Regulatory reforms hoped to push up road sector

Some expressway projects are likely to face issues over land acquisition, which may delay project timelines or result in cost inflation, Fitch Solutions says. (Illustrative image)

Fitch Solutions, a macro research unit of Fitch Group, noted in a newly released outlook for Vietnam’s road sector that the country’s road network will continue to expand over the next decade. As for 2019, the road and bridge sector is projected to grow by 7.2 per cent in real terms whilst it could reach an annual average growth of 6.7 per cent during the 2020 - 28 period, driven by a large quantity of road projects in the pipeline.

The research unit quoted the Key Projects Database as saying there are currently a total of 137 road projects under the planning or construction phase, accounting for 60 per cent of all planned projects.

It takes a positive stance that most of these projects will be deployed progressively over the next few years as a surge in demand for road infrastructure is coupled with the nation’s sustained and robust economic growth which is forecast to average 6.5 per cent annually until 2028.

Increasing business activities throughout the country helped freights transported via roads to increase rapidly from 36,179mn ton-km in 2010 to 63,803mn ton-km in 2017. Similar observations have also been made with regard to the number of passengers on road.

Fitch Solutions believes that these positive trends will continue, thus escalating the need for continued investment in road infrastructure. Although the country has sketched out plans to expand the mainline rail network to cater to increased inter-city traffic, rail projects are often more costly and complex to implement, and also suffer from longer timelines. The proposed Hanoi-Ho Chi Minh City high speed railway project for example, if implemented, has a targeted completion date of 2040.

These factors point to a greater demand in road transportation in the short term, which underpins the view that the country’s road network will continue to expand over the next decade.

The growth of the road sector will mainly be backed by the construction of expressways. The Government plans to expand the current network by more than five times to 7,000 km by 2030, an upward revision from the 6,400 km target announced in 2016.

The scheme will cover the construction of new expressways linking the northern and southern regions, several ring routes that will circle existing urban centers to enhance connectivity with suburban areas, and the expansion of existing expressways by extending routes and increasing the number of lanes.

Some expressway projects are likely to face issues over land acquisition, which may delay project timelines or result in cost inflation. Meanwhile, as most expressway projects are likely procured via public private partnership (PPP), the pace of expanding the nation’s expressway network will depend on the level of private interest. It will pick up if the PPP framework along with legal and financial institutions is improved.

The inclusion of sovereign guarantees and the implementation of a robust legal framework will likely increase interest in PPPs and provide tailwinds to the road sector’s growth. Current PPP regulations do not have minimum return guarantees by the Government, which means that the burden of project-related financial risk leans towards private investors.

Given this, low investor interest in PPP projects often leads to longer implementation times, and in some cases, the cancellation of PPPs. Such scenario is exemplified by the Dau Giay - Phan Thiet expressway project in which many investors expressed big interest before withdrawing at a later date due to financial uncertainties.

Legal barriers have also deterred potential investors from the road sector, Fitch Solutions said, claiming the lack of a strong legal framework as a main cause of concerns over site clearance, price fixing, and concessions.

This is illustrated by the legal environment sub-component of the Fitch Solutions’s Infrastructure Risk-Reward Index, which sees Vietnam rank poorly amongst regional peers with a score of 31.1, much lower the regional average (51.6) and only above frontier markets such as Pakistan, Myanmar, and Bangladesh.

Out of 87 road projects under the pre-construction phase, 61 are earmarked as PPPs. The progress of these projects will pick up once the legal environment in the country improves, and proper reforms to current PPP regulations are made to include guarantees on return.

The more balanced risk profile of these projects will make them a more attractive investment proposition for private investors, the research unit assumes.