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  • 1. Q2 2010 www.businessmonitor.comVietnaMinfrastructure reportINCLUDES 5-YEAR FORECASTS TO 2014issn 1750-5593published by Business Monitor international Ltd.
  • 2. Vietnam Infrastructure Report Q2 2010 Including 5-year industry forecasts by BMIPart of BMIs Industry Report & Forecasts SeriesPublished by: Business Monitor InternationalPublication Date: February 2010 Business Monitor International © 2010 Business Monitor International. Mermaid House, All rights reserved. 2 Puddle Dock, London, EC4V 3DS, All information contained in this publication is UK copyrighted in the name of Business Monitor Tel: +44 (0) 20 7248 0468 International, and as such no part of this publication Fax: +44 (0) 20 7248 0467 may be reproduced, repackaged, redistributed, resold in Email: subs@businessmonitor.com whole or in any part, or used in any form or by any Web: http://www.businessmonitor.com means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher. DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained.
  • 3. Vietnam Infrastructure Report Q2 2010© Business Monitor International Ltd Page 2
  • 4. Vietnam Infrastructure Report Q2 2010CONTENTSExecutive Summary .........................................................................................................................................5SWOT Analysis.................................................................................................................................................6 Vietnam Infrastructure SWOT ............................................................................................................................................................................... 6 Vietnam Infrastructure Project Finance SWOT ..................................................................................................................................................... 7 Vietnam Economic SWOT...................................................................................................................................................................................... 8 Vietnam Political SWOT ........................................................................................................................................................................................ 9Market Overview.............................................................................................................................................10 Vietnam..................................................................................................................................................................................................................... 10Industry Forecast Scenario ...........................................................................................................................13 Table: Construction and Infrastructure Industry Data ........................................................................................................................................ 13 Construction and Infrastructure Forecast Scenario.................................................................................................................................................. 14Transport Infrastructure ................................................................................................................................15 Table: Transport Infrastructure Industry Data .................................................................................................................................................... 15 Transport Infrastructure Forecast Scenario ............................................................................................................................................................. 17 Transport Infrastructure Overview ........................................................................................................................................................................... 18 Table: Ports Are The Weakest Link: Quality Of Infrastructure Global Ranking Out Of 134 Countries............................................................... 19 Table: Vietnam Railway Corporation’s Main Targets ......................................................................................................................................... 20 Major Projects – New and Ongoing Projects ........................................................................................................................................................... 20 Airports................................................................................................................................................................................................................ 20 Ports .................................................................................................................................................................................................................... 21 Roads................................................................................................................................................................................................................... 23 Railways .............................................................................................................................................................................................................. 25 Major Projects Table - Transport ........................................................................................................................................................................ 27 Table: Vietnam – Major Transport Infrastructure Projects ................................................................................................................................. 27Energy and Utilities Infrastructure ...............................................................................................................30 Table: Energy & Utilities Infrastructure Industry Data....................................................................................................................................... 30 Energy and Utilities Infrastructure Forecast Scenario ............................................................................................................................................. 31 Energy and Utilities Infrastructure Overview ........................................................................................................................................................... 32 Table: The Three Levels Of Liberalising Vietnam’s Electricity Market ............................................................................................................... 34 Major Projects – New and Ongoing Projects ........................................................................................................................................................... 35 Power Plants........................................................................................................................................................................................................ 35 Pipelines .............................................................................................................................................................................................................. 39 Water ................................................................................................................................................................................................................... 39 Major Projects Table – Energy and Utilities ....................................................................................................................................................... 40 Table: Vietnam – Major Energy and Utilities Infrastructure Projects................................................................................................................. 40Business Environment ..................................................................................................................................42 Vietnam Business Environment................................................................................................................................................................................. 42 Limits Of Potential Returns.................................................................................................................................................................................. 42 Risk To Realisation Of Potential Returns............................................................................................................................................................. 42 Regional Overview.................................................................................................................................................................................................... 43 Asia Pacific Infrastructure Business Environment Ratings.................................................................................................................................. 43 Table: Asia Pacific Infrastructure Business Environment Ratings....................................................................................................................... 46© Business Monitor International Ltd Page 3
  • 5. Vietnam Infrastructure Report Q2 2010Project Finance Ratings ................................................................................................................................47 Vietnam Project Finance Ratings ............................................................................................................................................................................. 47 Design and Construction ..................................................................................................................................................................................... 47 Commissioning and Operating ............................................................................................................................................................................ 47 Overall Project Finance Rating ........................................................................................................................................................................... 47 Regional Overview.................................................................................................................................................................................................... 47 Project Finance Ratings: Outlook For Asia Pacific............................................................................................................................................. 47 Table: Design and Construction Rating............................................................................................................................................................... 51 Table: Commissioning and Operating Rating...................................................................................................................................................... 52 Table: Overall Project Finance Rating, Asia Pacific........................................................................................................................................... 53Macroeconomic Outlook ...............................................................................................................................54 Table: Vietnam - Economic Activity..................................................................................................................................................................... 56Political Outlook .............................................................................................................................................57Company Monitor...........................................................................................................................................60 Cavico Corporation ............................................................................................................................................................................................. 60 Song Da Construction Corporation ..................................................................................................................................................................... 63 Vietnam Construction and Machinery Installation, Corporation (Lilama) ......................................................................................................... 65Global Overview .............................................................................................................................................67 Global Infrastructure Forecasts Revisited ........................................................................................................................................................... 67Methodology ...................................................................................................................................................71 New Infrastructure Data Sub-sectors: Methodology................................................................................................................................................. 71 Infrastructure Forecasts: Methodology ............................................................................................................................................................... 72 Sources ................................................................................................................................................................................................................ 74 Industry Forecasts .................................................................................................................................................................................................... 74 Construction Industry .......................................................................................................................................................................................... 75 Data Methodology .................................................................................................................................................................................................... 75 Construction ........................................................................................................................................................................................................ 75 Capital Investment ............................................................................................................................................................................................... 76 Construction Sector Employment......................................................................................................................................................................... 76 Infrastructure Business Environment Ratings........................................................................................................................................................... 77 Ratings Overview................................................................................................................................................................................................. 77 Table: Infrastructure Business Environment Indicators ...................................................................................................................................... 78 Project Finance Ratings ........................................................................................................................................................................................... 79 Table: Design And Construction Phase ............................................................................................................................................................... 80 Table: Commissioning And Operating Phase – Commercial Construction ......................................................................................................... 81 Table: Commissioning And Operating Phase – Energy And Utilities .................................................................................................................. 82 Table: Commissioning And Operating Phase – Transport................................................................................................................................... 83 Sources ................................................................................................................................................................................................................ 85© Business Monitor International Ltd Page 4
  • 6. Vietnam Infrastructure Report Q2 2010 Executive Summary Vietnam’s infrastructure sector shows strong signs of recovery for 2010 after a disappointing 2009 where construction industry value fell by 8% to US$5.3 bn from US$5.84bn in 2008. This was almost exclusively due to world market conditions throughout 2009, as underlying growth is forecast to be high over the remainder of the forecast period. Growth is expected to peak in 2010 with a year on year increase of 23.9% and continue till the end of the period when the industry is estimated to be worth VND260bn (US$15.12bn) in 2014. Infrastructure projects covered a wide variety of projects in the past quarter. Road and bridge building was especially strong. One of the major investments was from the Bidv Expressway Development Company (BEDC) which will invest US$1.8bn in constructing the 82km-long Trung Luong-My Thuan- Can Tho expressway project. In the power sector a variety of power plant projects were announced including hydro, thermal and coal power stations. The largest of these was a multi-billion-dollar coal- fired power plant to be completed by Sumitomo Corp. The plant will have a capacity of 1,320 megawatts (MW) and the estimated cost is JPY200bn (US$2.5bn). In terms of BMI’s Business Environment Ratings, Vietnam tied with the Philippines and Pakistan in the penultimate place for market risks, with a score of 35 out of 100. The country suffers from issues regarding the tendering process, which has come under much scrutiny. Vietnam has been keen to revamp its image and refine the tendering process, and is increasingly attracting large international companies. Overall Vietnam scored 50.7 for its Business Environment placing it in 7th place within the region. For BMI’s Overall Project Finance Ratings Vietnam also scored poorly. Along with other weak public private partnership (PPP) regulatory regimes it faced issues such as corruption and overtaxing government intervention in some industries. Vietnams rating presents some upside risk because of declining levels of inflation, but the risk rating also encompasses some deep structural problems in the countrys overall business environment. Overall the country scored 46.4. Despite poor scores for the country in terms of market risk, Vietnam is forecast to be one of the strongest performers in the Asian market over the coming years. A combination of cheap labour and ambitious government projects mean that there are numerous opportunities for international construction in the country. The government’s commitment to improving the business environment also weighs well for investors.© Business Monitor International Ltd Page 5
  • 7. Vietnam Infrastructure Report Q2 2010SWOT AnalysisVietnam Infrastructure SWOTStrengths There are several projects in the pipeline, particularly in the energy and transport infrastructure sectors. The current poor state of infrastructure in the country provides easy wins for foreign investors and construction companies. Government is keen to boost macroeconomic growth through demand-side policies that include infrastructure spending initiatives. Rapid growth has attracted investment from many of the world’s largest infrastructure companies.Weaknesses State-owned companies dominate the infrastructure market. This is especially so in the utilities sector, where Electricity of Vietnam (EVN)’s dominant position has deterred investments in the sector. The EU does not predict Vietnam will become a true market economy until 2018. Vietnam relies heavily on foreign imports: it is estimated that Vietnam needs to import 2mn tonnes of steel billets per year, adding up to 80% of the country’s annual demand. Low scores in BMI’s new Project Finance Ratings indicate a risky environment for major infrastructure projects and conducting project finance operations.Opportunities Strong growth forecast for 2010 will attract further investors. Demand for urban infrastructure projects in transport and sanitation will rise in tandem with urbanisation in coming years.Threats Global macroeconomic downturn and limited availability of finance could threaten capital expenditure plans for infrastructure projects, in both the public and the private sectors. Uncertainty and downside risks in business environment could have negative impact should any significant events occur to highlight Vietnam’s structural difficulties.© Business Monitor International Ltd Page 6
  • 8. Vietnam Infrastructure Report Q2 2010Vietnam Infrastructure Project Finance SWOTStrengths Strong fundamentals in Vietnam will sustain the long-term growth of the infrastructure sector, reducing long term demand risk. Large scale road building projects backed by government commitments, have created a thriving infrastructure sector. Location offers upside as transport hub with strong port sector as well as extensive demand for road and rail.Weaknesses High corruption and poor legal and regulatory frameworks limit project development. Poor existing infrastructure can hamper completion of projects.Opportunities As one of the fast growing countries in the region, Vietnam offers attractive return on investment for foreign firms. The government has a commitment to improving market risks promises to reduce negative effects of corruption.Threats The instability of business environment presents downside risk over the long term. Continued financial uncertainty may convince funding to move towards safer investments.© Business Monitor International Ltd Page 7
  • 9. Vietnam Infrastructure Report Q2 2010Vietnam Economic SWOTStrengths Vietnam has been one of the fastest-growing economies in Asia in recent years, with GDP growth averaging 7.6% annually between 2000 and 2007. The economic boom has lifted many Vietnamese out of poverty, with the official poverty rate in the country falling from 58% in 1993 to 20% in 2004.Weaknesses Vietnam still suffers from substantial trade, current account and fiscal deficits, leaving the economy vulnerable as the global economy continues to suffer in 2010. The fiscal picture is clouded by considerable off-the-books spending. The heavily-managed and weak dong currency reduces incentives to improve quality of exports, and also serves to keep import costs high, thus contributing to inflationary pressures.Opportunities WTO membership has given Vietnam access to both foreign markets and capital, while making Vietnamese enterprises stronger through increased competition. The government will, in spite of the current macroeconomic woes, continue to move forward with market reforms, including privatisation of state-owned enterprises, and liberalising the banking sector. Urbanisation will continue to be a long-term growth driver. The UN forecasts the urban population to rise from 29% of the population to more than 50% by the early 2040s.Threats Inflation and deficit concerns have caused some investors to re-assess their hitherto upbeat view of Vietnam. If the government focuses too much on stimulating growth and fails to root out inflationary pressure, it risks prolonging macroeconomic instability, which could lead to a potential crisis. Prolonged macroeconomic instability could prompt the authorities to put reforms on hold, as they struggle to stabilise the economy.© Business Monitor International Ltd Page 8
  • 10. Vietnam Infrastructure Report Q2 2010Vietnam Political SWOTStrengths The Communist Party government appears committed to market-oriented reforms, although specific economic policies will undoubtedly be discussed at the 2011 National Congress. The one-party system is generally conducive to short-term political stability. Relations with the US are generally improving, and Washington sees Hanoi as a potential geopolitical ally in South East Asia.Weaknesses Corruption among government officials poses a major threat to the legitimacy of the ruling Communist Party. There is increasing (albeit still limited) public dissatisfaction with the leaderships tight control over political dissent.Opportunities The government recognises the threat that corruption poses to its legitimacy, and has acted to clamp down on graft among party officials. Vietnam has allowed legislators to become more vocal in criticising government policies. This is opening up opportunities for more checks and balances within the one-party system.Threats The slowdown in growth in 2009 and 2010 is likely to weigh on public acceptance of the one-party system, and street demonstrations to protest economic conditions could develop into a full-on challenge of undemocractic rule. Although strong domestic control will ensure little change to Vietnams political scene in the next few years, over the longer term, the one-party-state will probably be unsustainable. Relations with China have deteriorated over the past year due to Beijings more assertive stance over disputed islands in the South China Sea and domestic criticism of a large Chinese investment into a bauxite mining project in the central highlands, which could potentially cause widescale environmental damage.© Business Monitor International Ltd Page 9
