PPP in Infrastructure: Financing Framework Is Essential

At the International Conference on Vietnam Public Private Partnership Program (PPP) in Infrastructure held by the Vietnamese Ministry of Planning and Investment and the World Bank (WB) in Hanoi, Deputy Finance Minister Tran Xuan Ha said, according to experts, the capital demand for Vietnamese infrastructure from now to 2020 is estimated at 10-11 % of GDP. However, under the current financial capacity, the financing for development investment from the State Budget has certain limits. The Government spending on general development investment in the 2001-2010 is around US$60 billion, accounting for 8.4 % of GDP, of which expenditure for traffic, irrigational, agricultural, forestry and fishery infrastructure makes up 50 %. On the other hand, refinancing of government’s loans is merely US$7.4 billion in the 2001-2010 period. This shows that finance sources of the Government hardly meet infrastructure investment needs and there is an urgent need for other capital sources, especially private sector.

 

In the past years, several capital-recoverable infrastructure projects have attracted the participation of the private sector (including FDI sector) like Phu My 2 power plant; Co May bridge (Ba Ria - Vung Tau province) invested by Hai Chau Vietnam Co., Ltd; and Son Duong - An Lac section on National Road in Ho Chi Minh City invested by Edico Company and Civil Engineering Construction Corporation No.6 (Cienco 6). “Results of these projects are very heartening and prove the soundness of policy encouraging all economic sectors, especially the private sector, to invest in infrastructure,” Ha added.

 

However, although the Vietnamese economic growth and development attracts more of the private sector to seek opportunities in infrastructure investment, the number of realised transactions is still beyond expectations. According to experts, approving and licensing process, capital payback rate and role and responsibilities of the State and private sector are now the main obstacles against PPP.

According to Mr Kamran Khan, Director of World Bank Infrastructure Financing and Research Group, the highest impediment to private financing for infrastructure in Vietnam is a clear legal system to enhance financial viability for PPP projects. Besides, Vietnam also needs a complete system of regulations and procedures to regulate private investments as well as sample transactions to strengthen the confidence of private sector in this system. Roles of State-owned enterprises in infrastructure financing also need clarifying.

 

Besides, according to Mr Ha, Vietnam needs to build a legal framework for PPP. The government needs to have master plans for sector-based and territory-based infrastructure development and determine fields for PPP priority. At the same time, the introduction of specific projects and implementation roadmaps are also essential. Possibly, several pilot projects should be carried out to draw experience to support policymaking.

Especially for finances, according to Mr Ha, the State capital allocation (both State Budget and ODA loan) needs restructuring to give rooms for the private sector. The financing regime, especially procedures in relation to financing and payment, needs perfecting to ensure the harmonisation of capital sources, including PPP partnership. The government also should consider guaranteeing regime for PPP investors to lend domestic and international capital as well as tax and fee policies.

 

Vietnam regards infrastructure development as a priority to ensure continued and balanced economic growth. According to the request of the Vietnamese government, the WB has closely coordinated with the Ministry of Planning and Investment, the Ministry of Finance and other relevant agencies to build a market-oriented PPP financing system in the past two years to boost private capital into infrastructure projects and help the Vietnamese government to carry out pilot PPP projects.

 

Ms Victoria Kwakwa, WB Country Director in Vietnam, the Vietnamese government and the WB have agreed that the issuance of the PPP Policy as a Prime Ministerial Decision in 2010 will be a policy trigger under the 2nd Public Investment Reform Loan. Ms Victoria added the WB Board of Directors have approved the preparation of a lending operation to help the Government implement the PPP Policy through pilot PPP projects. The first pilot PPP, a high-priority expressway, has been jointly selected by the MPI and WB on the basis of agreed selected criteria. More pilot projects will be identified based on selection criteria in the PPP Policy.

 

In the cooperating and coordinating programme for PPP infrastructure investment researches between the Ministry of Planning and Investment (MPI), the Ministry of Finance and the World Bank, MPI introduced three potential pilot projects to the WB, including the Dau Giay - Phan Thiet expressway project, Duong water supply project and Ninh Binh - Thanh Hoa expressway project. The research group has selected the Dau Giay - Phan Thiet expressway project as the first pilot project and submitted it to the Prime Minister for approval of PPP model in accordance with the general legal framework.

 

PPP model pilot projects are based on several criteria: building expressways, water supply systems or other priority fields stated in the PPP framework. Private investors need at least 50 % of total investment capital when they take part in the projects. Infrastructure asset value will be determined via competitive bidding. Besides, pilot projects must meet international standards and practices. The financing structure of pilot projects needs to prove that the public capital is used to contribute to PPP projects with private sourced capital.

 

PPP projects will use State Budget-sourced capital, even ODA loans, to prepare for investment and organise competitive bidding. The list of PPP projects, after being approved by the MPI, will be publicised by the MPI and related localities every year to attract domestic and international investors. Each field and locality can have particular regulations based on their local characteristics.

There are several problems in PPP transport projects. The first and foremost is the unclear PPP commitment, framework and legal regulations of the government (Decree 78/2007ND-CP being amended). Insufficient preparatory activities and finance for PPP projects lead to the shortage of data to invite and negotiate with investors, and there is no clear risk analysis and sharing. State-owned enterprises are major investors of BOT and small-sized projects. Large-scaled projects have low financial viability and are mainly carried out by assigned investors, not via competitive bidding.

 

On the other hand, the site clearance and land compensation do not please concerned parties, leading to the slowness of investment projects. The government should appropriately support slowed projects. Besides, State-led investors lack experience in managing and executing PPP projects. Experience of competent government agencies in PPP is also very limited, leading to incompleteness of PPP contracts and frequent amendments and negotiations of PPP contracts and the government is usually at the disadvantage position.

The infrastructure investment requires large capital over a long time and profit is not very attractive. Thus, the government needs to guarantee investing enterprises because if they do not, the government will have to borrow money. The government needs to share risks with private investors in PPP projects. To do this, the legal framework needs to be clear and limit overlapping and risks. Because the approach purposes are very different: the private sector for profit and the state for benefit, the key to successful PPP is to harmonise these two differences.