Why Vietnam’s Infrastructure is Crucial for Economic Growth

Vietnam currently spends 6 percent of its GDP on infrastructure while other countries in the region spend an average 2.3 percent, making Vietnam the leading country in ASEAN for infrastructure investment. However, experts maintain that Vietnam has a gap between its current infrastructure and its aspirations of being a fast-growing economy. Vietnam Briefing highlights key aspects of Vietnam’s infrastructure, current prospects, and government initiatives.

According to the most recent World Bank report, Vietnam is positioned 47^th out of 160 countries in infrastructure rankings and 103^rd in road quality as per the World Economic Forum’s ranking. As FDI pours into Vietnam, along with the government’s determination to implement Industry 4.0, the current state of infrastructure is unable to keep up.

Although Vietnam allocates up to 6 percent of GDP for infrastructure annually, 90 percent of that spending comes from the public budget, which has burdened the national debt and fiscal policy. Consequently, the government recently introduced public-private partnerships to scale up infrastructure upgrades. The country expects that 20 percent of investment in infrastructure will come from private funds in the incoming years, compared to only 10 percent in the past years.

As per the Global Infrastructure Hub, Vietnam needs on average US$25-30 billion annually for infrastructure if the country wants to ensure economic growth. However, the national budget can only allow for US$15-18 billion (at 7 percent of GDP). Therefore, the country has to source the remaining US$10-15 billion from private investors.

Vietnam Briefing explores key highlights of Vietnam’s infrastructure and opportunities where investors can tap in.

Transportation infrastructure

Vietnam’s road quality urgently needs improvement given that road transport is the backbone of the country’s logistics and transport industry. Only 20 percent of roads are paved with medium to low-quality materials that result in cracks and bumpy surfaces.

In 2021, the government issued of Decision No. 1454/QD-TTg which promotes the development of the road system for the 2021-2030 period, with a vision of 2050. The government aims to scale up the current 1,290 km of national highway to 5,000 km by 2030 while upgrading the road surfaces and increasing connections to major ports, airports, and railway stations. Especially, the ambitious 1,800 km HCMC-Hanoi highway is currently being constructed which will aid transport and goods movement throughout the country.

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In terms of aviation, Vietnam has 22 airports (for civil use) out of which 12 are international and 10 domestic.  The Long Thanh International airport in Dong Nai which will eventually replace Ho Chi Minh City’s Tan Son Nhat International Airport is expected to be completed for the first phase in 2025.

Currently, only five of the 12 international airports are up to world-class standards, including Tan Son Nhat International Airport, the capital Hanoi’s Noi Bai International Airport, Ha Long’s Van Don International Airport, Phu Quoc’s Phu Quoc International Airport, and Da Nang’s Da Nang International Airport.

The government has targeted increasing the number of airports to 26 by 2030 and 30 by 2050. However, experts believe the target can be too ambitious and more attention should be paid to upgrading the capacity of current operating airports to meet tourism and logistic demand. Meanwhile, the government is also planning to divest from airports to attract more private investments. Van Don International Airport is a good example of a private airport with remarkable success.

Public transit

Regarding public transit, Vietnam finally put into operation the first metro line in Hanoi after more than a decade of construction while the first metro line in Ho Chi Minh City expected to be completed in Q3 2022, has been delayed until Q3 2023,

Hanoi expects to construct six metro lines while Ho Chi Minh City will have eight metro lines. The delays in the completion of metro lines in both cities are attributed to two main factors: ODA capital and management board inefficiency.

Since public transit projects like the metro are costly but with low returns on profits, it was challenging to source capital from private investments. Therefore, capital for the first two lines in Hanoi and Ho Chi Minh City are from ODA loans (official development assistance loans), which means the procedure must conform to both foreign and domestic investment laws apart from added bureaucracy and red tape.

The metro line construction was also met with difficulties in site clearance due to confusing directions from the management board.

As the current metro project is far behind plans, experts held that, for the remaining metro lines, the government should source private investments for simplified procedures and, at the same time, enhance the efficiency of the management board.

Regarding city buses, as of March 2022, Ho Chi Minh City recorded 100,000 rides per day, up 52 percent compared to the previous month. Due to worsening traffic congestion and pollution, more people are switching to public transit in big cities, indicating a need for alternative transportation such as ride-hailing cars and motorbikes, electric buses, and public bikes for rent.

