A work in progress

Vietnam has emerged in the last decade to become one of Asia’s fastest growing economies and, according to the most optimistic reports, has the potential to become one of Southeast Asia’s tigers. But fears that the former communist state has not yet recovered from the legacy of an economy dominated by inefficient state-run enterprises still pervades the foreign investor view in many areas of infrastructure investment.

The country’s 2007 World Trade Organisation accession and the government’s incessant efforts to reform legislation incrementally have been key to liberalising business sectors and opening up infrastructure to private equity capital.

According to market observers, the strongest infrastructure sector in terms of attracting private investment in Southeast Asia so far has been power. The second is the transportation sector.

This may explain why Vietnam is pursuing development of these two sectors as a priority on its journey to liberalising its economy and modernising its country, with, notably, the signing in August this year, of a memorandum of understanding with America’s Lightbridge Corp to develop regulatory infrastructure for civil nuclear power.

In addition, last July, an Egis-Adetef consortium was mandated by the Asian Development Bank and the Agence Francaise de Developement, a French multilateral, to advise Vietnam’s government in its mission to develop a public-private partnership (PPP) framework.


Gilles Pequeux, Egis’ international business director, says the financing environment in Vietnam is characterised by a mix of traditional, non-PPP financing, which is still fundamental in an emerging country where everything is yet to be done, and PPPs, which are indicators of the emergence of the private sector.

“The latter gives a good dynamic as it generally creates technically-virtuous projects because, with concessionaries, their challenge is to start on time, to start making some money as soon as possible, and also to have financially optimised projects to stay within the cost-effectiveness parameters of the projects. It’s an extremely interesting financing model but it’s also a very difficult one to tackle for governments,” he says.

Pequeux sees Egis’ primary mission as protecting the government from any lobbying from influential groups, while showing the ropes to less established groups and enabling them to play more important roles within a competitive framework.

According to market sources, Egis’s challenge is two-fold: In Vietnam, investment decision-making originating at central government level does not exist in the traditional sense. With regards to the power and the transportation sectors, finding the final arbiter in the decision-making process is not always straightforward.

The second difficulty is working out the revenue stream for infrastructure such as toll roads.

A similar challenge applies to renewable power, as the government needs to find the right balance between affordability of renewable energy for the consumer and the right economic incentive for private investors.

In Vietnam, Electricity of Vietnam (EVN), the state-owned utility, buys all wind power at the regulated price of 7.8 cents per kilowatt-hour (kWh).

For some projects, located in areas where wind speeds aren’t strong, the price cannot ensure a profit.

Olivier Duguet, chief executive officer of The Blue Circle, an independent power producer (IPP) operating in the wind and solar power sectors in the Mekong Region, agrees there are difficulties within the renewables sector. According to him, the current price attached to wind power is low when looking at the absence of tax breaks and relatively lower wind speeds present in Vietnam compared with other similar jurisdictions.

“The government is aware that in Texas, US, for example, power purchase agreements negotiated for the private sector are setting prices as low as 3.0 to 3.5 cents per kWh. When looking at these prices and taking this reference as a point of comparison they [government officials] are comfortable with the position that current wind power feed-in tariffs (FITs) in Vietnam are generous enough. They forget that there are significant tax breaks in the US and that winds are twice as strong as in Vietnam.”

For him, the major problem in Vietnam for the power sector is the creditworthiness of the EVN, which has a monopoly over power generation and distribution. Banks are hesitant to lend to the EVN and to any potential suppliers to EVN, he explains.

The lack of understanding and knowledge at policy-making level, comes second.

Furthermore, his experience of looking for the right location and the right partners for wind farm projects in the country has been something resembling a quest for the Holy Grail.

The government did a survey of power resources in Binh Thuan and Ninh Thuan, two provinces north of Ho Chi Minh City, and established a master plan for land-zoning about two years ago.

“They thought they had a goldmine. A lot of developers got excited and asked for licenses to exploit these blocks. There was a lot of speculation, but very few developers actually started putting up wind masts,” explains Duguet.

The reason being, the rights given for wind farming on the blocks did not exclude other activities.

“On some of them there would be rice fields, shrimp farms, villages or farms. Most of these blocks were quite large, over 500 hectares, but sometimes accessibility would be next to none because you would have sand dunes or one-meter-deep water ponds for shrimp farms – so almost offshore projects!”

