Caution Needed When Vietnam Pursues Development Through Infrastructure Spending

Diep Nguyen

09:59 07/08/2019

BizLIVE -

Although official development assistance (ODA) with low interest and long repayment periods from bilateral donors is still available, Vietnam must, nonetheless, be cautious on increasing any type of public debt.

Caution Needed When Vietnam Pursues Development Through Infrastructure Spending
Currently, two thirds of Vietnam’s infrastructure spending comes from public sources (World Bank, 21 February). Additional infrastructure spending from the government’s budget would add a significant fiscal burden, given the limited fiscal space, according to the estimate by World Bank. 
After all, in recent years, Vietnam has been pursuing a contractionary fiscal policy (e.g., a 3.6% deficit target for 2019 vs 3.7% for 2018) due to a large amount of public debt, which is gradually moderating.
Meanwhile, Vietnam has become ineligible for concessional official development assistance and preferential loans from multilateral institutions, as it has transformed to lower-middle income status (World Bank GNI per capita of USD2,400 in 2018). It ‘graduated’ from the World Bank’s International Development Association (IDA) in June 2017 and Asian Development Fund (ADF) of the Asian Development Bank (ADB) in January 2019. 
Although official development assistance (ODA) with low interest and long repayment periods from bilateral donors is still available, Vietnam must, nonetheless, be cautious on increasing any type of public debt.
Given the budget constraints and public debt limit, Vietnam’s government has, as such, been actively encouraging private sector investments in infrastructure projects through the PPP model. This is seen as a more ‘sustainable’ solution to support the increasing needs of infrastructure investment without imposing further fiscal and debt costs. 
Institutionally, the government has laid out several legal frameworks. This included Decree 15 (in 2015), which aimed at creating a unified legal framework for PPP, and the replacement of Decree 63 (in 2018), which introduced more simplified administrative procedures to implement PPP projects (Vietnam Law & Legal Forum Magazine, 8 June 2018). 
A project development fund (PDF) was set up in 2016 to support PPP project preparation (ADB, November 2017). According to Vietnam’s Ministry of Planning and Investment, 200 projects have been executed under PPP in the last 20 years, with the majority in transport infrastructure (The Saigon Times, 4 December 2018).
Despite some progress, issues still remain. One is the rigid risk-sharing mechanism between public and private sectors (World Bank, 21 February). In particular, the lack of shared foreign currency risk between the government and private companies seems to be a major concern among foreign investors (The Saigon Times, 4 December 2018). 
Encouragingly, the government is drafting a new law on PPP, a move expected to tackle the lingering issues and streamline the legal framework. It is expected to be passed in 2020 (Vietnam Investment Review, 17 January). 
Another area where improvement is needed is the public management of large-scale infrastructure in planning and coordination. For example, Ho Chi Minh City’s (HCMC) metro line 1 is two years behind opening schedule with cost overruns, mostly due to delays in disbursements to pay foreign contractors.
Broadly speaking, more reforms are needed to create a better investment environment to attract more private investors. According to the 2019 World Bank Ease of Doing Business report, encouragingly, Vietnam has made progress in low-ranking areas like starting a business (reducing the cost of business registration), paying taxes (reducing the employer’s contribution to the labour fund), and enforcing contracts (making judgements in commercial cases available to the public online). 
However, in other areas, like cross-border trading, resolving insolvency and protecting minority investors, progress has been stalled. Therefore, improvements in the overall investment climate are needed to further incentivise private participation in Vietnam’s long-term infrastructure plans.
The stakes are high. Given limited public fiscal space and fewer options for funding from development banks, Vietnam must pursue effective PPP as the best option to sustaining improvements in infrastructure and further boosting competitiveness.

DIEP NGUYEN

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