes. Infour water companies equitization is under wayto change the legal framework under which thecompanies operate. The sector has also seenincreasing use of the private sector, for example

in the use of operating contracts in district townsand the proposed PPP contract to improveleakage management in HCMC. In rural watersupplies, fundamental change to the role ofCERWASS is under way through a new Bankfinanced project - leading to the creation of ruralwater supply companies and refocusingCERWASS on its policy and regulatory role.

On finance a new lending window has beenestablished in DAF to provide long term, nonsubsidized, financing for WSS investments andto illustrate sector opportunities to other lenders.Whilst small in size the facility is a step in theright direction. At the same time targeted capitalsubsidies are being piloted in a planned OutputBased Aid scheme in HCMC.

Finally, the Government is formulating a newUrban Water Decree to capture the new directionand provide guidance for the way ahead. Anumber of the recommendations in this report areunderstood to be reflected in the draft Decree.

Overall, therefore the pace of change is rapidand generally positive. The WSS strategypresented in this report will further support andenhance the development of the sector.

The key findings from the study aresummarized below, in two parts. The firstpresents the current situation, by sector. Thesecond draws on the sectoral assessments toidentify a number of key themes and to presentsuggestions on how the Government of Vietnammight address them..

1. Current Situation - By Sector

A. Urban Water Supply

Water supply service in Vietnam is not sufficientto meet growing demand6. The effectiveness andquality of service is variable, with larger urbancenters having higher coverage and better

xii

6. Vietnam Urban Water Supply Development Project: Pre-feasibility study, 2004

service than smaller ones. The key challenges aresummarized as follows:● Access to sufficient capital: The level of

autonomy of the urban WSCs remainslimited and tariff levels, set by the provincialPeople Committees (PCs) do not ensure thelong term financial sustainability of theutility. Over the last decade 85% ofinvestment in the urban sector has comefrom ODA, yet investment needs over thenext period are four times as high. There ismuch work to be done to build utilities thatcan be considered creditworthy to lenders,and in parallel, there is a need to develop alocal capital market that provides long-termfinancing which is currently unavailable.Access to short-term debt from commercialbanks is already occurring on a limited basisand the recent BOT initiative in HCMCshows that a range of sources of funds can bemobilized.

● Efficient operations and use of capital:Although the WSCs operational performancecompare favorably to other developingcountries, the utilization of treatment plantcapacity, particularly in small towns is low,the level of NRW remains high at 35% andthe number of staff per connection is about60% higher than the level expected in wellrun systems in developing countries. Thusthere are many opportunities to improveoperational performance and releaseresources for more productive use. Inaddition, the pilot benchmarking assessmentof capital costs in Vietnam showed widevariations in unit costs of providing systemcapacity. Taking into account that financingof capital costs usually accounts for 60-80% ofthe full cost recovery tariff, there are clearlybenefits to be derived from improved capitalefficiency.At the same time there remains someuncertainty over ownership of assets. Water

companies, PC and even central government,can potentially claim ownership of differentassets, depending on how they were financedin the first place. Whilst not a critical issuewhen the WSC are owned by the Provinces,this will become more important asequitization takes place and an increasinglycommercial logic takes hold.

● Institutional barriers and the need forincentives: Current regulations should beupdated and consistently enforced -particularly those relating to tariffs. At thesame time, the institutional models of WSCsneed to evolve to provide better incentivesfor efficient and effective service delivery.This will include formalizing assetownership, defining required performancelevels and dividend policy as well as byincreasing the autonomy and accountabilityof WSCs. With the present micro-management of the sector, the water utilityperformance is a reflection of theperformance of both the WSC managementand the PC oversight. Thus, it is alsoimportant that the PCs themselves areincentivized to deliver improved service.

● Towns require particular attention: Onlyabout one third of approximately 600 DistrictTowns have piped water supplies. These areimportant urban centers both in terms ofeconomic development, and providingalternative destinations for rural urbanmigration. Often, however, they lack financialresources or human capacity. Providingsustainable piped water supplies to thesetowns is therefore a development priority.

B. Rural Water Supply

In many rural areas people lack even theminimum amount of water needed for domesticuse. The key challenges facing the rural watersupply sector are summarized below:

xiii

● Overlapping and conflicting roles ofinstitutions: The responsible institution underMARD, CERWASS, has a dual role asregulator/developer/fund manager, andservice provider. This results in conflicts ofinterest, which isolates the provider from thegenuine needs of the beneficiary (buildingsystems that people do not want nor are willingto pay for), and develops a focus on assetcreation rather than sustainable asset operation.

● Fragmentation of the sector: Rural serviceprovision comes from many models and atmany levels (commune, district, etc.). Thisfragmentation may be acceptable for simplesystems, but for piped systems, it can lead todeterioration in service. In addition, from thegovernment side there is also a fragmentedapproach. This has been highlighted inearlier studies and led to the creation of inter-ministerial Standing Committee on ruralwater and sanitation. However, this has notmet.

● Role of the private sector: In response to aconsumer demand not being met by publicservices, the private sector has stepped intothe rural and small towns water supplyprovision by leveraging funds from fee-paying customers and own contributions.The private sector investment continuesgrowing despite the limited GoV incentivesfor private sector participation.

● Capacity in the rural sector: The highlyfragmented approach to service delivery, andthe lack of clear institutional models, leavesthe sector without any vehicles to assist eitherthe technical operations/management of thesystems, nor of their oversight by thecommunes and others. The professionalassociation VWSA is predominantly focusedon urban water companies, and given thefragmentation of the rural sector, reachingout to such a large number of

owners/operators will require a new modelof capacity building.

● Sustainability of service provision: In the pastthe focus was on asset creation with limitedeffort put into creating the institutionalarrangements for sustainable service provision.Paying for water services and maintainingO&M funds, has been insufficient. It isunderstood that a significant proportion of thewells drilled under previous assistanceprograms are not operational.

● Asset ownership. Unlike in the urban sectorthis is a more serious issue in rural waterservices where consumers typically provide60% of the initial capital costs to build thesystems. Despite this significant investment,the institutional arrangements leave theconsumer outside the system. Yet, it is alsounclear, how they can better participate.

C. Sanitation (Urban and Rural)

Sanitation in Vietnam is predominantly a privategood with the majority of households investingin septic tanks or latrines, depending on location.There are currently few wastewater treatmentplants in the cities. As a result, the watercourses,especially in the big cities, are severely polluted.GoV is paying commendable attention toaddressing environment degradation. Hanoi,HCMC, Haiphong, Danang, Halong and severalsecondary cities will all have sewerage andsewage treatment facilities in place in the nextfew years.

Sanitation in rural areas is rudimentary. Despitethe very low sanitation coverage of 11.5%7 in therural areas, the access to latrines has had animpressive growth rate of 238% between 1998 and2002 comparing to the water access growth rate of36% for the same period. The financing source forthis impressive growth has been predominantlycommunity/user contributions.

xiv

7. Vietnam MDG Report, April 2004 show figures of rural water & sanitation at 40% and 11.5% respectively.

● Predominantly an urban challenge in theshort term: With urbanization and theincreasing degradation of urbanenvironment the focus of the governmentshould be on urban sanitation. Here, giventhe relative inexperience of sanitation in thecountry and the region, there is a need todevelop an improved understanding of thekey issues including:

i. Institutional arrangements, e.g. stand-alone wastewater companies,combined companies, separation ofroles and responsibilities;

ii. Cost recovery via tariffs;iii. Financing by utilizing ODA, mix of

grant and loans;iv. Appropriate technical approaches and

standards of service;v. Capacity building since there is a

general lack of expertise in the sector.● Huge need and limited capacity: The Urban

Environmental Companies, who areresponsible for drainage, sewerage, solidwaste management and other urbanactivities, are institutionally and financiallymuch weaker than WSCs.

● Urban tariffs: The GoV Decree 67/2003introduces a uniform environmentalprotection charge for wastewater serviceswhich must not exceed 10% of the cleanwater tariff and should be collected by theWSCs. There is some confusion about thepurpose of this charge. The Provinces believethis is the wastewater fee, whereas, in fact,MONRE's purpose was to establish this as aseparate environmental charge, in addition toany wastewater fees. In many developedcountries the wastewater tariffs exceed watertariffs - so a 10% ceiling on wastewater tariffsis not sustainable and needs to be revised.

● Urban subsidies: The use of localgovernment subsidies for operating costs is

not sustainable. Those cities that areintroducing sanitation services are alsostarting to charge for the service. However,the charges levied are low and will not coverO&M costs in the short term. The intentionis that charges will rise as consumersbecome accustomed to the benefits of thenew services. This will need carefulmonitoring to avoid major future drains onlimited local government resources. As aminimum tariffs should cover both O&Mcosts and the depreciation of short livedassets.

● Sanitation benefits leveraged with softinterventions: Provision of latrines andsanitation infrastructure brings improvedoutcomes. However, these are significantlyincreased when beneficiaries are exposed toIEC on household sanitation practices. SuchIEC also generates demand for householdsanitation facilities, which can be providedby the private sector.

D. Cross Sectoral Issues

Whether urban or rural, water or sanitation,there is a need to improve the collection andquality of data about the sector. This will providepolicy makers and other stakeholders with theinformation they need to make the best decisionsfor the sector.

In addition, as the sectors become larger andmore sophisticated, there will be a need tofurther enhance the technical and managerialcapacity of a full range of stakeholders includingservice providers, system owners, oversightagencies in government, and customers.

2. The Way Forward

Based on the above sectoral assessments, thefollowing themes have been identified asneeding specific attention by the Government in

xv

order to further improve sector performance.The recommendations presented under eachtheme are directed at further clarifying the GoVurban and rural WSS strategies:

a) Bridging the financing gapb) Improving the sector efficiency and

incentivesc) Boosting sanitationd) Building capacity and addressing

knowledge gaps

A. Bridging the Financing Gap

Allocation of public funds and ODA

A forward-looking detailed development planfor the sector is needed where public investmentand recurrent expenditure are linked and scarceresources efficiently and effectively allocated. TheGoV resources as well as ODA funds should bedistributed based on assessment of externalities,cost of service provision, and the wealth ofrecipients - possibly using output-based aid(OBA) as a tool to allocate grant components.Currently, the relatively wealthy urban areasreceive 84% of ODA funds whereas the ruralareas, where 75% of the population resides, enjoyonly 13%.

The effectiveness of ODA over the past 10years needs to be assessed and supplementedby proposals for changing the role and use ofODA in the future. This will be particularlyimportant given the likely graduation ofVietnam from IDA to IBRD over the coming 10year period. Gradually, ODA should moveaway from water production to waterdistribution, from water supply to sanitation,and from funding investment to leveraginglocal capital. IDA funds should be used tosupport sanitation projects where publicbenefits are high and beneficiary awarenessand willingness to pay are more limited. Thiswill require alternative sources of financing,

particularly for water investments. The GoVneeds be proactive in determining the use ofODA funds through improved policyimplementation and coordination by the lineministries MoC and MARD.

As part of the need to expand alternativesources of finance, particularly for waterinvestments, the government should revisitCircular #40 (May 2005). This determines on-lending terms for ODA in a manner that is likely toreduce, rather than expand, alternative financingsources.

Tariffs and cost recovery.

The key to the success of the sector is higher butrealistic and affordable tariffs. Introducing andenforcing a uniform tariff mechanism for thewhole country is step in the right direction.Whilst joint circular 104 (November 2004) and itspredecessor (Circular #3, June 1999) both have asound basis for tariff calculations, the issue is oneof enforcement. In the long term the governmentshould consider the possibility of automaticindexation of tariffs as one way of retaining thevalue of user fees in real terms.

On the wastewater side the governmentshould review Circular #67 (2003), which capswastewater fees at 10% of water tariffs. Giventhat wastewater operations and investmentstypically cost more than the equivalent waterservices, such constraints will further diminishthe sustainability of the wastewater sector. As aminimum the wastewater tariffs should fullyrecover operations and maintenance costs, aswell as depreciation of short lived assets.

Currently, tariff affordability and willingnessto connect do not seem to be an issue in watersupply in Vietnam.

A new financing framework for urban utilities

As the creditworthiness of the sector improves,access to longer term local financing will become

xvi

important. The existing lending and riskmitigation instruments of IFIs can support localcapital market development. For waterinvestments a staged progression could beenvisaged over the next 10 years from currentreliance on ODA, through mixed financing, to asector built on local capital markets. Sanitationinvestments are likely to rely on grant orsubsidized funds for the foreseeable future - withsubsidies being targeted to those that most needthem.

The state banks can play a more significant rolein the financing of water infrastructure byparticipating as lenders rather than servicingagents to WSCs, thus assuming the full credit riskfor a fee. However, they need to strengthen theircommercial orientation, operational practices,profitability, balance sheet quality and loanappraisal capabilities8 in order to start lending toutilities or channel funds directly to communities.

Besides providing counterpart funding forODA water investments, the provincialgovernments could participate as guarantors onloans extended to WSCs by the SOBs. This addedsecurity on loans provided by state banks not onlyreduces the ultimate cost of funds to WSCs, andconsumers, but would better structure incentivesfor cost recovery and more cost-effective service.

The issuing of bonds by WSCs wouldencourage fiscal prudence in an otherwiseunregulated sector. The WSCs could be preparedfor such opportunities through improvedfinancial accounting rules, auditing,benchmarking, and the development of a ratingsystem.

Given the continuing high level of centralgovernment involvement in local infrastructureprojects and the immature financial sector, it islikely that a financial intermediary for local

infrastructure projects will be needed in the future.The key issue is how it will be operated and howthe sub-sovereign securities market will be built.The IDA funded Urban Water SupplyDevelopment Project includes a new unit withinDAF dealing with lending to water utilities on acommercial basis, which will recover its operatingexpenditure through the interest rate spread. Giventhe small size of the facility it must be viewed as justa small step towards the long term goal.

The proposed financing frameworkdeveloped by Baietti9 is based both on full costrecovery as a key to sustainability as well as oneffective corporate governance defining theroles, responsibilities and incentive structure forevery WSS stakeholder. Its ultimate target issustainable financing of new investment andintroducing private sector participation.

Small towns and rural areas.

As evident from the discussion above, the newfinancing mechanism relies on mobilizing localcurrency borrowing by WSCs. By contrast, insmall towns and rural areas, the consumers takeon local currency debt from micro financeinstitutions to finance small scale infrastructuredirectly. Since customers pay for the servicethrough their own debt obligations, this type ofborrowing is much more interested inefficiencies and sustainability of services andshould be actively supported by the GoVincluding with possible allocation of grants.

More precisely, a coherent workable financemechanism needs to be implemented based onthe review of the existing financing models. TheMARD proposal10 for a national creditmechanism with subsidized loans forhouseholds through the BSP and subsidized

xvii

8. The WB and IMF. Vietnam Poverty Reduction Strategy Paper Progress Report & Joint Staff Assessment, 20049. Based on Aldo Baietti. Financing framework for urban water utilities in Vietnam, July 2002. Annex 910. See Annex 8.

loans to enterprises through DAF could tacklethe issue of rural WSS finance.

B. Improved efficiency and incentives

Rationalizing sector institutions

Legal framework: The consistency andenforceability of the legal framework as well asthe speed of implementation of the sectorstrategies need improvement.

For example, a new legal frameworksupporting the National RWSS Strategy isnecessary, e.g. a legislation allowing communitywater user groups to take loans and open bankaccounts. In small towns, an appropriateregulatory framework on investment in small-scale projects for both authorities andcommunities to follow is required in order todecentralize investment decision-making thusavoiding the confusion of responsibilitiesbetween investor and investment implementingagency and simplify the project preparation11.

Policy coordination: A coordination andintegration of rural and urban water supplyprograms needs to be ensured together with thenational programs on flood and environmentalprotection as well as poverty alleviationprograms. The emphasis should be on use,sustainability and impact rather thaninvestment alone. Roles and responsibilities ofsector institutions need to be mapped andclarified - with complimentary approachesbeing adopted by donors. In addition the smalltowns/townlets segment requires a customizedpolicy and specific institutional responsibilities.Any sector policy will have to be all-inclusiveand consideration should be given toestablishing a single body governing andmonitoring water and sanitation services in

urban and rural areas.Continuing reform of rural institutions: A

plan for improving inter-ministerialcoordination, e.g. by making the NationalStanding Committee functional, should bedesigned and enforced. The plan needs toinclude the appropriate incentive structure forGoV staff, and capacity building program.Perhaps the most important task is to increasethe separation of sector policy/regulatory role ofCERWASS from its service provider role - ascurrently being piloted in the IDA funded RedRiver Delta Rural Water Supply and SanitationProject.

Targeted poverty interventions: With rapidurbanization, the GoV should decide on the focusof poverty interventions. Clearly, there is a needfor a careful analysis to establish the urban andrural priorities, although the existing strongercommunity support in the rural areas wouldsuggest that interventions in peri-urban areasmay have a greater poverty impact. Output basedaid should be considered as a mechanism for theuse of grant financing for poverty interventions.

Improving WSCs accountability, autonomyand incentives

WSCs governance and performance:International experience suggests that thefollowing attributes must be met in well run WSSservice providers:● The provider is autonomous and

accountable, i.e. able to make decisions,having access to resources and being heldaccountable for non-performance

● The provider is customer oriented, i.e.proactively informing and educating itscustomers

● The provider is market oriented, i.e.

xviii

11. WSP. Global initiative for small town WSS, October 2001.

benchmarking costs and services andoutsourcing selected activities through acompetitive process, thus introducing thebenefits of competition in the otherwisemonopolistic industry

● The sector has technical and managerialcapacity both within the service provider andin the local government (as owners). A broad strategy will be required which will

build on the following three components:i. More widespread knowledge about the

top performing water companies andbenchmark capital and operating costs

ii. Capacity building among sectorprofessionals on ways to reduce capitalcosts and improve operating efficiencieswithout sacrificing quality

iii. Policies must be put in place to provideincentives to water companies to achievehigher levels of performance

The first two are discussed later. Provision ofincentives to water companies requires a strictevaluation of performance and the need formeaningful rewards and sanctions which affectboth the service provider and their owners.

As a first step performance contracts can beprepared between the PPC and the serviceprovider. A central agency could review andadvise on these contracts to help reduce thepotential for conflicts of interest at theProvincial level. Establishing clear contractualrelationships will provide both the PC and theWSC with incentives to be flexible andresponsive to the changing businessenvironment and increasing demand. Anenforceable agreement will resolve the issueswith WSC asset ownership so that the collateralelement in securing finance is cleared. MoCshould consider an appropriate framework thatprovides WSCs with the correct incentives, andpenalties, so that the sector can grow in asustainable fashion.

Further reform would include transformingthe WSC into a Public Water PLC with the

municipality as a single shareholder. This willimprove their long term viability and provideopportunities in the future for a broaderequitization process.

Regulation: Regulation in its different formsprovides opportunities for increased autonomyand accountability of WSCs. The MoF issuedDecree 104 in 2004 introducing a uniform tariffmechanism for Vietnam based on the full costrecovery principle. In late 2005 the MoC has beendeveloping a new urban water decree that mightinclude the introduction of performance contractsbetween the PCs and the WSCs. However, theenforceability, management and monitoring ofthe current and proposed decrees poses genuinequestions of conflict of interest at the Provincelevel (as both tariff setter and owner of the WSC).Thus some form of oversight agency (nascentregulator) will be needed at the national level toreview these contracts/proposed tariffs. As aminimum such an agency could provideadvice/guidance to the PC on the design of thecontract, and on relative performanceassessments of the WSCs, even if it doesn't have aformal enforcement role.

