Financial Mechanism proposal (SP-RCC) (this material for technical level discussion)

1. Financial Mechanism proposal (SP-RCC)(this material for technical level discussion)

2. Structure • Necessity • Proposal basis • Discussion process • Comparison of options • Recommendation

3. Necessity • Scale of SP-RCC in comparison with NTP-RCC’s • Suitable FM to express increased priority given to CC response and environmental protection by the Gov. • Funding source for SP-RCC is ODA, and major part is Gov. loan, then effective utility and management is required • Contribution to general resource mobilization for sustainable development

4. FM Proposal basis • PM’s direction at Document No. 3870/VPCP-QHQT dated 7/6/2010 on approving negotiation result of JICA Loan Agreement. • Notice of Gov. Office at Decision issued by Deputy PM Hoàng Trung Hải • Loan Agreement • Regulation on State Budget Management

5. Discussion process and FM development • MOF actively involved in preparation of SP-RCC together with MONRE and donors. • MOF got comments from Ministries and proposed Financial Mechanism to PM whilst preparation for Loan Agreement signing. • Due to several different comments, PM assigned MOF to continue discussion with ministries/agencies to submit a detailed financial mechanism. • Vietnam has not much experience in developing financial mechanism to respond to CC, especially when the funding source is huge and increasing, thorough study and discussion are needed to give out a suitable mechanism as well as to avoid passive situation.

6. Several options for consideration • Option 1: Total ODA for SP-RCC is spent on project list submitted by MONRE to PM for approval, the loan capital is put into a separate account • Option 2: Total ODA for SP-RCC is spent on project list submitted to PM for approval, the loan capital is merged with State budget to allocate gradually for Ministries and localities • Option 3: Total ODA is merged with State budget; one part is prioritized for the Program under current State budget allocation procedure, the rest part is used for compensation of State budget over-spending

7. Some remarks • Loan is to compensate for State budget over-expenditure and this amount is within the total State budget over-expenditure estimation decided yearly by the National Assembly • Loan form is program loan to support state budget, loan is disbursed by courses • Loan principal and interest is paid • Following L/A: Loan utility is under decision of Vietnamese Gov., and to support the implementation of SP-RCC • Huge capital: estimated at $400 million from JICA for 3 years (loan); from AFD: 20 million EUR (loan); and other possible funding sources.

8. Analysis on each option • Option 1: Total ODA capital is maintained in a separate account to allocate for project list developed by MONRE and approved by Prime Minister. • Advantages: • Gov.’s high priority on the field of CC response is proved • Easy for capital mobilization from donors • Easy to supervise and report as it follows model of ODA project management

9. Option 1 (con’t) • Disadvantages: • Not linked to other sources of the Gov., not in line with state budget management principles, as: • Foreign capital is available in account, not necessary to go through budget estimation for allocation → this is nearly a source out of estimation of ministries/localities → no close supervision of ministries/localities; also no donors’ supervision → ineffective • Against the program support principle//budget support which utilizes the Gov.’s system in allocation, management and utility • Idle capital is not used for State budget while waiting for project implementation, at the same time interest payment is made, which leads to cost raising • Sudden increase of State-budget over-expenditure or sharp decrease in expenditure for other sectors is forced leading to serious impact on socio-economic development orientation

10. Option 2 • Total ODA capital is allocated for a separate list decided by Prime Minister, yet, not in a separate account but being merged into State budget for yearly allocation • Advantages: • Gov.’s high priority is proved • Easy for capital mobilization from donors

11. Option 2 (con’t) • Disadvantages: • Difficult for management and supervision (which project was allocated, which was not, redundant/insufficient…) for further annual capital arrangement → an agency in-charge is needed to regularly supervise allocated capital, used-up amount for each project: which Ministry shall take this task? • Ministries/localities’ responsibilities are not high since another Ministry has general supervision → lack of governing agency’s ownership, management role is overlapped • State budget management effectiveness is reduced since budget support capital is wrapped in a tough list; expenditure for CC response increases suddenly while sharp decrease in others (as over-expenditure level is constrained) → imbalance in financial policy • Difficult for information collection to report to Gov. and donors

12. Option 3 • Advantages: • Priority given to capital arrangement for CC response • State budget expenditure structure is changed with an objective and roadmap suitable for management capacity of Gov./governmental bodies • State budget management principles are met: general over-spending level is decided by Gov., ministerial/local projects are decided by ministries/localities based on priority for CC response; ownership and responsibility in capital utility are increased • Capital is used flexibly and effectively not only for CC response but also for general development objectives; sector development is in line with sustainable development as well as contributes to CC response • Match with the form of program support/budget support

13. Option 3 (con’t) • Disadvantages: • Report on annual total allocation is only made when MONRE defines specific tasks on CC response; • Difficult for summary and report on used-up amount (CC response area is large and mixed, capital is allocated through ministries/localities)

14. Option 3 is proposed for selection: Specific procedure • MONRE develops criteria/prioritized tasks and instructs Ministries to prepare projects • Ministries/localities prepare projects (outlined projects are accepted), send to environmental & natural resource agencies of same level as well as to MONRE for comments • Based on obtained comments, ministries/localities make their project list for annual capital allocation, with clear priority order • Ministries/localities discuss with planning & investment agencies and financial agencies of same level to allocate capital following channels of investment or enterprise capital, priority given to projects within the annual state budget balance capability • MPI and MOF put priority on capital allocation to CC response related projects whilst allocating annual state budget expenditure estimation.

15. Option 3 is proposed for selection (con’t) • Every year, MPI and MOF submit to the Government summary on estimated foreign capital allocation for SP-RCC (after adequate allocation is made for NTP-RCC), which is attached into the annual state budget estimation • Within the frame of total foreign capital, planning and financial agencies discuss with ministries/localities to allocate for these ministries/localities, taking into account their prioritized project list • Prior to estimation-making period, ministries/localities shall report annual situation of capital utility under project list; submit to MONRE, MOF and MPI.

16. Other tasks relating to FM • MONRE should consider to submit to the Prime Minister adjustment of NTP-RCC’ s scale; • MOF gets comments from other ministries on financial mechanism to submit to PM; • Implementing under PM’s decision; learning from experience; • Further studying cooperation on financial mechanism for CC response; learning and referring to international experience in developing financial mechanism.

17. Thanks for your attention!