Q2 2014 Vietnam

Q2 2014 www.businessmonitor.com

VIETNAM INFRASTRUCTURE REPORT

INCLUDES 10-YEAR FORECASTS TO 2023

ISSN 1750-5593 Published by:Business Monitor International Vietnam Infrastructure Report Q2 2014

INCLUDES 10-YEAR FORECASTS TO 2023

Part of BMI’s Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: January 2014

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Vietnam Infrastructure Report Q2 2014

CONTENTS

BMI Industry View ...... 7

SWOT ...... 9 Infrastructure SWOT ...... 9 Industry Forecast ...... 11 Construction And Infrastructure Forecast Scenario ...... 11 Table: Vietnam Construction And Infrastructure Industry Data, 2012-2017 ...... 11 Table: Vietnam Construction And Infrastructure Long-Term Forecasts, 2018-2023 ...... 13 Table: Factbox - Key Elements Of Vietnam's Revised Land Law ...... 20 Transport Infrastructure - Outlook And Overview ...... 23 Table: Vietnam Transport Infrastructure Industry Data, 2012-2017 ...... 23 Table: Vietnam Transport Infrastructure Long-Term Forecasts, 2018-2023 ...... 25 Table: Competitiveness Of Vietnam's Infrastructure ...... 28 Table: Vietnam Railway Corporation's Main Targets ...... 33 Major Projects Table - Transport ...... 42 Table: Major Projects - Transport ...... 42 Energy And Utilities Infrastructure - Outlook And Overview ...... 58 Table: Vietnam Energy & Utilities Infrastructure Industry Data, 2012-2017 ...... 58 Table: Vietnam Energy & Utilities Infrastructure Industry Long-Term Forecasts, 2018-2023 ...... 59 Major Projects Table - Energy & Utilities ...... 75 Table: Major Projects - Energy & Utilities ...... 75 Residential/Non-Residential Building - Outlook And Overview ...... 93 Table: Vietnam Residential And Non-residential Building Industry Forecasts, 2012-2017 ...... 93 Table: Vietnam Residential And Non-residential Building Long-Term Forecasts, 2018-2023 ...... 94 Major Projects - Residential/Non-Residential Construction And Social Infrastructure ...... 101 Table: Major Projects - Residential/Non-Residential Construction And Social Infrastructure ...... 101 Industry Risk Reward Ratings ...... 105 Vietnam - Infrastructure Risk/Reward Ratings ...... 105 Vietnam Risk/Reward Ratings ...... 105 Rewards ...... 105 Risks ...... 106 Asia - Infrastructure Risk/Reward Ratings ...... 107 Table: Asia Pacific Infrastructure Risk Reward Ratings ...... 115 Market Overview ...... 116 Competitive Landscape ...... 116 Table: Vietnam EQS Data ...... 116 Company Profile ...... 117 Cavico Corporation ...... 117 Electricity Vietnam Group ...... 120

Global Infrastructure Overview ...... 125 Africa In 2014: PPPs Cement Global Appeal ...... 125 Asia-Pacific In 2014: Shaping Up To Be A Benign Year ...... 130 Latin America In 2014: A Prosperous Year For Infrastructure Development ...... 137 MENA In 2014: Reaping Rewards Despite Risks ...... 140 North America And Europe In 2014: Turning A Corner ...... 145 Methodology ...... 152 Industry Forecast Methodology ...... 152 Sector-Specific Methodology ...... 153 Risk/Reward Rating Methodology ...... 157 Sector-Specific Methodology ...... 158 Table: Infrastructure Risk/Reward Rating Indicators ...... 158 Table: Weighting Of Indicators ...... 159

Vietnam Infrastructure Report Q2 2014

BMI Industry View

BMI View: Vietnam's construction sector is in an upward cyclical phase, as evidenced by a real growth rate of 5.3% y-o-y in the first nine months of 2013. We believe this could continue in 2014 and are maintaining our growth forecasts of 5.8% for 2014. Easy monetary conditions and greater investment interest from foreign sources in Vietnam's construction sector is likely to support growth for the year. Furthermore, the government continues its efforts to restructure state-owned enterprises and improve its business environment, both of which would level the playing field, free up public funds and improve profitability, and help to attract additional investment for infrastructure development over the coming years.

The major developments in Vietnam's infrastructure sector are:

■ In November 2013, the Vietnamese government approved an amendment in its Land Law (see 'Revised Land Law A Major Step In Tackling Corruption', December 9 2013). The revised legislation, which will come into effect on July 1 2014, is aimed at limiting land disputes by prohibiting the government from appropriating land for socio-economic development unless such projects have been approved by the prime minister and the Vietnamese parliament. We believe this revision is a major step in strengthening the regulatory framework and will increase transparency for projects that are implemented under the direction of the provincial government. It would also help reduce the risk of project delays which have been caused by long and costly disputes over compensation.

■ In October 2013, the Railway Gazette reported that Line 5 of the Ho Chi Minh metro system will be financed by three international organisations instead of two as previously announced by state officials. The Asian Development Bank, the European Investment Bank and the Spanish government will provide US$500mn, EUR150mn (US$206mn) and EUR200mn (US$275mn) respectively, to construct in 2015 the first 8.9km of the line that is slated to run between Sai Gon Bridge and the Bay Hien Intersection. In October 2013, the Vietnamese government granted approval to Hanoi General Export-Import Joint Stock Company (Geleximco) to withdraw from the build-transfer model-based Hoa Lac-Hoa Binh expressway linking Hanoi with localities in the northwest. According to the transport ministry, the company invested US$17mn in the project, with US$2mn in the construction and US$12.4mn in land acquisition, over three years, but continues to face escalating investment costs which has made it difficult for the company to reach the project deadline. Instead, the government will now look to alter the project's investment model to public-private partnership to make it more feasible and obtain official development assistance to help finance it.

■ In November 2013, event organiser FDI Vivina announced that Han & Han and Pedco, via a Japanese- Korean joint venture, had plans to construct a US$200mn waste-to-power plant in Hanoi, Vietnam. The plant, with a daily capacity of 75 tonnes, would generate electricity from 7MW to 9MW and produce high-value by-products, including raw materials for metal and glass. The plant would treat 100% of the waste, while controlling and cleaning green house gases and fumes.

■ In November 2013, Vietnam's Phuong Nam Technology Science Institute and US-based Executive Decision Export Services (EDES) scheduled to sign a memorandum of understanding (MoU) for the construction of the US$3.6bn railway project in Vietnam. The project, which will be implemented via a build, operate and transfer format, is designed to connect Hoi Chi Minh City to Can Tho City using the technical standards of a dual high-speed railway grade 1 with international gauge of 1,435mmm. Upon

signing the MoU, a joint venture firm will be formed by both parties, through which the feasibility studies and project will be executed.

■ In December 2013, the state utility and monopoly distributor Electricity of Vietnam (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 (US$1.3bn), with 85% of the investment coming from the Japan International Cooperation Agency and the remaining 15% of the cost paid by EVN. The construction of the 600MW plant is expected to commence in Q114, with the first plant scheduled to come online in Q417 and the second in Q218. The two-turbine plant is projected to generate about 3.3bn kWh every year.

■ In December 2013, a US$1.5bn contract to construct the 1,200MW coal fired thermal plant - Vinh Tan Thermal Power Plant No. 4 - in Binh Thuan was awarded to Doosan Corporation, Mitsubishi Corporation and two Vietnamese firms, Power Engineering Consulting Joint Stock Company 2 and Pacific Corporation. The plant will consist of two 600MW units, and is expected to be completed by 2017 and 2018.

SWOT

Infrastructure SWOT

Vietnam Infrastructure SWOT Analysis

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 easy wins for foreign investors and construction companies.

■ A hike in electricity prices should stimulate investment in the energy sector.

Weaknesses ■ State-owned companies dominate the infrastructure market. This is especially the case in the utilities sector, where Electricity of Vietnam (EVN)'s dominant position has deterred investors.

■ Vietnam relies heavily on foreign imports and it is estimated that the country requires 2mn tonnes of steel billets to be imported a year.

■ The country currently presents a relatively 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 2022 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.

Vietnam Infrastructure SWOT Analysis - Continued

■ Greater opportunities for public-private partnerships (PPP) - the country is offering the Dau Giay-Phan Thiet expressway project, the first road project and the largest infrastructure project to be developed under a PPP format.

Threats ■ A possible shift in the Vietnamese government's focus - from driving economic growth towards fighting inflation and addressing macroeconomic imbalances - could have a cooling effect on the sector.

■ Without foreign capital, public spending cuts and tighter credit conditions are likely to keep economic activity depressed.

■ Lack of energy infrastructure holds downside risk to nearly all projects and presents a significant bottleneck to development.

■ Should any significant events occur to highlight Vietnam's structural difficulties, uncertainty and downside risks in the business environment could have a negative impact.

■ The EU predicts Vietnam will not become a true market economy until 2018.

Industry Forecast Construction And Infrastructure Forecast Scenario

Table: Vietnam Construction And Infrastructure Industry Data, 2012-2017

2012 2013e 2014f 2015f 2016f 2017f

Construction industry value, 179,301.0 191,631.0 213,842.3 238,725.9 265,584.7 295,006.6 VNDbn Construction industry value, US 8.6 9.2 10.4 11.7 13.1 14.8 $bn Construction industry, real 2.1 5.8 5.8 6.4 6.3 6.2 growth, % y-o-y Construction industry, % of 5.5 5.3 5.2 5.2 5.2 5.2 GDP

Total capital investment, VNDbn 785,337.3 871,493.6 1,013,908.7 1,195,195.5 1,393,000.4 1,589,848.1 Total capital investment, US$bn 37.6 41.7 49.3 58.8 68.9 79.5 Total capital investment, % of 24.2 23.9 24.8 26.1 27.2 27.8 GDP Capital investment per capita, US$ 414.4 454.8 532.7 629.5 731.6 837.1 Real capital investment growth, 1.9 4.1 10.0 12.0 11.0 8.8 % y-o-y

Construction industry 3,183.5 3,423.9 3,678.0 3,972.9 4,279.9 4,602.4 employment, '000 Construction industry 2.5 7.5 7.4 8.0 7.7 7.5 employment, % y- o-y Total workforce, '000 64,081.4 64,820.1 65,485.2 66,093.7 66,647.3 67,144.3 Construction industry employees as % of 5.0 5.3 5.6 6.0 6.4 6.9 total labour force

Infrastructure 32.7 33.8 33.5 33.1 32.8 32.4 Industry Value As

Vietnam Construction And Infrastructure Industry Data, 2012-2017 - Continued

2012 2013e 2014f 2015f 2016f 2017f % of Total Construction Infrastructure Industry Value, 58,653.2 64,809.3 71,579.7 79,046.8 87,055.0 95,588.8 VNDbn Infrastructure Industry Value, US 2.8 3.1 3.5 3.9 4.3 4.8 $bn Infrastructure Industry Value Real 0.9 3.9 4.7 5.2 5.1 4.9 Growth (%) Infrastructure Industry Value as 1.8 1.8 1.8 1.7 1.7 1.7 % of GDP

Residential and Non-residential Building Industry 67.3 66.2 66.5 66.9 67.2 67.6 Value As % of Total Construction Residential and Non-residential Building Industry 120,647.8 126,821.7 142,262.6 159,679.1 178,529.8 199,417.8 Value, VNDbn Residential and Non-residential Building Industry 5.8 6.1 6.9 7.9 8.8 10.0 Value, US$bn Residential and Non-residential Building Industry 1.0 -1.5 6.4 7.0 6.8 6.8 Value Real Growth (%) Residential and Non-residential Building Industry 3.7 3.5 3.5 3.5 3.5 3.5 Value as % of GDP

Cement production (including 47,900,158.7 49,755,167.9 54,456,929.5 60,661,903.9 67,032,460.9 72,690,571.7 imported clinker), tonnes Cement production (including imported 1.8 3.9 9.4 11.4 10.5 8.4 clinker), tonnes, % y-o-y Cement consumption, 47,137,388.7 48,919,480.7 53,549,192.0 59,675,315.3 65,956,456.5 71,513,269.0 tonnes

Vietnam Construction And Infrastructure Industry Data, 2012-2017 - Continued

2012 2013e 2014f 2015f 2016f 2017f

Cement consumption, 1.4 3.8 9.5 11.4 10.5 8.4 tonnes, % y-o-y Cement net exports, tonnes 762,769.9 835,687.3 907,737.4 986,588.7 1,076,004.4 1,177,302.6 Cement net exports, tonnes, % 28.3 9.6 8.6 8.7 9.1 9.4 y-o-y

e/f = BMI estimate/forecast. Source: Vietnam General Statistics Office, BMI

Table: Vietnam Construction And Infrastructure Long-Term Forecasts, 2018-2023

2018f 2019f 2020f 2021f 2022f 2023f

Construction industry value, 327,200.5 362,647.4 401,855.5 444,791.0 492,279.3 544,276.1 VNDbn Construction industry value, 16.5 18.5 20.7 23.0 25.6 28.4 US$bn Construction industry, real 6.0 6.0 6.0 6.0 6.0 6.0 growth, % y-o-y Construction industry, % of 5.1 5.1 5.1 5.1 5.1 5.0 GDP

Total capital investment, 1,801,170.7 2,019,760.8 2,260,645.5 2,523,111.0 2,816,049.2 3,139,996.2 VNDbn Total capital investment, US 91.0 103.0 116.2 130.4 146.3 164.0 $bn Total capital investment, % 28.2 28.4 28.6 28.8 28.9 29.1 of GDP Capital investment per 950.6 1,069.0 1,197.5 1,334.9 1,488.7 1,659.4 capita, US$ Real capital investment 8.0 7.0 6.8 6.6 6.6 6.6 growth, % y-o-y

Construction industry 4,935.6 5,290.0 5,664.5 6,059.7 6,478.0 6,920.2

Vietnam Construction And Infrastructure Long-Term Forecasts, 2018-2023 - Continued

2018f 2019f 2020f 2021f 2022f 2023f employment, '000 Construction industry employment, % 7.2 7.2 7.1 7.0 6.9 6.8 y-o-y Total workforce, '000 67,594.9 68,011.1 68,401.6 68,772.1 69,122.4 69,448.6 Construction industry employees as 7.3 7.8 8.3 8.8 9.4 10.0 % of total labour force

Infrastructure Industry Value 32.0 31.6 31.2 30.8 30.4 30.1 As % of Total Construction Infrastructure Industry Value, 104,761.5 114,611.6 125,304.5 136,917.4 149,642.5 163,654.2 VNDbn Infrastructure Industry Value, 5.3 5.8 6.4 7.1 7.8 8.5 US$bn Infrastructure Industry Value 4.7 4.6 4.5 4.6 4.6 4.8 Real Growth (%) Infrastructure Industry Value 1.6 1.6 1.6 1.6 1.5 1.5 as % of GDP

Residential and Non-residential Building 68.0 68.4 68.8 69.2 69.6 69.9 Industry Value As % of Total Construction Residential and Non-residential Building 222,439.1 248,035.7 276,551.1 307,873.6 342,636.8 380,621.9 Industry Value, VNDbn Residential and Non-residential Building 11.2 12.7 14.2 15.9 17.8 19.9 Industry Value, US$bn Residential and Non-residential Building 6.6 6.7 6.7 6.6 6.6 6.5 Industry Value Real Growth (%)

Vietnam Construction And Infrastructure Long-Term Forecasts, 2018-2023 - Continued

2018f 2019f 2020f 2021f 2022f 2023f

Residential and Non-residential Building 3.5 3.5 3.5 3.5 3.5 3.5 Industry Value as % of GDP

Cement production (including 78,287,306.3 83,577,075.5 89,075,636.5 94,775,641.8 100,851,881.0 107,329,187.8 imported clinker), tonnes Cement production (including imported 7.7 6.8 6.6 6.4 6.4 6.4 clinker), tonnes, % y-o-y Cement consumption, 76,998,573.0 82,162,136.7 87,525,398.5 93,020,216.2 99,001,095.0 105,242,755.6 tonnes Cement consumption, 7.7 6.7 6.5 6.3 6.4 6.3 tonnes, % y-o-y Cement net exports, tonnes 1,288,733.2 1,414,938.8 1,550,238.1 1,755,425.6 1,850,786.0 2,086,432.2 Cement net exports, tonnes, 9.5 9.8 9.6 13.2 5.4 12.7 % y-o-y

f = BMI forecast. Source: Vietnam General Statistics Office, BMI

BMI View: The outlook for Vietnam's construction sector continues to be increasingly positive. This is primarily due to government policy, where the adoption of a loose monetary policy, revisions to the regulatory framework for land acquisition and the restructuring of state-owned enterprises are increasing the potential for greater construction investment over the coming years. This potential for greater construction activity is reflected in our projections, with our real growth forecasts for the sector revised up to 5.8% in 2014 (previously 5.4%) and averaging 6.2% per annum between 2015 and 2018 (previously 6.0%).

Construction activity in Vietnam has continued to recover from the lows of 2011. Latest data from the Vietnam General Statistics Office reveals that the construction sector grew by 5.8% in real terms in 2013,

faster than the -1.0% and 2.1% print in 2011 and 2012 respectively. This is in line with our view that the recovery in Vietnam's construction sector will be sustained in the next few quarters.

On The Path To Recovery

Vietnam - Quarterly Construction Industry Value, VNDbn

Source: General Statistics Office, State Bank of Vietnam

Looking beyond 2013, the outlook for Vietnam's construction sector continues to be increasingly positive. This is reflected in our projections, with our real growth forecasts for the sector revised up to 5.8% in 2014 (previously 5.4%) and averaging 6.2% per annum between 2015 and 2018 (previously 6.0%).

Not Like Before

Vietnam Construction (And Sum-Components) Industry Value Forecasts

e/f= BMI estimate/forecast. Source: General Statistics Office, State Bank of Vietnam, BMI

This relatively optimistic outlook is primarily driven by three main factors:

Conducive Monetary Conditions. The government is seeking to boost economic growth and has maintained its policy rate at 7.00% since May 2013, the lowest policy rate since December 2009. Given the lagged impact of monetary easing, any positive effects of this easing could last well into 2014. Moreover, inflation remains relatively benign, leading us to expect the Vietnamese central bank to maintain an accommodative policy stance throughout 2014 - we are forecasting the benchmark interest rate to remain at 7.00% by end-2014. This should be favourable for construction activity as Vietnamese companies would benefit from a lower cost of capital - making them more inclined to take up new projects or carry out capital-intensive construction works - while municipal and provincial governments could also find the necessary financing for their infrastructure plans.

A Loose Monetary Policy

Vietnam - Policy Rate, % & Headline CPI - Housing & Construction Materials, % y-o-y

Source: General Statistics Office, State Bank of Vietnam

Robust Foreign Direct Investment (FDI) Inflows. Foreign direct investment (FDI) inflows into the country have accelerated across 2013. According to the Ministry of Planning and Investment, Total FDI inflows into Vietnam grew by 54.5% to reach US$21.6bn in 2013, significantly surpassing the government's full-year target of US$13bn.

The sharp increase in FDI inflows bodes well for activity in the construction sector. This is because we believe a sizeable portion of these inflows were channelled into buildings and infrastructure. To be sure, the real estate achieved the third highest amount of FDI inflows amongst the 18 sectors between January and November 2013, while 84.1% of Japan's total investment capital into Vietnam, the country's largest foreign investor, was channelled into manufacturing and processing projects, according to the Ministry of Planning and Investment. Meanwhile, we have seen several agreements signed with Asian companies over the course of 2013 for the development of transport and power infrastructure projects in Vietnam (see 'High Tariffs And Deregulation Bearing Fruit', October 17 2013). Financing from European banks - a major source of finance for Vietnamese infrastructure - has also stabilised at a relatively positive growth rate of 6.5% year- on-year in Q213.

Limited Upside

Vietnam - Foreign Claims From European Banks, US$mn And % chg y-o-y

Source: Bank For International Settlements (January 2014), BMI

Revised Land Law. On November 29 2013, the Vietnamese government approved an amendment in its Land Law (see 'Revised Land Law A Major Step In Tackling Corruption', December 9 2013). The revised legislation, which takes effect on July 1 2014, is aimed at limiting land disputes by prohibiting the government from appropriating land for socio-economic development unless such projects have been approved by the prime minister and the Vietnamese parliament. From our perspective, the revised law is a major step in strengthening the regulatory framework with regards to land transfer and entitlement while increasing the transparency of economic development projects that are implemented under the direction of the provincial government. This strengthening of the regulatory framework for land acquisition and resettlement could help to reduce the risk of project delays that are brought on by long and costly disputes over compensation.

Table: Factbox - Key Elements Of Vietnam's Revised Land Law

■ The revised Land Law is effective from July 1 2014.

■ Land is owned by the people and managed by the State.

■ Land prices are required to be valued by independent agencies based on market prices at the time of assessment as well as land use purpose and duration.

■ New provisions provided on issue relating to ownership and usage of land as well as on compensation and resettlement of residents subject to relocation.

■ The regulation requiring the release of the government's land price list on January 1 of every year is abolished.

■ The concession for all types of farming land has been increased from 20 to 50 years.

Source: BMI

Non-Residential Sector: Rising Domestic Demand

There are also sub-sectoral factors that are driving our positive outlook for Vietnam's construction sector. In the non-residential building sector, we have seen a recovery in Vietnam's manufacturing production activity, with the HSBC Purchasing Managers' Index above 50.0 level since September 2013 (a signal of expansion in the manufacturing sector). While we remained concerned about the potential for deterioration in external trade activity (particularly the potential for a renewed downturn in the Chinese economy), the growing domestic demand for manufacturing goods could increase demand for non-residential buildings to support production activity.

Staying Strong

Vietnam - Purchasing Managers' Index

Source: BMI, Markit/HSBC

Residential Sector: Early Signs Of Recovery

The residential building sector is also showing early signs of improvement (see 'Early Signs Of A Recovery, But No Property Market Boom In Sight', August 14 2013). Although the sector is still suffering from significant oversupply and falling prices, unsold inventory of new residential units have fallen back to more moderate levels by historical standards. Unsold apartments as a share of total units under construction fell from 30.3% in Q412 to 27.7% in Q213, while unsold villas and townhouses fell from 54.3% to 10.7% over the same period. In addition, the rate of decline in housing prices is slowing down, which could indicate growing demand for property. As the accompanying chart shows, the Vietnam Real Estate Index, which tracks transaction prices of highly liquid apartments in Hanoi and Ho Chi Minh City, fell by 8.2% y-o-y in August 2013, significantly lower than the contraction of 15.2% y-o-y in August 2012.

Signs Of Bottoming

Vietnam - Real Estate Index

Source: BMI, Bloomberg

Lastly, the government's plan to increase the supply of social housing to low-and middle-income groups is accelerating, with several large-scale social housing programmes and projects being implemented. In August 2013, the Ministry of Construction announced that there were 50 projects, valued at around US $1bn, registered to convert 34,000 units of commercial houses to social houses.

Infrastructure Sector: Unlocking Capital

In the infrastructure sector, the Vietnamese government is also making progress with the use of public- private partnerships (PPPs) for infrastructure development. The government launched the initial tendering stage for its first road PPP project in September 2013 and there could be other infrastructure projects offered as PPPs over the near term (see 'Skeptical Over Dau Giay-Phan Thiet PPP Timeline', December 6 2013). We have long highlighted that the Vietnamese government does not have sufficient funds to meet the country's infrastructure needs and the use of PPPs could aid in meeting this deficit (see 'Construction Recovery On Track', July 14 2013). According to the Ministry of Planning and Investment, Vietnam will

need US$16-17bn per annum for infrastructure development over the next decade, but the capital raised from traditional channels can only meet 50-60% of the funds needed.

Most importantly, the government has taken an aggressive stance in restructuring its state-owned enterprises (SOEs, see 'Privatisation of SOEs Highly Positive For The Economy', January 8 2014). We believe this restructuring is crucial in unlocking investment for infrastructure development in Vietnam. This is because it could not only allow the Vietnamese government to raise funds for investment through the privatisation of these SOEs, but also attract greater FDI due to a less protectionist investment climate. Vietnam's SOEs have been a leading contributor of the misallocation of capital in the country, due to corruption and a lack of competition and oversight. This has, in turn, resulted in mounting losses for public sector firms (see 'More Restructuring To come For SOEs', September 26 2013). Due to these losses, a number of these SOEs are unable to repay their debts, which the Vietnamese government is obliged to repay. This has undermined the country's fiscal position and limited the government's ability to finance infrastructure projects.

Transport Infrastructure - Outlook And Overview

Table: Vietnam Transport Infrastructure Industry Data, 2012-2017

2012 2013e 2014f 2015f 2016f 2017f

Transport Infrastructure Industry 65.5 64.9 64.6 64.4 64.1 63.8 Value As % Of Total Infrastructure Transport Infrastructure Industry Value, VNDbn 38,444.5 42,086.3 46,256.9 50,903.2 55,831.7 61,030.7 Transport Infrastructure Industry Value, US$bn 1.8 2.0 2.2 2.5 2.8 3.1 Transport Infrastructure Industry Value Real -3.9 2.9 4.1 4.8 4.7 4.4 Growth (%) Transport Infrastructure Industry Value As Percent Of Total 21.4 22.0 21.6 21.3 21.0 20.7 Construction (%)

Roads and Bridges Infrastructure Industry Value As % of 50.1 50.7 51.2 51.9 52.5 52.8 Transport Infrastructure Roads and Bridges Infrastructure Industry 19,274.3 21,321.2 23,702.6 26,396.8 29,296.8 32,232.9 Value, VNDbn Roads and Bridges Infrastructure Industry 0.9 1.0 1.2 1.3 1.4 1.6 Value, US$bn

Vietnam Transport Infrastructure Industry Data, 2012-2017 - Continued

2012 2013e 2014f 2015f 2016f 2017f

Roads and Bridges Infrastructure Industry -6.6 4.0 5.4 6.1 6.0 5.1 Value Real Growth (%) Roads and Bridges Infrastructure Industry As % of Total 32.9 32.9 33.1 33.4 33.7 33.7 Infrastructure Roads and Bridges Infrastructure Industry As % of Total 10.7 11.1 11.1 11.1 11.0 10.9 Construction

Railways Infrastructure Industry Value As % of 24.3 24.1 23.7 23.4 23.0 22.8 Transport Infrastructure Railways Infrastructure Industry Value, VNDbn 9,343.3 10,143.6 10,978.2 11,886.6 12,844.9 13,911.9 Railways Infrastructure Industry Value, US$bn 0.4 0.5 0.5 0.6 0.6 0.7 Railways Infrastructure Industry Value Real 14.5 2.0 2.5 3.0 3.1 3.4 Growth (%) Railways Infrastructure Industry As % of Total 15.9 15.7 15.3 15.0 14.8 14.6 Infrastructure Railways Infrastructure Industry As % of Total 5.2 5.3 5.1 5.0 4.8 4.7 Construction

Airports Infrastructure Industry Value As % of 9.5 9.1 8.9 8.7 8.4 8.4 Transport Infrastructure Airports Infrastructure Industry Value, VNDbn 3,643.8 3,836.3 4,129.8 4,409.8 4,712.8 5,097.6 Airports Infrastructure Industry Value, US$bn 0.2 0.2 0.2 0.2 0.2 0.3 Airports Infrastructure Industry Value Real -23.7 -1.3 1.9 1.5 1.9 3.3 Growth (%) Airports Infrastructure Industry As % of Total 6.2 5.9 5.8 5.6 5.4 5.3 Infrastructure Airports Infrastructure Industry As % of Total 2.0 2.0 1.9 1.8 1.8 1.7 Construction

Ports Harbours and Waterways 16.1 16.1 16.1 16.1 16.1 16.0 Infrastructure Industry

Vietnam Transport Infrastructure Industry Data, 2012-2017 - Continued

2012 2013e 2014f 2015f 2016f 2017f Value As % of Transport Infrastructure Ports Harbours and Waterways Infrastructure Industry 6,183.1 6,785.3 7,446.4 8,210.0 8,977.3 9,788.2 Value, VNDbn Ports Harbours and Waterways Infrastructure Industry 0.3 0.3 0.4 0.4 0.4 0.5 Value, US$bn Ports Harbours and Waterways Infrastructure Industry -4.6 3.1 4.0 5.0 4.3 4.1 Value Real Growth (%) Ports Harbours and Waterways Infrastructure Industry As % of Total Infrastructure 10.5 10.5 10.4 10.4 10.3 10.2 Ports Harbours and Waterways Infrastructure Industry As % of Total Construction 3.4 3.5 3.5 3.4 3.4 3.3

e/f = BMI estimate/forecast. Source: Vietnam General Statistics Office, BMI

Table: Vietnam Transport Infrastructure Long-Term Forecasts, 2018-2023

2018f 2019f 2020f 2021f 2022f 2023f Transport Infrastructure Industry Value As % Of Total Infrastructure 63.5 63.2 62.8 62.4 62.0 61.6 Transport Infrastructure Industry Value, VNDbn 66,546.5 72,393.5 78,680.8 85,464.7 92,838.2 100,764.1 Transport Infrastructure Industry Value, US$bn 3.4 3.7 4.0 4.4 4.8 5.3 Transport Infrastructure Industry Value Real Growth (%) 4.1 4.0 3.9 3.9 3.9 3.9 Transport Infrastructure Industry Value As Percent Of Total Construction (%) 20.3 20.0 19.6 19.2 18.9 18.5

Roads and Bridges Infrastructure Industry 53.1 53.4 53.7 54.1 54.4 54.7

Vietnam Transport Infrastructure Long-Term Forecasts, 2018-2023 - Continued

2018f 2019f 2020f 2021f 2022f 2023f Value As % of Transport Infrastructure Roads and Bridges Infrastructure Industry Value, VNDbn 35,331.5 38,650.6 42,265.2 46,198.4 50,488.1 55,112.2 Roads and Bridges Infrastructure Industry Value, US$bn 1.8 2.0 2.2 2.4 2.6 2.9 Roads and Bridges Infrastructure Industry Value Real Growth (%) 4.7 4.6 4.6 4.6 4.6 4.6 Roads and Bridges Infrastructure Industry As % of Total Infrastructure 33.7 33.7 33.7 33.7 33.7 33.7 Roads and Bridges Infrastructure Industry As % of Total Construction 10.8 10.7 10.5 10.4 10.3 10.1

Railways Infrastructure Industry Value As % of Transport Infrastructure 22.6 22.5 22.4 22.2 22.1 21.9 Railways Infrastructure Industry Value, VNDbn 15,071.8 16,282.5 17,585.2 18,966.5 20,478.5 22,113.3 Railways Infrastructure Industry Value, US$bn 0.8 0.8 0.9 1.0 1.1 1.2 Railways Infrastructure Industry Value Real Growth (%) 3.4 3.2 3.2 3.2 3.3 3.4 Railways Infrastructure Industry As % of Total Infrastructure 14.4 14.2 14.0 13.9 13.7 13.5 Railways Infrastructure Industry As % of Total Construction 4.6 4.5 4.4 4.3 4.2 4.1

Airports Infrastructure Industry Value As % of Transport Infrastructure 8.3 8.3 8.2 8.2 8.2 8.2 Airports Infrastructure Industry Value, VNDbn 5,524.8 5,982.1 6,477.7 7,013.4 7,603.1 8,253.0 Airports Infrastructure Industry Value, US$bn 0.3 0.3 0.3 0.4 0.4 0.4 Airports Infrastructure Industry Value Real Growth (%) 3.5 3.5 3.5 3.6 3.7 3.9

Vietnam Transport Infrastructure Long-Term Forecasts, 2018-2023 - Continued

2018f 2019f 2020f 2021f 2022f 2023f Airports Infrastructure Industry As % of Total Infrastructure 5.3 5.2 5.2 5.1 5.1 5.0 Airports Infrastructure Industry As % of Total Construction 1.7 1.6 1.6 1.6 1.5 1.5

Ports Harbours and Waterways Infrastructure Industry Value As % of Transport Infrastructure 16.0 15.9 15.7 15.5 15.4 15.2 Ports Harbours and Waterways Infrastructure Industry Value, bn 10,618.4 11,478.4 12,352.7 13,286.5 14,268.6 15,285.6 Ports Harbours and Waterways Infrastructure Industry Value, US$bn 0.5 0.6 0.6 0.7 0.7 0.8 Ports Harbours and Waterways Infrastructure Industry Value Real Growth (%) 3.6 3.3 2.8 2.9 2.7 2.5 Ports Harbours and Waterways Infrastructure Industry As % of Total Infrastructure 10.1 10.0 9.9 9.7 9.5 9.3 Ports Harbours and Waterways Infrastructure Industry As % of Total Construction 3.2 3.2 3.1 3.0 2.9 2.8

f = BMI forecast. Source: Vietnam General Statistics Office, BMI

The transport sector forms the bulk of infrastructure investment pipeline in Vietnam across our 10-year forecast period, expected to account for 60-65% in 2022. In part, this is because the country still suffers from a significant deficit in transportation infrastructure and we believe the Vietnamese government will continue to develop this sector over the medium term. As such, we expect the transport infrastructure industry value to grow by an average of 4.5% year-on-year (y-o-y) between 2014 and 2017.

