VN Infrastructure Q4 2013

Q4 2013www.businessmonitor.com

VIETNAMINFRASTRUCTURE REPORTINCLUDES 5-YEAR FORECASTS TO 2017

ISSN 1750-5593Published by:Business Monitor International

Vietnam Infrastructure Report Q42013INCLUDES 5-YEAR FORECASTS TO 2017

Part of BMIs Industry Report & Forecasts Series

Published by: Business Monitor International

Copy deadline: August 2013

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CONTENTS

BMI Industry View ............................................................................................................... 7

SWOT .................................................................................................................................... 8Infrastructure SWOT .................................................................................................................................. 8

Industry Forecast .............................................................................................................. 10Construction And Infrastructure Forecast Scenario ........................................................................................ 10

Table: Table: Vietnam Construction And Infrastructure Industry Data, 2011-2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10Table: Table: Vietnam Construction And Infrastructure Long-Term Forecasts, 2017-2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Non-Residential Sector: Demand And Credit ............................................................................................... 17Residential Sector: Oversupply ................................................................................................................. 18Infrastructure Sector: Financing ............................................................................................................... 19Long-Term Still Positive .......................................................................................................................... 21

Transport Infrastructure - Outlook And Overview .......................................................................................... 22Table: Table: Vietnam Transport Infrastructure Industry Data, 2011-2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Table: Table: Vietnam Transport Infrastructure Long-Term Forecasts, 2017-2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Table: Title: Competitiveness Of Vietnam's Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Roads .................................................................................................................................................. 29Railways .............................................................................................................................................. 32

Table: Table: Vietnam Railway Corporation's Main Targets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

Ports ................................................................................................................................................... 36Airports ................................................................................................................................................ 39

Table: Table: Major Projects - Transport . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42Energy And Utilities Infrastructure - Outlook And Overview ............................................................................ 56

Table: Vietnam Energy & Utilities Infrastructure Industry Data, 2011-2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56Table: Vietnam Energy & Utilities Infrastructure Industry Long-Term Forecasts, 2017-2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57

Coal: Growing Foreign Participation ........................................................................................................ 61Hydropower: Indispensible, But Problematic .............................................................................................. 64Nuclear: Still In The Works ...................................................................................................................... 66Geothermal: Making A Presence ............................................................................................................... 68Water Treatment: Droughts Driving Demand For Services ............................................................................ 70

Table: Table: Major Projects - Energy & Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72Residential/Non-Residential Building - Outlook And Overview ......................................................................... 84

Table: Table: Vietnam Residential And Non-residential Building Industry Forecasts, 2011-2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84Table: Table: Vietnam Residential And Non-residential Building Long-Term Forecasts, 2017-2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84

Non-Civil Building To Outperform ............................................................................................................ 88Major Projects Table - Residential/Non-Residential Construction And Social Infrastructure ............................... 91Table: Table: Major Projects - Residential/Non-Residential Construction And Social Infrastructure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91

Industry Risk Reward Ratings .......................................................................................... 94Vietnam - Infrastructure Risk/Reward Ratings ............................................................................................... 94

Rewards .............................................................................................................................................. 94

Vietnam Infrastructure Report Q4 2013

Business Monitor International Page 4

Risks .................................................................................................................................................. 95Asia - Infrastructure Risk/Reward Ratings .................................................................................................... 96Nearly Developed Markets: Affected By Export Environment .......................................................................... 97Giants Of Asia: Sizeable Rewards, Sizeable Risks ....................................................................................... 100South East Asia: Better Rewards ............................................................................................................. 101

Table: Asia Infrastructure Risk Reward Ratings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

Market Overview ............................................................................................................. 104Competitive Landscape ........................................................................................................................... 104

Table: Table: Vietnam EQS Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104

Company Profile .............................................................................................................. 105Cavico Corporation ............................................................................................................................... 105Electricity Vietnam Group (EVN) ............................................................................................................. 108

Global Industry Overview ................................................................................................ 112Industry Trend Analysis .......................................................................................................................... 112Industry Trend Analysis .......................................................................................................................... 114

Methodology .................................................................................................................... 118Data Methodology ................................................................................................................................ 118Definitions .......................................................................................................................................... 120Capital Investment ............................................................................................................................... 120Infrastructure Risk/Reward Ratings ......................................................................................................... 122

Table: Infrastructure Business Environment Indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123



BMI Industry View

BMI View: Vietnam's construction sector is still in an upward cyclical phase, as evidenced by a real

growth rate of 5.1% y-o-y in H113. Therefore, we are maintaining our view that the recovery in Vietnam'sconstruction sector could last well into 2013 - our real growth forecasts for the sector remain at 5.3% for2013 - as monetary conditions are becoming increasingly conducive to construction. We have, however,

revised down our construction growth forecasts for 2014 from 6.4% to 5.6%. This is due to an increasinglypoor external environment for trade, an oversupply of housing and difficulties in securing project financingwithin the infrastructure sector.

The major developments in Vietnam's infrastructure sector are:

In April 2013, Vietnam started the construction of the Lach Huyen international port in the northern cityof Haiphong. The port is scheduled to be built in two phases, with the first phase entailing theconstruction of port infrastructure, while the second phase will include the construction of two 750mwharves capable of handling 100,000-tonne container ships. The Vietnam Maritime Administration willmanage the first phase, involving an investment of more than VND18.6trn (US$885mn), while a jointventure of Vietnamese and Japanese enterprises will manage the second phase worth more thanVND6.57trn (US$315mn). The port, due for completion in 2016, will have modern cargo handlingequipment. It will be capable of handling container ships of up to 8,000 twenty-foot equivalent units.

In April 2013, local authorities in the Kien Giang province announced that the Kien Luong Power Centreproject is likely to be halted if the Tan Tao Group is unable to arrange capital required for investment,worth around US$6.7bn. The project was licensed five years ago. The first phase of the project, thethermal power plant Kien Luong 1, was expected to become operational by end-2013. Land clearance forthe construction of the Kien Luong 1 was obtained more than 18 months ago, but no progress on it wasmade owing to a lack of capital, according to ITACO, a subsidiary of Tan Tao Group.

In June 2013, India-based electric utility Tata Power secured a contract worth US$1.8bn from theVietnamese government. The contract is to develop two 660-megawatt (MW) coal-fired thermal powerplants in South Vietnam. The construction of the power project, called Long Phu 2, is likely to start in2019. This is believed to be the largest Indian investment in Vietnam and will support Tata Power's ownaspirations in South East Asia and India's Look East policy.

In July 2013, the Vietnamese Ministry of Transport issued a request inviting applications for qualificationfor a second investor for the US$757mn Dau Giay-Phan Thiet Expressway Project. Under the project, thesuccessful bidders would design, finance, construct, operate and maintain a four-lane expressway andallied structures from Dau Giay in the Dong Nai province to Phan Thiet in the Binh Thuan provincethrough a special purpose vehicle (SPV). The SPV would be formed between Bitexco, which has beenappointed as the first investor for the project, and the second investor. The first investor will have a shareof 60% in the project and the other investor 40%. However, the first investor may dilute its share infavour of the second investor during the construction.



SWOT

Infrastructure SWOT

Vietnam Infrastructure SWOT Analysis

Strengths The country's strong project pipeline will sustain growth in the sector and add

capabilities for further development, particularly as transport structure improves.

Rapid growth has attracted investment from many of the world's largest infrastructure

companies.

The poor state of infrastructure in the country provides easy wins for foreign investors

and construction companies.

A hike in electricity prices should stimulate investment in the energy sector.

Weaknesses State-owned companies dominate the infrastructure market. This is especially the

case in the utilities sector, where Electricity of Vietnam (EVN)'s dominant position has

deterred investors.

Vietnam relies heavily on foreign imports and it is estimated that the country requires

2mn tonnes of steel billets to be imported a year.

The country presents a relatively risky environment for major infrastructure projects,

especially in relation to project finance operations.

Power outages are occurring daily in Vietnam, highlighting the country's severe

electricity problems.

Opportunities Demand for urban infrastructure projects in transport and sanitation over our 10-year

forecast period to 2022 will rise, in tandem with urbanisation.

Severe drought is driving demand in electricity generation sources besides

hydropower, such as gas-fired and wind-powered plants.

If the government's attempts to cool the overheating economy are successful,

Vietnam will see a more stable growth trajectory over the long term.



Vietnam Infrastructure SWOT Analysis - Continued

Threats The Vietnamese government's shift in focus - from driving economic growth towards

fighting inflation and addressing macroeconomic imbalances - is expected to have a

cooling effect.

Public spending cuts and tighter credit conditions are likely to keep economic activity

depressed.

Lack of energy infrastructure holds downside risk to nearly all projects and presents a

significant bottleneck to development.

Should any significant events occur to highlight Vietnam's structural difficulties,

uncertainty and downside risks in the business environment could have a negative

impact.

The EU predicts Vietnam will not become a true market economy until 2018.



