Vietnam_Infrastructure_Report_Sept2010.pdf

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VIETNAM

Opportunit per le imprese italiane nel settore delle infrastrutture

LIstituto nazionale per il Commercio Estero, con la propria rete di Ufficinel mondo e con le attivit di promozione e di assistenza, costituisce unosservatorio sui mercati internazionali al servizio delle imprese italiane.

LICE ha realizzato in lingua inglese la presente indagine nellambito delProgetto straordinario Made in Italy in Vietnam finanziato dal Ministero delloSviluppo Economico, a cura dellufficio ICE di Ho Chi Minh City.

Lindagine, per rispetto dellambiente, disponibile via web alla paginahttp://www.ice.gov.it/paesi/asia/vietnam/index.htm , nella sezione Informazioni

Utili, e verr distribuita in formato elettronico.

Settembre 2010

Copyright Istituto nazionale per il Commercio Estero


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TABLE OF CONTENTS

RAPPORTO DI SINTESI E SCHEDE PROGETTUALI ......................................................... 1

1. EXECUTIVE SUMMARY VIETNAM INFRASTRUCTURE OVERVIEW...................... 6

2. VIETNAM COUNTRY AND ECONOMIC OVERVIEW.............................................. 26

3. SECTOR ANALYSES AND RELATED OPPORTUNITIES.......................................... 35

3.1 ENERGY................................................................................................................... 353.1.1 BACKGROUND AND POLICY.................................................................... 353.1.2 KEY POWER PLANT PROJECTS.............................................................. 42

3.1.2.1 COAL FIRED POWER PLANTS................................................................... 433.1.2.2 GAS FIRED POWER PLANTS..................................................................... 453.1.2.3 HYDROPOWER PLANTS............................................................................ 473.1.2.4 RENEWABLE ENERGY............................................................................... 50

3.2 TRANSPORT............................................................................................................ 53

3.2.1 RAIL ........................................................................................................... 543.2.2 AIRPORTS...................................................................................................... 58

3.2.3 PORTS............................................................................................................ 593.2.4 ROADS AND BRIDGES.................................................................................. 67

3.3 ENVIRONMENTAL SERVICES, WATER AND SANITATION........................ 733.3.1 WATER SUPPLY............................................................................................ 74

3.3.2 SOLID WASTE TREATMENT..................................................................... 763.3.3 WATER TREATMENT................................................................................ 793.3.4 CLEAN DEVELOPMENT MECHANISM (CDM) PROJECTS...................... 81


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4. SOURCES OF FUNDING ........................................................................................... 82

5. RELATED INDICATORS COMPARED TO OTHER ASIAN NATIONS........................ 89

6. BUSINESS ENVIRONMENT....................................................................................... 93

6.1 PROCUREMENT AND OPERATION LEGAL GUIDELINES..................................... 93

6.2 GENERAL LEGISLATION AND REGULATIONS ON INVESTMENT ININFRASTRUCTURE ................................................................................................................ 94

6.3 TAX REGIME............................................................................................................ 94

6.4 LABOR FORCE ........................................................................................................ 96

6.5 CHALLENGES AND OPPORTUNITIES FOR DOING BUSINESS IN VIETNAM....... 97

7. PENETRATING THE INFRASTRUCTURE MARKET IN VIETNAM ............................ 99

7.1 INVESTMENT AND PROJECT DEVELOPMENT...................................................... 99

7.2 ENGINEERING, CONSTRUCTION, EQUIPMENT AND SERVICES....................... 101

7.3 MARKET ENTRY.................................................................................................... 102

7.4 CASE STUDIES..................................................................................................... 104

8. CONCLUSIONS AND RECOMMENDATIONS.......................................................... 107

9. ANNEXES................................................................................................................. 108

10. LIST OF KEY PROJECTS....................................................................................... 118

11. CONSTRUCTION COMPANY DATABASE............................................................. 145


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PHYSICAL AND POLITICAL MAP OF VIETNAM


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MAP OF PROVINCES OF VIETNAM


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1. EXECUTIVE SUMMARY VIETNAM INFRASTRUCTURE OVERVIEW

1.1 Vietnam Economic Review

Economic growth is expected to continue at average rates of between 6% to 8%per year over the next five years. The expansion of the domestic private sector,continued growth in exports, increased foreign direct investment, and stablemacroeconomic policies provide the foundation for future economic growth.

Over the past five years, infrastructure investments in Vietnam, although totalling afairly sizable amount, have not kept pace with average annual GDP growth of 7.3%,trade volumes that are increasing by an average of 16% per year and implementedforeign direct investment (FDI) that increased from an average of USD 2.2 billion peryear from 2001 2005 to USD 7.4 billion per year from 2006-2009.

With the maturing of the economy the nature of FDI has shifted from light industrialmanufacturing for export (garments, footwear, furniture, food processing) to capitalintensive projects. Many of these FDI projects are in heavy industries and large-sizedreal estate developments and both require substantial infrastructure in surrounding

regions to facilitate the investments, including sufficient power supplies, road networks,water supplies, drainage and access to ports.

The noteworthy business opportunities in the infrastructure sector, created byeconomic growth but also by new and more demanding citizens expectations, design anextremely interesting scenario for Italian companies willing to set foot in the market, bothin terms of direct investment and trade. On the other hand as in many other developingcountries, there exist risks determined by inefficiencies and gaps, to be kept in mind,notwithstanding the slow but steady progress being made. They include protection ofinefficient state-owned enterprises in key industries, bureaucratic decision makingprocess that slows necessary investments in infrastructure, periodic asset bubbles in thereal estate and stock markets, and periods of sharp inflation that occur due to asset

bubbles or global commodity price increases.

1.2 Government Policies on Infrastructure by Sector and Prospects to 2015

Inadequate planning, insufficient domestic resources, complex administrativeprocedures, and a reluctance to open infrastructure to private sector participation has leftVietnam with enormous infrastructure challenges, from which stem as many businessopportunities. Existing power, pollution control, and transport infrastructure has reachedcapacity and without further investment, Vietnams ability to sustain FDI inflows andtarget GDP growth rates of 7% - 8% over the next decade will be limited.

Foreign and domestic businesses now cite infrastructure as one of the largest

challenges to operating in Vietnam. In surveys conducted by the Vietnam BusinessForum, the main channel for foreign businesses to collectively discuss investment issueswith the Vietnamese government, poor Infrastructure was cited as the largest bottleneckfor conducting business in Vietnam. Nearly 88% of foreign enterprises and 83% ofdomestic enterprises described Vietnams infrastructure as either Bad or Very Bad. Inaddition, an astonishing 95.6% of foreign trading enterprises (i.e., those involved inimport/export) rated Vietnams infrastructure quality as Bad or Very Bad.


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These results were similar to the findings in the 2009 Global CompetitivenessReport by the World Economic Forum, where infrastructure was rated lowest in a set ofVietnam competitiveness indicators.

Vietnams Minister of Planning and Investment Mr. Vo Hong Phuc and otherparticipants in the infrastructure working committee of the Vietnam Business Forumestimate that over the next five years, some USD 139 billion of new investment isnecessary in ports, roads, rail, airports and telecoms if infrastructure supply is to meetexpected demand.

In the power sector, an additional USD 4 billion of new investment per year isneeded from 2010 2025 (USD 60 billion in total), if generation is to keep pace withannual power demand growth of 13-14%. In the environment sector, the Ministry ofNatural Resources and Environment (MONRE) estimates USD 7 8 billion in investmentis needed to reduce industrial pollution, while the World Bank estimates USD 6 billion ofinvestment is needed from 2010 2020 to meet Vietnams water supply and sanitationobjectives.

In sum, to meet projected demand and development goals, Vietnams estimatedinfrastructure spending requirements over the next five years alone are in the range ofUSD 165 billion approximately USD 33 billion per year.

From 2010 - 2015 Mekong Research estimates that up to USD 85 billion ininfrastructure projects in the transport, energy and environment sector may beimplemented in Vietnam. This estimate does not include telecom infrastructure. Wherepossible, it is based on licensed projects or projects that are in early stages ofimplementation / preparation. Estimates for investment in environment sector areprimarily based on needs identified by the Vietnamese government and multilateralagencies such as the World Bank and Asian Development Bank.

The value, in billion of USD, of infrastructure projects with construction

commencing during 2010 2015 has been estimated by this reports authors as follows.

Transportation 52.0Ports 8.0Roads and bridges 14.4Railways and metropolitan rail 20.0Airports 9.6

Energy 20.0

Environment 13.0Water supply 6.0

Waste water management and solid waste 7.0

1.2.1 Transport

PortsVietnams port infrastructure is at capacity, particularly in southern provinces

where most manufacturing and FDI is concentrated. Container demand in southern portsis an estimated 6.3 million TEU, while port capacity is 5.8 million TEU.


