Vietnam frets over Chinese ODA, contractors

Official Development Assistance (ODA) loans from China are a matter of serious concern, says a new report by Vietnam’s Ministry of Planning and Investment.

The report, submitted to the Prime Minister, deals with attracting, managing and using ODA and other preferential loans in 2018-2020 with a vision until 2025.

It notes that the interest rate for Chinese ODA loans is usually three percent per year, much higher than the 0.4-1.2 percent for Japanese ODA, 0-2 percent for South Korea and 1.75 percent of India or European Union countries.

Besides, loans from China are subject to a commitment fee of 0.5 percent and a management fee of 0.5 percent, while the loan duration and grace period are shorter than those from other lenders, by 15 and 5 years respectively, it adds.

ODA or preferential loans from China are only suitable for projects that can generate direct revenue and have good repayment capacity, the ministry says.

Projects using loans, contractors and equipment from China often fall behind schedule, end up costing more than originally planned and are of unguaranteed quality, the report says.

It cites the Cat Linh-Ha Dong elevated railway, running some 13 kilometers from Dong Da District's Cat Linh Street to Ha Dong District's Yen Nghia bus station in Hanoi, as an example.

The project was supposed to start in 2008 and be completed in 2013, but it only began work in 2011. The contractor has delayed work four times since and it is still unfinished. The total investment cost, meanwhile, has jumped from $552 million to $868 million.

Among the 12 projects managed by the Ministry of Industry and Trade that are in debt of up to VND58.5 trillion ($2.51 billion), four are using loans from China.

The ministry says Vietnam should exercise due caution in accessing ODA funding and preferential loans from China.

Stop ODA reliance

The report also points out several weaknesses inherent in ODA loans in general.

It says interest rates on ODA have a tendency to rise, and along with the fees for arranging mortgage, it is possible that the ODA loans end up costing more than normal loans from lenders inside the country.

Some ODA loans come with requirements in terms of technologies and contractor selection that boosts actual project costs. In fact, the actual project costs using these loans could end up higher than when contractors are chosen through the bidding process.

The risk from exchange rate fluctuations, especially appreciation of the preferential loan currency against the dong, should also be noted, the report says.

Vietnam has so far inked deals to borrow $84 billion in ODA and the government’s foreign outstanding loans by 2017 was $45.8 billion, or 20.25 percent of the country’s gross domestic product (GDP).

Transport infrastructure, economic development policy study and state management, human resources development and environmental protection are fields that are given priority for using foreign capital.

In 2016-2017, Vietnam struck deals to borrow more than $9.19 billion, including $6.8 billion in ODA, $2.2 billion in other preferential loans, and $216.8 million in non-refundable aid.

As much as 91.4 percent of the total ODA and preferential loans in the past two years have came from development banks, including the World Bank at 35 percent, Japan International Cooperation Agency at 33 percent the Asian Development Bank at 14.1 percent.

The ministry suggests that Vietnam should develop a set of criteria to select projects needing foreign loans in accordance with international practices and standards, and make a list of such projects for the future.

It recommends that ODA loans and preferential loans should account for 30-50 percent of the total project investments.

Preferential loans should be prioritized only for projects that directly promote economic growth, and promote sustainable development and smart production.

Loans for projects that serve local shopping demand should be limited to avoid increasing the nation’s public debt.

In particular, the ministry stresses that ODA should be seen as a temporary channel to access advanced technologies and knowledge, and that Vietnam should find ways to do this without it.

"In the long term, we need to have a strategic approach to all of these elements without using ODA, which means we need to focus on building a domestic capital market, accessing foreign capital markets, and improving the quality of domestic human resources to international levels,” it says.