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| The Golden Bridge in Da Nang. Viet Nam is on the path to its next phase of growth and development. Photo: Andreea Popa |
Viet Nam is preparing a new socio-economic development plan that will cover 2021 through 2025 and a new socio-economic development strategy covering 2021 through 2030. They are expected to establish ambitious development targets—as is appropriate for a country that has achieved much over recent years.
Ambition, however, has a price tag, and Viet Nam will need to adopt new approaches to fund its development.
Let’s put in context how much has changed since the last 5-year plan. In 2015, Viet Nam was the 5th largest recipient of net official development assistance and qualified for some of the most concessional assistance from ADB and other donors.
It’s a different story now. Viet Nam’s per capita income has been increasing at a compound annual growth rate of over 6%, making it among the fastest growing economies in the world. It is now firmly established as a middle-income country and is one of the most attractive destinations for foreign direct investment.
This success means, however, that donors will begin to allocate grants and other forms of deeply concessional assistance to countries with more pressing needs. This is already happening. In 2017, Viet Nam “graduated” from the World Bank’s concessional country classification and 18 months later from ADB’s equivalent grouping.
ADB and others have been trying to cushion this transition by blending grants with its lending to Viet Nam to reduce net borrowing costs. Additionally, ADB approved in 2019 a new pricing policy that provides a temporary benefit to countries, like Viet Nam, that are recent graduates from the most concessional assistance. Although helpful, these measures are temporary and inherently limited and will not provide the funding paradigm for Viet Nam’s next socio-economic development plan.
These funding needs, moreover, are considerable. ADB has estimated that Southeast Asia will need to invest on average $210 billion in infrastructure per year through 2030. Viet Nam will require a large portion of this with the Global Infrastructure Hub estimating that Viet Nam needs to invest $110 billion between 2021 and 2025 for infrastructure and to meet the Sustainable Development Goals. Based on historical trends, this leaves a projected $22 billion funding shortfall.
$22 billion over 5 years is a big number. But it’s not insurmountable. In fact, Viet Nam is in a better position than many. Whereas the Philippines, India, and other Asian countries have privately funded a large portion of their infrastructure, the private sector has historically only funded 10% of Viet Nam’s. That means there is a lot of scope for Viet Nam—particularly given its compelling growth story—to attract more infrastructure investment.
To make this happen, Viet Nam should pursue three complimentary strategies.
The first strategy is more catalytic use of development assistance. This requires a different mindset. Viet Nam is no longer a low-income country, but it is also not ready to fund itself exclusively through private investment and domestic capital markets. A transition period is needed where Viet Nam uses donors’ assistance to catalyze private investment that would not come otherwise.
This transition period will, however, require new tools. This includes issuing counter-guarantees to ADB and other development partners so they can use their strong international credit ratings to de-risk projects. Viet Nam should also prioritize development assistance to strengthen the financial sector, providing stand-by facilities or other enhancements to make it easier for state-owned enterprises tasked with key projects to access affordable financing, and allowing development partners to issue dong-linked bonds to lower the cost of capital for Vietnamese borrowers. These are all measures that ADB and others have introduced in other middle-income countries. But either because of statute or policy, they are currently not possible in Viet Nam.
Using development assistance catalytically to attract private investment closely ties to the second priority: passing a strong law on public-private partnerships (PPP). Time is short. The National Assembly has already considered a first draft of the bill and hopes to pass a second version in May. Consultations should focus on the key missing ingredients needed to attract international investment.
For example, the law needs to better mitigate the risk that the demand for an infrastructure project falls short of projections. Viet Nam already does this with feed-in-tariffs for power generation projects. The PPP law should afford similar protection to other sectors, particularly transport. This can be achieved through minimum revenue guarantees or ensuring that availability payments extend automatically beyond the current ceiling of 5 years.
Another PPP concern is governing law. The current decree governing PPPs provides more scope for using foreign laws to govern PPP contracts than the draft PPP bill. This is important. PPPs entail complicated legal contracts, and investors rely on legal systems with deep case histories to interpret them. Finally, termination risk must be addressed. Once a project is built, investors need assurance that they will be repaid even if the government terminates the contract. Without these changes, the new PPP law’s success is uncertain, and projects tendered in the road and other sectors are likely to receive only limited interest from foreign investors.
The final strategic priority is better mobilization of domestic capital markets. The passage of the new Securities Law in November 2019 was a good step as are recent regulatory changes that encourage companies to turn to the bond market instead of banks to fund long-term obligations.
More, however, is needed. Private pension funds, investment funds, and insurance companies all need to mature so there’s a strong base of demand for corporate bonds. Meanwhile, the main public pension, the Social Insurance Agency, must first be able to prudently manage and second start to invest in corporate debt. Viet Nam needs to establish a domestic credit rating agency, and the government should actively market this investment opportunity to leading international rating agencies. These steps will help the corporate bond market to evolve, eventually creating opportunities for project bonds, particularly if credit enhancement mechanisms are available for these instruments.
Viet Nam’s graduation from concessional funding sources is unequivocally positive. It is a direct result of the dynamism and potential of this thriving economy. The trick now is to manage that success by evolving its strategy to fund the next 5-year plan. On the one hand, it cannot be business as usual. Viet Nam will hopefully never again be one of the world’s largest recipients of aid.
On the other hand, Viet Nam cannot increase the share of private investment in infrastructure instantaneously. A measured strategy that deploys development assistance catalytically, strengthens PPPs, and makes better use of domestic capital would establish the resource base for Viet Nam’s next socio-economic development plan and beyond.
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