The financial issues clouding ambitious North-South railway

By Dr. Vu Dinh Anh - Expert, Price Market Research Institute, Ministry of Finance

The ninth chapter of the study states relevant legal documents for the project financial calculations. However, because the study was made two years ago, some of the referred documents are already outdated, for instance, when it comes to calculations of labour costs.

The same chapter mentions costs for infrastructure, equipment, land clearance, taxes, and more. Accordingly, the total investment required for the first phase of the project, Hanoi-Vinh-Nha Trang-Ho Chi Minh City, amounts to $24.7 billion, while the second phase for Vinh-Nha Trang would cost around $34 billion. Both sections bring the total required investment to $58.7 billion, equalling a near 25 per cent of 2018’s GDP. However, the calculations for these numbers are equally outdated and contain many variables that have already changed.

Besides this, the total interest expense and commitment fees were set at $258 million and are based on the assumption that interest rates during construction would be at 0.2 per cent per year. However, Vietnam has become a low-middle-income country since 2011 and is expected to become a high-middle-income country by 2030, meaning that concessional loan conditions will have major changes that need to be included in the calculations.

The current total investment is high, even higher than originally pre-calculated in 2010, and double that of the Ministry of Planning and Investment’s announcement at the beginning of the year. Therefore, it is necessary to explain the reasons for the differences to the previous estimates.

In addition, the pre-feasibility study outlines and analyses three plans to mobilise the nearly $60 billion for the project. One option includes the entire state budget, the second the entirety of official development assistance (ODA), and the third a combination of state and private capital in public-private partnerships with various overseas markets. However, the evaluation of all three options is not convincing as they are all based on previous GDP forecasts, which is not reasonable or practical.

Meanwhile, forecasts from the World Economic Forum, the World Bank, and the Prime Minister’s Advisory Group from 2018 are now very inaccurate and far from reality. Vietnam’s growth rates since were higher than forecast, however, due to the pandemic’s impact, this year’s growth rate stands at around 2-3 per cent, which renders prospects for the period until 2025 still uncertain.

The study stated that it is possible to mobilise 0.69 and 0.53 per cent of GDP for the project’s two phases, respectively, even up to 1.67 and 1.29 per cent at the highest. However, the study does not base these estimates on the actual investment developments in the previous period, the capital demand for projects, and the change in capital management according to the medium-term public investment plan.

In particular, the three capital mobilisation options stated in the report are not feasible, and state budget expenditure has been and remains at a very high level. To balance the state budget and reduce its deficit and public debt, instead of continuing to increase the state’s revenue, it can only reduce its expenditures, especially investment and development costs in infrastructure construction.

Vietnam set the target to reduce the state’s budget deficit to below 3 per cent of GDP by 2030. However, the budget deficit is causing difficulties in spending capital for the North-South high-speed railway as well as for borrowing additional funds, while ODA is forecast to be very limited in the coming years. The state budget deficit between 2006 and 2019 increased sharply in both absolute numbers and as a percentage of GDP compared to the previous period. The current global economic crisis promises to make the state budget deficit even worse.

Finally, the rise in public and external debts makes the state borrow even more. According to the Ministry of Finance, public debt has been growing rapidly from 56.3 per cent of GDP in 2010 to a peak of 63.7 per cent in 2016, only slowly decreasing in the following years until 2019 to around 56 per cent of GDP.

Foreign debt consists mainly of concessional loans, with the average loan term being 20 years at an interest rate of about 1.6 per cent per year, but because domestic debt comes mainly through short-term government bonds with high interest rates, pressure and direct debt repayments increase rapidly in the short term.

Currently, Vietnam is categorised as a low-middle-income country, so ODA mobilisation tends to decrease gradually with shorter terms and increased interest rates which lead to public debt obligations while state debts tend to increase.

To sum up, although it has been meticulously prepared, the financial problems of the North-South high-speed railway remain, and forecasts and planning need to be brought closer to reality with updated direction and variables in accordance with forecasts in each financial plan.

In addition, each financial option should be built based on updating and analysing the situation as well as economic growth trends, state and development expenditures, and the ability to utilise public debt and ODA loans to increase the feasibility of each possible direction.