Diversifying capital sources for urban

Diversifying Capital Sources for Urban Infrastructure Investment:
Land-based Financing in Transportation Development in Ho Chi Minh City
Thanh NGUYEN a
a
School of Management, Radboud University, Nijmegent, 6500 HK, the
Netherlands
a
E-mail: [email protected]
Abstract: Financing urban infrastructure, and especially roads, in Vietnam is a critical aspect
of development with the country. This paper explores the land-base financing mechanism in
Ho Chi Minh City (HCMC). Based on two case studies of new road projects, findings
revealed a clear move towards more market-based on infrastructure development. Public
Private Partnership (PPP) is not an ideal tool for public investment but is only solution in
Vietnam for this moment. With a new public infrastructure development method, the state
achieved objectives: rising funding for infrastructure, better comprehensive spatial
development, and more complete property rights. It was a result of ambition in solving stalled
developments of HCMC.
Keywords: Private Developer, Land, Local Revenue, Real Estate, PPP, road investment
strategy
1
INTRODUCTION
This paper focuses on financing for infrastructure from land in Vietnam’s urban development.
It will discuss about issues of trying mobilizing non-state funding to invest two public roads in
Ho Chi Minh City, Vietnam. The peri-urban development requires momentous public
investments from local, provincial and national authorities. The city authority needs to improve
basic urban infrastructure upto a level that could adapt the increasing demands of a greater
density of human activities. For now, nevertheless, city authorities are very hesitant to make
these expensive investments.
Vietnam nowadays, due to the lack of financing, local government tries to be more active
in fund raising besides supporting from central government. Land based financing emerges,
which led to mass land-use rights move to new potential users. The Vietnamese government
has instrumentalisation property rights and land development controls to realization mega land
redevelopment projects (Labbé & Musil, 2014). The new system is being in the proper
completion and function due to the role of the participants and the regulating mechanisms to be
defined accordingly. Apart from its unsharpened legal dimensions, the way of funding project
and using land have a sharp infrastructure development. Hence, an understanding mechanism
of exchanging land for developing transportation sectors will provide insights about the story
of urban changing in Vietnam.
In Vietnam, financing for key transportation projects relies on ODA, the State budget,
and Government bonds with spending of around US$2.35 billion (VND 50 trillion) per year. In
2014, the expenditure of US$4.7 million (VND100 billion) coming from non-State sources
proves an important contribution of the private sector in diversifying capital for transport
infrastructure development. What made the private sector want to involve into expensive public
infrastructure investment?
To achieve those objective we use case study mothod. Two road projects in Ho Chi Minh
City will demonstrate the financial mobilization story in the infrastructure investment (Figure
1). Nguyen Huu Tho was a private-state partnership project and Pham Van Dong road was a
foreign-invested project designed by the South Korean GS Engineering and Construction
Group (GS E&C). Our findings show that arrangement was built up between the private
developer and the government from behind the scene. The city follows “try and error method”
to build up urban planning policy. The government is willing to make mistakes during the trial
implementation of an incomplete new policy to correct it in the future by a new version to be
applied widely.
Data were collected through fieldwork from December 2014 to March 2015. The data
about two road projects were gathered at the Land Fund Development Center, PADDY short
course on 12/20141, the Department of Natural Resource and Environment. They were
enriched by secondary sources such as statistical publications, newspapers and unpublished
documents. To explore the story, we interviewed four city officers involved into the projects,
two university professors, two senior planners, three real estate developers and three residents
living at the projects.
Case study 1: The Nguyen Huu Tho Boulevard
Case Study 2: Pham Van Dong Boulevard
Figure 1. Location in HCMC of the two Case Studies
The paper is organized into five sections. The next section 2 analyses the problems of
financing public infrastructure. Section three introduces the related studies. Details of two case
studies follow in section 4. Section 5 delivers some thoughts. Section 6, the last section
summarizes and concludes the study.
