Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA TF-90325) ON A CREDIT

Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-40410 TF-90325) ON A CREDIT IN THE AMOUNT OF SDR 67.8 MILLION (US$ 105 MILLION EQUIVALENT) TO THE SOCIALIST REPUBLIC OF VIETNAM FOR A Report No: ICR1996 SECOND PAYMENT SYSTEM AND BANK MODERNIZATION PROJECT Financial and Private Sector Department Vietnam Country Management Unit East Asia and Pacific Region December 16, 2011

CURRENCY EQUIVALENTS Currency Unit = Vietnamese Dong Exchange Rate at Appraisal, January 6, 2005 US$ 1.00 = Vietnamese Dong 15,780 SDR 1.00 = US$ 1.54 Exchange Rate at ICR, December 16, 2011 US$ 1.00 = Vietnamese Dong 21,020 SDR 1.00 = US$ 1.54 FISCAL YEAR January 1 December 31 BIDV BOS BTA CBS DRC ERR ICR IAS ITDB ICT IBPS IDA INT JSBs MIS MSB NPSC NPV NPLs PPC PSBM PDO PIU PMU SDR SBDs SBV SEDS SMART SOCBs VBARD VDB VietinBank WTO ABBREVIATIONS AND ACRONYMS Bank of Investment and Development of Vietnam Banking Operational System Bilateral Trade Agreement Core Banking System Disaster Recovery Center Expected Rate of Return Implementation Complement and Results Report International Accounting Standards Informatics Technology Department, the State Bank of Vietnam Information and Communication Technology Inter-bank Payment System International Development Agency International Investigation (Word Bank) Joint-Stock Banks Management Information System Maritime Joint Stock Commercial Bank National Payment System Center Net Present Value Non-Performance Loans Payment Processing Center Payment System and Banking Modernization Project Project Development Objectives Project Implementation Unit Project Management Unit Special Drawing Rights Standard Bidding Documents State Bank of Vietnam Socio-Economic Development Strategy Specific, Measurable, Attributable, Realistic and Relevant, and Time-Bound State-owned Commercial Banks Vietnam Bank for Agriculture and Rural Development Vietnam Development Bank Vietnam Industrial and Commercial Bank World Trade Organization Vice President: James W. Adams Country Director: Victoria Kwakwa Sector Director: Tunc Tahsin Uyanik Project Team Leader: Nancy Chen ICR Team Leader: Wei Zhang

Vietnam Second Payment System and Banking Modernization Project CONTENTS Data Sheet A. Basic Information..i B. Key Dates...i C. Ratings Summary..i D. Sector and Theme Codes.ii E. Bank Staff ii F. Results Framework Analysis..iii G. Ratings of Project Performance in ISRs.vi H. Restructuring.vii I. Disbursement Graph..vii 1. PROJECT CONTEXT, DEVELOPMENT OBJECTIVES AND DESIGN... 1 2. KEY FACTORS AFFECTING IMPLEMENTATION AND OUTCOMES... 4 3. ASSESSMENT OF OUTCOMES... 9 4. ASSESSMENT OF RISK TO DEVELOPMENT OUTCOME... 14 5. ASSESSMENT OF BANK AND BORROWER PERFORMANCE... 14 6. LESSONS LEARNED... 17 7. COMMENTS ON ISSUES RAISED BY BORROWER/IMPLEMENTING AGENCIES/PARTNERS... 20 ANNEX 1. PROJECT COSTS AND FINANCING [TO CHECK WITH FM/LOAN OFFICER]... 22 ANNEX 2. OUTPUTS BY COMPONENT... 23 ANNEX 3. ECONOMIC AND FINANCIAL ANALYSIS... 25 ANNEX 4. BANK LENDING AND IMPLEMENTATION SUPPORT/SUPERVISION PROCESSES... 26 ANNEX 5. BENEFICIARY SURVEY RESULTS... 29 ANNEX 6. STAKEHOLDER WORKSHOP REPORT AND RESULTS... 31 ANNEX 7. SUMMARY OF BORROWER'S ICR AND/OR COMMENTS ON DRAFT ICR... 32 ANNEX 8. COMMENTS OF COFINANCIERS AND OTHER PARTNERS/STAKEHOLDERS... 42 ANNEX 9. LIST OF SUPPORTING DOCUMENTS... 43 MAP..44

A. Basic Information Data Sheet Country: Vietnam Project Name: Vietnam-Second Payment System and Bank Modernization Project Project ID: P082627 L/C/TF Number(s): IDA-40410,TF-90325 ICR Date: 12/16/2011 ICR Type: Core ICR Lending Instrument: SIL Borrower: Original Total Commitment: Revised Amount: SOC. REP. OF VIETNAM SDR 67.80M Disbursed Amount: SDR 59.92M n.a. Environmental Category: C Implementing Agencies: The Informatics Technology Department of the State Bank of Vietnam (ITDB) Bank for Investment and Development of Vietnam (BIDV) Vietnam Bank for Agricultural and Rural Development (VBARD) Maritime Joint Stock Commercial Bank (MSB) VietinBank (formerly Industrial and Commercial Bank of Vietnam, ICBV) Cofinanciers and Other External Partners: Japanese PHRD Grant B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 10/30/2003 Effectiveness: 9/15/2005 12/15/2005 Appraisal: 11/10/2004 Restructuring(s): 06/29/2010 Approval: 03/10/2005 Mid-term Review: 11/27/2007 02/09/2009 Closing: 06/30/2010 06/30/2011 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: S Low S S i

