Of ill repute

The poor standing of Chinese contractors in infrastructure projects in Vietnam has cast a cloud over the Long Thanh International Airport project.

Vietnam is simultaneously building ambitious national key projects to pave the way for future growth and to alleviate growing bottlenecks. As rising incomes result in fewer international aid dollars and the clout of State-owned enterprises (SOEs) wanes, Vietnamese authorities are turning to the public private partnership (PPP) model for infrastructure development, which relies on both local and foreign capital. The problem is, an unattractive PPP scheme is making non-Chinese investors think twice about diving into the development of the multibillion-dollar Long Thanh International Airport, while the public are dead against the idea of having contractors from its northern neighbor.

Lowest possible cost

Chinese investors are no strangers to sub-par projects in Vietnam that run massively over budget. Hanoi’s first urban railway line had a trial run in September cancelled without an alternative being proposed by its Chinese builders. On September 18, Vietnamese authorities told the media that further work on the project is not possible until China disburses $250 million in official development assistance (ODA) promised last year.

Construction of the capital’s first urban railway was planned to run from 2008 to 2013 at a cost of some $552 million, with $419 million in loans from China. Ground wasn’t broken until 2011. Costs were then projected to run to $868 million by 2016, with an additional $250 million to be pumped in by Chinese lenders. The final disbursement is due next March, but complicated procedures applied by China’s Eximbank have hindered the Chinese consortium headed by the China Railways Sixth Group.

Poor quality materials, faulty installations, and untrained workers have raised safety concerns. During his official visit to Beijing last year, Prime Minister Nguyen Xuan Phuc said the slow pace of work and accidents have, among other things, contributed to greater congestion in Hanoi, triggering public displeasure. There are plans to ask the Chinese embassy to work with the consortium on ameliorating the situation.

Common to all the projects have been low bids and cheaper investment arrangements. Economist Ms. Pham Chi Lan, former Vice Chairwoman of Vietnam Chamber of Commerce and Industry (VCCI), told VET that this will turn out to be very expensive in the long run and costs will continue escalating for low quality results. “Mistakes, shoddy work, obsolete machinery, and accidents have become commonplace, causing a general loss of confidence in China-backed projects,” she added. “Many are being reappraised, including 12 under the Ministry of Industry and Trade.”

But the thirst for capital has nevertheless spurred some local investors to disregard public sentiment and take on Chinese partners. The Hanoi Export-Import Co. (Geleximco), a private conglomerate with 30 member units and dozens of affiliates operating in industry, real estate, and financing, and its Chinese partner, Sunshine Kaidi New Energy Group, in August submitted a joint proposal for in principle approval to develop Long Thanh under the PPP model. Despite funding concerns for the new airport, which will cost an estimated $16 billion, the companies promised to finish work within three to five years at “the lowest possible cost”.

It wasn’t the first time Geleximco Chairman Mr. Vu Van Tien has made such a move. Dubbed as one of Vietnam’s “super-rich”, with total assets of $3 billion, eyebrows were raised after Geleximco and Hong Kong United Investors Holding were nominated to invest in four large-scale infrastructure projects worth up to $50 billion in Vietnam late last year: two sections of the North-South Expressway, an expressway that spans three economic hubs in the northern province of Quang Ninh, the North-South high-speed railway, and Long Thanh.

Unclear motives

Declining to speak about the latest proposal for Long Thanh, Mr. Tien, who is also Chairman of mid-sized lender An Binh Bank, told Vneconomy, VET’s sister publication, at the time that Geleximco has established partnerships with a number of large Chinese firms, including Kaidi, as well as major investment funds like Huarong Overseas Investment – a Chinese Government investment arm, China Minsheng Financial, and the Hong Kong-based IDG. At a July meeting with the Vietnamese Prime Minister in Hanoi, Kaidi Chairman Mr. Chen Yilong said that Kaidi, Huarong, and Geleximco had set up an international investment fund worth $15 billion to carry out joint projects.

