Infrastructure Financing Strategies for Sustainable Development in Viet Nam”
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“Infrastructure Financing Strategies for Sustainable Development in Viet Nam” National Study / Paper This version: 15 September 2017 The study was developed under a United Nations Development Account project entitled “Financing strategies for inclusive, equitable and sustainable development in Asia and the Pacific”, which focuses on a few selected countries, including Viet Nam, and is implemented by the Macroeconomic Policy and Financing for Development Division, ESCAP. The Document was developed with the assistance of the following consultant: Tran Duy Hung (Monitor Consulting) under the supervision of Mathieu Verougstraete (UNESCAP). The views expressed in this document are those of the authors and do not necessarily reflect the views of the United Nations Secretariat. The study has been issued without formal editing. DRAFT Executive Summary Viet Nam’s achievements in poverty alleviation, economic growth, and global economic integration demonstrate the government’s determination to modernize its economy and improve the well‐being of its people. The country has enjoyed strong economic growth in the last two decades, averaging 6% a year (6.7% in 2015)1 and growth is expected to continue from 6.2% to 6.3% over the medium term. Such growth momentum has required significant resources to meet the growing demand for infrastructure services and the country has sustained a high level of infrastructure investment at around 8% of GDP in recent years. According to the World Economic Forum (WEF), the Vietnam’s global infrastructure ranking has improved from 95th position in 2012 to 79th position in 2016.2 Investments in electric power generation, water systems and transportation have greatly supported economic growth and improve the quality of life in the country. Overall, infrastructure development is essential to deliver basic public services, increase productivity levels and promote job opportunities. Most infrastructure investment in Viet Nam is currently financed from the central government budget and Official Development Assistance (ODA). However, these sources are not sufficient to accommodate the existing and future infrastructure needs. In addition, ODA sources, while significant, are bound to decrease with the country economic development. Therefore, the government has to consider innovative solutions to finance the necessary infrastructure for the country’s sustainable development. Development banks estimate that Viet Nam requires annually between $16.7 billion to $25 billion in order to meet its infrastructure needs during the 2016-2020 period. Based on sector reviews, this study considers that Viet Nam will need about $20.2 billion per year on average.3 However, the current spending covers less than half of this amount and the financing gap can thus be estimated at around $12 billion annually. Due to limited government budget and ODA, a possible solution for financing infrastructure is to leverage domestic and international capital markets, and attract private investments. In addition, it is necessary to increase the institutional capacity and technical expertise to plan, build and operate efficiently economic and social infrastructure as this can lead to significant savings and better public services. Mobilization of domestic resources through on-going tax reforms and improving public expenditure efficiency are keys to the sustainable financing of infrastructure in Viet Nam. One of the challenges in this regard is a significant downward trend in revenue as a share of GDP. Reversing the decline in the revenue to GDP ratio is vital to stemming the recent build-up in public debt and to restore fiscal policy to a more sustainable path. To address this situation, significant new tax measures will be required including, for example, the possible introduction of a capital gains tax, property taxes, or by lifting marginal tax rates for corporate and personal income. Improved administration measures can also help by reducing tax evasion and arrears, discouraging tax fraud, and streamlining value-added tax refund procedures. Profitable state-owned enterprises should also be made to pay increasing dividends. As part of recommendations, other important area to focus is to improve the performance of SOEs related to public infrastructure and service delivery, particularly those in electricity, water supply, telecommunications, postal, ports, and airports sectors. It is crucial to lay out a new approach to reducing the economic distortions and fiscal costs created by SOEs. These strategies have 1 http://www.tradingeconomics.com/vietnam/gdp-growth 2 World Economic Forum, Global Competitiveness Report 2012-2013, 2016-2017 3 Author’s baseline estimates: $20.2 billion; climate-change adjusted estimates: $23.4 billion (Table 5). 2 DRAFT continued to emphasize the importance of reducing the number and state capital invested in SOE’s via equitization and it may help pave the way for private investment. They also began to highlight the importance of improving SOE corporate governance and the need for a revised legal framework to enhance the transparency and quality of public investment through SOE’s engaged in the delivery of essential public services. There are funds available for infrastructure projects in local and international markets. However, channeling such capital into infrastructure projects is a challenge for countries like Viet Nam. By attracting private investment, the country could also benefit from the private sector’s management and technical expertise to efficiently build, operate and manage economic and social infrastructure and services. In order to attract private investments, Viet Nam has to establish investor confidence through policy, legal and institutional reforms that meet international standards, streamline project delivery and enable the development of a pipeline of bankable projects. To facilitate private involvement, the government should also aim at developing the local capital markets. It is believed that there would be a market for a well-structured project revenue bond or a bond backed by securitized assets. The introduction of securitization and project revenue bonds would help to develop capital markets by adding new asset classes to the market. It would also be a way to increase financing without increasing the liabilities of the GVN and could be a mechanism for good projects with good management to attract financing. Foreign financing may be feasible for certain large national programs such as ports, airports and energy, but many other infrastructure projects will need to rely on domestic financing. Domestic bonds could be a sustainable source of funding in the future but important institutional reforms addressing governance and transparency in particular, are required to permit this potential to be realized. 3 DRAFT Table of Contents Abbreviations ......................................................................................................................................................... 6 1. Infrastructure Investment Environment .......................................................................................................... 7 1.1. Country Strategy ..................................................................................................................................... 7 1.2. Economic Growth and Infrastructure Competitiveness .......................................................................... 9 1.3. Historical Infrastructure Spending ........................................................................................................11 1.4. Infrastructure Sector Review ................................................................................................................12 2. Infrastructure Financing Needs.....................................................................................................................19 2.1. Investment Projections by Sectors ........................................................................................................19 2.2. Estimates by Government of Viet Nam ................................................................................................20 2.3. Estimates by International Financial Organizations .............................................................................21 3. Availability/ Sources of Funds for Infrastructure Development ..................................................................22 3.1. Public Expenditure in Infrastructure .....................................................................................................22 3.2. Tax Revenue, Fiscal Balance and Debt ................................................................................................25 3.3. SOEs in Infrastructure development .....................................................................................................28 3.4. ODA .....................................................................................................................................................29 3.5. Local Financing Funds and Facilities for Infrastructure .......................................................................32 3.6. Private Financing and Public- Private Partnership (PPP) .....................................................................34 3.7. Source of Infrastructure Finance ..........................................................................................................38 3.8. Climate Finance ....................................................................................................................................46