C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: S Government: MS Quality of Supervision: S Implementing Agency/Agencies: S Overall Bank Performance: S Overall Borrower Performance: S C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Performance (if any) Potential Problem Project at any time (Yes/No): Problem Project at any time (Yes/No): DO rating before Closing/Inactive status: No No Satisfactory Quality at Entry (QEA): Quality of Supervision (QSA): Rating None None D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Banking 76 77 Payments, settlements, and remittance systems 24 23 Theme Code (as % of total Bank financing) International financial standards and systems 67 67 Other financial and private sector development 33 33 E. Bank Staff Positions At ICR At Approval Vice President: James W. Adams Jemal-ud-din Kassum Country Director: Victoria Kwakwa Klaus Rohland Sector Director: Tunc Tahsin Uyanik Khalid A. Mirza Project Team Leader: Nancy Chen Xiaofeng Hua ICR Team Leader: ICR Primary Author: Wei Zhang Xiaofeng Hua ii

F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The project s Development Objectives are to assist Vietnam s banking sector to: (i) meet the demands of the economy for fast, reliable and safe payment services; (ii) broaden access to finance to facilitate the achievement of the government's poverty reduction targets; and (iii) improve the operations of the participating banks through the expansion of the IBPS and the CBS. Revised Project Development Objectives (as approved by original approving authority) N.A. (a) PDO Indicator(s) Indicator Indicator 1: Quantitative Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Steady increase of number of financial institutions/bank branches connected to IBPS and CBS, and of transaction volume and value processed by the new systems: IBPS: 49 financial institutions were connected to the pilot Inter-Bank Payment System with daily transaction volume of VND 16-20 billion. Connectivity: n.a. IBPS: 45% increase over 5 years CBS: 80% increase over 5 years CBS: Limited number of Transaction branches connected to the Volume and value: pilot CBS of the IBPS: 80% participating banks in increase over 5 2005 years CBS: 80% increase over 5 years IBPS: Coverage of institutions registered an average annual growth of 98% in 2005-2010; that of daily transaction about 87%; and that of daily transaction in VND over 1.5 times in the same period. CBS: All banks reported more than 100% average annual increase in the number of branches connected to the CBS in 2005 2010 (48 times growth for VBARD), and exponential increases in transaction volume and value. In particular BIDV and MSB provided iii

time series data: BIDV: No. of daily transactions increased by 8 times and in monetary terms by 90 times. MSB: No. of daily transactions increased by 760 times and in monetary terms by over 16 times. Date achieved December 2004 June 2010 June 2010 Comments (incl. % achievement) Fully achieved Indicator 2: Continuing high level of performance of the expanded systems in terms of speed, certainty, reliability and convenience Qualitative New pilot core systems performed well, but needed to be expanded urgently because of rapidly increasing market demand. Both IBPS and CBS successfully expanded and demonstrated high level of performance n.a. Speed: Real time Certainty: RTGS or End-of-Day net basis settlements Reliability: No major breakdowns and business continuity capacity significantly enhanced Convenience: Web-based interface for users, and onestop services for bank customers Date achieved December 2004 June 2010 June 2011 Comments (incl. % achievement) Fully achieved Indicator 3: Improved frequency and coverage of management information reports in participating banks Qualitative Management of New core banking n.a. BIDV, MSB and participating banks did not receive timely and reliable information systems successfully expanded/upgrade VBARD s MIS (by using data from centralized partly due to the existing to provide IAS CBS and data iv

central bank regulations as well as banks practices and system limitations. compatible information in a timely and reliable way. centers) provide daily information on the operation and financials of the whole bank (including branches). MIS acquired under Project (BIDV, VBARD and VietinBank) is IAS compatible. VietinBank completed MIS installation before project closure but regular reports were not yet available at project completion. Date achieved December 2004 June 2010 June 2010 Comments (incl. % achievement) Largely achieved (b) Intermediate Outcome Indicator(s) Indicator Indicator 1: Qualitative Baseline Value Original Target Values (from approval documents) Formally Revised Target Values All goods and consulting services contracts are successfully implemented to enable designed system expansion and upgrading No contract was n.a. available All 40+ contracts are successfully implemented Actual Value Achieved at Completion or Target Years At project completion, 28 contracts financed by IDA credit were implemented; Of which 27 contracts were successfully implemented, and the implementation of one contract continued after project closure per v

