Circular No. 16/TC-TCĐN guiding the financial management mechanism for water supply and sanitation projects in cities and towns borrowing from the Asian Development Bank (ADB)

CIRCULAR

OF THE MINISTRY OF FINANCE

Guidelines for the financial management mechanism of investment projects
for water supply and sanitation systems in cities and towns financed by the Asian Development Bank (ADB)
the city borrows funds from ADB

Pursuant to the credit agreements on water supply and sanitation projects for cities and towns signed between the Socialist Republic of Vietnam and the Asian Development Bank (ADB);

Pursuant to Decree No. 58/CP dated August 30, 1993 of the Government on the Regulation on Foreign Borrowing and Repayment;

Pursuant to Decree No. 42/CP dated July 16, 1996 of the Government on the Charter for Investment Management and Construction;

Pursuant to Circular No. 09 TC/NH dated June 2, 1994 issued jointly by the Ministry of Finance and the State Bank, and other circulars guiding the implementation of the above decrees;

Pursuant to decisions of the Prime Minister on investment in water supply and sanitation projects in cities and towns;

The Ministry of Finance guides the management, disbursement, and utilization of investment capital for water supply and sanitation projects in cities and towns as follows:

I. GENERAL PROVISIONS:

1. Definitions: Unless otherwise specified, the concepts and terms used in this circular have the same meanings as those in the credit agreements and loan agreements.

1.1. Project: It refers to investment projects for water supply and sanitation systems in cities and towns under credit agreements signed with ADB. Each project consists of component projects implemented in the designated cities and towns as stipulated in the credit agreements.

1.2. The project management agency is the Ministry of Construction. The Central Project Management Board is established within the Water Supply and Sewerage Development Management Board of the Ministry of Construction to implement, coordinate, and manage the activities of the projects.

1.3. The project implementing agency (Project Sponsor) is the Water Supply and Sewerage Companies in provinces where the projects are located. The Local Project Management Board is established at the Water Supply and Sewerage Companies in cities and towns, responsible for organizing the implementation of component projects.

2. Management principles:

2.1. The ADB loan is foreign borrowing by the Government of Vietnam, therefore, the entire borrowed amount must be reflected in the State Budget.

The Ministry of Finance manages and monitors the implementation of the loan and repayment to ADB according to the terms stipulated in the agreement and in accordance with current regulations in Vietnam.

2.2. The allocation and lending of funds from foreign loans and domestic counterpart funds to component projects are carried out as follows:

ADB loans are used to allocate and lend again to Water Supply and Sewerage Companies in cities and towns with projects according to the ratios specified in the credit agreements and the Government's investment decision, following the principle that during the initial phase, ADB funds will be allocated to component projects until the predetermined allocation limit is reached; thereafter, ADB loans will be lent again to Water Supply and Sewerage Companies.

ADB loans allocated to component projects are implemented through targeted subsidies from the Central Budget to the Local Budget, which then allocates funds to component projects.

The accounting principles for allocated funds are as follows:

For direct payment funds: After receiving ADB's notification of disbursement based on the request for direct payment funds, the Department of Foreign Financial Affairs issues a notice approving the budget estimate and sends it to the Department of State Budget regarding the disbursed amount. The Department of State Budget processes the recording of state budget revenue and expenditure subsidies to local budgets. Provincial Departments of Finance base their procedures for recording local budget revenue and expenditure on the orders from the Department of State Budget, allocating funds to the Provincial Investment and Development Bureau to provide to the Project Sponsors.

For advance payment funds: Upon receipt of the notification from the Central Investment and Development Bank about disbursement from the advance account of the Local Project Management Board, the Department of Foreign Financial Affairs issues a notice approving the budget estimate and sends it to the Department of State Budget regarding the disbursed amount. The Department of State Budget processes the recording of state budget revenue and expenditure subsidies to local budgets. Provincial Departments of Finance base their procedures for recording local budget revenue and expenditure on the orders from the Department of State Budget, allocating funds to the Provincial Investment and Development Bureau to provide to the Project Sponsors.

