Vietnam Strongly Needs to Improve Infastructure, Economists Say

Recently, HSBC Vietnam released the report named “Vietnam at a Glance”, in which HSBC gives out some comments and predictions about Vietnam’s infastructure currently. Moreover, HSBC highly recommends Vietnam to quickly improve the infastructure so that it will be better for the economic development later on.

While COVID-19 disrupted the agenda, the emphasis on long-term infrastructure has resurfaced as a priority for policymakers. In particular, upgrading and expanding Vietnam’s road connectivity remains the core, given heavy dependence on road transport in manufacturing and residents’ mobility. That said, some of the mega projects face long delays and cost overruns, thus prompting the authorities to take a more active role in overseeing progress and solving lingering issues.

To balance Vietnam’s increasing appetite for quality infrastructure and constraints on public funding, the country will need to continue to tap the Public-Private Partnership model. A recently enacted PPP Law is a positive move, reflecting the authorities’ willingness to solve lingering issues for private investors. That said, broad reforms are needed to encourage more private participation in long-term mega projects.

High frequency data starts 2H22 with a pergence. Export growth, surprisingly, moderated sharply, mainly dragged down by a drop in smartphone exports. This signals the start of rising trade headwinds, as global demand is set to slow. While imports also fell, the trade surplus shrank, eroding Vietnam’s current account position. That said, household spending continued to gain traction, with rosy consumption data on both goods and services, benefitting from re-opening tailwinds.

Time to revisit infrastructure

It is no secret that Vietnam is a firm believer in how quality infrastructure supports sustainable growth. After two years of disruptions stemming from the pandemic, infrastructure has ultimately returned to policymakers’ focus. Unsurprisingly, the government once again placed the development of infrastructure as a priority to be achieved in the Socio-Economic Development Plan of 2021-30.

Despite some improvements, further progress in the quality of Vietnam’s infrastructure is urgently needed. According to the 2019 Global Competitiveness Report, Vietnam ranked 77 out of a total of 141 countries in overall infrastructure, with low rankings across almost all transport sectors, especially in the quality of its road and air transport. While Vietnam is a regional outperformer in attracting consistent FDI, out-dated and overloaded infrastructure is constantly cited as an impediment to its future manufacturing capacity.

For example, in the European Chamber of Commerce’s latest survey, business leaders identified administrative difficulties and infrastructure development as the two main areas for future improvements. As the majority of FDI flows into manufacturing, this poses a hiccup to the production and export of manufactured goods. Indeed, according to the World Bank’s data, Vietnam’s non-tariff trade costs are already higher than ASEAN peers, with transport congestion costing as much as 21% of GDP in 2016, well-exceeding the global average of 12%. Thus, upgrading and modernising existing infrastructure would empower Vietnam to reduce the barriers to trade and strengthen its ability to attract FDI, in turn supporting its long-term growth.

In addition to upgrading existing infrastructure, Vietnam is also in increasing need of attracting more investment into new infrastructure to sustain strong economic growth and accommodate rising urbanisation. Based on the Global Infrastructure Hub’s estimates, Vietnam requires as much as USD25bn on average over the next 20 years, almost USD5bn more than its previous estimates per annum. Although the energy sector still accounts for the lion’s share (44%), road transport has risen to higher significance (22%), followed by telecommunications (16%).

Indeed, ‘traditional’ infrastructure has remained the core in recent years’ infrastructure projects. In particular, upgrading and expanding road transport has been a primary focus. In September 2021, Vietnam approved its master plan for road development for 2021-30, with a vision towards 2050, the first of such for a specific industry under the Law on Planning. Currently with around 1,290km of expressways, Vietnam aims to develop 5,000km by 2030, and further achieve over 9,000km by 2050. Among the projects, the North-South Expressway, connecting the key economic zones and easing traffic congestion, is seen as a national priority. Vietnam is striving to build over 2,000km in the eastern corridor and 1,000km in the western cluster. The first phase of the Expressway included 11 sub-components in the period of 2017-20, with the second phase of 12 sub-sections for 2021-25. Early in January, the National Assembly approved funding of USD6bn+ for the construction of these 12 sub-projects.

Given the significance of road infrastructure, it is not difficult to understand why Vietnam has been pushing to spearhead progress in the key North-South Expressway. Road is in a clear dominant position as a means of transport, accounting for three-quarters of freight and more than 90% of passengers carried. Vietnam’s continued dependence on road also highlights the need to persify traffic flows by developing other forms of transport, such as airports and railways, which have been limited in availability and access. Authorities have recognised this, driving projects such as Long Thanh International Airport, North-South high- speed railway, and new HCMC metro lines to facilitate both human and cargo mobility.

That said, many of the projects have suffered long delays and excessive costs. Out of the 11 sub-sections in the North-South Expressway for the period of 2017-20, the majority has seen delays in completion. For example, Dien Chau – Bai Vot Expressway, a subsection of the Expressway, was only 1.5%-complete by early 2022, prompting PM Pham Minh Chinh to request the Transport Ministry to ensure progress by solving issues such as slow site clearance, lack of materials and limited contractor capacity (Vietnam+, 5 February). Similar issues also arose in Hanoi’s second metro line, with an initial completion timeline of early 2018 pushed to end-2022. Now, the authorities are starting to take a more active role in overseeing progress and solving the roadblocks of these infrastructure projects. The government has recently established a steering committee, led by PM Chinh, that will assist in implementing key transport projects.

Given Vietnam’s ambitions on infrastructure, another key question is, how to finance? Currently, around 90% of Vietnam’s infrastructure spending comes from public sources, with concessional financing accounting for almost 50% of total infrastructure budget between 2010 and 2015 (World Bank, May 2020).

Indeed, Vietnam’s infrastructure spending tops ASEAN, consistently accounting for 6%+ of GDP annually. That said, Vietnam has been actively seeking to find alternative sources after ‘graduating’ from preferential loans in late 2016. As such, the Public-Private Partnership (PPP) model has emerged as a ‘sustainable’ solution to support the rising needs of infrastructure without imposing further fiscal and debt burdens. That said, the magnitude of such arrangements remains small, and mostly concentrated in the energy sector.

On a positive note, Vietnam has made progress in streamlining the legal framework to address lingering issues. The long-awaited PPP Law was passed in the National Assembly in mid-2020, before coming into effect from 1 January 2021. For the first time, the PPP Law allows the State to commit to revenue sharing mechanisms, a likely boost for PPP projects. That said, progress should not stop here. Broadly speaking, more reforms are needed to improve the overall investment climate to further incentivise private participation in Vietnam’s long-term infrastructure plans, boosting its competitiveness.