A workshop on “Suivi des marchés immobilliers et méthodes d’acquision fonciére en vue
de la creátion de rés serves foncières” (Monitoring Real Estate Market and Land
Acquisition method) was organized by Center De Prospective et D’Études Urbanes
(PADDY) and Ho Chi Minh City Department of Natural Resource and Environmental
(DONRE) on December, 2014 in Ho Chi Minh City, Vietnam
1
2
LACKED FINANCING FOR PUBLIC INVESTMENT AND APPEARING OF
PUBLIC PRIVATE INVESTMENT
The rapid urbanization usually went along with expanding new roads to suburban area. The
Vietnam has somehow achieved quantitative objectives but lacked synchrony urban
infrastructure and housing. In HCMC, with 6 new districts in 1997 and 2003, total urban area
in HCMC increased 142.15 km2 to 494.00 km2 (Storch & Downes, 2011). The HCMC has
developed in both informal and formal way (Leaf, 2009). An Phu and Phu My Hung new town
developed in a modern landscape by foreign capitals are the place for wealthy people. But the
rest of new urban area at Thu Duc, Tan Phu, District 9, and District 12 is just basic-need
physical infrastructure, and has fulfilled the housing demand for low-income immigration
people (D. Huynh, 2015). At the early stage of urbanization process in 1990s, the planner and
city authority assumed that the market, new land users would automatically build up better
urban area than old town, but in reality, those places have a poorer social standard and
landscape condition than the old core urban area. They should be better as they were a new
development area. The lack of mass investment to urban infrastructure plus fragile individual
housing developments cause a new poor looking area. So the landscape purpose of planer was
failed.
Five years in economy recession since 2009 put the revenue of almost cities of Vietnam
in the critical condition and HCMC is not an exception. There is a large number of private,
public projects that could not be implemented because of frozen real estate market. Not only
about finance but Vietnam also has a problem in efficient investments. In 2015 World
Economic Forum reported while Indonesia invested only 7% GDP but scored 4.5/7, Vietnam
spent 12% GDP for public infrastructure investment, scored 3.5/7. Currently, the HCMC has
spent a large amount of budget to develop the city such as to build a 30 ha Central Square at
Thu Thiem New Town, three circle ring roads, and metro lines. The city needs 9 million billion
Dong to implement projects in the Master Plan to 2025. But the city could afford 20%-25% of
this amount (Anh, 2014). The rest has to rely on international funds. This dependent situation
has happened for many years which makes the city very passive in public investment (D. T.
Huynh, 2012). But this source is not unlimited and very selective because the foreign investors
have different goals and thoughts. Budget constraint urges the HCMC authority to find a new
way to be independent from ODA (the International Organizations like World Bank, ADB or
European Bank) in developing the urban public infrastructure. The state encourages
partnership investment such as BOT, BT, and PPP to mobilize local capital. Up to 2014, there
are 200 PPP projects in the government’s ‘long list’ and 15 projects in its ‘short list’ waiting for
investment (EAIC, 2014).
Figure 2. Making Road Problems
While the city authority is finding a way to solve the financial problem (Figure 2), the
real estate recession provides an opportunity to bring developers and city authority closer by
applying Building and Transfer (BT) method. The state switches their un-done residential
project for the developer to get fund to do land clearance. There were a lot of local developers
who could not sell their residential project at a regular price. The pressure of banking rate up to
18-20% per year forces these developers to have to sell those apartments or lands at much
lower price than normal one. So those projects were sold as wholesale price for state for
relocation purpose. The relocated people were also happy to get the house immediately, instead
of waiting for many years like before. It speeds up the land acquisition process. In return, the
developers will get the land they want along with road project. Public Private Partnership is a
premise tool to rescue the financial difficulty of the local authority in the recession.
Nguyen Van Linh Road-Phu My Hung new town project was the first successful BT
corporation which makes city authority want to expand this model (Leaf, 2009). With relative
autonomous governance, HCMC has an opportunity to explore available potentials for HCMC
development (Tan, 2014). They seek investors to carry out infrastructure projects via
build-operate-transfer (BOT), build-transfer (BT) and public-private partnership (PPP) formats.