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Ports in and around HCMC account for some 65% of total container throughputs inVietnam. The key ports in HCMC have shallow drafts and can only accommodatecontainer carriers, so called feeder vessels, under 30,000DWT1, from which cargo istrans-shipped to oceanic container vessels of a capacity between 50,000 and 80,000DWT or more. Feeder ships shuttle with Hong Kong and Singapore ports for trans-shipping and this increases shipping times and costs as compared to a situation whereforwarders would have direct access to ports where oceanic vessels could dock directly.Also Haiphong, the main port in northern Vietnam, can only receive ships of less than30,000DWT.

For all these reasons, the Government has approved a series of new portinvestments. In 2009, a consortium of Vietnamese and foreign companies opened thefirst of these deep water ports, in Cai Mep Thi Vai, Bar Ria Vung Tau province. It canaccommodate ships up to 90,000 DWT, enabling direct shipments for the first time fromVietnam to markets in the U.S. and Europe.

Key ports being developed include:i) A port complex at the Cai Mep Thi Vai region of the southern province of Ba

Ria - Vung Tau will eventually replace Saigon Port. The plan for the complex calls forseven container and general ports with total investment capital of USD 700 million. Fiveof the ports are being developed by foreign companies, such as Hutchison PortHoldings, Maersk, PSA Singapore Terminals. Initial phases of some of the ports haveopened already, with others in the first of multiple construction phases.

ii) In northern Vietnam, SSA Marine and Vinalines have signed preliminaryagreements to invest in a USD 100 million upgrade of Cai Lan Port, near Haiphong. Aspart of the upgrade Vinalines is to dredge the passage leading to the port toaccommodate ships of up to 40,000 DWT.

iii) Vinamarine is exploring development of a deep water seaport at Lach Huyen,also near Haiphong. The port would handle ships of 60,000 80,000 DWT with

construction scheduled to begin in 2010 and completed by 2015.

iv) In central Vietnam, the government has approved a preliminary plan to developan international transshipment port at Van Phong Bay, Nha Trang province. The port willaccommodate ships of up to 200,000 DWT and have a capacity of 17 million TEU peryear.

Roads and BridgesUnder the Ministry of Transport road development plan, a total of 2,160 km of new

roads are being built between 2008 and 2020. Of these, 445 km are under construction,with an additional 1,680 km of roadways in the project preparation phase. In addition, thePrime Minister has recently approved a plan to build a 3,041 km highway along

Vietnams coastline.

Key road projects under development in Vietnam include the following ones.

1 The DWT, or dead-weight tonne, is a standard international unit measuring a vessels

capacity and corresponds to the weight it can carry. It includes commercial cargo, fuel, drinkingand ballast water, supplies, passengers and crew.


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i) Vietnams Prime Minister has approved a plan to spend USD 1.52 billion to builda north south highway along Vietnams coastline. The highway will cover 3,041 km andinclude construction of new road and upgrading of existing roads. Out of these funds,USD 800 million will be spent between 2010 and 2020 to build, upgrade and improve892 kilometres or road along the route. The rest of the funds will be disbursed later.

ii) A 264 km highway linking Hanoi to Lao Cai, on the border with China. Totalinvestment capital is USD 1.25 billion, with USD 1 billion financed by the AsianDevelopment Bank. The first of eight construction packages was awarded to KoreasPOSCO. Construction expected to be completed by 2015.

iii) A 100 km upgrade to Highway 5 linking Hanoi to Haiphong started preliminaryconstruction in 2008 but has faced delays due to resident relocation issues. Therefore asignificant portion of the project is still to be built. Project investors include VietnamInfrastructure Development and Financial Investment Corp (VIDIFI), BIDV bank andVietcombank. Korea's GS Construction won an initial construction package for part ofthe route.

iv) A 130 km highway linking Ha Noi to Lang Son on the China border. Totalinvestment estimated at USD 900 million. The ADB may finance up to USD 500 millionfor the project, but the loan not yet approved. Vietnam Expressway Corporation is theproject developer, with construction scheduled for 2011 to 2015.

v) A 51 km highway through HCMC - Long Thanh - Dau Giay improving transportlinks between HCMC and Dong Nai province, and providing the main road route to theplanned Long Thanh International Airport. Total investment size is USD 932 million,with Japan Bank for International Cooperation (JBIC) financing USD 516 million, theADB USD 410 million, and Vietnam Express Corporation USD 5.7 million. Initialconstruction tenders have been awarded.

vi) The World Bank is preparing to contribute partial financing for a USD 1.4 billion

road project connecting the largest city in central Vietnam, Danang, with a newlyindustrialized region in Quang Ngai province 140 kilometers south of Danang. The WorldBank is providing technical assistance to structure the investment as a Public PrivatePartnership (PPP) that will combine government funds, funding from ODA sourcesincluding Japan International Cooperation Agency and the World Bank, and financingfrom private investors. The project is scheduled to start construction in June 2011.

Metro RailFour metro rail lines are expected to be built between 2010 2015, two in Hanoi

and two in HCMC. Preliminary activities about several more lines will also be carried out.Relevant authorities and private companies and banks, both Vietnamese and foreign,including some Italian ones, have expressed their interest in taking part in the

development of projects in this area.

i) In HCMC Metro Rail Line 1 is a USD 1.1 billion project funded primarily byJapanese ODA (USD 900 million). The 19.7 km route linking district 1 to suburb of ThuDuc includes subway and above ground tracks. A Japanese firm has been awarded theengineering and design contract. Due to regulations applying to Japanese bilateral ODA,construction and equipment supply firms from that country are expected to win themajority of tenders; however, sizable opportunities to win subcontracts may be available,in partnership with Vietnamese or Japanese contractors. The possibility to act as a sub-


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contractor in this or other projects financed through bilateral or multilateral APS is not tobe ruled out, as it could afford the opportunity to acquire some experience in theVietnamese market in prestigious projects and with a reasonable certainty as far ascompletion times and payments are concerned.

ii) The Metro Rail Line 2 in HCMC is a USD 1.2 billion, 19 km route with fundingfrom the Asian Development Bank (USD 540 million), German Development Bank (USD325 million), and European Investment Bank (USD 203 million). The majority of the routeis expected to be subway. Due to funding from ADB and European Banks, Europeancompanies are likely to be selected for construction and design packages. Prefeasibilitystudies for the route have been completed.

iii) In Hanoi, the Chinese and Vietnamese governments signed agreements forconstruction of a 13-km elevated rail line. Under the agreement, the Chinesegovernment is to finance USD 420 million of the USD 550 million project. Construction isto be managed by China Railway Construction Co. #6, with scheduled start date in 2010and completion in 2014.

iv) Japans Itochu is conducting feasibility studies for a USD 700 million, 45 km railline linking Hanoi to Noi Bai International Airport.

AirportsThe government has identified airport construction projects with expected capital

needs of USD 9.6 billion through 2020. Over the next decade the Civil Aviation Authorityof Vietnam (CAAV) intends to upgrade existing airports at Cat Ba Island (nearHaiphong), Chu Lai in central Quang Ngai province, and Phu Quoc Island.

The most significant new airport project being planned is the USD 8 billion, LongThanh International Airport in Dong Nai Province, 50 km to the northeast of Ho Chi MinhCity. Long Thanh is slated to become a new international airport servicing HCMC,eventually taking over international traffic from the existing Tan Son Nhat Airport. The

Prime Minister has indicated that the project may be opened to foreign investors, built asa BOT or BOO.

The airport is to be built in two phases, with the USD 5 billion Phase I havingdesign capacity of 20 million passengers per year, with a passenger terminal and tworunways. The plan for Phase II envisions four runways 4,000 meters in length and 60meters wide, capable of accommodating heavy long-haul planes, including the AirbusA380. Total capacity will be 80 to 100 million passengers and 5 million tonnes of cargoper year. The CAAV has awarded a contract to Japan Airport Consulting Company(JAC) to conduct feasibility studies and masterplanning for the airport.

1.2.2 Energy

Energy demand in Vietnam has grown by 13% - 16% per year since 2001. Totalelectricity sales in Vietnam have increased by 150% from 2001 through 2008, increasingfrom approximately 26,000 GWh to nearly 66,000 GWh. In its low growth scenario, theMoIT and EVN envision electricity demand growth of 13% per year from 2010 to 2015,and 6% per year from 2015 to 2020.


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Although capacity at existing power plants is approximately 15,800 MW, matchingforecasted demand for electricity in 2010, actual supply falls short of demand. This isprimarily due to lower output at hydropower plants during the dry season in Vietnam.During the dry season, hydropower plants may operate at only 40% - 50% of capacity,resulting in shortages to the nationwide grid.

