Q3 2011 www.businessmonitor.com INFRASTRUCTURE REPORT ISSN 1750-5593 Published by Business Monitor International Ltd. VIETNAM INCLUDES BMI'S FORECASTS Business Monitor International Mermaid House, 2 Puddle Dock, London, EC4V 3DS, UK Tel: +44 (0) 20 7248 0468 Fax: +44 (0) 20 7248 0467 Email: subs@businessmonitor.com Web: http://www.businessmonitor.com © 2011 Business Monitor International. All rights reserved. All information contained in this publication is copyrighted in the name of Business Monitor International, 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. 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VIETNAM INFRASTRUCTURE REPORT Q3 2011 INCLUDING 10-YEAR INDUSTRY FORECASTS BY BMI Part of BMI's Industry Report & Forecasts Series Published by: Business Monitor International Copy Deadline: May 2011 Vietnam Infrastructure Report Q3 2011 © Business Monitor International Ltd Page 2 Vietnam Infrastructure Report Q3 2011 © Business Monitor International Ltd Page 3 CONTENTS Executive Summary . 5 SWOT Analysis . 7 Vietnam Infrastructure SWOT . 7 Market Overview . 8 Vietnam . 8 Building Materials 11 Global Overview . 11 Asia Overview . 17 Industry Forecast Scenario . 21 Table: Vietnam Construction And Infrastructure Industry Data 21 Table: Vietnam Construction And Infrastructure Industry Data 23 Construction And Infrastructure Forecast Scenario . 25 Transport Infrastructure 27 Table: Vietnam Transport Infrastructure Industry Data 27 Table: Vietnam Transport Infrastructure Industry Data 29 Transport Infrastructure Forecast Scenario . 32 Transport Infrastructure Overview . 33 Table: Ports Are The Weakest Link: Quality Of Infrastructure Global Ranking Out Of 134 Countries . 35 Table: Vietnam Railway Corporation’s Main Targets . 36 Key Projects – Transport . 37 Table: Major Infrastructure Projects – Transport . 37 Energy And Utilities Infrastructure . 44 Table: Vietnam Energy and Utilities Infrastructure Industry Data 44 Table: Vietnam Energy and Utilities Infrastructure Industry Data 46 Energy And Utilities Infrastructure Forecast Scenario . 48 Energy And Utilities Infrastructure Overview . 49 Table: The Three Levels Of Liberalising Vietnam’s Electricity Market . 51 Key Projects – Energy And Utilities 52 Table: Major Infrastructure Projects – Energy & Utilities 52 Residential/Non- Residential Construction and Social Infrastructure . 57 Table: Vietnam Residential and Non-residential Building Industry Data 57 Table: Vietnam Residential and Non-residential Building Industry Data 57 Residential/Non-Residential Construction Forecast Scenario 58 Residential/Non-Residential Construction And Social Infrastructure Overview . 59 Key Projects Table – Residential/Non- Residential Construction And Social Infrastructure . 62 Table: Major Infrastructure Projects – Residential/Non- Residential Construction and Social Infrastructure . 62 Business Environment 63 Vietnam Business Environment . 63 Rewards . 63 Risks 63 Regional Overview 64 Asia Pacific Infrastructure Business Environment Ratings 64 Table: Regional Infrastructure Business Environment Ratings 65 Vietnam Infrastructure Report Q3 2011 © Business Monitor International Ltd Page 4 Company Monitor . 70 Cavico Corporation . 70 Electricity of Vietnam Group (EVN) 73 Global Overview . 76 Methodology . 81 Industry Forecasts 81 Construction Industry 82 Data Methodology . 82 New Infrastructure Data Sub-sectors . 82 Construction 83 Capital Investment . 84 Construction Sector Employment . 85 Infrastructure Business Environment Rating 86 Table: Infrastructure Business Environment Indicators 87 Vietnam Infrastructure Report Q3 2011 © Business Monitor International Ltd Page 5 Executive Summary BMI View: The views presented by BMI last quarter have fully played out in Vietnam, and we expect that the attempts of both the Vietnamese government and the State Bank of Vietnam (SBV) to cool the economy will lead to a further moderation on construction activity. In spite of this, Vietnam’s construction sector still holds significant value, as the country is in dire need of both new transport and energy infrastructure. We anticipate that growth for the sector will remain positive over the forecast period (2011-2015), and industry value will reach US$13.9bn by 2015 Major developments over the past quarter include: A hike in electricity price approved in March 2011 by the Vietnamese government. Artificially capped prices