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Private sector needed in infrastructure

Released at: 08:00, 29/04/2018

Private sector needed in infrastructure

Photo: Viet Tuan

The huge cost of Vietnam's much-needed infrastructure development means the private sector must become more involved, especially foreign investors.

by Hong Nhung

After handing over the newly-built Pham Van Dong Street in Ho Chi Minh City to the local government at the end of 2016, GS E&C, one of South Korea’s leading property developers and engineering construction companies, actively sought further business opportunities in Vietnam last year and prepared to launch long-awaited property projects in the city. “Investments in infrastructure are critical for the sustainable development of Vietnam’s economy,” said Mr. Yang Seung Ho, General Director of GS E&C Vietnam.

Despite being one of the smallest economies in Asia, Vietnam is near the top in terms of infrastructure development. Public and private sector infrastructure investment has averaged 5.7 per cent of GDP in recent years - the highest in Southeast Asia - according to the “Meeting Asia’s Infrastructure Needs” report from the Asian Development Bank (ADB), released in 2017. Indonesia and the Philippines spend less than 3 per cent, while Malaysia and Thailand spend just under 2 per cent.

Long-term commitment

Vice President of GS E&C, Mr. Huh Myung Soo, told a meeting with Ho Chi Minh City authorities more than a year ago that the company would like to make further investments in the city’s infrastructure development, especially transport infrastructure. Though some difficulties were encountered, Pham Van Dong Street was fully completed under the build-transfer (BT) form and handed over to the city. This is considered the corporation’s symbolic project in its efforts to contribute to improving the city’s infrastructure. 

The company is also building projects at the Thu Thiem and Nha Be New Urban Areas in the city and participating in other infrastructure projects as a contractor, including Metro Line No. 1 and Vam Cong Bridge in the Mekong Delta, connecting Can Tho city and Dong Thap province. “Our investment in infrastructure in Vietnam helps us secure an image as a reliable partner of local governments in building infrastructure and urban areas, and such credibility is invaluable for our business in the long term,” Mr. Yang told VET. “I am very pleased that Vietnamese people now understand that GS E&C is not here just for short-term profit but for long-term contributions and cooperation.”

He also revealed that GS E&C Vietnam is preparing to tender for the construction of Metro Line No. 2 with prestigious partners and is also willing to bring in more foreign direct investment (FDI) into Vietnam’s infrastructure and development projects in the future, because the country still has a lot of room for such developments. However, “bottlenecks in logistics infrastructure present both problems and business opportunities for foreign investors,” he said. “Vietnam’s exports are performing strongly and this growth is expected to continue into the future, so logistics infrastructure must be developed faster to meet demand.”

Within the framework of APEC 2017, General Director of Mitsui & Co. Vietnam, Mr. Masahiro Moriyasu, paid a visit to Da Nang to investigate investment opportunities in key projects in the city, such as expanding and upgrading Da Nang International Airport, building Lien Chieu Port and metro line projects, and redeveloping urban areas. 

Among the company’s six major business lines, mineral resources, energy, and infrastructure are the three the group is seeking to invest in in Vietnam. “Investment in the infrastructure sector plays an important role, as we are pursuing potential investments in gas-fired power plants in the south to address power shortages and environmental issues, as well as infrastructure and seaport development projects in Vietnam,” Mr. Moriyasu told VET.

Vietnam having the highest expenditure on infrastructure in Southeast Asia expresses the government’s deep concerns about national infrastructure development and is evidence of the significant potential in boosting the logistics sector. Logistics has indeed seen increasing interest from world leading logistics companies such as FedEx, DHL, and UPS, who have already had a presence in the country for some time.

UPS was the first fully foreign-owned shipping and logistics company to enter the country, in 2003. It announced last year it would expand its services to ten additional provinces in central and southern Vietnam, as part of its long-term strategy to provide local small and medium-sized enterprises (SMEs) with greater access to global trade. “We recognized early on the huge potential in this incredibly dynamic market and sought to make solid investments as a result,” said Mr. Daryl Tay, Managing Director of UPS Vietnam. “We look forward to continuing to help Vietnamese businesses connect with customers globally as the country moves forward in tandem with its rapid economic development.”

