Document of The World Bank

For Official Use Only

Report No: 3 1023 VN

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 67.8 MILLION (USD 105 MILLION EQUIVALENT)

TO THE

SOCIALIST REPUBLIC OF VIETNAM

FOR THE

SECOND PAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

February 8,2005

Poverty Reduction and Economic Management Unit East Asia and Pacific Regional Office

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. I t s contents may not otherwise be disclosed without World I Bank authorization.

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CURRENCY EQUIVALENTS

(Exchange Rate Effective January 6, 2005)

BIDV BTA CAS CBS C B CPRGS IBPS IncomB ank ITDB JSB M C B MIS MOF NPSC PHRD PTU P M U PPC PSBM SBV SOCB SOE VBARD VND WTO

Currency Unit = Vietnamese Dong 1 VND = US$0.00006

US$ 1.00 = VND 15,780.00

FISCAL YEAR January 1 - December 31

ABBREVIATIONS AND ACRONYMS

Bank for Investment and Development o f Vietnam Bilateral Trade Agreement Country Assistance Strategy Core Banking Solutions Commercial Banks Comprehensive Poverty Reduction and Growth Strategy Inter-Bank Payment System Industrial and Commercial Bank o f Vietnam Informatics Technology Department o f SBV Joint-stock Commercial Bank Vietnam Marit ime Joint Stock Commercial Bank Management Information System Ministry o f Finance National Payment System Center Policy and Human Resources Development Project Implementation Unit Project Management Unit Payment Processing Center Payment System and Bank Modernization Project State Bank o f Vietnam State Owned Commercial Banks State Owned Enterprise Vietnam Bank for Agriculture and Rural Development Vietnamese Dong World Trade Organization

Vice President: Jemal-ud-din Kassum (EAPVP) Country ManagedDirector: Klaus Rohland (EACVF)

Chief Economist and Sector Director Sector Manager:

Task Team Leader:

H o m i Kharas (EASPR) Khal id A. Mirza (EASFP) Xiaofeng Hua (EASFP)

FOR 0IWICLA.L USE ONLY Vietnam: Second Payment System and Bank Modernization Project

CONTENTS

Page

STRATEGIC CONTEXT AND RATIONALE ................................................................. 1

1 . Country and sector issues .................................................................................................... 1

2 Rationale for Bank involvement 3 3 . Higher level objectives to which the project contributes .................................................... 3

A .

. .........................................................................................

B . PROJECT DESCRIPTION ................................................................................................. 4

1 . T_.endinc +.+ament ..................................................................................................... 4

Project development objective and key indicators .............................................................. 4

Project components ............................................................................................................. 4

Lessons learned and reflected in the project design ............................................................ 6

Alternatives considered and reasons for rejection .............................................................. 7

. ............................................................................................. 2 Program objective and phases 4

3 . 4 . 5 . 6 .

C . IMPLEMENTATION .......................................................................................................... 8 1 . 2 .

3 . 4 . Sustainability ..................................................................................................................... 10

5 . Critical risks and possible controversial aspects ............................................................... I O

6 . Loadcredit conditions and covenants ............................................................................... 12

Partnership arrangements .................................................................................................... 8

Institutional and implementation arrangements .................................................................. 8

Monitoring and evaluation o f outcomesiresults .................................................................. 9 . . .

D . APPR4ISAL SUMMARY ................................................................................................. 13

1 . Economic and financial analysis ....................................................................................... 13

2 . Technical ........................................................................................................................... 13

3 . Fiduciary ........................................................................................................................... 14

4 . Social ................................................................................................................................. 15

5 . Environment ...................................................................................................................... 15

6 . Safeguard policies ............................................................................................................. 15

7 . Policy exceptions and readiness ........................................................................................ 15

Annex 1: Country and Sector or Program Background ......................................................... 16

r

Th is document has a restr icted d is t r ibut ion and may be used by recipients only in the performance o f their of f ic ia l duties . I t s contents may n o t be otherwise disclosed w i thout W o r I d Bank author izat ion .

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies ................. 21

Annex 3: Results Framework and Monitoring ......................................................................... 23

Annex 4: Detailed Project Description ...................................................................................... 27

Annex 5: Project Costs ................................................................................................................ 31

Annex 7: Financial Management and Disbursement Arrangements ..................................... 33

Annex 8: Procurement ................................................................................................................ 40

Annex 9: Economic and Financial Analysis .............................................................................. 45

Annex 10: Safeguard Policy Issues ............................................................................................ 50

Annex 11: Project Preparation and Supervision ...................................................................... 51

Annex 12: Documents in the Project F i le .................................................................................. 53

Annex 13: Statement of Loans and Credits .............................................................................. 54

Annex 14: Country at a Glance .................................................................................................. 56

Annex 15: Map VNM33511 ....................................................................................................... 58

VIETNAM

Source Local Foreign BORROWEWRECIPIENT 7.00 0.00 INTERNATIONAL DEVELOPMENT 0.00 105.00 ASSOCIATION

SECOND PAYMENT SYSTEM AND BANK MODERNIZATION PROJECT

Total 7.00

105.00

PROJECT APPRAISAL DOCUMENT

EAST ASIA AND PACIFIC

EASFP

Financing Gap Total:

Date: January 3 1,2005 Country Director: Klaus Rohland Sector MangedDirector: Homi Kharas

Project ID: PO82627 Lending Instrument: Specific Investment Loan

[I Loan [XI Credit [ ] Grant [ ] Guarantee [ ] Other:

Team Leader: Xiaofeng Hua Sectors: Banking (78%); Payment system (22%) Themes: Other financial and private sector development (P)

Project Financing Data

0.00 0.00 0.00 7.00 105.00 112.00

FY 2006 2007 2008 2009 2010 Annual 15.75 36.75 26.25 15.75 10.50 Cumulative 15.75 52.50 78.75 94.50 105.00

Borrower: Socialist Republic o f Vietnam

[ ]Yes [XINO

[XIYes [ ] N o

Does the project include any critical r i sks rated “substantial” or “high”? Re$ P A D C.5 Does the project meet the Regional criteria for readiness for implementation? Re$ PAD D. 7 Project development objective Re$ PAD B.2, Teclzizical Annex 3

The Project’s Development Objectives are to assist Vietnam’s banking sector to (i) meet the demands o f the economy for fast, reliable and safe payment services, (ii) broaden access to finance to facilitate the achievement o f the government’s poverty reduction targets, and (iii) improve the operations o f the participating banks through the expansion o f the IBPS and the CBS. Project description [one-sentence surnmavy of each coinponent] Re$ PAD B.3.a, Teclznical Annex 4

The Project has two components: Component 1, Expansion o f Inter-Bank Payment System and Component 2, Expansion o f Banking Operational System. Which safeguard policies are triggered, if any? Re$ PAD D. 6, Teclzlzical Aizizex 10 None Significant, non-standard conditions, if any, for: Re$ PAD C. 7 Board presentation: None

Loanicredit effectiveness: None

Covenants applicable to project implementation: None

A. STRATEGIC CONTEXT AND RATIONALE

1. Country and sector issues

The Vietnamese banking sector reform has come a long way since its beginning in the late 1980s. The reform process began in eamest in 2001 and the reform agenda has been based on a comprehensive multi-year reform program. The objectives o f this program are: (i) strengthening the regulatory, supervisory and institutional framework; (ii) diversifying the financial sector; (iii) enhancing financial sector transparency and accountability; (iv) improving the financial performance o f the banking system; and (v) creating incentives for banks to operate in a more commercially-oriented framework based on institutional restructuring.

Important changes have been accomplished both in the structure, the regulation and the operations o f the banks, thus moving the banking sector towards a modus operandi that more closely resembles domestic banking sectors in other emerging markets and newly industrialized economies. Over the past decade, the four largest State Owned Commercial Banks (SOCBs) have evolved from specialized pol icy lending vehicles to state-owned banks that are expected to operate on a more commercial basis by intermediating domestic savings to various segments of the economy and by providing other needed banking services, both to the Vietnamese people and companies. The four largest SOCBs, which account for 73 percent o f al l credit to the economy, continue to implement their restructuring plans aimed at transforming them into more commercially oriented institutions, including improvements to credit policies and procedures, accounting practices, information systems, products and services, and capital. In June 2003, the SBV announced i t s intention to equitize two o f the five SOCBs, one o f which i s scheduled to have the participation o f a strategic foreign investor.' The consolidation o f the Joint-stock Banks (JSBs) has progressed and some o f the JSBs have posted strong growth and performance, despite the small size o f their operations in the marketplace. The environment in which banks operate has improved wi th the removal o f interest rate ceilings (in principle), and officials in SOCBs have been instructed to disregard political requests for directed credit. The SBV has promulgated numerous regulations on reorganizing bank supervision, gradually leveling the playing field for foreign banks, and reclassifying al l non-performing loans (NPLs) in the four SOCBs. Beyond these measures, a credit information center was set up in 1999, and a registry for secured credit transactions in 2002, both o f which may help to improve access to finance.

Despite these positive changes, overall progress in implementing the reform agenda has been mixed, and Vietnam sti l l has a long road ahead to comply with intemational standards o f best practice and to meet the coming challenges o f financial sector liberation under the US-Vietnam Bilateral Trade Agreement (BTA) and the forthcoming WTO accession. The current speed o f reform may be too protracted to meet the challenges resulting from the rapid opening o f the financial sector to foreign participation in the context o f BTA and WTO membership. These liberalization commitments wi l l provide potentially serious competitive threats to the SOCBs and to the regulation o f the financial sector. Once the sector i s fully liberalized, foreign banks and other service providers (e.g., insurance companies) would have a competitive edge through better product and service offerings. An immediate result o f this could be that the SOCBs wi l l be le f t with weak portfolios and potentially large fiscal liabilities for the govemment in the

' These are Meikon Housing Bank and VietcomBank.

1

future. These problems could be exacerbated by weak regulation and supervision o f the sector and a continued concentration o f financial operations in the banking sector due to limited growth in capital markets.

The SBV recognized the immediate threat that these challenges pose to the future growth and stability o f the banking system and developed a “Plan for the Intemational Economic Integration of the Banking Sector” in mid-2003 to address the core development needs through 2010.2 One of the key areas o f reform ofthis Plan i s the implementation o f appropriate banking systems infrastructure and the completion o f what was started under the comprehensive program developed in 1995 to develop a modem banking sector. The program aimed to improve both the banking systems and payment services in the economy in order to reduce float, speed up circulation o f funds and increase efficiency o f funds transmission while, at the same time, providing convenience, service, and safety to users. The development o f the national inter-bank payment clearing and settlement system to handle inter-and intra-provincial inter-bank payments (Inter-Bank Payment System - IBPS) was a primary focus o f this program. The program also had an important secondary focus on introducing modern, automated systems within the largest banks in the market. These new systems were designed to strengthen and restructure the operations and management of the banking sector through the implementation o f core banking, management information and accounting systems, new products and services and centralization o f the information within the largest banks.

The first phase o f the modemization program, supported by the Payment System and Bank Modernization (PSBM) project of The World Bank (Bank), was successfully completed in 2003, Under the project an intemationally compatible IT platform was established. O n the foundation o f this platform, a modem IBPS and two modem Core Banking Operational and Management Control Solutions (CBS) were introduced on a pi lot basis. The IBPS has vastly improved the payment services in the economy by reducing float, accelerating circulation o f funds and increasing efficiency o f funds transmission, while providing convenience and service to users. The system has also contributed to the solution o f cash shortages that had existed for years in the economy. The share o f cash in total liquidity i s declining, at 22.0 percent in 2003 compared with 22.6 percent in 2002 and 23.7 percent in 2001. The new electronic payment services available from the pi lot IBPS have been readily accepted by the commercial banks (CBs), with many banks originally not included in the pi lot project now having online connections and making active use o f the system. However, the capacity and throughput needs o f the system have far exceeded the original targets, and there i s an urgent need to expand the system.

The modem banking operational solutions have strengthened the institutional capabilities o f the participating banks (accounting for over 73 percent o f the banking system credit) under the f i rst project, as they have centralized the banks’ core businesses and stimulated initiatives to improve internal procedures, structure, management and customer services. The new systems have also brought about changes in banking regulations and operations as well as banking staff quality in al l aspects o f banking activities. The basic managerial structure o f each o f the commercial banks has started to change in order to take full advantage o f the new systems. A substantial problem now facing the participating banks i s that they are currently operating two completely different systems: the new centralized system supported by modem technologies, and the decentralized

’ Decis ion o f the Government o f the SBV Yo. 663, June 26,2003.

2

legacy systems based on the older manual methods. The r isks and costs associated with this type o f dual operation are high not only for these banks, but for the whole banking sector, given the market share that i s attributable to these banks, unless the new systems are rol led out to al l the branches in a relatively short time. In addition, the market demand i s increasing for non-cash- based payment instruments and products, and service delivery channels as Vietnam’s economy further develops.

The PSBM 2 project, designed to build directly upon the original PSBM project, i s a response to these urgent needs from (i) the SBV to increase the capacity o f IBPS processing centers to continue operating and expanding the outreach o f the payment systems in a fast, reliable, and safe manner; and (ii) the participating CBs to complete the r o l l out o f their new systems to minimize the possible operational problems and costs o f running two different systems in parallel through their branch networks, and to add new functions to these systems to meet the increased demand for new products and services.

2. Rationale for B a n k involvement

The Bank i s uniquely placed to continue assisting the Government with the expansion o f these systems under the PSBM 2 project. The Bank has the experience and proven record in such projects and i s wel l equipped to deal wi th the variety o f policy, design and implementation issues involved. It can provide objective “best practice” advice, thereby ensuring that key strategic and pol icy issues that need to be addressed for the overall implementation o f such systems are fully addressed. The outputs o f the project are largely public goods, and require heavy capital investment in imported goods. At present, the government and the government-owned banks do not yet have adequate access to low-cost and longer-term funding denominated in hard currency. Therefore, the government considers financing the cost o f PSBM 2 with IDA resources as an appropriate course o f action. N o other donors are providing assistance in this regard.

3. Higher level objectives to which the project contributes

The SBV’s goal i s to give al l banks and branches access to the IBPS system and expand the new CBS systems at the CBs beyond the pi lot programs. This wil l ensure that Vietnam’s integration wi th the international market takes place with a robust banking sector infrastructure that can sustain rapid economic growth and further private sector development. PSBM 2 wil l contribute to the achievement o f these objectives by addressing the needs for IBPS and banking system expansion.

The latest Country Assistance Strategy (CAS) for Vietnam (Report No. 24621-VN) indicates that the establishment o f a sound market-based financial intermediation system in Vietnam remains perhaps the most dif f icult technical challenge facing Vietnam’s pol icy makers, and an important part o f the Bank Group’s activities. While P S B M 2 was not originally included in the CAS, i t was added, at the request o f the Government, in the CAS Progress Report (Report No. 27659- VN), dated January 22, 2004. PSBM 2 i s fully consistent with the Bank’s broader financial sector strategy that i s being pursued through analytical work, pol icy dialogue, lending operations and technical assistance.