Table: Competitiveness Of Vietnam's Infrastructure

Rank/133 in Rank/139 in Rank/142 in Rank/144 in Rank/148 in 2009/10 2010/11 2011/12 2012/13 2013/14 Quality of Roads 102 117 123 120 102 Quality of Railroad Infrastructure 58 59 71 68 58 Quality of Port Infrastructure 99 97 111 113 98 Quality of Air Transport Infrastructure 84 88 95 94 92 Quality of Overall Infrastructure 111 123 123 119 110

Source: World Economic Forum, Global Competitiveness Report

Roads Dominant

Transport Infrastructure Value By Industry, VNDbn

e/f = BMI estimate/forecast, Source: Vietnam General Statistics Office, Local news sources, industry sources, BMI (Major Projects Database)

Roads

Within the transport infrastructure sector, the roads and bridges sub-sector leads in terms of contributions to total transport infrastructure industry value, accounting for 50% of total value in 2013. Although most of

Vietnam's national road network is paved (only 26%, or 46,650km out of 180,549km, is unpaved as of 2008), surveys indicated that approximately 40% of the network is in a poor or very poor condition and will require substantial investment to reach a maintainable condition. Indeed, according to the World Bank's 2014 Efficient Logistics report on Vietnam, it cites that higher logistical costs compared to its peers such as China and Thailand results in higher costs for businesses, and disruptions often force them to hold higher levels of inventories. Vietnam's Ministry of Transport and Communications has estimated that the country will require close to US$60bn in the period up to 2020 to fund new road infrastructure projects. Reaching this investment target will be crucial to Vietnam's long-term economic wellbeing, as roads facilitate the transport of most freight within the country, with a market share of around 60% of domestic cargo. Combined with increased traffic levels in Vietnam's urban areas and growing trade volumes to and from the country, there is a need for roads.

Over the past quarters, there have been several announcements regarding new road projects being planned - such as the Phap Van-Cau Gie highway build-operate-transfer (BOT) project - or being developed in Vietnam - such as the expansion of the NH-1A Cam Ranh City-Cam Lam District (Khanh Hoa province) BOT project, the Danang-Quang Ngai expressway and the Ho Chi Minh City (HCMC)-Long Thanh-Dau Giay Expressway.

However, there are still ongoing concerns about the viability of toll roads in Vietnam. Since February 2012, the Vietnamese transport ministry has been unable to find any investor intending to purchase the right to collect toll fees for the HCMC-Trung Luong expressway (as of August 2013). BIDV Expressway Development Company (BEDC) had previously purchased the toll collection right for 25 years, but due to financial constraints, the company had returned the project back to the government.

We believe that this lack of investment interest in one of the highways linking Vietnam's most economically developed cities reflects our concerns about the viability of building toll roads in Vietnam.

Costly To Build

Investment Cost of Expressways In Vietnam, US$mn per km

Source: Vietnam the Business Times (May 3 2012)

Part of this lack of viability is due to the high cost of construction for expressways within Vietnam. According to an official report from the Ministry of Construction in September 2012, the cost of constructing an expressway in Vietnam is about 1.5-2.0 times higher than comparable roads in China, Europe and Africa. The HCMC-Trung Luong expressway, for example, costs around US$9.9mn per km, higher than an average expressway in China (US$6mn/km) and the US (US$8mn/km).

We believe there are several factors contributing to this high construction cost for toll roads:

■ The lack of project management and technical expertise to complete road projects within budget, resulting in site clearance delays and cost overruns. To resolve this problem, the transport ministry is planning to classify investors and contractors into three grades, A, B and C, with companies at each grade developing projects of the same grade.

■ Corruption, with anecdotal evidence suggesting that 30% of a project's value is pocketed by the contractor in order to pay bribes to relevant parties.

■ Deficiency in regulations and government institutions that effectively balance the need to safeguard the public interest with the need for expeditious provision of land for infrastructure development. The current regulation - Decree 69/2009/ND-CP - only gives district-level people's committees, not the central government, the right to hire companies to settle site clearance and compensation issues.

■ Difficult geological conditions, as most of Vietnam's terrain is uneven.

■ A lack of specialised government institutions that can mediate between developers and landowners about compensation. Combined with the perceived potential for corruption at the district level, these deficiencies do not provide landowners with the assurance that they are receiving the fair amount of compensation for their land. As a result, they are unwilling to sell their land, causing delays in site clearances and cost overruns for road projects. Site clearances have been repeatedly reported by local media sources as the key reason for holding up major road projects in Ho Chi Minh City (HCM City), and they include the 14km Tan Son-Nhat Binh Loi outer ring road project, the 245km Noi Bai-Lao Cai expressway, the 55km HCM City-Long Thanh-Dau Giay Highway and the widening of the Hanoi Highway.

■ At the same time, businesses and commuters are unable to support higher toll rates. Together, these two factors increase the difficulties for Vietnam to raise financing for several road projects. According to a master transport plan for HCM City (approved by the government in April 2013), the city will upgrade or expand five expressways - the HCM City-Long Thanh-Dau Giay expressway, the HCM City-Thu Dau Mot-Chon Thanh expressway, the HCM City-Moc Bai expressway, the Ben Luc-Long Thanh expressway and the Bien Hoa-Vung Tau expressway - and build five four-lane flyovers with a total length of 70.7km. To finance these projects, the city will need VND45trn between 2013 and 2015.

■ To compound the problem, the Vietnamese government is heavily burdened by the debts of its state- owned enterprises (SOEs), and the need to repay this debt is limiting the government's ability to finance infrastructure projects. For example, Vietnam Expressway Corporation is facing the risk of falling into insolvency as it could be unable to pay its bond holders.

■ To secure financing for road development, the Ministry of Transport started collecting a fee for road maintenance from the start of 2013. This is because a number of key roads, including the National Highway 1A, are deteriorating rapidly and the government does not have sufficient funds to boost its budget for road maintenance - the ministry estimates that it only meets 40% of the funds needed for road maintenance. The government is also hiking toll fees for existing roads and implementing new toll stations on certain expressways - Intellasia reported that transport costs in Vietnam would treble by 2015 when 21 new BOT toll stations on NH-1A are operational, plus a rise of 3.5 times in road fees.

■ These toll and fee increases came about after the Vietnam Ministry of Transport revealed at the end of November 2012 that its original targets for highway construction between now and 2020 - 2,000km of expressways completed and 3,000km under construction by 2020 - are not possible due to the government's limited budget for roads and the lack of financing from the private sector.

■ We do highlight that financing from foreign sources for road projects has become increasingly forthcoming. In March 2013, Japan and Vietnam exchanged a diplomatic note which stated that Japan will finance 12 projects worth a combined US$2.2bn, mostly in transport infrastructure (such as the third phase of the Nhat Tan Bridge and the second phase of a road project linking Noi Bai Airport with Nhat Tan Bridge). In May 2013, Goldman Sachs, as leader of a lending syndicate, reached an agreement with the BT 20 Joint Stock Company consortium to provide US$250mn for the rehabilitation (first phase) of the 110km NH-20 under a BT format.

■ Besides NH-20, the Asian Development Bank had announced in August 2013 that it will provide a US $410mn loan for the Vietnamese government to develop a new arterial road. The loan would help in the construction of Second Southern Highway, which would connect Ho Chi Minh City in Southern Vietnam to the Mekong Delta and southern coastal regions. The project involves the construction of access and interconnecting roads totalling 26km, as well as two cable-stayed bridges with a combined length of 5km. The US$860mn project would also receive a loan of US$260mn from the Export-Import Bank of Korea, while the Vietnamese government would contribute US$56mn. Additionally, the Australian Agency for International Development would grant AUD160mn (US$143mn) for the project.

■ The Vietnamese government is also making progress with the use of public-private partnerships (PPPs) for roads. On September 19 2013, the Vietnam Ministry of Transport (MOT) and the World Bank completed the fourth and final investor conference for the US$757mn Dau Giay-Phan Thiet expressway project. The conference was aimed at showcasing the 98.7km expressway to international investors interested in becoming the project's secondary investor. In July 2013, the Vietnamese government had selected Vietnam-based Binh Minh Import-Export Production and Trade Company (Bitexco) as the primary developer of the 4-lane project, with Bitexco providing up to 60% of total equity investment and the remaining 40% by the secondary investor. Bitexco can, however, dilute its share in favour of the second investor during the construction. Since the road show, the Saigon Times reported that only seven investors, out of more than 100 participants, submitted applications to MOT. While the investors have yet to be made known, a report from the Philippines Star in mid-November noted that Hong Kong-based investment firm First Pacific and Philippines-based Metro Pacific Investments were both interested in the project.

■ The project is due to be awarded in the fourth quarter of 2014 under a 30-year Design, Build, Finance, Operate, Maintain and Transfer concession. The project is expected to start construction in June 2015 and be ready for commercial operations in January 2019. That said, we believe there are a number of issues, such as the hostile business environment that investors have to contend with, which are likely to delay the construction of the project.

■ The Dau Giay-Phan Thiet expressway project is also the first road project and the largest infrastructure project to be developed under a public-private partnership (PPP) format in Vietnam. It therefore serves as a reflection of the country's ability to implement infrastructure projects under a PPP framework and any failures would be a significant blow to investor confidence. As such, the Vietnamese government has taken several steps to ensure the project's bankability and that its PPP framework meets international standards. The project is also set to enjoy the bulk of the incentives initiated by the Vietnamese government to spur PPP infrastructure investment. This includes a non-refundable grant from Vietnam's viability gap financing mechanism and assistance for tax, currency exchange, site clearances (land acquisition cost will be carried out by the MOT and funded by the Vietnamese government) among others.

Railways

Railways will account for close to 24% of Vietnam's total transport infrastructure industry value in 2014, according to BMI's forecasts. Vietnam's rail network stretches for 2,632km, but only 527km is standard gauge (1.435m gauge). The network has around 1,790 bridges totalling 45km and 11.5km of tunnels. The principal axis is Hanoi-Ho Chi Minh City (1,726km). Other lines emanating from Hanoi are to Hai Phong (102km), Lao Cai (296km) and Dong Dang (162km).

Vietnam had previously planned to build a US$56bn north-south high-speed railway line, but this was rejected by the Vietnamese National Assembly in June 2010. The proposed project has since resurfaced, with Japan announcing in September 2012 that it remains keen to assist Vietnam in building this north- south high-speed railway line by 2030. In November 2013, an amended proposal was submitted, prepared by the Japan International Cooperation Agency, proposes to upgrade the existing north-south rail route at the cost of US$1.8bn before commencing building a new line, which will be pushed back to 2030. This

differs slightly from an earlier proposal made in April 2013, in which state-owned Transport Engineering Design Inc (TEDI) suggested that work on the north-south high-speed railway project in Vietnam should be delayed and the focus should be shifted on upgrading the current north-south track. It further proposed that the speed of the north-south high-speed train should be slowed down to 150-200km per hour from more than 200km per hour, while the time frame for the development of the trans-Asia railway should be reconsidered along with the rail lines connected to seaports, industrial zones and tourist sites.

There are still plans to build a high-speed railway line between Laos and Vietnam. The US$5bn high-speed railway project, which is close to starting construction work, will span 220km from the Laos central province of Savannakhet to the Lao Bao border gate of neighbouring Vietnam and is expected to be operational in the next five years.

Table: Vietnam Railway Corporation's Main Targets

■ Upgrading north-south railway routes and improving the running speed of passenger trains and freight trains to 100-120kph and 100kph respectively.

■ Upgrading west-east railway corridor so that the maximum speed of passenger trains and freight trains is 80-100kph and 60-80kph respectively.

■ Paying more attention to the development of new routes between Ho Chi Minh City-Vung Tau, Ho Chi Minh City-Can Tho, Thap Cham-DaLat, Yen Bai-Tuyen Quang-Bac Thai, Lien Chieu-Dung Quat, etc.

■ Carrying out surveys and preparing to link the railway network to Singapore-Kunming route is aimed at fulfilling missing links such as Ho Chi Minh City-Phnom Penh city and Cambodia-Vietnam.

Source: Vietnam Railways

Instead of a high-speed railway line, the government is looking to increase the speed of the existing normal- gauge north-south railway line. In April 2013, the Ministry of Transport said that it had assigned the Vietnam Railway Corporation to make a detailed plan to increase the speed of the line from 90km/h to 200km/h. This could be done in two phases. The first phase would increase the speed of the line from 90km/ h to 110km/h, while the second phase would involve the construction of a new double-track standard gauge line that increases the line's speed to 220km/h.

The government is also looking to improve its existing railway network. In March 2013, the Ministry of Transport said that between 2013 and 2020, the Vietnam Railway Corporation needed to focus on improving the existing railway system and building several new 1,435mm gauge dual track lines along the existing 1,726km north-south (Ngoc Hoi-Phu Ly) railway line. Under the amended planning the railway

sector would require around VND365.242trn (US$17.4bn) to 2020 for upgrading six existing lines, putting into place three new arterial routes, including some lines heading seaports, economic zones and tourist sites.

Amendments relating to Vietnam's railway development planning to 2020, with a vision toward 2030 (2009 planning), have been reported by the Vietnam Railway Administration (VRA) to the Ministry of Transport in April 2013. According to a proposal from the consultancy unit that is tasked with amending the 2009 planning, Vietnam will weigh up the construction of a trial electrified 1,435mm Ngoc Hoi-Phu Ly gauge dual-track line, with a velocity ranging from 160km to 200km per hour. Overhauling the existing 1,726km north-south railway is estimated to require a total investment of VND39.87trn (US$1.9bn). Of the total, the capital demand to 2020 is set at VND18.61trn (US$886mn).

By 2015, Hanoi Railway Station is expected to emerge as the centre of the country's system. The station will join the other means of transport and boast a multi-functional service centre. The upgraded facilities and services are to have an annual transportation capacity of 13.7mn tonnes of freight and 17.7mn passengers.

However, just like the roads, the railway sector suffers from a lack of financing. In October 2012 the deputy director of the railway administration, Nguyen Van Doanh, said that a total of 20 railway projects were earlier recommended by the VRA to be developed under the forms of BOT, build-transfer and build- transfer-operate. This list of projects was submitted to the Ministry of Transport in early 2010, but a lack of investors prevented them from starting. Among the 20 railway projects calling for investment in 2010-2020, they include the 381km Lao Cai-Hanoi-Hai Phong railway line, the 114km Bien Hoa-Vung Tau route and the 49km railway connecting Trang Bom in Dong Nai with Hoa Hung in HCM City.

Urban Railways

As most of the railway projects in Vietnam are at an early stage, we believe that it would be urban railway projects that will drive our railways infrastructure industry value forecasts over the short to-medium term. We believe these urban railway projects will be crucial to Vietnam's economic and social development, as the country attempts to deal with rapid urbanisation, while successfully managing a booming economy. The combination of rising urbanisation and steady population growth is exerting considerable pressure on Vietnam's urban transportation systems. This urbanisation trend is felt acutely in Hoh Chi Minh City and Hanoi, the country's largest cities and chief commercial hubs. Both cities are home to approximately 16% of the country's total population and traffic conditions have worsened. Congestion occurs frequently at road junctions during rush hour and average traffic speeds vary from around 10-30km/h in both cities. There is much scope for traffic conditions to worsen further. Not only could there be a fundamental shift to cars due

to rising incomes - for example, 90% of the vehicles in HCM City are motorcycles - but Vietnam is also looking to accelerate the urbanisation rate in the country. According to a draft national urban development programme approved by the government in June 2012, Vietnam will strive to achieve an urbanisation rate of 38% with 870 urban areas by 2015, and 45% with 940 urban areas by 2020. The country is estimated to currently have an urbanisation rate of 30%.

The development of an urban railway system will therefore help alleviate many of the problems associated with congestion. No other system can carry more people and run on such a dependable schedule at a lower cost, and we expect Vietnam to continue to push forward with urban railway projects. As of May 2012, the government transport plan for Hanoi to 2030 includes eight urban railways, with a total length of 284km, and six subway lines, linking key parts of Hanoi and its outlying areas. Meanwhile, Ho Chi Minh City aims to complete around six metro lines with a total length of 120km by 2020.

Some of these urban railway plans have moved forward (such as Ho Chi Minh City's Ben Thanh-Suoi Tien Metro line 1, the underground section of the Metro line 2), but just like the roads sector, several have also faced delays. This is because they are suffering from slow site clearances (such as the Cat Linh Street-Ha Dong District railway line in Hanoi, which is two years behind schedule), cost overruns (such as the Nhon- Hanoi Station urban railway line No. 3), the lack of a legal framework, a lack of proper planning for underground space and integration with other transport modes, and the lack of skilled labour.

The sector is also heavily reliant on financing, mainly official development assistance loans, from several foreign countries and multinational development banks. This has caused delays as to access these loans Vietnam needs to conform to the regulations of all its donors, making it difficult to coordinate construction work for the projects. In addition, European banks are set to face difficult economic conditions and stricter capital controls over the coming years. This could lead to a decline in European financing for Vietnamese projects and has already transpired, with the Spanish government announcing in late November 2012 that it would only provide 40% of the financing it had initially promised for an urban railway project in Ho Chi Minh City (the Metro Line No.5).

Having said that, some lenders remain keen to provide funds for Vietnam's urban railway sector. In March 2013, Japan and Vietnam exchanged a diplomatic note, under which Japan agreed to finance 12 local projects such as the first phase of the Hanoi urban railway line 1 (Gia Lam-Giap Bat).

Officials from the Ho Chi Minh City administration also pointed out in March 2013 that the Asian Development Bank (ADB) and the European Investment Bank (EIB) will provide a combined US$735mn for the Metro Line No.2. The loan agreement for the Metro Line No.2 was signed in July 2013. Line 5 of

the Ho Chi Minh metro system will be financed by three international organisations, according to the Railway Gazette. The Asian Development Bank, the European Investment Bank and the Spanish government will provide US$500mn, EUR150mn (US$206mn) and EUR200mn (US$275mn) respectively, to construct in 2015 the first 8.9km of the line that is slated to run between Sai Gon Bridge and the Bay Hien Intersection.

Ports

Although roads and railways are dominating transport infrastructure, we highlight that ports, harbours and waterways will see their share increase significantly over the coming years. Vietnam's dense river and canal network - which measures 17,702km - provides the country with a highly developed inland waterway system, but its port infrastructure is poor by international standards. The main ports currently in operations are the Cam Pha Port, Da Nang, Haiphong, Ho Chi Minh, Phu My and Quy Nhon.

Vietnam's seaport network comprises many small and medium-sized entities, with inefficient distribution. Most ports in the northern part of Vietnam are dispersed and small in scale, while most big ports are located on rivers, such as Hai Phong and Ho Chi Minh City, with limited depth at the entrance. Some ports are located in big cities, thus making it difficult to connect with other modes of transport due to traffic congestion. With the exception of several new or upgraded ports, most have been operating for many years and lack investment. The loading and unloading equipment in some ports is obsolete, leading to low productivity. The average productivity of a Vietnamese port is only 2,500 tonnes/m per wharf, which is less than half of the productivity of other ports in the region. As of January 2013, Vietnam was home to 266 large and small-scale seaports, but only nine ports are able to handle 50,000-deadweight tonne (dwt) ships.

Activity in the maritime sector is mainly concentrated on boosting the capacity of the southern economic zone, especially in the Thi Vai River area. Major global port operators with interests in the region include Hutchison Port Holdings, Singapore's PSA International, Saigon Port, Denmark's Maersk and France's Compagnie Maritime d'Affrètement-Compagnie Générale Maritime (CMA CGM). These companies have all been involved in the operation and development of major Vietnamese ports in the Thi Vai River.

BMI anticipates increasing investment into Vietnam's port infrastructure over the long term, as it is a sector crucial to the country's economic growth. There are two major factors central to our view:

■ The country needs to upgrade its ports to avoid major bottlenecks, which would constrain the country's export-led growth and investment. Vietnam's port infrastructure ranked only 113th in the 2012/13 competitiveness report published by the World Economic Forum.

■ Vietnam is becoming increasingly important, not just to growing Intra-Asian trade but also on the global stage. An increasing number of shipping companies are choosing Vietnam as their port of call as they ply the east-west trade route. Vietnam's ports are gradually graduating from feeder stop-offs on the major routes to boasting direct services on both the Asia-US and Asia-Europe services.

Vietnam is keen to address this deficit, but lacks the necessary fiscal strength to meet the required investment. This keenness to meet this deficit has also been dampened recently due to feeble external demand. The slowdown in global economic activity in 2012 and 2013 had dampened the demand for Vietnamese goods and minerals, resulting in a glut in port capacity, particularly with deep-sea ports in South Vietnam. This glut has become so serious that in August 2013, Vietnam's transport ministry announced that it will not issue any licences for the construction of new container ports in Ba Ria-Vung Tau, Ho Chi Minh City and Dong Nai until 2015. This comes as ports in Cai Mep-Thi Vai have been carrying out operations at far below capacity. This forms part of measures by the government to enhance operation efficiency of the port system in the three localities. Meanwhile, the government has also decided not to expand existing ports in HCM City to move goods to Cai Mep-Thi Vai. The ministry will consider granting permission for new ports only after 2015, depending on market demand.

Vinacomin also decided to suspend the construction of the Ke Ga deepwater port in the Binh Thuan province, according to Vinacomin General Director Le Minh Chuan in February 2013. The company took the decision due to a cut in bauxite production. The port was scheduled to receive bauxite from mines in Tay Nguyen, with an annual capacity of up to 3.5mn tonnes by 2015, 17.5mn tonnes by 2020, 27mn tonnes by 2025 and 37mn tonnes by 2030. However, the output of bauxite at Tan Rai and Nhan Co alumina projects in Dak Nong Province is low and may reach only 1.3mn tonnes.

Besides Vinacomin, Vinalines is also selling stakes in four of its ports - namely Hai Phong, Da Nang, Quang Ninh, Saigon and Quy Nhon - between 2013 and 2014 to pare down its high level of debts, which were brought on by investment in under-performing ports.

As a result, Vietnam had adjusted its port development plans at the start of January 2013, with the Vietnam Maritime Administration announcing that it would only focus on building large deep-sea ports in Hai Phong's Lach Huyen and Ba Ria-Vung Tau's Cai Mep - Thi Vai port complexes. The administration will also focus on converting the remaining ports in the central region and the Mekong Delta into special-use ports to transport materials for thermo-power plants. Small ports that had been planned for development will not be put into this time's zoning plan if they are not in urgent need.

This plan appears to be taking place, with only the Lach Huyen port project starting construction works in April 2013. The port is scheduled to be built in two phases, with the first phase entailing the construction of

port infrastructure, while the second phase will include the construction of two 750m wharves capable of handling 100,000-tonne container ships. The Vietnam Maritime Administration will manage the first phase, involving an investment of more than VND18.6trn (US$885mn), while a joint venture of Vietnamese and Japanese enterprises will manage the second phase worth more than VND6.57trn (US$315mn). The port, due for completion in 2016, will have modern cargo handling equipment. It will be capable of handling container ships of up to 8,000 twenty-foot equivalent units (TEUs).

Vietnam's difficult business environment could continue to slow project implementation. In July 2011, construction work on the US$3.6bn Van Phong International Port in Vietnam's southern central province of Khanh Hoa was suspended, because initial feasibility studies for the port project did not sufficiently assess the site's geology. This resulted in inconsistencies in pile design during the construction phase. Although the project investor Vinalines had signed a deal with Netherlands-based Rotterdam Port for the port's construction, the lack of financial strength in Vinalines has finally forced the government to suspend the project in September 2012. In June 2013 the management of the Van Phong Economic Zone cancelled the investment licence, held by Vinalines, to build Van Phong International Port project. Vinalines is required to complete all procedures to liquidate the project within H114.

Another business environment issue that is hindering the growth of the port sub-sector is the lack of coordination in developing the different types of infrastructure (roads, ports, airports, railways). Two ports in Ho Chi Minh City - the US$17.5mn Phu Huu Port and the US$19.1mn Phu Dinh Port - have been left unused for several years due to lack of access to key roads. These ports are connected to streets that are either often flooded, too narrow for container trucks or lack access to highways. This could remain an issue for other ports currently being developed. The VND2.73trn Saigon-Hiep Phuoc port was scheduled to be completed by 2014, but as of March 2013, a harbour bridge and port routes to connect it with main highways and roads have yet to materialise:

■ A shortage of qualified logistics staff is a problem, where, according to the Vietnam Freight Forwarders Association (July 2012), only 40% of the demand for qualified logistics staff is met.

■ A lack of proper planning is also an issue. According to the Vietnam Seaports Association in January 2013, seaport zoning plans of Vietnam are yet to be synchronic and have still failed to meet rising sea transport demand due to a disproportional focus on the construction of small ports, which are inefficient in meet Vietnam's transhipment needs.

■ The government has also been slow in implementing regulations that support the development of a PPP framework for port projects. A PPP framework has been on the cards for several years but has yet to be developed, with investors still seeking incentives from the government to attract PPP investment in August 2012.

■ Access to financing remains an issue, despite a sharp decline in Vietnam's interest rates. This is partially due to Vietnam's financial regulations and the decline in government investment.

In June 2012, Formosa Plastics Group (FPG) was reported to be facing difficulties in obtaining funds for its steel and seaport project in Vietnam's Central Ha Tinh province. This is due to lending limitations at foreign bank branches in Vietnam, as a foreign bank is not permitted to lend more than 15% of its own equity for a single borrower.

During December 2012, Saigon Port Company Deputy Director Huynh Van Cuong said that the Saigon Port relocation project has not made any considerable progress due to capital shortages. The relocation work is moving at a slow pace despite financial assistance from the Vietnamese government. The Hiep Phuoc Port construction project is required to be finished first in order to relocate the Saigon Port from Ho Chi Minh City; however, construction work is only 38% completed.

There are still foreign companies keen on entering Vietnam's port sector. In June 2013, Australia-based N&M Commodities unveiled plans to develop a US$3.5bn deep-sea port on Hon Khoai Island, Ca Mau province. The company was completing the necessary administrative procedures for the project, which is expected to start construction works at the end of 2016. Once completed, the Hon Khoai Seaport is expected to become the gateway to the Mekong Delta and HCM City.

Airports

Although the airport infrastructure sub-sector accounts for the smallest portion of transport infrastructure, the government has ambitious plans to modernise and expand the country's airport infrastructure, which consists of 44 airports. The government's initial plans were to develop 10 international airports by 2020: Noi Bai, Cat Bi, Phu Bai, Danang, Chu Lai, Cam Ranh, Tan Son Nhat, Long Thanh, Can Tho and Phu Quoc; and 16 domestic airports in the same timeframe, which includes Dien Bien Phu, Na San, Lao Cai, Quang Ninh, Gia Lam, Vinh, Dong Hoi, Phu Cat, Tuy Hoa, Pleiku, Buon Ma Thuot, Lien Khuong, Rach Gia, Ca Mau, Con Son and Vung Tau.

This willingness by the government to get projects under way for the private sector (although this is partially due to a lack of public funds) provides grounds for optimism and this has attracted foreign investors to the sector. In April 2011, US-based ADC-HAS Airports presented a proposal to the Vietnamese Ministry of Planning and Investment with regard to investing in seven airports in the country's central region - Chu Lai, Phu Bai, Da Nang, Tuy Hoa, Quy Nhon, Pleiku and Cam Ranh airports. This plan is still in the works. In August 2012, ADC-HAS Airports suggested a plan to develop the Chu Lai airport into an industrial airport, while the Khanh Hoa provincial government was seeking permission for a plan to develop the Cam Ranh airport with ADC-HAS Airports and Vietnam Airlines (VAC). ADC-HAS Airports

is also interested in developing the Da Nang airport with VAC. In April 2013, the Airports Corporation of Vietnam (ACV) tasked Parsons Brinckerhoff with investigating the potential to develop the Chu Lai airport into a regional cargo hub. The study was funded by a grant from the US Trade and Development Agency. In June 2013, ADC-HAS Airports reiterated its interest in expanding the Cam Ranh Airport and Danang airport.

However, the lack of demand for air travel in the near term and the stiff competition from other airports in Asia to serve as regional hubs could make it difficult for these new airports to be financially viable.

Since early 2012, Vietnam has announced that it was in the search for foreign investors to help construct two international airports: the US$1.2bn Van Don International airport in the northern province of Quang Ninh and the US$10bn Long Thanh International airport in the southern province of Dong Nai. The two airports are part of a strategy to compete with neighbouring airports in Thailand and Singapore. According to Nguyen Cong Hoan, a director for the Vietnamese airport operator ACV, foreign investors have already expressed interest in the Van Don airport, with South Korean investors being highlighted as one of the interested parties in late-2012. Interested investors were due to complete project documents and submit them to provincial and central agencies in November 2012.