Industry Forecast

Construction And Infrastructure Forecast Scenario

Table: Table: Vietnam Construction And Infrastructure Industry Data, 2011-2016

2011 2012e 2013f 2014f 2015f 2016f

Constructionindustry value,VNDbn 162,620.0 179,301.0 200,466.4 223,396.2 248,741.5 276,128.2

Constructionindustry value, US$bn 7.9 8.6 9.6 10.9 12.2 13.7

Constructionindustry, realgrowth, % y-o-y -1.0 2.1 5.3 5.6 6.1 6.0

Constructionindustry, % ofGDP 6.4 6.1 6.0 6.0 5.9 5.9

Total capitalinvestment, VNDbn 745,494.0 849,629.1 944,668.6 1,047,433.5 1,172,978.8 1,319,073.3

Total capitalinvestment, US$bn 36.1 40.7 45.2 50.9 57.7 65.6

Total capitalinvestment, % ofGDP 29.4 28.8 28.5 28.1 28.0 28.0

Capital investmentper capita, US$ 406.5 453.9 498.6 556.3 624.1 703.4

Real capitalinvestment growth,% y-o-y -10.4 4.3 4.4 4.8 6.4 7.1

Constructionindustryemployment, '000 2,687.2 2,731.3 2,845.3 2,972.9 3,118.6 3,271.1

Constructionindustryemployment, % y-o-y -0.8 1.6 4.2 4.5 4.9 4.9

Total workforce,'000 62,824.3 63,694.6 64,449.1 65,116.8 65,719.2 66,294.0

Constructionindustryemployees as % oftotal labour force 4.3 4.3 4.4 4.6 4.7 4.9

InfrastructureIndustry Value As 32.7 32.7 32.3 32.0 31.7 31.3



Table: Vietnam Construction And Infrastructure Industry Data, 2011-2016 - Continued

2011 2012e 2013f 2014f 2015f 2016f% of TotalConstruction

InfrastructureIndustry Value,VNDbn 53,227.4 58,653.2 64,758.5 71,519.5 78,729.6 86,497.8

InfrastructureIndustry Value, US$bn 2.6 2.8 3.1 3.5 3.9 4.3

InfrastructureIndustry Value RealGrowth (%) -1.7 0.9 3.9 4.6 4.8 4.9

InfrastructureIndustry Value as% of GDP 2.1 2.0 2.0 1.9 1.9 1.8

Residential andNon-residentialBuilding IndustryValue As % ofTotalConstruction 67.3 67.3 67.7 68.0 68.3 68.7

Residential andNon-residentialBuilding IndustryValue, VNDbn 109,392.6 120,647.8 135,707.8 151,876.7 170,011.8 189,630.4

Residential andNon-residentialBuilding IndustryValue, US$bn 5.3 5.8 6.5 7.4 8.4 9.4

Residential andNon-residentialBuilding IndustryValue Real Growth(%) -1.9 1.0 6.0 6.1 6.7 6.5

Residential andNon-residentialBuilding IndustryValue as % of GDP 4.3 4.1 4.1 4.1 4.1 4.0

Cementproduction(includingimported clinker),tonnes 45,837,499.7 47,694,500.4 49,674,863.4 51,930,004.4 55,080,157.6 58,798,585.4

Cementproduction(including importedclinker), tonnes, %y-o-y -9.8 4.1 4.2 4.5 6.1 6.8

Cementconsumption,tonnes 45,223,300.9 47,012,275.1 48,914,913.9 51,082,000.8 54,131,051.8 57,737,007.6



Table: Vietnam Construction And Infrastructure Industry Data, 2011-2016 - Continued

2011 2012e 2013f 2014f 2015f 2016f

Cementconsumption,tonnes, % y-o-y -8.9 4.0 4.0 4.4 6.0 6.7

Cement netexports, tonnes 614,198.9 682,225.3 759,949.5 848,003.6 949,105.9 1,061,577.8

Cement netexports, tonnes, %y-o-y -48.1 11.1 11.4 11.6 11.9 11.9

e/f = BMI estimate/forecast. Source: Vietnam General Statistics Office, BMI

Table: Table: Vietnam Construction And Infrastructure Long-Term Forecasts, 2017-2022

2017f 2018f 2019f 2020f 2021f 2022f

Constructionindustry value,VNDbn 306,297.1 339,497.7 375,120.3 413,679.0 456,190.0 503,058.3

Constructionindustry value,US$bn 15.3 17.0 18.8 20.7 22.8 25.2

Constructionindustry, realgrowth, % y-o-y 5.9 5.8 5.5 5.3 5.3 5.3

Constructionindustry, % ofGDP 5.8 5.7 5.6 5.5 5.5 5.4

Total capitalinvestment,VNDbn 1,488,904.0 1,657,150.2 1,830,488.1 2,018,113.1 2,224,969.7 2,453,029.1

Total capitalinvestment, US$bn 74.4 82.9 91.5 100.9 111.2 122.7

Total capitalinvestment, %of GDP 28.1 27.9 27.5 27.0 26.6 26.2

Capitalinvestment percapita, US$ 791.0 873.1 956.9 1,047.2 1,146.6 1,255.9

Real capitalinvestmentgrowth, % y-o-y 7.5 6.0 5.2 5.0 5.0 5.0

Constructionindustry 3,430.5 3,596.8 3,762.4 3,930.3 4,107.0 4,292.9



Table: Vietnam Construction And Infrastructure Long-Term Forecasts, 2017-2022 - Continued

2017f 2018f 2019f 2020f 2021f 2022femployment,'000

Constructionindustryemployment, %y-o-y 4.9 4.8 4.6 4.5 4.5 4.5

Total workforce,'000 66,773.8 67,197.2 67,607.8 68,026.5 68,431.5 68,849.3

Constructionindustryemployees as% of totallabour force 5.1 5.4 5.6 5.8 6.0 6.2

InfrastructureIndustry ValueAs % of TotalConstruction 31.0 30.6 30.3 30.0 29.7 29.4

InfrastructureIndustry Value,VNDbn 94,854.6 103,917.5 113,608.0 124,072.5 135,496.0 147,949.9

InfrastructureIndustry Value,US$bn 4.7 5.2 5.7 6.2 6.8 7.4

InfrastructureIndustry ValueReal Growth (%) 4.7 4.6 4.3 4.2 4.2 4.2

InfrastructureIndustry Valueas % of GDP 1.8 1.7 1.7 1.7 1.6 1.6

Residential andNon-residentialBuildingIndustry ValueAs % of TotalConstruction 69.0 69.4 69.7 70.0 70.3 70.6

Residential andNon-residentialBuildingIndustry Value,VNDbn 211,442.4 235,580.2 261,512.2 289,606.5 320,694.0 355,108.5

Residential andNon-residentialBuildingIndustry Value,US$bn 10.6 11.8 13.1 14.5 16.0 17.8

Residential andNon-residentialBuildingIndustry ValueReal Growth (%) 6.5 6.4 6.0 5.7 5.7 5.7



Table: Vietnam Construction And Infrastructure Long-Term Forecasts, 2017-2022 - Continued

2017f 2018f 2019f 2020f 2021f 2022f

Residential andNon-residentialBuildingIndustry Valueas % of GDP 4.0 4.0 3.9 3.9 3.8 3.8

Cementproduction(includingimportedclinker), tonnes 63,005,497.9 66,623,381.2 69,946,160.7 73,307,146.5 76,835,758.5 80,540,503.2

Cementproduction(includingimportedclinker), tonnes,% y-o-y 7.2 5.7 5.0 4.8 4.8 4.8

Cementconsumption,tonnes 61,820,438.3 65,303,823.2 68,492,531.8 71,710,598.4 75,193,311.6 78,803,973.1

Cementconsumption,tonnes, % y-o-y 7.1 5.6 4.9 4.7 4.9 4.8

Cement netexports, tonnes 1,185,059.6 1,319,557.9 1,453,628.8 1,596,548.0 1,642,446.8 1,736,530.1

Cement netexports, tonnes,% y-o-y 11.6 11.3 10.2 9.8 2.9 5.7

f = BMI forecast. Source: Vietnam General Statistics Office, BMI

BMI View: Vietnam's construction sector is still in an upward cyclical phase, as evidenced by a real

growth rate of 5.1% year-on-year in H113. Therefore, we are maintaining our view that the recovery inVietnam's construction sector could last well into 2013 - our real growth forecasts for the sector remain at5.3% for 2013 - as monetary conditions are becoming increasingly conducive to construction. We have,however, revised down our construction growth forecasts for 2014 from 6.4% to 5.6%. This is due to anincreasingly poor external environment for trade, an oversupply of housing and difficulties in securingproject financing within the infrastructure sector.

In line with our view, construction activity in Vietnam continues to recover in 2013. Latest data from the

Vietnam General Statistics Office reveals that real growth for the construction sector grew by 5.1% year-on-

year (y-o-y) in H113, faster than the 4.8% in Q113 and much higher than the -5.4% in H112. We do,



however, note that growth in Q113 is still significantly slower than the 12.2% growth in Q412, which couldsuggest that recovery in construction might not be as forthcoming as previously expected.

