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Report and Recommendation of the Presidentto the Board of Directors

Sri LankaProject Number: 33307November 2005

Proposed Loan

Socialist Republic of Viet Nam:

Greater Mekong Subregion: Kunming-Haiphong

Transport CorridorNoi Bai-Lao Cai Highway

Technical Assistance Project

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CURRENCY EQUIVALENTS(as of 7 November 2005)

Currency Unit dong (D)D1.00 = $0.000063$1.00 = D15,895

ABBREVIATIONS

AADT annual average daily trafficADB Asian Development BankADF Asian Development FundAP affected personAusAID Australian Agency for International DevelopmentCFD Caisse Franaise de DveloppementDFID Department for International DevelopmentEA executing agencyEIA environmental impact assessment

EIRR economic internal rate of returnEMDP ethnic minority development planEMP expressway master planFIRR financial internal rate of returnGDP gross domestic productGMS Greater Mekong SubregionHIV/AIDS human immunodeficiency virus/

acquired immune deficiency syndromeIA implementing agencyJBIC Japan Bank for International CooperationMOT Ministry of TransportNH national highway

O&M operation and maintenancePIU project implementation unitPRC Peoples Republic of ChinaRP resettlement planSDR special drawing rightsSEDP Socio-Economic Development PlanSEIA summary environmental impact assessmentTA technical assistanceVEC Vietnam Expressway CorporationWACC weighted average cost of capitalWB World Bank

NOTE

In this report, "$" refers to US dollars.

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Vice President L. Jin, Operations Group 1Director General R. Nag, Mekong Department (MKRD)Director J. Cooney, Infrastructure Division, MKRD

Team leader Y. Tanaka, Transport Specialist, MKRD

Team members M. Huddleston, Senior Social Development/Resettlement Specialist, MKRDT. Kawano, Economist, MKRDS. Phanachet, Senior Financial Specialist, MKRDM. Sultana, Social Development/Poverty Reduction Specialist, MKRDS. Tu, Environment Specialist, MKRDN. Tuyen, Social Development and Gender Officer, MKRD

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CONTENTS

Page

LOAN AND PROJECT SUMMARY i

MAPS

I. THE PROPOSAL 1

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1

A. Performance Indicators and Analysis 2B. Analysis of Key Problems and Opportunities 3

III. THE PROPOSED PROJECT 5

A. Impact and Outcome 5B. Outputs 5C. Special Features 6D. Cost Estimates 7

E. Financing Plan 8F. Implementation Arrangements 8

IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS 10

A. Project Benefits and Impacts 10B. Project Risks 11

V. ASSURANCES 11

A. Specific Assurances 11B. Conditions for Loan Effectiveness 12

VI. RECOMMENDATION 12

APPENDIXES

1. Design and Monitoring Framework 132. Sector/Subsector Analysis 153. Feasibility Study of the Noi Bai-Lao Cai Highway Project 194. External Assistance to the Road Subsector 225. Summary Poverty Reduction and Social Strategy 236. Cost Estimates and Financing Plan 267. Project Management Structure 278. Implementation Schedule 289. Outline Terms of Reference for Consultants 2910. Consulting Services Contract Package 36

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LOAN AND PROJECT SUMMARY

Borrower The Socialist Republic of Viet Nam

Classification Targeting classification: General interventionSector: Transport and communications

Subsector: Roads and highwaysThemes: Sustainable economic growth, regional cooperation,capacity developmentSubthemes: Fostering physical infrastructure development,institutional development, organizational development

EnvironmentAssessment

Category C. This technical assistance project has no adverseenvironmental impact. The ensuing investment project will becategorized at a later stage.

Project Description The Greater Mekong Subregion: Kunming-Haiphong TransportCorridorNoi Bai-Lao Cai Highway Technical Assistance Project

(the Project) is to assist the Government in preparing the ensuingNoi Bai-Lao Cai Highway Project. The scope of the Project willinclude: (i) detailed engineering design, (ii) updated economic andfinancial studies, (iii) social and environmental studies, and(iv) procurement assistance for civil works and constructionsupervision consulting services for the ensuing highway project.

Rationale Viet Nams economy has grown over the past decade by anaverage 78% per annum. Based on the Governmentsforthcoming Socio-Economic Development Plan (SEDP) for 2006to 2010, this rate of growth is projected to continue. Among themost important consequences of this soundly based and steady

growth is a dramatic reduction in the countrys poverty rate, from53% in 1993 to 25% in 2005. The SEDP estimates that the rate willfall to 1516% by 2010. However, Viet Nam will need to investabout 35% of gross domestic product (GDP) to achieve this, andbasic economic infrastructure will receive a large share.Infrastructure bottlenecks are becoming apparent, especially in thetransport and energy sectors. These will need to be addressedquickly if growth and consequent poverty reduction targets are tobe met. The proposed Project will assist the Government inpreparing one of its highest priority infrastructure investmentsamodern standard road link from Hanoi to connect at Lao Cai withthe road network of the Peoples Republic of China (PRC). This

link will serve two purposes. At the national level, it will connect thenorthwest region of the country, now very poor and isolated, withthe economic centers that have developed around Hanoi and itsport, Haiphong. At the regional level, it will link the rapidly-expanding economy of PRCs Yunnan province with Hanoi andHaiphong, facilitating rapid expansion of cross-border trade andcommerce.

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Impact and Outcome The proposed highway will contribute significantly to thedevelopment of the poor northwest region of the country, byimproving national and regional transport linkages. It will also helpreduce poverty levels in this region. The Project will facilitateachieving these objectives by providing the resources required toensure that the highway is: (i) designed to the highest technical

standards, (ii) cost-effective, and (iii) takes into account the uniqueenvironmental and social characteristics of the region it will passthrough and impact significantly.

Cost Estimates The project cost is estimated at $8 million.

Financing Plan The Asian Development Bank (ADB) will provide a loan of$6 million equivalent (75%) and the Government will finance$2 million equivalent (25%).

Loan Amount and Terms It is proposed that ADB provide a loan of $6 million equivalent,denominated in Special Drawing Rights, from its Asian

Development Fund (ADF). The loan will have a term of 32 years,including a grace period of 8 years, an interest charge of 1% perannum during the grace period and 1.5% per annum thereafter,and such other terms and conditions as are set forth in the draftLoan Agreement.

Allocation andRelendingTerms

The Borrower will transfer the loan proceeds from the Governmentto the Implementing Agency through budgetary allocation.

Period of Utilization 2 years

Estimated Project

Completion Date

31 March 2008

Executing Agency The Executing Agency will be the Ministry of Transport (MOT), andthe Implementing Agency will be the Vietnam ExpresswayCorporation (VEC).

ImplementationArrangements

MOT will have overall responsibility for project implementation, andformal correspondence with line ministries, the governments of theprovinces through which the highway will pass, and ADB. VEC willbe responsible for day-to-day project implementation under MOTssupervision. VEC will set up a project implementation unit headedby an experienced project director and suitable staff.

Procurement Equipment will be procured in accordance with ADBs Guidelinesfor Procurement(2004).

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Consulting Services An international consulting firm will be recruited using quality andcost-based selection procedures, in accordance with ADBsGuidelines on the Use of Consultants (2005) and otherarrangements satisfactory to ADB for the engagement of domesticconsultants. About 90 person-months of international consultantsand 240 person-months of domestic consultants will be required.

The consultants will have expertise in project management, designof high standard highways, road safety, transport economics,financial analysis, environmental impact assessment, resettlementplanning, social development (including indigenous peoples), andprocurement assistance. The duration of the consulting serviceswill be about 15 months.

Project Benefits andBeneficiaries

The proposed highway, to be constructed based on the outputs ofthe Project, will support Viet Nams poverty reduction programthrough enhanced economic growth and by providing access forcurrently isolated communities to economic and social services. Itwill also contribute to the efficient development of the Greater

Mekong Subregion by strengthening connectivity with neighboringcountries and increasing competitiveness. The Project will producedirect benefits such as: (i) preparing the subsequent highwayproject to high technical and safeguards standards;(ii) implementing the ensuing project without unnecessary delay;and (iii) substantially improving VECs capability for projectmanagement, detailed design of highways, procurement, andsafeguard arrangements.

Risks and Assumptions The main risk for the Project is delayed implementation because ofslow finalization of the single consulting services contract, whichwill implement the Project. This is being addressed through

advance procurement action for the Projects consulting services,and by providing MOT and VEC with specialist support for theconsultant selection process.

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I. THE PROPOSAL

1. I submit for your approval the following report and recommendation on a proposed loanto the Socialist Republic of Viet Nam for the Greater Mekong Subregion (GMS): Kunming-Haiphong Transport CorridorNoi Bai-Lao Cai Highway Technical Assistance (TA) Project (theProject).

II. RATIONALE: SECTOR PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

2. The proposed Noi Bai-Lao Cai Highway is an integral section of the GMS North-SouthEconomic Corridor, connecting Kunming in Yunnan province of the Peoples Republic of China(PRC) with Hanoi and Haiphong port in Viet Nam. In Yunnan, the 400-kilometer (km)expressway from Kunming to the border with Viet Nam will be completed in 2008. However, inViet Nam, most of the existing Hanoi-Lao Cai highway is narrow, contains a large number ofbridges with limited capacity, and there is substantial ribbon development on most of its length.These factors severely limit its capacity and reduce the possibility of improving it to cater for theprojected growth in traffic demand in the corridor. The section of the highway from Noi Bai toHanoi and Haiphong has been improved under assistance from other external donor agencies.