Given that Vietnams current generating capacity is approximately 15,800 MW(and actual output is lower), it is clear that the country will require significant newinvestment in plants to meet even the low-growth demand forecasts. In terms of peakdemand, EVN and the MoIT foresee total generation requirements increasing by 140%over the next ten years, from 15,800 MW in 2010 to 38,000 MW by 2020.

In the draft of the 7th Power development master plan, which was underpreparation ath the time to close this Report, the most significant points for foreigninvestors and equipment suppliers include the following ones.

i) The governments determination to lessen the reliance on hydropower and toincrease the role of coal-fired power plants in the countrys energy mix over the nextdecade

ii) Encouragement of foreign investor participation in the coal-fired power plantsegment, while retaining Vietnamese-company focus on gas-fired and hydro powerplants.

iii) The increased role of non-EVN companies in the energy industry, especiallyVinacomin, a state-owned enterprise and leading coal producer, and PetroVietnamPower Corporation

iv) Plans to approve, and build, enough power plants over the next 10 years toincrease domestic capacity from the current 16,000 MW to approximately 55,000 MW by2020 an average of roughly 4,000 MW of new generating capacity per year.

v) A commitment to build Vietnams first nuclear power plant by 2020

Over the next five years, the government has planned for coal-thermal projects toaccount for nearly 32% of generating capacity, up from the current 12%. The majority ofplanned plants from 2010 2015 are coal-fired plants, including both domestic andforeign-backed projects.

Key upcoming projects by type of fuel supply include:

i) Vinh Tan power complex, Binh Thuan province includes three separate coal-firedpower plants with a total capacity of 4,400 MW, and construction of a dedicated port to

receive coal barges and/or ships with capacity of 150,000 DWT. Total investmentapproximately USD 1.8 billion.

ii) The Son My power complex, Binh Thuan province includes three coal-firedpower plants, 1, 2 and 3 with total electricity production capacity of 3,600 MW. Totalprojected investment at the complex is estimated at USD 4.9 billion.

iii) The Mong Duong power complex in northern coastal province of Quang Ninh,location of nearly all of Vietnams domestic coal supplies. Includes two power plants with


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total output of 2,200 MW. First plant is under construction by Electricity of Vietnam(EVN) with USD 900 million in financing by the ADB. Second plant is still in developmentphase, a planned BOT by U.S. firm AES.

iv) The Duyen Hai coal- power plant complex is located in the Mekong Deltaprovince of Tra Vinh, in southern Vietnam. Plans for the complex include three coal-firedpower projects with a total power generation capacity of 4,400 MW on 641 hectares ofland. Total investment at the site is estimated at USD 5 billion.

v) The Soc Trang power complex in the Mekong Delta. Four power plants with atotal installed capacity of 4,400 MW and will be constructed in phases. The power plantswill use super critical boiler technology and use imported coal. Japan Bank forInternational Cooperation (JBIC) has committed to finance one of the plants, with theADB possibly financing one plant.

vi) Power complexes using natural gas include the O Mon power complex near theMekong Delta city of Cantho. Four power plants are planned for the complex, with a totaloutput of 2,800 MW. In March 2010, PetroVietnam Gas Corporation, Americas Chevron,Japanese Mitsui Oil Exploration Company and Thai PTT Exploration and ProductionCompany signed contract establishing a consortium to build a USD 1 billion gas pipelineto supply power plants at O Mon. According to reliable sources, PetroVietnam Power Cois expected to build three of the four plants and ADB is deemed to have expressed apreliminary interest for financing them.

vii) The Nhon Trach gas-fired power plant complex in Dong Nai Province includesone completed plant of 460 MW, developed by PetroVietnam. Plans call for an additionalthree plants to be built increasing the total capacity of the Nhon Trach complex to 2,400MW. There are concerns that the three follow-on plants may not be built if additional gassupplies are not accessed from the Nam Con Son Basin, offshore eastern Vietnam.

1.2.3 Environment

Vietnam is facing severe degradation of its environment due to rapid economicgrowth and industrialization. Although the country has passed comprehensiveenvironmental protection laws, enforcement is weak. Vietnam now faces widespreadindustrial pollution, especially of its waterways.

Lack of government planning and investment has resulted in a deficit of watersupply and a shortage of wastewater and solid waste treatment facilities. The Ministry ofIndustry and Ministry of Environment (MONRE) estimate that USD 7.6 billion (120,000billion VND) of investment is needed to tackle pollution in 16 key industries2.Approximately one half of this amount is required in the key extractive industries of oil,gas and mining along with utilities (electricity generation) and steel.

Additional studies indicate that USD 5.6 billion of investment is needed forwastewater treatment, urban waste management, solid waste treatment, and wastewater drainage systems in 20 major provinces alone. This estimate includes some of theenvironmental services investment needed for the key industries cited above. Based on

2 Such sectors include textiles, oil and gas, coal and mining, chemical products, paper,

steel, beverages, electric power, cement, furniture and handicrafts, industrial parks, health,agriculture, transportation, tourism and aquaculture.


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a survey of the 20 key provinces, a total of 6 million tons of solid waste is generated inurban centres per year.

Pollution of water bodies has become very serious, due to the acceleration in thecountrys industrialization and urbanization. The capacity of wastewater treatment plantsis limited, therefore such waters are mostly offloaded directly to rivers and canals.According to MONRE, an estimated 2 million m3 of untreated wastewater is dischargedinto the water supply each day. Serious pollution affects both small and medium-sizedrivers in urban areas and major ones, which are a source of water for main citiesdownstream, such as the Red river in the north and Saigon and Dong Nai rivers in thesouth.

Hazardous waste from hospitals has become a primary concern. There are some670 hospitals and clinics operating without wastewater treatment plants, resulting in120,000 m3 of hospital wastewater discharged into the environment each year, and anadditional 24,000 tons of hazardous solid waste that is disposed without propertreatment.

Solid Waste TreatmentMunicipal waste is usually handled by URENCOs (Urban Environment

Companies), on a city and provincial basis. These companies are owned by the stateunder the local People Committee and are in charge of waste collection, disposal andtreatment. They may also have wider responsibilities for sanitation in public spaces andbuildings.

Solid waste treatment is an infrastructure sector that has seen limited butsuccessful investments by foreign investors in Ho Chi Minh City and Hanoi. Foreigncompanies have obtained concessions to operate landfills and to construct waste-to-energy plants at landfills. These investors have successfully negotiated tipping feeswith local governments at rates sufficient to provide returns on investment.

The Ministry of Construction, which is in charge of master planning and investmentfor solid waste, recently announced a fund raising package of 44,000 billion VND (USD2.2 billion ) sourced from state and local budgets supplemented with loans from theBank for Investment and Development of Vietnam (BIDV). The plan is to build 44municipal waste treatment plants (BOT or BT) for all municipalities by 2020. The firstphase, up to 2015, will focus on municipalities in Mekong Delta. This initiative couldprovide momentum in this sector and provide increased opportunities for technologytransfer and equipment sales from foreign suppliers.

With regard to medical waste, hospitals have been actively installing wasteincinerators over the last 5-7 years. Most incinerators are small and imported from eitherTaiwan or Japan.

Industrial and hazardous waste disposal is similarly characterized by many smallprivate operators. The exceptions are two incinerators run by URENCOs in Hanoi andBinh Duong province and a treatment plant being built in Ho Chi Minh City.

Water Supply and Wastewater TreatmentThe government has set numerous targets for water supply and sanitation in urban

and rural areas for this year and out to 2020. These include 95% of urban residentshaving clean water access by 2010, and 40% of urban/industrial wastewater treated. In


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rural areas, the government is targeting 85% access to clean water by 2010. By 2020,100% of residents in urban areas are to have access to 150 liters of clean water percapita per day, while in rural areas 100% are to have access to 60 liters per capita perday.

The World Bank estimates Vietnam needs some USD 600 million of investmentper year to reach these targets by 2020. This compares with some USD 1.1bn investedin the last decade. Hence spending needs to rise by a factor in excess of five-fold tomeet these aims.

The public sector dominate existing supply under the auspices of the provincial ormunicipal water supply companies (WSCs). Historically, the WSCs have been hamperedby central government price caps on water pricing, particularly for residential customers.Low prices, combined with inefficiencies and poor management resulted in operatinglosses and an inability to invest in new capacity.

The financing of urban water supply, sanitation and drainage is under theresponsibility of each provincial Peoples Committee. Due to budget shortages, thenational government provides support for capital investment and coordinates ODA fundsfor water supply and sanitation projects.

Water supply projects have been opened to several trial BOT or BOO investmentsby consortiums of Vietnamese companies, however there have been few foreigninvestments in water supply projects due, among other factors, also to government pricecaps on water supply tariffs.

1.3 Sources of Funding

Vietnam is unable to meet all of the financing needs for required infrastructureinvestments. The State budget remains limited, and existing national and state-ownedenterprise debt loads cannot increase indefinitely. As a result, the government has

gradually liberalized the infrastructure sector to new domestic and foreign projectsponsors in sectors such as energy and transport previously dominated by a singlestate-owned enterprise monopoly.