For funds requested by the Central Project Management Board: The budget accounting and allocation procedures for component projects are carried out quarterly. The Department of Foreign Financial Affairs bases its actions on ADB's notifications of disbursement (direct payments) and bank notifications (advance account disbursements), and the Central Project Management Board's spending plan for component projects, issuing a notice approving the budget estimate and sending it to the Department of State Budget. The Department of State Budget processes the recording of state budget revenue and expenditure subsidies to local budgets. Provincial Departments of Finance base their procedures for recording local budget revenue and expenditure on the orders from the Department of State Budget, allocating funds to the Provincial Investment and Development Bureau to provide to the Project Sponsors.

ADB loans for lending to component projects are implemented through the Investment and Development General Administration system and follow the provisions in the supplementary loan agreements signed between the Ministry of Finance and the Water Supply and Sewerage Companies, and the loan contracts signed between the Provincial Investment and Development Bureau and the Water Supply and Sewerage Companies. The Investment and Development General Administration system is responsible for managing and monitoring the implementation of the re-lending funds and the recovery of principal and interest when due.

The accounting principles for re-lending are as follows:

Upon receipt of ADB's notification of disbursement via direct payment or the notification from the Investment and Development Bank about disbursement from the advance account, the Department of Foreign Financial Affairs issues a notice approving the budget estimate and sends it to the Department of State Budget regarding the disbursed amount. The Department of State Budget processes the recording of state budget revenue and expenditure for re-lending, and the Investment and Development General Administration notifies the Provincial Investment and Development Bureau to provide funds to the component projects already opened at the Provincial Investment and Development Bureau according to the loan contracts signed between the Provincial Investment and Development Bureau and the component projects.

2.3. Counterpart capital for projects allocated by the People's Committees of provinces from provincial-managed funds (budget, mobilization, basic depreciation, and other sources...) shall be consistent with the project implementation schedule already committed.

2.4. Capital allocated for coordination and management activities of the Central Project Management Board shall be included in the total investment cost of the project and distributed within the capital allocation for component projects according to the ratio determined in the Agreement and project documentation. The Ministry of Finance (Investment Development General Department) shall manage, review, and allocate expenditures proposed by the Central Project Management Board.

2.5. Investors are responsible for using capital in accordance with the approved purpose and content of the project in compliance with domestic regulations and provisions in credit agreements, sub-loan agreements, and loan contracts.

2.6. The Ministry of Finance and the State Bank authorize the Investment and Development Bank to serve as the bank for the projects, to carry out procedures for withdrawing funds from loans (including direct payment methods, repayment, and letters of commitment) for the project upon the approval of the Ministry of Finance for each withdrawal.

2.7. During the process of withdrawing funds, the Investment and Development Bank shall be entitled to service fees based on the specific transactions generated (including telegraphic fees, fax fees, document transmission fees, letter of credit opening fees...) according to the fee schedule of the Investment and Development Bank and in compliance with the State Bank's regulations on service charges.

The aforementioned service fees shall be covered from the domestic counterpart capital and included in the total investment cost of the project.

2.8. The Investment Development General Department under the Ministry of Finance shall manage the allocated capital and the re-lending capital for projects and be entitled to service fees as prescribed.

3. Total expenses and capital structure:

Specific provisions are set forth in the Prime Minister's investment decisions, credit agreements, and accompanying documents.

II. PLAN DEVELOPMENT:

1. Financial planning for the project:

1.1. Annually, in accordance with the procedure for preparing, submitting, and reviewing the state budget plan, the investor shall prepare the financial plan of the component project to be consolidated in the provincial state budget plan, submitted and defended with the Ministry of Planning and Investment and the Ministry of Finance, and presented to the Government and National Assembly for approval. The investor's plan shall also be sent to the Central Project Management Board.