3

B. PROJECT DESCRIPTION

1. Lending instrument

As a continuation o f the f i rst PSBM project and in line with the CAS progress report, PSBM 2 wil l be a Specific Investment Loan (SIL). International Development Association (IDA) financing wil l account for about 94 percent o f the total project cost o f US$112 million. The proposed IDA credit o f US$105 mi l l ion wi l l be made to the Socialist Republic o f Viet N a m at IDA’S standard terms for 40 years including 10 years o f grace on repayment o f principal. The standard commitment fee o f not to exceed 0.50 percent and a service charge o f 0.75 percent wi l l apply. The SBV, on behalf o f the Socialist Republic o f Vietnam, wi l l be the primary implementing agency. Part o f the proceeds o f the IDA credit (76 percent) wil l be on-lent by the govemment to the participating CBs in U S dollar-denominated subsidiary loans. The Subsidiary Loan Agreements (SLA) which set out the on-lending terms and conditions and i t s implementation arrangements, satisfactory to IDA, wil l be concluded between the Ministry o f Finance (MOF) and each o f the participating banks.

2. Program objective and phases

NIA

3. Project development objective and key indicators

The ultimate objective o f PSBM 2 i s to continue assisting the govemment and the banks in their efforts to modernize the financial sector through further development o f the financial sector infrastructure to support (i) economic growth, and (ii) achievement o f the poverty reduction targets set out in the govemment’s Comprehensive Poverty Reduction and Growth Strategy (CPRGS). The specific Project Development Objectives (PDO) are to assist Vietnam’s banking sector to (i) meet the demand o f the economy for fast, reliable and safe payment services, (ii) broaden access to finance to facilitate the achievement o f the govemment’s poverty reduction targets, and (iii) improve the operations o f the participating banks through expansions o f the IBPS and the CBS.

The overall project outcome indicators for the purpose o f monitoring and evaluating the progress toward the achievement o f the PDOs are: (i) steady increase o f the number o f financial institutions/bank branches connected to the IBPS and the new banking systems; (ii) steady increase o f the transaction volume and value processed by the IBPS and the CBS; (iii) continuing high level o f performance o f the expanded systems in terms o f speed, certainty, reliability and convenience; (iv) continuous growth in the use o f non-cash payment instruments and widened range o f banking products and services; and (v) improved financial accounting and operational reporting in the participating banks.

4. Project components

P S B M 2 i s built squarely on the foundation la id by the f i rs t PSBM. To fulfill the development objectives, the PSBM 2 project i s organized around two main components: (i) Inter-Bank Payment System (IBPS) Expansion; and (ii) Core Banking Solutions (CBS) Expansion. Project implementation i s expected to be completed by December 2009 and the project wi l l be closed on

4

June 30, 2010. The total project cost i s estimated at US$112 million, and IDA funding i s US$105 mi l l ion equivalent. Retroactive financing w i l l be available for eligible expenses o f goods and consulting services that may be incurred after January 1,2005 up to Credit effectiveness.

Component 1, IBPS Expansion (IDA Credit allocation o f US$ 25.2 million). The IBPS i s a centralized single-current-account-based, inter-bank clearing and settlement system managed by the SBV. Under the f i rs t PSBM project, a pi lot IBPS system was established, which i s composed o f the National Payment System Center (NPSC), i t s back-up center and five regional Payment Processing Centers (PPC). The pi lot system has provided the core functionality o f the IBPS, but the transaction volume and value handled by the pi lot IBPS have far exceeded the original targets. The situation calls for an immediate expansion o f the system. Originally, the SBV planned to address the capacity problem by adding 11 PPCs throughout the country. Given the recent improvement in telecommunication access and quality in Vietnam, the central bank has decided to focus on the upgrading and expansion o f the existing national and regional centers under PSBM 2. This i s in l ine with the international trend wherein inter-bank payment systems are increasingly centralized for better efficiency, enhanced reliability and reduced cost. The main activities o f Component 1 are (i) upgrading hardware and installing new software to expand processing capability and strengthen interconnection, system, and physical security; (ii) consultant support of project implementation such as advisory services on the required legal and regulatory environment; and (iii) staff training. The component’s target group i s the central bank, the banking industry, and the customers o f the banks and other future financial institution participants. The indirect beneficiaries include the government’s Treasury, Customs, and the financial markets, as the expanded IBPS wil l provide faster and more reliable payment services to these institutions.

Component 2, CBS Expansion (IDA Credit allocation o f US$ 79.8 million). Under the f i rs t PSBM project, the participating banks have adopted international standard core banking solutions, which centralize accounting and control functions with respect to customer files, deposit and loan, general ledger and financial control, trade finance, and other commercial bank core businesses. But the application o f solutions i s limited to the head office and a few pi lot branches. There i s an urgent need to rollout the solutions to mitigate the high operational risk o f running two parallel, but completely different systems, and to enhance the system and physical security o f the new facilities. To further strengthen operational efficiency and risk management, new modules such as financial management and MIS are required. The banks are also under increased market pressure to provide new products and services through new delivery channels (e.g. internet and telephone banking). Under the component, new hardware and application software wil l be acquired for the purpose o f systems rollout and expansion. Experienced consultants wil l be engaged to provide project implementation support. Another main activity o f Component 2 i s staff training. The component’s immediate target group i s the four participating banks (three o f the country’s largest SOCBs, and one JCB). However, since these banks account for over 66 percent of the banking sector assets, the whole banking system, as wel l as the public, are the ultimate beneficiaries.

Components outputs and outcomes. The installation, testing, acceptance and operation of the expanded systems are the main outputs o f the two components. Component 1 i s expected to bring about the following outcomes: enhanced speed, certainty, reliability, security, and

5

convenience o f the payment transactions handled by the IBPS system. Under Component 2, the outcomes include increased use o f non-cash payment instruments and new service delivery channels in the economy, as well as availability o f timely and reliable information for senior level bank management on the institution-wide financial position and operational performance. If successfully implemented, these components wi l l contribute to the development o f an appropriate banking system infrastructure and the strengthening o f commercial bank operations, which are among the main sector issues addressed in the govemment’s “Plan for the Intemational Economic Integration o f the Banking Sector.”

Full project descriptions by component are contained in Annex 4. Detailed project cost and financing plans are presented in Annex 5.

5. Lessons learned and reflected in the project design

The most relevant project i s the first Payment System and Bank Modemization (PSBM) project from which lessons leamed are reflected in the design o f PSBM 2. These lessons are summarized below. Detailed discussion o f the lessons i s presented in the f i rs t project’s Implementation Completion Report (ICR, Report No. 27635).

The main lessons leamed and reflected regarding the project scope and implementation duration

The introduction o f the underlying systems required timely and consistent legal and regulatory support to underpin the new financial services and related procedures, control and reporting. Parallel legal developments and implementing regulatory measures regarding electronic transactions and records must be maintained to ensure that the courts recognize and accept electronic records as evidentiary material in the settlement o f any disputes.

Nationally important systems such as the IBPS and the CBS necessitate a minimum set o f operational security and business continuity provisions, which include a back-up system plus strict adherence to individual access and usage rights to al l and any components o f the systems to assure the integrity o f the system and to prevent misuse.

The provision o f adequate time and resources are important to ensure that the required fundamental changes in attitudes and behaviors at a l l levels are matched properly with the time required for procurement and implementation o f new facilities.

The main lessons leamed and reflected regarding project implementation arrangements are:

(a) Having the SBV as the executing agency for the first PSBM allowed for i t s successful completion. The SBV plays a pivotal role in the Vietnamese banking sector as nominal ownerlmanager o f the SOCBs, and as the regulator and supervisor o f the sector. Although the SBV should be removed from the ownedmanager role in the SOCBs, the SBV will s t i l l act as the supervisor o f the

6

banks and thus, the retention o f SBV as the chief executing agency o f PSBM 2 i s essential.

The establishment and existence o f a competent Project Management Unit (PMU) at SBV and Project Implementing Units (PIU) at participating banks has been instrumental in project success and wil l be retained for PSBM 2.

Close supervision by the Bank’s task team after overcoming the early delays by reassigning the primary entity responsible for the whole project implementation ensured that the project’s implementation stayed on track. Ongoing dialogue and coordination wil l be maintained between the Bank and the SBV P M U during al l procurement and implementation stages.

Clear guidance i s required to help the project implementing entit ies define different stages o f completion within the project, especially with respect to the definition o f acceptance o f vendor deliverables. Appropriate definitions o f acceptance wil l be attached as an annex to the commercial contracts to be entered into between the recipients and the vendors.

Clearer SBV/MOF payment processing procedures and guidelines are needed for timely payments by the project implementing entities for goods and service suppliers per contract terms. The SBV and the participating banks have agreed to adopt a set o f processing procedures and service standards in the form o f a Memorandum o f Understanding (MOU).

6. Alternatives considered and reasons for rejection

The following two basic altemative approaches to the scope and content o f PSBM 2 have been considered: (i) “do not provide further assistance,” and (ii) “provide increased assistance to meet al l known needs beyond the scope o f this repeater project.” Each o f these i s briefly discussed below:

(a) No Assistance: The pi lot implementation undertaken under the f i rst PSBM project has shown that the parallel emphasis on capacity building, structural reform, modem procedures and banking practices has been successful and supported the practical introduction o f a modem payments system and associated modern banking systems. The sought after benefits associated with the expansion and national roll-out o f the new systems must take place as a matter o f urgency to both achieve national coverage and to avoid the excessive costs associated wi th operating outdated legacy systems in parallel with new pi lot systems. Thus, the SBV and the participating banks must undertake the expansion and rollout phase. This phase represents a major investment for each bank and this demand for investment occurs simultaneously with the banks’ attempts to introduce more stringent loss provisioning and loan write-offs, as well as targeting increased profitability to boost capitalization. P S B M 2 assists these overall reform efforts, avoids adverse balance sheet impacts for the banks, and ensures that tangible business benefits accrue to the customers o f the banks.

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(b) More Assistance: Having a larger, more inclusive PSBM 2 was another option, especially with respect to the number o f participating financial institutions (more SOCBs, JSBs, etc.), which are keen to receive assistance. Nevertheless, this option has been rejected because a larger, more inclusive project would take much longer to prepare (than a repeater project), and the SBV and the CBs that participated in the f i r s t project could not afford to wait that long to upgrade their systems, continue the roll-out, and ensure that customer benefits are made available o n a timely basis.

C. IMPLEMENTATION

1. Partnership arrangements

NIA

2. Institutional and implementation arrangements

Institutional armngements. The project wil l be implemented by five project implementing entities. The Informatics Technology Department (ITDB) o f the SBV wil l implement Component 1, and the four participating banks, namely the Bank for Investment and Development o f Vietnam (BIDV), the Industrial and Commercial Bank o f Vietnam (IncomBank), the Marit ime Joint-stock Commercial Bank (MCB), and the Vietnam Bank o f Agriculture and Rural Development (VBARD), wil l be responsible for the implementation o f Component 2. These CBs participated and successfully completed their components under the f i rst project. Overall management o f the project i s entrusted to the ITDB/SBV, which acted as the PMU from 1998 to 2003 under the f i rs t PSBM project. The ITDB will be responsible for covering al l aspects o f the project’s financial management arrangements, including accounting, internal controls, financial reporting, audit, and management o f special account. Each o f the participating CBs wil l be responsible for the implementation and financial management o f their respective component and wil l retain the existing Project Implementing Unit (PIU) within their organizations. The PIUs wil l identify technical requirements, select contractors and consultants, and supervise contract implementation for the rollout and expansion o f their new operational systems. They wil l also ensure that financial management arrangements and procurement processes are done in accordance with the Development Credit Agreement (DCA) and World Bank’s policies and procedures on financial management and procurement.

Financial management arrangements. The project financial management review was carried out in November 2003 and updated a year later. The reviews found that this project met the minimum requirements o f the Bank’s OP/BP 10.02, but the financial management arrangements and processes o f the ITDB have some weaknesses which need to be addressed. As a result, the ITDBISBV has adopted an action plan for strengthening project financial management, mainly in the areas o f accounting procedures and supporting systems, financial reporting and staffing. With the fulfillment o f the action plan as detailed in Annex 7, the project will meet IDA minimum requirements o n financial management. The PMU will prepare annual financial statements in accordance with International Public Sector Accounting Standards (IPSAS) and quarterly FMRs in a format agreed upon with the Bank and submit them for the Bank team’s review. The project accounts wi l l be subject to normal internal audit procedures o f SBV and the

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CBs. Extemal audit o f the project’s financial statements wil l be carried out annually in accordance with International Standards on Auditing by an independent accounting firm. The audit wil l be carried out in accordance with terms o f reference satisfactory to IDA.

Flow of funds and disbursement arrangements. Part o f the IDA Credit proceeds (US$25.2 mi l l ion equivalent) wi l l finance the SBV part o f the project (Component 1). The rest o f the Credit proceeds (US$79.8 mi l l ion equivalent) wi l l be made available v ia an on-lending mechanism from the government to the four participating CBs. A Subsidiary Loan Agreement between the M O F and each o f the CBs, acceptable to IDA, wil l be put in place. Counterpart funding in terms o f in-kind contributions and additional cash resources to finance those eligible expenditures that are not covered by the IDA credit i s to be provided by each o f the participating CBs and the SBV for the components they implement, respectively. The project wil l use the traditional disbursement arrangements acceptable to IDA, in accordance with government procedures on disbursement o f official technical assistance. Disbursement wi l l be made against applications o f withdrawal for direct payment and replenishment o f the Special Account (SA). Replenishment o f the SA will be on the basis o f Statement o f Expenditures and Summary Sheet. A special account (SA) in U S Dollars wil l be opened in a commercial bank by the Borrower’s central bank, on terms and conditions acceptable to IDA. The init ial allocation o f SA and i t s authorized allocation are set at US$2 mil l ion.

Procurement arrangements. Procurement for the project w i l l be carried out in accordance with the World Bank’s “Guidelines: Procurement Under IBRD Loans and IDA Credits” dated M a y 2004; and “Guidelines: Selection and Employment o f Consultants by World Bank Borrowers” dated M a y 2004, and the provisions stipulated in the Development Credit Agreement (DCA). Procurement under the project wi l l be carried out by the P M U and the PIUs. An assessment o f the procurement capacity o f the project implementing entities carried out in March 2004 found that al l the project implementing entities are fully functional and staffed adequately with technical experts on banking and IT, with considerable procurement experience gained through 5 years o f implementation o f the successfully completed f i rs t PSBM project. The key issues and risks conceming the procurement for implementation o f the project identified are mainly related to the capacity o f the implementing entities in commercial contract management and supervision. The corrective measures which have been agreed upon are: (1) to use input from original system contractors for the preparation o f specifications for major and complex I C B contracts for which compatibility and integration with the existing system i s an issue; (2) to use independent consultants to review or prepare specifications, and use their services in direct purchase negotiations, bid evaluations and contract supervision.

Details o f the institutional and implementation arrangements are presented in Annex 6-8.

3. Monitoring and evaluation o f outcomes/results

Results indicators. To monitor and evaluate the achievement o f the outcomes and results, a results monitoring timetable (Annex 3) has been developed using the following measurable indicators where appropriate: (i) Increase in the number o f branches connected to the systems, and (ii) Percentage increase in the volume and value o f transactions handled by the IBPS and the CBS.

9

Monitoring and evaluation arrangements. The SBV’s P M U and the banks’ P l u s wi l l be responsible for collecting these data, and evaluating project implementation status on a regular basis. The PMU i s expected to send the monitoring and evaluation report to the Bank task team on a semi-annual basis, no later than January 3 1 and July 3 1 o f the subsequent half-year. In addition to a status check vis-a-vis the indicators, the semi-annual progress report wil l document implementation progress on all aspects o f the project, and l i s t main problems requiring prompt resolution. The Bank task team wil l review these reports and communicate in a timely manner with the P M U regarding the issues raised. I t wi l l report project implementation status in the Bank’s supervision reporting system, and conduct at least two supervision missions a year.

