Hanoi - Hai Phong Expressway Project

- Bond issuance 70% of total investment

+ Funding sources: Focus on key subjects such as Insurance Companies, Commercial Banks and other investment organizations.

+ Expected bond issuance: Bonds are issued with a face value of 100,000 VND, including many terms: 5 years, 7 years and 10 years. The issuance amount is determined based on the disbursement and revenue of the project during construction and operation. The bond interest rate is about 9.43%/year.

+ Bond type: In Vietnamese Dong issued by PMU 1, guaranteed by the Ministry of Finance for payment of both principal and interest.

In order for the project to be successful, ensuring a reasonable source of payment for maximum term loans, according to the capital recovery progress of the investment project, VEC has proposed that the State should provide at least 30% of the total investment cost for the project to prepare for investment, carry out site clearance and some other initial costs. Also to increase the attractiveness to ensure the ability to call for investment capital for the project, VEC proposed that the Government approve the Ministry of Finance to guarantee the payment of both principal and interest for the entire number of bonds planned to be issued. In addition, VEC also proposed that the Government allow the implementation of preferential regimes or exemption of income tax on bond interest for organizations participating in investment in project bonds. This can both encourage increased investment and reduce the pressure on interest rates to mobilize capital for the project; During the implementation process, the Investor can proactively set flexible interest rates, in accordance with the market interest rate level to increase the ability to mobilize capital. At the same time, the Investor will proactively consider listing the issued bonds on the stock exchange market to create more liquidity for the bonds, which also increases the attractiveness of the bonds.

The project implementation process is as follows:

- 2006: Started construction of the Cau Gie - Ninh Binh expressway section, with a minimum highway scale of 4 lanes.

- 2011: Operate Cau Gie - Ninh Binh expressway, with a minimum scale of 4 lanes. At the same time, carry out sub-projects to enhance traffic capacity in phase I.

- 2014-2015: Phase II investment, implementing the expansion of Cau Gie - Phu Ly and Phu Ly - Ninh Binh sections, to 6 lanes.

- 2016: Complete 6-lane Cau Gie - Ninh Binh expressway

Jar.

* Nature of the project according to the capital mobilization model using construction bonds

A project under the project bond model is a project through which investors issue bonds to raise capital to build a project, exploit that project for a number of years to earn revenue, mainly from project users during the agreed operating period to repay the capital and interest raised, at the end of this period the project will be handed over to the Government. Thus, the mobilization of capital outside the State budget in this project, through indirect investment from the non-State budget sector, is demonstrated by the purchase of project bonds. The strength and attractiveness of project bonds is that they are guaranteed by the Government, but the issuance of bonds to create capital for project implementation has not been as expected. In particular, the issuance in 2011 encountered difficulties, that is, the Ministry of Finance announced that it would no longer guarantee the issuance of project bonds.

In Vietnam, this model has traditionally been applied to projects with small investment scales. Current road projects such as highways are often projects with quite large investment scales, while state budget capital is limited, so projects mobilizing capital through project bonds are considered a feasible and promising method of investing in large-scale infrastructure.

In early 2011, the Ministry of Finance issued document No. 17387/BTC-TCNH, affirming to "stop guaranteeing the issuance of project bonds" and requesting VEC to "find other legal sources of capital" for the project. Furthermore, the Ministry of Finance also did not approve VEC's proposal to guarantee this enterprise to borrow commercial capital from banks and international financial institutions, with an average interest rate lower than the interest rate issued.

issue domestic bonds as well as repay all interest and principal due for the issued project bond capital during the time VEC has not issued bonds (due to guarantee procedures). The reason why the Ministry of Finance stopped guaranteeing the issuance of bonds is because the debt ratio on charter capital of VEC has now exceeded at least 3 times the mobilization limit (maximum 3 times charter capital) prescribed in Decree 199/2004/ND-CP dated December 3, 2004 of the Government promulgating regulations on financial management of State-owned enterprises and management of State capital invested in other enterprises. However, the ability of VEC to mobilize other capital sources at the time of the project's withdrawal is impossible at this time, so it has delayed the payment of some payment documents, the debt for each contractor is up to tens of billions of VND.