From 2001 2008, the World Bank estimates infrastructure investments inVietnam reached approximately 9.4% of GDP. Based on these estimates, total spendingon infrastructure (including telecoms) during the period was approximately USD 39.4billion, an average of USD 4.9 billion per year. Over the past decade, the World Bankestimates funding for infrastructure projects has come from ODA (37%), State Budget,Government Bonds and State-bank Lending (27%), Private Sector, including foreigninvestors and domestic companies (21%), final users, in the form of fees for services ortaxes (14%) and other sources (1%).

Despite greater participation by domestic private-sector companies and foreigninvestment, the state budget remains the primary source of funding for infrastructureprojects in Vietnam. State budget expenditures take the form of direct expendituresapproved by the Ministry of Finance or other relevant Ministries (Ministry of Construction,Ministry of Industry and Trade, Ministry of Natural Resources and Environment).

Investments by major state-owned enterprises active in infrastructure developmentare also considered State spending. These include investments by state-owned


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construction companies, and key companies involved in power generation includingEVN, PetroVietnam, Vietnam National Coal and Minerals Corporation (Vinacomin).

Finally, overseas development assistance (ODA) loans make up a criticalcomponent of spending on infrastructure projects, however, the majority of these loansare eventually placed on the government balance sheets and are included in statebudget obligations.

By infrastructure sector, the main sources of funding in order of frequency andvalue are:

Transport:Roadsi) State budgetii) ODAiii) Domestic consortiums building roads under BOT structuresiv) No foreign investment

Bridgesi) ODAii) State budgetiii) Domestic consortiums (including by private sector companies)iv) No directed foreign investment but there some loans and export credit from

foreign banks

Airportsi) ODA,ii) State budgetiii) No foreign investment.

Ports

i) ODAii) State budgetiii) Domestic consortiums (including by private sector companies)iv) Foreign investment (including directed private investment and financial

participant from bank)

Raili) State budget.ii) Future metro rail projects to be financed by ODA.iii) Foreign investment (being arranged, in urban railway networks)

Energy

Gas-fired plantsi) State budget (through projects developed by State-owned enterprises).ii) Foreign investment / private sector.iii) ODA

Hydropower plantsi) State budget (through projects developed by State-owned enterprises).ii) ODA.


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iii) Small and medium sized hydro projects developed by Vietnamese privatecompanies.

Coal-fired plants:i) State budget (through projects developed by State-owned enterprises.)ii) ODA.iii) From 2010 2015 expected funding from foreign investment and increased

participation by domestic private sector companies

Renewable:i) Small and medium sized renewable energy projects developed by Vietnamese

private companies.

Environment:Water supply and sanitation:i) State budgetii) ODA

Wastewater treatment:i) Private sector (owners of industrial zones, owners of specific industrial plants /

manufacturing plants)ii) State budget

Solid Waste:i) State budgetii) Foreign investmentsiii) Domestic private sector investment

1.4 Related Indicators Compared to Other Asian Nations

Vietnams infrastructure ranks 94th out of 133 countries surveyed in The GlobalCompetitiveness Report 2009-2010 published by the World Economic Forum, indicatingsignificant need for increased investment in the sector. Vietnams outdatedinfrastructure, combined with economic growth rates that are higher than most countriesin the region, heightens the importance of implementing infrastructure projects rapidly.

Vietnams infrastructure spending over the past five years has averaged between9% and 10% of GDP, the highest rate of the region. Indeed, China and Indonesia devote6% of their GDP to infrastructure, Thailand 3.4% and the Philippines less than 3%. Theabsolute value of Vietnamese expenditures is nonetheless still lower than that of theabove-mentioned nations and it is expected to remain so during the 2010-2015 period.

Indonesias government has approved a USD 140 billion infrastructure investmentprogram from 2010 2015, of which USD 90 billion is open to investment by private andforeign-invested companies.

Thailand is implementing a USD 57 billion economic stimulus program over thenext four years, of which nearly all is allocated to infrastructure investments includingmass transit lines, airports, roads and irrigation. Although political instability in Thailandis delaying implementation of some of these investments, the government is activelypromoting private sector participation to complement the governments expenditures.


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Vietnams commitments to infrastructure investments do compare favourably to the

Philippines. Over the past five years, annual spending on infrastructure in the Philippinesamounted to just 3% of GDP. However, the Philippines government has approved aComprehensive Integrated Infrastructure Program for 2009-2014 that would increaseinfrastructure investments to 6.5% of GDP per year over the next 6 years, with much ofthis investment coming from the private sector.

The emphasis that neighbouring countries have placed on attracting private sectorinvestment to meet infrastructure needs over the next five years is consistent withhistorical trends in these countries. While Vietnam is taking steps to increase non-stateinvolvement in infrastructure projects, World Bank data indicates that Vietnam does notcompare favourably to other nations in Southeast Asia when it comes to private sectorinvestment in infrastructure.

According to the World Bank database on private participation in infrastructureinvestments, the total value of infrastructure investments with private sector participationfrom 1990 2008 sees Vietnam occupying the lowest position among non-leastdeveloped countries of the region, with USD 6.2 billion. First is China (107.7 bn.) thencome Indonesia (45.2), the Philippines (45.1) and Thailand (35.3).

2.Legal Environment

Vietnamese procurement laws and regulations and special provisions forforeign companies Foreign companies operating in Vietnam are governed by the Construction Law

of Vietnam No. 16/QH 11 dated November 26, 2003 and the Tendering Law ofVietnam No. 61/2005/QH11 dated November 29, 2005.

Foreign investors in infrastructure projects are entitled to decide preferred meansfor selecting contractors, whether by open tendering, limited tendering or direct

appointment of contractors.

In projects where the Government finances at least 30% of the project costs,appointment of contractors is subject to Vietnams Tendering law. Such projectsmust select contractors using one of following methods: open tendering; limitedtendering; selection of an individual to carry out a consulting service; directappointment of contractors; direct procurement of goods; competitive offers; orself implementation. The conditions to use each these methods are clarified inthe Tendering Law and Decree No.58/2008/ND-CP dated May 05, 2008, whichprovides guidelines for implementing the Tendering Law

In 2010, the government issued new regulations under Directive 494/CT-TTg

requiring that projects financed by Vietnamese state capital can only issuetenders for goods, equipment and EPC contracts to international suppliers if it isdetermined that local bidders do not meet required standards. The purpose of thedirective is to encourage increased participation by domestic contractors andequipment / materials suppliers. Projects funded by ODA are not subject to thedirective.


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The World Bank and the Asian Developing Bank have their own the proceduresapplying to all contracts for goods and works financed in whole or in part fromtheir loans.

Regulations on operations of foreign contractors in Vietnam Operations of foreign contractors in Vietnam are governed by Decision No.

87/2004/QD-TTg of May 19, 2004. According the Decision, foreign contractors can operate in Vietnam only after

being granted contracting licenses by competent Vietnamese State agencies(including but not limited to the Ministry of Planning and Investment, Ministry ofConstruction and other agencies.)

For all construction projects in Vietnam, foreign investors must enter into apartnership with a Vietnamese contractor or use Vietnamese sub-contractors toimplement their work in Vietnam. Foreign construction companies are notpermitted to conduct 100% of the works involved in infrastructure or non-infrastructure related projects.

General legislation and regulations on investment in infrastructureprojects in Vietnam

Since 1993, Vietnam has issued numerous build operate transfer (BOT)regulations, pursuant to which private investors can build infrastructure undercertain favorable conditions and charge a tariff agreed with the State for the useof that infrastructure for an agreed period of time.

Key incentives offered to foreign investors investing in BOT infrastructureprojects include reduced corporate income taxes, delayed payment of incometaxes, exemption from import duties, exemption from land use or land rent feesfor the area of land allocated to the project, loan guarantees, and fewerrestrictions related to conversion to foreign exchange, among others.

Funds to cover expenses for formulating and appraising project feasibility studyreports or project proposals, excluding project proposals made by investors, canbe allocated from the state budget and other revenue sources as appropriate.

The most recent regulation on project finance deals, Decree No.108/2009/ND-CP, covers investment in BOT, build transfer operate (BTO), and build transfer(BT) projects. Several foreign investors are currently exploring build own operate(BOO) projects, though legal guidelines on such projects have not yet beenformalized.

Projects covered under Decree 108 include sectors and sub-sectors such asroads, bridges, tunnels and ferry landings; railways and related infrastructure,airports, ports, water supply and drainage systems, wastewater and solid wastetreatment, and power plants.

To date, nearly all infrastructure projects covered under this legislation havebeen in the port and power sectors, with a limited number of waste treatmentprojects approved.