Mid-term review. To facilitate the assessment o f project effectiveness during implementation, the Bank and the government wi l l carry out a jo int mid-term review no later than the middle o f the third year o f project implementation. The mid-term review wil l take stock o f progress towards achieving the project objectives and outcomes, assess the market demand for payments and banking services, update project implementation plans and results monitoring indicators i f necessary, and provide guidance for the successful completion o f project implementation. The Bank task team wil l submit a project Implementation Completion Report (ICR) to the Board within six months o f the closing date o f the project, which wil l include the evaluation by the project implementing entities.

4. Sustainability

The overall project sustainability i s likely, as it i s built on a solid foundation o f the f i rst project. Because o f the identifiable and proven benefits brought about by the pi lot systems in the development o f a sound financial sector infrastructure and the modernization o f the banking sector, the repeater project to scale up the developmental gains has received wide support within the government. The strong interest demonstrated by other Vietnamese banks not covered by the project to participate in the IBPS, and in the proposed Financial Sector Modernization and Information System project (FSMIS) i s another critical factor to the project’s sustainability (see Section 5 for detail).

The sustainability o f PSBM 2 is also assured by the strong ownership o f the project on the part o f the SBV and the participating banks. Both the SBV and the participating banks have allocated their own funds for system upgrades and/or rollout during the transition period before the implementation o f PSBM 2 i s initiated, in order to ensure the smooth operation o f the systems.

The project sustainability i s further supported by the government’s multi-year financial sector reform program, which highlights the need for continuing development o f an internationally compatible payments system and the modernization o f the banking industry. The government remains committed to this program.

5. Critical risks and possible controversial aspects

No major r isks have been identified that could endanger the achievement o f the developmental objectives o f PSBM 2. I t is, however, important to note that the project might put non- participating financial institutions at a disadvantage vis-a-vis the participating banks, and therefore, weaken the developmental effectiveness o f the project. However, the viable banks

10

within the sector are already making their own investments in modemizing operations and may partner with intemational banks in the near future. In addition, over 20 JSBs have joined hands with information technology (IT) solution providers to set up a shareholding company in order to produce banking software for their respective banks. In terms o f connectivity and bank reporting systems, discussions are underway with the SBV regarding an additional Bank financial sector investment lending operation, the FSMIS loan, which aims at providing assistance for SBV modemization and bank reporting system strengthening.

Risk

In the f i rst PSBM project, there were some difficulties and delays in bringing the IBPS to operation due to the required steps that needed to be undertaken in the banking regulatory framework to assure the legal basis for the system. Potential risk for delay in the implementation of PSBM 2 may also come from the need to make additional changes to the legal and regulatory framework under which banks operate. This has been noted in the Implementation Completion Report (ICR) for the f i rs t project and both the PHRD Grant provided by the Japanese govemment for the preparation o f PSBM 2 and the project fund activities supporting the review and revision o f the relevant laws and regulations. Another modest risk to successful project implementation can be found in the need to enhance the PMU and PIUS’ capacity with regard to commercial contract management. The design o f PSBM 2 has taken this capacity building need into consideration through the agreed corrective measures mentioned in Section C.2.

Risk Rating with Mitigation Risk Mitigation Measures

Consultants services have been (under the PHRD Grant), and will continue to be provided under the project to the SBV to review the existing laws and regulations and recommend on the revisions.

Corrective measures have been agreed with the SBV and the participating banks to enhance the capacity (see Section (2.2).

1 I

To project developmental objectives:

Modest

Modest

Modest

Other financial institutions not covered by the project might be put at a disadvantage.

The viable financial institutions not covered under P S B M 2 are making investments with their own resources and may partner with international banks. Discussions were held with the government regarding the need for a third bank modernization project to assist these FIs.

To component results:

(1) Pace o f change in legal and regulatory framework on electronic transactions and records i s slow to support the operation o f the expanded systems.

(25 Relatively weak capacity o f P M U and PIUs to manage procurement process and commercial contract.

Overall risk rating:

Modest

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6. Loadcred i t conditions and covenants

Effectiveness conditions. The following actions have to be completed by Credit effectiveness:

The MOF and at least three o f the participating CBs have signed the Subsidiary Loan Agreements. The SBV and the four participating banks have appointed 6 project accountants, two. for the PMU and one for each PlU; and have provided training to these accountants. The SBV and the four participating banks have signed the Memorandum o f Understanding on payments processing procedures and services standards. The PMU and the PIUs have adopted the Financial Management Manual acceptable to the World Bank. The SBV has adopted the improved accounting software used by the PMU satisfactory to the Bank. The SBV and the four participating banks have selected procurement/contract management consultants.

Financial covenants. The financial reporting requirements are presented below:

0 The SBV shall send for Bank team’s review the annual audit report o f the project accounts by an independent auditor satisfactory to the Bank no later than six months after the closing date o f the fiscal year. The SBV shall send for Bank team’s review the Quarterly Financial Monitoring Report (FMR) in an agreed format no later than 45 days after the closing date o f the reporting quarter. The participating banks shall send their annual audited financial statements to the World Bank for review no later than six months after the closing date o f the fiscal year.

0

0

Other covenants. The following covenants have been agreed to in order to facilitate project monitoring and evaluation:

0

0

The SBV shall send the semi-annual project monitoring and evaluation report to the Bank for review no later than January 3 1 and July 3 1 o f each year. The SBV and the four participating banks shall j o i n the Bank to carry out a mid-term review o f project implementation no later than two and hal f years after the Credit effectiveness. The SBV and the participating banks shall contribute to the preparation o f the I C R and provide their own written evaluations after the closure o f the project.

0

0

12

D. APPRAISAL SUMMARY

1. Economic and financial analysis

The project benefits cannot be easily quantified in conventional terms, mainly because cost accounting has yet to be widely adopted in Vietnam’s banking sector. However, there i s extensive empirical evidence showing that the economy benefits substantially from an efficient banking infrastructure. Centralized payment and banking systems substantially improve provision o f services to businesses and households, increase confidence in banks, and hence help to deepen financial intermediation and stimulate private sector growth. The benefits o f these types o f investments are already taking root in Vietnam wi th the successful completion o f the f i rst PSBM project including improvement o f (i) payment services through a more reliable, convenient and efficient, centralized clearing and settlement system; (ii) monetary pol icy execution as uncertainties in the distribution o f float are reduced; (iii) CB’s operational efficiency wi th centralized customer f i les and accounting systems; (iv) CB’s fund mobilization through new service delivery channels; and (v) fight against money laundering and criminal activity thanks to centralized, automated systems. All these developments promote economic activities with obvious benefits to the business sector and the general public.

Based on the growth o f the pi lot systems, the SBV and the participating banks have estimated that the transactions to be handled by the expanded IBPS and CBSs may increase by an average o f 25-35 percent in the next five years during the implementation period o f PSBM 2. The design o f the system expansions has taken into consideration this growth.

2. Technical

The technologies and architectural design features used in the pi lot implementations both for the Inter-Bank Payments System component and for the Commercial Banking System components installed in each o f the participating commercial banks are based on the use o f modem open system concepts. In particular, the application system software solutions are independent o f both the data processing and data communication architectures. These philosophies are also embedded and preserved in the service rollout and application system enhancement features that wil l be acquired and implemented during the P S B M 2 project. The envisaged solutions wil l provide modem financial sector infrastructures that are modular and scalable in design, and thus can support additional future application system enhancements and capacity increases over time without difficulty. The solutions envisaged also reflect the need for system security, data integrity, business continuity, and service level availability similar to that embedded in financial systems in advanced economies, thus assuring high levels o f user confidence in the Vietnamese banking systems. Also, based on an analysis o f the specific hardware, telecommunications, and application systems that are to be acquired, i t is evident that appropriate attention has been given to the need for cost effectiveness in a manner that i s consistent wi th the needs for future flexibility. Based also o n a discussion o f the business plans, i t i s anticipated that the envisaged technical solutions wil l satisfy the critical banking services needs o f the project participants for at least a five-year period. However, as there i s always uncertainty as to the rates at which service usage wil l increase, i t would be prudent to undertake a reassessment o f the specifics o f these needs at the time o f the mid-term review.

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The design o f the payments infrastructure components continues to be in l ine with best practices and the BIS standards for payment and settlement systems. Implementing al l components o f the payments system in this second phase on a national basis i s s t i l l a challenge for the SBV. However, SBV has built up i t s technical expertise through the f i rs t PSBM project to manage these programs and wi l l supplement i t s staff with international experts. I t continues to receive technical advice from the international financial institutions (IFI).

In summary, from a technical perspective there are no substantial project r isks other than those experienced in typical complex software based initiatives. Most o f these r isks stem from overly ambitious implementation speed expectations and can be mitigated through close project management o f project scope, schedule and cost.

3. Fiduciary

The reviews o f the project’s financial management capacity conclude that the financial management risk i s average. The SBV and the participating banks selected to address the identified main weaknesses with respect to the accounting system, financial reporting and staffing, have adopted a time-bound action plan. The reviews conclude that the project wi l l meet IDA’S minimum requirements on financial management with the fulfil lment o f the action plan. Given the need to enhance the project’s financial management capacity, the project implementing entities have agreed to adopt the actions by negotiations or Credit effectiveness. The accounting and financial reporting requirements o f the project have also taken into consideration this capacity building need. Detailed requirements on staffing, accounting principles and procedure, reporting and monitoring and audit arrangements are provided in Annex 7.

The review o f the project’s procurement capacity found that al l the project implementing entities are fully functional and staffed adequately with technical experts on banking and IT with considerable procurement experience gained through 5 years o f implementation o f the successfully completed f i rs t PSBM project. The overall project risk for procurement i s rated as average. The key issues and r isks identified concerning the procurement for implementation o f the project are mainly related to the capacity o f the implementing entities to (i) negotiate direct purchase o f goods from the technological vendors under the first project, (ii) prepare specifications for new hardware and software to be procured through International Competitive Bidding (ICB), and (iii) evaluate bids and supervise contract implementation. To address these weaknesses, a set o f corrective measures have been agreed upon and incorporated into the project design (See Section C.5 and Annex 8). The selection o f procurement consultants by the P M U and at least three PIUs i s a condition for Credit effectiveness.

In addition to the regular monitoring and interactions, supervision missions wil l be carried out at least twice a year. Supervision o f project financial management wil l be undertaken on a risk- based approach at least twice a year. The procurement supervision wil l be conducted every 12 months. To further facilitate project monitoring and evaluation, a BanWGovemment joint review (mid-term review) within the third year o f project implementation wil l be carried out to take stock o f progress toward achieving the developmental objectives, assess market demand for payment and banking services, update the project implementation plans and monitoring indicators, and provide guidance for the rest o f the project implementation period.

14

4. Social

While difficult to measure, there are obvious social benefits through improved access to financial services for the population in general, and specific economic impact on the consumption capacity o f the average Vietnamese, who wil l have better access to basic banking services such as ATMs, direct deposits, and internet banking. Based on the available information, the project i s not expected to have negative social impact.

5. Environment

NIA

6. Safeguard policies

Safeguard Policies Triggered by the Project Yes N o Environniental Assessment (OP/BP/GP 4.0 1) [I [XI Natural Habitats (OP/BP 4.04) [I [XI Pest Management (OP 4.09) [I [XI Cultural Property (OPN 11.03, being revised as OP 4.1 1) [XI Involuntary Resettlement (OP/BP 4.12) [ I [XI Indigenous Peoples (OD 4.20, being revised as OP 4.10) [XI Forests (OPIBP 4.36) [I [XI Safety o f Dams (OPIBP 4.37) [I [XI Projects in Disputed Areas (OPIBPIGP 7.60)* [ I [XI Projects on International Waterways (OP/BP/GP 7.50) [I [XI

El

[I

7. Policy exceptions and readiness

The P S B M 2 project requires no exception to Bank policies.

The project has met the following readiness for implementation criteria:

(a) Fiduciary arrangements have been agreed upon and wil l be in place by effectiveness. (b) Project staff and consultants have been mobilized. (c) Counterpart funds have been budgeted and are available. (d) Results monitoring arrangements have been spelled out and agreed upon. (e) Disclosure requirements have been met.

Tender documents for the first year's procurement wil l be prepared and approved around Credit effectiveness.

* By supporting the proposed project, the Batik does riot iriteiid to prejudice tliefirzal deterrnirzatiori of the parties' claiiizs 011 the disputed areas

15

Annex 1 : Country and Sector o r Program Background Vietnam’s economy doubled in size during the last decade, while i t s poverty rate was halved. The gross domestic product (GDP) per capita expanded by around 6 percent per year on average over that period, in spite o f the East Asian crisis. The growth rate o f GDP was 7.2 percent in 2003. I t i s expected to be similar or higher in 2004. Exports are growing by 15 to 20 percent per year in value terms, and Foreign Direct Investment (FDI) inflows by 10 percent per year. Savings rate rose six-fold, to around 25 percent o f GDP, wi th private investment accounting for an increasingly large share o f total capital accumulation. Meanwhile, the poverty headcount f e l l f rom 58 percent in 1993 to 37 percent in 1998 and to 29 percent in 2002. The decline in poverty was widespread, as the increase in inequality has been modest so far. Social indicators improved markedly, positioning Vietnam well to attain key Millennium Development Goals (MDGs). The last decade was thus characterized by undeniable progress in the l ives o f the Vietnamese population.

As with the overall economic progress, the Vietnamese banking sector has come a long way since the reform program began in the late 1980s. The reform process began in earnest in 2001, so the process has not been underway for a long period, and the reform agenda has been based on a comprehensive multi-year reform program. The objectives o f this program were: (i) strengthening the regulatory, supervisory and institutional frameworks; (ii) diversifying the financial sector; (iii) enhancing financial sector transparency and accountability; (iv) improving the financial performance of the banking system; and (v) creating incentives for banks to operate in a more commercially-oriented basis based on institutional restructuring.

Important changes have been accomplished both in the structure, the regulation and the operations o f the banks, thus moving the banking sector toward a modus operandi that more closely resembles domestic banking sectors in other emerging markets and newly industrialized economies. Over the past decade, the four large State Owned Commercial Banks (SOCBs) have evolved from specialized pol icy lending vehicles to state-owned banks that are expected to operate on a more commercial basis by intermediating domestic savings to various segments o f the economy and by providing other needed banking services, both to Vietnamese individuals and companies. The SOCBs continue to implement their restructuring plans aimed at transforming them into more commercially-oriented institutions, including improvements to credit policies and procedures, accounting practices, information systems, products and services, and capital. In June 2003, the SBV announced i t s intentions to equitize two o f the five SOCBs, one o f which i s scheduled to have the participation o f a strategic foreign i n ~ e s t o r . ~ The consolidation o f the Joint Stock Banks (JSBs) has progressed and some o f the JSB sector has posted strong growth and performance, despite the small size o f their operations in the marketplace. The environment in which banks operate has improved with the removal o f interest rate ceilings (in principle) and with officials in SOCBs instructed to disregard political requests for directed credit. The SBV has promulgated numerous regulations on reorganizing bank supervision, gradually leveling the playing field for foreign banks, and reclassifying al l non- performing loans (NPLs) in the four SOCBs. Beyond these measures, a credit information center was set up in 1999, and a registry for secured credit transactions in 2002, both o f which may improve access to finance.

See footnote 1. 3

16

These improvements have been reflected in the rising level o f formal financial intermediation in the country. Confidence in the banking system has grown rapidly, as evidenced by the rapid growth in deposits from 43 percent o f GDP in 2000 to 56 percent in 2003. In addition, credit to the economy has grown at a similarly rapid pace at a rate o f over 20 percent per annum and credit to the State Owned Enterprise (SOE) sector has fallen substantially.