Increasing competition: Public reporting ofthe performance of WSCs could be a promisingstart to improving transparency andaccountability. At a marginal cost, thebenchmarking initiative started in 2002 with theassistance of VWSA can be improved andformalized. The data can be used by theprovincial governments, the regulator/centraloversight agency (when established), the WSCsand the potential private investors, for cross-sectoral comparison. This initiative continuesand further funding is included in the IDAUrban Water Supply Development Project.

Increasing customer orientation: Improvedcustomer service standards enshrined in acustomer charter could prove the basis for thisorientation. The annual benchmarking datacould be supplemented by publishing a range ofstandard performance indicators. This would

xix

ensure both greater customer orientation andimproved quality of information.

Focusing on the core business. Within thenext ten years WSCs should divest theirconstruction and other services from thewater business. This will provide the basis forthe development of a competitive market forconstruction services, reduce the opportunityfor hidden cross subsidies between thedifferent businesses, and allow themanagement of the water company to focuson their core business12.

Private sector development and models forservice provision

Private sector in urban areas: The successfulreform and improved performance of WSCswill indicate the readiness of the sector formarket entry of both international players andlocal private providers. The short-term priorityshould be on network management, andfocused services (e.g. pump stationmaintenance) where a combination ofcompetition and collaboration between the localWSCs and the private sector through openbidding for service contracts could beconsidered. Whilst there has been some limitedprivate investment in the sector it is expected toremain limited or modest until the regulatoryand financial strength of the sector improves.

Management models small towns andrural: In small towns and rural areas it isexpected that contracting out operations forextended periods will be the most sustainableapproach in the short term. This is theapproach planned for the recently approvedWorld Bank Urban Water Supply DevelopmentProject and Red River Delta Rural WaterSupply and Sanitation Project.

3. Boosting Sanitation

Urban sanitation

Establishing a profit & loss entity for the provisionof sanitation services, with a defined customer andrevenue base, is the immediate step in sanitationreform. This can be complemented by increasingcost efficiency by selective outsourcing to theprivate sector. Merging the wastewater activitiesinto the business of the urban WSC will takeadvantage of operating and administrativesynergies and should be considered in all but thelargest cities where a separate wastewater companymay be appropriate.

Considering the limited resources, step-by-step improvements in urban sanitation are moreappropriate than building up expensivewastewater treatment plants and extensiveseparate collection systems. Evaluating andprioritizing appropriate capital expenditures willbe important - the use of combined versusseparate systems, for example, needs to becarefully weighed in order to achieve maximumbenefit from each VND invested. Expansion ofpiped networks to less dense areas needs to becarefully considered, alongside the extent oftreatment and the capacity of wastewater plant.These technical decisions have a significantimpact on the pace at which appropriatesanitation services can be provided.

More effective sanitation projectmanagement in rural areas

Market research is essential to understand whatintervention strategies will work and besustainable. The GoV should make use of thefindings from many other countries thatsuccessful sanitation programs require lesseducational and more promotional approaches

xx

12. Ian Walker, 2002.

to find out what motivational forces work forlocal populations in bringing about behavioralchange13.

The provinces, districts and communesshould be ranked and projects prioritized basedon poverty, existing WS coverage, water-relateddiseases, population density, and existingcapacity of local government agencies to supportproject activities. The utilization of a clusteringapproach would optimize management costsand achieve high coverage within selecteddistricts rather than spreading project activitiesout over too many districts/provinces14.

At the grass roots level, developing localcapacity to supply skills and materials to meetsanitation needs will enhance sustainability. Forexample, the type of latrine offered has to becompatible with the physical, economic andsocial reality of the household. Offering a rangeof options with upgrade possibility and range offinancing arrangements may help stimulate andsustain demand and usage.

Continuing Soft Interventions

Raising public awareness and education on thelinkages between sanitation and health is neededto support any physical investments. Since watersupply itself is insufficient to dramaticallyreduce diarrhea disease, sanitation and hygienebehavior change needs much greater emphasisin all areas. A very important initiative is theactive promotion of hand washing.

The interventions need to build on theconsiderable knowledge and educationalmaterials prepared so far. Process monitoring,self-assessments, and other methods would

support learning and dissemination of bestpractices15. The measure of success should notonly be the coverage (ownership) of sanitationfacilities but also the access, use and upgrade ofthe facilities, changes in hygiene behavior andself-sustained demand for more facilities.

4. Building Capacity and Knowledge

Incentivizing the service providers and oversightagencies will only be successful provided there isadequate capacity among them. Buildingcapacity on a sound foundation also calls forimproved data about the sector.

Addressing knowledge gaps

Compilation and analysis of sector information:Government needs to be more active in compilingand analyzing sector data. This information willallow for better and more informed decisionmaking on sector policy, on allocation of scarceODA resources, and in oversight of the sector asa whole. This will be particularly relevant if acentral responsibility is allocated to reviewcontracts and tariffs at the provincial level undercurrently drafted or existing decrees.

Sanitation: A sanitation study is required toreview the sub-sector and to develop and keepupdated comprehensive and reliable data. Themapping of access, providers and institutionalresponsibilities will allow better planning and resourceallocation. The dissemination of best practices in ruraland small towns' sanitation will ensure sustainedgrowth in access and hygiene behavior.

Review of institutional options for urbanand rural water sectors: As the water sector

xxi

13. WSP 2002 Study.

14. The World Bank, Project Appraisal Document, Red River Delta Rural Water Supply and Sanitation Project,

August 15, 2005.

15. The World Bank, WSP, Danida. VRWSIHIP, draft inception report, March 2004.

develops there will be a need to study sectordevelopments including critically assessing theissues of asset ownership, increasingseparation of roles within the sector (policy,sector regulation, ownership, corporateoversight and service provision), providingand aligning incentives, and the role ofregulation. These reviews would include anassessment of the various service models in thecountry.

Building capacity

Government: The line ministries need to buildtheir oversight and policy development skillsthrough improved collection and analysis ofdata. This will facilitate the efficient allocation ofresources and the expansion of the WSS servicesto better meet the needs of the country.

Institutions: Training is required to properlyintroduce commercial relationships andeffective corporate governance and oversightbetween the owners and the service providers.The PCs, as owners, need to improve theirunderstanding of the opportunities for sectordevelopment and how they can benefit. No suchcapacity building facility exists and nationalagencies will have to take a lead to fill this gap.

Providers: The VWSA (or appropriatetechnical institutions) should play a bigger rolein building technical and managerial capacity

in service providers. As a first step acoordinated action to reduce NRW, andimprove energy efficiency, would have mostbeneficial results. Training programs on anational scale targeting small-scale providersneed to be carried out as well in order toenhance their management and financialcapability, and capacity for quality control,contract and contractor management. It alsomakes little sense to assign communitiesresponsibility for O&M if they do not have theknowledge, skills, motivation and finances todo it. Dramatic improvements in communitycapacity and capability are needed to ensuresustainability of project investments. The small-scale IEC projects of both local and internationalNGOs could address the on-site training of localmasons. Other examples include thedevelopment of a technical backstoppingfacility for rural systems and the introduction ofa certification system for operators.

Civil society: The civil society and consumerpower groups require capacity building as amajor stakeholder naturally able to exercisesubstantial pressure on the PCs and WSCs inimproving the service provided to theconsumers. A well informed civil society isimportant to building political and publicawareness and commitment to providingimproved services and giving voice toconsumers.

xxii

xxiii

The Way Forward: Summary Table

Short term (1-3 years)

Introduce tariff methodology perCircular 104, and revisit/reviseCirculars 67 and 40.Develop PC loan guaranteeapproach and financing model onbasis of shared risk basis betweenODA and local marketsDevelop finance mechanism for nonODA financed rural facilities (e.g.MARD/BSP approach)Assess ODA effectiveness andprepare proposals for next 10 years(targeting of IDA, transition to IBRD

and use of OBA). Refine urban sector benchmarking

Introduce performance basedcontracts between PC and serviceproviders

Establish service providers with ringfenced accounts and recovery ofO&M costs + depreciation of shortlived assetsContinue to stimulate demand forrural sanitation and develop localcapacity to provide services

Enhance capacity, data andplanning within line minstriesUndertake review of sanitation sectorin VietnamDevelop capacity building programto reduce NRW and improve energyefficiency

Medium term (4-6 years)

Enforce new tariffs and revisedcirculars

WSC borrow mix of ODA and localcapital through development ofmunicipal or infrastructure funds

Implement the rural financemechanism

Implement findings of ODAassessment

Begin auditing for regulatory andODA allocation processPublicreporting of benchmarkingMandate performance contractsbetween owners and operators andinitiate formal oversight Identify barriers to use of nationaland international private sectorInitiate customer charters on trialbasis

On going

On going

Targeted IEC to those areas withworst health outcomesOn going

Institutional study to improve urbansector efficiency and effectiveness Develop capacity building program forprovincial PCs, communities, other

Long term (7-10 years)

Introduce penalties for PCs notapplying circulars

WSC to access local capitalmarkets

On going

On going

Use benchmarking as part ofregulatory process

Introduce formal regulatory reviewof performance contracts

Remove barriers to use of privatesectorIntroduce customer charters in allproviders

On going

On going

On going

On going

Institutional review to identifymodels for provision of RWSS On going

Bridging the Financing Gap

Improving Sector Efficiency and Incentives

Boosting Sanitation

Building Capacity and Addressing Knowledge Gaps

A. Laws and Institutions

Vietnamese law comprises an extensive set oflegislation, decrees, circulars, decisions and otherregulations. The main laws and regulationsgoverning the water supply and sanitation sectorin Vietnam are included in Annex 1.

The separation of regulations and institutionalresponsibility between urban centers and smalltowns follows the classification of urban centers,presented in Table 1.1, and which is usedthroughout this report. The responsibilities andregulations of WSS in rural areas are separatedfrom the urban one although, as the countrydevelops, the rural/urban split in terms ofcustomer expectations and technical solutions willstart to disappear, thus calling for a more uniformapproach.

Under the Water Resource Law, which cameinto force in January 2000, the state manages waterresources and all customers and agencies (exceptfor households) are required to obtain a license

from MARD or the relevant provincial PC to usewater sources. Based on river basin management,the Law identifies the link between land wateruse, surface and underground management andwater quality and quantity.16

Water sector responsibilities are dividedbetween central and provincial governments, asshown in Table 1.2. The Strategy and Orientationfor rural and urban water supply is a matterrequiring the approval of the Prime Minister. Theline ministries have authority over sector policyand submission of major projects to the PrimeMinister for approval whereas provincial PCs areresponsible for supply services in projects ofinvestment costs below VND 200 billion in theirrespective jurisdictions. The provincial WaterSupply Company is responsible for provision ofwater supply to urban areas and operates andcontrols both the treatment plants anddistribution networks.

In addition, a number of other formal andinformal groups are active in improving the

1

I. Water Supply and Sanitation Policy and Institutional Framework

Table 1.1: Classification of Urban Centers

Class Type Population Number/CommenSpecial Cities Largest Cities 1.5 million and more Hanoi and Ho Chi Minh City

1 National Cities 0.5 to 1.5 million Three cities2 Regional Cities 250,000 to 500,000 12 cities3 Provincial Cities 100,000 to 250,000 16 cities4 District Towns 50,000 to 100,000 58 Towns5 Townlets 4,000 to 50,000 612 Townlets

16. Vietnam Urban Water Supply Development Project: Pre-feasibility study, 2004.

sector coordination and collaboration: ThematicAd-hoc Group of MARD; Donor WSSCoordination Group; the Vietnam WaterPartnership; River Basin Organizations, andINGO Working Group17.

B. Policies and Responsibilities -Urban

The major policies in urban water and sanitationare listed in Table 1.3.

2

17. "Towards the Vietnam Development Goals for Water Supply and Sanitation", April 2004

Table 1.2: Major WSS Institutions in Vietnam

The Prime Minister Approval of WSS sector strategy and orientations

Ministry of Planning Allocates state budget. All major investment projects must have theand Investment approval of MPI

Ministry of Finance Distributes state funds to sectors and projects, sets annual sector goalsand regulates accounting

Ministry of Health Controls drinking water and sanitation quality

Ministry of Natural Manages water resources, water use, pollution and hydrologyResources and Environment

Ministry of Science and Manages standardization and technology in water & sanitationTechnology

Ministry of Education Manages integration of health, water and environmental issues into and Training standard curricula and lessons plans

Ministry of Construction Line Ministry of urban water supply, sanitation & drainage

Ministry of Agriculture Line Ministry of rural water supply and sanitationRural Development

Local City Government 3-tier system: city, urban/suburban districts and wards/communes. (People’s Committees) At each level, the people’s council elected by votes elects people’s

committee. The people’s committee has departments mirroring all keyMinistries

Departments of People’s Department of Construction or Department of Transportation and Committee Public Works supervises the operations of the WSCs

Water Supply Companies 64 state-owned WSCs in 61 provinces and cities.

Adopted from the Study on Urban Drainage and Sewerage System for Ho Chi Minh City, JICA, December 1999 and Vietnam

Water Supply Development Project. Report of Deacons and Vision & Associates, July 2002.

Water Supply: The MoC is responsible forurban water policy, which is set down in the"Orientation for Urban Water SupplyDevelopment" of March 1998 - a sound documentunderpinned by the principle that water is aneconomic and social good. The implementation ofthe policy is decentralized to provincial levelgovernments with the MoC providing oversight.The objectives of the program are as follows:

i. 100% of urban population havingaccess to safe water of 120-150l/capita/day by 2020

ii. Reform the sector including thefinancial policy

iii. Modernize technology and equipmentand enhance human resourcedevelopment

iv. Mobilize contributions from

communities and all sectors of theeconomy

During the second half of 2005 the MoC waspreparing a new decree governing the urbanwater sector. At the time of writing this report theDecree has not been published. Draft textsindicate that the government is building on the1998 document and placing greater emphasis ona clearer separation of roles and responsibilities ofthe various parties, and the introduction ofperformance contracts between the serviceprovider (the PWC) and the owner (the PPC).This will likely be complemented by greaterattention to the collection and publication ofperformance benchmarking data.

WSCs are established under decisions of provincialPCs. In large cities, WSCs report to the City Transport andUrban Public Works Departments, which are equivalent tothe Department of Construction at the Provincial level18.

3

Table 1.3: Major WSS Policies in Vietnam Urban

Main WSS Policies

GoV Strategies

CGPRS

VDGs

GoV 2010Environmental Strategy

Urban

Water Supply

Orientation for Urban Water SupplyDevelopment:By 2020, 100% of urban populationhaving access to safe water of 120-150 l/capita/day.

By 2005, 80% of urban population,especially those living far from themajor transport roads, having accessto clean water with an average dailysupply of 50 l/day/capita.

By 2005, 80% of the urban populationhaving access to clean and safe water.

By 2010, 95% urban access to cleandrinking water

Sanitation

Orientation for the Development of UrbanSewerage and Drainage until 2020:By 2020, all urban areas with suitable waterdrainage systems and wastewater treatmentfacilities.

By 2010, all wastewater in towns and citiestreated.

By 2010, 40% urban wastewater treatment and60% disposal of "dangerous waste" fromindustry, hospitals, etc.

Note: There is no policy specifically targeting small towns.

18. Vietnam Urban Water Supply Development Project: Pre-feasibility study, 2004.

Water and sanitation is clearly referenced inthe CGPRS. The WSS sector is seen as acontributor to ensuring growth and povertyreduction with concrete targets set for increasedaccess to WSS services. Within the largeinfrastructure projects in water supply, drainageand sewerage, a priority is given to Hanoi andHCMC. Besides overall WSS targets, the CGPRSalso gives directions for the provision of essentialinfrastructure facilities to poor people, poorcommunities and poor communes.

The GoV is committed to achieving theMillennium Development Goals and theVietnam Development Goals (VDG). Thedetailed targets of the VDGs are listed below.

Sanitation: Parallel to policy developmentsin water supply, in March 1999 the MoC issuedthe "Orientation for the Development of UrbanSewerage and Drainage until 2020". Theobjective of the Orientation is to reducesubsidy requirements through theimplementation of an urban drainage publicservices enterprise model, which needs toreach self-sustainability over the longer termby the means of: introducing drainage andsewerage charges and incorporating them intothe water tariff; tariffs should cover operating

costs and gradually move towards covering aportion of capital costs; and combining themanagement of water supply andsanitation/drainage except in the largest cities.

The policy aims to ensure that all urban areasshould have suitable water drainage systems andwastewater treatment facilities that guaranteeenvironmental hygiene and address floodingissues. Wastewater should be treated beforeentering the sewerage system, mostly throughthe use of septic tanks. The application of thesepolicy elements is in its very early stage.

In December 2003, the GoV issued a new 2010environmental strategy, which contains relevanttargets for water and sanitation that are notcompletely aligned with those of theCPRGS/VDG (see Table 1.3). It is interesting thatthe targets of the CGPRS are not reflected in thedecisions of other government institutions. Thiscalls for a better coordination in increasing thecooperation among the institutions and theconsistency of the government policies.

The institution responsible for urbansanitation is the Ministry of Construction.However, there is lack of clarity over the exactdivision of responsibilities between city andcentral government. The Department of UrbanInfrastructure under the MoC collects data onurban sewerage. The data is reported annuallyby the provincial Departments ofConstruction.

C. Policies and Responsibilities -Small Towns

Small towns in Vietnam comprise a) small towns(population between 4-30,000), which representcategory 5 urban areas in Table 1.1, and b)townlets (3,000 country-wide of minimumpopulation of 2,000). The population residing insmall towns and townlets amounts to 15million19 (about 22% of total population).

4

19. Evolving management models for small towns water supply in a transition economy (Vietnam), 2002

Hanoi Water Business Company’s Nam Du WaterTreatment Plant

Small towns fall under the mandate orjurisdiction of MoC, as do water supply servicesin all larger urban areas. Townlets fall underMARD, in which CERWASS is the lead agency.No single organization is responsible for settingthe WSS policy and managing itsimplementation and coordination in both smalltowns and townlets as a distinct market segment.This segment does not completely fit either theurban or the rural context since small towns areconsidered either too small for institutionalmanagement or too big for effective communitymanagement. No target policy dealing with thedistinct issues of small towns has beendeveloped so far.

Water supply: The responsibility forproviding water differs with major dutiesbelonging to the District PCs. In some casesthough, the management has been assigned bythe PCs to the provincial WSC20. All investmentprojects of the small town PCs need to beapproved by the provincial PC. On the otherhand, the small town PC could be the watersupply project owner or the supervisor of theconstruction and O&M of the water system.

Sanitation: The Orientation for UrbanSewerage and Drainage Development to 2020includes small towns as part of the urbanpopulation whereas the National Strategy forRWSS to 2020 includes townlets as part of therural population. As part of the latter, the GoVundertakes to clarify official ownership rights,legal requirements, and operation andsupervision management rights, including therole of the consumer groups.

There is no clear responsibility for managingsewerage, drainage and sanitation in smalltowns and townlets. In principle, the small townPCs have the responsibility in managing waterand sanitation under the support of the DistrictIndustry, Construction and TransportationDivision, but there is lack of sufficient attention

and investment planning.

D. Policies and Responsibilities -Rural

The major policies in rural water and sanitationare listed in Table 1.4.

As noted in the urban section above, waterand sanitation is clearly referenced in theCGPRS. In particular a priority is given ingovernment spending to the development ofrural infrastructure, of which WSS is a part.