The Long Thanh airport, approved in 2011, also appears to be making some progress, albeit slowly. In March 2013, the provincial government of Dong Nai disclosed a development plan for the area surrounding Long Thanh International Airport. The government plans to develop a tourism complex, several industrial clusters and world-class sporting, education and healthcare venues in the 21,000-hectare (ha) area. The plan entails the development of 12 communes in Long Thanh and Cam My districts in the area, excluding the 5,000ha zoned for the terminal, by 2025. The northern part of the airport covering 5,720ha will boast condominiums for aviation employees and locals, while the southern area covering about 4,400ha will boast an international transhipment centre, a supporting industrial park and an area zoned for fruit farms and industrial plants. The plan is likely to be implemented in three phases during 2012-2025, with land acquisition estimated to cost VND10trn as of March 2013.

The terminal will also be developed in three phases, starting from 2015. The first phase (2015-2020) requires US$5.6bn for the construction of two runways, taxiways, aircraft parking zones and two terminals with an annual handling capacity of 25mn passengers and 1.2mn tonnes of cargo. The second phase (2020-2030) involves the construction of a third runway and the increase in passenger handling capacity by 50%, while cargo handling capacity is increased to 1.5mn tonnes per annum. The third phase (2030-)

involves the construction of a fourth runway and the increase in passenger and cargo handling capacity to 100mn passengers and 5mn tonnes of cargo per annum.

Both airports are part of the government's strategy to develop as many as six international airports, which include locations such as Cam Ranh, Chu Lai, Danang and Hue. The Long Thanh airport is the centrepiece of this expansion, as it is the largest greenfield airport project in Vietnam (and possibly in Asia), with an eventual annual passenger capacity of 100mn per annum, a 5mn tonne cargo capacity and four runways.

While there are compelling factors driving the government to build new airports - to meet a growing demand to travel within Vietnam's population and to unlock the growth potential of its tourism sector - these airports could struggle to be financially viable if their aim is to serve as regional transit hubs. Not only is there a lot of competition from other airports in Asia to serve as regional hubs, but these airports already have well established airlines using them as their main point of transit.

Several airports in Vietnam, particularly in the central provinces, were already operating way below capacity, despite the rapid rise in tourists. The Dong Hoi airport incurred losses of VND6.9bn (US $332,000) in 2010 and VND9bn (US$432,000) in 2011. This suggests that the demand for new airports is not broad-based throughout Vietnam, with air traffic in certain regions still immature.

Another reason for this lack of usage could be due to the small number of runways that are able to handle international flights. Most of the international flights in Vietnam are handled by just three of the country's 21 airports, while only nine of these have runways with a length of more than 3,047m, which is a standard requirement to handle international flights for wide-body aircraft. This suggests that Vietnam could need to upgrade the runways in its existing airports, rather than construct new airports. As of September 2012, Vietnam continues to find difficulty in securing financing for its airport projects and is still seeking investment capital from different sources.

The government has since recognised this lack of financial viability for some of these proposed airports and is shifting its focus on a few key airports such as Noi Bai, Danang and Long Thanh. The smaller airports such as Lao Cai, Lai Chau and Quang Ninh could be developed after 2020, according to official from the ministry of Transport in April 2013.

Major Projects Table - Transport

Table: Major Projects - Transport

Value (US Capacity/ Project Name $mn) Length Companies Timeframe Status

Airports Vietnam Railway Corporation (VRC), At planning stage 56,000 Japan International -2025 (November 2013 - North-South High-Speed Cooperation Agency Project re-proposed) Railway Project (JICA) 0.33mn Civil Aviation Pleiku Airport Upgradation 35 passengers/ Administration of -2020 At planning stage Project (Phase 1), Gia Lai yr Vietnam (CAAV) Announced (January Lao Cai International Airport 61.9 -2020 2012) Vietnam Railway Corporation (VRC), North-South (Ho Chi Minh 1,800 1,726km Japan International -2020 At planning stage (April City - Hanoi) railway Cooperation Agency 2013) rehabilitation project (JICA) Under construction (October 2013 - Transport Minister has sought an additional US$3.1bn for project; 3,183km -2020 First phase completed; Second phase under construction and to be completed by 2015, Ho Chi Minh Road, NH-2 with third phase to (Pac Bo - Dat Mui) complete in 2020) Six-lane Nha Trang City [Khanh Hoa Province] - Feasibility studies/EIA Phan Thiet City [Binh Thuan 3,500 235km -2020 underway (August Province] PPP Expressway 2012) Project Urban Railway Line No. 1 Vietnam Railway In tender/Tender (Giap Bat-Gia Lam), Hanoi 15.36km Corporation (VRC) -2019 launched (July 2013) Urban Mass Rapid Transit Project - Railway Line No. 2, Hanoi Urban Railway At planning stage (July Nam Thang Long-Tran Hung 11.54km Management Board -2018 2013 - Construction Dao, Hanoi yet to begin) Asian Development Bank (ADB)[Financier], Vietnam Expressway Contract Awarded 57.8km Corporation, Japan -2016 (January 2013 - Ben Luc-Long Thanh International Construction Expected Expressway - Part of North- Cooperation Agency to start soon) South Highway (JICA)[Sponsor] Under construction Ca Pass tunnel (Phu Yen 742.8 14.5km Deo Ca Investment -2016 (October 2013 - and Khanh Hoa provinces) Project is running one

Major Projects - Transport - Continued

Value (US Capacity/ Project Name $mn) Length Companies Timeframe Status year behind schedule (Delayed)) Under construction (March 2013 - The Ministry of Transport Six-lane road widening BOT 6,000 1887km Government of -2016 (MoT) said that it will project, Hanoi - Can Tho Vietnam[Sponsor] put forth its best section, part of 2300km efforts to finish the National Highway 1 upgrade) At planning stage (October 2013 - Work 5.5mn will include second 214.3 passengers/ 2015-2030 runway and Cam Ranh International yr upgradation of first Airport Expansion Project runway) At planning stage (October 2013 - Work includes two runways, 25mn Airports Corporation of taxiways, parking area, 7,200 passengers/ Vietnam, Japan Airport 2015-2020 operation yr Consultants management area, air traffic management Long Thanh International area, auxiliary area and Airport, Phase 1 passenger terminal) At planning stage (July 2013 - Joinus Ltd has Quang Ninh International 2mn Korea Airports proposed switching Airport (Phase1), Doan Ket 166 passengers/ Corporation (KAC), 2015-2020 from BOT model to commune, Van Don region, yr Joinus Ltd PPP investment Quang Ninh province approach) Ho Chi Minh City Urban Project finance closure Railway Management (November 2013- US Metro line 5 (Saigon Bridge Board, Spanish $260mn from ADB, US [District 2] - Bay Hien government[Sponsor], $206 from EIB, US Intersection [Tan Binh 1,850 17km Idom Ingenieria 2015-2016 $275 from Spanish District] - Can Giuoc Bus Consultoria, GEV Corp, government; Station [District 8]), Ho Chi Asian Development Construction to begin Minh City Bank (ADB)[Sponsor] in 2015) At planning stage Quang Tri Airport (new 27 -2015 (February 2009- terminal) Approved) Announced (October 2.3mn China Civil Aviation 2013 - Work includes Chu Lai International Airport 190 passengers/ Administration -2015 two present runways Upgradation Project, Phase yr to 4,000m long, a 1 passenger terminal) Ke Ga deep-water port Delayed (November (three-phase), Tan Thanh 2013 - construction Commune, Ham Thuan Nam 1,000 3,500,000 Vietnam Coal and -2015 halted due to District, Binh Thuan tonnes Mineral Industries (TKV) reduction in bauxite Province production) 0.5mn Phan Thiet airport, Binh 50 passengers/ Rang Dong Group 2014-2020 Approved (October Thuan province yr 2013)

Major Projects - Transport - Continued

Value (US Capacity/ Project Name $mn) Length Companies Timeframe Status 6mn Da Nang International 64.5 passengers/ Da Nang International Completed (Opening Airport terminal expansion yr Airport on May 2011) Underground MRT Section (Thu Thiem New Urban Area HCMC Management [District 2] - An Suong Authority, Asian At planning stage (July Coach Station [District 12]), 1,370 20km Development Bank 2014-2018 2013) part of Mass Rapid Transit (ADB)[Sponsor] (MRT) - Line 2 Obermeyer Planen & Beraten, Tedi South, European Investment Project finance closure Bank (EIB)[Financier], (Project has secured a 1,110 11.2km Poyry, Asian 2014-2017 loan worth US$500 Development Bank million from the Asian Metro line 2 Phase-1 (Ben (ADB)[Financier], Asian Development Bank Thanh [District 1] - Tham Development Bank (ADB)) Luong [District 12]) (ADB) Contract Awarded (September 2012 - European Investment MoU signed between Bank (EIB), Asian Italian Thai 200 8.5km Development Bank -2014 Development Monorail Line 3 (between (ADB), Italian Thai Company and Quang Trung street to Tan Development (ITD) Management Authority Thoi Hiep ward) PPP for Urban Railways of Project, Ho Chi Minh City Ho Chi Minh City)

Ports Transport Engineering Design Incorporated (TEDI), Cuu Long CIPM, African Development Project finance closure 32.3km Bank, Japan -2014 (April 2012 - Seeking International finance) My Thuan-Can Tho Cooperation Agency Expressway Project, (JICA), Korea Southwest Vietnam Development Bank In tender/Tender Six-lane Dau Giay-Phan Binh Minh Import Export launched (July 2013 - Thiet expressway PPP 750 98.7km Production and Trading 2013-2020 Project attracted the project (parallal to NH-1), Group (Bitexco) interest of many Dong Nai Province investors) Under construction (The tender announcement of the initial procurement 1,070 15km 2013-2019 package for Hanoi Urban Railway Line 1 international (Gia Lam - Hanoi railway competitive bidding is station - Ngoc Hoi), Hanoi due in July 2013) Japan International Cooperation Agency At planning stage (JICA), Japan Overseas (October 2013 - 350 Coastal Area 2013-2018 Planning underway; Da Nang Port Upgrade Development Institute Seeking ODA funds Project - Phase 2, Tien Sa (ACDI), Japan Port from JICA) Port Consultants Ltd (JPC),

Major Projects - Transport - Continued

Value (US Capacity/ Project Name $mn) Length Companies Timeframe Status Japan Transport Cooperation Association (JTCA) Hitachi[Equipment], SABMiller, Vincom Joint Stock Company[Sponsor], Traffic Works Construction Corporation No. 6 Under construction (Cienco 6) (August 2013- 2,070 19.7km [Construction], 2013-2017 Construction to begin Sumitomo[Construction] in Q4 2013) , European Investment Bank (EIB)[Financier], Metro line 1 (Ben Thanh GS Engineering & Market [District 1] - Suoi Construction Tien [outlying District 9]), Ho Corporation[Constrution Chi Minh City ] Australian Agency for International Development (AusAID), Asian Development Under construction 271 2.9km Bank (ADB), 2013-2017 (September 2013 - Government of Vietnam, Construction begins) Export-Import Bank of Vam Cong Bridge Korea (Eximbank) Project Management Unit 85, Nippon Engineering Consultants, Chodai and Thai Engineering 1,400 139.52km Consultants, Nippon 2013-2017 Under construction Koei Group, Japan International Cooperation Agency Da Nang-Quang Ngai (JICA)[Financier], World Expressway Project (DQEP) Bank[Financier] Korea Exim Project finance closure Bank[Financier], Asian (August 2013 - US Central Mekong Delta 860 26km Development Bank 2013-2017 $410mn financing from Region Connectivity Project (ADB)[Financier] ADB secured) Under construction How Yu Construction (October 2013 - 278 19.8km 2013-2016 construction started, Vietnam Company project is a part of Ha Ha Long city - Bach Dang Limited Long - Hai Phong bridge road Highway project (25.2)) At planning stage (Project is a part of Ha 4.3km SE Group Inc 2013-2016 Long - Hai Phong Highway project Bach Dang Which Bridge (25.2km)) Cat Bi international airport (first phase) upgrading 2mn Under construction project, Haiphong, Northern 170 passengers/ 2013-2015 (March 2013) Vietnam yr

Major Projects - Transport - Continued

Value (US Capacity/ Project Name $mn) Length Companies Timeframe Status Contract Awarded Van Don International Curzon Group, Airports (October 2013, total Airport (Phase 1), Quang Corporation of Vietnam 2013-2015 project cost is USD 1.2 Ninh province bn) Japan ODA (Official Development Assistance), Vietnam 60,000,000 National Shipping Lines tonnes (Vinalines), Molyto, Under construction Lach Huyen deepwater port 1,200 (900,000 TEU Mitsui O.S.K. Lines 2013-2015 (April 2013) two-phase PPP project (four ) (MOL), Nippon Yussen container wharves), Hai Kaisha (NYK), Itochu, Phong province, east of Saigon Newport Hanoi Corporation At planning stage (March 2013 - Work Ha Long City - Mong Cai could start from Q2 City expressway project, 2,100 132km Italian Thai 2013-2015 2013, project is a part part of Noi Bai - Halong - Development (ITD) of Noi Bai - Halong - Mong Cai expressway, Mong Cai expressway, Quang Ninh province Quang Ninh province) Hue Junction Multi-level Flyover Project, Da Nang 85.8 2013-2015 Under construction City (September 2013) Electricity of Vietnam (EVN), China Under construction Port Project in Duyen Hai 200 12,000,000 Communications 2013-2014 (April 2013 - Ground Electricity Center, Tra Vinh tonnes Construction Company breaking ceremony province (CCCC) held) Completed 5mn (September 2013 - Phu Bai International Airport 28.2 passengers/ Middle Airports 2013-2013 Airport reopened after (Upgrade), Thu Thien-Hue yr Corporation upgrade works of six Province months) Japan Bridge & Structure Institute Inc(JBSI), Nippon Koei Group, Oriental Contract Awarded 568 15.63km Consultants, Japan 2013- (May 2013) Tan Vu-Lach Huyen ODA (Official Expressway Project (Part of Development Lach Huyen Port Project) Assistance)[Sponsor] Japan International Cooperation Agency (JICA), Vietnam Expressway Under construction Corporation, Asian -2013 (May 2012) Development Bank Ho Chi Minh City - Long (ADB), Ministry of Thanh - Dau Giay Highway Transport of Vietnam

Oshima Shipbuilding At planning stage company, Department (June 2012 - of Investment and 2012-2016 Investment license Two-Phase Shipyard Project Planning - Khanh Hoa granted; Total project - Phase I, Thinh Dong Province cost estimated at US$ Commune, Cam Ranh city 180 million)

Major Projects - Transport - Continued

Value (US Capacity/ Project Name $mn) Length Companies Timeframe Status VietinBank[Sponsor], Societe Generale[Sponsor], Credit Agricole CIB[Sponsor], Deo Under construction 748.8 14.5km Ca Investment[Sponsor] 2012-2016 (November 2012 - Ca pass tunnel BOT project , BOT Hai Thach Financial closure (Dong Hoa [Phu Yen Investment[Sponsor], reached) province] - Van Ninh [Khanh Hanoi Construction Hoa province] section), part Corp, Mai Linh Group of National Highway 1A JSC Under construction (January 2013; Mai Linh Group JSC, Additional funding Hanoi Construction provided by Credit 750 13.4km Corp, BOT Hai Thach 2012-2016 Agricole Corporate Investment, Deo Ca and Investment Bank, Investment Societe Generale Bank Deo Ca Tunnel Project and Goldman Sachs) Railway development plan (includes construction of Approved (June 2012- Hanoi - HCM City railway Vietnam Railway Received government line, Lao Cai - Hanoi - Hai 9,300 Corporation (VRC) 2012-2015 approval, preparations Phong line, Hanoi - Dong being finalised) Dang line) China Guangzhou International Economic & Technical Cooperation Co., Vietnam Infrastructure 169 15.3km Development and 2012-2015 Under construction Finance Investment (September 2011) Joint Stock Company (VIDIFI), Guangdong Gia Loc-Tu Ky section, Hai Provincial Changda Duong province Highway Engineering Contract Awarded Vietnam Infrastructure (September 2011 - Development and EX5 awarded by Package EX4, EX5 & EX6, 40km Finance Investment 2012-2015 VIDIFI, EX4 & EX6 part of six-lane Hanoi-Hai Joint Stock Company awarded by Phong expressway project, (VIDIFI) September and Hai Duong province October respectively)

Rail Civil Engineering Construction Project finance closure Noi Bai International Airport Corporation No. 4, (A Japanese ODA to Nhat Tan Bridge 240.2 12.1km Japan International 2012-2015 Loan agreement connecting road Cooperation Agency signed) construction project (JICA)[Financier] Ring Road No. 2 (from Nhat Tan Bridge to ending point World Bank[Financier], Under construction of Cau Giay Crossroad), 304.7 2km Global Environmental 2012-2015 (March 2012) Hanoi Facility 4 road projects, Thu Thiem Vietnam Infrastructure new urban area, District 2, 480 Development and 2012-2015 Contract Awarded Ho Chi Minh City Finance Investment (October 2013)

Major Projects - Transport - Continued

Value (US Capacity/ Project Name $mn) Length Companies Timeframe Status Joint Stock Company (VIDIFI), Dai Quang Minh Real Estate Northern Airports Under construction Corporation (NAC), (September 2013 - 10mn Taisei Corporation, Hoa work is expected to Noi Bai International Airport 960 passengers/ Binh Construction and 2012-2014 complete in December Extension Project (T2 yr Real Estate Trading 2014, US$759mn ODA terminal) Joint Stock Co (HBC) loan from Japan) Four-lane elevated highway, Vinh Binh bridge (Thuan An commune) to My Phuoc Approved (September town (Ben Cat district), 800 31.5km 2012-2014 2011) southern Binh Duong province Two overpasses, part of Ho Chi Minh City-Long Thanh- IDICO Investment Under construction Dau Giay (National Highway 33.8 1.48km Consultancy Joint Stock 2012-2013 (February 2012 - 1) expressway Company Construction started) Saigon Bridge No. 2 project, linking Binh Thanh District HCM City Infrastructure Completed (October and District 2 in Ho Chi 71.5 1km Investment Joint Stock 2012-2013 2013) Minh City Co (CII) Four-lane Buu Hoa - Hiep Hoa bridge, Dong Nai 29 1.5km Vietnam Railway 2012-2013 Completed (April 2013) province Corporation (VRC) Deepwater port, Mekong OGL Mineral and Coal At planning stage (April Delta region 1,000 Mining Company 2012- 2012) National railway project (involves Hoa Hung railway At planning stage station and District 3 [Hao (June 2012 - initial Hung] - Binh Chanh District 2012- design rejected by [Tan Kien] track section), Ho HCMC authorities) Chi Minh City Metro line 3A/3B [Ben Thanh Market [District 1] - Tan Kien, Cong Hoa Crossroads [Tan Binh 23km 2012- At planning stage (July District] - Hiep Binh Phuc 2012) [Thu Duc District]), Ho Chi Minh City Underground interchange/ terminals for lines 1, 2, 3A, 4 Japan International At planning stage (July and, District 1, Ho Chi Minh 429 Cooperation Agency 2012- 2012) City (JICA)[Sponsor] At planning stage (May 2012 - At planning National Highway No 1 stage, seeking expansion BOT project, 4,300 1,057km Government of 2012- government approval, Thanh Hoa - Vung Ang (Ha Vietnam[Sponsor] government funds fully Tinh province) - Can Tho disbursed, in need of section additional funds) At planning stage Bac Luan 2 bridge 2012- (March 2012 - connecting Mong Cai Agreement signed

Major Projects - Transport - Continued

Value (US Capacity/ Project Name $mn) Length Companies Timeframe Status (Quang Ninh) and Dongxing between Vietnam and (Guangxi) China) Delayed (April 2012 - Design work Beltway No. 2 (An Lap 2012- completed, slow site intersection to Nguyen Van clearance delays the Linh Parkway) project) Ring Road No. 5 (Son Tay- Phu Ly, Phu Ly-Bac Giang; Transport Engineering Bac Giang-Thai Nguyen and 4,100 340km Design Incorporated 2012- At planning stage Thai Nguyen-Son Tay), (TEDI) (August 2012) Hanoi Feasibility studies/EIA Japan International underway (September 376 Cooperation Agency 2012- 2012 - US$376mn loan (JICA) [Sponsor] from JICA, at pre- 84 bridge upgrading project feasibility study stage) Cuu Long Traffic Investment, Development and Management Joint Contract Awarded Venture and Mekong (9/1/2012; Total 123km East Co, Petroleum and 2012- Upgrade of National Construction Joint Highway 20 Project Upgrade of National Stock Company, Cost: US$400 million) Highway 20 Project - Phase Construction Materials I (Dau Giay - Bao Loc City) No 1 Under construction (Project approved in 1,100 50,000 Quang Tri province, 2011-2020 October 2008, tonnes Marine Consultant Co. Construction My Thuy deep water port commenced in 2011) European Investment Bank (EIB)[Sponsor], Hanoi Urban Railway 12.5km Management Board, (57.31mn Systra, Vietnam Bank Under construction Urban Mass Rapid Transit 1,010 passengers/ for Industry and 2011-2018 (July 2013) Project - Railway Line No. 3 yr) Trade[Sponsor], Asian (Nhon [Liem District] - Hanoi Development Bank Railway Station [Hoan Kiem (ADB)[Sponsor], District]) Government of France

Asian Development Project finance closure Bank (ADB)[Financier], (August 2013; Project 860 29.3km Australian Agency for 2011-2017 includes Vam Cong International Bridge, Cao Lanh Mekong Delta connectivity Development (AusAID) Bridge and 23.5km of (first phase) project roads) Under construction Road upgrading project, 170 300km Asian Development 2011-2016 (US$80mn loan from northern provinces Bank (ADB)[Financier] ADB) BIDV Expressway Development Under construction My Thuan - Can Tho 338 32.2km Corporation[Sponsor], 2011-2016 (March 2011) Expressway Project Cuu Long CIPM

Major Projects - Transport - Continued

Value (US Capacity/ Project Name $mn) Length Companies Timeframe Status Under construction 60,000 Can Tho City People`s (Phase I completed, 32 tonnes Committee, Vinalines 2011-2015 Phase II under Cai Cui port project construction) Cat Linh (Dong Da District) - Yen Nghia (Ha Dong District) Under construction urban railway line No. 2A, 552.86 13.08km 2011-2015 (October 2012) Hanoi Project finance closure Road linking Phuc Tho and 8 4.3km 2011-2014 (Investment finalised in Son Tay district Q410) Government of Vietnam[Financier], Under construction Government of (May 2011 - Under Rach Gia section, part of Australia[Financier], construction; 924km southern coastal 82 20.8km Asian Development 2011-2014 Financing from ADB, corridor project, Chau Bank (ADB)[Financier], Korea, Australia, Thanh District, Kien Giang Government of South Vietnam) Province Korea[Financier] Under construction (May 2011 - Under construction; - 50 21km Asian Development 2011-2014 (including 2 bridges Bank (ADB)[Financier] over Cai Lon and Cai Minh Luong - Thu Bay Be rivers), part of section 217km)

Roads & Bridges

Government of Under construction Vietnam[Financier], (December 2011 - Republic of South construction started, 137 5.5km Korea[Financier], GS 2011-2014 US $100 million Engineering & sourced from the Construction Republic of Korea's Vinh Thinh Bridge, Hanoi Corporation ODA loan.) Port facility, Nghe An At planning stage province 365 Kobe Steel 2011-2013 (January 2011) Approved (October 2010-Received Nguyen Van Cu-Thach Ban 11.42 3km 2011-2013 government approval Road Project, Hanoi for construction) Asian Development Bank (ADB), Japan International 932.4 51km Cooperation Agency 2011-2013 Under construction Ho Chi Minh City Long (JICA)[Financier], (August 2011) Thanh Dau Giay Expressway Vietnam Expressway (HLD expressway) Corporation Cienco4, Japan International Completed (October Ring Road No. 3, Hanoi, 256 8.5km Cooperation Agency 2011-2012 2012) Phase II (JICA) At planning stage Seven PPP airport projects 2011- (Proposal for projects (Chu Lai, Phu Bai, Da Nang, send to Vietnamese

Major Projects - Transport - Continued

Value (US Capacity/ Project Name $mn) Length Companies Timeframe Status Ministry of Planning Tuy Hoa, Quy Nhon, Pleiku and Investment (MoPI) and Cam Ranh) by ADC-HAS) Tan Cang-Cai Mep deepwater container trans- 1,800,000 Wan Hai Lines, Hanjin, shipment terminal, Ba Ria- 204 TEU Mitsui OSK Lines (MOL) 2011- Completed Vung Tau province Waterway transport Under construction (corridors and river ports) (First two bidding upgrade project (includes package under Viet Tri - Quang Ninh construction; At corridor, Lach Giang 201.5 World Bank[Financier] 2011- December 2011 - Loan estuary, Phu Tho port, Ninh of US$171.5bn Binh port), northern delta, secured from World Bac Ninh province Bank) Vietnam Expressway At planning stage Overhaul of Phap Van-Cau 71.4 30km Corporation, Central 2011- (Under negotiations for Gie expressway Japan Expressway a JV) At planning stage Ring roads 3 and 4, ((Ring road 3); connecting Ho Chi Minh 197.6km (Ring road 4) City with the Ben Luc-Long 8,000 100km 2011- - Vietnamese Ministry Thanh and Bien Hoa-Vung of Transport to start a Tau procedure to call) Six-lane Ninh Binh - Thanh Under construction Hoa [Nghi Son] road project 1,565.19 126.7km 2011- (May 2011) Contract Awarded Korea Exim (September 2011 - Thu Bay - Kenh section, part 47.3 31km Bank[Financier], 2011- Contract awarded; of 924km Southern Coastal Ssangyong Engineering Financing from Korea Corridor Project and Construction Exim Bank) Southern Coastal Corridor Ssangyong Engineering Contract Awarded Project (Vietnam - Thailand) 47.3 31km and Construction 2011- (September 2011) Under construction International Transport (Construction 490 18,000,000 Development And 2010-2030 underway; Phase II to Cua Lo port expansion, tonnes Investment Joint Stock complete in 2020 and Nghe An Phase III in 2030) Duc Long Gia Lai Group Contract Awarded (DLG), Vietnam (Credit contract National Road No 14 50 Commercial Joint Stock 2010-2022 signed; September crossing, Dak Nong Bank for Industry and 2010 - BOT contract province Trade (VietinBank-CTG) announced) Thanh Phuoc Port Joint Stock Company, U&I Logistics JSC., Binh Under construction Thanh Phuoc Port, Tan 65.33 Duong Construction, 2010-2018 (May 2012; Phase I Uyen District, Binh Duong Nam Tan Uyen completed) province Industrial Park JSC Japan Port Consultants Ltd (JPC), International Transport Development Approved (License 71,000,000 And Investment Joint granted; Phase I to Dong Lam cement port 64 tonnes Stock 2010-2017 complete by 2013)

Major Projects - Transport - Continued

Value (US Capacity/ Project Name $mn) Length Companies Timeframe Status Vietnam Railway At planning stage (At Saigon My Tho Railway 445 87km Corporation (VRC) 2010-2015 design stage) European Investment Monorail Line 2 (between Bank (EIB), Asian East-West Highway and 350 14km Development Bank 2010-2015 Project finance closure National Road No 50) PPP (ADB), Italian Thai (July 2013) Project, Ho Chi Minh City Development (ITD)

Ring road No. 4, Hanoi 1,970 98km 2010-2015 At planning stage Under construction North-South Highway 18,500 1941km Cengiz Insaat (Holdings) 2010-2015 (May 2013) Vietnam Expressway Corporation, Asian Under construction Development Bank (January 2013 - Ho Chi Minh City-Long 1,180 55km (ADB)[Sponsor], Japan 2010-2014 Significantly behind Thanh-Dau Giay (National Bank for International schedule, 60% Highway 1) expressway, Cooperation[Sponsor], completed at HCMC- part of North South Highway Hashin Construction Long Thanh section) National Road No 25 expansion (ie Phu Yen Approved (December section, 21.5km; Gia Lai 113 57.5km 2010-2014 2010) section) Under construction (At Gemalink Cai Mep 1,200,000 SAMWHA, Dealim, CMA June 2012 - Container Terminal (first 300 TEU CGM Group, Gemalink 2010-2013 construction tempo phase) slowed) Tran Thi Ly- Nguyen Van Troi bridge 513.8 0.73km 2010-2013 Under construction Vietnam Expressway Corporation, Asian Development Bank (ADB)[Sponsor], Doosan Under construction Heavy Industries & (January 2013 - 1,500 245km Construction Co., 2010-2013 Significantly behind Keangnam, POSCO schedule due to land Four-lane Noi Bai [Hanoi Engineering and clearances) Airport] - Lao Cai [Chinese Construction, Guangxi border] highway RBEC, Vinaconex Maritime Bank[Financier], Under construction 106 29km Agribank[Financier], 2010-2013 Upgrading of the provincial Southeast Asia (US$92.3mn loan road No 39B, Thai Binh Bank[Financier], Tasco pledged by banks) province Joint Stock Hoa An Bridge over Dong Nai River 56 1.3km 2010-2013 Under construction Delayed (April 2012 - Land acquisition delayed,slow site 2010-2013 clearence delays the project. More than 200 Provincial Road 10, Long An households have yet Province to moved.)