1.2. The Central Project Management Board shall prepare the direct expenditure plan at the Central Project Management Board, including regular expenses of the Board and common expenses for the entire project (consultant fees, machinery and equipment purchase costs). This plan must be detailedly allocated to each component project and sent to the Local Project Management Boards to be consolidated in the financial plans of the component projects.

1.3. The content of the financial plan of the component projects must reflect the volume of work to be carried out, the sources of capital, including foreign loans (ADB), domestic counterpart capital (allocated by the province), the schedule for withdrawing loans and using domestic capital, detailed distribution by month, quarter, year, and by each work category, including the budget for the Central Project Management Board's operations.

2. The Central Project Management Board is responsible for compiling the overall financial plan of the entire project, sending it to the Ministry of Finance and the Ministry of Planning and Investment as the basis for reviewing the state budget plan and the overall withdrawal plan for the project.

3. The Provincial People's Committee shall notify the approved investment plan to the Project Sponsor after receiving the plan allocation decision from the Prime Minister.

Investors shall notify the approved plans to the Central Project Management Board so that the Central Project Management Board can compile and report to the Ministry of Finance (Foreign Financial Affairs Department, Investment Development General Department) and the Central Investment and Development Bank to monitor the withdrawal situation of the entire project.

III. OPENING ACCOUNTS:

To receive ADB advance funds, the State Bank Branch opens a Temporary Advance Account for the project, the Central Investment and Development Bank opens a Project Account with the Central Project Management Board as the account holder, while classifying sub-accounts to track the withdrawal and use of funds for each component project.

2. The investor opens:

- A Component Project Account at the Provincial Investment and Development Bank to receive ADB advance funds,

- An account for fund allocation at the Provincial Development Investment Department to track fund allocation for the project.

- A Loan Account at the Provincial Investment Development Bureau.

IV. WITHDRAWAL, ALLOCATION AND MANAGEMENT OF CAPITAL
FOREIGN LOANS:

1. Withdrawal and Payment through the Temporary Advance Account:

1.1. Withdrawal to the Temporary Advance Account:

1.1.1. Initial Withdrawal to the Temporary Advance Account: The Central Project Management Board prepares the expenditure plan for the first six months and, based on the Temporary Advance Account limit specified in the Credit Agreement, submits the initial withdrawal request to the Temporary Advance Account to the Ministry of Finance (Foreign Financial Affairs Department) and the State Bank (Branch). The documents include:

Application for Withdrawal

Request for Withdrawal

Budget of Expenditures

Within five working days from the date of receipt of the withdrawal application, if the documents are complete and valid, the Ministry of Finance will issue an approval letter to the State Bank (Branch) and the Central Project Management Board.

After receiving the Ministry of Finance's approval letter and verifying the validity of the withdrawal conditions, the State Bank will sign the withdrawal application and send it to ADB.

Upon disbursement by ADB, the funds will be transferred to the Temporary Advance Account of the project at the State Bank (Branch). On the same working day, the State Bank will immediately transfer this amount to the Project Account at the Central Investment and Development Bank. The withdrawal flowchart is attached as Appendix 1.

1.1.2. Supplementary Withdrawal to the Temporary Advance Account: The principle of supplementary withdrawal to the Temporary Advance Account is actual expenditure, meaning the project can only withdraw additional funds for amounts already paid.

Monthly (but not exceeding three months), the Central Project Management Board may submit an application for supplementary withdrawal from the Temporary Advance Account. The withdrawal request documents sent to the Ministry of Finance (Foreign Financial Affairs Department) and the State Bank (Branch) include:

Application for Withdrawal

Request for Withdrawal

Statement of Expenditures

Statement of the Temporary Advance Account at the Investment and Development Bank

Central

Necessary supporting documents

Within five working days from the date of receipt of the withdrawal application, if the documents are complete and valid, the Ministry of Finance will issue an approval letter for the withdrawal request to the State Bank (Branch) and the Central Project Management Board.

