Q1 2016 www.bmiresearch.com VIETNAM INFRASTRUCTURE REPORT INCLUDES 10-YEAR FORECASTS TO 2024 Published by:BMI Research Vietnam Infrastructure Report Q1 2016 INCLUDES 10-YEAR FORECASTS TO 2024 Part of BMI’s Industry Report & Forecasts Series Published by: BMI Research Copy deadline: October 2015 ISSN: 1750-5593 BMI Research Senator House 85 Queen Victoria Street London EC4V 4AB United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@bmiresearch.com Web: http://www.bmiresearch.com © 2015 Business Monitor International Ltd All rights reserved All information contained in this publication is copyrighted in the name of Business Monitor International Ltd, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any 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 Ltd 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 Ltd makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained Vietnam Infrastructure Report Q1 2016 INCLUDES 10-YEAR FORECASTS TO 2024 Part of BMI’s Industry Report & Forecasts Series Published by: BMI Research Copy deadline: October 2015 ISSN: 1750-5593 BMI Research Senator House 85 Queen Victoria Street London EC4V 4AB United Kingdom Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@bmiresearch.com Web: http://www.bmiresearch.com © 2015 Business Monitor International Ltd All rights reserved All information contained in this publication is copyrighted in the name of Business Monitor International Ltd, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any 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 Ltd 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 Ltd makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained Vietnam Infrastructure Report Q1 2016 CONTENTS BMI Industry View Table: Infrastructure - Construction Industry Forecasts (Vietnam 2014-2020) Table: Infrastructure Risk Reward Index (Vietnam 2015-2015) SWOT Infrastructure SWOT Industry Forecast 11 Construction And Infrastructure Forecast Scenario 11 Latest Updates 11 Table: Construction And Infrastructure Industry Data (Vietnam 2014-2024) 11 Table: Construction And Infrastructure Industry Data (Vietnam 2019-2024) 12 Transport Infrastructure - Outlook And Overview 21 Latest Updates 21 Table: Transport Infrastructure Industry Data (Vietnam 2014-2024) 21 Table: Competitiveness Of Vietnam's Infrastructure 22 Table: Transport Projects 35 Energy And Utilities Infrastructure - Outlook And Overview 36 Latest Updates 36 Table: Energy And Utilities Infrastructure Data (Vietnam 2014-2024) 36 Table: Construction & Social Infrastructure Projects 50 Residential/Non-Residential Building - Outlook And Overview 51 Latest Updates 51 Table: Residential and Non-Residential Building Industry Data (Vietnam 2014-2024) 51 Table: Construction & Social Infrastructure 55 Industry Risk Reward Ratings 56 Vietnam - Infrastructure Risk/Reward Index Vietnam Risk/Reward Index Rewards Risks Asia Pacific Infrastructure RRI: Developed Markets Increasingly At Risk 56 56 56 57 59 Table: Asia Risk/Reward Index 65 Market Overview 66 Competitive Landscape 66 Table: Vietnam EQS Data 66 Company Profile 67 Cavico Corporation 67 Electricity Vietnam Group 70 Methodology 75 © Business Monitor International Ltd Page Vietnam Infrastructure Report Q1 2016 Industry Forecast Methodology Sector-Specific Methodology Risk/Reward Index Methodology Sector-Specific Methodology 75 76 80 81 Table: Infrastructure Risk/Reward Index Indicators 81 Table: Weighting Of Indicators 82 © Business Monitor International Ltd Page Vietnam Infrastructure Report Q1 2016 BMI Industry View BMI View: A recovery in Vietnam's property market, coupled with positive regulatory changes, robust economic growth and favourable funding conditions will help to spur construction activity over the coming quarters, with the transport sector expected to outperform Growth remains below potential as ongoing reforms of state-owned enterprises will require years of implementation before any significant impact is seen Forecast And Latest Updates ■ We maintain a positive outlook for Vietnam's construction sector and expect real growth of 5.9% in 2015 and to average 6.1% per annum between 2015-2019 ■ An expected recovery in the real estate market supported by easing foreign restrictions on property ownership, resilience in exports as well as a growing tourism sector will support growth for the residential and non-residential building segment ■ Growth will still not be at full potential, largely owing to the long implementation period required before reforms can have a significant impact on the sector Table: Infrastructure - Construction Industry Forecasts (Vietnam 2014-2020) 2014 2015f 2016f 2017f 2018f 2019f 2020f 209,875.00 224,728.26 246,868.47 274,344.62 304,400.31 337,481.12 374,049.66 Construction Industry Value, Real Growth, % y-o-y 7.10 4.98 6.15 6.23 6.06 6.07 6.04 Construction Industry Value, % of GDP 5.3 5.3 5.2 5.2 5.2 5.1 5.1 Construction industry value, VNDbn f = BMI forecast Source: Vietnam General Statistics Office, BMI Risk/Reward Index ■ Vietnam's Risk/Reward score remains the same at 54.2, despite dropping