So, only the Noi Bai-Lao Cai section needs to be upgraded to complete the Kunming-HaiphongTransport Corridor. The project feasibility study confirmed the necessity and viability of amodern highway linking the existing highway network around Hanoi, at Noi Boi, with the bordercrossing at Lao Cai, covering about 260 km.1 The Project will build on the work undertaken inthat study and will prepare a subsequent project, suitable for Asian Development Bank (ADB)funding, to construct the highway. A design and monitoring framework for the Project is inAppendix 1.

3. The total project cost for the highway is estimated at about $620 million. Such a large-scale infrastructure projectinvolving substantial investment and social and environmentalimpactsrequires detailed design study, detailed economic and financial analyses, andsafeguard arrangements. The proposed Project will provide the resources to undertake these

studies and prepare the subsequent investment project.

4. The Vietnam Expressway Corporation (VEC) will play a critical role in preparing andimplementing the Project, and will participate in the subsequent investment project. VEC wasestablished in October 2004 as a state-owned enterprise under the Ministry of Transport (MOT).VEC manages expressway-related businesses, including: (i) technical consultancy on thedevelopment of national expressway networks, and feasibility study and design of eachexpressway project; (ii) investment and project management for expressway construction;(iii) operation and maintenance (O&M) of expressways; and (iv) commercial services forexpressway users. To date, it has little experience in project management, financialmanagement, procurement, and safeguard issues. Institutional capacity building through theProject will enable VEC to manage this and similar projects in the future.

1 A preliminary economic and financial study for the highway project was carried out under the Asian DevelopmentBank (ADB). 2002. Technical Assistance to the Socialist Republic of Viet Nam for Preparing the Kunming-HaiphongTransport Corridor Project. Manila (TA 4050-VIE). It appeared that overall economic internal rate of return for theProject is 22.0% and financial internal rate of return for the Project is 8.7%, assuming that the toll rate for thehighway is double the current toll rate. Details are shown in Appendix 3.

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A. Performance Indicators and Analysis

5. The proposed highway will cross Hanoi, Pho Tho, Vinh Phuc, Yen Bai, and Lao Caiprovinces. Together, these provinces have a population of about 13.3 millionabout 17% of thetotal population of Viet Namand were responsible for about 18% of gross domestic product(GDP) in 2003. Per capita GDP is $1,011 in Hanoi, but only $361 in Pho Tho, $254 in

Vinh Phuc, $210 in Yen Bai, and $198 in Lao Cai provinces.

6. The proposed highway will reduce the travel time between Hanoi and Lao Cai from atleast 10 hours at present, to about 3 hours. This decrease in travel time will encourageeconomic activities in the affected provinces, provide employment opportunities for the localpopulation, and improve access to social services. Many ethnic minority groups live in Yen Baiand Lao Cai provinces. Most live below the poverty line, mainly due to poor accessibility toeconomic opportunities, and education and health services. This is largely caused by poor roadinfrastructure, particularly on the right bank of the Red River, since the existing highway travelsalong the left bank and there is very little cross-river traffic. The proposed highway will belocated on the right bank because the terrain is easier and it will provide an immediate andsignificant benefit to communities in this area that have never had good road access.

7. In the context of the GMS and regional integration, economic cooperation betweenViet Nam and the PRC has developed since the late 1990s. The trade volume between thecountries has increased more than three times, from $1.3 billion in 1999 to $4.6 billion in 2003.2Imports from the PRC grew by 47.9% (20022003) while exports to the PRC grew by 30.5%.Yunnan province is a major producer of tobacco, minerals, steel, and fertilizer. Viet Nam, on theother hand, excels in producing vegetables, fruits, seafood, crude oil, rubber, minerals, and lightindustrial goods (such as textiles and footwear). So, Yunnan province and Viet Nam have acomplementary economic relationship through their border trade. The total trade valueregistered at the Hekou-Lao Cai border crossing points expanded by 36% in 2003 and 51% in2004 to $336 million,3 which accounts for 80% of Yunnan-Viet Nam trade and 10% of PRC-Viet Nam trade in 2004. Almost 1 million tons of cargo is transported annually across the

Hekou-Lao Cai border crossing points. Arrangements for initial implementation of the GMSCross-Border Transport Agreement at the Hekou-Lao Cai border crossing points have beenfinalized; this is expected to be signed by the two governments in early 2006 and commence by30 June 2006. In addition, agreement has been reached by the two governments to consider, atthe earliest possible time, expanding the scope of the existing bilateral road transportagreement to include the entire Kunming-Hanoi-Haiphong transport corridor as an interimmeasure until the relevant annexes and protocols of the GMS Cross-Border TransportAgreement are ratified. This will facilitate the exchange of commercial traffic rights along thecorridor, which would reduce the incidence of costly and time-consuming transshipment at theHekou-Lao Cai border crossing points.

8. The passage of containerized freight is particularly important for the trading relationship.

Forwarders of overseas container cargos in Kunming do not currently use the Kunming-Hekou-Lao Cai-Hanoi-Haiphong route, partly because of the poor condition of the Lao Cai-Hanoisection in Viet Nam, inefficient custom control procedures at the Hekou-Lao Cai border, and thecost of transshipping containers at the border crossing. Instead, they send container cargos byrail or road to ports in Guangzhou province (PRC), which takes up to 6 days. The proposed Noi

2 National Bureau of Statistics of China. 2004. China Statistical Yearbook 2004. Beijing.3 ADB. 2005. Trade Flow and Logistics Analysis Study, Report on the Study of the Greater Mekong Subregion North-South and East-West Economic Corridors. Manila.

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Bai-Lao Cai Highway will allow forwarders in Kunming to reach Haiphong port, a large containerfacility, in 1 day. Once the proposed Noi Bai-Lao Cai Highway has been completed, and theADB-supported border crossing operation is streamlined,4 a substantial number of containersoriginating in Kunming could be diverted to the Kunming-Haiphong route. Viet Nam wouldbenefit from this, through transit and port fees, among others.

9. The Government is planning to expand the expressway and modern highway networkthroughout Viet Nam, in line with the outline of the expressway master plan (EMP).5 Appendix 2contains analysis of the road subsector, focusing on expressways. VEC is responsible for thedevelopment of the expressway network, partly funded by revenues from expressway tolls.

B. Analysis of Key Problems and Opportunities

10. Viet Nams economy has grown at 78% per annum over the past decade, and theGovernment estimates that it will continue, as reflected in the forthcoming Five-Year Socio-Economic Development Plan (SEDP) 20062010.6 While this growth has had a dramatic impacton the countrys poverty rate, which declined from about 59% in 1993 to an estimated 25% in2005, it has severely strained the capacity of basic economic infrastructure, particularly power

and transportation systems. The feasibility study of the Noi Bai-Lao Cai Highway Project hasfound that traffic is growing at about twice the rate of GDP and that this high growth rate is likelyto continue beyond 2020, reflecting Viet Nams very low level of vehicle ownership. 7 Majoroutputs of the feasibility study are in Appendix 3.

1. The Governments Strategy

11. The Government is acutely aware of the impact of inadequate infrastructure on growthand poverty reduction. It is beginning to see the adverse impact of infrastructure bottlenecks onforeign investment and its desire to spread development more equitably with areas far from themajor urban centers (Hanoi, Ho Chi Minh City, Da Nang, etc.). The Government is taking a dualapproach to the road sector: (i) developing a network of high-capacity expressways and

highways linking the main urban areas with (a) each other, (b) less-developed regions of thecountry and, (c) neighboring countries; and (ii) developing the institutions required to plan,design, implement, and manage this network. MOT is responsible for implementing thisprogram. To date, it has developed a preliminary outline for the network and established VEC tooversee its further development and implementation.

12. The existing national road system was mainly constructed with two lanes and a smallpart with four lanes. Traffic management is rudimentary and the rate of traffic accidents is veryhigh. Government studies have indicated that the main national highway network should bewidened and new highways built to connect important economic zones, large urban centers andindustrial zones, and international borders. Reflecting this need, the Government has directedMOT to prepare the EMP (para. 9). Its basic outline (all that exists at present) provides for

2 north-south expressways, 6 east-west expressways, and 14 outer urban circular expressways.

4 ADB. 1999. Technical Assistance for Facilitating the Cross-Border Movement of Goods and People in the GreaterMekong Subregion. Manila (TA 5850-REG).

5 ADB. 2005. Technical Assistance for the Expressway Network Development Plan Project. Manila (TA 4695-VIE).6 Ministry of Planning and Investment. 2005. The Five-Year Socio-Economic Development Plan 2006-2010 (Draft).

Hanoi.7 ADB. 2005. Economic and Financial Study for the Kunming-Haiphong Expressway Project (Hanoi-Lao Cai) (draft).

Manila.

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The ADB TA (footnote 5) will assist MOT and VEC with developing this network, of which theproposed highway is an integral part.

