Mobilizing Finance for Local Infrastructure Development in Vietnam: A City Infrastructure Financing Facility

Abstract

Since the decentralization and liberalization reforms in the 1990s, Vietnam has experienced rapid urbanization and remarkable economic growth. By 2025, more than half of the population will live in cities. The country is at a critical juncture now. Decentralization has delegated significant responsibilities to provincial governments while the affordability of local infrastructure investments has become a fundamental challenge for the provinces. The provinces need to leverage their balance sheets and use debt financing to fund their infrastructure needs. This transition will require enhanced capacity by the provinces to leverage private finance, as well as an enabling regulatory and legal environment for subnational borrowing. Apart from the primary cities of Hanoi and Ho Chi Minh City, which already have demonstrated capacity and experience in tapping capital markets on their own, a group of secondary provinces (net contributors to the central government budget) have shown strong demand for local infrastructure financing and potential creditworthiness for leveraging private capital. These provinces will need to enhance their capacity to obtain private capital in the market; standardize provincial budgeting, accounting, and financial reporting procedures; and ensure better quality of financial disclosure. This book presents the findings of three assessments that focused on (a) the borrowing capacity and creditworthiness of selected provincial governments, (b) the capacity of the commercial banking sector to invest in provincial governments, and (c) the current status of Vietnam’s regulatory framework. The pilot CIFF in Vietnam would help develop a steadily expanding provincial government debt market in which financial risk is appropriately allocated and properly priced. In Vietnam, provincial government financial risk is not clearly and legally distinguished from central government financial risk. Commercial banks and the capital market cannot properly price provincial debt based on each province’s credit strength. Thus, a key development goal of this book is to inform the design of a CIFF to ensure its objectives of stimulating private sector debt financing for provincial infrastructure. If a financing facility were structured to require private investors to lend their own capital to finance provincial government infrastructure, hence placing their money at risk, the facility will create a significant leveraging effect and would expand private sector financing on a more sustainable basis.