Lesson 2: Solving the problem of investment incentive mechanism

(Baonghean) - Currently, in the investment structure in our country, nMany studies also show that rigid regulations on the state capital contribution ratio are one of the reasons why projects are unattractive in the eyes of private investors.

According to Decision 71, in essence, PPP is just a special case of BOT, BTO (when the investor is private). Meanwhile, Decision No. 71 has a lower legal status and State capital participation than Decree No. 108/2009/ND-CP on investment in the form of BOT, BTO and BT contracts. While the Government wants to adopt the PPP form to reduce the burden on the State budget by reducing the capital contribution rate from 49% to 30% to control public debt, private investors participating in projects want the State's contribution rate to be higher and not include incentives as stipulated in the pilot regulations. Regarding the capital requirements of private investors participating in projects under the PPP form, it is more stringent, while Decree 108 only requires investors to have a minimum capital of 15% of the total investment value of the project, but according to the PPP pilot regulations, the requirement is 30%.

North-South railway overpass and National Highway 1A. Photo courtesy

In order to attract private investment in the transport infrastructure sector, Decree No. 108/2009/ND-CP (Article 5) provides many incentives on corporate income tax (exemption, reduction within a certain period, low tax rate); import and export tax (exemption or reduction); registration fee (exemption, reduction); support policies related to land (exemption, reduction of land rent, land use fee); support for input costs; support for implementation of items and auxiliary works serving the project.

Create attractive conditions for investors

These incentives are implemented according to preferential policies for each issue. Accordingly, incentives on corporate income tax, import tax, and land rent are also aimed at creating favorable conditions and attracting investors. However, in reality, because investors have to bear high compensation and land clearance costs, the total cost for investors to use the land is very high. In addition, because the compensation and site clearance process is often prolonged, investors waste a lot of time and lose opportunities. Thus, it can be seen that incentive mechanisms in the transport infrastructure sector are similar to investment incentives in other sectors and fields. Meanwhile, investment in transport infrastructure often requires large capital, long capital recovery periods and many risks.

Regarding the capital policy for investors, it is worth noting the policy of borrowing capital from the Government. Infrastructure projects often have large investment capital, while the equity capital of project investors is limited. To implement the project, investors must proactively mobilize capital from various sources. In recent times, the Government has had a number of policies for enterprises, including infrastructure investors, to access capital sources from State credit. In particular, being able to re-borrow ODA capital and preferential foreign loans from the Government; re-borrowing foreign commercial loans from the Government;State development investment credit loans.

The above channels are intended to help businesses overcome capital difficulties. However, in essence, state credit sources for private investors are just a change of capital users, not the capital of the private sector itself to invest in infrastructure. To access the above capital sources, the private sector must ensure confirmation from the program or project management agency or the re-lending agency on financial capacity and organization to manage the implementation of the program or project. This is not an easy journey for the private sector.

BOT project of Ben Thuy 2 bridge toll station

In addition to lending capital through state credit channels, the Government provides guarantees for foreign commercial loans. The guaranteed subjects are programs and projects that the National Assembly or the Prime Minister decides on investment policies and implements according to the provisions of the Law on Public Debt Management. The condition for being guaranteed is that the enterprise implementing the project must ensure at least 20% equity capital compared to the total investment. With the constraints of public debt, in the coming time, the guarantee of foreign loans for infrastructure projects will face many challenges.

Barriers to capital mobilization in the bond market

Not only that, there are also barriers to capital mobilization in the bond market. One of the channels for enterprises to mobilize capital is through the issuance of corporate bonds, construction bonds, etc. However, access to the bond market for infrastructure projects still has many barriers. According to Master Nguyen Dinh Hoa (Vietnam Economic Institute), Decree No. 52/2006/ND-CP on corporate bond issuance stipulates that enterprises are allowed to issue bonds when the production and business results of the year immediately preceding the issuance year must be profitable. This is a difficulty for transport infrastructure projects, especially in the early years of the project life cycle, when revenue is not enough to cover costs.

Currently, project bonds are considered a method for infrastructure project investors to mobilize capital. Through project bonds, investors issue bonds to mobilize capital to build a project, exploit that project for a number of years to get revenue, mainly from project users during the operating period according to the agreement to repay the capital and interest mobilized. Cau Gie - Ninh Binh Expressway is the first project implemented under the BOT investment method, using capital from project bonds and other capital sources.

According to the regulations on issuance of government bonds and local government bonds, one of the conditions for enterprises to issue bonds is that the programs and projects have completed investment procedures according to the provisions of the law on investment and related legal provisions. Meanwhile, if based on Decree No. 12/2009/ND-CP on management of construction investment (Decree No. 12) - Construction Law, construction investment projects are only considered to have completed investment procedures after the competent authority signs the investment decision. But the problem is that, according to Decree 12, the requirement to identify the source of capital is the most important condition for the project to be approved. Therefore, if the condition for issuing bonds is not lowered from "completing investment procedures according to regulations" to "having investment policy approved", it will be very difficult for transport infrastructure projects that want to mobilize capital through the issuance of construction bonds to be implemented.

Obviously, to attract secondary investors to buy transport infrastructure bonds, there needs to be preferential regimes or exemptions from income tax on bond interest. However, investment support and incentives (if any) in the transport infrastructure sector are only for investors named in the projects, investors participating through the purchase of project bonds still do not enjoy preferential regimes. Therefore, attracting capital from the private sector to participate in the transport infrastructure sector requires preferential regimes or exemptions from income tax on bond interest for organizations participating in investment in project bonds. This can both encourage increased investment and reduce capital mobilization interest rates for investors in transport infrastructure projects.

Thus, in order for the private sector to mobilize capital through the corporate bond and construction bond markets, it is necessary to review related laws such as the Construction Law, the Real Estate Business Law, etc.

Facing policy risks

According to Master Nguyen Dinh Hoa, one of the risks for investors in transport infrastructure is the issue of sharing the benefits and risks. Transport infrastructure projects often have long-term factors, so risks are inevitable. The risks that investors may encounter are: risks related to costs and time of site clearance (and other risks), risks of exchange rates, operating revenue (due to traffic volume not reaching expectations), etc. Among them, the risk of site clearance due to compensation costs and long time is the most worrying. This is also the reason why the PPP investment form has not yet attracted investors and they want the Government to increase the participation rate through site clearance compensation.

In addition, there are risks related to exchange rates. Enterprises investing in transport infrastructure that import machinery and equipment and/or have loans in foreign currencies always have to bear this risk. According to data from the General Statistics Office, during the years 2008-2012 of the economic crisis period, the VND/USD exchange rate (year after year compared to the previous year) always fluctuated at a high level, specifically: in 2008 it increased by 2.4%; in 2009 it increased by 9.2%; in 2010 it increased by 7.6%; in 2010 it increased by 8.5%; in 2012 it was 0.2%. If added together, during this period, the VND/USD exchange rate increased by about 28%, or an average of 5.6% per year.

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