On The Path To Recovery

Vietnam - Quarterly Construction Industry Value, VNDbn

Source: General Statistics Office, State Bank of Vietnam

Given this H113 performance and our belief that this recovery in Vietnam's construction sector will last

well into 2013, we are content to maintain our real growth forecasts for Vietnam's construction sector at

5.3% in 2013.



Not Like Before

Vietnam Construction (And Sum-Components) Industry Value Real Growth Forecasts

f= BMI forecast. Source: General Statistics Office, State Bank of Vietnam, BMI

This relatively optimistic outlook for Vietnam's construction sector is primarily driven by the country's

conducive monetary conditions. The government is seeking to boost economic growth and brought the

policy rate down to 7.00% in May 2013; the lowest policy rate since December 2009. Given the lagged

impact of monetary easing, this means that the positive implications of this easing will only start to translate

in H213. Furthermore, inflation continues to remain relatively benign, leading us to expect the Vietnamese

central bank to keep monetary conditions conducive throughout 2013 and into 2014 - we are forecasting the

benchmark interest rate to remain at 7.00% at the end of 2013 and 2014. This should be favourable for

construction activity as Vietnamese companies would benefit from a lower cost of capital - making them

more inclined to take up new projects or carry out capital-intensive construction works - while municipaland provincial governments could also find the necessary financing for their infrastructure plans.



Monetary Conditions Conducive

Vietnam - Policy Rate, % & Headline CPI - Housing & Construction Materials, % y-o-y

Source: General Statistics Office, State Bank of Vietnam

We have, however, revised down our construction growth forecasts in 2014 from 6.4% to 5.6%. This is

because several issues continue to dampen the demand for residential/non-residential buildings and

infrastructure.

Non-Residential Sector: Demand And Credit

We have revised down our real growth forecasts for Vietnam's buildings sector to 6.1% in 2014 (previously7.3%). This decline will take place in both the residential and non-residential building sectors. We expectnon-residential building activity in H213 and 2014 to be dampened by the lack of trade activity. The latest

reading on the HSBC Purchasing Managers' Index showed that the recovery experienced by Vietnam's

manufacturing sector in March and April has stalled, with manufacturing sector growth reaching contraction

territory in May and June. We believe that the manufacturing sector could continue to perform poorly in

H213 as the cyclical upturn in China's economy is already starting to show signs of losing steam, with latest

economic data on China providing evidence that the mainland economy is on course for a growth relapse in

H213 (see 'Core Views Reiterated Following Q213 Growth Print', July 15). Given this poor businessclimate, companies are likely to maintain a cautious outlook and scale back on fixed investment.



Stalled Lending And Poor External Demand

Vietnam - Purchasing Managers' Index

Source: BMI, Markit, HSBC

In addition, Vietnamese banks remain saddled with bad debts, prompting them to be cautious towards

extending credit to businesses. According to the State Bank of Vietnam, total bad debts by the entire

banking sector accounted for 4.7% of total outstanding debts, which is estimated to be VN400trn in May

2013. This lack of credit from local banks has lead to failures by several investors in implementing their

non-residential building projects. For example, in June, Vietnamese media reported that local authoritieshad cancelled 93 projects on Phu Quoc Island - including a EUR2.6bn luxury resort project proposed bySwiss Trustee Group - because the investors of these projects were unable to find sufficient financing.

Although the State Bank of Vietnam has established a debt management agency in early-July to clean up the

build-up of bad debt across the banking sector (see 'All Eyes On New Debt Management Company', June28), it remains to be seen if the clean-up and other reforms to restructure the banking sector will beimplemented in a timely manner. Therefore, even though interest rates in Vietnam are at a record-low,

businesses may still be unable to secure financing for their fixed investment plans.

Residential Sector: Oversupply



We also expect residential building activity to be poor over the near term. This is because the residential

sector in Vietnam is still suffering from significant oversupply. According to a report from the Vietnam

Ministry of Construction, 34,000 apartments and 15,300 houses across 55 provinces and cities were unsold

at the end of March 2013, and they had an estimated combined value of around VND125trn. Although there

is still significant demand for low-cost housing, supply in other housing segments is still outstripping

demand. This has created a challenging market for developers to sell their completed properties, making it

unlikely for them to take on new residential projects.

Furthermore, several of these local developers are in the red, deterring foreign investors and Vietnamese

banks from releasing credit to them. At present, some of the developers are reducing their inventory by

converting their housing projects into low-cost housing. The Vietnamese government has also approved aVND30trn stimulus package in June 2013 to provide loans for purchasing and completing low-cost housing,

though the impact of the stimulus package is expected to be limited given its relatively small scale.

Infrastructure Sector: Financing

We have maintained our real growth forecasts for Vietnam's infrastructure sector at 4.6% in 2014. We

continue to expect the sector to face difficulties in securing project financing and this is due to three factors:

Debt Burdens: The Vietnamese government is heavily burdened by the debts of its state-owned enterprises

(SOEs), and the need to repay this debt is limiting the government's ability to finance infrastructure projects.We have also earlier highlighted the issues with bad debt among the Vietnamese banking sector, which

should also affect access to domestic financing for infrastructure projects.

Project Viability: We believe that the uncertainties surrounding the outlook for the global economy and thelack of financial viability seen in much existing infrastructure in Vietnam will dampen the demand for

riskier assets such as infrastructure projects in the country.



Limited By Debt

Vietnam - Capital Investment By State Budget, VNDbn And % chg y-o-y

Source: Bloomberg, BMI, General Statistics Office of Vietnam

Europe Difficulties: With European banks - a major source of finance for Vietnamese infrastructure - set toface difficult economic conditions and stricter capital controls over the coming years, funds from these

sources could decline as European banks look to strengthen their capital ratios by calling back higher-risk

loans and imposing curbs on issuing new loans.

Evidence of these finance shortages continues to emerge among large-scale infrastructure projects. In April2013, local authorities in the Kien Giang province announce that the US$6.7bn Kien Luong Power Centreproject will likely be halted if ITACO, a subsidiary of Tan Tao Group, is unable to arrange the capitalrequired for the project. Land clearance for the first phase of the project, thermal power plant Kien Luong 1,was obtained more than 18 months ago, but no progress on it was made owing to a lack of capital,

according to ITACO.



In Decline

Vietnam - Foreign Claims From European Banks, US$mn And % chg y-o-y

Source: Bank For International Settlements (July 2013), BMI

However, we highlight that financing from foreign sources has become increasingly forthcoming and this

represents an upside to our forecasts. According to figures published by the Ministry of Planning and

Investment (MPI), foreign direct investment (FDI) inflows into Vietnam grew by 16.0% y-o-y to US$10.5bn in H113, while FDI in new projects was worth US$5.8bn, an increase of 3.7% over the same periodin 2012. We believe these FDI inflows are from Japanese sources. In March 2013, Japan and Vietnam

exchanged a diplomatic note which stated that Japan will finance 12 projects worth a combined US$2.2bn,mostly in transport infrastructure. Meanwhile, the US$1.2bn Lach Huyen port project, a project financed bythe Japanese government and Japanese companies, started construction works in April 2013.

Long-Term Still Positive

Looking beyond 2014, we continue to believe that the construction and infrastructure sectors in Vietnam

should register decent growth rates, though not at the levels seen in previous years. We are forecasting real

growth for the construction and infrastructure sectors to average 6.0% and 4.8% per annum between 2015

and 2017 respectively.



The Vietnamese government is currently carrying out reforms to address some of the fault-lines in the

country's business environment for infrastructure, such as the privatisation of several SOEs (a leading factorfor investment wastages), improving access to credit from domestic banks (a leading factor for excessiveallocation of resources in certain sectors) and high electricity subsidies (a leading factor for insufficientpublic fixed investment). These measures could alleviate some of the government's debt issues and providefinancing for construction and infrastructure projects. Between 2012 and March 2013, 16 SOEs wereequitised, five were merged, three were sold and three were transformed into one-member limited liability

companies.

Meanwhile, we expect Vietnam's economy to grow relatively robustly over the long term - we are

forecasting real growth for Vietnam's economy to average 6.9% per annum between 2013 and 2017 - and

this should also drive construction activity in the country. Growing industrialisation will put demand-side

pressure on the electricity supply and transportation systems, while rising incomes among Vietnamese

consumers will drive demand for housing and commercial construction projects such as malls and hoteldevelopment. The robust economic activity should also boost the financial viability of existing

infrastructure, making it more attractive for investors to finance new projects.

The Vietnamese government is also trying to secure funding for infrastructure projects by promoting the useof public-private partnerships (PPPs). In July 2013, the Vietnamese Ministry of Transport issued a requestinviting investors to develop the US$757mn Dau Giay-Phan Thiet expressway with Vietnam's Bitexcounder a PPP framework. The country is also reviewing its PPP regulations, though progress has been slow.