Vingroup – Vietnam’s dominant conglomerate well-known for Vinfast electric cars, has also introduced its Vinbus model – electric buses, in Ho Chi Minh City. The model can be the stepping stone for future sustainable public transit though more will needed to be done.

Port infrastructure

Vietnam has 251 ports, with a total capacity of up to 543.7 million tons of cargo/per year. Concerning seaport infrastructure, Vietnam currently has 45 seaports: 2 seaports of class IA (international port); 12 seaports of class I (regional port); 18 seaports of II (local port); and 13 seaports of class III (oil and gas port).

Vietnam’s port infrastructure is currently a magnet of FDI, with large-scale investments from major shipping lines and joint-venture port companies globally. However, challenges remain for this industry as the current capacity has failed to meet soaring demand from import/export activities, indicating a call for greater investment to pour into this attractive sector.

Energy infrastructure

Vietnam is still dependent on coal and natural gas as the main sources of electricity. However, in 2021, the capacity of renewable energy ramped up, contributing to 15 percent of the national capacity, equivalent to 13.15 billion kWh.

The Politburo issued Decree No. 55-NQ/TW on the national energy development strategy by 2030, with a vision to 2045. The decree seeks to ramp up the renewable energy sector while keeping the energy supply in the country stable, to make Vietnam a leading country in ASEAN energy-wise. The estimated shares of energy sources in Vietnam as of 2021 are as follows:

Vietnam set the following goals for the energy sector by 2030:

Telecommunications infrastructure

The telecoms sector in Vietnam is undergoing significant transition in light of Vietnam’s digital transformation, coupled with the effects of the pandemic that has ramped up demand for digital services.

The telecoms network coverage has already reached 100 percent of communal-level localities and 2G, 3G, and 4G coverage is prevalent for 99.8 percent of the population. In addition, 5G has also been piloted in 16 localities while the IPv6 user rate had reached 50 percent by June 2022, making Vietnam the 10^th country worldwide in IPv6 user rate.

Manufacturing infrastructure

Vietnam’s determination to become one of the world’s manufacturing hubs is evident in its 20-year goal: becoming a developed country with upgraded industrial infrastructure and lower-middle income by 2025; a developed country with modernized industrial infrastructure and upper-middle income by 2030; and a developed country with wealthy citizens by 2045.

There are three industrial zones across the country:

• Northern region: There are 125 industrial parks across 21 provinces, chief among them include Song Khe – Noi Hoang Industrial Park, Luong Son Industrial Park, Mai Son Industrial Park, Luong Son Industrial Park, and Song Cong Industrial Park;
• Central region: There are 56 industrial parks across 11 provinces, chief among them include Bim Son Industrial Park, Lam Son Industrial Park, and Cua Lo Industrial Park; and
• Southern region: Northern region is the main hub for manufacturing in Vietnam, with up to 183 industrial parks across 19 provinces. Chief among them include Sonadezi Chau Duc Industrial Park, Hiep Phuoc Industrial Park, and Tan Phu Trung Industrial Park.

Currently, most of Vietnam’s industrial parks are highly rated with cutting-edge technology and ready-built infrastructure with high productivity. Vietnam attracts substantial FDI into industrial zones, from Asian investors in Japan and South Korea to Western investors in Germany and the US, thereby enjoying the expertise in technology that foreign companies offer.

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Foreign firms mainly invest in Vietnam’s industrial parks for textiles, electronics, rubber-plastic, food processing, electronic parts and components, iron and steel, footwear, and wood processing. In 2021, FDI in manufacturing accounted for 53.4 percent of total capital in the sector, at US$11.83 billion and up 16.45 percent year on year.

Manufacturers in Vietnam are increasingly adopting artificial intelligence and 3D model printing into their products while the government is making plans to upgrade the transportation infrastructure around industrial zones to boost logistics and attract FDI.

Despite positive signs, the rate at which industrial infrastructure grows still falls short. Up to 17 percent of German companies investing in Vietnam stated that the current infrastructure is a big challenge for them as high technologies and automation, although increasingly adopted in factories, have yet to be applied on a large scale. Many factories are still labor-dependent instead of being automated and technology-based.

Takeaways

Infrastructure is a key driver behind Vietnam’s economic growth and FDI. Although infrastructure in transportation and manufacturing has seen some major improvements and efforts from the government, many projects are still not time-efficient and high technologies have yet to be transferred and applied on a large scale. However, with the growth of FTAs, preferential investment policies, and strong determination of the government, Vietnam’s infrastructure is likely to further improve significantly while also presenting opportunities for investors.

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