2. Lessons Learned

13. Viet Nam Country Portfolio Review Missions have noted that there have been

implementation delays in previous road projects, in particular during the project start-up phase.Project designs have required that project supervision consultants prepare detailed designs andbidding documents for civil works, meaning that the initial 13 years of the loan period aredevoted to these essential but low-disbursement activities. The bulk of the loan remainsundisbursed during this period, which causes the Government to incur substantial commitmentand other financing costs, especially for ordinary capital resources loans. Delays in recruitingconsultants or preparing detailed designs have led directly to delays in award of civil works,exacerbating the situation. This is addressed in the design of the Project by: (i) using advanceaction for the selection of consultants, and (ii) incorporating all safeguard-related planning andprocurement-related activities (for the subsequent investment project) in the scope of theProject. By the time the investment project loan has been processed and become effective (orthe Government has found other means to finance the highways construction), land acquisition

and resettlement should be ready for physical action, and all civil works and consulting servicescontracts will be ready for award.

3. ADBs Strategy

14. In ADBs Country Strategy and Program Update (20062008) approved in August 2005,key development challenges for the next 5 years include the following: (i) sustain high economicgrowth and poverty reduction; (ii) create jobs for new labor market entrants; (iii) reduce inequitythrough targeted poverty reduction; (iv) support social development by improving health andeducation services, gender equality, and social inclusion; (v) protect the environment; and(vi) improve governance to ensure these challenges are sufficiently and efficiently addressed.Viet Nam has contributed significantly to enhancing connectivity, increasing competitiveness,

and promoting a greater sense of community in the GMS. The subsequent highway project isfully supportive of this strategy, at both national and regional levels. The Project is also in thelending pipeline of the Regional Cooperation Strategy and Program Update (20062008) 8 as itforms a high-priority section of the Kunming-Hanoi-Haiphong transport route of the GMS North-South Economic Corridor.

4. External Assistance

15. Since lifting the embargo on external financing in 1993, there have been many projectssupporting the road subsector in Viet Nam (Appendix 4). Initially, these projects focused onrehabilitating National Highway 1, which runs along the east coast of Viet Nam and acts as thecentral spine for the road network.9 Subsequently, integral parts of the GMS economic corridors

8 ADB. 2005. Regional Cooperation Strategy and Program Update (20062008) The Greater Mekong SubregionBeyond Borders. Manila.

9 ADB. 1993. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to theSocialist Republic of Viet Nam for the Road Improvement Project. Manila (Loan 1272-VIE); ADB. 1996. Report andRecommendation of the President to the Board of Directors on a Proposed Loan to the Socialist Republic ofViet Nam for the Second Road Improvement Project. Manila (Loan 1487-VIE); and ADB. 1998. Report andRecommendation of the President to the Board of Directors on a Proposed Loan to the Socialist Republic ofViet Nam for the Third Road Improvement Project. Manila (Loan 1653-VIE).

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in Viet Nam were improved under ADB-funded projects.10 As the work on improving nationalhighways is drawing to a close, projects are increasingly focusing on other parts of the roadnetwork. ADBs Provincial Roads Improvement Project is upgrading provincial roads in17 provinces in the northern uplands and Red River Delta regions.11 The upgrading of ruralroads in 18 provinces was addressed under ADBs Rural Infrastructure Sector Project,12 andrural roads are being improved in 40 provinces across the country with funding from the World

Bank and the United Kingdoms Department for International Development (DFID) under theRural Transport II project.13 ADB is currently processing the Central Region Transport NetworksImprovement Sector Project, which will address the removal of transport constraints oneconomic and social development in the rural areas of 19 provinces in central Viet Nam.14

III. THE PROPOSED PROJECT

A. Impact and Outcome

16. Construction of the Noi Bai-Lao Cai Highway will be based on the outputs of the Project.The current travel time between Kunming and Haiphong is more than 2 days. Transportbetween Kunming and Haiphong will be 1 day upon completion of the highway. Due to the

substantial reduction in travel time and much improved transport conditions, industries clusteredaround Hanoi and Haiphong will be able to expand to the very poor northwest of the country,bringing employment, better access to social services, and other benefits. In addition, some ofthe freight transport in Yunnan province which is currently moving to ports in the PRC could bediverted to Haiphong port. Viet Nams ability to export agricultural and maritime products toYunnan province, already a rapidly growing trade, will also be substantially enhanced.

B. Outputs

17. The feasibility study for the subsequent highway project (footnote 1) confirmed itseconomic and financial viability. The Project will provide the Government with preparatory workfor the highway project. The scope of the Project will include: (i) detailed engineering design; (ii)

updated economic and financial studies based on the detailed engineering designs and costs;(iii) social and environmental studies, including environmental impact assessment (EIA), andresettlement and ethnic minority development plans; and (iv) procurement assistance for civilworks and construction supervision consulting services required for the subsequent highwayproject, so that related contracts will be ready for award when project loans become effective.Procurement will be undertaken in line with ADBs Anticorruption Policy (1998), Guidelines onthe Use of Consultants (2005), and Guidelines for Procurement (2004). A secondary output of

10 ADB. 1998. Report and Recommendation of the President to the Board of Directors on Proposed Loans to theKingdom of Cambodia and to the Socialist Republic of Viet Nam for the Greater Mekong Subregion: Phnom Penhto Ho Chi Minh City Highway Project. Manila (Loan 1660-VIE); and ADB. 1999. Report and Recommendation ofthe President to the Board of Directors on a Proposed Loan and Technical Assistance Grant to the Lao Peoples

Democratic Republic and a Proposed Loan to the Socialist Republic of Viet Nam for the Greater MekongSubregion: East-West Corridor Project. Manila (Loan 1728-VIE).

11 ADB. 2001. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to theSocialist Republic of Viet Nam for the Provincial Roads Improvement Sector Project. Manila (Loan 1888-VIE).

12 ADB. 1997. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to theSocialist Republic of Viet Nam for the Rural Infrastructure Sector Project. Manila (Loan 1564-VIE).

13 World Bank. 1999. Project Appraisal Documents on a Proposed Credit in the Amount of SDR 74.7 Million (US$103.9 Million Equivalent) to the Socialist Republic of Vietnam for a Rural Transport II Project. Washington.

14 ADB. 2005. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to theSocialist Republic of Viet Nam for the Central Region Transport Networks Improvement Sector Project. Manila(Loan 2195-VIE).

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the Project would be a significantly strengthened VEC, able to manage the subsequent highwayproject, and develop and manage similar projects in the future.

C. Special Features

18. The proposed highway will pass through two quite different geographical and social

environments. Closer to Hanoi, between Noi Bai and Yen Bai (about 120 km), the terrain is flatto rolling, traffic volume is high and growing quickly, population density is relatively high, and theproportion of ethnic minorities is low. From Yen Bai to Lao Cai (about 140 km), the terrainchanges from rolling to mountainous, existing and projected traffic is relatively low, populationdensity is very low (particularly on the right bank of the Red River where the highway will belocated), and the proportion of ethnic minorities is very high. The configuration of the proposedhighway, to be reflected in its detailed technical designs and subsequent operation, will reflectthese differences. Briefly, the Noi Bai-Yen Bai section will be designed as a high standard dualcarriageway facility, with grade-separated interchangesin essence, an expressway. It will betolled as a closed system, with tolls being used for O&M and debt service for the entire facility. Itwill be constructed with four traffic lanes initially, with provision for two additional lanes at a laterdate (when justified by the growth in traffic). The Yen Bai-Lao Cai section, on the other hand,

will be constructed initially to a much simpler configuration, essentially as a two-lane singlecarriageway rural highway, with at-grade intersections and an open barrier tolling system thatwill allow local traffic to use the road without payment; only traffic passing through the Yen Bai-Lao Cai section will pay. However, the design of this section will include provision for a secondcarriageway and grade separation, if traffic volumes increase to require additional capacity.Based on the feasibility study (Appendix 3), it is unlikely that this would occur for at least 10years after the opening of the initial two-lane facility. To ensure maximum utilization of bothsections of the highway and maximum distribution of its benefits, the Project will include thedevelopment of linkages to the existing road networkin particular to the existing highwaybetween Noi Bai and Lao Cai located on the opposite bank of the Red River. Bridges will bebuilt over the Red River to connect to the existing highways.

19. The highway will require a six-lane structure for the Noi Bai-Yen Bai section and a four-lane structure for the Yen Bai-Lao Cai section, in about 1020 years. Right-of-way for thehighway will be acquired based on these lane configurations. The detailed design work to beundertaken under the Project will determine the positions of these additional lanes and relatedstructures to: (i) ensure that the highways subsequent expansion can be undertaken with aslittle impact as possible on the highway in service and the traffic using it, and (ii) define the landacquisition boundaries for the ultimate configuration.

20. In April 2004, the governments of the six GMS countries reached agreement on theRoad and Bridge Design and Construction Standards and Specifications (GMS HighwayStandards), Annex 11 of the GMS Cross-Border Transport Agreement. In principle, the highwaywill be designed to GMS Highway Standards. Detailed design and technical specifications will

be formulated through the detailed design study and technical coordination meetings betweenViet Nam and the PRC. Access-controlled highways that provide appropriate modality of long-distance traffic and restrict accessibility of local people along highways are necessary for saferoad transport if vehicle ownership rises at twice the rate of per capita GDP in Viet Nam (para.10). A road safety audit will be carried out to identify accident-prone areas and proposeadequate road safety improvement measurements for access roads to existing roads. Thepercentage of motorcycles in traffic volume is very high for the following sections of the existingroad: Hanoi-Viet (25%), Viet Tri-Yen Bai (33%), and Yen Bai-Lao Cai (44%) (footnote 7). Due totraffic safety and efficiency, a modal mix between motorcycles and non-motorcycle traffic should

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be avoided on the highway. The detailed design study will determine the most appropriate laneconfiguration and traffic regulations for motorcycle traffic.