Apart from the CPRGS, government policy isarticulated through the National RWSS Strategy.The underlying principle of the NRWSS strategyis sustainability rather than speed ofimplementation. IEC activities have beenrecognized as a vital element of NRWSS and giveparticular emphasis to promoting construction ofhygienic latrines and their proper use as well ason making people fully aware of the relationshipbetween sanitation facilities, water supply andhealth. The objectives call for the improvedhealth and living conditions of the ruralpopulation as well as reduced environmentalpollution from human and livestock excreta

5

20. Vietnam Urban Water Supply Development Project: Pre-feasibility study, 2004

National Rural Water Supply and Sanitation Strategybringing treated water to rural areas

through active promotion of communityparticipation and a demand responsiveapproach. The National RWSS is underpinnedby the principles of allocating decision-makingand management at the lowest appropriate level,and emphasizing the participation of women inmanagement.

At the national level, MARD is the leadministry to coordinate all issues related toNational RWSS. MARD has delegated thisresponsibility to the CERWASS, which is acenter under MARD. The National TargetProgram (NTP) on RWSS is the umbrella for allprograms and projects within the RWSS sector

and is considered as a tool to implement theNational RWSS Strategy21. In many provinces,Provincial Steering Committees have beenestablished for the management andadministration of all NTPs with the practical co-ordination and implementation delegated to theprovincial CERWASS. An inter-ministerialStanding Committee of the NTP on RWSS wasestablished in July 2002, but has only met onceand its Statues have not been approved yet.

The Department of Health is the maincoordinating agency at provincial level inrelation to control of water quality and latrines,and is a key institution in relation to IEC

6

21. Helle Stoltz. RWSS Sector in Vietnam: Background Note. DANIDA, 10 March 2004. 22. Helle Stoltz. RWSS Sector in Vietnam: Background Note. DANIDA, 10 March 2004.

Table 1.4: Major rural WSS policies

Main WSS Policies

GoV Strategies

CGPRS

VDGs

GoV 2010EnvironmentalStrategy

Rural

Water Supply Sanitation

By 2005, 60% of the rural populationwith access to clean water with anaverage daily supply of 50 l/day/capita and by 2010, 85% of the ruralpopulation obtains 60 l/day/capita.

Special emphasis in the short-term onproviding clean water in nurseryschools, kindergartens, schools andhealth clinics in rural areas.

By 2010, 60% of the rural populationhaving access to clean and safe waterand by 2005, 85%.

By 2010, 85% rural access to cleandrinking water

By 2005, 50% of rural households having toiletsthat meet basic sanitation standards.By 2010,75% of rural households having toilets that meetbasic sanitation standards Special emphasis inthe short-term on providing environmentalsanitation in nursery schools, kindergartens,schools and health clinics in rural areas.

The VDGs do not yet include targets on ruralsanitation

-

The National Rural Clean Water Supply and Sanitation Strategy:By 2020, 100% of ruralpopulation having access to national-standard clean water of minimum 60 l/day and usehygienic latrines.By 2010, 85% of the rural population having access to national-standardclean water of minimum 60 l/day and 70% of rural households using hygienic latrines.By2005, 50% of the country’s households using hygienic sanitation facilities and 80%having "domestic quality" water.

activities. The provincial Women's Union (WU),Youth Union (YU), Farmers' Association (FA)and other mass organizations play key roles inIEC activities22.

Rural households and communities areexpected to take the lead responsibility for ruralinfrastructure development to ensuresustainability. Government agencies play afacilitating role and ensure adherence to national

regulations and standards. The overall approachto be taken is underlain by the principle ofdemand responsiveness, with households andcommunities making decisions about what typeof service they want and are willing to pay forthrough a process of informed choice. As ageneral principle, users are expected to pay forall construction and operating costs of water andsanitation systems.

7

A. Water Supply

There are 4 main types of provision of watersupply services in Vietnam:

1) Utility provision by state-owned WSCs2) Small towns/townlet provision3) Self-provision - households and

communes that obtain water forthemselves

4) Local private sector in rural areas

Utility Provision

Over the past 10 years, the utility provision ofwater supply and drainage services has beendecentralized from central to provincial level ofthe government and the utilities have beenestablished as legally distinct state-ownedeconomic entities. Despite decentralization, thelevel of autonomy of the water supplycompanies remains limited. Water supply tariffsare set by the provincial PCs at levels whichcover O&M costs but are insufficient to fullyrecover the costs of capital needed by the utility.Key management and operating decisions suchas overall production levels, capital investmentand maintenance expenses, staff salary andbenefits, and senior management appointmentsstill require government approval23. WSCs donot have ownership rights over water resourcesor public land usage24. Although the province

exercises ownership on the assets of the WSC,there are no contractual relationships betweenthe two parties to govern this right. Most of thePWCs are Public Service Enterprises, operatingunder the Enterprise Law, except the watertariffs, as mentioned above, are set by therespective Provincial People's Committee.

In each province or city the relevant WSC ismainly responsible for the operation and controlof both the water treatment and distributionnetworks together with billing and collection.However, many companies carry out additionalactivities, mainly in the field of construction andequipment trading, and these can be performedin other provinces (see Figure 2.1).

There is no competition in the utility provisionof water services. However, in January 2004, theMoC was assigned the responsibility to develop aproposal on "Renovation of organizational modelsand management mechanism for WSCs" targetingWSC restructuring, water supply planning, andNRW management (reduction to 30%) as well asavoidance of monopoly abuse through issuingtechnical and economic norms for clean watersupply. The MoC proposed to allow the WSCs toprovide services outside existing service areas,make municipal authorities responsible for watersupply, and equitize the WSCs. These proposalsrequire further discussion to ensure they willmeet the needs of the sector - particularly withregard to achieving economies of scale in service

9

II. Sector Structure and Ownership

23. Ian Walker, 200224. Vietnam Water Supply Development Project. Report of Deacons and Vision & Associates. July 2002.

delivery, and having sufficient capacity on theowner side to manage such arrangements.

However, as noted earlier in this report, thesector is undergoing rapid change. The MoC isdrafting a new urban water decree which willlikely propose formal contracts between ownersand operators, as well as clarifying issues of assetownership. At the same time a number of PWCshave converted from Public Service Enterprisesto equitized companies. These includeHoChiMinh City, the largest water company inthe country, as well as smaller companies in theprovinces of Son La and Can Tho. Theseequitized companies operate under theEnterprise Law and, in theory at least, have moreflexibility than their PSE counterpart.

Private Sector and Competition: Vietnam hasnow more than 130,000 local private enterpriseswith a combined capital of US$10 billion. TheGoV plans to equitize 50% of the remaining state-owned enterprises by 200526 - although it is clearthat progress has not been as rapid as originallyanticipated. In May 2004, the MPI announced theplans for two new laws to provide a uniformlegal framework and level playing flied for all

businesses in the country, and among others, toease the foreign investors' participation ininfrastructure projects27.

The Law on Enterprise of 1999 does notprohibit the involvement of private companies inwater supply services. However there are only afew private companies operating in the waterservice area in Vietnam28. In order to attract FDIin large infrastructure projects, the GoV issuedregulations governing BOT contracts byamending the foreign investment law in 1992.However, while foreign investments in Vietnamhave been growing rapidly, investment inwater/wastewater BOT have been slow withsome contracts cancelled (see Annex 2). The mainreason stated by the HCMC for the cancellationof two of the BOT contracts with foreigninvestors was the tariffs becoming too high as aresult of imported know-how, equipment andmaterials.

Notwithstanding, HCMC subsequentlyproceeded to procure a new water treatment plant(Thu Duc) on a BOO basis, using a localconsortium of companies as the investmentvehicle, supported by international consultants

10

25. VWSA Benchamarking Report December 2004.26. Oxford Analytica. Vietnam: Equitization raises more questions than answers. 21 June 2004.27. Dow Jones, May 200428. Vietnam Water Supply Development Project. Report of Deacons and Vision & Associates. July 2002.

and contractors. The city and consortium adopteda mix of bidding and negotiated selectionprocedures in a process which has been rapid byVietnamese standards. Just 18 months elapsedbetween a decision by HCMC PC to proceed withthe BOO scheme and the signing, in March 2005, ofa US$ 92million contract between HyundaiCorporation and the BOO consortium, for theconstruction of the water plant.

Evidently, the GoV has made an effort tointroduce some form of competition in a limitedway through BOT contracts for bulk watersupply. Water provision to customers at thedistribution and service level though will remainprimarily with the WSCs but examples are underway or planned that will introduce more privatesector operations through service contracts,particularly in Category 5 towns.

Small Towns/Townlets Provision

WSS services are provided by a wide variety ofmanagement models in small towns with thediversity being much higher in townlets29:● Direct management by Small Town People's

Committee in small towns and CommunePeople's Committee in townlets

● Community management;● Cooperatives;● Provincial WSCs (pWSC) . They are

responsible for providing water supplyservices to Class 4 towns, but recently haveseen their mandate extended to also providetheir services to small towns, Class 5

● Other state-owned enterprises mainlyconsisting of district water supply companiesand/or environmental service companies;and

● Private water companies.The provincial PC makes the decision on

ownership for small towns water supply projects.The project owner is usually pWSC, pCERWASS,District PC or small towns PC. Local agriculturecooperatives or private organizations maybecome the owners mainly in townlets and rural

11

29. WSP. Evolving management models for smalltowns water supply in a transition economy, May 2002

Thu Duc BOO 300,000 m3/day Water Treatment Plant

being constructed in Ho Chi Minh City

Typical small town water supply scheme

areas. For larger projects, project owners mustobtain a water license. Private investors haveparticipated in construction of a number oftownlet projects in areas with good economicprospects, high demand for clean water, andscarce water resources by investing sums ofbetween VND 300 million to 1 billion.

In the past pCERWASS has been the mostactive government agency in the provision ofrural water supplies. They have played the rolenot only of the owner/promoter of the ruralschemes, but also the operator. However, thismodel has not been a great success as theemphasis has been on asset creation rather thanon asset operation and maintenance. As a resultmany schemes have been built which are eithernot wanted by the community, or have falleninto disrepair due to disinterest or lack ofcapacity in pCERWASS. A new model hastherefore been adopted in the Red River DeltaRural Water Supply and Sanitation Projectapproved by the Bank in September 2005. In thisproject the pCERWASS role has been refocusedon policy and sector oversight, leaving newlyformed rural water supply companies to takethe lead in asset creation and operation. Thesenew companies are likely to be joint stockcompanies, and are expected to contract outsome or all of their operations to the localprivate sector. This new institutionalarrangement is complemented by the use ofdemand responsive approaches in systemselection and design as a means to ensurecommunity buy in to the new facilities.

Self-Provision

Self-provision exists in Vietnam in rural andurban areas both as a sole source of drinkingwater and a less expensive addition to pipedwater consumption in order to decrease the total

cost of supply to the household. Traditionally,the rural areas would collect water from ponds,canals and other uncovered open wells incommunity locations or installed in their homes.Others will collect rainwater. The self-provisioncould also come from community-installed handpumps.

The quality of water suffers excessivepollution in some areas or is questionable.Considering the health impact and time/costforgone in obtaining water, the real cost of self-provision to a household is often higher than theconnections to piped schemes.

Local Private Sector in Rural Areas

The local private sector, either with or withoutexternal assistance, has stepped into the ruralwater supply provision by investing its ownfunds, and leveraging funds from a fee-payingconsumer base. The growth in private sectorinvestment in RWS in Vietnam has occurred inresponse to a consumer demand that was notbeing met by public services. GoV recognizesand supports these private sector initiatives30

(see Box 2.1 and Annex 3).Non WSC Provider Survey. Whilst there is a

growing set of data about the WSC in Vietnam,

12

Typical community installed hand pump

30. Dan Salter. Private sector in Rural Water Supply in Vietnam and Cambodia, February 2003

there is little systematic data collection aboutother forms of providers in the country. TheGeneral Statistics Office Business EnterpriseSurvey, 2003, identified 142 formal providers ofwater and sanitation services comprising theWSC and other major providers.

As part of a pilot sectoral study to assess theaggregate performance of all WSS serviceproviders in a country, the Bank sampled a cross

section of non PWC providers in Vietnamduring FY05. The initial results, whilst based ona limited sample size, provide some interestinginsights into the state of the sector, outside theWSC (See Box 2.2).

Overall the situation appears positive withmost non WSC providers expecting to expandservices in the next three years and to befinancially viable in the short term. The mostsignificant perceived barriers to growth areaccess to finance, insufficient revenues and lackof customer demand.

B. Sanitation

Up until now, no comprehensive study has beenundertaken of Vietnam's sanitation sub-sector.Data is scattered and only project-related. It isnot possible to make an informed conclusionabout the overall number, market share andperformance of the sanitation providers inVietnam.

Urban Provision

The sewerage networks in Vietnam are virtuallyall combined systems, where the same pipes

13

Box 2.1: Successful Rural Alternative Provision

Although data about the market share of thesealternative providers is not available, there aresome promising examples. In Central Vietnam,even though water access is relatively cheap, aprivate sector supply market has developed inresponse to the demand, and by virtue of itsstructure provides cheaper and more localizedservices than comparative state-owned suppliersin the same areas. In the southern province of TienGiang, 65% of the 1.6 million population isalready being served by non-state watercompanies established predominantly by usergroups. The rate of development of new schemesis now so rapid that the remaining 35% of thepopulation will likely be served within the next 3-4 years.

The non WSC providers sampled as part of thestudy were a mix of private, government andcommunity organizations, and a mix of urban andrural. The private providers appear more confidentthan the others that they could pay their costs asthey fell due, and considered their maintenanceexpenditures were sufficient to maintainoperations. The majority of providers arefinancially sustainable in the short run. Collectionrates are high with a mean of 97% for non PWCproviders.There is a limited reliance (11%) on debt financingby those providers not listed with GSO comparedto nearly 50% of those listed with GSO.Only around 40% of all the non WSC providersperceived that the ability to raise investment funds

would be a significant or partial barrier, with ruraland small providers seeing this as more of a barrierthan urban and larger providers. Governmentowned providers perceive raising funds as less of abarrier than private or community providers. Major barriers to provision of service by non WSCproviders are presented in Figure 2.2 wherefinancial issues are preceived as the mostsignificant barriers. Lack of customer demand is,interestingly, the factor which has greatest weightin terms of substantial or partial barrier, whilstgovernment procedures were seen as the leastsignificant barrier.Overall, 85% or more of the non WSC providersplan to invest and expand or improve service overthe coming three years

Box 2.2: Non WSC Provider Survey

and channels serve to convey stormwater aswell as sewage. Most of the attention is beinggiven to sewerage and drainage investments.Consequently, the coverage of wastewatertreatment is virtually zero. Only a few hospital,industrial and ODA supportedwastewater treatment plants areoperating, or being planned, in theClass 1 towns.

The responsibility for sewerage anddrainage lies with the urbanenvironmental companies whosebusiness diversity is similar to the oneof the WSCs. Water supply togetherwith sanitation/drainage services,without any other urbanresponsibilities, are provided by 30 outof 80 state-owned companies31. A fullset of water supply, sanitation & urbanmanagement services such as solidwaste management, street pavementsmaintenance, parks and public

gardens, street lighting, road construction, funeralservices and even civil and industrial construction isprovided by 8 companies. Exclusively wastewaterservices are supplied by 2 providers (see Figure 2.3).

The urban environmental companies are

14

BOX 2.2: Non WSC Provider Survey (Continue)

31. VWSA "Vietnam Water Supply and Sewerage Summary" May 2003.

15

often a city cost center since they do not chargeany fees for the sewerage and drainageservices (see Annex 4 for sanitation providersin HCMC).

As the sector matures there will be a need torevisit current models of urban sanitationprovision to assess their effectiveness. Asservices expand, and wastewater collection andtreatment becomes more important, theseparation of these wastewater services fromother urban services will become routine. Whilststand alone wastewater companies may be asolution for larger cities, combined water andwastewater companies are likely to be a moreefficient and effective solution for smaller citieswith populations of less than 6-700,000 people.

Rural Provision

Communities: Communities, where localcapacity has developed to supply materials andskills for sanitation, see faster and moresustained growth of latrine users. Local masonsfind ways to promote their business and thusadd to the number of facilities.

For instance, a local enterprise to produce

concrete from local raw materials enabled anisolated mountainous community in Vietnam tobuild more and cheaper toilets withoutdepending on external supplies. Hands-onconstruction training was provided tocommunity members during the building of thevery first latrines. Depending on the quality ofthis training, the skill developed helpedconstruction by other households. Wheretraining was not made available or done badly,it inhibited further consumer demand32.

Small-scale providers: The international NGOIDE together with DANIDA are successfullysupporting small scale providers in 6 rural districtsof 30 communities - most of them living below thepoverty line - in order to improve access andachieve sustainability of rural sanitation33. After 4months of project implementation, a 15% increaseof access was achieved equivalent to the number oflatrines built in the same communes during thepast 2 years.

The local entrepreneurs entered the valuechain either as construction project managers(local masons) offering often also design andmarketing services, or as suppliers of pre-madecement cylinders.

32. WSP. Achieving sustained sanitation for the poor. Prepared by Nilanjana Mukherjee33. WSP Field Note, February 2005: Private Sector Sanitation Delivery in Vietnam: Harnessing Market Power for

A. Investment Needs in Water andSanitation

Government's targets for service provisionby 2010, which reflect the MDGs in WSS,will require investment in the magnitude ofUS$8.8 billion (see Table 3.1 for investmentrequirements). There is some inconsistency

among the World Bank estimates, the GoVestimates and the VDG Report estimates.

Current investment in urban WSS: Duringthe last decade, as a result of the high level ofpriority assigned by the GoV on WSS more thanUS$ 1 billion has been invested in urban waterand sanitation projects (excluding user

17

III. Water Supply and Sanitation InvestmentNeeds and Financing

Table 3.1: Investment Requirements

World Bank Estimates (urban water only) 2000 2010 2020Total Urban Population 19,000,000 32,000,000 46,000,000Urban population with piped water in 2000 (48%34) 9,120,000 9,120,000 9,120,000Population requiring piped water 9,880,000 22,880,000 36,880,000Estimated cost/capita in 2000 prices 165 165 165

Funds Required for 100% coverage by 2020 1,630,200,000 3,775,200,000 6,085,200,000Government Estimates Coverage 2010 2000- 2010 2004-2010 35

Urban water supply (2000 coverage 45%) 85% 3,800,000,000 1,120,000,000 36

Urban sanitation (2000 coverage 35%) 85% 3,800,000,000 1,326,000,000 37

Rural water supply (2000 coverage 28%) 75% 800,000,000 660,000,000 38

Rural sanitation (2000 coverage 24%) 75% 400,000,000 464,000,000Total 8,800,000,000 3,620,000,000

Note: The funds for sewerage and wastewater treatment have not been accounted for in the investment needs of rural sanitation..

US$ funding required until 2020 for 100% water supply coverage in urban areas

US$ funding required until 2010 for water supply and sanitation in both urban and rural areas

34. Based on the Benchmarking Report, 200235. "Towards the Vietnam Development Goals for Water Supply and Sanitation", May 2004.36. Study team calculations based on VWSA/World Bank (2003): Utility Benchmarking in Vietnam, June 2003. 37. Presentation paper by Mr Nguyen Ton at 2002 VWSA Conference. The figure covers only 2005 target of 50-

60% catchment and is thus underestimated.38. Study team calculations based on CERWASS (2003): "Credit Mechanisms of the NRWSS, Draft, August 2003".

contributions). They have typically been carriedout by the provincial WSCs with significantODA contributions, in average over 80%. Some40% of the investments (US$100 millionannually) were carried out in the four largestcities39 (see Annex 5).