However, the city has found it hard to implement these investment formats as difficulties have
arisen over refunding for BOT investors because of a lack of available land for BT developers
and an unclear legal framework for PPP investment activity. What is the tool to cooperate State
and Private capital to finance infrastructure? Models from different countries will be useful for
Vietnam to solve presented problems in next section.
3
RELATED WORKS
There has been a previous study about Vietnamese cities especially land and infrastructure
development for the last decade. The recognition of property right and the interplays between
various stakeholders in land acquisition and transportation project were studied by a number of
researchers.
3.1
Theoretical:
In the world
In late 1980’s, when private sectors start to involve into public investment, cost sharing
became a term to financing of growth. New residents will pay for the cost of incremental
infrastructure, called current-sharing scheme (CS), the infrastructure cost is paid up-front.
Usually, real estate developers will do this. Dependent on off-site or on-site investment,
exactions will be taken in two forms: in-kind provision of infrastructure, and cash payments.
From CS scheme it developed into new kind of indolent impact-fee scheme (IF). In IF the
developer will pay full infrastructure cost at time of development. All the owners of urban land
at that date shared the investment cost and the interest payment at any time in the future by the
sale of infinite-maturity bonds. Brueckner (1997) analysis how urban develop in US cities
under CS and IF scheme infrastructure financing. He found that the choice between IF and CS
has no effect on resource allocation but IF scheme is more efficient to accommodate the
growing population.
Willoughby (2013) talked about a way financing road development with Public Private
Partnership. He emphasizes the importance of the private investment in reduction the local
authorities’ resource constraints through the case Seoul, Sao Paulo, Beijing. Beside the positive
things, it also has negative points that the government has to be careful. PPP projects have an
obliged long pregnancy periods, which is associated with the risk. Furthermore, it could be
easy to make serious mistakes in payment arrangements like Tran Santiago Bus Franchise
(Chile) or potential users in the early Santiago expressways. Or when the developers could not
maintain their profitable business like in this World Recession (2008-2015), they could not
keep reinvesting into the project until the end. This problem also happened in our case study 2,
where some developers withdraw their parts, which causes a delay of whole project.
In Asia,
Many countries in Asia such as Thailand, Indonesia, and China have invited foreign firms and
contractors from Japan, Korea, Hong Kong to invest in their infrastructure projects. Because
these foreign firms and contractors often possess advanced technologies and a vast amounts of
capital, they may be enticed by domestic politicians with the “red carpet”: financial
incentives allowing the creation of tax-free bonds for the infrastructure; or 15-year tax holidays
for investments in infrastructure. There are a number of noticeable issues happening in those
investments. The first is a very long time which is required to conduct negotiations and
renegotiations among the infrastructure companies, foreign and domestic banks, and politicians
of the host country like in China. This could increase the financial risk like in China (Chang,
2014). The second is a political risk because the decisions rest in the hands of politicians like at
Thailand and India. Therefore, nowadays, the developers and the local government want to
avoid risks, and secure each other in large-scale by project bond. Project bonds with bullish
event-risk provisions can provide bondholders with opportunities for wealth gains by
converting debt into equity upon the occurrence of some designated events (Chen, 2002). Chen
concludes that the problem is not only the capital market, but also the financial legal and
accounting systems. Those Asian countries need to build up a good invisible hand,
well-functioning and globally linked capital markets to mobilize capital to public investment
projects.
The experience of Chinese in mobilizing capital for public investment provides a useful
point for those countries. Wei (2012) evaluated the restructuring process for growth in
metropolitan China, and also observed that state institutions not only direct the land
development process, but also lead large-scale projects as developers themselves. Politics will
also a factor to boost urban changing. Sun Sheng Han (2010) used a small Chinese town to
withdraw an important conclusion that urban form does not necessarily reflect the economic
status of a city; and the city government just wants to attract foreign capital by the strategy
“literally to build the bird nest for attracting birds”. Another study of from Wang (2014) is
that Chinese government has preserved the state ownership of land, so that local state can
control market logic to achieve growth. Fiscal reform aims to rebalance the revenue sources
and expenditure responsibilities for both central and local governments and institutionalize the
central-to-local transfer payments. Above studies show that the market force, and here is
private developers, who could not have opportunities to do whatever they want if it is not
allowed by local government or without policy from central government (Zhang, 2014).