have long made it unprofitable for foreign infrastructure companies to invest in the Vietnamese power sector because most of the equipment for power stations needs to be purchased from other countries at global market prices. The price increase represents therefore a noteworthy improvement. Japan's Overseas Development Assistance (ODA) coordinator Japan International Cooperation Agency (JICA) is set to team up with Japanese companies to construct the JPY140bn (US$1.7bn) Lach Hyuen port project in northern Vietnam. BMI believes that this project highlights the attractiveness of this sector in the country as well as the importance of foreign investment in Vietnam's port infrastructure. Plans to improve Vietnam's urban transport system have moved forward significantly over the past six months, with funding secured and construction companies selected for many of the country's metro railway projects. For instance, in March 2011, the Asian Development Bank (ADB) agreed to provide US$293mn to support the construction of Hanoi's US$1bn metro railway line 3. A new recent draft housing development plan, which includes spending for US$19.7bn between 2015 and 2020, with an emphasis on low-income housing provision. This is an encouraging sign, as it shows that the government is taking the necessary steps to deal with the country's expanding housing deficit. We also stress that Vietnam’s business environment continues to be an issue for the country, as Vietnam’s score has slipped to 53.72 from the already low 54.9 of last quarter. Although the country’s infrastructure market continue to score quite well, downside risks from market volatility and country risk have further dragged down the overall score. Corruption still remains a problem for Vietnam and is likely to continue to impede infrastructure development until government reforms can change the landscape. Yet, with increased foreign investment on the back of attractive growth rates there have been signs that the country Vietnam Infrastructure Report Q3 2011 © Business Monitor International Ltd Page 6 is moving in the right direction in invoking structures to improve the business environment such as PPP regimes. Vietnam Infrastructure Report Q3 2011 © Business Monitor International Ltd Page 7 SWOT Analysis Vietnam Infrastructure SWOT Strengths Strong project pipeline will still sustain growth in the sector and add capabilities for further development, particularly as transport structure improves. Rapid growth has attracted investment from many of the world’s largest infrastructure companies. The current poor state of infrastructure in the country provides easy wins for foreign investors and construction companies. Hike in electricity prices should stimulate investments in the energy sector. 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. 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. The country presents a relatively risky environment for major infrastructure projects, especially with regard to project finance operations. Power outages are occurring daily in Vietnam, highlighting the severe electricity problems in the country. Opportunities Demand for urban infrastructure projects in transport and sanitation will rise in tandem with urbanisation in coming years. Severe droughts is driving demand in other electricity generation sources besides hydropower; i.e. gas-fired and wind power plants. If the government’s attempts to cool the overheating economy are successful, Vietnam will see a more stable growth trajectory for over the longer term. Threats The Vietnamese government's shift in focus from driving economic growth towards fighting inflation and addressing macroeconomic imbalances is expected to have a cooling effect on the economy Public spending cuts, tighter credit conditions and aggressive monetary tightening are likely to keep economic activity depressed over the coming months. Lack of energy infrastructure holds downside risk to nearly all projects and presents significant bottleneck to development. Uncertainty and downside risks in business environment could have negative impact should any significant events occur to highlight Vietnam’s structural difficulties. The EU does not predict Vietnam will become a true market economy until 2018. Vietnam Infrastructure Report Q3 2011 © Business Monitor International Ltd Page 8 Market Overview Vietnam Vietnam's emergence as one of the