Current investment in rural WSS: Accordingto the 2004 Workplan of the NTP on RWSS, thetotal investment for rural WSS in 2003 amountedto VND 1,600 billion with a predominantcommunity participation (see Figure 3.1 andAnnex 5). The total GoV investments were VND236 billion whereas donors and investors countedfor another VND 387 billion, bringing the total

spending at USD 40 million. This is somewhatlower than the average of USD 50 million duringthe 1999-2002 period. No major changes areforeseen the near future

B. Sources of Funds

One of the key questions is, therefore, how willVietnam finance its WSS infrastructure in thenext several years, and increasingly diversify itsfinancing sources? Table 3.2 lists the sources anduses of funds.

The demand for infrastructure will be fueledby the country GDP growth, which was morethan 7% per year in the last 5 years with the stateeconomy contributing 53.6% in 2004; Non-statesector 30.9; and FDI 15.5%.40

State and Provincial Budget Sources ofFunds

Under the present Budget Law, the financing ofurban water supply, sanitation and drainage isunder the responsibility of each provincial PC.In reality though, the provincial budget isinsufficient to meet the essential upgradingrequirements and accordingly, the GoV

18

Source: WB (2003), Participatory assessment of urban water supply& sanitation projects in Vietnam, and NTP Plan, 2004

39. "Towards the Vietnam Development Goals for Water Supply and Sanitation", May 2004.40. Source: Statistical Yearbook, 2004, statistical Publishing House, 2005

Treated Water Pumping Station in Hai Phong

provides direct support for capital investment inthe sector, which is very dependent on externalassistance. O&M costs are excluded from thedirect government subsidies41. Still, if thebudget contribution to urban water andsanitation remains at the level of the last 10years, this source will be able to finance, on itsown, only about 4% of the urban needs in 2004-2010 (see Figure 3.1 and Table 3.1). With thecurrent mix of ODA and government fundssome 25% of urban needs can be funded.

According to the NRWSS, users areresponsible for all the investment and O&Mcosts of the rural WSS facilities with the GoVgrants supporting the poor. With the currentlevel of investment though, the budget can onlymeet 17% of the officially recognized VND50,000 billion needed to achieve the target of100% of rural population having access to cleanwater and environmental sanitation by 2020 (seeAnnex 6). With the current mix of ODA andgovernment funds some 25% of rural needs canbe funded.

ODA Source of Funds

For the ten year period to 2001, a total of

US$838,224,000 was invested by multilateraland bilateral financial institutions in urbanWSS. In December 2004 the World Bankapproved a credit of $112million for urbanwater supplies and in October 2005 a furthercredit of $46 million was approved for ruralWSS projects. The urban ODA providers arethe World Bank, ADB, DANIDA, JICA,AusAID, FINNIDA, and AFD (France). Thereis a very high donor commitment to alsosupport the development of the RWSS sectorand the National RWSS Strategy by AusAID,ADB, DANIDA, JICA, the World Bank,UNICEF and a number of internationalNGOs.42

The coordination of ODA follows a typicaltop-bottom approach with the MPI being thefocal point, MoF being the official contractual"borrower", the branch Ministries acting asstate supervisor of operational implementationis assigned to the Line Agencies (e.g.CERWASS). According the recent GoVdecree43, the ODA funds are to be whollyallocated from the State Budget with thereciprocal funds allocated from the localbudgets for domestic urban or rural sanitationand sanitation in hospitals.

19

41. Ian Walker, 2002.42. Helle Stoltz. RWSS Sector in Vietnam: Background Note. DANIDA, 10 March 2004.43. Circular No.108/2003/TT-BTC of 7 November 2003.

Table 3.2: Financing Water and Sanitation in Vietnam

Expected increase in uses of funds Increased population growthIncreased per capita demand forwaterIncreased coverage from current levels

Urbanization/affordabilityLevels of non-revenue water

Orthodox sources of fundsCentral government budgetProvincial government budgetWater supply companies■ Tariff■ Income from provision of

construction/other services ODAForeign direct investment

Non-orthodox sources of fundsBanking sector Provincial government credit accessWater supply companies■ Improved CAPEX management■ Increased OPEX efficiencies

Small-scale private providersHouseholds

ODA on Lending Terms

In May 200544 the government sought tosimplify and standardize the on lending termsfor ODA funds for water supply projects. Theintention was to avoid competition for sourcesof ODA funds that might be provided on morepreferential terms. The circular established onlending rates of 0% p.a. for Category 5 townsand 5% p.a. for Category 4 towns or larger. Theidea is sensible (i.e. to avoid competitionbetween ODA funding sources) but anunintended consequence may be thatopportunities for local private finance will bereduced - with borrowers preferring to wait for0% interest ODA than seeking out commercialsources of financing. This is to the detriment ofthe sector leading to diminished, rather thanexpanded, financing sources.

Sub-Sovereign Credit A ccess

Decentralization of financing: Vietnam hasbeen relatively slow in decentralization offinancing45. Budgeting, spending levels andinvestment decisions are centrally controlledwith the local budgets part of a unified budgetapproved annually. Revenue sharing isformulae-driven and the shares are determinedinversely by the relative wealth of provinceswith the poorer getting more.

Sub-sovereign borrowing: Borrowingpowers of provincial governments are verylimited and little tested and the centralgovernment effectively allocates both grants andloans for capital purposes. Borrowing for allpurposes is usually done either throughgovernment banks or from on-lending programson subsidized terms and with sovereign

guarantee thus making market-based lendingunattractive. Commercial banks are notpermitted to lend directly to provincialgovernments but they can invest in sub-sovereignbonds and have made modest loans to WSCs.

Sub-sovereign guarantees: There is onlyadministrative, not legal, separation betweencentral and provincial governments in Vietnam.The latter cannot sign legally binding contractsand their legal obligation is also that of thecentral government. Still, provincialgovernments have, in some circumstances,provided guarantees on water projects, e.g. theBOT project with Binh An Water Corporationhad an inherent guarantee from the HCMC PC(see Annex 2). It was widely assumed thoughthat the national government would step in ifthe PC cannot meet this obligation.46

Sub-sovereign bonds: Provincialgovernments have the option to borrow up to30% of their annual budget for developmentinvestments - HCMC and Hanoi are allowed toborrow up to 100%. The debt can be raisedthrough revenue or general obligation bonds. Todate, only three provinces - HCMC, Hanoi, andDong Nai - have made use of such instruments,and all debt raised thus far has been in the formof general obligation bonds. In 2005 both HCMCand Hanoi issued bonds worth around VND 2trillion (equivalent to US$127 million) whileDong Nai was successful in mobilizing over VND239 billion (equivalent to US$15 million).

With the exception of pricing (coupon rate onbonds), all parameters of a bond issue (tenor,amount, etc.) are proposed by the issuingprovince and approved by the centralgovernment. Pricing is determined exclusivelyby the MoF with seemingly little or no inputfrom the issuing province. In determining thepricing of a debt issue, the MoF allows only a

20

44. Circular No. 40/2005/TT-BTC - financial mechanism applicable to clean water supply projects funded by ODA45. The World Bank. Sub-sovereign credit access and infrastructure financing in four East Asian Countries, June 200346. Aldo Baietti, 2002.

small spread over central government debtobligations of comparable size and tenor, whichhas led to limited demand for provincial bondsaside from SOCBs. The market appears to expecta larger spread between sub-sovereign andsovereign bonds.

Local Development Infrastructure Funds:In response to the increasing demands formunicipal infrastructure, the GoV has beenencouraging the provincial governments totake greater responsibility for financingmunicipal infrastructure. In this context, LocalDevelopment Investment Funds (LDIFs) havebeen established in 13 provinces and havebecome an important municipal finance toolbecause they offer an operational and legalstructure for the provincial governments tofocus on infrastructure, including the ability tomobilize capital and enter into contracts withthe private sector. The LDIF model is beingdeveloped to focus on municipalinfrastructure investments that offer costrecovery. HIFU, the HCMC-based LDIF hasmanaged to use its equity investments toleverage private capital in the 4.8x range,indicating the emergence of a trend/tool forthe provincial governments to leverageprivate investment for WSS projects.

Securities exchange: There is a newlyformed securities exchange in HCMC with only27 stocks listed in 2005 and 10% of the exchangevolume in bonds. The Securities Commission isinvestigating the possibility of municipal bondtrading on the secondary market. However,domestic financing in long-term maturities isgenerally not available in Vietnam.

Banking Sector

Banking reform: The progress of the bankingreform has been mixed with bank assets still

concentrated in 4 large state-owned banks. Non-performing loans represented the still manageable15% of all lending in 200047 whereas grossdomestic savings were 28.8% of GDP in 2002. Thereform aims at improving the regulation andsupervision of banks, and enhancing theirtransparency and accountability. The GoV hasinitiated the separation of preferential and policy-based credit activities from the SOCBs through thecreation of the GoV guaranteed VBSP and DAF.This will shift the inherent risks associated withpolicy lending from the financial sector to theseextra-budgetary institutions.

Lending to utilities: Although SOCBsremain by far the largest providers of credit toSOEs, the lending to WSCs has been limitedwhich represents a challenge by itself. The bestestimated figure for SOCB lending to water iscurrently about $50-70 million. Both BIDV andIncombank could potentially be considered forthe role of lenders though, given their extensivenetwork of branches and existing position in theinfrastructure finance market.

Micro-credits: There is a strong demand formicro-finance in Vietnam which grew 47% inlending in 1998-2001.48 Some estimates state that

21

47. The World Bank. Taking stock 2003. ConsultativeGroup Meeting, December 2003

48. Vietnam Development Report 2004.

Bank for Investment and Development of Vietnam(BIDV)

three quarters of households get credit in oneform or another. Many organizations areinvolved in supporting the micro-credit sector(see Box 3.1):● The main providers VBARD and VBSP

(credit to 8.3 million rural households in2001)

● Saving-and-loan schemes run by severalcommunes and district governments

● Mass organizations such as Women's Union,Farmer's Union, Youth Union

● 57 international NGOs support micro-finance accounting for 5% of all micro-credits

● Informal sector - moneylenders, rotationalsavings and credit associations, and lendingbetween friends - contributing about 50% ofthe total micro-credit market.

Utility Sources of Funds: IncreasedEfficiency and Tariff Reform

The 2003 benchmarking study49 of capitalefficiency evaluates 30 provincial WSCs andgives preliminary estimate of capital perparticular type of asset (Table 3.3).

To achieve the GoV goal of 100% urbancoverage by the year 2020, the water utilities willneed to provide water to an additional 25 millionpeople. Based on the benchmarking survey, theaverage capital investment required to achieve thisgoal is US$2,239 million. By delivering assets basedon the performance of the top quartile ofVietnamese water utilities, 43% can be saved due tocapital efficiency. Whilst these are very preliminaryestimates, and such significant savings are unlikelyto be fully replicable, there is no doubt thatincreased capital efficiency is possible and willreduce the total amount of investment needed forthe country, and hence the financing needs.

In addition, an analysis of water companyoperating costs and performances in 2003, showsignificant savings can also come fromimproved operating practices (see Annex 7). Thesimplified analysis demonstrates that the capitalcosts of network expansion, NRW reduction andenergy efficiency programs can be financed bythe sale of water. Furthermore, the analysis hasshown that there is significant unused capacityin Vietnam's treatment plants. By utilizingavailable production capacity at that time, waterutilities could increase revenues, expand

22

Table 3.3: Savings due to Capital Efficiencies

Distribution Costs Production Capacity Cost Total CostsTop Quartile $ 843,931,567 $ 587,615,470 $ 1,265,456,064 Average Costs $ 1,285,106,218 $ 953,882,292 $ 2,238,988,510 Amount saved by capital efficiency $ 973,532,446

49. Rossana Dudziak and William Kingdom. Utility Benchmarking in Vietnam, June 2003

Box 3.1: Micro-credit in WB projectsThe WB Three Cities Sanitation Project includes amicro-finance component being implemented bythe City Women's' Unions which enables poorfamilies to take small loans to improve theirhousehold sanitation. Out of 15,000 loans madein the first two years of implementation, the loanrepayment is close to 100%. Also, under thecurrent Vietnam Urban Water SupplyDevelopment Project, a revolving fund for smalltowns will be established under the administrationof the Women's Union providing funds forsanitation to poor households.

23

distribution networks, and benefit up to 6million new domestic customers.

Utilities can therefore reduce unit costs to deliverassets, and can be more efficient in their operations.Finally, they can increase their revenues throughtariff increases and, to a lesser extent, throughattention to collection rates and illegal connections.The latter two are areas where the country is alreadyan excellent performer so there is less opportunityfor improvement. Focus must therefore move toestablishing tariffs that can fund the borrowingnecessary to meet the investment needs.

Small Towns Capital Investment Resources

The state partially finances most water supplyprojects in small towns, especially projectsowned by the provincial WSCs throughdomestic investment program, internationalloans or grants or mixed credit (including statebudget credit and individual credit). Funding isnormally from (i) consumer fees 10-55%; (ii)state budget 10-60%; (iii) external supportagencies 0-30%; (iv) in some of the southernprovinces, private investment up to 38%.

Similar to rural investment regulations,

consumer contributions are required especially intownlets. In some small townlet projects, consumerscan contribute labor or cash for constructionamounting to 20-30% of the total costs. Althoughthere are wide variations, the average per capita costis lower than $40 and may vary between $18-28 inthe case of cooperatives, community-managed andprivate sector schemes. Per capita costs areinfluenced by the geographical location, per capitaincome, price of supplies, raw water source andscarcity.50

Rural WSS Investment by Households andSmall Scale Providers

The private sector, made up of thousands of microand small enterprises selling water and installingwater technologies, have developed businesses byproviding services at a free market rate.

In the IDE hand pump program in CentralVietnam, the resources spent on social change,demand creation and private sector capacitybuilding was in the order of $1.2 million, and thetotal invested by end-users was $3.2 million.51 InTien Giang province, public funds provided thetechnical design, and some subsidy to poorercommunities, but 62% had come from non-publicsources. Investment capital was usually raisedfrom the consumers themselves, by charging alarge upfront connection fee of $60-$100. Themembers of informal user-groups andcooperative-managed systems usually investedabout $60 in a fund used to build a water system.

It is not possible to estimate the totalinvestment by these enterprises each year.However, users have already provided almost50% of the total funds in the rural WSS in 2003(see Annexes 2 and 4). It is very likely that thetotal private sector / user investment in thesector far exceeds the institutional investment.

50. WSP. Evolving management models for small towns water supply in a transition economy , May 200251. Dan Salter, 2003

Detecting leaks to reduce non-revenue water

A. Water Supply

A ccess

Coverage and accessestimates differ sometimessubstantially in Vietnam.52

Divergent definitions andmonitoring methods appliedmay partly explain thosedifferences, together withthe existing practice ofsharing connections.

Based on the JointMonitoring Programstatistics for 2002 Vietnamhas the best access statistics for both rural andurban water supplies of all the lower incomecountries in the region. All the lower middleincome countries in the region boast better accessfigures, although only marginally so in the casesof China and Indonesia.

The annual growth rates from 1993-2004 inaccess to improved water sources reached theimpressive 7% overall (see Table 4.1). If the pastgrowth rates can be maintained until 2010, it islikley that the GoV's targets can be met. It will

however, depend on the GoV's maintaineddedication to the sector and on the provision ofsufficient funding from domestic (public,private, and households) as well as internationalsources

Urban coverage: The piped water coveragediffers substantially with respect to the urbanpopulation category with the small towns havingas low as 10.6% in 2000, the biggest cities 67.3%and the medium size towns 31%.55 A more recentbenchmarking study56 undertaken by the

25

IV. Sector Performance

Table 4.1:

Official Water Supply Coverage Data, incl. Projections (VLSS)53

Access to improved water, % of the populationYear 1993 Year 2002 Growth Year 2010*

rate p.a.Urban coverage 58.5 76.3 3.0 96.6Rural coverage54 18.1 39.6 9.1 79.4Average national coverage 26.2 48.5 7.1 83.8

Source: Vietnam Development Report 2004, World Bank, constructed on GSO data.*Projection Year 2010 under the assumption that future growth rates equals pastgrowth rates.

52. It is striking that rural water coverage estimates for 2002/3 are in the range of 40% to 55%, and for urban watersupply 56% to 76%.

53. Source: Vietnam MDG Report, April 200454. Improved water includes "bought water" but excludes hand-dug wells. The coverage rates are consequently

under-estimates of the coverage of improved water. Figures from the Joint Monitoring Program (JMP) -WHO/UNICEF - indicate figures of rural water & sanitation at 68% and 26% respectively, and urban water &sanitation at 93% and 84% respectively.

55. Benchmarking Report 200256. Benchmarking Report 2003 (issued December 2004)

Vietnam Water Supply Association indicatesthat, according to the WSC, overall urbancoverage is 61% but that there are still 7 WSC outof 66 with coverage below 25%, and 27 out of 66with coverage less than 50%.

Small towns' coverage: The percentage ofconnections in small towns is very low withabout one third of district towns having someform of piped supply. Even where there is pipedwater, it typically supplies only a smallproportion of the population mainly in the towncenter. The poor have to buy water at very hightariffs or use other water sources, which do not

meet quality standards. Whereconnections are available, people still usealternative water sources (see Figure 4.1);consumption therefore is very lowaffecting the efficiency of the systems.

The Bank's Urban Water SupplyDevelopment Project, approved inDecember 2004, has a component thatspecifically focuses on small town serviceprovision. The project aims to provideservice in up to 135 district towns in some25 Provinces.

Rural coverage: Rural coveragefigures for water and sanitation also varyconsiderably. According to the NTP of

MARD, the 2003 rural access to water is highestin the proximity of the largest cities; withcoverage of 70-80%. More remote provinces suchas Dong Thap and Tay Ninh have coveragefigures of less than 30%. Those disparities revealthe acute need to focus activities and investmentsin the poorest and most remote provinces (seeAnnex 6).

Consumption: The national residentialconsumption rate in 2000 was 81.8 lpcd. The HCMCinner city consumption varies between 5 and 10m3/hh/month, whereas in the suburbs it falls to

0.06 - 1.8 m3 levels.57 The most recentbenchmarking report indicates a higherfigure of 97 lpcd. The larger cities consumenearly 50% more water than smaller cities.Small towns rely on self-provision fromtraditional water sources in order todecrease the price of piped water; thus,consumption is low: 80-120 lpcd for smalltowns and 25-50 lpcd for townlets.

A recent World Bank project58

estimated the current domestic waterconsumption in small towns to be 50liters/person/day and is expected toincrease to 80 liters/person/day by 2020.

26

57. Vo Quang Chau, HCMC WSC. Technical Papers, International seminar, 5-6 December 200258. Vietnam Urban Water Supply Development Project: Pre-feasibility study, 2004.

This is the way many of the urban poor obtain their water

Overall Performance of the Sector

Urban water supply:59 Many water treatmentplants, even those built recently, suffer fromdesign and construction faults due to lack ofappropriate equipment, high quality materials,management skills, and financial resources.Some urban centers have no treatment facilitiesand raw water is pumped directly to thedistribution network, with suspended solids,iron, or high levels of contamination.Maintenance is not always adequate to maintainan appropriate level of service. As a result,existing schemes are often difficult to operate,and not sufficiently reliable or efficient.