21. The highways construction will involve large excavation, acquisition of residential andagricultural lands, and some resettlement of project-affected people, although the finalalignment will be developed to ensure that resettlement is kept to a minimum, as required by

ADBs Policy on Involuntary Resettlement (1995). In addition, the highway will pass throughareas that have a high proportion of ethnic minorities. Since the social and environmentalimpacts of the highways construction are likely to be significant, the following reports will beprepared as part of the Projects scope, in accordance with ADBs safeguard policies: (i) an EIA,(ii) a full resettlement plan (RP), and (iii) an ethnic minority development plan (EMDP). Thehighway project may increase the exposure of local population to HIV/AIDS 15 during theconstruction and post-construction periods. The social assessment will include information onthe present HIV/AIDS and human trafficking situation, as well as the potential increase inHIV/AIDS cases and human trafficking in the project area, including the border area. The EMDPand gender strategy will also include prevention and mitigation measures. Details on the socialassessment and gender strategy included in the Summary Poverty Reduction and SocialStrategy are in Appendix 5.

D. Cost Estimates

22. The total cost of the Project is estimated at $8.0 million equivalent, including the cost ofconsulting services, equipment, incremental administration, interest during implementation,taxes, and contingencies. Cost estimates are shown in Table 1 and details are in Appendix 6.

Table 1: Cost Estimates($000)

Item ForeignExchange

LocalCurrency

TotalCost

Percentage

A. Consulting Servicesa 2,400.0 4,400.0 6,800.0 85.00B. Equipment 350.0 0.0 350.0 4.38C. Incremental Administration Cost 0.0 150.0 150.0 1.88D. Contingencyb 200.0 400.0 600.0 7.50

Total Base Cost 2,950.0 4,950.0 7,900.0 98.75

E. Interest during Implementation 100.0 0.0 100.0 1.25

Total Project Cost 3,050.0 4,950.0 8,000.0 100.00

a Includes taxes, estimated at $1,000,000.b Includes physical contingency only.

Source: Asian Development Bank estimates.

15 Human immunodeficiency virus/acquired immune deficiency syndrome.

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E. Financing Plan

23. The Projects financing plan is shown in Table 2 and details are in Appendix 6.16 ADBwill provide a loan of $6 million equivalent (75% of the total cost), and the Government willfinance $2 million equivalent (25% of the total cost) comprising 25% of the consulting servicescost, 30% of the equipment and the incremental administration cost, and all taxes.

Table 2: Financing Plan($000)

Item ForeignExchange

LocalCurrency

TotalCost

Percentage

Asian Development Bank 2,945.0 3,055.0 6,000.0 75.00Government 105.0 1,895.0 2,000.0 25.00

Total 3,050.0 4,950.0 8,000.0 100.00Source: Asian Development Bank estimates.

24. The loan will be denominated in special drawing rights (SDR) from ADBs AsianDevelopment Fund (ADF) Special Funds resources, with a term of 32 years including a graceperiod of 8 years, an interest charge of 1% per annum during the grace period and 1.5% perannum thereafter. The Borrower for the Project will be the Socialist Republic of Viet Nam. TheMinistry of Finance will be responsible for repayment of the loan and will provide counterpartfunds to MOT through budgetary allocations. MOT will provide the loan and the counterpartfunds to VEC through budgetary allocations.

F. Implementation Arrangements

1. Project Management

25. The Executing Agency (EA) for the Project will be MOT and the Implementing Agency(IA) will be VEC. MOT will have overall responsibility for project implementation and formalcorrespondence with the line ministries, provincial governments, and ADB. VEC will haveresponsibility for day-to-day project implementation under MOTs supervision. VEC will set up aproject implementation unit (PIU) headed by an experienced project director and suitable staff.The project management structure is in Appendix 7.

2. Implementation Period

26. The overall implementation schedule for the Project is in Appendix 8. This illustrates thelinkages between the Project and the subsequent highway project. Consultant recruitment willstart in January 2006. Implementation of the Project will commence by July 2006 and becompleted before September 2007. Construction of the highway should commence in late 2007and be completed by the end of 2010, subject to: (i) the outcome of the Project, (ii) ADBsapproval of a subsequent highway project, and (iii) completion of procurement, land acquisitionand resettlement, and other pre-construction activities.

16 The allocation of loan proceeds in the Loan Agreement will be presented in the equivalent of SDR 4,209,000, withreference only to total expenditure, in accordance with the policy on Cost Sharing and Eligibility of Expenditures forAsian Development Bank Financing: A New Approach.

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3. Procurement

27. The Project will not require civil works procurement. Procurement of equipment will beundertaken in accordance with ADBs Guidelines for Procurement (2004). Since the itemsrequired will be small and few in numbermainly vehicles, computers, design software andequipment, testing and survey equipment, and similar itemsprocurement will follow local

competitive bidding or direct purchase procedures.

4. Consulting Services

28. The consulting services will be implemented by an international consulting firm inassociation with domestic consultants. The consultants will have expertise in projectmanagement, design of high standard highways, road safety, road traffic information system,transport economics, financial analysis, EIA, resettlement planning, social development(including indigenous peoples), and procurement assistance. Outline terms of reference are inAppendix 9. The consulting services will include amounts for surveys of all types, aerialphotography, equipment, and other inputs essential for effective and timely projectimplementation. The duration of the consulting services will be about 15 months, although much

of the last portion of this period will be for procurement assistance and will require relatively fewinputs. The bulk of consulting services inputs and related expenditure will be during the initial9 months of the project period.

29. VEC will recruit an international consulting firm for the consulting services using qualityand cost-based selection procedures, in accordance with ADBs Guidelines on the Use ofConsultants (2005), and other arrangements satisfactory to ADB for the engagement ofdomestic consultants. Full technical proposals will be used. The contract package is describedin Appendix 10.

5. Anticorruption

30. ADBs Anticorruption Policywas explained to and discussed with the Government of VietNam, MOT, and VEC. Consistent with its commitment to good governance, accountability andtransparency, ADB reserves the right to investigate, directly or through its agents, any allegedcorrupt, fraudulent, collusive or coercive practices relating to the Project. To support theseefforts, relevant provisions of ADBs Anticorruption Policyare included in the Loan Regulationsand bidding documents for the Project. In particular, all contracts financed by ADB in connectionwith the Project shall include provisions specifying the right of ADB to audit and examine therecords and accounts of the EA, the IA, and all contractors, suppliers, consultants, and otherservice providers as they relate to the Project.

6. Disbursement Arrangements

31. Loan disbursement will be in accordance with ADBs Loan Disbursement Handbook(2001), and detailed arrangements between the Government and ADB. The loan proceeds willbe disbursed directly to the consultants, based on an approved contract under the directpayment procedure. Payments for equipment and the incremental administration cost will bemade from an imprest account held at a commercial bank acceptable to the Government andADB, under ADBs imprest account procedure as shown in ADBs Loan DisbursementHandbook (2001). The initial deposit to the imprest account will be based on estimatedexpenditures for the first 6 months of the project implementation or $300,000, whichever islower. The statement of expenditure procedure will be used to reimburse eligible expenditures

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and liquidate advances to the imprest account to facilitate project implementation. The ceilingfor each payment under the statement of expenditure procedure is $50,000.

7. Accounting, Auditing, and Reporting

32. MOT will ensure that VEC maintains separate financial records and accounts adequate

to identify financing resources received and project expenditures, including goods, works, andservices financed out of the loan proceeds and local funds. The loan accounts and relatedfinancial statements will be audited annually in accordance with sound auditing standards by anauditor acceptable to ADB. MOT will submit annual audited reports and related financialstatements to ADB within 6 months after the end of each fiscal year.

8. Project Performance Monitoring and Evaluation

33. VEC will have responsibility for day-to-day project implementation and managing theconsulting services, including timely submission of reports through the consultants projectmanager.

9. Project Review

34. ADB will conduct at least three defined review missions, and numerous special reviewmissions. First, an inception review will be carried out to address issues that MOT, VEC, andthe consultant are encountering and are about to encounter, immediately after the consultantsinception report is submitted. Second, a midterm review, which will also be the Fact-FindingMission for the subsequent highway project, will be undertaken to assess overall progress inproject implementation and achievements, when reports of the detailed design study, economicand financial studies, and social and environmental studies are completed. Third, a projectcompletion review mission will be fielded about 1 year after project completion. There will alsobe special reviews as required to address issues that arise during project implementation.

IV. PROJECT BENEFITS, IMPACTS, ASSUMPTIONS, AND RISKS

A. Project Benefits and Impacts

35. The proposed highway, to be constructed based on the outputs of the Project, willsupport Viet Nams poverty reduction program through enhanced economic growth and byproviding access for currently isolated communities to economic and social services. It will alsocontribute to the efficient development of the GMS, by strengthening connectivity withneighboring countries and increasing competitiveness. The highway will greatly facilitatetransport between Kunming and Haiphong, and create a new freight transport link betweenYunnan province, Hanoi, and Haiphong port.

36. The Project will produce direct benefits such as: (i) preparing the subsequent highwayproject to high technical and safeguards standards; (ii) implementing the subsequent projectwithout unnecessary delay; and (iii) substantially improving VECs capability for projectmanagement, detailed design of highways, procurement, and safeguard arrangements.