  • 11. Vietnam Infrastructure Report Q2 2010Market OverviewVietnam Vietnams emergence as one of the most promising economies in Asia, if not the world, stems largely from the Communist Party of Vietnams (CPV) adoption of the Doi Moi market reform policies in 1986. The gradual but steady shift from a largely agrarian country with a high degree of state ownership and government intervention to a market economy has stimulated the flow of foreign investment and domestic entrepreneurship, which are now the prime drivers of growth. Foreign direct investment (FDI) reached US$6.7bn in 2007, of which a quarter went towards fixed capital formation, according to data from UNCTAD. Vietnam’s poor infrastructure is putting a damper on the country’s growth as the industry is highly dependent on sound infrastructure (especially power and road) to operate. Vietnam’s planning and investment deputy minister, Cao Viet Sinh, said in August 2008 that weaknesses in infrastructure are slowing down the absorption rate of FDI in the country. PricewaterhouseCoopers (PWC)’s executive director for south east Asian infrastructure is quoted in the Saigon Times saying, Vietnam will need to increase the levels of infrastructure investment at twice the growth rate of GDP to increase its overall national competitiveness. According to VietNamNet, citing the Japan Bank for International Co-operations (JBIC) survey in 2008, Japanese investors continue to be concerned about undersized infrastructure in Vietnam, especially its roads, ports and power systems. A total of 78% of Japanese businesses responded with the opinion that roads in Vietnam needed to be upgraded, 60% cited power supply and 45% cited seaports. This message appears to be heeded as 2010 has seen a stream of road building projects boost the infrastructure market. Foreign investment pledges for the port sector, also increased over the third quarter of 2009. Taiwans Formosa Plastics Group – which is rapidly emerging as one of the largest, if not the largest, foreign investors in Vietnam – confirmed its commitment to the government to build a deep-sea port in Son Duong, next to the Vung Ang Economic Zone, where it is investing US$19.2bn in petrochemical, steel and oil refinery projects. According to the latest figures announced by Vietnam’s Foreign Investment Agency, it is anticipating US$50bn in newly pledged funds for 2008, while US$45bn were already pledged from January to July of that year. Of those, US$6bn was disbursed for investments. It is to be expected that in any market the majority of the pledged funds may not materialise into investments as projects get cancelled or investors© Business Monitor International Ltd Page 10
  • 12. Vietnam Infrastructure Report Q2 2010 change their plans. The weakness in infrastructure that has impeded the process poses a key constraint, but it is a matter that the government of Vietnam can tackle. Vietnam, however, has been making noteworthy efforts to attract investments, and the government has made infrastructure a priority investment area. The urbanisation pressures and the population figures, however, indicate that the pressure on urban infrastructure will increase in the coming years. According to BMI forecasts, between 2009 and 2016, Vietnam’s population will increase by 10%. Vietnam’s Ministry of Planning and Investments has released a list of 60 urban infrastructure projects to be implemented between 2009 and 2016. The total estimated investment required for the projects is US$12bn. The projects range from new water and sanitation infrastructure to new roads and traffic systems, and will take place in 15 provinces around the country. Around 18 of the proposed projects on the list will be funded by official development assistance (ODA) from Europe, Japan and the Asian Development Bank, while the ministry said that the rest will come from the private sector, through public private partnerships (PPPs). Infrastructure bonds are another option, but this idea has not gained much support from the government thus far. However, as the capital requirements for projects in energy, utilities and transport increase, infrastructure-specific bonds may become more popular. Investors are showing keen interest in acquiring concessions in Vietnam’s transport sector, and thus establishing a long-term presence in the country. However, we also warn against the obstacles and challenges that still characterise Vietnam’s business environment, including corruption (the country ranks 121 in the ‘2008 Corruption Perception Index’ of Transparency International) and the fact that in spite of the commendable strides the government has been taking in opening up, the EU stresses that the country will not be considered a market economy until 2018. A regulatory and legal framework to nurture the development of concessions is also largely absent, though there are regulatory frameworks under construction. In a conference organised by the Asian Development Bank in February 2009 called Strengthening Public Private Partnerships For Infrastructure Investments In Vietnam, a core theme among the participants was the absence of an enabling institutional and regulatory/legal environment, which hinders the proliferation of PPPs. Law firm Duane Morris identified four main obstacles for the limited participation of the private sector in infrastructure in Vietnam. These are: the weak governance structures of the state-owned companies that dominate the construction and utilities sectors, difficulty in accessing domestic capital, projects can experience delays due to the weak regulatory environment that can prove to be costly, and finally the support of the government is often uncertain. In the long run, these problems could become a major obstacle for economic growth. Duane Morris noted in their presentation at the ADB conference that the government is able to meet a quarter of financing needs for infrastructure, and official development assistance (mainly from the JBIC) another quarter. This© Business Monitor International Ltd Page 11
  • 13. Vietnam Infrastructure Report Q2 2010 leaves 50% of financing needs unmet by public finances, which at the moment make up the main source of financing. The challenges in the investment climate for Vietnam are reflected in the country’s weak standing on the Project Finance table. Risks appear to be slightly higher during the initial stages of a project’s lifecycle, though the difference compared with the second stage is negligible in the face of overall risks, which appear to be quite formidable, giving the country an overall score of 49.5 out of 100. Although Vietnams rating presents some upside risk due to the declining levels of inflation, the risk rating also encompasses some deep structural problems in the countrys overall business environment, such as corruption and overtaxing government control and intervention in some industries, one of which is the energy and utilities sector. Taisei Corp. and Kajima Corp. have been banned from participating in road and bridge construction projects in Vietnam for one year because of their involvement with the Can Tho Bridge, which collapsed in September 2007, killing 52 people. Bloomberg quotes Tran Quoc Viet, the director of quality control at the Ministry of Transport, who said that this is punishment for the Japanese companies. According to Bloomberg, the bridge collapsed owing to unforeseen weaknesses of the two concrete supports on either side that collapsed causing the bridge to fall. Taisei and Kajima spokespeople have confirmed that they received notice of their temporary suspension on June 20 2009. In a related development, Vietnams Ministry of Transport also announced that it has banned 34 local contractors from participating in World Bank-funded projects for three years, and from Ministry of Transport projects for a year, citing violations in bidding regulations, Thanhnien News reported. The newspaper notes that 16 of the contractors are from Quang Ngai Province, eight from Lao Cai, four from Hanoi, four from Nam Dinh, and two from Ha Giang.© Business Monitor International Ltd Page 12
  • 14. Vietnam Infrastructure Report Q2 2010Industry Forecast ScenarioTable: Construction and Infrastructure Industry Data 2007 2008 2009f 2010f 2011f 2012f 2013f 2014fConstruction IndustryValue, VNDbn 79,617 95,969 94,877 126,115 157,745 189,959 224,542 260,829Construction industry value,US$bn 4.95 5.84 5.34 6.73 8.41 10.41 12.7 15.1Construction industry, realgrowth, % y-o-y 12.01 0.37 -8.14 23.93 18.58 14.42 12.2 10.7Construction industry, % ofGDP 6.96 6.49 5.77 6.84 7.60 8.22 8.7 9.0Total capital investment,VNDbn 437,702 531,987 564,432 624,392 696,406 776,326 863,210 954,133Total capital investment,US$bn 27.2 32.4 31.7 33.3 37.1 42.5 49 55Total capital investment, %of GDP 38.3 36.0 34.3 33.9 33.6 33.6 33.3 33.1Capital investment percapita, US$ 318.1 373.0 360.8 373.7 410.8 464.3 524 588Real capital investmentgrowth, % y-o-y 24.2 3.8 1.0 3.0 4.5 6.0 6.0 6.0Construction sectoremployment, 000 2,268 2,378 2,408 2,499 2,639 2,834 3,040 3,259Construction industryemployment, % y-o-y 6.14 4.87 1.26 3.76 5.60 7.39 7.29 7.21Total workforce, 000 45,462.8 46,563.1 47,690.0 48,844.1 50,026.2 51,236.9 52,476.9 53,746.9Construction industryemployees, as % of totallabour force 4.99 5.11 5.05 5.12 5.27 5.53 5.79 6.06Infrastructure industry value,as % of total construction 42.48 45.71 44.87 47.26 48.89 49.98 50.81 51.45Infrastructure industry value,VNDbn 33825 43865 42574 59604 77115 94951 114100 134193Infrastructure industry value,US$bn 2.10 2.67 2.39 3.18 4.11 5.20 6.43 7.78Infrastructure industry valuereal growth (%) 15.40 6.68 -9.94 31.00 22.88 17.13 14.17 12.11Infrastructure industry value,as % of GDP 2.96 2.97 2.59 3.23 3.72 4.11 4.41 4.65f=forecast. Source: Vietnam General Statistics Office, IMF, ILO, BMI© Business Monitor International Ltd Page 13
  • 15. Vietnam Infrastructure Report Q2 2010Construction and Infrastructure Forecast Scenario According to our forecasts, infrastructure will make up on average 49.7% of total Robust Rebound Construction Industry Value, VNDbn construction industry on average between 2010 and 2014, indicating that 300,000 52 250,000 50 investments in infrastructure in Vietnam 200,000 48 will continue to dominate the 150,000 46 construction sector. This is above the 100,000 44 global average of 36.4%, which 50,000 42 0 40 highlights that Vietnam is indeed one of 2008e 2009f 2010f 2011f 2012f 2013f 2014f the most dynamic infrastructure markets Construction Industry V alue, V NDbn globally. (LHS) Inf rastructure Industry V alue A s % of Total Construction (RHS) In terms of value, however, Vietnam is e=estimate, f=forecast. Source:Vietnam General Statistics Office, found wanting. According to the national BMI statistics database, industry value added in 2008 was almost VND96trn (US$5.8bn). New preliminary estimates from the national statistics agency further indicate that construction industry value real growth for 2008 was a mere 0.4%. According to our forecasts, the construction industry will see real growth of 23.1% in 2010 taking the industry value to US$6.73bn. Of that, infrastructure will contribute 47.3%, or VND59trn (US$3.8bn). By the end of our forecast period, the infrastructure industry value is forecast to reachUS$7.8bn. Recovery will be swift and robust according to our forecasts, both for the construction and infrastructure sector. The annual average construction sector real growth between 2010 and 2014 is forecast to be 8.1%. For infrastructure, the figure is even higher, at 19.5%. There are several projects in the pipeline for Vietnam’s infrastructure, especially in the transport sector, that we believe will sustain the momentum for the country’s construction sector, even though private investments may subside. The strength of Vietnam’s infrastructure sector is evident by the fact that while the overall construction industry value is projected to show a very healthy real growth of 24% in 2010. The infrastructure sector is expected to far exceed it with growth of 31%.© Business Monitor International Ltd Page 14
  • 16. Vietnam Infrastructure Report Q2 2010Transport InfrastructureTable: Transport Infrastructure Industry Data 2007 2008 2009f 2010f 2011f 2012f 2013f 2014fTransport InfrastructureIndustry Value As % OfTotal Infrastructure 59.50 63.64 62.78 67.12 69.66 71.28 72.46 73.34Transport InfrastructureIndustry Value, VND bn 20,126.0 27,916.0 26729.4 40006.2 53718.2 67684.2 82678.5 98412.3Transport InfrastructureIndustry Value, US$bn 1.25 1.70 1.50 2.14 2.86 3.71 4.66 5.71Transport InfrastructureIndustry Value RealGrowth (%) 24.72 15.71 -11.25 40.67 27.77 20.00 16.15 13.53Transport InfrastructureIndustry Value AsPercent Of TotalConstruction (%) 25.28 29.09 28.17 31.72 34.05 35.63 36.82 37.73Roads and BridgesInfrastructure IndustryValue, As % Of TransportInfrastructure 29.90 21.21 19.86 12.55 9.31 7.36 6.00 5.02Roads and BridgesInfrastructure IndustryValue, VNDbn 6017.66 5921.43 5307.64 5021.69 5001.12 4980.55 4959.98 4939.41Roads and BridgesInfrastructure IndustryValue, US$bn 0.37 0.36 0.30 0.27 0.27 0.27 0.28 0.29Roads and BridgesInfrastructure IndustryValue Real Growth (%) -17.70 -24.60 -17.37 -14.39 -6.91 -6.41 -6.41 -5.91Roads and BridgesInfrastructure Industry,As % Of TotalInfrastructure 17.79 13.50 12.47 8.43 6.49 5.25 4.35 3.68Roads and BridgesInfrastructure Industry,As % Of TotalConstruction 7.56 6.17 5.59 3.98 3.17 2.62 2.21 1.89Railways InfrastructureIndustry Value, As % OfTransport Infrastructure 37.99 42.80 43.38 48.33 50.58 51.93 52.88 53.56Railways InfrastructureIndustry Value, VND bn 7645.85 11948.6 11596.3 19334.5 27169.6 35149.7 43716.4 52705.1Railways Infrastructure 0.48 0.73 0.65 1.03 1.45 1.93 2.46 3.06© Business Monitor International Ltd Page 15
  • 17. Vietnam Infrastructure Report Q2 2010Table: Transport Infrastructure Industry Data 2007 2008 2009f 2010f 2011f 2012f 2013f 2014fIndustry Value, US$bnRailways InfrastructureIndustry Value RealGrowth (%) 75.46 33.28 -9.95 57.73 34.02 23.37 18.37 15.06Railways InfrastructureIndustry, As % Of TotalInfrastructure 22.60 27.24 27.24 32.44 35.23 37.02 38.31 39.28Railways InfrastructureIndustry, As % Of TotalConstruction 9.60 12.45 12.22 15.33 17.22 18.50 19.47 20.21Airports InfrastructureIndustry Value, As % OfTransport Infrastructure 26.30 25.96 26.63 25.92 25.43 25.14 24.94 24.79Airports InfrastructureIndustry Value, VNDbn 5293.13 7246.03 7117.20 10369.7 13662.8 17016.9 20617.6 24395.7Airports InfrastructureIndustry Value, US$bn 0.33 0.44 0.40 0.55 0.73 0.93 1.16 1.41Airports InfrastructureIndustry Value RealGrowth (%) 23.72 13.90 -8.78 36.70 25.26 18.55 15.16 12.82Airports InfrastructureIndustry, As % Of TotalInfrastructure 15.65 16.52 16.72 17.40 17.72 17.92 18.07 18.18Airports InfrastructureIndustry, As % Of TotalConstruction 6.65 7.55 7.50 8.22 8.66 8.96 9.18 9.35Ports Harbours andWaterways InfrastructureIndustry Value, As % OfTransport Infrastructure 5.81 10.03 10.13 13.20 14.68 15.57 16.19 16.64Ports Harbours andWaterways InfrastructureIndustry Value, VND bn 1168.31 2799.92 2708.26 5280.32 7884.58 10537.0 13384.4 16372.1Ports Harbours andWaterways InfrastructureIndustry Value, US$bn 0.07 0.17 0.15 0.28 0.42 0.58 0.75 0.95Ports Harbours andWaterways InfrastructureIndustry Value RealGrowth (%) 259.41 116.66 -10.27 85.97 42.82 27.64 21.02 16.82Ports Harbours andWaterways InfrastructureIndustry As % Of Total 3.45 6.38 6.36 8.86 10.22 11.10 11.73 12.20© Business Monitor International Ltd Page 16
  • 18. Vietnam Infrastructure Report Q2 2010Table: Transport Infrastructure Industry Data 2007 2008 2009f 2010f 2011f 2012f 2013f 2014fInfrastructurePorts Harbours andWaterways InfrastructureIndustry As % Of TotalConstruction 1.47 2.92 2.85 4.19 5.00 5.55 5.96 6.28e/f= BMI estimate/forecast. Source: BMI CalculationTransport Infrastructure Forecast Scenario Transport infrastructure remains the predominant sector accounting for Transport Infrastructure Industry Value By Sub-Sector, VNDbn 67.1% of total infrastructure value in 120,000 2010. This is set to rise to 73.3% by Ports 2014. Within this sector, railway 100,000 A irports Railw ays Roads and Bridges infrastructure is the clear winner 80,000 accounting for 48.3% of transport 60,000 infrastructure value in 2010. This equates to a massive year on year real growth rate 40,000 of 57.7% for 2010. Over the course of the 20,000 forecast period, railway infrastructure 0 value will more than quadruple from 2008e 2009f 2010f 2011f 2012f 2013f 2014f US$0.65bn in 2009 to US$3.1bn by e=estimate, f=forecast. Source: BMI Research 2014. According to our new data series, the ports sector will increase the most in terms of percentage of total transport infrastructure value. Its contribution to the total transport infrastructure value will climb from an estimated 10.03% in 2008 to 16.6% in 2014. The contribution that roads make to the total transport industry value will steadily decline over the forecast period, mainly because investments in other underdeveloped transport modes (railways, ports, airports) are expected to be of larger value in the years to come. Airports will steadily contribute around a quarter of transport infrastructure’s industry value throughout the forecast period. Airports will be the second largest contributor to transport infrastructure industry value after railways.© Business Monitor International Ltd Page 17
  • 19. Vietnam Infrastructure Report Q2 2010Transport Infrastructure Overview Road and bridge building has stepped up a gear moving into 2010 with several high profile projects already underway. The Hanoi-Hai Phong highway construction project received approval from the Vietnam Development Bank (VDB) for a project involving construction of a 105.5km-long expressway, six lanes and road surfacing. Along the highway, two sudden-stop lanes, six intersections, nine large bridges, 21 medium bridges and 22 overhead bridges will also be built. The Bidv Expressway Development Company (BEDC) separately received approval for the construction of the Trung Luong-My Thuan section of the expressway. BEDC will invest US$1.8bn in constructing the 82km-long Trung Luong-My Thuan-Can Tho expressway project. The increased traffic levels in Vietnam’s urban areas and the country’s general fast-paced economic development have increased the volume of exports and imports to and from the country, thus creating a pressing need for better infrastructure between ports and inland. Vietnam has a total road network of 222,000km – the 20th largest globally – although only 19% of it is paved, indicating the poor condition of road infrastructure in the country. It should be noted the 10 years preceding 2010, large-scale projects have been implemented and more are under way or in the pipeline; therefore, the ratio of paved to unpaved is improving. Vietnam’s Ministry of Transport and Communications has disclosed estimates that it will require close to US$60bn in the period up to 2020, to fund road infrastructure projects. The ports sector is also seeing a good deal of activity in transport infrastructure. A.P Moller-Maersk Terminals (APM Terminals), a global port operator, signed a new joint venture (JV) agreement in late- September 2009 with Vinalines, a unit of Vietnams shipping line and terminal operator Vietnamese National Shipping Lines, to develop ports in the country. The JV will work on the development of general cargo, container terminals and transhipment hubs in Vietnam. The government has ambitious plans to modernise and expand the country’s airport infrastructure, though some, like the Long Thanh international airport, have been in the pipeline for years with little progress being made. However, the government’s willingness to get projects off the ground provides grounds for optimism. The Ministry of Transport announced in early May 2009 that it will upgrade and expand Vietnam’s main airports. Plans include a new international airport in Phu Quoc, Long Thanh, Cam Ranh, Chu Lai, Danang, and Hue. The Noi Bai airport in Hanoi will be expanded, as will the Cat Bi airport in Haiphong. In the maritime sector, activity has mainly been concentrated on boosting the capacity of the southern economic zone, especially in the Thi Vai River area. Major global port operators with interests in the region include Hutchison Port Holdings, Singapore’s PSA International, Saigon Port, Denmark’s© Business Monitor International Ltd Page 18
  • 20. Vietnam Infrastructure Report Q2 2010 Maersk and France’s Compagnie Maritime dAffrètement-Compagnie Générale Maritime (CMA CGM), all of which have been involved in the operations and development of major Vietnamese ports in the Thi Vai River, in an effort to enter one of Asia’s most promising markets. Americanshipper.com estimates that the amount invested in Vietnamese ports is close to US$4.5bn, and that up to eight new terminals are under development at Vung Tau along an S-shaped channel, most of which are expected to open in 2011. The river ports near Ho Chi Minh City, handle more than 70% of Vietnams total maritime container volume. These investments are essential. The rankings of the ‘Global Competitiveness Report’ published by the World Economic Forum annually highlight the weakness of the port sector infrastructure in Vietnam.Table: Ports Are The Weakest Link: Quality Of Infrastructure Global Ranking Out Of 134 CountriesOverall Infrastructure Rank 97Quality of roads 102Quality of railroads 66Quality of port infrastructure 112Quality of air transport infrastructure 92Quality of electricity supply 104Source: The Global Competitiveness Report 2008-2009. Rank above 90 denotes disadvantage for the country Though the country has 266 ports, the majority of maritime infrastructure is outdated and has barely any support infrastructure to transport goods from the port to the rest of the country. The Vietnam Japan Consulting joint venture (VJC), the company responsible for conducting the feasibility studies for Vietnams high-speed railway, has said that final estimated costs for the project are US$55.8bn. This is an astronomical amount for one project and for the government’s coffers. The Saigon Times cited estimates from the VJC that of the total required funding, US$35bn would come directly from the state budget and government loans for the construction of the infrastructure, while the remainder would come from the VJC and other developers and would pertain to costs relating to the acquisition of land and setting up of facilities. The final plan will be submitted to the annual National Assembly meeting in December 2009.© Business Monitor International Ltd Page 19
  • 21. Vietnam Infrastructure Report Q2 2010Table: Vietnam Railway Corporation’s Main TargetsUpgrading north-south railway route and improving the running speed of passenger trains and freight trains to 100-120kph and 100kph respectively.Upgrading west-east railway corridor so that the maximum speed of passenger trains and freight trains is 80-100kphand 60-80kph respectively.Paying more attention to the development of new routes between Ho Chi Minh city-Vung Tau, H Chi Minh city-CanTho, Thap Cham-DaLat, Yen Bai-Tuyen Quang-Bac Thai, Lien Chieu-Dung Quat, etc.Carrying out surveys and preparing to link the railway network to Singapore-Kunming route aimed at fulfilling missinglinks such as Ho Chi Minh city-Phnompenh city and Cambodia-VietnamSource: Vietnam Railways The two major urban centres, Hanoi and Ho Chi Minh (HCM) City are also seeking increased investments in their infrastructure sectors. HCM City officials estimate that the city will need a massive US$15bn of investments in the transport infrastructure sector to 2020. Construction of the urban railway project in Hanoi is due to start in early 2009. At the same time, HCM City has announced plans for a US$2bn injection into transport projects in the same year in order to stimulate the construction industry and in turn boost economic growth.Major Projects – New and Ongoing ProjectsAirports In December 2010, US-based Rockingham Asset Management submitted construction plans for the Van Don international airport. The US$1.2bn project will be carried out on a build-operate-transfer (BOT) basis, and the airport is expected to become operational in 2014. Its control will be transferred to Vietnamese authorities in 2048. In November 2010, the Quang Nam province in Vietnam sought a new investor for its delayed Chu Lai international airport project. Spanish project management and consulting firm Garuda Group had signed a memorandum of understanding (MoU) in April 2009, for carrying out a feasibility study for the airport, which it has failed to complete. US-based Airis International Holdings (Airis) has expressed its interest in developing the airport. Airis has also recently submitted a new investment plan for the development of Chu Lai airport. AirportsQ1 2010 In September 2009, the deputy prime minister of Vietnam, Hoang Trung Hai, instructed Southern Airports Corporation to come up with a plan for constructing the Long Thanh international airport, in© Business Monitor International Ltd Page 20