One of the objectives of the GoV under theCGPRS is to ensure water and air quality meetthe national standards by 2005. However, exceptfor HCMC and Hanoi, the urban water fails tomeet the WHO standards or the GoV guidelines.Conventional facilities for clarification, filtrationand disinfection do exist in the majority of theprovincial towns. About 50% of the 66 WSCsparticipating in the 2004 Benchmarking studyclaimed they did not have proper laboratoryequipment to perform water quality tests.

The water quality can be largely affected bythe continuity of service. In Vietnam, theaverage level of provision in urban areas(excluding townlets) is 22 hours/day. Inaddition, although 97% of the customers aremetered in urban centers, the meter quality andaccuracy can be poor.

The sector has been expanding at a rapid ratesince 1997: 54% of the distribution system hasbeen built within the last five years. However, thecapacity of the treatment plants exceeds thecapacity of the distribution system. On averagethe utilities are operating at 81% of production

capacity, although in the smaller towns the levelis closer to 50%. The financial performance ismoderately good with an average working ratio(operating costs/operating revenues) of close to0.63. While this level is impressive compared tomany developing countries, the low tariff meansthat the cash generated from the WSCs in absoluteterms is also low. This limits the WSC ability tofinance expansion out of existing revenues whichcan only be rectified by further reducing theworking ratio (say to <0.5) and raising tariffs. Thedays accounts receivable of less than 30 reportedby 100% of WSCs is much better than theperformance level reached by top 25% utilities ofdeveloping countries (90 days). The averagepercentage of NRW remains high at 35%compared to 23% achieved by the top quartile ofutilities in developing countries but has beenrelatively static over the past few years. NRWshows significant variations in different provinces,ranging from 14% to 55%. The number of staff per'000 connections has decreased in recent times andthe 2003 weighted national average of 8.0 remainsnearly 1.6 times higher than the level considered asgood practice in developing countries60 (5 staff per'000 connections).

Small towns water supply: The performance

27

59. Figures reported in this section are based on the VWSA Benchmarking Report, December 2004, for the year 2003.60. Viewpoint 242: A Water Scorecard, Nicola Tynan and Bill Kingdom

Nam Du Water Treatment Plant in Hanoi

within categories of management models varieswidely. Systems managed by communities,cooperatives and private operators evidentlyperform better than systems managed underother models. However, the more importantaspect of management is not so much theorganizational model, but what "rules of thegame" are being applied. The autonomy inmanaging the water supply business and propertariff levels may be better predictors of successthan the management models per se. Theobserved success of more customer-orientedapproaches is supported by evidence elsewherein the world that demand-responsiveness has apositive impact on sustainability.

The average continuity of service in smalltowns (excluding townlets) is estimated at 16hours/day. Water clarity or odor is a problem.The Global Small Towns Study of 22 small townsin Vietnam shows customer satisfaction withwater pressure and quality varies considerablybetween 58% and 98%.

Rural water supply: Private enterprises a) inthe examples of Tien Giang province in southernVietnam and b) in areas in central Vietnamtargeted by the supply chain intervention of theIDE are, by nature, responsive to customer needsand adaptable. Service quality is high sincerepeat service is the only way to generate thenext sales. The connection time is shorter andresponsiveness to leakage faster. This is boostedby the fact that investors and operators are oftenusers themselves.61

Cost efficiency is dramatically improvingwhen the private sector is involved: hand pumpsand drilled wells have been installed by thegovernment enterprise for $100 in CentralVietnam and by the private sector for less than

1/3 of this cost. The ability of the private sector toraise financing is also very high: in addition tothe schemes financed entirely by the users, someproviders use a combination of private funds,bank loans and advance payments discountedfrom the water bill.

There is no monitoring and evaluation ofwater quality and quantity in rural areas62

despite the emerging challenge of arsenicpollution in some areas and large-scale industrialand cumulative small-scale craft villagepollution.

Water Tariffs

Urban water Tariff: Tariffs are set by the PCs afterthe WSC submits their tariff proposal and oftenafter the PCs obtain the consent of the People'sCouncil. Tariffs are reviewed annually. Theimplementation of Circular 03/1999, stating localgovernment must gradually increase water tariffsto fully recover costs, has been slow. In November2004, the MoF and the MoC issued a joint circularstipulating the common tariff framework for thewhole country63, including rural areas, based onthe principle of full cost recovery and a reasonableprofit. The MoF assumed the prime responsibilityfor enforcing the joint circular. Since then, thewater tariffs have been increased or adjustedsignificantly in most WSCs in the country, helpingto improve the financial status of the water sector.

Urban water tariffs are typically in the rangeVND 1600 to 2700/m3 although there areexamples outside this band. In 2003 the averageresidential tariff was VND 2,181/m3, anincrease of 4% over the previous year. There is apositive trend towards increasing tariffs,HCMC for example increased tariffs by 60% in

28

61. Dan Salter, 2003

62. Dr. Le Van Can, Presentation at the National Workshop on Rural WSS, Hanoi, 4-5 March 2004

63. Joint Circular No.104/2004 of 8 November 2004 of MoF and MoC

2004 (Box 4.1). Overall, however, tariffs are atlevels which are not able to fully support theborrowing required for all sectoral investments.

The average urban connection fee in 2003 wasVND 791,800 (about 50$) representingapproximately 20% of GDP per capita . Nearly80% of the companies determine the price of theconnection fee based on thelength and diameter ofconnection pipes. Over 50% ofcompanies offer reducedconnection fees for low-incomefamilies and nearly 60% acceptinstallment payments.64

Slums Water Tariffs: Inurban areas, the migrants areunable to secure waterconnection since they don'thave KT3 living registrationand are forced to buy muchmore expensive water fromthe richer households. Privatevendors in HCMC chargeVDN up to 6,000/m3. In TanBinh District, the migrantswithout registration wouldpay 7-8 times the residentialwater tariff.65

Small Towns Water Tariffs: Current districtwater tariffs in Vietnam range between VND1,000 and VND 4,000 per m3 and domestic tariffsare typically VND 2,000 to 2,500/m3. This coversonly the direct operating costs and does notusually include the full costs of depreciation. Theconnection fee ranges from VND 300,000 to VND1 million or more. Cooperatives and community-based water supply systems, funded withcontributions from local residences or by privatesector investment, agree water prices amongstthemselves. Still, the tariffs need to be endorsedby the PC. The tariffs vary between the differentmanagement models (SOEs charge the most)with an average66 being $0.13/m3 -unfortunately no more recent data is available.Block tariffs (low tariff applied to essentialconsumption of 15m3/month) or cross-subsidization of different user categories are

29

Box 4.1: Urban water tariffs - HCMC tariff structure

In 1999, all consumers were metered, billed monthly with no seweragesurcharge (10% surcharge was introduced only recently). The watertariff aimed at full cost recovery including profit and contingencies. InJuly 2004, a new water tariff was implemented by HCMC Water SupplyCompany.

Category 1999 water tariff per 2004 tariffcubic meter, VND/m3

Base CAPEX Total Totalsurcharge

Domestic- below 4 m3/capita/month 1,000 300 1,300 2,700- above 4 m3/capita/month 1,500 600 2,100 5,400- above 6 m3/capita/month 8,000Industry (production) 2,500 600 3,100 4,500Business and service 8,000- below 8 m3/month 4,700 500 5,200- above 8 m3/month 4,700 4,000 8,700

64. Benchmarking report - December 200465. Vietnam Development Report 2004. Poverty.66. WSP. Global Initiative for small town WSS, October 2001.

Water meter testing laboratory in Haiphong

utilized in order to help the poor gain access, yetas more poor do not have access to piped water,the benefits accrue to the well-off customers.

The tariff calculations for 15 district towns inthe Urban Water Supply Project (population of144,300 people67) show cost recovery tariffs in therange of VND 3,900-5,200 m3, when funds are on-lent to the WSC at a subsidized rate of 3% peryear. More than 82% of the participatinghouseholds were willing to connect to theseplanned systems even though the tariff would beat least 50% higher than the existing tariff chargedin other towns and in some cases two and a halftimes the existing tariff (see Table 4.3).

Rural Water Tariffs: The rural problems withwater supply evolve more around availabilityrather than cost. In Tien Giang province, therevenues of the private water suppliers wouldcome from the upfront connection fee (usually atthe market rate of US$ 60-100) and the tariff. Oneof the small piped water providers in the sameprovince charged a tariff of VND 3,750/m3 fortreated water and yet faced an increasingdemand for service.

A ffordability

The average percentage of the cost of water andwastewater services in the total household

income is usually used to measure theconsumer ability to pay. For planning purposes,a rule of thumb of around 3% for water and 5%for water and sanitation is used. With respect tothe urban poor, a lifeline of 40-60 l/capita/dayshould be satisfied with 4-6% of the income,whereas the average consumers would demand80-120 l/capita/day by spending 3-6% of theirincome.

Current tariffs in Vietnam are typically below2% of the average household income (see Annex6). Households that already have piped water arereluctant to pay more than the current tariff andconversely, communities that have no access topiped water are willing to pay much more thanthe current tariff. Currently, more than 50% ofthe households are paying for water whereasalmost all rural households get it for "free".Although the richest (usually urban dwellers)spend more in terms of actual amount, thepoorest spend twice as much as percentage oftheir income. The time and money spent onobtaining drinking water are not taken intoaccount.

Urban Water Supply Affordability: Thecomparison between the % of householdincome paid for water in the richest cities likeHCMC (0.6% in 2002) with the GDP per personin Tien Giang Province of about $335 (2001), out

30

67. Vietnam Urban Water Supply Development Project: Pre-feasibility study, 2004.68. The World Bank. Vietnam Water Supply Development Project, Project Appraisal Document, 2004

Table 4.3:Affordability in 3 Provinces68

Province Existing water tariff, Households willing Agreed average tariff Affordable tariff VND/m3 to connect, % for participating towns, increase, %

VND/m3

Nam Ha 2100 94 5190 1.47Thai Binh 2800 82-99 (by town) 4170-6080 48.93 -117.14Binh Dinh 1700 86 4100 141

of which a household was willing to invest $60-$100 in water connections reveals the currentaffordability gap in Vietnam (see Annex 6 forcomparison data).

Small Towns Water Supply Affordability:Connection costs are a major obstacle toachieving greater coverage of water supplyservices in small towns and townlets. Althoughtariffs are well below 3% of the averagehousehold income, connection fees could reachas high as 10-35%. Cross subsidies may be usefulin some cases but more research is needed tounderstand how the poor can benefit fromtargeted external subsidies and/or crosssubsidies. Furthermore, the removal ofconnection fees can also be considered as a wayto reduce the connection barrier. This approachwas adopted in the pilot Design, Build and Leaseproject in Bac Ninh and Haiphong Provinces.

Rural Water Supply Affordability: Surveysof time and money spent on obtaining drinkingwater in Vietnam indicate that ruralcommunities, including the poor, are willing tocontribute to the capital and maintenance costsof water and sanitation, provided that they havemade an informed choice for the service levelprovided69. To some extent, rural communitieshave also demonstrated a willingness tosupport poorer members through cross-subsidies.

Overall, affordability is not considered amajor issue at the current time. As tariffs rise inthe future consideration will have to be given toprovision of targeted subsidies to low incomehouseholds.

Public Subsidies in Water Supply

Urban Subsidies: According to the VWSA

Benchmarking study (December 2004) all watercompanies but two covered their operationscosts from user fees in 2003.

Rural Subsidies: There are two types offunding of NTP. The first is routine funds forconstruction of water systems and sanitationcoverage/IEC. The second type of funding isinvestment subsidies for water supply, especiallyfor schools and kindergartens, hospitals,Commune Health Stations, and rural markets.

The levels of grants stated in National RWSSStrategy are 80% of construction costs for watersupply of very poor households and 60% ofconstruction costs for poor households. Inaddition, users can obtain loans up to 75% oftotal construction costs from the GoV ruralwater and sanitation fund. For gravity watersystems in high mountain areas70, the subsidycannot exceed 90%. For water piped schemes ina standard single village, the subsidy levelscould reach 40% of the total construction cost,whereas for more difficult sites inmountainous, island and border areas, thenational government subsidy can be as much as60% to be supplemented by provincialgovernment funds.

Thus, whilst there are few subsidies foroperations costs in the water sector, a capitalsubsidy is present for many systems, particularlyfor rural and small town schemes. This may benecessary in the short term but it needs to beproperly targeted, and on a reducing scale - sothat alternative sources of funds are encouragedto flow into the sector.

New Approaches to Targeted Subsidies.Internationally there has been increased interestin how best to target subsidies in the water andsanitation sector. One promising approach iscalled "Output Based Aid" (OBA) where

31

69. The World Bank. Vietnam Red River Delta Rural Water Supply and Sanitation Project, PAD, August 15, 200570. According to Decision 135/1998/QD-TTg.

subsidy payments are made on delivery of aparticular output. This approach is beingassessed in HCMC where a possible OBAscheme is being prepared71. The concept inHCMC is to make OBA payments to the watercompany on delivery of a working houseconnection to a low income household alongwith a reduction in physical water losses fromthe distribution network. If successful thisapproach could have great replicability aroundthe country as this targeted subsidy approachaddresses two of the main challenges in thesector a) reducing water losses and b) connectinglow income households.

B. Sanitation

A ccess

As for water supplies there arewide variations of estimates onsanitation coverage. Based on theJoint Monitoring Programstatistics for 2002 Vietnam hasthe best access statistics forurban sanitation of all the lowerincome countries in the region,and is second behind Mongoliafor rural sanitation access. All thelower middle income countriesin the region boast better accessfigures, although onlymarginally so in the case ofChina.

The coverage of hygienicsanitation has increased by morethan 10% annually, yet theoverall coverage was only 31%by 2004. Despite an annual

growth rate of more than 20%, only 16.4% ofrural households have access to hygienic latrines,where as the respective percentage for urbanhouseholds is 76.0%. If the reported figures arereliable72 and the current growth rates can bemaintained, it is likely that the GoV targets canbe met in urban areas. Rural coverage continuesto lag behind and requires specific emphasis.

It will be, however, unrealistic to assume thatthe targets for wastewater treatment and solidwaste can be met by 2010 . Stakeholdersrecommend that targets be graduated andadjusted downwards, depending on the size oftowns and cities. They are also concerned that

32

Table 4.4: VLSS Sanitation Coverage Data, incl. Projections73

Access to hygienic Year 1993 Year 2002 Growth Year 2010*latrines rate p.a.Urban coverage 44.9 68.3 4.8 99.2Rural coverage 1.8 11.5 22.9 59.8Average national 10.4 25.3 10.4 55.8coverage

71. GPOBA has provided grant financing in FY2005 to investigate the application of OBA in HCMC72. And there is doubt. Figures from the Joint Monitoring Program (JMP) - WHO/UNICEF - indicate figures of

rural sanitation at 26% and urban sanitation at 84%.73. Based on CSO data. "Towards the Vietnam Development Goals for Water Supply and Sanitation", 2004

Polluted flood waters are a regular occurrence in Vietnam’s Cities

insufficient attention is given to environmentalissues in present investment plans.

Urban Access: Environmentally acceptablesanitation facilities in urban areas are generallyunavailable. Under the existing regulation,human waste should be treated in the septic tankbefore being discharged to the sewer. Whilearound 40% of households in provincial townshave septic tanks, only a small portion of theseseptic tanks is connected to sewers or drains (seeFigure 4.2). In many urban areas, septic tank

effluent or seepagecontaminates thegroundwater table in areaswhere water from wells iswidely used for drinking.

Currently, less than 65%of the HCMC population hasseptic tanks where 87% ofonly the wastewater from thetoilets is treated; "gray"domestic water is not treated.In fact, only 50% of theexisting septic tanks inHCMC are reportedlydesigned and constructed

properly and due to lack of strict regulations,most of them have not been regularly subjectedto solids removal. Septic tanks are cleaned onrequest by the Urban Environmental Companywith a frequency of 3 months up to 10 years74.Due to lack of enforcement of regulation, manynew housing constructions in HCMC havedirect connections to the city drainage systemwithout the obligatory septic tank.

Small Towns Access: In general, households indistrict towns have fewer septic tanks than those in

provincial towns, and some even lack basictoilet facilities. Those without access to anysanitation facilities have no organizedsystem of wastewater collection, treatment,and disposal, and use open ground, localdrains, and watercourses for disposal ofexcreta and wastewater.

The provincial disparities observedfor water supply are also valid forsanitation. The VLSS shows that accessto hygienic latrines is more than 85% inthe most urbanised provinces, but lessthan 10% for the poorest and mostremote provinces.

Rural Access: According to the 2004Workplan of the NTP on RWSS, thenumber of the people having access to

33

74. The World Bank: HCMC Environmental Sanitation Project. PAD, February 2001.

Informal public toilet in Ho Chi Minh City

improved sanitation by the end of 2003 reached41%, i.e. twice as much as in 1999 (see Box 4.2).

The National RWSS Strategy does notconsider piped sewerage (network of gravitysewers which may be combined with surfacewater drainage) as an appropriate solution forrural areas at the present. Unhygienic systems -pit latrines, over-water latrines and single vaultlatrines - are also actively discouraged.

Urban Performance

The level of connections by households to sewersand drains varies. In some cities households withseptic tanks are banned from connecting todrains/sewers and few connections exist. Inothers, whilst there is a formal ban onconnections, many properties connect to thedrains either directly or from the outlet of theirseptic tanks. Where connections take place theycommonly discharge into combined systemswhich discharge to nearby watercourses, usuallywithout treatment. Large sections of thesecombined networks, constructed decades ago,need rehabilitation due to lack of maintenance.

Flooding is common in urban centers in the wakeof heavy rainfalls. Many drains were constructedwithout adequate grades for self-cleansing andthere are often no design provisions for odorcontrol or dry weather flow. The untreatedsewage and industrial wastewater is dischargeddirectly into water bodies and streams in thesurrounding areas and pose high risks to aquaticecosystems (see Annex 4 for the details ofsanitation provision in HCMC). The urbandrainage and environmental companies areinstitutionally and financially much weaker thanWSCs.

However, GoV is paying commendableattention to addressing the environmentaldegradation. The biggest cities Hanoi, HCMC,Haiphong, Danang, and Halong will all havesewerage and sewage treatment facilities in placein the next few years and investments are alsobeing planned for several secondary cities. It willtherefore be important to establish best practiceinstitutional models that can be replicated, andthree models are appearing. In the largest citiesseparate drainage/sewerage collection andtreatment companies are being formed (forexample in HCMC, Hanoi and Haiphong). Inmedium cities drainage/sewerage services areeither being undertaken by a) the URENCOs,alongside solid waste and other municipalactivities or b) as part of a combined water anddrainage/sewerage company. There is noconsensus on the most appropriate model inVietnam but the combined water andwastewater model provides opportunities foreconomies of scale and scope, as well as a greatercommercial orientation.

Urban Tariffs: The GoV Decree 67/2003introduces a uniform environmental protectioncharges for wastewater both for industrial anddomestic customers which must not exceed 10%of the clean water tariff and should be collectedby the WSCs. There is some confusion about thepurpose of this charge. The Provinces believe this

34

Box 4.2: Rural AccessThe 2002 WSP Study identified higher access rateto latrines in households in plains and hillcommunities as opposed to the poorer coastalregions (where sand dunes provide traditionallypreferred defecation zones). Overall in the 12communities analyzed, 87% of the relatively richhouseholds owned a toilet compared to 71% ofmiddle income ones and only 45% of poorhouseholds; 42% of the poor households stillpracticed open air defecation. The sharing offacilities was found to be widespread among poorhouseholds. Ownership of, and access to,"improved systems" such as pour flush and DVClatrines was evidently related to thesocioeconomic status. The access of the poor toimproved systems was high in only twocommunities, which were the only communitieswhere a credit scheme managed by thedevelopment committee of the hamlet has beenmade available.