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In practice, the regulatory framework for infrastructure projects is not applieduniformly. While the competence to decide about smaller projects has recentlybeen transferred to local authorities, for larger projects nearly all decisions mustbe approved by the Prime Minister or Deputy Prime Minister, creating significantdelays in implementation.

According to new drafts of a Public Private Partnership (PPP) law, which shouldbe enacted between the end of 2010 and the beginning of 2011, the governmentwill contribute up to 30% of an infrastructure projects value to assist in attractingprivate investment. It is expected that Government investment in such cases willfocus on creating conditions to attract private sector investment, such as accessto land, land clearance, and development of surrounding infrastructure (dredgingwaterways, road construction, access to power, water and other relatedinfrastructure).

3. Penetrating the Infrastructure Market in Vietnam

3.1 Investment and Project Development

To this day, there are about 90 projects implemented by private investor with acombined funding of USD 7,1 billion, coming from various sources. However, since 1993only two projects using international commercial financing have been implemented, thelargest one being the Phu My power plants and natural gas pipeline. The governmenthas repeatedly stated its interest in attracting foreign investment in some infrastructuresectors. Project financing in the form of the BOT contract, now appears regularly on listsof priority investments preferred by the authorities. Indeed, as it will be seen later, manyinitiatives are currently under study, with active support from not only the central andlocal authorities but also from the major development banks, bilateral or multilateral.Among the latter, WB (both through IBRD and IDA and through IFC) and ADB occupy aprominent position. Given also the opening to greater foreign participation ininfrastructure development in 2008-2010, some banks and Italian companies have

begun to explore the multiple business opportunities available in the market.

More particularly, as regards to transport, there are still few foreign investmentsbut future opportunities are arising in a number of projects, thanks also to new financingschemes inspired by the PPP model, which is strongly supported by multilateral banksand the Vietnamese Government. The latter, with assistance from the former, ispreparing new legislation to encourage investments based on PPP in infrastructure,which would build on a combination of government funds, private sector investment andincreased government guarantees to foreign project investors.

Vientamese entities invest in toll roads and highway projects, with a minimalparticipation of foreign contractors, mostly involved in projects which have obtained ODA

funding.Vietnam Expressway Corporation (VEC) under the Ministry of Transport is the

main developer of new roadways in Vietnam. The majority of roads and bridges inVietnam are built by state-owned construction companies including ConstructionCompany #1, Lilama, Cienco, and Vinaconex, among others. Therefore, mostopportunities for foreign companies in the sector are for equipment and machinerysupply rather than engineering or construction contracts. However, there areopportunities for large-scale bridge, tunnel, and highway projects where greatertechnical expertise is required or where funding is primarily from ODA sources. Given


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the strong contribution given by Japan and the active presence of Japanese companies,the construction of many ODA funded roads in Vietnam has been contracted toJapanese engineering and construction firms, which have then worked with localconstruction firms for project implementation.

Most airport upgrades and new terminal construction are developed byVietnamese aviation bodies, though projects involving ODA financing have involvedforeign contractors and designers, particularly from Japan. However, there areopportunities for foreign investors and/or financiers in the main international airport in thecountry, the one to be located in Long Thanh, close to Ho Chi Minh City, and worth anestimated USD 8 billion. The Prime Minister has preliminarly approved its constructionwith a BOT or BOO financing scheme, open to foreign investors. In the past, someairport expansions financed through ODA have involved foreign entrepreneurs anddesigners, in particular from Japan.

Projects to build bridges, urban railroads and parking garages can offer betteropportunities to foreign investors, even if to this day foreign participation has been moresizable in the areas of design, engineering, supplies and contracting rather than in thearea of investment.

In the ports sector, a series of projects has been developed with the participationof global port operators such as Hutchison from Hong Kong, SSA Marine from USA andSingapore Port Authority. These projects combined private sector investment by foreignport companies, with government commitment to build land-side infrastructure anddredging of waterways to access the ports. Also in this area the introduction of alegislation to foster PPP could bring renewed thrust to foreign banks and companiespresence.

Some energy projects currently under development involve foreign investors,particularly in the case of coal-fired power plants. Opportunities to invest in natural gas-fired power projects have bee in the past mostly confined to Vietnamese companies,

such as EVN and Petrovietnam. Nowadays, several foreign-invested projects have beendeveloped or are in the planning stages, however these involve companies that areconcurrently developing offshore gas reserves and pipelines. The opportunities to investin hydropower projects are limited as concessions have only been granted toVietnamese state-owned and private companies

In the environment sector, the best opportunities for foreign investment are insanitation, particularly solid waste landfills and treatment. Several foreign investedprojects in this sector have been approved, with one project already operating nearHCMC. Landfill waste-to-energy projects also appear to have potential, with severalforeign investors in project development stages.

Looking back at to the past three years, there has been movement towards moreforeign involvement in infrastructure development. However, the main hurdles to foreigndevelopment of infrastructure projects include:

- Long lead times to obtain government approval for infrastructureconcessions (if given at all). The Prime Ministers office usually must approve alllarge scale private and/or foreign sector infrastructure investments.


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- Approval of pricing schemes for infrastructure services. The private sectorcannot develop projects without an adequate return; yet the government placesprice ceilings on key services such as electricity, water supply, and sanitation.Negotiations over other fees, such as road tolls, are difficult to complete andimplement.

- Difficulties negotiating feedstock supply agreements, particularly in theenergy sector. Power project owners must negotiate with large state-ownedenterprises that supply coal (Vinacomin) or natural gas (PetroVietnam).

- Negotiations with end-users. In the power sector, Electricity of Vietnam(EVN) maintains a monopoly on power distribution. It is time consuming andextremely difficult to complete power sales agreements with EVN at rates highenough to ensure sufficient returns to private power developers. For othersectors, pricing must be negotiated with government bodies, such as solid wastehandling fees (city Peoples Committees), road tolls (Ministry of Transport, localPeoples Committees)

- Obtaining sufficient government guarantees that SOEs or governmentbodies will fulfill contract obligations. Without government guarantees,commercial financing, particularly international project finance, is extremelydifficult to secure.

3.2 Engineering, Construction, Equipment and Services

Due to the large investment requirements and complexities of executinginfrastructure projects in Vietnam, the best opportunities in the sector are in the supply ofequipment and services, or in the award of engineering, procurement and constructioncontracts (EPC).

The best opportunities for suppliers of equipment, services, and construction

management include:- Projects developed wholly or in part by foreign investors

- Projects with financing from ODA or multilateral sources (World Bank,Asian Development Bank)

- Projects with foreign project financing, including those that have securedexport credit financing

The projects above tend to use international competitive bidding practices to awardcontracts, have financing in place, and have more streamlined decision makingprocesses than projects managed by Vietnamese firms or with financing from the statebudget.

Projects funded with bilateral ODA or export credit guarantees usually require thata certain percentage of contracts are awarded to companies from the country providingthe financing. For example, Japan is the leading provider of ODA to Vietnamsinfrastructure sector, and most projects require that at least 60% of contract values areawarded to Japanese firms. In practice, the amounts awarded to Japanese companiesare typically higher.

While the projects above may provide the best opportunities for foreign equipmentsuppliers or contractors, the majority of infrastructure projects are undertaken by


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Vietnamese project developers, particularly SOEs. Nearly all key construction firmsinvolved with infrastructure development are large state-owned companies. Compared toprivate companies, state-owned companies are less risky as far as payments areconcerned and apply procedures that allow all businesses having some prerequisites tobid. On the other hand, dealing with state enterprises may take longer and prove morecomplex for the following reasons.

- The common practice by purchasing managers to require commissions of upto 10% before awarding a contract to a supplier.

- The need to bid on projects jointly with local Vietnamese suppliers- The existence of several levels in the decision-making process, both inside

each company and in the competent Ministry (for example, EVN is owned by theMinistry of Industry and Trade)

- The need to demonstrate international quality and competitiveness of products

Despite Directive 494/CT-TTg requiring that projects financed by Vietnamese statecapital can only issue tenders for goods, equipment and EPC contracts to internationalsuppliers if it is determined that local bidders do not meet required standards, mostequipment required for construction of infrastructure projects is not produced in Vietnamand therefore will continue to be supplied via imports and international suppliers.

Below are some of the common equipment opportunities available by infrastructuresector:

Transport- Roads/Bridges: Bulldozers, road levelers, backhoes, cranes, bore pile

machines/drilling equipment, bitumen/asphalt plants, mobile generators, trucks,- Ports: Cranes, container stacking equipment, dredging equipment- Airports: Air traffic control equipment, baggage handling equipment, runway

lighting- Rail: Rolling stock, signalling equipment

Environment- Composting equipment, complete plants- Complete wastewater treatment plants- Biological and chemical treatment agents- Leachate prevention and treatment technologies- Pumps

Energy- Typically EPC contractor installs or sources equipment for entire plants- Wide range of imported equipment, including

- boilers- turbines

- steam generators- cooling equipment- scrubbers (for coal-fired plants)

4. Conclusions and Recommendations

i) Vietnams greatest needs for new infrastructure are concentrated in the energyand transport sectors. The country faces energy shortfalls annually due to anoverreliance on hydropower plants which operate below capacity during the dry season.