original contract terms. 1 Date achieved December 2004 June 2010 June 2011 Comments (incl. % Largely achieved achievement) Indicator 2: All system expansions/upgrading are ready for acceptance. Qualitative Existing pilot systems needed to be expanded and/or upgraded to meet rapidly growing business demand. All system expansions/ upgrading are tested and prove to be ready for acceptance. n.a. All systems acquired were accepted, except for VBARD s DRC for which acceptance is expected after project closure. Date achieved December 2004 June 2010 June 2011 Comments (incl. % achievement) Fully achieved G. Ratings of Project Performance in ISRs No. Date ISR Archived DO IP Actual Disbursements (USD million) 1 06/17/2005 Satisfactory Satisfactory 0.00 2 12/21/2005 Satisfactory Satisfactory 0.00 3 07/25/2006 Satisfactory Moderately Satisfactory 1.00 4 12/29/2007 Moderately Satisfactory Moderately Satisfactory 4.43 5 02/18/2009 Moderately Satisfactory Moderately Satisfactory 27.14 6 06/29/2009 Satisfactory Satisfactory 37.88 7 06/30/2010 Satisfactory Satisfactory 53.55 8 05/30/2011 Satisfactory Moderately Satisfactory 2 71.17 1 The total number of contracts was reduced from 40+ to 30+ before and after Mid-Term Review due to the scope readjustments of the MSB and VietinBank components. 2 The downgrading of the rating was mainly due to the implementation status of the PHRD grant for project implementation support. vi

H. Restructuring (if any) Restructuring Date(s) Board Approved PDO Change ISR Ratings at Restructuring DO Amount Disbursed at Restructuring in USD millions 06/29/2010 S S 53.55 IP Reason for Restructuring & Key Changes Made Extension of IDA credit and PHRD grant closing date to June 30, 2011 I. Disbursement Profile vii

1. Project Context, Development Objectives and Design (this section is descriptive, taken from other documents, e.g., PAD/ISR, not evaluative) 1.1 Context at Appraisal (brief summary of country and sector background, rationale for Bank assistance) 1. Country and sector context: The Vietnamese banking sector reform began in earnest in 2001. By 2005 important changes were accomplished both in the structure, the regulation and the operations of the banks, thus moving the banking sector towards a modus operandi that more closely resembles domestic banking sectors in other emerging markets and newly industrialized economies. The four largest State Owned Commercial Banks (SOCBs) which accounted for 73 percent of all credit to the economy had evolved from specialized policy lending vehicles to stateowned banks operating on a more commercial basis. The consolidation of the Joint-Stock Banks (JSBs) had led to the sub-sector s strong growth and performance. The environment in which banks operate improved with the removal of interest rate ceilings (in principle). The State Bank of Vietnam (SBV, the central bank) promulgated regulations on reorganizing bank supervision, leveling the playing field for foreign banks and reclassifying all non-performing loans (NPLs) in the four SOCBs. Despite these positive changes, overall progress in implementing the reform agenda was mixed. The speed of reform at the time was considered as too protracted to meet the challenges resulting from the rapid opening of the financial sector to foreign participation in the context of the Vietnam-US bilateral trade agreement (BTA) and the expected WTO membership. The liberalization commitments under those trade agreements were expected to present significant competitive pressure to the SOCBs and regulatory challenges to the SBV. 2. The SBV recognized the immediate threat that the challenges pose to the future growth and stability of the banking system and developed a Plan for the International Economic Integration of the Banking Sector in mid-2003 to address the core development needs through 2010. One of the key reform areas of this Plan was the development of appropriate banking infrastructure and the completion of what was started under the comprehensive program developed in 1995 to develop a modern banking sector. The program aimed to improve both the banking systems and payment services in the economy in order to reduce float, speed up circulation of funds and increase efficiency of funds transmission while providing convenience, service, and safety to users. The development of a national payments system for inter-bank clearing and settlement (Inter-Bank Payment System IBPS) was a primary focus of this program. The program also had an important secondary focus on introducing modern, automated operating systems (e.g. core banking, centralized accounting and management information) within the largest banks. 3. The first phase of the modernization program was supported by the Payment System and Bank Modernization (the PSBM) project financed by the World Bank (the Bank). The first PSBM project was successfully completed in 2004 which introduced on a pilot basis a modern IBPS in the SBV and two modern Core Banking Solutions (CBS) in six commercial banks. The Second Payments System and Bank Modernization Project (PSBM2, the Project), designed to build directly upon the first PSBM project, was a response to the urgent needs to expand the pilot systems. 4. Rationale for Bank assistance: The Bank was uniquely placed to continue assisting the government with the expansion of the IBPS and CBS systems under the PSBM 2 project. The Bank had the experience in such projects and was well equipped to deal with the variety of policy, design and implementation issues involved. It could provide objective best practice advice, 1