35

is the wastewater fee, whereas, in fact, MONRE'spurpose was to establish this as a separateenvironmental charge, in addition to anywastewater fees. In many developed countriesthe wastewater tariffs exceed water tariffs so a10% ceiling on wastewater tariffs is notsustainable and needs to be revised.

Hanoi has been levying a drainage surchargeof 15% of the water bill. A flat wastewater rateacross all customer categories of VND 300 percubic meter of water billed has been introducedin Haiphong, whilst in Da Nang the rate isbetween VND 300 per cubic meter (domestic) and500 VND per cubic meter (commercial/tourism)reflecting better the distribution of benefits (e.g.tourism will bear higher charge than domesticusers). Ha Long and Cam Pha have likewisedecided to levy a tariff based on customercategory ranging from VND250 to VND500 percubic meter. HCMC, as from August 2004, haswastewater tariffs of between VND250 andVND400 per cubic meter depending onconsumption level and customer category. In thelatter case the fees are collected by the WSC, but

the revenue stream will accrue to and beused by UDC.75

All these cities plan to increasewastewater charges gradually to achieverecovery of O&M costs, and depreciation ofshort lived assets, by 2006 - 2009.

Small Towns Performance

As of the end of 2005, there was not yet anycomplete drainage and sanitation system insmall towns. The simple and incompletesystems are used concurrently for rainwater,wastewater and livestock wastewaterdisposal. During the rainy season, localpollution is worse because these sewerage

systems either get blocked or overflow. Residentsdischarge solid waste directly into waterways andonto open land causing environmental pollutionand serious health problems. Hygienic toilet use isstill problematic and public bucket toilets or opendefecation is used in a number of small towns andtownlets. Many existing toilets are improperlymaintained such as the double vault compostlatrine. Some households have flush toilets butthey do not connect to sewerage and drainagesystems or wastewater treatment.

Rural Performance

Small-scale providers: The localentrepreneurs - who act as providers ofconstruction project management, design andmarketing services as well as suppliers of pre-made cement cylinders - are obviouslyperforming well based on the significant increasein hygienic latrine usage. The successfulintervention of IDE and DANIDA76

demonstrated the potential profitability of theseptic tanks business line proven by the fact that

75. The World Bank. HCMC Environmental Sanitation Project. PAD, February 200176. IDE. Support to Small-Scale Private Sector Development and Marketing for Sanitation in Rural Areas in

Vietnam. First annual progress report for 2003, February 2004

Waste water Interceptor Tunnel under Nhieu Loc Thi NgheCanal in Ho Chi Minh City

36

the majority of purchases were paid in fullwithout any need of micro-credits. Thetechnological choice of latrines reflected thepreference to convenience and social statusrather than price.

Stimulating demand: The 2002 Study of WSPshowed that, contrary to the traditionalapproaches, health concerns are the not the initialmotivator for households to stimulate demandfor sanitation but availability of water and land.The demand for household latrines wasincreased predominantly by the followingfactors77:● The role of the local government authorities● Increase in community awareness of

sanitation as improved way of life● Project assistance both in kind and in cash● The use of human waste as a supply of night

soil● Economic prosperity● Increased demand for land● Reputation with neighbors● Availability of building materials and skills.

Sustainability: Local government authoritiesin Vietnam have been very effective inmobilizing rural communities to commit totargets for improved sanitation practices78. Thisis done through agreeing targets withhouseholds for building toilets, water wells,animal pens, by ensuring people's contributionto common funds for developing commonservices like waste disposal, treatment sites andby organizing commune cleaning events whereeveryone should contribute their time and effort.The agreed targets (i.e. facilities constructed) areperiodically monitored by the local governmentand village development boards and the resultsare made public. Those who do not use theirtoilets or leave them dirty may suffer theembarrassment of having their names

announced publicly over the commune radiosystems.

Public Subsidies in Sanitation

Urban subsidies: In the past in HCMC, similarlyto other urban centers, the urban drainage andsewerage company been entirely funded by thecity budget since there were no sewerage ordrainage surcharges.

The use of local government subsidies foroperating costs is not sustainable. Those cities thatare introducing sanitation services are also startingto charge for the service. However, the chargeslevied are low and will not cover O&M costs in theshort term. The intention is that charges will rise asconsumers become accustomed to the benefits ofthe new services. This will need careful monitoringto avoid major future drains on limited localgovernment resources. As a minimum tariffsshould cover both O&M costs and the depreciationof short lived assets.

The government generally provides capitalsubsidies for sanitation services. At present allODA investments in sewers and wastewatertreatment are provided as grants to the localmunicipalities, although counterpart fundingensures some demonstration ofcommitment/demand from the beneficiaries.Given the public benefits of many sanitationinvestments, and the low appreciation byconsumers of the health impacts of poor sanitation,such funding arrangements may be needed untilsocietal awareness has increased. However,opportunities for less generous capital subsidiesshould be sought where possible, as in the case ofHCMC where the city has recently borrowed fromthe Bank for sanitation investments. (See Box 4.3)

Rural subsidies: The levels of grants stated inNational RWSS Strategy are 70% for latrines of very

77. Selling Sanitation in Vietnam: What Works? WSP, January 2002 78. WSP. Achieving sustained sanitation for the poor, April 2001. Prepared by Nilanjana Mukherjee

poor households and 50% for latrines of poorhouseholds. In addition, users can obtain loans upto 75% of total construction costs from the GoVrural water and sanitation fund. For wastewatertreatment in industrial villages, there is a maximumsubsidy of 40% of the total construction cost.Subsidies are also provided for developing MasterPlans and investment feasibility studies. Nosubsidies are provided for individual familylatrines; only for public facilities.

37

Box 4.3: Sub-Sovereign Borrowing

The WB HCMC Environmental Sanitation Projectincludes the divestiture of city-owned drainageenterprises and a management contract to operatethe new wastewater facilities of the project. Itmarks the first time that a city in Vietnam hasborrowed (as opposed to being allocated a grantfrom central Government) for investments inwastewater infrastructure.

The Financing Gap

Financing challenge and costs: Investment needsto meet the Vietnam MDGs in both rural andurban water and sanitation by 2020 are tentativelyestimated at $600 million annually which isroughly four times the annual investment in thelast 10 years79. Improving the efficient allocation ofpublic funds and consistent and rational use ofODA funds, while important areas by themselves,will not be adequate.

Therefore, there is clearly an issue with theappropriate method to mobilize local financing tofill in the financing gap. Moreover, given thatVietnam is likely to graduate from IDA in themedium term, financing, other than frombudgetary sources, will be at commercial or closeto commercial terms. These commercial non-concessional funds are associated with alternativeassessments of risk, i.e. less credibility withregard to the institutional and regulatoryframework for infrastructure translates directlyinto a higher cost of capital.

As part of the need to expand alternativesources of finance, particularly for waterinvestments, the government should revisitCircular #40 (May 2005). This determines on-lending terms for ODA in a manner that is likelyto reduce, rather than expand, alternativefinancing sources.

Tariffs and cost recovery: Cost recovery forwater supply and sanitation is currently

inadequate but beginning to move in the rightdirection. GoV's policy is that users shall pay thefull cost - however, it has been a challenge toenforce this policy. The real water tariffsgenerally meet O&M costs but are not sufficientto contribute to future investment needs whereaswastewater charges have only been recentlyintroduced at a nominal level.

Tariffs are set at the Provincial Level. Theindustrial and commercial tariffs are 2-3 timeshigher than the domestic one leading to theindustry seeking product substitutes by utilizingprivate wells. Tariff increases are subject to theapproval of elected PCs who are generallyreluctant to approve the levels of increaserequired. In November 2004, the MoF and theMoC issued a joint circular stipulating thecommon tariff framework for the wholecountry80, including rural areas, based on theprinciple of full cost recovery and a reasonableprofit. The MoF assumed the prime responsibilityfor enforcing the joint circular. Since then, thewater tariffs have been increased or adjustedsignificantly in most WSCs in the country,helping to improve the financial status of thewater sector and thus enable the borrowingrequired to satisfy sectoral investments.

On the wastewater side the governmentshould review Circular #67 (2003), which capswastewater fees at 10% of water tariffs. Given thatwastewater operations and investment typicallycost more than the equivalent water services,

39

V. Main Issues in Water Supply and Sanitation

79. "Towards the Vietnam Development Goals for Water Supply and Sanitation", April 200480. Joint Circular No.104/2004 of 8 November 2004 of MoF and MoC.

such constraints will further diminish thesustainability of the wastewater sector. As aminimum the wastewater tariffs should fullyrecover operations and maintenance costs, as wellas depreciation of short lived assets.

Banking and micro-finance: There are somepromising actions by the GoV to shift policy-based(or directed) lending to specialized governmentfinancial institutions and liberalize interest rates.However, the issues facing the banking sector suchas lack of credit policies, procedures andcheck/balances; lack of risk management; excessivegrowth of lending; lack of understanding ofcosts/pricing; deep corporate governance issues onmanagement and supervision, and lack of reliabledata both from the banks and from borrowers willmake commercial banks more hesitant to startlending to the water sector on commercial terms.The perceived lack of creditworthiness of the WSCsdeepens the problem. Moreover, long-term lending(15 years or more) is currently unavailable.

Despite the impressive growth and positivenew developments, the micro-credit sector inVietnam suffers from high fragmentation, lack ofregulation, lack of credit risk management andinadequate HR and management & reportingcontrol. Considering the level of subsidies inmicro-finance, this creates sustainabilityconcerns. In addition, lack of borrower'scollateral, high transaction costs and the smallsize of the loans forces the borrower to go to themuch more expensive informal sector.

Deficiencies in rural fund transfer: The WorldBank Report on Fiscal Decentralization andDelivery of Rural Services highlighted the factthat deficiencies in public administration,transparency, and participation at all levels haveled to a situation where only a small share ofdevelopment expenditure for rural areas ofVietnam is received by the beneficiaries at whomit was aimed, and the physical infrastructure

developed often does not match the beneficiaries'own priorities.

Additionally, different RWSS programs usedifferent finance mechanisms, i.e. have differentlevels and arrangements for loans and grants tohouseholds and water user groups. The MARDproposal (Annex 8) for a national credit mechanismwith subsidized loans for households through theBSP and subsidized loans to enterprises throughthe DAF could tackle the issue of the uniformapproach to rural finance.

Maturity of Sector Institutions

Government institutions: One of the challengesfacing the GoV is to review the current institutionalframework and the overlapping and conflictinginstitutional roles and responsibilities. The urbanand rural areas are overseen by separate lineministries (MoC and MARD), yet many townletsand rural areas are served by piped systems similarto urban. Moreover, the specificity and the size ofthe small towns/townlets segment calls for acustomized approach to designing the appropriatepolicies and allocating the institutionalresponsibilities. Although the responsibilities forwater vis a vis sanitation are allocated in oneministry, the GoV urban water policy is separatedfrom the urban sanitation policy. Water resources,on the other hand, are moving under the control ofthe Ministry of Natural Resources.

In rural water supplies, CERWASS has a dualrole as developer/fund manager, and serviceprovider. This results in conflicts of interestwhich isolate the provider from the genuineneeds of the beneficiary (building systems thatpeople do not want nor are willing to pay for),and develops a focus on asset creation rather thanasset operation. In the IDA funded Red RiverDelta Rural Water Supply and SanitationProject81, this conflict of interest is being

40

81. Approved by the World Bank Board in September 2005

addressed by refocusing the role of CERWASS inparticipating Provinces on policy and regulation,and creating new rural service providerorganizations. If successful this model could beexpanded across the country.

On the other hand, the current efforts forcooperation and coordination among theinstitutions is insufficient, e.g. the inter-ministerial National Standing Committee for theNational Target Program for RWSS established inJuly 2002 has only met once.

Government policies: The rural WSS is arapidly evolving sub-sector, thus the NationalRWSS strategy needs to be updated, asrecommended in the document itself. In addition,not all national partners, particularly at provincialand lower levels, have accepted its key principles:the focus on demand-responsive andparticipatory approach and community-management of shared water supply facilities82.

There is not always clear consistency betweenthe targets set in all policy documents. Inaddition, there is a lack of clear and uniformsector definitions and standards. The monitoringsystems of different agencies are overlapping,inconsistent and with varying degrees ofscientific methods being used to collect andanalyze the data83.

The bottom line is the GoV has effective Waterand Sanitation Strategies but currently lacks theadequate institutional capacity to effectivelyimplement it, particularly at rural, i.e. district andcommune, level. The donors active in VietnamWSS have also different priorities and proceduresto follow, some of which are not fully in line withthe national strategies. There is no one overallWSS plan/program showing what activities and

areas the GoV and different donors support.Urbanization and poverty: It is anticipated

that the level of urbanization in Vietnam willreach 33% by 2010 from the current 25%. Themigrants would tend to move to the existing low-income areas thus increasing the cramming onlimited lands and pressure on the alreadyinadequate infrastructure84.

The latest data85 shows that although theproportion of the $1 a day poor households fellfrom 15% to 8%, between 2000 and 2005, 53% ofthe rural households do not have access to safewater. Although the percentage of urban poorhas declined from 25% in 1993 to 3.6% in 2004(VHLSS), slums and temporary houses are still

41

82. The World Bank, WSP, Danida. VRWSIHIPP, draft inception report, March 2004; the NRWSS of 1999, and HelleStoltz, DANIDA. RWSS Sector in Vietnam: Background Note, 10 March 2004.

83. same84. The World Bank. Vietnam Urban Upgrading Project PID. April 200485. Vietnam Growth and Reduction of Poverty, Annual Progress Report of 2004-2005, November 2005

Drainage improvement in low income area

the housing means of 20% of the population in200486. To illustrate, the percentage of slumspopulation targeted by the WB Urban UpgradingProject in Can Tho City is 16%, the correspondingpercentage in Haiphong is 31%, and in Nam Dinh- 10%. The majority of urban poor live in areaswhere the infrastructure services are of limitedavailability: limited water supply, frequentfloods, lack of sewerage connections, and directdischarge into drains and lakes, the waters ofwhich is then used for bathing. The problem willinflate in the near future.

Sustainability of rural service provision: Inthe past, the focus in rural water supply has beenon asset creation with limited effort into creatingthe institutional arrangements that will lead tosustainable service provision. Paying for waterservices and maintaining funds for O&M, hasbeen insufficient. It is reported that up to 90% ofthe wells drilled under previous assistanceprograms are not operational.

The highly fragmented approach to servicedelivery, and the lack of clear institutionalmodels, leave the rural sub-sector without anyvehicle to assist the technicaloperations/management of the systems, andtheir oversight by the communes and others.Reaching out to such a large number ofowners/operators will require a new model ofcapacity building or, alternatively, the creation ofnew service providers who can operate across anumber of villages and thus obtain economies ofscale and scope. This latter approach is beingutilized in the IDA Red River Delta Rural Waterand Sanitation Project.

Sector Performance

WSCs governance and performance:International experience suggests that the

following attributes must be met in well run WSSservice providers:● The provider is autonomous and accountable,

i.e. able to make decisions, having access toresources and being held accountable for non-performance

● The provider is customer oriented, i.e.proactively informing and educating itscustomers

● The provider is market oriented, i.e.benchmarking costs and services andoutsourcing selected activities through acompetitive process, thus introducing thebenefits of competition in the otherwisemonopolistic industry

● The sector has technical and managerialcapacity both within the service provider andin the local government (as owners). The "Orientation for Urban Water Supply

Development" calls for water utilities to becomefinancially viable on the basis of costs recoveredfrom consumers and allows the private sector andcommunities to participate in the provision andfinancing of infrastructure. In practice, the WSCsrely heavily on accessing ODA for capital works,and have limited financial and business autonomy.The management capacity is weak but improving.The WSCs in the largest cities/provinces are closeto following reasonable corporate businesspractices - but many remain, effectively, sections ofProvincial Public Works Departments There are nocontractual relationships between the WSC and theprovince dealing with asset ownership (i.e. lease orlicense agreement), performance and dividendpolicy. The implementation of such contractualrelationships, however, is being considered in thenew Urban Decree being drafted at the current time(December 2005).

The benchmarking studies revealed thatVietnam's WSCs generally compare favorably

42

86. Vietnam: Growth and Reduction of Poverty - Annual Report of 2002-2003.

with those from other developing countriesexcept for the levels of NRW. It is clear howeverthat increasing existing capacity utilization andreducing costs will contribute substantially toaccelerating water systems expansion. The briefassessment of capital costs87 showed widevariations in unit costs of providing systemcapacity with a range of up to three between thehighest and lowest cost solutions. Thus, there is agood potential for improving capital efficiencyand making each million VND invested delivermore service to customers.

An issue affecting the efficiency of the coreoperations of WSCs is the construction activityas part of their portfolio of services. It divertsthe management attention away from the watersupply services (since construction ispotentially more profitable business line),reduces the available capacity to assumesewerage responsibility, creates a preferencetowards expansion strategies as opposed toimproving O&M efficiency and reducing NRW,limits the possibility for private sectorcompetition in procurement and exposes the

WSCs to higher cash flow volatility88. In thelonger term these activities could be separatedout and sold. In the meantime the companiesshould clearly separate the costs and revenuesassociated with these different businesses.

Private Sector Participation

Few incentives for private sector participation:GoV policy permits private sector participation inwater and sanitation but there are only a fewexamples of domestic entrepreneurs since theregulatory and legal environment is not yetconducive to entrepreneurs. There are very fewincentives - tariffs are fixed at levels, which barelycover costs, there is no independent regulatoryframework, tax and financial reporting systeminhibits growth and the legal position is unclear.

Private investors in urban WSS are rare.Although the private sector has stepped in therural areas, the restrictive governmentregulations tend to reduce system performance.Also, while the strategy of engaging the privatesector and user financing in high density and

lowlands rural areas has beensuccessful, it is very difficult toengage in low density, remote uplandareas. In highlands, costs of watersupply and sanitation systems can beas much as $600 per householdcompared to as little as $4 in somelowland areas89.

Only one foreign BOT watertreatment facility has been built sofar (see Annex 2). Generally, theforeign investors in Vietnam areconcerned about licensing delays,unstable GoV policy, inadequateinfrastructure, lack of transparency

43

87. Rossana Dudziak and William Kingdom. Utility Benchmarking in Vietnam, June 200388. Ian Walker, 200289. "Sharing INGO experiences in Vietnam", Workshop on RWSS, March 2004.

Haiphong Water Supply Company’s telemetry system which helpsimprove their efficiency

44

and accountability, irregular tax structure andcorruption90.

Whilst private sector investment in the sectoris low there are a number of initiatives under waythat will involve the private sector in theoperations of systems. These include pilot designbuild and lease projects in Bac Ninh andHaiphong Province, the planned contracting outof the operation of District Town systems builtunder the IDA funded Urban Water SupplyDevelopment Project, and the proposedperformance based NRW contract to reduceleakages in one part of HCMC, under the sameIDA funded project.

Ownership of new facilities: Following thelegislative lack of clarity and the mix ofinvestment source for rural water supplysystems, asset ownership issues among privateinvestors, government and community canbecome very complicated. This is an acute issuesince rural consumers typically provide 60% ofthe initial capital costs to build the systems.Despite this significant investment, theinstitutional arrangements leave the consumeroutside the system. Still, the internationalexperience has shown that only when usersbecome real owners and managers of the facilitiescan sustainability be achieved.

