Last update: 13:09 | 11/07/2017
The Vietnam government fully understands that to compete for foreign direct investment with other Asian countries over the long term— low wages aren’t sufficient, says leading economist Eugenia Victorino.
More and more top transnational manufacturers are finding that the current Vietnam allure of cheaper overhead, lower labour cost and reduction in taxes isn’t the most profitable option for them over the long term.
What is needed to keep foreign manufacturers relocating to the small Southeast Asian country is much improved infrastructure, Mr Victorino, who works for the Australia & New Zealand Banking Group in Singapore told reporters.
However, the challenges to finding the large sums of money to pay for the needed infrastructure are daunting, he noted, as the country must amass an estimated US$480 billion through 2020 just to pay for the electricity and road infrastructure required.
This spending would purchase 11 power plants with total capacity of 13,200 megawatts and a few thousand kilometres of highways and bridges, according to the Vietnam government, added Mr Victorino.
Among the key priority road and bridge projects is a US$13 billion, 1,800-kilometre 10-lane highway connecting the capital city of Hanoi in northern Vietnam with Ho Chi Minh City at the southern tip of the country.
Private sector bigger role
Just last month, Prime Minister Nguyen Xuan Phuc ordered the transport ministry to speed up plans to attract more private investment for infrastructure as the government coffers are depleted and can only support about one third of the indispensable funding.
Rana Hasan, the director of development economics at the Asian Development Bank, said the fundamental problem is the lack of infrastructure funding coming from the private sector.
In countries like India, the private sector has accounted for approximately 30% of the annual total of investment in infrastructure over recent years, whereas in Vietnam the share the private sector has shouldered is below 10%, which is insufficient.
Official Vietnam government figures estimate it allocated over the past few years 5.7% of the gross domestic product for infrastructure in the budget, a rate that is currently not sustainable over the long term, and even if it were, is still far shy of what is essential.
New avenues for infrastructure investment
Meanwhile, some Vietnamese companies are stepping forward and taking the initiative to address the situation. Real estate giant Vingroup recently signed a memorandum of understanding with the Hanoi government to invest US$5 billion in the local rail system in the capital city of Hanoi.
All the details reached in the preliminary agreement have yet to be unveiled, in this the first urban transit network in Vietnam to be funded by the private sector.
All that is known, is Vingroup will obtain standard security interests in commercial buildings and other regional developments consistent with normal international practices for these types of transactions.
Planning and Investment Minister Nguyen Chi Dung also recently announced that the government is looking to public-private partnerships and the so-called build, operate and transfer model as the avenue forward to fund new infrastructure projects.
He has suggested as the first PPP project a 1,800km railway to connect Hanoi and Ho Chi Minh City. The massive north-south railway project would cost at least US$13.3 billion, substantially all of which, he believes, could be funded by the domestic and foreign private sector.