  • 22. Vietnam Infrastructure Report Q2 2010 Airports 2 Dong Nai Province, according to a report in Intellasia. The airport will be built on a 50km area. The airport will have the capacity to handle nearly 100mn passengers annually. According to previous estimates, cost could reach US$6bn. In July 2009, the Prime Minister of Vietnam, Nguyễn Tấn Dũng, gave the go-ahead for the planned VND10.52trn (US$590mn) upgrade for Cam Ranh International Airport, reported Intellasia. The upgrade will enable the airport to handle 27 aircraft during peak hours, and to receive 5.5mn passengers and nearly 100,000 tonnes of cargo per year by 2020.Q2 2009 Following the opening of a new regional office in Vietnam in early April 2009, the Spanish project management and consulting firm Garuda Asea Co. signed a memorandum of understanding with US- based Airis International Holdings and the regional government of the Quang Nam Province, to conduct a feasibility study for the construction of the Chu Lai International Airport. Estimated costs are US$1bn.Ports In January 2010, the Vietnam Seaport Development Master Plan was approved. The project will require a total investment of VND360-440trn (US$19.5-23.8bn) by 2020. The plan aims to increase the transportation capacity of the country by 500-600mn tonnes of goods by 2015, 900-1,000mn tonnes by 2020 and 2,100mn tonnes by 2030. The primary focus of the plan will be the international transit port Van Phong in Khanh Hoa Province, development of a Lach Huyen seaport complex in Hai Phong, and a seaport at the Nghi Son oil refinery from now to 2015. In November 2009, Vietnam started building the Van Phong port in the province of Khanh Hoa. The international container port, costing US$3.6bn, is intended to accelerate economic development in the region. The port, which will have 42 wharves, will have an annual capacity to handle up to 200mn tonnes of cargo. The port is expected to be operational in 2020. In November 2009, Vietnam National Shipping Lines (Vinalines) started work on the development of an international transhipment port complex in Van Phong Bay in the Khanh Hoa Province in Vietnam. Vinalines has started the construction of the first two wharves as part of the first phase of construction, involving an investment of VND4trn (US$250mn). The wharves, with a total length of 650m are scheduled to be completed by 2013. The first phase will be carried out from 2010 to 2015. In October 2009, Japans largest shipping company, Mitsui OSK Line (MOL) announced it would set up a terminal operation company to build and manage a new container terminal at Cai Mep in Vietnams Vung Tau Province.© Business Monitor International Ltd Page 21
  • 23. Vietnam Infrastructure Report Q2 2010 In October 2009, Indian developer and operator of Mundra Port, Mundra Port and Special Economic Zone, was in discussions with the Vietnamese government to construct a port in Vietnam. The port will cater for iron ore and coal shipments. Mundra Port director, Rajeeva Sinha, has said that the company is planning to set up at least one port in the region in the next three to four years. PortsQ1 2010 In September 2009, Taiwans Formosa Plastics Group said it is hoping the port of Son Duong will become the largest deep-sea port in Southeast Asia. The company is planning the construction of the port, which has an estimated cost of US$1.2bn, and it is designed to accommodate vessels with a capacity of between 200,000 and 400,000 deadweight tonnes (DWT). In August 2009, the general director of Vietnam-based company Gemadept Joint Stock (GMD) said that the company will start work on two port projects – Cai Mep deep-water port and Le Loi Plaza – in Q110, reported Intellasia. In line with its plans, GMD has established Gemadept-Terminal Link Joint Stock Company – a joint venture between GMD and its Egypt-based partner Terminal Link, a unit of shipping group CMA CGM – to carry out the work on the projects. GMD has contributed US$39.5mn in the form of land for the Cai Mep port project. The project will be funded by local banks. In August 2009, the Japanese International Cooperation Agency and Vietnams Ministry of Transportation decided to apply the PPP model to the Hai Phong International gateway port. The first phase of the project will be financed by official development assistance (ODA) loans of US$260mn from the Japanese government. US$165mn will be invested by Vietnam-based shipping company Vietnam National Shipping Lines (Vinalines) in the construction of two container harbours. The second phase of the Cai Cui seaport project in Can Tho city in Vietnam started on July 11 2009. The second stage construction will include 500m-long wharves, modern handling facilities and a logistic area worth VND600bn (US$34.3mn), and is scheduled to be complete by 2015. The Prime Minister, Nguyen Tan Dung, stated that the port will help in reducing transportation costs in the Mekong delta and ease overloading at Saigon port.Q2 2009 Phase one of Tan Cang Cai Mep deep water port commenced operations on June 3 2009 in Vietnams Ba Ria-Vung Tau province. This is Vietnam’s first deep-water port, and is being developed in a joint venture between Saigon Port and PSA International. The port has the capacity to handle 1.1mn twenty-foot equivalent units (TEUs) annually and can accommodate vessels of up to 80,000dwt. The first phase of the project cost a total of US$240mn. In May 2009, construction started on the Saigon-Hiep Phuoc port, in HCM City. The total estimated cost of the new port is US$337mn. It should be noted that according to local press sources, there is still not a road leading to the port. In April 2009, HCM City-based company Trai Thien Sea Transport Investment and Development© Business Monitor International Ltd Page 22
  • 24. Vietnam Infrastructure Report Q2 2010 Ports Joint Stock Company acquired a licence to construct a deep-water international transhipment port in Con Dao island, situated in Ba Ria Vung Tau province. The total cost for the port project is estimated at US$300mn. The new Con Dao port will be extended to 300 hectares (ha) to expand its capacity to handle heavy tonnage ships. The total load capacity will be 10mn tonnes every year. In April 2009, Deputy Director Duong Van Hoa announced that Vietnam National Coal-Mineral Industries Group (Vinacomin) will build a US$250mn deepwater port at Khe Ga Cape, in Binh Thuan province. Khe Ga Seaport will be utilised to import coal and export aluminium and minerals. The port will be able to handle ships up to 80,000DWT.Roads In December 2009, bidding began for the A7 section of the Noi Bai-Lao Cai expressway project. The first phase of the bidding package includes construction work on a road with total length of 26.7km. The winning bidder for the package was China-based Guangxi Road and Bridge Construction, with a contract price of VND1.6trn (US$86.6mn). Construction is expected to take 38 months. In December 2009 Netherlands-based engineering firm DHV was awarded a US$100mn contract for work on a 250km stretch of Vietnams Mekong River. The project will involve deepening and widening the river as well as constructing 18 bridges and a new lock to ease transport. In December 2009, Czech Republic-based Komerční Banka (KB Bank) moved forward with loans for the Hanoi-Hai Phong highway construction project in Vietnam and approval for Vietnam Development Bank (VDB) to secure 10-year loans from KB Bank for the project. The highway project involves construction of a 105.5km-long expressway, six lanes and road surfacing. Along the highway, two sudden-stop lanes, six intersections, nine large bridges, 21 medium bridges and 22 overhead bridges will also be built. In November 2009, the Vietnamese Transport Ministry started work on a 61.3km-long four-lane expressway that will connect Thai Nguyen, Bac Ninh and Hanoi,. The expressway is expected to ease the traffic on National Highway 3 and facilitate the growth of trade between Hanoi and other northern parts of the country. The project also includes construction of six junctions, 29 bridges and other facilities. The Japan International Cooperation Agency (JICA) will provide a VND6.1trn (US$338.89mn) loan for the VND8.1trn (US$450mn) project, which is scheduled to be completed by 2013. In November 2009, Vietnamese expressway development company Bidv Expressway Development Company (BEDC) received approval from the Tine Giang provincial Peoples Committee for the construction of an expressway in the country. This will enable BEDC to begin construction of the Trung Luong-My Thuan© Business Monitor International Ltd Page 23
  • 25. Vietnam Infrastructure Report Q2 2010 section of the expressway. BEDC will invest US$1.8bn in constructing the 82km-long Trung Luong-My Thuan-Can Tho expressway project. In November 2009, the Vietnamese road authority signed a build-operate-transfer (BOT) contract with local company Bien Hoa-Vung Tau Expressway Development (BVEC) for the expansion of National Highway 51. The national highway, linking the provinces of Dong Nai and Ba Ria-Vung Tau, will be expanded to 32.9m in width. The project also includes expansion of 10 bridges and construction of 12 new bridges. The project will require an investment of VND3.31trn (US$185.36mn), out of which 10% will be provided by investors, with the rest to be contributed by commercial loans. In November 2009, Thang Long project management unit (PMU) launched a tender inviting bids for the second phase of the Hanoi Ringroad 3 project. The project, which will require an estimated investment of VND5.6trn (US$313.64mn), involves construction of the first double-decker road in Vietnam. The winner of the tender will be responsible for construction of an 8.9km urban expressway from Thanh Xuan to northern Linh Dam Lake. RoadsQ1 2010 In October 2009, construction started on the first 55km stretch of the North South Highway. This section will begin in HCMC, and go via the still-in-planning Long Thanh international airport to Dau Giay. The section will be completed in 2013. In August 2009, the vice-chairman of the southern Vietnamese province of Ba Ria-Vung approved a plan for the construction of a major road artery that will link the ports and industrial zones in the area. According to the plan, the road will be built in two phases. The first phase pertains to the construction of an 8.3km road and five bridges, but no specific route has been announced. Construction will start during the fourth quarter of 2009 and be completed by 2012. The second phase will start construction in 2012 and be completed in 2015 and pertains to the construction of a 3.2km road and a bridge. The total estimated cost of the project is VND6.3trn (US$350mn). The Department of Transport will own the new road. Initial plans called for the construction of an inter-port road system to begin from the lower Cai Mep container port, pass through the Tan Thanh District and finish at the Phuoc An Port, the Saigon Times reports. In August 2009, Danish construction firm MT Højgaard was awarded a contract to construct a road bridge in Haiphong city, in Vietnam. The 240m long cable-suspended bridge will have six lanes. The construction of the bridge is expected to start in September 2009 and is likely to be completed in the next 21 months. The project will be funded by the Finnish government. In August 2009, Japanese construction companies Ishikawajima-Harima Heavy Industries (IHI) and Mitsubishi Construction jointly won an order for the construction of a bridge worth JPY40bn (US$423mn) from the government of Vietnam, reports Nikkei English News. The two companies will© Business Monitor International Ltd Page 24
  • 26. Vietnam Infrastructure Report Q2 2010 Roads be responsible for the construction of a section of the Nhat Tan bridge in Hanoi, Vietnam. In August 2009, Vietnamese joint stock company Becamex IDC Corporation started construction work on the My Phuoc-Tan Van Expressway project in Binh Duong province in partnership with the provincial government. The cost of the project is VND3.5trn (US$196.6mn), out of which VND1.7trn (US$95.5mn) was contributed by the provincial government. The work includes construction of a 30km expressway with six lanes and 18 bridges. The expressway will link industrial areas in Ben Cat, Thuan An and Di An communes; Thu Dau Mot town; Dong Nai and Binh Duong to HCM City container port and Long Thanh international port. The project is scheduled to be completed in 2013.Q3 2009 In early July 2009, the Ministry of Transport disclosed that the second phase of the ring road number three project in Hanoi will be launched by the end of 2009. Total cost for the second phase, that will see the ring road extend for 9km, will be VND5trn (US$280mn). Construction is due to commence in July on a 21km highway linking Hanoi to Van Giang, in neighbouring Hung Yen province. The total estimated cost of the project is VND380bn (US$22.5mn). The contract is a build and transfer contract and was awarded to Construction Machinery Corp. and Thanh Nam Construction and Investment Joint Stock Company. Once the project is completed in two years’ time, the companies will transfer ownership to Hanoi’s government.Q2 2009 Vietnams Ministry of Transport began work on a 121km-long expressway connecting Ninh Binh province to Nghi Son on June 16. The construction of the expressway is part of a programme to upgrade the north-south national road. Total investment in the project is forecast to be VND32trn (US$1.9bn). In June 2009, the Hanoi city Peoples Committee announced plans to invest VND881.6bn (US$50.9mn) in a project to upgrade the 1A National Highway, from Ngoc Hoi to Cau Gie, in Thuong Tin district and Phu Xuyen district. The Hanoi Department of Transportation has been given the responsibility to carry out the project as part of its mandate to develop the transportation network, and upgrade the route capacity. In April, the Asian Development Bank (ADB) and the French Development Agency (AFD) offered a financial grant of almost US$7mn to assist Vietnam in upgrading infrastructure facilities in three districts. The fund will be utilised to construct 41km of rural road and for irrigation projects. The projects are anticipated to commence in Q409.Railways In November 2009, a consortium formed from French construction company VINCI Construction Grands Projets and French manufacturer LOHR Industrie signed an agreement for the construction of the first light© Business Monitor International Ltd Page 25
  • 27. Vietnam Infrastructure Report Q2 2010 railway line in Ho Chi Minh city in Vietnam. The project, with an estimated cost of EUR200mn (US$297.77), involves design and construction of 12km railway line that will have a total of 23 stations. In October 2009, the Ministry of Traffic and Transportation of Vietnam announced that seven Korean investors, in association with the Transport Investment & Construction Consultant Joint Stock Company (TRICC), will invest in and construct the 33.5km Hanoi urban metro line 5 and Nha Trang-Saigon section of North-South high speed railway in Vietnam. The companies selected include Samsung, Daewoo, Ska, Kumho and Kangnam. RailwaysQ1 2010 In October 2009, the Ministry of Traffic and Transportation of Vietnam announced that seven Korean investors, in association Vietnam Railways, have been awarded a build, operate and transfer contract for the construct of the 33.5km Hanoi urban metro line five and Nha Trang-Saigon section of North- South high-speed railway in Vietnam. The contract is valued at US$1.2bn. The companies have agreed to invest US$574mn for the first phase and US$653mn for the second phase. The companies selected include Samsung, Daewoo, Ska, Kumho and Kangnam.Q2 2009 The Railroad Management Board Region 2 in Vietnam announced in late June 2009 that the project for upgrading the railroad between Vinh-Nha and Trang will be officially launched in Q309. The upgrade on the railroad, with a total length of 700km, is expected to cost VND4trn (US$231.8mn). In May 2009, the Vietnam Railways Administration and a Chinese railway corporation signed a contract for an urban railway project in Hanoi worth more than US$350mn. Under the terms of the agreement, the Chinese company will be responsible for the survey and design of the project as well as providing equipment. The total investment in the project will be US$552.86mn, with China lending 85% of the amount, and the rest being contributed by the project owner, Vietnam Railways. The Cat Linh-Ha Dong urban rail project in Hanoi is expected to be operational in 2014. The 13.5km route will have a capacity of 28,500 passengers per hour in each direction. Construction was due to begin in 2009, but this has been pushed back. In April 2009, the Vietnamese finance ministry approved VND499bn (US$30mn) to Vietnam Railway Corp. to accelerate work on five of its vital projects, valued at VND11.6trn (US$670mn), in 2009. The corporation plans to invest in the Hanoi-Lao Cai railway, the signal information system of Hanoi-Vinh railway phase two, Vinh-Nha Trang railway line, Thong Nhat railway, and 44 bridges along with Thong Nhat railway.© Business Monitor International Ltd Page 26
  • 28. Vietnam Infrastructure Report Q2 2010Major Projects Table - TransportTable: Vietnam – Major Transport Infrastructure Projects Project ValueProject (US$mn) Company name(s) Timeframe StatusAirportsCam Ranh InternationalAirport 590 na na Project approved Garuda Asea, Airis MoU for feasibiltyChu Lai International Airport 1000 International na study app Southern AirportsPhu Quoc Airport 970 Corporation 2009-2012 Under Construction Approved inGio Linh District Airport 21.5 na 2009-2015 February 2009Noi Bai International Airportextension 852 (initial stage) na 2009-2020 At planning stage Louis Berger Group, Airport ConsultantsDanang Airport passenger B.V.and Nationalterminal 160 Construction Consultants 2006-2010 Under ConstructionNew international airport inLong Thanh, Dong Nai Southern Airports Geological surveyprovince 6,000 Corporation 2009-2020 underwayPorts Trai Thien Sea Transport Investment and Development Joint StockCon Dao transhipment port 300 Company na Licence awarded Construciton of the second phaseCai Cui port project na na 2009-2015 underwayHai Phong International port 425 Vinalines na At planning stageSon Duong deep water port 1200 Formosa Plastics Group na At planning stageSaigon- Hiep Phuoc port 337 na 2009- Under ConstructionDedicated box facility in BaRia-Vung Tau, in Cai Mep Mitsui OSK Lines (MOL), SPV pendingPort na Hanjin and Wan Hai 2009-2011 creationDeep water Port at Khe GaCape, Binh Thuan Province 250 Vinacomin 2009- At planning stageSaigon InternationalTerminal, Phu My 1 China HarbourIndustrial Park 163 Engineering Company 2009-2011 Under Construction Marine Consultant Co. and Approved inMy Thuy deep water port 1,100 Quang Tri province na October 2008 Civil EngineeringCai Mep-Thi Vai Construction Joint Stock Phase I inInternational Port 700 Co. No.6 and Truong Son na operation/© Business Monitor International Ltd Page 27
  • 29. Vietnam Infrastructure Report Q2 2010Table: Vietnam – Major Transport Infrastructure Projects Project ValueProject (US$mn) Company name(s) Timeframe Status CorpVan Phong InternationalEntreport 550 Vinalines na Seeking investorsRoadsMy Phuoc- Tan VanExpressway 196.6 Becamex IDC Corporation 2009-2013 Under Construction Construction due toRing Road No.3, Hanoi, begin by the end ofPhase II 280 na 2009- 2009 Construction of theHighway to link Cai Mep and first phase due toPhuoc An ports 350 na 2009-2015 commence in Q409Ninh Binh- Nghi SonHighway na na 2009- Under construction Construction Machinery Construction due to Corp., Thanh Nam 2009- commence in JulyHanoi- Van Ginag Highway 22.5 Construction 2011/12 2009Da Nang- Quanf Ngai Governmentexressway 2,480 na na seeking financeNhat Tan Bridge, package IHI, Mitsubishi Contract awarded inNo.3 423 Construction na August 2009Tran Thi Ly- Nguyen Van Approved inTroi bridge 86 na na January 2009 GS Engineering & Contract awarded inNew Highway (unspecified) 174.3 Construction na December 2008 Vietnam Road BOT contractBypass of National Road Department and BOT Ninh agreed inNo.1A extension 3.19 Thuan na DecemberHo Chi Minh City- National ADB loan approvedHighway 1 Expressway 932 na 2009-2014 in March 20091A National Highway (NgocHoi - Cau Gie section) 50.9 na At planning stage PSJ Holdings, Cienco 1 Company and Infrastructure Partnership 420 (Czech Development and Finance agreement finalisedHanoi- Hai Phong Republic loan) Investment Company na in November 2008 VN Express, POSCo Engineering and ADB loan approvedNoi Bai- Lao Cai highway 1,100 Construction (for part of it) na in October 2008 2009- Project approved inMu Loi Bridge 88 na 2011/2012 September Construction due toSong Bung 4 access road 1.15 Cavico Corp. 2009- 2010 begin in 2009© Business Monitor International Ltd Page 28
  • 30. Vietnam Infrastructure Report Q2 2010Table: Vietnam – Major Transport Infrastructure Projects Project ValueProject (US$mn) Company name(s) Timeframe Status Transport Consultation First phase byHanoi-Haiphong Highway 1,450 and Design Company 2006-2010 2009-10Construction of a roadconnecting Tan Son NhatInternational Airport with the GS Engineering andTrans-Asia Highway 300 Construction corp na At planning stageNorht South Highway ( HoChi Minh City, Long Thanh Vietnam Express Highwayand Dau Giay section) 1,180 Corporation (VEC) 2009-2013 Under ConstructionRailwaysVinh-Nha Trang railway Railroad Management Project to begin inrevamp 232 Board Region 2 2009- Q309Hanoi Metro Line 5 1200Cat Linh-Ha Dong urban rail, Start of constructionHanoi 552.8 Vietnam Railways 2009-2014 delayed Finance Ministry Vietnam Railway approved US$30mnCore projects of VRC 670 Corporation (VRC) 2009 loan in March 2009 7,800 (total cross-countryHCM- Na Trang railway express railway ) Chungsuk Engineering na At planning stageCat Linh-Ha Dong urban railproject in Hanoi 552 na 2009-2020 final plan to beNorth South High Speed submitted inRailway 55,800 na -2035 December 2009Lao Bao-Dong Ha railway na Giant Group na Approval pendingConstruction of a double Korean Internationaltrack rail line between Hanoi Cooperation Agency Feasibility studiesand the Ha Tinh province 9,200-10,100 (Koica) na being carried out Vietnam Railway Department, China Mechanical Equipment Import Export CorporationConstruction of railway links and China Railwaywith Cambodia and Laos 527.5 Construction Corporation na At planning stage Vietnam RailwaySaigon My Tho Railway 444.7 Corporation (VRC) 2010-2015 At design stageNote: Some of the projects in the table are from BMIs 2008 Vietnam quarterly reports, where they can be also befound analytically. na= not available. Source: BMI© Business Monitor International Ltd Page 29
  • 31. Vietnam Infrastructure Report Q2 2010Energy and Utilities InfrastructureTable: Energy & Utilities Infrastructure Industry Data 2007 2008 2009f 2010f 2011f 2012f 2013f 2014fEnergy and UtiltiesInfrastructure IndustryValue, As % Of TotalInfrastructure 40.50 36.40 37.22 32.88 30.34 28.72 27.54 26.66Energy And UtilitiesInfrastructure IndustryValue, VNDbn 13699.2 15966.7 15844.8 19597.4 23397.0 27267.0 31421.4 35780.4Energy and UtilitiesInfrastructure IndustryValue, US$bn 0.85 0.97 0.89 1.05 1.25 1.49 1.77 2.07Energy and UtiltiesInfrastructure IndustryValue Real Growth (%) 3.85 -6.45 -7.76 14.68 12.89 10.54 9.24 8.37Energy and UtiltiesInfrastructure IndustryValue, As % Of TotalConstruction (%) 17.21 16.64 16.70 15.54 14.83 14.35 13.99 13.72Power Plants andTransmission GridsInfrastructure IndustryValue, As % Of TotalEnergy and Utilities 95.00 95.00 95.03 94.17 93.57 93.14 92.79 92.51Power Plants andTransmission GridsInfrastructure IndustryValue, VNDbn 13013.8 15168.3 15057.6 18454.1 21893.1 25395.7 29155.8 33101.0Power Plants andTransmission GridsInfrastructure IndustryValue, US$bn 0.81 0.92 0.85 0.99 1.17 1.39 1.64 1.92Power Plants AndTransmission GridsInfrastructure IndustryValue Real Growth (%) 2.10 -6.44 -7.73 13.56 12.14 10.00 8.81 8.03Power Plants andTransmission GridsInfrastructure Industry,As % Of TotalInfrastructure 38.47 34.58 35.37 30.96 28.39 26.75 25.55 24.67Power Plants AndTransmission GridsInfrastructure Industry,As % Of TotalConstruction 16.35 15.81 15.87 14.63 13.88 13.37 12.98 12.69© Business Monitor International Ltd Page 30