37. Resettlement for the subsequent highway project could have an adverse impact on theaffected people, specifically on ethnic minority groups, who are vulnerable to change. Theproject activities could bring significant social and economic change, which could be bothpositive and negative. Once the highway is completed, HIV/AIDS and trafficking of women and

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children could become more prevalent. Appropriate prevention and mitigation planning will beincorporated in the Project to address issues related to HIV/AIDS and human trafficking.

B. Project Risks

38. The main risk for the Project is delayed implementation because of slow finalization of

the single consulting services contract, which will implement the Project. This is beingaddressed through advance procurement action for the Projects consulting services, and byproviding MOT and VEC with specialist support for the consultant selection process throughanother TA project (footnote 5).

39. During the construction phase, HIV/AIDS risks could increase in the areas around laborcamps and the core project area. Short and long-term planning to prevent and mitigateHIV/AIDS during the construction and post-construction periods will be incorporated in theProject.

V. ASSURANCES

A. Specific Assurances

40. In addition to the standard assurances, the Government has given the followingassurances, which are incorporated in the legal documents:

(i) MOT will cause VEC to prepare an EIA and a Summary EIA (SEIA) for thesubsequent highway project, which will include an environmental managementplan with adequate public consultation, in accordance with the requirements ofADBs Environment Policy (2002), and submit them to ADB for approval. MOTwill ensure that the contract documents for the subsequent highway projectinclude specific measures as indicated in the SEIA and EIA and in accordancewith ADB's Environment Policy to mitigate negative environmental impacts

caused by the construction and to give due consideration to prevention ofdamage to the natural environment in the design, construction, operation, andmaintenance of the highway facilities.

(ii) MOT will cause VEC to prepare an RP for the subsequent highway project inaccordance with the requirements of ADBs Policy on Involuntary Resettlement(1995), and submit the RP to ADB for approval.

(iii) MOT will cause VEC to prepare and implement an EMDP for the subsequenthighway project if impacts on the ethnic minorities living in the project area aresignificant. The determination whether the EMDP is needed and its preparationwill be in accordance with ADBs Policy on Indigenous Peoples(1998).

(iv) During project implementation, MOT will ensure that VEC has in place soundfinancial management, financial reporting, internal controls and internal auditingsystems acceptable to ADB.

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B. Conditions for Loan Effectiveness

41. The following are conditions for loan effectiveness:

(i) the Government approves its internal feasibility study of the Noi Bai-Lao CaiHighway Project in accordance with Government regulations; and

(ii) VEC has completed the establishment of the PIU headed by an experienceddirector and suitably staffed.

VI. RECOMMENDATION

42. I am satisfied that the proposed loan would comply with the Articles of Agreement of theAsian Development Bank (ADB) and, acting in the absence of the President, under theprovisions of Article 35.1 of the Articles of Agreement of ADB, I recommend that the Boardapprove the loan in various currencies equivalent to Special Drawing Rights 4,209,000 to theSocialist Republic of Viet Nam for the Greater Mekong Subregion: Kunming-Haiphong TransportCorridorNoi Bai-Lao Cai Highway Technical Assistance Project from ADBs Special Funds

resources with an interest charge at the rate of 1.0% per annum during the grace period and1.5% per annum thereafter; a term of 32 years, including a grace period of 8 years; and suchother terms and conditions as are substantially in accordance with those set forth in the draftLoan and Project Agreements presented to the Board.

Joseph B. EichenbergerVice President

24 November 2005

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Appendix 1 13

DESIGN AND MONITORING FRAMEWORK

DesignSummary

PerformanceTargets/Indicators

Data Sources/ReportingMechanisms

Assumptionsand Risks

Impact1. Promotion of

economic growth in theproject area and GMSby strengtheningconnectivity withneighboring countriesand increasingcompetitiveness

2. Reduced poverty inthe project area

Average per capita

income in Pho Tho,Vinh Phuc, Yen Bai,and Lao Cai provinceswill reach the nationalaverage by 2015

Total trading volumewith PRC will double by2015

Poverty rate is aimed todrop 1518% by 2015

National statistics on

population, income, trade,and industry

Provincial statisticalreports

Household living standardsurvey

Assumption

Streamlined cross-

border operation and nobarriers to trading andmobility

Risks

Reduction in economicgrowth

Barriers fordecentralization of socialand economic activities,and public sectorsservices

Outcome1. Enable theImplementing Agency(VEC) to construct theNoi Bai-Lao CaiHighway

2. Enable 1-daytransport betweenKunming and Haiphongupon completion of thehighway between NoiBai and Lao Cai

3. Generate revenue forVEC through incomefrom the highway

4. Create a new freighttransport link betweenYunnan province, PRC,and Hanoi-Haiphongport

5. Strengthen VECsproject managementcapability

Civil works contracts tobe awarded will beready when the ensuingloan becomes effective

The highway will becompleted by 2010

EIRR of the highwayproject will be higherthan 12%, and projectFIRR in real terms aftertax will be higher thanWACC

A substantial proportionof freight originating inKunming going to portsin PRC will be divertedto the Kunming-Haiphong corridor

Reports of review missions

Progress reports made byconstruction supervisionconsultants

Financial statement, auditreport, and financialprojection of VEC

Custom and immigrationstatistics

Traffic count and origin-destination surveys

Interview with forwardersin Kunming and HaiphongPort Authority

Assumptions The highway is

constructed based onthe outputs of the TA

ADB finances thehighway project

Lao Cai-Hekou border isoperated based on GMSCross-Border TransportAgreement

Trade and transportsecurity in destinationcountries is ensured

Counterpart financingand human resourcesare available to carry outthe Project

Risks

Construction of thehighway is delayed

Toll revenue is lowerthan expected due to lowtraffic demand or lowerthan expected toll rates

Trafficking of women

and children andprevalence of HIV/AIDSare expanded throughthe project highway

Outputs1. Detailed design ofthe highway and relatedfacilities

Detailed designdocuments will becompleted byMarch 2007

Reports of review missions

Inception, monthlyprogress, and project

Assumptions

Consultants deliver high-quality output

Adverse social andenvironmental issues are

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14 Appendix 1

DesignSummary

PerformanceTargets/Indicators

Data Sources/ReportingMechanisms

Assumptionsand Risks

2. Update of detailedeconomic and financialanalysis of the Projectand financial

assessment of VEC3. Planning forenvironmentalmitigationmeasurements, landacquisition andresettlement, and socialdevelopment

4. Procurementdocuments for civilworks and assistance inprocurement exercise

5. Preparation ofinvestment loan for thehighway

6. Provision of trainingin highway design,procurement, andsafeguardarrangements for PIU

Economic and financialviability of the Projectand financial capabilityof VEC will be

confirmed; safeguardplans will be approvedby ADB by April 2007

Procurement of civilworks will start byMarch 2007 and bidevaluation will beapproved by ADB byDecember 2007

Pre-physical activitiesfor land acquisition andresettlement will be fully

completed by March2008

Loan for the investmentproject will becomeeffective beforeMarch 2008

completion reportsprepared by consultants

Consultation with projectstakeholders, includingMOT, VEC, provincialgovernments along thehighway, and projectaffected peoples

Review of EIA, SEIA, RP,EMDP, procurementdocuments, andprequalification and bidevaluation reports

mitigated Financial and project

management capacity ofVEC is developed

Risks

Land acquisition andresettlement are delayed

Procurement of civilworks and constructionsupervision consultantsfor the investmentproject is delayed

Activities with Milestones1.1 Engineering surveys (by Sep 2006)1.2 Detailed design of road alignment and structures and information system,cost estimate and contract packaging (by Jan 2007)

1.3 Drawings of the Noi Bai-Lao Cai Highway (by Mar 2007)2.1 Economic and financial assessment of the Project (by Mar 2007)2.2 Financial capability analysis of VEC (by Mar 2007)

3.1 EIA, SEIA, RP, and EMDP (by April 2007)3.2 Update of the RP (by Oct 2007)

4.1 Procurement documents for civil works (by Jan 2007)4.2 Prequalification evaluation (by Apr 2007)4.3 Bidding evaluation (by Sep 2007)4.4 Contract award (by Oct 2007)

5.1 Consultant recruitment documents for construction supervision services for

the investment project (by Mar 2007)5.2 Selection of construction supervision consultants (by Oct 2007)

Inputs ADB:75% of cost of consultingservices (about 90 person-

months for internationalconsultants and about240 person-months fordomestic consultants);engineering, traffic, social,and environmental surveys;and 70% of equipment andincremental administrationcost. MOT and VEC:25% of cost of consultingservices, all taxes, and30% of equipment andincremental administrationcost (including full-timecounterpart staff)

ADB = Asian Development Bank, EIA = environmental impact assessment, EMDP = ethnic minority developmentplan, FIRR = financial internal rate of return, GMS = Greater Mekong Subregion, HIV/AIDS = humanimmunodeficiency virus/acquired immune deficiency syndrome, MOT = Ministry of Transport, PIU = projectimplementation unit, PRC = Peoples Republic of China, RP = resettlement plan, SEIA = summary environmentalimpact assessment, TA = technical assistance, VEC = Vietnam Expressway Corporation, WACC = weighted averagecost of capital.

