Diversification of investment capital for road construction in Vietnam

tal in road construction is an indispensable solution. In fact, the diversification of investment capital in road construction is not only the result of economic and social changes and developments in the market economy, but also the result of awareness on economic responsibility of state in its relationship with private sector. The economic role in the modern market economy have been developed and shaped in economic theories. So far, the diversification of investment in road construction has become very common in many countries including both developed or developing countries. Diversification of investment capital in road construction is considered in three aspects: ownership relations, organization, management and distribution relationships. Diversification of investment capital for road construction is a condition for the survival of diversification of income distribution, establishing the diversity of economic interests in the multi-sectoral economy of this economic field. 2.1.3. The need to diversify investment capital for road construction in Vietnam The diversification of investment capital for road construction in Vietnam is not out of the above-mentioned regularity trend, but also a necessary solution, rooted in the importance of road construction for the promotion of the country’s modernization and industrialization as well as the need to accelerate the development of a market economy that integrates deeply and widely into the world economy. Diversification of investment capital in road construction in Vietnam is not only necessary for people to share the burden of State budget investment in public products but also to expand the investment sector to exploit potential resource in society for development purposes. It is a solution to create opportunities, to seek for a management mechanism for investment infrastructure faster and more effective. 8 2.2. FORMS, PRINCIPLES AND CONDITIONS FOR IMPLEMENTATION THE DIVERSIFICATION OF INVESTMENT CAPITAL FOR ROAD CONSTRUCTION 2.2.1. Forms of diversification of investment capital for road construction - State-owned investment capital: In addition to the state budget, in the market economy, t state can generate investment capital in road construction through the operation of state-owned enterprises, the issuance of government bonds, local government bonds, credit loans, receiving official development assistance (ODA) and revenues from economic activities of the state. - Investment capital of the non-state economic sector: including capital from private economic entities, joint-stock companies and foreign investment (referred to as private sector capital). Private investment in this sector is often aimed at the road product which can exclude users for profit purposes. In the market economy, in addition to ownership capital, investors can also access capital through financial intermediaries such as banks and credit institutions to supplement, compensate for deficits to ensure the progress of construction to soon put the project into exploitation and operation. - Mixed state-private investment: This is a common form of universal application in every country of the world. It is called public-private partnership (PPP). PPP is an economic cooperation agreement between the state and private sector investors to implement public investment projects, including road construction. In this form, road ownership remains under the State. PPP should not be confused with privatization, as it differs in terms of ownership, responsibility, operating mode, risk and benefits. PPP is shown in project contracts such as: BOT, BTO, BOO, BT, BTL, BLT, O & M. In road construction, many countries apply BOT, BTO and BT contracts. - Forms of voluntary contributions of organizations and individuals at home and abroad: Due to motivation for the common interests of the community, the interests of enterprises and other motivations people and 9 organizations can voluntary contribute money and efforts to road construction to meet their transportation and travel needs in the area. 2.2.2. Principles for diversification of investment capital for road construction Due to the objective of diversification of investment in road construction to create public goods, which contributes to increase the efficiency of the economy and improve the quality of social life while promoting the efficiency of the capital, ensuring practical benefits for investors, the implementation, must adhere to the following principles: Firstly, the principle of complying with the country's socio-economic development strategy and plan. Secondly, the principle of publicity and transparency to ensure the strong and effective attraction of social capital in this investment field. Thirdly, the principle of efficiency. When a project is completed and put into operation, it must contribute to the cost savings and time of transportation and means of participating in traffic, increasing the socio-economic efficiency compared to previous time when the road is not yet constructed Fourthly, the principle of sustainability. Diversification of investment capital in road construction must achieve sustainable development in all three aspects: demand responsiveness, capacity building and institutional sustainability. 2.2.3. Conditions for diversifying investment capital for road construction In addition to the natural conditions that must be taken into account in road construction, there are conditions that directly relate to the environment and the economic benefits of the investors and users of the service. More specifically, these conditions are: - Consistency and effectiveness of economic institutions - Ability to choose form and investment partner - The level of risk allocation of the project - Level of funding for the project 10 2.3. EXPERIENCES OF SOME COUNTRIES ON THE IMPLEMENTATION OF DIVERSIFICATION INVESTMENT CAPITAL FOR ROAD CONSTRUCTION 2.3.1. Experience on development of state capital for road construction investment of Japan The Japanese government created a special account for large infrastructure projects, national bonds, local bonds, taxes, road tolls, highway bonds ... 