Safeguards crucial to protect local construction groups

Does the construction industry appear sluggish in comparison to the previous year?

Nguyen Quoc Hiep - President of the Vietnam Association of Construction Contractors (VACC)

The construction sector is experiencing extraordinary hardship. Last month, a group of 21 southern contractors under the leadership of Hoa Binh Construction submitted an aid request to the prime minister at a time when there were about 40 unemployed businesses in the central region and several businesses in the north going through an order crisis.

Notably, many companies in the top 10 construction industries are in a state of financial emergency, unable to pay subcontractors, materials, and labour wages.

According to a report by the Ministry of Construction (MoC), the construction industry contracted 3 per cent in the first quarter of 2023 compared to the same period the previous year. However, the VACC survey revealed that businesses only completed 8 per cent of the 2023 plan in the first quarter. This is the most catastrophic possible circumstance. Vietnam’s construction industry contributed 6 per cent of GDP in 2022.

If there is no safeguard process in the next few years, will construction firms risk accepting contracts given the current state of affairs?

Vietnam does lack a legal protection mechanism for contractors. In the Law on Construction, the Law on Bidding, and construction contracts, the safeguarding content only refers to budget capital and not privately invested capital. In the meantime, private investment accounts for around 40 per cent of initiatives.

Without a mechanism and legal pathway to protect construction contractors, these businesses will be compelled to cease operations or declare bankruptcy.

For construction projects, companies must borrow money from banks at an annual interest rate of 11-13 per cent, which is only repaid after the project is completed. However, as the real estate market declines, investors become increasingly inactive and unable to pay their debts.

Even many investors are unable to repay the loan, with some even requesting housing products as payment. When the current law lacks a protection mechanism for contractors, construction companies are pushed to the verge of insolvency.

Does the VACC consider the potential for civil law protection for contractors?

In practice, this act offers little protection to construction contractors. Even though the Artemis Commerce Centre project in Hanoi has been concluded for eight years, Delta Construction Group has not yet recovered the debt because the investor has not yet signed the acceptance document. Delta’s lawsuit against the investor, which relies on civil law, has not yet been resolved.

Is the most crucial issue fixing the legal framework governing the construction industry?

Yes, as the construction and real estate industries are interdependent. The regulation governing final settlement approval is one of the procedures causing the contractor difficulty and harm. The construction contractor, under the supervision of numerous stakeholders, has the volume to perform, and the payment value can be determined. The contract stipulates that a percentage will be retained for warranty and pending settlement approval; however, the warranty period of 5-10 years has not yet been approved.

In addition to legal removal, the construction industry requires a protection mechanism for contractors. Currently, construction companies are observing the extent of land law, housing law, and real estate business law regulation with an attentive gaze. They anticipate that the newly enacted legislation will eliminate legal obstacles; only then can the construction industry recover incrementally.

Does inadequate legislation also contribute to the large debt situation?

Late payment is a significant issue within the construction industry. Large arrears are occurring in both public investment packages and non-budget projects, affecting the residual 20-25 per cent of the project’s burden. Despite the fact that numerous initiatives have been operational for several years, contractors have not yet been selected.

Currently, many contractors have debt that is several times greater than their equity, and many companies owe close to $426 million. Complex payment and settlement procedures, particularly for projects with escalating volumes, are the primary cause of large outstanding debt in numerous public projects.

As for off-budget initiatives, there is a substantial quantity of outstanding debt due to the limited financial capacity of many investors, at around 30 per cent.

How, in your opinion, should the problem of outstanding debt be addressed?

The outstanding debt situation has persisted for nearly a decade, resulting in numerous adverse effects on businesses. The VACC has proposed to the MoC, and the Ministry of Planning and Investment has proposed to the prime minister, a review of all outstanding debts of public investment initiatives to date in order to fully address the outstanding debt situation.

The long-term measure for initiatives utilising non-budget capital is for the state management agencies and relevant ministries to concur on a contract mechanism; that is, the remaining 20 per cent must have a payment guarantee.

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