1. [ w w w . d u a n e m o r r i s . c o m ]
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Private Investment in
the Water Sector in Viet
Nam
The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI), the
Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and
accepts no responsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB official terms.
Oliver Massmann
Partner
Duane Morris Viet Nam LLC

2. [ w w w . d u a n e m o r r i s . c o m ]
Water sector
● Huge investment demand:
Short term: investment of US$ 3.62 billion
required over 2005-2010 to meet government
targets of water and sanitation coverage
Mid and long term: current estimated annual
investment of US$600 million to be increased
four-fold to meet Viet Nam´s MDGs by 2020

3. [ w w w . d u a n e m o r r i s . c o m ]
Water sector (cont.)
● Overdependence on ODA sources
Nearly 85% of all investments over the past ten
years funded by ODA
Anticipated transition to MIC status
ODA flows likely to decrease
Different sources of funding needed, private sector!
● Tariff structure
To date not market-oriented
Tariffs charged by water companies below cost-
recovery, need for government subsidies

4. [ w w w . d u a n e m o r r i s . c o m ]
Private Sector Participation
● Little incentives for private investment so far
Regulatory environment does not adequately
encourage commercial activity
Fixed tariffs often below cost-recovery
Deficient infrastructure
Irregular tax structure
Licensing delays
Insufficient transparency and accountability
Corruption
Uncertainties over asset ownership
Foreign private investment activity in Viet Nam’s
water sector is extremely low

5. [ w w w . d u a n e m o r r i s . c o m ]
Binh An Project
● US$36 million bulk water supply project negotiated in
1994
● BOT contract between Binh An Water Corporation Limited
(BAWC), a special purpose entity owned 100% by a
Malaysian consortium acting as the BOT company, and
HCMC Water Supply Company as offtaker
● Intended output: 100,000 m3/day bulk water, supplied on
a flat take-or-pay charge of US$0.3/m3 under an offtake
contract with a duration of 20 yrs

6. [ w w w . d u a n e m o r r i s . c o m ]
Binh An Project (cont.)
● No competitive bidding process: negotiated directly
between the investors and HCMC People’s Committee
● License issued in 1995
● Construction started in 1997 and was completed in 1999
● Post approval delays due in part to cumbersome and
poorly managed land access and re-settlement
negotiations
Land required was to be contributed freely to the investors by the HCMC
authorities
However, proposed site was located in Song Be province which did not
benefit directly from the project
BOT company ultimately reportedly had to pay fees for resettlement and
land compensation before construction could start

7. [ w w w . d u a n e m o r r i s . c o m ]
Binh An Project (cont.)
● Guarantees
No guarantee for bulk sale contract by State Bank of Viet Nam
Only guarantee was that of the HCMC People´s Committee, which
was based on an unaudited annual budget of US$286 million
● Risk allocation
Investors directly bore construction, operating, transportation
(pipe) and regulatory risks
Government almost certainly agreed to bear market risk and
foreign exchange on the basis of a take-or-pay offtake agreement
denominated in US Dollars, and the guarantee from the HCMC
People’s Committee

8. [ w w w . d u a n e m o r r i s . c o m ]
Binh An Project (cont.)
● End of project
Second project phase licensed in 1999 but never
commenced
Project was taken over by the HCMC WSC in
2004
Government reportedly agreed to pay US$4 million
in compensation to the Malaysian investors

9. [ w w w . d u a n e m o r r i s . c o m ]
Thu Duc Project
● BOT company/ contract
● Licensed in 1997
● BOT company named Lyonnaise Viet Nam Water Company
(LVWC), established by a subsidiary of French multinational
Suez-Degremont, the world’s largest water group, and
Malaysian construction company Pilecon Engineering Berhad
● Projected to go operational in 2003
HCMC Water Supply Company was to purchase 300,000 m3/day
of treated water at an average price of US$23 million/year.
(=US$0.21/m3)
However, retail prices for consumers approx. US$0.11/m3
Balance would have to have been subsidized by the city
authorities

10. [ w w w . d u a n e m o r r i s . c o m ]
Thu Duc Project (cont.)
● Original project cost estimates US$140 million,
total actual cost about US$150 million
● Debt portion US$100 million, based on 70:30
debt-to-equity ratio
● Financing:
Direct ADB loan of US$35 million
ADB together with OND and Coface additionally provided
coverage for US$65 million underwritten by three banks
ANZ Investment Bank (US$26 million (40%))
Fortis Bank (US$26 million (40%))
Credit Lyonnais (US$13 million (20%))

11. [ w w w . d u a n e m o r r i s . c o m ]
Thu Duc Project (cont.)
● Risk mitigation provisions
Reportedly contract provisions covering the
standard political risks such as wars, riots,
expropriation and transfer risks
In addition: outstanding debt in case of failure to
pay termination compensation by Vietnamese
government
Lenders would be insured in case of termination,
irrespective of whether such termination was
caused by the BOT company or the Vietnamese
side.

12. [ w w w . d u a n e m o r r i s . c o m ]
Thu Duc Project (cont.)
● Contract abandoned in 2003 by foreign investor
consortium
Reportedly disputes over contract interpretation, one reason
stated being that the Vietnamese government failed to fulfill some
of the conditions precedent to enable the BOT concession to
come into effect during the 7 years of implementation
Most likely, disputes over the offtake price also played an
important role.
● Subsequently, HCMC council chose not to continue the
project with foreign participation although it received
proposals from potential Singaporean and Malaysian
investors

13. [ w w w . d u a n e m o r r i s . c o m ]
Thu Duc Project (cont.)
● After transfer of assets form of a build-operate-own
contract
● Tender to build facility restricted to Vietnamese
companies, reportedly because it would help save on
construction costs and ensure fair water prices
● Water prices:
HCMC authorities decided not to sell water at the
actual market price yet
While they accepted that a hike in water prices was
necessary to raise capital, they stated that only
moderate increases will be accepted

14. [ w w w . d u a n e m o r r i s . c o m ]
Recommendations
● Tariff structure:
Government should work towards gradually
establishing a market-determined price system
To attract investment by enabling utilities to
generate operating surpluses to finance capital
expenditure
To encourage efficiency and optimum output

15. [ w w w . d u a n e m o r r i s . c o m ]
Recommendations (cont.)
● Bankability problems due to current tariff system
Water companies not considered creditworthy,
mainly because of below-cost tariffs
Market-oriented system will be needed for water
supply companies to develop creditworthiness and
thus raise capital for expansion
Subsidies will be needed for the transition phase to
commercially viable operations
Guarantees for early commercial loans could be employed
to build confidence
Development of domestic capital markets to enable local
financing will be crucial

16. [ w w w . d u a n e m o r r i s . c o m ]
Recommendations (cont.)
● Thu Duc experience:
Clear project proposals and contracts with clearly
defined rights and obligations indispensable for
successful implementation
Problems with price structure and off-take price
Need to determine benchmarks for competitive
tariffs on national, regional or case-to-case basis

17. [ w w w . d u a n e m o r r i s . c o m ]
Thank you