one position to 13th place spot, as growth in Thailand over the past quarter saw the latter move up to 11th place ■ A brightening economic outlook indicates that risks to our outlook for the country remain on the upside over the coming quarters ■ Positive policy formation in terms of public private partnership regulations, investment laws and foreign ownership restrictions on property also support our increasingly positive outlook © Business Monitor International Ltd Page Vietnam Infrastructure Report Q1 2016 Table: Infrastructure Risk Reward Index (Vietnam 2015-2015) Geography Vietnam Risk/Reward Index Rewards Industry Rewards Country Rewards Risks Industry Risks Country Risks 54 55 52 60 51 40 59 Source: BMI © Business Monitor International Ltd Page Vietnam Infrastructure Report Q1 2016 SWOT Infrastructure SWOT Vietnam Infrastructure Industry SWOT Strengths ■ The country's strong project pipeline will sustain growth in the sector and add capabilities for further development, particularly as transport structure improves ■ Rapid growth and firm government commitment has attracted investment from many of the world's largest infrastructure companies ■ The poor state of infrastructure in the country provides plenty of opportunities for foreign investors and construction companies Weaknesses ■ A hike in electricity prices should stimulate investment in the energy sector ■ State-owned companies dominate the infrastructure market This is especially the case in the utilities sector, where Electricity of Vietnam's dominant position has deterred investors ■ Vietnam relies heavily on foreign imports and it is estimated the country requires 2mn tonnes of steel billets to be imported a year ■ The country offers a risky environment for major infrastructure projects, especially in relation to project finance operations ■ Power outages are occurring daily in Vietnam, highlighting the country's severe electricity problems Opportunities ■ Demand for urban infrastructure projects in transport and sanitation over our 10-year forecast period to 2023 will rise, in tandem with urbanisation ■ Severe drought is driving demand in electricity generation sources besides hydropower, such as gas-fired and wind-powered plants ■ If the government's attempts to cool the overheating economy are successful, Vietnam will see a more stable growth trajectory over the long term © Business Monitor International Ltd Page Vietnam Infrastructure Report Q1 2016 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 largescale mixed-use projects under way Strategy According to the company's declared business strategy, the key points that will guide investment 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 Cavico has kept to its strategic guidance and has managed to expand into 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 within Vietnam and to cement its presence in the country's infrastructure sector BMI believes Cavico is well placed in its operations in Vietnam Its presence in the country has set a precedent 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 that could allow Cavico to achieve its aim of increasing its order backlog This rose 33.8% y-o-y to reach USD304.6mn as of June 30 2010 The firm also saw a loss of USD1.8mn in the second quarter of 2010 According to the company, this was due to the fact many of its hydropower construction projects were in the early stages, and not generating sufficient revenue to offset their initial construction costs Once these projects progress further into completion, net income will increase as more revenues are generated Recent ■ Developments ■ ■ In April 2011 Cavico Corporation announced its subsidiary Cavico Mining had received an investment licence for the Tan My Hydropower Plant The licence grants Cavico the right to build-own-operate (BOO) a hydropower plant downstream from the Tan My Irrigation Reservoir The plant will be built in the Phuoc Tan Village, Ninh Thuan Province The plant has a designed capacity of 6MW and is estimated to cost USD6.7mn In March 2011, Cavico Corporation announced that its subsidiary Cavico Construction Manpower & Services signed a contract to construct the tunnel roof and grout the arch consolidation of a 1.4-mile-long rock transport tunnel at the Nghi Son cement plant, Thanh Hoa Province The contract was valued at approximately USD1.3mn Cavico expected to complete the project within seven months from the start of construction In January 2011, Cavico Corporation announced that its subsidiary Cavico Hydropower Construction signed a USD7.75mn tunnel construction contract with Song Giang Hydropower Joint Stock Company for the Song Giang hydropower plant in Khanh Vinh District, in central Vietnam's Khanh Hoa Province The twin-unit plant, which is 31 miles from Nha Trang city, will have a 24MW annual capacity once it becomes operational Song Giang Hydropower Joint Stock Company expects to invest a total of USD23.2mn in the plant © Business Monitor International Ltd Page 68 Vietnam Infrastructure Report Q1 2016 ■ In December 2010, Cavico Corporation announced that its subsidiary