Major Projects - Transport - Continued

Value (US Capacity/ Project Name $mn) Length Companies Timeframe Status Vietnam Expressway Design and consultancy Corporation, Nippon contract for Ben Luc-Long 10 Engineering 2010-2012 Contract Awarded Thanh expressway Consultants, Katahira Viet Hung Urban A 530.5m bridge linking the Development and east side of Hanoi with the 26 0.53km Investment, Utracon 2010-2012 Contract Awarded Van Giang district across Overseas, Ultracon the Bac Hung Hai river Vietnam Company Kon Brai Bridge, Kon Tum province (Part of National 164 Vietnam Road 2010-2012 Under construction Highway No 24) Corporation [Sponsor] (January 2011) Cai Lan Port Investment Cai Lan International 720,000 TEU Joint Stock Company, 2010-2011 Completed (Secured Container Terminal Carrix, Cordiant Capital funding of US$127mn) Vietnam National Coal- Deep water Port at Khe Ga 250 3,500,000 Mineral Industries 2009-2020 At planning stage Cape, Binh Thuan Province tonnes Group (Vinacomin) Delayed (March 2013 - put on hold due to 337 8,700,000 2009-2020 shortage of funds; tonnes December 2012 - 38% Saigon-Hiep Phuoc port completed) Vietnam National Shipping Lines SP-SSA International 95.43 1,500,000 (Vinalines), SSA 2009-2020 Under construction Terminal, Cai Mep River, Ba TEU Holdings International, (October 2013) Ria-Vung Tau Province Saigon Port SK Engineering & Construction, Nippon Suspended Koei Caminosca Sisa, (Construction 3,600 13,500 TEU Vietnam National 2009-2015 suspended, Planning Van Phong International Shipping Lines resumed, At Entreport, Khanh Hoa (Vinalines), Portcoast, September 2012 - Province Rotterdam Port seeking investors) Highway to link Cai Mep and Phuoc An ports 350 21.3km 2009-2015 Under construction Sumitomo Mitsui Bank[Financier], GS Engineering & Construction Corporation, Vietnam Infrastructure Under construction Development and (February 2013 - 33% 1,500 105.5km Finance Investment 2009-2015 completed, Joint Stock Company significantly behind (VIDIFI), PSJ Holdings, schedule) Cienco 1 Company and Infrastructure Six-lane Hanoi [Gia Lam] - Development and Hai Phong [Dinh Vu dam] Finance Investment expressway project Compan

My Phuoc-Tan Van 196 42km Becamex IDC 2009-2013 Under construction Expressway Corporation

Major Projects - Transport - Continued

Value (US Capacity/ Project Name $mn) Length Companies Timeframe Status BIDV Expressway Development Under construction Trung Luong - My Thuan 1,100 54km Corporation[Sponsor], 2009-2013 (March 2011) Expressway Project Cuu Long CIPM

Mu Loi Bridge 88 2009-2012 Completed Nhat Tan Bridge (includes Vinaconex, IHI access roads), package No. 423 3,900km Corporation, Sumitomo 2009-2012 Completed 3, Hanoi Mitsui Construction Saigon International China Harbor Terminal, Phu My 1 163 Engineering Company 2009-2011 Completed Industrial Park (CHEC)

Song Bung 4 access road 1 Cavico Corporation 2009-2010 Completed Trai Thien Sea Transport Delayed (April 2010- Ben Dam deep water 10,000,000 Investment and project delayed due to transhipment port, Con Dao 300 tonnes Development Joint 2009- disputes, April 2009- district, Vung Tau city Stock Company licence awarded) 1A National Highway (Ngoc Hanoi Department of Hoi - Cau Gie section) 50 24km Transportation -2009 Completed Under construction Samsung Construction (September 2013 - 30,000,000 & Trading (Samsung Construction Son Duong deep water port, 1,200 tonnes C&T), Formosa Plastics 2008-2015 underway; At June part of Vung Ang Economic Group, Formosa Ha 2012 - Project facing Zone, Ha Tinh Province Tinh Steel financing difficulties) Truong Son Cai Mep-Thi Vai Construction Corp, Civil International Port (includes 100,000 Engineering Completed (January roads connecting National 619 tonnes Construction Joint 2008-2013 2013) Highway 51 to the Cai Mep Stock Co. No.6, port) ODA[Sponsor] Under construction (September 2013 - A GS Engineering & five-kilometre section Tan Son Nhat International 340 13.7km Construction 2008-2013 of the Tan Son Nhat- Airport - Binh Loi - Outer Corporation Binh Loi Outer Ring Ring Road BT project, Ho Road in HCM City Chi Minh City opened.)

2.6mn PAE Limited, CPG Phu Quoc International 780 Corporation Pte Ltd, 2008-2012 Completed (December airport (new airport), Phase passengers/ Airports Corporation of 2012) 1 yr Vietnam National Highway 61B (Vi Thanh District [Hau Giang Completed (May 2012- Province] - Can Tho City 165 47.5km 2008-2012 Road opened to traffic) [Mekong Delta]) Under construction 508 Company, Civil (September 2011 - Engineering 50% completed; Duong Dong - Cua Lap 16 7km Construction Company 2008- Originally to be road, connecting Phu Quoc No 5 completed by Airport November 2009)

Major Projects - Transport - Continued

Value (US Capacity/ Project Name $mn) Length Companies Timeframe Status Six-lane Cau Gie - Ninh Binh Vietnam Expressway expressway project first Corporation, Japan phase (National Highway 1A 430 50km International 2006-2012 Completed (June (in Hanoi) to Highway No.10 Cooperation Agency 2012) (Nam Dinh province) (JICA)[Sponsor] Louis Berger Group, Middle Airports 6mn Corporation, Airport Completed (December 74 passengers/ Consultants B.V., 2006-2011 2011) Danang International Airport yr National Construction (new passenger terminal) Consultants Feasibility studies/EIA underway (May 2012 - Currently preparation board is in the process of submitting for approval of 3 sub- projects named (EIA), Tien Lang International construction works, Airport (new airport), Hai bomb and mine Phong detection) At planning stage (October 2013 - Approved from Ba Ria- Vung Tau authorities, province will build a Vung Tau airport (Relocate plan and submit it to to Go Gang island of Long the Government for Son commune) approval.) Chu Lai International Airport Civil Aviation Upgradation Project - Phase Administration of 2 Vietnam (CAAV) Airports Corporation of Long Thanh International Vietnam, Japan Airport Airport - Phase 2 Consultants Airports Corporation of Long Thanh International Vietnam, Japan Airport Airport - Phase 3 Consultants Quang Ninh International Airport (Phase 2), Doan Ket Korea Airports commune, Van Don region, Corporation (KAC), Quang Ninh province Joinus Ltd Civil Aviation Pleiku Airport Upgradation Administration of Project (Phase 2), Gia Lai Vietnam (CAAV) Port and Waterway Dung Quat II Port, Part of Engineering Consultants Contract Awarded Dung Quat Economic Zone, JSC, Nikken Sekkei Civil (August 2012) Quang Ngai Province Engineering Ltd European Investment Metro Line 4 (Nguyen Van Bank (EIB), Asian Linh - Ben Cat Bridge 2,500 36km Development Bank At planning stage (April [District 12]) PPP Project, (ADB), Italian Thai 2011) Ho Chi Minh City Development (ITD)

Major Projects - Transport - Continued

Value (US Capacity/ Project Name $mn) Length Companies Timeframe Status Ho Chi Minh City Line (Ben Thanh Market - Ba Son 2.2km In tender/Tender Shipyard) launched (June 2013) eDES Engineering Solutions, Phuong Nam At planning stage Ho Chi Minh City - Can Tho 3,600 134km Institute of Science and (November 2013) Province Railway Line Technology Ministry of Transport of Urban Railway Line No. 5 Vietnam, Japan Bank for Feasibility studies/EIA PPP Project (West Lake-Ba International underway (April 2012) Vi District), Hanoi Cooperation Trang Bom (Dong Nai) - Hoa Hung (HCM City) Railway Vietnam Railway At planning stage Line Project, Ho Chi Minh 550 Corporation (VRC), (September 2009) City Government of Japan Bien Hoa-Vung Tau Railway At planning stage (May Line, Ho Chi Minh City 54.6km 2013) At planning stage Lao Cai-Hanoi-Haiphong 4,286.4 381km Vietnam Railway (September 2012 - Railway Line Project Corporation (VRC) Seeking investors) Railway line (Phnom Penh's Oudong District [Kampong Speu Province] - Vietnam's Government of Loc Ninh District [Binh China[Sponsor] Phuoc Province]) Metro Line 3B (Cong Hoa Crossroads [Tan Binh District] - Hiep Binh Phuc [Thu Duc District]), Ho Chi Minh City Metro Line 6 (Ba Queo - Phu Lam Intersaction) Road linking East-West Japan International Avenue with the Trung 106.79 2.7km Cooperation Agency At planning stage Luong Expressway (JICA) (December 2010) Construction Company Thai Ha Bridge Over Red 102 No. 1, Ministry of Approved (2009) River Construction (Vietnam) At planning stage Bach Khoa Construction (October 2012 - On Nhieu Loc-Thi Nghe flyover Consultant Corporation hold due to lack of no. 1 project investors) Van Tuong Co Ltd, Volunteer Youth Group, Traffic Works Construction Corporation No. 8, Contract Awarded 1,000 81.7km Construction (March 2012) Corporation No. 1, La Son - Tuy Loan highway Truong Son BT project, part of North- Construction Corp, South Highway Truong Thinh Group

Major Projects - Transport - Continued

Value (US Capacity/ Project Name $mn) Length Companies Timeframe Status Joint Stock Co, Son Hai Group Co Ltd Nguyet Vien-Thanh Hoa Bridge PPP 11km At planning stage First overhead road project At planning stage (Cong Hoa Intersection - (June 2012 - At Nguyen Huu Canh Street), 714 8.4km planning stage, Ho Chi Minh City seeking Financing) Second overhead road At planning stage project (To Hien Thanh (June 2012 - At Street - Belt road No. 2), Ho 328 10.2km planning stage, Chi Minh City seeking Financing) Third overhead road project (To Hien Thanh Street - At planning stage Nguyen Van Linh 817 (June 2012 - At Boulevard), Ho Chi Minh planning stage, City seeking Financing) Fourth overhead road project (Binh Phuoc At planning stage Junction - Cong Hoa 547 7.7km (June 2012 - At Intersection), Ho Chi Minh planning stage, City seeking Financing) Sa Huynh - Dung Quat Coastal Road Project, 2.26 Project finance closure Quang Ngai (September 2013) Lao Bao [Quang Tri Province] - Hai Phong port [Hanoi] (Extension of the 900km At planning stage Khon Kaen-Tien Sa Port (December 2012) Road) Cao Lanh Bridge (over the Tien River), part of the Mekong Delta Connectivity project Ring road No 4 around Hanoi At planning stage (April Mekong East Co, Cuu 2013; Total Long CIPM, Upgradation of Upgradation of National 145km Construction Materials National Highway 20 Highway 20 Project - Phase No 1 Project Cost: US$400 II (Dau Giay - Bao Loc City) million)

na = not available. Source: BMI Key Projects Database

Energy And Utilities Infrastructure - Outlook And Overview

Table: Vietnam Energy & Utilities Infrastructure Industry Data, 2012-2017

2012 2013e 2014f 2015f 2016f 2017f

Energy and Utilties Infrastructure Industry 34.5 35.1 35.4 35.6 35.9 36.2 Value As % Of Total Infrastructure Energy And Utilities Infrastructure Industry Value, VNDbn 20,208.7 22,723.0 25,322.7 28,143.7 31,223.3 34,558.1 Energy and Utilities Infrastructure Industry Value, US$bn 1.0 1.1 1.2 1.4 1.5 1.7 Energy and Utilties Infrastructure Industry Value Real Growth (%) 11.5 5.8 5.7 5.9 5.9 5.8 Energy and Utilties Infrastructure Industry Value As Percent Of Total Construction (%) 11.3 11.9 11.8 11.8 11.8 11.7

Power Plants and Transmission Grids Infrastructure Industry Value As % Of Total 90.5 90.8 90.9 90.9 90.9 90.9 Energy and Utilities Power Plants and Transmission Grids Infrastructure Industry Value, VNDbn 18,288.7 20,623.0 23,010.3 25,578.5 28,369.9 31,413.3 Power Plants and Transmission Grids Infrastructure Industry Value,US$bn 0.9 1.0 1.1 1.3 1.4 1.6 Power Plants and Transmission Grids Infrastructure Industry Value Real Growth (%) 12.7 6.2 5.8 5.9 5.9 5.8 Power Plants and Transmission Grids Infrastructure Industry Value As % of Total 31.2 31.8 32.1 32.4 32.6 32.9 Infrastructure Power Plants and Transmission Grids Infrastructure Industry Value As % of Total 10.2 10.8 10.8 10.7 10.7 10.6 Construction

Oil and Gas Pipelines Infrastructure Industry Value As % Of Total Energy and Utilities 1.7 1.6 1.5 1.4 1.3 1.3 Oil and Gas Pipelines Infrastructure Industry Value, VNDbn 341.8 356.9 377.9 398.3 419.8 442.5 Oil and Gas Pipelines Infrastructure Industry Value, US$bn 0.0 0.0 0.0 0.0 0.0 0.0 Oil and Gas Pipelines Infrastructure Industry Value Real Growth (%) -22.1 -2.2 0.1 0.2 0.4 0.5 Oil and Gas Pipelines Infrastructure Industry As % of Total Infrastructure 0.6 0.6 0.5 0.5 0.5 0.5 Oil and Gas Pipelines Infrastructure Industry As % of Total Construction 0.2 0.2 0.2 0.2 0.2 0.1

Water Infrastructure Industry Value As % Of Total Energy and Utilities 7.8 7.7 7.6 7.7 7.8 7.8

Vietnam Energy & Utilities Infrastructure Industry Data, 2012-2017 - Continued

2012 2013e 2014f 2015f 2016f 2017f

Water Infrastructure Industry Value, VNDbn 1,578.2 1,743.1 1,934.5 2,166.8 2,433.5 2,702.3 Water Infrastructure Industry Value, US$bn 0.1 0.1 0.1 0.1 0.1 0.1 Water Infrastructure Industry Value Real Growth (%) 7.7 3.8 5.2 6.8 7.3 6.1 Water Infrastructure Industry As % of Total Infrastructure 2.7 2.7 2.7 2.7 2.8 2.8

e/f = BMI estimate/forecast. Source: Vietnam General Statistics Office, BMI

Table: Vietnam Energy & Utilities Infrastructure Industry Long-Term Forecasts, 2018-2023

2018f 2019f 2020f 2021f 2022f 2023f

Energy and Utilities Infrastructure Industry 36.5 36.8 37.2 37.6 38.0 38.4 Value As % Of Total Infrastructure Energy And Utilities Infrastructure Industry Value, VNDbn 38,215.0 42,218.1 46,623.6 51,452.7 56,804.3 62,890.1 Energy and Utilities Infrastructure Industry Value, US$bn 1.9 2.2 2.4 2.7 3.0 3.3 Energy and Utilities Infrastructure Industry Value Real Growth (%) 5.7 5.7 5.6 5.7 5.7 6.1 Energy and Utilities Infrastructure Industry Value As Percent Of Total Construction (%) 11.7 11.6 11.6 11.6 11.5 11.6

Power Plants and Transmission Grids Infrastructure Industry Value As % Of Total 90.9 91.0 91.0 91.0 91.1 91.1 Energy and Utilities Power Plants and Transmission Grids Infrastructure Industry Value, VNDbn 34,748.5 38,399.3 42,414.9 46,827.7 51,722.3 57,311.6 Power Plants and Transmission Grids Infrastructure Industry Value, US$bn 1.8 2.0 2.2 2.4 2.7 3.0 Power Plants and Transmission Grids Infrastructure Industry Value Real Growth (%) 5.7 5.7 5.7 5.7 5.8 6.2 Power Plants and Transmission Grids Infrastructure Industry Value As % of Total 33.2 33.5 33.8 34.2 34.6 35.0 Infrastructure Power Plants and Transmission Grids Infrastructure Industry Value As % of Total 10.6 10.6 10.6 10.5 10.5 10.5 Construction

Oil and Gas Pipelines Infrastructure Industry Value As % Of Total Energy and Utilities 1.2 1.2 1.1 1.1 1.0 1.0

Vietnam Energy & Utilities Infrastructure Industry Long-Term Forecasts, 2018-2023 - Continued

2018f 2019f 2020f 2021f 2022f 2023f Oil and Gas Pipelines Infrastructure Industry Value, VNDbn 466.0 490.2 515.7 542.0 569.6 598.7 Oil and Gas Pipelines Infrastructure Industry Value, US$bn 0.0 0.0 0.0 0.0 0.0 0.0 Oil and Gas Pipelines Infrastructure Industry Value Real Growth (%) 0.4 0.4 0.4 0.4 0.4 0.5 Oil and Gas Pipelines Infrastructure Industry As % of Total Infrastructure 0.4 0.4 0.4 0.4 0.4 0.4 Oil and Gas Pipelines Infrastructure Industry As % of Total Construction 0.1 0.1 0.1 0.1 0.1 0.1

Water Infrastructure Industry Value As % Of Total Energy and Utilities 7.9 7.9 7.9 7.9 7.9 7.9 Water Infrastructure Industry Value, VNDbn 3,000.6 3,328.7 3,693.1 4,083.1 4,512.3 4,979.8 Water Infrastructure Industry Value, US$bn 0.2 0.2 0.2 0.2 0.2 0.3 Water Infrastructure Industry Value Real Growth (%) 6.1 6.1 6.1 5.9 5.8 5.8 Water Infrastructure Industry As % of Total Infrastructure 2.9 2.9 2.9 3.0 3.0 3.0

f = BMI forecast. Source: Vietnam General Statistics Office, BMI

Slowly Overshadowed

Energy & Utilities Infrastructure Value And Share Of Infrastructure Value

e/f = BMI estimate/forecast, Source: Vietnam General Statistics Office, Local news sources, industry sources, BMI (Major Projects Database)

Although the total investment in the transport sector will continue to overshadow spending on energy & utilities, the value of the power plants and transmission grids sub-sector will increase, with real growth averaging 5.8% annually between 2014 and 2017. Vietnam's power consumption is expected to rise sharply, in light of both positive economic and demographic growth. The government will therefore need to step up the country's power generation to meet growing demand and avoid the real risk of persistent electricity shortages, which could in turn deter foreign manufacturers from using the country as an export base and force them to direct investment elsewhere.

The government has since announced ambitious plans for the sector. Under the government's Seventh Power Development Plan, the government has set a target of developing 75,000 megawatts (MW) of power generation capacity by 2020, with coal-based plants taking up 48% of this investment. This plan is expected to require an investment capital of US$48.8bn.

Vietnam does not have the fiscal strength to finance this ambitious plan, and as such, we believe that interest from foreign investors is vital for it to succeed. That said, the current structure of the market

suggests that this is unlikely to happen, with limited private investment, due to the bureaucratic obstacles and rigidity of the internal market. Electricity Vietnam (EVN) enjoys a monopoly over distribution in Vietnam's electricity market. A unified tariff is applicable across the country, and artificially low, capped prices have long made it unprofitable for foreign infrastructure companies to invest in the power sector, mainly because most of the equipment for power stations has to be purchased from other countries at global market prices. They have also been deterred by an onerous negotiating process for pricing and distribution contracts.

Addressing those two issues is clearly within the government's reach and could boost activity in the market, helping to mitigate some of the risks to future growth inherent in the over-reliance on EVN's investment programme. In early 2006, the country's Prime Minister approved EVN's master plan for the development of a three-step competitive power market by 2022. This will be restricted to power generation up to 2014, expanding to the wholesale market between 2015 and 2022, followed by the retail sector.

Bottom-Up Restructuring

Vietnam's Power Development Roadmap

Source: Electricity Regulatory Authority of Vietnam

Vietnam officially launching its competitive generation market (CGM) on July 1 2012, marking the first phase of its power market development roadmap. The roadmap spans over 10 years and is projecting the introduction of an electricity wholesale market in 2014 and an electricity retail market by 2022. Under the CGM, independent power producers (IPPs) would forward their asking prices to the Electric Power Trading Company (EPTC). These EPTCs would purchase the electricity via a competitive cost-based pool and sell it to distribution companies and large consumers at regulated prices.

To liberalise the power sector further, Vietnam's Minister of Industry and Trade, Vu Huy Hoang, granted approval to establish three power generation companies in June 2012: Genco 1, Genco 2 and Genco 3. These companies are to take over power generating plants directly under EVN. Genco 1 will manage hydropower plants, such as Dai Ninh, Ban Ve and Song Tranh. Meanwhile, Uong Bi Thermal Power in Northern Quang Ninh Province will serve as a backbone for Genco 1, which will also acquire EVN's shares in the Quang Ninh thermal power plant and some other thermal project management boards throughout the country. 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 3 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.

EVN Still Dominating Power Generation

Vietnam - 2010 Installed Capacity Mix By Owners, %

Source: Vietnam Institute of Energy 2011

Coal: Growing Foreign Participation

The first ever public-private partnership (PPP) in Vietnam's power generation sector gained momentum in May 2009. Malaysia's JAKS Resources reportedly signed a memorandum of understanding (MoU) with

the Vietnamese government for the construction and operation of the Hai Duong thermal power station. This is a significant milestone for Vietnam as it indicates that opportunities to fill the investment gap left by state-owned EVN are proliferating for IPPs.

Since then, foreign involvement in the sector has significantly accelerated, with the largest project a U $10.6bn deal signed between Russian and Vietnamese authorities to construct Vietnam's first 2,000- megawatt (MW) nuclear power plant in the Ninh Thuan province.

The coal generation sector has also been receiving significant attention from foreign investors. The Mong Duong 2 plant in particular is representative of this growing liberalisation in the Vietnamese utilities sector, as it is one of Vietnam's first foreign-backed build-operate-transfer (BOT) coal-fired plants. Aside from being built and operated by foreign companies, the project is financed by foreign banks. Besides the Mong Duong 2 plant, four other coal-fired plants (Nghi Son 2, Phu My 3, Phu My 2.2 and Hai Duong) are being implemented by foreign independent power investors under BOT contracts.

Several BOT coal-fired power plant projects are in the pipeline.

In February 2013, Japan's Sumitomo Corporation lodged an application to secure an investment licence for the construction of a US$2bn, BOT coal-fired power plant in Khanh Hoa. The first turbine of the 1,320MW plant is likely to start commercial operations in 2017. The plant will use coal imported from Australia and other nations and will deliver power to state-owned EVN. As of May 2013 negotiations with the government over the contract terms were under way, with the BOT contract expected to be signed in Q114.

In April 2013, the Vietnamese government approved Toyo Ink Group's request to be the project investor of the US$3.5bn Song Hau 2 thermal power plant under a BOT basis. A MoU would be negotiated and signed by the Ministry of Industry and Trade and several government agencies with Toyo Ink on the project. As of July 2013, the company had yet to finalise negotiation with the authorities regarding detailed terms such as the power tariff, concession period, and fuel supply.

In June 2013, India-based electric utility Tata Power secured a contract worth US$1.8bn from the Vietnamese government. The contract is to develop two 660MW coal-fired thermal power plants in South Vietnam. The construction of the power project, called Long Phu 2, is likely to start in 2019. This is believed to be the largest Indian investment in Vietnam and will support Tata Power's own aspirations in South East Asia and India's Look East policy. The memorandum of understanding for this deal was signed subsequently in November 2013.

In September 2013, a department in the Ministry of Industry and Trade signed a memorandum of understanding with Singapore's Sembcorp Industries to jointly develop the US$2bn Dung Quat coal-fired power plant in Quang Ngai Province.

In September 2013, Vietnam approved the construction of the 1200MW Vinh Tan 1 coal-fired power plant, with the US$2bn BOT project scheduled to be officially awarded to China Southern Power Grid in mid- October 2013.

Besides BOT contracts, the Vietnamese government is keen to award foreign players engineering, procurement and construction (EPC) contracts for thermal (gas- and coal-fired) power plants. The government had announced in September 2011 that it is in talks with foreign companies over the construction of a further 12 power plants in the country. Some of the foreign companies that have won such projects are: Chinese consortium CHENGDA, DEC, SWEPDI and ZEPC for the Duyen Hai 3 coal-fired power plant in August 2011; Hyundai Engineering & Construction for the Mong Duong 1 coal-fired plant in September 2011; Wuhan Kaidi Electric Power for the Thang Long coal-fired power plant in December 2011; PHI Group for the Hai Lang coal-fired power plant in December 2011; Toyo Ink Group for the Song Hau 2 coal/diesel oil plant in January 2012; Trisun International Development for a US$400mn plasma-converted gas plant for power generation in Ho Chi Minh City; and Daelim Industrial for the O Mon 1 gas-based power plant in September 2012. The 440MW Mao Khe coal-fired power plant was also completed in April 2013 under an EPC contract, awarded to Wuhan Kaidi Electric Power and Germany's WULFF.

Vietnam is also reliant on foreign players to provide equipment for coal-fired power plants. In May 2012, a joint venture (JV) comprising South Korea's Daelim Industrial and Japan's Sojitz Corporation was awarded an US$826mn contract to provide plant equipment for the 1,200MW Thai Binh 2 coal-fired power plant. The JV signed the contract with PetroVietnam Construction Joint Stock(PVC), the construction subsidiary of state-run oil and gas company PetroVietnam. Under the terms of the agreement, the JV would install and test-run boilers, turbines and two generators for the US$1.6bn Thai Binh 2 plant, according to the Vietnamese government cited by Reuters. This was followed by US-based Babcock & Wilcox being awarded a US$300mn equipment contract for the project in August 2012. In February 2012, PVC had signed a US$1.6bn contract with state utility EVN to provide EPC services for the Thai Binh 2 plant. If completed, the Thai Binh 2 plant would be the largest conventional thermal power plant in northern Vietnam. The plant is expected to become operational by 2016.

The country is also keen for foreign companies to develop a domestic power equipment manufacturing industry in Vietnam. In July 2012, the Vietnamese government had selected three thermal power plants that are to use locally manufactured power equipment, reports Intellasia. Through the use of local power equipment, the government is aiming to increase the capacity of domestic power equipment manufacturers and end low-quality power equipment imports, which arrive mostly from China. The three plants in question are: the Vinacomin-invested Quynh Lap 1 in Central Nghe An province; the PetroVietnam- invested Song Hau 1 in Southern Hau Giang province; and the PetroVietnam-invested Quang Trach 1 in Central Quang Binh province.

The pilot plan to use locally manufactured power equipment is expected to encourage domestic and foreign manufacturers that have established facilities in Vietnam to boost their investment in the country. The statement was made by Dao Phan Long, the deputy president of the Vietnam Association of Mechanical Industry. Tran Viet Ngai, the chairman of the Vietnam Energy Association, said that Chinese contractors have participated in 20 thermal power projects in Vietnam. Surveys have found that the weakness of contracts has led to problems in the implementation and operation of these projects.

We highlight that coal-fired power plants that rely on domestically sourced coal are set to face rising fuel costs, which could erode their profitability. This is because state coal miner and supplier Vinacomin has been selling coal to power plants below the cost of production. Although the price of coal sold to the power sector was raised on April 20 2013, this is still just equal to 85-87% of the projected production cost for 2013. Vinacomin was previously able to sustain losses from these sales as the power sector only accounted for 10-15% of total output, while coal exports (which accounted for most of total output) were highly profitable. However, a decline in global coal prices and an increase in demand from local power producers (30% of total output in 2012) has led to the unwinding of the situation, and the Vietnamese trade ministry is in the midst of determining a second rate hike.

Some coal-fired power plant projects are also facing difficulties with reaching financial closure. In April 2013, local authorities in the Kien Giang province announced that the Kien Luong Power Centre project will likely be halted if the Tan Tao Group is unable to arrange capital required for investment, worth around US$6.7bn. The project was licensed five years ago. The first phase of the project, thermal power plant Kien Luong 1, was expected to become operational by end-2013. Land clearance for the construction of the Kien Luong 1 was obtained more than 18 months ago, but no progress on it was made owing to a lack of capital, according to ITACO, a subsidiary of Tan Tao Group. Although the Tan Tao Group still plans to continue with the project - the group has already pumped US$240mn into infrastructure and land clearance -

the provincial People's Committee has filed a petition with the Ministry of Industry and Trade to revoke the investment licence for the thermal plant over the company's failure to arrange capital for it.

Hydropower: Indispensible, But Problematic

Hydropower provides more than a quarter of Vietnam's electricity. In previous years, there has been a stable stream of investment into increasing hydropower capacity as elevated coal prices in Asia render coal plants costly to operate. This trend has changed in recent years, with a growing number of hydropower projects, particularly small-scale hydropower plants, being cancelled. The country has 1,021 hydropower projects, with a combined capacity of 24,246MW, located in over 36 provinces and cities.

In October 2012, nine hydropower projects planned in the Vietnamese province of Thua Thien Hue were cancelled by the provincial People's Committee in late-September. These nine are part of 21 small- to medium-capacity plants planned in the province for completion by 2020, with a total combined capacity of 357MW. Reasons given for the cancellation included poor economic feasibility, a lack of progress and environmental concerns.

In March 2013, the Vietnamese province of Kon Tum had implemented a ban on new hydroelectric power (HEP) projects, reports Energy Business Review. The ban was imposed owing to environmental reasons, namely the loss of forest cover and the erosion of downstream river basins, which has occurred as a result of HEP development. There have been 21 proposed HEP projects cancelled as a consequence of the ban. Several other Vietnamese provinces have previously imposed similar prohibitive legislation.

In June 2013, a recent report published by the Vietnam National Assembly (NA) showed that nearly half of the 1,108 small-scale hydro-power projects in the National Master Plan for Power Development until 2020 had been cancelled. In addition, NA Deputy Truong Van Vo had also proposed that the government withdraw the planned hydropower projects 6 and 6A in Dong Nai Province from the national master plan. The projects have a combined capacity of 240MW, and were undergoing environmental impact assessments.

We believe this adverse sentiment towards hydropower plants is due to three factors:

Reliability: In recent years, hydropower has proven to be an unreliable source of electricity, as severe droughts have plagued Vietnam.

A lack of economic feasibility: The report published by the NA stated that there was a lack of investor interest in hydropower projects due to low profits. We believe this is due to the fact that electricity prices are artificially capped; the government controls prices, and the average rate for electricity in Vietnam is VND1,369 (US$0.066) per kilowatt hour (kWh), which is one of the lowest in the world. This means that the country's sole electricity distributor, EVN, is likely to purchase electricity at an even lower rate, thus making it hard for hydropower producers (loaded with high upfront costs) to break even within an attractive period of time.

Environmental concerns: Environmental concerns - namely deforestation and the destruction of natural landscapes - were key reasons cited by the Vietnamese Department of Industry and Trade in June 2012 regarding its decision to reject 52 sub-standard hydroelectricity projects for the first half of 2012. The NA also stated that only 2.1% of the 51,000 hectares of forested land that had been used for construction of hydro-power projects in Vietnam had been planted with new trees.

Despite this negative investment climate, there are still hydropower projects being developed. In January 2013, Alstom was awarded a contract to supply electro-mechanical equipment for a hydroelectric power plant in Vietnam, reports Energy Business Review. Alstom will install turbines and generators at the 154MW Dong Nai 5 facility, working in conjunction with its Chinese business partner, Hydrochina Huadong.

Nuclear: Still In The Works

Vietnam has taken the first step towards nuclear. Vietnam's nuclear ambitions stretch back to the 1980s, when the country first considered developing the technology. According to the country's Seventh Power Master Plan, there are plans for 10 nuclear power plants with an installed capacity of 10,700MW by 2030. Eight sites in central Vietnam are being considered as location for potential nuclear power plants, including locations in Ninh Thuan, Binh Dinh, Phu Yen, Ha Tinh and Quang Ngai provinces. According to a statement by the Vietnamese prime minister in March 2013, the country now plans to build 8,000MW of nuclear capacity by 2025 and 15,000MW by 2030, representing 10% of total generation.