In Vietnam,
Thien Thu and Perera (2011b) present the dynamic of real estate market and private sector in
incomplete property rights environment like Vietnam. Emerging property rights and high
administrative lead to the extra cost for investment permits applications through different levels
from central to city and district. Surprisingly, urban planning departments were able to carry out
predetermined plans in lack of enforcement of the master plans. The real estate market lacks
proper level playing field between local and foreign, since foreign developers and buyers get
only 49-year land use rights in Vietnamese Land Law, 2013. But international and local
developers are still eager to compete for a project in attractive cities like Ha Noi or Ho Chi
Minh City. Indeed, findings on downtown of HCMC may well reflect the situation of the
entire city when the factors of privatization, developer’s interest and redevelopment of the core
urban are considered together, and the lack of policies; administrative procedures and norms
are obvious (D. Huynh, 2014; Nguyen, van der Krabben, & Samsura, 2014). In our study, we
revealed the active corporation in urban development between the state and private investors of
Vietnam.
In the North of Vietnam, land appropriation leads to violent conflicts between farmers and
local authorities. Han’s study show the coalition between developers and the State was very
tight at the early of urbanization in the Vietnam. The state totally supported developers in
getting agriculture land for new residential projects. The government favored developers but at
the expense of individual sitting tenants. They set the low value of land price. By compulsory
acquisition, the developers were helped to get cheap land and resell much higher price after
investing infrastructure. The high profit from land transaction for a decade was good lure to
attract FDI capital to local investment (VPBS, 2014). But most of the profit comes to
developers without reallocation to local or local municipality. In our presentation, it still shows
the association to private developers but in another level. They are still in coalition but no
longer partnership. Each side has own goals, so the agreement is achieved only when
objectives of both sides are matched.
Kim (2011) provided another story on the Vietnamese property rights reform after so
many social conflicts over the relocation of population for urban land redevelopment. The
price of compensation was close to the market price because the state let developer negotiate
with the resident. At the 2000-2009 period, because the land values were rising rapidly after
converting from agriculture land to urban land by master plan of government, developers were
willing to pay the exaction. The planning started working as market way, relying on negation.
By law, the state could not force landowner to sell their land. This improvement is positive to
society in private commercial project. But it also makes planning more difficult to do in land
assembly for public project because of costly land. In her conclusion, for the first time Kim
discuss collaboration of public finance and property rights in Vietnam.
3.2
Two practical review
Brazil
Now, we return to Brazil to see how Sao Paolo searched funding for the city redevelopment?
They had planned to make two new roads, close to the downtown of Sao Paolo. Where is
money to build two new commercial boulevards in the expensive center area? After doing site
clearance, the Sao Paolo authority announced a needing 40-mililon dollars to construct two
new commercial roads.
First of all, they issued rights to build license: a certificate. Total floor area is 300,000m2
for whole building along to the two roads.. Each certificate was $250 value and could make 1,
5 m2. This price was calculated from total cost: land compensation and construction cost of the
roads divided to total floor area from all planed buildings. The more developers bought, the
more floor areas they could build. The interest of this model is the initial selling license before
construction. The licenses were given out by auction. So the city would have more money than
basic estimation.
They only started construction when they sold out the license in a particular small
amount of road. So the money comes from selling license and the city does not have to borrow
money. The rights to build license was a kind of stock, and could be transferred to other
developers. Once again, this model only is applicable in the big cities in Brazil. This model
needs the specialist to calculate the finance. A constraint here is the “rights to build” stock after
transfer will increase a final total construction cost of building. So the selling price of property
will be high.