However, the Cau Gie - Ninh Binh Expressway Project is the first expressway project to implement this measure, so it has a special meaning, possibly opening a new direction for mobilizing investment capital for infrastructure development in Vietnam.

* Characteristics of highway construction projects using the project bond capital mobilization model.

Highway construction projects under the construction bond model have some special features compared to other projects, which are:

- The longest bond term is 15 years, so the minimum payback period of the Project is only 15 years. Road construction projects often have a slow payback period, so the revenue is realized over a long period of time in the future, which is important for the financial capacity and potential attractiveness in the investor's appraisal, and the risk of the currency market.

- Pressure on high interest rates.

- There are many commercial risks for businesses investing in construction bonds because there will be other roads, such as Highway 5A, competing with Highway 5B in terms of traffic toll collection after Highway 5B is put into use. These roads may not collect tolls from users, although the road may be in poor condition and will be renovated.

Future upgrades or renovations may have attractive toll rates or may not have tolls, so toll revenue may be affected.

- Because the Government's tax incentives only take effect when traffic fees are collected and the project starts to make a profit. Investors will have to suffer a lot of tax losses during the project construction phase.

- Because investors have direct relations with road users, they will be greatly affected, directly affected by any price fluctuations in traffic fees.

- Risks in issuing construction bonds when the guarantor declares that it will not guarantee the bond issuance.

These characteristics mean that the implementation of certain legal provisions and incentives on conditions and possible future incidents is important to help investors cope with risks and recover an acceptable turnover within a certain period. Thus, the need to recover investment costs by collecting traffic tolls means that there is pressure to maintain high toll levels, which discourages road users and may be contrary to the Government's objective of optimizing road use for economic development. Therefore, a clear legal system is needed to accept and manage the differences that may arise as mentioned.

* The main characteristics of highway construction projects under the construction bond model can be summarized as:

+ Projects often have high initial investment costs.

+ Because of the high costs and the minimum payback period of a Project of 15 years, the level of future revenue is very important for the ability to mobilize financial resources. Therefore, it is necessary to implement a clear regulatory system from the beginning of the project on future changes in traffic toll prices and the Government's support is very much needed.

+ The need to recover investment capital may make transportation fees higher than required to optimize economic profits.

+ The need to recover project costs means that regular toll rates need to be increased over time.

Issuing project bonds is also a capital mobilization channel to repay advanced capital from the State budget and to mature and repay interest when the project's cash flow has not yet reached a positive state.

If the project's capital flow does not continue to be cleared, the 56 km long, 4-lane highway from Cau Gie to Ninh Binh will certainly not be able to open to traffic as planned. Not only that, this situation will make it impossible for VEC to repay previous loans, so it is very possible that VEC will fall into a difficult situation due to objective circumstances.

Thus, through analysis of the project implementation status, it shows that:

* Legally : VEC fully complies with the regulations of the State, the Ministry of Transport, and relevant Ministries through compliance with legal documents, from formulating feasible plans to mobilizing capital sources.

* About the risks of the Project::

+ Revenue risks: Although the Cau Gie - Ninh Binh expressway is a key expressway, it has many branch roads, which makes toll collection difficult, for example, National Highway 1 (QL1) and the railway running parallel, the Red River - Day River waterway (from Pha Den port to Ninh Phuc port). Moreover, the cost of toll collection is often quite large (construction of toll stations, human resources for toll collection...).

+ Project financial risks: Project financial risks include

(a) Inability to generate sufficient revenue to pay interest, especially in the early years.

(b) Inability to mobilize sufficient capital to invest in the project, and

(c) The possibility of not having enough resources to pay the principal on time due to the project's payback period being too long while the bond's maturity does not match the project's payback period.

+ Natural disaster risk: If a natural disaster occurs that is greater than expected, maintenance and repair costs will increase, and the destroyed part of the structure may even have to be rebuilt. Thus,

Interest and principal payments will be greatly affected as revenues are reduced or interrupted and the project payback period is extended.

+ Policy risk: This is considered an objective risk. If the mechanism and policy change (due to State management requirements...), then the project implementation will certainly be significantly affected.