  • 32. Vietnam Infrastructure Report Q2 2010Table: Energy & Utilities Infrastructure Industry Data 2007 2008 2009f 2010f 2011f 2012f 2013f 2014fWater InfrastructureIndustry Value As % OfTotal Energy and Utilities 5.00 5.00 4.97 5.83 6.43 6.86 7.21 7.49Water InfrastructureIndustry Value, VNDbn 685.34 798.78 787.16 1143.34 1503.98 1871.30 2265.62 2679.36Water InfrastructureIndustry Value, US$bn 0.04 0.05 0.04 0.06 0.08 0.10 0.13 0.16Water InfrastructureIndustry Value RealGrowth (%) 52.27 -6.45 -8.46 36.25 25.04 18.42 15.07 12.76Water InfrastructureIndustry, As % of TotalInfrastructure 2.03 1.82 1.85 1.92 1.95 1.97 1.99 2.00Water InfrastructureIndustry, As % of TotalConstruction 0.86 0.83 0.83 0.91 0.95 0.99 1.01 1.03e/f= BMI estimate/forecast. Source: BMI CalculationEnergy and Utilities Infrastructure Forecast Scenario According to our forecasts, the energy and utilities sector will witness a steady Energy And Utilities Infrastructure Industry Value, VNDbn decline in its share of total infrastructure 5.0 40 industry value. Though the value of the 35 energy and utilities sector will increase in 4.0 30 3.0 25 the coming years and real growth will 20 average 11.1% annually between 2010 2.0 15 10 and 2014, the investments in the transport 1.0 5 sector will increasingly overshadow those 0.0 0 in energy and utilities. This is mainly due 2008e 2009f 2010f 2011f 2012f 2013f 2014f Energy A nd Utilities Inf rastructure Industry V alue, to the fact that while investments in V NDbn LHS Energy and Utilties Inf rastructure Industry Value A s energy remain on a stable rate over the % Of Total Inf rastructure RHS coming years, we anticipate investments e=estimate, f=forecast. Source:EIA, BMI in transport infrastructure to accelerate quite significantly particularly in the rail and port sectors.© Business Monitor International Ltd Page 31
  • 33. Vietnam Infrastructure Report Q2 2010Energy and Utilities Infrastructure Overview Hydropower provides a quarter of Vietnam’s electricity needs and although it is an important source, coal has also gained popularity as a power generation source. There is a stable stream of investments into increasing hydropower capacity, particularly as the Asian coal market is becoming strained and Chinese demand is pushing up prices. Vietnamese Prime Minister Nguyen Tan Dung announced in early March 2009 that Electricity of Vietnam (EVN) will not be permitted to spend money in non-core fields. According to the prime minister, EVN has to focus its attention on ensuring the power supply in the country. The utility needs to take steps to avoid an electricity shortage in 2009 as well as subsequent years. Nevertheless, in a statement contradicting earlier cited concerns regarding financing, Electricity of Vietnam disclosed in January 2009 that it is planning to spend VND49.99trn (US$3.03bn) on power projects in 2009. Of the total, VND42.45trn (US$2.42bn) has been earmarked for net investments in the projects, VND6.50trn (US$.37bn) will be used for payment of debts, while VND1.04trn (US$0.06bn) is expected to be used towards development and investment in joint stock companies. In late January 2009, Vietnamese media reported that EVN had managed to raise US$28.6mn from a corporate bond offer. EVN is aiming to run nine power projects comprising hydropower and thermo power plants in 2009. The total capacity of the projects is expected to be 2,696 megawatts (MW). Keen to see the power generation sector grow, Vietnams ministry of industry and trade said that plans for the development of the 13 power projects that were rejected by the state-owned utilities company EVN have been finalised – the plans will now be submitted to the government for consideration. Under the latest plans, EVN will instead invest in two projects with an overall capacity of 2,000MW, and the rest of the projects will be financed by investors. It should be noted that the challenges faced by EVN in the domestic credit market will be similar, if not greater, for the private sector. The private sector will need to face the additional challenge of red tape and negotiate pricing and distribution contracts with EVN (since EVN has a monopoly over distribution), a process that itself is reportedly strenuous for investors.© Business Monitor International Ltd Page 32
  • 34. Vietnam Infrastructure Report Q2 2010 The government strictly regulates electricity retail prices, with adjustments Fuel As % Of Electricity Generation recommended by the ministry of the 2009f interior and requiring approval by the Natural prime minister. A unified tariff is Hydro Gas 44% 39% applicable across the country and is considered rather low in comparison with other regional countries. That is a further reason why investors may decide against major investments in Vietnam’s power sector, a factor that has also filtered Coal Oil through to our new project finance 1% 16% ratings when assessing price risks to the energy and utilities sector. f=forecast. Source: EIA, BMI There may be a silver lining, even as the situation deteriorates. The plea by EVN to increase private participation or risk a chronic structural problem in the power market may induce the government to speed up its liberalisation programme of the electricity sector. This would break the monopoly of EVN in the distribution side of the market earlier than the planned 2022 date, therefore allowing electricity tariffs to fluctuate. We believe that investor demand is indeed high for the utilities market in Vietnam, as the rapid economic growth of the economy has created very high demand. However, private investments have been limited due to the bureaucratic obstacles and rigidity of the internal market. Addressing those two issues is clearly within the government’s reach. If addressed, this could boost activity in the market and help mitigate some of the risks that the overreliance on EVN’s investment programme places on future growth. Indeed, the first ever public private partnership (PPP) in Vietnams power generation sector gained momentum in May 2009. Malaysias JAKS Resources reportedly signed a memorandum of understanding (MoU) with the Vietnamese government for the construction and operation of the Hai Duong thermal power station. This is a significant milestone for Vietnam. It further indicates that opportunities to fill the investment gap left by state-owned EVN are proliferating for independent power producers (IPPs). The regulatory framework for establishing PPPs in Vietnam, however, remains opaque. According to the Hai Duongs planning and investment department head, the BOO contract was pursued under the regulations of Decree 78, passed in 2005. Decree 78 is perhaps the only bit of legislation at the moment governing PPPs in Vietnam. The thin legal framework is an obstacle to the development of PPPs in the country as investors feel more exposed to an uncertain business environment. The Hai Duong project will be a litmus test for the IPPs in Vietnams utilities sector.© Business Monitor International Ltd Page 33
  • 35. Vietnam Infrastructure Report Q2 2010 Vietnam has also taken the first step towards ratifying a decision to build two nuclear power plants in the country. The National Assembly has approved the resolution calling for the construction of the plants and now, pending further clarification, the resolution will be submitted to Prime Minister, Nguyen Tan Dung, for final approval. The resolution estimates that the cost of construction of the plants will be approximately VND200trn (US$10.8bn). The plants could be located in the province of Ninh Thuan and each will have capacity of 2gigawatts (GW). Despite concerns over Vietnam’s readiness to adopt nuclear power, the country is at a more advanced stage than other developing countries in its preparations. The country already has cooperation agreements in place with South Korea, Japan, US, Canada, China and France. China Guangdong Nuclear Power Group (CGNPC), the second largest nuclear power plant construction company in China, has agreed to help Vietnam develop its first nuclear reactor. The proposed plans include the construction of a 2,000 megawatts (MW) power plant in Ninh Thuan Province. A report on developing nuclear power in the country will be submitted to the National Assembly for approval in April 2009. Vietnams nuclear ambitions stretch back to the 1980s when the country first studied developing the technology. In 2006, the government announced plans to develop 2,000MW of nuclear generating capacity, with construction due to start in 2014, and expected to take around five years. Table: The Three Levels Of Liberalising Vietnam’s Electricity Market Level one (2005-2014): A competitive generation power market will replace the current monopoly and subsidised power situation. Level two (2015-2022): The establishment of a competitive wholesale power market. Level three (after 2022): The realisation of a competitive electricity retail market. Power shortages are never far off in Vietnam, and the government has repeatedly stressed its plans to mitigate the county’s power problems through investments and the liberalisation of the market. According to the Power Development Master Plan for Vietnam, over the period 2006 to 2025 the electricity sector needs total investment of approximately US$79.9bn. Around US$52bn of this amount will be invested in power generation, and the rest in the electricity transmission and distribution network. The government has plans to increase Vietnam’s total installed generating capacity to 81GW by 2020. In November 2008, the World Bank approved a loan of US$150mn for rural electrification expansion projects. According to statements, 1,800 households have been connecting to the grid every year over the last decade, a figure that highlights the proliferation of demand for electricity beyond the urban areas and into the country side. This project will target the expansion of distribution systems.© Business Monitor International Ltd Page 34
  • 36. Vietnam Infrastructure Report Q2 2010 The industry and trade ministry forecast that electricity demand would increase by 15% in 2009 if the economy grows by 7%. However, the expected slowdown in economic activity will curb demand for 2009, thus providing some much needed breathing space for power generation sector.Major Projects – New and Ongoing ProjectsPower Plants In January 2010, Toyo Ink, announced that it is considering a rights issue to raise money for the proposed coal-fired thermo-electric plant in Vietnam. The company is also studying other options to finance the construction of the power plant, which is pending approval from the Vietnamese prime ministers office. The power plant, costing of US$2.5bn, will be located at Duyen Hai 3 in Tra Vinh Province. In November 2009, Japanese trading house Sumitomo Corporation signed a memorandum of understanding (MoU) with the government of Vietnam for the construction and operation of a multi-billion-dollar coal-fired power plant. According to the terms of the MoU, Sumitomo will hire local contractor Hanoi Investment Industrial Construction Joint Stock Co. (Hanoinco) to build the power plant, which will be fitted with next- generation technology to minimise emissions. The plant will have a capacity of 1,320MW and the estimated cost is JPY200bn (US$2.5bn. In October 2009, Chinese equipment manufacturer Shanghai Electric Corporation (SEC) was awarded a US$1.38bn contract by the Vietnamese state-owned utility Electricity Group of Vietnam (EVN) to construct a thermal power plant in Binh Thuan province of Vietnam. Under the terms of the contract, SEC will provide engineering, procurement and construction services for the 1,244MW coal-fired Vinh Tan 2 plant. The power plant, scheduled to come online in 2013, will supply electricity to the countrys southern region. In October, Vietnam-based utility Vinh Son-Song Hinh Hydropower JSC (VSH) started construction work on the 220MW Thuong Kon Tum hydropower plant in the Kon Tum region of the country, reports the Saigon Times. The plant will have a reservoir, an 18km-long water tunnel and two turbines. The plant, with a capital investment exceeding VND5.7trn (US$322mn), is expected to generate 1.1bn kWh of electricity annually by 2014. Power Plants and Transmission GridsQ1 2010 In October 2009, Vietnam-based utility Vinh Son-Song Hinh Hydropower JSC (VSH) started construction work on the 220MW Thuong Kon Tum hydropower plant in the Kon Tum region of the country. The plant will have a reservoir, an 18km-long water tunnel and two turbines. The plant, with a capital investment exceeding VND5.7trn (US$322mn), is expected to generate 1.1bn KWh of electricity annually by 2014.© Business Monitor International Ltd Page 35
  • 37. Vietnam Infrastructure Report Q2 2010 Power Plants and Transmission Grids In September 2009, the Development Bank of Vietnam (BDV), the Bank for Investment and Development of Vietnam (Bidv) and the Vietnam-Russia joint venture Bank (VRB) agreed to a loan of VND1.37trn (US$76.57mn) to fund the construction of the Dong Nai 2 hydropower plant project in Lam Dong province in Vietnam. The total cost of the 70MW plant is VND1.95trn (US$109.19mn), and Trung Nam hydropower Joint Stock is the main investor in the project. In September 2009, the Asian Development Bank (ADB) approved a loan of US$151mn to Vietnam to support the construction of hydropower plants in rural areas. The loan will be used for the construction of five to 10 grid-connected mini-hydropower plants, with a combined capacity of 100MW. The hydropower plants are expected to be completed by 2015. The loan will cover 76% of the cost of the US$197.6mn project, while the remainder will be contributed by the government. In August 2009, the Bank for Investment and Development of Vietnam (Bidv) signed a credit contract with Nam Muc Hydropower Joint Stock Company for VND1tn (US$58.5mn) for the construction of the 44MW Nam Muc hydropower plant, in Muong Mun. The plant is expected to generate 176mn KWh of electricity annually and is scheduled to become operational by 2011. In August 2009, Japanese companies Sojitz and Toshiba were jointly awarded a JPY11bn (US$115mn) order by Vietnamese state-owned company Vietnam Construction and Machinery Installation (LILAMA) to supply two 600MW steam-turbine generators for the Vung Ang 1 coal-fired thermal plant, located in Ha Tinh Province of Vietnam. The turbine generators are expected to be delivered in phases by November 2011 and the power plant is expected to become operational in 2012.Q3 2009 In July, the Vietnam National Coal and Mineral Industries Group (Vinacomin) commenced construction of the Mao Khe thermoelectric plant in northern Quang Ninh province, in Vietnam. The cost of the plant is US$577mn and it is scheduled to become operational in 2012, two years behind schedule. Vinacomin has signed an engineering project management construction contract worth US$429.5mn with Chinas Wuhan Kaidi Electric Power.Q2 2009 In late-June 2009, construction started on the 750MW Nhon Trach Power Plant No. 2 in Dong Nai Province. The project’s estimated cost is US$700mn. Viet Nam National Oil and Gas Group (PetroVietnam) is investing 51% in this project and the rest will be funded by Electricity of Viet Nam (EVN), Viet Nam Post and Telecommunications Group, Viet Nam National Coal and Mineral Industries Group, Bank for Investment and Development, and Technology Development Co. The plant is expected to be finished in 30 months and will generate 4.5bn KWh of electricity annually. Also in late June, the Prime Minister Nguyen Tan Dung gave preliminary approval to Tan Tao Investment and Industry to be the main investor for two power plants in the Kine Luong district in southern Vietnam. The Kien Luong 1 and the Kien Luong 2 will have capacity of 1,200MW and 1,200© Business Monitor International Ltd Page 36
  • 38. Vietnam Infrastructure Report Q2 2010 Power Plants and Transmission Grids to 2,000MW respectively, and are planned to be operational by 2014. No cost estimates have been released. In June 2009, the World Bank and the State Bank of Vietnam singed a concessional credit agreement for projects in the renewable energy sector in Vietnam. The total credit facility is for US$202mn, and will come from the International Development Association (IDA). The total estimated cost for the entire venture is US$316mn and in addition to the loan, the government, local banks and project sponsors will also contribute towards financing. The funds will be disbursed over four years and, according to one report, will be used to finance approximately 25 projects. According to the credit facilitys mandate three local banks, the Bank for Investment and Development of Vietnam, Sacombank and Vietcombank, will have access to the credit facility and will arrange loans for projects up to 30MW, which will be developed by private sponsors. The Bank for Investment and Development of Vietnam (Bidv), in partnership with the Vietnam-Russia Bank agreed to provide a loan of VND1trn (US$58.7mn) for the Van Chan hydroelectric power project in Yen Bai. Under the contract, which was signed on June 11, Bidv will provide VND850bn (US$49.9mn) while the Vietnam-Russia Bank will provide the remaining VND150bn (US$8.8mn). The 57MW power plant will be operational by 2011. In May 2009, Malaysias JAKS Resources singed an agreement with the government to build, own and operate (BOO) the Hai Duong thermal power station. It will have capacity to produce 1200MW of coal-generated electricity, with the coal supplied locally from Vinacomin, the state-owned coal producer. Construction is due to commence in October 2010 and the plant will be operational in the beginning of 2014. The plant will be located in the northern province of Hai Duong, in the Kinh Mon district. The press reports cite the total estimated cost for the power plant at US$2bn. Regarding financing, JAKS CEO, Chee Seong Heng, said in November 2008 that they were considering fundraising through a rights issue and long-term financing arrangements. In May 2009, the Hanoi-based infrastructure company Cavico Corp. announced that it had received final authorisation by the Lam Dong provincial government for the development of an onshore wind farm. The plant will be developed under a build, own and operate (BOO) basis. The total estimated cost is US$56mn and Cavico will contribute 20% equity and raise the remainder in debt. Construction is due to begin in the end of 2010 and be completed by 2012. Initial capacity will be 30MW. Given the new World Bank facility for renewable projects (see bullet point above), we anticipate that this will be one of the first projects to use the available funding. In May 2009, PetroVietnam announced the beginning of construction of the Long Phu power complex in Soc Trang province. The designed capacity of the Long Phu complex is expected to be 4,400MW. The US$1.4bn Long Phu 1 power plant project includes construction of three coal-fired power plants and other related infrastructure. PetroVietnam expects to start the operation of the first turbine with© Business Monitor International Ltd Page 37
  • 39. Vietnam Infrastructure Report Q2 2010 Power Plants and Transmission Grids targeted capacity of 600MW at the end of 2013. In May 2009, the government authorised plans to develop the A Luoi hydro-electric power plant, which will be the largest hydroelectric power project in the Thua Thien-Hue province. The two-turbine power plant is planned to have a capacity of 170MW, to generate 686.5mn KWh annually. The overall investment estimated for the project is in excess of VND3.2trn (US$180mn). The project is expected to become operational by the end of 2011. EVN secured a syndicated loan from four domestic banks for the construction of the Huoi Quang hydropower plant. The estimated cost of the project is VND11trn (US$617mn), and the loan is for VND4trn (US$225mn). The banks that arranged the loan are Vietncombank (VND300bn), Agribank (VND200bn), PVFCCo (VND450bn) and EVN (VND100bn). The hydropower plant will have capacity of 520MW. In late April 2009, a representative of Czechs KV Venti Group said in press conference in Hanoi that the firm is seeking to establish a 100% foreign-owned enterprise for investments in Vietnams wind power sector. Initially, it will inject capital in south central and southern provinces of Ninh Thuan and Binh Thuan. In late April 2009, Intellasia reported that four commercial banks – Argibank, Bidv, Vietcombank and PG Bank – have promised to jointly offer a syndicated credit of VND2.6trn (US$150mn) to Electricity of Vietnam (EVN) for its Ban Chat hydropower project. Agribank will fund VND1.5trn (US$90mn) in a loan term of 13 years. The 220MW Ban Chat power plant is one of EVNs vital projects in 2009 with total cost estimated to be VND8.6trn (US$490mn). In April 2009, Cavico secured a US$4.9mn construction contract from the Vietnamese state-owned engineering firm Lilama. Under the contract, Cavico will construct a diversion tunnel and coffer dam at the Hua Na hydropower plant. Once the plant is operational, it will generate 180MW of power and will supply 706mn KWh of power annually. The construction of the plant will need a total investment of about US$250mn. In April 2009, the Asian Development Bank (ADB) approved US$151mn in loans to assist Vietnam with the development of five to 10 mini-hydropower plants around the country.© Business Monitor International Ltd Page 38
  • 40. Vietnam Infrastructure Report Q2 2010Pipelines Oil and Gas PipelinesQ1 2010 In October 2009, state-owned PetroVietnam reportedly decided to construct a second gas pipeline in the Nam Côn Sơn Basin. The report quoted PetroVietnams CEO Phùng Đình Thực, as saying, that the second Nam Côn Sơn pipeline would supply power plants in Phu My.Q2 2009 In mid-May 2009, PetroVietnam said it was preparing to launch the construction of the US$1bn block B-O Mon gas pipeline in southern Can Tho City in Q409. The 406km gas pipeline comprises a 246km offshore pipeline and a 160km onshore pipeline. The pipeline will link more than five Mekong Delta localities, including Can Tho City, Hau Giang, Kien Giang, Bac Lieu and Ca Mau provinces. The pipeline project is expected to be operational in July 2011. It will have a capacity of 5.8-6.6bcm and would be constructed by Russo-Vietnamese joint venture (JV) Vietsovpetro.Water WaterQ1 2010 Engineering, consulting and construction company Black & Veatch has started work on the Central Region Small and Medium Towns Development Project in Vietnam. The government of Vietnam and Black & Veatch signed a contract wherein Black & Veatch will provide consulting services to the government on the project. The project includes investments in water supply, wastewater and drainage and solid waste infrastructure. The project is financed by the Asian Development Bank and the government of Vietnam. It will be implemented over a period of five years.© Business Monitor International Ltd Page 39
  • 41. Vietnam Infrastructure Report Q2 2010Major Projects Table – Energy and UtilitiesTable: Vietnam – Major Energy and Utilities Infrastructure Projects Project ValueProject (US$mn) Company name(s) Timeframe StatusPower Plants and Transmission SystemsTunnel and coffer dam atthe Hua Na hydropower Cavico (EPC Contract awarded inplant 4.9 contractor) na April 2009 Nam Muc Credit agreementNam Muc hydropower Hydropower Joint singed in Augustplant 58.5 Stock Company 2009-2011 2009 Trung NamDong Nai 2 hydropower hydropower Joint Loan agreement inplant 109 Stock na September 2009Thuong Kon Tum Vinh Son-Song Hinhhydropower plant 322 Hydropower JSC 2009-2014 Vinacomin/WuhanMao Khe 577 Kaidi Electric Power 2009-2012 Under Construction Tan Tao Investment Power plants due to and Industry (main be operational byKien Luong 1&2 na investor) -2014 2014 Loans for theVan Chan hydropower project arranged inplant na na na May 2009Hai Duong coal fired First utilities BOOpower plant 2,000 JAKS Resources 2010-2014 contract in Vietnam Official approval granted in MayLam Dong wind farm 56 Cavico 2010-2012 2009 First turbine expected online inLong Phu power complex 1,400 PetroVietnam 2009-2013 2013 Official approval granted in MayA Luoi hydropower plant 180 na -2011 2009Huoi Quang hydropower Financing arrangedplant 617 EVN na in May 2009Hua Na Hydropower plant 250 Lilama na na Lilama, PetroVietnam Construction Joint Stock Corporation(EPC contractors) and Nhon Trach 2 PowerNhon Trach 2 power plant 524 Joint Stock Company na Under Construction Petro Vietnam, Lilama (EPC Construction due toVung Ang 1 power plant 1170 contractor) 2009 begin in April 2009© Business Monitor International Ltd Page 40
  • 42. Vietnam Infrastructure Report Q2 2010Table: Vietnam – Major Energy and Utilities Infrastructure Projects Project ValueProject (US$mn) Company name(s) Timeframe Status Argibank, Bidv, Vietcombank and PG Bank syndicated loan ofBan Chat hydropower US$150mn, Aprilplant 490 EVN na 2009the Song Giang 2Hydropower project works 9.8 Cavico hydropower 2009-2010 Due for constructionDuyen Hai 2 coal-fired Contract awarded inpower plant 1,500 Janakuasa 2011-2015 January Contract expectedMong Duong 2 1,400 AES Copr. na in 2009Song Bung 4 hydropower 268 EVN na At planning stage JV OneEnergy established inBinh Thuan coal-fired IPP na OneEnergy na October 2008Binh Thusan coal-firedpower plants (Hai Phong3) 3,000 Vinacomin na At planning stage Cuu Long Power Engineering and Construction due toDak Di 1&2 36 Consulting Co. 2009- begin in early 2009Construction of a3,600MW thermal powerplant in southern Vietnam 4,000 Ensham Resources 2008-2012 At planning stageConstruction of a3,000MW coal fired powerplant in the Tra Vinhprovince 3,000 Skoda Praha na Deal signedConstruction of the1,000MW coal fired MongDuong power plant in Electricity of VietnamQuang Ninh 1,100 (EVN) 2008-2012 Loan approvedOil and Gas PipelinesB-O Mon natural gas Construction likelypipeline 1,000 PetroVietnam 2009-2011 to begin in Q309Nam Côn Sơn 2 pipeline na PetroVietnam na At planning stageNote: Some of the projects in the table are from BMIs 2008 Vietnam report, where they can be also be foundanalytically. na= not available. Source: BMI© Business Monitor International Ltd Page 41
