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"Vietnam’s Infrastructure Development Dilemma: The China Factor" by Le Hong Hiep

2019/82, 8 October 2019

On 24 September 2019, Vietnam’s Ministry of Transport announced that it had cancelled an earlier international tender invitation for eight sections of the North – South Expressway project, which will be built under the Build-Operate-Transfer (BOT) model. More importantly, the Ministry decided to rule out foreign investors and would instead invite fresh tenders with lowered criteria for the project from local investors next year.

The decision, while delaying the implementation of this important project, was generally welcomed by the Vietnamese public. Some commentators even asserted that it is hitherto the “best decision” by Minister of Transport, Nguyen Van The, who has been beleaguered by criticisms for his perceived incapability as well as the widespread corruption in the transport infrastructure development sector.

Unsurprisingly, China appeared to be a key factor that accounted for the decision as well as the Vietnamese public’s supportive attitude. Half of the sixty investors that submitted expressions of interest for the eight sections came from China, raising the prospect that Chinese investors will win most of these concession contracts. Such a prospect has generated unease among Vietnamese officials and the public.

First, Chinese contractors have a poor track record in Vietnam. They have been known, among other things, for delays, cost overruns, and poor construction quality in various projects. The Cat Linh – Ha Dong metro line in Hanoi, which is funded by Chinese loans and built by a Chinese contractor, is a stark example. The project was originally scheduled for completion in 2013, but up to October 2019, its completion date remains uncertain. The project costs have also more than doubled, from US$377 million to US$771 million. There have been several accidents during the construction phase and the questionable safety profile of the project is currently one of the main issues preventing it from being put into operation.

Second, there have been concerns that these BOT projects, if built and operated by Chinese concessionaires, will cause public resentment in view of the strong anti-China sentiments among Vietnamese people. BOT projects in Vietnam have attracted many public protests in recent years, mainly due to the unreasonable toll fee or toll gate locations. These incidents, coupled with the China factor, may cause the project to become a new target of public resentment and protests, creating potential political hotspots that the government wants to avoid.

Finally, with China seeking to expand its economic and geo-strategic reach through international infrastructure investments via the Belt and Road Initiative, Vietnamese authorities are wary of the participation of Chinese investors in infrastructure projects, especially those that have significant national security implications such as the North-South expressway. China’s ongoing violations of Vietnam’s Exclusive Economic Zone and continental shelf in the South China Sea since early July further compounded Vietnamese concerns about allowing Chinese companies to bid for the project.

The cancellation of the tender for the eight sections of the North-South Expressway highlights Vietnam’s dilemma regarding how to overcome the infrastructure bottleneck to promote economic growth while fending off unwarranted economic and security influences from China. As Vietnam needs private capital and technical expertise to build the project in a timely and efficient manner, reserving the project for domestic investors casts doubt on the economic rationality of the decision.

Although Vietnamese companies do not lack technical expertise, securing enough capital to finance the construction of the project is an issue. Among the eleven sections of the project, only three are publicly funded, while the remaining eight will rely on private capital. Most Vietnamese construction companies do not have enough funding to qualify for even the smaller sections of the project, which will cost about US$4.3 billion in total. Borrowing from local banks will prove difficult given banks’ distaste for BOT infrastructure projects, mainly due to the poor reputation and performance of projects that have been put into operation. Should Chinese as well as other foreign investors be allowed to bid for the project, either on their own or in partnership with local ones, it would be much easier for Vietnam to solve the capital issue.

The tale of Vietnam’s North-South Expressway project exemplifies the dilemma of developing countries in balancing between development needs and security concerns, especially in considering Chinese loans and investments. While many countries have chosen development, Vietnam has prioritized security, as seen in the North-South Expressway project as well as the rollout of its 5G network, in which Hanoi has ruled out Huawei.

With capital shortage, the most immediate cost for Vietnam’s decision will be project delays. But given the current status of Vietnam-China relations, Vietnam’s menu of options is limited. Vietnamese security-minded policy makers seem to believe that regardless of potential economic costs, it is always better to be “slow but sure” in dealing with China.

Dr Le Hong Hiep is Fellow at ISEAS - Yusof Ishak Institute.

Vietnam’s infrastructure development will be one of the topics discussed at “Vietnam Forum 2019: Vietnam's Business Environment Amidst Global Uncertainties” to be held on 1 November 2019. Click HERE to register for the conference.

The facts and views expressed are solely that of the author/authors and do not necessarily reflect that of ISEAS – Yusof Ishak Institute.  No part of this publication may be reproduced in any form without permission.