Despite these seemingly positive developments, there are signs that the dramatic increase in lending has not been matched by a commensurate enhancement to the systems, accounting standards and corporate governance structures to enable sound risk management. The r ise in the level o f Non-Performing Loans, as can be seen in the table below, i s a key indicator o f these problems. In addition, another worrying sign i s that the market share o f the SOCBs o f over 73 percent by credit has not fluctuated much despite increasing competition from JSBs and foreign banks, as well as a declining SOE sector (due to privatizations).

Key Banking Sector indicators 1 2000 I 2001 1 2002 1 2003

Notes: Figures on Non-performing Loans (NPLs) are based on the International Accounting Standards (IAS) audits of the four largest SOCBs in 2001, and on IAS audits of two SOCBs and AtaSfprojections in 2002. Estimatedjgures are indicated with an ater isk . NPL resolution is with reference to identified NPLs of VND 21.3 tr i l l ion at end- 2000. Source: World Bank and International Monetaiy Fund (IMF) staff estimates based on data from SBV, Price Waterhouse-Coopers, and Ernst & Young.

Overall progress in implementing the reform agenda has been mixed and Vietnam s t i l l has a long road ahead to obtain international standards o f best practice and to meet the coming challenges o f financial sector liberalization under the U.S.-Vietnam Bilateral Trade Agreement (BTA) and the forthcoming WTO accession. The current trajectory o f reform wil l be too protracted to meet the rapid opening o f the financial sector to foreign participation in the context o f B T A and WTO membership. These liberalization commitments wi l l provide potentially serious competitive threats to the SOCBs and to the regulation o f the financial sector. Once the sector is fully liberalized, foreign banks and other service providers (Le., insurance) may quickly take the most attractive clients in the market through better product and service offerings. An immediate result o f this could be that the state financial institutions wil l be left with weak portfolios and potentially large fiscal liabilities for the Government in the future. These problems could be exacerbated by weak regulation and supervision o f the sector and a continued concentration o f finance in the banking sector due to limited growth in capital markets.

The foremost reform challenge area has been in the slow transformation o f the state financial institutions. The governance o f SOCBs i s deficient, as are their operational, credit appraisal and risk management procedures, and their level o f technology. These banks retain close business

17

links with SOEs, suggesting their failure to adapt their customer base to changing ownership structures in the economy. Most o f these management and operational weaknesses also apply to the Development Assistance Fund (DAF) and the Vietnam Bank for Social Policies (VBSP) and even with the re-channeling o f directed credit through these institutions; the SOCBs are s t i l l open to pressures for politically preferred lending, especially in provincial branches. Meanwhile, NPL resolution i s stalled, which i s probably due to the lack o f a clear coherent strategy. At a deeper level, the resolution o f uncollateralized loans requires decisions about the future o f the delinquent State Owned Enterprises (SOEs), which the SOCBs are in no position to make. Despite the limited progress on the structural reform o f the banks, SOCBs have received about VND 10.9 tr i l l ion in capital injections, which i s an invitation for further waste, and wil l neither insulate depositors nor induce prudent behavior at the banks. The SOCBs must have greater autonomy o f operations, either through the improvement o f the corporate governance structures or the equitization process, but such autonomy wil l make i t more difficult to ensure the safety and soundness o f their operations.

Problems

The weak regulation and supervision o f the banking sector has further delayed the transformation o f the state financial institutions. The SBV acts o n behalf o f the State as the owner o f the SOCBs and the SBV exerts this role through the management o f the SOCB operations. This management is conducted indirectly through the regulation o f virtually all operational decisions and in many ways; this management role serves as a surrogate method o f bank supervision. The SBV role in the SOCBs represents a dual weakness o f the regulatory framework and supervision capacities, both o f which pose increasingly greater r isks to systemic development i f improvements are not made soon. These limitations o f the legal and regulatory framework, and o f existing supervisory capacity, also imply that the risk o f financial failures among JSBs and perhaps insurance f i r m s cannot be adequately contained. With increased liberalization and the l ikely growth in the share o f private intermediaries, the risk o f failures by banks and insurance companies i s bound to increase. H o w to control the r isks to the depositors, to the deposit protection fund, and (implicitly) to the fiscal authorities i s a challenge that has not yet found an adequate response in Vietnam.

~ ~

State Owned Commercial Banks State Bank o f Vietnam

W V ) (SOCBs)

Other Financial Institutions General Issues

Inadequate legal Weak supervisory Lack o f competitive and Inefficiencies in the and regulatory capacities, modern products, Joint Stock Banks policies for organizational services, management and (JSBs), People’s international structures, and operational practices. Credit Funds (PCFs), competit ion and information specialized credit

The SBV has recognized the immediate threat that these challenges pose to the future growth and stability o f the banking system and developed a “Plan for the International Economic Integration o f the Banking Sector” in mid-2003 to address the core developmental needs to 2010.4 This plan identif ies the following core challenges on an institutional basis to be reformed by the end o f 2005.

Summary o f the SBV International Integration Plan to 2005

Decision o f the Governor o f the State Bank o f Vietnam No. 663, June 26, 2003.

18

Projected Reforms

new financial markets.

Amend, supplement, revise and eliminate legal documents and policies unsuitable with integration commitments, to gradually complete the legal framework for the banking sector to be consistent with bilateral and multilateral commitments.

iechnologies.

Reformthe supervision and evaluation mechanism o f banks, including credit risk and CAMELS’, based o n international standards Complete the development o f a modern payments system Develop a modern financial information system (MIS) Continue to bring auditing regime into l ine with international standards Build the stock exchange and inter- bank monetary

Source: State Bank of Vietnam, Decision of the Governor of

Further implement restructuring plans, and NPLs resolution Eliminate subsidies for operations Continue to develop modern payment and M I S systems Fully Implement I A S Develop credit procedures Improve the management, staffing, and operations Develop new services Issue a p lan to equitize one SOCB

nstitutions, and non- lank financial nstitutions.

Continue restructuring o f JSBs, including debt resolution, increasing capital, consolidation Complete the reorganization o f the Credit Cooperative Fund (CCF) and develop more robust regulations for PCFs

efficiency o f specialized credit institutions (Development Assistance Fund Vietnam Postal Savings Corporation, Vietnam Bank for Social Policies, etc.)

framework for Yon-Bank Financial Institutions

Assess the

Amendlegal

7 State Bank of Vietnam on the Plan on International Integration of the Banking Sector., No. 663/Q$-NHNN, June 26, 2003.

As can be seen from the table above, one o f the key areas o f reform i s the implementation o f an appropriate banking system infrastructure. Before basic computer-assisted processing procedures were introduced in Vietnam in the early 1990s, most payments were executed manually through SBV’s municipal and provincial branches through the country. While these procedures helped improve the level o f services, much more was needed to improve the design, development and installation o f a comprehensive, effective and efficient national payment processing system. In addition, the majority o f banks only had rudimentary systems in place to support the rapidly growing demands for finance within the economy.

In response to this situation, the Government in 1995 developed a comprehensive program supported by the World Bank to develop a modern banking sector. The program was aimed at improving both the banking systems and payment services in the economy in order to reduce

Capital, Assets, Management, Equity, Liabil it ies and Sensitivity (CAMELS)

19

float, speed up circulation o f funds and increase efficiency o f funds transmission while, at the same time, providing convenience, service, and safety to users. The development o f the national inter-Bank payment clearing and settlement system to handle inter- and intra-provincial inter- bank payments (Inter-Bank Payment System-IBPS) were a primary focus o f this program. The program also had an important secondary focus on introducing modern systems within the largest banks in the market-the SOCBs. These new systems were designed to strengthen the operations and management o f the banks through the implementation o f core banking, management information and accounting systems, new products and services by the banks, and centralization o f the information within the banks.

The first phase o f the modernization program, supported by the Payment System and Bank Modernization (PSBM) project o f the World Bank, was completed in 2003 and was highly successful, after overcoming early delays in project implementation. The new electronic payment services available from the IBPS have been readily accepted by the commercial banks (CBs), with many banks not included in the pi lot project now having online connections and making active use o f the system. The capacity and throughput o f the system has been far exceeded, when we compare the original targets against i t s current usage as shown in the Annex 4 table.

The four largest SOCBs and two JSBs have successfully completed the design and pi lot implementation o f their new banking systems. The new systems have strengthened the institutional capabilities o f these banks and stimulated initiatives to improve their own internal procedures, structure, management and customer services. They also brought about changes in banking regulations and operations as well as banking staff quality in al l aspects o f banking activities. However, this has resulted in the operation o f two different systems during the transition period: the new IT-supported system and the manual method o f bookkeeping, which cannot be replaced overnight. The r isks and costs associated with this type o f dual operation are high, unless the new systems are rolled out to al l the branches in a relatively short time. In addition, market demand i s increasing for non-cash-based payment instruments and service- delivering channels, as Vietnam’s economy further develops.

The PSBM 2 project, designed to build directly upon the original PSBM project, i s a response to these new challenges.

20

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies

The Payment System and Bank Modemization (PSBM) 2 project, designed to build directly upon the original PSBM project, i s a response to: the urgent need from (i) the SBV to increase the capacity o f IBPS processing centers to continue operating the system in a fast and safe manner; and (ii) the participating CBs to complete the ro l l out o f their new systems to minimize the possible operational problems and costs o f running two different systems in parallel through their branch networks, and to add new functions to the systems to meet the increased demand for new products and services.

The Bank is uniquely placed to continue assisting the Government with the expansion o f these systems under the proposed project. The Bank has the experience and proven record in such projects and i s well equipped to deal with the variety o f policy, design and implementation issues involved. I t can provide objective “best practice” advice, thereby ensuring that key strategic and pol icy issues that need to be addressed for the overall implementation o f such systems are fully addressed. PSBM 2 i s fully consistent with the Bank’s broader financial sector strategy that i s being pursued through analytical work, pol icy dialogue, lending operations and technical assistance. Furthermore, i t complements ongoing initiatives by other donors active in financial sector reform.

N o other bilateral or multilateral agencies are involved in the provision o f technical assistance for the development o f payment systems in Vietnam. The only exception could be assistance provided by the French Development Agency (Agence Francaise de Developpement, or AFD) under their institutional and financial support loan provided to the Vietnam Bank for Agriculture and Rural Development (VBARD). The AFD assistance wil l provide financial support at VBARD, but it i s not related to payment system. Other agencies are providing Technical Assistance (TA) to the SBV for reforming i t s operations and supervisory capacities, as wel l as T A to the CBs for the implementation o f their restructuring plans, and are seen as a strong complement to the development o f their payment and banking systems. By keeping the major bilateral and multilateral agencies engaged and informed during the regular meetings o f the Financial Sector Donor Working Group (in which the Bank has the leading coordinating role), duplication o f projects i s avoided and TA i s better targeted to the needs o f the country and in l ine with a clear and agreed upon strategy. The table below provides an indication o f the assistance projects o f bilateral and multilateral donors that are ongoing or have been completed in areas directly related to bank restructuring and SBV reform.

Sector Issue

Banking System Modernization

Poverty reduction, governance and xonomic management - including public

Project

Payment System and Bank Modernization

(completed) PRSC 1

(completed)

Latest Supervision (PSR) Ratings

(Bank-financed projects only) Implementation

Progress (IP)

S

S

Development Objective (DO)

S

S

21

Sector Issue

f inancial management

Poverty reduction, governance and economic management-including public f inancial management

Financial management

Poverty reduction, governance and economic management-including public f inancial management

tory), HU (Highly L

OTHER DEVELOPMENT AGElCIES

Bank restructuring

Bank restructuring

Bank restructuring

State Bank o f Vietnam

Financial Intermediation

atisfactory

Financial Intermediation

Financial Intermediation

I P i D O Ratings: H S (Highly Satisfactory),

Project

PRSC 2 (Completed)

Public Financial Management Reform

(ongoing)

PRSC 3 (planned)

AFD France: Support for implementation o f ICB

Restructuring Plan

Netherlands: Twinning arsangement for V C B

AFD France: Institutional and

financial support for VBARD

CIDA: Supervisory, regulatory and banking

services (planned)

ADB: Second Financial Sector Program L o a n

AFD: Second Financial Sector Loan

ADB: TA for capacity bui lding non-bank

financial institutions Satisfactory), U (Unsatisj

Latest Supervision (PSR) Ratings

(Bank-financet xojects only)

S

S

22

Annex 3: Results Framework and Monitoring

Results Framework

PDO

Expand the IBPS system to meet the demand o f the economy for fast, reliable and safe payment services. Expand the IBPS and the CBS to broaden access to finance to facilitate the achievement o f the govemment’s poverty reduction targets. Enhance the CBS to improve the operational efficiency o f the participating banks.

Intermediate Outcomes

Component One: Enhanced speed, certainty, reliability, security and convenience o f the payment transactions handled by the IBPS system.

regulations o n electronic transactions and records.

0 Improved laws and

Project Outcome Indicators

(i) Steady increase o f the number o f financial institutionsibank branches connected to the IBPS and the CBS.

transaction volume and value processed by the IBPS and the CBS.

,iii) Continuing high level o f performance o f the expanded systems in terms o f speed, certainty, reliabil i ty and convenience.

:iv) Continuous growth o f the use o f non-cash payment instruments and widened range o f banking products and services.

accounting and operational reporting in the participating banks.

(ii) Steady increase o f the

(v) Improved financial

Intermediate Outcome Indicators

Component One: (i) Progress in project

implementation per the contracts for supply o f goods and services.

(ii) Completion and result report o f training activities.

\ni) Percentage increase o f additional coverage o f the IBPS in terms o f number o f institutions.

[iv) Percentage increase in the volume and value o f transactions handled by the IBPS.

,...

Use o f Project Outcome Information

S emi-annual Implementation Progress Report by SBV. Semi-annual Project Status Reports by WB team. Year 3 mid-term review jo int ly by SBV, participating banks and WB. Final evaluation and assessment o f the project in ICR after the project’s closure by WB team with substantive inputs from SBV and project implementing entities.

Use o f Intermediate Outcome Monitor ing

Component One: (a) Regular monitoring and

assessment o f project implementation under the component by SBV.

Implementation Progress Report by SBV.

(c) Semi-annual Project Status Reports by WB team.

(d) Year 3 mid-term review S B V and WB.

(e) I C R by WB team with SBV inputs .

(b) Semi-annual

23

Component Two: 0 Adoption o f centralized

banking system throughout the participating banks

0 Increased use o f non-cash payment instruments and new service delivery channels in the economy.

information to top bank management on operations, risk exposures and financial performance.

0 Timely and reliable

Component Two: (i) Progress in project

implementation per the contracts for supply o f goods and services.

(ii) Completion and result report o f training activities.

iii) Percentage increase in the number o f branches using the new systems.

:iv) Percentage increase in the volume and value o f transactions handled by the new systems.

(v) Frequency and coverage o f management information reDorts.

Component Two: (a) Regular monitoring and

assessment o f project implementation under the component by participating banks.

Implementation Progress Report by SBV.

(c) Semi-annual Project Status Reports by WB team.

(d) Year 3 mid-term review by participating banks and WB.

(e) I C R by WB team with inputs from participating banks.