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The problem was especially acute in 2010, with power outages and scheduled blackoutsaffecting businesses nationwide.

ii) Similarly, insufficient road and port infrastructure is limiting the countrys exportpotential and one of its greatest competitive advantages, which is to offer a low-costmanufacturing platform for export. The combination of unreliable power supplies andpoor transport networks is reducing the countrys attractiveness as a destination forforeign investment and threatening the governments goal of an annual GDP growth of7% - 8% over the next five years.

iii) The government and the state-owned enterprises are unable to finance all ofthe necessary investments required to meet the critical demand for new infrastructure.As a result, the Vietnamese government in 2009 and 2010 has sped the pace ofliberalization to permit more investment by domestic and foreign private-sectorcompanies. Increased amounts of overseas development assistance (ODA) have alsobeen approved for the transport and energy sectors.

iv) Transport and energy are therefore the two sectors providing the bestopportunities for Italian project developers and suppliers of equipment and services.Within the transport sector, the best opportunities are in port development or in suppliesof related equipment and services. In the energy sector, the best opportunities areconstruction or equipment supply for coal-fired power plants. The environment sector isstill strongly occupied by local service providers and contractors, but offers undoubtedopportunities because of the scale and the complexity of the issues caused byeconomic, and especially industrial, development.

v) As a whole, prospects for investing in infrastructure in Vietnam appearpromising. To face the vast necessities, well exemplified by the number of projectsapproved in the energy and transportation sectors, the government has made decisionswhich clearly aim at opening the market to a broader participation by foreign investorsand is adopting new laws to bring to fruition public-private partnership schemes to

finance infrastructure. In addition to the above mentioned factors, the presence in thepriority investment lists of many highly complex projects, with no precedents in thecountry, allows to forecast with a reasonable degree of certainty that foreign investorswill be strongly supported both by Vietnamese authorities and by local and internationaldevelopment banks. To compete in this area Italian companies shall establish apresence in the country, select some projects and technological counterparts, such asother Vietnamese or foreign companies, and financial counterparts, such as commercialor development banks or export credit agencies, and establish a dialogue with thecompetent administrations to get to the preparation of an offer.

vi) Projects with financing from foreign investors or overseas development aid arethe easiest to access for foreign suppliers due to international bidding practices, reduced

bureaucracy, lower payment risks and shorter delivery times. Italian contractors andequipment or service providers should therefore focus on projects which are at leastpartly developed or financed by foreign investors or overseas development aid donors.

vii) It is forecast that the demand of international-grade equipment and services willincrease thanks to the implementation of new infrastructure works and to the renovationof the existing ones, also through the use of more advanced machinery. Imports inalmost all categories of construction equipment have significantly increased between2004 and 2008. In the sector of construction machinery, covered by harmonized system


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(HS) codes 8249 and 8434, the value of the main counterpart countries exports hasincreased from USD 255 million in 2004 to 695 million in 2008. Flowd of Italian exportshave been recorded, in 2008, in the subsectors pumps (HS 8413), cranes (HS 8426)and other construction machinery (HS 8431).

vi) For projects funded by the state budget, suppliers and contractors shouldestablish relationships and demonstrate international expertise and of being capable ofsatisfying certain quality standards to relevant ministries, particularly the Ministry ofTransport, Ministry of Construction and Ministry of Industry and Trade. Similar stepsshould be taken with relevant state-owned enterprises developing key infrastructureprojects, for example Vinacomin, PetroVietnam and EVN in the power sector, orVinalines and Saigon Port in the port sector. State entities or State-owned enterprisesmay recommend that suppliers work through Vietnamese trading firms or agents. Forthis reason, but also because of the limitations imposed by current legislation, it is crucialto establish a stable presence in the country, with frequent visits or a representativeoffice, and start a relationship with distributors and other local counterparts, also in theprivate sector and with the support of the Italian Trade Commission office in Ho Chi minhCity. Supplying in cooperation with a local partner can leverage existing relationships thelocal firms have with government bodies and assist in navigating the tender process.

viii) Key risks related to supplying equipment and services to domestic entities anddomestically-financed investments include project delays, insufficient financing, paymentrisk, corruption in awarding tenders, exchange-rate fluctuations that may result indelayed payments, and extended up-front investment of time to establish relationshipsand to demonstrate product superiority.

References for further information

Readers interested in further information about regulations and businessopportunities may request them from the Hochiminh City Office of the Italian Institute forForeign Trade (Ice), using the following contact information.

Italian Institute for Foreign Trade11 Doan Van Bo streetWard 12 - District 4Ho Chi Minh CityVietnamTel +84 8 38269646Fax +84 8 38269647e-mail [email protected]

Readers are also recommended to consult the country webpage in Ices site, sinceit includes several documents about business opportunities in infrastructure, mostly in

Italian language. The page can be reached at the following Internet address.

http://www.ice.it/paesi/asia/vietnam/index.htm

The International Organizations section of the Industrial Collaboration andRelations with International Organizations Office in Ice Rome is available for informationand/or further details about projects financed by international lenders. Its contactinformation follows.


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Area collaborazione industriale e rapporti con gli organismi internazionaliLinea Organismi internazionaliVia Liszt 2100144 RomaItaliaTel +39 06 59926979Fax +39 06 0689280314e-Mail [email protected]


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2. VIETNAM COUNTRY AND ECONOMIC OVERVIEW

Geography and populationVietnam is located centrally in Southeast Asia and lies in the eastern part of the

Indochina peninsula, bordered by China to the north, Laos and Cambodia to the west,and the South China Sea and Pacific Ocean to the east and south.

Major agricultural products include rice, coffee, rubber, fruits and vegetables.Vietnams major industries include manufacturing, food processing, construction, oil andgas production, mining and quarrying.

Vietnam ranks as the thirteenth most populous country in the world with apopulation of 87 million. An estimated 72% of the population lives in rural areas, with28% living in urban centers.

Table 2.1 Population 2005-9 (000 persons)

20

05

20

06

20

07

20

08

20

09Total

population83,

10684,

15685,

19585,

789

86,818

Urban 22,337

22,824

23,343

25,374

25,678

Rural 60,770

61,332

61,852

60,415

60,959

Source: General Statistics Office of Vietnam (GSO), 2009 Estimates Preliminary

Vietnams population is growing by 1.5% per annum. Official populations of

Vietnams largest two cities are Hanoi (3.4 million) and HCMC (7.1 million).Actual populations in these cities believed to be significantly higher due topresence of unregistered residents that migrate to urban centers for employment. Someurban planners estimate actual populations at over 4 million in Hanoi and 8.5 million inHCMC

In late 2008, Hanoi annexed neighboring Ha Tay province. Hanoi province nowhas a population of 6.4 million. By 2020, Hanoi population (including Ha Tay province)expected to be between 8.1 and 9.2 million

Nationwide urban population growing at 3.4% per year, compared to 0.4% in ruralareas

Other key urban areas include the port cities of Haiphong in the north, Danang onthe Central Coast, and Cantho in the Mekong Delta in the south.

According to the United Nations Development Program (UNDP), 70% of thepopulation is under the age of 39 and the overall adult literacy rate is approximately 94%among men and women (compared to an average of 65% in most low incomecountries).


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Vietnams population is young, literate, hard-working, free of significant religiouscontentions, consumer-oriented, and highly motivated.

Government StructureThe Communist Party of Vietnam, founded in 1930, is the ruling party. Party

leaders are selected at Party Congresses, held every five years. In April 2006, theCommunist Party held its tenth National Congress, and the agenda included the electionof a new Central Committee. Mr. Nong Duc Manh was re-elected as General Secretaryof the Communist Party for a second term. Other key leaders include Prime MinisterNguyen Tan Dung and President Nguyen Minh Triet.

The next Party Congress is to be held in 2011. Due to the potential changes inleadership that can occur at Party Congresses, major decisions involving large-scaleinvestments, including those in infrastructure, can be delayed until after the Congressesare complete. As a result, large infrastructure projects awaiting approval in 2010 and2011 may be delayed until new political leadership is confirmed.

The four levels of government are the central, provincial (which includes the

provinces and the five directly administered municipalities), district and communal levels.Under the Constitution enacted by the National Assembly in 1992 and amended in 2001,the National Assembly is the highest organ of State power while the government is theexecutive organ of the National Assembly and the highest organ of Stateadministration. Other central level institutions established under the Constitution includethe Presidency, the Supreme Peoples Court and the Supreme Peoples Procuracy.There are currently 64 provinces and five centrally-run municipalities (Hanoi, HCM City,Hai Phong, Danang and Cantho).