The most important thing is the price of floor area and it must be equal to the total
construction cost. The idea comes from the history of Brasil, which is urban sprawl. The urban
expands out of control so the city authority wants to concentrate on development in particular
area. This is a good method in term of economic; the landscape might have problems when
separating the high-rise building in the front of boulevard and low quality of resident behind.
However, issue depends on personal perspective view. In Brasil, they accepted this model. In
HCMC, there are foreign and local investors, with this model, both type of developers will
compete each other.
Dutch Model
Land assembly involves changes in land ownership through acquisition of necessary parcels of
land to make property development and infrastructure provision possible (Erik, 2008).
Acquiring land is a critical step in urban redevelopment, because it is usually out of control in
the processing time. Decision of getting land involves in interesting sitting tenants, the
developers and the government. In Western countries, the city municipality must discuss about
awareness of landowner in acquiring land before any further steps of planning project (Renard,
2009). Dutch planning system is a representative for adaptable market model with the fast
achieving objective and short-term result. Depending on the type of projects, they divide land
acquisition into two categories with two different approach: project-led and plan-led land
assembly (Erik, 2008). Both ways concern the recovery cost of public investment, which is so
costly for any municipality. The municipalities become land developers like a private real
estate enterprise in the real estate market. But they do not have different in-ready solutions out
of plan to deal with many dangers of market occurring during the public land development.
Lefcoe (1978) has alarmed it 40 years ago and it became true in 2009-2014 depression that
Dutch municipalities are in-debt disaster (Van der Krabben & Jacobs, 2013). As we seen
various risks are associated with land-based financing of urban infrastructure. Real estate
markets are highly cyclical.
4
THE DETAILS OF TWO CASE STUDIES
We selected two new boulevard projects in suburban. They are successful projects for
city development. Both roads connect the city to the neighborhood provinces and reduce the
pressure of traffic jams of old National highway.
1.1
The Nguyen Huu Tho Street
Figure 3 Nguyen Huu Tho Boulavard project
The section of road in case study starts from Phu My Hung in District 7 (Figure 3) to
Nguyen Van Tao road. The old name of the Nguyen Huu Tho Street project was the
North-South Road project. This is a new road connecting the city to the southern side of
HCMC, go to Hiep Phuoc Industrial (1997) then go to the sea at the Can Gio province to
develop those wet land areas. The agriculture is not productive because of being close to the
sea, where the water is salty. So authority decided to shift it to develop Industry, Service sector.
This road aims to modernize the area. The road is 7 km long, divided into 34 zones of land to
sell to private developers (Figure 4). The Nguyen Huu Tho street project was conducted from
2001-2007. Land acquisition was in 2003-2007 period. In 2008 the city authority did land
auction. The developers paid the land auction in one month after winning the project. There is
a full of residential, commercial, educational projects such as New Saigon, Kentons
Residences, Phú Hoàng Anh, Ton Duc Thang University, Lotte Mart.
Figure 4.
34 zones for sale allong the road.
This project started in 2001. In 2003, the central government allowed HCMC PC to own
lands along the highway. The city authority wants to capture the increasing value, different
land price from acquiring and selling price. The city acquired extra 70 m to both sites of the
road. Land acquisition affected 341 families. At the beginning of the project, the
Transportation Department was the developer. The Center of Land Bank Development did not
exist at that time. After Center of Land Back was established, they handled land acquisition
task from the Department of Transportation.
In 2008, the Centers finished land acquisition to have clear land for selling. Master plan
of whole project has a commercial and residential zone. The Land Development Center sold 24
zones by auction. The detail of allowed construction in some zones such as:
•
Zone 4 (2.2 ha): high-rise buildings: 1.5 ha, the land use coefficient is 5 for whole 2.2
ha.
•
Zone 6 (3.2 ha): high-rise building 1.3 ha, housing area 1.6. In this zone, the developer
had another clean land very close to the project. So developer moved old residents to
this new land. The developer bought this land for a housing project by himself before
the project. In this area, 2300 m2 is for park. Land use coefficient is 5 for whole 3.2 ha.
