Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No.73503-VN

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FOR A PROPOSED CREDIT

IN THE AMOUNT OF SDR 32.6 MILLION (US$50.0 MILLION EQUIVALENT)

TO THE

SOCIALIST REPUBLIC OF VIETNAM

FOR A

HIGHER EDUCATION DEVELOPMENT POLICY PROGRAM –

THIRD OPERATION

January 31, 2013

Education Sector Unit Vietnam Country Management Unit East Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS (Exchange Rate Effective Date)

Currency Unit = Vietnamese Đồng (VND) USD 1.00 = VND 20840.00 USD 1.00 = SDR 0.652

GOVERNMENT FISCAL YEAR

January 1 – December 31 ABBREVIATION AND ACRONYMS

ADB Asian Development Bank HEP2 Second Higher Education Project ASEAN Association of Southeast Asian

Nations HERA Higher Education Reform Agenda

CFAA Country Financial Accountability Assessment

IBRD International Bank for Reconstruction and Development

CGA CPS

Country Gender Assessment Country Partnership Strategy

IDA IMF

International Development Association International Monetary Fund

DA DPO

Deposit Account Development Policy Operation

MOET MOF

Ministry of Education and Training Ministry of Finance

EMCC Economic Management & Competitiveness Credit

MPI Ministry of Planning and Investment

FDI Foreign Direct Investment NPL Non-pool loans FIRST Fostering Innovation through

Research, Science and Technology NMUP New Model University Project

FSAP Financial Sector Assessment Program

ODA Overseas Development Assistance

GDP Gross Domestic Product PFM Public Financial Management GGGI Global Gender Gap Index PRSC Poverty Reduction Support Credit GOV Government of Vietnam SAV State Audit of Vietnam HE Higher Education SBV State Bank of Vietnam HEDPP Higher Education Development

Policy Program SDR Special Drawing Rights

HEDPO1 Higher Education Development Policy Program-First Operation

SOE State-Owned Enterprise

HEDPO2 Higher Education Development Policy Program-Second Operation

STEM Science, Technology, Engineering and Mathematics

HEDPO3 Higher Education Development Policy Program -Third Operation

VHLSS

Vietnam Household Living Standards Survey

HEI

Higher Education Institution WTO World Trade Organization

Regional Vice President: Country Director:

Sector Director: Sector Manager:

Task Team Leader:

Ulrich Zachau (Acting) Victoria Kwakwa Xiaoqing Yu Luis Benveniste Thanh Thi Mai

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SOCIALIST REPUBLIC OF VIETNAM HIGHER EDUCATION DEVELOPMENT POLICY PROGRAM – THIRD OPERATION

TABLE OF CONTENTS

I. INTRODUCTION ................................................................................................................................................ 1 II. COUNTRY CONTEXT ....................................................................................................................................... 1

RECENT ECONOMIC DEVELOPMENTS IN VIETNAM ............................................................................. 2 MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ............................................................. 6

III. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES ......................................... 10 HIGHER EDUCATION SECTOR CONTEXT .............................................................................................. 10 HIGHER EDUCATION AND LABOR MARKET NEEDS ........................................................................... 13 HIGHER EDUCATION REFORM AGENDA ............................................................................................... 15 WORLD BANK ASSESSMENT .................................................................................................................... 18

IV. BANK SUPPORT TO GOVERNMENT’S STRATEGY ............................................................................... 19 LINK TO CPS ................................................................................................................................................. 19 COLLABORATION WITH THE IMF AND OTHER DONORS ................................................................... 19 RELATIONSHIP TO OTHER BANK OPERATIONS .................................................................................. 20 LESSONS LEARNED .................................................................................................................................... 20

V. THE PROPOSED OPERATION ...................................................................................................................... 23 OPERATION DESCRIPTION ....................................................................................................................... 23 POLICY AREAS ............................................................................................................................................ 25

VI. OPERATION IMPLEMENTATION ............................................................................................................... 41 POVERTY AND SOCIAL IMPACTS ............................................................................................................ 41 ENVIRONMENTAL ASPECTS .................................................................................................................... 45 IMPLEMENTATION, MONITORING AND EVALUATION ...................................................................... 45 FIDUCIARY ASPECTS ................................................................................................................................. 46 DISBURSEMENTS AND AUDITING .......................................................................................................... 46 RISKS AND RISK MITIGATION ................................................................................................................. 47

ANNEX 1: LETTER OF DEVELOPMENT POLICY .......................................................................................... 49

ANNEX 2: POLICY MATRIX AND RESULT FRAMEWORK .......................................................................... 57

ANNEX 3: REFERENCES ....................................................................................................................................... 61

ANNEX 4: FUND RELATIONS NOTE .................................................................................................................. 63

ANNEX 5: TIMETABLE AND KEY PROCESSING EVENTS ........................................................................... 66 ANNEX 6: COUNTRY AT A GLANCE ................................................................................................................. 67

ANNEX 7: IBRD MAP 33511 ................................................................................................................................... 70

LIST OF TABLES

TABLE 1. VIETNAM KEY ECONOMIC INDICATORS ...................................................................................... 4

TABLE 2. TERTIARY EDUCATION COVERAGE INDICATORS, 2008 ........................................................ 11 TABLE 3. SHARE OF ENROLMENT BY PRIVATE HIGHER EDUCATION INSTITUTIONS .................. 12

TABLE 4. STAFF QUALIFICATIONS IN HIGHER EDUCATION INSTITUTIONS (%) ............................. 13

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TABLE 5. PROJECTED SOURCES OF FUNDING FOR GOVERNMENT’S HIGHER EDUCATION REFORM AGENDA, 2006-2020 .............................................................................................................................. 17

TABLE 6. CURRENTLY PROJECTED WORLD BANK AND ASIAN DEVELOPMENT BANK LENDING DISBURSEMENTS FOR HIGHER EDUCATION (US$ MILLION) ................................................................. 17

TABLE 7. TUITION AS PERCENT OF VARIOUS TOTALS, BY DISCIPLINES IN 2010 ............................ 30

TABLE 8. ACTUAL UNIT COSTS IN 2010 (VND MILLIONS) ......................................................................... 30

TABLE 9. HEDPO3 – COMPARISON OF INITIAL TRIGGERS AND FINAL PRIOR ACTIONS .............. 37

LIST OF FIGURES

FIGURE 1. POVERTY TRENDS IN VIETNAM..................................................................................................... 9

FIGURE 2. REGIONAL DIMENSIONS OF POVERTY ....................................................................................... 9

FIGURE 3. POVERTY TRENDS URBAN/RURAL IN VIETNAM .................................................................... 10

FIGURE 4. HIGHER EDUCATION GROSS ENROLMENT RATE BY ........................................................... 11

FIGURE 5. HIGHER EDUCATION GROSS ENROLMENT RATE BY INCOME QUINTILES .................. 12 FIGURE 6. EMPLOYMENT OF HIGHER EDUCATION GRADUATES ........................................................ 14

FIGURE 7. HOURLY INCOME OF WAGE WORK BY DIFFERENT LEVELS OF EDUCATION (THOUSAND VND PER HOUR) ............................................................................................................................ 14

FIGURE 8. SKILL BOTTLENECKS, TECHNOLOGY, AND OPENNESS ...................................................... 15

FIGURE 9. PERCENTAGE OF STUDENTS RECEIVING FEE EXEMPTIONS BY INCOME QUINTILES.. ............................................................................................................................................................. 42

The Credit was prepared by an IDA team consisting of:

Core team: Mai Thị Thanh (Senior Education Specialist and Task Team Leader, EASHE), Emanuela di Gropello (Lead Human Development Economist, AFTHD), Christian Bodewig (Senior Economist, EASHS), Vũ Thanh Bình (Senior Education Specialist, EASHE), Prateek Tandon (Economist, EASHE), Franco Russo (Operations Officer, EASHE), Luc Weber (Consultant, EASHE), Sophie Cerbelle (Consultant, EASHE), Robert Gilfoyle (Senior Financial Management Specialist, EASFM), Yuling Zhou (Lead Procurement Specialist, EAPPR), Anjali Acharya, Senior Environmental Specialist (EASVS), Martin Serrano (Senior Counsel, LEGES) and Nông Thị Mai Hương (Junior Counsel, EACVF).

Contributors: Keiko Sato (Manager, Portfolio and Operations, EACVF), Deepak K. Mishra (Lead Economist, EASPR), Habib Rab (Senior Economist, EASPR), and Vu Hoang Linh (Poverty Economist EASPR).

Peer Reviewers: Andreas Blom (Lead Education Economist, AFTEE), Jeffrey Waite (Lead Education Specialist, MNSHD), and Hana Polackova Brixi (Lead Economist, MNSHD).

Program Assistants: Juliana Williams and Anna Coronado (EASHD), Nguyễn Minh Nguyệt (EACVF).

