Current experiences, opportunities and innovations of municipal financing in Ho Chi Minh City, Vietnam

1. Current experiences, opportunities and innovations of municipal financing in Ho Chi Minh City, Vietnam Presentation to International Conference on Financing Municipalities & Sub-national Governments 30th September 2004

2. CONTENTS • An introduction of Ho Chi Minh City Investment Fund for Urban Development (HIFU). • Experience in fund raising for urban infrastructure development. • Opportunities – challenges & HIFU’s strategies to capital mobilization for Ho Chi Minh City’s infrastructure development.

3. Introduction of HIFU • HIFU, a state-owned financial institution, directed by Ho Chi Minh City People’s Committee, was established by the Government in 1997 as a pilot model to increase effectiveness in utilizing state budget and non-state mobilized funds for developing urban infrastructure. • HIFU’s equity capital increased from USD 12.84 million in 1997 to USD 39.75 million at the end of 2003. • HIFU’s operations mainly focus on: • Disbursement and repayment management of trusted fund; • Lending to urban infrastructure projects of transportation, treated water, health, education, resident areas, and industrial parks; • Directly investment through founding and managing joint-stock companies operating in socio-economic insfrastructure aspects.

4. Fund raising Experiences • Trusted state fund management • Loan syndication with banks • Foundation of joint-stock companies investing in infrastructure fields • Municipal bond issuance

5. Trusting state fund to HIFU’s management • City’s government assigned a part of state capital to HIFU’s management of disbersement, utilization and repayment • This mechanism has partly helped transform state-subsidized mechanism into budget lending with full repayment. • This mechanism has been mostly applied in financing projects of channel area clearance, damaged resident building clearance, and new area building... • With its experiences of trusted fund management, HIFU has been assigned to manage Pollution Minimization Fund of HCMC and Revolving Fund, which are cleaner production and enviromental improvement program.

6. Loan syndication with banks • Advantages of this financing are: • Ability of raising a large amount of fund for long-term financing of revenue-backed projects couldn’t be funded by any single bank. • Risks can be shared among banks and the controlling of project implementation will be increased. • This mechanism has been applied to finance many big infrastructure development projects in the City. • As a role of syndication leader, HIFU’s capital participated in these projects about 20%. Then, local government has been successful in mobilizing remaining 80% from other economic sectors for investment.

7. Foundation of joint-stock companies investing in infrastructure fields • This is a typical model of public – private partnership. • Advantages of this modality: • Investment responsibility and risks previously on state’s side can be partly transferred to private sector • Better management • Stable profitability • Successful applying through foundation of Ho Chi Minh City Infrastructure Investment Company (CII) in 2001

8. CII – model of public-private partnership • Founded by HIFU in 2001, CII operates in concession contracts of operating transportation projects; investing in revenue – backed infrastructure projects under various forms of BT, BOT,... • The city has transferred to CII the entitlement of operating 02 roads to take back budget resource for other projects. • Based on this cocession contract and contributing 15% of equity to CII, HIFU publicly mobilized capital to set up an initial USD 20-million registered capital • CII then has multiplied this model by participating in other urban infrastructure projects. HIFU’s strategy is putting in seed capital (about 20% of registered capital) to attract other public financial resources to invest in the City’s infrastructure projects.

9. Municipal bond issuance • HCMC Municipal Bond (local government bond) were firstly issued by Ho Chi Minh City’s government in 2003, under the form of general obligation bond. • The City’s government has empowered HIFU, by basing on legal stipulations of government bonds, to issue USD 127 million of 2003’ municipal bond. • Successful municipal bond issues in HCMC opened up a new fund raising channel with advantages of longer term and stable financing, reasonable cost of financing, and suitable to infrastructure projects. • In 2004, HIFU has issued another USD 127 million of municipal bond and has been studying municipal bond issued plan for revenue-backed projects of the City

10. Opportunities • High decentralization for HCMC allows it to mobilize every domestic and foreign resource for local needs, specially in seeking finacing of infrastructure development. • HIFU’s achievments over the past opens up its future opportunites: • Ability of mobilizing financial resource from any economic sector in Vietnam and from abroad. • Affirming HIFU’s stratergic position as a leader and coordinator in fund raising. • Applying various market – based economy financing mechanisms in emerging Vietnam. • Chances of working with international partners for achieving larger funding size and applying other financing mechanisms

11. Challenges • Mission of raising a large size capital for infrastructure development lead to the demand of expanding and multiplying of HIFU model in other provinces. • A need of large – in – size long – term financing with low interest rate to make public services and to match projects’ revenue generation and budget balancing of the City. • A need of improvements and adjustments in financing process management, financial and accounting transparency, autonomy, and achieving credit ratings in accordance with international financing standards. • Building of capacity to meet international standards and the expansion of HIFU’s and other local funds’ capital size. • Creation of supporting agencies for Viet Nam such as credit rating agencies should be one of priorities.

12. HIFU’s long term development strategies • A Technical Assistance project has been put in implementation, including HIFU’s capacity building task to bring HIFU to an international or an Asian Region standard fund • Mobilizing capital in local and overseas markets (domestic/foreign currency – denominated municipal bond issues, bond issues in international financial markets under HIFU as the issuer, and other types of debt financing) • An idea of setting up Ho Chi Minh City Infrastructure Development Fund (HIDF) for the City which has received strong interest and support from Ho Chi Minh City’s government, other national ministries.