(b) Semi-annual

24

2 f:

2 f:

2 fi

2 f:

2 f:

s 2 s

IA

c

c c u 6 -

s 0 N

s 0 W

E c E e a I

! C E

b E ;

f

i fi

?s fi

?s fi

4

i fi

i fi

i fi

s- o W

s- m N

Annex 4: Detailed Project Description

Background. The foundation o f the Second Payment System and Bank Modernization Project (PSBM 2) i s the f i rst PSBM project, under which a centralized Inter-Bank Payment System (IBPS) and two centralized Banking Operational Solutions (CBS) have been introduced on a pi lot basis.

ITEM Average transaction volume Peak transaction volume Number o f participating banks No. o f participating branches

The IBPS has vastly improved the payment services in the economy by reducing float (from up to 30 days in mid-1995 to less than 24 hours today), accelerating circulation o f funds and increasing efficiency o f funds transmission, while providing convenience and service to users. The project also contributed to the solution for the cash shortage that had existed for years in the economy. The share o f cash in total liquidity i s declining, at 22.0 percent in 2003 compared with 22.6 percent in 2002 and 23.7 percent in 2001.

ORIGINAL TARGET CURREXT 4,500 10,000 8,000 12,000

7 51 150 190

In addition, the most important contribution o f the system to the Vietnam’s banking sector i s the provision o f an I T platform that i s compatible to international standards. The modern technological infrastructure, including the payment technology on automation and modernization, not only improved the operational efficiency o f the banking sector and its services, but also upgraded the technical understanding and expertise o f banking staff. With management o f more efficient, timely, and accurate information, IT has significantly influenced institutional reform as well as reform in banking management and supervision.

However, as the table below shows, the capacity and throughput needs o f the system have far exceeded the original targets and there i s an urgent need to expand the IBPS capacity and coverage.

The participating banks o f the f i rs t project, including the four largest SOCBs and two JSBs, have successfully completed the design and pi lot implementation o f their new banking systems. These banking solutions have strengthened the institutional capabilities o f these banks and stimulated initiatives to improve their own internal procedures, structure, management and customer services. I t also brought about changes in banking regulations and operations as well as banking staff quality in al l aspects o f banking activities. For the CBs’ management, the new system has improved its operations, and increased the number o f banking products and services for the benefit o f current customers, as well as to attract new ones. Furthermore, the new system provides a more accurate picture of core operations on a daily basis for timely decision-making. The basic managerial structure o f each o f the commercial banks has started to change in order to take full advantage o f the new systems. Pi lot branch managers can now focus on activities to expand their customer base and the range of services, while spending less time on reporting and data management. In response to these changes, the institutional capabilities o f participating banks have been strengthened with many initiatives to improve internal management o f banking activities, including in particular the introduction o f risk management in their portfolios.

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However, this has resulted in the operation o f two different systems, the new centralized operations system and the decentralized legacy system. The r isks and costs associated with this type o f dual operation are high, unless the new systems are rolled out to al l the branches in a relatively short time. In addition, market demand i s increasing for non-cash-based payment instruments and service delivering channels, as Vietnam’s economy further develops.

Project scope and objectives. The PSBM 2 project, designed to build directly upon the original PSBM project, i s a response to the urgent need from (i) the SBV to increase the capacity o f IBPS processing centers to continue operating the system in a fast, reliable, and safe manner and (ii) the participating CBs to complete the ro l l out o f their new systems to minimize the possible operational problems and costs o f running two different systems in parallel through their branch networks, and to add new functions to the systems to meet the increased demand for new products and services.

The ultimate objective o f PSBM 2 i s to continue assisting the government and the banks in their efforts to modemize the financial sector through further development o f the financial sector infrastructure to support (i) private sector development and economic growth, and (ii) achievement o f the poverty reduction targets set out in the government’s Comprehensive Poverty Reduction and Growth Strategy (CPRGS). The specific Project Development Objectives are to (i) enhance the IBPS system to meet the demand o f the economy for fast, reliable and safe payment services, (ii) broaden access to finance to facilitate the achievement o f the government’s poverty reduction targets, and (iii) improve the operations o f the participating banks to strengthen Vietnam’s banking sector.

The overall project outcome indicators for the purpose o f monitoring and evaluating progress toward achievement o f the PDOs are: (i) steady increase o f the number o f financial institutiondbank branches connected to the IBPS and the CBS; (ii) steady increase o f the transaction volume and value processed by the IBPS and the CBS; (iii) continuing high performance o f the expanded systems in terms o f speed, certainty, reliability and convenience; (iv) continuous growth in the use o f non-cash payment instruments and widened range o f banking products and services; and (v) improved financial accounting and operational reporting in the participating banks.

To fulfill the development objectives, the PSBM 2 project i s organized around two main components: (i) Inter-Bank Payment System (IBPS) Expansion; and (ii) Banking Operational Solutions (CBS) Expansion. The main investment activities are acquirement o f imported hardware, software, services o n system integration and project implementation support, and training. Counterpart funding wil l be provided by the SBV and the participating banks in the form o f in-kind contribution and additional cash resources for the portion o f the eligible cost o f local goods that the Bank usually does not finance. The project implementation i s expected to be completed by December 31,2009, and the project i s to be closed on June 30,2010.

Component 1, I B P S Expansion. The IBPS i s a centralized single account inter-bank clearing and settlement system managed by the SBV. Under the f i rs t PSBM project, a pi lot IBPS system has been established which i s composed o f the National Payment System Center (NPSC), i t s back-up center and five regional Payment Processing Centers (PPC). The pi lot system has

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provided the core functionality o f the IBPS, but the transaction volume and value handled by the pi lot IBPS have far exceeded the original targets. The situation calls for an immediate expansion o f the system. Originally, the SBV planned to address the capacity problem by adding 11 PPCs throughout the country. Given the recent improvement in telecommunication access and quality in Vietnam, the central bank has decided to focus on upgrading and expansion o f the existing national and regional centers under PSBM 2. This i s in l ine with the intemational trend wherein inter-bank payment systems are increasingly centralized for better efficiency, enhanced reliability and reduced cost. The main activities o f Component 1 are (i) upgrading hardware and installing new software to expand processing capability and strengthen interconnection and system and physical security; (ii) consultant support o f project implementation such as advisory services o n the required legal and regulatory environment and project implementation support; and (iii) staff training, workshops and knowledge transfer. The component’s target group i s the central bank, the banking industry and their customers, and the future FI participants and their clients. The indirect beneficiaries include the government’s Treasury, Customs, and the financial markets, as the expanded IBPS wil l provide faster and more reliable payment services to these institutions.

The project implementing entity under Component 1 i s the Informatics Technology Department (ITDB) o f the SBV. The project team under the first PSBM project wi l l be maintained and enhanced per the recommendations o f the Bank’s financial management capacity assessment. As a result o f the Bank’s procurement capacity review, a procurement consultant wil l be engaged to support the management o f procurement and contract negotiations process.

Component 2, CBS Expansion. Under the f i rst PSBM project, the participating banks have adopted intemational standard core banking solutions, which centralize accounting and control functions with respect to customer files, deposit and loan, general ledger and financial control, trade finance, and other commercial bank core businesses. But the application o f the solutions i s limited to the head office and a few pi lot branches. There i s an urgent need to ro l l out the solutions to mitigate the high operational risk o f running two parallel, but completely different, systems, and to enhance the system and physical security o f the new facilities. To further strengthen operational efficiency and risk management, new modules such as financial management and MIS are required. The banks are also under increased market pressure to provide new products and services through new delivery channels like the internet and telephone banking. Under the component, new hardware and application software wi l l be acquired for the purpose o f systems rollout and expansion. Experienced consultants wil l be engaged to provide project implementation support. Another main activity o f Component 2 i s staff training and workshops for technology transfer and knowledge sharing. The component’s immediate target group is the four participating banks (three o f the country’s largest SOCBs, and one JCB). However, since these banks account for over 66 percent o f the banking sector assets, the whole banking system as well as the public are the eventual beneficiaries.

The project implementing entities o f Component 2 include the Bank for Investment and Development o f Vietnam (BIDV), the Industrial and Commercial Bank o f Vietnam (IncomBank), the Marit ime Joint-stock Commercial Bank (MCB), and the Vietnam Bank o f Agriculture and Rural Development (VBARD). These banks participated in the first PSBM project, and have agreed to maintain and strengthen the existing PrUs in accordance with the

29

Bank’s financial management capacity assessment. The banks wil l also work with procurement consultants to better manage the procurement and contract management process.

Total cost and financing plan: The total project cost i s estimated at U S S l l 2 million, out o f which the proposed IDA Credit would finance US$l05 million. Component 1’s total cost i s estimated at US$26.43 million, and the IDA Credit allocation for the component i s US$25.2 million, or 95 percent o f the component’s total cost. Component 2’s cost is estimated at US$85.57 million, and IDA financing accounts for about 92 percent in an amount o f US$79.8 mil l ion. To facilitate a smooth beginning o f project implementation, a retroactive financing mechanism wil l be available under the proposed Credit. The expenses that are eligible for this financing mechanism should be incurred for goods and consultant services that are procured in compliance wi th the procurement policies and procedures specified in the Development Credit Agreement after January 1,2005 up to the Credit effectiveness. The total amount o f expenses eligible for retroactive financing should not exceed US$600,000.

30

Annex 5: Project Costs

Total Local U S

$mil l ion

Foreign U S $million U S $mil l ion Project Cost By Component and/or Activi ty

Component 1. IBPS Expansion 1,225,000 23,400,000 24,655,000 Component 2. Banking System Expansion 4,129,000 78,109,000 82,238,000 Systems

Total Baseline Cost Physical Contingencies Price Contingencies

Total Project Costs'

5,354,000 101,539,000 106,893,000

2,6 19,000 3,49 1,000 5,137,000 1,646,000 105,000,000 112,000,000

-- -- --

Total Financing Required 7,000,000 105,000,000 112,000,000 'Identifiable taxes and duties are US$19.7 mill ion, and the total project cost, net o f taxes, i s US$93.3 mil l ion. Therefore, the share o f project cost net o f taxes is 83 percent.

31

Annex 6: Implementation Arrangements

The institutional arrangement under the f i rst PSBM project wil l be maintained. However, the number o f the project implementing entities has been reduced from seven to five. The VietcomBank and the EximBank have decided to mobilize funding on their own for the system rollout and expansion. Under PSBM 2 the Informatics Technology Department o f the State Bank o f Vietnam (ITDB) wi l l continue to be responsible for the implementation o f Component 1, IBPS Expansion, and the following four participating banks w i l l be in charge o f the implementation o f Component 2, CBS Expansion: Bank‘ o f Investment and Development o f Vietnam (BIDV), Industry and Commercial Bank (IncomBank), Maritime Joint-stock Commercial Bank (MCB), and Vietnam Bank o f Agriculture and Rural Development (VBARD).

The overall management o f the project i s entrusted to ITDB/SBV, which wil l continue acting as the Project Management Unit (PMU). In addition to i t s responsibility for the implementation o f Component 1, ITDB will monitor and evaluate project implementation under Component 2. The PMU i s expected to ensure that the participating banks follow World Bank policies and procedures throughout the procurement process. The financial management system for the whole project wi l l continue to be placed in and operated by ITDB. The central bank department’s responsibilities under PSBM 2 cover al l aspects o f the project’s financial management arrangements, including accounting, internal control, financial reporting, audit, and management o f special account. In addition, the P M U wil l coordinate with the Ministry o f Finance on issues related to payments to vendors and consultants, and/or reimbursement o f the participating banks. Another important function o f ITDB i s to coordinate with the Bank’s task team and support the supervision missions. To support the function o f the PMU, the proposed Credit wil l finance the incremental operating costs incurred by the PMU for the purpose o f the project management, such as the additional communications and office supply expenses.

Each o f the participating CBs wil l be responsible for the implementation and financial management o f their respective component. The existing Project Implementing Unit (PIU) at these banks shall be retained. The PIUs will identify technical requirements, select contractors and consultants, and supervise contract implementation for the rollout, enhancement and expansion o f the banking operational systems. They wil l also ensure that financial management and procurement are done in accordance with the Development Credit Agreement (DCA) and Wor ld Bank’s policies and procedures on financial management and procurement. In addition, the PIUs are responsible for providing the Bank’s team with the required audited annual financial statements, and other documents related to the project upon request on a timely basis.

The arrangements for project implementation, financial management and procurement are included in the Project Implementation Manual (PIM), which also include a project implementation timetable. The PIM i s available in the project files and at the offices o f ITDB/SBV. The P M U and PIUs wil l update the procurement plans and the project implementation timetable every year. The P M U shall provide the Bank’s task team on a semi- annual basis an Implementation Progress Report regarding the status o f proj ect implementation, including the progress toward achieving the project’s development objectives and intermediate outcomes on an annual basis, as well as actions adoptedheeded to address main problems.

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Annex 7: Financial Management and Disbursement Arrangements

SUMMARY OF THE FINANCIAL MANAGEMENT ASSESSMENT

A financial management review and analysis o f the Second Payment System and Bank Modernization Project (PSBM 2), which was conducted in November 2003 and updated in November 2004, concluded that this project meets the minimum requirements o f the Bank’s OP/BP 10.02. The implementing agency wil l be the Informatics Technology Department (ITDB) o f the State Bank o f Vietnam (SBV) and the project activities wi l l be carried out by the I T D B and four commercial banks. PSBM 2 wil l adopt the traditional disbursement method with a special account maintained by the SBV for IDA credit funds, and separate counterpart bank accounts at the SBV and the commercial banks (CBs) for government contributions. The project wil l produce quarterly financial monitoring reports and annual financial statements consolidated for al l financial activities o f the project. The annual financial statements wil l be audited by independent auditors acceptable to the Bank and in accordance with International Standards o f Auditing and terms o f reference acceptable to the Association

COUNTRY ISSUES

The International Development Association (IDA) conducted a Country Financial Accountability Assessment (CFAA) o f Vietnam in 2001, which provides a diagnosis o f the country’s financial management environment. The C F A A helps the Government o f Vietnam and IDA to, among other things, assess and manage the risk that public funds might be used for unintended purposes and identify the key risks, capacity gaps and constraints to progress in this area. An action plan to address the key findings o f the C F A A has been agreed upon with the Government o f Vietnam.

Key findings o f the C F A A that are relevant to financial management o f the project are the following: (a) management reports for effective decision-making are not widely used; (b) the requirements o f public expenditure accounting are very comprehensive and detailed, compliance with the requirements i s challenging for al l units particularly at the lower levels; (c) accounting staff focus on more easily accomplished requirements l i ke mechanical verification o f payments and receipts; and (d) the regular and efficient monitoring o f state budget information for effective use o f public funds at times i s not carried out in a timely manner.

The C F A A also reports “the current budget arrangement in Vietnam suffers from a lack o f transparency for achievement o f objectives.” The conclusion o f the assessment i s that there i s a certain degree o f fiduciary risk in the use o f public resources, although overall the fiduciary risk for this project i s manageable with the steps that wil l be taken under the financial management plan.

IMPLEMENTATION ARRANGEMENT

Overall management o f P S B M 2 i s entrusted to the ITDB o f the SBV, which wil l act as the Project Management Unit (PMU). The ITDB i s specifically responsible for implementing Component 1, Inter-Bank Payment System Expansion, and wil l supervise the implementation o f Component 2, Commercial Banking Systems Expansion, which wil l be implemented by four CBs, namely BIDV, VBARD, Incombank and M C B . A Project Implementing Unit (PIU) wil l be

33

set up at each o f the CBs, and they wil l be responsible for implementing Component 2 at their own bank.

