Crunch time for expressway PPPs

The North-South Expressway will stretch over an impressive 2,100km, Photo: Le Toan

The Ministry of Finance (MoF) has raised concerns over the limited state funding for the development of the vital national transport project after the proposal of the Ministry of Transport (MoT) to transform three of the eight public-private partnership (PPP) sections into public investment projects.

“If approved, the number of totally state-funded sections will jump from three to six, thus increasing total investment and site clearance costs to VND54.36 trillion ($2.36 billion),” the MoF said in a recent report to the government.

Meanwhile, the country’s mid-term public investment fund approved by the National Assembly (NA) is VND55 trillion ($2.39 billion). This means that there will be no funding left for the five remaining PPP sections in the 2016-2020 period. Moreover, up to now, VND16.59 trillion ($721.3 million) has been allocated for the project, with only VND6.8 trillion ($295.65 million) disbursed, which makes it unlikely that the remaining VND37.77 trillion ($1.64 billion) will be allocated and all the funds can be disbursed during this period.

The MoF’s concern is reasonable amid the current state budget constraints, although the MoT made the proposal to speed up the three PPP sections. At a recent meeting, the government agreed to the proposal in principle, but it needs to secure the NA’s approval before the projects can be kicked off in August.

This means that the MoT’s proposal – the first of three scenarios – proves less effective in raising the bankability of the projects. Although the MoT has built second and third scenarios, they are also less feasible.

As per the second scenario, the MoT proposes to transform the eight PPP sections into public investment projects, and then transfer the operation rights under operation and maintenance contracts to investors to make returns on the investment. This plan is not bankable because, according to analysis by the MoF, it is already difficult for the state coffers to arrange funding for the proposed three PPPs.

“If the first scenario is approved, the room for private investors will be narrowed, as fewer projects will be available to the same number of players. If the second scenario is selected, there will be no opportunities left at all,” Le Net, lawyer at LNT & Partners, told VIR. Recently, the Ministry of Defence has proposed the prime minister to add its Truong Son Construction Corporation to the priority list of direct contracting to develop the three PPP sections, while the names of many other powerful construction firms under this ministry were also put forward.

This makes competition fiercer for construction giants such as Vinaconex, Deo Ca Group, and Tasco JSC.

If the third scenario gets the green light, both domestic private and foreign investors will have more opportunities and maybe international giants such as Daewoo, Lotte, and Hyundai can rejoin the race. However, this scenario comes with several risks as project development would depend heavily on the results of bidding to select capable investors. If investors cannot mobilise funding, the whole project could be thrown in jeopardy.

The North-South Expressway, which is set to cover 2,100 kilometres, costs VND118.71 trillion ($5.16 billion) and has 11 sub-projects (three of which will be state-funded), is tied down by limited funds allocated from the state budget and difficulties in mobilising private investment due to the lack of supporting legal framework. Both investors and lenders want a guarantee mechanism, minimum revenue commitments, and foreign exchange conversion guarantees – all of which are missing from current rules.

While the MoT had pinned high hopes on attracting private financiers to join the project by opening international bidding, it had to cancel this because of poor results in the international prequalification round and has been forced to cater to more capable domestic groups. Mobilisation of private investment has proved difficult, as lenders still hesitate to offer loans, making bankability an issue.

Build-operate-transfer (BOT) initiatives have been a controversial topic for years in Vietnam because of the high risk of losses and the lack of a completed legal framework and risking-sharing mechanisms. A series of BOT transport schemes with better financial plans than the eight PPP sections were stuck with credit, such as Huu Nghi-Chi Lang, Van Don-Mong Cai, and Trung Luong-My Thuan. Many of them even halted construction for up to two years due to difficulties in accessing loans.