Updates to Vietnam's management and use of ODA and concessional loans from foreign donors

Streamlining management processes and improving efficiency 8 min read

Since 1993, Vietnam has attracted more than US$80 billion in Official Development Aid (ODA) and concessional loans, making it one of the largest ODA beneficiaries globally^[1]. The Vietnamese Government has repeatedly affirmed the importance of ODA funds in socio-economic development and considered it an integral part of any mid-term public investment plan^[2].

In December last year, with the aim of streamlining the management process and improving the efficiency applicable to ODA and concessional loans, the Government issued Decree 114/2021/ND-CP on the management and use of ODA and concessional loans from foreign donors (Decree 114)^[3], which took effect on 16 December 2021 and replaced the previous Decree 56/2020/ND-CP (Decree 56) on the same topic. Decree 114 contains the following key content.

Types of ODA and concessional loans 

Decree 114 defines ODA and concessional loans as capital provided by a foreign donor for Vietnam to assist the development and assurance of welfare and social security of the country. They consist of three types, including (a) non-refunded ODA, (b) ODA in the form of a foreign loan with between a 25% and 35% grant element (depending on whether it's a conditional or non-conditional loan); and (c) concessional loan, with terms more favourable than a commercial loan, but a grant element lower than that of an ODA loan.

Decree 114 introduces a new concept of emergency aid where ODA and concessional loans will be used to provide disaster relief, disease prevention or to perform urgent tasks to ensure national defence, security and foreign affairs. It is expected that ODA and concessional loans can help relieve the burden currently placed on the state budget in providing relief during disasters or crises.

Governing body

In addition to State agencies and other organisations assigned with public investment via programs/projects funded by ODA or concessional loans, Decree 114 allows the committee managing State capital enterprises to assist state-owned enterprises (SOEs) in accessing ODA and concessional loans.

Prioritised use for ODA grants

In the same way it was done under Decree 56, Decree 114 emphasises that the use of ODA grants be prioritised in the execution of projects/programs for the development of socio-economic infrastructure, capacity improvement, institutional and administrative reform. It also provides four additional prioritised uses for disaster relief, disease prevention, green growth and innovation. These additions present an opportunity for sustainable development projects to gain access to ODA grants.

Basic principle of state management of ODA and concessional loans

The most fundamental principle in using ODA and concessional loans is that they must be used for development investment costs. They must not be used to cover regular expenditures such as taxes, fees, interest and land clearance costs, or to pay for general and capacity building training which are not for the purpose of transferring technology, equipment or machinery operational skills. Companies allocated with ODA and concessional loans should be careful to avoid spending the loan or grant on these regular expenditure activities.

Procedure for management and use of ODA and concessional loans

Decree 114 sets out a detailed management procedure for programs/projects using ODA and concessional loans, which largely inherits the key requirements set out under Decree 56. In addition, Decree 114 introduces a new shortened procedure for emergency projects funded by ODA grants, which will be carried out pursuant to Article 42 of the Public Investment Law.

Investment Policy Decision (IPD) application

Compared to the IPD application requirements under Decree 56, the application under Decree 114 requires one less document. Specifically, the written request for appraisal of the Pre-FS and investment policy proposal is no longer required. Although this reduction demonstrates an effort to streamline the procedure to apply for the IPD, the application still requires many documents including, (i) request for the IPD issuance, (ii) approval of the program/projects proposal (unless it falls within an exemption set out under Decree 114), (iii) the governing body's internal appraisal report of the investment policy, (iv) Pre-FS and investment policy proposal as well as relevant approvals from competent authorities and (v) other project-specific documents.

Procedure to amend the IPD

Under Decree 56, with respect to programs/projects whose IPD is subject to the Prime Minister's approval, changes to the contents of the granted IPD (such as the program/project's name, donor, governing body, purpose, scope, place, duration, total investment) needed to follow the same procedure as issuing a new IPD, which was very time-consuming.

Decree 114 looks to create a more flexible procedure where only the project timing is altered, while other primary contents stay the same. If the amount of ODA and concessional loans is decreased, but new financial obligations arise with other primary content remaining the same, the governing body will send a document reporting on the reason for such amendment to the Ministry of Planning and Investment to gather the opinion of the Ministry of Finance (MOF) and report to the Prime Minister for the final decision. Thus, the governing body does not have to follow the time-consuming process as though applying for a new IPD. Nevertheless, the steps for this new procedure remain unclear and it is uncertain just how effective and efficient it will be compared to the old procedure.

Procedures for concluding, amending, extending and renewing international treaties on ODA and concessional loans

Decree 114 clarifies the procedure to conclude, amend, extend and renew international treaties on ODA and concessional loans by stipulating that it follows the procedure in the Law on Treaties. In addition, Decree 114 provides for an expedited procedure to conclude international treaties on ODA and concessional loans on behalf of the Government due to urgent need.

This expedited procedure represents the Government's efforts to accelerate the process of concluding and amending international treaties on ODA and concessional loans. ODA donors and lenders are also given a more active role in this process, eg providing the draft treaty. Nevertheless, we expect the expedited procedure to be used infrequently since it's only applicable to urgent situations and would require massive efforts from the MOF, who appear to be required to take a leading role in this process.

Use of ODA and concessional loans by SOEs

The chapter on SOEs' use of ODA and concessional loans is a new addition in Decree 114. It addresses (i) the sector and conditions for SOEs' use of ODA and concessional loans; (ii) the application process (which is mostly governed by the Law on Investment and the Law on Public Debt Management); and (iii) the management process (which is mostly governed by the Law on Public Debt Management). With this chapter, SOEs are now officially eligible to use ODA and concessional loans after a period of policy vacuum. Donors and lenders will now also have more choices for projects and counterparts.

What's next

Although Decree 114 has come into effect, it's likely that guiding Circular 48/2021/TT-BTC on the forms for disbursement reports under Decree 56, which was issued in June of 2021, will continue to be applied in practice for now. As many of the newly introduced procedures in Decree 114 remain unclear, it is expected that guiding circulars will be issued to elaborate on the interpretation and implementation of these procedures.