thereby ensuring that key strategic and policy issues that would need to be addressed for the overall implementation of such systems were fully addressed. The outputs of the project required heavy capital investment in imported capital goods. At the time of appraisal, neither the government nor the participating banks had adequate access to low-cost and longer-term hard currency funding denominated. The government considered financing the cost of PSBM 2 with IDA resources as an appropriate course of action. No other donors were providing assistance in this regard at PSBM2 appraisal. 1.2 Original Project Development Objectives (PDO) and Key Indicators (as approved) 5. The project s Development Objectives are to assist Vietnam s banking sector to: (i) meet the demands of the economy for fast, reliable and safe payment services; (ii) broaden access to finance to facilitate the achievement of the government's poverty reduction targets; and (iii) improve the operations of the participating banks through the expansion of the IBPS and the CBS. 6. The PDO indicators as approved by Board were as follows: (i) Steady increase of the number of financial institutions/bank branches connected to the IBPS and the CBS. (ii) Steady increase of the transaction volume and value processed by the IBPS and the CBS. (iii) Continuing high level of performance of the expanded systems in terms of speed, certainty, reliability and convenience. (iv) Continuous growth of the use of non-cash payment instruments and widened range of banking products and services. (v) Improved financial accounting and operational reporting in the participating banks. 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification 7. There was no formal revision of the PDO and the key indicators. However, the PDO indicators were consolidated into three main values in the first Implementation Status and Results Report (dated June 17, 2005), to improve the presentation of the indicators and enhance their measurability. A further informal revision of the third PDO Indicator took place in 2007 to make it more measurable. Those revisions were made after discussions with the regional quality assurance unit (EAPCO), and reflected the evolution of the Bank s current practices in developing and using a SMART results framework in Bank financed operations. 3 Details of the revisions are provided in Section 2.3. 1.4 Main Beneficiaries (original and revised, briefly describe the primary target group identified in the PAD and as captured in the PDO, as well as any other individuals and organizations expected to benefit from the project) 8. The primary target groups were the SBV and the four participating commercial banks including the Bank of Investment and Development of Vietnam (BIDV), the Maritime Joint Stock Commercial Bank (MSB), the Vietnam Bank for Agriculture and Rural Development (VBARD) and the Vietnam Industry and Commerce Bank (VietinBank, formerly IncomBank). The indirect 3 SMART stands for Specific, Measurable, Attributable, Realistic and Relevant, and Time-Bound. 2

beneficiaries included the banking industry, the customers of the participating banks and other future IBPS members including the State Treasury. 1.5 Original Components (as approved) 9. The PSBM 2 project was organized around two main components: (i) Inter-Bank Payment System (IBPS) Expansion; and (ii) Core Banking Solutions (CBS) Expansion. 10. Component 1, IBPS Expansion (US$ 25.2 million equivalent): The pilot IBPS was a centralized, single current-account based, inter-bank clearing and settlement system managed by the SBV. It composed of the National Payment System Center (NPSC), its back-up center, and five province-based Payment Processing Centers (PPCs). The pilot IBPS proved to be up to the international standards that helped improve the payment services and address perennial cash shortages in the economy through effective management and uses of centralized funding. It provided the core functionality of the interbank payments system, but the transaction volume and value handled by the pilot IBPS far exceeded the original targets. The situation called for an immediate expansion of the system. There was also an urgent need to enhance the system s capacity for performance, network security and business continuity. The main activities of Component 1 were (i) upgrading hardware and installing new software to expand processing capability and strengthen interconnection; business continuity, and network and security system; (ii) consultant support of project implementation; and (iii) staff training. The implementing agency of this component was the Informatics Technology Department of the SBV (ITDB). 11. Component 2, CBS Expansion (US$ 79.8 million equivalent): Under the first PSBM project, the participating banks adopted international standard core banking solutions (CBS) and a few other modules of banking operational systems (BOS), which centralized accounting and control functions with respect to customer files, deposit and loan, general ledger and financial control, trade finance, and other commercial bank core businesses. Those automated tools stimulated initiatives to improve internal procedures, organizational structure and customer services; but the application of solutions was limited to the head office and a few pilot branches. There was an urgent need to rollout the solutions to mitigate the high operational risk of running both the new and the legacy systems in parallel. There was also a need to build the capacity for business continuity and enhance the network and physical security of the new facilities. To further strengthen operational efficiency and risk management, new modules such as financial management and improved MIS were required. Finally, increasing market demand required the banks to add more operational modules to the CBS system to provide non-cash-based payment instruments and more diversified financial products and services (e.g. internet and telephone banking). The main activities were similar as those under Component 1. The implementing agencies of Component 2 were the four participating banks. 1.6 Revised Components N.A. 3

1.7 Other significant changes (in design, scope and scale, implementation arrangements and schedule, and funding allocations) 12. The project s closing date was extended once from June 30, 2010 to June 30, 2011, mainly to allow time for implementation completion by three participating banks (BIDV, MSB and VietinBank). An amount of over SDR7.9 million 4 was canceled upon the closure of the IDA credit account on October 31, 2011. The canceled amount was from the savings under the IBPS, BIDV and VBARD components, and the IDA allocation originally to finance five goods packages under the MSB and the VietinBank components as those banks did not have time to implement the related activities by the project closing date. 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry (including whether lessons of earlier operations were taken into account, risks and their mitigations identified, and adequacy of participatory processes, as applicable) 13. Overall review: The project was prepared following the conclusion of the first PSBM as a repeater operation. The result of the first PSBM project was verified and accepted by the SBV together with the Ministry of Finance, the Ministry of Planning and Investment, and the Ministry of Information and Communications. The Vietnam Association for Information Processing, an independent IT organization, also provided verification of the pilot systems. At the time of PSBM2 project completion, the project design was considered as Satisfactory. This assessment is based on the incorporation in the project design of the lessons learned (see the following three paragraphs for details). It also takes into consideration the complexity. Complexity is relative to the nature of a project and the implementing agencies capacity. Including commercial banks in the payments system related projects such as PSBM and PSBM2 may be seen as adding complexity. However, it turned out to be a major contributing factor to project success. Traditionally, Bank payments system projects tend to concentrate on providing such a system to the central bank, leaving system implementation throughout the banking market to the client. This type of project design appears to be less complex but usually entails more difficulties in making a system work as the client might not have the technical capacity or investment funding to push the new system through the banking market. For the national payments systems members, getting a new model will not work unless they also re-engineer their core banking and operational systems. By providing funding and technical support to three of the country s four largest banks, and a fast expanding joint-stock bank, PSBM2 ensured a critical mass of transaction coverage and a balanced representation of national payments system members. All the implementing agencies had experience in implementing IT based projects in particular through the first PSBM project, although much remained to be learned by those agencies as the implementation of PSBM2 found out which were summarized in the implementing agencies own project closure reports. 14. Lessons learned - Flexibility: The project design took into account the Bank s experience in other financial infrastructure development projects and in particular that gained under the first PSBM project. International experience related to IT investment projects was also considered. The central lesson learned under the first project was flexibility in the overall solution design. The pilot systems contained all the basic functionality to satisfy users immediate and medium-term needs, but left the system expansion and performance enhancement to PSBM2 to allow the beneficiaries to gain experience, see tangible benefits and build confidence. The design 4 US$12.3 million equivalent at the exchange rate used for the credit (SDR1=USD1.54899 as of December 31, 2004). 4