most promising economies in Asia, if not in the world, stems largely from the Communist Party of Vietnam's (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. For instance, foreign direct investment (FDI) reached US$6.7bn in 2007, of which a quarter went towards fixed capital formation, according to data from UNCTAD. However, Vietnam’s poor infrastructure has long been putting a damper on the country’s growth as its developing industry is highly dependent on sound infrastructure (especially power and road) to operate. In August 2008, even Vietnam’s planning and investment deputy minister, Cao Viet Sinh admitted that the weaknesses of the country’s infrastructure are slowing down the absorption rate of FDI. In addition, the urbanisation process and the growing population figures, also indicate that the pressure on urban infrastructure will increase in the coming years. According to BMI forecasts, between 2011 and 2015, Vietnam’s population will increase by 3,98%. 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 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. Vietnam has indeed been making noteworthy efforts to attract investments, and the government has made infrastructure a priority investment area. The country is undeniably in need of significant infrastructure investments, and PricewaterhouseCoopers (PWC)’s executive director for South East Asian infrastructure (quoted in the Saigon Times) affirmed that 'Vietnam will need to increase the levels of infrastructure investment at twice the growth rate of GDP to increase its overall national competitiveness.' In the past few years, the government has demonstrated a strong commitment to the sector, making infrastructure a priority investment area and concentrating noteworthy efforts on attracting adequate funding. Among various demand-side policies aiming to boost macroeconomic growth, the government itself adopted various infrastructure spending initiatives. Furthermore, over the past year Vietnam has Vietnam Infrastructure Report Q3 2011 © Business Monitor International Ltd Page 9 been pushing for faster implementation and development of public-private partnerships (PPPs) for upcoming infrastructure projects. The move was announced at a conference held in Ho Chi Minh City in July 2010, by Vietnam's deputy minister of planning and investment, Dang Huy Dong. BMI believes that this is a step in the right direction towards addressing the structural weaknesses of the infrastructure sector, though wholly predicated upon the approval of the draft regulatory PPP framework to govern the sector. Foreign investments have also been playing a growing role. BMI notes that while poor infrastructure still inhibits foreign investment in the country, we expect this effect to diminish over the next few years. The country's infrastructure deficit combined with an improving business environment provides growing opportunities for foreign infrastructure and construction companies in the country. For instance, in March 2010, Japan's government announced plans to increase its participation in co-financing infrastructure projects in Vietnam, as part of a wider venture to spearhead the involvement of Japanese companies in the development of infrastructure in the region. This is part of a wider trend for foreign involvement in the sector. Improved contract agreements between the Export-Import Bank of the United States (US Ex- Im Bank) and the Vietnam Development Bank (VDB) are also helping to change the outlook for the infrastructure sector. A stream of road building projects is set to boost the infrastructure market. Foreign investment pledges for the port sector, also increased over the third quarter of 2009. Taiwan's 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. 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 116 in the ‘2010 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. From this perspective, the absence of an enabling institutional and regulatory/legal environment, which hinders the proliferation of PPPs, was a core theme among the participant of a conference organised by the Asian Development Bank (ADB) in February 2009, called Strengthening Public Private Partnerships For Infrastructure Investments In Vietnam., Law firm Duane Morris identified four main obstacles for the limited participation of the private sector in infrastructure in Vietnam. These are: [...]