An inevitable trend

1 Oct 2018


Divestment from State-owned enterprises and groups is an inevitable trend brought about as the consequence of rampant investments through “powerful blows” during the years in the late 2000s and early this decade.


The Ministry of Industry and Trade has recently consulted relevant counterparts and agencies about replacing Vietnam Oil and Gas Group (PVN), the investor of the Long Phu III thermal power project, with a Chinese investor. Earlier, the ministry had suggested the government approve the transfer of the Quynh Lap 1 thermal power project, with the Vietnam Coal and Mineral Industries Group (Vinacomin) as the investor since 2009, to the joint venture of Geleximco-Hong Kong United Investors Holding. Several other thermal power projects, such as Quynh Lap 2, Quang Trach 1, Quang Trach 2 and Hai Phong 3, have also received investment proposals from foreign investors.


Inevitable trend

The main reason for the proposal to change investors of thermal power projects in particular and possibly a number of projects in other sectors in general is the difficulties in capital arrangement facing investors, who are generally State-owned enterprises (SOEs) and groups like PVN and Vinacomin.


In reality, these SOEs and groups are also investors of many other capital-intensive projects. Those projects have frequently faced delay and slow progress, as the investors have had limited capacity in capital arrangement but made widespread investments. This practice has worsened the capital shortage, which has in turn led to slow progress and cost overruns, forcing the investors to make shift with the funds available and delay development of the projects, sometimes indefinitely.


For example, besides the Long Phu III thermal power project, PVN is also the investor of four coal-fueled power projects, seven gas-fueled power projects and some important upstream gas production projects. So, the group needs a huge amount of capital, and will face “some emerging problems” if it moves on with the Long Phu III. Meanwhile, Vinacomin has reported that it cannot have enough funds to meet the equity capital requirement of $425 million for the Quynh Lap 1 thermal power project. The group may fail to obtain bank loans because it must have capital equivalent to 20 percent of the total investment for the project. If the group is the sole investor of this project, it will be short of a huge sum needed annually for development while it is currently “facing many difficulties.”


So, divestment from SOEs and groups is an inevitable trend brought about as the consequence of rampant investments through “powerful blows” during the years in the late 2000s and early this decade. In the context of the “exhausted” State budget and, as equally important, apparently inefficient public investment, it’s an obvious affair that the State must reduce public investment projects and speed up the equitisation of and divestment from SOEs.


For good divestment

Unfortunately, SOEs and groups have spent some capital to cover the cost for development of many projects where the State has to divest its capital. It would be very hard to recover this capital if the projects are transferred to private investors, simply because the ball is not in their court. Furthermore, unreasonably inflated costs are something not uncommon with public investment projects, and so it would also be unreasonable to ask private investors to pay in full for the costs demanded by the previous investors.


Nevertheless, the State should not, for the sake of recovering some capital spent on such public investment projects, promise extremely attractive financial incentives, such as more guarantees and pledges over the lifetime of the projects, to “appease” new investors, as the social cost of such guarantees and pledges will be much bigger than the unrecovered capital. The principle is not to promise to new investors more than the incentives pledged to the previous investors. In case no new investors join the projects, the State should boldly drop them despite some large amounts of capital spent.


Of note is that most new investors of such projects are Chinese companies. It’s not uncommon for Chinese investors to win in the auction of public investment projects in Vietnam. Therefore, if there is no fundamental change in the bidding criteria and mechanism, it would be likely that not many investors and contractors, except for Chinese ones, are ready to join such projects.


As a normal practice, Vietnamese authorities usually appease public concerns with the argument that the Chinese technology is “advanced, able to reduce pollution and suitable to the world’s technological development trend and Vietnam’s direction,” and they (Chinese investors and contractors) “have pledged to meet the government’s strict requirements for technology and environment protection.”


In practice, the Chinese technology, especially in thermal power production, is not completely useless. What matters is how to oblige Chinese investors or contractors to comply with what they have pledged, and so the ball is not in the Chinese court but Vietnam’s. Environmental disasters like the Formosa Ha Tinh incident is a wakeup call for the inspection and supervision of investment projects by Vietnamese authorities.


Source: The Saigon Times

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