After receiving the Ministry of Finance's approval letter and verifying the validity of the withdrawal conditions, the State Bank will sign the withdrawal application and send it to ADB.

When funds are credited to the Advance Account, on the same working day, the State Bank (Trading Department) shall immediately transfer the amount to the Project Account at the Central Investment and Development Bank.

1.2. Payment from the Project Account (Advance Account):

1.2.1. At the request of the Central Project Management Board:

When there is a need for expenditure for the operation of the Central Project Management Board's Office or for tasks carried out directly by the Central Project Management Board on behalf of component projects in signing contracts with contractors/suppliers, the Central Project Management Board must submit the following documents to the Ministry of Finance (Investment Development General Department):

The expenditure plan of the Central Project Management Board's Office

Contracts, invoices, quotation slips, and other necessary documents proving that the work has been completed or handed over.

Request to withdraw payment funds from the Advance Account.

Within five working days from the date of receipt of complete and valid documentation, the Ministry of Finance (Investment Development General Department) will issue a letter approving the withdrawal of funds from the Project Account (Advance Account) to be sent to the Central Investment and Development Bank. After receiving the approval letter, the Central Investment and Development Bank will carry out the payment withdrawal according to the request of the Central Project Management Board.

See Appendix 2 for the withdrawal process diagram.

1.2.2. At the request of local Project Management Boards:

In case of payment for the operation of the local Project Management Board's Office:

Based on the monthly regular expenditure plan, the local Project Management Board prepares a letter requesting the Central Project Management Board to transfer advance funds into the Component Project Account, with the maximum amount transferred by the Central Project Management Board not exceeding US$50,000. When there is a need for expenditure for the operation of the Office, the local Project Management Board submits the following documents to the Provincial Investment Development Department and the Provincial Investment and Development Bank:

Letter requesting payment from the Component Project Account

Expenditure plan approved by the competent authority.

Necessary receipts and supporting documents.

Within five days from the date of receipt of complete and valid documentation, the Provincial Investment Development Department is responsible for reviewing and confirming the volume of work or basic construction works that have been completed and meet the conditions for fund withdrawal and issuing a letter approving the withdrawal of funds.

Upon receipt of the approval document from the Provincial Investment Development Department, the Provincial Investment and Development Bank will carry out the payment according to the request of the local Project Management Board.

Provisional funds for regular operating expenses of local project management boards will be replenished when the local project management board completes settlement procedures for expenditures with the Central Project Management Board.

See Appendix 3 for the withdrawal process diagram.

- In case of payment for basic construction works or equipment procurement, the local Project Management Board submits the following documents to the Provincial Investment Development Department:

Letter requesting payment from the Project Account (Advance Account).

Technical design and total budget estimate approved by the competent authority.

Bid award decision.

Contract.

Acceptance certificate.

the plan approved by the People's Committee of the district. Each sub-project only has one advance payment and one payment upon completion.

Other necessary documents if required.

Within five days from the date of receipt of complete and valid documentation, the Provincial Investment Development Department is responsible for reviewing and confirming the volume of work or basic construction works that have been completed and meet the conditions for fund withdrawal and issuing a letter approving the withdrawal of funds.

After receiving the confirmation document from the Provincial Investment Development Department, the local Project Management Board requests the Central Project Management Board to withdraw payment from the Project Account (Advance Account), accompanied by the confirmation document from the Provincial Investment Development Department and other necessary documents. The Central Project Management Board then processes the request to the Central Investment and Development Bank for direct payment according to the request of the local Project Management Board.

See Appendix 4 for the withdrawal process diagram.

2. Direct payment:

2.1. At the request of the local Project Management Board.

Based on the payment request of the goods or service provider, the local Project Management Board prepares a letter requesting the Central Project Management Board to withdraw funds for direct payment to the goods or service provider, along with necessary documents such as:

Goods procurement contract, service contract

Documents proving the validity of the contract

Bill of lading

Invoice certifying delivery

Other necessary documents (if any).

