Circular No. 40/2005/TT-BTC guiding the financial mechanism applicable to water supply projects using Official Development Assistance (ODA) funds.

CIRCULAR

Guidelines for the financial mechanism applicable to water supply projects using Official Development Assistance (ODA) fundssử dụng nguồn vốn Hỗ trợ phát triển chính thức (ODA)

Pursuant to Decree No. 90/1998/NĐ-CP dated November 7, 1998, issued by the Government on borrowing and repaying foreign debts;

Pursuant to Decree No. 17/2001/NĐ-CP dated May 4, 2001, issued by the Government on managing and utilizing ODA sources;

Pursuant to Decree No. 77/2003/NĐ-CP dated July 1, 2003, issued by the Government stipulating the functions, tasks, powers, and organizational structure of the Ministry of Finance;

Pursuant to Circular No. 1250/VPCP-QHQT dated March 15, 2005, issued by the Government approving the principles for adjusting a unified financial mechanism for water supply projects using ODA funds;

The Ministry of Finance hereby provides guidance as follows:

I.  GENERAL PROVISIONS

1. Scope of application: This Circular applies to all water supply projects using Official Development Assistance (ODA) funds, including projects providing clean water to urban areas, rural clusters, and mountainous regions.

Water supply projects using ODA funds that have been and are being implemented before this Circular takes effect shall be adjusted to the new lending mechanism as provided for in this Circular.

2. Financial Mechanism Applied:

- For projects supplying clean water to rural clusters and mountainous regions: Implement the full grant allocation system for ODA funds (including both non-repayable aid and concessional loans) as stipulated in Decree No. 90/1998/NĐ-CP dated November 7, 1998. The counterpart funds for these projects shall be arranged by the project sponsors, with any shortfall to be supported by local budgets.

- For projects supplying water to urban areas: Implement the re-lending of the entire ODA funds (including both non-repayable aid and concessional loans). The counterpart funds for these projects shall be arranged by the project sponsors. The conditions for re-lending for these projects are specified in Section II below.

II.  SPECIFIC PROVISIONS

1. Conditions for Re-lending:

1.1 For water supply projects for urban areas classified as type 5 under Decree No. 72/2001/NĐ-CP dated October 5, 2001 (towns within districts) using ODA loan funds (including both loans and non-repayable aid): Implement the state budget re-lending in Vietnamese dong at zero interest rate for the entire ODA funds (the state budget will support 100% of the interest and loan fees). The re-lending period and grace period are applied according to point 1.2 a) below. Project sponsors only need to pay the re-lending fee as currently prescribed.

1.2 For water supply projects for urban areas classified as type 4 or higher under Decree No. 72/2001/NĐ-CP dated October 5, 2001; and projects supplying water to industrial zones and export processing zones using ODA funds (including both loan and non-repayable aid): Implement the state budget re-lending for ODA funds under the following re-lending conditions:

a. Re-lending period: As proposed by the project sponsor but not exceeding 25 years, including an 8-year grace period, starting from the date of signing the loan agreement.

The above conditions regarding the re-lending period and grace period are independent of the original loan conditions set by foreign lenders.

b. Currency for re-lending: Project sponsors may choose to re-borrow in Vietnamese dong or foreign currency. In cases where re-lending is in foreign currency, the Ministry of Finance will uniformly apply the US dollar (USD) as the re-lending currency for all projects. If the project uses other foreign currency loans, it must convert to USD according to the monthly exchange rate for foreign currency accounting as prescribed by the Ministry of Finance at the time of conversion.

c. Interest rate for re-lending:

- If re-borrowing in Vietnamese dong: A uniform interest rate of 5% per annum (inclusive of domestic re-lending fees) will be applied to all projects. In case significant changes occur in the basis for calculating the interest rate, the Ministry of Finance will review and propose adjustments to the Prime Minister.

- If re-borrowing in foreign currency: A uniform interest rate of 2% per annum (inclusive of domestic re-lending fees) will be applied to all projects. In cases where the government's foreign borrowing rate exceeds 2%, the government's foreign borrowing rate will be applied.

d. In addition to the aforementioned interest rates, ODA water supply project sponsors must pay various foreign loan fees such as credit insurance fees, commitment fees, management fees, etc. (except for projects covered by point 1.1 of Part II above).

2. Guidance on Application and Adjustment of Re-lending Conditions:

2.1 Projects initiated from the date this Circular becomes effective shall apply the re-lending conditions stated in point 1 of Section II of this Circular.

2.2 Adjustment of re-lending conditions for ongoing projects:

a. Projects that have been and are being implemented before this Circular becomes effective shall adjust their re-lending conditions based on the new conditions at the time of transition. Retroactive adjustments for debts paid up to the transition date will not be made.

b. Projects that have withdrawn funds and request to switch from foreign currency re-lending to Vietnamese dong re-lending must convert the entire outstanding balance (principal, interest, fees, overdue interest if any...) to Vietnamese dong at the monthly accounting exchange rate prescribed by the Ministry of Finance on the conversion date.

Withdrawals of foreign currency funds after the conversion date shall be converted to Vietnamese dong at the monthly accounting exchange rate prescribed by the Ministry of Finance on the actual withdrawal dates.

c. Projects requesting to switch from foreign currency re-lending to US dollar re-lending must convert the entire outstanding balance (principal, interest, fees, overdue interest if any...) to US dollars at the statistical exchange rate between US dollars and other foreign currencies prescribed by the Ministry of Finance on the conversion date.

Withdrawals of foreign currency funds after the conversion date shall be converted to US dollars at the statistical exchange rate between US dollars and other foreign currencies prescribed by the Ministry of Finance on the actual withdrawal dates.

d. To adjust the loan conditions according to the new conditions mentioned above, the Project Owner shall issue a letter to the Ministry of Finance and the Refinancing Lender, including specific requests for refinancing conditions based on the guidance at Point 1, Section II of this Circular, accompanied by a repayment plan under these refinancing conditions. These adjustment requests must be sent before November 30, 2005. After this deadline, if the Project Owner does not make any adjustment requests, the Refinancing Lender will continue to implement according to the previously approved mechanism.

e. Based on the Project Owner's proposal, the Refinancing Lender will review the borrowing data, agree on specific conditions for adjusting the refinancing conditions as stipulated in this Circular, and sign a Loan Agreement or an amendment to the Loan Agreement with the Project Owner based on that agreement. After signing, the Refinancing Lender will send a report letter to the Ministry of Finance along with the Loan Agreements or Amendment Agreements mentioned above as the basis for amending the Loan Mandate Agreements signed between the Ministry of Finance and the Refinancing Lender.

2.3. For projects that have been granted by the Government more favorable refinancing conditions than the new conditions mentioned above, they shall continue to be implemented under those favorable conditions.

2.4. In cases where international agreements on ODA signed with donors contain financial mechanisms applicable to water supply projects funded by ODA that differ from the provisions of this Circular, such agreements shall be applied according to the terms of the international agreements on ODA signed with the donors.

III. IMPLEMENTATION

This Circular takes effect fifteen days after its publication in the Official Gazette.

The Ministries and local People's Committees responsible for managing the projects have the responsibility to inform the Water Supply Project Owners using ODA funds in their respective areas about this and coordinate with the Ministry of Finance to guide implementation according to the instructions in this Circular.

During the implementation of this Circular, if there are any difficulties, the Ministries, local People's Committees responsible for managing the projects, and the Project Owners are requested to immediately reflect them to the Ministry of Finance and the Refinancing Lender for consideration and resolution.