Nevertheless, if properly developed, this could be help to offset the decline in credit from European banks.

Lastly, Vietnam continues to exhibit significant potential for growth in construction and infrastructure - a

youthful population, large consumption base, large unexploited deposits of bauxite and high infrastructure

deficit are just some supportive factors that spring to mind.

Transport Infrastructure - Outlook And Overview

Table: Table: Vietnam Transport Infrastructure Industry Data, 2011-2016

2011 2012 2013f 2014f 2015f 2016f

TransportInfrastructure IndustryValue As % Of TotalInfrastructure 68.6 65.5 64.9 64.7 64.6 64.4

Transport InfrastructureIndustry Value, VNDbn 36,496.3 38,444.5 42,051.2 46,241.7 50,828.7 55,666.1



Table: Vietnam Transport Infrastructure Industry Data, 2011-2016 - Continued

2011 2012 2013f 2014f 2015f 2016f

Transport InfrastructureIndustry Value, US$bn 1.8 1.8 2.0 2.2 2.5 2.8

Transport InfrastructureIndustry Value RealGrowth (%) -6.0 -3.9 2.9 4.2 4.7 4.5

Transport InfrastructureIndustry Value As % OfTotal Construction (%) 22.4 21.4 21.0 20.7 20.4 20.2

Roads and BridgesInfrastructure IndustryValue As % ofTransport Infrastructure 51.5 50.1 50.7 51.3 51.8 52.4

Roads and BridgesInfrastructure IndustryValue, VNDbn 18,779.8 19,274.3 21,307.5 23,699.5 26,337.3 29,148.4

Roads and BridgesInfrastructure IndustryValue, US$bn 0.9 0.9 1.0 1.2 1.3 1.5

Roads and BridgesInfrastructure IndustryValue Real Growth (%) 12.5 -6.6 4.0 5.4 5.9 5.7

Roads and BridgesInfrastructure IndustryAs % of TotalInfrastructure 35.3 32.9 32.9 33.1 33.5 33.7

Roads and BridgesInfrastructure IndustryAs % of TotalConstruction 11.5 10.7 10.6 10.6 10.6 10.6

Railways InfrastructureIndustry Value As % ofTransport Infrastructure 20.7 24.3 24.1 23.7 23.4 23.1

Railways InfrastructureIndustry Value, VNDbn 7,551.3 9,343.3 10,136.0 10,976.5 11,882.6 12,839.7

Railways InfrastructureIndustry Value, US$bn 0.4 0.4 0.5 0.5 0.6 0.6

Railways InfrastructureIndustry Value RealGrowth (%) -8.2 14.5 2.0 2.5 3.0 3.1

Railways InfrastructureIndustry As % of TotalInfrastructure 14.2 15.9 15.7 15.3 15.1 14.8

Railways InfrastructureIndustry As % of TotalConstruction 4.6 5.2 5.1 4.9 4.8 4.6



Table: Vietnam Transport Infrastructure Industry Data, 2011-2016 - Continued

2011 2012 2013f 2014f 2015f 2016f

Airports InfrastructureIndustry Value As % ofTransport Infrastructure 11.7 9.5 9.1 8.9 8.7 8.5

Airports InfrastructureIndustry Value, VNDbn 4,257.5 3,643.8 3,832.1 4,125.3 4,405.0 4,707.7

Airports InfrastructureIndustry Value, US$bn 0.2 0.2 0.2 0.2 0.2 0.2

Airports InfrastructureIndustry Value RealGrowth (%) -45.3 -23.7 -1.3 1.9 1.5 1.9

Airports InfrastructureIndustry As % of TotalInfrastructure 8.0 6.2 5.9 5.8 5.6 5.4

Airports InfrastructureIndustry As % of TotalConstruction 2.6 2.0 1.9 1.8 1.8 1.7

Ports Harbours andWaterwaysInfrastructure IndustryValue As % ofTransport Infrastructure 16.2 16.1 16.1 16.1 16.1 16.1

Ports Harbours andWaterwaysInfrastructure IndustryValue, VNDbn 5,907.6 6,183.1 6,775.6 7,440.4 8,203.8 8,970.4

Ports Harbours andWaterwaysInfrastructure IndustryValue, US$bn 0.3 0.3 0.3 0.4 0.4 0.4

Ports Harbours andWaterwaysInfrastructure IndustryValue Real Growth (%) -10.1 -4.6 3.1 4.0 5.0 4.3

Ports Harbours andWaterwaysInfrastructure IndustryAs % of TotalInfrastructure 11.1 10.5 10.5 10.4 10.4 10.4

Ports Harbours andWaterwaysInfrastructure IndustryAs % of TotalConstruction 3.6 3.4 3.4 3.3 3.3 3.2

e/f = BMI estimate/forecast. Source: Vietnam General Statistics Office, BMI



Table: Table: Vietnam Transport Infrastructure Long-Term Forecasts, 2017-2022

2017f 2018f 2019f 2020f 2021f 2022f

TransportInfrastructure IndustryValue As % Of TotalInfrastructure 64.1 63.8 63.5 63.2 62.8 62.5

Transport InfrastructureIndustry Value, VNDbn 60,923.9 66,425.5 72,358.9 78,679.5 85,399.1 92,616.1

Transport InfrastructureIndustry Value, US$bn 3.0 3.3 3.6 3.9 4.3 4.6

Transport InfrastructureIndustry Value RealGrowth (%) 4.1 4.0 3.9 3.7 3.5 3.5

Transport InfrastructureIndustry Value As % OfTotal Construction (%) 19.8 19.4 19.1 18.8 18.5 18.2

Roads and BridgesInfrastructure IndustryValue As % ofTransport Infrastructure 52.6 52.9 53.0 53.2 53.3 53.5

Roads and BridgesInfrastructure IndustryValue, VNDbn 31,966.1 35,011.3 38,214.1 41,621.4 45,326.0 49,353.9

Roads and BridgesInfrastructure IndustryValue, US$bn 1.6 1.8 1.9 2.1 2.3 2.5

Roads and BridgesInfrastructure IndustryValue Real Growth (%) 4.7 4.5 4.1 3.9 3.9 3.9

Roads and BridgesInfrastructure IndustryAs % of TotalInfrastructure 33.7 33.7 33.6 33.5 33.5 33.4

Roads and BridgesInfrastructure IndustryAs % of TotalConstruction 10.4 10.3 10.2 10.1 9.9 9.8

Railways InfrastructureIndustry Value As % ofTransport Infrastructure 22.9 22.8 22.7 22.6 22.6 22.6

Railways InfrastructureIndustry Value, VNDbn 13,908.5 15,081.4 16,345.4 17,723.2 19,219.8 20,824.9

Railways InfrastructureIndustry Value, US$bn 0.7 0.8 0.8 0.9 1.0 1.0

Railways InfrastructureIndustry Value RealGrowth (%) 3.3 3.4 3.4 3.4 3.4 3.4



Table: Vietnam Transport Infrastructure Long-Term Forecasts, 2017-2022 - Continued

2017f 2018f 2019f 2020f 2021f 2022f

Railways InfrastructureIndustry As % of TotalInfrastructure 14.7 14.5 14.4 14.3 14.2 14.1

Railways InfrastructureIndustry As % of TotalConstruction 4.5 4.4 4.4 4.3 4.2 4.1

Airports InfrastructureIndustry Value As % ofTransport Infrastructure 8.4 8.3 8.3 8.3 8.3 8.4

Airports InfrastructureIndustry Value, VNDbn 5,092.0 5,518.7 5,992.1 6,512.5 7,083.7 7,714.7

Airports InfrastructureIndustry Value, US$bn 0.3 0.3 0.3 0.3 0.4 0.4

Airports InfrastructureIndustry Value RealGrowth (%) 3.2 3.4 3.6 3.7 3.8 3.9

Airports InfrastructureIndustry As % of TotalInfrastructure 5.4 5.3 5.3 5.2 5.2 5.2

Airports InfrastructureIndustry As % of TotalConstruction 1.7 1.6 1.6 1.6 1.6 1.5

Ports Harbours andWaterwaysInfrastructure IndustryValue As % ofTransport Infrastructure 16.1 16.0 16.0 15.9 15.7 15.6

Ports Harbours andWaterwaysInfrastructure IndustryValue, VNDbn 9,786.6 10,627.2 11,512.1 12,419.0 13,375.9 14,386.1

Ports Harbours andWaterwaysInfrastructure IndustryValue, US$bn 0.5 0.5 0.6 0.6 0.7 0.7

Ports Harbours andWaterwaysInfrastructure IndustryValue Real Growth (%) 4.1 3.6 3.3 2.9 2.7 2.6

Ports Harbours andWaterwaysInfrastructure IndustryAs % of TotalInfrastructure 10.3 10.2 10.1 10.0 9.9 9.7



Table: Vietnam Transport Infrastructure Long-Term Forecasts, 2017-2022 - Continued

2017f 2018f 2019f 2020f 2021f 2022f

Ports Harbours andWaterwaysInfrastructure IndustryAs % of TotalConstruction 3.2 3.1 3.1 3.0 2.9 2.9

f = BMI forecast. Source: Vietnam General Statistics Office, BMI

The transport sector forms the majority of infrastructure investment in Vietnam throughout our 10-yearforecast period, forecast to account for 60-65% in 2022. Vietnam still suffers from a significant deficit in

transportation infrastructure and we believe the Vietnamese government will continue to develop this sector

over the medium term. This is reflected in our forecast for transport infrastructure industry value, which is

expected to grow by an average of 4.1% year-on-year (y-o-y) between 2013 and 2017.