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CREDIT AND PROGRAM SUMMARY

SOCIALIST REPUBLIC OF VIETNAM HIGHER EDUCATION DEVELOPMENT POLICY PROGRAM – THIRD OPERATION

Recipient Socialist Republic of Vietnam Implementing Agency

Ministry of Education and Training

Financing Data

IDA Credit Terms: IDA blend (25-year maturity with 5-year grace period) Amount: US$50.0 million

Operation Type

Development Program Lending Programmatic operation: Third in a series of three single-tranche operations

Main Policy Areas

1. Higher education governance and institutional autonomy; 2. Sector financing and institutional financial management; and 3. Quality improvement, accreditation and assurance.

Key Results Indicators

• Governance: (i) Capacity to decide overall student numbers and academic content transferred to Higher Education Institutions (HEIs); (ii) Number of HEIs having increased academic autonomy; (iii) Number of public HEIs having established university council; and (iv) Number of joint training programs with foreign HEIs;

• Financing/Financial management: (i) Percentage of total HEI revenue coming from tuition fees; (ii) Percentage of education budget allocated for HE sector; (iii) Percentage of students received loans; and (iv) Number of HEIs having annual financial report.

• Quality: (i) Percentage of students in credit-based programs; (ii) Number of accreditation agencies established; and (iii) Number of HEIs having established internal quality assurance system.

Program Development Objective and Contribution to Country Partnership Strategy

The objectives of the Higher Education Development Policy Operations (HEDPO) are to strengthen governance, financing and quality of higher education by: (i) improving the responsiveness of higher education and research and increase the quantitative capacity of the system; (ii) enhancing fiscal transparency, sustainability and effectiveness of the higher education sector; and (iii) improving the quality of Higher Education institutions. It contributes to the Country Partnership Strategy (CPS) first pillar-Competitiveness with the objective of “develop[ing] a higher education system that produces graduates better suited to the new economy’s needs.”

Risks and Risk Mitigation

Vietnam faces important short-term domestic macroeconomic management challenges. Whilst foreign exchange reserves have more than doubled in 2012, it is low compared to international levels. The ongoing domestic credit crunch could further worsen both growth prospects and asset quality. Another risk is the authorities’ departure from fiscal and monetary discipline prompting inflation resurgence. This could unravel gains already made and further weaken confidence. A similar outcome, but where potential growth is compromised, could arise from delayed and poor implementation of

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structural reforms including the resolution of bad debts in banks and state-owned enterprises (SOEs). Vietnam is also vulnerable to the effects of a prolonged global economic slowdown, which could adversely affect exports, remittances, foreign investment, and possibly aid. Although it has managed to navigate the global economic crisis reasonably well through implementation of a large stimulus package, fiscal space is now limited because of high levels of public debt and large contingent liabilities from a weak banking sector and poorly managed SOEs. Mitigation measures include closer monitoring of macroeconomic developments, and increased dialogue with the authorities in collaboration with the International Monetary Fund to ensure steadfast implementation of reforms already announced and to prepare for new ones. The ongoing work on a Financial Sector Assessment Program (FSAP) by the World Bank and IMF is expected to provide a comprehensive roadmap for financial sector reform and accelerate implementation. The Economic Management and Competitive Credit (EMCC) series itself can be considered as part of a risk mitigation strategy as it underscores the need to reform, builds consensus around challenging issues and helps design appropriate responses. Sector-specific risk: Many policies promoted in the HEDPO go beyond the mandate of Ministry of Education and Training (MOET) and need strong support from Ministry of Finance (MOF), Ministry of Planning and Investment (MPI) and Ministry of Science and Technology (MOST) and leadership of the Prime Minister’s Office and the Communist Party. Mitigation: The development of the higher education sector Master Plan drew on wide consultation with all stakeholders; key reforms are laid out in phases with transition in the roles/responsibilities key stakeholders. The Higher Education Law has been deliberated and promulgated by the National Assembly, the highest legislative body in the country. Policy-related risk: MOET capacity may not have increased as much as anticipated to be able to develop coherent policies. Mitigation: The Second Higher Education Project (HEP2) helped building capacity of MOET in the areas of diagnostics and making policy recommendations. Key policies for increasing autonomy of HEIs and system differentiation have been adopted but the risk of weak implementation capacity remains. Institutional risk: • MOET and HEIs may not be fully effective in applying the regulations

to their full potential. Mitigation: The New Model University Project (NMUP) provides a privileged locus for testing the full application of the new body of regulations and offering a demonstration effect for roll-out to other HEIs.

Operation ID Number

P116354

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I. INTRODUCTION

1. The programmatic series of three single-tranche operations of Higher Education Development Policy Operations (HEDPO1-3), are designed to support the Government’s implementation of its “Socio-Economic Development Strategy (SEDS) 2011-2020” and its “Higher Education Reform Agenda” (HERA) 2006-2020. In particular, HEDPO1-3 aim to strengthen governance, financing and quality of higher education by: (i) improving the responsiveness of higher education and research and increase the quantitative capacity of the system; (ii) enhancing fiscal transparency, sustainability, and effectiveness of the higher education sector; and (iii) improving the quality of Higher Education Institutions (HEI).

2. The proposed Higher Education Development Policy Program Third Operation (HEDPO3) aims to support and institutionalize key elements of the HERA. Although each individual operation was to be delivered annually1 after having completed the relevant prior actions, HEDPO3’s delivery had taken longer than anticipated for two reasons: (i) the triggers for the third operation are complex that required additional time to complete; and (ii) the government’s wish to elevate key policy measures to be adopted by the highest legislative body (the National Assembly) through a Higher Education Law. This effort is commendable because the adoption of the HE Law required high-level political support and an extensive consultative process that involved multiple ministries and agencies involved in Higher Education. HEDPO1-3 are implemented as three equal tranches of US$50 million equivalent and the Policy Matrix and Result framework (Annex 2) presents a historical view of HEDPO1-2 achievements while laying out the prior actions for the proposed third operation.

II. COUNTRY CONTEXT

3. Vietnam has witnessed impressive economic growth and poverty reduction in the past 25 years. Political and economic reforms (Đổi Mới) launched in 1986 have transformed Vietnam from one of the poorest countries in the world, with per capita income below US$100, to a lower middle-income country within a quarter of a century. At the end of 2011, Vietnam’s per capita income was estimated at US$1,374.2 Using a ‘basic needs’ poverty line initially agreed in 19833, the poverty headcount fell from 58 percent in the early 1990s, to 14.5 percent by 2008, and is expected to be well under 10 percent by 20144. The country has attained five of its ten original Millennium Development Goal targets and likely to attain two more by 2015.

4. Reforms in the early nineties contributed to major competitiveness gains, which enabled a structural shift from agriculture to manufacturing and services. Investments in physical capital and human resources led to increased capital and labor productivity. Vietnam’s membership of the Association of Southeast Asian Nations (ASEAN) and the World Trade

1 HEDPO1 was approved in June 2009, and HEDPO2 was approved in November 2010. 2 Source: World Bank http://data.worldbank.org/country/vietnam 3 The GSO-WB poverty line was presented in the 2000 Country Economic Memorandum Attacking Poverty (World Bank, 2000) and is approximately US$1.10 (2005 PPP). It was constructed on the basis of the consumption behavior of the poor in the 1993 VLSS, and has been updated for inflation for each round of the VHLSS. 4 In September 2010, Vietnam announced a new official poverty rate of 14.2 percent. In June 2012, the World Bank and GSO, using 2012 VHLSS data, have proposed a new and higher poverty line for Vietnam that is consistent with its status as a lower-middle income country

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Organization (WTO) in 1995 and 2007 respectively, and a series of bilateral trade agreements, promoted reforms and led to higher private and public sector investments.

5. There is growing recognition however that reforms now need to promote more efficient use of factor endowments, and increase productivity across the economy. Loss of competitiveness and declining productivity in Vietnam are evident in:5 (i) low productivity within manufacturing; (ii) low and declining public investment efficiency; (iii) low execution of Foreign Direct Investment (FDI) commitments; (iv) concentration of exports in low value added manufactures with high and growing import needs; and (v) depletion of natural resources and environmental damage, which are not fully reflected in final prices.

6. Recent assessments and surveys indicate that competitiveness constraints stem largely from a number of policy and institutional weaknesses.6 There have been bouts of macroeconomic instability, which has impacted on market confidence. Public sector governance is increasingly fragmented, leading to uneven implementation of rules and regulations. Inefficient public investments have contributed to falling marginal productivity of capital. Finally, a severe shortage of skilled labor is creating bottlenecks for business expansion and higher value addition. Addressing these challenges is critical to helping Vietnam avert a middle income trap – where it will be no longer able to compete against low wage economies in manufactured exports, or against more advanced economies in innovative products.