Generally, the issue of ownership is still notresolved in Vietnam. The private companies cannotuse land as a collateral when borrowing from a bankand can only informally rent land for theirmanufacturing and storage purposes. The new LandLaw that came into effect in August 2004 does notchange the basic premise of all citizens collectivelyowning the land but does introduce formalregulations for the real estate market.

Sanitation

Providers: The sanitation falls behind the water

provision. In most cases, the UrbanEnvironmental Companies (URENCO) are not aseparately identified profit & loss entity. Indeedthe URENCOs themselves may not be the mostappropriate service provider and wastewaterservices might best be provided by a combinedwater and wastewater company, or a stand alonewastewater company (in the largest cities). At thesame time the GoV policies on cost and price arenot consistent. For example, the call for 100%wastewater treatment in the biggest cities comestogether with caps on service charges whichwould make financing of such investmentimpossible. Moreover, the willingness to pay isuncertain. The customer base needs segmentation(at least between connected and not connectedcustomers), and education to promote demand isneeded.

Prioritizing investment: The publicinvestment to replace decaying infrastructureand to keep pace with rapid urban growth isinsufficient and the problem is aggravated by theinconsistencies between planning andpolicies/strategies of the government agencies.Although the sewerage networks have had littleinvestment over the past two decades, there hasbeen significant, and continuously growing,improvements in facilities at the household level,reflecting the high rates of economic growth . Forinstance, the high growth rates of rural on-sitesanitation already require considerableinvestment in sewerage. The overly ambitiousVDG target of treatment for all urban areas by2010 raises the questions about investmentpriorities, treatment standards and customizedsolutions.

Health and hygiene behavior: Publicawareness about environmental sanitation islimited. Despite the dramatic decline in infantmortality over the past 20 years, water-relatedinfectious diseases remain major health problems

90. Dow Jones, May 2004.

45

in Vietnam. Diarrhoea of infectious origin is theleading cause of morbidity nationwide, with 1202cases over 100,000 inhabitants in 200391.

The positive outcomes of sanitation provisionare significantly increased when beneficiaries areexposed to IEC related to hygiene behaviorchange. Such IEC also generates demand forhousehold facilities which can be provided by theprivate sector. However, there is currently much

emphasis on physical targets forconstruction of RWSS facilities andinsufficient focus on their quality andsustainability, improving the existingRWSS facilities and IEC activities. Fundsfor IEC come mainly from internationaldonors and NGOs.

Finally, improving school sanitationand hygiene is a one of the most effectiveways of spending public money. Ityields multiple benefits: improvedhealth of pupils by practicing hygienewithin schools, improved academicperformance by reducing absenteeismand encouraging female attendance.Finally children deserve the right to an

enjoyable educational experience where theylearn and practice behaviors that are likely to betaken into adulthood. The Coastal CitiesSanitation Project, due to be delivered to theBank Board in summer of 2006, specificallyincludes investments both for provision ofsanitation facilities in schools, on a demandresponsive basis, and capacity building forhygiene behavior change.

91. Annual Statistics from Ministry of Health.

Campaign to promote hygiene behaviour change

The recommendations developed in thissection fall under the following categories:

a. Bridging the financing gapb. Improving the sector efficiency and

incentivesc. Boosting sanitationd. Building capacity and addressing

knowledge gaps

A. Bridging the Financing Gap

Allocation of Public Funds and ODA

A forward-looking detailed development planfor the sector is needed where public investmentand recurrent expenditure are linked and scarceresources efficiently and effectively allocated. TheGoV resources as well as ODA funds should bedistributed based on assessment of externalities,cost of service provision, and the wealth ofrecipients - possibly using output-based aid(OBA) as a tool. Currently, the relatively wealthyurban areas receive 84% of ODA funds whereasthe rural areas, where 75% of the populationresides, enjoy only 13%.

The effectiveness of ODA over the past 10years needs to be assessed historically andsupplemented by proposals for changing the roleand approach of ODA over the next 5-10 years.Gradually, ODA should move away from waterproduction to water distribution, from watersupply to sanitation, and from fundinginvestment to leveraging local capital. The GoVneeds to take a proactive role in determining the

use of ODA funds through improved policyimplementation and coordination by the lineministries MoC and MARD.

As mentioned earlier there is also a need torevisit Circular #40 which appears to work toreduce, rather than expand, alternative sources offinancing for the sector.

Tariffs and Cost Recovery

The key to the success of the sector is higher butrealistic and affordable tariffs. Introducing andenforcing a uniform tariff mechanism for the wholecountry is step in the right direction. Whilst jointCircular # 104 (November 2004) and its predecessor(Circular #3, June 1999) both have a sound basis fortariff calculations, the issue is one of enforcement. Inthe long term the government should consider thepossibility of automatic indexation of tariffs as oneway of retaining the value of user fees in real terms,and to revisit the tariff structure proposed inCircular #104 which introduces added complexitywith little benefit.

On the wastewater side the governmentshould review Circular #67 (2003), which capswastewater fees at 10% of water tariffs. Given thatwastewater operations and investment typicallycost more than the equivalent water services,such constraints will further diminish thesustainability of the wastewater sector. As aminimum the wastewater tariffs should fullyrecover operations and maintenance costs, as wellas depreciation of short lived assets.

Currently, tariff affordability and willingnessto connect do not seem to be an issue in watersupply in Vietnam.

47

VI. The Way Forward in Water Supply and Sanitation

48

A New Financing Framework for UrbanUtilities

As the creditworthiness of the sector improves,access to longer term local financing will becomeimportant. The existing lending and riskmitigation instruments of IFIs can support localcapital market development. A stagedprogression could be envisaged over the next 10years from current reliance on ODA, throughmixed financing, to a sector built on local capitalmarkets.

The state banks can play a more significantrole in the financing of water infrastructure byparticipating as lenders rather than servicingagents to WSCs, thus assuming the full credit riskfor a fee. However, they need to strengthen muchmore their commercial orientation, operationalpractices, profitability, balance sheet quality andloan appraisal capabilities92 in order to startlending to utilities or channel funds directly tocommunities.

Besides raising counterpart funding for ODAwater investments, the provincial governmentscould participate as guarantors on loans extendedto WSCs by the SOBs. This added security onloans provided by state banks not only reducesthe ultimate cost of funds to WSCs, andconsumers, but would better structure incentivesfor cost recovery and more cost-effective service.

The issuing of bonds by WSCs wouldencourage fiscal prudence in an otherwiseunregulated sector. The WSCs could be preparedfor such opportunities through improvedfinancial accounting rules, auditing,benchmarking, and the development of a ratingsystem.

Given the continuing high level of central

government involvement in local infrastructureprojects and the immature financial sector, it islikely that a financial intermediary for localinfrastructure projects will be needed in thefuture. The key issue is how it will be operatedand how the sub-sovereign securities market willbe built. The IDA funded Urban Water SupplyDevelopment Project includes a new unit withinDAF dealing with lending to water utilities on acommercial basis, which will recover its operatingexpenditure through the interest rate spread.

A proposed financing framework developedby Baietti93 (Annex 9) is based both on full costrecovery as a key to sustainability as well as oneffective corporate governance defining the roles,responsibilities and incentive structure for everyWSS stakeholder. Its ultimate target is sustainablefinancing of new investment and introducingprivate sector participation.

Small Towns and Rural Areas

As evident from the discussion above, the newfinancing mechanism relies on mobilizing localcurrency borrowing by WSCs. By contrast, insmall towns and rural areas, the consumers takeon local currency debt from micro financeinstitutions to finance small scale infrastructuredirectly. Since customers pay for the servicethrough their own debt obligations, this type ofborrowing is much more interested in efficienciesand sustainability of services and should beactively supported by the GoV including withpossible allocation of grants.

More precisely, a coherent workable financemechanism needs to be implemented based onthe review of the existing financing models. TheMARD proposal94 for a national creditmechanism with subsidized loans for households

92. The WB and IMF. Vietnam Poverty Reduction Strategy Paper Progress Report & Joint Staff Assessment, 200493. Based on Aldo Baietti. Financing framework for urban water utilities in Vietnam, July 200294. See Annex 7.

through the BSP and subsidized loans toenterprises through the DAF could tackle theissue of rural WSS finance.

B. Improved Efficiency andIncentives

Rationalizing Sector Institutions

Legal framework: The consistency andenforceability of the legal framework as well asthe speed of implementation of the sectorstrategies need improvement.

For example, a new legal frameworksupporting the National RWSS Strategy isnecessary, e.g. a legislation allowing communitywater user groups to take loans and open bankaccounts. In small towns, an appropriateregulatory framework on investment in small-scale projects for both authorities andcommunities to follow is required in order todecentralize investment decision-making thusavoiding the confusion of responsibilitiesbetween investor and investment implementingagency and simplify the project preparation95.

Policy coordination: A coordination andintegration of rural and urban water supplyprograms needs to be ensured together with thenational programs on flood and environmentalprotection as well as poverty alleviationprograms. The emphasis should be on use,sustainability and impact rather than investmentalone. Roles and responsibilities of sectorinstitutions need to be mapped and clarified -with complimentary approaches being adoptedby donors. In addition the small towns/townletssegment requires a customized policy andspecific institutional responsibilities.

Any sector policy will have to be all-inclusiveand a consideration may be given to establishing

a single body governing and monitoring waterand sanitation services in urban and rural areas.

Targeted poverty interventions: With therapid urbanization, the GoV should decide onthe focus of poverty interventions. Clearly, thereis a need for a careful analysis to establish theurban and rural priorities, although the existingstronger community support in the rural areaswould suggest that interventions in peri-urbanareas would have a greater poverty impact.Output based aid should be considered as amechanism for the use of grant financing forpoverty interventions.

Improving WSCs Accountability, Autonomyand Incentives

A broad strategy will be required which willbuild on the following three components:● More widespread knowledge about the top

performing water companies andbenchmark capital and operating costs

● Capacity building among sectorprofessionals on ways to reduce capital costsand improve operating efficiencies withoutsacrificing quality

● Policies must be put in place to provideincentives to water companies to achievehigher levels of performanceThe first two bullet points are discussed later.

Provision of incentives to water companiesrequires a strict evaluation of performance andthe need for meaningful rewards and sanctionswhich affect both the service provider and theirowners.

As a first step performance contracts can beprepared between the PPC and the serviceprovider. A central agency could review andadvise on these contracts to help reduce thepotential for conflicts of interest at the Provinciallevel. Establishing clear contractualrelationships will provide both the PC and the

49

95. WSP. Global initiative for small town WSS, October 2001.

WSC with incentives to be flexible andresponsive to the changing businessenvironment and increasing demand. Anenforceable agreement will resolve the issueswith WSC asset ownership so that the collateralelement in securing finance is cleared. MoCshould consider an appropriate framework thatprovides WSCs with the correct incentives, andpenalties, so that the sector can grow in asustainable fashion. (See Box 6.1)

Further reform would include transforming theWSC into a Public Water PLC with themunicipality a single shareholder. This willimprove the long term viability of the companyand facilitate any future, broader, equitizationprocess.

Regulation: Regulation in its different formsensures the increased autonomy andaccountability of WSCs. The MoF has issued in2004 the new decree introducing a uniform tariffmechanism for Vietnam based on the full costrecovery principle. In late 2005 the MoC has beendeveloping a new urban water decree that mightinclude the introduction of performancecontracts between the PCs and the WSCs.

However, the enforceability, management andmonitoring of the current and proposed decreesposes genuine questions of conflict of interest atthe Province level (as both tariff setter and ownerof the WSC). Thus some form of oversightagency (nascent regulator) may be needed at thenational level to review thesecontracts/proposed tariffs. As a minimum suchan agency could provide advice/guidance to thePC on the design of the contract, and on relativeperformance assessments of the WSCs, even if itdoesn't have a formal enforcement role.

Increasing competition: Public reporting of theperformance of WSCs could be a promising start toimproving transparency and accountability. At amarginal cost, the benchmarking initiative startedin 2002 with the assistance of VWSA can beimproved and formalized so that data is used bythe provincial governments, the regulator (whenestablished), the WSCs and the potential privateinvestors for cross-sectoral comparison. Theexisting benchmarking initiative continues andnow has funding from the IDA Urban WaterSupply Development Project.

Increasing customer orientation: Improvedcustomer service standards enshrined in acustomer charter could provide the basis for thisorientation. The annual benchmarking datacould be supplemented by publishing a range ofstandard performance indicators. This wouldensure both greater customer orientation andimproved quality of information.

Focusing on the core business. Within thenext ten years WSCs should divest theirconstruction and other services from the waterbusiness. This will provide the basis for thedevelopment of a competitive market forconstruction services, reduce the opportunityfor hidden cross subsidies between thedifferent businesses, and allow themanagement of the water company to focus ontheir core business96.

50

Box 6.1: Incentivizing WSCs by introducingcompetition for rewards for good performance

■ Competition against a set target where theorganization is rewarded upon the achievement ofthe target■ Competition among peers where betterperforming companies are rewarded.■ Competition to improve performance, where(incremental) improvement is rewarded■ Competition for the market. In case of pooroperational performance by the existing WSCs, theProvincial PC may opt to competitively bid un-served district towns for new water supply service.■ Competition for ODA finance - donors shouldbe encouraged to introduce more performancebased lending

96. Ian Walker, 2002

Private Sector Development and Models forService Provision

Private sector in urban areas: The successfulreform and improved performance of WSCs willindicate the readiness of the sector for marketentry of both international players and localprivate providers. The short-term priorityshould be on network management, andfocused services (e.g. pump stationmaintenance) where a combination ofcompetition and collaboration between the localWSCs and the private sector through openbidding for service contracts (e.g. NRWperformance based management in HCMC)could be considered.

Management models small towns and rural:In small towns and rural areas it is expected thatcontracting out operations for extended periodswill be the most sustainable approach in theshort term. This is the approach planned for therecently approved World Bank Urban WaterSupply Development Project and Red RiverDelta Rural Water Supply and SanitationProject.

C. Boosting Sanitation

Urban sanitation

Establishing a profit & loss entity for theprovision of sanitation services, with a definedcustomer and revenue base, is the immediatestep in sanitation reform. This can becomplemented by increasing cost efficiency byselective outsourcing to the private sector.Merging the wastewater activities into thebusiness of the urban WSC will take advantageof operating and administrative synergies andshould be considered in all but the largest citieswhere a separate wastewater company may beappropriate.

Considering the limited resources, step-by-

step improvements in urban sanitation aremore appropriate than building up expensivewastewater treatment plants and extensiveseparate collection systems. Evaluating andprioritizing capital expenditures in the sectorwill be important as a major factor inhibitingsanitation progress has been the scale ofwastewater projects and their high sunk costs.For example the use of combined versusseparate systems needs to be carefullyweighed in order to achieve maximum benefitfrom each VND invested. Expansion of pipednetworks to less dense areas needs to becarefully considered, alongside the extent oftreatment and the capacity of wastewaterplant. These technical decisions have asignificant impact on the pace at whichappropriate sanitation services can beprovided.

Successful and sustainable urban sanitationimprovement programs have generally relied onextensive user involvement in planning, choiceof service levels, scale of investments, chargesand cost recovery structures. The urban facilitiesshould be installed after consultation with usersand should ensure the optimum benefitstogether with the resources for on going O&M.

51

Waste Water Treatment Plant for Danang

More Effective Sanitation ProjectManagement in Rural Areas

Market research is essential to understand whatintervention strategies will work and besustainable. The GoV should make use of thefindings from many countries which found thatsuccessful sanitation programs require lesseducational and more promotional approachesto find out what motivational forces work forlocal populations in bringing about behavioralchange97. Demand for sanitation needsstimulation as any new product introduction tothe market. Until the perceived benefits equal orexceed perceived costs, change in hygienebehavior is unlikely.

The provinces, districts and communes couldbe ranked and projects prioritized based onpoverty, existing WS coverage, water-relateddiseases, population density, and existingcapacity of local government agencies tosupport project activities. The utilization of aclustering approach would optimizemanagement costs and achieve high coveragewithin selected districts rather than spreadingproject activities out over too manydistricts/provinces98.

The GoV needs to focus on financial viabilityas important criteria for scheme selection, suchas ensuring scheme-specific and cost-basedtariffs, willingness-to-charge and ability tocollect adequate revenues, in addition towillingness and ability to pay. Developing localcapacity to supply skills and materials neededfor existing and future needs will ensuresustainability. The type of latrine offered has tobe compatible with the physical, economic andsocial reality of the household. Offering a rangeof options with upgrade possibility and range of

financing arrangements may help stimulate andsustain demand and usage.

Raising public awareness and education onthe linkages between sanitation and healthwould support the success of interventions.Since water supply itself is insufficient todramatically reduce diarrhea disease, sanitationand hygiene behavior change needs muchgreater emphasis in all areas. A very importantinitiative is the active promotion of handwashing.

The interventions need to build on theconsiderable knowledge and educationalmaterials prepared so far. The effective processmonitoring, self-assessments, and othermethods would support learning anddissemination of best practices99. The measureof success should not only be the coverage(ownership) of sanitation facilities but also theaccess, use and upgrade of the facilities, changesin hygiene behavior and self-sustained demandfor more facilities.

D. Building Capacity and Knowledge

Incentivizing the service providers andoversight agencies will only be successfulprovided there is adequate capacity amongthem. Building capacity on a sound foundationalso calls for improved data about the sector.

Addressing Knowledge Gaps

Compilation and analysis of sector information:Government needs to be more active incompiling and analyzing sector data. Thisinformation will allow for better and moreinformed decision making on sector policy, onallocation of scarce ODA resources, and inoversight of the sector as a whole. This will be

52

97. WSP 2002 Study98. The World Bank, PAD Red River Delta RWSP, August 15, 200599. The World Bank, WSP, Danida. VRWSIHIP, draft inception report, March 2004

53

particularly relevant if some centralresponsibility is allocated to review contractsand tariffs at the provincial level under currentlydrafted or existing decrees.

Sanitation: A sanitation study is required toreview the sub-sector and to develop and keepupdated comprehensive and reliable data. Themapping of access, providers and institutionalresponsibilities will allow better planning andresource allocation. The dissemination of bestpractices in rural and small towns sanitation willensure sustained growth in access and hygienebehavior.

Review of institutional options for urban andrural water sectors: As the water sector developsthere will be a need to study sectordevelopments including critically assessing theissues of asset ownership, increasing separationof roles within the sector (policy, sectorregulation, ownership, corporate oversight andservice provision), providing and aligningincentives, and the role of regulation. Thesereviews would include an assessment of thevarious service models in the country.

Building Capacity

The GoV should increase the use of the nationalrather than international expertise and buildlocal capacity to ensure sustainability. The focusshould be on identifying and resolving thecapacity bottlenecks amongst the variousstakeholders. Improved sector monitoring willalso help learning and knowledge managementand ensure the adaptability of approaches.

Government: The line ministries need tobuild their oversight and policy developmentskills through improved collection and analysisof data. This will facilitate the efficient allocationof resources and the expansion of the WSSservices to better meet the needs of the country.

Institutions: Training in introducing and

maintaining commercial relationships, andeffective corporate governance and oversightwill largely benefit the city, provincial anddistrict PCs in their interactions with WSCs. ThePCs, as owners, need to improve theirunderstanding of the opportunities for sectordevelopment and how they can benefit. No suchcapacity building facility exists and nationalagencies will have to take a lead to fill this gap.