Table: Title: Competitiveness Of Vietnam's Infrastructure

Rank/133 in

2009/10*Rank/139 in

2010/11**Rank/142 in

2011/12***Rank/144 in2012/13****

Quality of Roads 102 117 123 120

Quality of RailroadInfrastructure 58 59 71 68

Quality of Port Infrastructure 99 97 111 113

Quality of Air TransportInfrastructure 84 88 95 94

Quality of OverallInfrastructure 111 123 123 119

*Rank out of 133 countries in 2009/10. ** Rank out of 139 countries in 2010/11. *** Rank out of 142 countries in 2011/12.****Rank out of 144 countries in 2012/13. Source: World Economic Forum, Global Competitiveness Report 2009/10,2010/11, 2011/12 and 2012/13



Roads Dominant

Transport Infrastructure Value By Industry, VNDbn

e/f = BMI estimate/forecast, Source: Vietnam General Statistics Office, Local news sources, industry sources,

BMI (Major Projects Database)



Roads

Within the transport infrastructure sector, the roads and bridges sub-sector leads in terms of contributions to

total transport infrastructure industry value, accounting for 50% of total value in 2013. Although most of

Vietnam's national road network is paved (only 26%, or 46,650km out of 180,549km, is unpaved as of2008), surveys indicated that approximately 40% of the network is in a poor or very poor condition and willrequire substantial investment to reach a maintainable condition. Vietnam's Ministry of Transport and

Communications has estimated that the country will require close to US$60bn in the period up to 2020 tofund new road infrastructure projects. Reaching this investment target will be crucial to Vietnam's long-term economic wellbeing, as roads facilitate the transport of most freight within the country, with a market

share of around 60% of domestic cargo. Combined with increased traffic levels in Vietnam's urban areas

and growing trade volumes to and from the country, there is a need for roads.

Over the past quarter, there have been several announcements regarding new road projects being planned -such as the Phap Van-Cau Gie highway build-operate-transfer (BOT) project - or being developed inVietnam - such as the expansion of the NH-1A Cam Ranh City-Cam Lam District (Khanh Hoa province)BOT project, the Danang-Quang Ngai expressway and the Ho Chi Minh City (HCMC)-Long Thanh-DauGiay Expressway.

However, there are still ongoing concerns about the viability of toll roads in Vietnam. In July 2012, the

Vietnamese government accepted a proposal from the Ministry of Finance to reduce toll fees for trucks

using the HCMC-Trung Luong expressway by 25-30%. The approval was given on July 4 2012 and would

allow the finance ministry to finalise the details and determine a date for the toll cut. Once implemented,

trucks weighing over 18 tonnes and 40-feet container trucks would pay around VND448,000-480,000 (US$22-23) per trip for using the 61.9km expressway, compared with the current fee of VND640,000 (US$31).The decision to cut toll fees is because traffic volumes fall sharply in the HCMC-Trung Luong expressway

once it required commuters to pay a toll fee in February 2012.

We believe that this toll cut in one of the highways linking Vietnam's most economically developed cities

reflects our concerns about the viability of building toll roads in Vietnam. The approval of the toll cut not

only suggests that the sector could be oversaturated, but that economic development within Vietnam has not

reached levels that are financially viable for such toll roads.

This lack of financial viability for toll roads in Vietnam is collaborated with anecdotal evidence regarding

the HCMC-Trung Luong Expressway. According to the association, heavy trucks - the main vehicle used by



transport companies - have to pay a toll fee of VND320,000-640,000 for a round trip on the expressway.

However, these companies only earn a profit of VND300,000-400,000 for each transport trip within 100km.

Costly To Build

Investment Cost of Expressways In Vietnam, US$mn per km

Source: Vietnam the Business Times (May 3 2012)

We believe that this lack of viability and the need for unattractive toll fees are due to the high cost of

construction for expressways within Vietnam. According to an official report from the Ministry of

Construction in September 2012, the cost of constructing an expressway in Vietnam is about 1.5-2.0 times

higher than comparable roads in China, Europe and Africa. The HCMC-Trung Luong expressway, for

example, costs around US$9.9mn per km, higher than an average expressway in China (US$6mn/km) andthe US (US$8mn/km).

We believe there are several factors contributing to this high construction cost for toll roads:

The lack of project management and technical expertise to complete road projects within budget,resulting in site clearance delays and cost overruns. To resolve this problem, the transport ministry isplanning to classify investors and contractors into three grades, A, B and C, with companies at each gradedeveloping projects of the same grade.



Corruption, with anecdotal evidence suggesting that 30% of a project's value is pocketed by thecontractor in order to pay bribes to relevant parties.

Deficiency in regulations and government institutions that effectively balance the need to safeguard thepublic interest with the need for expeditious provision of land for infrastructure development. The currentregulation - Decree 69/2009/ND-CP - only gives district-level people's committees, not the centralgovernment, the right to hire companies to settle site clearance and compensation issues.

Difficult geological conditions, as most of Vietnam's terrain is uneven.

A lack of specialised government institutions that can mediate between developers and landowners aboutcompensation. Combined with the perceived potential for corruption at the district level, thesedeficiencies do not provide landowners with the assurance that they are receiving the fair amount ofcompensation for their land. As a result, they are unwilling to sell their land, causing delays in siteclearances and cost overruns for road projects. Site clearances have been repeatedly reported by localmedia sources as the key reason for holding up major road projects in Ho Chi Minh City, and theyinclude the 14km Tan Son-Nhat Binh Loi outer ring road project, the 245km Noi Bai-Lao Caiexpressway, the 55km HCM City-Long Thanh-Dau Giay Highway and the widening of the HanoiHighway.

This lack of viability makes it difficult for Vietnam to raise financing for several road projects, which arecapital-intensive. According to a master transport plan for HCM City (approved by the government in April2013), the city will upgrade or expand five expressways - the HCM City-Long Thanh-Dau Giayexpressway, the HCM City-Thu Dau Mot-Chon Thanh expressway; the HCM City-Moc Bai expressway,

the Ben Luc-Long Thanh expressway and the Bien Hoa-Vung Tau expressway - and build five four-lane

flyovers with a total length of 70.7km. To finance these projects, the city will need VND45trn between2013 and 2015.

To compound the problem, the Vietnamese government is heavily burdened by the debts of its state-owned

enterprises (SOEs), and the need to repay this debt is limiting the government's ability to financeinfrastructure projects. For example, Vietnam Expressway Corporation is facing the risk of falling intoinsolvency as it could be unable to pay its bond holders.

One of the major road projects being delayed due to financing is the 101km Dau Giay-Phan Thiet highwayproject. The US$1.12bn highway project is planned to be Vietnam's first public-private partnership (PPP)highway project, but has so far failed to attract foreign liquidity. A fresh capital structure proposal was putforward in February 2013 to boost the implementation of the Dau Giay-Phan Thiet expressway project, butit remains to be seen if this would work. The proposal has hiked the portion of the state capital contribution

to the 101km Dau Giay-Phan Thiet expressway project to 40% of the project's total investment capital from29.4% with a loan from the World Bank. The state's share in the project would come to around US$429mn.The figure may vary depending upon the land acquisition costs, according to the Ministry of Transport. The

project was originally scheduled to be only developed by Binh Minh Import Export Production and



Trade (Bitexco), but would now form a joint venture with the second developer, which would be selectedthrough an international tender.

In July 2013, the Vietnamese Ministry of Transport issued a request inviting applications for qualification

for a second investor for the US$757mn Dau Giay-Phan Thiet Expressway Project. Under the project, thesuccessful bidders would design, finance, construct, operate and maintain a four-lane expressway and allied

structures from Dau Giay in the Dong Nai province to Phan Thiet in the Binh Thuan province through a

special purpose vehicle (SPV). The SPV would be formed between Bitexco, which has been appointed asthe first investor for the project, and the second investor. The first investor will have a share of 60% in theproject and the other investor 40%. However, the first investor may dilute its share in favour of the secondinvestor during the construction.

To secure additional financing for road development, Ministry of Transport started collecting a fee for road

maintenance from the start of 2013. This is because a number of key roads, including the National Highway

1A, are deteriorating rapidly and the government does not have sufficient funds to boost its budget for road

maintenance - the ministry estimates that it only meets 40% of the funds needed for road maintenance. The

government is also hiking toll fees for existing roads and implementing new toll stations on certain

expressways - Intellasia reported that transport costs in Vietnam would treble by 2015 when 21 new BOT

toll stations on NH-1A are operational, plus a rise of 3.5 times in road fees.

