Beyond Bottlenecks: Attracting International Investment in Vietnam’s Infrastructure Sector
Introduction
Over the past decade Vietnam has made spectacular progress in GDP growth and poverty reduction. Annual per capita growth has averaged 5.9 percent, the eighth highest in the world over the decade.
However, Vietnam’s rapid economic growth has resulted in serious transport bottlenecks and infrastructure investment needs beyond the Government’s own resources. In addition, many Vietnamese still live in remote and rural areas with little access to services and markets. Better infrastructure is needed for Vietnam to reduce poverty and reach its ambition of becoming an industrialized country by 2020.
Finance Infrastructure Vietnam projects
A critical part of this success has been a high level of investment in infrastructure. Around 10 percent of GDP has been invested in transport, telecommunications, energy, water, and sanitation in recent years, a very high level of infrastructure investment by international standards. Microeconomic studies provide evidence of a strong link between this infrastructure investment and Vietnam’s growth and poverty reduction.
Moreover, Vietnam’s need for investment in infrastructure to keep pace with economic growth has been consistently called for. Until now, the State and overseas development assistance (ODA) have been the main sources of funds for infrastructure development. Despite preferential Government policies for privately funded infrastructure projects in Vietnam, in practice, very few foreign invested projects have been implemented. About 40% of total investment capital in infrastructure development is funded by international capital sources, while only 15% comes from the private sector.
However, in the near future, foreign participation in infrastructure will become more common, following the success of the Phu My 3 power plant, the first build-operate-transfer (BOT) power plant invested in by foreign investors.
Recent developments include:
- In February 2013, Japan’s Sumitomo Corporation submitted an application for an investment license for the construction of a US$2B, BOT coal-fired power plant in Khanh Hoa. The 1,320MW plant is likely to start commercial operations in 2017. The plant will use coal imported from Australia and overseas and will deliver power to State-owned Electricity of Vietnam (EVN).
- In March 2013, the Dong Nai Provincial Government released a development plan for the area surrounding Long Thanh International Airport. The Government plans to develop a tourist complex, several industrial clusters and world-class sporting venues, education and healthcare facilities in the 21,000 hectare area. The plan is to be implemented in three phases between 2012-2025.
- In March 2013, Japan agreed to finance 12 local projects worth a total of JPY202.93B (US$2.16B) in Vietnam; most are related to traffic infrastructure and will be undertaken in Hanoi. The projects include Phase 1 of the Hanoi urban railway route No.1, Phase 2 of a road project linking Noi Bai Airport with Nhat Tan Bridge and Phase 3 of the Nhat Tan Bridge.
- In March 2013, Korea’s State-owned utility, Korea Electric Power Corporation (KEPCO) and Japan’s Marubeni Corporation were awarded a US$32.3B BOT contract for the construction of a 1200MW coal-fired power plant in Nghi Son, Thanh Hoa Province. Construction is scheduled to be completed by 2018 and the plant will operate for the next 25 years before being transferred to the Vietnamese Government. The project will be financed by Korea EximBank and Japan Bank for International Cooperation.
Legal Framework
Where private participation in infrastructure has taken place, the majority of contracts have been Build-Operate-Transfers (BOTs). Other forms of concession which have been offered by the Vietnamese Government include Build-Transfer-Operate (BTO), Build-Transfer (BT) and Build-Operate-Own (BOO) contracts. The current law is contained in Decree No. 108/2009/ND-CP enacted by the Government on November 27, 2009 (as amended by Decree 24/2011/ND-CP) (BOT Decree). This BOT Decree replaced the previous Decree No. 78/2007/CP in 2010, stipulating the sectors, conditions, procedures and incentives applicable to infrastructure development investment projects through BOT, BTO, BT and similar contractual forms. The prevailing legislation governing Public-Private Partnerships (PPP) in Vietnam is the current law found in Decision 71/2010/QD-TTg.
Identifying Opportunities
There are no restrictions on the infrastructure sectors which are open to foreign investors. Under the BOT Decree, the Government expressly encourages investment in infrastructure facilities, including roads, rail, airports, ports, water and waste plants, and power plants.
Recent power shortages over the years have highlighted the need for power investment while the port sector is seeing an increase in private participation.
Many power plants developed by local companies are already in operation and more are expected to be completed in the next few years. The Government has published a list of power plant projects inviting foreign investors to participate in joint ventures with local partners.
Government Guarantees
Previously, investors have had some success in obtaining Government guarantees to support the obligations of the State-owned enterprise, which may be the relevant project off-taker, or to ensure the conversion of project revenues into foreign exchange. Two projects which have been internationally financed (Phu My 2.2 and Phu My 3) were both supported by central Government guarantees.
Investment Certificate and Structure
An investment certificate is required for a foreign investment project of any nature in Vietnam, including for the implementation of a BOT or other infrastructure project. The BOT Decree distinguishes between an investor (the company or individual investing capital in the project) and a project enterprise (the joint venture vehicle set up by the investors to implement the project). The investment certificate issued for the implementation of the BOT project will concurrently be the incorporation certificate of a project enterprise with foreign participation.
Under the Law on Investment 2005 (Law 59/2005/QH11), foreign-invested enterprises may operate in several different forms, including a limited liability company, a joint stock company, a private company or partnership. The BOT Decree allows any form of project enterprise to be established and used pursuant to the Law on Enterprises (Law 60/2005/QH11) and Law on Investment 2005. Usually, joint ventures with local partners are favorably looked upon by Vietnamese authorities.
Investment Incentives
Certain incentives are available for foreign investors undertaking a BOT project, such as:
- Exemption from applicable land use fees or rent
- Exemption from import duties on goods imported in order to implement the project;
- Reduced corporate income tax and tax holidays for investments in development of infrastructure in sectors listed under special investment incentives;
The Law on Corporate Income Tax 2008 (CIT), which came into effect on January 1, 2009 (Law 14/2008/QH12), sets out the CIT incentives available to special important infrastructure projects (Decree No. 124-2008-ND-CP, as amended and supplemented by Decree 122/2011/ND-CP, dated December 27, 2011) and is noteworthy because it may be possible for investors to request an extension of additional incentives for a particular project.
Other Forms of Private Participation
While BOTs have been the usual method in Vietnam for private participation in infrastructure, there are several other contractual alternatives such as construction, service or management contracts (for example, construction of ODA-funded projects and other infrastructure projects such as Tan Son Nhat International Airport and Dung Quat Refinery). In addition, full privatization may also be possible (as indicated, for example, by the Ministry of Industry and Trade for Independent Power Producers [IPPs]).
Conclusion
As Vietnam becomes richer and more developed, it faces more challenges in adapting its infrastructure policies and institutions. While the old challenges of providing basic services for all remain, new challenges are emerging, such as accessing new sources of finance, refining planning processes, preparing for rapid urbanization, improving the efficiency of infrastructure service providers, and developing stronger institutions to encourage private participation in infrastructure or direct private provision of infrastructure.
This article was originally published in South East Asia Infrastructure Magazine.
Recent Comments