Diversifying capital sources for transport infrastructure development

Friday, 2015-01-16 07:51:48
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A view of the newly established Nhat Tan Bridge, which helps shorten the distance between downtown Hanoi and Noi Bai airport by half. (Image credit: giaothongvantai.com.vn)
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NDO – While funding for transportation projects is largely dependent on ODA, the State budget, and Government bonds with an expenditure of around VND50 trillion (US$2.35 billion) per year, the record expenditure of VND100 billion (US$4.7 million) in 2014 coming from non-State sources proves a significant contribution for the sector in diversifying capital for transport infrastructure development.

VND235 trillion to be spent on transportation projects

In recent years, the transport sector has recorded a major breakthrough in attracting investment from non-State sources for transport infrastructure. According to the management board for investment of public-private projects under the Ministry of Transport (MoT), over the last three years the ministry has mobilised VND160 trillion (US$7.52 billion) in the form of non-State resources for 65 projects, of which 2014 saw investment worth VND42.6 trillion in 24 projects.

The amount of VND160 trillion is considered extremely significant as it accounts for about 64% in comparison with other funding sources derived from the State budget and ODA expenditure on transport projects – which only meet half of the demand.

It is expected that in 2015 non-State investment in transport will be higher, at about VND45 trillion. The figure is estimated to total approximately VND235 for the 2016-2020 period.

For now, many projects previously drawn to a halt such as the Ninh Binh – Thanh Hoa – Bai Vot and Trung Luong – My Thuan Highways have been relaunched thanks to the investment from non-State sources.

In addition to road transport, the MoT also calls for non-State investment in many other fields, such as the North-South railway project, construction for Long Thanh International Airport, and a range of seaports and inland waterway projects.

Tackling obstacles

While responding to questions at the last eighth session of the 13th National Assembly, Minister of Transport Dinh La Thang confirmed this was a breakthrough to capital sources for future transport projects.

Though transport projects increasingly attract attention from investors, many of them hesitate to implement projects due to potential risks they may face.

After nearly 12 years operating in infrastructure with huge expenditure pouring into projects spanning from Ninh Thuan to Can Tho, Director of Ho Chi Minh City Infrastructure Investment JSC, Le Quoc Binh, said that for investors who make investments in transport infrastructure, profits always come with risks.

Dong Tru Bridge spanning the Duong River links Hanoi’s Long Bien and Dong Anh districts.

 

Binh added that transport infrastructure investment requires very large-scale and long-term payback periods, typically over 15 years, but ROI is quite low compared to other investment channels - only higher than interest rates by several percentage points.

This could lead to two problems Binh identified; firstly, long payment periods corresponding to macro-scale risks go beyond investors’ defensive measures. Secondly, in the context of low ROI but large-scale investment, a small deviation of profits could lead to heavy losses in comparison with other investment with higher ROI.

Therefore, to offset the possible encountered risks, investors, especially foreign ones, expect a high IRR, yet this is contrary to the opinion of the majority of State management agencies. For that reason it is very difficult for the two sides to negotiate contracts.

Meanwhile, the liquidity of investment for transport infrastructure projects is still low. Investors in transport infrastructure projects, especially BOT toll collection station projects, usually only have two choices. The first is to fully exploit the station throughout its phase to recover capital. The second is to transfer the right of toll collection to other investors. However, the second is not an easily feasible plan at any time as the number of qualified investors participating in the market is too small, not to mention the undervaluation of investment due to difficulties in pursuing partners for toll collection right transfer. This is one of the factors that scare away investors from participating in transport infrastructure development.

Moreover, investment in transport infrastructure is also affected by many other factors, such as the professionalism in management of the project implementation, as well as a range of policies related to State management bodies, legal risks, and regulations on toll rate adjustment.

Creating favourable conditions for investors, ensuring satisfaction for people

With a series of risks surrounding transportation infrastructure investment, Deputy Director of Investment Department under the Ministry of Finance Le Tuan Anh said that PPP is not a magic wand but an essential tool for Vietnam. A specific PPP model for Vietnam is important, he added.

Minister Thang also confirmed that a Government decree on PPP soon to be issued will certainly bring about big changes to boost PPP capital for transport projects.

However, the minister also indicated that there are difficulties and risks facing implementation of PPP projects, so ensuring harmony of interests between the State, investors and the people during the implementation process is a must. He also pledged to create favourable conditions for investors with long-term and stable investment policies, but also to ensure satisfaction for the people.

In order to attract private investment in the sector, there should be incentives for land use and better management capacity, in addition to support facilities like the warehouse system which connect modes of transport, suggested Chairman of the Board of Members of Vietnam Railways Corporation Tran Ngoc Thanh.

Financial expert Nguyen The Trong proposed that the establishment of infrastructure guarantee funds, provision of guarantees for viable PPP projects, and raising capital from pension funds and social insurance should be considered financial instruments to mobilise non-State resources for transportation infrastructure development.

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