RECENT ECONOMIC DEVELOPMENTS IN VIETNAM

7. Vietnam’s economy gradually returned to a relatively stable macroeconomic environment during 2012 compared to the tumultuous period of 2007-11. In early 2011, the country was in a phase of heightened macroeconomic vulnerabilities. This was characterized by high and rising inflation, extreme volatility in the foreign exchange market, rapidly dwindling international reserves, a sharp rise in country risk following default by one of its biggest SOEs, high levels of fiscal and trade deficits, and weaknesses in the banking and corporate sectors. These vulnerabilities and the absence of a persuasive strategy to address them led to weakening sentiments towards the country’s economic prospects. 8. Stabilization measures (Resolution 11) implemented in 2011 and 2012 have helped Vietnam avert a macroeconomic crisis. They have also helped restore macroeconomic stability, reduce inflation, strengthen fiscal and external accounts, and stabilize the exchange rate. The increased supply of US dollars in the market has enabled the State Bank of Vietnam (SBV) to replenish foreign exchange reserves, which are now reportedly just over two months of imports. Real Sector

9. Stabilization policies coupled with sluggish global growth, however, has also led to slower growth Vietnam in 2012. Real GDP growth has slowed to 4 percent in Q1 year-on-year, 5 Ref: (i) CIEM, ACI and NUS, “Vietnam Competitiveness Report,” (p. 39-57); (ii) VDR 2012; (iii) MOIT, UN, UNIDO, “Vietnam Industrial Competitiveness Report,” 2011 – Executive Summary 6 Ibid plus also refer to European Chamber of Commerce in Vietnam, “Whitebook of Trade, Investment Issues and Recommendations,” (2012) and the EuroCham Business Climate Index

3

the lowest in three years. Growth picked up in Q2 (4.6 percent) and Q3 (5.4 percent), reaching 5.03 percent for the whole year. This is below the initial 2012 target of 6 - 6.5 percent. One of the main reasons is the low level of public and private investments. With slowdown in credit growth and efforts to restructure public investment, total investment has fallen sharply from 41.9 percent of GDP in 2010 to 34.6 percent in 2011. The slowdown has been felt most acutely in the construction sector as well as by small and medium-sized enterprises.

External Sector

10. Slowing output in domestic enterprises stands in sharp contrast to relatively strong performance in the foreign invested export sector. In 2011, Vietnam recorded the highest rate of export growth in East Asia amongst developing nations, with China at a distant second. The country’s total export turnover in 2012 is estimated at US$114.6 billion, rising 18.3 percent over 2011. The foreign invested sector (including crude oil) contributed 63 percent of Vietnam’s total exports and grew by 31 percent in 2012, while the domestic sector contributed 37 percent and grew at 1 percent.

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Table 1. Vietnam Key Economic Indicators 2010 2011 2012e 2013f 2014f 2015f

Output, Employment and Prices Real GDP (% change y-y) 6.8 6.0 5.0 5.5 5.7 6.2 Domestic demand (% change y-y) 10.3 -0.4 3.1 4.4 5.0 5.6 Industrial production index 1/ (% change y-y) 9.3 6.8 4.8 5.5 6.5 6.8 Unemployment (%) 2/ 4.3 3.6 4.2 4.0 4.0 4.0 Consumer price index (% change, period

average) 9.2 18.7 9.1 8.0 7.2 6.0

Public Sector Government revenues (% GDP) 29.6 27.7 25.1 25.4 25.5 25.3 Government expenditures (% GDP) 32.7 30.9 29.9 29.2 29.1 28.7 Government balance, official (% GDP) 3/ -0.7 -1.5 -3.2 -2.3 -2.0 -2.0 Government balance, general (% GDP) 4/ -3.1 -3.2 -4.8 -3.8 -3.5 -3.4 Public sector debt (% GDP) 5/ 54.0 55.4 53.7 53.3 53.1 53.0

Foreign Trade, BOP and External Debt Trade balance (billions US$, BOP definition) -5.1 -0.5 9.9 8.9 9.3 10.1 Exports of goods (billions US$, fob) 72 97 115 131 151 175 (% change y-y) 26.4 34.2 18.2 14.1 15.5 16.1 Key export (% change y-y) 6/ -23.0 45.9 15.0 5.0 5.0 5.0 Imports of goods (billions US$, cif) 85 107 114 132 154 180 (% change y-y) 21.2 25.9 6.6 16.3 16.3 16.6 Current account balance (billions US$) -4.3 0.3 7.1 3.8 3.7 3.9 (% GDP) -4.1 0.2 5.0 2.5 2.2 2.1 Foreign direct investment (billions US$, net) 7.1 7.1 7.2 7.3 7.5 7.5 External debt (billions US$)/5 45.4 50.1 55.6 59.8 63.5 68.2 (% GDP) 43.8 40.8 39.3 38.4 37.4 36.9 Debt service ratio (% exports of g&s) 3.3 2.8 3.4 3.3 3.1 3.0 Foreign exchange reserves, gross (billions US$) 12.4 13.6 .. .. .. .. (months of imports of g&s) 1.8 1.5 .. .. .. ..

Financial Markets Domestic credit (% change y-y) 32.4 14.3 7.0 12.0 15.0 15.0 Short-term interest rate (% p.a.) 7/ 11.6 14.9 9.0 .. .. ..

Exchange rate (Dong/US$, eop) 8/ 19,498 20,82

8 20,82

8 .. .. Real effective exchange rate (2000=100) 117.4 122.7 .. .. .. (% change y-y) 1.0 4.5 .. .. .. Stock market index (Jul. 2000=100) /9 484.7 351.6 413.7 .. ..

Memo: Nominal GDP (billions US$) 103.6 122.8 141.5 155.5 170.0 184.9 Sources: Vietnam Government Statistics Office, State Bank of Vietnam, IMF, and World Bank staff estimate

e = estimate; f = forecast 1/ The industrial production index (IPI) is a new series replacing previous "industrial production value in constant 1994 price". 2/ Urban areas 3/ Excludes off-budgetary items 4/ Includes off-budgetary items 5/Public and publicly-guaranteed debt. Forecast by Debt Sustainability Analysis 2012 6/ Crude oil (value) 7/ Three-month deposit, end-of-period. 8/ Central Bank's inter-bank exchange rate. 9/ Ho Chi Minh Stock Index.

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11. Imports have slowed down significantly together with falling growth, and in particular due to falling demand for construction material. Import spending in the year to August is estimated at US$114.3 billion, up 7.1 percent year-on-year. Imports of machinery and equipment by foreign firms remained strong. However imports by domestic firms decreased, reflecting a strong consolidation of public as well as private investment. Imports of raw materials and intermediate goods (fertilizer, animal feed, cotton, fiber, fabrics) have also decreased, reflecting falling domestic demand and growing inventory. Imports of automobiles and motorbikes fell sharply partly because of a hike in taxes and fees to deal with chronic traffic congestion in large cities. 12. Vietnam has, as a result of these developments, posted a surplus on its trade account for the first time since 1992. This has in turn contributed to a record current account surplus estimated at 5 percent of GDP. Vietnam’s turnaround in its external balance—from double digit deficit to surplus in a period of five years and without any sharp and sudden adjustments to the exchange rate—has been particularly impressive. 13. The improved current account position has enabled the SBV to shore up foreign exchange reserves. International reserves have built up from 7 weeks of import cover (end 2011) to about 10 weeks (December 2012), which is roughly US$20 billion.7 This was also helped by a fall in domestic capital flight, as exchange rate stability and falling inflation have helped to restore confidence in the VND (Chart 13). This is reflected in the fact that the reference rate for VND has been stable at VND20,828 to the US$1 for nearly a year, and a narrowing differential between the parallel and official rates.

Inflation and monetary policy

14. Inflation has been falling steadily in the past twelve months. High commodity prices, delayed withdrawal of stimulus measures and inability to raise interest rates in a timely manner in late 2010 led to a steady increase in inflation during the first half of 2011. As the impact of Resolution 11 started to take hold, inflation began to fall. By December 2012 headline inflation for the year had fallen to 6.8 percent. Easing of food prices has contributed the most in overall disinflation.

15. The SBV had aggressively cut interest rates between March and July 2012 in response to the slowdown in growth and falling inflation. Key policy rates were cut by 500 basis points over this period. The cap for dong deposit was reduced from 14 percent to 11 percent. The rules on lending to real estate and for private consumption had also been relaxed. SBV encouraged commercial banks to lower lending rates and promote credit for production, agriculture and rural development, exports, and small and medium enterprises.

16. Despite this, total credit has grown by only 7 percent in 2012, which is much lower than the 15 percent target for the year. Total deposits on the other hand rose by more than 11 percent during the ten eight months of the year. The rate cuts may have helped alleviate cost pressures in the private sector, but they are unlikely to impact on supply or consumer spending.

