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Most public investment programs are the responsibility of local governments. These do not have the capacity and sometimes lack clear authority to efficiently plan and implement infrastructure projects.

Economists Point Out the Reasons Behind Vietnam’s Underperformed Infastructure
Photo: GettyImages
Recently, WorldBank released a report titled “Vibrant Vietnam: Forging the Foundation of a High-Income Economy” which provides analyses and policy recommendations on how Vietnam can maintain quality growth in the next decade. 
The report suggests that a productivity-driven development model–combining innovation with balanced development and allocation of private, public, human and natural capital–will be key for Vietnam to achieve its goal of becoming a high-income economy by 2045.
Vietnam has made great progress in infrastructure development overall, even if performance varies across different sectors. It has been great in energy, where 98 percent of households had electricity access in 2018; good in transport, even if new construction is not always planned in an integrated way; less good in water supply where reliability has declined in recent years; and poor in wastewater collection and treatment where Vietnam is one of the worst performers in the region. 
Required infrastructure spending will continue to be vast. Estimates are as high as $25-30 billion per year while funding capacity currently reaches only $15-18 billion. More resources must be mobilized. But, more importantly, spending must also become much more efficient for infrastructure to contribute more to productivity growth.
There are several reasons why most infrastructure sectors have underperformed. Most public investment programs are the responsibility of local governments. These do not have the capacity and sometimes lack clear authority to efficiently plan and implement infrastructure projects. Least cost planning, which also considers such options as demand management alongside supply expansion, is not universally applied. 
Coordination of infrastructure planning across sectors or jurisdictions has led to ports that are poorly connected to roads or competition between districts for the same water resource.
Neglected maintenance is another barrier to efficient infrastructure. OECD estimates that each dollar spent on maintenance avoids $1.50 in new investments. Too few infrastructure projects properly account for maintenance costs down the line. For transport, ten percent of capital investments have been allocated for maintenance of Vietnam’s extensive road network—well below the 30 percent in OECD countries or 37 percent in Indonesia. 
In other cases, maintenance funds have been redirected to cover administrative costs as in the irrigation sector where the maintenance backlog is causing a deterioration of services.
More sustainable financing is a third critical area for making infrastructure provision more efficient. Vietnam has mostly used tax revenue, borrowing and donor-supported concessional financing to pay for infrastructure. User fees are significantly below supply costs. 
This has facilitated access for poor households and small firms but has created perverse incentives for providers who can run large operational deficits and for users who will overconsume infrastructure services.
The disconnect between revenues and expenditures extends across administrative levels. Local governments are responsible for 60 percent of public expenditures but control only 30 percent of total revenue. Experience elsewhere shows that local spending will be highly inefficient if not accompanied by devolution of rights and responsibilities including in revenue collection.
• Embrace markets: Both on the supply and demand side, a greater reliance on price signals and markets improves the efficiency of infrastructure provision. Competitive procurement should be the standard mechanism for awarding contracts. This requires effective audits, inspections and conflict resolution procedures. As 90 percent of infrastructure provision is currently public, there is also far more scope for private sector participation as has already been the case in the energy sector. 
This may be outright private provision where feasible, or public-private partnerships based on clear rules and procedures. And as concessional financing options diminish, Vietnam could tap much more into emerging domestic and international capital markets for infrastructure financing. 
Again, the energy sector, including renewable energy, is showing the way. On the demand side, user fees should be adjusted to cover a greater share and eventually total supply costs through progressive tariff increases.
• Modernize institutions: Improving the capacity for planning, coordinating, financing and implementing infrastructure investments is a clear priority. The focus needs to be on local governments who can best assess demand and lead implementation. Devolution of responsibilities and revenue generation must be accompanied by extensive capacity building. 
Central government will still have a major role, especially in ensuring mechanisms for coordination between jurisdictions but also between sectors. Centrally compiled information such as the Ministry of Transport’s Vietnam Logistics Statistical System support coordination and rational decision making.
Rethink incentives: Attempting to address equity objectives by providing infrastructure services well below supply costs is highly inefficient. The benefits of such subsidy schemes disproportionately benefit wealthier households. Lifeline tariffs such as block tariffs where charges for a minimum amount of consumption are lower are one way to protect poorer households while reducing benefit leakage. 
Other approaches include supporting the poor to reduce, for instance, energy or water consumption by subsidizing more efficient appliances or better home insulation. A third approach is through social protection systems that directly provide support for utility payments to the poor, although this requires high administrative effort if it cannot be tagged on to existing programs. 
Either way, governments need to consider the distributional effects of utility price reforms and use smart incentives or subsidies to buffer their impact on the poor.
Investments in human capital become more important as an economy moves from low-skill, labor-intensive production of goods and services to more complex and higher productivity tasks. Vietnam has done well in providing basic skills to most of its people. The country ranks higher in the World Bank’s Human Capital Index than many of its peers with higher incomes. 
Basic education and health services for an expanding population enabled a structural transformation and a boom in manufacturing, much of it for export. Making the next step, moving to a more productive and innovative economy, demands a larger pool of higher skilled labor and—in the face of a rapid demographic transition—drawing more people into the labor force as well as an education system that is responsive to changing skill demands. Already, half of Vietnamese firms see a shortage of workers with advanced cognitive, technical and socio-behavioral skills as a major barrier to expansion.
Younger cohorts are better educated. But at the current pace, average years of education would increase by only 1.3 years by 2050 – far from best performers in East Asia.

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