This ambition appears to be in process of being achieved as, in November 2011, Vietnam signed two key agreements - one loan agreement and one consultancy agreement - with Russia for the construction of its first nuclear power plant, the US$10bn, 2,000MW Ninh Thuan 1 nuclear project. The project is estimated to cost a total of US$10bn, and Russia will provide up to US$9bn for the project, as well as a second loan of US$500mn for the establishment of a nuclear science and technology centre. A Russian consortium was

expected to complete the feasibility study of the project by late-2013, which includes the selection of the project site. Atomstroyexport, a subsidiary of Russian state nuclear holding company Rosatom, will begin constructing the plant in 2014, which is to become operational in 2020.

In a visit in January 2014, the International Atomic Energy Agency's chief, Yukiya Amano, agreed to provide support to Vietnam. This includes the nuclear watchdog sending delegations of experts to discuss infrastructure, safety and other issues, on top of funding aid through technical projects.

Thermal Dependent

Vietnam Electricity Generation Capacity Mix, 2012e

e = BMI estimate. Source: UN Data, EIA, BMI

Similarly, in September 2011 a Japanese consortium known as the International Nuclear Energy Development of Japan (INEDJ) signed an agreement with Vietnamese state utility EVN to jointly develop the Ninh Thuan 2 nuclear power project in Vietnam. As part of the agreement, nuclear plant operator Japan Atomic Power conducted a US$26mn feasibility and environmental study on the project and was set to report the results, which include an assessment on tsunamis, to EVN in July 2013. Japan Atomic will also provide consulting to EVN on the preparation of necessary documentation for site approval for Vietnam's Ninh Thuan 2 nuclear plant, according to the Wall Street Journal. Japan Atomic would also provide or

secure financing and insurance of up to 85% of the project's total coast, with Japan providing loans around US$500mn for the project.

Vietnam's Song Da 5 also signed a contract in early February with Russian company NIAEP to send some Vietnamese workers to build Russia's Rostov nuclear power plant. This is part of the training to build the Ninh Thuan nuclear plant, with Vietnamese workers to be sent to Japan as well.

Despite concerns over Vietnam's readiness to adopt nuclear power, the country is at a more advanced stage than other developing countries and already has cooperation agreements in place with South Korea, Japan, the US, Canada, China and France. Vietnam has also passed an Atomic Energy Law - which has been in effect since 2009 - and a national nuclear safety commission responsible to the Prime Minister, which was established in July 2010. Vietnam was also planning to set up a new National Council for Atomic Energy Development in May 2013. The council, headed by Vietnam's science and technology minister, will advise the government on identify strategies and draw up key policies on nuclear energy development. It will also coordinate with various agencies, governmental bodies and localities in developing nuclear energy. However, even in its most optimistic outlook, the Vietnamese government does not expect nuclear capacity to come online before 2020.

South Korean companies are also keen to build nuclear power plants in Vietnam. In March 2012, South Korea signed an agreement with Vietnam to check the viability of building a nuclear power plant. South Korea was expected to initiate the feasibility studies in April 2012 and these were scheduled to be concluded in mid-2013. The US also appears keen to secure any future nuclear power plant contracts in Vietnam, as the country sent a delegation in May 2013 to discuss the development of nuclear generation in the US and Vietnam.

Geothermal: Making A Presence

In October 2012, a 25MW geothermal power plant was scheduled to be constructed in Dakrong District in Central Quang Tri Province, Vietnam, according to the deputy chairman of Viet Nam Thermal Association, Ta Huong. This will be the first power plant of its kind in Vietnam and has already secured licences by provincial authorities. The geothermal plant will have the capability to operate 24 hours a day without being affected by weather conditions such as sunlight, wind or waves. The plant will reportedly use hot dry rock heat mining technology to generate power.

ADB To Support Underinvested Transmission Network

Vietnam's electricity transmission network is in a poor condition and suffers from high levels of electricity wastages, due to an inefficient grid system. According to EVN, electricity losses in the first five months of 2012 were over 5.3bn kWh; 11% of the total electricity production and purchase. This is significantly higher than its South East Asian peers who have an electricity loss ratio of about 4-5% according Tran Viet Ngai, chair of the Vietnam Energy Association. According to Ngai (cited from Intellasia), the losses are due to old transmission lines, overloading, locking connectors, distribution wires and old substations.

Significant investment is therefore required to address these transmission losses and meet future demand for grids. According to the National Power Transmission Corp (NPT) in June 2012, total demand for investment capital to develop the electricity transmission network to 2020 reaches about US$10bn. Transmission projects have so far borrowed only US$4bn-worth of official development assistance (ODA) and commercial loans; the remaining US$6bn has not been arranged.

Vietnam is looking to change this. In November 2011, the NPT announced that Vietnam will develop 300-350 power transmission projects in the period up to 2015. This would require an annual investment of US$1bn and the country is seeking foreign investment. The Asian Development Bank (ADB) has since agreed to provide some of the financing.

In February 2012, the ADB and the State Bank of Vietnam signed documents for the first tranche of a US $730mn loan facility to be provided by the ADB to improve the electricity transmission network of Vietnam. The loan will be used to finance the Power Transmission Investment Programme, which is designed to fulfil the increasing electricity demand of the industrial sector and households. The ADB is expected to provide the funds in four tranches, with the programme scheduled to be completed in June 2020. The first payment of US$120.5mn will be provided through ordinary capital resources and will have a term of 25 years. The funds from the first tranche will be utilised to build 648km transmission lines with a voltage of 500 kilovolt (kV), and 100km transmission lines with 220kV voltage.

In May 2012, Vietnamese state-operated power company Ho Chi Minh City Power Corporation (HCMC Power) has asked the Saigon municipal government to allow it to install power lines underground, reports The Saigon Times. HCMC needs to invest VND17tn (US$816mn) in development by 2015, but has an annual budget of just VND600bn (US$28mn). The company has therefore proposed to install underground power lines in order to cut costs, comprising 18km of medium-voltage power lines and 43km of low-voltage power lines. The entire city's power network is expected to be underground by 2025. However, structural

changes need to be made before there is sufficient investment to meet the long-term demand for grids. Vietnam's electricity transmission price remains low, averaging 6.58% of electricity prices during the 2008-2012 period. This is much lower than the global average price and needs to be raised to 10-12% of electricity prices.

In July 2012, NPT started implementing a US$215mn power transmission line project which involves: the 437km, 500kV Pleiku-My Phuoc-Cau Bong transmission line; the 15.94km, 220kV Cau Bong-Hoc Mon- Binh Tan line in HCM City; and the 13.4km 220kV Cau Bong-Duc Hoa line in HCM City. The project is financed by ADB (US$115mn) and by the French Development Agency (US$100mn). The project aims to transmit electricity from power plants in the central region, imported electricity from Laos and Cambodia, coal-fired power plants in Northern Vietnam to the southern provinces.

In January 2013, the Southern Electricity Corporation announced that it would invest nearly VND4.5trn (US$225mn) for major power projects in 2012. These projects include a 56km sea cable system from Ha Tien to Phu Quoc island - the EPC contract for the project was awarded to Italy's Prysmian Powerlink Sri and power transmission networks in areas inhabited by Khmer people in Kien Giang, Soc Trang and Tra Vinh provinces.

Water Treatment: Droughts Driving Demand For Services

Vietnam has significant potential for large-scale water treatment facilities and we are forecasting real growth in the water infrastructure industry to average 6.0% per annum between 2013 and 2017. Despite the presence of the Mekong River, Vietnam faces severe droughts periodically, with the drought in early 2010 reportedly one of the country's worst in 100 years, according to Time Magazine.

We believe that these droughts have the potential to increase in severity over the long term. Rapid industrialisation throughout Vietnam is polluting the country's water supply at an increasing rate and reducing the availability of potable water.

Driving Demand For Water Treatment Services

Vietnam - Real GDP And Organic Water Pollutant Emissions Data

f= BMI forecast. Source: BMI, World Bank, Vietnam General Statistics Office

Many countries located along the Mekong River, such as China and Laos, are also keen to utilise the river's hydropower potential for electricity generation, damming up major tributaries further up the Mekong River. These countries have questionable environmental licensing regulations; thus, it is unclear if water resources used for electricity supply are environmentally sustainable. This creates significant potential for severe environmental consequences and further reduces the availability of clean water supply to Vietnam. Consequently, large-scale water treatment facilities are needed to make up for this decline in water supply, and we have seen the country offer several projects under a PPP framework.

Urbanisation in major Vietnamese cities is also rapidly contaminating their water sources, while at the same time increasing their demand for potable water. Hanoi, for example, is reliant on ground water to meet its water needs, with clean water demand estimated to be around 550,000m3 per day according to local media reports. With urbanisation and economic growth, this demand for potable water is expected to surge to 1.0-1.5mn m3 per day. This would create a deficit in clean water resources and necessitate the use of surface water resources, which are potentially contaminated.

Various multilateral financial institutions are keen to finance these water utility projects, with the ADB having already agreed to provide US$1bn in funds to improve the country's water supply system between 2011 and 2020. Indeed, the urban water supply projects in Vietnam are now mainly funded by ODA capital and developed by local state-owned water supply companies, said Tran Tuong Lan, head of the Department for Infrastructure and Urban Centers under the Ministry of Planning and Investment.

Most of the country's large-scale water utility projects are located near the main cities, Hanoi and Ho Chi Minh City.

Vietnam has also recognised the need to improve its water infrastructure, and we have seen Vietnam offer several large-scale water utility projects (mainly water treatment facilities) under a PPP framework. According to the Vietnam Ministry of Construction, there are around 15 large-scale urban water supply projects worth US$500mn that are in need of investment across Vietnam.

In addition, there is also a significant deficit in wastewater treatment facilities among Vietnam's industrial parks. In August 2012, the Vietnam Department of Environmental Crime Control (under the Ministry of Public Security) said that only 143 out of the 232 industrial parks in Vietnam have wastewater treatment facilities. With Vietnam set to take a tougher stance on pollution, this could prompt companies to develop the necessary wastewater treatment facilities.

Under the law on administrative sanctions to come into force on July 2013, the maximum penalty for environmental violations will quadruple from the current VND500mn to VND2bn. In addition, the Ministry of Public Security is coordinating with the Ministry of Natural Resources and Environment to revise the 2005 Environment Protection Law and map out an Ordinance on the Vietnam Environment Police. This is expected to be issued in the third quarter of 2013.

Several foreign investors have expressed an interest in Vietnam's water utilities sector, particularly Japan- and Philippines-based companies. For example, Japan-based clean water companies Metawater and TSS are believed to be building the Bay Mau wastewater treatment plant in Hanoi, a project financed by Japan's ODA coordinator, Japan International Cooperation (JICA). Another notable example is the recent acquisitions by Philippine conglomerate Ayala Group. In May 2012 Ayala, through its subsidiary Manila Water, had acquired stakes in two Vietnamese water utility companies. The company bought a 10% stake in Nha Be Water Supply, a company that supplies potable water to a district in Ho Chi Minh. Manila Water also bought a 49% stake in Kenh Dong Water Supply, the owner of the 300,000m3/day Thu Duc

Water Treatment Plant. This makes Manila Water the largest foreign investor in Vietnam's water utilities sector.

There are, however, many investors still deterred from Vietnam's water utilities sector, and we believe some of the reasons are:

■ The inability for investors to determine the price of water sold to customers, which is currently set by Vietnamese authorities. Given that most countries do not allow the private sector to set the price of water, we believe this issue has more to do with Vietnam's lack of regulatory capacity to address and manage downside risks for private investors.

■ The lack of incentives to attract investors to the sector. According to the HCMC Institute of Development Studies (cited by the Saigon Times), private companies enjoy corporate income tax reductions and exemptions, but unlike state-owned enterprises, they do not have priority access to preferential loans. This is particularly important at the moment due to poor credit conditions globally.

■ The lack of clarity regarding the PPP framework for water utility projects. The Vietnamese government had launched a pilot PPP mechanism in November 2010, but specific regulations for the different types of infrastructure (including water) have yet to be completed by their respective agencies.

Major Projects Table - Energy & Utilities

Table: Major Projects - Energy & Utilities

Project Name Value (US$mn) Capacity/ Length Companies Timeframe Status

Oil & Gas Pipelines

Nam Con Son 2 Contract Pipeline Project, 1,200 293km Petrovietnam Gas -2014 Awarded (July Southern Vietnam Corporation (PV Gas) 2011) B-O Mon Natural Petrovietnam Gas Gas Pipeline Corporation (PV Gas), Project Vietsovpetro Joint Contract 400km (6.4 bcm/ Venture Co, Awarded year) Petrovietnam (March 2010) Construction Joint Stock Corporation (PVC)

Power Plants & transmission grids

Ninh Thuan 2 At planning nuclear power stage plant Unit 4, Vinh Japan Atomic Power (December Hai Company (JAPC), 2012 - 1,000MW International Nuclear -2027 Feasibility Energy Development study to be Corporation of Japan completed by March-2013) Song Hau 2 coal- Contract fired power plant, PetroVietnam, Toyo Ink Awarded Hau Giang 3,500 2,000MW -2022 (April 2013 - Group BOT project received

Major Projects - Energy & Utilities - Continued

Project Name Value (US$mn) Capacity/ Length Companies Timeframe Status government approval) Song Hau 2 Coal- At planning fired power plant, stage Hau Giang (February 2013 - Malaysia's Toyo Ink Group signed a memorandum 3,500 2,000MW Toyo Construction -2022 of understanding (MOU) with Vietnam's industry ministry for the project; Project to be built in two phases) Song Hau 2 coal- Contract fired power plant Awarded phase -2, Hau (April 2013 - Giang 1,000MW PetroVietnam, Toyo Ink -2022 BOT project Group received government approval) Song Hau 2 coal- Contract fired power plant Awarded phase -1, Hau (April 2013 - Giang 1,000MW PetroVietnam, Toyo Ink -2021 BOT project Group received government approval) Long Phu 2 coal- Contract fired power plant, Awarded Soc Trang (November Province 2013 - Contract awarded 1,800 1,200MW Tata Power 2019- based on pre- feasibility studies; feasibility studies to begin in 2014) Son My Power Feasibility Centre (LNG) BOT studies/EIA Project, Ham Tan underway District (Oct 2011 - International Power, Feasibility 4,667 3,000MW Sojitz Corporation, -2019 study PacifiCorp prepared for 1950MW Son My 1 power plant)

Vinh Tan 1 thermal Vietnam Coal and Contract power plant, part Mineral Industries (TKV), of Vinh Tan Electric 2,000 1,200MW China Power -2017 Awarded Centre, Tuy Phong International (August 2013)

Major Projects - Energy & Utilities - Continued

Project Name Value (US$mn) Capacity/ Length Companies Timeframe Status districts, Binh Development Limited, Thuan China Southern Power Grid Coal-fired power plant, Dung Quat Contract Economic Zone, 2,000 1,200MW Sembcorp Utilities 2016-2021 Awarded Binh Son district, (October Quang Ngai 2013) Ninh Thuan 1 Kiev Scientific Research nuclear power and Designing Institute plant Unit 2, Thuan (JSC KIEP), Energo Nam District Project Technology (LLC EPT), Atomexportstroy, 1,060MW Electricity of Vietnam 2016-2020 (EVN), Government of Russia[Sponsor], Rosatom, E4 Group, VTB An Khanh Thermo- An Khanh Thermo Project electricity Plant 2 481 300MW Power Joint Stock Co., -2016 finance in Pho Yen District Bank of China [Sponsor] closure Coal-fired Power Delayed Plant BOT Project, (November Van Phong 2013 - Economic Zone, Investor has Khanh Hoa not yet started 2,190 1,320MW Sumitomo 2015-2019 negotiations with the Ministry of Industry and Trade (MoIT) over a BOT contract.) Huoi Quang HydroChina hydropower plant Corporation, Song Da Under project Group, Alstom construction SA[Equipment], Agence (Received US 520MW Francaise de -2015 $100mn Developpement (AFD), financing from Electricity of Vietnam AFD) (EVN) Thang Long Khai Dich Vu Han Power thermo power Engineering Co Ltd, At planning plant, Le Loi 645 600MW Thang Long -2015 stage Commune, Hoanh Thermoelectric, Wuhan (January Bo Dist, Quang Kaidi Electricity Power 2012) Ninh Engineering Company Thermoelectric Phu Quoc Investment plant, Ganh Dau and Development At planning Commune 356.8 200MW Management Board, -2015 stage World Bank[Financier] Dong Nai 5 Alstom SA, Vietnam hydropower plant National Coal-Mineral Contract Industries Group Awarded 310 154MW (Vinacomin), Hydrochina -2015 (February Huadong Engineering 2013) Corporation

Major Projects - Energy & Utilities - Continued

Project Name Value (US$mn) Capacity/ Length Companies Timeframe Status Mekong Delta Vietnam Development Wind Power Bank [Sponsor], Export- Under Centre, Vinh Trach 500MW Import Bank of the -2015 construction Dong Commune United States [Sponsor] (May 2012) Dong Nai 6/6A Cancelled hydroelectriciy (October 2013 plant - Government shuts down 241MW Duc Long Gia Lai Group -2015 Vietnam's (DLG) Dong Nai 6, 6A hydropower projects.) Ninh Thuan 2 Feasibility nuclear power studies/EIA plant, Vinh hai underway (December Japan Atomic Power 2012 - Company (JAPC), Feasibility 12,000 4,000MW International Nuclear 2014-2027 study to be Energy Development completed by Corporation of Japan March-2013, Four units to be constructed) Ninh Thuan 1 Kiev Scientific Research nuclear power and Designing Institute plant, Thuan Nam (JSC KIEP), Energo District Project Technology (LLC EPT), Atomexportstroy, 10,000 4,120MW Electricity of Vietnam 2014-2025 Approved (EVN), Government of Russia[Sponsor], Rosatom, E4 Group, VTB Ninh Thuan 1 Kiev Scientific Research nuclear power and Designing Institute plant Unit 1, Thuan (JSC KIEP), Energo Nam District Project Technology (LLC EPT), Atomexportstroy, 1,060MW Electricity of Vietnam 2014-2020 Approved (EVN), Government of Russia[Sponsor], Rosatom, E4 Group, VTB Vinh Tan 1 Power China Power Plant, Binh Thuan International At planning 1,750 1,200MW Development Limited, 2014-2018 stage CSG Limited, China (September Southern Power Grid 2013) Hai Duong Coal- At planning Fired Power Plant stage (May BOT Project JAKS Resources, 2013- Wuhan Kaidi Electricity Sanjung 2,260 1,200MW Power Engineering 2014-2018 Merpati Sdn Company Bhd decided to terminate agreement)

Major Projects - Energy & Utilities - Continued

Project Name Value (US$mn) Capacity/ Length Companies Timeframe Status Vinh Tan 3 thermal Harbin Electric Contract power plant BOT International (HEI), Vinh Awarded project, Binh 1,100 1,980MW Tan 3 Energy Joint 2014-2018 (October Thuan province Stock Company (VTEC) 2013) Hai Duong Coal- At planning Fired Power Plant stage (May BOT Project, Unit JAKS Resources, 2013- 2 Wuhan Kaidi Electricity Sanjung 600MW Power Engineering 2014-2018 Merpati Sdn Company Bhd decided to terminate agreement) Hai Duong Coal- At planning Fired Power Plant stage BOT Project, Unit (January 1 JAKS Resources, 2013- Jaks Wuhan Kaidi Electricity terminate 600MW Power Engineering 2014-2017 contract with Company existing partners, signed with new partners) Da Nhim Japan International hydropower plant Cooperation Agency At planning expansion project 90.1 80MW (JICA)[Financier], Da 2014-2016 stage Nhim-Ham Thuan-Da Mi (September Hydropower JSC 2013) Vung Ang II At planning Thermal Power Mitsubishi Corporation, stage Plant 1,700 1,320MW Vapco Engineers 2014- (October 2013) Kien Luong Coal- Contract Fired Power Plant Awarded (July Complex (KLPP) 2010; The phase 2, Vietnam commercial China Huadian operation of 1,200MW Corporation, Tan Tao -2014 the second Energy Corporation unit will start at the beginning of 2014) Vietnam Under Distribution Vietnam Electricity construction Efficiency Project 201 110 kV Corporation, World 2013-2017 (January Bank[Financier] 2013) Quang Trach 1 Under Coal-Fired Power construction Plant, Quang Binh (July 2012 - JPAWORR Group, Seeking 2,250 1,200MW PetroVietnam, EPF 2013-2015 funds, Power, selected to Sumitomo[Sponsor] use local power equipment)

Undersea (110KV) World Bank[Sponsor], Under Power Cable 112 58km EVN Southern 2013-2014 construction Project (Ha Tien (November Township - Phu Power[Sponsor], 2013 -

Major Projects - Energy & Utilities - Continued

Project Name Value (US$mn) Capacity/ Length Companies Timeframe Status Quoc Island), Kien Installation Giang kicked off on November 14, 2013, with Prysmian Powerlink SRL completion Group date announced as January 13, 2014) An Khanh Thermo- Under electricity Plant 1 An Khanh Thermo construction in Pho Yen District 160 100MW Power Joint Stock Co. 2013- (December 2013) Hai Phong 2 Under Thermal Power construction Plant (October 2013 - Third generator connected to the National Grid at the Hai Phong Thermo capacity of 300MW Power Joint Stock Co -2013 300MW; Plant No.2 is in progress to connect the fourth generator (the last one) to the National Grid) Trung Son Electricity of Vietnam Hydropower (EVN), Samsung Under Project, Quan Hoa 411 260MW Construction & Trading 2012-2017 construction District, Thanh Hoa (Samsung C&T), World (November Province Bank[Sponsor] 2012) Duyen Hai 3 Coal- Under fired Power Plant, construction Tra Vinh province (December Bank of China[Sponsor], 2012 - Electricity of Vietnam commercial (EVN), ICBC (Industrial operation for and Commercial Bank the first 1,200 1,245MW of China), China 2012-2017 turbine within Development Bank, 46 months Eastern Electrification, and the Southwest Design second one Institute, Zhejiang will start Power Construction operation within 50 months.) O Mon IV Contract combined cycle Awarded power station (part AF Group, Can Tho (November of O Mon thermal Thermal Power 2012 - power complex, 793.5 750MW Company Limited, Asian 2012-2017 Contract Can Tho city) Development Bank awarded to (ADB)[Financier] AF-Consult Switzerland OE)

Major Projects - Energy & Utilities - Continued

Project Name Value (US$mn) Capacity/ Length Companies Timeframe Status Quynh Lap 1 coal- Under fired power plant, Vietnam National Coal- construction Central Nghe An Mineral Industries Group (July 2012 - province 1500 1,200MW (Vinacomin), No 1 2012-2016 selected to Construction use local Consultancy JSC power equipment) Grid revamping project; 8km of medium-voltage At planning power lines and 816 HCMC Power 2012-2015 stage (May 43km of low- Corporation 2012) voltage power lines O Mon 2 gas- based power plant, part of O Mon Can Tho Thermal Power At planning thermal power 720MW Company Limited 2012-2015 stage (August complex, Can Tho 2012) city O Mon 3 gas- based power plant, part of O Mon Can Tho Thermal Power At planning thermal power 700MW Company Limited 2012-2015 stage (August complex, Can Tho 2012) city Thermo-power Feasibility plant, Binh Dinh studies/EIA underway (Feasibility study STFE, Khang Thong contract 972 1,400MW Group 2012-2014 signed with Russia-based Zarubezhener goproekt Group (Phase I)) Pleiku-Phu Lam 500kV Power Transmission transmission line, Company No. 3, Export- Completed part of North- 40 500km Import Bank of the 2012-2013 (June 2013) South power United States[Sponsor], transmission General Electric Waste plasma- At planning converted gas- Trisun International stage (March fired Power Plant 400 Development, KGC 2012- 2012 - Project, Ho Chi Company contract Minh City awarded) Solar Farm, Binh At planning Thuan province stage (June 2013- ACO Investment 50MW ACO Group 2012- Group is seeking to build Solar Farm)

Major Projects - Energy & Utilities - Continued

Project Name Value (US$mn) Capacity/ Length Companies Timeframe Status Phuong Mai No 1 Wind Power Plant, Nhon Hoi 60.25 30MW Clean Energy, Phuong 2012- Under Economic Zone, Mai Windpower construction Binh Dinh province Thermal power Suspended plant, Ly Son (April 2012 - Island, Quang Ngai Project province -2012 suspended due to environmental concerns) Power Transmission In tender/ Investment Asian Development Tender Program (invovles 730 860km Bank (ADB), National 2011-2020 launched building 648km of Power Transmission (October transmission lines Corp (NPT) 2012) in first tranche) Nghi Son 2 Coal Contract Fired Power Plant Awarded 25-year BOT (April 2013 - Project, Thanh Hoa Japan Bank for Marubeni International Corporation Cooperation, Korea and Korea Exim Bank, Korea Electric 2,300 1,200MW Electric Power 2011-2018 Power Corporation (KEPCO), Corporation Marubeni, Vietnam received National Coal-Mineral contract to Industries Group construct, (Vinacomin) own and operate the project) Song Hau 1 Coal- Under fired Power Plant, construction Hau Giang (August 2013 province - Company PetroVietnam, Japan targets to 1,500 1,200MW International 2011-2018 commission Cooperation Agency the two (JICA)[Financier] 600MW units of the Song Hau 1 in 2017 and 2018.) Lai Chau Under hydropower plant, construction Lai Chau province (May 2013 - Project is Alstom SA, Electricity of constructed in 1831 1,200MW Vietnam (EVN), Song Da 2011-2017 three phases, Group First phase to be completed by March 2016) Thai Binh 2 coal- PetroVietnam Power Under fired power plant, Corporation, Toshiba, construction Thai Binh province 1,600 1,200MW Babcock & Wilcox 2011-2016 (July 2013 - Beijing Company US Exim Bank (BWBC), Petrovietnam withdraws

Major Projects - Energy & Utilities - Continued

Project Name Value (US$mn) Capacity/ Length Companies Timeframe Status Construction Joint Stock Corporation financing due (PVC), Sojitz to Corporation, Daelim environmental Industrial Company concerns.) Mong Duong 2 Doosan Heavy coal-fired BOT Industries & power plant Construction Co., Posco project, Quang Energy Ltd., AES, China Under Ninh 1,900 12,40MW Investment Company 2011-2015 construction (CIC), Hoa Binh (September Construction and Real 2013) Estate Trading Joint Stock Co (HBC) Duyen Hai 2 Coal- Project Fired Power Plant, finance Tra Vinh Province closure (To start Alstom SA, Teknik construction 1,500 1,200MW Janakuasa Sdn Bhd 2011-2015 in 2011; Project fully financed by Huadian Engineering) Mong Duong 1 Vietnam Electricity Power Plant Coal- Corporation[Sponsor], fired PPP Project, LILAMA Vietnam Vietnam Machine Installation Under Corporation[Equipment], construction Export-Import Bank of (June 2013 - 1,700 1,080MW Korea (Eximbank) 2011-2015 boiler drum [Sponsor], Asian successfully Development Bank installed in (ADB)[Sponsor], the plant) Hyundai Engineering & Construction Long Phu 1 coal- At planning fired power plant, stage (Project Soc Trang Petrovietnam Technical is comprising Province 1,200 1,200MW Services Joint Stock 2011-2014 with two units Corporation (PTSC) of 600MW each) Cong Thanh Coal- Contract Fuelled Power Awarded (July Plant, Nghi Son 2012 - GE will Economic Zone, 619 660MW General Electric, Cong 2011-2014 supply one Thanh Hoa Thanh Corporation steam turbine generator for the project) Pleiku-My Phuoc- Under Cau Bong 500KV construction Transmission Line National Power (November Project Transmission Corp 2013 - (NPT), Asian Temporary 447 437km (500 kV) Development Bank 2011-2014 operations (ADB), Agence begins, Francaise de project is due Developpement (AFD) for completion in Q1 2014)

Major Projects - Energy & Utilities - Continued

Project Name Value (US$mn) Capacity/ Length Companies Timeframe Status Nam Cong 2 & 3 Under power plants, construction Attapeu, Laos 135 111MW Hoang AnhAttapeu 2011-2013 (February Electric 2011; Licence Granted) Dadrinh Under Hydropower Plant, construction along Tra Khuc (US$178 River, Quang Ngai credit Province contract signed with Credit PetroVietnam, Dakdrinh Agricole Corp; 170 125MW Hydropower Joint Stock 2011-2013 First turbine Company to be operational in September 2013 with the second in December 2013) Solar power Project generation plant, finance Quang Binh closure (June province 2011- US 14 2011-2013 $12mn loan approved from Korea Eximbank) Wind Power Project, Tram At planning Hanh Commune, 300MW 2011-2013 stage (July Da Lat City, Lam 2011) Dong Ninh Loan Wind Power Plant, Duc Under Trong District, Lam 2011-2013 construction Dong (July 2011) Dakrinh Under hydropower plant, construction Kon Turn province PV Power, (December PetroVietnam, Dakdrinh 2012 - Project 160 125MW Hydropower Joint Stock 2011-2013 will be put Company into operation in December 2013.) Vung Ang 1 Coal- Under fired Power Plant, construction Ha Tinh province PetroVietnam, Toshiba, (October 2013 Japan Bank for - Project International should be Cooperation[Sponsor, completed by 1,595 1,200MW Sumitomo Mitsui 2011-2013 December Bank[Sponsor], LILAMA 2013, project Vietnam Machine is divided into Installation Corporation, two units of Sojitz Corporation 600MW each.)