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Appendix 2 15

SECTOR/SUBSECTOR ANALYSIS

A. Growth of Economy and Traffic Demand

1. Per capita gross domestic product (GDP) in Viet Nam increased to $482.6 in 2003 from$374.5 in 1999, at an average growth rate of 6.5%. The industry and construction sector

accounts for 40.0% of GDP and is the most rapidly developed sector, growing by 17.3% in 2003.In the Northern Economic Triangle Areaincluding Hanoi, Hai Duong, Haiphong, and QuangNinh provincesheavy industries (e.g., steel and shipbuilding) and light industries (e.g., textiles,footwear, machinery, and wooden products) are developed. The main driving forces behind therapid growth are domestic private companies and foreign-invested companies in export-orientedbusinesses. The service sector, accounting for about 38.2% of GDP, grew by 12.3% in 2003.This growth was mainly driven by wholesale, retail, transport, and postal services, whichaccompany improved living standards, especially in large cities. The tourism industry is alsobeing developed by easing visa requirements for foreign tourists. The agriculture, forestry, andfisheries sectors, accounting for about 21.8% of GDP, grew by 7.1% in 2003, largely due tohigher export prices. Overall, this sector has an international comparative advantage inViet Nam. To continue stable and strong economic growth, a high-standard road network

connecting cities and linking with neighboring countries and ports must be developed.

2. Table A2.1 shows the estimated number of vehicles registered in the project area, basedon data from the Viet Nam Registration and National Transport Safety Committee. Ownership ofvehicles (including trucks) in the project area has sharply increased at a much higher rate thanGDP growth. Elasticity of the growth rate of car ownership in the project area with respect to percapita GDP is 37, except in the case of coach/bus in 2002.

Table A2.1: Estimated Number of Vehicle Registered in the Project Area

Type ofVehicle

Item 1999 2000 2001 2002 2003 2004

Number of vehicles 16,069 20,151 28,674 36,305 48,424 60,358

Car Growth rate 25% 42% 27% 33% 25%Number of vehicles 4,582 5,469 9,219 7,068 13,307 15,345

Coach/busGrowth rate 19% 69% (23%) 88% 15%Number of vehicles 15,327 18,245 34,661 42,333 54,396 62,159

TruckGrowth rate 19% 90% 22% 28% 14%

Sources: Viet Nam Registration and survey by Asian Development Bank.

3. Table A2.2 shows the growth rate of annual average daily traffic (AADT) in passengercar units for National Highway 2. Traffic has increased considerably over recent years, withaverage growth rates of 18% for passenger traffic and 22% for freight traffic. Elasticity of theAADT growth rate in the project area with respect to per capita GDP is 34.

Table A2.2: Growth Rate for Annual Average Daily Traffic ofNational Highway 2 (Hanoi-Viet Tri)(%)

Year Type

19981999 19992000 20002001 20012002 20022003 20032004 Growth Rate

Passenger 19 15 10 43 7 13 18Freight 51 12 4 60 (1) 5 22Sources: Viet Nam Road Administration and survey by Asian Development Bank.

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16 Appendix 2

B. Road Safety

4. The Asian Development Bank (ADB) and development partners have provided financialassistance to the road sector in Viet Nam, and the national road network has been improved.However, the number of fatalities from traffic accidents has increased rapidly since 2000 andreached 13,000 in 2003. The major causes of traffic accidents on the improved roads are

speeding and recklessness of drivers and motorcyclists, as well as local peoples unchangedroad use. Also, the mixture of different vehicle types in road traffic is cause of the lack of roadsafety and inefficient road traffic management. The Government established an interministerialNational Traffic Safety Program to address road safety initiatives and allocate roles and budgetto each ministry concerned. It is also promoting traffic enforcement, a road traffic safetycampaign, and regulation on the sale and use of motorcycles to reduce traffic accidents, butthere have been no tangible effects to date. 1 Full access-controlled highways (essentiallyexpressways) that provide high modality of long-distance traffic and restrict accessibility of localpeople to the highways are necessary for safe road transport if vehicle ownership rises at twicethe expected rate of economic growth and income increase in Viet Nam.

C. Expressway Master Plan

5. The existing national road system was mainly constructed with two lanes, and a smallpart with four lanes. According to the government traffic estimate, which the transportdevelopment strategy until 2020 was based on, traffic jams are inevitable on main nationalroads. To support sustainable economic development, these roads should be widened or newroadways constructed to connect with important economic zones, large urban centers, industrialzones, and international borders. The Government assigned the Ministry of Transport (MOT) toprepare a master plan for development of the expressway network. The basic outline of theexpressway master plan (EMP) proposes 2 north-south expressway axes, 6 east-westexpressway axes, and 14 centripetal expressway axes. To complete development of EMP, MOTneeds to improve its knowledge of planning expressway networks and construction, institutionaldevelopment, financial mobilization and debt management, and operation and maintenance

(O&M) from other countries.

6. In the draft EMP, a 1,346-km expressway will be constructed during the first stage(20052015) and a 1,357-km expressway during the second stage (20162025). The Noi Bai-Lao Cai Highwaypart of this networkis planned in the first stage. The capital investmentrequirement for construction of the planned expressway network is D205,767 billion($13 billion): D111,012 billion ($7 billion) for the first stage and D94,755 billion ($6 billion) for thesecond stage. The estimated construction cost per year is about $600 million$700 million.

7. ADB will provide MOT with advisory technical assistance (TA) on the ExpresswayNetwork Development Plan Project.2 The TA comprises development of a business plan for theVietnam Expressway Corporation (VEC), the EMP, and public-private partnership. The EMP

component will include developing proposals for: (i) policy and criteria for expresswayconstruction; (ii) route (origin-destination); (iii) priority (20062015, 20162025, and 2025onwards); (iv) technical specifications; (v) road services and administrative facilities; (vi) costestimates at pre-feasibility level (construction, land acquisition and resettlement, and O&M); (vii)

1 Japan Bank for International Cooperation. 2003. Final Report of Social Republic of Vietnam Transport SectorSurvey. Tokyo.

2 ADB. 2005. Technical Assistance for the Expressway Network Development Plan Project. Manila (TA 4695-VIE).

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Appendix 2 17

economic and financial viability assessment (assuming an appropriate toll); and (viii) preliminarysocial and environmental assessment.

D. Vietnam Expressway Corporation

8. In October 2004, VEC was established as a state-owned enterprise under MOT. VEC

business lines include:

(i) investment, construction project management, maintenance, and toll collection of thenational expressways;

(ii) developing and trading in such services as rest houses, restaurants, gas stations,advertisements, and construction materials along expressways;

(iii) technical consultancy on transportation and communication, such as study of thedevelopment of national expressway networks, and feasibility study and design ofeach expressway project; and

(iv) study and development of service forms in areas adjacent to expressways.

9. The Ministry of Finance provided VEC with equity amounting to D1,000 billion ($63million) in the form of: (i) transfer of D50 billion ($3 million) from the state budget to VECsaccount, and (ii) selling toll fee collection right at Gie Bridge and Phu Dong toll plazas during the10-year period after 1 January 2005, amounting to D950 billion ($60 million). With 60 employees(as of May 2005), VEC has established financing and accounting, planning and business,project technical, and administration divisions. VECs first expressway project (Cau Gie-NinBinh) has a total project cost of D5,422 billion ($341 million). VEC financed this project by usingall its equity ($63 million) and issuing a government-guaranteed bond amounting toD4,422 billion ($278 million).3 Since all VECs equity will be spent on the first expresswayproject, it has to request additional equity from the Government for subsequent expresswayprojects to secure its financial sustainability. To generate funds for investment in expresswayprojects, VEC issues a government-guaranteed bond and wishes to receive loans from donororganizations. However, VEC has yet to secure the budget for expressway construction andcomplete its business model, which ensures financially sustainable expressway projects.

10. The business model development component under the TA on Expressway NetworkDevelopment Plan Project, will review the: (i) government policies, laws, regulations, decrees,circulars, and charters relevant to VEC; (ii) current organizational structure of VEC, with dueconsideration given to role and responsibilities of each department and division of VEC,segregation of duty, staffing, etc.; and (iii) VECs future organizational development plan. Withthe objectives of promoting institutional efficiency and good governance in VECespeciallyregarding financial management, accounting system, and auditingthe study will recommend:(i) necessary reforms of the legal and regulatory frameworks; and (ii) appropriate institutionalsetup, including mission, objectives, functions of departments and divisions, regional branches,and performance specifications and targets.

E. Toll Setting

11. The current toll level for national highways is shown in Table A2.3, based on theprinciple that toll revenue is used for road maintenance works only. Subject to approval by theMinistry of Finance, the toll level for expressways will be set at not more than double the currenttoll level for general highways, based on a new concept that the toll revenue from expressways

3 VEC has issued a bond in the amount of $230 million to date, but has not yet received loans from external donororganizations.

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18 Appendix 2

will be used for maintenance works, recovery of the capital cost (including interest repayment),and expansion of the expressway network. However, it is still unclear whether this toll level cancover those expenses. Therefore, the toll level for expressways should be reexamined in thelight of financial requirements and toll sensitivity of potential expressway users.

Table A2.3: Current Toll Level for National Highways

(D per km)

Vehicle Toll Unit Toll RateMotorbike/Lambretta 10,000 333Tourist Car/Jeep 10,000 333Small Coach (=25 seats) 15,000 500Light Truck (=2.5 tons, 2 axles) 22,000 733Heavy Truck (>3 axles) 40,000 1,333Container 80,000 2,667D = dong, km = kilometer.

Source: Ministry of Finance.

