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Funding the future
(08/09/2010)
A sound-to-invest Vietnam theme could get started by empowering investors to participate in the country’s high-cost infrastructure projects. 

The traffic lights are off, and drivers look to the policeman in the middle of the intersection rather than the red and green signals. The power is out once more, with the state-run Electricity of Vietnam (EVN) trying to balance supply and demand by shutting off supply in certain locations at certain times. But people still go about their business. 

Which is a fair analogy for Vietnam: ploughing on despite the difficulties. And its developing economy has a number of internal strengths to give it the necessary drive. Power shortages are just one of many infrastructure obstacles hindering Vietnam’s further development. Cash-strapped road, port, bridge and mass transportation projects have become more urgent than ever before, and find their way on to the agenda at nearly every session of the National Assembly (NA). “The underdeveloped state of Vietnam’s infrastructure, whether in transportation, telecommunications or power generation, represents a bottleneck to growth,” wrote Mr Tai Hui, regional head of research at the Singapore-based Standard Chartered Bank, in its May report.

Source: VNEconomy.
Opportunity knocks

Whatever its problems, Vietnam is still undoubtedly an emerging frontier for investors, particularly in terms of developing infrastructure projects. Some even say they still see Vietnam as “a must buy”, at least in the medium term. Economic growth, political stability and appealing demographics are three positives for Vietnam, according to Mr Tai Hui. “We estimate Vietnam’s trend growth over the medium term to be around 7 per cent. Income growth and the benefits of expanding trade and infrastructure development are likely to underpin this growth momentum,” he wrote. In terms of demographics, Vietnam is poised for rapid growth in its economically-active population, while many mature economies in Asia have ageing populations. “We expect the country’s labour force to expand from 53 million in 2005 to 71 million in 2035,” Mr Hui added. “This also implies a rise in consumption power.”

Vietnam does lack the resources to fund and develop its infrastructure pillars, both hard and soft, while foreign investors have long despaired at the bottlenecks. “We believe that to attract and retain foreign investors, Vietnam should realise three core issues: infrastructure and energy, human resources development, and continuing regulatory and administrative reforms,” Mr Alain Cany said at last month’s mid-term Vietnam Business Forum (VBF). However, a few foreign-invested projects have materialised since the country launched its “doi moi” policy given the fact that, according to Mr Fred Burke, Managing Lawyer at Ho Chi Minh City-based Baker&McKenzie law firm, a number of regulations have been issued. “First, it should be noted that some green shoots are starting to appear on the physical infrastructure side, following several years of hard work,” he said. “International ports are gearing up, and a few key bridges and highways have been coming on line, so the situation is improving. Of course, there are quality issues with road construction, and plenty of linkages to fill in, but it can be said that the situation is developing.”

But infrastructure investment, according to foreign analysts, is considered very risky and they tend to produce returns on investment that are slow and low. Most international private equity funds look for much faster ways of getting their money back, such as in commercial real estate. “So the State needs to do more to enable infrastructure development,” according to Mr Burke.

Since the introduction of the first build-operate-transfer (BOT) decree back in 1994, there has been a perception gap about risk allocation in infrastructure projects in Vietnam. Investors want guarantees from the government, while the government expects private investors to take the risk and contribute the funds for infrastructure development if they are to take the profit from it. Balancing these perspectives is a challenge, and the recent discussions on Public-Private Partnerships (PPPs) seem to be little more than new words for the same issues.

What matters, according to Mr Burke, is that the PPP discussions flesh out the specific risk allocation issues, such as land clearance, the environment, construction costs, foreign exchange availability and remittance, collateral security and guarantees for lenders, etc. “Each of these and other key risks need to be borne by one or more parties to the project, and it may not be the case that ‘one size fits all’ in this area,” he said. For example, subsidies in the form of feed-in tariffs are critical to the development of wind power, but there are questions as to whether they are appropriate for coal-fired power plants that pollute the environment, imposing other indirect costs on the nation. “So different solutions are needed to allow each to succeed,” Mr Burke said.