7 The Prime Minister at the Consultative Group Meeting in December 2012 indicated that reserves were equivalent to three months of imports.

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This is partly because both individuals and firms are already highly leveraged, and there are uncertainties over future economic prospects, which has contributed to a more cautious attitude.

Fiscal Policy

17. The Government has prioritized fiscal consolidation efforts, particularly by targeting more efficient public investment. The overall deficit was at an estimated 3.2 percent of GDP in 2011. The 2012 State Budget commits the Government to further rationalize public investment, and increase the relative share of social spending. Total Government expenditure is estimated at VND 896 trillion, of which VND 651 trillion is recurrent expenditure, and VND 245 trillion is capital expenditure. Social spending is around one third of total planned spending, out of which education accounts for 47 percent, social protection for 29 percent, and health for 17.5 percent. Government policy is to allocate 20 percent of total spending on education and to ensure that the health budget increases by at least the same rate as the overall budget.

18. A combination of economic slowdown and tax relief for enterprises has contributed to lower than expected domestic revenues in the first nine months of 2012. Revenues have declined 0.6 percent in nominal terms compared to the same period last year. Government expenditure in the first nine months of 2012 has remained on track. Discipline over capital expenditure has been maintained. The overall impact on the government’s 2012 fiscal deficit target is still uncertain though may increase to around 4.8 percent of GDP. Oil revenue will be higher than budgeted, and tax collections may increase in the last quarter as the economy gathers pace. The preliminary estimates for the 2013 Budget show efforts to bring the fiscal deficit down to 3.8 percent of GDP, including a possible small reduction in on-budget capital expenditure.

MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY

19. Vietnam’s economy is expected to grow at a moderate pace of around 5.5 percent during 2013. In the Bank’s base case scenario, assuming the continuation of the good spell of macroeconomic stability and reasonable export growth, we do not expect any strong headwinds that could destabilize the economy in 2013. The trade and current accounts are expected to remain in surplus in 2013 though by a smaller amount than in 2012. We also expect some consolidation of the fiscal accounts and inflation remaining in the high single digit. 20. With the restructuring agenda gaining momentum, we expect some important progress in 2013. Efforts to divest non-core assets and equitize a large number of SOEs could send a positive signal to investors about government’s commitment to this agenda. It could also involve some pains in terms of retrenchment of labor and restructuring of bad debts. We also expect some efforts to resolve the bad debt problem, though given the complexity of the issues involved, it is likely to be a much more drawn-out process. Many of these actions would involve costs and it is unclear how these will be met. If the costs are paid by allowing foreign or domestic private enterprises and banks to invest in the weak banks, it will certainly help to keep the fiscal situation under control and boost investor’s confidence. Given the low price of risk in global capital markets, Vietnam has a unique opportunity to clean up a part of its bad debt problem by accessing external capital at a much lower cost than would have been otherwise possible.

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21. There are however several downside risks to the projections. First, on the external side we expect a weak global recovery but no big negative shocks from the United States, Euro Area or Japan. Therefore Vietnam’s exports, FDI and remittances should continue to do as well as in 2012 or better. It is also assumed that oil prices will remain relatively high (around US$105 per barrel) but non-oil commodity prices would gradually fall—which should help keep dpwn domestic inflation. Furthermore, progress is expected to be made on the restructuring agenda in 2013 compared to 2012.

Debt Sustainability 22. Vietnam’s public debt is currently at sustainable levels. Total outstanding Government and Government Guaranteed external debt increased by nearly 50 percent from 2008 (US$21.8 billion or around 21 percent of GDP) to end of 2010 (US$32.5 billion or 32.7 percent of GDP) due to the Government’s fiscal stimulus package. Although debt to the external private sector rose from around US$3 billion in 2008 to US$5.4 billion in 2010, more than 80 percent of Government and Government Guaranteed external debt is long-term and concessional from official creditors. Domestic public debt has gone from around 18 percent of GDP between 2006 and 2008, to around 21.5 percent of GDP in 2010, also due to the fiscal stimulus. 23. Vietnam is assessed at low risk of debt distress. The Present Value of Government and Government Guaranteed external debt is estimated at around 27 percent of GDP, considerably lower than the 50 percent of GDP threshold for external debt sustainability. The Present Value of public sector debt (i.e. including domestic debt) is closer to 50 percent of GDP. Maintaining the current course of fiscal consolidation is essential for debt sustainability. It will help to shelter against potential exchange rate shocks, slowing exports due to falling global demand, and declining sources of concessional financing. Some of the recent developments imply a different set of assumptions than what was considered in the last Debt Sustainability Analysis (DSA). Weaker economic growth and higher recapitalization needs due to large non-pool loans (NPLs) would adversely impact the debt sustainability. This will be looked at in more detail in the next DSA planned for Q2 2013. 24. There is growing recognition that contingent liabilities from SOEs and the financial sector pose significant risks to debt sustainability. Explicit obligations in the form of government guarantees are less than 5 percent of GDP. But implicit obligations, for example in the event of a systemic shock in the financial sector, are not captured under government and government guaranteed debt statistics. A large proportion of NPLs is attributed to state enterprises. SOEs are in turn highly leveraged – between 2007 and 2009, debt to equity ratio averaged 307 percent relative to 183 percent for non-state firms and 145 percent for foreign firms. The SOEs also had the highest debt-to-asset ratio among the three groups. Therefore economic slowdown, affecting SOEs could further affect NPLs and a banking sector crisis. However, even in the absence of a shock, Vietnam’s debt dynamics can change quickly depending on costs of the government’s economic restructuring agenda. The latter includes a plan to deal with NPLs in the system and restructure the largest state enterprises in the country (i.e. Economic Groups and General Corporations). The preliminary 2013 Budget estimates however do not seem to have provisions for restructuring costs.

8

Summary 25. Vietnam’s current macroeconomic situation is more stable than it has been in the past two years. As discussed earlier, Vietnam’s inflation is at two-year low, its international reserves have doubled in the past 12 months, the exchange rate has been stable, and its trade and current account deficit are at modest levels. Stabilization measures implemented over the course of 2011 and 2012 have helped to achieve and maintain this stability. Policies pursued by the Government have been costly in terms of growth, but they are consistent with restoring macroeconomic stability. Moreover, the Government remains fully committed to maintaining macroeconomic stability as seen from the communiqué issued after the recently concluded Party Plenum. Therefore, the current macroeconomic policy framework is deemed adequate for a Development Policy Operation. 26. However, Vietnam faces important short-term domestic macroeconomic management challenges. Whilst the level of foreign exchange reserves has more than doubled in 2012, it is low by international standards. The sharp slowdown in domestic credit and tepid growth are further worsening asset quality. The risk that authorities would depart from fiscal and monetary discipline prompting inflation resurgence is low but rising. Delayed and poor implementation of structural reforms including the resolution of bad debts in the banks and SOEs could unravel gains already made and weaken confidence further. Vietnam is also vulnerable to the effects of a prolonged global economic slowdown, which could adversely affect exports, remittances, foreign investment, and possibly aid. Although it has managed to navigate the global economic crisis reasonably well through implementation of a large stimulus package, fiscal space is now limited because of high levels of public debt and large contingent liabilities from a weak banking sector and poorly managed SOEs. 27. These risks are being mitigated through closer monitoring of macroeconomic developments, and increased dialogue to ensure steadfast implementation of reforms already announced and to prepare for new ones. The ongoing Financial Sector Assessment Program (FSAP) is expected to provide a comprehensive roadmap for financial sector reform and accelerate implementation. Economic Management and Competitiveness Credit (EMCC) series itself can be considered as part of a risk mitigation strategy as it underscores the need to reform, builds consensus around challenging issues and helps design appropriate responses Poverty reduction 28. Vietnam’s record on economic growth and poverty reduction over the past two decades has been remarkable. Progress also has been substantial in other dimensions of well-being, ranging from high primary and secondary enrolments to improvements in health status, and reduced morbidity and mortality.

29. Despite remarkable progress, the task of poverty reduction is not complete, and in some respects has become more difficult. Although tens of millions of Vietnamese households have risen out of poverty over the past decade, many have income levels still very near the poverty line. These households remain vulnerable to falling back into poverty as a result of idiosyncratic or economy-wide shocks, which have tended to become larger, more frequent, and lengthier. New challenges have arisen in reaching those still living in poverty due to isolation,

9

limited assets, low levels of education and poor health status, while poverty reduction has become less responsive to economic growth. Furthermore, while Vietnam’s 53 ethnic minority groups make up less than 15 percent of the total population, they account, for 47 percent of the poor in 2010 compared to 29 percent at the end of 1990s, which is a real concern.