12. A survey on the toll sensitivity of road users was carried out under TA 4050-VIE.4 TableA2.4 shows percentage of use of the Noi Bai-Lao Cai Highway, which will be of expresswaystandard, under the different toll rates. For the Noi Bai-Yen Bai section where travel timereduction is low, elasticity of the percentage of highway use with respect to toll level is high. Forthe Yen Bai-Lao Cai section where travel time reduction is high, elasticity is low. If the toll levelfor expressways is set as double the current toll level for general highways, 50% of traffic on theexisting roads will be diverted to the expressway for the Noi Bai-Viet Tri section, 60% will bediverted to the Viet Tri-Yen Bai section, and 85% will be diverted to the Yen Bai-Lao Cai section.There is little relevance of the elasticity of the percentage of highway use with respect to thedistance reduction.

Table A2.4: Percentage of Use of the Noi Bai-Lao Cai Highway

Item Noi Bai-Viet TriSection

Viet Tri-Yen BaiSection

Yen Bai-Lao CaiSection

Distance of existing highways 51.0 km 91.0 km 169.0 kmTravel time of existing highways 1.3 hours 2.3 hours 4.0 hoursDistance of the highway 53.4 km 64.6 km 138.0 kmTravel time of the highway 0.5 hours 0.6 hours 1.7 hours1.5 times the current toll level 60% 80% 90%2 times the current toll level 50% 60% 85%3 times the current toll level 30% 50% 80%

km = kilometer.

Source: ADB. 2005. Economic and Financial Study for the Kunming-Haiphong Expressway Project (Hanoi-Lao Cai)(draft). Manila.

4 ADB. 2002. Technical Assistance to the Socialist Republic of Viet Nam for Preparing the Kunming-HaiphongTransport Corridor Project. Manila.

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Appendix 3 19

FEASIBILITY STUDY OF THE NOI BAILAO CAI HIGHWAY PROJECT

1. Considering that the average growth rate of per capita gross domestic product (GDP)was 6.5% in 19992003, the feasibility study assumed that growth in Viet Nam could average5.4% for 20052015, 5.0% for 20162025, and 4.0% for 20262040. The feasibility studyapplied elasticity of 2.0 for passenger growth against GDP growth and 1.51.0 for freight. Table

A3.1 summarizes the traffic growth rate for the feasibility study.

Table A3.1: Traffic Growth Rate(%)

Type of Traffic 20052015 20162025 20262040Passenger 10.8 10.0 8.0Freight 8.1 6.0 4.0Source: ADB. 2005. Economic and Financial Study for the Kunming-Haiphong Expressway

Project (Hanoi-Lao Cai) (draft). Manila.

2. The traffic demand forecast for the Noi Bai-Lao Cai Highway consists of: (i) naturalgrowth traffic, (ii) traffic generated by construction of the highway, and (iii) traffic diverted to theKunming-Hanoi-Haiphong route from other routes because of the highways construction. Thenatural growth traffic increases from baseline traffic in 2005 in accordance with the traffic growthrate in Table A2.5. The generated traffic is assumed as 15% of the natural growth traffic, basedon the existing study. The major shippers in Kunming, Yunnan province currently use Shenzhenand Guangzhou ports in Guangdong province, and Fancheng, Qinzhou, and Beihai ports inGuangxi province, Peoples Republic of China (PRC). The annual container output to and fromKunming in 2005 is 213,000 20-foot units. As a result of an interview with the major shippers,10% of the container cargos would be diverted to the Kunming-Hanoi-Haiphong route due toreduction in the travel distance. Table A3.2 shows the forecast daily traffic volume for the threesections of the highway under the assumption that the toll level will be double the current level.

Table A3.2: Traffic Demand Forecast for the Noi Bai-Lao Cai Highway

(passenger car unit per day)

Section 2005 2015 2025 2035Noi Bai-Viet Tri 9,646 28,822 64,091 122,163Viet Tri-Yen Bai 6,633 20,420 45,909 88,375Yen Bai-Lao Cai 974 3,117 7,075 13,690Source: ADB. 2005. Economic and Financial Study for the Kunming-Haiphong Expressway

Project (Hanoi-Lao Cai) (draft). Manila.

3. The length of the Noi Bai-Lao Cai Highway is 256 km. Based on the above traffic volumeforecast, lane configuration for the Noi Bai-Viet Tri and Viet Tri-Yen Bai section is initially fourlanes but expandable to six lanes as traffic increases; and initially two lanes but expandable tofour lanes for the Yen Bai-Lao Cai section. The total project cost for the initial highway

construction is estimated at about $620 million, including construction cost, consulting servicecost, land acquisition and resettlement cost, and physical and price contingencies.

4. Economic and financial analysis was undertaken by comparing the with highway projectand without highway project scenarios. The economic internal rate of return (EIRR) for thehighway project is about 22.0%. The net present value of the highway project, using the socialdiscount rate of 12%, yields $349 million. Table A3.3 summarizes the result of the economicsensitivity analysis. Delay in project implementation has the most impact on the economicviability. However, even if there is a concurrent 10% increase of project cost, 10% decrease of

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20 Appendix 3

traffic demand, and 1 year delay in project implementation, the EIRR for the highway project ishigher than 12%. Table A3.4 summarizes the results of the financial sensitivity analysis.Assuming that 72% of the project cost is funded by ADBs ordinary capital resources and otherloans, and the remaining 28% is funded by the Government of Viet Nam, the weighted averagecost of capital (WACC) for the highway project is 6.0%. Similar to the economic viability, even ifthere is a 10% increase in project cost, 10% decrease in traffic demand, and 1 year delay in

project implementation, at the same time, the financial internal rate of return (FIRR) is still higherthan the WACC. The highway project generates enough profit to recover the entire loan within14 years. It is concluded that the economic and financial viability of the highway project isrobust.

Table A3.3: Economic Sensitivity Analysis(%)

Item EIRR1. Base case 22.02. 10% increase in project cost 20.43. 10% decrease in traffic demand 19.94. 1 year delay in project implementation 19.75. Combination of 2, 3, and 4 16.7EIRR = economic internal rate of return.Source: ADB. 2005. Economic and Financial Study for the Kunming-Haiphong

Expressway Project (Hanoi-Lao Cai) (draft). Manila.

Table A3.4: Financial Sensitivity Analysis(%)

Item Project FIRR Owner FIRR1. Base case 8.7 16.52. 10% increase in project cost 7.9 13.63. 10% decrease in traffic demand 7.9 14.84. 1 year delay in project implementation 8.2 14.7

5. Combination of 2, 3, and 4 6.7 10.5FIRR = financial internal rate of return.Source: ADB. 2005. Economic and Financial Study for the Kunming-Haiphong Expressway

Project (Hanoi-Lao Cai) (draft). Manila.

5. As shown in Table A2.4 of Appendix 2, the traffic demand is affected by the toll level.Figure A3.1 indicates the impact of the toll level on EIRR and FIRR. The current toll level forpassenger cars is D1,000 per 30 km. EIRR rapidly declines as the toll increases, and falls below12% when the toll level is over four times the current level. The current toll level yields FIRRlower than WACC, therefore the highway project is not financially viable. From the financialperspective, the toll level of D2,000D4,000 per 30 km is appropriate and the optimal toll level isD3,000 per 30 km. Taking both economic and financial perspectives into account, a range ofD2,000D2,500 per 30 km is the best toll level to operate the Noi Bai-Lao Cai Highway.

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Appendix 3 21

Figure A3: Impact of the Toll Level on EIRR and FIRR

0

5

10

15

20

25

30

1,000 2,000 3,000 4,000 5,000

Toll Level (D per 30 km)

EIRR,FIRR,andWACC

EIRR

Project FIRROwner FIRR

WACC

D = dong, EIRR = economic internal rate of return, FIRR = financial internal rate of return, km =kilometer, WACC = weighted average cost of capital.Source: ADB. 2005. Economic and Financial Study for the Kunming-Haiphong Expressway Project

(Hanoi-Lao Cai) (draft). Manila.

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22 Appendix 4

EXTERNAL ASSISTANCE TO THE ROAD SUBSECTOR

ProjectImplementation

ScheduleProject Cost

($ million)External Funding

Source

A. National Highway and Provincial Roads Network

Loan 1272 Road Improvement Project Completed 141.0 ADB: 120 million

Loan 1487 Second Road Improvement Project Completed 237.0 ADB: 120 millionJBIC: 64 million

Loan 1564 Rural Infrastructure Sector Project 19972005 150.0ADB: 105 millionCFD: 15 million

Loan 1653 Third Road Improvement Project 19992003 239.0ADB: 130 millionJBIC: 60 million

Loan 1660GMS: Phnom Penh to Ho Chi Minh City HighwayProject

Completed 144.8 ADB: 100 million

Loan 1728 GMS: EastWest Corridor Project 20002005 30.0 ADB: 25 million

Loan 1888 Provincial Roads Improvement Project 20022006 100.0 ADB: 70 million

Highway Rehabilitation Project II and III Completed 416.6 WB

Road Safety Project 20052009 25.0 WB

NH1 Bridge Rehabilitation Project Completed 162.2 JBIC

NH1 Bridge Rehabilitation Project (2) 19992006 211.0 JBICNH1 Bridge Rehabilitation Project (3) 20032009 80.1 JBIC