Need to deliver

In modern supply chains even the best products need efficient and reliable distribution. Therefore, foreign investors demand effective and comprehensive transport and logistics infrastructure to complement the country’s competitive cost of production. While other countries have lower labour costs than China, multinationals are still buying from Chinese manufacturers because the accompanying logistics ensure timely delivery. As a result, countries with less developed logistics infrastructure have faced significant competitive pressure from Chinese producers. “Vietnam will therefore need to ensure that its infrastructure is able to meet investors’ expectations,” wrote Mr Hui from Standard Chartered Bank. In reality, the government has set a target of raising investment as a percentage of GDP to above 40 per cent; $5 billion more per year from the current level of 34.5 per cent. However, according to Mr Hui, this is more than just a numbers game. “How infrastructure is funded and operated has a significant impact on its future and sustainability,” he believes. “In addition, this drive for higher investment can also fuel inflationary pressure further.” 

In terms of regulation, according to Mr Burke, many observers have said Vietnam has an opportunity to leapfrog the “industrial-era polluting age” by being an early adopter of alternative clean technologies, especially solar and wind technologies. Yet traditional energy - coal and oil - are the focus of the monopoly power provider. “If the State could create more space for the alternatives, it might lay the groundwork for the next generation of cleaner technologies,” said Mr Burke.

In terms of logistics, according to the Standard Chartered Bank report, Vietnam’s congested urban roads and limited road network connecting cities will become bottlenecks for manufacturers, if they are not already. In particular, Vietnam trails behind most Asian economies in terms of its logistics set-up; logistics infrastructure and logistics competence are two areas where Vietnam is especially weak. Power outages, meanwhile, are sometimes scheduled during peak periods in the dry season as supply growth fails to keep up with surging demand. Hydro-electric plants struggle to run at full capacity when water levels are low, and power production capacity is also a constraint.

Thus, different solutions apply for different forms of infrastructure. According to Mr Burke, where roads and bridges are concerned, quality and efficiency issues seem to be improving though only gradually. “In the past, people heard that road construction had to be reserved for local companies for sovereignty reasons, but what kind of roads has that left us with? Perhaps it’s time to open up the sector to more direct foreign participation in order to get better infrastructure on line more quickly.” Traffic in Hanoi and Ho Chi Minh City is quickly becoming strangled, and a range of measures are needed to manage it. Restricted access in congested areas, tolls in these areas, parking infrastructure, and public transportation must be seen as necessary companions to simply building more roads. 

In almost all cases, Mr Burke believes, foreign investors expect a stronger central government to assert its authority to work out the differences among the various ministries and other stakeholders in a more timely manner. “A more powerful centralised coordinating agency in the Government Office would help,” he concluded.

“Foreign investors have to continue to work with relevant ministries to work out solutions to the issues that are slowing things down. They should draw on the solutions that have worked in similar economies elsewhere. Do we need to have the kind of gridlock that Bangkok had in the early 1990s before we start serious work on city centre parking and mass transportation? At the same time, foreign investors need to be clearer about the risks they reasonably expect to bear and those that they reasonably expect the State to bear. Negotiating this balance for each project in each industry will vary, but at this point we should be able to draw on the successes of the past to try to reach these agreements much faster than they are being done today.”

Mr Fred Burke, Managing Lawyer, Baker&McKenzie

The government plans to spend $4.5 billion on improving seaport infrastructure in the next five years. It has also announced the construction of various projects to improve infrastructure facilities. The Asian Development Bank (ADB) has identified nine road projects totalling 565km, which will need $3 billion worth of investment from the public or private sector or both. There are also regional infrastructure projects underway that aim to improve Vietnam’s connectivity with other countries in the region, especially in the Greater Mekong Region, and to take advantage of the hydropower capacity in neighbouring Laos and Cambodia to support Vietnam’s economic development. According to the government’s Master Plan VI of power generation, generation capacity will need to rise from 53 billion kWh to 190 billion kWh by 2015 under the base case scenario, and to 198 billion kWh under the most aggressive scenario.

 

 
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