These toll and fee increases came about after the Vietnam Ministry of Transport revealed at the end of

November 2012 that its original targets for highway construction between now and 2020 - 2,000km of

expressways completed and 3,000km under construction by 2020 - are not possible due to the government's

limited budget for roads and the lack of financing from the private sector.

We do highlight that financing from foreign sources for road projects has become increasinglyforthcoming. In March 2013, Japan and Vietnam exchanged a diplomatic note which stated that Japan will

finance 12 projects worth a combined US$2.2bn, mostly in transport infrastructure (such as the third phaseof the Nhat Tan Bridge and the second phase of a road project linking Noi Bai Airport with Nhat TanBridge). In May 2013, Goldman Sachs was close to reaching an agreement with the BT 20 Joint StockCompany consortium to provide US$250mn for the rehabilitation (first phase) of the 110km NH-20 under aBT format. Besides NH-20, the World Bank was also reported to be thinking of providing around US

$600mn risk guarantee package for the Hanoi-Hai Phong expressway project.

Railways



Railways will account for around 24% of Vietnam's total transport infrastructure industry value in 2013,

according to BMI's forecasts. Vietnam's rail network stretches for 2,632km, but only 527km is standard

gauge (1.435m gauge). The network has around 1,790 bridges totalling 45km and 11.5km of tunnels. Theprincipal axis is Hanoi-Ho Chi Minh City (1,726km). Other lines emanating from Hanoi are to Hai Phong(102km), Lao Cai (296km) and Dong Dang (162km).

Vietnam had previously planned to build a US$56bn north-south high-speed railway line, but this wasrejected by the Vietnamese National Assembly in June 2010. The proposed project has since resurfaced,with Japan announcing in September 2012 that it remains keen to assist Vietnam in building this north-

south high-speed railway line by 2030. As of April 2013, plans on the north-south high-speed railway line

are still in a state flux as state-owned Transport Engineering Design Inc (TEDI), as a consultant to theMinistry of Transport for Vietnam railway transport development strategy for 2020, had submitted a

proposal to the government with major adjustments to the high-speed railway plan. In the proposal, TEDIsuggested that work on the north-south high-speed railway project in Vietnam should be delayed and thefocus should be shifted on upgrading the current north-south track Additionally, the speed of the north-

south high-speed train should be slowed down to 150-200km per hour from more than 200km per hour,

while the time frame for the development of the trans-Asia railway should be reconsidered along with the

rail lines connected to seaports, industrial zones and tourist sites.

There are still plans to build a high-speed railway line between Laos and Vietnam. The US$5bn high-speedrailway project, which is close to starting construction works, spans 220km from the Laos central provinceof Savannakhet to the Lao Bao border gate of neighbouring Vietnam and is expected to be operational in the

next five years.

Table: Table: Vietnam Railway Corporation's Main Targets

Upgrading north-south railway routes and improving the running speed of passenger trains and freight trains to100-120kph and 100kph respectively.

Upgrading west-east railway corridor so that the maximum speed of passenger trains and freight trains is 80-100kph and60-80kph respectively.

Paying more attention to the development of new routes between Ho Chi Minh City-Vung Tau, Ho Chi Minh City-CanTho, Thap Cham-DaLat, Yen Bai-Tuyen Quang-Bac Thai, Lien Chieu-Dung Quat, etc.

Carrying out surveys and preparing to link the railway network to Singapore-Kunming route is aimed at fulfilling missinglinks such as Ho Chi Minh City-Phnom Penh city and Cambodia-Vietnam.

Source: Vietnam Railways



Instead of a high-speed railway line, the government is looking to increase the speed of the existing normal-

gauge north-south railway line. In April 2013, the Ministry of Transport said that it had assigned the

Vietnam Railway Corporation to make a detailed plan to increase the speed of the line from 90km/h to

200km/h. This could be done in two phases. The first phase would increase the speed of the line from 90km/

h to 110km/h, while the second phase would involve the construction of a new double-track standard gauge

line that increases the line's speed to 220km/h.

The government is also looking to improve its existing railway network. In March 2013, the Ministry of

Transport said that between 2013 and 2020, the Vietnam Railway Corporation needed to focus on

improving the existing railway system and building several new 1,435mm gauge dual track lines along the

existing 1,726km north-south (Ngoc Hoi-Phu Ly) railway line. Under the amended planning the railwaysector would require around VND365.242trn (US$17.4bn) to 2020 for upgrading six existing lines, puttinginto place three new arterial routes, including some lines heading seaports, economic zones and tourist sites.

Amendments relating to Vietnam's railway development planning to 2020, with a vision toward 2030 (2009planning), have been reported by the Vietnam Railway Administration (VRA) to the Ministry of Transportin April 2013. According to a proposal from the consultancy unit that is tasked with amending the 2009

planning, Vietnam will weigh up the construction of a trial electrified 1,435mm Ngoc Hoi-Phu Ly gauge

dual-track line, with a velocity ranging from 160km to 200km per hour. Overhauling the existing 1,726km

north-south railway is estimated to require a total investment of VND39.87trn (US$1.9bn). Of the total, thecapital demand to 2020 is set at VND18.61trn (US$886mn).

By 2015, Hanoi Railway Station is expected to emerge as the centre of the country's system. The station

will join the other means of transport and boast a multi-functional service centre. The upgraded facilitiesand services are to have an annual transportation capacity of 13.7mn tonnes of freight and 17.7mn

passengers.

However, just like the roads, the railway sector suffers from a lack of financing. In October 2012 the deputydirector of the railway administration, Nguyen Van Doanh, said that a total of 20 railway projects wereearlier recommended by the VRA to be developed under the forms of BOT, build-transfer and build-

transfer-operate. This list of projects was submitted to the Ministry of Transport in early 2010, but a lack ofinvestors prevented them from starting. Among the 20 railway projects calling for investment in 2010-2020,they include the 381km Lao Cai-Hanoi-Hai Phong railway line, the 114km Bien Hoa-Vung Tau route and

the 49km railway connecting Trang Bom in Dong Nai with Hoa Hung in HCM City.

Urban Railways



As most of the railway projects in Vietnam are at an early stage, we believe that it would be urban railwayprojects that will drive our railways infrastructure industry value forecasts over the short to-medium term.BMI believes these urban railway projects will be crucial to Vietnam's economic and social development,as the country attempts to deal with rapid urbanisation, while successfully managing a booming economy.

The combination of rising urbanisation and steady population growth is exerting considerable pressure on

Vietnam's urban transportation systems. This urbanisation trend is felt acutely in Hoh Chi Minh City and

Hanoi, the country's largest cities and chief commercial hubs. Both cities are home to approximately 16% of

the country's total population and traffic conditions have worsened. Congestion occurs frequently at road

junctions during rush hour and average traffic speeds vary from around 10-30km/h in both cities. There ismuch scope for traffic conditions to worsen further. Not only could there be a fundamental shift to cars due

to rising incomes - for example, 90% of the vehicles in HCM City are motorcycles - but Vietnam is also

looking to accelerate the urbanisation rate in the country. According to a draft national urban development

programme approved by the government in June 2012, Vietnam will strive to achieve an urbanisation rate

of 38% with 870 urban areas by 2015, and 45% with 940 urban areas by 2020. The country is estimated to

currently have an urbanisation rate of 30%.

The development of an urban railway system will therefore help alleviate many of the problems associated

with congestion. No other system can carry more people and run on such a dependable schedule at a lower

cost, and we expect Vietnam to continue to push forward with urban railway projects. As of May 2012, thegovernment transport plan for Hanoi to 2030 includes eight urban railways, with a total length of 284km,

and six subway lines, linking key parts of Hanoi and its outlying areas. Meanwhile, Ho Chi Minh City aims

to complete around six metro lines with a total length of 120km by 2020.

Some of these urban railway plans have moved forward (such as Ho Chi Minh's City's Ben Thanh-SuoiTien Metro line 1, the underground section of the Metro line 2), but just like the roads sector, several havealso faced delays. This is because they are suffering from slow site clearances (such as the Cat Linh Street-Ha Dong District railway line in Hanoi, which is two years behind schedule), cost overruns (such as theNhon-Hanoi Station urban railway line No. 3), the lack of a legal framework, a lack of proper planning forunderground space and integration with other transport modes, and the lack of skilled labour.

The sector is also heavily reliant on financing, mainly official development assistance loans, from several

foreign countries and multinational development banks. This has caused delays as to access these loans

Vietnam needs to conform to the regulations of all its donors, making it difficult to coordinate construction

work for the projects. In addition, European banks are set to face difficult economic conditions and strictercapital controls over the coming years. This could lead to a decline in European financing for Vietnamese



projects and has already transpired, with the Spanish government announcing in late-November 2012 that itwould only provide 40% of the financing it had initially promised for an urban railway project in Ho ChiMinh City (the Metro Line No.5).

