|A section of the HCMC-Trung Luong expressway in Tan An, the capital city of Long An Province in Mekong Delta region. Vietnam needs US$110 billion to fund its infrastructure projects between 2021 and 2025 – PHOTO: BAO GIAO THONG
In a blog post, Donald Lambert, a principal private sector development specialist at ADB’s Southeast Asia Department, highlighted three strategies that can help Vietnam boost its economic growth in the years to come.
The first strategy is to increase the catalytic use of development assistance. “This requires a different mindset. Vietnam is no longer a low-income country, but it is also not ready to fund itself exclusively through private investment and domestic capital markets,” said Lambert.
He noted that a transition period is needed where the Southeast Asian nation uses donors’ ODA to catalyze private investment that would not come otherwise.
“This transition period will, however, require new tools. This includes issuing counter-guarantees to ADB and other development partners so they can use their strong international credit ratings to lower risk for projects,” he stated.
Vietnam should also prioritize ODA to strengthen the financial sector, providing standby facilities or other enhancements to make it easier for State-owned enterprises tasked with major projects to access affordable financing and allowing development partners to issue dong-linked bonds to lower the cost of capital for Vietnamese borrowers.
Using ODA catalytically to attract private investment closely ties into the second priority: passing a strong law on public-private partnerships (PPP).
Vietnam’s legislative National Assembly has already considered a first draft of the bill and hopes to pass a second version in May. He remarked that consultations should focus on the main missing ingredients needed to attract international investment.
For example, the law needs to better mitigate the risk of the demand for an infrastructure project falling short of projections.
“Vietnam already does this with feed-in tariffs for power generation projects. The PPP law should afford similar protections to other sectors, particularly transport,” he stressed, adding that this can be achieved through minimum revenue guarantees or ensuring that availability payments extend automatically beyond the current ceiling of five years.
Another PPP concern is governing law. The current decree governing PPPs provides more scope for using foreign laws to govern PPP contracts than the draft PPP bill.
He explained that PPPs require complicated legal contracts, and investors rely on legal systems with deep case histories to interpret them. Termination risk must also be addressed. Once a project is built, investors need assurances that they will be repaid even if the Government terminates the contract.
Without these changes, the new PPP law’s success is uncertain, and projects tendered in the road and other sectors are likely to receive only limited interest from foreign investors, he warned.
The final strategic priority is better mobilization of domestic capital markets. The passage of the new Securities Law in November 2019 was a good step as are recent regulatory changes that encourage companies to turn to the bond market instead of banks to fund long-term obligations.
He stressed that private pension funds, investment funds and insurance companies all need to mature so that there is a strong base of demand for corporate bonds.
Meanwhile, the main public pension, the Social Insurance Agency, must first be able to prudently manage and then start to invest in corporate debt.
Lambert suggested Vietnam establish a domestic credit rating agency and the Government actively market this investment opportunity to leading international rating agencies.
These steps will help the corporate bond market to evolve, eventually creating opportunities for project bonds, particularly if credit enhancement systems are available for these instruments, according to the specialist.
ADB estimated that Southeast Asia will need to invest, on average, US$210 billion in infrastructure per year through 2030.
Vietnam will require a large portion of this, with the Global Infrastructure Hub estimating that the country needs to invest US$110 billion between 2021 and 2025 for infrastructure and to meet the Sustainable Development Goals. Based on historical trends, this leaves a projected US$22 billion funding shortfall.
Lambert said the private sector has historically only funded 10% of Vietnam’s infrastructure, which means there is a lot of scope for the country to attract more investment.