[Member News] Vietnam’s infrastructure growth hinges on profitability and funding

By Vaibhav Saxena* 

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The highway, which was opened to traffic on October 10, cuts the Hanoi-Hoa Binh Province travel time by a third. Photo by VnExpress

The realization of the country’s ambitious infrastructure development plan depends on how it sorts out issues of profitability and funding.

Vietnam has an ambitious master plan that aims at complete transformation of the nation’s sluggish infrastructural platforms, so as to attract investment and business, promote its industrial hubs and increase its GDP.

According to Asian Development Bank (ADB), Vietnam is among the top in terms of infrastructure development, with average infrastructure investment taking up 5.7 percent of the GDP in recent years, the highest in Southeast Asia.

The expansion of the nation’s road network is currently facing financial troubles. Against the cost estimate of $134 billion, only $99 billion has been earmarked so far.

The latest Global Infrastructure Outlook has estimated that Vietnam will only meet 83 percent of its infrastructure needs by 2040.

Looking at some of the major projects and markers of Vietnam’s infrastructure development can give us an idea of the challenges and opportunities that lie ahead.

The big ones

Pursuant to the prime ministerial Decision No.631/QD-TTg in 2014, a number of major national projects have been outsourced for foreign investment and implementation by 2020. As a result, conception and implementation of those projects have been accelerated.

In particular, the Government wants to build the Long Thanh Airport of international standards that will gradually reach the capacity of 100 million customers and 5 million tons of goods per year. Total estimated expenditure equals $16.03 billion (unit price in 2014).

Since the Long Thanh Airport in not expected to commence operations until 2025, the existing Tan Son Nhat Airport in HCMC is to be expanded to accommodate 50 million passengers a year. Adjustment costs for this add up to more than $1.3 billion as per the latest design proposal.

The 3,096 km long North-South expressway, running from Hanoi to the Mekong Delta province of Can Tho, expected to be built in the 2020-2030 period, will cost approximately $37.7 billion.

Despite being previously dismissed, the North-South high speed railway plan is in the picture again and will be presented to the National Assembly in 2019. The estimated length and investment costs are 1,545km and $58.7 billion, respectively.

Likewise, there is considerable investment demand for port construction. As stipulated in the Prime Minister’s Decision No.1037/QD-Ttg in 2014, several renovations must be made to the existing ports and future port developments are also expected in the 2020- 2030 period.

A few other major national infrastructure projects including roads, airports and ports are expected to be implemented, according to growing needs of the country.

How is the nation planning to fund these projects?

Investment methods and incentives

Private sector investors, especially foreign investors, enjoy preference and certain favorable conditions under Vietnamese laws.

Private investors can cooperate with the Vietnamese Government to conduct investment projects through public-private partnership (PPP) contracts or completely take up investment through privatization.

The Government is encouraging PPP projects in transportation and other undertakings of national scope in specific sectors, as decided by the Prime Minister.

The current Investment Law provides that development or management of infrastructure works are carried out on business lines with investment incentives.

“Infrastructure works” are identified as “water plants, power plants, water supply and drainage system; bridges, roads, railroads, airports, seaports, river ports; airfields, train stations, and other particularly important infrastructure works decided by the Prime Minister.”

Investment preferences under the PPP regime include tax incentives: lower corporate income tax; exemption from import duty on goods imported to form fixed assets, raw materials, supplies and components for implementation of the investment project; and exemption from, or reduction of, land rent, land use fees and land use tax.

Projects requiring investment of at least VND6 trillion ($257 million) are also entitled to tax exemptions on non-agricultural land and import duties.

The Investment Law protects lawful assets of the investors from being nationalized/ confiscated by any administrative measures and allows them to be transferred abroad by foreign investors.

The Prime Minister, on a case to case basis, guarantees contractual obligations of competent authorities or state-owned companies participating in PPPs for infrastructural development.

State-owned enterprises are obliged to supply raw materials, utilize products and services and fulfill other contractual requirements.

Decree 63 further ensures the exercise of land use rights throughout the investment period, foreign currency availability, and provision of public services such as land, roads and other public works. Most importantly, investors under PPP projects shall receive guarantees on ownership of the property.