2.3.2. Experience on diversification of investment capital for road construction in China In addition to capital, the State, the Chinese government also borrows foreign capital, mobilizes capital from enterprises and individuals through taxation stations, road maintenance fees ... to build highways. 2.3.3. Experience in implementing public-private partnerships in diversifying investment capital for road construction in Korea The Government adopted the Law on Private Investment in Infrastructure, carried out project contracts, established the Private Infrastructure Investment Management Center (PIMAC) and implemented diversification forms such as BTO, BOT, BTL ... 2.3.4. Lessons learned for Vietnam From the experience of Japan, China and Korea, it is possible to draw some lessons on the diversification of investment capital in road construction in Vietnam as the followings: Firstly, properly awareness of the need to diversification of investment capital for road construction Second, the development of state funding for road construction investment is essential. Thirdly, attracting investment capital from the private sector through the development of public-private partnerships in road construction. In order to develop the diversification of road construction, attention should be paid to the harmonious integration of economic interests among other actors during the implementation. 11 Chapter 3 THE STATUS OF DIVERSIFICATION OF INVESTMENT CAPITAL FOR ROAD CONSTRUCTION IN VIETNAM SINCE 2011 TILL TODAY 3.1. THE CONTEXT OF INVESTMENT CAPITAL FOR ROAD CONSTRUCTION IN VIETNAM BEFORE 2011 3.1.1. Overview of road transportation development in Vietnam prior to 2011 Promoting social capital of road construction has been a tradition in Vietnam since the war of resistance against French aggression with the spirit of "traffic ahead of pavement" initiated by President Ho Chi Minh. Thanks to many efforts, by the end of 2010, the country has built and put into operation of 188,744 km of roads of all kinds, contributing significantly to the growth and economic development. However, the road transport system is still backward. 3.1.2. Changes in the method of attracting investment capital for road construction before 2011 The reform of awareness and organization of investment capital for road construction in Vietnam has been developed from the affirmation of a multi- sector market economy and all economic sectors that follow the law have play an important role. The implementation of the diversification investment capital for road construction was initiated by the Government's Decree No. 77 / CP dated June 18, 1997 on the Regulation of investment in the form of Build- Operate-Transfer (BOT), applicable to all domestic investors. Following this, the Government issued a number of pilot investment policies and regulations in the form of PPP; Ministries and localities conducted pilot guidance. However, the amount of capital from social mobilization for road safety still small low and not as much as expected. 12 3.2. MECHANISMS, POLICIES AND FORMS OF IMPLEMENTATION THE DIVERSIFICATION OF INVESTMENT CAPITAL FOR ROAD CONSTRUCTION IN VIETNAM FROM 2011 TILL TODAY 3.2.1. Establishment of a legal framework for the diversification of investment capital for road construction The 11th Party Congress (2011) requires infrastructure for road transportation as one of the three breakthrough strategies that need to be invested. It is necessary to attract all economic sectors, including foreign investors, to invest in the development of infrastructure, ensuring the satisfactory benefits of investors, increasing commercial viability of the project and user contributions. To implement this policy, Government issued Decree No. 24/2011 / ND- CP amending some articles of Decree No.108/2009 / ND-CP on investment in the form of BOT, BTO and BT contracts. Investment in the field of road transportation, bridge, tunnel, ferry is encouraged. State has reviewed and amended the Bidding Law, the Public Investment Law; adopted Investment Degree in the form of the PPP. Relevant Ministries and sectors have issued guiding documents, in which the Ministry of Transport is responsible for guiding the application of modernization of capital investment for road construction. 3.2.2. Diversification of investment incentives and guarantees - Diversification of incentives for investment include investment incentives; Service fee support; Tax incentives for contractors participating in project implementation; Guarantee obligations of investors, project enterprises and other enterprises; Prioritizing mortgage of property, rights to do business; State investment capital is mainly allocated to support the construction of support works, compensation, ground clearance and resettlement. - State guarantees for investment in the form of diversification: ensuring the exercise of land use rights; Foreign currency balance; providing public services; property rights; and securing dispute resolution. 3.2.3. Organizational structure to diversify investment capital for road construction Organizational structure for diversification of investment capital for road construction is primary covered by the general provisions on PPP, including the 13 order of project implementation; Project selection criteria, project proposal content, project appraisal and approval, project announcement, and investment form conversion. - Investors - the establishment of project enterprises and the management and operation of project works must comply with conditions agreed in the project contract. - State - relevant ministries and agencies should be responsible for assisting the Government in managing the diversification of road construction investment. 