The selection process hasn’t started yet, but questions are already being asked about its partner’s expertise. Kaidi was established just 25 years ago and has no prior experience in building airports, according to the profile published on the company’s website. The United Nations Development Program, a partner of Kaidi in the ODA-funded energy project in China, said the company is a high-tech investment company working in the field of green energy and is known as the largest private company in biomass power generation in China. It’s no stranger to Vietnam, but not in the field it professes to excel in. Kaidi has worked as an investor, contractor, and consultant for at least five thermal power projects in northern and central Vietnam. Two of them began operations at the end of May this year but the others have been delayed.

Airports Corporation of Vietnam (ACV), the State-owned company in charge of managing all the country’s airports, said caution is advisable when it comes to selecting an investor for the project. “Long Thanh will be the country’s main airport, so national security interests are at stake,” Deputy CEO of ACV Mr. Do Tat Binh told VET. “We will follow a strict set of guidelines to select investors, including experience in the field and financial capacity.”

ACV has been assigned by the government to study investment proposals for the project, but if outsiders are involved, questions are being asked whether ACV will remain the operator of the airports or will simply receive a percentage of revenues, with the balance going to external investors. “It’s too soon to appraise Geleximco’s plan right now,” Mr. Binh said. “But if the company does select a Chinese partner, then ACV will have to control the construction technology and quality and progress of the project,” adding that there will be “many risks” if the pair are granted the project.

Chinese firms, which normally offer a markedly lower price than competing bidders thanks to subsidies from the Chinese Government, are currently the dominant engineering contractors in Vietnam. However, “unlike other contractors who, once awarded contracts, strictly implement the terms and conditions, Chinese contractors normally adopt a different strategy,” Mr. Le Hong Hiep, a Vietnam analyst at the ISEAS-Yusof Ishak Institute in Singapore, wrote in a 2013 research paper. “They are willing to offer low prices, but after being awarded the contract they try to save costs by persuading project owners to change the contract’s original terms and conditions or just ignore them.”

Alternative choice

The Hanoi urban railway line has been seized upon by analysts as a prime example of problematic China-backed projects. Surveys suggest most projects suffer from quality concerns, delays, and cost overruns. These include the $69 million My Dinh National Stadium in Hanoi, a $360 million steel complex expansion in northern Thai Nguyen province, a $264 million iron and steel mill in northern Lao Cai province, a $1.4 billion bauxite-alumina project in the central highlands, waste treatment and energy-related projects, and a number of textile factories.

Analysts say that Vietnam wouldn’t need Chinese contractors to build Long Thanh if SOE equitization and PPP were both more reasonable from a commercial standpoint. Two years ago, France’s Aeroports de Paris (ADP) expressed an interest in investing in Long Thanh and said it could bring $2 billion to the table. It was the first investor to contact ACV as a possible strategic partner, two days after the government approved the equitization plan.

Even though the government has given approval for ADP to acquire 20 per cent of ACV, considerable disagreements over the sale still need to be addressed by the government, according to a knowledgeable source. First, the French airport authority wants to establish a principle of “One Airport - One Operator” at all 22 airports currently managed by ACV, through a special decree or circular issued by the Ministry of Transport, before completing the acquisition. This is believed to be the most important issue for ADP, with ACV to be the only operator even when airports are expanded or upgraded.

Secondly, the French company wants to have assurances that ACV will benefit from the under-construction Long Thanh. In ADP’s opinion, if Long Thanh is put into operation, part of the revenue from Tan Son Nhat, which is currently the biggest money-maker for ACV, will be reallocated. Thirdly, there is disagreement over the price of the shares to be sold to ADP. The French partner wants the price to be negotiated based on various pricing methods, with expectations suitable to its business and strategies, while the government wants to set the price based on the price of ACV’s shares on the Unlisted Public Company Market (UPCoM), where its 2.1 billion shares were listed in November last year after an initial public offering (IPO) in 2015.

In the meantime, the legal framework for PPPs has been in place for ten years but results remain limited. Inadequate support to the financial viability of projects, weak financing, and risk allocation between the government and the private sector have appeared to be not so fruitful for investors during Vietnam’s infrastructure development race. The Japan International Cooperation Agency (JICA), the implementing arm of Japan’s ODA programs, acknowledged in a study that the guarantees and assistance currently offered under Vietnam’s PPP scheme have been inferior to other countries, just a few months before the Japanese Government also denied a $2 billion investment in Long Thanh in 2014.

by Anh Duy / VET