Business Climate A Risk To Water Growth
In a recent seminar, Ho Chi Minh City (HCMC) authorities commented that it is difficult to attract private investment for water utility projects. BMI believes this lack of interest from the private sector is due to the sector's difficult business environment and not due to the lack of demand for water utility infrastructure.
We have long highlighted the robust potential for growth in Vietnam's water utilities sector, due primarily to macroeconomic factors (growing industrialisation and urbanisation) and the growing use of the Mekong River as a source of electricity generation (See BMI's Industry News - Yen So Plant Highlights Growth Opportunities For Water Treatment - July 6 2011 and Project News - Water Treatment To Be A Robust Growth Market - October 12 2011). Vietnam has also recognised the need to improve its water infrastructure, and we have seen Vietnam offer several large-scale water utility projects (mainly water treatment facilities) under a public private partnership (PPP) framework. According to the Vietnam Ministry of Construction, there are around 15 large-scale urban water supply projects worth US$500mn that are in need of investment across Vietnam.
|Business Environment A Downside Risk|
|Vietnam Water Infrastructure Industry Data|
However, Ho Chi Minh authorities have recently commented that it is difficult to attract private corporations to invest in these projects. While we believe this is primarily due to the difficult credit conditions globally and within Vietnam (See BMI's Industry Trend Analysis - Construction Sector: Robust Recovery Still On The Cards - July 13 2012), another key factor deterring investors is the sector's poor regulatory framework. Some of the concerns raised in recent months include:
The inability for investors to determine the price of water sold to customers, which is currently set by Vietnamese authorities. Given that most countries do not allow the private sector to set the price of water, we believe this issue has more to do with Vietnam's lack of regulatory capacity to address and manage downside risks for private investors.
The lack of incentives to attract investors to the sector. According to the HCMC Institute of Development Studies (cited by the Saigon Times), private companies enjoy corporate income tax reductions and exemptions, but unlike state-owned enterprises, they do not have priority access to preferential loans. This is particularly important at the moment due to poor credit conditions globally.
The lack of clarity regarding the PPP framework for water utility projects. The Vietnamese government had launched a pilot PPP mechanism in November 2010, but specific regulations for the different types of infrastructure (including water) have yet to be completed by their respective agencies .
Despite these comments from HCMC, we note that the potential for growth in Vietnam's water utilities sector is still proving to be attractive enough for some private investors to overlook the difficult business climate. A notable example is the recent acquisitions by Philippine conglomerate Ayala Group. In May 2012, Ayala, through its subsidiary Manila Water, had acquired stakes in two Vietnamese water utility companies. The company bought a 10% stake in Nha Be Water Supply, a company that supplies potable water to a district in Ho Chi Minh. Manila Water also bought a 49% stake in Kenh Dong Water Supply, the owner of the 300,000m3/day Thu Duc Water Treatment Plant.
Therefore, we remain cautiously optimistic towards the sector but note that the sector's poor regulatory framework poses as a major downside risk to our forecasts. At present, we are forecasting real growth for Vietnam's water infrastructure industry to average 7.2% per annum between 2012 and 2016.