In a bid to enhance economic growth and international competitiveness, countries in the Southeast Asian (SEA) region are ramping up their infrastructure, which ranks far below global standards at present. Of the 144 countries surveyed in the World Bank’s Global Competitiveness Report 2014–15, Singapore and Malaysia are the only ASEAN countries to feature amongst the top 20 for best infrastructure. This highlights the urgency for enabling strong infrastructure growth, particularly in countries like Vietnam, which over the years, have become attractive investment destinations, but face a huge deficit in terms of infrastructure quality and financing infrastructure investments.
Vietnam, in recent years, has emerged as a strong contender for foreign investments flowing into the SEA region. During 2013, the country accounted for about 7 per cent of the total foreign direct investment (FDI) in the SEA region, following countries such as Singapore (50.83 per cent), Indonesia (14.7 per cent), Thailand (10.32 per cent) and Malaysia (9.81 per cent). Drivers such as political stability, low wages, a growing young and literate population base and relatively high productivity have enhanced Vietnam’s attractiveness as a promising investment destination.
However, to ensure the long-term sustainability of such investments, establishing quality physical infrastructure is equally important, an area where Vietnam fares poorly. There exist deficiencies and delays in the development of key transport infrastructure such as inter-provincial roads, bridges, strategically located seaports and their related land-side infrastructure, and intra-city public transportation such as light rail. The existing infrastructure in the country is in dire need of a revamp, which is evident from its ranking in the World Bank’s Competitiveness Report 2014–15 – it currently ranks 112 in terms of overall quality of infrastructure, 104 in terms of quality of roads, 88 in terms of both power and ports and 87 in air transport.
Vietnam follows a highly decentralised administrative structure, where individual provinces select and undertake their own infrastructure projects and compete with each other. The decentralisation, and the subsequent competition amongst provinces, has done more harm than good for the development of infrastructure in the country. For instance, in the case of seaports, the country today has several seaports scattered across provinces, most of which have idle capacity and slow traffic. For instance, Cai Mep port, located in Ba Ria-Vung Tau province, has seven terminals. The newest one, opened in December 2013, competes against six other terminals and runs at just 30 per cent of capacity. The country probably needs three to four big ports each in the south, north and central regions. In all, 11–12 good ports would prove to be more efficient for Vietnam than having 50–60 smaller and underutilised ports.
As for Vietnam’s power sector, pricing of contracts is a key issue as power purchase agreements cannot be negotiated at viable tariffs given the dominant role of Electricity of Vietnam.
The inadequacy of current expenditure on infrastructure remains the biggest challenge that the country faces today. Vietnam currently spends 6–8 per cent of its gross domestic product (GDP) on infrastructure development. While this figure is high when compared to that of many of its peers, it is not substantial enough to match the country’s rapid urbanisation – Vietnam’s middle class is expected to increase from 2 million today to 33 million by 2020. According to industry estimates, the country annually needs to dedicate 10–11 per cent of its GDP to develop infrastructure.
Financing this huge infrastructure deficit is proving to be a daunting task. According to a World Bank report, Vietnam lacks financial mechanisms to mobilise capital for infrastructure development. Most infrastructure projects are funded through government’s revenues, budgetary allocations, money from bond issues and official development assistance (ODA). However, with the restructuring of public investment, tightening of budgetary strings, banks’ hesitation in lending to local governments and an underdeveloped bond market, the traditional sources of funding are falling short of infrastructure requirements.
A study done by the World Bank and Vietnam’s Ministry of Finance in March 2014 indicates that public funds are increasingly proving to be inadequate to meet the growing infrastructure needs and can only cater to 50–60 per cent of the total requirement. According to the Ministry of Planning and Investment (MPI), Vietnam needs $500 billion to develop new roads, bridges, ports, water sanitation, power and other infrastructure in the next 10 years. Interestingly, the state budget, ODA, and other public financial sources will be able to address only 40 per cent of the financing requirement, indicating a shortage of $300 billion.
Thus, turning to the private sector is a logical step to address the infrastructure deficit in the country. Besides serving as a key source of funding for the country’s infrastructure sector, private participation will play a pivotal role in enhancing the efficiency of the system and bringing in financial and technical expertise.
