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Loans to the Nghi Son Cement Corporation in Viet Nam

Loans to the Nghi Son Cement Corporation in Viet Nam

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ASIAN DEVELOPMENT BANK Operations Evaluation Department



In this electronic file, the report is followed by Management’s response.

Performance Evaluation Report

Project Number: PPE: VIE 29713 Equity Investment Number: 7133 Loan Number: 1502-VIE May 2006

Viet Nam: Loans to the Nghi Son Cement Corporation

Operations Evaluation Department

Director General Director Team Leader Team members

B. Murray, Operations Evaluation Department (OED) R. Adhikari, Operations Evaluation Division 2, OED B. Finlayson, Senior Evaluation Specialist, OED J. Dimayuga, Evaluation Officer, OED R. Perez, Senior Operations Evaluation Assistant, OED Operations Evaluation Department, PE-682

The guidelines formally adopted by the Operations Evaluation Department (OED) on avoiding conflict of interest in its independent evaluations were observed in the preparation of this report. Kenneth S. Postle, Le Tu Trinh, and Tran Quy Suu were the consultants. To the knowledge of the management of OED, there were no conflicts of interest of the persons preparing, reviewing, or approving this report. This report contains information that may be subjected to disclosure restrictions agreed between ADB and the relevant sponsor or recipient of funds from ADB. Recipients should therefore not disclose its content to third parties, except in connection with the performance of their official duties. A summary of this report shall be made publicly available in accordance with ADB’s Public Communications Policy (PCP) and such summary shall not include any confidential information and other information that falls within the exceptions set out in Paragraphs 126, 127 and 130 of the PCP.

As agreed by Operations Evaluation Department, Office of the General Counsel, Office of the Secretary, and the Department of External Relations, only the four-paged redacted summary will be uploaded in the Board Document System.

VIET NAM: LOANS TO THE NGHI SON CEMENT CORPORATION Project Performance Evaluation Report In December 1996, the Asian Development Bank’s (ADB) Board of Directors approved a direct loan of $30 million and a loan of $26.5 million under it’s complementary financing scheme (CFS) for the Nghi Son Cement Corporation (NSCC), a joint venture between the NihonMitsubishi Cement Corporation (NMCC) and Viet Nam National Cement Company (VNCC). The direct loan was from ADB’s ordinary capital resources (OCR). ADB jointly financed the senior debt with the International Finance Corporation (IFC). This project performance evaluation report (PPER) assesses ADB’s support for NSCC (the Project), ADB’s first private sector project in Viet Nam. During project construction, NSCC was the largest greenfield cement plant in the world. The Project was designed as a 2.14 million ton per annum (mtpa) cement plant at Nghi Son, and a cement handling terminal in Ho Chi Minh City (HCMC) with a capacity of 1.3 mtpa. The Project began operations in July 2000, 13 months after the original starting date of June 1999. The delay was due mainly to problems obtaining licenses and permits. The Project was completed below budget. Disbursements for ADB’s OCR loan totaled $21.24 million, while those for the CFS facility were $18.76 million—both 29% below the appraisal targets. In December 2003, after the plant had been operating for 3.5 years, the Private Sector Operations Department prepared a project completion report (PCR). The PCR concluded that NSCC had performed satisfactorily, and had serviced its obligations promptly. NSCC’s financial performance had been as envisaged at appraisal. Future performance was contingent upon NSCC’s ability to secure a reliable electricity supply and maintain its competitive position. ADB fielded an Operations Evaluation Mission (OEM) 7–18 November 2005 to review the Project. The OEM interviewed critical project stakeholders, including (i) VNCC and NSCC senior management; (ii) national Government officials and NSCC financiers in Hanoi; and (iii) NSCC production management, raw material suppliers, local government officials, and members of the local communities in Thanh Hoa and Nghe An provinces. The PPER incorporates the findings of the OEM, observations of relevant ADB staff, and a review of project reports and documents. The evaluation criteria used for the Project were based on the best practice guidelines identified by the Evaluation Coordination Group of the Multilateral Development Banks on Private Sector Operations, as well as the criteria being established in ADB’s draft Guidelines for the Preparation of Performance Evaluation Reports of Private Sector Operations. The evaluation criteria consisted of development outcome, ADB’s investment profitability and ADB’s operational effectiveness. Development outcome, which was rated satisfactory, was based on five subcriteria: (i) private sector development was rated satisfactory, as the objective of catalyzing private investment in the cement industry was not realized fully, offsetting strong corporate performance; (ii) business success was satisfactory since returns to-date have been reasonable although profit upside is limited by the Government’s policy on cement price controls; (iii) economic sustainability was rated satisfactory due to the high value of cement to the economy when evaluated at border, rather than local, prices; (v) contribution to living standards was rated satisfactory, as resettlement issues might have offset some of the substantial Project returns to regional living standards; and (iv) environmental performance was rated excellent due to the high quality of the technology and strong management. ADB’s second criterion, investment profitability, was satisfactory as loan rates reflect market benchmarks.