Economic History and Integration into the World EconomyVietnam is a member of the Association of Southeast Asian Nations (ASEAN) and

the Asia-Pacific Economic Cooperation Forum (APEC), and is also a party to the ASEAN

Free Trade Area. In 1995, Vietnam entered into the General Agreement on EconomicCooperation with the European Union.

In December 2001, Vietnam and the US entered into a Bilateral Trade Agreement(USBTA). Vietnams obligations under the USBTA require it to liberalize trade andinvestment, to accede to international trade agreements and to implement generalprinciples consistent with WTO practices. Vietnam and the US signed a bilateral marketaccess agreement on May 31, 2006 and as a result, legislation was passed in the USCongress in December 2006 which granted Vietnam permanent Normal Trade Relationsstatus.

On October 26, 2006, the Working Party on the Accession of Vietnam to the WTOmet in Geneva for its 14th and final session. The meeting concluded eleven years of

preparation, including eight years of negotiations, with the approval by all Working Partymembers of Vietnams WTO accession package. On November 7, 2006, a meeting ofthe General Council of the WTO approved Vietnams membership agreement and onJanuary 11, 2007, Vietnam became the 150th member of the WTO.

The package of Vietnams accession documents consists of the Schedule ofConcessions and Commitments on Goods, the Schedule of Specific Commitments onTrade in Services (the Services Schedule) and the Working Party Report. TheSchedule of Concessions and Commitments on Goods sets forth a list of tariffs, quotas


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and ceilings on duties for agricultural and non-agricultural goods. Some of these involvereductions phased over periods up to 2014, the precise end date varying from product toproduct. The Services Schedule describes the services sectors that foreign serviceproviders will be granted access to, either immediately upon accession or subject to aphase-in period, and stipulates any additional conditions including limits on foreignownership. Finally, the Working Party Report describes Vietnams legal and institutionalframework for trade, along with commitments Vietnam has made in many areas,including on foreign exchange, reform of state enterprises, pricing and price controls,trading rights, excise duties, quantitative or other restrictions, and intellectual propertyrights.

Economic Growth and Structure of EconomyVietnams economic performance has improved remarkably since it embarked on

its Doi Moi (Renovation) policy in 1986 to transform itself from a centrally plannedeconomy into a market economy. In the first five years after Doi Moi, GDP growth was4.5%. Today, it has one of the fastest growing economies in the world. Annual GDPgrowth has averaged 7.3% over the past five years.

Vietnams economic transition has included growing industrial and services

sectors. To date, Vietnam has had enormous success as an exporter of agricultural andfood commodities such as rice, coffee, cashews, spices and seafood. However, asVietnams economy begins to modernize and grow from its rural roots, agriculturesshare of total GDP has declined while manufacturings share of total GDP hasincreased.

Table 2.2 Gross Domestic Product by Sector 2005 2009 (% of Total GDP)

2005 2006 2007 2008 2009

Agriculture 21.0 20.4 20.3 21.9 n/a

Industry andconstruction

41.0 41.6 41.6 39.9 n/a

Services 38.0 38.1 38.1 38.1 n/a

Source: IMF, GSO. 2009 Data on share of GDP by sector not yet available.

In 1990, agriculture accounted for 39% of Vietnams GDP, while industry andconstruction accounted for just 23%. As Vietnams economy has modernized,agricultures contribution to GDP has declined to 20%, while industry has grown to40%The slowdown of investment and economic activity in the second half of 2008resulted in lower output by the industry and construction sectors

The main drivers of GDP expansion over the past five years include consistentexport growth of over 20%, strong domestic consumption in the retail and constructionsectors, and an increase in FDI commitments from USD 6 billion in 2005 to USD 20billion in 2009. The services sector has grown by an average of 7.5% per annum overthe past five years primarily due to increased output from the tourism,telecommunications, trade, transportation, and finance sectors. Retail sales of goodsand services have been growing by some 20% per year over the past four years.


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Although overall agricultural output value grew slower than value in industry andservices sectors, output in one of Vietnams key export industries, seafood production,has risen by an average of 9.5%over the past five years.

Table 2.3 Real GDP Growth by Sector (Annual % change)

2005 2006 2007 2008 2009

GDP 8.4 8.2 8.5 6.2 5.3

Agriculture,forestry and fishery

4.0 3.4 3.4 3.8 1.9

Industry andConstruction

10.7 10.4 10.6 6.3 5.5

Services 8.5 8.3 8.7 7.2 6.6

Source: ADB, GSO

Vietnams GDP increased to USD 87 billion in 2009, doubling in size from 2003.However, the IMF and International Finance Corporation (IFC) estimate that the informaleconomy is approximately half the size of recorded GDP. Unrecorded economic activityis common due to the prevalence of cash-based transactions and under-reportedrevenues. With informal economic activity included, Vietnams total GDP may actually becloser to USD 120 billion.

Chart 2.1 National GDP 2003-2009

The economy expanded 5.3% in 2009 from a year earlier, down from 6.2% in

2008, according to the Asian Development Bank and General Statistical Office.Due to rising inflation and asset bubbles that developed in the real estate and

stock markets in 2007, the government enacted tighter monetary and fiscal policies in2008. These factors, combined with the global economic crisis, resulted in slowereconomic growth in 2008 and 2009 than that seen in previous years.

Trade Liberalization

87.2

39.645.6

53.160.1

70.182.8

5.30%

7.3%7.8%

8.4% 8.2%8.5%

6.2%

0.010.0

20.030.0

40.050.060.070.0

80.090.0

100.0

2003 2004 2005 2006 2007 2008 2009

NationalGDP($billion)

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

11.0%

12.0%

%Growth

Nominal GDP

Real GDP Growth


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Vietnam has implemented a number of trade liberalization measures inaccordance with its commitments under the ASEAN Free Trade Area, the USBTA, andthe WTO. These include a series of tariff reductions and other measures designed torelax import restrictions, and an opening of the export sector for a wide range of goodsto the domestic private sector. The import and export of the majority of goods, includingimports of fertilizers and exports of rice, no longer require import/export licenses from theMinistry of Trade and Industry.

As a result of these trade liberalization measures, Vietnam has achieved strongtrade growth over the past five years and domestic demand has increased for imports.Vietnam has leveraged its low-cost and relatively high-skilled labor force to become aleading destination for export manufacturing. Exports have surged since 2002 when theUSBTA came into force. The USBTA reduced tariffs on a wide range of goodsmanufactured in Vietnam, effectively opening the worlds largest market to Vietnam.Consequently, exports have played a major role in GDP expansion, growing by anaverage of 24.5% per year over the past four years, reaching USD 56.7 billion in 2009.

Chart 2. 2 Trade Volumes (Source: Ministry of Trade, GSO)

Trade Volumes USD$ billion (2005 - 2009)

0

10

20

30

40

50

60

70

80

90

2005 2006 2007 2008 2009

Imports Exports

Some of the growth in export value is attributable to the steep increase in oil pricesas crude oil is Vietnams single largest export item by value. However, the increases inoil exports have been accompanied by parallel increases in Vietnams other key exports,including seafood, furniture, garments, footwear, and agricultural products such ascoffee, rice, pepper, cashews, and rubber.

Vietnams imports in 2009 reached nearly USD 70 billion, widening the trade deficitto USD 12.3 billion. The rise in import value is attributed to higher global prices for keycommodities, particularly refined petroleum products, and increased demand for capitaland intermediate goods.

Though the trade deficit reached the highest levels seen in the past five years, it isnot considered a major concern because the currency outflows have been offset by anestimated USD 10 billion in foreign investment inflows, USD 2 billion in ODA funding,USD 5 billion in registered and non-registered remittances from overseas Vietnamese,and an estimated USD 2 billion in indirect investment. Moreover, a large proportion of


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Vietnam's imports came in the form of capital goods. Over the longer term, this shouldincrease Vietnam's productive capacity, boosting the economy's long-run growthpotential.

Foreign Direct InvestmentAs a key component of its reform policy, the government has gradually been

opening Vietnam to foreign direct investment (FDI). These reforms culminated in severalkey pieces of legislation over the past two years, including:

The enactment of the Common Investment Law (CIL) in November 2005,effective on July 1, 2006, which combines the Law on Foreign Investment withthe Law on Domestic Investment, provides more equal treatment to domestic andforeign-invested enterprises, better defines the types of foreign investmentspermitted, and clarifies the laws under which they can operate; and

Accession to the WTO in early 2007 that requires Vietnam to open more sectors ofthe economy to foreign investors (particularly in services and trading), andprovides greater legal protection to foreign investors.

Foreign investors seeking to spread risk across several manufacturing bases have

included Vietnam in China + 1 strategies, investing in production bases in Vietnam tocomplement existing investments in China.