of PSBM2 benefited from this approach and maintained the flexibility (e.g. the co-existence with the IBPS of the legacy payments systems at the provincial level to service the State Treasury which is still developing an automated government cash management system, and the modular approach towards additions of new CBS/BOS functionalities). The Bank team discussed this main lesson in a published a SmartLesson Note listed in Annex 9. 15. Lessons learned Procurement planning: The main activities of IT-based projects are system procurement and implementation. In Vietnam (and probably in other economies at a similar technological development level), engagement and working with international consultants for detailed technical design and procurement support is another main activity. Under PSBM2, procurement plans were carefully evaluated at project appraisal and in SBV s Feasibility Study. When it was necessary to readjust the procurement plans for two components with serious implementation delays, the new procurement plans were again carefully evaluated both from the technical and procurement standpoints. These efforts were time consuming but were necessary for successful implementation. 16. Lessons learned Project management capacity: Based on the experience learned under the first project, the PSBM2 design maintained the designated project management units at the SBV and the implementing agencies to ensure that the institutional memories gained were maintained, and adequate attentions would be paid to project implementation without major interruptions to the normal operation of the implementing agencies. The design also highlighted the importance of maintaining the institutional capacity. 17. Risks identified: At appraisal the overall risk was rated as Modest which remained appropriate at project completion. One risk to the PDO and two risks to the component results were identified and rated as Modest. They were, Other financial institutions not covered by the project might be put at a disadvantage (risk for PDO #2); and Pace of change in legal and regulatory framework on electronic transactions and records is slow to support the operation of the expanded systems (Component risk#1), and Relatively weak capacity of PMU and PIUs to manage procurement process and commercial contract (Component risk #2). With the benefit of hindsight, the second PDO was somewhat too generic, and the identified risk and its mitigation were beyond the scope of the project. 5 The first identified component risk did not materialize as the existing legal and regulatory framework upgraded under the first project and by the SBV on its own turned out to be able to govern and support the operation of the expanded systems. The second risk to component results turned out to be a major implementation risk as there were staff changes in particular of PIU personnel at MSB and VietinBank, 6 and delays in procurement and payments to contractors during project implementation. This risk should have been rated as high, although at the time of appraisal there were no sign of any major staff changes at the banks. Some main causes to procurement and payments delays were beyond the scope of the project. 2.2 Implementation (including any project changes/restructuring, mid-term review, Project at Risk status, and actions taken, as applicable) 5 The project was appraised in early 2005 and at that time the going trend within the Bank for performance indicator designs was to highlight in PDOs the contribution of Bank financed operations to the poverty reduction agenda. PSBM2 s contributions to poverty reduction were meaningful but indirect. By the current Bank practice expected indirect impact is beyond a project s control and should not be used as a project-specific objective. 6 Project staff changes significantly contributed to the catch-up in project implementation at MSB and VietinBank. 5