The Central Project Management Board, based on the request of the local Project Management Board, prepares a withdrawal application form, a letter requesting direct withdrawal, and necessary supporting documents to send to the Ministry of Finance (Department of Foreign Financial Affairs).

Within five working days from the date of receipt of the withdrawal application, if the application is complete and valid, the Ministry of Finance will issue a letter approving the withdrawal request to be sent to the Investment and Development Bank and the Central Project Management Board.

After receiving the approval letter from the Ministry of Finance, the Investment and Development Bank and the Central Project Management Board sign the withdrawal application form for direct payment to be sent to ADB for payment to the beneficiary (contractor, supplier).

Upon receipt of ADB's notification regarding the direct payment to the contractor/supplier, the Central Project Management Board is responsible for informing the Ministry of Finance (Department of Foreign Financial Affairs and Investment Development General Department) to proceed with the recording of revenue and expenditure in the budget.

See Appendix 5 for the withdrawal process diagram.

2.2. At the request of the Central Project Management Board:

For direct payments for works and contracts directly signed and implemented by the Central Project Management Board for the entire project, the Central Project Management Board follows the procedures outlined in section 2.1 above.

3. Payment according to commitment procedure: carried out strictly according to the direct payment procedure.

V. PAYMENT WITH COUNTERPART FUNDS
IN COUNTRY:

Domestic contributing funds for component projects shall be allocated from sources managed by the provincial People's Committee (budget, mobilization, basic depreciation, and other sources...).

Counterpart funds are allocated quarterly, in accordance with the loan drawdown schedule and the project implementation progress as stipulated in Decree 42/CP dated July 16, 1996, and related guiding documents.

VI. REPORTING, AUDITING, SETTLEMENT REGIME:
1. Quarterly, annually, and upon completion of the construction period of the project, the local Project Management Board is responsible for reporting on the project implementation status, preparing annual settlement statements, and component project settlement statements upon completion to be submitted to the Provincial People's Committee, Provincial Department of Finance, Provincial Investment Development Department, and the Central Project Management Board. Settlement verification and approval follow current regulations.

The Provincial Department of Finance is responsible for approving annual settlements and component project settlements.

The Department of Finance is responsible for approving the annual settlement and the settlement of component projects.

The Central Project Management Board shall be responsible for compiling and reporting to the Ministry of Finance (Investment Development General Department, Foreign Financial Affairs Department), the Ministry of Planning and Investment, the State Bank, and ADB on the implementation of the project, especially the situation regarding the withdrawal and use of ADB loans and counterpart funds, and the final account report of the Project. To fulfill its responsibility for compiling reports and final accounts, the Central Project Management Board shall be responsible for designing and guiding component projects to apply a unified accounting model and reporting forms.

Monthly, the Central Investment and Development Bank shall be responsible for notifying the Ministry of Finance (Foreign Financial Affairs Department, Investment Development General Department), the State Bank (Trading Department) with detailed statements of the Project Account, branches of the Central Investment and Development Bank shall send detailed statements of the component project accounts to the Provincial Finance Departments and Investment Development Departments. In the statement, it clearly states the monthly interest accrued on the balance of the Project Account and the date of the Ministry of Finance's interest transfer.

2. Periodically and urgently, the Ministry of Finance, the Ministry of Construction, and the People's Committees of provinces with projects shall inspect the implementation of the project and the use of capital. If cases of improper use of capital are discovered, the Ministry of Finance will suspend the transfer of capital to handle violations according to current regulations.

3. Annually, the Advance Payment Account and Project Accounts, component project accounts, books, vouchers, and accounting files of the project must be audited by independent auditing companies approved by the Ministry of Finance in accordance with Vietnamese and ADB regulations. The audit report must be sent to the Ministry of Finance (Foreign Financial Affairs Department and Investment Development General Department).

VII. IMPLEMENTATION PROVISIONS:

This Circular shall take effect fifteen days from the date of signature. During the implementation process, if there are difficulties, agencies need to promptly reflect them to the Ministry of Finance for study and amendment.

