The Vietnam Expressway Corporation is among the first to act under a new policy to free up funds for future transport infrastructure projects.
It has been months since it was announced that the Hanoi - Hai Phong expressway was to be put up for sale and India’s Infrastructure Leasing & Financial Services (IL&FS) first set their eyes on it. At the end of October IL&FS signed a deal on the project with JSC Vietnam. Under the deal, IL&SF will buy a 70 per cent share in the project and will manage it for 30 years. The contract was the first under the Vietnamese Government’s new policy on transport infrastructure.
New guidelines issued by government call for transport projects to be sold to fund new projects. Financial resources from the State budget are limited, preventing the government from investing in many large transport infrastructure projects at the same time. Many are invested using government budget funds and financial resources from other investors. Given the pressure on the State budget and the fact local investors lack resources, seeking foreign investment is clearly the way to go. “It is necessary to seek other sources of capital besides the State budget and government bonds to invest in the development of transport infrastructure,” Minister of Transport Dinh La Thang told a conference in October. Public-private partnership (PPP) negotiations are expected to bring in sufficient financial resources within a short period of time for the State to invest in new transport projects.
Not everyone, however, has welcomed the policy. Some are concerned that foreign ownership of key expressways may lead to unexpected difficulties regarding access. In response, Mr. Mai Tuan Anh, General Director of the Vietnam Expressway Corporation (VEC), said: “VEC believes the government’s policy of ‘using infrastructure to invest in infrastructure’ is the right one to adopt. It will ease pressure on public investment while retaining funds to invest in new projects.” The policy raises key questions, such as what projects to transfer, who can buy, how negotiations should be conducted, and what benefits it will bring to the economy.
Up for sale
VEC is one of the first corporations to follow the policy, announcing it will transfer five expressways in the “Development of the Expressway Network in Vietnam” project: Cau Gie - Ninh Binh, Noi Bai - Lao Cai, Ho Chi Minh City - Long Thanh - Dau Giay, Da Nang - Quang Ngai, and Ben Luc - Long Thanh, with a total length of 540 km (320 km of which is completed) and expected total investment capital of VND125.5 billion (nearly $6 billion). VND71.5 billion ($3.36 billion) of this (57 per cent) is from the State budget, with the remainder being mobilized by the corporation.
The Cau Gie - Ninh Binh expressway received total investment of VND8.977 trillion ($421.9 billion) and now caters to rising numbers of vehicles, at 5 million per year. The Noi Bai - Lao Cai expressway has only been operating since September but collects VND1.5 billion ($70,500) in tolls each day, with transport volumes increasing by 30 per cent and transport costs falling by 20 per cent for drivers. Though only one part has been opened, the Ho Chi Minh City - Long Thanh - Dau Giay expressway has shortened the journey to Vung Tau to just over an hour, cutting the travel time by 60-80 minutes and reducing transport costs by 30 per cent for drivers. The Long Thanh - Dau Giay leg collects fees from 5 million vehicles each year, at an average of 14,000 to 15,000 each day. The yet-to-be-completed section of the expressway and the Da Nang - Quang Ngai and Ben Luc - Long Thanh expressways are expected to be completed between 2016 and 2018, but are already seeking private investors, especially foreign investors.
VEC is considering two methods for the transfer. The first is the establishment of a joint stock company. For example, both the State and VEC invested in the Cau Gie - Ninh Binh project. After 30 years the project is to be handed over to the State, meaning potential investors are limited to this timeframe. A joint stock company would have to follow legal provisions on responsibility and authority. The transfer would relate to the right to exploit, operate and maintain the expressway.
The second method is to transfer the right to collect tolls for five or ten years, as happened with the Ho Chi Minh City - Trung Luong project. This will depend on the investor’s capital. It is likely, however, that VEC would prefer to establish a joint stock company to pass on responsibility to investors in exploiting and maintaining the expressway rather than simply transfer responsibility for collecting tolls.
The transfer price will vary based on the method and the duration of the transfer. As transport projects are national assets, the sale must be transparent for every form of purchase and sale. The sale price must therefore satisfy two criteria: profitability for the investor and being in the interests of the State. The funds VEC will receive from the transfers will be used as investment in new expressway projects, with the aim of 1,000 kilometers of new expressway being in operation by 2020.
As for tolls, these will be specified in each contract. The level will be reasonable and investors must provide good services or drivers will simply bypass the expressway. “The toll will be set under the Ministry of Finance’s price framework and the conditions in the contract,” said Minister Thang. Investors will have to make calculations based on their financial plans.
VEC is paying much attention to the effectiveness of the project as well as emphasizing policy stability to attract investors. As these are projects with huge amounts of capital, with a return on investment coming over years or decades, policy stability is a particularly important matter.
Hunt for investors
Given the size of these projects, Mr. Tuan Anh from VEC believes that investors must have sound financial resources and experience in the field. “We are not only trying to attract financial investment but also experience in operating expressways,” he said. Investors from the US and Europe have already expressed interest and VEC will send invitations to other investors shortly. As the transfer is part of a new policy and the investment sought is huge, investors will need to conduct thorough research.
“VEC will have to work on financial plans and policy mechanisms that are in accordance with Vietnam’s legal framework,” said Mr. Tuan Anh. “During this process, if investors have proposals outside of the legal framework then they must be considered and still submitted to authorities.” It will be a slow process, and the legal framework for each project will be specified in contracts. The first expressway to be put up for sale is Cau Gie - Ninh Binh.
Investors will have to bear in mind that there will be different issues in different projects. There are a range factors to take into account and proper analysis is a must. For example, in the context of transport planning and other planning changing quite often, traffic flow forecasts over long periods of time are almost certain to contain incorrect assumptions. The task will be difficult for all concerned.
Mr. Mai Tuan Anh, General Director of VEC, shared his thoughts about plans to transfer five expressway projects to private investors.
What is the price tag on these five expressways? How will they be transferred? Post-transfer, how many toll booths can investors open and how many years will they be allowed to impose tolls?
The price will be specified in the contract and investors must provide good services to win over drivers or else they will continue to use old roads instead of the new expressways. Investors will have to make their calculations according to their financial plan.
There are three fields involved: the first is investment in infrastructure, the second is exploiting, operating and charging tolls, and the third is services along the expressway. All of these can be sold but each has a different price. For example, transferring the right to charge tolls for five to ten years and transferring the right to operate the expressways over decades will involve different calculations to determine the price.
This means there are various situations for each specific purpose. VEC will reinvest in other expressways, striving for a target of investing in 1,000 km of expressways by 2020. Reinvestment will greatly reduce the pressure on public debt.
Have any investors expressed interest in the expressways? What are the criteria for investors?
Investors from the US and Europe have expressed interest. VEC is now planning to send invitations to investors. This is a new policy and the investment amount is huge, so investors need to conduct some research. Such a deal cannot be done quickly.
For investors, the biggest issue in buying an expressway project is the high level of investment capital. According to the financial plan of expressway projects, the tolls investors can collect are not high. Calling for investors is therefore not simple. They would normally look to invest in an expressway project that has high profits. And foreign investors tend to prefer short-term investment because long-term projects are risky.
As these are large projects, investors are required to have good financial resources and experience in the field. It is clear that Vietnam lacks the financial capacity and experience to operate expressways, so it is necessary to call for foreign investors. We are not only trying to attract financial investment but also experience in operating expressways.