18. Overall review: The project implementation was considered Satisfactory at project completion, in particular when viewed against the international and country experience with information and communication technology (ICT)-based projects. Even in a developed banking environment, the failure rate of core banking implementations can be as high as 70 percent. 7 Under the project, systems were successfully implemented and in general in smooth operation. The project was completed in a relatively short time for similar IT-based projects (6 years), with all the expected outcomes fully or largely achieved. Concerns for low disbursement at the early phase of project implementation proved to be pre-mature as the final disbursement rate was 91 percent of the original baseline cost baseline cost (Bank financing portion of total cost). Examples of successful project implementation are provided in Section 5.2 (b). 19. Implementation efficacy: Project implementation was efficient at project completion and compared with similar Bank IT projects in Vietnam and other countries. However, implementation was not always smooth and at times suffered major delays in: a) the credit effectiveness (270 days), b) engagement of implementation support consultants (12 months), c) procurement processes for goods, and d) payments to contractors. Those delays were mainly caused by the following factors. 20. Factors subject to implementing agencies control: The main factor in this category was the staff changes in the project management units (and to a lesser extent the technical teams) due to internal re-organization, staff rotation, new assignment, retirement and/or career development concerns. 8 In the case of MSB and VietinBank, the changes were major but with a positive impact on the pace of project implementation. With the departure of experienced staff, the PIUs had to re-build the institutional memory and knowledge about IT projects, international practices of contract management and World Bank guidelines. 21. Factors subject to government control: Two factors in this category became substantial causes to the delays in project implementation and they are the common problems under donorfunded projects in Vietnam: 1) The project implementing agencies tended to follow both the Bank procurement guidelines and the government s procurement regulations at the same time, which had significant gaps between them. Vietnam's Public Procurement Law stipulates that the provisions of the legal agreement of the donor prevail over the national law. The government s Decree 131 has a similar provision. 9. It appears that those provisions were either not well disseminated to project entities and the relevant enforcement authorities (e.g. the State General Auditor and the State Treasury); or were not supported by specific implementation procedures. Perceived non-compliance of national laws and regulations can lead to specific and severe punishment while that of the donors guidelines may not. The resulted confusion often led to more rounds of review and revision. 2) The internal processes for reviewing and approving payments to contractors were long and tedious at the State Treasury (for the SBV component) and the Vietnam 7 A number of research papers report high failure rate of core banking system implementations. A 2008 Banker s Academy survey found that 70% of core banking implementations failed. See Annex 9 for details of the paper 8 Effects on staff s career development were another cause of staff changes when they had to be away from their regular jobs for an extended period. 9 Decree 131 stipulates that if there is a discrepancy between any provision in an international treaty on ODA to which the Socialist Republic of Vietnam is a signatory, and the Vietnamese Law, the provision in the international treaty on ODA shall take preference 6

Development Bank (VDB, for the banks components). This created unnecessary frictions between the clients and the contractors. 22. Other factors: There was a factor that affected the implementation of a participating bank s component in 2007 2008. Based on information received, the Bank s INT undertook an investigation of a consulting firm engaged by the participating bank to support project implementation. This firm was found to have misrepresented its capacity and commitment in the proposal and was debarred by the Bank in April 2010. The debarment was solely in response to fraudulent behavior of the firm, and not in response to any fraudulent behavior on the part of any agency of the government of Vietnam. This was a factor out of the control of the government or the implementing agency. The case presented no serious impacts on the project s implementation. 10 23. Actions taken: The impact of staff changes was overcome eventually as new staff gained experience through the learning by doing process and several rounds of training on Bank guidelines. In the case of MSB and VietinBank, it was also due to the quality of staff replacement. The technical weaknesses were supplemented once the implementation consultants were engaged (in March 2006). MSB reduced the number of goods packages in the procurement plan from five to four (with the Bank s no-objection) in 2008 to focus on what the bank could deliver within the life time of the project. VietinBank, faced with a possibility of having their component canceled at the time of Mid-Term Review, also substantively readjusted the procurement plan in 2009 to focus on what the bank could deliver towards achieving the objectives of the project before project completion. The time taken to pay contractors was also improved after the Mid-Term Review recommended more proactive interactions with the State Treasury and the VDB (e.g. establishing an MOU on the standards for processing payment requests). This was part of a twolevel approach to deal with the problems, at both the project level and the country management level. The country management s dialogue with the relevant government agencies is continuing. Those actions led to accelerated project implementation. 11 10 World Bank News Release, April 12, 2010 11 A PHRD implementation support grant (TF090325) was secured in 2007 mainly to support the PMU to monitor implementation progress and the VietinBank to overcome the obstacles in project implementation, but the grant was not fully utilized due to the reasons discussed in the PHRD grant s implementation completion GRM. The grant, however, contributed to the monitoring and evaluation of project performance. The grant also financed an activity to introduce principles of payments system oversight which was important to IBPS sustainability. 7

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 24. The project s M&E arrangements were embodied in a results framework developed in accordance with the Bank s relevant operational guidance at the time of appraisal. Viewed against today s operational policies, the second PDO ( broaden access to finance to facilitate the achievement of the government's poverty reduction targets ) was too broad. The outcome indicators as approved were also somewhat repetitive, and therefore were consolidated shortly after the Board approval. The consolidation reduced the Project Outcome Indicators from five to three. The original forth PDO Indicator on growth of uses in non-cash payments instruments was dropped as it was considered to be difficult measure during the lifetime of the project, although at project completion statistics were available to demonstrate the increased uses of banks cards at the participating banks. In 2007 the third PDO Outcome Indicator was modified, when it became clear that the indicator would be difficult to measure due to the mismatch between the project s life time and the time needed for the new MIS systems to generate verifiable, broad results in financial accounting and reporting. The Intermediate Outcome Indicators were also revised to make them more pertinent to the outputs of the components. At project completion, the upgraded results framework was considered as clear, realistic and responsive to Vietnam s financial sector development strategy and the project entities development priorities. The Bank team used the results framework regularly for project supervision purpose. The project entities use of the results framework to assess the project s achievement increased when the initial tangible outputs became available. 2.4 Safeguard and Fiduciary Compliance (focusing on issues and their resolution, as applicable) 25. Procurement: In general, procurement processes under the project were in line with the Bank guidelines and resulted in the acquisition of internationally compatible payments and core banking systems. The reported good performance of the systems is another sign of the success of the procurement processes. Section 2.2 discussed the procurement issues that caused project implementation delays and the actions taken. 26. Financial management: All the annual audits of the project were unqualified. The audits were carried out in accordance with the international auditing standards by a local accounting firm acceptable to the Bank. The main shortcoming identified by Bank supervision missions was the delayed payments to contractors which were due to the slow services of the State Treasury and Vietnam Development Bank who acted as the verification agents of the expenses claims of the project. 27. The project did not trigger Safeguard reviews. 2.5 Post-completion Operation/Next Phase (including transition arrangement to post-completion operation of investments financed by present operation, Operation & Maintenance arrangements, sustaining reforms and institutional capacity, and next phase/follow-up operation, if applicable) 8