Having said that, some lenders remain keen to provide funds for Vietnam's urban railway sector. In March

2013, Japan and Vietnam exchanged a diplomatic note, under which Japan agreed to finance 12 local

projects such as the first phase of the Hanoi urban railway line 1 (Gia Lam-Giap Bat). Officials from the HoChi Minh City administration also pointed out in March 2013 that the Asian Development Bank (ADB) andthe European Investment Bank (EIB) will provide a combined US$260mn and US$735mn for the MetroLine No.5 and Metro Line No.2. The loan agreement for the Metro Line No.2 was signed in July 2013.

Ports

Although roads and railways are dominating transport infrastructure, we highlight that ports, harbours and

waterways will see their share increase significantly over the coming years. Vietnam's dense river and canal

network - which measures 17,702km - provides the country with a highly developed inland waterway

system, but its port infrastructure is poor by international standards. The main ports currently in operations

are the Cam Pha Port, Da Nang, Haiphong, Ho Chi Minh, Phu My and Quy Nhon.

Vietnam's seaport network comprises of many small and medium-sized entities, with inefficient

distribution. Most ports in the northern part of Vietnam are dispersed and small in scale, while most big

ports are located on rivers, such as Hai Phong and Ho Chi Minh City, with limited depth at the entrance.

Some ports are located in big cities, thus making it difficult to connect with other modes of transport due to

traffic congestion. With the exception of several new or upgraded ports, most have been operating for many

years and lack investment. The loading and unloading equipment in some ports is obsolete, leading to low

productivity. The average productivity of a Vietnamese port is only 2,500 tonnes/m per wharf, which is less

than half of the productivity of other ports in the region. As of January 2013, Vietnam was home to 266

large and small-scale seaports, but only nine ports are able to handle 50,000-deadweight tonne (dwt) ships.

Activity in the maritime sector is mainly concentrated on boosting the capacity of the southern economic

zone, especially in the Thi Vai River area. Major global port operators with interests in the region includeHutchison Port Holdings, Singapore's PSA International, Saigon Port, Denmark's Maersk and France's

Compagnie Maritime d'Affrtement-Compagnie Gnrale Maritime (CMA CGM). These companieshave all been involved in the operation and development of major Vietnamese ports in the Thi Vai River.

BMI anticipates increasing investment into Vietnam's port infrastructure over the long term, as it is a sector

crucial to the country's economic growth. There are two major factors central to our view:



The country needs to upgrade its ports to avoid major bottlenecks, which would constrain the country'sexport-led growth and investment. Vietnam's port infrastructure ranked only 113th in the 2012/13competitiveness report published by the World Economic Forum.

Vietnam is becoming increasingly important, not just to growing Intra-Asian trade but also on the globalstage. An increasing number of shipping companies are choosing Vietnam as their port of call as they plythe east-west trade route. Vietnam's ports are gradually graduating from feeder stop-offs on the majorroutes to boasting direct services on both the Asia-US and Asia-Europe services.

Vietnam is keen to address this deficit, but lacks the necessary fiscal strength to meet the required

investment. This keenness to meet this deficit has also been dampened recently due to feeble external

demand. The slowdown in global economic activity in 2012 has also dampened the demand for Vietnamese

goods and minerals, resulting in a glut in port capacity, particularly with deep-sea ports in South Vietnam.

This glut has become so serious that in December 2012, investors were calling for a halt in licences been

issued for container terminal building projects in HCM City and a delay to the launch of the US$660mn CaiMep-Thi Vai port complex. A report of the Vietnam Seaport Association showed that in 2012, the

international container ports in the Cai Mep-Thi Vai deep water port complex area ran at 15-20% of their

designed capacity.

Vinacomin also decided to suspend the construction of the Ke Ga deepwater port in the Binh Thuan

province, according to Vinacomin General Director Le Minh Chuan in February 2013. The company took

the decision due to a cut in bauxite production. The port was scheduled to receive bauxite from mines in

Tay Nguyen, with an annual capacity of up to 3.5mn tonnes by 2015, 17.5mn tonnes by 2020, 27mn tonnes

by 2025 and 37mn tonnes by 2030. However, the output of bauxite at Tan Rai and Nhan Co alumina

projects in Dak Nong Province is low and may reach only 1.3mn tonnes.

Besides Vinacomin, Vinalines is also selling stakes in four of its ports - namely Hai Phong, Da Nang,

Quang Ninh, Saigon and Quy Nhon - between 2013 and 2014 to pare down its high level of debts, whichwere brought on by investment in under-performing ports.

As a result, Vietnam has adjusted its port development plans at the start of January 2013, with the VietnamMaritime Administration announcing that it would only focus on building large deep-sea ports in Hai

Phong's Lach Huyen and Ba Ria-Vung Tau's Cai Mep - Thi Vai port complexes. The administration will

also focus on converting the remaining ports in the central region and the Mekong Delta into special-use

ports to transport materials for thermo-power plants. Small ports that had been planned for development

will not be put into this time's zoning plan if they are not in urgent need. This plan appears to be taking

place with, the Lach Huyen port project starting construction works in April 2013. There are also plans todevelop a US$3.5bn deep-sea port on Hon Khoai Island, Ca Mau province. The project proposal was



unveiled by Australia-based N&M Commodities in June 2013. The company was completing the necessary

administrative procedures for the project, which is expected to start construction works at the end of 2016.Once completed, the Hon Khoai Seaport is expected to become the gateway to the Mekong Delta and HCM

City.

In April 2013, Vietnam started the construction of the Lach Huyen international port in the northern city of

Haiphong. The port is scheduled to be built in two phases, with the first phase entailing the construction of

port infrastructure, while the second phase will include the construction of two 750m wharves capable of

handling 100,000-tonne container ships. The Vietnam Maritime Administration will manage the first phase,

involving an investment of more than VND18.6trn (US$885mn), while a joint venture of Vietnamese andJapanese enterprises will manage the second phase worth more than VND6.57trn (US$315mn). The port,due for completion in 2016, will have modern cargo handling equipment. It will be capable of handling

container ships of up to 8,000 twenty-foot equivalent units (TEUs).

However, Vietnam's difficult business environment continues to slow project implementation. In July 2011,construction work on the US$3.6bn Van Phong International Port in Vietnam's southern central province ofKhanh Hoa was suspended, because initial feasibility studies for the port project did not sufficiently assessthe site's geology. This resulted in inconsistencies in pile design during the construction phase. Although the

project investor Vinalines had signed a deal with Netherlands-based Rotterdam Port for the port'sconstruction, the lack of financial strength in Vinalines has finally forced the government to suspend the

project in September 2012. In June 2013 the management of the Van Phong Economic Zone cancelled theinvestment licence, held by Vinalines, to build Van Phong International Port project. Vinalines is requiredto complete all procedures to liquidate the project within H114.

Another business environment issue that is hindering the growth of the port sub-sector is the lack of

coordination in developing the different types of infrastructure (roads, ports, airports, railways). Two portsin Ho Chi Minh City - the US$17.5mn Phu Huu Port and the US$19.1mn Phu Dinh Port - have been leftunused for several years due to lack of access to key roads. These ports are connected to streets that are

either often flooded, too narrow for container trucks or lack access to highways. This could remain an issue

for other ports currently being developed. The VND2.73trn Saigon-Hiep Phuoc port was scheduled to be

completed by 2014, but as of March 2013, a harbour bridge and port routes to connect it with main

highways and roads have yet to materialise.

A shortage of qualified logistics staff is also an issue, where according to the Vietnam Freight Forwarders

Association (July 2012), only 40% of the demand for qualified logistics staff is met.



A lack of proper planning is also an issue. According to the Vietnam Seaports Association in January 2013,

seaport zoning plans of Vietnam are yet to be synchronic and have still failed to meet rising sea transport

demand due to a disproportional focus on the construction of small ports, which are inefficient in meet

Vietnam's transhipment needs.

The government has also been slow in implementing regulations that support the development of a PPP

framework for port projects. A PPP framework has been on the cards for several years but has yet to bedeveloped, with investors still seeking incentives from the government to attract PPP investment in August

2012.

Lastly, access to financing remains an issue, despite a sharp decline in Vietnam's interest rates. This is

partially due to Vietnam's financial regulations and the decline in government investment.

In June 2012, Formosa Plastics Group (FPG) was reported to be facing difficulties in obtaining funds forits steel and seaport project in Vietnam's Central Ha Tinh province. This is due to lending limitations atforeign bank branches in Vietnam, as a foreign bank is not permitted to lend more than 15% of its own

equity for a single borrower.

In December 2012, Saigon Port Company Deputy Director Huynh Van Cuong said that the Saigon Port

relocation project has not made any considerable progress due to capital shortages. The relocation work ismoving at a slow pace despite financial assistance from the Vietnamese government. The Hiep Phuoc Port

construction project is required to be finished first in order to relocate the Saigon Port from Ho Chi MinhCity; however, construction work is only 38% completed.