The financial management system for PSBM 2 wil l continue to be operated by the ITDB. ITDB’s functions cover al l aspects o f the project’s financial management arrangements, including accounting, internal control, financial reporting, audit, and management o f special account. The P I U o f each CB wil l prepare their own budget, and these wil l be consolidated by the ITDB. Each P I U wil l maintain i t s own accounts and record for project management purposes, including payment-tracking arrangements showing date o f invoice’s receipt, dates o f payment approval by the commercial bank and by ITDB and the date o f payment to contractors/suppliers. A similar system wil l be in place in I T D B for i t s own component and monitoring claims submitted by the CBs.

An on-lending agreement wi l l be signed between the government and each CB for the IDA credit associated with Component 2. I t i s recommended that a memorandum o f understanding, setting out the key financial responsibilities and processes o f the project and agreed processing and service standards, be developed and agreed upon between the ITDB and the CBs.

Risk Analysis and Mitigating Measures

Most o f PSBM 2’s activities wil l be implemented via large contracts across a number o f provinces, which were not covered by the f i rs t project. The fiduciary r isks associated with the project therefore wil l be mitigated by an effective contract monitoring system in which payments are monitored against individual contracts/contractors. In addition, ITDB will review and approve claims before payment i s made under Component 2. Other measures include clear documentation o f financial management procedures and responsibilities funds flow, accounting and reporting requirements, and key internal controls such as segregation o f duties, regular reconciliations, application o f proper delegations, controlled access to modifying data in the financial systems.

STRENGTHS AND WEAKNESSES

The ITDB managed the f i rst phase o f the project from 1998 to 2003 and i s familiar with the Bank’s disbursement procedures. Audits o f the f i rs t project over the last 3 years show no significant internal control issues.

The financial management arrangements and processes o f the ITDB have some weaknesses, which need to be addressed. The f i rst PSBM project did not have a Financial Management Manual, although some general guidelines on accounting from the SBV were available. Also, the accounting software o f ITDB was not used to capture al l the transactions o f the project and an Excel spreadsheet was used to prepare the financial statements, with inputs from ITDB’s computerized accounting system and the CBs. I t i s noted that the f low o f information from CBs to the I T D B was not always timely. Under PSBM 2, the memorandum o f understanding between SBV and the four commercial banks and the project financial management manual wil l set out the framework, including the form, format and timing o f the information that SBV and the commercial banks wil l communicate to address this issue.

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Under the first PSBM project the ITDB was not required to prepare and submit Financial Monitoring Reports (FMRs) on a quarterly basis and therefore i s not familiar with this IDA requirement. Maintaining the contract register and the monitoring o f payments against contract were done manually, which required an additional effort o f the project accountant that may not be necessary when the contract register together with suitable contract monitoring reporting i s incorporated into the accounting software.

All identified weaknesses in relation to the accounting software, accounting and reporting procedures, FMRs and Financial Management Manual, staffing have been discussed with the ITDB and are addressed in the Financial Management Action Plan.

STAFFING

The I T D B wil l ensure that the Chief Accountant o f ITDB from the first phase o f the project wil l continue to work with the second phase o f the project. In addition, another accountant dedicated to the second phase o f the project wi l l be identified and appointed. The project management wil l ensure that this accountant has a strong accounting background and experience. Each commercial bank wil l appoint an accountant, with qualifications and experience acceptable to the Bank, to work on the financial management aspect o f the project.

ACCOUETING POLICIES AND PROCEDURES

P S B M 2 wil l use accounting policies and procedures acceptable to IDA. For reporting purposes, Intemational Public Sector Accounting Standards (IPSAS) should be used by the project. P S B M 2 wil l rely on the current accounting and reporting system and intemal controls o f I T D B and wil l modify them as necessary to comply wi th the development credit agreement and the Bank’s policies, guidelines and procedures on Financial Management.

REPORTING AND MONITORING

The P M U wil l prepare annual financial statements in accordance with IPSAS and submit i t s audited accounts to IDA no later than six months after the closing date o f the financial year/ period. The annual financial statements wil l analyze income by sources o f fund and expenditure by categories o f expenditure, project components and sources o f fund in relation to financial budgets. In addition, an analysis o f income and expenditure by each bank wil l be included in the notes to the financial statements.

In addition to the annual accounts, the project wi l l prepare quarterly FMRs in a format agreed upon by IDA and submit them to the Bank no later than 45 days after the closing date o f the reporting quarter. The format o f the FMR i s tailored for monitoring purposes o f the project management and IDA and wil l be made available to the auditors as required.

AUDIT ARRANGEMENTS

Internal Audit

The project wi l l be subject to normal intemal audit procedures o f SBV and the CBs. The findings from intemal audits wil l be shared with the project management, the extemal auditors and IDA.

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External Audit

The project’s financial statements wi l l be audited annually in accordance with International Standards on Auditing by an independent accounting firm. The audit wil l be carried out in accordance with terms o f reference satisfactory to IDA. The Auditor shall be appointed within 6 months from the f i rst disbursement. The auditors’ report wi l l be submitted to IDA no later than six months after the close o f the previous fiscal year. The auditor together with the financial statements audit report wil l also provide a management letter addressing internal control weaknesses o f implementation agencies. Auditing fees may be financed by the credit.

Flow of Funds

The flow o f funds i s summarized as follows:

Notes: - _ _ _ - - F Fund f low __+ Document f low

0 Contractors/consultants/sewice providers submit invoice and other documents concerned to ITDB (1) or to CBs (PIU) (2) depending on the component o f the project for which the supply o f goods and/or services i s contracted; CBs review the invoice and verify i t s accuracy and validity against the contract or purchase order and the certification o f goods/services received and submit payment request to ITDB (3) for review and approval; ITDB reviews the payment request (4) and then returns to the commercial bank (4); Payment from counterpart fund i s made from CBs (5) or ITDB (6) depending on the component o f the project from which i t i s paid; The IDA share o f eligible expenditure i s paid from the special account by I T D B (7);

0

0

0

0

36

e

e

e

ITDB submit withdrawal applications together with required supporting documents (if any) to the Ministry o f Finance (MOF) for review and approval (8); The withdrawal application i s approved by MOF (9), and then returned to ITDB for submitting to the Bank for credit disbursement (1 0); and Disbursement i s made from the Bank to the special account (1 1) or directly to contractors/consultants/service suppliers depending on type o f withdrawal application (SOE-based S A replenishment or direct payment).

DISBURSEMENT ARRANGEMENTS

The project wil l use the traditional disbursement arrangements acceptable to IDA, in accordance with government procedures on disbursement o f official technical assistance. Disbursement wil l be made against applications o f withdrawal for direct payment and replenishment o f the Special Account (SA). Replenishment o f the SA wil l be on the basis o f SOEs and Summary Sheet. The applications o f withdrawal, for both direct payment and replenishment o f SA, wi l l be made by the ITDB, the special account holder, in accordance with IDA procedures.

Use of Statement of Expenditure

Expenditures for (a) goods under contracts costing less than US$lOO,OOO equivalent each; (b) consultants’ services provided by f i r m s under contracts costing less than US$lOO,OOO equivalent each; (c) consultants’ services provided by individuals under contracts costing less than US$50,000 equivalent each; and (d) training and incremental operating costs, wil l be paid from the S A and detailed in SOE-supported withdrawal applications for replenishment o f SA. Withdrawal applications for expenditure exceeding the SOE thresholds specified above are subject to direct payment and wil l be supported by full documentation and signed contracts. Supporting documentation for statement o f expenditures would be retained by the ITDB and by individual CBs for review by IDA missions and the project’s external independent auditor.

Special account

A special account (SA) in U S Dollars wil l be opened in a commercial bank by the Borrower’s central bank, on terms and conditions acceptable to IDA. The bank in which the SA i s opened should be able to produce monthly bank statements and make them available to the project in a timely manner. The init ial allocation o f SA and i t s authorized allocation are set at US$2 mil l ion. Payment from SA is to be made for IDA’S share o f the project’s eligible expenditures, in accordance with the Development Credit Agreement and World Bank’s guidelines. Replenishment o f the SA will be made on the basis o f Statements o f Expenditure, supported by appropriate documentation, and submitted to IDA together with the withdrawal applications, at least every 2 months or when the balance o f the S A i s lower than 70 percent o f i t s authorized allocation, whichever comes first.

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FINANCIAL MANAGEMENT ACTION PLAN

Action Identi fy and select 6 accounting staff for the project at ITDB and CBs with qualifications acceptable to I D A . Appoint accounting staff for the project at ITDB and CBs with qualifications acceptable to IDA. Draf t a Memorandum o f Understanding setting out the financial processes and service standards between the ITDB and the commercial banks Sign Memorandum o f Understanding between S B V and the commercial banks. Draf t an on-lending agreement between the government and each commercial bank, satisfactory to IDA. Sign an on-lending agreement between the government and each commercial bank. Improve accounting software o f the ITDB to capture a l l project expenditure in an integrated system including contract registers, payments against individual contracts, and payments f rom counterpart fund by CBs. Improve reporting function o f the software to analyze expenditure by bo th source o f fund and expense category, and facilitate preparation o f SOE by transactions and source o f fund satisfactory to IDA. Agree on the content and format o f FMR Finalize draft project financial management manual. Adopt project financial management manual acceptable to IDA by ITDB and CBs. Provide training o f project accountants Appoint auditors

Responsibility Date of completion

ITDBi CBs By negotiation

ITDBi CBs By effectiveness

SBViCBs By negotiation

S B V i CBs By effectiveness

By negotiation

By effectiveness

S B V I MOF i CBs

S B V i MOF i CBs

ITDB By effectiveness

ITDB By negotiation ITDB By negotiation

ITDBi CBs By effectiveness

ITDB By effectiveness

ITDB 6 months after effectiveness

SUPERVISION PLAN

Supervision o f project financial management wi l l be perfonned on a risk-based approach at least twice a year. The supervision will review the project’s financial management system, including but not limited to operation o f Special Account, SOEs, internal controls, reporting and fol low up o f audit findings and previous supervision mission findings. IDA’S financial management specialist wil l conduct the financial management supervision.

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Project Disbursement Category by Comnonent cost Credit Allocation

Training and Workshops SUBTOTAL

1 MCB 1 I I

263,000 250,000 16,203,000 15,400,000

I n com Ban k Goods Consultant services Training and Workshops

SUBTOTAL

17,076,000 16,300,000 52,000 50,000 84,000 80,000

17.21 2.000 16.430.000

39

Goods Consultant services Training and Workshops

SUBTOTAL

2,443,000 2,330,000 526,000 500,000 42,000 40,000

3.01 1.000 2.870.000 VBARD Goods Consultant services Training and Workshops

SUBTOTAL Total Project Cost & IDA funding

48,066,000 44,100,000 1,000,000 950,000

83,000 50,000 49,149,000 45,100,000 112,000,000 105,000,000

Annex 8: Procurement

A. General

Procurement for the proposed project would be carried out in accordance with the World Bank’s “Guidelines: Procurement Under IBRD Loans and IDA Credits” dated M a y 2004; and “Guidelines: Selection and Employment o f Consultants by World Bank Borrowers” dated M a y 2004, and the provisions stipulated in the Legal Agreement. The general description o f various items under different expenditure categories i s described below. For each contract to be financed by the Credit, the different procurement methods and consultant selection methods, estimated costs, prior review requirements and time frame are agreed upon between the Borrower and the Bank in the Procurement Plan. The Procurement Plan wil l be updated at least annually, or as required to reflect the actual project implementation needs and improvements in institutional capacity.

Background: Under the f i rst Bank-funded Payment System and Banking Modernization Project (Cr. 27850-VN) which closed in December 2003, a single-current-account national Inter-Bank Payment System (IBPS), and two core banking software and hardware solutions were procured by the State Bank o f Vietnam and 6 commercial banks through I C B procedures using the Bank’s 2-stage IT bidding documents. The I C B process resulted in 7 contracts being awarded to 2 suppliers (3 core banking contracts wi th Silver-Lake and 4 IBPS and core banking contracts with Hyundai). These solutions were only for a limited number o f pi lot sites. Building upon the current successful pi lot operations o f the IBPS and the core banking solutions in each o f the participating commercial banks, the objective o f the proposed second project i s to expand the existing IBPS, enhance and ro l l out the entire suite o f core banking solutions within the participating commercial banks located throughout the country, fill the gaps in software coverage and hardware capacity that were not included in the pilot, and improve banking services by adding new delivery channels.

Procurement of Works: N o procurement o f works i s expected under this project.

Procurement of Goods: Goods procured under this project would include hardware, software, and communication and facility security equipment. The procurement wi l l be done using the Bank’s SBD for al l I C B and National SBD agreed upon with the Bank. More specifically, the goods to be procured are listed below.

IBPS Software: This wi l l include synchronized software solutions, database, middleware, and application software integration and implementation support.

Core Banking Software: This wil l include additional software licenses, implementation support, and enhancement and post implementation maintenance & support services for the existing core banking systems to make the services available at a large number o f additional locations throughout the country.

New Banking Software: This wil l include new banking applications that can be added to the existing core banking systems, since the systems are based on an open architecture, new service delivery channels such as intemet banking and call centers, and implementation support.

40

Processing Hardware such as servers, telecommunications equipment, PCs, security devices, ATM and POS machines which are required to (i) upgrade the current IBPS and CBS technical infrastructure; and (ii) provide better services to IBPS users and commercial banks customers.

A very important consideration i s a proper integration o f the various new components to be procured under the new project with the original systems to ensure that the final product i s a complete operational system, as a lack o f integration would create serious coordination and responsibility risks.

Direct contracting o f the software and related services therefore i s a viable method to address the integration and responsibility issues since the procurement o f a number o f goods involves enhancement and extensions o f the existing software. Standardization o f the core banking software i s imperative, as the software required at the additional branches must be identical to that already installed at other branches, and especially compatible with that installed at the central processing centers. The existing solution, i.e. the systems installed during the init ial pilots, have proven to be suitable. However, software licenses and installation support services must be acquired to support the rollout. The use o f similar core banking software from other suppliers would result in compatibility problems and would require mult iple software packages to be supported at the central processing site, as well as additional interface software to integrate the systems into a cohesive whole. I t i s clearly not a desirable approach to equip a bank’s branches with different core banking software, as i t would be tremendously costly as well as technically difficult. All DC contracts are subject to the Bank’s prior review.

International Competitive Bidding (‘CB) procedures and standard documents shall be used for goods estimated at a cost o f more than US$lOO,OOO equivalent per contract. This method i s expected to be used to procure goods such as security enhancement systems, disaster recovery systems, licenses for new system products such as new modules for banking application, servers, ATM and POS system packages including software (POS and ATM module,) and hardware (Automatic Teller Machines and Point o f Sale machines), a credit card management system, communications equipment etc., which represent the bulk o f goods procurement. The possibility o f grouping al l hardware and similar equipment for al l participating banks into a couple o f large contracts was assessed. However, the possible benefit from an economy o f scale would be outweighed by the complexity o f Government accounting requirements, since each bank would be treated as an independent “project owner” with a separate budget, procurement and accounting. The possibility o f using original system suppliers (Silver-Lake and Hyundai) to act as procurement agents for the PMU and PIUs for procurement o f hardware was also assessed. However, i t would be dif f icult for these suppliers to bear al l the risks associated with the procurement process. In addition, in this case, the vendors o f major hardware o f the existing system would be excluded from competition because o f potential conflicts o f interest in case the vendor was involved earlier in preparation o f the hardware procurement. Any I C B contract with a value above US$lOO,OOO i s subject to the Bank’s prior review.