  • 43. Vietnam Infrastructure Report Q2 2010Business EnvironmentVietnam Business Environment In the BMI Business Environment Rating matrix, Vietnam receives an infrastructure rating of 50.7 out of 100, slightly below the regional average of 55.9, placing it seventh out of 14 in the Asia Pacific region. This represents significant downside risk considering the scale of growth in the country. Corruption and lack of necessary legal and regulatory frameworks both present issues. The components of its score are:Limits Of Potential Returns Vietnam’s score in this category is slightly higher than many than the regional avarage. This is indicative of a dynamic market and reflects our view that Vietnam will continue to be one of the most active and attractive infrastructure markets in the region. Construction expenditure rated poorly however scoring only 2 out of 10. The risks to the market are to the upside, as gross fixed investments needed in road and power infrastructure are estimated at US$140bn to 2020, and the number rises further when investments in urban infrastructure systems, railways, ports and bridges are taken into account. Country Structure In terms of country structure components, which include financial market infrastructure and labour market infrastructure, Vietnam’s rating well below the regional average. The predominant cause is a lack of sufficient financial infrastructure. Lending in Vietnam is characterised by poor lending standards and dominated by the four state-owned banks while access of foreign capital can be difficult. There are some risks to the upside as the banking sectors enters a phase of privatisations.Risk To Realisation Of Potential Returns Market Risks In terms of market risks, Vietnam again achieves among the lowest score in the region. This is indicative of structural weaknesses in the infrastructure sector, which in turn pose long-term risks to investors. The transparency of the tendering process is rated very poorly scoring only 3 out of 10. The competitiveness in the infrastructure and construction sector remains limited and road building as well as the energy and utilities sector is dominated by state owned firms. The ports and urban railways sector is where there is the greatest level of foreign investor penetration in the infrastructure sector. Country Risk Corruption is prevalent in Vietnam resulting in poor scores within the country risk ratings. Investors see official corruption as one of the biggest hindrances to running a business in Vietnam. Joint ventures with state-owned enterprises are particularly prone to corruption and graft, though surveys indicate that while© Business Monitor International Ltd Page 42
  • 44. Vietnam Infrastructure Report Q2 2010 corruption affecting businesses is quite prevalent, the amounts involved are usually quite small. Rapid economic growth provides opportunities for graft to grow more quickly than government systems evolve. Vietnam scored 2.9 out of 10 BMI’s rating for corruption and also ranks poorly for its external risks and legal framework.Regional OverviewAsia Pacific Infrastructure Business Environment Ratings There has been little change in the Asia Pacific infrastructure Business Environment Ratings this quarter. China still retains the top spot, and Pakistan remains at the bottom, with its business environment leaving much to be desired. In Q210, we have introduced a new group of countries in BMIs infrastructure Business Environment Ratings, encompassing all developed states for which we have ratings. This has been done in an attempt to compare like-for-like in terms of the business environment facing investors, specifically in terms of the limits to potential returns and the risks to realisation of returns. We have used the definition of developed states used by BMIs Country Risk team. Therefore the new Developed States group is made up of Australia, the United States, Germany, the United Kingdom, France, Japan and Greece. Consequently, from now on our Asia Pacific infrastructure Business Environment Ratings will no longer include Japan and Australia. BMIs Business Environment Ratings are compiled by looking at indicators that fall into two main groups. First, limits to potential returns, which includes factors that show the potential of the market, for example government investment and growth forecasts for the infrastructure market. Second is risk to realisation of returns, which includes risks to investors, including corruption, policy continuing and transparency. Limits Of Potential Returns Limits of potential returns takes into account the opportunities available for investing in infrastructure through the infrastructure market indicator. Countries with large stimulus packages from which we have already seen evidence of investment filtering though, such as China, score well here. For the more developed countries with a high class of existing infrastructure, such as Singapore, the opposite is true. The country structure sub-rating takes into account factors such as the availability and sophistication of the labour market, the maturity of the financial services sector, and the levels of access to electricity. In the Asia Pacific region, China presents the fewest limits to potential returns, with the highest score of 75.3 out of 100. The country scores in the 70s for both infrastructure market and country structure.© Business Monitor International Ltd Page 43
  • 45. Vietnam Infrastructure Report Q2 2010 Pakistan, on the other hand, has by far the weakest score, 27 out of 100, posing the most limits to investors. The country also has the poorest score for country structure, and only manages to score 20 out of 100 for infrastructure market, due to a small existing infrastructure market with limited potential for growth over the mid term. Notable scores in the infrastructure market also include Hong Kong and Malaysia, which both score just 27.5 out of 100, joint second lowest. Hong Kongs infrastructure market has been declining for some time, undermining the positives of its country structure, which conversely scores the highest in the region. Malaysias infrastructure market has been stagnant for some time, and this is unlikely to change in the near future, keeping the small market from getting any bigger. India has the highest potential in terms of infrastructure market (85 out of 100), making up considerably for its far below average country structure (48.9). This score is one of the few that has notably changed from Q110, rising by 20 points, reflecting the countrys continued commitment to infrastructure development, the limited impact that the financial crisis has had on the sector, and future growth potential. Because of these factors, India is fast catching up with China in terms of its overall limits to potential returns for investors, with the second highest score in the region in Q210 of 72.4. Risks To Realisation Of Returns The risk to realisation of returns indicator assesses the level of risks inherent in countries infrastructure markets. The reverse is generally true when looking at which countries perform well here compared with the limits of potential returns stage. More developed countries generally have more sophisticated financial and legal frameworks and a higher level of transparency and policy continuity. The highest score for risks to realisation of returns – therefore the country presenting the fewest risks to an investor – is Singapore, with a near-perfect score of 92 out of 100. Once again, the lowest score belongs to Pakistan, with 34.2, making it BMIs riskiest country in which to invest in Asia Pacific. With a near-perfect score of 95 out of 100, Singapore posts the highest score for market risks in Asia Pacific, and indeed the highest score of all the countries in BMIs infrastructure ratings. Singapore offers infrastructure investors a highly transparent and competitive environment in which to do business. This is matched by the highest score in the region for country risk, 89.9, due to exceptional scores for policy continuity and external risk as well as no perceived corruption. The spread of scores in this section is quite considerable. Only one country scores in the 90s (Singapore) and only one in the 80s (Hong Kong). Indeed, the most popular group is scores below 50.© Business Monitor International Ltd Page 44
  • 46. Vietnam Infrastructure Report Q2 2010 Indonesias score is the second lowest in the region, 41.8 out of 100; this is due to the regions lowest score for market risks, making its infrastructure market the riskiest in which to be involved. There are few companies active in the country, and the level of transparency in the tendering process leaves much to be desired, with allegations of corruption at this stage common. Three countries tie for second-last place in terms of market risks, with scores of 35 out of 100, bringing the regional average for this indicator down to 55.8 out of 100. Philippines, Pakistan and Vietnam all suffer from similar issues regarding the tendering process, which has come under much scrutiny in all three. While Philippines and Vietnam have been keen to revamp their image and refine the tendering process, a process that has perhaps been most successful in Vietnam, limited progress in this area is expected anytime soon in Pakistan. The same can be said of the presence of competition in the market, with Vietnam increasingly attracting large international companies, and Pakistan making no progress in the right direction. Infrastructure Business Environment Ratings - January 2010 Little has changed with the scores in Q210, with a few notable exceptions, and the rankings remain largely unchanged bar some shuffling around in the middle section. The emerging economies of Asia are still fraught with different levels of risks, whether political, operational or institutional, making the development of effective public private partnerships (a necessary component to bridge the infrastructure deficit) or broader private sector participation still somewhat challenging. Widespread corruption and bureaucracy, as well as cumbersome tendering procedures, continue to act as deterrents for potential investors. China maintains its position at the top of the table with an overall score of 70.9 out of 100. Strong potential in the infrastructure market due to the governments public works focused stimulus plan means the country has one of the fastest growing infrastructure sectors globally. While the potential in China is evident, the level of risk is higher than average (although only marginally). The dominant position of large state-owned infrastructure firms is something to be aware of, especially as contracts from the stimulus plans have favoured state-owned enterprises, which in turn enhances their dominant position in the market. With the absence of (previous second and third ranked) Japan and Australia, Singapore moves up to take the second spot. With few risk for investors, the country offers a sound and stable investment destination; however, its stagnant infrastructure sector means few opportunities to invest materialise. However, there have been some signs of progress, with large projects in the pipeline. As these become more concrete, we expect Singapore to cement its high-ranking position. India has been the biggest mover this quarter, with its overall score growing by almost 10 points to 67.9 out of 100. India is fast catching up with China, especially in terms of market potential. Indeed, the gap in© Business Monitor International Ltd Page 45
  • 47. Vietnam Infrastructure Report Q2 2010 terms of both potential and risks is closing, indicating Indias presence as one of the most dynamic infrastructure markets in the region. Pakistan remains at the bottom of the table, although with a marginally improved score of 29.2. However, the significant risks facing an investor for little potential growth in return mean it remains unattractive as an infrastructure investment destination.Table: Asia Pacific Infrastructure Business Environment Ratings Limits of Potential Returns Risks to realisation of returns Infrastructure Country Market Country Infrastructure Regional Market Structure Limits Risks Risk Risks BE Rating RankingChina 77.5 71.3 75.3 50.0 67.7 60.6 70.9 1Singapore 45.0 84.4 58.8 95.0 89.9 92.0 68.7 2South Korea 57.5 80.3 65.5 75.0 75.2 75.1 68.4 3India 85.0 48.9 72.4 50.0 62.3 57.4 67.9 4Hong Kong 27.5 84.8 47.6 85.0 77.2 80.3 57.4 5Taiwan 32.5 71.2 46.1 75.0 74.5 74.7 54.6 6Vietnam 60.0 42.3 53.8 35.0 49.2 43.5 50.7 7Thailand 30.0 75.7 46.0 55.0 62.5 59.5 50.1 8Indonesia 57.5 45.9 53.4 24.0 53.7 41.8 49.9 9Malaysia 27.5 71.5 42.9 55.0 73.5 66.1 49.9 10Philippines 35.0 52.3 41.1 35.0 51.4 44.8 42.2 11Pakistan 20.0 40.1 27.0 35.0 33.6 34.2 29.2 12RegionalAverage 46.3 64.1 52.5 55.8 64.2 60.8 55.0Source: BMI. Scores out of 100, with 100 highest. The Infrastructure BE Rating is the principal rating. It is comprised oftwo sub-ratings Limits of Potential Returns and Risks to realisation of returns, which have a 70% and 30% weightingrespectively. In turn, the Limits Rating is comprised of Infrastructure Market and Country Structure, which have a 65%and 35% weighting respectively and are based upon growth/size of the Infrastructure industry (Market) and thebroader economic/socio-demographic environment (Country). The Risks rating is comprised of Market Risks andCountry Risk which have a 40% and 60% weighting respectively and are based on a subjective evaluation of industryregulatory and competitive issues (Market) and the industrys broader Country Risk exposure (Country), which isbased on BMIs proprietary Country Risk Ratings. The ratings structure is aligned across the 14 Industries for whichBMI provides Business Environment Ratings methodology, and is designed to enable clients to consider each ratingindividually or as a composite, which the choice depending on their exposure to the industry in each particular state.For a list of the data/indicators used, please consult the appendix at the back of the report.© Business Monitor International Ltd Page 46
  • 48. Vietnam Infrastructure Report Q2 2010Project Finance RatingsVietnam Project Finance RatingsDesign and Construction Legal and regulatory risks were the most significant issues for Vietnam at the design and construction phase. Scoring only 33.1 it was the third lowest country within the region. It ranked alongside Philippines, India for its poor legal system and common place corruption. The country did marginally better on economic risks and political environment where it scored 50.6 and 59.4 respectively.Commissioning and Operating Vietnam also struggled to compete at the commissioning and operating phase scoring around 50 out of 100 for most sections. Energy and utilities scores were affected by the rising price of oil and BMIs upward revisions for oil price forecasts in the coming years. With an increase in cost of operating power generation assets the projected long-term revenue stream are reduced. As a result Vietnam scored only 46.1 overall for Commissioning and operating placing it 8th in the region.Overall Project Finance Rating The weak PPP regulatory regime in Vietnam helped to reduce the country’s overall score. Along with China it scored only five out of 10 indicating significant room for improvement. Widespread corruption also impacted on project finance ratings dragging the country’s ranking down due to the inherent risks to investment. In total the country managed a score of only 46.4 placing it third from last in the Asia Pacific regionRegional OverviewProject Finance Ratings: Outlook For Asia Pacific For Q210, we have introduced a new group of countries in BMIs Project Finance Ratings (PFR) encompassing all developed states for which we have ratings. This has been done in an attempt to compare like-for-like in terms of the maturity and sophistication of public-private partnerships (PPPs) and project finance markets. We have used the definition of developed states used by BMIs Country Risk team. Therefore the new developed states group is made up of: Australia, the United States, Germany, the United Kingdom, France, Japan and Greece. Developed states are characterised by strong financial, legal and regulatory infrastructure frameworks, which are reflected in the high scores the countries achieve for the legal and regulatory risks group of© Business Monitor International Ltd Page 47
  • 49. Vietnam Infrastructure Report Q2 2010 indicators. In addition, political stability safeguards a certain level of policy continuity, which in turn provides stability for the operating environment of an asset. BMIs PFR provide a globally comparative, numerically based assessment of the risks facing major infrastructure projects in the energy and utilities, transport, and commercial construction sectors. Specifically, it evaluates the degree of uncertainty facing projects that are generally characterised by the following: long construction period, high construction costs, difficulty in redeploying project assets (eg power station) to other uses, earnings generated only after construction completed. The PFR is best used for evaluating the breadth and depth of risks facing major infrastructure projects, which will in turn affect the source, availability and cost of finance. Thus, in the current environment of limited global finance for such projects, it provides a leading indicator for the cost of financing major projects and the pace at which infrastructure development will occur in each state. We have created two different tables aiming to better identify, analyse and assess broad categories of risks that sponsors and/or companies may encounter during the projects lifecycle. The two tables are composed – very broadly – first of the design, engineering and construction phase and second of the commissioning and operation phase. The two final scores for each country are then combined to yield the overall project finance rating. The weightings of each indicator and each group of indicators (inputs, regulatory, market risks, etc) are adjusted to reflect the relative importance, and thus relative risk level, they pose for sponsors and equity holders. State Of Play In The Asia Pacific Region, January 2010 The volatility that characterised the global economy over 2009 has subsided. This is indicated by the Volatility Index (VIX) published by the Chicago Board Options Exchange (CBOE), which in the height of the financial crisis (November 20 2008) reached 80.86, while in the first days of 2010 hovered at around 19, indicating a return to normal market conditions. VIX is part of our PFR matrix, and the indicators return to normal levels will buttress our ratings of economic and financial stability. Consequently, volatility has also subsided for the economies of the Asia Pacific region, giving way to rising confidence regarding the resilience of Asian demand for infrastructure assets, the fundamental driver behind rising investor demand. Once again, we point to the proliferation of infrastructure funds targeting the Asia Pacific infrastructure markets, emerging both in Asia and the developed states, as evidence of a cautious, yet sustained recovery in infrastructure financing in the region.© Business Monitor International Ltd Page 48
  • 50. Vietnam Infrastructure Report Q2 2010 The key point to note in Q210 is that across the board the scores of countries in the commissioning and operating phase have decreased. This decrease indicates more pertinent risks in the later phases of a projects lifecycle. Consequently, this has dragged down the entire project finance score of each country and the region as a whole. Because the change in scores affected all countries, the rankings have not altered significantly. The top places in the Asia Pacific table are still occupied by Hong Kong and Singapore. The overall project finance scores on the top of the table are low compared with previous scores of 83 (Hong Kong) and 78 (Singapore), in end-2008. It is also worth noting that countries in the Asia Pacific region exhibit the largest disparities between the top and the bottom of the table, a difference of almost 46 points between the top (Hong Kong) and the bottom (Pakistan). Chinas score has witnessed the largest increase this quarter, climbing from 59.8 to 63.2. The country has even managed to escape the reduction in score in the operating phases of energy projects as a result of higher expected oil prices. While most countries have lost points mainly as a result of this one indicator, Chinas low inflation expectations mute the effect of higher oil prices over the next four years. India is the only other country that has witnessed an increase in its score this quarter. Indias score has been bolstered by an increase in its political risk rating, which indicates greater long-term stability. Therefore its operating risks rating has become more favourable. Some of the most severe risks according to our ratings (where the score is below five out of 10) are: weak PPP regulatory regimes in China, Indonesia and Vietnam; heightened demand risk for transport infrastructure in Hong Kong and Singapore; contract enforceability weakness in India and Indonesia; currency volatility in Pakistan and Indonesia (both of which score zero out of 10); demand and price risks in Indonesias energy and transport sectors; security risks in Pakistan; and corruption in the Philippines and Vietnam. Design And Construction Phase The design and construction table encompasses factors such as inflation and long-term currency volatility (henceforth referred to as inputs), which at this stage primarily affect the cost of equity and debt, but also the cost of raw materials if they are sourced locally and hence the total cost of the project, as well as legal and regulatory risks that the company or sponsors may encounter and which can delay commencement of construction and pose regulatory (red tape) issues. Closely related to the legal and regulatory risks are the risk factors within the wider political framework, encompassing political risk factors such as the level to which the rule of law is enforced and respected, and the long-term policy continuity and consistency of government policies over the years. Last but not least is the financial risk component, comprising domestic economic stability and the international availability of finance.© Business Monitor International Ltd Page 49
  • 51. Vietnam Infrastructure Report Q2 2010 Broadly speaking, we can distinguish four bands/groups within the table. There are no real surprises in our ratings for the Asia Pacific region with Singapore and Hong Kong at the top of the table with scores above 70 out of 100 on the merit of their sound institutional, regulatory and banking environment, as well as proficiency in project finance operations. Singapores 90-page Public Private Partnership Handbook, published initially in 2004 by the ministry of finance, is perhaps the most comprehensive guide to PPP regulations and procedures any country has issued in the world, highlighting the willingness of the government to create the most conducive environment possible for the successful implementation of PPPs; a goal they have achieved, as Singapore represents one of the most stable environments in the region and globally. Their high scores in the PPP Legal Framework indicator reinforce their position on the top of the Design and Construction regional table. Taiwan, Malaysia, South Korea and China follow the first group closely, but fall within the second group (scores in the 60s). Chinas score in this category has seen the largest increase on account of better inflation expectations. Malaysias legal and regulatory environment leaves room for improvement, a fact that lowers the countrys score, since a weak institutional and legal framework, especially a poor track record in contract enforceability in Malaysia, is one of the risks facing sponsors and contractors in the initial stages of a projects lifecycle. In the third and fourth groups (scores in the 50s and 49 and below) we find four of the most dynamic infrastructure markets in Asia: India, Philippines, Vietnam and Indonesia. In spite of the impressive infrastructure development course these four countries have embarked on the past half decade, they still present formidable risks, which extend to project finance operations as well. It is worth noting that the common weakness shared by all four is the legal and regulatory environment, where the scores of all four countries show the closest convergence. Corruption, PPP/concessions legal framework and contract enforceability are the three indicators that make up the group. In almost all three of these indicators Vietnam, Philippines, India and Indonesia have scores below five out of 10. Pakistan remains at the bottom of the table owing to low scores in terms of inputs and the political/security environment.© Business Monitor International Ltd Page 50