Logistics comes third as an impending obstacle to projects taking off. The dearth of deep-water and international-standard equipment near industrial parks and export-processing zones is a deterrent for export-import.

The absence of transportation infrastructure as well as difficulties in importing equipment needed to process large wind turbines act as deterrents for the installation of the latest generation technologies. For example, he points to the lack of availability of cranes to put turbines on top of the higher masts.


Despite the challenges, in September, The Blue Circle, backed by fund manager Armstrong Asset Management, installed its first 100-metre wind mast in Ninh Thuang. Armstrong is one of the few investors to compete with the domestic players in this highly competitive market.

Michael McNeill, a partner at Armstrong, sees many prospects for investors in renewables in the Southeast Asia region provided they take a measured, step-by-step approach.

“Subject to the introduction of economic tariffs and strengthening of the legal and regulatory framework, there are opportunities for investors who can aggregate smaller projects to scale,” he says. “The right approach in Southeast Asia is to start small and build a relationship with developers, and then possibly deploy more capital.”

Some observers anonymously confide that for large infrastructure projects there is generally a surprising amount of competition and, as the market matures, one would expect to see even more local capital being deployed.

For some investors, the reason for competitiveness is largely due to the country having a number of domestic players which have capital to deploy and for whom reaching out to foreign capital often is not a necessity.

Johan Bastin, chief executive officer of CapAsia (Capital Advisors Partners Asia), believes the country’s framework at a macroeconomic, fiscal and regulatory level is not fit for fund investors yet.

“Strategic investors are entering the Vietnamese market, particularly in the power sector, but they have a longer time horizon, a higher risk appetite and often lower return expectations. This makes it difficult for fund investors to compete there for the same deals,” he says.

Meanwhile, forecasts for transportation in Vietnam, according to most observers, are very good. Airports and ports are viewed as being as critical as internal roads and rail infrastructure for Vietnam’s development. “If governments solve that need and do it right, then investors will definitely come in,” maintains Tho.

Marc Stordiau, chief executive officer of Rentaport, a marine infrastructure and industrial zone developer, is upbeat about port concessions in Vietnam. “From our experience, port development can only be profitable and attractive for a private investor if it is a combination of port infrastructure (jetties and quay walls) with at least some logistic and industrial land behind. It is very similar to the economy of port authorities in Europe whereby at least 60 percent of the profit is derived from the land income.

In a nutshell, it is the following mutual enrichment: the quay wall gives value to the land, and the industry on the land creates a basic traffic for the quay wall.”

He adds: “The length of the country is a trump card for maritime transport. We do not see major economic risks which could deter investors in Vietnam. On the other hand, in all our projects we are covering political risk through the national export insurance credit systems of European countries such as Delcredere or Coface.”


Greg Karpinski, co-head of energy, resources & infrastructure at Standard Chartered Bank Principal Finance, tells a similar story from the angle of a private equity investor. According to him, private equity’s role in Vietnam is still very limited.

“Vietnam is fast developing, and while the government continues to work on strengthening its regulatory framework, we don’t expect private sector investors to be rushing to the market,” he reflects.

“We have a medium-term focus of about three to five years. Typical private equity firms have five – to eight-year hold periods. The construction period is typically four years – and that doesn’t take into account the development cycle. Private equity capital needs to move, be recycled and moved on to the next investment project. We’re just not suitable for projects with extremely long hold periods, and which are subject to regulatory and construction issues.”

“Ports are a nice asset class, but frankly in this part of the world – where you have the likes of APM Terminals, Hutchison Ports, DP World, Singapore Ports – developers are content with an 11 percent rate of return. To them, owning the ports is often tied to shipping lines. They invest in ports, and handle the containers and everything else, and can afford to take lower rates on the ports because they can get bigger rates on their shipping lines.

So for us, as private equity investors, investing in a port – which means going through land acquisition and other regulatory approval issues, and trying to bid on projects where your competitor has a cost of capital which is half yours – just doesn’t make economic sense.”

He concludes: “There are enormous opportunities in Southeast Asia, especially in niche areas like small and medium scale-LNG (liquefied natural gas) projects and distributive power solutions. These are the kind of areas where you can make good quality investments, but for the large scale PPP-type projects, private equity is not going to be a good match.”