Although passed in June of this year, next month, the Public-Private Partnership Law- a law intended to simplify investing in Vietnamese infrastructure- will be implemented by the Vietnamese government. The enactment of this law comes at a time where it is clearly needed. This month the Vietnamese Ministry of Transport announced that two more sub-projects from the North-South-Expressway would no longer be funded through a public-private partnership after being unable to find investors. The announcement now makes the forty-three-kilometer-long Nghi son section in Thanh Hoa and the fifty kilometer Nghi Son to Dien Chau section the two latest in a series of projects that have been switched from a public-private partnership to publicly funded.
The two sub-projects that were recently switched by the Ministry of Transport to being state funded are components of the more extensive eleven sub-project long North–South Expressway that covers, more or less, the eastern coast of Vietnam and the 2,109 km length of the country; from the more “mountainous” north province of Lang Son to the southernmost province of Ca Mau. Some analyst expect the expressway to cost about $4.3 billion, although the cost is anticipated to balloon.
The ruling Communist Party of Vietnam (CPV) has put a high value on both this project and development generally because this has become the crux of its performance-based legitimacy. The central tenet of performance-based legitimacy is that as long as a governing body, institution or individual meets the governed population’s performance standards, they retain legitimacy to rule. As Southeast Asian specialist, Le Hong Hiep, argues, by the 1980s, “the party’s traditional sources of political legitimacy [had] been exhausted… [and] socio-economic performance emerged as the single most important source of legitimacy for the CPV.”
To that end, in 1986, the CPV set off a series of economic reforms, the Doi Moi reforms, that prioritized a market-based approach to the economy rather than the centrally planned one. These reforms resulted in a massive cut to poverty across the country. The reforms’ success is in the numbers: the poverty rates declined from over 70% to just under 6% while GDP per capita increased by 2.5 times. Inevitably, the CPV’s legitimacy became wrapped up in its economic success that focused on cheap labor and export-oriented growth.
Nonetheless, when economic growth determines your legitimacy, you must support that development to maintain legitimacy, and cheap labor and export oriented growth can only expand an economy so far. Therefore, developing other sectors in an economy becomes necessary to sustain growth, which requires infrastructure development. However, Infrastructure is severely underdeveloped in Vietnam. A 2017 UNESCAP report that Vietnam’s road infrastructure needs are 29 billion USD. A Vietnamese Ministry of Transport Studypredicts that this number will increase further between 2018 and 2040. Therefore, this project is expected by many to be the backbone of a developing economy because it makes up this shortfall of road infrastructure by doubling the number of existing highways in Vietnam (in 2019, Vietnam only had around 1,000 km of highway.
The North-South Expressway is expected by analysts and government officials alike to revolutionize transportation in the country and act as a catalyst for future economic growth, particularly in light of Covid-19. With that in mind, the CPV considers the project a “national priority”.
Although support for the project is clear to see, funding has proven to be more difficult to conjure. Initially, the government split the project into 11 sub-projects, with 8 being a public-private partnership. However, when bids were presented on the eight public-private partnership sub-projects, aside from China, little interest arose from the typical infrastructure developers in the region such as Britain, America and Japan. Although companies from each nation expressed early interest, none formally bid on the sub-projects.
Nonetheless, the Chinese have stepped in to bid on the project. Of the 60 bids originally put on the sub-projects, 30 of them alone came from Chinese companies, 15 of them came from Vietnamese companies and the remaining came from France, South Korea and the Philippines.
At face value, this investment would be sought out by the Vietnamese government as the Chinese have extensive experience in infrastructure development at home and abroad. China put a high priority on national infrastructure development as a means for economic growth, and therefore directed much of its resources towards this end. A report by the Reserve Bank of Australia points out that since 2000, the amount of Chinese infrastructure investment grew at an annual average rate of 11%.
As a result of this experience, Chinese companies have developed into some of the largest, most practiced and efficient in the world. For example, according to Tunnel Business Magazine, the four largest construction companies worldwide are based in China. The first is China State Construction and Engineering, the second is CREC, the third is CRCC, and the fourth is the CCCC. More to the point, the leading construction company in China who is also the company contracted to the ECRL project, the CCCC, has been “named as the third top international contractor in the world.”
Yet, in a move that the analyst perceived as being directed at China, the CPV has banned all foreign investment in the project. It is difficult for the Vietnamese government to accept Chinese investment for two reasons. First, the CPV is ambivalent about the Chinese Communist Parties’ (CCP) intentions and the geopolitical considerations that come along with them. This geopolitical focus rests on the fear that, through BRI, China will utilize its unique economic position and asymmetrical financial leverage, to force Vietnam into submission in different areas of national interest. The financial leverage is particularly a worry in the South China Sea disputes where Vietnam and China constantly battle over the ownership of the Parcel and Spratly islands.