  • 52. Vietnam Infrastructure Report Q2 2010Table: Design and Construction Rating Legal/ Economic/ Regulatory Political Financial Inputs Risks Environment Risks TotalSingapore 84.0 84.3 88.0 58.4 76.1Hong Kong 82.0 86.7 83.6 57.4 74.7Taiwan 84.0 61.7 77.7 57.2 68.6Malaysia 80.0 60.4 73.5 53.4 65.1South Korea 54.0 74.0 81.5 52.7 64.4China 92.0 49.0 60.7 56.5 63.2Thailand 74.0 56.3 58.7 51.5 58.8India 70.0 33.4 65.2 53.1 55.6Philippines 58.0 39.2 58.9 50.4 51.8Vietnam 32.0 33.1 59.4 50.6 45.6Indonesia 12.0 23.1 60.5 51.5 40.2Pakistan 12.0 19.9 43.8 44.9 33.1Source: BMI Commissioning And Operating Phase The table that identifies potential factors that influence the levels of risk during the commissioning and operation of a project has been broken down into three categories: transport, energy and utilities, and commercial construction. The aim is to reflect the different levels of risk a power plant has from a toll road or a stadium for instance during the operational phase of the projects lifecycle. The aim was to add a degree of separation between sub-sectors in infrastructure, and although the sub-categories in the table are similar for all three sectors, the scores are different for each country in each sector, which allows us to gauge the different levels of potential risk and potential breadth of the financial impact they may have. The rising price of oil and BMI’s upward revisions for oil price forecasts in the coming years has eroded the score of many countries. This is because a core determinant of the inputs score for energy and utilities is the price of oil. Higher price expectations mean that the cost of operating power generation assets will also increase, therefore jeopardising the projected long-term revenue stream of assets. For this reason, in Q210 we find that for many countries the inputs score for energy and utilities has in fact decreased, dragging down the entire score of countries.© Business Monitor International Ltd Page 51
  • 53. Vietnam Infrastructure Report Q2 2010Table: Commissioning and Operating Rating Commercial/Business Construction Energy And Utilities Transport Inputs Outputs Total Inputs Outputs Total Inputs Outputs TotalHong Kong 68.5 72.4 71.2 83.5 71.2 74.9 88.0 68.4 74.3Singapore 69.5 67.3 68.0 79.5 67.3 71.0 76.0 65.0 68.3China 88.5 57.5 66.8 76.0 56.4 62.2 88.0 56.9 66.2Taiwan 82.0 54.3 62.6 67.0 54.3 58.1 76.0 52.1 59.2Malaysia 62.5 51.2 54.6 75.0 51.7 58.7 70.0 51.7 57.2India 55.0 54.1 54.4 70.0 55.2 59.7 70.0 54.7 59.3South Korea 42.0 53.3 49.9 49.5 52.7 51.8 36.0 53.3 48.1Vietnam 48.5 49.5 49.2 38.5 49.5 46.2 38.0 49.5 46.1Thailand 57.0 45.3 48.8 72.0 45.3 53.3 66.0 43.1 49.9Philippines 56.5 42.3 46.5 61.5 44.0 49.2 52.0 44.0 46.4Indonesia 8.5 38.0 29.1 21.0 38.6 33.3 8.0 38.6 29.4Pakistan 11.0 25.1 20.9 28.5 25.6 26.5 8.0 25.1 20.0Source: BMI Overall Project Finance Rating For The Asia Pacific Region Combining the scores of the two tables we have distilled the overall project finance rating, which thus takes into account all of the above sectors and sub-categories. Here we can also categorise the results into four groups or bands of countries, with each group presenting a similar level of risk that may affect the source, availability and cost of finance. In the first group (score of 70 and above) we find Singapore and Hong Kong, whose overall characteristics and market components create the safest environment in the region for project finance operations. Based on both countries overall scores, Singapore presents fewer risks in the initial development phases, but more uncertainty in the longer term, while Hong Kong has the highest score for the commissioning and operation phase. Vietnam, the Philippines, Indonesia and Pakistan are at the bottom of our table again this quarter. Although Vietnams rating presents some upside risk because of declining levels of inflation, the risk rating also encompasses some deep structural problems in the countrys overall business environment, such as corruption, overtaxing government intervention in some industries, one of them being the energy and utilities sector. Indonesias legal and regulatory scores also present an upside in light of recent changes in the PPP regulations along with the introduction of a state-guarantee agency specifically for the infrastructure sector (January 2010). Pakistan presents a plethora of other structural problems, which combine to give the country the lowest score in the region and consequently the riskiest profile, which© Business Monitor International Ltd Page 52
  • 54. Vietnam Infrastructure Report Q2 2010 indicates significant risks to any project in infrastructure, both in the construction phase and the potential returns on investments over the long term.Table: Overall Project Finance Rating, Asia Pacific Commissioning and Design and Construction Operating OverallHong Kong 74.7 73.5 74.1Singapore 76.1 69.1 72.6Taiwan 68.6 60.0 64.3China 63.2 65.1 64.1Malaysia 65.1 56.8 61.0South Korea 64.4 49.9 57.2India 55.6 57.8 56.7Thailand 58.8 50.7 54.7Philippines 51.8 47.4 49.6Vietnam 45.6 47.2 46.4Indonesia 40.2 30.6 35.4Pakistan 33.1 22.4 27.7Source: BMI Risks and Limitations To BMIs Project Finance Ratings It should be noted that although we believe that the resultant scores are a reliable guide to project finance risks, PFR assesses broad industry risks, rather than individual projects. This has several implications. First, there will be instances where the risk profile – for example, the supply of inputs – of a particular project is markedly different from the general risk prevailing in the industry. Second, the PFR will not take into account measures by private sector project participants to mitigate risk when structuring finance – for example, by securing a substantial equity involvement from the sponsoring agency or government.© Business Monitor International Ltd Page 53
  • 55. Vietnam Infrastructure Report Q2 2010Macroeconomic Outlook Double Dip Now Our Core Scenario BMI View: With Vietnams balance of payments yet again approaching breaking point, we expect a sharp tightening of fiscal and monetary policy in 2010, which will see real GDP growth dip to 4.4% from an expected 5.1% in 2009. This will raise criticism of economic policy at the 11th National Congress in January 2011, but we expect the market reform agenda to be maintained. We have shifted our Vietnam growth outlook from expecting a gradual economic recovery in 2010 to a double-dip scenario with real GDP expansion dipping from an expected 5.1% in 2009 to 4.4% in 2010. This is based on our expectations that fiscal and monetary policy will have to be tightened sharply in early 2010 in order to rein in the widening trade deficit and halt inflationary pressures. Our outlook for Vietnam has much in common with our outlook for China. However, while the policy aims of the respective governments are similar, we view the macroeconomic concerns in Vietnam as more alarming, at least in the short term, as Hanois fiscal and monetary resources are considerably more limited. As a consequence, we find it likely that the inevitable shift towards tighter monetary and fiscal policy will come earlier in Vietnam than in China. Hanois fiscal and monetary stimulus has helped economic growth recover from a low of 3.1% year-on-year (y-o-y) in Q109 to 5.2% in Q309, but it has also been a key factor, in our view, to a considerable widening of the trade deficit over the same period to US$1.9bn in October. While the return to positive growth in G3 markets in H209 and 2010 should give some support to Vietnamese exports, we believe a continuation of the current accommodative policy would lead to a further widening of the trade deficit. With Vietnams foreign exchange reserves in Q409 estimated to be below the three months of imports seen as a minimum, we believe drastic policy action will be needed to avoid a balance-of-payments crisis. This will include: A downward adjustment of the dong towards our VND19,000/US$ end-2009 forecast, from VND17,862/US$ on November 6 2009, to stem the outflow of US dollars through the trade channel. A hiking of policy rates to uphold public confidence in the dong, stem capital outflows, and contain upward pressure on inflation through higher import prices. We are now expecting 500bps of hikes in 2010, bringing the Vietnam base rate from 7.00% in November 2009 to 12.00%.© Business Monitor International Ltd Page 54
  • 56. Vietnam Infrastructure Report Q2 2010 A reduction of the fiscal deficit from VND118trn (US$6.6bn), or 7.2% of GDP, to VND105trn (US$5.9bn), or 5.7% of GDP, in 2010 on the back of reductions in both current and capital expenditure growth. Implications For Growth We expect the fiscal and monetary tightening to lead to a double dip in growth after the tentative rebound seen in the last three quarters of 2009. We are expecting real GDP growth to come in at 4.4% in 2010, as weak growth in G3 markets will weigh on exports and prevent a marked improvement in net exports in spite of the devaluation of the dong. This will mean that the slowdown in domestic demand will be harder felt. With inflation expected to average roughly 9.0% in 2010, we expect government consumption to decrease by 3.5% in real terms, which will shave 0.3 percentage points (pp) off headline growth. A more marked effect will be coming from a slowdown in private consumption growth as credit conditions are tightened. We expect private consumption growth (in real terms) to slow to 2.3% from an expected 4.9% in 2009 and 9.2% in 2008. This should see the contribution to growth from private consumption decrease to 1.6pp in 2010 from 3.3pp in 2009 and a massive 6.0pp in 2008. We are, on the other hand, expecting an increase in the contribution from gross fixed capital formation from 0.4pp to 1.1pp as FDI disbursements, down 12.1% y-o-y to US$8bn in January-October 2009, recover and state-and aid-financed projects gather pace. However, the precarious state of the property market, where activity and prices have been supported by the loan-subsidy programme, is a risk to this forecast. While only a minority of property purchases are financed through bank lending, higher interest rates should still have an impact on the market and on commercial and residential construction. Policy Rebalancing Needed At 2011 Party Congress We expect the slowdown in growth in 2009 and 2010 to make economic policy the main matter of debate during the Communist Party of Vietnam (CPV)s 11th National Congress scheduled for January 2011. The macroeconomic rollercoaster ride experienced in recent years has raised criticism against Prime Minister, Nguyen Tan Dung, the most important proponent of economic reform, from more conservative members in the Politburo. We believe the mainstay of the CPV is still behind Nguyens reform agenda, meaning that there will be no drastic shift in the socio-economic development strategy for 2011-2016. However, we expect measures to be taken to achieve greater macroeconomic stability, including a reduction of official growth targets, a shift in monetary policy towards inflation targeting and increased exchange rate flexibility. This is likely to come at a cost to economic growth in the short term, and we are consequently forecasting real GDP growth of 5.5% and 6.0% in 2011 and 2012, respectively, as the global economic environment is expected to be less conducive than in the 2003-2007 boom years. A failure to take a decision on rebalancing economic policy would, on the other hand, mean a high risk of a© Business Monitor International Ltd Page 55
  • 57. Vietnam Infrastructure Report Q2 2010 continuation of macroeconomic volatility as expressed in Vietnams score of 43.8 out of 100 in our short- term economic risk ratings.Table: Vietnam - Economic Activity 2005 2006 2007 2008 2009f 2010f 2011f 2012f 2013f 2014fNominal GDP, 2VNDbn 83,9211 974,266 1144015 1478695 1628770 1825075 2053255 2288455 2562686 2855653Nominal GDP, 2US$bn 52.9 60.9 71.1 89.8 85.7 96.1 108.1 123.7 138.5 154.4Real GDP growth, 2% change y-o-y 8.4 8.2 8.5 6.2 5.1 4.4 5.5 6 6.8 6.9GDP per capita, 2US$ 637 724 835 1,035 974 1,077 1,195 1,350 1,492 1,640 3Population, mn 83.2 84.4 85.6 86.8e 88 89.2 90.4 91.6 92.8 94.1Industrialproduction index, 1,4% y-o-y, ave 17.7 16.8 16.7 14.9 6.8 10 12 14 14 14Unemployment,% of labour force, 4eop 5.3 4.8 4.6 5 5.5 5.5 5 4.5 4 4 e f 1 2 3 4Notes: BMI estimates. BMI forecasts. at 1994 prices; Sources: IMF (General Statistics Office); IMF; GeneralStatistics Office© Business Monitor International Ltd Page 56
  • 58. Vietnam Infrastructure Report Q2 2010 Political Outlook Relations With China At Forefront Of Internal Power Struggle BMI View: Vietnams relations with China have come to the forefront of an internal power struggle within the Communist Party of Vietnam, pitting economic reformers, centred around Prime Minister Nguyen Tan Dung, against more conservative Politburo members with links to China. With the two factions seeking to strengthen their positions ahead of the 2011 National Congress, we believe the reformists will maintain the upper hand. Faced with ever-increasing internet penetration and an army of bloggers, the Communist Party of Vietnam (CPV) has in recent years sought to improve its means of monitoring and controlling public opinion. Nonetheless, hardliners within the Politburo are now arguing that increasingly unruly expressions of dissent against public policy on the internet is evidence of Prime Minister Nguyen Tan Dungs reformist agenda getting out of control, thus necessitating a policy redirection. Indeed, this is becoming a key theme ahead of the CPVs next National Congress, scheduled for early 2011, which threatens to pit economic reformers against more conservative hardliners in the quest for political nominations. The rapid economic growth seen in recent years has undermined the base for political dissidents in Vietnam as the general public has seen little reason to oust a regime that has delivered tangible material gains for the majority of the population. Nonetheless, the CPV has become notably unnerved by an increasing mass of political opinion driven by the easy access to internet and online forums that a majority of the Vietnamese population now enjoys. Vietnamese authorities have estimated that 21mn Vietnamese people use the internet, and there are reportedly between one and four million blogs, covering a wide area of topics. To police this immense body of content, the government regulates internet content and usage through a variety of technical and legal means, but users are constantly seeking and finding means to circumvent these measures, in spite of the heavy penalties handed down by the authorities. China Dominating Internet Discussion The most inflammatory subject on Vietnamese blogs over the past year has been Hanois relationship with China, which has been tested by ongoing disputes over the Paracel and Spratly islands in the South China Sea, a controversial Chinese-financed bauxite mining project in the central highlands and a severely skewed trade relationship. A number of journalists and bloggers have criticised Beijings – and the Vietnamese governments – conduct in the disputes between the two countries, a criticism that has fallen on fertile ground, as the Vietnamese public is highly sensitive to any perceived encroachment of Vietnams sovereignty by its northern neighbour.© Business Monitor International Ltd Page 57
  • 59. Vietnam Infrastructure Report Q2 2010 With the regime in Hanoi fearful of Chinas sensitivity to any criticism and aware of the need to maintain a working relationship with Beijing, the authorities have stepped in to stem any perceived instigation of anti-Chinese public opinion. This has seen the arrest of journalists and bloggers who have published articles and blogs critical of China, on the basis that the criticism threatens efforts by the two governments to reform the economic relationship between the two countries. This has so far been characterised by a heavily skewed trade flow with an avalanche of cheap Chinese goods flooding the Vietnamese market, driving local competitors out of business, with little but commodities such as coal and rubber going the other way. The massive trade deficit with China – which amounted to US$11.1bn in 2008, roughly 12% of GDP – has been a subject of dispute between the Chinese and Vietnamese leaders in recent years, and thus also a point of discussion during Prime Minister Nguyen Tan Dungs visit to China in April 2009. The perceived solution to achieve a more mutually beneficial economic relationship has been to promote increased Chinese investment in Vietnam. This does indeed make economic sense as investment from Vietnams traditional sources of foreign direct investment – Malaysia, Singapore, South Korea and Taiwan – is likely to be less forthcoming over the next few years as foreign investment partners rebuild their balance sheets and pare back their expansion plans. Indeed, foreign direct investment pledges dropped 85.7% y-o-y in the first three quarters of 2009 to US$7.6bn. One difficulty is that China’s manufacturing sector is equally, if not more, competitive than Vietnams, meaning the Chinese investment interest in Vietnam has been mainly directed towards the extractive industry, with the aim of securing resources to fuel the Chinese industrial behemoth. This has fuelled allegations in the case of the bauxite mining project in Lam Dong province that China is merely exploiting Vietnams natural resources, while causing considerable environmental damage in the central highlands, which are both scenic and the centre of Vietnams coffee industry. Add to this the propensity of Chinese investors to bring their own workers rather than to employ locals, and the severe public backlash against the investment plans comes as no surprise. With technical solutions failing adequately to prevent the posting of inflammatory content on the internet, the government has turned to incarcerating a number of bloggers and journalists to deter the voicing of critical opinion. Political Jockeying Ahead Of 2011 Congress The ability to control domestic dissent has become a key issue ahead of the Communist Party of Vietnam (CPV)s 11th National Congress, scheduled for early 2011, where key appointments and policy decisions are to be made. The increasing leeway afforded to new media has reportedly become a sticking point for the more conservative forces within the CPV, who argue that Prime Minister Dung has gone too far in his policy of economic liberalisation. That he has increased openness towards the US and North East Asian countries such as Japan and South Korea at the expense of Hanois relationship with its ideological brethren in Beijing. This could mean a serious confrontation at, or before, the 11th National Congress.© Business Monitor International Ltd Page 58
  • 60. Vietnam Infrastructure Report Q2 2010 We expect Nguyen to maintain his authority within the Politburo as a younger, less ideological generation of CPV members is strongly supportive of continued economic reform. However, he is likely to face continued opposition from a more conservative faction within the Politburo, who believe that his agenda of increased economic liberalisation is putting the CPVs monopoly on public opinion – and, by extension, political power – at risk. Members of this faction are said to be at the forefront of the reaction against bloggers. The General Department II (GDII), an intelligence unit led by Vice Defence Minister Nguyen Chi Vinh, has been instrumental in tracking and punishing political dissent on the internet. It has been alleged that hardliners have also used technology, at the command of GDII, to monitor ideological opponents within the CPV, thus gaining an upper hand in the behind-the-scenes jostling for promotions that characterises the CPV and other power structures. While there is a risk that the internal power struggle could intensify ahead of the National Congress, we see no major risks to policy direction. Hence, we maintain our 90 out of 100 rating for Vietnam in the policy continuity sub-category of our short-term political risk ratings. With inflation currently in low single digits and the conflict with China over the Paracel and Spratly islands contained, Vietnam scores a high 80 out of 100 in our short-term political risk rating. A low characteristics of polity rating (27.6 out of 100) brings Vietnams long-term political risk rating down to 52.8, reflecting our view that one-party rule is unsustainable in the longer term.© Business Monitor International Ltd Page 59
  • 61. Vietnam Infrastructure Report Q2 2010 Company MonitorCavico CorporationStrengths It is diversified across a number of interrelated sectors. A portfolio of projects completed, creates precedence for the company in the construction and infrastructure sectors in Vietnam.Weaknesses According to the company, ‘Cavico’s business growth is highly correlated to Vietnam’s economic and infrastructural development’; this endangers the company’s operations and revenue streams in the current downturn. The small-size of the company means that competition from domestic state-owned companies and foreign majors could erode its market share. The value of contracts is very small for a construction and infrastructure company, typically below US$10mn.Opportunities Vietnam is one of the best-placed Asian economies to weather the global financial crisis. The government’s willingness to improving infrastructure seems undiminished. The energy and utilities sector in Vietnam has picked up a lot of pace since Q309, creating plenty of opportunities.Threats There are slow procedures in Vietnam for a project to get started (administrative burdens and inefficiency). Regional contraction in the Asian markets poses threats to Cavico’s planned expansions in the region.Company Overview Cavico Corp. is the largest private infrastructure and mining company based in Vietnam*. Through its various subsidiaries, Cavico operates in the power, transport and urban development sectors. In the power generation sector, Cavico mainly focuses on hydropower and dam construction, although lately it has also made its first venture in wind power generation. Transport is the largest, or most active, segment of the company, with operations in tunnels, bridges and highways. The company also has a presence in commercial and residential construction in Hanoi, and other regional centres with large-scale mixed-use projects under way.Financial Highlights In Q209, revenues were US$13.9mn, a decrease of 28.9% year-on-year (y-o-y), but an increase of 13.2% compared with the first quarter of 2009. Net profit declined by 45% y-o-y in the second quarter of 2009 reaching US$0.6mn. The company’s largest customer is EVN, whose contracts generated 65% of revenue in 2008. For 2009, the company expects revenues to reach US$80mn and net profit to increase by 255.6%. However, in H109 the company’s revenues were less than a third of the US$80mn target indicating that the company has a significant amount of ground to cover in the second half of the year if it is to reach its target. © Business Monitor International Ltd Page 60
  • 62. Vietnam Infrastructure Report Q2 2010 Order backlog at the end of 2008 was US$252mn.Strategy and According to the company’s declared business strategy, the key points that will guide investmentEvaluation decisions are: prioritising the key businesses of industrial engineering, infrastructure construction and mining; investing in strategic industries for the economy of Vietnam (infrastructure, energy, mining, tourism); diversifying further; widening the company’s portfolio abroad; and increasing joint ventures and partnerships with international majors. Hitherto, Cavico has kept to its strategic guidance and has managed to expand the company’s portfolio in new sectors ( such as wind power generation) and abroad, most recently in neighbouring Laos. The company’s aim is to increase its current backlog of projects (US$335mn, June 2008) within Vietnam and so cement its presence in the infrastructure sector in the country. BMI believes that Cavico is well placed in its operations in Vietnam. Its presence in the country for nine years has created a precedent for the company and it has a history of partnerships with local state-owned contractors. Vietnam’s planned infrastructure investments in the power and transport sectors present significant opportunities for Cavico to indeed achieve its aim of increasing its order backlog. In a guidance note dated February 12 2009, Cavico said that it does not foresee any negative impact to the government’s planned infrastructure spending as a result of the financial crisis. Cavico cited forecasts by the World Bank that forecast 2009 growth at 6.5%, on strong FDI inflows and exports. Our medium to long-term outlook, remains unchanged, and we anticipate the infrastructure sector will witness much activity in the coming years. Construction industry value real growth will rebound alongside overall macroeconomic performance in 2010. Nevertheless, by implication, our short-term view raises concerns regarding Cavico’s 2009 expectations from the infrastructure sector. In December 2008, the company said that it expects 2009 revenues to reach US$80mn and net profit to increase by 255.6%. The company said that ‘anticipated growth will be driven by existing and new operations, including its entry in the wind energy market’. Although we agree with the company’s expectations that new opportunities will appear in 2009, we caution that the pace of investments and new developments may be slower than hoped for.Recent Activity and In September 2009, Cavico Traffic Joint Stock (Cavico TC) started work on a wind farm inProjects the country by signing a consulting agreement with German consulting firm Altus AG, reports Intellasia. In September 2009, subsidiary company, Cavico Transport Construction, signed a construction package with Dakdrinh Hydropower Company Joint Stock Company (Dakdrinh) for a 7.5km water tunnel at they hydropower plant. Cavico’s portion of this project is US$16mn with the construction expected to be completed within 60 months. Also in September, Vinh Son-Song Hinh Hydropower Joint Stock Company awarded Cavico a contract to construct a service access tunnel and road leading to Thuong Kon Tum hydropower plant. The project’s Phase I and II contracts have an estimated revenue value of © Business Monitor International Ltd Page 61
