Finding a way for sustainable FDI attraction

Amid rapid global changes, Vietnam is urged to take actions to increase the quality of investment flows. LNT & Partners, ALB Thomson Reuters Vietnam Law Firm of the Year 2019, analyses the important factors for the country to attract sustainable investment.

Vietnam has been one of the successful attractors of foreign direct investment (FDI) in the world, and is increasingly attractive to international investors due to its improved business climate, young and relatively affordable workforce, vast network of free trade agreements, and strategic location.

Statistics from the Ministry of Planning and Investment showed that total FDI into the country rose by 4.3 per cent on-year to $29.11 billion in the first 10 months of 2019. Among the top foreign investors in Vietnam, the world’s largest economies have all expressed plans to expand to and in Vietnam.

FDI has contributed greatly to Vietnam’s socio-economic development over the past years. However, there are a number of issues that should be dealt with to increase the quality and sustainability of FDI flows. To increase the quality of FDI towards sustainable development, Vietnam should look into some important factors. Tendering should be opened for most important projects, and the government should be careful before granting government guarantee undertakings (GGU). Investors that had been given investment certificates without tender and received GGU usually have fewer incentives to perform efficiently, while other – more capable – investors may have missed the window to submit their bids due to a lack information or time to submit dossiers.

Vietnam’s trade missions, as well as Vietnamese businesses, should make more trips abroad and open representative offices overseas to approach the best foreign investors rather than receiving investment applications from intermediaries.

The Vietnamese government should give more time for international bidders to study the projects and submit the most efficient option. For international lenders, a strong local investor, steady cashflows from the project, and free conversion rights are more important than the GGU.

Two key factors for sustainable investment are logistics (sea, air, and road transportation) and renewable energy. Vietnam has drawn a strong growth of investment in the north with tumultuous road and port infrastructure projects. It should do the same to the south and the central regions, by adopting a private public partnership (PPP) law that would be attractive enough for foreign investors. The fields that would be most efficient for PPP are roads, seaports, airports, and hospitals because currently they lack steady cashflows – unlike the power sector or grid projects. As a matter of fact, Vietnam has just received an extra 4GW of solar power by June 2019.

To make PPP viable for private investors, it is necessary to provide a steady cashflow to cover financial debts. That means risk sharing or minimum revenue guarantee schemes for road developers, at least in the first five years.

To do so, the country should use reputable international advisors to assess the financial costs and expected revenues of the bidders, and the Ministry of Finance should establish a viable gap fund to fill in revenue shortcomings for the purpose of financial debts repayment.

To avoid future projects ailing from sluggish progress and mounting capital costs, Vietnam would need to use qualified international experts from the Organisation for Economic and Cooperation Development (OECD) countries in supervising foreign contractors. Apart from engineering consultants, the country will also need lawyers that have extensive experience dealing with foreign counterparts.

Finally, Vietnam needs to be mindful of technology development trends like fintech sandbox and renewable energy. For example, nowadays, the cost of wind power in the United Kingdom could be even lower than that of coal, and a sandbox to test fintech solutions will provide more benefits and efficiencies to Vietnamese consumers. These points will bring sustainability to Vietnam.

 

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Finding a way for sustainable FDI attraction