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FEATURE STORY

Doing more for less: Improving the effectiveness of public investment

January 12, 2012


The theme of this VDR is market economy for a middle-income Vietnam. The report focuses on weak institutions, distorted incentives and inadequate information - labled as the three "I's" of the market economy - as the explanation for Vietnam's current tribulations. 

Public investment is being viewed as unaffordable, inefficient and, therefore, unsustainable

Vietnam’s successful growth story has been driven primarily by rapid factor accumulation—physical and human capital—with productivity growth playing a secondary role. Equally important has been Vietnam’s ability to translate the high level of investment into basic infrastructure services, making the development process extraordinarily inclusive. But Vietnam’s investment regime, especially its public investment component, is being increasingly viewed in the last few years as unaffordable, inefficient and, therefore, unsustainable.

There are three commonly cited concerns against the current investment regime:

  • Affordability: Because the strategy has relied almost exclusively on raising the “level” of investment rather than improving its “efficiency,” the amount of financial resources required to meet Vietnam’s future infrastructure needs has reached an unaffordable level.
  • Impact: Despite huge investment, Vietnam’s infrastructure bottleneck remains a significant constraint to future growth. Along with macroeconomic stability, other factors cited by investors as some of the main constraints to operating in Vietnam are lack of adequate and reliable electricity, congestion on the roads and at seaports and airports, and poor quality of infrastructure in industrial areas.
  • Link to growth: A strong positive correlation between investment rate and growth over a sustained period is one of the well-known stylized facts in the literature on growth. This relationship appears to have weakened in Vietnam in recent years.

Vietnam’s existing public investment regime can be best described as one in which the parts do not add up to the whole. In Vietnam’s highly decentralized administrative structure, developing infrastructure is the responsibility of local governments. This has been done without connecting the infrastructure to the strategic priorities of the country (such as improving competitiveness) or using the market as a means of allocating resources. Consequently, each province has worked in isolation to create fragmented, suboptimal infrastructure projects, many of which have become idle.
 
Vietnam’s existing public investment regime can be best described as one in which the parts do not add up to the whole. In Vietnam’s highly decentralized administrative structure, developing infrastructure is the responsibility of local governments. This has been done without connecting the infrastructure to the strategic priorities of the country (such as improving competitiveness) or using the market as a means of allocating resources. Consequently, each province has worked in isolation to create fragmented, suboptimal infrastructure projects, many of which have become idle.

If all the approved projects in Vietnam were built, the country would have one of the highest numbers of deep-sea ports, international airports and industrial parks in the world relative to the size of its economy.

The VDR 2012 uses three case studies—one on industrial parks and two from the port sector— to identify the problems that have contributed to an inefficient public investment regime and what can be done to address them.

These case studies were chosen because they illustrate the generic nature of the problem facing many infrastructure projects in Vietnam, namely (a) use of nonmarket means to allocate resources, especially land; (b) poorly specified and enforced property rights; (c) weak coordination among governments, line agencies, and state-owned enterprises (SOEs); (d) lack of impartial regulating agencies; and (e) weak implementation of existing laws. These case studies also reflect the problems associated at different stages of the public investment cycle—strategic planning, screening, appraisal, selection, implementation, and evaluation—and discusses potential ways to address them.

The report proposes four ideas to strengthen the effectiveness of public investment:

  • Clarifying and strengthening property rights to force competition for land into the market and out of the political arena: Land is the most important asset in Vietnam. Because land-use rights are administrative in nature, the solution to the problem is sought by the government through administrative means rather than through market mechanisms.
  • Creating impartial agencies in key sectors to regulate infrastructure development: A second cause of institutional fragmentation is the absence of clear boundaries between regulators and market participants, central government ministries and local authorities, and even among units of one agency. Under these conditions, the rules of the game are unclear and unenforceable.
  • Creating a mechanism to share revenues among local authorities to encourage development of regional and national infrastructure: Many local governments are keen to build infrastructure since it becomes a source of a future revenue stream.
  • Strengthening the public investment management cycle: A more rigorous public investment management (PIM) cycle, synchronized with the budget process, will help Vietnam avoid approving inefficient and cost-ineffective public investment projects. In Vietnam, the stages that need strengthening seem to be the initial stages of the PIM cycle, namely, strategic guidance and screening, formal project appraisal, appraisal review, and project selection and budgeting. Projects or programs that meet the first screening test should be subject to appraisal of their viability, which requires a feasibility analysis.

 

 


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