Cavico Bridge and Tunnel had signed a USD6mn construction contract with Vietnam's state-owned electricity company, EVN, for the100MW Song Bung hydropower plant project Under the contract, Cavico will be responsible for the construction of three tunnels, a surge tank and a power house © Business Monitor International Ltd Page 69 Vietnam Infrastructure Report Q1 2016 Electricity Vietnam Group SWOT Analysis Strengths ■ EVN's power companies account for 55% of Vietnam's total electricity generation ■ EVN has outlined ambitious plans to build 74 new power stations by 2020, in line with the country's power sector development Weaknesses ■ EVN has a diversified portfolio and is involved in all types of power plant projects ■ Tightening credit conditions in the domestic banking sector are a key source of funds for the company These, together with rising construction costs, have severely hindered EVN's ability to implement its investment mandate Opportunities ■ High debt levels are inhibiting plans for expansion ■ The Vietnamese government is committed to energy sector development visible in its ambitious plans to increase Vietnam's total installed generating capacity from 20GW in 2011 to 75GW by 2020 Threats ■ Vietnam's Electricity Law (2005) might make operating in the electricity sector more complex, especially in relation to transitional procedures Company Overview Electricity Vietnam (EVN) was founded in 1995 as a state-owned utility engaged in the generation, transmission, trading and distribution of electricity EVN owns five limited liability power companies: Electricity North Vietnam (EVN NPC); Southern Electricity Corporation (EVN SPC); Central Electricity Corporation (EVN CPC); TP Power Corporation Hanoi (EVN HANOI); and the Electricity Corporation TP Ho Chi Minh City (EVN HCMC) In addition, the subsidiary in charge of EVN's transmission grids is the National Power Transmission Corporation (NPT) As of 2010, EVN's power companies accounted for 60% of total electricity generation in the country and had around 98,000 employees EVN is managing almost all plant groups, except for some independent power plants (IPP) and some other build-operatetransfer (BOT) power plants Despite further privatisation plans, power transmission companies and hydropower plants - including Hoa Binh, Tri An and Yaly - as well as the nuclear power programme, are expected to remain under the management of EVN © Business Monitor International Ltd Page 70 Vietnam Infrastructure Report Q1 2016 EVN has also played a role in Vietnam's successful rural electrification programme by implementing power projects financed by the World Bank Strategy EVN is expected to face major changes in future due to the launch of the Electricity Law in 2005 The law sets out a phased introduction of a competitive generation market, followed by a competitive wholesale market and finally a competitive retail market While there are target dates for the realisation of each phase, important detail is lacking, especially in relation to transitional procedures EVN, which is currently the monopoly off-taker and controller of the electricity transmission and distribution network, is expected to face increasing competition in the future As the largest utility and electricity wholesaler in Vietnam, EVN is the main force driving the development of Vietnam's power sector It has taken up this mantle by launching and financing numerous power projects throughout Vietnam and has plans to continue to so In July 2011, EVN announced that it would invest USD39bn in building an additional 95 power plants with a total capacity of around 49,000MW over the next 10 years, 38 of which will be built between 2011 and 2015 To meet this target by 2015, EVN would need to invest USD3bn a year in new power plants and transmission infrastructure between 2011 and 2015 However, this target appears to be difficult to achieve EVN is suffering from crippling debts and is unable to raise sufficient capital to meet its investment needs In late June 2012, EVN said that it faced a funding gap of around VND185trn (USD8.9bn) for power plant projects between 2011 and 2015 One reason for EVN's high debt levels is artificially low electricity prices in the past, and a lack of sophistication in setting electricity prices Electricity prices in Vietnam were at levels below the cost of electricity production, making it unprofitable for power utilities to sell electricity Meanwhile, these electricity prices are not allowed to fluctuate, thus a rise in the cost of basic inputs such as energy commodities cannot be passed on to the consumer Consequently, EVN is forced to incur additional losses to absorb these costs In addition to electricity prices, diversification into non-core businesses such as the Vietnamese telecoms sector is another contributing factor which has damaged EVN's profit-generating ability EVN had invested significant capital in setting up a Vietnamese telecoms subsidiary, EVN Telecom, despite the presence of several established players - VinaPhone, MobiFone and Viettel Telecom EVN has found it difficult to compete in