3.3. EVALUATING THE STATUS OF DIVERSIFICATION INVESTMENT CAPITAL FOR ROAD CONSTRUCTION IN VIETNAM SINCE 2011 TILL TODAY 3.3.1. Achievements Firstly, the scale of investment capital for road construction is increasing In term of scale and number of projects: From 2011-2015, the total investment capital for diversification was put into the road construction of the country reached 378.581 billion, including 62 projects in the form of BOT and BT contracts. By March 2016, the country has completed and put into operation 40 road construction projects in the form of diversification investment with a total investment of 106,373 billion. Private investment capital growth: In the period 2011-2015, the country has implemented 62 BOT and BT investment projects to build national ways with the capital of 121.903 trillion dong, 33.4 times higher than the period from 2006 to 2010 with an average growth of 47.8% per year. State investment capital growth: The amount of investment capital for national way construction increased from VND 15,909 billion to VND 45,816 billion, or 2.9 times in five years, the average growth rate of state capital reached 30, 3 years. ODA capital for road construction from 2011 to 2015 is significant increased, accounting for more than a quarter of the total investment in road construction (Table 3.1). 14 Table 3.1: Total investment capital for construction national way in Vietnam from 2011-2015 Total investment capital Investment capital from domestic private sector ODA Investment Investment capital from state sector Year Amount of money (Trillion VND) Growth (%) Amount of money (Trillion VND) Percent (%)(*) Amount of money (Trillion VND Percent (%)(*) Amount of money (Trillion VND Percent (%)(*) 2011 33.151 217,6 8.787 26,5 8.455 25,5 15.909 48,0 2012 47.500 43,3 8.005 16,9 15.344 32,3 24.151 50,8 2013 66.337 39,7 21.761 32,8 16.630 25,1 27.946 42,1 2014 110.797 83,3 41.370 37,3 30.000 27,1 39.497 35,6 2015 120.796 9,0 41.980 34,8 103.429 27,3 45.818 37,9 Total 378.581 63,2 121.903 32,2 103.429 27,3 153.321 40,5 Outcomes of investment diversification of in provincial, district and commune roads: The diversification of investment capital in road construction has been implemented in some provincial, district and commune roads. Average capital for rural transport during the period from 2010 to 2015 of the country is 35,077.5 billion per year (more than 3 times higher than the average in the period from 2001 to 2010), of which the central budget provided 28%, local budges provided 43.3%, ODA capital for local level is 3.2% of which are non- refundable, other capital is 7.4% and social capital is 18.1%. Outcome of diversification of investment capital: In the period 2011-2015, there has been a faster increase in private sector investment compared to public sector investments in road construction. Secondly, the structure of the investment capital for road construction is more diversified than before - In term of investment capital structure: There has been a faster increase of private sector investment compared to other investment capital for road construction. If in 2011 state-owned capital accounted for 48.0%, private sector accounted for 26.5% and ODA capital accounted for 25.5%, by 2015 this proportion is 37.9%; 38.4% and 27.3% (Figure 3.1). Capital investment for road construction from the private sector has been relatively strong. 15 Figure 3.1: Total Capital structure of diversification in road construction in Vietnam from 2011 to 2015 - In term of structure by capital owners: State-owned capital is mainly mobilised from three sources, including state budget, government bonds and official development assistance (ODA), of which State budget capital increased nearly 2 times, capital of government bonds increased 1.65 times and ODA capital increased 1.95 times compared with the increase of state budget. Private sector capital includes capital owned by the investor and loans from commercial banks and credit institutions. Of the BOT projects being invested, 12.2% are owner capital and 87.8% are loans from commercial banks and credit institutions. Thirdly, there has been certain achievements in the diversification of investment capital in the system connection and road transportation supporting - In addition to road construction projects, there is also a diversification of investment capital in projects creating connectors and supporting system as as tunnel, ferry and ancillary works, bus station, rest stop, investment in management, exploitation and maintenance of road connecting system. The implementation of the first phase of the People's Bridge Construction Project launched by the Ministry of Transport on 9- 17/1/2015 has mobilized more than 360 billion dong of diversification capital from the credit institutions and enterprises and other organizations, accounting for 41% of total project costs. Fourthly, the quality of investment and utilization management, exploitation and maintenance of roads is more important - In the form of diversification of investment capital in road construction, the micro-management of investment activities of the business, projects are 16 carried out in accordance with market principles. The management of toll fee for return on capital and profit is also paid more attention. Thanks to that, the return of capital is faster, contributing to the limitation of risk, the businesses soon have capital to reinvest in other road transpiration systems. Fifthly, the diversification of investment capital in road construction has initially met the economic interests of both the people, businesses and the state - Capacity of road transportation to meet the needs of society is better than before: As of March 2016, the country has completed and put into operation 895.5 km of national way and highway that was constructed in the form of diversification investment capital, occupying 4.2% of the total national highway length. The length of local roads (province, district) in the form of investment diversification has been completed, put into use 4,891 km, accounting for 5.6% of the total length of use. By diversification of investment capital, the