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Paying For Vietnam’s High-Speed Rail: Unpacked

Travelling at a speed of just 40 kilometres an hour on a good day, it takes about two-and-a-half hours to cover the roughly 90-kilometre stretch between Hanoi and Ninh Binh on Vietnam’s current north-south train line, which is very, very slow.

This could, however, soon be a thing of the past if all goes to plan and a high-speed railway is built between Hanoi and Ho Chi Minh City. Planned to run at up to 350 kilometres per hour, it could cover the trip from Hanoi to Ninh Binh in less than 20 minutes, representing a significant improvement.

The pros column, however, doesn’t end there: it could also ease pressure on the Hanoi to Ho Chi Minh City air route and could provide a significant boost for Vietnam’s fledgling economy–think major nation-building projects like the United States’ Hoover Dam or Australia’s Highway One.

But a 1,400-kilometre high-speed rail line is expensive. The current working estimate is around US$67 billion dollars or about 15 percent of Vietnam’s current GDP. While this is a hefty sum, Vietnam’s public debt stands at only about 37 percent of GDP, and with 60 percent generally considered optimal, one of Southeast Asia’s most rapidly developing nations has ample room to borrow.

That said, Vietnam doesn’t want to borrow–at least not from external creditors.

“With a spirit of independence and self-reliance, the Politburo has decided that we will not depend on foreign loans, as borrowing from any country often comes with strings attached,” Nguyen Danh Huy, Deputy Minister of Transport, told local reporters last week.

This fits with an emerging paradigm in which foreign participation in Vietnam’s development is becoming much more controlled. Stricter visa requirements for foreign workers, for example, were introduced back in 2020, followed by cuts to the length of tourist visas in 2021, and then in 2022, Decree 58 added significantly more scrutiny to foreign non-governmental organisations operating in Vietnam. This new way of thinking was then crystallised earlier this year in the leaked Directive 24:

“Hostile and reactionary forces have thoroughly taken advantage of [Vietnam’s] international integration process to increase their sabotage and internal political transformation activities,” it reads.

The same Directive goes on to say that the government should “…not accept foreign funding for legislative development projects that have complex and sensitive content”, possibly informing this latest announcement from the Ministry of Transport.

Indeed, broadly speaking, borrowing funds from abroad can see foreign lenders wield significant influence over their debtors. Cambodia, for example, it has often been argued, has taken investment and technical support on major infrastructure projects from China and in return has sided with the world’s second-biggest economy on geopolitical issues like territorial disputes in the South China Sea.

Overseas development assistance is also often conditional. Occupational health and safety, environmental, and human rights requirements are often embedded in the fabric of this form of financing, all areas in which Vietnam often struggles. 

On the flip side, however, foreign financing can breed competition between financier nations driving down costs, increasing investments, and creating better conditions for debtor nations.

For example, in 2016, the Solomon Islands signed an MOU with China’s Huawei for a US$68 million undersea internet cable connecting the islands to Australia. This, however, was flagged by Australia’s intelligence services and the Australian government subsequently stepped in to take over the project including fronting up US$75 million in foreign aid funds to pay for it.

Furthermore, international creditors also tend to provide support managing projects and their finances, as well as technical expertise.

That said, this reality has not slipped by the Ministry of Transport which has said that it will take out some foreign loans though will favour those with the fewest constraints and that include technology transfers.

And, on that note, to be clear, the Ministry of Transport does not appear to be advocating for no foreign loans at all but rather as few as possible preferring to focus on local sources. It has, however, been decidedly mum on what its expectations are with respect to the mix of foreign and local financing Vietnam might be looking at.

Of note, national and provincial budgets, and government bonds have all been floated as possible sources of capital. The national budget, however, has run deficits of about three to four percent of GDP for the last four years and several of its biggest provinces in terms of their budgets would not even be on the line, Ba Ria-Vung Tau, Binh Duong, Hai Phong, and Bac Ninh, for example.

What’s more, Vietnam’s bond market has not been particularly popular of late in the wake of several high-profile bond frauds. Government bonds, however, do benefit from regulations that limit Vietnam’s Social Security Fund from investing in almost anything else. This “captive demand”, as the IMF puts it in its latest consultation report, has seen government bond interest rates remain low but also risks the sustainability of the pension system as well as distorts other capital markets.

That is to say, sourcing capital locally may be challenging and may have wide-reaching impacts on the economy on the whole. That’s not to say, however, that it can’t be done, but just that it needs to be carefully thought through.

Indeed, there is a lot to think about with respect to Vietnam’s north-south rail project, and no doubt more details will be forthcoming in the near future. With this in mind, foreign firms in the infrastructure space can best keep up with the latest developments by subscribing to the-shiv.

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