Figure 1. Poverty Trends in Vietnam Composition of poor by minority/majority

Source: 2000, 2008 VDR; WB estimates from VHLSS

30. Regional differentials are important and likely to become more so in the future. Poverty levels vary substantially across regions with poverty headcounts being highest in the mountainous and more isolated Northwest region, as well as in the North East and the Central Highlands. Despite all regions having witnessed progress in recent years (Figure 2), disparities remain.

Figure 2. Regional Dimensions of Poverty

Source: 1998 VLSS, 2010 VHLSS

31. If poverty in Vietnam is still predominately a rural phenomenon (Figure 3), there is a growing concern regarding urban poverty. New forms of poverty may arise as a result of rapid economic transformation and global integration. The global crisis has exposed Vietnam’s susceptibility to external shocks at both the macroeconomic and household levels as evidenced

10

by rising unemployment and widespread reports of wage cuts and reduced working hours8. Several studies and rapid assessments9 have shown that these events have been particularly challenging for urban residents: 65 percent of households surveyed in the 2009 Urban Poverty Survey reported higher food and other essential item prices as a source of difficulties, making inflation by far the most common factor among job loss, business slowdowns, natural disasters, health shocks, and others.

Figure 3. Poverty Trends Urban/Rural in Vietnam10

Source: GSO, VHLSS and World Bank III. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES

HIGHER EDUCATION SECTOR CONTEXT

32. Education attainment and growth in Vietnam have been impressive. The country has expressed strong commitment to achieving universal basic education as a foundation for social development and economic growth. Accordingly, primary and secondary net enrolments have grown rapidly11 with upper levels of education having seen the greatest expansion: Enrolment in colleges and universities has nearly doubled from 2001 to 2011. This increase can be explained by: (i) an initially low enrolment rate; (ii) high demand for higher education as a result of higher returns to skills; and (iii) the Government’s actions in expanding the sub-sector.

33. Despite the rapid increase in higher education enrolment, overall coverage remains low compared with other countries in the region. The fast growing economy and the increasing need for innovation and higher quality skills have placed major demands on the existing higher education system. Vietnam Household Living Standards Survey (VHLSS) data show that the higher education gross enrolment rate increased from about 11 percent in 1998 to 18 percent in 2008 to 24 percent in 2010 but remains low compared with countries such as Thailand, Malaysia or Korea.

8 Oxfam BG/ActionAid (2011), Participatory Monitoring of Urban Poverty in Vietnam : Fourth round Synthesis Report, 2011, p.17 9 Oxfam GB/Action Aid (2008), Participatory Monitoring of Urban Poverty in vietnam : Synthesis Report 2008 Vietnam Academy of Social Sciences (2009), Participatory Poverty Assessment : 2008 Synthesis Report Vietnam Academy of Social Sciences (2011), Rapid Impact Assessment – Vietnam in 2011 : Synthesis report UNDP (2010) Urban Poverty Assessment in Hanoi and Ho Chi Minh City 10 Data in the figure are calculated with official methodolgy. The new GSO-WB methodology gives higher poverty line figure. National poverty rate is therefore estimated at 20.7% (6% for urban, 27% for rural) 11 EdStats

0

20

40

60

80

2002 2004 2006 2008 2010

National

Urban

Rural

11

Table 2. Tertiary Education Coverage Indicators, 2008

COUNTRY Total Enrolment (‘000) Gross Enrolment

Rate (%) Number of Graduates

Graduates per 1000 inhabitants

Cambodia 123 7 8,333b 1 China 26,692 23 5,872,815d 5

Indonesia 4,420 21 612,975c 2 Korea 3,204 98 604,862d 12

Malaysia 922 32a 181,000d 7 Mongolia 152 50 25,938d 11

Philippines 2651 29 410,000d 5 Thailand 2,430 45 506,266d 8 Vietnam 1,655 18 182,489b 3

Source: All countries: UIS; Vietnam GER: VHLSS 2008 a/: Data for 2007; b/: data for 2006; c/data for 2005; d/data for 2004

34. Access to higher education is becoming more equitable across urban and rural areas and income quintiles but ethnic minority groups have yet to see significant improvement. Individuals from more advantaged groups still outpace those from other groups in terms of higher education enrollment, but rural areas and groups from lower income quintiles have registered the fastest gross enrollment rate growth (Figures 4 and 5). These trends, however, stand in stark contrast with almost insignificant improvements of ethnic minorities’ access to higher education between 1998 and 2010 (Figure 4).Therefore, reducing the large differences in enrolment between advantaged and disadvantaged groups and closing the large educational attainment gap will require a sustained effort.

Figure 4. Higher Education Gross Enrolment Rate by

Geographic Area, Gender, and Ethnic Group

Source: VHLSS, various years

05

1015202530354045

All Vietnam Urban Rural Males Females MajorityKinh

Ethnic

1998

2004

2006

2008

2010

12

Figure 5. Higher Education Gross Enrolment Rate by Income Quintiles

Source: VHLSS, various years

35. The emergence of private higher education started in the mid-1990s in response to an increasing demand for and enrolment in higher education. By 2012, Vietnam counted 419 HEIs, of which 80 are private. Although the Government remains by far the main provider in the sector, private provision is playing a critical role and has become an increasingly important share of the total sector provision (Table 3).

Table 3. Share of enrolment by private higher education institutions

Level 2000-2001

2001-2002

2002-2003

2003-2004

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

Colleges 7.93 8.7 9.6 11.0 9.08 7.39 9.89 10.74 14.02 16.63 24.82 Universities 12.23 10.8 11.32 13.9 10.79 12.71 13.82 12.15 12.18 14.65 15.21 Total 9.5 9.8 10.96 12.5 10.44 11.57 13.0 11.78 12.69 13.29 15.44

Source: MOET

36. Currently, the state is providing 55 percent while tuition fees provide 45 percent of public HEIs budgets. Given that this policy could have strained some students and their families’ capacity to pay, an expansion of student loans schemes and other aid mechanisms was introduced. In this funding context and to support further expansion, main options include a further increase in public spending, diversification of resources12 and further expansion of the private sector.

37. The management of the higher education system is fragmented. Responsibility for the oversight of the education sector is shared between the Ministry of Education and Training (MOET), and other line ministries and local authorities: some 60 public HEIs are under direct MOET control, while the others are controlled by other ministries (depending on the areas of study and research) or Provincial People’s Committees. HEIs submit their annual plans and budget estimates to their respective ministries for approval and consolidation. Ministry of Finance (MOF) and Ministry of Planning and Investment (MPI) consolidate the budget proposals from line ministries and make final allocations based on budget availability. This has led to 12 Universities in Vietnam do not generate any significant income from research activities or donations, or any other sources such as sale of services.

0

10

20

30

40

50

60

Q1 Q2 Q3 Q4 Q5

1998

2004

2006

2008

2010

13

issues of incoherent and non-transparent budget allocations. The quality of higher education and faculty has not significantly improved. The proportion of faculty members with doctoral degrees is generally used as an indicator of the quality of a higher education institution, especially in the case of international rankings. In Vietnam, the proportion of faculty having a doctoral degree has been falling (Table 4) due to the rapid system expansion, leading to an increase of academic staff without a postgraduate degree. The large number of students for each faculty member13 has negative consequences on the learning environment.

Table 4. Staff Qualifications in Higher Education Institutions (%)

1999-2000

2001-2002

2003-2004

2005-2006

2007-2008

2008-2009

2009-2010

2010-2011

Doctorate 14.8 13.8 13.4 12.4 10.5 10.2 10.1 10.6 Master 22.4 26.6 29.3 32.3 36.1 37.3 38.6 40.7

Other university & college qualifications 59.1 56.6 54.6 53.4 51.7

51.2

50

47.5 Professional qualifications 1.9 1.7 1.4 0.9 0.8 0.6 0.6 0.6 Others 1.8 1.3 1.3 1.1 0.9 0.7 0.7 0.6

Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: MOET

HIGHER EDUCATION AND LABOR MARKET NEEDS

38. Vietnam is going through a structural shift of its economy, going from a net food importer to the world's second-largest rice exporter. The agriculture sector share of economic output declined, falling to 21 percent of GDP in 2010 as production in other sectors of the economy rose. Industry and construction represented 40.9 percent of GDP and services 38.1 percent in 2010. Foreign trade and FDI have also improved significantly. In this evolving economic context, employment opportunities for tertiary graduates have increased substantially. Nevertheless, employment of tertiary graduates is still concentrated in a few sectors and employment opportunities are still constrained by a high share of self-employment. There is an increasing demand for highly skilled labor, especially in sectors such as manufacturing and FDI. This is also visible from the combination of drastic increases in the tertiary education wage premium over the 1998 to 2008 period (by over 40 percent) with very high “professionalization” rates14 (over 80 percent)15. The figure below shows that employment attainment for tertiary graduates remains quite stable over the 2002-2010 period with some variations: Less tertiary graduates worked in state owned enterprises in 2010 than they did in 2002 (respectively 20.84 percent against 8.32 percent) while more tertiary graduates worked in private enterprises in 2010 (20 percent) compared to 2002 (only 7 percent).