whole country has 151,639 km of communal roads, 175,324 km of village roads and 106,134 km of inner-field trunk roads have been put into use. - The economic benefits of investors and project businesses have been brought: Investors and project businesses have earned a profit of 11-12% per annum for equity. - The economic benefits of the people when using the projects of social mobilization increased: It is not only meet the demand for travel and transportation of goods and services increasing people, but also help the Vehicle owners significantly shorten travel times, reduce fuel costs and vehicle depreciation, and make traveling safer. - The economic benefits of the State have been better than before: it did not only contribute to reduce the burden of the state budget investment in road construction but also give the state a contribution of 22% income tax from the projected enterprises; contributing to reducing congestion and traffic accidents, reducing environmental pollution, ensuring national defence and security, and expanding international relations. - According to the World Economic Forum, the level of availability and quality of transport in Vietnam in 2014 stood at 74, an increase of 16 levels compared to 2012 and an increase of 29 levels compared to 2010. 17 3.3.2. Limitations, inadequacies and causes in the implementation of diversification investment capital for road construction in our country during the past time 3.3.2.1. Limitations and inadequacies - The scale of investment capital for road construction in the direction of diversification is not as expected. In the period from 2011to 2015, total new mobilized investment capital in transport infrastructure was 379,213 billion, reaching 78.3% of demand. the scale of capital mobilised from private sector for new diversification projects was accounted for 32.2% of the total investment in road infrastructure, whereas the capital need in this region was 67%. - The diversification of contract forms is still quite limited. They are mainly in the form of BOT project, which accounts for 93.1%, the newly signed form accounts for only 6.9% of total PPP investment; Other types of projects, especially BTO contracts have been successfully applied in Korea, Japan ... but not applied in Vietnam. There is also an absent of diversification form that include foreign direct investors in road construction. - Duration of contract and implementation of the project was too long. There were even projects being implemented prior to signing contract. - Costs of diversification projects have not been strictly controlled. Many BOT projects raised total investment by "over blocking" to increase the charge and extend the charging period. - There are many concerns in the fee for the use of the road transportation. There are still unreasonable series that created burden to the people, and business, causing social anxiety in the society. These concerns include the the road toll free, toll station, pressing on the toll rates and duration of fee. - The diversification was only mainly focuses on road construction, accounting for more than 99.1% of total investment capital, while investment in other transport infrastructure is lacking. 3.3.2.2. Causes of limitations and inadequacies Firstly, objective causes: (1) Because the low starting point of our economy, the income of the people and the State is low, and the impact of the economic downturn due to Global financial crisis 2008-2009; (2) Vietnam is transited to a market economy, the factors of production are still 18 underdeveloped, not synchronous. Most BOT and BT transport investors can only look for additional capital from Borrowing commercial banks. In that condition, people are lack of business approach, less active in investment. Secondly, subjective causes: This is the most important reason. - Lack of diversification planning for investment in road infrastructure. - The legal corridor for diversification is not strong enough. - The state management capacity for diversification of investment in road construction is weak. - There remains may issue of concern regarding capacity and business culture of investors and project owners Chapter 4 VIEWPOINTS AND SOLUTIONS TO PROMOTE THE DIVERSIFICATION OF INVESTMENT CAPITAL FOR ROAD CONSTRUCTION IN VIETNAM 4.1. VIETNAM ROAD TRANSPORT DEVELOPMENT OBJECTIVES AND VIEWPOINTS FOR DIVERSIFYING INVESTMENT CAPITAL FOR ROAD CONSTRUCTION TO 2020, VISION TILL 2025 4.1.1. Demand and objective of road transportation development in Vietnam 4.1.1.1. Demand for road transportation in Vietnam According to the forecast of demand of people and goods and services by the road transportation, by 2020, the size of road transportation of our country must reach 319,160 km and 367,030 km by 2030. Demand for the length of the high way by 2020 will be over 2,000 km and by 2025 will be 2,606 km, of which the North-South high way in the east will be 851 km to the East, North - South high way to the West will be 1,085 km, Northern region will need 540 Km, the central region will need 50km, the Southern region will need 80 km. By 2030 there will be 31 routes with a total length of 6,411 km. 4.1.1.2. Development Goals By 2025, the transport demands and transport services of the society with high quality, speedy, convenient and safe should be addressed; there should be 19 connection to other modes of transport, especially connection between long- distance passenger transportations with urban passenger transportation. To complete and basically modernize the network of road infrastructure, to continue building highways, urban roads. By 2020, it must reach 319,160 km, including 23,220 km of national highway, 31,800 km of provincial road, 64,280 km of district road, and 367,030 km by 2025. 4.1.2. Viewpoints to promote the diversification of investment capital for road construction in Vietnam by 2025 On the basis of the viewpoints and guidelines of the Party, the diversification of investment capital in road construction in our country to 2025 include th