National Competitive Bidding (NCB) procedures (incorporating the improvements listed in the DCA) and sample procurement documents agreed with the Bank would be used for procurement of goods estimated to cost less than US$lOO,OOO but more than US$20,000 per contract. The

41

first N C B contract without regard to contract value i s subject to the Bank’s prior review. All other N C B contracts are subject to the Bank’s post review.

Shopping procedures in accordance with Articles 3.5 o f the Guidelines would be used to procure goods such as fire extinguishers, estimated to cost less than US$20,000 per contract. The first shopping contract without regard to contract value i s subject to the Bank’s prior review. Al l other shopping contracts are subject to Bank’s post review.

Procurement o f non-consulting services: N o procurement o f non-consulting services i s expected under the project.

Selection of Consultants: Consulting services include procurement and implementation assistance, legal framework consultancy, contract supervision, quality assurance and training. N o procurement o f consulting services composed entirely o f national consultants i s expected under the project.

Quality and Cost-Based Selection (QCBS) procedure and standard documents would be used for major consulting services estimated to cost more than US$lOO,OOO equivalent per contract. Short l i s ts o f consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely o f national consultants in accordance with the provisions o f paragraph 2.7 o f the Consultant Guidelines. Any QCBS contract with a value over US$lOO,OOO i s subject to the Bank’s prior review.

Consultant QualiJication (CQS) Consulting Services estimated to cost less than US$lOO,OOO per contract may be procured through CQS procedure. Any CQS contract with a value over US$lOO,OOO i s subject to the Bank’s prior review.

Individual Consultants (IC): Consulting services meeting the conditions specified in paragraph 5.1, Section V o f the Consultant Guidelines would be procured in accordance with procedures specified in paragraphs 5.2 through 5.4 o f the same section. Any I C contract with a value over USS50,OOO i s subject to the Bank’s prior review.

Operating Costs: Operating costs would cover incremental costs o f the PMU at the ITDB/SBV, which are related to project implementation activities including office supplies and communications.

Others: In addition to training incorporated in major goods and services contracts, a number o f separate workshops and training courses both in-country and overseas wil l be carried out in accordance with agreed procedures based on training programs with detailed itemized budgets approved by the Bank. The training programs shall provide the objectives, criteria for selection o f participants, venue and/or institute selected, period o f activity and estimated cost. Expenditures incurred under these activities wil l generally be claimed under SOEs.

The procurement procedures and SBDs to be used for each procurement method, as wel l as model contracts for goods procured, are presented in the Project Implementation Manual.

42

B. Assessment o f the agency’s capacity to implement procurement

Project implementing entities

Procurement activities wi l l be carried out by the following 5 project implementing entities; each has maintained a separate Project Management Uni t (PMU for ITDB/SBV) or Project Implementing Unit (PIU for the participating banks), and wil l be responsible for their respective component:

Staffing o f Project Unit 1 Staffing o f Procurement Section

1. Informatics Technology Department o f the State Bank o f Vietnam (ITDBBBV) 2. Vietnam Bank for Investment and Development (BIDV) 3. Vietnam Bank for Agriculture and Rural Development (VBARD) 4. Vietnam Bank for Commerce and Industry ( INCOMBANK) 5. Vietnam Maritime Bank (MARITIME BANK)

ITDBiSBV

The staffing o f the PMU and the PIUs and their respective procurement units are shown in the following table:

10 5 BIDV VBARD INCOMBANK MCB

20 10 20 10 30 8 30 5

Nguyen Chien Thang, Sr. Procurement Specialist (EAPCO) carried out an assessment of the capacity o f the implementing entities to implement procurement actions for the project on March 8-15, 2004. The assessment found that the P M U and al l the PIUs are fully functional and staffed adequately with technical experts on banking and IT with considerable procurement experience gained through 5 years’ implementation o f the recently and successfully completed f i rst phase project. The assessment reviewed the organizational structure for implementing the project. The ITDB/SBV has maintained a separate P M U and the four participating banks a separate PIU.

The key issues and r isks concerning the procurement component for implementation o f the project have been identified and are mainly related to the capacity o f the PMUs to negotiate direct purchase o f software from the original system contractors, to prepare specification for new hardware and software to be procured through ICB, to evaluate bids and supervise contract implementation and overall, to act as system integrator.

The corrective measures which have been agreed upon are: (1) to use input from original system contractors for preparation o f specification for major and complex I C B contracts for which compatibility and integration with the existing system are an issue; (2) to use independent expert consultants to review or prepare specification, participate in direct purchase negotiation, bid evaluation and contract supervision.

The overall project risk for procurement i s average.

43

C. Procurement Plan

The Borrower, at appraisal, developed a procurement plan for project implementation, which provides the basis for the procurement methods. This plan has been agreed upon between the Borrower and the Project Team in November 2004 and i s available at ITDB/SBV at the State Bank of Vietnam, Hanoi, Vietnam. I t wi l l also be available in the project’s database and in the Bank’s external website. The Procurement Plan wil l be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

D. Frequency of Procurement Supervision

In addition to the prior-review supervision to be carried out from Bank offices, the capacity assessment o f the implementing entities has recommended annual supervision missions to visit the field to carry out post review o f procurement actions.

E. Details of the procurement Arrangements Involving International Competition

1. Goods, Works, and Non-Consulting Services

(a) List o f contract packages to be procured following I C B and direct contracting: See attached Tables.

(b) I C B contracts estimated to cost above US$lOO,OOO per contract and al l direct contracting wil l be subject to prior review by the Bank.

2. Consulting Services

(a) List o f consulting assignments with short list of intemational f i rms : See attached Tables.

(b) Consultancy services estimated to cost above USS100,OOO per contract and al l single source selection o f consultants ( f i rms) wi l l be subject to prior review by the Bank.

44

Annex 9: Economic and Financial Analysis

Benefits from the Second Payment System and Bank Modernization Project (PSBM 2) cannot b e easily quantified in conventional terms, as cost-accounting mechanisms are not yet adopted o n a widespread basis in Vietnam’s banking sector. However, there i s extensive empirical evidence showing that the national economy in any country benefits substantially from an efficient payments system infrastructure. The economic benefits stemming from well-functioning payments systems are generally accepted around the world, as they are an essential element o f a modern financial system infrastructure. They offer significant tangible and intangible economic and social benefits. Reliable and efficient payment systems substantially improve provision o f services to businesses and households, increase confidence in banks, and hence help to deepen financial intermediation and stimulate private sector growth. The benefits o f these types o f investments are described below and in many instances have already taking root in Vietnam with the successful completion o f the f i rs t (PSBM 1) project. However, the Inter-Bank Payment System (IBPS) and the Banking Operational Solutions (CBS) established under the f i rst project were pilots. P S B M 2 is designed to ro l l out the systems on a national basis and thus make the benefits available to al l geographical areas o f Vietnam.

Item Volume o f Transactions

Value (billion dong)

Improving payment services

2001 2002 2003 207,246 257,52 1 309,275

1,082,000 1,233,000 1,384,000

The legacy payments arrangements based on obsolete technology between the SBV and the banks, between the banks and within a banking organization underpinned the payments system relationships before the establishment o f the pi lot IBPS. This system resulted in an inefficient use o f the available money stock, inequitable risk sharing between transaction parties, lack o f confidence in the banking system, and inadequate support for the development o f new financial services. When the pi lot IBPS utilization started about two years ago, i t processed 233 transactions per day with a cumulative value o f VND 25 bi l l ion (US$15 million). Now, the system processes over 10,000 transactions per day with a cumulative value exceeding VND 4 tr i l l ion (US$267 million). These new payments arrangements have contributed substantially to the ability o f the banking system to deliver efficient funds transfer services to the economy in general. It has provided specific measurable improvements by successfully reducing float (from up to 30 days in mid-1995 to less than 24 hours in 2004), accelerating circulation o f funds and increasing efficiency o f funds transmission, while providing convenience and service to users. Available statistics on the operation o f the IBPS since i t s introduction show a steady increase in both the volume and value o f transactions as illustrated in the fol lowing table:

As mentioned above, the pi lot IBPS has substantially reduced the time taken to process payment transactions. In addition, the share o f non-cash payments in the economy has increased steadily since 1999, from about 70 percent to about 77 percent in 2003. With the planned expansion supported by PSBM 2, this trend wil l continue and wil l provide opportunities for al l sectors o f the economy including individual consumers to move away from informal mechanisms, as the formal sector wi l l offer services that are less expensive and more reliable.

45

Based on recent experience; the SBV believes that transaction volume wil l grow at the rate o f 35 percent per annum over the next five years. In addition, the IBPS i s being increasingly used to process payment collections and disbursements relating to government activities such as those associated with the treasury and customs departments, and wil l also underpin the cash leg o f financial market activities such as a future interbank money market and the cash leg o f securities transactions.

Improving monetary policy implementation

Large and unpredictable levels o f cash float influence short-term liquidity in the economy and create uncertainty in controlling monetary aggregates. The pi lot IBPS has enhanced the SBV’s capacity in monetary policy execution as it has substantially reduced float, increased the availability o f funds in the formal economy-without the negative inflationary implications o f an absolute increase in the money supply-and reduced uncertainty in the distribution o f float on a daily basis. The expansion o f the new infrastructure and the associated information systems wil l further improve the ability o f (SBV) to manage liquidity on a national basis in near real-time, adjust reserve requirements efficiently and use indirect pol icy instruments through open market operations.

Improving CBs operational efficiency

Before the pi lot banking operational systems went into operation under the f i rs t PSBM project, the participating banks used decentralized, old technology PC-based banking systems, which were ill-fitted to provide a basis for the design and delivery o f modern banking products and services in a cost-effective and risk management-based manner. Thus the ability o f the participating banks to offer a reasonable range o f customer demanded services was quite limited, which in turn had substantial constraining impacts on overall economic development and growth. The new banking systems are customer-oriented and are based on modern centralized “customer information f i les and accounting systems.” Senior bank management are now able to plan, monitor and control the status o f banking operations at both the branch and aggregate level on a daily basis, and thus better manage the contribution to profitability by individual business l ines on a customer, product, and branch basis for those branches that have installed the new systems. With the implementation o f PSBM 2, information relating to every aspect o f the bank’s business wil l be available on a centralized basis. Thus participating banks wil l be able to produce accounting statements on a daily basis including balance sheets and proactively manage al l aspects o f the business o n a branch, regional and national basis.

The organizational structure and managerial attitudes within each participating bank have started to change and are allowing the banks to exploit the benefits attaching to the new systems. The systems expansion under PSBM 2 wil l provide bank management with timely information on an increasingly expanded geographical basis. Branch managers wi l l be able to focus on customer service activities, expand their customer base and the range o f services offered, while spending less time o n reporting and data management. In summary, the expansion in banking systems will strengthen the institutional capacity o f participating banks especially with respect to business planning, new product and market development, financial accounting and reporting and r isk management. The associated improvements in operational efficiency and profitability wil l

46

enhance the banks’ value and potential credit rating, and thus support future possible equitization or extemal market borrowing activities.

Improving CBs fund mobilization

For the financial sector, the potential benefits o f the payments and banking systems modemization wil l be realized through lower intermediation and transaction costs, and through additional revenues realized from new products. In addition, improved services should attract a larger number o f customers and deposits. For example, today most salaries in Vietnam are paid in cash and do not generally find their way into the banking system. However, more and more employers are processing salary payments through the banking system when such opportunities arise. Participating banks indicate that salary payments are one o f the factors accounting for the substantial increase in customer accounts since 2002. Experience in al l countries confirms that once an account relationship i s established, customers rapidly become comfortable wi th using other banking services, including fee-based services that provide convenience such as the use o f ATM facilities for cash withdrawals and deposits. Such changes, which are already beginning to take place in Vietnam, wi l l further improve non-interest revenues for the participating banks and access to the balances maintained in customer accounts.

Improving fight against money laundering and criminal activity

The new banking information infrastructure, coupled with a decrease in cash transactions, wi l l enable better monitoring and control o f financial transaction flows in a timely and transparent manner. This wil l provide a valuable tool in the fight against money laundering activity and in particular wil l support investigations relating to suspicious and abnormal funds transfers.

In addition to the direct benefits described above, the expanded IBPS and CBS are expected to bring about the following indirect, higher level benefits.

Promoting economic activity

With reliable and efficient payment mechanisms, state-owned and private companies, as wel l as small and medium enterprises (SMEs), wil l continue to benefit from the following:

More efficient support for day-to-day business operations (payments o f goods to suppliers and receipts o f timely payments from their customers); Optimization o f their available liquidity through efficient payment order processing and the potential to switch balances into the most profitable bank-maintained accounts on a short-term basis; Reduction in under-utilized cash reserves (decreasing the use o f cash) and their conversion to productive purposes. For example, through deposits, savings or investment accounts; or through use as working capital that underpins business expansion.

Additionally, a reliable and efficient payment system provides a strong incentive, as well as being a prerequisite for economic agents to move away from informal economy mechanisms and the associated r isks to the formal economy and the advantages provided through access to a

47

broad range o f safe, reliable and cost-effective services and convenient new service delivery channels.

Broadening access to financial services

Since the Inter-Bank Payment System (IBPS) began l ive operation in M a y 2002 and up to December 2003, more than 500,000 new accounts have been opened at CBs throughout the country; the number o f ATMs continues to grow and payments v ia debit and credit cards are starting to expand in the major cities and commercial centers throughout the country. Thus, access to financial services i s becoming substantially more convenient. Convenience has also increased for customers undertaking business at bank branches, as the end-to-end time per transaction has decreased quite dramatically.

A primary objective o f PSBM 2 i s to assist the banking sector provide basic services to the majority o f the population. These services, which include access to credit, access to deposit- taking services and access to remittance services, wil l satisfy the major needs o f citizens who today are unserved or underserved. The widespread availability o f the new services wil l also enhance access to working capital loans for entrepreneurs and investors, and thus indirectly result in increased employment opportunities throughout the economy.

Facilitating integration with international markets

Large sections o f al l economies are increasingly dependent on international trade. International trade requires an efficient banking industry to facilitate trade and funds transmission services. The pi lot IBPS has already provided an internationally compatible IT platform for Vietnam's banking sector, and the expanded IBPS wil l further consolidate and expand the benefits o f the f i rs t project to connect institutions throughout Vietnam efficiently and effectively with the international financial and real sectors. Taking account o f the agreements relating to financial sector liberalization under the Vietnam-US. BTA and with the eventual accession to WTO, the expansion o f the new CBS wil l also help the participating banks better prepare themselves to face new challenges while satisfying the needs o f their customers.

Fiscal impact and sustainability analysis

Fiscal impact. PSBM 2's investment costs and recurrent/operational/maintenance costs for the operation o f the system wil l be borne by the SBV, as in the previous project. However, these costs wil l be recovered by appropriate fees charged to participants for the services provided, while the participating banks' costs would be recovered by the savings realized through efficient operation o f the payment systems in terms o f time, labor, and revenues from new products and an expanded customer base. Given the cost recovery features o f this project, the fiscal expenditures related to the implementation o f this operation would be minimal. Counterpart funds for the project have been budgeted by SBV and the participating banks, which have made continuing investment on their own to upgrade and expand their electronic banking system.

Sustainability. This lending operation i s an IDA credit with highly concessional terms and would not present any extra debt service burden to the government's budget. Vietnam has

48

maintained a prudent fiscal pol icy since the country opened i t se l f to the international community, and the government has established a track record for l ow budget deficits for the past ten years at below five percent of the GDP. Debt service (principal and interest) for exports remains below 10 percent, a manageable ratio, with exports growing at an annual average o f over 15 percent (2000-2004) and with an annual GDP growth rate o f about 7 percent a year. The stock o f extemal debt as a share o f GDP i s less than 40 percent and this share i s projected to decline to about 34 percent in 2004.