+ Financial market risks: When there is inflation, imbalance in currency supply and demand, regional economic crisis...

+ Risk of bond issuance when the guarantor stops guaranteeing.

There are also risks such as the resettlement not being implemented, making the lives of people in the relocated households difficult; construction risks; exchange rate risks... Thus, risk management also needs to be given due attention, and must be included as part of the preferential conditions later. The Government will hold an important position to control the risks as mentioned above, therefore, the reasonable decentralization of the Government to the State agencies in the licensing of an agreed process to ensure risk minimization for the project.

3.2.3. Hanoi - Hai Phong Expressway Project

*. General assessment: The core cities of the Northern Key Economic Zone (KTTĐ) are the three vertices of the triangle: Hanoi, Hai Phong and Ha Long. The developed core cities will be the locomotives and promote the development process of the entire Northern region. The urbanization rate from 29.5% in 2005, has reached 56% in 2010, requiring the infrastructure to be commensurate.

+ Regarding planning : According to the planning and design, the Hanoi - Hai Phong expressway, also known as National Highway 5B, will be a modern road of international stature, overcoming the limitations of the current National Highway 5A.

+ Regarding legal basis: The Prime Minister issued Decision No. 1621/QD-TTg dated November 29, 2007 on a number of mechanisms and policies for pilot investment in the Hanoi - Hai Phong Expressway Project. The Hanoi - Hai Phong Expressway Project is a national key project, this is the first expressway in Vietnam to be built.

according to international standards and implemented under the BOT method approved by the Government for implementation. Through the Government's issuance of Document No. 1393/CP-CN dated September 24, 2004, through the pre-feasibility study report of the Hanoi - Hai Phong expressway project in the form of BOT, approving the route plan and investment scale in the pre-feasibility study report. On October 12, 2004, the Ministry of Transport permitted the establishment of an investment project to build the Hanoi - Hai Phong expressway. Decision No. 3026/QD - TTg of the Prime Minister, the BOT project was implemented with the goal of building a modern expressway connecting two major cities in the Northern region, the capital Hanoi and the port city of Hai Phong, combined with other national and provincial highways to form a smooth road traffic network for the Northeast region of Vietnam. At the same time, along the highway, a system of industrial parks, modern urban areas, services and logistics will be formed and developed with planning suitable to the socio-economic development orientation of the provinces and cities through which the route passes.

Hanoi – Hai Phong Expressway Project, Photo by Duc Thang

+ Form of capital mobilization: According to Decision No. 1621/QD-TTg of the Prime Minister "On some mechanisms and policies for pilot investment in the Hanoi - Hai Phong Expressway Project", the Infrastructure Development and Financial Investment Corporation

Vietnam (VIDIFI) is the project investor under the BOT contract form. VIDIFI has a charter capital of 5,000 billion VND, of which the Vietnam Development Bank (VDB) holds 51%. This is a national key project, but the capital is mobilized from society (including foreign loans), and the works around the project are used to recover capital: Industrial parks, urban areas, when the project is completed, put into use, organize toll collection to recover capital for about 35 years, then hand it over to the State for management.

Table 3.10. Main technical parameters of the Project.

STT

Technical specifications name	Unit	Specifications
1	Rank		Class A highway
2	Calculation speed	km/hour	120
3	Number of design lanes	Lane	6
4	Roadbed width	meter	35
5	Vehicle running area (6 lanes x 3.75m)	meter	22.5
6	Median strip	meter	3.0
7	Safety strip 2 x 0.75 m/side	meter	1.5
8	Emergency stop lane (both sides: 2 x 3.0m/side)	meter	6.0
9	Land curb (2 x 1.0 m on both sides of the road, side)	meter	2.0
10	Minimum curve radius	meter	650
11	Design hydrological frequency	%	P= 1%
12	Design loads of bridges		HL.93, pedestrian 300kg/m2
13	Earthquake level calculation	Grant	7 and 8
14	Bridge width on highway	meter	35
15	Asphalt concrete highway surface structure	Eyc	>= 237.5 Mpa
16	Other contents according to the Construction Investment Project approved construction

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