Population is 2,600 peoples; average each family has 4 people. Luxury apartment is
around $2,000/m2.
Development Center sold Phu Long at Zone 1; zone 4 and zone 6 to Tai Nguyen
Company. In 24 sold zones, all of them have started construction work. There are a few parcels
in large land left. Actually, all of them were allocated, and waiting for developers to start
projects. Phu Dien preserved 13 ha because the company will build a Water Treatment Factory
for city to get the land. They will have lands after finishing and transferring the factory project
to the city. Some of them are preserved for future connecting to a new town. Then those
parcels will be preserved for GS E&C, a Korean developer to connect with their Metrocity
project, a new town. The city also wants to use some parcels to negotiate with GS E&C to
make underground electric system. The urban project got the nod from the Prime Minister in
2008, but now the two sides are still negotiating about land rents and land use fees.
Number of interesting issues happened during the projects:
Finance: Capturing increasing value method reduced the budget for the city in making
infrastructure and generate budget for city. Total time to acquire whole agriculture area was 4
years (2003-2007). The city spent VND 105 billion to get lands (excluding the preserve land
for GS E&C, new town developer). But they got VND 1600 billion from land auction. This
was a big successful for trial method.
Land use rights: the sold areas will make the preserved area (attached with the new
town land) and increase the price in the future. Korean developer GS E&C could not own the
land forever like local developers. According to land law, foreigners could only use land in 50
years. In case of local developers, the residential areas are long-term use (like own land); the
other commercial areas are limited to 50 years. So the issue here is at the case of new town
with housing area; those houses could transfer to the buyers with long-term land use rights, and
the cost of transferring from 50 years lease to long term land use rights will be covered by the
developer. For the first time in Vietnam, officially, HCMC allow foreign developers to have
long-term land use rights to transfer (sell) house to local people (Luan, 2012).
Lesson learnt:
The land acquisition is relatively successful. What is the element to make project
successful? The success here is not only the profitable money from the land auction but also
the new method to mobilize capital of private sector in land acquisition, and to reduce the cost
compared with the old infrastructure project in the past. It raises budget for the city. In term of
planning, the city could create a new modern area at sub-urban area in short time.
Nha Be was a bit lucky. Most of compensation was conducted in 1999-2001 period, so
the price was low. Then selling land was in 2008-2009 when the real estate market was at peak.
The compensation is based on agriculture land. The price was reasonable at that time.
Interestingly, most of landowners were not local famers. They were speculators, and living at
the old city center. The distant owners from city center did not require social compensation but
profitable compensation. So the compensation work was even harder in pricing deal. The
conflict came from market price and state price in compensation (Thien Thu & Perera, 2011a).
Market price is the price people discuss on the market. They usually blame why is the state
barem not close to the price in the market? One of the explanations, the market price is
different in every location even in the same road. So it is very much dependent on the sense of
individual people. In Vietnam, there is no law court to give final decision what amount is the
right price. So to avoid the variable of the market, the complicated appraising, the state
negotiate compensation based on state price frame. The Government regulates the state price
framework. It calculates from the income of the user generated in their parcel. The Department
of Finance will make it every 5 years.
With local people, because there were only a few of famer families, the city easily
moved them to available land of developers (Figure 5). According to Officer from Nha Be
District, the local government established Career Training Center and provided free education
to the member of those families. Most of the old local residents became workers after that.
However, when relocating the farmers to new apartment, the apartment living style is quite
different from traditional house with land, so they need time to adapt.
Figure 5. Lands of developers to relocate old resident (lands in the blue polyline)
1.2
Pham Van Dong Boulavard
Source: HCMC Department of Planning and Architecture, 2010
Figure 6. Master Plan of Pham Van Dong Road
This highway connects Tan Son Nhat airport to industry zone in Binh Duong and Dong
Nai (figure 6). Pham Van Dong Boulevard was earlier called Tan Son Nhat-Binh Loi-outer belt
road because of the direction of Tan Son Nhat via Binh Loi Bridge linking the outer ring road
at Xuan Hiep crossroads (Thu Duc). GS Engineering & Construction (GS E&C) is going to
finish the whole road in the 2016. The ambition of city authority in this project is they want to
joint Airport to Eastern provinces, connect HCMC with satellite towns in the neighboring
provinces of Binh Duong and Dong Nai. The government of HCMC proposed this project
fifteen years ago but it has not completed so far.
