FDI for Infrastructure Construction: Consistent Solution Needed

Infrastructure is the foundation to draw FDI flows to any country. In fact, countries with poor infrastructure will find it difficult to catch the interest of foreign investor. To break this vicious cycle, the Government of Vietnam has focused on resolving infrastructure investment issues. In the context of the tight state budget, mobilising FDI flows for infrastructure development is prioritised.

According to a report by the Ministry of Planning and Investment, Vietnam will need about US$68 billion of foreign investment capital for infrastructure development over the next five years. This is a significant challenge to the Government of Vietnam.

Vietnam is currently working to improve legal provisions covering infrastructure development to attract foreign resources. It, however, still faces some obstacles needed to be addressed, for example, regulations on socialisation of aviation, electricity and energy, and public-private partnerships (PPP).

According to economists, experiences from developed countries in the region such as Indonesia, Thailand, and the United States show that specific indicators such as the quality of communication systems, roads, railways and air traffics are taken into account to maintain FDI.

Accelerating SOE privatisation to draw foreign investors

To raise competitiveness and market transparency, the Government of Vietnam set a roadmap to divest State capital from many infrastructure companies. Accordingly, in the 2016 - 2020 period, Vietnam has planned to reduce State ownership ratio in State-owned enterprises (SOEs). Accordingly, the Government will hold over 65 per cent of stake in aviation, mining and oil and gas exploration and production companies, 50 - 65 per cent of stake in chemical and aviation, petroleum and telecom (with network infrastructure) and electricity retail companies with over 30 per cent of market share.

The government may hold less than 50 per cent, even zero of stake in water supply and drainage, manufacturing, real estate, agriculture, forestry, power generation, telecommunication and construction.

For foreign businesses, the quickest way to have a foothold in the Vietnamese market is acquiring the stake in domestic companies, especially equitised SOEs. But, share value is inhibiting them from taking over local firms. Although selling price is not a legal content, the offering party must adhere to legal regulations on share offering because it is the government.

In the viewpoint of the Government, the selling price must be the market price. But, whether the selling price, the listed price or traded price on UPCoM is really the market price for long-term investors who buy a big share, not just a few units?

According to economists, transactions on the stock market are usually performed by financial institutions and speculators who cannot actually create value or provide long-term benefits to listed companies as strategic shareholders can. If such regulations are rigidly applied, they will adversely affect the privatisation process, which will lead to lengthy negotiations and dissatisfactory outcomes.

Thus, it is believed that the SOE privatisation can only be effective when the share selling price is negotiated on the market value of such SOE. Therefore, the share selling price to shareholders should not be based on trading prices on the stock market. Instead, it must be determined by business valuation and taken into account all rights, assets, future development and other market factors.

Adding appeal to PPP model

As for the public-private partnership (PPP) investment form, after two years of enforcing Decree 15/2015/ND-CP on PPP, no major PPP projects have been auctioned successfully. Economists attribute failures to many reasons, including the lack of investment incentives and weaker appeal than investments in other economic sectors.

Non-state commercial banks (both local and foreign) usually show their concerns over the practicality of PPP projects when they receive borrowing documents. In addition, restrictions on government guarantees and principles of financial compensation for PPP projects are among major issues needed to be resolved first to start PPP programmes in a comprehensive manner. These issues can be addressed on a project-by-project basis but the cost of preparing project proposals without guidance on possible support will make preparations more difficult.

To attract FDI funds for infrastructure construction projects, Vietnam should concentrate its resources to carry out some backbone projects funded by banks to demonstrate the feasibility and scale of this investment model, according to experts. When these projects are successful and profitable, foreign and domestic investors are motivated to pursue PPPs. The successful implementation of such projects will also help authorities and investors gain practical experience and lessons learned from law enforcement.

Luong Tuan / vccinews