Providers: The VWSA (or appropriatetechnical institutions) should play a bigger rolein building technical and managerial capacityin service providers. As a first step acoordinated action to reduce NRW, andimprove energy efficiency, would have mostbeneficial results. Training programs on anational scale targeting small-scale providersneed to be carried out as well in order toenhance their management and financialcapability, and capacity for quality control,contract and contractor management. It alsomakes little sense to assign communitiesresponsibility for O&M if they do not have theknowledge, skills, motivation and finances todo it. Dramatic improvements in communitycapacity and capability are needed to ensuresustainability of project investments. Thesmall-scale IEC projects of both local andinternational NGOs could address the on-sitetraining of local masons. Examples mightinclude the development of a technicalbackstopping facility for rural systems and theintroduction of a certification system foroperators.

Civil society: The civil society and consumerpower groups require capacity building as amajor stakeholder naturally able to exercisesubstantial pressure on the PCs and WSCs inimproving the service provided to theconsumers. The organized civil society is key tobuilding political and public awareness andcommitment and giving voice to consumers.

55

Annex 1: Laws and Regulations in Vietnam Waterand Sanitation Sector

No. Date and number Issuing institution Short description

1 Decree No.179/1999/ND-CP of 30 December 1999 - Water Resource Law

Prime Minister Implementation of Water Resource Law with the primary purpose of establishing the policies in water resources management, rights and obligations of the institutions and users, includinsystem for water licensing and wastewater discharge permits

2 Decision No.63/1998/QD-TTg of 18 March 1998

Prime Minister Orientation for Urban Water Supply Developmeto 2020

3 Circular No.40/1998/CT-TTg of 14 December 1998

Prime Minister On Strengthening Urban Water Supply Development and Management

4 Decision 35/1999/QD-TTg of 5 March 1999

Prime Minister Orientation in Developing Urban Drainage in Vietnam to 2020

5 Directive No.04/2004/CT-TTg of 20 January 2004

Prime Minister Improvement of Management over Clean WaterSupply and Consumption

6 Law on Environmental Protection of 1993

Prime Minister DOSTE and NEA are the responsible institution fenvironmental protection. Requires EIA report fonew activities/project be submitted to NEA.

7 Decision 256/2003/QD/TTg of December 2003

Prime Minister and the Ministry of Natural Resources and Environment

2010 Environmental Strategy

8 Decree No.67/20032/ND-CP of 13 June 2003

Prime Minister Environmental protection charges for waste wate

9 Decision No. 104/2000/QD-TTg of 25 August 2000

Prime Minister National Strategy on RWSS up to 2020

10 Decision No. 604 of 5 March 2003

Minister of Agriculture and Rural Development

Assigns CERWASS to be the Standing Office for the National TargeProgram on RWSS

11 Decision No.122/2003/QD-BNN of 10 November 2003

Minister of Agriculture and Rural Development

CERWASS roles, functions, authority and organizational structure

12 Decision No.99/2002/QD-TTg of 23 July 2002

Prime Minister Establishment of National Standing Committee oRWSS

13 Decree No. 237 of 5 December 1998

Prime Minister Approves the National Target Program for RuralClean Water Supply and Environmental Hygieneuntil 2005 thus making rural access to safe watesupply and improved sanitation a national priori

14 No.6119/CPCP-KG of 9 December 2003

Office of the Government

Review of the implementation of the National Target Program on RWSS

15 Draft Statue Statue of Standing Committee of National TargeProgram on RWSS

56

No. Date and number Issuing institution Short description

16 The inter-ministerial circular No 66/2003 / TTLT/ BTC-NN&PTNT of the dated 3/7/2003 (replaced circular 103/1999/ TTLT/ BTC-NN&PTNT)

Ministry of Finance and Ministry of Agriculture and Rural Development

Instruction on management, funding, and disbursement for the National Target Program (NTP) on RWSS

17 Decree No.29/1998/ND-CP Prime Minister Regulations on the exercise of democracy in communities

18 Circular No.03/1999 of 6 June 1999

Ministry of Construction

Guidelines on pricing and authorization to set clean water consumption tariffs in urban and residential areas and industrial zones. Local governments must increase tariffs to fully recover costs

19 Joint Circular No.104/2004/TTLT-BTC-BXD of 8 November 2004

Ministry of Finance and Ministry of Construction

Principles, methods and responsibilities for setting & control of clean water consumption tariffs in urban areas, industrial zones and rural population clusters

20 Surface water quality standard TCVN 5942-1995

Ministry of Science, Technology and Environment

Specifies parameters and their maximum allowable concentrations in surface water

21 Coastal water quality standard TCVN 5943-1995

Ministry of Science, Technology and Environment

Specifies parameters and their maximum allowable concentrations in coastal water

22 Industrial wastewater standard TCVN 5945-1995

Ministry of Science, Technology and Environment

Specifies parameters and their maximum allowable concentrations in industrial wastewater before being discharged into a water body

23 Urban effluents standard TCXD 188-1996

Ministry of Construction

Specifies parameters and their maximum allowable concentrations in the urban effluent

24 Ground water quality standard TCVN 5944-1995

Ministry of Science, Technology and Environment

Specifies parameters and their maximum allowable concentrations in ground water

25 Standard No.1329/2002/BYT/QD

Ministry of Health Drinking water quality standards

26 Standard TCVN 6772-2000 Ministry of Science, Technology and Environment

Domestic wastewater standards

27 Decree No.17/2001/N§-CP of 4 May 2001

Prime Minister Issuance of Regulation on the Management and Utilization of Official Development Assistance with WSS stipulated as a priority sector for ODA loans. The decree outlines the principles to handle ODA projects from initial stages such as biding and negotiations to the implementation and completion stages.

57

No. Date and number Issuing institution Short description

28 Circular No.06/2001/TT-BKH of 20 September 2001

MPI Provides guidance on the implementation of Decree No.17 above

29 Circular No.108/2003/TT-BTC of 7 November 2003

Minister of Finance

The financial mechanism applicable to environmental sanitation projects funded with Official Development Assistance (ODA) capital sources

30 Circular of 28 February 1994 Guiding Implementation of the Regulations on Investment in the Form of Build-Own-Operate-Transfer Contracts

31 Decree No.56/CP of 2 October 1996

Refers to public service state-owned enterprises and states that water service provision is the responsibility of provincial or municipal WSCs

32 Decision No.72/2001 ND-CP of 5 October 2001

Prime Minister Classification of urban areas

33 Circular No. 40/2005/TT-BTC 25 May, 2005

Minister of Finance

Financial mechanism applicable to clean water supply projects funded by ODA

58

In order to attract FDI in large infrastructureprojects, the GoV issued regulations governingBOT contracts by amending the foreigninvestment law in 1992. Under the theseregulations, a project may be undertaken with100% foreign-owned capital or as a JV withforeign-owned and Vietnamese capital after acompetitive tender or direct negotiations. So far,the preference has been towards directlynegotiated BOT contracts in a JV with a state-owned enterprise. Tax and other strongincentives exist to enter into a JV with SOEs,whose equity contribution is typically in theform of land. The BOT regulations haveprocedures for dealing with disputes includinginternational arbitration.

In 1994, the first water supply BOT wasawarded by the HCMC PC to the Malaysian firmBinh An Water Corporation. Under the agreement,the Binh Anh water treatment plant was supplying

water to the HCMC WSC at the rate of 100,000m3/day for a flat take-or-pay charge ofUS$0.3/m3 under (data of 2001). The second phasewas licensed in 1999 but never started. In August2004, the HCMC WSC took over the second phaseafter the City has agreed to compensate theMalaysian investor with $4 million.

Another BOT project for the construction ofthe Thu Duc No.2 water treatment plant with acapacity of 300,000 m3/day was licensed toLyonnaise Vietnam Water Company in 1997and projected to go operational in 2003.However, LVWC withdrew in February 2003.After the transfer of the assets, the CentralGovernment allowed the city to carry out theproject under the build-operate-own contractand invite tenders to build the facility. InAugust 2004, a local Vietnamese consortium ledby HCMC Infrastructure Investment Joint StockCompany won the tender.

Annex 2: BOT Projects and FDI

59

In the southern province of Tien Giang,65% of the 1.6 million population isalready being served by non-state watercompanies, mostly through schemesdeveloped since the mid to late 90s. Thenon-state providers in Tien Gianginclude initially unregulatedindividually invested utilities generallyfinanced using borrowed capital;cooperative invested and managedsystems; and informal user-groupsystems backed by commune levelgovernment, where the capital is raisedup-front by 'investing' users (see FigureA3.1 and Figure A3.2).

There is an obvious issue about theregulation of such providers. In 1998,the Tien Giang Provincial Governmentissued a decree to govern the RWSsector. This stipulates investment /operating mechanisms, and whichprovincial level authorities regulatepricing, drilling, and water quality. Italso specifies that private investors canno longer raise investment capital fromtheir target consumer base. However, someprivate investors continue to raise capitalfrom users, but provide a reduced water tariff

until such time as the user 'investment' isrepaid - a good strategy considering the largeup-front investments, and relatively lowOPEX.

Annex 3: WSS Providers: Successful Alternative Provision

60

The original drainage and sewerage system inHCMC, which was planned as a combinedsystem, has been constructed by the Frenchgovernment in 1870s and improved by the US in1960s. The facilities, however, has beendesigned for a population of 1.5m and currentlyHCMC is 5.5m. The domestic and industrialwastewater is discharged without anytreatment in the rivers and lakes.

As a result, the BOD of Saigon River inHCMC of 16 mg/l in 1997 was 4 times higherthan the maximum allowed by the VietnameseStandards. There is a high heavy metalconcentration in the HCMC canals. Not only thequality of the rivers and canals is affected by theuntreated wastewater but also there is anincreasing trend of waterborne diseases such asdiarrhea and dysentery. Most of the privateseptic tank treatment companies are dumpingtheir collected untreated sludge into the waterbodies. The national sludge-dumping site inBihn Chanh has not been constructed in the dueway to prevent infiltration into the soil beneathcausing an adverse environmental impact.

The existing sewerage system in HCMC ismaintained by the Urban Drainage Company(UDC) and the state-owned district PCs'enterprises maintain shallow sewers of thesmallest grade. The basic level sludgetreatment is carried out by a private companythat does not collect any fee but recovers itsOPEX by selling the compost. The UDCmaintains the drainage canals and sewersystem and until recently was in practice a citycost center without any tariff collection orlong-term asset ownership (data as of 1999).The Water Supply and Electricity Companywas the owner of all assets excluding land andcollected the service fees. The seweragesurcharge was introduced to water bills onlyrecently and represents an exception ratherthan a rule.

In October 2003, Hanoi Department ofTransportation and Public Works commencedthe construction of the first 2 wastewatertreatment plants servicing a total of 25,000people financed by JBIC of Yen 1.067 billion andVND 10.440 billion (VWSA and IWA, 2004).

Annex 4: Sanitation in HCMC

61

Annex 5: Investment in WSS

Table A5.1: Investments in Urban Water Supply and Sanitation, Past 10 Years

Total investment, USD Regions

No. of pr ojects Total funding Government reci procal

capital International donors

Red River Delta 16 258,536,500 45,975,000 212,561,0Eastern North 14 163,549,000 31,421,000 132,128,0Western North 3 12,737,000 2,122,000 10,615,0North Central 9 38,650,000 7,177,000 31,473,0South Central 10 105,209,000 12,872,000 92,377,0Central Highlands 3 33,175,000 5,899,000 27,276,0Eastern South 13 233,128,000 30,599,000 202,529,0Mekong River Delta 10 66,336,000 6,031,000 60,305,0Other projects in provincial capitals 92,000,000 69,000,000 23,000,0Total 78 1,003,320,500 165,096,500 838,224,0

Source: World Bank (2003). Participatory assessment of urban water supply and sanitation projects in Vietnam

Table A5.2: Investments in Rural Water Supply and Sanitation, 1999-2002

Popula ttion

Total i nnvest --ment

Government bbudgets

Other budgets Foreign ddonors

Users

(1,000) VND billion Total 59,799 3,160 600 700 400 1,460 Ministries 55 55 Provinces 59,799 3,105 545 700 400 1,460 Regional Distribution: Eastern & Western North 9,555 552 189 157 110 95 Red River Delta 14,427 607 74 156 18 359 North Central 9,143 332 63 38 55 176 South Central 6,001 301 74 36 31 160 Central Highlands 2,532 446 32 48 30 36 South Eastern 5,202 432 30 105 7 290 Mekong River Delta 12,939 735 83 160 148 344 Relative distribution 100% 19% 22% 13% 46%

Source: National Target Program, MARD, 2002.

62

Annex 6. Access and Affordability of WaterSupply Services

Table A6.1: Access to Clean Water in Rural Areas

By 2003 Rate of increase in

2003 By the end 2003 No. Location

Rural population by

2003 Capita % Capita % Capita %

Total 63.958.400 31.838.000 50 2.816.000 4 34.654.000 54 1 Northern

mountainous areas 9.874.400 4.367.000 44 570.000 4 4.937.000 49

2 Red River delta 14.743.500 7.819.000 53 570.000 4 8.489.000 57 3 Central north 9.420.000 4.539.000 48 366.000 4 4.905.000 52 4 Central area 6.852.100 3.162.000 46 264.000 3 3.426.000 50 5 Toy Nguyn 3.048.000 1.192.000 39 172.000 4 1.364.000 45 6 South East area 4.806.600 2.769.000 58 144.000 5 2.913.000 61 7 Cuu Long river

delta 15.213.800 7.990.000 53 730.000 5 8.720.000 58

Source: MARD National Target Program on RWSS. Workplan 2004. Socialist Republic of Vietnam

Table A6.2: Access and Out-of-pocket Costs of Drinking Water in 20021

Access, % Clean wwater

Hygienic llatrines

Average expenditure on water, pper paying household

Rural 39.6 11.5

Households ppaying for water

% Thousand VND Expenditure

Urban 76.3 68.3 Rural Urban Rural Urban %

Poorest 22.7 2.0 2.0 17.9 115 170 2.8

Near poorest 35.4 5.0 3.6 14.3 159 245 2.7

Middle 42.7 10.7 5.7 27.9 171 282 2.2

Near richest 54.0 28.4 10.2 51.7 233 301 1.8

Richest 78.8 69.9 19.1 68.9 300 446 1.3

Vietnam 48.5 25.3

6.8 56.3 225 402 1.4 Source: Vietnam Development Report, 2004 (1US$ = 15,500 VND in Nov 2003)

1. Vietnam Development Report, 2004. Poverty

63

64

The operating cost benchmarking report of 2003evaluates the efficiency savings based on the2002 study of 67 water supply companies in 3different scenarios and estimates the followingresults:

Scenarios 2&3 have longer payback periodsand would need additional financing in the

form of grants or tariff increase. The financialgains from NRW reduction increases from $3.5million in Scenario 1 to over $18 million inScenario 2 when the water is sold proving thatin infant industries, NRW is worthsignificantly more in sales than inenergy/chemicals savings.

Annex 7: Urban Water Utilities Operating CostSavings

1. Rossana Dudziak and William Kingdom. Utility Benchmarking in Vietnam, June 2003

SCENARIO 1: Costs and Benefits - Reduced Operating Costs OnlyTotal Cost Savings 7,653,752$Total cost of Efficiency savings 40,751,215$Break Even Period 7.22 yearsDebt Servicing - Max Loan Principal 46,186,170$

SCENARIO 2: Costs and Benefits - Including Sale of Former NRWTotal Cost Savings and Revenue Gains 22,296,686$Total costs (Efficiency+Network Expansion for NRW) 199,988,354$Break Even Period 16.42 yearsDebt Servicing - Max Loan Principal 134,548,196$

SCENARIO 3: Costs and Benefits - Including Maximizing Prod CapacityCost Savings and Revenue Gains 27,095,128$Total costs (Effici+Network Expan NRW & Spare Cap) 461,468,360$Break Even Period >25 yearsDebt Servicing - Max Loan principal 164,182,209$

65

The Prime Minister's Decision number62/2004/QD-TTG dated April 16, 2004 on"Credit Mechanism for RWSS" to provide softloans for rural households and economicorganizations to invest in RWSS facilities.According to the Decision every ruralhousehold can borrow soft loans up to VND4.0 millions, without collateral from theSocial Policy Bank to improve theirhousehold water supply and sanitationfacilities. It is estimated that the credit needfor RWSS for 2004-2010 is approximatelyVND 6,373 billion, out of which VND 500billion is for 2004-05.

The State Budget (including the allocated

ODA) takes 50% of the total investment capitalfor construction of facilities and the mobilizedresources from DAF and VBSP ensures theremaining 50%.

The suggested terms of the loan are:maturity 5 years, interest rate 3%, 2 years graceperiod and amount caped at 80% ofconstruction costs.

The planning and coordination is performedby MARD whereas the implementation isallocated to the Steering Committee on NTP ofRWSS together with DAF and SPB. Theimplementation will start with 10 pilotprovinces until 2005, followed by a nation-widecoverage by 2010.

Annex 8: New Developments in RWSS Micro-credit

66

Annex 9: Realistic Framework for WaterInvestments

System Design & Planning

Supply driven with substantial national oversight

Demand driven, with community consultations on affordability and willingness to pay.

Delegation to local level with community consultations.

CAPEX Risk

Government/SOE assume responsibility with the construction of systems

Construction should be competitively contracted to private firms

Private firms and SOEs could compete for bids.

Operation & Commercial Risk

Little accountability for operating performance as too many parties made decision that affects the viability of the utility. As such, responsibility is diffused.

Ultimately operations can be transferred to private firms where they take on the full commercial risk of the operation under a defined regulated environment.

WSC need to have full autonomy in operational and commercial activities. This requires a clear incentive/penalty framework which will apply equally to all service providers whether public or private.

Equity Financing Most equity for utilities is sourced from the national governments and from donor grants without the expectation of generating a return on these contributions

With an entirely private system, equity would be sourced from private sponsors with the expectation of a return

Local governments should be main sources of equity financing. The National government and donors should continue support. A return should be expected and retained to leverage new investments financing.

Subsidies

Most households subsidized by commercial and industrial consumers. Provided generally through budget transfers to WSCs.

User should pay for their fair share of the full cost of services.

Specific and targeted subsidies to poor communities and some level of cross subsidies among consumer classes.

Sources of Debt Financing

Mostly through public sources and donor on-lending

Private finance markets Through public sources and donor on-lending

FX Risks Ministry of Finance will typically absorb the FX risk but without a proper pricing methodology

Ideally some type of hedge facility would be best option for taking cross currency risk.

MOF is in the best position to take up FX risks, but with proper pricing and management

On-Lending Vehicle

Direct sub-loans to WSCs from MOF

Private Banks should be taking up the credit risks

State Banks can begin to take up credit risks

Table A9.1: Elements of a Realistic Framework for Water Investments in Vietnam

67

On-Lending Vehicle

Direct sub-loans to WSCs from MOF

Private Banks should be taking up the credit risks

State Banks can begin to take up credit risks

Debt -Service Responsibility

Currently, the WSC is responsible for debt service. However, it is unclear what happens in case of default.

The private utility WSC with the guarantee from the local municipality

Debt Pricing Subsidized Market-Based Mark-up or cost based Pricing

Tenor of Debt If sourced through private channels it is usually short term, typically less than 5 years.

Development of capital markets such that access to long term debt financing can be secured

Leverage ODA long-term financing for as much as 20 years. Make most use of equity from private sponsors.