13 The student/faculty ratio is about 30:1, which is widely viewed as too high by international standards. 14 Proportion of higher education graduates employed in professional occupations 15 Putting Higher Education to Work: Skills and Research for Productivity and Growth in East (World Bank 2012)

14

Figure 6. Employment of Higher Education Graduates

39. Education level affects salary income. Higher education is correlated with higher income as showed in the figure below. The hourly salary income has since sharply increased in particular for the higher education, upper secondary level and professional secondary/vocational training level.

Figure 7. Hourly Income of Wage work by Different Levels of Education (thousand VND per hour)

Source: VHLSS, various years

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002 2004 2006 2008 2010

Wage-work in FDI

Wage-work in Private Enterprises

Wage-work in State OwnedEnterprises

Public Employee, Public/ CivilServant

Wage-work in HouseholdBusinesses

Self-employment in non-agriculture

Self-employment in agriculture

0

5

10

15

20

25

30

2002 2004 2006 2008 2010

No primary

Primary

Lower secondary

Upper secondary

Prof secondary/vocationaltraining

Higher Education

15

40. While demand for higher education graduates has been growing, there are significant levels of skills “mismatches” related to higher education. Skills mismatches are particularly relevant in technologically intensive and export-oriented sectors in Vietnam (Figure 7) suggesting both important constraints to country competitiveness and mismatches affecting higher education (quantity and quality)16. Beyond issues of shortages of highly skilled labor, it is clear that poor quality and relevance of skills acquired in higher education are a big issue. Recent evidence collected from employer and employee surveys confirms pervasive gaps in technical, English and communication skills of professionals. A recent report on foreign employers also confirms that only 10 percent of the recent graduating class of engineers had the potential to become “effective employees”.17 Two constraints to higher relevance clearly appear: (i) information regarding employment of graduates, labor market and skills is still weak; and (ii) research capacity of universities is not only low but also more supply- than demand-driven. Furthermore, the lack of university-industry linkages and lack of information on labor market needs have negative consequences on the relevance of university programs. Vietnam’s national competitiveness increasingly depends on skilled human capital, which its higher education system is expected to deliver.

Figure 8. Skill bottlenecks, Technology, and Openness

Source: Putting Higher Education to Work, Skills and Research for Growth in East Asia, World Bank

HIGHER EDUCATION REFORM AGENDA

41. The Government’s socio-economic development strategy 2011-202018 stresses the theme of quality, efficiency and sustainability of national development. It emphasizes that if economic restructuring is to be sped up, growth must be harmoniously combined with social progress and equality. The SEDS 2011-2020 emphasizes “[Vietnam] will concentrate on education and training, especially tertiary and vocational training, to have a labor force of high

16 Due to the fact that these are traditional sectors of employment of higher education graduates. 17 Putting Higher Education to Work, Skills and Research for Growth in East Asia, World Bank 2012. 18 Socio-Economic Development Strategy 2011-2020, attachment to the Notice of the Central Party’s office No. 362/CV-VPTW dated March 17, 2011.

Share of Firms Reporting Skills of Workforce as an Obstacle by Technological Intensity

MongoliaChinaThailand

Vietnam

Malaysia

Laos

Indonesia

Philippines

Cambodia

South Korea

0%

5%

10%

15%

20%

25%

30%

35%

0% 5% 10% 15% 20% 25% 30% 35%

Firms Not Engaging in Technological Innovation

Fir

ms

En

gag

ing

in

Tec

hn

olo

gic

al

Inn

ov

ati

on

Share of Firms Reporting Skills of Workforce as an Obstacle, by Exporting Intensity

Mongolia

ChinaThailand

VietnamMalaysiaLaos

Indonesia

Philippines

CambodiaSouth Korea

0%

10%

20%

30%

40%

50%

60%

70%

0% 10% 20% 30% 40% 50% 60% 70%

Non-Exporting Firms

Ex

po

rtin

g F

irm

s

16

quality and proper structure, and thus accelerate the economic restructuring and the shift of [sustainable] growth models.”

42. The Government sets clear goals for higher education in its HERA.19 The strategy aims for an overall quantitative goal of “increasing enrolment in universities and colleges by 10 percent annually, to reach a level of 450 students per 10,000 population by 2020”, and an overall qualitative goal of “approaching the advanced education standards of the region and the world”. Specifically, the following targets for the higher education sector have been set: (i) revenue from research activities increased to 25 percent by 2020; (ii) proportion of university teaching staff with masters’ level degree increased to 60 percent by 2020; (iii) proportion of university teaching staff with doctoral level degree increased to 25 percent by 2020; and (iv) ratio of university students to teaching staff reduced to 26:1 by 2020.

43. The main objectives of the HERA are: (i) complete the national network of HEIs with greater autonomy to individual institutions and introducing measures in order to create a climate of competition between and within institutions that promotes improvement; (ii) a dramatic expansion in physical capacity to allow an increase of the participation rate in higher education institutions; (iii) simultaneous increase in quality and/or efficiency of the system;20 (iv) introduction or reinforcement of research in universities in order to better train future new teachers, to enrich and upgrade present teachers’ teaching abilities and to upgrade the quality level and international visibility of Vietnamese universities; and (v) improve the governance of the higher education and research system at both national and regional levels.

44. HERA proposes comprehensive measures including: (i) renovating curricula and teaching methods; (ii) developing systems that increase study opportunities through transfers; renovating financial mechanisms and policies to make institutions more pro-active and responsible for finance, staffing and organization; (iii) renovating management with stronger decentralization, clearer responsibilities and authorities for different entities; (iv) implementing quality assurance and accreditation schemes, gradually joining international educational quality accreditation systems; (v) encouraging the establishment of private institutions, including institutions with foreign investments; and (vi) encouraging foreign experts and Vietnamese expatriates to teach in Vietnam.

45. The HERA is backed by an ambitious plan to cover the additional costs over the 15-year period 2006-2020, which the MOET estimates to be US$20 billion. The largest share is estimated for HEI infrastructure (US$18 billion) and smaller shares to training program development, staff development and student financial assistance. The MOET plans to finance HERA’s additional cost from a combination of public, private and Overseas Development Assistance (ODA) funds, in which half of the costs are to be covered from private sources.

19 Nghị quyết về Đổi mới Cơ bản và Toàn diện Giáo dục Đại học Việt Nam Giai đoạn 2006-2020 (Government Resolution No. 14/2005/NQ-CP, dated November 2, 2005, on substantial and comprehensive renewal of Vietnam’s tertiary education in the 2006-2020 period). See Annex 1. 20 This includes lower teacher-student ratios, a reformed entrance examination, better trained teachers, better pedagogy, the development within universities of research activities that are indispensable for deepening and broadening teachers’ scholarship, the transformation of selected institutions into teaching and research institutions, improved curriculum frameworks and better assessment of learning outcomes, greater flexibility of study programs and student mobility with the introduction of a credit accumulation system, and the development of a quality culture within the institutions, including the implementation of an accreditation system of all institutions (public and non-public) at the national level.

17

Table 5. Projected sources of funding for Government’s Higher Education Reform Agenda, 2006-2020

Share

(%) Amount

(VND billion) Amount

(US$ million) State budget 30 96,000 6,000 Private contributions (tuition fees, etc.) 50 160,000 10,000 Overseas Development Assistance (ODA) 20 64,000 4,000 Total 100 320,000 20,000

Source: MOET, Higher Education Reform Agenda: background paper (2006)

46. The Government has plans to raise major ODA financing for the development of the higher education sector. The World Bank and the Asian Development Bank (ADB) currently have operations and future plans to provide approximately US$700 million specifically to Vietnam’s higher education sector. Other ODA contributions to the HERA strategy come from bilateral sources, including assistance directly to certain HEIs and various scholarship programs that enable HEI faculty to complete their doctoral studies in overseas universities.

Table 6. Currently projected World Bank and Asian Development Bank lending disbursements for higher education (US$ million)

2008 2009 2010 2011 2012 2013 2014 2015 2016 Total HEP2 (IDA & PHRD) 6 17 21 16 5

65

NMUP (IDA) 5 10 50 50 65 180 HEDPO1-3 50 50 50 150 FIRST(IDA) [pipeline] 20 30 30 20 100 HESDP (ADB-OCR) 30 50 50 50 30 210

Total World Bank & ADB 6 17 71 96 60 110 100 110 65

705 47. The government financing strategy for HERA also expects that substantial resources will come from foreign sources. The government has opened the education market, which provides a range of opportunities for foreign investment and partnerships. The sector received a boost with the enactment of a March 6, 2000 decree, providing incentives for foreign investment in several areas, including education and training. To date five foreign-owned institutions with a total investment of about US$70 million have started operations21.