ADB’s effectiveness was rated satisfactory as weaknesses in appraisal, monitoring, and supervision offset (i) the high quality of the feasibility studies, (ii) the robust financial structure developed by ADB and IFC, and (iii) material additionality of the Project. Overall, the Project was rated satisfactory. The individual ratings are summarized in Table 1. Table 1: Evaluation of the NSCC Project Item Development Outcome Private Sector Development Business Success Economic Sustainability Contribution to Living Standards Environmental Performance ADB’s Investment Profitability Loan Returns ADB’s Operational Effectiveness Screening, Appraisal, and Structuring Monitoring and Supervision Role, Contribution, and Additionality Unsatisfactory Partly Satisfactory Satisfactory X X X X X X X X X X X X Excellent

ADB = Asian Development Bank. NSCC= Nghi Son Cement Corporation. Source: Operations Evaluation Mission.

Based on the developments outlined above, ADB could improve project performance by considering the following factors when designing projects: (i) Government’s Commitment to Reform: The Report and Recommendation of the President (RRP) for the Project gave significant weight to some proposed reforms, including (i) revising import tariffs and price controls, (ii) increasing private sector involvement in the cement industry, and (iii) changing the law to allow the use of property as collateral. While the Government of Viet Nam is widely regarded as a strong proponent of reform, few of the liberalization measures envisaged in the RRP have materialized. This result highlights the need for caution when designing projects in transition economies. Where possible, liberalization measures should occur before making investments, because demonstration effects are likely to have limited impact once funding is committed. If reforms are anticipated to take place during implementation, synergies must be developed whereby the public sector operations of ADB actively support private sector investments by undertaking the necessary policy dialogue with the government. Better development results will be achieved if the public and private sector operations of ADB work together to achieve a common objective.


(ii) Private Sector Development: The primary benefit ADB has provided to NSCC has been the mobilization of finance. ADB has not been in a position—or it has not taken the opportunity—to directly influence political and regulatory issues such as price controls. The implementation of the Project led to the involvement of a high-quality sponsor that could introduce leading-edge technology in cement production and environmental and safety procedures. Its large-scale and consequent high visibility made this impact material. The public and private sector operations of ADB should have interacted more for the purpose of discussing policy issues with the Government, including cement pricing and market liberalization to maximize private sector development. (iii) Revenue and Cost Projections: Sensitivity analyses should include variations of up to 50% for prices and volume. Further, the project plans and designs should anticipate the possibility of delays of up to 50% in the construction period. Appraisal of projects with local currency income and no hedge of the currency risk in foreign loans should include stress testing with an assumed sharp, one-off devaluation (e.g., 30%), as well as continuous modest local currency depreciation. Analyses should consider the availability of critical inputs such as power, and their impact on operating costs and quality of output. (iv) Resettlement and Compensation. Ideally, land made available to families should be procured at the same time as the project site, and be of a similar agreed quality. Livelihood promotion measures should be given preferential access to land to avoid any ambiguity over a change in status as a consequence of the Project, and to obviate the need for high-risk livelihood measures, such as the provision of subsidized credit. Where measures need to be introduced after construction and loan drawdown, reporting arrangements should be introduced based on independent reviews by specialists. Measures to strengthen local authorities need to be considered where they lack the capacity to implement proposed programs and establish a comprehensive database that can be used to calibrate the social monitoring system. The resettlement policy should make clear whether monitoring is concerned with compliance with due process or project outcomes. (v) Sponsor Selection: The strong commitment of the sponsors, NMCC and VNCC, was vital to the success of the Project. (vi) Financial Structure: The financial arrangements adopted for the Project have been robust. The model could be replicated in other projects in Viet Nam and other developing member countries. The absence of an ADB equity participation in NSCC, which was viewed as a weakness during loan processing, turned out to be an advantage, because it eliminated any potential conflict of interest with ADB’s loan participation, without detracting from the development impact. (vii) Project Administration: There were weaknesses in (i) applying a consistent methodology in financial and economic appraisals, (ii) continuing client liaison, (iii) managing project documentation, and (iv)monitoring the Project. Offsetting this result, ADB has been effective in dealing with issues as they have arisen in areas such as modifying the working capital requirement. More clarity and standardization of