  • 63. Vietnam Infrastructure Report Q2 2010 US$7mn and US$5mn, respectively. In May 2009, Cavico Corporation announced that it had received final authorisation by the Lam Dong provincial government for the development of an onshore wind farm. The plant will be developed on a build, own and operate (BOO) basis. The total estimated cost is US$56mn and Cavico will contribute 20% equity and raise the remainder in debt. In April 2009, Cavico secured a US$4.9mn construction contract from the Vietnamese state- owned engineering firm Lilama. Under the contract, Cavico will construct a diversion tunnel and coffer dam at the Hua Na hydropower plant. hydropower project. * While we appreciate that mining activities are at the heart of the company’s operations, for the purpose of this report we will only focus on the infrastructure aspect of the company.Key Statistics Financial Data Revenue H12009: US$26.1mn Net income Q209: US$0.6mn© Business Monitor International Ltd Page 62
  • 64. Vietnam Infrastructure Report Q2 2010Song Da Construction CorporationCompany Overview The Song Da Construction Corporation is a state-owned company founded in 1960 that undertakes a multitude of construction activities. Its areas of expertise include building hydropower plants, transport engineering, civil and industrial works, installing power transmission lines and substations, producing construction materials such as steel and cement, providing consultancy services in construction, importing and exporting of materials such as steel and cement, and construction technology. The corporation has a number of power projects under way, including the Tuyen Quang Hydropower plant in Na Hang district. This plant has a 342 megawatt (MW) capacity. It is likely that the first generator will be operational by August 2007 with the plant to be completed during 2008, as stated in September 2006. The total value of the investment is in the region of US$500mn. The project necessitates the resettling of up to 3,500 households, but benefits should come with the development of new urban areas in the district. Across the border in Laos, Song Da is heading up the Viet-Lao Power Investment and Development Joint Stock Company consortium to build the XE Kaman Power Plant. The plant will have a capacity of 250MW, and is being developed under the BOT model with a 30-year lifespan, including construction time. More than 4,000 Vietnamese workers will be moved to Laos to execute this project, bringing it to completion by July 2008. Other ongoing projects include civil works on the south tunnel section of the Haivan Pass Tunnel project. The tunnel, which is more than 6km in length, is part of a project costing more than US$130mn, with a number of contractors involved in various works. The Ngang Pass Tunnel in central Quang Binh Province, which was designed and built by Song Da Construction Corporation, opened to traffic in August 2004, nearly one year ahead of schedule. The use of Austrian construction technology and modern technical equipment enabled heightened labour productivity. The Song Da Corporation has set up a financial company to manage and enlarge its finances. The financial company will also be responsible for listing the corporation’s shares and for issuing corporate bonds. The company has been involved in the construction of the 2,400MW Son La power plant costing USD2.5b. However cracks were discovered on the dam supplying the plant. After government inspection it was decided that the work met the technical requirements of the job.Key Statistics Annual Revenue 2009: 17 trillion dong Pre-tax profit (2009): 900 billion dong No. of employees: 20,000Key Personnel Chairman: Le Van Que Director: Nguyen Van Binh © Business Monitor International Ltd Page 63
  • 65. Vietnam Infrastructure Report Q2 2010 Director: Pham CuongAddress Song Da Construction Corporation G10 Thanh Xuan Nam Quarter Thanh Xuan District Hanoi Vietnam Tel: +84 (4) 854 1164 Fax: +84 (4) 854 1161 Website: www.songda.com.vn © Business Monitor International Ltd Page 64
  • 66. Vietnam Infrastructure Report Q2 2010Vietnam Construction and Machinery Installation, Corporation (Lilama)Company Overview The Lilama Corporation is an expansive Vietnamese construction company that undertakes a wide range of activities and has more than 60 affiliates. Lilama provides consultancy, design and manufacture of technological equipment; installation of pressure pipe systems, electrical equipment and machines; shipbuilding and general power generation; and infrastructure works in its portfolio of activities. A state-owned company under the management of the Vietnamese Ministry of Construction, Lilama has 16 subsidiaries. In August 2007, Lilama, in consortium with other local companies, invested US$199.2mn to develop a thermal power plant in central Ha Tinh province. The coal-powered plant will have a capacity of 1,200 megawatts (MW). Lilama has been involved in 150 projects throughout Vietnam, including work for the expansion of Quang Ninh province’s Uong Bi thermoelectric plant, the Ca Mau power project, the third phase of the Hoang Thach cement project and the Dung Quat refinery in central Vietnam. A Lilama affiliate has also won a US$600,000 contract from Japan’s Sumitomo Electric Industries to produce two air-drying systems used in thermoelectric plants. Ongoing projects include work on three hydroelectric power plants that are being built in Vietnam’s central highlands. Lilama is working alongside other big Vietnamese players such as Song Da Construction Corporation, Vinaconex and the Corporation for Infrastructure Construction and Development to develop these plants, which are designed to produce 2.675bn KWh of power annually. These plants are estimated to cost in the region of US$570mn, and will become operational between 2008 and 2010. Lilama also won a US$305.05mn bid to expand the Uong Bi power plant. It is now planning a stake in eight joint-stock projects worth more than US$37mn, in order to spread its investments in the near future. Lilama’s largest investment of VND140bn (US$8.75mn) will go into Quang Ninh Electricity, followed by VND54bn (US$3.5mn) in a Laos-based electricity company, VND30bn (US$1.9mn) in Ha Long Cement, and VND8.6bn (US$537,000) in Thang Long Cement. Lilama will also spend VND15bn (US$974,000) on a share of Hung Vuong Cement, VND9bn (US$584,000) on Cam Pha Electricity and VND750mn (US$48,700) on Hai Phong Electricity.Key Statistics Annual sales volume (2003): US$150mn No. of employees: 20,000 Year established: 1975Key Personnel President and CEO: Pham HungAddress Lilama Corporation 124 Minh Khai Hai Ba Trung © Business Monitor International Ltd Page 65
  • 67. Vietnam Infrastructure Report Q2 2010 Hanoi Vietnam Tel: +84 (4) 8633067 Fax: +84 (4) 638104 Web: www.lilama.com© Business Monitor International Ltd Page 66
  • 68. Vietnam Infrastructure Report Q2 2010Global OverviewGlobal Infrastructure Forecasts Revisited In Q110 BMI introduced new data series BRICs To Dominate The Global for infrastructure and its subsectors Infrastructure Market (transport and energy & utilities) in an Infrastructure Industry Value, US$bn, 2010f- 2014f effort to quantify trends and growth 300 patterns in the infrastructure sectors of 2010f 250 the key emerging and developed markets 2012f in 35 out of the 62 main markets from 200 2014f BMIs Infrastructure service. A quarter 150 on and several updates later, we revisit 100 our initial conclusions and highlight how 50 the changes in the global macroeconomic outlook have impacted our initial 0 China India Russia Brazil findings. f=forecast. Source: BMI Research, National Statistics Agencies Key Findings…In A Nutshell The key finding from the creation of the new data series was that infrastructures share in the total construction industry value will continue to climb among the fastest growing emerging markets to the end of our forecast period in 2014. On the contrary, in developed markets, infrastructure as a percentage of total construction industry value will either remain along the same levels, or will see a steady decline. A new conclusion from revisions in our US And Japan Maintain A Clear Lead core forecasts for China indicates that Infrastructure Industry Value Added, US$bn, 2010f 2010 will be the first year when Chinas 140 infrastructure industry value overtakes 120 that of the United States, thus becoming 100 the largest infrastructure market globally. 80 This is the result of two factors. Firstly, 60 40 Chinas overall robust economic 20 performance over 2009 has propelled the 0 industry. Secondly and related to the Germany Turkey US UK Japan France Indonesia South Korea Australia Mexico latter point, though both the United States and China have had multibillion dollar infrastructure-geared stimulus plans in f=forecast. Source: National Statistics Agencies, BMI Research place, Chinas implementation of projects© Business Monitor International Ltd Page 67
  • 69. Vietnam Infrastructure Report Q2 2010 seems to have been much more immediate than in the United States. China dominates global infrastructure industry value, followed by US and Japan. The three other BRIC countries (Brazil, Russia and India), then follow. France follows Russia by a small margin, but according to our forecasts, India Brazil and Russia will only keep increasing the margin between them and non- BRIC countries (with the exception of US and Japan) by the end of our forecast period. Methodology And Core Assumptions BMIs methodology rests on the core assumption that groups of countries along a similar trajectory of economic development, will also exhibit similar patterns in terms of infrastructure investment. This assumption allows the extrapolation of infrastructure/construction ratios for a broader group of countries than was previously possible. Furthermore, the availability of BMIs Major Projects Databases has enabled us to detect country- specific, historical sub-sector to sub-sector ratios (for instance airports as part of overall transport infrastructure) spanning a period of at least three years. The backbone of BMIs new Infrastructure data series is the combination of: a) BMIs macroeconomic and industry value forecasts and b) the infrastructure and sub-sector ratios extrapolated from the top down and bottom up approaches outlined above. Thus for the first time, it has been possible to provide globally comparable, numerically based historical data series for the global infrastructure industry and its sub-sectors in transport and energy & utilities, which in turn has enabled the calculation of five-year forecasts. Infrastructure Tiers Of Countries Each Tier comprises a group of countries that are on a similar economic development trajectory and have similar patterns in terms of infrastructure spending, levels of infrastructure development and sector maturity. This methodology enables us to confirm and overcome any deficiencies of infrastructure- specific data, by applying an average group ratio (calculated from the countries for which official data exists) to the countries for which data is limited. Tier I- Developed States Common characteristic: mature infrastructure markets, where investments typically target maintenance of existing assets or highly advanced projects at the top of the value chain. According to BMI data infrastructure as a percentage of total construction is found to be on average around 30%. Countries in Tier I: Germany, Greece, UK, US, France, Hong Kong, Taiwan, Singapore, Israel, Japan, Australia. Tier II - Core Emerging Markets Common characteristic: the most rapidly growing of emerging markets, where infrastructure investments are a strategic priority for the governments. There is significant scope for new infrastructure facilities from very basic levels (highways, heavy rail for instance) to more high value projects (renewables, urban© Business Monitor International Ltd Page 68
  • 70. Vietnam Infrastructure Report Q2 2010 transport). According to BMI data infrastructure as a percentage of total construction is found to be, on average, around 45% and above. Countries in Tier II: Mexico, South Korea, Peru, Turkey, Vietnam, Poland, Hungary, South Africa, Nigeria, Russia, China, India Brazil, Indonesia. Tier III- Emerging Europe Common characteristic: regional socioeconomic synergies of economic development, which has been defined by the recent or pending accession to European structures such as the European Union. Infrastructure development is to a large degree dictated by EU development goals and financed through instruments such as the expanded, Poland and Hungary: Assistance for Restructuring their Economies (PHARE) programme and Instrument for Structural Policies for Pre-Accession (ISPA) programme; and through institutions such as the European Bank for Reconstruction and Development (EBRD) and European Investment Bank (EIB). According to BMI data, infrastructure as a percentage of total construction is found to be on average between 30% and 40%. Countries in Tier III: Czech Republic, Romania, Bulgaria, Slovakia, Slovenia, Estonia, Latvia, Lithuania, Croatia, Ukraine. BRICs Dominate The numbers verify the trends BMIs infrastructure analysts have been observing in the global infrastructure industry. China dominates the global infrastructure sector in terms of industry value. Brazil, Russia and India in 2010 are still forecast to lag behind the US and Japan in 2010, but while Japans infrastructure industry value is forecasted to stagnate, the three other countries will power ahead, increasing their margins between them and the other non-BRIC economies. Interestingly however, it is not China that has the highest infrastructure-to-construction ratio. In fact, historical data from the Chinese central statistics bureau indicate that infrastructures share of the total construction industry value has traditionally been less than a third, below the trend established by other emerging markets peers (Tier II). However, following Chinas announcement and implementation of the infrastructure-geared stimulus plan, we estimate that infrastructures share will make a significant leap and for 2009 onwards will represent closer to 40% of the total construction industry value. A major change this quarter has been the revision in our infrastructure-to-construction ratios. New data for Mexico meant that it no longer occupies first place in the table. Instead, Brazil is now the market we expect will show, on average, the largest infrastructure-to-overall construction ratio. The possibility of a second Growth and Acceleration Programme (PAC) in Brazil and the preparations in the major cities for the World Cup and the 2016 Olympics in Rio de Janeiro, validate the countrys position at the top spot. Another country that has been preparing for a global sporting event, South Africa is in second place. We anticipate that post-World Cup 2010 the investments in infrastructure will continue, especially in the power sector where the state owned utility Eskom is implementing one of the largest capital expansion programmes globally.© Business Monitor International Ltd Page 69
  • 71. Vietnam Infrastructure Report Q2 2010 Singapore and the UK are the countries that have to lowest infrastructure-to-construction ratios. Both are Tier I countries, thus it is to be expected that infrastructure as a percentage of total construction would be the lowest. According to data by the Singapore department of statistics, infrastructure as a percent of total construction peaked in 2004, when it reached 27%, after which point it started to decline. The UK exhibits the typical characteristics of Tier I countries: mature infrastructure market, where maintenance surpasses new investments and typically infrastructure has a lower share of the total construction compared to residential and commercial construction. Brazil Leads The Way Infrastructure Industry Value As % of Total Construction, 2007-2014f Average f=forecast. Source: BMI Research, National Statistics Agencies© Business Monitor International Ltd Page 70
  • 72. Vietnam Infrastructure Report Q2 2010MethodologyNew Infrastructure Data Sub-sectors: Methodology BMI’s new Infrastructure Data examines the industry both from the top down and the bottom up in order to calculate the industry value of infrastructure and its sub-sectors. For the bottom up - a country-specific - approach, we have made full use of BMI’s Infrastructure Major Projects Databases for each country, in most cases dating back to 2005. This has allowed us to calculate historical ratios between general infrastructure industry value and its sub-sectors, which we then use for forecasting. Our Major Projects Tables are not exhaustive, but they are sufficiently comprehensive to provide a solid starting point for our calculations. The top down approach uses deduction to form the main hypothesis. We have separated the 35 countries into three Tiers. Each Tier comprises a group of countries that are on a similar economic development trajectory and have similar patterns in terms of infrastructure spending, levels of infrastructure development and sector maturity. This methodology enables us to confirm and overcome any deficiencies of infrastructure-specific data, by applying an average group ratio (calculated from the countries for which official data exists) to the countries for which data is limited. Tier I- Developed States; common characteristic: mature infrastructure markets, investments typically target maintenance of existing assets or highly advanced projects at the top of the value chain. Infrastructure as percent of total construction on average around 30%. Countries in Tier I: Germany, Greece, UK, US, France, Hong Kong, Taiwan, Singapore, Israel, Japan, Australia. Tier II – Core Emerging Markets; common characteristic: the most rapidly growing of emerging markets, where infrastructure investments are a strategic priority for the government. There is significant scope for new infrastructure facilities from very basic levels (highways, heavy rail for instance) to more high value projects (renewables, urban transport). Infrastructure as percent of total construction on average around 45% and above. Countries in Tier II: Mexico, South Korea, Peru, Turkey, Vietnam, Poland, Hungary, South Africa, Nigeria, Russia, China, India Brazil, Indonesia. Tier III- Emerging Europe; common characteristic: regional socioeconomic trajectories, development has been defined by the recent or pending accession to European structures such as the European Union.© Business Monitor International Ltd Page 71
  • 73. Vietnam Infrastructure Report Q2 2010 Infrastructure development to a large degree dictated by EU development goals and financed through vehicles such as the PHARE and ISPA programmes, and institutions such as the EBRD and EIB. Infrastructure as percent of total construction on average between 30% and 40%. Countries in Tier III: Czech Republic, Romania, Bulgaria, Slovakia, Slovenia, Estonia, Latvia, Lithuania, Croatia, Ukraine. This methodology has enabled us to calculate infrastructure industry values for states where this was not previously possibly. Furthermore, it has enabled us to create comparable indicators. The top down hypothesis-led approach has been used solely to calculate the Infrastructure Industry Value as a Percentage of Total Construction. For all sub-sector calculations we have applied the bottom-up approach, i.e. calculated the ratios from our Major Projects Tables where data was not otherwise available.Infrastructure Forecasts: Methodology BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric regression modelling. The precise form of model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. BMI mainly uses OLS estimators and in order to avoid relying on subjective views and encourage the use of objective views, uses a ‘general-to-specific’ method. BMI mainly uses a linear model, but simple non-linear models, such as the log-linear model, are used when necessary. During periods of ‘industry shock’, for example a deep industry recession, dummy variables are used to determine the level of impact. Effective forecasting depends on appropriately selected regression models. BMI selects the best model according to various different criteria and tests, including, but not exclusive to: R2 tests explanatory power; Adjusted R2 takes degree of freedom into account Testing the directional movement and magnitude of coefficients Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value) It must be remembered that human intervention plays a necessary and desirable role in all of BMI’s industry forecasting. Experience, expertise and knowledge of industry data and trends ensures that analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not.© Business Monitor International Ltd Page 72
  • 74. Vietnam Infrastructure Report Q2 2010 Within the infrastructure industry, this intervention might include, but is not exclusive to, new investments across sectors, or projects getting cancelled; general investment climate and business environment changes; domestic or regional trends changing; macroeconomic indicators; and regulatory changes. Forecasting figures of construction and infrastructure value mainly depend on past and future fixed capital investment formation as a strong expected investment in a nation drives the construction growth rate. BMI uses top down approach to forecast infrastructure and its sub-sectors. Generally speaking, a fast construction growth means a strong increase in most parts of infrastructure. Infrastructure and Construction Added Value Figures for construction and infrastructure value added to GDP are based, where possible, on national accounts as published by the relevant statistics agencies and central banks, as well as primary government/ministry sources and official data. Where these are unavailable, construction GDP estimates are based on a range of variables including: Stated infrastructure and development programmes Likely increases owing to related urban or industrial sector developments Political factors (such as an electorally motivated public works programmes) Infrastructure and Construction Real Growth and as a percentage of GDP is calculated using BMI’s own macroeconomic forecasts. Employment Within The Construction Industry These figures are forecast based on: The growth or otherwise of real gross fixed capital formation Company results and expansion plans Example of Construction Value Model: (Construction Value)t = β0 + β1*(Gross Fixed Capital Formation)t + εt Example of Infrastructure Value Model: (Infrastructure Value)t = β0 + β1*(Construction Value)t + εt Note: Infrastructure sub-sector values are forecast using a similar regression model.© Business Monitor International Ltd Page 73
  • 75. Vietnam Infrastructure Report Q2 2010Sources BMI uses publicly available information to compile the country reports and collate historical data. Sources used in Infrastructure reports include UN statistics; national accounts; infrastructure, public works, transport, energy and economy ministries; officially released company results and figures; trade bodies and associations and international and national news agencies.Industry Forecasts BMI’s industry forecasts are generated using the best-practice techniques of time-series modelling and causal/econometric modelling. The precise form of model we use varies from industry to industry, in each case being determined, as per standard practice, by the prevailing features of the industry data being examined. BMI mainly uses ordinary least squares (OLS) estimators and in order to avoid relying on subjective views and encourage the use of objective views, uses a ‘general-to-specific’ method. BMI mainly uses a linear model, but simple non-linear models, such as the log-linear model, are used when necessary. During periods of ‘industry shock’, for example a deep industry recession, dummy variables are used to determine the level of impact. Effective forecasting depends on appropriately selected regression models. BMI selects the best model according to various different criteria and tests, including, but not exclusive to: R2 tests explanatory power; Adjusted R2 takes degree of freedom into account; Testing the directional movement and magnitude of coefficients; Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value); All results are assessed to alleviate issues related to auto-correlation and multi-collinearity. BMI uses the selected best model to perform forecasting. It must be remembered that human intervention plays a necessary and desirable role in all of BMI’s industry forecasting. Experience, expertise and knowledge of industry data and trends ensures that analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not. Within the infrastructure industry, this intervention might include, but is not exclusive to, new investments across sectors or cancelled projects; general investment climate and business environment changes; changing domestic or regional trends; macroeconomic indicators; and regulatory changes. Example Of Construction Value Model (Construction value)t = β0 + β1*(Gross Fixed Capital Formation)t + β2*(inflation)t + β3*(lending rate)t + β4* (population)t + β5*(government expenditure)t + β6*(construction value)t-1 + εt© Business Monitor International Ltd Page 74