48. HERA assumes that the total government spending for education will reach 20 percent by 2010 and stay at least at that level thereafter. The budget for scientific research to be conducted by higher education institutions is expected to reach 1.5 percent of the government budget by 2015. In line with regional practice22, the principle of cost sharing between the state and students and families continues to underlie the HERA targets.

21 Government’s report No. 51/BC-CP dated May 8, 2010 22 Recent data from Mongolia, Indonesia and China show that tuition fees represent between 30 and 50% of overall income for public higher education institutions.

18

WORLD BANK ASSESSMENT

49. The HERA has ambitious targets and the main challenge for the Government is to operationalize the strategic goals of HERA by addressing broad governance issues (e.g. legal and financial frameworks) while promoting local, HEI-level modernization. This requires a shift in responsibilities between the central authorities and individual HEIs, with the MOET taking on a “stewardship” role in broad sector orientation, public financing (especially with a view to ensuring equitable access to higher education), and monitoring results for public accountability. The governance reforms supported by HERA fit squarely within international best practices and several Organisation for Economic Co-operation and Development countries and East Asian countries (in particular Japan, Singapore, Hong Kong SAR, China) have greatly increased the institutional autonomy of their public institutions.23 Greater autonomy has the potential to lead to better alignment with labor market needs through flexibility, an increased role of external stakeholders and higher innovation potential in combination with competition. International experience also shows the importance of putting in place well-working accountability arrangements, including: (i) appropriate financial and quality assurance mechanisms; (ii) information and monitoring systems; (iii) management structures with external stakeholder involvement; and (iv) incentives for competition among HEIs24.

50. The Bank recognizes risks in the HERA strategy. The experience of policy development in Vietnam has revealed economic and institutional constraints inherent in the system that hinder the pace and directions of the reform. Although concrete steps have already been taken to begin the reform process, the efforts generally emphasize issuance of decrees and circulars, campaigns and short workshops for university administrators, rather than deep structural transformations of management and personnel policies that are needed to achieve lasting institutional changes. Furthermore, there are gaps in the regulatory and legal framework,25 which need to be addressed. Policymakers will need to be flexible in reexamining and reworking policies based on evidence of their effectiveness. So far, the reform focused on the need to discipline more strictly HEIs that violate regulations. However, positive incentives should also be part of the new system-level oversight mechanisms, along with tough penalties, to ensure quality improvement emerge from inside HEIs themselves.

51. Some measures may have unintended effects. Raising standards that new private investors have to meet to enter the higher education market are intended to improve quality; overly restrictive standards may, however, constrain investment to the point where the Government’s targets for quantitative expansion are not met . Likewise, the continuous application of cost sharing policies between the state and students with a rising share of tuition fees may have unintended negative consequences on the equity of access if not adequately mitigated by effective student loans and scholarships policies.

23 Raza (2010). 24 Raza (2010) 25 Report 329/BC-UBTVQH12, May 29, 2010

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IV. BANK SUPPORT TO GOVERNMENT’S STRATEGY

LINK TO CPS

52. The World Bank five-year Country Partnership Strategy (CPS)26 supports Government’s “Five-Year Socio-Economic Development Plan 2011-2015.” Under CPS Pillar I, which focuses on building the country’s competitiveness, the World Bank’s program will help to “develop a higher education system that produces graduates better suited to the new economy’s needs” to which the three HEDPO operations are expected to contribute.

53. Higher education contributes to economic development. Building a higher education system in Vietnam that is innovative, responsive to the demands of the market and of high quality is essential to Vietnam’s economic growth and development. The Government has requested the World Bank to provide continued support for its higher education agenda, recognizing the success of past collaboration in the sector. This is all the more critical at a time when Vietnam, having recently acceded to membership of the WTO, is looking to develop a skilled population, with a strong knowledge base, that will position the country for economic expansion and integration into the global economy.

54. Higher education contributes to social development and equity. Economic development is not the only driver of investment in higher levels of education. Higher education institutions also satisfy a growing demand from students for a sophisticated and rewarding education and provide a forum in which societies can examine their culture and values, analyze problems and identify appropriate solutions. The higher education system must provide equal education opportunities, regardless of students’ gender, ethnicity, family income or other characteristics.

COLLABORATION WITH THE IMF AND OTHER DONORS

55. The IMF has not had a program in Vietnam since the Poverty Reduction and Growth Facility expired in April 2004. But it maintains a regular policy dialogue through Article IV consultations, interim staff visits, and its resident representative office in Hanoi. It supplements this dialogue with technical assistance. The IMF has engaged closely in the Poverty Reduction Support Credit (PRSC) process, including through the provision of Letters of Assessment in support of PRSC operations. There are a range of ongoing areas of joint work between the Bank and the Fund, which are of direct relevance to the Economic Management and Competitiveness Credit. These include: (i) a joint work program on strengthening debt management; (ii) annual joint debt sustainability analysis; (iii) tax policy and administration reform; (iv) public expenditure management; (v) banking sector supervision; and (vi) the Financial Sector Assessment Program.

56. In the education sector, the International Finance Corporation, through the Vietnam Business Forum Secretariat cooperates closely with the World Bank in Vietnam and contributes actively in the area of policy development, particularly in foreign investment policy and strategies for the sector.

26 Report No. 65200-VN.

20

57. The two multilateral Banks - ADB and WB - are currently working together in the higher education sector, supporting the implementation of two new model university projects. The new model projects provide opportunities to demonstrate the benefits of innovative arrangements in governance, financing, quality improvement, quality assurance and financial management in research-oriented universities. The Bank’s work in quality assurance has also benefited from experiences from pilot projects in selected universities, supported by the Netherlands Organization for International Cooperation in Higher Education.

RELATIONSHIP TO OTHER BANK OPERATIONS

58. HEDPO1-3 is designed explicitly to complement the Poverty Reduction Support Credits, focusing on macro and structural reforms. It bridges the gap between the macro-reform agenda and the micro-operational foundations of ongoing investment operations. It supports a set of mid-level policy and institutional actions that institutionalize a programmatic reform agenda for improved delivery of higher education services.

59. HEDPO1-3, along with the HEP2, the New Model University Project and the Fostering Innovation, Research, Science and Technology Project, supports the Government’s implementation of the HERA. HEP2 provided grants to a large number of universities to improve their training and research activities. HEP2 also provided technical assistance, workshops and training for policy development. This process covered the definition of the problems, the collection and analysis of information, and the development and discussion of policy options. HEDPO1-3 covers the promulgation and execution of policy measures. NMUP demonstrates these policy measures in specific institutional settings. The forthcoming FIRST project will further strengthen innovation policy development.

60. The set of higher education operations mentioned above complements the Bank’s support for access to, and quality of, basic education. The School Education Quality Assurance Program (SEQAP), the Vietnam Escuala Nueva Project (VNEN) and the forth-coming School Readiness Promotion Project (SRPP) aim at increasing the opportunities of learning in basic education for students from disadvantaged backgrounds. In this way, the Bank’s Vietnam education portfolio contributes both to the Government’s growth strategy (CPS Pillar I) and its equity strategy (CPS Pillar III). More generally, equity issues in the education sector will continue to be a major focus of the World Bank's support for basic education. With an emphasis on achieving an equitable distribution of quality education outcomes across the school-age population and ensuring a greater proportion of young people from disadvantaged backgrounds complete basic education, the opportunities of these groups to take up post-basic education will increase.

LESSONS LEARNED

61. A comprehensive approach is needed to reform. Previous operations highlight the importance of a comprehensive approach to reform in particular because of the linkages between policy actions across policy areas, so that a piecemeal approach would end up being less effective. For instance, shifting from state control to state supervision of Higher Education (HE) requires creating regulatory and incentive frameworks to support institutional accountability and autonomy. These policies, which include quality assurance and accreditation schemes, strong

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university governing boards, and performance-based funding mechanisms, form the architecture of a competitive, autonomous higher education system with ever-improving standards. In order to make this transition, the Government of Vietnam (GOV) will need to reduce the number of planning and oversight functions but increase its efficiency in carrying out these functions.

62. Time requirement is long but efforts are steady. Progress in several areas of higher education reform has been slower than expected. Vietnam’s consensus building processes takes time and a realistic timetable would ensure consistent and continued progress towards achieving critical policy measures.

63. Better coordination would strengthen policy reforms. There is a need for greater coordination of policy reforms in higher education than is currently being provided by MOET. As discussed earlier, many important public HEIs do not report to MOET. Therefore, reforming HEIs relationships with these other ministries or offices is crucial if they are to fully benefit from the autonomy provided by MOET.