such a challenging market and was reported to have generated revenues of just VND2.8trn (USD135.9mn) in 2010, equivalent to 61% of its target We believe that this is because EVN Telecom lacks the financial capacity to invest in networks; it also incurs substantial rental costs due to infrastructure leasing EVN was looking to divest EVN Telecom, but its plans to sell the subsidiary to the Corporation for Financing and Promoting Technologies fell through in April 2011 Vietnam Multimedia Corporation is © Business Monitor International Ltd Page 71 Vietnam Infrastructure Report Q1 2016 now the most likely candidate to acquire the telecoms subsidiary, according to local media reports Weather conditions have also played a part in damaging EVN's profit-generating ability A sizeable portion of its portfolio is hydropower and severe droughts across the country have reduced water levels for hydropower reservoirs, hampering their ability to generate electricity As a result, EVN has to rely on expensive oil-based generation sources and electricity imports from China to meet the shortfall In a bid to ease EVN's current financial difficulties and meet its investment targets, the Vietnamese prime minister has directed commercial banks to extend credit to carry out projects under the six power planning scheme EVN will also be granted guarantees by the Ministry of Finance for domestic credit loans to pay for electricity purchases from thermo power plants under the direction of the prime minister This has taken place in January 2013, where EVN secured a USD120mn loan from Vietnam Development Bank for two new thermal power plants (Vinh and Duyen Hai 1) The utility was also seeking a government guarantee for its loan to build Duyen Hai thermal power plant in midDecember 2012 EVN would also be allowed to issue domestic bonds in 2013 to meet its funding gap, but it remains to be seen if investors would be interested given the bond scandals with several state-owned companies such as Vinashin Lastly, the government had allowed EVN to hike electricity prices twice (5% in July, 5% in December) in 2012, increasing electricity prices by a total of 10% Electricity prices averaged VND1.437 (USD0.07) at the end of December 2012 and the hike in December could potentially allow EVN to earn an additional VND7trn (USD330mn) in 2013 There are also plans (as of March 2013) to adjust electricity prices if input costs increase by 2-5% over the current average power price, according to a draft decision about the mechanism for retail power price management and adjustment Recent Developments In April 2014, EVN announced it had divested from its non-core and unprofitable real estate holdings, selling all of its shares in the Land Saigon and Land Mien Trung realty developers The move reflects an ongoing effort by EVN to focus more on its core business and less on non-core sectors, such as real estate and telecoms In December 2013, state utility and monopoly distributor EVN and Japan-based Marubeni Corporation signed an engineering, procurement and construction contract for the main thermal power plant of the Thai Binh Power Station in Vietnam The project will entail an investment of VND26.5trn (USD1.3bn), with 85% of the investment coming from the Japan International Cooperation Agency and the remaining 15% from EVN The construction of the 600MW plant is expected to commence in Q1 2014, with the first turbine scheduled to operate in Q4 2017 and the second in Q2 2018 The two-turbine plant will generate about 3.3bn kWh every year © Business Monitor International Ltd Page 72 Vietnam Infrastructure Report Q1 2016 In October 2013, EVN reported its total outstanding bank debts were VND118.84trn at the end of July 2013 In September 2013, EVN and the National Power Transmission Corp (EVN NPT) announced that the Lai Chau-Son La-expanded power line of 500kV and Son La power station of 500kV was to start in late 2013 In the same month, EVN Finance sold more than 16mn shares (23% stake) of Thac Mo Hydropower Company (TMP) In August 2013, EVN announced that electricity prices in Vietnam will increase by 5% starting from August 2013 The average electricity price will be increase to VND1508.85 per KWh During July 2013, EVN was expected to auction its 25.2mn shares in An Binh Commercial Joint Stock Bank (ABBank) in August 2013 EVN is required to finish divestment from non-core operations by the end of 2015 Besides ABBank, EVN has invested in companies such as Global Insurance Company, EVN Finance Company, Saigon Vina Property Company and Central Power Corporation In June 2013, EVN reported that it aims to have six new generators with a combined capacity of 1420MW operational in 2013 They are two generators in Nghi Son thermo power plant, a generator in Quang Ninh power plant, a generator in Hai Phong power plant and two generators in Ban Chat hydropower plant According to EVN's seventh power plan, the utility will put 20 generators with a combined capacity of 6,366MW into operation between 2013 and 2015 In March 2013, the Vietnam Ministry of Industry and Trade issued a decree stating