Major Projects - Energy & Utilities - Continued

Project Name Value (US$mn) Capacity/ Length Companies Timeframe Status 220KV Dak Nong- Vietnam Electricity Phuoc Long-Binh Corporation, National Completed Long Transmission 67 128.17km (220 kV) Power Transmission 2011-2013 (October Line Project Corp (NPT) 2013) Nam Cong 2 Approved power plants in Hoang AnhAttapeu (February Attapeu, Laos 78.98 66MW Electric 2011-2013 2011; Licence Granted) Nam Cong 3 Approved power plants in Hoang AnhAttapeu (February Attapeu, Laos 55.97 45MW Electric 2011-2013 2011; Licence Granted) 1.1mn-volt ultra At planning high voltage (UHV) stage electric power (February transmission Tokyo Electric Power 2011- 2011 - project near Ho Company Co. (TEPCO) Feasibility Chi Minh City studies completed) Hydropower plant Project finance closure Chugoku Electric Power (February Co, Sumitomo Mitsui 2011 - US 62.5 Bank, Nippon Export 2011- $51mn loan and Investment granted by Insurance of Sumitomo Japan[Sponsor] Mitsui Financial Group) Phu My 2.2 Project thermal power finance station 715MW Electricite de France 2011- closure (EDF (EDF) selected as investor) Da M'bri Hydropower Plant, 85.36 75MW DONG Energy, Southern 2011- Under Lam Dong Region Hydropower construction A solar and wind Approved power (Received development, Ninh 249 124.5MW 2011- investment Thuan province licences) Hai Phong 1 Completed thermo power (Q2 2011 - plant 300MW -2011 Generator No 1 and 2 joined national grid) Duyen Hai 1 Coal- Under fired Power Plant, Chinese Oriental Power construction Tra Vinh province 1,570 1,245MW Group, Electricity of 2010-2015 (January 2013 Vietnam (EVN) - Financing secured)

The Vinh Tan 2 Electricity of Vietnam Under thermopower plant 1,130 1,244MW (EVN) 2010-2014 construction (April 2013)

Major Projects - Energy & Utilities - Continued

Project Name Value (US$mn) Capacity/ Length Companies Timeframe Status Wind Farm, Bac Under Lieu, Cuu Long construction Province, Mekong (October Delta Cong Ly Construction, 2012- first 247 99.2MW General 2010-2014 phase (15MW) Electric[Equipment] completed; Secured credit for II phase) Kien Luong Coal- Under Fired Power Plant construction Complex (KLPP) (July phase 1 China Huadian 2010; The Corporation[Constructio commercial 2,000 1,200MW n], Tan Tao Energy 2010-2013 operation of Corporation the first unit will start at the end of 2013) Coc San Under hydropower plant, Zhejiang Power construction Vietnam 41 29.7MW Construction, Colben 2010-2013 (February Energy JSC 2013) Dak Mi 2 Suspended Hydropower plant (October 2012 128 96MW Song Da Group 2010-2013 - Construction halted) Srepok 4A Completed Hydropower Plant Viet A Joint Stock (November Project Commercial 2013 - Project 55 64MW Bank[Financier], Buon 2010-2013 is going to Don Hydropower Joint become Stock Co operational soon) Wind farm in Under Thuan Bac district, Trung Nam Investment construction Ninh Thuan 500 200MW and Construction 2010- (September 2013) Kien Luong Coal- Delayed fired Power Tan Tao Energy (October 2013 Complex (Phase 1,200MW Corporation, China 2010- - Yet to reach 2), Kien Giang Harbor Engineering financial Province Company (CHEC) closure) Kien Luong Coal- Delayed fired Power Tan Tao Energy (October 2013 Complex (Phase 2,000MW Corporation, China 2010- - Yet to reach 3), Kien Giang Harbor Engineering financial Province Company (CHEC) closure) Mao Khe Coal- Wuhan Kaidi Electric Fired Power Plant, Power Company Ltd, Quang Ninh Wuhan Kaidi Electricity Province Power Engineering 577 440MW Company, Vietnam 2009-2013 Completed National Coal-Mineral (April 2013) Industries Group (Vinacomin), BNP Paribas[Sponsor], Bank

Major Projects - Energy & Utilities - Continued

Project Name Value (US$mn) Capacity/ Length Companies Timeframe Status of China[Sponsor], WULFF Luoi hydroelectric Cavico Corporation, plant, Thua Thien Vietnam Bank for Completed Hue 202.1 170MW Agriculture and Rural 2009-2012 (April 2012) Development Ba Thuoc 2 Hoang Anh Gia Lai Joint hydropower plant Stock Company (HAGL), project 72 Hoang Anh Thanh Hoa 2009-2012 Under Hydroelectric Joint construction Stock Company Nhon Trach 2 gas- based power plant, Completed Ong Keo Industrial 470 760MW PetroVietnam 2009-2011 (November Park, Dong Nai 2011) province Hua Na PetroVietnam Power Completed Hydropower Plant, Corporation, LILAMA (The plant Que Phong, Nghe Vietnam Machine was An Province 286 180MW Installation Corporation, 2008-2013 inaugurated in Hua Na Hydropower September Joint Stock Co 2013) Nong Son thermal Suspended power plant (January Vietnam National Coal- 2013; Mineral Industries Group Construction (Vinacomin)[Financier], halted as 253.3 China National Heavy 2008- chinese Machinery Corporation contractor (CHMC) quit in August 2012; 55% completed) A Luoi Hydropower Central Hydropower Plant, Thua Thien 155.5 170MW JSC, Cavico 2007-2012 Completed Hue Province Corporation Dak R'Tih Completed hydropower plant, Construction (October 2011 Gia Nghia town, Corporation No. 1, - Completed Dak R'Lap district, 192 141MW Dakdrinh Hydropower 2007-2011 without Dak Nong province Joint Stock Company foreign guidance) Nam Chien Under hydropower plant construction BO project, Son La Song Da Group, Bharat (February province 300 200MW Heavy Electricals (BHEL) 2005-2013 2013 - First 100MW unit commissione d) Son La hydropower power plant, Muong La 2900 2,400MW Electricity of Vietnam 2005-2012 Completed district, Son La (EVN)[Sponsor] province Wind power plant, Approved BinhThuan 440 200MW Saigon Invest Group (October 2010)

Major Projects - Energy & Utilities - Continued

Project Name Value (US$mn) Capacity/ Length Companies Timeframe Status Wind power At planning project in Vinh Tan stage and Vinh Phuoc, 300MW EAB Group, Trasesco (November Soc Trang 2013) Tidal energy farm ScottishPower Approved 40 10MW Renewables (May 2011) Coal-fired power Contract plant, Hai Lang Awarded District, Quang Tri 3,000MW PHI Group, Sao Nam (January Economic Zone Group 2012-MoU signed) Song Bung 4 Contract hydropower EPC Alstom SA, Hydrochina Awarded project, Bung River 156MW Huadong Engineering (February Corporation 2012) Coal-fired power plant, Quang Tri EGAT province Pedco Waste-to- power plant, Hanoi Han & Han, Pedco Kien Luong Coal- Fired Power Plant China Huadian Contract Complex (KLPP) 2,000MW Corporation, Tan Tao Awarded (July phase 3, Vietnam Energy Corporation 2010) Ninh Thuan 2 Japan Atomic Power nuclear power Company (JAPC), plant Unit 2, Vinh International Nuclear Hai Energy Development Corporation of Japan Ninh Thuan 2 Japan Atomic Power nuclear power Company (JAPC), plant Unit 3, Vinh International Nuclear Hai Energy Development Corporation of Japan Lai Chau Under hydropower plant construction phase 1, Lai Chau (May 2013; province Project is Alstom SA, Electricity of constructed in 400MW Vietnam (EVN), Song Da three phases, Group First phase to be completed by March 2016) Thermo-power STFE, Khang Thong plant, Binh Dinh Group Thermo-power STFE, Khang Thong plant, Binh Dinh Group Song Hau 2 Coal- fired power plant (Phase I), Hau Toyo Construction Giang Song Hau 2 Coal- fired power plant Toyo Construction

Major Projects - Energy & Utilities - Continued

Project Name Value (US$mn) Capacity/ Length Companies Timeframe Status (Phase II), Hau Giang Song Hau 2 Coal- fired power plant (Phase II), Hau Toyo Construction Giang Wind Farm Phase I, Bac Lieu, Cuu Cong Ly Construction, Long Province, General Mekong Delta Electric[Equipment] Wind Farm Phase II, Bac Lieu, Cuu Cong Ly Construction, Long Province, General Mekong Delta Electric[Equipment]

Water

Yen Xa Water Project Treatment Plant 98.55mn m3 per Hanoi Water Drainage finance PPP, Hanoi 642.85 year Company, ODA -2020 closure (April [Sponsor] 2013) Song Hau 1 Water At planning Treatment Plant stage PPP Project - 182.5mn m3 per (September Phase I, Can Tho 600 year 2015-2020 2013 - City Seeking PPP Investment) Song Hau 2 Water At planning Treatment Plant stage PPP Project - (September Phase I, Can Tho 365mn m3 per year 2015-2020 2013 - City Seeking PPP Investment) Song Hau 3 Water At planning Treatment Plant stage PPP Project - (September Phase I, Can Tho 73mn m3 per year 2015-2020 2013 - City Seeking PPP Investment) Thanh My Loi Project Ward Wastewater finance Treatment Plant closure (July 2013; Project is part of US$ 470 million HCMC Environmental Sanitation World Bank 2015-2019 Project/ Scheme which also includes improvement of drainage system in the Nhieu Loc - Thi Nghe canal)

Major Projects - Energy & Utilities - Continued

Project Name Value (US$mn) Capacity/ Length Companies Timeframe Status Western West Lake waste water 22.41mn m3 per At planning treatment plant, 144 year -2015 stage (July Hanoi 2012) Nhieu Loc-Thi At planning Nghe wastewater stage (July treatment plant 2013; July (second phase), 480 310.25mn m3 per 2014-2019 2012 - Thanh My Loi year Received Ward, District 2, HCM City Ho Chi Minh City approval) Phuc Hoa Water Project Resource Project, finance Ho Chi Minh City closure (June 2011; Financing is Asian Development for the Bank (ADB)[Financier], -2014 construction Government of Vietnam of two new irrigation systems for agricultural development) Tan Hiep 2 water At planning treatment plant, 100 109.5mn m3 per Saigon Water Supply 2013-2024 stage (August Ho Chi Minh City year Corporation (Sawaco) 2013) Thu Duc 4 water At planning treatment plant, 130 109.5mn m3 per Saigon Water Supply 2013-2024 stage (August Ho Chi Minh City year Corporation (Sawaco) 2013) Tan Hiep 3 water At planning treatment plant, 162 109.5mn m3 per Saigon Water Supply 2013-2024 stage (August Ho Chi Minh City year Corporation (Sawaco) 2013) Thu Duc 5 water At planning treatment plant, 176 182.5mn m3 per Saigon Water Supply 2013-2024 stage (August Ho Chi Minh City year Corporation (Sawaco) 2013) Thu Duc 3 water Commerzbank[Sponsor] treatment plant, , Construction Linh Trung Ward, Corporation No. 1, Under Thu Duc District, 58 109.5mn m3 per Saigon Clean Water and 2013-2014 construction Ho Chi Minh City year Investment Joint Stock (April 2013) Company, Passavant- Roediger Water supply Saigon Infrastructure project, Pleiku, Gia Real Estate Investment Lai province 9 10.95mn m3 per (SII), HFIC Investment 2013-2014 Under year Joint Stock Company, construction Tuan Loc Company Water pipeline system project (Binh Thai Project intersection [Thu Saigon Water Supply finance Duc District] - Dien 154 10km Corporation (Sawaco), 2012-2014 closure (June Bien Phu Street Asian Development 2012 - US near Saigon Bank (ADB)[Financier] $138mn loan Bridge), Ho Chi from ADB) Minh City

Major Projects - Energy & Utilities - Continued

Project Name Value (US$mn) Capacity/ Length Companies Timeframe Status Bay Mau PPP Japan International WWTP under II Cooperation Agency Hanoi Drainage (JICA), Metawater, Under Project , Vietnam 29 4.86mn m3 per year Environment Investment 2012-2014 construction Construction, Hanoi (November Water Drainage 2012) Company Tra Bong water supply project, Under Binh Son district, 190 73mn m3 per year Anh Phat Water Supply 2012- construction Quang Ngai Group Joint Stock Co (April 2013) province Ha Dong waste water treatment At planning plant (first phase), 20 73mn m3 per year ODA [Sponsor] 2012- stage (July Hanoi 2012) Water supply project, Van Phong 10.95mn m3 per Under Economic Zone, 4.8 year 2012- construction Khanh Hoa Provinc (May-2013) Son Tay water At planning treatment plant, 12 3.27mn m3 per year 2012- stage (May Hanoi 2013) Water pipeline system project Asian Development (Binh Thai Bank (ADB), Saigon Completed intersection - Thu 12.4km Water Supply -2012 (June 2012) Duc water plant), Corporation (Sawaco) Ho Chi Minh City Seven water Under supply projects, Saigon Water Supply construction Ho Chi Minh City 240 Corporation (Sawaco) 2011-2015 (September 2011) Binh Hung wastewater treatment plant Japan International second phase, 80 210.2mn m3 per Cooperation Agency 2011-2015 Under Binh Chanh year (JICA), Center of Urban construction District, Ho Chi Flood Control Minh City Water supply and Project irrigation system finance project, south of closure (US Vietnam $85mn loan 329 Asian Development 2011-2014 from ADB and Bank (ADB) French government; The rest from Vietnamese government) Wastewater Binh Duong Water Treatment Plant, Supply Sewerage Binh Duong Environment Co Ltd 95 6.4mn m3 per year (BIWASE), Japan 2011-2013 Completed International (June 2013) Cooperation Agency (JICA)

Major Projects - Energy & Utilities - Continued

Project Name Value (US$mn) Capacity/ Length Companies Timeframe Status Sewage treatment Approved plant, Ben Rong (September commune, Go Dau 2011 - district, Tay Ninh Received approval from Vietnam Green Tay Ninh 14.4 Environment Company 2011-2012 provincial People's Committee; Capacity - 300 tonnes/ day) Hoa Lien Project Wastewater finance treatment PPP Nihon Suido closure project, Da Nang Consultants, JFE (December city 190 Holdings, Japan 2011- 2012 - US International $2mn from Cooperation Agency JICA for (JICA)[Sponsor] feasibility study) Yen So Wastewater Japan International Treatment Plant Cooperation Agency Completed PPP Project, 250 73mn m3 per year (JICA), Hanoi Water 2008-2013 (September Hoang Mai District, Drainage Company, 2013) Hanoi Gamuda Nhieu Loc-Thi Completed Nghe Canal Basin (April 2012 - environmental US$317mn sanitation project World Bank[Sponsor], first phase 787 Asian Development 2003-2012 under Bank (ADB)[Sponsor] construction; Second phase to cost US$470mn) Kenh Dong water Kenh Dong Water treatment BOT Supply Joint Stock Co, project, Ho Chi 73mn m3 per year Manila Water Company 2003-2012 Completed Minh City (MWC), Ayala (April 2012) Corporation Phu Do At planning Wastewater stage (June Treatment Plant 144 73.55mn m3 per Hanoi Water Drainage 2012 - PPP, Hanoi year Company Seeking Finance) At planning stage (August 2012 - Design, feasibility, 700 Vietnam Waste geological Solutions Co. (VWS) study Green waste completed; treatment plant, Capacity - Thu Thua district, 40000 tonnes/ Long An Province year)

Major Projects - Energy & Utilities - Continued

Project Name Value (US$mn) Capacity/ Length Companies Timeframe Status Yen So waste water treatment plants, Ha Noi Bay Mau Lake waste water treatment plants, Ha Noi Dam Bay and West Lake waste water treatment plants, Ha Noi Yen Xa waste water treatment plants, Ha Noi Western West Lake waste water treatment plants, Ha Noi Son Tay Nine waste water treatment plants, Ha Noi

na = not available/applicable. Source: BMI Key Projects Database

Residential/Non-Residential Building - Outlook And Overview

Table: Vietnam Residential And Non-residential Building Industry Forecasts, 2012-2017

2012 2013e 2014f 2015f 2016f 2017f Residential and Non-residential Building Industry Value As % of Total Construction 67.3 66.2 66.5 66.9 67.2 67.6 Residential and Non-residential Building Industry Value, VNDbn 120,647.8 126,821.7 142,262.6 159,679.1 178,529.8 199,417.8 Residential and Non-residential Building Industry Value, US$bn 5.8 6.1 6.9 7.9 8.8 10.0 Residential and Non-residential Building Industry Value Real Growth (%) 1.0 -1.5 6.4 7.0 6.8 6.8 Residential and Non-residential Building Industry Value as % of GDP 3.7 3.5 3.5 3.5 3.5 3.5

e/f = BMI estimate/forecast. Source: Vietnam General Statistics Office, BMI

Table: Vietnam Residential And Non-residential Building Long-Term Forecasts, 2018-2023

2018f 2019f 2020f 2021f 2022f 2023f Residential and Non-residential Building Industry Value As % of Total Construction 68.0 68.4 68.8 69.2 69.6 69.9 Residential and Non-residential Building Industry Value, VNDbn 222,439.1 248,035.7 276,551.1 307,873.6 342,636.8 380,621.9 Residential and Non-residential Building Industry Value, US$bn 11.2 12.7 14.2 15.9 17.8 19.9 Energy and Utilities Infrastructure Industry Value As % Of Total Infrastructure 6.6 6.7 6.7 6.6 6.6 6.5 Residential and Non-residential Building Industry Value as % of GDP 3.5 3.5 3.5 3.5 3.5 3.5

f = BMI forecast. Source: Vietnam General Statistics Office, BMI

We expect the residential and non-residential building sector to see a significant recovery in 2014. Real growth for the sector is forecast to contract by 1.0% in 2013, while we believe the pace will pick up to reach 6.4% in 2014. Our optimistic outlook for Vietnam's buildings sector is primarily driven by the country's easy monetary conditions, which will make it conducive for developers to start building and help lift demand for commercial property. In an attempt to boost economic growth, the central bank brought its policy rate down to 7.00% in May 2013; the lowest policy rate since December 2009. Inflation remains relatively benign, thus we believe the Vietnamese central bank will continue to maintain an accommodative policy stance throughout 2013 and 2014 (we are forecasting the benchmark interest rate to remain at 7.00% by end-2014).

Recovering After 2012

Residential And Non-Residential Building Industry Forecasts

300,000 10

200,000 5

100,000 0

0 -5 2015f 2011 2016f 2012 2017f 2013e 2018f 2014f

Building Industry Value, VNDbn (LHS) Building Industry Value Real Growth (%) (RHS)

e/f = BMI estimate/forecast. Source: BMI, Vietnam General Statistics Office

We believe that this recovery will be driven by the non-residential buildings sector, rather than the residential building sector. Large inflows of foreign capital into the real estate market, poor economic conditions in Vietnam and loose monetary policy in recent years have led to an oversupply in the residential building sector. This oversupply of units has prompted a sharp decline in land and real estate prices as investors aggressively lower their asking prices to offload their units.

To compound the problem, many of the real estate companies have taken on large amounts of debt to fuel their building activity in previous years. With a sizeable part of their real estate stock unsold, many of them are facing difficulties repaying their loans and are unable to take on new projects. Indeed, Vietnamese banks are wary about providing credit to real estate developers as they already account for a significant portion of their debts - 13% of total bad debts in the banking system according to the State Bank of Vietnam in December 2012.

Although the aggressive rate cuts taken by the government in recent months could reignite demand for housing, but the scale of the oversupply makes any quick price escalation unlikely. According to

Vietnamese investment group Dragon Capital in September 2012, the current stock of apartments could take seven years to be fully absorbed by the market unless demand stimulus measures are executed.

We do believe, however, that the residential building sector is starting to show early signs of improvement. Although the sector is still suffering from significant oversupply and falling prices, unsold inventory of new residential units has fallen back to more moderate levels by historical standards. Unsold apartments as a share of total units under construction fell from 30.3% in Q412 to 27.7% in Q213, while unsold villas and townhouses fell from 54.3% to 10.7% over the same period. In addition, the rate of decline in housing prices is slowing down, which could indicate growing demand for property. The Vietnam Real Estate Index, which tracks transaction prices of highly liquid apartments in Hanoi and Ho Chi Minh City, fell by 8.2% y- o-y in August 2013, significantly lower than the contraction of 15.2% y-o-y in August 2012.

Signs Of Bottoming

Vietnam - Real Estate Index

Source: BMI, Bloomberg

We have also seen an increase in foreign investment into the Vietnamese residential sector. According to statistics from the Ministry of Planning and Investment, the real estate sector attracted US$588.1mn worth of FDI inflows in the first eight months of 2013. The sector achieved the second highest amount of FDI

inflows amongst the 18 sectors during that period, accounting for 4.7% of the country's total FDI inflows. This increase in FDI inflows into the residential sector could continue over the coming years as the government is set to lift existing restrictions on foreign ownership of real estate in Vietnam. The proposal for these measures, submitted by the Ministry of Construction, is expected to be approved by the end of 2013.

The proposal will allow foreign organisations including investment funds, banks, representative offices of multinational companies, as well as individuals who possess a valid visa, to purchase and own residential properties in Vietnam. The proposal has been well received by local developers, while surveys conducted by various real estate agencies suggest that foreign investors generally view the move as a highly positive development for the property market. At present, only 427 out of 80,000 expats in Vietnam are eligible to own properties in Vietnam, but there is growing demand to ease this regulation and allow all foreigners to own properties in Vietnam.

However, foreign investors have also highlighted complicated regulations, inefficiencies with the regulatory authorities, the lack of liquidity, and other delays throughout the entire process of purchasing a property, as key factors making the Vietnamese market less attractive relative to the region. Accordingly, we believe that more aggressive reforms will be needed to boost foreign participation in the Vietnamese property market over the long run (so far, progress has been slow on this front). For now, we believe that domestic investors will remain the main driver of the property market, and given that general sentiment towards Vietnam's economic prospects in 2013 and 2014 remain relatively cautious, we believe that demand for residential properties will remain weak going into 2014.

Besides relaxing foreign ownership, the Ministry of Construction (MoC) was also seeking approval from the government in April 2013 to turn commercial housing into houses for lease. This could ease financial pressures on real estate companies and allow people from low-income groups to secure housing. At present, rented houses account for more than 6.3% of people who own houses in Vietnam, according to the MoC. Around 14% and 19% of all housing in Hanoi and in HCM City are for rent respectively, with the rest of the cities around 5%. A national housing strategy approved in 2011 had aimed to raise the proportion of rental housing to 20% by 2015 and 30% by 2020. As of June 2013, the MoC was still finalising the rental housing plan.

In June 2013, the Vietnamese government approved a VND30trn stimulus package to provide loans for purchasing and completing low-cost housing, though the impact of the stimulus package is expected to be limited given its relatively small scale. The demand for affordable houses is still robust, as residential

development in the past has largely focused on high-end customers. The Vietnamese government is keen to meet this demand. For example, there are plans to build 2.7mn m2 of social housing by the end of 2015 in HCM City. The social housing programme is expected to provide accommodation for 100,000 college students and 93,000 workers, as well as 17,500 apartments for low income earners. In Hanoi, city authorities have announced in July 2013 that they will supply 15,500 apartments for low-income people by 2015. The project, which is in its first phase, is expected to cost US$402mn.

The MoC had also introduced Circular No 02/2013, which allows companies to convert the apartment structure of commercial housing projects to low-cost housing. As of August 2013, 50 housing projects, valued at around US$1bn, had been given permission to convert to low-cost housing.

Besides government measures, other upside risks for the residential sector are Vietnam's attractive macroeconomic and population fundamentals. Rising incomes among Vietnamese consumers and rapid urbanisation rates will boost demand for housing and commercial construction projects, such as malls and hotels, over the coming years. Meanwhile, the country's private consumption growth is expected to remain resilient, while the unemployment rate will remain at historical lows over the long term. These factors would also ensure that the demand for housing and commercial projects remains robust over the long-term.

Non-Civil Building To Outperform

We believe that the main driver of growth for the residential and non-residential building sector is the non- residential sector. Although the lack of external demand for Vietnam's manufacturing goods is set dampen the demand for industrial buildings (such as factories and warehouses) over the coming years, the demand for Vietnam's resources could remain robust and this could drive demand for energy-related facilities and non-residential buildings. A key sector is the petrochemicals industry. Around nine petrochemicals projects are at the planning stage and are expected to be completed by 2025, with foreign investment to be sought for six of the plants managed by PetroVietnam. The country is racing to meet growing demand for petrochemicals - to reach about 5.4mn tonnes per annum by 2020 - and a supply shortfall is expected to remain, even after the completion of the planned projects. The projects include a facility with 1mn tonnes per annum (tpa) polyethylene, 500,000tpa polypropylene and 400,000tpa PVC capacity, according to the director of PetroVietnam's Research and Development Centre for Petroleum Processing, Phan Minh Quoc Binh, as quoted by Plastics News.

One of the largest projects is the Long Son petrochemical complex. In February 2012, Siam Cement Group (SCG), QPI Vietnam, PetroVietnam and Vietnam National Chemical Corporation (Vinachem) signed a joint venture agreement to invest in a US$4.5bn petrochemical complex in Southern Vietnam.

Under the deal, SCG is to acquire a 46% stake in the project. The fully integrated complex, which will use ethane, propane and naphtha as feedstock, will be situated on Long Son Island at Ba Ria-Vung Tau province. The complex, which is likely to start commercial operations within four years, will have an annual production capacity of 1.4mn tonnes of olefins. As of August 2013, 400ha of cleared land has been handed over to the project investors and the project is expected to start construction works in early 2014.

Another key project is the US$8bn Nghi Son oil refinery in the central province of Thanh Hoa. The US $2.1bn engineering, procurement and construction (EPC) contract for the project was awarded to GS Engineering and Construction and SK Engineering & Construction making it Vietnam's largest ever EPC contract for the oil and gas sector. Under plans first unveiled in 2008, Nghi Son refinery is a joint venture between PetroVietnam with a 25.1% stake, Kuwait Petroleum International with 35.1%, Japan's Idemitsu Kosan with 35.1% and Mitsui Chemicals with 4.7%. The project is expected to be completed by 2017 and have an annual capacity of 10mn tonnes of crude oil, or 200,000, 1.5 times greater than Dung Quat's current capacity.

Vietnam's relatively low cost of labour could also still attract investors to develop manufacturing capacity in the country. In March 2013, Samsung started building a US$3.2bn high-tech complex in the Thai Nguyen province, which will house Samsung's largest mobile phone factory in the world.

Tourism - Gambling On A Trend

Another key driver of growth in the non-residential buildings sector is the tourism sector. We expect tourism - both domestic and regional - to become a growing source of value creation for the sector, as disposable income levels rise across the Asia Pacific region and short-haul travel becomes more accessible to an expanding middle-class population. As such, there is a growing demand for hotel rooms. For example, Ho Chi Minh City's tourism authority had projected an additional supply of 27,000 hotel rooms by 2020 as part of its master plan. As of April 2013, Ho Chi Minh City had 49,900 hotel rooms, with 27% of them three- to five-star units.

The Vietnamese government is turning to its nascent gaming industry to help boost tourism revenues and attract foreign direct investment from multinational casino operators. Despite concerns that liberalising the gaming industry could invite social problems including increased organised crime and addiction to gambling, the success that Singapore and Macau have had with managing these risks in recent years will give Vietnamese policymakers the confidence to adopt a more aggressive stance on developing the industry. Singapore and Macau have enjoyed tremendous success in boosting tourism revenues and creating new jobs

for the economy by effectively targeting the region's burgeoning class of wealthy elites. Given that Chinese visitors contribute the largest share of gaming revenues in these countries, Vietnam's proximity to China naturally makes the country an attractive target for multi-national casino and hotel operators.

A key project is a US$7.5bn casino and hotel complex project in Van Don and multi-billion project that will line a 1,800-hectare economic zone with casinos, hotels, and other tourist attractions. Located next to Halong Bay, one of the country's most popular tourist destinations, the development of the Van Don Economic Zone is expected to bring in millions of tourists from the region each year.

However, the development of the gaming industry has not been all smooth-sailing. In September 2012 Genting Malaysia, a subsidiary of Genting Group, withdrew from a US$4bn resort project (Nam Hoi An project) in the Quang Nam province. The project was to be jointly developed with VinaCapital, but the Malaysian gaming conglomerate chose to pull out because the Vietnamese government does not allow Vietnamese to enter gaming facilities.

Meanwhile, a US$1bn hotel project site invested by Vietnam's Kinh Bac City Development in Hanoi remains a wasteland. The project has been in a limbo since 2009, where Japan's Riviera Group pulled out of the project due to financial difficulties and Kinh Bac stepped in to take over the investment. As of December 2012, the project is used for agriculture, parking and football pitches.

In June 2013, Vietnamese media reported that local authorities had cancelled 93 projects on Phu Quoc Island - including a EUR2.6bn luxury resort project proposed by Swiss Trustee Group - because the investors of these projects were unable to find sufficient financing

The US$4.2bn Ho Tram Strip is also facing a delay in its opening due to the pull-out of its first resort's operator and financing problem. In March 2013, the developer of the Ho Tram Strip - Asian Coast Development (Canada) Limited (ACDL) - announced that MGM Resorts International (MGM) would no longer be able to manage the first of the Ho Tram Strip's five resorts in Ba Ria-Vung Tau province. ACDL had signed an agreement with MGM for the first resort in November 2008. The Ho Tram Strip, valued at US$4bn, is the largest tourism complex in Vietnam, with five five-star hotels, two of which have casinos and golf courses. ACDL is building the second hotel tower of the first resort, with 559 five-star rooms, while an eight-hole golf course designed by Greg Norman is under construction.

Besides the Ho Tram Strip, the US$4.3bn New City project, developed by Brunei's New City Group, is still undergoing site clearance as of August 2013 even though it received its investment license in 2008. This was the same case for a similar project in the Ba Ria-Vun province.

The lack of proper planning and delays in the development of the Ke Ga seaport has also adversely affected resort investors in the Binh Thuan Province. The construction of the Ke Ga seaport required the land of 12 resorts, which the government prompted requested to be shut down for the seaport. The resort investors were expected to be compensated, but Vinacomin delayed their disbursement of compensation, resulting in losses for the resort investors.

There are also concerns about the potential for an oversupply in hotel rooms. Room rental rates in Hanoi had decline in H113 and this could worsen over the near term as the hotel room supply in Hanoi is expected to reach nearly 10,000 rooms by the end of the year, up 13.5% from the previous year.

To increase the viability of casinos in Vietnam, the government announced during a meeting in August 2013 that it had lifted entry restrictions on citizens, allow those that meet certain criteria to gamble in a casino to be built in the Van Don Economic Zone, Quang Ninh Province.