Completing this road would reduce the traffic jams and upgrade the image of the city.
This route handles forty percent of vehicles entering HCMC from Binh Duong Province. The
initial goal of the city is that they want to have 6 lanes, 60m-wide road. However, this proposal
is not visible. The crowded existing population along the road prevents this ambition becoming
true, and large-scale demolishment will make a messy society. Finally, the city authority
decides to narrow some parts and alter the road to new position across the park.
Table 1. Main characteristics of the two projects
Name of project
Developers
Capital (USD)
Nguyen Huu Tho Boularvard
State+Private Companies
90 million (1999)
Pham Van Dong Boularvard
Private
340 million (2010)
Effected Household
Location
Time
Investment form
Methodology
Length (kilometres)
340
Suburban
1994-2008 (4 years)
BT
Selling Land
7km
3812
Suburban+Inner city
2008-2016 (8 years)
BT
Exchange Lands
13.7km
Source: Combination from different reports to HCMC PC, 2014
Table 1 shows the different from previous case studies. This project was more
complicated because land ownership is fragile and some parts of road go through different
districts of the city (Go Vap, Thu Duc, Tan Binh, Binh Thanh). So the number of involved
families is very large, 3854 households. Total length is 13.7 km within which 12.4 km was
done and 1.3 km still for final construction after changing plans. The city plans requires USD
340 million to do it but budget of city could afford.
In 1997 Vietnam’s Prime Minister approved Multi Usage Holdings Berhad (MUH), a
Malaysian company to invest $210 million to build this road by operate and transfer (BOT)
model. Unfortunately, the 1997-1998 financial crisis in East Asia forced the MUH to give up
the project. The city had to search for another developer to continue the plan. The project was
postponed until 2004 when GS E&C, a South Korean company (new name of LG E&C),
offered to construct the road via build and transfer (BT) model. They would be both developer
and contractor to make the road and ask for pieces of land to compensate the investment cost.
On a 5/12/2007 contract, HCMC’s People Committee authorized GS Engineering &
Construction to build this project. GS E&C agreed to spend USD 291,866,071 included USD
171.866.071 to build a whole road and bridges on road in four years, plus USD 120 million
for land acquisition. In return the city agreed to exchange five pieces of “clean” lands to the
Korean developer. In the contract, GS E&C build the road in 4 years based on clean land,
acquired by the city (Figure 7).
Figure 7. BT Contract between GS E&C and HCMC’s PC
Source: authors drew from project advertising on media
Immediately, GS E&C sent $120 million to the city to conduct land acquisition. After
that in 2008, the city delivered the GS (were both constructor and developer) four of the five
pieces of land, appraised around $150 million (value in 2007). These pieces of land locate in
different districts of the city. So the GS could use them to generate short-term capital to
conduct this long-term project.
Figure 8. Adjusted section: The big road (thick line) was changed into two smaller roads (two
smaller lines).
Source:http://www.govap.hochiminhcity.gov.vn/Hnh%20nh%20bn%20tin/2010-12/QUY%20HOACH%20VA%2
0PHAT%20TRIEN/THONG%20TIN%20QUY%20HOACH/3.jpg
In 2005 the city has to adjust 1.6 km of 13.5 km because of a long delay in clearing land. One
section connecting to airport is so crowded with resident; so acquiring land would be too costly.