28. Post-completion operation: At project completion all but one of the systems procured under the project were performing well with no major system stoppages or service interruptions. 12 Multi-year maintenance contracts and the ongoing or planned enhancement activities at the project entities (see below) would ensure continued operation and good performance of the systems. 29. Next phase: The SBV, BIDV and MSB have completed the next 5-year plan for the development of their banks IT architecture, and the other two banks are in the process of developing the strategy. All the project entities are enhancing the systems. For example, BIDV plans to add capital market models to the CBS/BOS system; MSB is in the process of enhancing the operational applications procured under the first PSBM; and VietinBank has turned the PIU into an investment management unit in charge of 20 projects including those on internet banking and business chain formulation. The SBV has drafted a regulation on the fee structure of interbank payments to encourage more uses of the RTGS module of the IBPS. The central bank is also considering internally about the legal/regulatory and institutional issues regarding the clearance and settlement of foreign currency transactions (which is not processed by IBPS at present). In addition, the SBV is finalizing a five-year strategy for developing a cashless economy in Vietnam and has requested Bank s assistance in implementation of this strategy. Considering the importance of the payment system as a critical financial infrastructure for Vietnam, the Bank s financial sector team is discussing with SBV the options to support this important initiative for improving financial inclusion in Vietnam. 3. Assessment of Outcomes 3.1 Relevance of Objectives, Design and Implementation (to current country and global priorities, and Bank assistance strategy) 30. Overall review: The project remained Highly Relevant at completion as viewed against the current government economic development strategy and Bank assistance strategy. 31. Country priorities: The Government of Vietnam s 2011-2020 Socio-Economic Development Strategy (SEDS) has set as the overall goal for the country to become a modern, industrialized society by 2020. The ten-year development strategy has highlighted three priority areas for achieving the overall goal, i.e.: (i) promoting human resources/skills development (particularly skills for modern industry and innovation); (ii) improving market institutions; and (iii) infrastructure development. The project (together with the first project) has provided Vietnam in particular its financial institutions a critical financial market institution which is the modern inter-bank payments system. It has also contributed to the operational re-engineering of most of the country s largest financial institutions. Those results are the basic building blocks for innovation in the banking sector and continuous improvements of financial market institutions. 32. Bank assistance strategy: The Bank Group s new Country Partnership Strategy (FY12- FY16), 13 which supports the government s thrust of SEDS, is composed of three pillars: (i) strengthening Vietnam's competitiveness in the regional and global economy; (ii) increasing the environmental sustainability of its development; and (iii) broadening access to economic and 12 At implementation completion VBARD was still in the deployment of the disaster recovery system procured under the project and the related cost was to be financed by VBARD. The bank has adopted a three-pillar architecture for system reliability and business continuity and has the backup center enhanced under the project. 13 Presented to the Board on December 15, 2011. 9

social opportunity. Underpinning the pillars are two cross-cutting themes: (i) strengthening governance and (ii) improving resilience in the face of external economic and natural hazards and shocks and the impact of climate change. International experience including the lessons from the most recent global financial crisis demonstrate that a sound and stable financial sector is critical to a country s competitiveness and resilience to external shocks. As part of the critical infrastructure of the country, the expanded IBPS allows the SBV to closely monitor, and if necessary promptly support, market liquidity, in addition to channeling much needed funds to various economic actors in a timely, safe and reliable way. With the centralized operational systems in place that centralize funding, the participating banks are in a better position to provide better services and innovative products (e.g. internet banking) to their customers. The management information modules of the systems are able to provide timely and holistic information which are expected to strengthen risk management at the participating banks. 3.2 Achievement of Project Development Objectives (including brief discussion of causal linkages between outputs and outcomes, with details on outputs in Annex 2) 33. Overall review: The Project Development Objectives were achieved with Satisfactory results at project completion when evaluated against the following PDO Outcome Indicators. 34. Indicator #1, Steady increase of number of financial institutions/bank branches connected to IBPS and CBS, and of transaction volume and value processed by the new systems: All the banks are now members of the IBPS. VBARD s vast branch network of over 2000 business units are operating on the same CBS/BOS platform. While system rollout at the other participating banks was mainly funded on their own, the enhanced/expanded capacity of the systems has contributed to the exponential increases of the transactions processed (see Section F of the Datasheet above for details). The achievement of this indicator is further demonstrated in the following tables. Table 1: IBPS Expansion Year Connectivity Daily Transaction Volume (No.) Total Transactions per day (VND billion) 2002 (April- December) 20 credit institutions 300-500 transactions processed per day Transactions processed per day reached VND16 20 billion 2005 49 credit institutions with 220 member units/branches 2010 94 credit institutions with 881 member units/branches June 2011 97 credit institutions with 788 member units/branches 14 13,000 transactions processed per day 69,500 transactions processed per day 84,000 transactions processed per day VND8,000-10,000 billion VND 105,000 billion VND 182,000 billion 14 Member banks consolidated payment transaction at their headquarters level and reduced membership of their branches with IBPS. 10