Biggest  infrastructure spenders in asia, by % of gdp

Source: ADB, 2017

China vs. Japan funding in infrastructure

Source: BMI Research, 2017

Huge financing demand

As one of the fastest-growing countries in the world, Vietnam is boosting its infrastructure to attract more foreign investment as it positions itself as an “Asian Tiger”. The challenges to be addressed, however, are formidable. It needs about $480 billion to 2020 for infrastructure investments, with additional projects in the pipeline including eleven power plants with total capacity of 13,200 MW, and about 1,380 km of highways, according to the government. Early last year, Prime Minister Nguyen Xuan Phuc directed the Ministry of Transport to speed up plans to attract more private investment in infrastructure as the State budget can only meet one-third of financial needs.

While investment levels are high as Vietnam seeks to reinforce its infrastructural backbone, the share of development funding coming from the private sector remains low. According to ADB estimates, the share may actually be less than 10 per cent of the national total, compared to as much as 30 per cent in, for example, India. Reasons for the low participation include the long-term nature of such projects, where returns on investments take far longer than those in other sectors, such as property.

The need for more private funding of infrastructure will become even more pressing in the years to come, with the ADB estimating that the State budget will be able to fund just one-third of the $480 billion in planned spending by the end of the decade. Mr. Akio Mimura, Chairman of the Japan Chamber of Commerce and Industry, during a visit to Vietnam in January, said: “I understand that the government wants to use PPPs [public-private partnerships] but if the benefits of investing in a project are not made clear, then private businesses will be hesitant.”

To better tap into private funding, Vietnam needs to deepen its capital market structure, according to the “Deepening Capital Markets in Emerging Economies” report published last year by consultants McKinsey. The report said that Vietnam, along with several other Asian countries, should do more to tap into private savings to help finance infrastructure expansion and ease reliance on the public sector.

Of the 12 countries covered in the report, Vietnam ranked last in both development maturity and the size of the local market as a share of GDP. Capital markets in Japan, for instance, were valued at some 400 per cent of GDP to Vietnam’s 50 per cent. Such gaps put Vietnam at a disadvantage when seeking to mobilize private sector finance for infrastructure investments, the study noted.

Better policies needed

From a low starting point, Vietnam’s infrastructure network has now improved significantly. Quality, however, has been a persistent issue, causing bottlenecks that stymie economic development and making it necessary to focus FDI capital in the sector. In the World Economic Forum (WEF)’s Global Competitiveness Report 2017-2018, Vietnam’s infrastructure development indicator was ranked 79th among 137 countries, which is considered poor despite the improvements seen in recent times. 

Vietnam has been working to innovate for more than 30 years and has obtained a number of outstanding achievements in socioeconomic development, but there are sign of slowing growth and difficulties in overcoming the middle-income trap. Expensive but inefficient large-scale projects fail to attract foreign capital, which challenges the country’s aims to reach sustainable economic growth.

Meanwhile, “it is not easy to secure certain projects and huge patience is required to implement any project as a private business,” said Mr. Yang from GS E&C. “We think the policies from Vietnamese Government on PPPs are effective measures for urban infrastructure development, even though there are still several obstacles.”

The government early last year signed a bilateral cooperation agreement with the WEF on “Developing a Self-Reliant Vietnamese Economy”, with seven fields of cooperation, including on the issue of the future of long-term investment, infrastructure and development, the establishment of the Vietnam Infrastructure Working Group (IWG), and the bringing together of a community of leaders, businesses, and scholars to share initiatives. This is an opportunity for Vietnam to research and learn from other countries’ experience as well as attract investment capital flows into infrastructure development.

Optimistic about the market’s prospects, Mr. Yang also revealed that “we expect to launch our property projects this year after the settlement of most of our obstacles, especially site compensation and clearance. GS E&C is also preparing to participate in the tender for Metro Line No. 2 in Ho Chi Minh City and other involvements in urban railway lines. We are also very much open to new opportunities in construction and development.”

“Improving infrastructure will raise Vietnam’s competitiveness and its sustainable economic development targets can be achieved.”
Mr. Yang Seung Ho, General Director, GS E&C Vietnam

“Vietnam remains as an attractive destination for foreign investors. Logistics infrastructure plays a key role in attracting new FDI flows and contributes to the country’s sustainable growth, with recent efforts coming from the government to improve local transport infrastructure as well as customs clearance.”
Mr. Masahiro Moriyasu, General Director, Mitsui & Co. Vietnam

“To take Vietnam to the next level in terms of competitiveness, we hope to see a continued commitment from the government towards building a robust transport infrastructure network as well as strong coordination on policy across transportation, customs, and other regulatory agencies, to identify and remove policy barriers that impede the competitiveness of the logistics sector.”
Mr. Daryl Tay, Managing Director, UPS Vietnam

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