Secondly, and more importantly, Chinese investment is incredibly unpopular with domestic audiences. For instance in 2018, when a law was proposed by the national government that would offer 99-year leases for foreign companies to purchase Vietnamese lands. The government quickly realized that it “underestimated [the] deep-seated resentments against China, and the speed at which protesters can utilise social media to organise street marches in cities including Hanoi and Saigon.” The result of this protest was a promise to reduce the length of the lease and eventually to postpone the vote for “further scrutiny.” All of this is dangerous for the CPV’s political legitimacy or as Bill Hayton states, “By criticizing China’s actions… protestors… [are] indirectly questioning the legitimacy of [the] communist party.”
The fear of social unrest over Chinese investment was a factor in the decision to ban all foreign companies from the project in the first place. On Sept. 4th, the CPV announced that the names of the companies awarded the project bids would be kept anonymous. The result of this announcement was an onslaught of outrage over social media. The anonymity of it instilled a suspicion that Chinese companies had won the bids with the result being, “Chinese economic penetration of Vietnam.” From there, “The public… voiced their concern on social media about the possibility of Chinese firms… winning the bids.” The fear of sub-projects being awarded to Chinese companies elicited such a visceral response by Vietnamese citizens that the government rejected the Chinese investment full stop.
However, as these last two projects have proven, finding alternative sources of funding is not easy. Unfortunately, the government’s ability to finance the project on its own is questionable at best, especially after the economic downturn caused by Covid-19. Although the project itself is attractive, the unclear and often opaque public-private structure is likely the culprit dispelling investors. Common in Vietnam is to create broad, interpretive regulations that give ministries the power to be flexible when implementing them. However, this ambiguity can be very frustrating for investors who require reliability and structure.
Importantly, it leaves Vietnam stuck between a rock and a hard place. On the one hand, infrastructure investment in its transportation networks is critical for its further development and, therefore, the basis of the CPV’s legitimacy. Meanwhile, the government cannot fund these projects themselves. Moreover, it is politically and strategically precluded from accepting Chinese investments and Vietnam’s ambiguously unattractive framework for investing in public-private partnerships chases away competent non-Chinese investors. In other words, without reforming its legal framework for investing in public-private partnerships, the government is running out of options to fund the much-needed transportation investment.
To its credit, the Vietnamese government has recognized the need to make its Private Public Partnership legal framework clearer. Beginning next year, the recently passed (June 20th, 2020) Public-Private Partnership Law (PPPL) will come into effect that creates a unified and transparent legal framework for public-private partnerships. The law will clarify the process of investing in Vietnam by creating standard form contracts, government guarantees to fulfill their end of the project (capped at 50%) and to foreign investors to pay them in the proper foreign currency and a risk-sharing mechanism.
At its core, the PPPL essentially elevates and integrates the many different laws, decrees and circulars that regulated public-private partnerships in five sectors- transportation, healthcare, education, transmission grid, and water- into one authoritative law. Prior to the PPPL, six circulars, three decrees and eight laws all regulated investment in public-private partnerships. Notably, the PPPL will also be the first law relating to public-private partnerships passed by the Vietnamese National Assembly with 92.75% of deputy support, sending an important signal of government authority and unity behind the law. The hope for this law is to make private and foreign investment in government-sponsored infrastructure projects less confusing, risky and, therefore, more appealing, increasing the investment level.
Nevertheless, Vietnam is at a crossroads in its development and requires investment in its transportation network to sustain and expand its growth. By rejecting Chinese investment out of domestic and geopolitical considerations without attracting interest from other sources in the North-South Expressway, Vietnam is stuck in a hard place. To relieve that pressure, a more straightforward and more navigable public-private partnership framework to entice foreign investors is vital. The PPPL sets out to do this in a simple but revolutionary way. If Vietnam wants to develop with as little Chinese assistance as possible, the success of the PPPL is crucial. Only time will tell if the reform is enough or implemented with the same vigor the National Assembly passed it with. Still, it is a big step in the right direction by clearly signaling the government’s desire to increase private investment in the countries infrastructure.
Vincenzo Caporale is a recent graduate of the University of Cambridge POLIS graduate program. He writes on development, poverty, infrastructure and domestic politics in Southeast Asia for the Borgen Project and also researches development in Ghana for ‘She Grows it Consultancy’.