Status quo

According to the Global Competitiveness Report 2020 published by the World Economic Forum (WEF), Vietnam’s infrastructure quality is much lower than other emerging market countries including Malaysia, India, and Indonesia.

The Asian Development Bank (ADB) estimates Vietnam’s need for infrastructure investment will be around $480 billion by 2030. The Global Infrastructure Outlook, a G20 initiative, estimates that Vietnam will need more than $600 billion to achieve its infrastructure targets in 2040.

Significant infrastructure investments will be required in the coming decades requiring even larger amounts of capital. With the government’s strict limits on public debt and the constraints on taking loans from multilateral development banks, new avenues to access capital are required.

Vietnam, like many other developing countries, is facing financial and budgetary hurdles to develop and maintain its infrastructure because of rapid urbanization, rapid economic growth, and the need to improve public services quality serving the steadily increasing needs of the people. It is therefore essential to enable private capital to invest in infrastructure development, thereby reducing reliance on the state’s budget. PPP projects will attract private capital and increase the efficiency and effectiveness of current resources.

In investigating the potential to mobilize PPP capital, the Global Infrastruture Investor Survey Report in 2019, by Singapore’s Infrastrure Research Institute EDHEC, articulates that Vietnam is in the top five emerging countries globally with the highest potential for infrastructure development, along with India, China, Brazil, and Indonesia. But several PPP experts, both private and from the ADB, noted that only 10% of Vietnam’s infrastructure is currently financed by the private sector, much lower than other Asian middle-income countries.

Private investors are showing interest in PPPs by selling their management abilities and experience, especially in delivering public services. They can earn a rate of return through user-paid fees or government payments.

The PPPs Committee of the National Council for Sustainable Development and Competitiveness Enhancement stated that attracting private investors will bring efficiency in offsetting resource gaps. Expansion of PPPs can also help the government take advantage of the expertise and new technologies by using the private sector for construction and management of infrastructure and public services. It will benefit the people by improving services and making them more affordable, develop national infrastructure and the economy, and bring more socio-economic benefits.

New frontiers

Most of Vietnam’s current infrastructure is financed directly by the government and other public agencies such as local authorities and state-owned enterprises, while the private sector’s participation is very limited. This traditional approach to finance for infrastructure projects will not be able to address the infrastructure needs of the future. PPPs will help bridge that gap.

Dr. Tran Chung, associate professor and chairman of the Vietnam Association of Road Traffic Investors (VARSI), said that to access private-sector capital and expertise for PPP projects, the government needs to make changes to its institutions, policies, and administrative procedures.

Vietnam has passed the PPP Law to mobilize social resources, but it has proved unattractive to potential investors. Secondly, the current limit on the state’s contribution, including land clearance, compensation, and resettlement costs, is capped at 50% of the total project value, and this limit will eliminate many projects from being considered under a PPP model. This is especially relevant to projects with large clearance costs.

PPP infrastructure projects have large capital requirements that are usually financed through long-term loans. In international best practices, projects are mainly financed through project finance with limited recourse. Lenders are not interested in the project’s underlying assets but in future cash flow that is adequate to replay loans and interest.

In many countries where PPPs form a significant form of instructure investments, governments have risk-reducing mechanisms available to protect lenders. These mechanisms can take the form of revenue guarantees, minimum usage guarantees, or termination payments, to name a few.

Bonds may play a key role in financing infrastructure projects. Deo Ca, for example, issued VND2,700 billion ($115 million) in corporate bonds for the Cam Lam-Vinh Hai Expressway project. There have been some proposals on how to encourage use of the bond market.

One option is the use of convertible bonds. When a company issues convertible bonds, the holders of those bonds have a right to convert their bonds into equity, typically between three and five years. After converting the bonds into equity, the bond issuer will no longer have a debt obligation but will be allowed to use the proceeds to develop the business and projects.

Another proposal is to establish a National Infrastructure Investment Fund that will specialize in providing preferential loans or making investments in infrastructure or project bonds. This fund can “crowd in” additional investments by providing initial funding and making capital investments to build confidence in the market.

Institutional investors, including pension funds, insurance companies, and sovereign wealth funds, often have a low appetite for risk but are willing to make long-term investments, and are an important source of capital for infrastructure projects in many countries. They represent an untapped source of capital that can potentially be unlocked if appropriate policies and incentives are created.

Institutional investors are attracted by these assets because of their characteristics: low competitiveness, stable cash flows, and long-term predictability (10 to 30 years or even longer), allowing debt reciprocity and protection from inflation. However, institutional investors need appropriate financial mechanisms and a favorable environment for their investments.

Some enterprises propose allowing the government to contribute capital during the operations phase of the project, in addition to the development and construction phases, to address unexpected challenges.

There is also an expectation from foreign investors to convert Vietnam dong to foreign currency for payments made under a PPP contractual obligation and for debt repayments.

Looking at the future

With all that said, the VCCI, with the support of the United States Agency for International Development (USAID), has collected recommendations from the private sector on mechanisms to improve the PPP regulatory framework. The key takeaways are focusing on attracting investment in PPPs in the key infrastructure sectors such as energy, transportation, healthcare; studying and improving the revenue-sharing mechanism; and applying effective and transparent risk controls and management tools.

The cooperation between the VCCI and USAID will strengthen the on-going efforts to enable and improve the environment to attract private investors to develop sustainable infrastructure in Vietnam.

VCCI and USAID are now cooperating to launch a PPP website to provide up-to-date information, share international experiences, and address PPP-related questions. The PPP website is a much-needed tool to improve PPP capacity and knowledge for stakeholders in Vietnam, both public and private enterprises, and features online PPP training, a PPP helpdesk, and many information articles. The website can be visited at https://vcci-ppp.vn