Table 2: CBS Expansion 200215 2005 2010 Number of branches connected with CBS/BOS16 BIDV 1 266 597 MSB 10 18 41 VBARD 44 47 2300 VietinBank 0 70 153 Average total daily transactions processed by loan module (VND billions) BIDV 135 1,384 3,114 MSB n.a. 15 271 VBARD n.a. n.a. 22,280 Number of active cards holders17 BIDV 1,327 900,000 2,000,000 MSB n.a. n.a. 16,475 VBARD 120,000 300,000 >7,000,000 Daily reporting to management of operational activities and financial position and performance by branch through MIS module (Yes/No) BIDV Yes Yes Yes MSB Yes Yes Yes VBARD No No Yes 35. Indicator #2, Continuing high level of performance of expanded/upgraded systems in terms of speed, certainty, reliability and convenience: All the project entities confirmed good performance of the systems in the areas highlighted by the indicator. Interbank and intra-bank payments can now be settled in real time as compared to days in the past (speed and certainty). The systems reliability has been significantly strengthened with the backup and disaster recovery centers and network security capacity (e.g. automatic tracking of hacks). The systems use the web-based technology interface, which is user-friendly. 36. Indicator #3, Improve frequency and coverage of management information reports of participating banks: This indicator was largely accomplished. The upgraded MIS systems at BIDV and VBARD send overnight financial and operational information to the desk of senior management based on data from the core banking system and the centralized databases. VietinBank completed the implementation of a MIS module before the project closing date, which is expected to provide similar daily information. MSB uses an in-house developed MIS which has benefited from the CBS and the data warehouse. The centralized databases also enable the banks to respond to the SBV s information requirements in a timely manner. All the MIS modules procured/enhanced under the two projects are IAS compatible. 37. Other indicators: The evidence of PDO achievement can also be found in the direct benefits gained for the SBV and the participating banks. The expanded IBPS has enhanced the SBV s capacity to better monitor and manage interbank market liquidity, thanks to direct transfer of funds between banks and within a bank across the country, online processes, standardized 15 The base year for BIDV and VBARD was 2003. 16 Including all the branch network units of the bank, e.g., branches, sub-branches, deposit taking outlets, etc. except for VietinBank s data which only included first level branches. 17 Including all types of cards issued by the banks, e.g., debit, credit and ATM cards. 11

procedures, adequate processing capacity and single settlement account (at least for the three SOCBs). The expanded CBS/BOS (with automated operations, unified operational systems, large processing capacity, centralized funds management and customer database, 24/7 call center and one-stop customer services) have improved the banks competitiveness and operational efficiency as well as strengthened their capacity for better risk management. The technologies adopted are in line with the international standards in terms of capacity, speed, application software, security and business continuity. The discussions in Section 3.3 and 3.5 provide further evidence of the achievement of the PDOs. Detailed information on the main benefits gained under the project can be found in the implementing agencies project completion reports. 3.3 Efficiency (Net Present Value/Economic Rate of Return, cost effectiveness, e.g., unit rate norms, least cost, and comparisons; and Financial Rate of Return) 38. Given the nature of the project, no ERR/NPV analysis was carried out to quantify the economic benefits of the project at appraisal. However, qualitative economic analysis was conducted against a group of well-accepted economic benefits from well-functioning payments systems and commercial banking systems. Using the same qualitative method, the following economic benefits were achieved at project completion: The expanded IBPS and CBS/BOS are an essential element of a modern financial sector infrastructure in Vietnam. The expanded IBPS improves the effectiveness of monetary policy implementation as it has reduced cash float for most of payments in the banking system to real time or within the day, which in turn greatly improved predictability of cash flows within the economy. The expanded CBS/BOS are a tool for better risk management at the participating banks as bank management can now plan, monitor and control the status of banking operations at both the branch and head office levels on a daily basis. The expanded systems make it easier to investigate on suspicious and abnormal funds transfers, as most of the financial transactions (in value) are now captured by the systems. The expanded IBPS and CBS/BOS contribute to broadening the access to finance, as they: Enable the participating banks to provide to their customers one-stop services, and new products (e.g. credit and debit cards and internet banking); and Help bank customers to improve financial management of their businesses (e.g. more efficient processing of payments and receipts, and decreased uses of cash). The expanded systems are an important prerequisite for the economic agents to move away from the informal sector, hence help to reduce the risks to economic and socio development planning and macroeconomic stability. 39. No standard financial analysis was conducted at appraisal, as cost-accounting was not yet adopted on a widespread basis in Vietnam s banking sector, and the financial results of IT systems development are difficult to quantify in the short life cycle of the project. 40. At project completion, the project was considered as Efficient given the realized and verifiable benefits achieved. A more elaborated discussion on the methodology used is provided in Annex 3. 12