Major Projects - Residential/Non-Residential Construction And Social Infrastructure

Table: Major Projects - Residential/Non-Residential Construction And Social Infrastructure

Project Name Value (US$mn) Capacity/ Length Companies Timeframe Status

Commercial Construction Casino ecotourism resort 4,000 1,350,000 square -2020 Approved project, Phu Quoc metres (September 2013) Riviera Point Condominium Ssangyong complex (Three 57.8 549 units Engineering and -2015 Under construction condominiums), Construction, (August 2013) Ho Chi Minh City Keppel Land Ecotourism centre (includes 20km At planning stage bridge), Southern 142.14 2012- (Project was Hon Khoai Island, announced in July Ngoc Hien District, 2012) Ca Mau Province Tokyu Binh Duong Garden City Under construction (includes 7,500 (It will encompass apartments, and 1,100,000 square Becamex IDC over 7,500 commercial/ 1,200 metres Corporation, Tokyu 2012- apartments, entertainment Corporation commercial areas, facilities), Binh services, and office Duong province spaces) Long Thanh At planning stage international 210,000,000 2012- (Work underway airport area square metres on the Loc An

Major Projects - Residential/Non-Residential Construction And Social Infrastructure - Continued

Project Name Value (US$mn) Capacity/ Length Companies Timeframe Status residential area, the roads connecting the area with the Ho Chi Minh City - Long Thanh - Dau Giay Expressway, development plan and parts of the (Phase 1),Dong Nai International province Training Center) Happyland Vietnam Entertainment Complex project (includes US $600mn 35,000,000 square Under construction Happyland theme 2,000 metres Sanderson Group 2011-2014 (October 2012) park project and US$140mn Movie World), Ben Luc District, Long An Province Empire Residences and Resort project Thanh Do (include 5-star 476 21,294 square Construction and 2011-2014 Under construction hotel), Ngu Hanh metres Investment (July 2011) Son District SSG Tower, Binh Ryobi Kiso Thanh District, Ho 11.3 5,983.2 square Holdings, Phu 2011-2013 Under construction Chi Minh City metres Cuong (July 2011) Wonderland World Vung Tau complex (includes a five- star hotel, 4 four- Suspended star hotels, an 1,300 Good Choice -2011 (October 2011 - entertainment Investor's license centre), Nguyen An cancelled) Ninh Ward, Vung Tau city Eight ibis hotels in At planning stage Vietnam's major Accor, Benthanh 2010- (1st hotel to open cities Group in 2012) At planning stage (November 2013 - VinaCapital looking South Hoi An 4,000 21,000,000 square VinaCapital for preferred resort project, Chu metres partner; October Lai Open 2012 - Genting Economic Zone withdraws from the (OEZ), Quang Nam project) Long Thanh international airport area development plan (Phase 2), Dong Nai province Long Thanh international airport area

Major Projects - Residential/Non-Residential Construction And Social Infrastructure - Continued

Project Name Value (US$mn) Capacity/ Length Companies Timeframe Status development plan (Phase 3), Dong Nai province Long Thanh international airport area development plan (Dong Nai province)

Industrial Construction Vietnam Oil and Gas Group, Nghi Under construction Son Refinery and (October 2013 - 200,000 b/d Petrochemica, Project to be built Nghi Son Oil 9,000 (10,000,000 Mitsui Chemicals, -2017 on 400 hectares Refinery and tonnes) Idemitsu Kosan, area in Nghi Son Petrochemical Kuwait Petroleum economic zone) Complex, Tinh Gia International (KPI) Siam Cement, QPI Vietnam, Delayed (August 1,650,000 tonnes PetroVietnam, 2013 - Land Long Son Island 4,500 (4,000,000 square Vietnam National 2013-2016 acquired; Petrochemical metres) Chemical Construction Complex, Ba Ria- Corporation expected to begin Vung Tau (Vinachem) in 2014) Solar Cell Factory - Phase I, Dong Project finance Nam Industrial 700 First Solar Group -2012 closure (March Park 2011) Solar Cell Factory - First Solar Group, Phase I, Dong First Solar Vietnam Project finance Nam Industrial 300 238MW Manufacturing Co 2011-2012 closure (January Park Ltd 2011) Delayed (Indochina Energy Industry Co ltd has requested Industry Company Chu Lai Open 120 MW (120.000 Limited (ICE), Economic Zone Solar modules 390 square metres) IndoChina Energy Management manufacturing Company Board to extend plant, Chu Lai the timeline for Open Economic completing the Zone project)

Residential Construction Development of 60mn square metres of 19,700 600,000 units 2015-2020 At planning stage residential space (public housing) Daewoo Engineering & Construction Contract Awarded Commercial- 188 Company, Hi -2013 (April 2011) residential Brand Vietnam, complex, Hanoi Inpyung

Major Projects - Residential/Non-Residential Construction And Social Infrastructure - Continued

Project Name Value (US$mn) Capacity/ Length Companies Timeframe Status Residential developments and Keppel Land, manufacturing 291 CapitaLand, 2010- Contract Awarded projects PepsiCo

na = not available/applicable. Source: BMI Key Projects Database

Industry Risk Reward Ratings Vietnam - Infrastructure Risk/Reward Ratings

Vietnam Risk/Reward Ratings

Vietnam has achieved a score of 54.6 in BMI's Asia Pacific infrastructure Risk/Reward Ratings (RRRs). It remains firmly in the lower half of the rankings at 11th position, out of 16 countries. That said, the country has actually one of the fastest-moving business environments in the region. Rapid expansion has raced ahead of the regulatory environment and the country is a clear outperformer among emerging South East Asian countries in terms of rewards. That said, corruption and heavy delays to project development continue to represent significant downside risk.

Rewards

Industry Rewards

Vietnam's score in this category is higher than the regional average. This is indicative of a dynamic market and reflects our view that Vietnam will continue to be one of the most active and attractive infrastructure markets in the region. The long-term risks to the market are generally to the upside. Based on BMI's Key Projects Database, around 330 infrastructure projects with a combined value of around US$328bn are currently listed as under construction or under consideration in Vietnam. As such, the country achieves a relatively high score for sector growth in this category.

Country Rewards

In terms of country structure components, which include financial and labour market infrastructure, Vietnam disappoints, coming in below the regional average. The predominant cause is a lack of sufficient financial infrastructure. Lending in Vietnam is characterised by poor lending standards and dominated by the four state-owned banks, while gaining access of foreign capital can be difficult. These poor lending standards have also resulted in very high loan-to-deposit ratios in Vietnam's banking sector. In the event of a liquidity shortage, or insolvency triggered by economic stress, a financial crisis would be a plausible scenario, further restricting funding to the construction sector. There are some risks to the upside, given that the banking sector has witnessed a raft of privatisations and increased involvement from foreign development banks - something that may liberalise the sector which could bode well for the construction sector in the long term.

Risks

Industry Risks

Industry Risks represent the largest hurdle for Vietnam at present, as the country scores only 40 in this category. This is indicative of structural weaknesses in the infrastructure sector, which in turn pose long- term risks to investors. The transparency of the tendering process is rated very poorly, scoring only three out of 10. The competitiveness in the infrastructure and construction sector remains limited and road building, as well as the energy & utilities sector, is dominated by state-owned firms. The ports and urban railways sector is where there is the greatest level of foreign investor penetration in the infrastructure sector and we have seen growing foreign private participation in the power plant and transmission sector.

Vietnam has also been pushing for the faster implementation and development of public-private partnerships (PPPs) for upcoming infrastructure projects. While PPPs have the potential to address the country's infrastructure needs, this method is wholly predicated upon the creation of a regulatory PPP framework to govern the sector. In November 2010, the prime minister had launched a mechanism piloting PPP investment model via Decision 71/QD-TTg, which came into force from January 15 2011. Under this legislation, concerned agencies were tasked to craft regulations that allow projects to be developed under a PPP model and to evaluate and award projects for investment under a PPP model. Companies under the PPP model would enjoy corporate tax reductions and exemptions, as well as land use fee or land rental exemptions. Companies are also allowed to buy foreign currencies for project execution. Investors under the PPP model would not have to worry about site clearance as it would be done by the local officials.

This pilot ruling was meant to be replaced by new PPP guidelines or a full PPP law in 3-5 years, but progress was slowed by an inability for sub-sovereign governments and state agencies to carry out the necessary project assessments.

However, progress on these tasks is proceeding very slowly and the PPP framework for areas such as payments for land rental, land clearance and compensation remained unclear. The Ministry of Planning and Investment has since introduced draft amendments to Decision 71/QD-TTg, but it remains to be seen if they are effective. Over 20 projects have been proposed for development under the PPP format, but only the Dau Giay-Phan Thiet expressway is at an initial tendering stage, with the rest in the pre-feasibility study stage.

Country Risk

Corruption is prevalent in Vietnam, resulting in poor scores within the Country Risk ratings. Investors see official corruption as one of the biggest hindrances to running a business in Vietnam, with anecdotal evidence suggesting that 30% of a project's value is pocketed by the contractor to pay bribes to relevant parties. For example, at the end of 2011, the World Bank banned Vietnam's Social and Environmental Development and its Managing Director, Nguyen Xuan Doan, for five years, following allegations of fraud among World Bank-financed water supply projects. Joint ventures with state-owned enterprises are particularly prone to corruption and graft, though surveys indicate that while corruption affecting businesses is fairly prevalent, the amounts involved are usually quite small. Rapid economic growth provides opportunities for graft to grow more quickly than government systems evolve. Vietnam scored 2.7 out of 10 in BMI's rating for corruption and also rates poorly for its external risks and legal framework.

There are gradual changes to its political system, which could speed up economic reforms and improve Vietnam's business environment. In June 2013, the Communist Party of Vietnam (CPV) made an unprecedented move by allowing for a no-confidence vote on the performance of senior government officials, setting the stage for increased accountability for party members going forward. Government officials who received 'Low Confidence' votes from two-thirds of the 500-member National Assembly (NA) will face another vote, which could lead to their dismissal. Meanwhile, those who received more than 50% in 'Low Confidence' votes for two years consecutively will be asked to relinquish their post.

The move symbolises a significant milestone in Vietnam's evolving political system towards a more accountable and gradually more democratic system of government. This is crucial to maintaining political stability over the long term. Not only is the CPV struggling to cope with a more informed population due to the rapid adoption of internet technologies such as social media, but policymakers are also facing mounting pressure to allow for democratic reforms due to an increasingly vocal and highly educated population of young Vietnamese citizens.

Asia - Infrastructure Risk/Reward Ratings

BMI View: The average Risk/Reward scores for the Asian infrastructure sector remain largely unchanged from the previous quarter. However, the risk/reward profiles for several countries have changed slightly, with greater risks being presented by several of the larger emerging markets and lesser risks by others. Overall, the potential for returns in Asia's infrastructure sector remains considerable, reinforcing the region's status as the world's most concentrated infrastructure and construction market.

The average Risk/Reward scores for Asia's infrastructure sector this quarter remain relatively unchanged from the previous quarter. There is still a substantial disparity in the demand for infrastructure throughout Asia. This translates into a significant divergence in rewards and risks among the Asia Pacific infrastructure markets, and a sizeable 40-point differential exists between the top- and bottom-ranked countries in our regional infrastructure ratings table. This wide dispersion presents investors with a range of rewards for different risk appetites.

The key findings from this quarter's update can be summarised as follows:

■ The more developed countries in the region continue to present the most attractive business environments to realise their relatively sizeable rewards, with some of these markets (i.e. Australia and Japan) experiencing an improvement in policy continuity - a major criterion to project execution and viability - following their parliamentary elections.

■ That said, exposure to the Chinese economy is a threat to the demand for infrastructure in some export- oriented economies - namely Taiwan and Hong Kong.

■ The most populous countries in the region continue to present sufficient scope in rewards to overcome risks, but these risks are rising. Policy inertia and continuity continue to be a problem in India and Indonesia, suggesting that risks at a grass-roots level will remain considerable for these countries.

■ Emerging South East Asian (SEA) countries continue to offer sizeable rewards for their level of risk, though recent events have changed their individual level of risks, with some markets (such as Thailand and Cambodia) presenting greater risks, while others (such as Vietnam and the Philippines) offering fewer.

A Mixed Bag

Asia Pacific - Infrastructure BE Risk/Reward Ratings, Scores out of 100

Source: BMI

Developed Markets: Favoured

The top spots in our Asia Pacific Risk/Reward infrastructure regional ratings table continue to be dominated by countries that have attained developed market status in terms of their infrastructure market maturity, with Australia, South Korea, Singapore and Japan coming in at first, second, third and fourth place respectively.

Despite their maturity, these markets still offer significant greenfield opportunities. The average score for rewards in these developed markets is 57.8 out of 100, higher than the other 10 Asian markets (higher scores indicate higher rewards) which have an average of 50.7. Meanwhile, they offer the best business environments for realising these investment returns as they are highly developed in terms of their legislative and regulatory environments and present very little in the way of risks to sponsors and financiers. The average score for risks in these developed markets is 78.2 out of 100, significantly higher than the other 10 Asian markets (higher scores indicate lower risks) which have an average of 49.1.

Greatest Potential To Realise Rewards

Developed Countries In Asia - Infrastructure Rewards (LHS) And Risks (RHS) BER, Scores out of 100

*Higher Score = Lower Risks. Source: BMI

Looking at the individual countries, Australia and Japan have experienced an improvement in policy continuity - a major criterion to project execution and viability - following their parliamentary elections. In Japan, the Liberal Democratic Party's success in the Upper House elections has increased the potential for policy formation and execution, which could speed up the country's reconstruction process and see the implementation of reforms that could lift long-term infrastructure demand. In Australia, the Liberal- National coalition's victory in the federal elections and the party's dominant political clout at the state level creates a strong potential for greater coordination between state and federal governments over infrastructure development across Australia. This could lead to an improvement in project execution for all public-led infrastructure projects in Australia.

However, the infrastructure sectors of countries that are heavily reliant on trade activity with China - namely Hong Kong and Taiwan - appear highly vulnerable to the deleterious effects of a languorous Chinese economy. Although the recent resurgence in credit aggregates has once again boosted economic activity in China, we believe that it might not last and that China's structural downturn could come back into focus in 2014. Taiwan is also set to hold elections in five major municipalities in 2014 and the lack of political clarity could deter investors from taking on infrastructure projects.

Giants Of Asia: Rewards Sizeable, Risks Sizeable

These developed markets however, do not offer the highest rewards to investors. Asia's largest emerging economies - China, India and Indonesia - continue to head the group in terms of industry rewards, securing second, third and fourth place respectively for this category. The combination of high industry values, positive long-term macro fundamentals, large fiscal expenditure on infrastructure and expectations of relatively high growth in construction and infrastructure industry value underpin the high scores in this category. However, they also present numerous risks, as indicated by their below-average risks scores.

Below Average Risks

China, India And Indonesia - Infrastructure Rewards (LHS) And Risks (RHS) BER, Scores out of 100

*Higher Score = Lower Risks. Source: BMI

China, for example, is expected to face greater threats to its rewards in the near-future, and this is reflected by our downward revision of its rewards score from 68.4 to 66.8. The country's infrastructure market still presents considerable opportunities, but these are increasingly located in tier-two and tier-three cities - areas where the economic viability for some projects is highly questionable. In addition, the new government has been quick to implement changes to the infrastructure programmes in China, starting with the break-up of the powerful Ministry of Railways and greater considerations towards environmental issues. These changes suggest to us that the new government is re-thinking several of its previously announced infrastructure projects in transport (especially railways) and power generation. This could result in a severe scaling down

of infrastructure investment as the country rebalances to a consumer-driven economy. Lastly, the structural deficiencies within the Chinese economy (shaky financial system, overvalued property market, expensive infrastructure build-up, and huge industrial overcapacity) still remain. This creates the potential for a deep slowdown in China's economic activity, which could cap infrastructure demand over the near-term.

India is also experiencing significant threats to its rewards. Some of these threats are: the relatively high cost of capital in India; a weak rupee, resulting in costlier imports of equipment and raw materials for Indian infrastructure companies; and the numerous business environment issues that continue to delay infrastructure development (e.g. environmental clearances, land acquisition, convoluted bureaucracy).

Political risk is also on the rise in India, prompting us to revise the country's risks scores from 54.9 to 54.7 (a lower risk score represents greater levels of downside risks to returns for investors). The country is scheduled to hold general elections between April and May 2014, with recent results at the state elections indicating a strong potential for a change in government. The country's ruling Indian National Congress Party suffered major defeats to the main opposition Bharatiya Janata Party (BJP) in all four state elections held in December 2013, signalling its weakening popularity. The four states - namely Delhi, Rajasthan, Madhya Pradesh and Chhattisgarh - comprise some 15% of the India's population, and the BJP victories will mean that the party will head into the 2014 campaign very much on the front foot.

While we believe that a BJP victory would improve the country's political risk profile and increase the potential for economic reform, we note that such a transition in power would likely have negative effects on short-term political stability and policy continuity. As seen in many countries, a change in government could lead to a review of infrastructure projects approved by the predecessor. This typically results in new feasibility studies and schemes being conducted and crafted respectively, which could lead to project delays, revisions, or worse, cancellations.

Varied Performance

Asia Pacific - Q313 & Q413 Infrastructure Rewards Ratings, Scores out of 100

Higher Score = Higher Rewards. Source: BMI

As for Indonesia, the country continues to present vast opportunities across the entire infrastructure spectrum - in November 2013, the central government released the fifth edition of its Public Private Partnership (PPP) Book during Indonesia's annual infrastructure conference, with the book listing 48 infrastructure projects on offer to investors.

However, risks to infrastructure development are on the rise in Indonesia, which is reflected in our downward revision of the country's risks scores from 47.4 to 46.6. President Susilo Bambang Yudhoyono is constitutionally prohibited from standing for the presidential elections in 2014, while popular support for his party, the Democratic Party, has collapsed. This scenario creates a growing likelihood for a more protectionist and potentially nationalist candidate to accede to the office. The government and the private sector also continue to experience considerable difficulties in filtering infrastructure investment into the ground, while Indonesia's macro environment is becoming increasingly non-conducive for infrastructure development.

South East Asia: Fluctuations In Risks

South East Asian (SEA) countries continue to offer sizeable rewards for their level of risk as they push forward with their multi-billion dollar infrastructure-building programmes. However, recent events have seen a change in the level of risks for the individual SEA markets, with some markets (such as Thailand and Cambodia) presenting greater risks and others (such as Vietnam and the Philippines) presenting fewer risks than before.

In Thailand, we have revised down the country's risks scores from 56.9 to 56.1. This is because we are witnessing a complete breakdown in political stability, with the dissolution of parliament and the escalation of anti-government protests since November 2013. At present, this political crisis looks unlikely to end anytime soon as the ruling Puea Thai Party (PTP), led by Prime Minister Yingluck Shinawatra, have refused demands for the immediate resignation of Yingluck Shinawatra as caretaker prime minister and a suspension of the electoral process, which would lead to the formation of a 'people's council' to oversee political and electoral reforms in Thailand. This lack of political stability will most likely lead to fresh delays for the PTP's infrastructure plans and disruptions to on-going project infrastructure tenders. This is because political unrest typically increases security threats to project sites and requires the government to devote considerable resources and attention to resolve the crisis.

Similarly in Cambodia, we have revised down the country's risks scores from 37.2 to 36.6 as the country continues to be gripped by political unrest since the end of general elections in July 2013. The ruling Cambodian People's Party (CPP), led by long-time Prime Minister Hun Sen, and the opposition Cambodia National Rescue Party (CNRP) are still at loggerheads over the results of the elections and a resolution does not appear forthcoming over the near term. Even if a resolution is reached, the end of CPP's political dominance and the formation of a more evenly-balanced parliament are likely to set the stage for an increase in uncertainty and paralysis regarding government policy. This is because the CPP would need support from the opposition to make amendments to the constitution and the CNRP could hold up certain parliamentary proceedings by walking out of the National Assembly.

In Vietnam however, we have revised up the country's risks scores from 51.8 to 53.0. This is because we expect monetary conditions to remain conducive for construction in 2014. We have also seen the government take an aggressive stance in restructuring its state-owned enterprises (SOEs) and improve the business environment for infrastructure development. The restructuring process could not only allow the Vietnamese government to raise funds for investment through the privatisation of these SOEs, but also attract greater FDI due to a less protectionist investment climate. In addition, the Vietnamese government

has strengthened its regulatory framework for public-private partnerships (PPPs) - it had launched the tender for its first road PPP project in the second half of 2013 - and passed a revised legislation that could speed up the land acquisition process.

Table: Asia Pacific Infrastructure Risk Reward Ratings

Rewards Risks

Industry Country Industry Country Infrastructure Regional Rewards Rewards Rewards Risks Risk Risks RR Rating Ranking Australia 62.5 86.1 70.8 90.0 77.0 82.2 74.2 1 South Korea 47.5 88.9 62.0 70.0 77.5 74.5 65.7 2 Singapore 37.5 86.2 54.6 90.0 88.6 89.2 64.9 3 Japan 45.0 87.0 59.7 75.0 73.7 74.2 64.1 4 China 70.0 60.9 66.8 40.0 66.8 56.1 63.6 5 India 75.0 45.4 64.6 55.0 54.5 54.7 61.7 6 Hong Kong 35.0 90.1 54.3 85.0 72.3 77.4 61.2 7 Malaysia 55.0 64.3 58.2 55.0 62.3 59.4 58.6 8 Thailand 47.5 72.3 56.2 50.0 60.1 56.1 56.2 9 Indonesia 65.0 48.2 59.1 35.0 54.4 46.6 55.4 10 Vietnam 52.5 60.4 55.3 40.0 61.7 53.0 54.6 11 Taiwan 30.0 74.0 45.4 75.0 69.9 71.9 53.4 12 Philippines 47.5 55.1 50.2 35.0 60.1 50.1 50.1 13 Myanmar 40.0 24.7 34.6 25.0 43.4 36.0 35.0 14 Pakistan 25.0 43.6 31.5 35.0 48.1 42.9 34.9 15 Cambodia 32.5 25.9 30.2 25.0 44.3 36.6 32.1 16 Regional Average 48.0 63.3 53.3 55.0 63.4 60.0 55.4

Scores out of 100, with 100 highest. Source: BMI

Market Overview Competitive Landscape

Construction companies in Vietnam are fairly small and are confined to urban and roads infrastructure projects. The inland waterway transport sub-sector is managed by two state corporations affiliated with the Ministry of Transport, a state-owned enterprise (SOE) affiliated with the Vietnam Inland Waterway Authority and some enterprises managed by other ministries, which are operating in support of the power generation, cement and paper industries.

Table: Vietnam EQS Data

Revenue Operating Interest Latest FY Market Cap Growth (% y- Profit Growth Total Debt/ Coverage PE Name Earnings (US$mn) o-y) (% y-o-y) EBITDA Ratio Ratio Vietnam Construction & IMPO 12/2012 239.3 -13.7 -43.5 7.3 0.9 28.8 Songda Urban & Industrial Zo 12/2012 66.7 -64.5 -472.1 na -131.1 na HCM City Infrastructure INV 12/2012 101.5 19.3 na 43.4 0.0 5.6 Becamex Infrastructure Devel 12/2012 105.9 -53.6 -38.9 2.0 6.9 14.9 PetroVietnam Construction Co 12/2012 96.1 -51.8 na na -2.7 na Development Invest Construct 12/2012 69.4 -0.2 -66.8 19.6 0.5 na Kinh Bac City Development SH 12/2012 107.8 -55.6 na na -0.3 na Cotec Construction JSC 12/2012 71.5 -0.7 -12.5 0.0 451.3 7.0

na = not available/applicable. Source: Bloomberg

Company Profile Cavico Corporation

SWOT Analysis

Strengths ■ It is diversified across a number of interrelated sectors.

■ A portfolio of completed projects sets a precedent for the company in Vietnam's construction and infrastructure sectors.

Weaknesses ■ According to the company, 'Cavico's business growth is correlated to Vietnam's economic and infrastructural development' - this endangers the company's operations and revenue streams in the current downturn.

■ The small size of the company means that competition from domestic state-owned companies and foreign majors could erode its market share.

■ The value of contracts is very small for a construction and infrastructure company, typically below US$10mn.

Opportunities ■ Vietnam is one of the best-placed Asian economies to weather the global financial crisis.

■ The government's willingness to improve infrastructure seems undiminished.

Threats ■ The procedures for project start-ups are bureaucratic in Vietnam (administrative burdens and inefficiency).

■ Regional contraction in the Asian markets poses threats to Cavico's planned expansion in the region.

Company Overview Cavico Corp. is the largest private infrastructure and mining company based in Vietnam (while mining activities are at the heart of the company's operations, for the purpose of this report we will only focus on Cavico's infrastructure operations). Through its various subsidiaries, Cavico operates in the power, transport and urban development sectors. In the power generation sector, Cavico mainly focuses on hydropower and dam construction, although recently it has also made its first venture into wind power

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 large- scale 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 that 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 by 33.8% year-on-year (y-o-y) to reach US$304.6mn as of June 30 2010. The firm also saw a loss of US$1.8mn 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 ■ In April 2011, Cavico Corporation announced that its subsidiary Cavico Mining had Developments 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 6 megawatts (MW) and is estimated to cost US$6.7mn. ■ 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 US $1.3mn. 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 US$7.75mn tunnel construction contract with Song Giang Hydropower Joint Stock Company for the Song Giang 1 hydropower plant in Khanh Vinh District, in central Vietnam's Khanh Hoa Province. The twin-unit plant, which is located 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 US$23.2mn in the plant.

■ In December 2010, Cavico Corporation announced that its subsidiary Cavico Bridge and Tunnel had signed a US$6mn construction contract with Vietnam's state-owned electricity company, EVN, for the100MW Song Bung 2 hydropower plant project. Under the contract, Cavico will be responsible for the construction of three tunnels, a surge tank and a power house. Cavico expects to complete construction by 2014.

Financial Data In Q210, revenues rose by 7.9% y-o-y to reach US$14.7mn. Net profit for Q210 was a loss of US$1.8mn, compared with net income of US$37,445 in the same period of 2009.

Order backlog as of June 30 2010 was US$304.6mn, an increase of 33.8% y-o-y.

For 2010, the company expected revenues of between US$65mn and US$70mn, while overall the company expected to see a net loss in the range of US$4-5mn.

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.

• EVN has a diversified portfolio and is involved in all types of power plant projects.

Weaknesses ■ 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.

■ High debt levels are inhibiting plans for expansion.

Opportunities ■ 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-operate- transfer (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.

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 many major changes over the coming years 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 do so. In July 2011, EVN announced that it will invest US$39bn in building an additional 95 power plants with a total capacity of around 49,000 megawatts (MW) 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 US$3bn 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 (US$8.9bn) for power plant projects between 2011 and 2015, while its overdue payments reached VND10.15trn (US$488mn) at the end of 2011.

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 (US$135.9mn) 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

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 US$120mn loan from Vietnam Development Bank for two new thermal power plants (Vinh 2 and Duyen Hai 1). The utility was also seeking a government guarantee for its loan to build Duyen Hai 3 thermal power plant in mid- December 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 (US$0.07) at the end of December 2012 and the hike in December could potentially allow EVN to earn an additional VND7trn (US$330mn) 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 In December 2013, state utility and monopoly distributor EVN and Japan- Developments 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 (US$1.3bn), 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 Q114, with the first turbine scheduled to operate in Q417 and the second in Q218. The two-turbine plant will generate about 3.3bn kWh every year.

In October 2013, EVN reported that 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 500 kV and Son La power

station of 500 kV 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 1 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 1 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 (US$483mn) worth of bonds in the domestic market, while converting its debt to PetroVietnam into bond debt via a VND14trn (US$673mn) issuance.

In December 2012, EVN pulled out from the US$800mn Lower Se San 2 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 US $800mn project aimed at ensuring stable power supply in Vietnam. The World Bank will provide a loan worth US$449mn with an annual interest rate of 1.25% over a 25-year period, with a five-year grace period. Meanwhile, a US$30mn 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 US $8mn 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 2 and Genco 3. These companies are to take over power generating plants directly under EVN. Genco 1 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 3 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 the end of 2012.

Global Infrastructure Overview

Africa In 2014: PPPs Cement Global Appeal

Sub-Saharan Africa (SSA) looks set to continue to offer the highest growth rates for construction globally over the coming years - with real growth averaging 8.3% annually to the end of our forecast period in 2023. That said, endemic risks across the region remain prevalent and will continue to offset the potential gains for those wishing to take advantage of the multitude of opportunities on offer. As part of this growth story we have indentified three key trends which will support our forecasts over 2014 and emerge as driving factors for infrastructure development. These trends are the continued development of the public-private partnership (PPP) model across the continent, massive investment into the cement industry to satisfy demand and the increasing presence of other emerging market players in the development of African infrastructure.

Africa's Potential Clear

Regional Construction Industry Real Growth (% Change year-on-year)

Source: BMI

PPP Proliferation Proceeds

The further proliferation of the PPP model in Africa remains one of our trends to watch over the coming year, as an increasing number of African nations pursue project development through private players. Whilst PPPs are already used across the continent, insufficient bureaucratic capacity within African governments' PPP units has often resulted in projects falling victim to technical delays, allegations of corruption and cost overruns. However, we have seen an increasing amount of PPP legislation being passed and frameworks developed to better implement projects - and increase their attractiveness to players with private capital. Notably Kenya adopted its Public Private Partnerships Act in 2013, which bodes well for two subsequent PPP projects in the pipeline. The most successful countries thus far have been Côte d'Ivoire, Cameroon, Ghana and Namibia. Côte d'Ivoire in particular is seeking out alternative and creative financing methods in order to open up financing to enable private sector players to take up projects.

The proliferation of the PPP model goes hand-in-hand with our view that African governments will increasingly be able to fund their own infrastructure projects, as opposed to relying on international aid and Chinese financing. To finance these PPPs and other public works projects, robust economic growth and low global bond yields have allowed a number of African countries to go to the debt markets to raise funds; an option unavailable to most even five years ago. Eurobond issuances have taken off over the past 12 months in SSA, and more are planned for 2014. Most include at least a partial allocation for infrastructure, with many fully earmarked for the sector.

While these opportunities remain attractive, and rewards could be substantial, risks remain the highest globally (with SSA posting the lowest average in our Project Finance Ratings). Given the long-term nature of PPPs, this is a major deterrent for investors. Risks, both regulatory and political, subdue international investor interest. In an attempt to mitigate these risks, we have seen a number of initiatives to increase access to private sector capital in Africa. One of the most promising has been the World Bank's Africa50 vehicle. One of the main aims of the initiative is to make infrastructure projects more attractive to financiers by making skilled legal, technical and financial experts available to projects from an early stage of development. It is hoped that better planned and executed projects will incur fewer delays, legal costs and limit the potential for corruption, thus lowering the risks for investors.

Risks Remain Elevated, But PPPs Spread

BMI African Project Finance Ratings

Source: BMI. Scores 0-100, 100 being

Cement Investment A Sign Of Things To Come

From cement majors to local players, there is huge investment planned for the cement industry over 2014, which will significantly boost capacity. We expect that frontier markets will garner particularly strong interest due to their growing economies but minimal existing capacities. We highlight Angola, Cameroon, Ghana and Zambia as key locations in which cement producers are ramping up investment into the cement industry.

That said, investment is going into the sector across the continent. Nigerian conglomerate Dangote plans to boot its cement production capacity to 55mn tonnes per annum by 2016, with new plants planned in Niger, Zambia, Cameroon, Kenya, Ethiopia and South Africa - all expected to be under construction in 2014. South Africa's PPC plans to expand in Ethiopia, Rwanda, Zimbabwe and the Democratic Republic of the Congo (DRC). Indicating that the growth potential of African cement is attractive, Africa features heavily in major producer Heidelberg's capacity expansion plans for 2014, with new plants planned in Ghana, Burkina Faso, Togo and Tanzania, whilst other locations are still under consideration.

The increase in cement capacity across the continent bodes well for our construction industry forecasts, as producers feel confident in the growth potential in Africa. We expect that increasing numbers of cement plants will be built, owing to poor transport infrastructure and the fact that accessing remote locations raises the cost of importing cement or shipping it from a small number of large plants.