ANNEX 1

WITHDRAWAL OF INITIAL FUNDS INTO THE ADVANCE PAYMENT ACCOUNT

(1) Request for withdrawal into the Special Account

(2) The Ministry of Finance reviews and provides comments to the State Bank

(3) Based on the approval opinion of the Ministry of Finance, the State Bank signs the withdrawal request form to be sent to ADB

(4) ADB transfers money to the State Bank

(5) On the same day, the State Bank transfers the money to the Advance Payment Account at the Central Investment and Development Bank

PAYMENTS FROM THE ADVANCE PAYMENT ACCOUNT AT THE REQUEST OF

ANNEX 2

THE CENTRAL PROJECT MANAGEMENT BOARD
(1) Signing a contract, the Contractor requests payment

(2) The Central Project Management Board reviews and requests the Investment Development General Department to approve payment from the Advance Payment Account

(3) The Investment Development General Department reviews, confirms, and agrees to make payments from the Advance Payment Account

(4) Based on the agreement of the Investment Development General Department, the Central Investment and Development Bank processes the payment from the Advance Payment Account as requested by the Central Project Management Board

LOCAL PROJECT MANAGEMENT BOARD

(Expenditure for office activities)

(1) Request for fund transfer according to plan

(2) The Central Project Management Board compiles the plan and requests the Central Investment and Development Bank to transfer funds according to the plan to the Local Project Management Board's account at the Provincial Investment and Development Bank

(3) The Central Investment and Development Bank transfers funds to the Provincial Investment and Development Bank

ANNEX 3

THE CENTRAL PROJECT MANAGEMENT BOARD
(4) The Local Project Management Board signs a contract with the supplier. The supplier requests payment

(5) The Local Project Management Board reviews and requests the Provincial Investment Development Department to approve payment

(6) The Provincial Investment Development Department reviews and approves payment, sending it to the Provincial Investment and Development Bank

(7) The Investment and Development Bank, based on the approval of the Provincial Investment Development Department, proceeds to pay the supplier as requested by the Local Project Management Board

LOCAL PROJECT MANAGEMENT BOARD

(Expenditure for construction works)

(1) The Contractor signs a contract with the Local Project Management Board. The Contractor requests payment

(2) The Local Project Management Board reviews and requests the Provincial Investment Development Department to approve payment

(3) The Provincial Investment Development Department reviews and confirms the quantity of construction work sufficient for payment

ANNEX 4

THE CENTRAL PROJECT MANAGEMENT BOARD
(4) Based on the confirmation of the Provincial Investment Development Department, the Local Project Management Board requests the Central Project Management Board to pay the Contractor

(5) The Central Project Management Board compiles and requests the Central Investment and Development Bank to pay the Contractors

(6) The Central Investment and Development Bank pays the Contractors based on the request of the Central Project Management Board

(1) The Local Project Management Board signs a contract with the Contractor. The Contractor requests payment

(2) The Local Project Management Board reviews and requests the Central Project Management Board to pay the Contractor

(3) The Central Project Management Board reviews and requests the Ministry of Finance to approve payment

(4) Based on the approval of the Ministry of Finance, the Central Project Management Board requests the Central Investment and Development Bank to sign the withdrawal request form to be sent to ADB

(5) The Central Investment and Development Bank and the Central Project Management Board sign the form and send it to ADB

ANNEX 5

DIRECT PAYMENT

(6) ADB makes direct payment to the Contractor

(2) The Project Management Board PMB-DP checks and requests the Central Project Management Board to make payment to the contractor

(3) The Central Project Management Board checks and requests the Ministry of Finance to approve the payment

(4) Based on the agreement of the Ministry of Finance, the Central Project Management Board requests the Development Bank to issue a withdrawal request to be sent to ADB

(5) The Development Bank and the Central Project Management Board sign the document and send it to ADB

(6) ADB makes direct payment to the contractor