49

Annex 10: Safeguard Policy Issues

VIETNAM: VN-Second Payment System and Bank Modernization Project

NIA

50

Annex 11: Project Preparation and Supervision

Below is a timeline o f project preparation.

P 1 anned Actual P C N review 10/15/2003 10/30/2003 Init ial P I D to PIC 02/20/2004 02/20/2004 Init ial ISDS to PIC NIA NIA

Negotiations 01/24/05 Board/RVP approval 3/8/2005 Planned date o f effectiveness 06/08/05 Planned date o f mid-term review Planned closing date 06/08/ 10

Appraisal 06/1/2004 11/10-22/2004

11/15/2007

Key institutions responsible for preparation o f the project include the State Bank o f Vietnam, and the fol lowing CBs: Bank for Investment and Development o f Vietnam (BIDV), Industrial and Commercial Bank of Vietnam (ICB), Vietnam Marit ime Joint-stock Commercial Bank (MCB), and Vietnam Bank for Agriculture and Rural Development (VBARD).

A Japan PHRD grant for US$444,250 (TF053537) was received and used for project preparation by the SBV to fund the following consultant services: (a) assessment o f technical design and detailed costing, (b) review o f international charging models for software packages, (c) preparation o f procurement packages, (d) review o f Vietnam’s laws and regulations on electronic transactions and records against the international best practices, (e) preparation o f participating banks’ profiles, ( f ) preparation o f the project Financial Management Manual, and (8) upgrading o f PMU accounting software. The grant has also supported staff training o n procurement and commercial contract management for the SBV and the participating banks, upgrading o f the P M U office equipment and incremental operating cost. The grant i s being successfully executed by the SBV. All planned outputs are expected to be completed by early March 2005. The consultant’s performance has been satisfactory, with significant transfer o f technical knowledge to their client. The SBV and the participating banks have also benefited from the training activity and the strengthening o f the project financial management system.

Bank staff and consultants who worked on the project include:

Name Xiaofeng Hua Miguel Navarro-Martin Robert Keppler Thomas Rose James Seward Thang-Long Ton Thang Chien Nguyen Thong Quang Tran Hoi-Chan Nguyen

Tit le TTL, Financial Analyst Sr. Financial Officer Sr. Adviser Adviser Financial Sector Specialist Economist Sr. Procurement Specialist Financial Management Specialist Senior Counsel

Unit EASFP BCFBD OPD EASFP EASFP EASPR EAPCO EAPCO LEGEA

51

~

Name Title Unit Laura Mitchel l Team Assistant EASFP Lachlan Fleming Consultant Arthur D. L i t t le Spain Consultant Schlumberger SEMA Consultant

Bank funds expended to date on project preparation: 1. Bank resources: 1 17,747 2. Trust funds: 250,793 3. Total: 368,539.86

Estimated Approval and Supervision costs: 1. Remaining costs to approval: 82,253 2. Estimated annual supervision cost: 90,000

52

Annex 12: Documents in the Project Fi le

A. Counterpart documents

Pre-Feasibility Studies, October 2004 Feasibility Studies, January 2005 TORS for PHRD grant funded consultants, September-December 2004 Government consultant report on project technical design and detailed cost, October 2004 Government consultant report on software charging models, October 2004 Government consultant report on procurement packages, December 2004 Project Implementation Manual, January 2005 Draft government Subsidiary Loan Agreement, January 2004 Draft P M U Financial Management Manual, January 2005

B. Bank documents

0

Project Concept Note, October 2003 Minutes o f decision meeting, April 2004 Preparation and appraisal mission aide-memoirs and back to office reports, April - November 2004 Arthur D. L i t t le Report on M C B and BIDV, March 2004 Arthur D. L i t t le Report on ICB, March 2004 Schlumberger S E M A Report on VBARD, March 2004 L. Fleming report on commercial banking system expansion, M a y 2004

53

Annex 13: Statement o f Loans and Credits

Original AmoLiiit in US$ Millions Difference between expected and actual

disbursements

Project ID FY

PO59663

PO7101 9

PO44803

PO75399

PO51 838

PO59936

PO73778

PO73305

PO72601

PO66396

PO52037

PO62748

PO42927

PO59864

PO42568

PO56452

PO04833

PO04845

PO04828

Po5 1553

PO04839

PO45628

PO04844

PO04843

PO04830

PO04838

2004

2003

2003

2003

2002

2002

2002

2002

2002

2002

200 1

2001

200 1

2000

2000

2000

1999

1999

1999

1999

I998

I998

I998

1998

1997

I996

Purpose IBRD IDA SF GEF Cancel. Undisb. Orig.

VN-Road Network Improvement

VN-GEF Demand-Side Management & Energy

VN-PRIMARY EDUC FOR DISADVANTEGED CHILRE

Public Financial Management Reform Proj.

VN-PRIMARY TEACHER DEVELOPMENT

V N -Northein Mountains Poverty Reduction

VN-GEF-System Energy Eqiiitizatioii- Renewa

VN-Regional Blood Transfusion Centers

V N - Rural Finance II Project

VN-SYSTEM ENERGY, EQUlTlZATlON & RENEWAB

VN-HCMC ENVMTL SANK.

V N - COMMUNITY BASED RURAL INFRA.

VN-Mekong Transport/Flood Protection

VN-RURAL TRANSPORT II

V N - COASTAL WetVProt Dev

VN-RURAL ENERGY

VN-Urban Transport Improvement

V N - MEKONG DELTA WATER

VN-HIGHER EDUC.

VN-3 CITIES SANITATION

V N -FOREST PROT. & RUL DE

VN-TRANSM ISSION & DISTR

VN-AGRIC. DIVERSIFICATION

VN-Inland Waterways

VN-WATER SUPPLY

VN-NATIONAL HEALTH SUPPORT

Total:

0.00 225.26

0.00 0.00

0.00 138.76

0.00 54.33

0.00 19.84

0.00 l10.00

0.00 0.00

0.00 38.20

0.00 200.00

0.00 225.00

0.00 166.34

0.00 102.78

0.00 110.00

0.00 103.90

0.00 31.80

0.00 150.00

0.00 42.70

0.00 101.80

0.00 83.30

0.00 80.50

0.00 21.50

0.00 199.00

0.00 66.90

0.00 73.00

0.00 98.61

0.00 101.20

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

5.50

0.00

0.00

0.00

0.00

4.50

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

8.19

0.00

0.00

0.00

0.00

0.00 0.00

0.00

31.28

0.00 2.35

230.27

5.50

195.70

57.83

21.36

119.41

5.37

44.70

177.02

261.26

177.00

113.59

109.67

42.82

3 I .45

72.98

19.47

84.82

67.47

64.30

17.71

118.62

37.60

49.91

14.67

24.10

0.00 0.33

0.88

-1.03

7.94

28.11

0.53

1 1.64

-26.98

65.02

20.07

16.08

78.50

20.32

23.10

60.75

25.47

70.84

49.73

33.88

15.63

109.95

23.88

45.55

49.95

33.04

F m . Rev’d

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

7.56

0.00

0.00

0.00

0.00

0.00 0.54

0.00

23.37

-0.23

1 1.28

22.99

10.54

11.99

7.89

0.00

0.00 2,544.72 0.00 10.00 41.82 2.164.60 763.18 95.93

54

VIETNAM STATEMENT OF IFC’s Held and Disbursed Portfolio In Mi l l ions o f U S Dollars

Committed Disbursed

I FC IFC

FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

2003 ACB-Vietnam 0.00 5.02 0.00

2002

2002

2002

2002

2003

1996

I998

I997

I995197

2001

I996

2003

2002103

1996

AZIAGF Vietnam

CyberSoft

Dragon Capital

F-V Hospital

Glass Egg

Holcim Vietnam

MFL Vinh Pliat

NATL

Nghi Son Cement

RMlT Vietnam

SMH Glass Co. Sacombanlc

VEIL

VILC

0.00

0.00

0.00

5.00

0.00

18.54

0.15

14.56

16.99

7.25

6.1 1

0.00

0.00

0.00

1.32 0.00

I .25 0.00

2.00 0.00

0.00 3.00

1.75 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

0.00 0.00

2.93 0.00

8.00 0.00

0.75 0.00

0.00

0.00

0.00

0.00

0.00 0.00

31.29

0.00

11.34

12.43

0.00

0.56

0.00

0.00

0.00

0.00

0.00

0.00

0.00

5 .oo 0.00

18.54

0.15

14.56

16.99

0.00 6.1 1

0.00

0.00

0.00

0.00

1.32

I .25

2.00

0.00

0.00 0.00

0.00

0.00

0.00

0.00

0.00

2.77

0.00

0.75

0.00

0.00

0.00

0.00

3.00

0.00

0.00

0.00

0.00 0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00 0.00

0.00

31.29

0.00

I I .34

12.43

0.00

0.56

0.00

0.00

0.00

Total portfolio: 68.60 23.02 3.00 55.62 61.35 8.09 3.00 55.62

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

2002 F-V Hospital 0.00 0.00 0.00 0.00

2000 Interflour 0.01 0.00 0.00 0.01

1999 MFL Chau Giaiig 0.00 0.00 0.00 0.00 1999 MFL M i d i Minh 0.00 0.00 0.00 0.00

2000 MFL Mondial 0.00 0.00 0.00 0.00 2000 MFL-AA 0.00 0.00 0.00 0.00

Total pending commitment: 0.01 0.00 0.00 0.01

55

Annex 14: Country at a Glance

VIETNAM: VN-Second Payment System and Bank Modernization Project

P O V E R T Y and S O C I A L Vietnam

2 0 0 2 Popuiation, mid-year (millionsj 80.5 GNi per capita (Atlas method, US$) 430

34.8 GNi (Atlas method, US$ billionsj

Average annual g rowth , 1996-02

Population (%) 1.3 Labor force (%j 1.7

M o s t recent e s t i m a t e ( la tes t year avai lable, 1996-02)

Poverty (%of population belo wnatio nal po verty linej Urban PO pulation (%oftotalpopulationj 25 Life expectancyat birth (years) 70 Infant mortaiityiper 1,OOOlive births) 26

34 77

6 6 Male 6 9 Female 6 2

Child malnutrition (%of children under5j Access to an improved water source (%ofpopulation) illiteracy (%ofpopulation age 159 7 Gross primaryenroliment (%of school-age populationj

KEY ECONOMIC R A T I O S a n d LONG-TERM T R E N D S

1982 1992

GDP (US$ billions) .. 9.9

Exports of goods and services/GDP .. 34.7 Gross domestic investmentiGDP .. V.6

Gross domestic savingsiGDP .. x3.6 Gross national savingsiGDP

Current account balanceiGDP .. -0.8 Interest paymentsiGDP .. 0 4 Total debtiGDP .. 246.6 Total debt serviceiexports .. ' 7.1 Present value of debt/GDP Present value o f debtiexports

1982-92 1992-02 2 0 0 1 (average annualgrovdh) GDP 5.2 7.4 6.9 GDP DercaDita 2.9 5.8 5.5

Eas t As ia B Low-

P a c i f i c i n c o m e

1,838 950

1,740

10 12

38 69 33 15

76 0

6 6 6 5 6 6

2 0 0 1

32 7 312 54 6 28 8 30 9

16 11

38 5 6 7

33 5 60 8

2,495 430

1,072

19 2 3

30 59 81

76 37 95 6 3 87

2 0 0 2

35 1 32 1 55 5 28 1

-15 0 8

38 0 5 9

2 0 0 2 2 0 0 2 - 0 6

7 0 5.7

STRUCTURE o f t h e E C O N O M Y

(%of G D f j Agricuiture industry

Services

Private consumption General government consumption Imports o f goods and services

Manufacturing

(average annualgrovdh) Agriculture Industry

Services

Private consumption General government consumption Gross domestic investment Imports of goods and services

Manufacturing

1962 1992

33.9 .. 27.3 .. 15.4 .. 38.8

.. 80.7

.. 5.8

.. 38.8

1982-92 1992-02

3 1 4 2 5 0 112 19 113

7 9 6 6

5 0 3 4

0 8 23 9

2 0 0 1 2 0 0 2

232 230 38 1 385 8 8 206

386 385

648 6 5 7 6 3 6 2

5 6 9 595

2 0 0 1 2 0 0 2

3 0 4 1 6 4 9 4 11 3 11 6 6 1 6 5

5 6 7 9 6 6 5 4 6 8 6 6 2 3 222

Deve lopment diamond'

Life expectancy

Gross primary

enroliment

GN I

I

Access to improved water source

Vietnam

Lo w-inco m e group

E c o n o m i c ra t ios '

Trade

Indebtedness

Vietnam

Low-income w o w

Growth o f inves tment and GDP (Oh) I 15 - 10

5

0

I Growth o f e x p o r t s a n d i m p o r t s (Oh)

50 40 ~4%

97 98 99 00 01 02

Exports -inports I

56

Vietnam P R I C E S a n d G O V E R N M E N T F I N A N C E

D o m e s t i c p r i c e s (%change) Consumer prices Implicit GDP deflator

1982

G o v e r n m e n t f inance /%of GDP, includes current grants) Current revenue Current budget balance Overall surplusideficit

T R A D E

(US$ millions) Total exports (fob)

Rice Fuel Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (S95=00) Import price index (1995=00) Terms o f trade (895=00)

1982

B A L A N C E o f P A Y M E N T S

(US$ miilions) Exports o f goods and services Imports of goods and sewices Resource balance -659

1982

Net income Net current transfers

-85 90

Current account balance -654

Financing items (net) Changes in net reserves

458 196

M e m o : Reserves including gold (US$ millions) Conversion rate /DEC,local/US$) 0 9

E X T E R N A L D E B T and R E S O U R C E FLOWS

(US$ millions) Total debt outstanding and disbursed

1982

43 IBRD 0 IDA 35

Total debt service iBRD IDA

Composition of net resource flows Official grants Official creditors Private creditors Foreign direct investment Portfolio equity

World Bank program Commitments Disbursements Principal repayments

0 0 0

1992

37 7 32 6

P O 0 0

1992

2,475 300 756

2,950 82

6 8 950

1992

3.199 2 950

249

-384 59

-76

538 -462

11,202 2

1992

24,332 0

57

232 0 1

113 248 $40

385 0

0 0 1

2001

-0 4 19

214 5 4

-2 5

2 0 0 1

15,027 588

3 , m

8332

1871

2 0 0 1

l7,837 77,783

54

-634 1,x)o

521

-196 -325

14,725 2

2 0 0 1

t2.584 0

1,344

1,2 u 0 x)

263 993 -591

1,300 0

739 279

2

2 0 0 2

4.0 4.1

21.0 5.5

-2.3

2002

8,706 725

3,270

19,733

2,077

2 0 0 2

8,654 21,777 -1,523

-766 1,767

-522

986 -464

15,279.5

2002

23,332 0

1,715

IT74 0 13

686 -641 1,x)o

0

558 261

2

I GDPdeflator -CPI

Expor t and i m p o r t leve ls (US$ mill.)

125.000

20 000 t

96 97 98 99 00 01 02

I ci Exports E Imports

Current a c c o u n t balance to G D P ( O h )

~~~

C o m p o s i t i o n o f 2 0 0 2 debt (US$ mill.)

706 B 1715

E 7.635

A - IBRD E - Bilateral B - IDA D - Other mitilateral F - Private C - I M F G-Short-term

57

Annex 15: Map VNM33511

58

MAP SECTION