Following The Chinese Into Africa

Our final trend to highlight for 2014 is that, following a number of pledges of investment in 2013, international players, particularly from other emerging markets, will increase their exposure to Africa as risk premiums fall.

Brazilian companies have held dominant market positions in lusophone African countries (namely Angola and Mozambique) for some time. Now, in line with a broader global expansion strategy, we are seeing these companies expanding their focus outside of their traditional remit, with West Africa at the forefront of this trend. Ghana in particular is benefitting from an influx of Brazilian construction players and capital. Currently, Ghana follows only Angola and Mozambique in terms of construction market share of Brazilian companies, with US$600mn-worth of projects being developed in Ghana by Brazilian companies. Ghana is, therefore, likely to be the first step under a broader strategy by Brazil's biggest construction players to expand their geographical presence in Africa.

Others Look To Where China Has Gone

Percentage Market Shares

Source: BMI/ENR

In East Africa, it is the BRIC nations which are increasing their presence by targeting the efforts to better integrate the region's transport network. Both Russia and Brazil have shown interest in funding and developing the LAPSEET corridor project. Ethiopia looks set to benefit from Indian investment in developing its road and rail capacity and connections with Djibouti, whereas Mozambique has seen Indian capital pledged for power and transport projects.

Other Asian nations, particularly Japan and South Korea, look to repeat the Chinese model in the search to secure resources. South Korea has increased its foreign aid to Liberia with a view to improving the infrastructure of the country - notably one of the few in which China's presence is not too heavily felt. Similarly South Korean companies are increasingly active on the continent, looking to tap the growing opportunities not automatically accorded to Chinese firms.

However, it is Japan which has set about asserting itself more in Africa and looks set to carry on doing so. In June, Japan's Prime Minister Shinzo Abe announced US$32bn in funding for Africa over a five-year period (including an undefined portion for infrastructure). This follows an announcement in May in which

Japan pledged US$2bn to develop infrastructure around Africa's natural resources, capitalising on rising anti-Chinese sentiment in light of its African investment strategy.

Asia-Pacific In 2014: Shaping Up To Be A Benign Year

BMI View: Our outlook for the Asia Pacific construction market in 2014 is relatively benign against the historical average, where lingering uncertainties towards the outlook for the global economy could prevent the region from maximising its construction potential. We have identified five trends that we believe will play out in the Asia Pacific construction market in 2014. They are the growing relevance of the more developed markets in Asia towards regional construction growth, lower capital costs, considerable project opportunities, pertinent business environment risks and greater financing invention due to weaker government fiscal positions.

Our outlook for the Asia Pacific construction market in 2014 is benign relative to the historical average, with our forecasts for construction growth in 2014 similar to the historical ten-year average (4.9% versus 5.0%). Although several countries have seen political risks subside following the conclusion of elections and remain focused on addressing their infrastructure and building deficits, there are still considerable difficulties in translating pledged investment into actual construction activity. Coupled with the numerous uncertainties that cloud the outlook for the global economy, these conditions have the potential to stifle financing for new construction projects and hamper project implementation in 2014. That said, despite these concerns the Asia-Pacific region is still expected to outperform the global construction market, which is forecast to grow by just 3.5% in 2014.

Indifferent Outlook

Asia Pacific - Construction Industry Value Forecasts

e/f = BMI estimate/forecast. Source: BMI, Various State Agencies

In this analysis, we will review the current prospects for the construction market in the Asia Pacific region, highlighting some of the key themes that we expect to unfold over the course of 2014.

Developed States Increasingly Relevant: While we are projecting Asia's construction growth in 2014 to be relatively similar to the historical ten-year average, the drivers of this activity continue to change. Hong Kong, Singapore, South Korea, Taiwan, Australia, Japan, and New Zealand are becoming increasingly relevant to the region's growth performance. These markets are expected to contribute to 27.9% of Asia's overall construction growth in 2014, compared to an average contribution of -0.7% per annum between 2004 and 2013.

Changing Composition

Asia Pacific - Contribution To Construction Industry Value Real Growth, By Key Sub-Groups, Percentage Points

Developing Asia: Hong Kong, South Korea, Singapore, Taiwan. Developed Asia: Australia, New Zealand, Japan. e/f = BMI estimate/forecast. Source: BMI, Various State Agencies

We believe that this trend has arisen due to two factors: a sharp cutback in capital expenditure in China, the biggest contributor to construction activity among Asian emerging markets, but more importantly, increased opportunities among these developed markets. An unusually high number of natural disasters among the developed countries in 2011 have heavily damaged existing infrastructure and a large portion of the reconstruction effort, particularly in Japan and New Zealand, has yet to be completed. Meanwhile, Taiwan, Singapore, Hong Kong are implementing major plans to improve inter- and intra-transport links after years of perennial underinvestment.

We also highlight that the recent electoral victories by the Liberal Democratic Party in Japan and the Liberal-National coalition in Australia have increased the potential for a broad-based improvement in policy formation and construction-project execution in two of the largest developed markets in Asia.

More Conducive Monetary Backdrop: We expect the cost of capital across Asia in 2014 to be lower than over the past ten years. Most Asian countries have adopted a looser monetary policy to spur economic

activity - India and Vietnam are expected to register the greatest decline in domestic lending rates among Asian economics - and this could reignite private sector interest in construction in 2014.

Lower Capital Costs

Asia Pacific - Lending Rates, 2014 And 10-Year Historical Average (2004-2013), %

e/f = BMI estimate/forecast. Source: BMI, Various State Agencies

Considerable Project Opportunities: We expect project opportunities in Asia's infrastructure and construction sectors to remain considerable in 2014. Although government fixed capital expenditure in the region is not expected to clock the highs seen during the stimulus-driven 2008-09 recovery (due to China's spending reductions on infrastructure), Asia's infrastructure and building needs are still massive and many Asian governments remain keen to address this deficit.

Still Lacking

Asia Pacific - Quality Of Infrastructure, By Country, 2012 And 2013

*Out of 144 Countries. **Out of 148 Countries. Note: Lower Rank = Higher Quality. Source: World Economic Forum Global Competitiveness Report 2012/13, 2013/14

Most of the infrastructure-building programmes introduced by emerging economies in Asia (particularly in South East Asia) to attract private investors are gaining momentum - for example, Indonesia's Master Plan for the Acceleration and Expansion of Indonesian Economic Development, Malaysia's Economic Transformation Programme, and Philippines' Public Private Partnership (PPP) Programme. These emerging economies have also ramped up capital spending for all types of infrastructure to record highs, while developing and developed countries in Asia are ramping up spending to address transport bottlenecks and rebuild disaster-hit infrastructure, respectively.

China's capital expenditure plans will also still be significant and will mostly likely dwarf allocations in all other emerging markets. Even though the Chinese central government is increasingly targeting economic growth driven by private consumption and not by fixed asset investment, the latter - particularly into infrastructure sector - continues to be viewed by the central government as the easiest way to generate a satisfactory economic growth rate in the near term. For example, the Chinese government increased its railway investment target for the 12th Five-Year Plan (2011-2015) by CNY500bn (US$14bn) to CNY3.3trn.

Lastly, many Asian governments (we highlight China, Singapore, Hong Kong and Malaysia) are channelling funds into public housing as record-high housing prices create social problems for these countries.

Business Environment Risks Remains Pertinent: We believe that business environment issues (such as red tape, land acquisition, environmental clearances and deficits in institutional capacity and regulatory framework) are still a major problem in several emerging markets in Asia. This is despite some countries taking significant steps to resolve these regulatory bottlenecks (such as the breakup of the Ministry of Railways to reduce red tape and increase operational transparency for investors) or making attempts to do so (such as the parliamentary approval of a new land acquisition bill in India). Many of these flaws are deeply ingrained in their bureaucratic system and require years for reforms to mature and fully resolve them. These countries also need years to train the necessary human resources to boost instructional capacity. As such, these issues could take many years to be resolved.

Investment Challenges Abound

Asia-Pacific - Ease of Doing Business Rankings, By Country, 2013 And 2014, Out Of 189 Countries.

Note: A Higher Ranking Denotes A Poorer Business Environment. Source: BMI, World Bank

Weaker Fiscal Position Prompts Financing Invention: We expect most Asian countries to run historically high fiscal shortfalls as they could continue to find it difficult to decrease their welfare spending

(such as in Thailand, Indonesia and India) or be obliged to pay for the excesses of their state-owned enterprises (such as in China and Vietnam).

This weaker fiscal position not only undermines investor confidence, but also affects their ability to finance their infrastructure plans in two ways. Firstly, these governments would have to continue to channel funds into supporting non-development expenditure at the expense of infrastructure development. Secondly, demand for their sovereign bonds could wane on the back of a weaker fiscal picture, making it more costly for them to secure debt to support their subsidy schemes and capital expenditure plans.

Greater Debt

Asia Pacific - Budget Balance, 2014 And 10-Year Historical Average (2004-2013), % of GDP

e/f = BMI estimate/forecast. Source: BMI, Various State Agencies

It has prompted some of them to privatise public fixed assets to raise financing for their capital expenditure plans and utilise non-traditional business mechanisms to garner private sector investment. These mechanisms include the use of Islamic bonds, infrastructure funds, financial assistance schemes (such as takeout financing and viability gap funding) and new PPP models that reduces project risks to private investors (such as an equity investment from the private sector). We expect both trends to take greater prominence in 2014.

Latin America In 2014: A Prosperous Year For Infrastructure Development

BMI View: Latin America continues to be a highly attractive destination for investment in infrastructure. The region is seeing high levels of activity in the transport and energy sectors and the Public-Private Partnership (PPP) model looks set to continue to play a leading role. In addition, improvements to the regulatory environment are being implemented in order to better mitigate a number of downside risks. As such, our outlook for 2014 remains broadly positive, although we highlight that several risks remain pertinent to investing in Latin America in the upcoming year.

Latin America presents a diverse array of markets, which offer opportunities but also challenges in the infrastructure market. Although we like the region as whole, we draw attention to the fact that each country offers a very unique set of conditions. However, we identify the following common themes which will be prevalent over 2014:

■ PPP model continues to gain momentum

■ Regulations to adapt to meet industry challenges

■ We do not anticipate radical changes to overall business environments

■ Delays on environmental permits, land ownership issues and relations with local communities will continue to be among the main risks to investment in the region

PPPs Role Continues To Strengthen In Hand With New Regulation

The strengthening of the PPP model in Latin America is a sign of growing confidence in the market. The model's increasing popularity bodes well for future investment in the region as several governments open up their infrastructure sector to private investment in order to share the financial burden, better manage the risk, but most importantly to attract expertise where institutional capacity is weak. At the moment, Latin America is undertaking some of the most challenging construction works that would have previously been unthinkable without the involvement of the private sector. These include ports in Mexico, hospitals in Chile, airports in Brazil, public transport in Peru, and an ambitious road network in Colombia. Indicative of the success of the model, countries without a PPP framework in place have subsequently started to develop one - Paraguay finally approved a PPP law in November after four years of negotiations.

As a general trend, higher levels of economic growth in the region have led central governments to prioritise infrastructure development in order to increase competitiveness and improve living standards. The strong momentum in the industry will be maintained through 2014 on the back of a robust project pipeline

and strong government support. As such, PPPs will continue to play a major role in 2014 allowing the construction of technically challenging, high-cost projects.

Sustained Growth

Latin America Construction Industry Value (US$bn) And Real Growth %

500

250 0

0 -5 2008 2009 2010 2011 2012 2013f 2014f 2015f

Latam construction industry value, US$bn (LHS) Latam Const Industry Value, Real Growth % y-o-y (RHS)

F = BMI forecast. Source: Central Banks/National Statistics Agencies of Argentina, Belize, Bolivia, Brazil, Chile, Colombia, Costa Rica, Cuba, Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Nicaragua, Panama, Peru, Trinidad&Tobago, Venezuela. BMI

Regulatory Improvements

In terms of changes in regulation, we highlight progress made by President Enrique Peña Nieto in Mexico with a bill to liberalise the energy sector (to be approved by December 15). The new legislation is expected to benefit construction industry companies such as Empresas ICA which is highly exposed to the energy sector-related infrastructure operations. Also in Colombia, President Juan Manuel Santos recently signed a bill to speed up land purchasing and environmental permits for infrastructure projects of national interest. The new law - which is pending approval from the Constitutional Court - is expected to be implemented soon.

No Major Surprises But Familiar Risks

We do not anticipate radical changes for 2014 in terms of outperformers and underperformers in the region. On top of our Risk Reward Ratings (RRRs), we expect Chile, Mexico, Colombia and Peru to continue to lead as they offer the best compromise between risks and rewards. In terms of underperforming markets, Venezuela, Honduras, El Salvador and Guatemala are likely to remain at the bottom of our rankings. The political outlook in Venezuela is not particularly promising; President Maduro continues to strengthen his hold on power while acting as a deterrent to private investment. In turn, structural weaknesses in some of the Central American economies are unlikely to be solved in the short term. As for the Caribbean, we do not anticipate high levels of construction industry growth as weak economic outlooks and high levels of external leverage suggest that, in the absence of exchange rate flexibility, it is only a matter of time before another small-island economy in the Caribbean defaults.

Regional Outperformers Stay On Top

Latin America Risk/Reward Ratings

Source: BMI

Although we anticipate the region will remain largely stable in 2014, we highlight the potential risk of upcoming elections and potential instances of public unrest. Next year, presidential elections will be held in

Costa Rica, El Salvador, Panama, Colombia, Brazil, Uruguay, and Bolivia. Although we do not expect the elections to have a significant impact on infrastructure development, a change of leadership in countries like Brazil is bound to have an impact on the business environment. In addition, we are keeping track on the progress in the peace process in Colombia which is expected to be completed in 2014. If successful, we expect to see an increase in foreign interest in the country's infrastructure development.

Unsurprisingly, the capacity of several Latin American states to deal with the calibre and pace of current infrastructure projects continues to be limited. As such, we anticipate some of the familiar challenges of investing in emerging markets to remain in 2014. Risks vary depending on the market, but delays in the granting of environmental permits, land ownership issues, and opposition from local community groups to continue to be present challenges to infrastructure projects.

MENA In 2014: Reaping Rewards Despite Risks

BMI View: 2014 is set to be an important year for infrastructure in the Middle East and North Africa. With massive government expenditure plans, these markets are some of the fastest growing in the world, whilst weaker markets have entered recovery after a tumultuous few years.

Key trends we identify for 2014 which will dictate this growth story include:

■ High risk, high reward markets will become increasingly attractive, especially for regional construction companies;

■ The GCC will suffer capacity constraints in light of a boom in activity;

■ And a number of political risks will come to a head in 2014 which could either boost or undermine market growth potential.

High Risks, High Rewards?

Having to pay a risk premium has always come with operating in the MENA region. However, after a turbulent decade of war and revolution, the risk premiums have risen dramatically for a number of markets; namely Iraq, Libya and Egypt. There have been upticks in violence in Iraq and Libya over recent months, and political turmoil continues to threaten stability in Egypt. However, instead of descending into economic ruin, these markets present some of the biggest construction growth markets in the region. Not only is the repair and reconstruction of existing infrastructure a top government priority, but buoyed by hydrocarbon revenues, international assistance and pressure from restive populations, infrastructure deficits are beginning to be addressed.

In 2013 Aecom returned to Libya to assist with the reactivation of billions of dollars worth of pre-revolution contracts and implement the investment of Libya's oil wealth into new infrastructure projects. European companies such as Salini Impregilo have already begun to take advantage of this and we expect that others will follow suit in 2014 (see 'Salini Impregilo's Risky Markets Paying Off', 25 November).

Growth in Iraq will be among the strongest in the region over the 2014-2018 period, averaging 8.1% y-o-y, as the government looks to address power and housing deficits. Additionally, the outperformance of the Kurdish region of Iraq is one of our views we expect to continue to proliferate over the course of 2014 (see 'Kurdish Stability Attracts Tourists, Creates Opportunities', 21 June).

For Egypt, despite uncertainty, the market's appeal appears to still be in place as a number of public-private partnership projects have moved forward and investors seem keen to enter the market. Saudi Arabia's persistent interest in Egypt demonstrates that investors from neighbouring Arab countries are less sensitive to the political risk generated by regime change in the country. As such, Gulf-based (and Turkish) firms are investing in the region, and we believe that these firms will be well placed to capitalise on stability, when it is achieved.

Overall we see that in light of government aims to placate populations with high infrastructure spending, coupled with existing infrastructure deficits, we should see much in terms of construction industry growth - enough to make the high risk markets appealing to those with enough appetite.

Unexpected Opportunities

BMI's Short Term Political Risk Ratings, %

Source: BMI, Higher scores = lower risk

GCC - Victim Of Own Success

We retain a generally positive view of the GCC's prospects as we head into 2014, and expect the region to be the outperformer in the Middle East and North Africa. However, the sheer size of GCC members' ambitious infrastructure spending programmes, particularly in Saudi Arabia and Qatar, are leading to shortages, delays and price inflation, which we expect to continue and even accelerate over 2014. With Qatar's World Cup preparations, a recovery on the cards in the UAE's construction sector and Dubai winning the World Expo, and huge investment being ploughed into rail projects, demand for construction materials is set to soar. EC Harris reports that Qatar alone could experience price inflation of 18% in the construction sector. Whilst over the medium term we expect regional cement production capacity will increase to match demand, especially in Saudi Arabia, over 2014 and 2015 at least we expect to see shortages of cement, tarmac and other materials.

Demand for highly skilled workers, project managers and engineers is also exceptionally high in the region, with many projects held up in light of a lack of oversight. Also, demand has drawn in influx of expat labour

into the GCC, which has exacerbated already severe housing shortages. Again over 2014, we expect these issues to continue, although more housing projects are coming online as confidence in real estate increases and domestic project management capabilities are increasing.

Rail and Power Investment Like Nowhere Else

Sector Share Of Key Projects Value

Source: BMI Key Projects Database

Coupled with this problem is the issue of construction labour, which the GCC has long been under pressure from due to accusations of poor worker conditions. 2013 in particular has seen labour come under the international media spotlight, and we expect that 2014 will continue this trend. A jump in the number of deaths on construction sites has attracted criticism towards on Qatar's World Cup preparations. Elsewhere, programmes of promoting private sector employment to indigenous populations whilst cracking down on illegal migrant workers has seen millions of construction workers leave the GCC. Felt most acutely in Saudi Arabia, Kuwait and Oman, the increased costs of stricter labour rules will likely impact firms throughout 2014.

Political Risk Key To Outlook

A number of political issues are likely to dictate the direction of the MENA region's construction industry, as how they play out will dictate investor confidence in a number of markets. The revolutions which swept North Africa are still preventing markets such as Tunisia from fully recovering following their revolutions. Presidential and parliamentary elections, initially set to take place in 2013, are unlikely in our view to be held before H214. Recent developments also highlight the fragility of the security situation. A suicide bomb attack in the Tunisian tourist resort of Sousse on October 30, the first such assault in more than a decade, is an episode which is likely to hit the all-important tourism sector. Additionally, after being pushed out of Mali into the Sahel region, Algeria and Libya in particular have been targeted by Islamist terrorism. After the January 2013 attack on the In Amenas facility, this has particularly affected investment and operations from international oil companies, which is a key driver of construction industry growth in the region. A situation in flux does not present an attractive investment climate, which is what the construction industry in North Africa needs.

Elsewhere, the affect of improving relations between Iran and the West could yield better market conditions in both Iran and the GCC in 2014. Although tentative at present, further rapprochement and warming of relations could not only see an increase in trade between the GCC and Iran, as the GCC is a key exporter to Iran, but also see construction activity pick up surrounding this trend. However, if the deal surrounding Iran's nuclear ambitions fails, we could see the region enter a tense period which may damage investor perceptions. In particular, due its vehement opposition to Iran's nuclear capabilities, Saudi Arabia may escalate tensions in the region.

Finally, tensions between Baghdad and Erbil within Iraq remain high as the Kurdish regional government pursues its own energy agenda. Despite protests from Baghdad, a number of international oil companies have moved operations into the Kurdish region, which subsequently threatens the vitally important oil revenues for Baghdad. Whilst the construction sector in Kurdistan is booming, supported by private investment, the construction industry in the rest of Iraq is heavily dependent on government funding. As such, should relations between Baghdad and Erbil continue to sour, we are less likely to see a deal which would see oil revenues shared, which poses significant downside risk to Baghdad's ambitious infrastructure and housing investment plans.

North America And Europe In 2014: Turning A Corner

BMI View: Long considered the laggard in the global infrastructure space, the European and North American construction sectors should experience a continuation of the turnaround which took hold in late 2013. Stable to positive outlooks are becoming increasingly frequent across the region as a whole, and therefore we do not expect a triple dip recession in the European construction industry, with growth to accelerate to 2.5% for the region in 2014, versus 1.8% estimated for 2013.

This turnaround will be facilitated by an expansion of capital for the sector, although not from pre-recession sources. Instead, the EU, supported by the European Investment Bank (EIB), as well as institutional capital both through direct investments and private equity funds, should support projects. Broadly speaking, developed markets will drive growth in North America and Europe 2014; however, we remain uncertain over the sustainability of this trend over the medium term.

Turning A Corner

Europe Construction Industry Real Growth, % y-o-y

-5

-10 2012 2016f 2005 2009 2013f 2017f 2002 2006 2010 2014f 2018f 2003 2007 2011 2015f 2004 2008

f=BMI forecast, Source: Central Banks, National Statistics, BMI

Our key themes for the North American and European construction markets for 2014 are:

■ The EU and EIB will continue to play a crucial role in supporting infrastructure investment in Europe, especially in the periphery;

■ Whilst substantial capital pledged through private equity funds will buoy investment into infrastructure in Western Europe and North America.

■ Developed markets to play a crucial role in the region's construction sector growth performance.

■ Emerging European recoveries to remain fragile and construction growth will trend below pre-crisis highs.

EU and EIB will continue to play a crucial role in supporting infrastructure investment in Europe

With the European banking sector unlikely to experience an expansion and infrastructure financing constrained by new banking regulations, traditional sources of project finance - absent since the financial crisis - will remain elusive in 2014.

Stepping in to fill this void has been the EU in conjunction with the EIB. We believe their role in European infrastructure finance will only accelerate in 2014 in line with a number of new programmes.

Outlined in 2013, the Connecting Europe Facility (CEF) will support Projects of Common Interest under the Trans European Transport and Energy Networks (TEN-T and TEN-E) scheme. The EUR29.3bn plan will run between 2014 and 2020 and support European infrastructure projects through direct loans as well as preferential access to EIB loans and capital guarantees, in the form of project bonds, risk capital or enhanced loans.

One of the major areas of focus of the CEF is the energy sector. In October the EU outlined 248 energy Projects of Common Interest, with a price tag of EUR9.1bn, these projects will benefit from EUR5.12bn in CEF funding, with the remainder to be supported by EIB funding. Energy projects will be a key area of priority for the EU over the near term, as the region struggles to balance its green energy agenda with rising electricity prices and capacity concerns. As such, policy clarification along with improving the region's security of supply and better integration of energy infrastructure will be a focus over 2014.

Complementing the CEF facility is the Europe 2020 Project Bond Initiative, which is a joint initiative of the EC and the EIB. The venture, launched in November 2012, aims to provide credit enhancement for infrastructure public-private partnerships (PPPs), in particular TEN-T and TEN-E projects and high speed broadband. The initiative works by providing credit enhancement to improve the credit quality of project bonds in order to attract institutional investors with high investment thresholds. It will do this by taking a subordinated debt in the project company, in order to elevate the credit quality of the senior debt.

Levelling The Playing Field

Competitiveness Of Infrastructure, Rank Out Of 148

Source: World Economic Forum, Global Competitiveness Report, 2013-14

The mandate of these programmes will necessitate that much of the financing support is directed outside of the more developed markets. TEN-T and TEN-E projects are designed to better integrate periphery countries into the region through improving inter-regional connectivity, reducing bottlenecks, filling in missing links. Periphery countries remain considerably behind their developed European peers in terms of infrastructure quality, and thus we expect 2014 this acceleration of EU and EIB financing support for infrastructure weighted towards projects in emerging Europe.

Capital pledged through private equity funds will buoy investment into infrastructure in Western Europe and North America

Whilst emerging European infrastructure development will be predominantly sponsored by the EU and EIB, we expect an acceleration in the level of institutional investors and private equity investments into Western European and North American infrastructure assets in 2014.

2013 saw a substantial expansion in the amount of capital raised by infrastructure funds, with impressive closes reached by many (Brookfield Infrastructure Fund II closed the second largest fund ever with US$7bn

raised). European-focused infrastructure fundraising has seen a considerable expansion in 2013, with EUR9.1bn raised as of October 22 2013, versus EUR4.8bn over 2012 and just EUR2.6bn in 2011 (according to Preqin data). Infrastructure fundraising is benefiting from the number of institutional investors that are either turning to the asset class for the first time, or are increasing their infrastructure mandate.

In addition to institutional investors increasing infrastructure allocations through private equity funds, many are going direct into the sector, supported by government measures to entice greater capital into the market. European and US institutional investors are increasingly looking to compete with their Canadian peers who are leaders in direct investments into infrastructure. In the UK for example, the government has encouraged investment from both pension funds and the insurance industry, the latter of which announced plans in December 2013 to invest GBP25bn into infrastructure in the UK.

The net impact is considerably more capital available for infrastructure investment in 2014 and over the medium term. Indeed, the majority of funds and direct investors are targeting North America and Western Europe, and therefore we expect increased competition for high quality assets in the regions. Indeed, the key risk seems not to be capital availability, rather the number and quality of opportunities on offer. We expect therefore to see considerable competition for high quality, regulated assets in the region over 2014.

Clear Regional Preference

Unlisted Infrastructure Fund Dry Powder, By Regional Focus, EURbn

Source: Preqin

Developed markets to play a crucial role in the region's construction sector growth

In line with a sustained focus by investors on the developed markets in Europe and North America, we also expect these countries to be the major engines of construction sector growth. Indeed, the US and Canada have been global developed market outperformers since 2012, and we expect Europe to follow suit in 2014.

Following deep recessions over recent years which saw Europe's largest construction markets act as a net drag on overall industry performance, 2013 saw many of the major construction markets in the region return to growth. As such, the developed markets in Europe are becoming increasingly important to the regional's overall growth and we believe this will continue into 2014, supported by a broader improvement in the Eurozone economic picture.

In 2014 we are anticipating a turnaround in Germany, a continued revival in the UK construction sector, and sustained growth in France and Italy. However, Spain and Greece will continue to be the developed market laggards, with growth to return only in 2015 and 2017 respectively.

Whilst growth in the developed market region should return to pre-crisis levels in 2014, we highlight less certainty over the medium term for sustained robust growth rates. Both Germany and the UK have seen strong growth in the second half of 2013 and we expect growth rates to remain elevated in 2014, and potentially through to 2015. However, sustaining growth beyond the near term will depend on the governments' abilities to implement ambitious infrastructure investment plans.

Emerging Europe To Trend Lower

Emerging And Western Europe, Construction Industry Value Real Growth, % y-o-y

-10 2012 2016f 2005 2009 2013f 2017f 2002 2006 2010 2014f 2018f 2003 2007 2011 2015f 2004 2008

Western Europe Emerging Europe

f=BMI forecast, Source: National Statistics, Central Banks, BMI

Emerging European recoveries to remain fragile

Conversely, growth will be far more volatile in emerging Europe. Although positive growth will return more broadly across the region, with growth rates expected to outperform those in developed market peers, it will trend substantially lower than pre-crisis levels.

In order to support more sustainable infrastructure investment over the medium term, outside of EU- mandated projects, structural improvements are needed in the economies of emerging Europe. Economies across the region are struggling to recover from the financial crisis, with private consumption rates

remaining weak; this is weighing on domestic demand for infrastructure. At the same time, the region is losing competitiveness, in part due to high electricity costs, and this is weighing on demand for infrastructure from industrial users and foreign investors. Consequently, with low existing capacity utilisation and weak demand across the region, infrastructure investment is unlikely to be a priority. Indeed, whilst we see austerity measures easing, infrastructure investment is likely to remain constrained, as governments focus on measures which will improve private consumption.

Rebound Unsustainable?

Emerging Europe Economic Data

40 10

20 5

0 0

-20 -5

-40 -10 2015f 2011 2007 2016f 2012 2008 2004 2017f 2013f 2009 2005 2014f 2010 2006

Fixed capital formation, real growth % y-o-y (LHS) Real GDP growth, % (RHS)

f=BMI forecast, Source: National Statistics, Central Banks, BMI

Methodology

Industry Forecast Methodology

BMI's ndustry 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 non- linear 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:

2 2 ■ R tests explanatory power; adjusted R 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

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 year-on-year. 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.

Construction Industry, % Of GDP/Construction Value (US$)

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 (US$), % 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.

Government Capital Expenditure, US$bn, % 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, 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.

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 Rating Methodology

BMI's Risk/Reward Ratings (RRR) 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 RRR 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 market and country risks, or market and country rewards. These two results in turn provide an overall Risk/Reward Rating, 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 Rating 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 rating is revised on a quarterly basis. This ensures that the rating draws on the latest information and data across our broad range of sources, and 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 Ratings (CRR) 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 ratings, the following indicators have been used. Almost all indicators are objectively based.

Table: Infrastructure Risk/Reward Rating Indicators

Indicator Rationale Rewards Industry rewards Construction Objective measure of size of sector. The larger the sector, the greater the opportunities expenditure, US$bn available. Sector growth, Objective measure of growth potential. Rapid growth results in increased opportunities. % y-o-y Capital investment, % of Proxy for the extent the economy is already oriented towards the sector. GDP Government spending, Proxy for extent to which structure of economy is favourable to infrastructure/ % of GDP Country rewards Labour market From BMI's Country Risk Ratings (CRR). Denotes availability/cost of labour. High costs/low infrastructure quality will hinder company operations. Financial infrastructure From CRR. Denotes ease of obtaining investment finance. Poor availability of finance will hinder company operations across the economy. Access to electricity From CRR. Low electricity coverage is proxy for pre-existing limits to infrastructure coverage. Risks Industry risks No. of companies Subjective evaluation against BMI-defined criteria. This indicator evaluates barriers to entry. Transparency of Subjective evaluation against BMI-defined criteria. This indicator evaluates predictability of tendering process operating environment. Country risks Structure of economy From CRR. 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 CRR. Denotes vulnerability to external shock - principal cause of economic crises. Policy continuity Subjective rating from CRR. Denote predictability of policy over successive governments.

Infrastructure Risk/Reward Rating Indicators - Continued

Indicator Rationale Legal framework From CRR. Denotes strength of legal institutions in each state. Security of investment can be a key risk in some emerging markets. Corruption From CRR. 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 Weighting, % Rewards 70, of which - Industry rewards 65 - Country rewards 35 Risks 30, of which - Industry risks 40 - Country risks 60

Source: BMI