  • 76. Vietnam Infrastructure Report Q2 2010Construction Industry A number of principal criteria drive our forecasts for each construction and engineering variable: Construction GDP And Infrastructure Spending Figures for construction GDP and infrastructure spending are based, where possible, on national accounts as published by relevant central banks, as well as primary government/ministry sources and official data. Where these are unavailable, construction GDP forecasts are based on a range of variables including: Stated infrastructure and development programmes; Likely increases owing to related urban or industrial sector developments; Political factors (such as an electorally motivated public works programmes). Construction as a percentage of GDP is calculated using BMI’s own macroeconomic and demographic forecasts. Employment Within The Construction Industry These figures are forecast based on: The growth or otherwise of the construction industry; Company results and expansion plans.Data MethodologyConstruction Construction Value Our data is derived from GDP by output figures from each country’s national statistics office (or equivalent). Specifically, it measures the output of the construction industry over the reported 12 month period in nominal values (i.e. domestic currency terms). As it is derived from GDP data, it is a measure of value added within the industry (i.e. the additional contribution of the construction industry over other industries, such as cement production). Consequently, it does not measure the nominal value of all inputs used in the construction industry, which, for most states would increase the overall figure by 50-60%. Furthermore, it is important to note that the data does not provide an indication of the total value of a country’s buildings, only the construction sector’s output in a given year. This data is used because it is reported by virtually all countries and can therefore be used for comparative purposes. However, it is important to note that, where we are able to locate them, data released by national statistical offices or industry groups or associations for the overall value of the construction sector also taken into account and published by us.© Business Monitor International Ltd Page 75
  • 77. Vietnam Infrastructure Report Q2 2010 Growth Our data and forecasts for real construction measures the real increase in output (rather than nominal growth, which would also incorporate inflationary increases). In short, it is an inflation adjusted value of the output of the construction industry year-on-year. Consequently, real growth will – in virtually all instances – be lower than the nominal growth of our ‘construction value’ indicator. Construction Industry, % Of GDP/Construction Value (US$) These are derived indicators. We use BMI’s Country Risk team’s GDP and exchange rate forecasts to calculate these indicators.Capital Investment Total Capital Investment Our data is derived from GDP by expenditure data from each country’s national statistics office (or equivalent). It is a measure of total capital formation (excluding stock build) over the reported 12 month period. Total capital formation is a measure of the net additions to a country’s capital stock, so takes into account depreciation as well as new capital. In this context, capital refers to structures, equipment, vehicles etc. As such, it is a broader definition than construction or infrastructure, but is used by BMI as a proxy for a country’s commitment to development. Capital Investment (US$), % Of GDP, Per Capita These are derived indicators. We use our Country Risk team’s population, GDP and exchange rate forecasts to calculate them. As a rule of thumb, we believe an appropriate level of capital expenditure is 20% of GDP, although in rapidly developing emerging markets it may, and arguably should, account for up to 30%. Government Capital Expenditure This is obtained from government budgetary data and covers all non-current spending (i.e. spending on transfers, salaries to government employees, etc.). Due to the absence of global standards for reporting budgetary expenditure, this measure is not as comparable as construction/capital investment. Government Capital Expenditure, US$bn, % Of Total Spending These are derived indicators.Construction Sector Employment Total Construction Employment This data is sourced from either the national statistics office or the International Labour Organization (ILO). It includes all those employed within the sector.© Business Monitor International Ltd Page 76
  • 78. Vietnam Infrastructure Report Q2 2010 Construction Employment, % y-o-y; % Of Total Labour Force These are derived indicators. Average Wage In Construction Sector This data is sourced from either the national statistics office or the ILO.Infrastructure Business Environment Ratings BMI’s Infrastructure Business Environment Ratings (IBER) provide a numerically based evaluation of prospects for the infrastructure sector in each state that we cover. Our approach is threefold. Firstly, the risks rated capture the operational dangers to companies operating in this industry globally. Secondly, we attempt, where possible, to identify objective indicators that may serve as proxies for indicators that were previously evaluated on a subjective basis. Finally, we use BMI’s proprietary Country Risk Ratings (CRR). Overall, the ratings system – which is integrated with those of all the industries covered by BMI – offers an industry-leading insight into the prospects and risks for companies across the globe.Ratings Overview Conceptually, the ratings system is divided into two distinct areas: Limits Of Potential Returns An evaluation of sector’s size and growth potential in each state and also broader industry/state characteristics that may inhibit its development. Risks To Realisation Of Returns An evaluation of industry-specific dangers and those emanating from the state’s political/economic profile that call into question the likelihood of anticipated returns being realised over the assessed time period. For each category and sub-category, each state is scored out of 100 (100 being the best), with the overall IBER a weighted average of the total score. Importantly, as most of the countries and territories evaluated are considered by BMI to be ‘emerging markets’, our IBER is revised on a quarterly basis. This will ensure that the IBER draws on the latest information and data from across our broad range of sources, and the expertise of our analysts.© Business Monitor International Ltd Page 77
  • 79. Vietnam Infrastructure Report Q2 2010Table: Infrastructure Business Environment IndicatorsIndicator RationaleLimits to potential returnsMarket structureConstruction expenditure, Objective measure of size of sector – the larger the sector, the greater the opportunitiesUS$bn availableSector growth, % y-o-y Objective measure of growth potential – rapid growth results in increased opportunitiesCapital investment, % ofGDP Proxy for the extent the economy is already oriented towards the sectorGovernment spending, % of Proxy for extent to which structure of economy is favourable to infrastructure/GDP construction sectorCountry structure From BMI’s Country Risk Ratings (CRR). Denotes availability/cost of labour. HighLabour market infrastructure costs/low quality will hinder company operations From BMI’s CRR. Denotes ease of obtaining investment finance. Poor availability ofFinancial infrastructure finance will hinder company operations across the economy From BMI’s CRR. Low electricity coverage is proxy for pre-existing limits toAccess to electricity infrastructure coverageRisks to potential returnsMarket risk Subjective evaluation against BMI-defined criteria. This indicator evaluates barriers toNo. of companies entryTransparency of tendering Subjective evaluation against BMI-defined criteria. This indicator evaluates predictabilityprocess of operating environmentCountry risk From BMI’s CRR. Denotes health of underlying economic structure, including seven indicators such as volatility of growth; reliance on commodity imports, reliance on singleStructure of economy sector for exports From BMI’s CRR. Denotes vulnerability to external shock – principal cause of economicExternal risk crises Subjective rating from BMI’s CRR. Denote predictability of policy over successivePolicy continuity governments From BMI’s CRR. Denotes strength of legal institutions in each state – security ofLegal framework investment can be a key risk in some emerging markets From BMI’s CRR. Denotes risk of additional illegal costs/possibility of opacity inCorruption tendering/business operations affecting companies’ ability to competeSource: BMI© Business Monitor International Ltd Page 78
  • 80. Vietnam Infrastructure Report Q2 2010Project Finance Ratings BMI’s Project Finance Ratings (PFR) provide a globally comparative, numerically based assessment of the risks facing major infrastructure projects in the power, transport, and commercial construction sectors. It evaluates the degree of uncertainty facing projects that are generally characterised by the following: long construction period; high construction costs; difficulty in redeploying project assets (e.g. power stations) to other uses; earnings generated only after construction completed. The PFR draws on BMI’s broad analytical expertise. The methodology incorporates our industry-leading Country Risk Ratings (CRR), drawing on our 25-year expertise in assessing political, economic and business operational risk, as well as our in-depth knowledge of the global infrastructure industry. While we believe the resulting scores are a reliable guide to project finance risks, it should be emphasised that the PFR assesses broad industry risks, not individual projects. This has several implications. First, there will be instances where the risk profile, for example the supply of inputs, of particular projects is markedly different from general risks in the industry. Second, the PFR will not take into account measures by private sector project participants to mitigate risk when structuring finance – for example, by securing a substantial equity involvement from the sponsoring agency or government. The PFR is best used to evaluate the breadth and depth of risks facing major infrastructure projects, which will in turn affect the source, availability and cost of finance. Thus, in an environment of limited global finance for such projects, it provides a leading indicator for the cost of financing major projects and the pace at which infrastructure development will occur in each state. Ratings Overview To reflect the life-cycle of infrastructure projects, the PFR is divided into two distinct sub-ratings: Design And Construction Risks This evaluates risks in the broad assumptions underpinning construction cost projections. Specifically, it assesses uncertainty in the political, economic and regulatory environment, and input cost volatility. Sector Operational Risk This evaluates risks in revenue projections during the operational period of a project. It assesses uncertainty regarding supply and cost of inputs, and sale of outputs, including the regulatory, market and political environment. Ratings Components The rating uses 10 subjectively measured indicators and around 40 separate indicators/datasets. The weighting of each indicator and group of indicators (inputs, regulatory, market risks, etc) reflects their relative importance, and the relative risk level that they pose for sponsors and equity holders. The relative influence of each indicator and group of ratings on the final score can be found below. The score next to© Business Monitor International Ltd Page 79
  • 81. Vietnam Infrastructure Report Q2 2010 the segment sub-heading indicates the weighting of the segment in the final rating, and the score next to each indicator shows each indicator’s influence within the segment.Table: Design And Construction PhaseIndicator Definition Rationale WeightingInputs 20% (segment) Domestic: Average consumer inflation 2002-2009, High and uncertain inflation raises risks inflation adjusted for standard deviation to input cost projections 60% International: Standard deviation of monthly average long-term of past 12 months of data, plus Currency volatility increases risks to currency volatility standard deviation of moving average cost projections of imported goods 40%Political environment 25% (segment) Measure of government intervention in economy, using data for government expenditure and revenue from state- Governments with strong commitment owned enterprises; average trade tariff to free markets are unlikely to make rates; tax levels; trade bureaucracy; sudden changes to the Market orientation and history of FDI inflows investment/trade regime 20% The higher the security risk, the higher the risks to infrastructure assets in terms of physical security (as they tend to become targets) and insurance Measure of level of security threat premiums, which rise with security Security risk (external and internal) facing a country risks, increasing costs to sponsors 20% Strong policy continuity between elites BMI’s evaluation of level of broad (within or across parties) minimises Long-term policy governmental policy consistency over risks that new legislation will alter the continuity past decade business environment 20% BMI’s evaluation of system of Democratic governments with strong, Characteristics of government and constitutional independent institutions are less prone polity framework against ideal type to sudden policy shifts 20% Evaluation of breadth and depth of government’s ability to protect Strong rule of law reduces direct threats Rule of law individuals and property to assets during construction 20%Legal/regulatory risks 20% (segment) Transparency is essential to planning of Subjective measure of level of predictable input delivery and cost and Corruption corruption the predictability of officials’ decisions 50% Confidence in the legally binding nature Contract World Bank Index of cost, procedures of contracts is essential to minimise enforceability and time taken to recover a bad debt domestic counterparty risk 50%Economic/financial risks 35% (segment) BMI’s long-term economic rating, which Economic stability reduces risks to Domestic: incorporates 20 indicators to assess project activity (e.g. due to financial economic stability risk of an economic crisis problems at suppliers) 30% International: US and eurozone average interest Project finance is mainly raised availability of rates, adjusted for Chicago BOE VIX internationally. Price and availability 70%© Business Monitor International Ltd Page 80
  • 82. Vietnam Infrastructure Report Q2 2010Table: Design And Construction PhaseIndicator Definition Rationale Weighting finance index depend on US and eurozone interest rates and investor risk appetite (VIX is a proxy). A global, rather than country- specific, indicatorSource: BMITable: Commissioning And Operating Phase – Commercial ConstructionIndicator Definition Rationale WeightingInputs 30% (segment) Domestic: Average consumer inflation 2002-2009, High and uncertain inflation raises risks inflation adjusted for standard deviation to input cost projections 30% Domestic: power, Supply of utilities is essential to imports as % of As stated. Power is used as proxy for functioning of asset and revenue consumption all utilities generation 25% International: Standard deviation of monthly moving long-term average of past 12 months of data, plus Currency volatility increases risks to currency volatility standard deviation of moving average cost projections of imported goods 45%Sale of outputs Regulatory 20% (segment) BMI’s subjective view of transparency Clarity regarding future market supply Supply risk of government planning policy essential to forecast demand for asset 20% BMI’s subjective view of transparency of government policy regarding price of Clarity over policy/regulations covering Price risk service related to asset price are essential to projecting income 20% Confidence in legally binding nature of Contract World Bank Index of cost, procedures contracts is essential for minimising enforceability and time taken to recover a bad debt domestic counterparty risk 60% Market risks 30% (segment) BMI’s long-term economic rating, which incorporates 20 indicators to assess An economic crisis would cut projected Economic stability risk of economic crisis demand, potentially greatly Standard deviation of monthly moving average of the past 12 months of data, Sharp currency movements introduces Long-term plus standard deviation of moving risks to value of income in international currency stability average currency 50% Political risks 20% (segment) Measure of government intervention in economy, using data for government expenditure and revenue from state- Governments with strong commitment owned enterprises; average trade tariff to free markets unlikely to make sudden Market orientation rates; tax levels; trade bureaucracy; changes to investment/trade regime 10%© Business Monitor International Ltd Page 81
  • 83. Vietnam Infrastructure Report Q2 2010Table: Commissioning And Operating Phase – Commercial ConstructionIndicator Definition Rationale Weighting and history of FDI inflows The higher the security risk, the higher the risks to infrastructure assets in terms of physical security (as they tend to become targets) and insurance Measure of the security threat (external premiums, which rise with security Security risk and internal) facing a country risks, increasing costs to sponsors 40% Strong policy continuity between elites (within or across parties) minimises BMI’s evaluation of level of policy risks that new legislation will alter the Policy continuity consistency over past decade business environment 10% Evaluation of breadth and depth of government’s ability to protect Strong rule of law reduces direct threats Rule of law individuals and property to assets 40%Source: BMITable: Commissioning And Operating Phase – Energy And UtilitiesIndicator Definition Rationale WeightingInputs* 30% (segment) Volatile inflation risks unanticipated cost Average inflation, 2002-2009, and its increases that may be impossible to Inflation standard deviation pass on to asset users 30% Gas and other fuel prices correlate BMI’s Brent Crude forecasts for next closely with oil. Price stability is five years, adjusted for standard desirable, as are anticipated future deviation of prices over past three trends. This is a global, rather than Crude price costs years country-specific, risk 25% Standard deviation of monthly moving Currency volatility increases risks to average of the past 12 months of data, cost projections of imported goods or Long-term plus standard deviation of moving goods bought in US dollars (i.e. fuel currency volatility average feedstock) 45%Sale of outputs Regulatory 20% (segment) BMI’s subjective view of government Transparency regarding government energy policies and implications for energy policies is essential for Demand risk industry demand evaluating demand 20% BMI’s subjective view of transparency of government policy regarding power Clarity over policy/regulations covering Price risk prices price essential to projecting income 20% Contract World Bank Index of cost, procedures Confidence in legally binding nature of enforceability and time taken to recover a bad debt contracts is essential to minimising 60%© Business Monitor International Ltd Page 82
  • 84. Vietnam Infrastructure Report Q2 2010Table: Commissioning And Operating Phase – Energy And UtilitiesIndicator Definition Rationale Weighting domestic counterparty risk Market risks 30% (segment) BMI’s long-term economic rating, which incorporates 20 indicators to assess An economic crisis would cut projected Economic stability risk of economic crisis demand, potentially greatly 50% Standard deviation of monthly moving average of the past 12 months of data, Sharp currency movements introduces Long-term plus standard deviation of moving risks to value of income in international currency stability average currency 50% Political risks 20% (segment) Measure of government intervention in economy, using data for government expenditure and revenue from state- Governments with strong commitment owned enterprises; average trade tariff to free markets internally and rates; tax levels; trade bureaucracy; internationally unlikely to make sudden Market orientation and history of FDI inflows changes to investment/trade regime 10% The higher the security risk, the higher the risks to infrastructure assets in terms of physical security (as they tend to become targets) and insurance Measure of the security threat (external premiums, which rise with security Security risk and internal) facing a country risks, increasing costs to sponsors 40% Strong policy continuity between elites BMI’s evaluation of level of broad (within or across parties) minimises governmental policy consistency over risks that new legislation will alter the Policy continuity past decade business environment 10% Evaluation of breadth and depth of government’s ability to protect Strong rule of law reduces direct threats Rule of law individuals and property to assets 40%* No distinction between internal and domestic risks. This reflects BMI’s view that all projects would have fuel feedstockcontracts in place prior to construction. Source: BMITable: Commissioning And Operating Phase – TransportIndicator Definition Rationale WeightingInputs 30% (segment) Volatile inflation risks unanticipated cost Domestic: Average inflation, 2002-2009, and its increases that may be impossible to inflation standard deviation pass on to asset users 40% Standard deviation of monthly moving International: average of the past 12 months of data, long-term plus standard deviation of moving Currency volatility increases risks to currency Volatility average cost projections of imported goods 60%Sale of outputs© Business Monitor International Ltd Page 83
  • 85. Vietnam Infrastructure Report Q2 2010Table: Commissioning And Operating Phase – TransportIndicator Definition Rationale Weighting Regulatory 20% (segment) BMI’s subjective view of government regulation and its record in supporting Transparency regarding government Demand risk substitutes etc policy essential for evaluating demand 20% BMI’s subjective view of transparency of government policy regarding price of Clarity over policy/regulations covering Price risk service related to asset price essential to projecting income 20% Confidence in legally binding nature of Contract World Bank Index of cost, procedures contracts essential to minimising enforcibility and time taken to recover a bad debt domestic counterparty risk 60% Market risks 30% (segment) BMI’s long-term economic rating, which incorporates 20 indicators to assess An economic crisis would cut projected Economic stability risk of economic crisis demand, potentially greatly 50% Standard deviation of monthly moving average of the past 12 months of data, Sharp currency movements introduces Long-term plus standard deviation of moving risks to value of income in international currency stability average currency 50% Political risks 20% (segment) Measure of government intervention in economy, using data for government expenditure and revenue from state- Governments with strong commitment owned enterprises; average trade tariff to free markets are likely to refrain from rates; tax levels; trade bureaucracy; sudden changes to the Market orientation and history of FDI inflows investment/trade regime 10% The higher the security risk, the higher the risks to infrastructure assets in terms of physical security (as they tend to become targets) and insurance Measure of the security threat (external premiums, which rise with security Security risk and internal) facing a country risks, increasing costs to sponsors 40% Strong policy continuity between elites BMI’s evaluation of level of broad (within or across parties) minimises governmental policy consistency over risks that new legislation will alter the Policy continuity past decade business environment 10% Evaluation of breadth and depth of government’s ability to protect Strong rule of law reduces direct threats Rule of law individuals and property to assets 40%Source: BMI© Business Monitor International Ltd Page 84
  • 86. Vietnam Infrastructure Report Q2 2010Sources BMI uses publicly available information to compile the country reports and collate historical data. Sources used in Infrastructure reports include UN statistics; national accounts; infrastructure, public works, transport, energy and economy ministries; officially released company results and figures; trade bodies and associations and international and national news agencies.© Business Monitor International Ltd Page 85
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