that EVN's CEO will be dismissed if the utility fails to maintain the expected return on equity or suffer losses for two consecutive years In return, EVN will be given permission to adjust the electricity prices within the regulated price limits EVN announced in January 2013 that it plans to issue VND10trn (USD483mn) worth of bonds in the domestic market, while converting its debt to PetroVietnam into bond debt via a VND14trn (USD673mn) issuance In December 2012, EVN pulled out from the USD800mn Lower Se San hydropower plant project in Cambodia China's Hydrolancang International Energy is expected to purchase EVN's stake in the project, with the electricity produced from the dam to be used in Cambodia During November 2012, EVN signed an agreement with the World Bank to finance a USD800mn project aimed at ensuring stable power supply in Vietnam The World Bank will provide a loan worth USD449mn with an annual interest rate of 1.25% over a 25year period, with a five-year grace period A USD30mn loan will be provided by the Clean Technology Fund, carrying an annual interest rate of 0.75% over a 20-year period, with a 10-year grace period Technical assistance estimated to be worth USD8mn will be provided by the Australian Agency for International Development In June 2012, Vietnam granted approval to establish three power generation companies: Genco 1, Genco and Genco These companies are to take over power © Business Monitor International Ltd Page 73 Vietnam Infrastructure Report Q1 2016 generating plants directly under EVN Genco will manage hydropower plants, such as Dai Ninh, Ban Ve and Song Tranh Genco 2, which is the upgrade of Can Tho Thermal Power, will manage the Quang Tri and An Khe KaNak hydropower plants and the Thu Duc, Hai Phong and Pha Lai thermal power plants The establishment of Genco is based on Phu My Thermal Power and 11 affiliates, including the Vinh Tan thermal power plant and the Buon Kuop hydropower plant These three companies will remain under EVN, which will also appoint their personnel Financial Data In January 2013, EVN announced a profit of VND6trn in FY2012, a reversal from the loss of VND3.5trn in FY2011 This return to profitability was attributed to the company's hydropower business and electricity price hikes However, the company still had debts amounting to an estimated VND34trn at end-2012 © Business Monitor International Ltd Page 74 Vietnam Infrastructure Report Q1 2016 Methodology Industry Forecast Methodology 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 Common to our analysis of every industry, is the use of vector autoregressions Vector autoregressions allow us to forecast a variable using more than the variable's own history as explanatory information For example, when forecasting oil prices, we can include information about oil consumption, supply and capacity When forecasting for some of our industry sub-component variables, however, using a variable's own history is often the most desirable method of analysis Such single-variable analysis is called univariate modelling We use the most common and versatile form of univariate models: the autoregressive moving average model (ARMA) In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data quality is poor In such cases, we use either traditional decomposition methods or smoothing methods as a basis for analysis and forecasting We mainly use OLS estimators and in order to avoid relying on subjective views and encourage the use of objective views, we use a 'general-to-specific' method BMI mainly uses a linear model, but simple nonlinear models, such as the log-linear model, are used when necessary During periods of 'industry shock', for example poor weather conditions impeding agricultural output, dummy variables are used to determine the level of impact Effective forecasting depends on appropriately selected regression models We select 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 © Business Monitor International Ltd Page 75 Vietnam Infrastructure Report Q1 2016 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 our industry forecasting Experience, expertise and knowledge of industry data and trends ensure that analysts spot structural breaks, anomalous data, turning points and seasonal features where a purely mechanical forecasting process would not Sector-Specific Methodology Construction Industry Construction Industry 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 (ie domestic currency terms) As it is derived from GDP data, it is a measure of value added within the industry (ie 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 Construction Industry Value Real 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 y-o-y Consequently, real growth will be lower than the nominal growth of our 'construction value' indicator, except in instances where deflation is present in the industry Data for this is sourced from the constant values for construction value added, using the same sources noted above We use officially calculated data to accurately account for inflation specific to the construction industry © Business