Parties to a PPP contract involving at least one foreign investor have full autonomy to choose a foreign law to be the governing law if it doesn’t contradict Vietnam law; and to select the method of dispute resolution as arbitration.

Actual investment status quo

To take advantage of incentives and realize potentially substantial returns from infrastructure projects, several investors have either proposed to partake of or have actually committed to raise large portions of investment capital for major projects.

The challenges to be addressed, however, are formidable.

Vietnam needs about $480 billion by 2020 for infrastructure investment, with additional projects in the pipeline including around eleven power plants with total capacity of 13,200 MW and about 1,380 km of highway; but the State budget can only meet one third of the actual financial needs.

The long-term nature of such large scale projects, where returns on investment take far longer to realize than those in other sectors, is one of the reasons that make investors hesitate to take the risks involved in them.

According to the ADB, the share of development funding coming from the private sector is less than 10 percent of the national total.

In the road and railway sectors the most obvious payoff is the drastic reduction of time required to travel between major cities.

Most notably, the time from Hanoi to Ho Chi Minh City will fall from 32 hours to seven hours after the completion of the North-South express railway. Foreseeable beneficiaries are industries with extensive supply chains and complex sourcing needs.

The North-South expressway, therefore, has to potential to expedite business as it is the central route that runs through more than 20 provinces and cities.

Under Resolution No.20/NQ-CP on construction of eight sections of the expressway, investors shall contribute at least 20 percent of the total investment.

The profit margin on feasibility study reports and tendering documents are assessed using the average profits of past build-operation-transfer (BOT) projects.

Therefore, investors can expect the profit ratio to be around 11.77 percent, based on the average derived from around 67 BOT projects already implemented by the Ministry of Transport.

The actual profit rate is to be determined via competitive tendering no earlier than May 2019, and the capricious nature of this arrangement could prove to be an investment deterrent.

Smaller projects promise more bankability to investors, like the National Highway No.1 Project – Phu Ly Bypass Road in northern Ha Nam Province that was been given to Coteccons and FCC.

Logistic costs shall decrease once road quality is enhanced, with traffic jams and bottlenecks becoming less frequent.

After investing in the Tan Son Nhat airport expansion and other airports including Noi Bai, Cat Bi, Chu Lai and Phu Bai, the Airport Corporation of Vietnam (ACV) predicts $702 million in revenues. As of now, remaining portions of the Tan Son Nhat project are awaiting investors.

ACV is also the host investor in the Long Thanh International Airport. At present, constructors are joining the tendering process for pre-feasibility studies. Prices for land around the Long Thanh Airport’s proposed site have skyrocketed.

The seaport system has been largely privatized since 2014, with the equitization of 432 state-owned enterprises. For example, state-owned shipping giant Vinalines has sold all its shares in Quang Ninh Port.

With Lach Huyen and Cai Mep, the only two deep-water international ports, only the former has been conceived and is now in the final stage of construction with investments from the Government ODA loans, the HITC Company, Itochu and other companies.

IPP Group has promised to make investments worth $50 billion in establishing a special economic zone in the Bac Van Phong area in central Khanh Hoa Province, including but not limited to a smart city, an airport and a seaport.

Because international trade is conducted mainly via marine transport, developing ports with adequate capacity can guarantee reduced transport time and costs.

Hopeful signs

Recognizing that improving infrastructure increases the country’s competitiveness, Vietnam is vigorously revitalizing its infrastructure platforms.

However, with certain national projects of large scope and size, profitability and required capital contribution are potential stumbling factors.

The Government has signed a bilateral cooperation agreement with the World Economic Forum (WEF) on “Developing a Self-Reliant Vietnamese Economy” to co-operate in seven fields, including infrastructure development.

Furthermore, the establishment of Vietnam Infrastructure Working Group (IWG) is expected to bring leaders, businesses, and scholars to share ideas and initiatives. This is a great opportunity for Vietnam to research and learn from other countries’ experience as well as attract investment for infrastructure development.

Moreover, a new circular to supplant existing regulations on PPP agreements is currently being prepared.

Therefore, there is that more favorable treatment of investors will speed up major infrastructure development projects, in turn making considerable headway in achieving national goals.

*Vaibhav Saxena is a legal consultant at Vietnam International Law Firm (VILAF)

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