Infrastructure a need, and a good bet

Tony Foster and Le Hai Duong

Ho Chi Minh City has flooded more often recently. The sewers fail and the roads in Ho Chi Minh City become tributaries of the greater Mekong. Many houses suffer damage. Tan Son Nhat airport – the largest in the country and already overloaded – must cancel flights until the flood waters dissipate.

The consequences of unbridled growth in housing and late provision of related infrastructure are visible all over Ho Chi Minh City. That is troubling in the context of it being a riverside city slated to be one of the top 10 victims of climate change.

Hanoi does not flood as often. But even Ministry of Transport officials are annoyed about having to get up earlier and earlier to beat the traffic to the office. Air pollution can be of startling proportions, and is certainly driving some people away.

As former Prime Minister Nguyen Tan Dung stated at the Vietnam-Baden Wuerttemberg Economic Forum in 2014, Vietnam currently needs tens of billions of dollars to invest in infrastructure, power, renewable energy, and urban transport. This plays to German investors’ strengths. Whereas many companies from around the world can provide cheap infrastructure, few have the technology and know-how to combat climate change issues and complicated urban transportation woes.

The issue is whether German companies are prepared to invest. They will of course sell equipment, but Vietnam needs more. It needs solutions to solve its massive infrastructure problems. One of the building blocks for such solutions – indeed one of the key foundations for a quantum leap to avoid the much-feared “middle-income trap” – is a robust rule of law. As the German vice chancellor stated at the 14th Asia-Pacific Conference of German Business in November 2014, Vietnam needs a more complete and stable legal framework to facilitate long-term German investments.

In the infrastructure sector, last year’s Decree 15 on public-private partnerships (PPP) supposedly heralded great progress. And indeed, it does have some positive potential. With PPP, there are more options for investors to choose the investment form that fits their project, such as build-lease-transfer contracts – which previously did not exist. Investment sectors were expanded and now include education, training, economic zones, and industrial zones. Investors can also make project proposals.

Unfortunately, the law creeps from day to day at a slow pace, while businesses forge ahead without consideration of ancillary consequences. The gaps in the PPP regulations are only now being worked through, including most crucially the risk allocation for each type of project. The result is that genuine PPP – in the sense of a project developed under these regulations – will remain somewhat theoretical for foreign investors for a long time to come.

The good news for German investors is that they can still invest in infrastructure in other ways and many are already doing so. These investments include projects with Vietnamese government support, like the various build-operate-transfer power projects that are in the financing stage at the moment (Nghi Son 2, Nam Dinh, and Vung Ang 2); projects with foreign government support (Lach Huyen port – effectively, a Japanese PPP); and projects that are being done on a merchant basis, such as various hydropower projects.

In light of the poor state of infrastructure, there are plenty of opportunities. But opportunities are hard to access in the absence of better legal underpinnings. German companies should therefore leverage their strengths and those of their government. This has been occurring in the context of renewable energy and energy efficiency.

Germany is supporting the modernisation of the electricity transmission network. Wind energy has moved forward thanks to the GIZ Energy Support Programme. With incredible ambition, Vietnam believes that its domestic solar power capacity will increase to 12,000 megawatts by 2030.

Germany’s early lead in green energy is holding up. But there are obstacles, including inadequate feed-in tariffs, poor power purchase agreements, and insolvent utilities to buy the power generated. Ongoing and active German government support will be of strategic value to German companies investing in this area.

Infrastructures and institutions are overextended countrywide. Investment is needed everywhere. The mode of thought of men and women, the whole outlook on transport, the grouping of sub-cities – all are encountering tremendous change.

But as investment takes effect, the deluge will subside and the water will fall, and the great chancelleries of Hanoi and Berlin will emerge, the integrity of their relationship strengthened – not just by the Metro Line 2, not just by the German House so strategically located between my office and my hotel, but also by private investments made by their companies.