64. Different incentives would provide more support to HEIs to implement the new mechanisms set up by the reform. A policy-based operation such as a Development Policy Operation (DPO) that provides funding to the Government for policies it adopted but expects implementation to be carried out by autonomous institutions led to a mismatch between incentives and implementation. Aside from increased autonomy to impact their financial situation in the future, HEIs were offered no other incentives and minimal technical support to put in place required new mechanisms, institutional arrangements, and overall improvements. In future programs in Vietnam it would be important to consider possible different incentives to HEIs, both financial and perhaps technical support, to motivate implementation of new policies.

65. Some issues remain, related to the ambiguity of the content, feasibility for implementation, comprehensiveness and consistency between different regulations for higher education. HEIs will need to have the capacity both to decide their own goals and programs and determine how their goals and programs will be pursued. Critical for the nascent institutional autonomy will be “academic freedom, individual academic autonomy, institutional sovereignty and institutional self-determination”27. Vietnam’s higher education system is very much in early stage of development. The tendency of “awaiting instruction from the top” still exists. Many universities are still looking for specific guidance for implementation from the center. In many ways, some universities are still passive in performing their roles in the new legal environment.

66. Government’s incremental approach, rather than a radical “paradigm shift”, in implementing its higher education reform may prove virtuous but to succeed in a fast changing world requires both efficiency and speed. The ability to respond rapidly has become a significant advantage in business. Most important of all is a strategic vision for immediate and long-term objectives, direction, demand, capacity relevant to development trends, guiding ideology, and a general action map; this constitutes a philosophy for development. Vietnam has ambitious objectives, but without a bold, systematic and comprehensive vision, as well as processes for implementation of its reform, progress may be less substantial and systematic than

27 Hayden, P.M.; Thiep, L.Q.(2007)

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expected. The decision-making process at the highest levels relies on extensive consensus building across a range of political stakeholders. Thus, the development of the HERA and the HE Law involved an extensive consultation process with numerous stakeholder groups. There was a serious effort to collect inputs from different groups of Vietnamese society. In addition to internal discussions within government, consultation workshops were held with local officials, universities, groups of academics, the domestic business sector, international and local experts.

ANALYTICAL UNDERPINNING

67. The study “Higher Education and Skills for Growth28” showed that the demand for skills has been increasing significantly in Vietnam, due to a combination of inter-industry employment changes, capital accumulation and skills-based technical change. Employment opportunities for tertiary graduates now exist in most sectors. Higher education graduates also contribute positively to firm productivity. On the one hand, this evidence provides a strong justification for further expansion and improvement of higher education. On the other hand, increasing evidence of skills bottlenecks, combined with broad institutional and financing constraints, suggests that the higher education system may not have yet the tools to adapt to the growing and changing needs of the dynamic economy. Improving higher education responsiveness will require a set of reforms that create a more flexible and diverse system, with more private sector participation, higher autonomy at the HEI level and greater emphasis on research with the potential development of centers of excellence. The study recommends that the government creates supporting governance and financing frameworks, with new roles for the public and private sector, by pursuing a reform agenda in stages. The initial stages would aim at strengthening the framework for a competitive higher education system, while helping universities improve the relevance of decision making to the emerging social and economic needs. A later stage would then focus on further investments in building a first class higher education system.

68. A regional flagship report on “Putting Higher Education to Work: Skills and Research for Growth in East Asia29” shows that higher education systems in East Asia are not contributing actively to innovation and technological capacity, and have not effectively addressed the mismatches between the demand and the supply of skills. These structural deficits largely result from countries’ failure to implement coherent sets of policies to address the challenges and shape the directions of their higher education system in holistic ways. These problems are compounded by the institutional segmentation and fragmentation that characterize higher education system of most countries in the region. In Vietnam, for instance, the significant transfer of decision making authority to HEIs in recent years has been recognized but was accompanied by: (i) ambiguity of content; (ii) low implementation feasibility; and (iii) inconsistency between different regulations due to the lack of systematic vision and coordination between agencies responsible for higher education. The study argues that a well performing higher education system can only be achieved by establishing the right incentives through autonomy and accountability, and mobilizing and allocating resources efficiently and effectively.

28 World Bank (2008) 29 World Bank (2011)

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69. A case study on “Equity and Access to Tertiary Education in Vietnam”30 has also been conducted to investigate the results and lessons of efforts to expand access to tertiary education and improve the chances of success for under-privileged youths (with particular emphasis on the effects of the fee structure as well as student loans and scholarships schemes). The study found that the comprehensive package of measures introduced by the Government has had some success in reducing disparities. However, it also documents important gaps and offers concrete recommendations on how to address them – with focus on the amount, coverage and allocation of student aid and loan schemes.

70. The Government, under HEP2, conducted several important diagnostics and policy deliberation including: (i) the development of the Higher Education Sector Master Plan; (ii) the calculation of actual and appropriate unit costs; (iii) the evaluation of public financing policies and procedures; and (iv) the development of the quality assurance framework. Details about these diagnostics and policy recommendations are presented in the next section, which describes the policy measures included in HEDPO331.

V. THE PROPOSED OPERATION

OPERATION DESCRIPTION

71. As mentioned in the introduction, the preparation of HEDPO3 has taken longer than originally planned but the program content remains consistent with the on-going Government’s Higher Education Reform Agenda. In addition to the complexity of the reforms, the Government’s wish to include key policy measures in the Higher Education Law required more time for consultation and consensus building. The Law was not expected by the previous HEDPOs. Instead, it was foreseen that by HEDPO3 the Government would have only issued a Master Plan of Higher Education. The approval of the Education Law at highest level of authority (National Assembly) in June 2012 reflects the strong commitment of the Government. In other words, Vietnam went beyond the defined prior actions in HEDPO1-3, overachieving compared to initial expectations. In this context, it made sense to wait for the approval of the Higher Education Law before programming the 3th operation.

72. The policy measures for HEDPO1-3, summarized in the Policy Matrix (Annex 2), are drawn from the Government’s HERA Strategy and the recommendations from the Country Fiduciary Accountability Assessment 2007 (“CFAA 2007”) 32 that are relevant to the higher education sector. All measures have been selected on the basis of: (i) the importance for the achievement of key reform objectives; (ii) Government ownership; (iii) transparency and 30 World Bank (2011) 31 A detailed list of analytical outputs produced by the World Bank and others is presented in Annex 4 (list of analytical outputs). 32 The CFAA 2007 analyzed the education sector and highlighted four key findings and recommendations: • Improve the comprehensiveness of annual budgets by incorporating all revenues and other fund sources; • Develop and implement measures to require public, private and semi-public institutions to adopt standard PFM practices and

provide regular financial and audited annual financial statements, as well as public disclosure of budget plans and financial reports;

• Require institutions that are controlled by provinces, cities or other ministries, to provide financial plans and financial audit reports to the relevant sector Ministry to enhance the comprehensiveness of sector budgets and sector oversight;

• Increase transparency by ensuring compliance with requirements for publication of quarterly and annual plans, budget allocations, financial reports and audit results.

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predictability of the achievement; and (iv) the agreed framework and use of Government’s own systems and procedures for implementation, monitoring and evaluation, its cycles and timelines HEDPO1 set out initial elements of reform, HEDPO2 extended the scope of key policies and HEDPO3 aims to institutionalize key reform measures at the highest legislative level.

73. The government conducted extensive consultation on the key policy measures that are included in the HEDPO series. Focused group discussions have been held to discuss the concepts and directions for change. The drafting of the new regulations goes through many iterations with inputs from key constituencies. The final drafts are published on the websites of the government agencies for public consultation for 60 days before they are submitted for final signature and promulgation.

74. HEDPO3 aims to strengthen governance, financing and quality of higher education by (i) improving the responsiveness of higher education and research and increase the quantitative capacity of the system; (ii) enhancing fiscal transparency, sustainability and effectiveness of the higher education sector; and (iii) improving the quality of Higher Education institutions.

75. The HEDPO3 prior actions are presented below. The HE Law is the most important policy action as it covers all three broad policy areas: (i) Governance; (ii) Financing and Financial Management; and (iii) Quality. In addition to the HE Law, other prior actions have been presented along these policy areas as summarized in the following Box 1.

Box 1. Prior actions of HEDPO3 Higher Education Law Prior action 1: The National Assembly has enacted Law No. 08/2012/QH13, of June 18, 2012, on Higher Education, defining: (i) the qualification and training modalities of HEIs; (ii) the classification of HEIs; (iii) the structure of networks of HEIs and their differentiation/segmentation in the system by institutional missions; (iv) the regulation of HEIs’ institutional autonomy and accountability in academic, organizational and financial affairs; and (v) the regulation of HEIs’ institutional accreditation and quality assurance processes. Governance Prior action 2: MOET has issued Circulars No 57/2011/TT-BGDDT and 20/2012/TT-BGDDT, of December 2, 2011 and June 12, 2012, res