procedures is needed for calculating financial and economic internal rates of return, and improving project administration procedures. There are no environmental issues that require follow-up action, although resettlement concerns need to be monitored. Given the lack of baseline data, direct action to address potential resettlement grievances would appear to be difficult. The design of future projects should take into account the lessons from this project, especially regarding (i) what can be expected from a project in terms of private sector development without active support from ADB’s public sector operations, and (ii) the need for greater involvement of ADB’s public sector operations when designing feasible measures and ensuring adequate capacity to implement the agreed resettlement initiatives.

Bruce Murray Director General Operations Evaluation Department


On 15 November 2006, the Director General, Operations Evaluation Department, received the following response from the Managing Director General on behalf of Management:


Overall Assessment and Key Issues

1. Management finds OED’s Project Performance Evaluation Report (PPER) well written and provides a good picture of the progress of the Project, including the “satisfactory” rating for ADB’s effectiveness and project’s development impact. 2. Private Sector Development. The Project is regarded to have stimulated private sector investment and increased competition in the cement industry, as evidenced by the fact that foreign private sector cement operations accounted for about 26.4% of the total cement production in the country at the end of 2005 from a level of 0% at the time of loan processing. Moreover, the PPER pointed out that the existing private sector joint venture cement plants intend to expand their production capacities within the medium term and five new joint-venture plants are expected to be built under the Government’s master plan for the cement industry. It would be difficult to imagine that these investments are being contemplated by the private sector if the incentives to do so were not that compelling. 3. It is also noteworthy to stress that private sector investment does not only imply equity, but also includes debt from the private sector. The PPER recognized that financing from private sector banks were mobilized for the Project that would have otherwise not been available had it not been for the involvement of ADB and the International Finance Corporation. It would have been meaningful, therefore, if the evaluation had examined whether financing from private sector banks became more readily available and the terms and conditions to finance the funding requirements of the cement industry were improved in Viet Nam. This is particularly important given the huge financing requirement of the industry estimated at roughly $3.7 billion over a 15-year period. Such investments would be needed to increase local cement capacity from roughly 24.0 metric tons per annum (mta) in 2005 to about 54.3 mta by 2015 to supply the large infrastructure requirements of the country. B. Lessons Learned and Follow-Up Actions

4. Coordination between ADB’s Private and Public Sector Operations. Management notes the PPER’s suggestion that ADB could have maximized the development impact of a project through close coordination between the Private Sector Operations Department (PSOD) and the regional departments, as the private sector issues could be considered when designing interventions to assist the public sector in adopting market reforms. It is also noted that despite the Government’s strong influence in the industry, this Project was generally

successful with clear development impacts. The PPER concludes that “the public and private sides of ADB should have interacted more for the purpose of discussion policy issues with the Government, including cement pricing and market liberalization (para 46).” In 1996, the Government had its own approach to market liberalization and the role of SOEs in that process, allowing little role for ADB to change this. While it would be ideal to let market forces dictate pricing, we would caution against concluding that such government intervention was a deterrent to private sector participation. It would have been more meaningful if the PPER analyzed the reasons behind the government policy of fixing cement prices—particularly with respect to the relationship of cement prices to infrastructure development, inflation, growth targets, and the need to compel local cement operations to improve their inefficient operations. 5. There is no follow-up action required on environment issues, but we will monitor any resettlement concerns. We will take into account the lessons learned for design of future projects.

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