Airports

Although the airport infrastructure sub-sector accounts for the smallest portion of transport infrastructure,

the government has ambitious plans to modernise and expand the country's airport infrastructure, which

consists of 44 airports. The government initial plans were to develop 10 international airports by 2020 - Noi

Bai, Cat Bi, Phu Bai, Danang, Chu Lai, Cam Ranh, Tan Son Nhat, Long Thanh, Can Tho and Phu Quoc -and 16 domestic airports in the same timeframe - which includes Dien Bien Phu, Na San, Lao Cai, QuangNinh, Gia Lam, Vinh, Dong Hoi, Phu Cat, Tuy Hoa, Pleiku, Buon Ma Thuot, Lien Khuong, Rach Gia, Ca

Mau, Con Son and Vung Tau.

This willingness by the government to get projects under way for the private sector (which is partially dueto a lack of public funds) provides grounds for optimism and this has attracted foreign investors to the



sector. In April 2011, US-based ADC-HAS Airports presented a proposal to the Vietnamese Ministry of

Planning and Investment with regard to investing in seven airports in the country's central region - Chu Lai,

Phu Bai, Da Nang, Tuy Hoa, Quy Nhon, Pleiku and Cam Ranh airports. This plan is still in the works. InAugust 2012, ADC-HAS Airports suggested a plan to develop the Chu Lai airport into an industrial airport,

while the Khanh Hoa provincial government was seeking permission for a plan to develop the Cam Ranh

airport with ADC-HAS Airports and Vietnam Airlines (VAC). ADC-HAS Airports is also interested indeveloping the Da Nang airport with VAC. In April 2013, the Airports Corporation of Vietnam (ACV)tasked Parsons Brinckerhoff with investigating the potential to develop the Chu Lai airport into a regional

cargo hub. The study was funded by a grant from the US Trade and Development Agency. In June 2013,

ADC-HAS Airports reiterated its interest in expanding the Cam Ranh Airport and Danang airport.

However, the lack of demand for air travel in the near term and the stiff competition from other airports in

Asia to serve as regional hubs could make it difficult for these new airports to be financially viable.

Since early 2012, Vietnam has announced that it was in the search for foreign investors to help construct

two international airports: the US$1.2bn Van Don International airport in the northern province of QuangNinh and the US$10bn Long Thanh International airport in the southern province of Dong Nai. The twoairports are part of a strategy to compete with neighbouring airports in Thailand and Singapore. According

to Nguyen Cong Hoan, a director for the Vietnamese airport operator ACV, foreign investors have already

expressed interest in the Van Don airport, with South Korean investors being highlighted as one of the

interested parties in late-2012. Interested investors were due to complete project documents and submitthem to provincial and central agencies in November 2012.

The Long Thanh airport, approved in 2011, also appears to be make some progress, albeit slowly. In March

2013, the provincial government of Dong Nai disclosed a development plan for the area surrounding Long

Thanh International Airport. The government plans to develop a tourism complex, several industrial clusters

and world-class sporting, education and healthcare venues in the 21,000-hectare (ha) area. The plan entailsthe development of 12 communes in Long Thanh and Cam My districts in the area, excluding the 5,000ha

zoned for the terminal, by 2025. The northern part of the airport covering 5,720ha will boast condominiums

for aviation employees and locals, while the southern area covering about 4,400ha will boast an

international transhipment centre, a supporting industrial park and an area zoned for fruit farms and

industrial plants. The plan is likely to be implemented in three phases during 2012-2025, with land

acquisition estimated to cost VND10trn as of March 2013.



The terminal will also be developed in three phases, starting from 2015. The first phase (2015-2020)requires US$5.6bn for the construction of two runways, taxiways, aircraft parking zones and two terminalswith an annual handling capacity of 25mn passengers and 1.2mn tonnes of cargo. The second phase

(2020-2030) involves the construction of a third runway and the increase in passenger handling capacity by50%, while cargo handling capacity is increased to 1.5mn tonnes per annum. The third phase (2030-)involves the construction of a fourth runway and the increase in passenger and cargo handling capacity to

100mn passengers and 5mn tonnes of cargo per annum.

Both airports are part of the government's strategy to develop as many as six international airports, which

include locations such as Cam Ranh, Chu Lai, Danang and Hue. The Long Thanh airport is the centrepiece

of this expansion, as it is the largest greenfield airport project in Vietnam (and possibly in Asia), with aneventual annual passenger capacity of 100mn per annum, a 5mn tonne cargo capacity and four runways.

While there are compelling factors driving the government to build new airports - to meet a growing

demand to travel within Vietnam's population and to unlock the growth potential of its tourism sector -

these airports could struggle to be financially viable if their aim is to serve as regional transit hubs. Not only

is there a lot of competition from other airports in Asia to serve as regional hubs, but these airports already

have well established airlines using them as their main point of transit.

Several airports in Vietnam, particularly in the central provinces, were already operating way below

capacity, despite the rapid rise in tourists. The Dong Hoi airport incurred losses of VND6.9bn (US$332,000) in 2010 and VND9bn (US$432,000) in 2011. This suggests that the demand for new airports isnot broad-based throughout Vietnam, with air traffic in certain regions still immature.

Another reason for this lack of usage could be due to the small number of runways that are able to handle

international flights. Most of the international flights in Vietnam are handled by just three of the country's21 airports, while only nine of these have runways with a length of more than 3,047m, which is a standard

requirement to handle international flights for wide-body aircraft. This suggests that Vietnam could need to

upgrade the runways in its existing airports, rather than construct new airports. As of September 2012,

Vietnam continues to find difficulty in securing financing for its airport projects and is still seekinginvestment capital from different sources.

The government has since recognised this lack of financial viability for some of these proposed airports and

is shifting its focus on a few key airports such as Noi Bai, Danang and Long Thanh. The smaller airports

such as Lao Cai, Lai Chau and Quang Ninh could be developed after 2020, according to official from theministry of Transport in April 2013.



Table: Table: Major Projects - Transport

Project NameValue (US

$mn)Capacity/

Length Companies Timeframe Status

Airports

Quang Tri Airport -Gio Linh DistrictAirport 27 na na 2009-2015

Planning stage -Approved in

February 2009

Passenger terminal,Danang InternationalAirport 74

6mnpassengers /

year

Middle Airports Corp., Louis BergerGroup, Airport Consultants

B.V. and National ConstructionConsultants

2006 -December

2011

Completed, twoyears behind

schedule(December 2011)

Cam RanhInternational Airportexpansion 590

5.5mnpassengers/

yr na 2009-2020

Project approved,US$9.5mn terminal

completed inlate-2009 (Nov

2011)

Noi Bai InternationalAirport extension(includes T2 terminal) 960

10mnpassengers /

year

Northern Airports Corporation(NAC), Taisei, Hoa Binh

Construction and Real EstateCorporation

September2012 -

November2014

Contract awarded(September 2012);

US$759mn ODAloan from Japan

Phu QuocInternational airport,Duong To Commune 780

3mnpassengers/

yr Southern Airports Corporation

2009 -December

2012

UnderConstruction,

Construction onterminal started in

end-Jan 2012(October 2012)

Chu Lai InternationalAirport 1,000

4mnpassengers /

year Garuda Asea, Airis International -2025

Memorandum ofunderstanding

(MoU) for feasibilitystudy approved

Long Thanhinternational airport(Passenger terminal,runway, parkingplace), Dong Naiprovince 6,740

100mnpassengers /

yearJapan Airport Consultants, Airports

Corporation of Vietnam 2015-2020

At planning stage,Land clearing to

begin in 2013 (April2013)

Phu Bai InternationalAirport upgrade, ThuThien-Hue Province 595

5mnpassengers/

year Middle Airports Corp. 2011-2020

At planning stage,government to

arrange financingfor 2012 (Nov 2011)

Tien LangInternational Airport,Hai Phong na

80mnpassengers /

year na 2010- At planning stage

Pleiku Airport (two-phase upgrade), GiaLai 105

500,000passengers /

year na2011-2030

(first phase) At planning stage

Da Nang InternationalAirport terminalexpansion 64.5

6mnpassengers /

year Da Nang International Airport na

Completed;Opening in May

2011

Seven PPP airportprojects (Chu Lai, PhuBai, Da Nang, TuyHoa, Quy Nhon,Pleiku and Cam Ranh) na na na 2011-

Proposal forprojects send to

VietnameseMinistry of Planning

and Investment(MoPI) by ADC-

HAS



Table: Major Projects - Transport - Continued

Project NameValue (US

$mn)Capacity/

Length Companies Timeframe Status

Cat Bi internationalairport (first phase)upgrading project,Haiphong, NorthernVietnam 240

2mnpassengers/

yr na

February2013-2015

(first phase);- 2025

Documents

VN Infrastructure Q4 2013