Private participation – Experience so far
Public–private partnership (PPP) regulations in Vietnam have been in place since 1997 with Decree 62 for domestic investors and Decree 77 for foreign investors. In 2009, Decree 108 regulated build–operate–transfer (BOT), build-transfer (BT) and build–transfer–operate (BTO) projects. Decree 71 announced another pilot programme for PPP projects in 2010. Currently, there are no restrictions on the infrastructure sectors open to foreign investors. However, despite government policies for privately funded infrastructure projects, very few foreign-invested projects have been implemented in practice. Local authorities’ lack of understanding of PPP projects and lack of clarity on regulations have been cited as key reasons for the poor response. Consequently, even though about 40 per cent of total investment capital in infrastructure development is funded by international capital sources, only 15 per cent comes from the private sector.
The majority of contracts involving private participation have been implemented on a BOT basis in the country. The power sector has proven most attractive for private sector participation in Vietnam. According to data available from the World Bank’s Private Participation in Infrastructure database, Vietnam’s power sector attracted private investments worth $7.49 billion in 64 projects between 1990 and 2013. Power shortages over the years have highlighted the need for investment in the sector and independent power producers from Japan, Thailand, Korea, and the US have taken interest by embarking on power projects such as Nghi Son 2, Vung Ang 2, Van Phong 1, Vinh Tan and Thai Binh. The success of the Phu My 3 power plant, the first BOT power plant with foreign investment, has further increased the country’s confidence to attract private investments in the sector.
While BOT has been the usual method to allow private participation in infrastructure, several other contractual alternatives such as construction, service or management contracts have also been explored. These include construction of ODA-funded projects and other projects such as Tan Son Nhat International Airport and Dung Quat refinery.
The government now also wants to encourage participation of domestic and foreign private players in the transport sector as state budgets are proving to be inadequate sources – around 20 trillion dong is allocated to transport projects a year, which is less than 50 per cent of the demand. In the past three years, private sector funds worth 165 trillion dong have been mobilised for 65 projects. This funding will be utilised for road projects, north–south railway development, the big-ticket Long Thanh International Airport project in the southern province of Dong Nai, seaport projects and inland waterway projects across the country. The investments in transport infrastructure development are projected at 960 trillion dong in 2014–20, and ODA and the state budget will account for only 47 per cent of this.
However, the ride for private participants in Vietnam’s infrastructure sector is not smooth. They face difficulties in mobilising long-term capital for project implementation. Long-term loans from commercial banks come with closing-guarantee requirements. According to regulations, the government does not act as guarantor for domestic commercial loans of domestic businesses. The World Bank’s Global Competitiveness Report ranks Vietnam 104 amongst 145 countries in terms of ease of financial service access.
The new PPP Decree
To leverage the success of PPPs experienced by other countries, Vietnam is in the process of finalising an improved PPP framework. The latest draft of the PPP Decree (September 2014) by MPI suggests a larger number of models for PPP projects, fiscal incentives for investor-proposed projects and government guarantees and other incentives. Further, the draft of the Investor Selection Decree (October 2014), guiding the law on public procurement, also provides incentives for investors who propose small PPP projects.
The draft PPP Decree has enhanced the scope of partnerships by allowing build–own–operate, build–transfer–lease, build–lease–transfer and operation and management contracts, in addition to traditional forms of BOT, BTO and BT. Further, the draft PPP Decree distinctly sets out where project contracts can be governed by foreign law, namely, contracts involving a foreign party and government agency guarantee contracts. The foreign arbitration route can be explored for disputes involving a foreign investor and even for contracts backed by government guarantees.
The draft of the Investor Selection Decree provides incentives for investor-proposed smaller projects that are not solicited by the government. These projects will remain open to competitive bidding, but the proposing investor will receive a 5 per cent advantage (service price, state capital or other method) over other bidders.
The way forward
In order to retain the momentum of foreign investment inflows into the country, Vietnam has to step up the involvement of the private sector in infrastructure development. Wider contributions from the local capital market as well as private investors will be crucial for sustainable capital supply in the country as public funds and ODA fail to match the growing demand.
Increased private sector participation in infrastructure investment, primarily through PPPs, is an important tool to address the financing, technical skills, and management gaps faced by the country’s infrastructure sector. The new PPP Decree being anticipated in this regard will set the stage for greater private participation in Vietnam.
