On several economic measures, Vietnam is primed for takeoff.

Gross domestic product (GDP) has expanded by more than 6% for the past four years, foreign direct investment hit US$15 billion last year and will be higher this year, equity markets are booming, exports are up, and tourist arrivals have jumped 28% so far this year.

The only major speed bump is the country’s inadequate and slow growing transport infrastructure. Traffic in main cities Hanoi and Ho Chi Minh City (HCMC) has almost reached Bangkok’s notorious level, flights are frequently delayed at Tan Son Nhat International Airport and access roads to major ports are often backed up with trucks.

“If you go too fast you are going to crash, if you go too slow you have to come back down,” said Andy Ho, chief investment officer of VinaCapital Group, invoking the analogy of an airplane’s speed for take-off. “But, hey, guess what? Infrastructure isn’t coming up. If we don’t invest in it the friction cost of investing in Vietnam gets higher and higher.”

To be sure, infrastructure development is being prioritized by the government, at least in Hanoi and Ho Chi Minh City, but clearly not quick enough to keep pace with economic take-off.

Last year an estimated 400,000 new cars and three million new motorcycles were registered nationwide. Around 98% of households in Hanoi (8 million people) and HCMC (8.5 million) own at least one motorcycle, with 6 million registered in HCMC alone.

Mass transit systems are the only real alternative to private vehicles, and have been on city master plans for the past two decades. At least three new metro lines are now being developed in Hanoi and HCMC.

Japan International Cooperation Agency (JICA) approved to help finance the US$1.4 billion project to build HCMC’s Line 1 mass transit system in 2006. Construction started in 2010 and seven years later is still far from complete.

Meanwhile, the cost of the project has more than doubled due to inflation, the depreciation of the dong currency and fast rising land prices.

“We experienced about 10-12% inflation per year, which also affected the exchange rate between Japanese yen and Vietnamese dong,” said Akito Takahashi, senior representative of JICA.

Many components of the project, such as subway tunneling equipment, had to be imported. Vietnamese authorities also expanded the scope of the 19-kilometer line, 2.6 kilometers of which will run underground, after the initial design was approved, adding to the delays and costs.

“For these various reasons the project cost is exceeding the original amount – I understand that it is by more than 2.8 times,” Takahashi said.

The metro line, the only one of six planned lines that is actually under construction, runs from the Ben Thanh Market in downtown HCMC’s center to Suoi Tien, a northern suburb.

Much of Le Loi street, connecting Ben Thanh Market to the world famous Opera House, is now a giant construction site off limits to traffic, except to the ubiquitous motorcycles that vie with pedestrians for the sidewalks. Much of the tunneling has been completed and the line is now expected to be opened in 2020, two years behind schedule.

Hanoi hopes to have its first overhead metro service by next year, though about three years behind schedule. Line 2A, under construction by the China Railway Group with financing from the Export-Import Bank of China, is designed to run for 13 kilometers in the northwest part of the capital.

Details about the China-led project, such as its total cost, are scarce. Public confidence in the Line 2A system has already been hit by numerous accidents, some fatal, during construction which started in January 2011.

The Asian Development Bank is helping to finance two metro lines, one in each city. Line 3, which will run from Hanoi Central Railway Station to Nhon, a northwestern suburb and emerging business district, has completed 40% of its civil works.

The underground tunneling in the old part of Hanoi, home to many heritage sites such as the Temple of Literature, has not yet started.

ADB tendered the tunneling contract last year, but the contractor still needs to conduct an environment and social impact study. Meanwhile, the Hanoi People’s Committee has yet to compensate families for resettlement, a time-consuming and costly procedure that is likely to delay the project which was originally slated for completion in 2020.

“The official announcement has not been made yet, but it has been delayed,” said Daisuke Mizusawa, senior transport specialist at ADB. The original investment was an estimated US$1.37 billion, but is now likely to go up, he said.

The Vietnamese government generally matches at least 15% of investment in Official Development Assistance (ODA) projects, which means the state also bears the burden of project overruns.

And Vietnam cannot afford more overruns. Last year, public debt hit 63.6% of GDP, fast approaching the government’s self-imposed ceiling of 65%. This year the figure is down somewhat to an estimated 62.6% of GDP.

The cost of borrowing from bilateral and multilateral sources is also on the rise. “Vietnam will graduate from a low-income country in 2019,” said the ADB’s Mizusawa. “Next year will be the last year that they are eligible for Asia Development Fund concessional lending.”

Although interest rates on non-concessional funding are still low, they could rise in the future, adding to the risk of taking giant infrastructure-related loans. ADB has estimated that Vietnam will need US$480 billion between now and 2030 to meet its infrastructure needs.

Other mega-projects on the horizon include the US$16 billion Long Thanh International Airport, an alternative to HCMC’s overcrowded Tan Son Nhat Airport, to be finished by 2025, and the recently approved North-South national expressway, to be finished by 2030 at a cost of US$14 billion.

Commercial bank loans to infrastructure projects, such as toll roads, ports and airports, are also getting more difficult to finalize after the government this year ended the practice of allowing the Finance Ministry to guarantee such lending.

One alternative would be to move toward Public Private Partnership (PPP) projects, which are popular elsewhere in Asia but have not taken off yet in Vietnam.

That’s because authorities have yet to clarify the risk-sharing mechanism in which governments guarantee a certain minimum revenue flow for the developer, agreeing to top it off if it isn’t met.

“There needs to be a fair risk-sharing mechanism because if most of the risk is passed on to the developer, the banks will say, ‘sorry, I can’t support that project,” said one foreign bank executive.

PPPs may work for road projects, ports and airports, which are usually economically feasible, but they are less viable for urban mass transit systems or new high-speed train services that are universally money-losers, observers note.

Pricing of fares on urban metro lines will be a particularly sensitive issue; priced too low and the system loses money, too high and they are under-utilized. Given Vietnam’s now well-entrenched motorcycle culture, it remains to be seen if the mass transit system, if or when it’s finally built, will get people off their bikes and on to the trains.

“I’ll wait and see what the fares are,” said Lina, a receptionist at a Hanoi hotel who spends two hours a day on public buses and motorcycles to get to work on time.

By Peter Janssen - Asia Times - December 15, 2017