Monitor International Ltd Page 76 Vietnam Infrastructure Report Q1 2016 Construction Industry, % Of GDP/Construction Value (USD) 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 (USD), % 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 (ie 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 © Business Monitor International Ltd Page 77 Vietnam Infrastructure Report Q1 2016 Government Capital Expenditure, USDbn, % 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 Labor Organization (ILO) It includes all those employed within the sector 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 Data Sub-Sectors BMI's Infrastructure data examines the industry from the top down and bottom up in order to calculate the industry value of infrastructure and its sub-sectors We use a combination of historic data as reported by the central banks, national statistics agencies and other official data sources, and BMI's Infrastructure Key Projects Database tool Where possible we source historic data for the relative portion of either infrastructure spend or value generated by the various sub-sectors we classify as infrastructure We seek to segment official infrastructure data into pre-set categories classified by us, across all countries, in order to optimise the ability to compare industry value across the sub-sectors of infrastructure We then apply ratios to the infrastructure subsector value in order to derive the value Real growth is calculated using the official construction inflation rate In those instances where historic data is not available, we use a top down and bottom up approach incorporating full use of BMI's Infrastructure Key Projects Database, in most cases dating back to 2005 This allows us to calculate historical ratios between general infrastructure industry value and its sub-sectors, © Business Monitor International Ltd Page 78 Vietnam Infrastructure Report Q1 2016 which we then use for forecasting Our Key Projects Database is not exhaustive, but it is comprehensive enough to provide a solid starting point for our calculations The top down approach uses data proxies We have separated countries into three tiers Each tier comprises a group of countries on a similar economic development trajectory and with similar patterns in terms of infrastructure spending, levels of infrastructure development and sector maturity This 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 characteristics include: ■ 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 averages around 30% ■ Tier I countries: Canada, Germany, Greece, UK, US, France, Hong Kong, Taiwan, Singapore, Israel, Japan, Australia • Tier II - Core Emerging Markets Common characteristics include ■ The most rapidly growing emerging markets, where infrastructure investments are a government priority; ■ Significant scope for new infrastructure facilities from very basic levels (eg highways, heavy rail) to more high value projects (renewables, urban transport); ■ Infrastructure as percent of total construction averages around 45% and above ■ Tier II countries: Colombia, Malaysia, Mexico, South Korea, Peru, Philippines, Turkey, Vietnam, Poland, Hungary, South Africa, Nigeria, Russia, China, India, Brazil, Indonesia • Tier III- Emerging Europe Common characteristics include: ■ Regional socioeconomic trajectories; ■ Development defined by recent or pending accession to European structures such as the EU 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 averages between 30% and 40% ■ Tier III countries: 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 © Business Monitor International Ltd Page 79 Vietnam Infrastructure Report Q1 2016 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 apply the bottom-up approach, ie calculating the ratios from our Key Projects Database where data was not otherwise available Risk/Reward Index Methodology BMI's Risk/Reward Index (RRI) provide a comparative regional ranking system evaluating the ease of doing business and the industry-specific opportunities and limitations for potential investors in a given market The RRI system divides into two distinct areas: Rewards: Evaluation of sector's size and growth potential in each state, and also broader industry/state characteristics that may inhibit its development This is further broken down into two sub categories: ■ Industry Rewards (this is an industry-specific category taking into account current industry size and growth forecasts, the openness of market to new entrants and foreign investors, to provide an overall score for potential returns for investors) • Country Rewards (this is a country-specific category, and the score factors in favourable political and economic conditions for the industry) Risks: 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 This is further broken down into two sub categories: ■ Industry Risks (this is an industry-specific category whose score covers potential operational risks to investors, regulatory issues inhibiting the industry, and the relative maturity of a market) • Country Risks (this is a country-specific category in which political