The value of approved FDI in Vietnam has surged since 2004 on the back ofconsistently strong economic growth, market liberalization, and Vietnams entry to theWTO in early 2007. The total value of foreign investment projects approved by theMinistry of Planning and Investment (MPI) reached USD 20 billion in 2009.

Chart 2.2 Foreign Direct Investment Trends (Source: MPI)

Foreign Direct Investment Trends (2004-2009)

0

10000

20000

30000

40000

50000

60000

70000

2005 2006 2007 2008 2009

Implemented FDI Registered FDI


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FDI project implementation is increasing alongside FDI registrations, withdisbursed FDI in 2008 and 2009 reaching USD 10 billion, up from USD 3.3 billion in2005.

With the maturing of the economy the nature of FDI has shifted from light industrialmanufacturing for export (garments, footwear, furniture, food processing) to capitalintensive projects.

Many of these FDI projects are in heavy industries and large-sized real estate and both require substantial infrastructure in surrounding regions to facilitate theinvestments, including sufficient power supplies, road networks, water supplies, drainageand access to ports.

Some recent examples of companies committing to significant investmentsinclude:

Formosa Heavy industries from Taiwan plans to build a steel complex andintegrated deep-water port with estimated cost at USUSD 1.2bn

Vietnam has signed a USUSD 6bn joint venture deal with Japans IdemitsuKosan and Kuwait Petroleum International to build its second oil refinery in northernThanh Hoa province

Intels USUSD 1bn chipset assembly and testing plant in the Saigon Hi-TechPark is expected to trigger a surge of electronics investment.

Thailands Siam Cement has formed a joint venture with Petrovietnam andVinachem for planned construction of a USUSD 3.5 4bn petrochemicals complex nearVung Tau

Koreas POSCO steel planning a USD 5.8 billion steel complex

Large scale investment is flowing into new heavy-industry zones, including DungQuat Industrial Zone in central Vietnam (Tycoon Steel - USD 500 million, Doosan HeavyIndustries - USD 250 million, PetroVietnam refinery USD 2 billion)

Nidec Tosok (a leading Japanese electronics maker) is increasing investmentfrom USD 100 million to a planned USD 1 billion over the next five years;

Official Development Assistance (ODA)Aided by assistance in the form of grants and preferential loans, official

development assistance from multilateral and bilateral official government sources andinternational agencies (collectively referred to as ODA), Vietnam is also making progress

on meeting its social goals.

Over the past 10 years, the local economic boom has lifted an estimated 20 millionpeople out of poverty, as the proportion of the population considered by the World Bankas poor has fallen from 58% in 1993 to less than 15% currently. The government is alsoon course to meet other development goals, while social indicators such as educationenrollment and infant mortality continue to show a steady improvement.


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ODA remains an important source of capital inflows, complementing FDI. ODA is aprimary source of financing for poverty reduction programs and infrastructure,particularly for rural areas. For 2009, donors pledged a record USD 5.8 billion.

InflationInflation is a primary concern for the government and foreign investors in Vietnam.

Rapid economic growth, expanding bank credit, and global price fluctuations have led toperiods of sharp inflation over the past three years.

In 2008, year-on-year inflation reached 25.2%. In response to increased concernover rising inflation, the government has initiated a number of policy moves to addressthe issue. These included import tax reductions on a variety of industrial and consumergoods, and limiting new rice export contracts to try to lower food prices. The governmentalso required banks to limit securities investment loans and increased banks requiredreserves. The central bank has imposed stricter rules for lending, and raised interestrates.

During 2009 the government eased some of these restrictions and lowered interestrates as part of government stimulus package during the global economic crisis. Inflation

rates eased to 6.9% in 2009.

The main causes of high inflation in Vietnam include:

Rapid economic growth and associated increases in demand;

Expanding bank credit prior to government moves to restrict bank lending

Increased foreign investment and related demand for inputs and raw materials;

A global inflationary environment that has resulted in higher industrial input costs(petroleum, steel and other construction materials);

Higher food and construction materials prices:

Speculative activity in the stock and real estate markets and continued manageddepreciation of the local currency relative to global currencies.

Table 2.4. CPI Period average

2005 2006 2007 2008 2009

CPI periodaverage

8.3 7.5 8.3 25.2 6.9

Exchange Rates and Exchange ControlsHistorically, the governments priority has been to maintain export competitiveness

by allowing a gradual depreciation of the VND vs. the US dollar. The State Bank hasmanaged a decline in value of VND of between 1% - 2% per year over the past fiveyears.

A significant amount of economic activity in Vietnam is conducted in US dollars.Vietnam maintains a managed floating exchange rate regime under which the rate of


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exchange of VND to US dollars is adjusted according to market forces, subject toparameters set by the State Bank.

Under the managed floating exchange rate regime, the State Bank sets the officialexchange rate daily by averaging rates from the previous days interbank foreignexchange transactions. Foreign exchange transactions must then be executed withinplus or minus 5% of the official exchange rate. A significant amount of unofficial foreignexchange transactions occur and unofficial exchange rates may differ from the officialrate.

In 2009 and early 2010, the government revised its foreign exchange policy,weakening the currency by 6.4% after State Bank of Vietnam devalued the dong twice tobring the official exchange rate closer to the black-market rate.

The devaluations, combined with a shortage of foreign currency due to declines inexports, tourist arrivals, and foreign direct investment, led to foreign currency hoardingparticularly by exporters in late 2009 and into 2010.

Both trends are notable risks for exporters of infrastructure and construction

equipment to Vietnam. Local trading companies and end users may attempt to deferpurchases or cancel contracts following any weakening of the local currency. Similarly,due to the shortage of foreign exchange, some companies may not be able to accesssufficient funds to purchase imported products.

Table 2.5 Vietnam Exchange Rate Developments 2005 - 2009

2005

2006

2007

2008

2009

Dong per U.S. dollar, end ofperiod

15,875

16,091

16,114

17,698

18,670

Source: IMF, Interbank rate as reported by the State Bank of Vietnam


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3. SECTOR ANALYSES AND RELATED OPPORTUNITIES

3.1 ENERGY3.1.1 BACKGROUND AND POLICY

State-owned Electricity of Vietnam (EVN) manages the power sector in Vietnamand is responsible for ensuring sufficient electricity supplies nationwide. EVN is underthe direction of the Ministry of Industry and Trade (MoIT). Both EVN and MoIT report tothe Prime Minister, whose office must approve all major power projects, policies anddevelopment plans. EVN accounts for some 80% of total domestic power generationwith the balance supplied by independent power producers (IPPs) and imports fromChina. EVN manages almost all (95%) the countrys entire transmission and distributionnetwork.

While EVN remains the main builder of new power plants in the country, EVNsconstruction of new plants has failed keep pace with energy demand growth of 13 15%per year over the past decade. EVN has limited capability to meet projected futuredemand. This is due to a number of factors, primarily increased input costs for coal andother thermal fuels and inefficiencies in generation and transmission. EVN is unable to

pass on these increased costs to consumers due to government-imposed price ceilingson its electricity sales. Though a series of price increases have been allowed by thegovernment over the past two years, EVNs profit margins remain low, restricting itsability to invest in new plants.

Recognizing EVNs limited capability to meet electricity demand growth, in 2005the government enacted an Electricity Law which improved the legal framework forprivate participation in the power sector. It also created the Electricity RegulatoryAuthority under the MoIT to oversee pricing, new investment in generation andtransmission, and gradual liberalization of the generation, wholesale and retail marketsover the coming 20 years.

The main result of the new legislation has been the introduction of new developers,primarily state-owned enterprises which previously supplied fuels to EVN plants,including the Vietnam National Coal Corporation (Vinacomin) and PetroVietnam. Inaddition, the sector has seen new investment by private or semi-private (partiallygovernment owned) companies which are building smaller-scale power plants. Theintroduction of these new players has expanded sales opportunities for suppliers ofequipment, machinery and engineering services in the power sector.

While the number of Vietnamese companies developing power plants hasexpanded over the past five years, foreign participation has been extremely limited. Thisis due to a number of reasons, including: i) The negotiation and approval process is timeconsuming and bureaucratic, with the Prime Minister required to approve final contract

terms and licenses, ii) The difficulty of negotiating fuel supply agreements and power-purchase-agreements with suppliers and offtakers iii) The absence of sufficientgovernment guarantees provided to foreign developers.

Over the past 15 years, two large-scale foreign invested power projects have beencompleted and are in operation (Phu My 2.2, Phu My 3 gas-fired power plants in VungTau). The success of these plants largely depended upon one off support of the WorldBank and ADB which agreed to provide guarantees in an effort to kick-start foreigninvestment in the power sector in Vietnam.


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Forei

Vietnam_Infrastructure_Report_Sept2010.pdf

Documents

Transcript of Vietnam_Infrastructure_Report_Sept2010.pdf