... GDP 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 3.8 f = BMI forecasts Sources: Local news sources, industry sources, BMI Research (Major Projects Database)/ILO © Business Monitor International Ltd Page 24 Viet ietnam Infrastructure Report Q3 2011 Construction And Infrastruc ructure Forecast Scenario Fiscal And Monetary Tighte ening To Inhibit Growth The views expressed by BMI last quarter I have played out in Vietnam,... Infrastructure Report Q3 2011 Asia Overview Building Materials: Asia Will Be Key Global Growth Driver In 2011 BMI View: Robust economic growth across key Asian markets will drive demand for building materials to new heights in 2011 and 2012, significantly outperforming the still muted outlook in developed countries BMI notes that while many countries are expanding their production capacities to cope with rising... Total Infrastructure 3.5 6.4 8.9 12.0 12.4 13.3 14.3 15.3 16.4 Ports Harbours and Waterways Infrastructure Industry As % of Total Construction 1.5 2.9 4.1 5.5 5.6 5.9 6.3 6.7 7.1 e/f = BMI estimate/forecast, Source: BMI Research Table: Vietnam Transport Infrastructure Industry Data 2012f 2013f 2014f 2015f 2016f 2017f 2018f 2019f 2020f Transport Infrastructure Industry Value As % Of Total Infrastructure... Total Infrastructure 13.3 14.3 15.3 16.4 17.5 18.6 19.6 20.5 21.4 Ports Harbours and Waterways Infrastructure Industry As % of Total Construction 5.9 6.3 6.7 7.1 7.5 7.9 8.3 8.6 9.0 e/f = BMI estimate/forecast, Source: BMI Research © Business Monitor International Ltd Page 31 Viet ietnam Infrastructure Report Q3 2011 Transport Infrastructure Fo Forecast Scenario The transport sector continues to form... selected he on for many of the country's metr railway projects BMI believes these urban railway p etro projects will be crucial to Vietnam's economic and social development as the country attempts to deal with rapid ic eal urbanisation while successfull managing a booming economy According to our new historic data ully ew (which reflect BMI s Project Database) railways will represent close to 31.4%... potential of the r ely road and bridges sector is still elevated As illus lustrated by BMI s Key Project Database, in Vietnam ther are currently road here and bridges projects for over US$55.92bn in the pipeline, and the sector will be equal to about 32.8% of rU ual total transport industry in 2011 011 Finally, BMI anticipated incre creasing investment into Vietnam's port infrastructure, a sector crucial... region's building materials sector © Business Monitor International Ltd Page 14 Vietnam Infrastructure Report Q3 2011 Treading Higher Relative Performance Of Iron Ore & LME Steel Billet Prices* Source: BMI / *Rebased (January 2009 = 100) Developed economies to lag While the key challenges are firmly on the supply-side in the developing markets, the issues facing the building materials sector in developed... w equal to was 6.8% in 2010, surpassing the V e Vietnamese government's target of 6.7% H However, a noteworthy increase in inflatio has tion forced the government to inter tervene f=forecast, Source: BMI, Vietnam General Sta Statistics Office Latest economic figures publis blished by the General Statistics Office (GSO suggest that a shift in the Vietnamese government's fo SO) 's focus from driving... macroeconomic imbalanc is beginning to nces have a cooling effect on the economy Vietnam's real GDP growth came in at a relativ subdued 5.4% ec tively y-o-y in Q111, compared to 7.2% in Q410 In light of this, BMI expect economic acti 7 ctivity to moderate over the coming months as the full impact of fiscal and monetary tightening continues to feed through the es economy The government’s attempts to cool the... a ers, ted dampening effect on construct uction activity, especially since in Vietnam the governmen still plays a ent paramount role in infrastructur projects financing In light of these developments, BMI reconfirm its ture previous views, and further ris the downside risk priced in last quarter, with construc rise ruction industry’s real growth now falling to 4.5% in 2011 (compared to 8.5% in our previous . INFRASTRUCTURE REPORT Q3 2011 INCLUDING 10-YEAR INDUSTRY FORECASTS BY BMI Part of BMI& apos;s Industry Report & Forecasts Series Published by: Business. Business Monitor International Ltd Page 5 Executive Summary BMI View: The views presented by BMI last quarter have fully played out in Vietnam, and we expect