and economic instability, unfavourable legislation and a poor overall business environment are evaluated to provide an overall score) We take a weighted average, combining industry and country risks, or industry and country rewards These two results in turn provide an overall Risk/Reward Index, which is used to create our regional ranking system for the risks and rewards of involvement in a specific industry in a particular country For each category and sub-category, each state is scored out of 100 (100 being the best), with the overall Risk/Reward Index a weighted average of the total score Importantly, as most of the countries and territories evaluated are considered by us to be 'emerging markets', our score is revised on a quarterly basis This ensures that the score draws on the latest information and data across our broad range of sources, and © Business Monitor International Ltd Page 80 Vietnam Infrastructure Report Q1 2016 the expertise of our analysts Our approach in assessing the Risk/Reward balance for infrastructure industry investors globally is fourfold: ■ First, we identify factors (in terms of current industry/country trends and forecast industry/country growth) that represent opportunities to would-be investors ■ Second, we identify country and industry-specific traits that pose or could pose operational risks to would-be investors ■ Third, we attempt, where possible, to identify objective indicators that may serve as proxies for issues/ trends to avoid subjectivity ■ Finally, we use BMI's proprietary Country Risk Index (CRI) in a nuanced manner to ensure that only the aspects most relevant to the infrastructure industry are incorporated Overall, the system offers an industry-leading, comparative insight into the opportunities/risks for companies across the globe Sector-Specific Methodology In constructing these indices, the following indicators have been used Almost all indicators are objectively based Indicators Table: Infrastructure Risk/Reward Index Indicators Rationale Rewards Industry rewards Construction expenditure, USDbn Objective measure of size of sector The larger the sector, the greater the opportunities available Sector growth, % y-o-y Objective measure of growth potential Rapid growth results in increased opportunities Capital investment, % of GDP Proxy for the extent the economy is already oriented towards the sector Government spending, % of GDP Proxy for extent to which structure of economy is favourable to infrastructure/ Country rewards Labour market infrastructure From BMI's Country Risk Index (CRI) Denotes availability/cost of labour High costs/low quality will hinder company operations Financial infrastructure From CRI Denotes ease of obtaining investment finance Poor availability of finance will hinder company operations across the economy Access to electricity From CRI Low electricity coverage is proxy for pre-existing limits to infrastructure coverage Risks Industry risks © Business Monitor International Ltd Page 81 Vietnam Infrastructure Report Q1 2016 Infrastructure Risk/Reward Index Indicators - Continued Rationale No of companies Subjective evaluation against BMI-defined criteria This indicator evaluates barriers to entry Transparency of tendering process Subjective evaluation against BMI-defined criteria This indicator evaluates predictability of operating environment Country risks Structure of economy From CRI Denotes health of underlying economic structure, including seven indicators such as volatility of growth; reliance on commodity imports, reliance on single sector for exports External risk From CRI Denotes vulnerability to external shock - principal cause of economic crises Policy continuity Subjective score from CRI Denote predictability of policy over successive governments Legal framework From CRI Denotes strength of legal institutions in each state Security of investment can be a key risk in some emerging markets Corruption From CRI Denotes risk of additional illegal costs/possibility of opacity in tendering/business operations affecting companies' ability to compete Source: BMI Weighting Given the number of indicators/datasets used, it would be inappropriate to give all sub-components equal weight Consequently, the following weighting has been adopted: Table: Weighting Of Indicators Component Rewards Weighting, % 70, of which - Industry rewards 65 - Country rewards 35 Risks 30, of which - Industry risks 40 - Country risks 60 Source: BMI © Business Monitor International Ltd Page 82 ... © Business Monitor International Ltd Page Vietnam Infrastructure Report Q1 2016 Table: Infrastructure Risk Reward Index (Vietnam 2015-2015) Geography Vietnam Risk/Reward Index Rewards Industry... 40 59 Source: BMI © Business Monitor International Ltd Page Vietnam Infrastructure Report Q1 2016 SWOT Infrastructure SWOT Vietnam Infrastructure Industry SWOT Strengths ■ The country''s strong... economy are successful, Vietnam will see a more stable growth trajectory over the long term © Business Monitor International Ltd Page Vietnam Infrastructure Report Q1 2016 Vietnam Infrastructure Industry