NH5 Improvement Project (1), (2), and (3) Completed 326.3 JBIC

NH10 Improvement Project (1) 19982007 161.3 JBIC

NH18 (1) 19982006 107.8 JBIC

Transport Infrastructure in Hanoi 19982006 113.7 JBIC

Hai Van Tunnel Construction (1), (2), and (3) 19982008 372.4 JBIC

NH18 Widening Projects (2) 20002007 232.0 JBIC

Can Tho, Thanh Tri, Bai Chay, Binh BridgeConstruction

20002005 882.0 JBIC

NH10 Improvement Project (2) 20002007 116.3 JBIC

Red River Bridge Construction (1), (2), and (3) 20022010 179.1 JBIC

Saigon EastWest Highway Project (1), (2), and (3) 20002008 919.9 JBIC

NH1 Bypass Road Construction Project 20012006 76.3 JBIC

Transport Sector Loan 20042010 86.7 JBIC

My Thuan Bridge Completed 79.3 AusAID

Subtotal (A) 5589.8

B. Rural Roads Network (District and Commune Roads)a

Rural Transport Project Completed 60.9 WB

Rural Transport II Project 20002005 145.3 WB/DFID

Rural Access Project 19982000 1.3 DFID

Rural Infrastructure Development and LivingStandard Improvement Project (Loan II)b

Completed 133.0 JBIC

Subtotal (B) 340.5

Total 5,930.3

ADB = Asian Development Bank, AusAID = Australian Agency for International Development, CFD = CaisseFranaise de Dveloppement, DFID = Department for International Development, GMS = Greater MekongSubregion, JBIC = Japan Bank for International Cooperation, NH = national highway, WB = World Bank.a Excludes ADB-financed rehabilitation of rural roads as specific components of rural infrastructure projects.b Amount of project cost is only for the road component.Sources: Viet Nam Road Administration, Ministry of Transport, and Asian Development Bank estimates.

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Appendix 5 23

SUMMARY POVERTY REDUCTION AND SOCIAL STRATEGY

A. Linkages to the Country Poverty Analysis

Is the sector identified as a nationalpriority in country poverty analysis?

Yes

No

Is the sector identified as a nationalpriority in country poverty partnershipagreement?

Yes

No

Contribution of the sector or subsector to reduce poverty in Viet Nam:

Viet Nams record in poverty reduction has been impressive in the last decade. The proportion of the population belowthe poverty line has declined from around 59% in 1993 to 25% in 2005. The proposed target for the Five-Year Socio-Economic Development Plan 20062010 is to reduce poor households to 15%16% by 2010. While significant interms of magnitude, progress in poverty reduction remains fragile, with a significant number of near poor clustered

just above the poverty line. To support the Government in pursuing balanced economic growth and poverty reduction,the Country Strategy and Program Update 20062008 for Viet Nam and the Poverty Partnership Agreement betweenViet Nam and ADB emphasize regional cooperation through cross-border trade and access to markets within theregion. Viet Nam and Yunnan province in the PRC are experiencing rapid economic growth, centered on exports toworld markets, and through increasingly bilateral trade in agriculture, aquatic, mining, and industrial products.Sustained development requires modernization and improvement of physical infrastructure and associated servicesinfrastructure that accommodates bilateral trade and international transit traffic. The Kunming-Haiphong Corridor is

recognized by Viet Nam and the PRC as a strategic asset that enables accelerated economic growth based onbilateral trade and transit traffic. The corridor is perceived as a cornerstone in developing the economies in Yunnanprovince and northern Viet Nam. The Greater Mekong Subregion: Kunming-Haiphong Transport CorridorNoi Bai-LaoCai Highway Technical Assistance Project (the Project) will help to develop the subregional transport system andimprove inter-sectoral linkages through the development of an economic corridor. Remoteness and disconnectionhave been identified as factors for poor peoples inability to benefit from economic growth. Improved transportinfrastructure is critical for sustained rapid economic growth and poverty reduction, and will also contribute toregionally balanced and equitable economic growth by stimulating agriculture production, increasing access toemployment opportunities, and facilitating better access to social services.

B. Poverty Analysis Targeting Classification: General intervention

What type of poverty analysis is needed?

Following ADBs Enhanced Poverty Reduction Strategy (December 2004), projects classified as general intervention

no longer require project level poverty assessments. However, social assessments will be prepared for resettlement,ethnic minority groups, HIV/AIDS, and human trafficking, as they represent significant risks for implementation of theProject.

In addition to social and economic data related to resettlement plan and an EMDP (Appendix 9), social assessmentdata will include: (i) the potential impact of the Kunming-Haiphong highway on social change for various ethnic groupsin the project area, (ii) employment opportunities, (iii) movement of goods, (iv) reduction of transport costs associatedwith transportation on the provincial road networks, (v) change in family farm production and its potential impact onwomen, and (vi) access to social service delivery. Social analysis will include the potential negative impact ofresettlement on various ethnic groups, risks of HIV/AIDS spreading, and human trafficking. Trafficking of women andchildren has become a serious problem since the 1990s. In the provinces located in Red River Delta, trafficking ofwomen has increased due to a number of road links and commune border with the PRC. Assessment of HIV/AIDSand human trafficking will include: (i) the present situation of HIV/AIDS and human trafficking in the project areas; (ii)type and level of vulnerability of the population along the proposed highway to HIV/AIDS and human trafficking(disaggregated by gender, ethnicity, age, type of occupation, mobility, etc.); and (iii) recommendation for activities to

prevent and mitigate the impacts. The social assessment will also: ( i) review existing anti-HIV/AIDS and anti-traffickingprograms of the Government, donors, and nongovernment organizations and recommendation for relevant linkages;and (ii) assess the capacity building training needs of relevant agencies for anti-HIV/AIDS and anti-trafficking (lawenforcement authority in the boarder areas). The social assessment will also focus on the environmental issues andpossible negative impacts on the livelihood of the poor and ethnic minority groups, whose lives largely depend on theforest and its products.

The core analysis will be prepared from both primary and secondary data. Primary data will be collected from selectedproject areas through sample survey and participatory appraisal. Secondary data will include existing data such ascensus, national socioeconomic surveys, and available HIV/AIDS and human trafficking related data.

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24 Appendix 5

C. Participation Process

Is there a stakeholder analysis? Yes No

During the early stage of feasibility study of the Kunming-Haiphong Transport Corridor Project (TA 4050-VIE),consultations were held with ethnic minority groups and various government agencies. During the fact-finding for the

TA project, discussion was held with the executing agency and stakeholders from other relevant agencies.

Is there a participation strategy? Yes No

A participatory stakeholder analysis will be an integral part of the economic (distributional assessment), social,resettlement, EMDP, and gender analysis. The stakeholder analysis under the economic and social assessments willbe both quantitative and qualitative. For land acquisition and resettlement issues, individual and group consultationswill be undertaken with affected people at the village, hamlet, and commune level. Separate consultation will beundertaken with affected minority groups with regard to resettlement issues. The stakeholder analysis will includeassessment of human trafficking and HIV/AIDS. The participatory strategy will include a grassroots level mechanismfor public information disclosure of compensation and resettlement issues, and grievance procedures for affectedpersons from various ethnic groups.

D. Gender Development

Strategy to maximize impacts on women:

The socioeconomic data will be disaggregated by gender and various ethnic groups. Data on resettlement and ethnicminority groups and data on HIV/AIDS and human trafficking will be disaggregated by gender. A project specificgender strategy will be prepared and gender related strategies will be incorporated in the resettlement plan andEMDP. Socioeconomic assessment will examine the extent to which the expressway would have an impact onwomens social and economic condition in the project area. Data on social assessment will include information on: (i)the extent to which land acquisition and relocation will impact on womens social condition and economic activities,and (ii) available social services and womens access to social services (by various ethnic groups). The capacity of theExecuting Agency and leaders of the commune and Womens Union will be assessed in terms of implementation of agender strategy and programs related to HIV/AIDS and human trafficking.

The gender strategy will include specific activities to ensure project benefits for women. It will ensure that: (i) womendo not become more vulnerable because of relocation; (ii) women are involved in the consultation process for

preparation of loss of inventory, and the grievance process on resettlement and compensation issues; (iii) womenretain access to land or land title during resettlement; (iv) potential social problems in the projects are addressed; and(v) women fully participate in programs related to HIV/AIDS prevention and human trafficking. A relevant capacitybuilding training program will be developed for men and women officials of the Executing Agency; leaders of thecommunes; and provincial, district, and commune level Womens Unions, to ensure effective implementation of theresettlement plan and EMDP, and monitoring of project activities. The gender strategy will include activities to increasewomens participation in community level monitoring of implementation resettlement activities, EMDP, HIV/AIDS andhuman trafficking related program activities. Community level monitoring and consultation for land acquisition,compensation price, and relocation and implementation of the EMDP will include mechanisms for communityinvolvement and participation, as outlined in the government decrees on regulation for participatory investmentsupervision, and grassroots democracy. Gender disaggregated monitoring indicators by various ethnic groups will bedeveloped to assess the impact of resettlement and the expressway. Monitoring indicators will also include monitoringof HIV/AIDS and trafficking activities in the project area.

Has an output been prepared? Yes No

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Appendix 5 25

E. Social Safeguards and Other Social Risks

ItemSignificant/

Not Significant/None

Strategy to Address Issues Plan Required

Resettlement

Significant

Not significant

None

A full resettlement plan acceptable to ADB will beprepared.

Full

Short

None

Affordability

Significant

Not significant

None

The highway project will promote