Hence, the GS consult the city to replace planed 60 meter-wide road by another two 20
meter-wide roads (fig.7). One will widen an old existing road, and one will across the park to
reduce acquiring land. If the city implement old plan (1999), they need to move 392
households (259 families lost all land and 133 houses would be cut a part). The new plan
(2005) affected only 284 households that were (39 families moved out and 245 houses to be
cut apart). It saved the city nearly VND 3 thousand billion (the different of 11 thousand billion
for land acquisition with old plan and 8 thousand with new plan). But the city lost 1, 3 ha park
with a lot of big trees 50 years old (Figure 9). This change causes a problem for the
municipality latter on because it went out of approved plan from central government (Thanh,
2011).
Figure 9. Cutting down trees at Gia Dinh Park for road construction
Source: Dương Thanh (2015)
GS E&C broke ground in 2008. They also contributed USD 100,000 to build four
schools at the districts along the road (Sa, 2008). The project was supposed to be completed in
2012, but the 4 years of late land clearance has delayed the project (Figure 10). The city just
finished land acquisition in 2012 instead of 2008 like contract. Removing 3,812 household at
the same time were really tough work even the city had experience in Nhieu Loc-Thi Nghe
project (mostly poor people and without legal paper).
Figure 10. Project progress
Financial story: Working out of law
One social argument is value of the land is appraised much lower than its real market
value because it was not exchanged via auction process. HCMC is the most attractive place to
invest in Vietnam (ref..). But the city had issue in appraising land value. It seems that the city is
in the weak position in negotiating with developer. As we have said in previous parts, the city
and GS E&C invest in this project in BT form. The developer had 5 pieces of land in good
location but lack of infrastructure. So the potential increasing price is visible. The center area
currently, having been laid out and serviced with basic infrastructure during a period of less
rapid expansion, faces the less challenging problem of expanding capacity, rather than of
setting aside land to create whole new systems. In part because of this distinction between core
and peri-urban locations and growth, the urban core is able to generate income for the
developer through commercial development.
The problem here is a legal framework. In principle, the national law does not allow the
city could not do something like exchanging land. So the city went beyond the law during
working with the GS E&C. When the project is still in the initial phases of progress, GS E&C
has gotten the rights to more than one million square meters of land. In regulation, the
developers only have it after finishing project. Besides, the price of the land would be
calculated at the moment of issuing transferring land decision. However, the city transferred
the land use rights of Thao Dien 1,2 Lands in June and January 2008 and the price had been
still calculated at the moment of December 2005, at the bargaining period.
Table 2. Five Lands to exchange Pham Van Dong Road
Location
Thảo Điền 1 (Dist. 2)
Thảo Điền 2 (Dist. 2)
90A Lý Thường Kiệt
(Dist.10)
Thủ Thiêm (Dist. 2)
Long Bình (Dist. 9)
Total
Area
(m2)
Appraised in 2006
(USD)
Actual Value
in 2008 (USD)
27,018
17,208
6,807,732
6,316,035
24,300,000
15,300,000
17,940
40,222
917,913
1,020,301
37,030,088
100,000,000
78,545,000
228,698,855
51,600,000
125,000,000
108,000,000
324,200,000
Note: Value appraised in 2006, constract signed in 2007, delivered land in 2008
Similarly, GS received 90A Ly Thuong Kiet (District 10) land in January 2008, it was
considered USD 37 million, much under the value at that moment because it got price
appraised on January 2005. For reference, in July 2009, before the GS built XI Grand Court Ly
Thuong Kiet building, the Department of Construction had appraised this land about USD 51.6
million. The central government estimated the city losing nearly USD 15 million.
Next is the Long Binh Land in district 9. The city spent USD 80 million to acquire this
land but agreed to give GS E&C this land in 2008 equal to USD 78,5 million (in 50 years). The
price was calculated in 2006, while the Department of Finance recommended it should be 108
million in 2008. So in this piece the city lost another USD 29.5 million.
Furthermore, in the contract, the city could change hand to the GS only after three years
preserving (2008+3=2011) or not untill GS completed 70% percent of road project. The city
might lose even more, because the different value of land in 2011 and 2006 was very far.
Totally, the city lost USD 44.3 million according to the audit result from central government in
Hanoi (Vọng, 2011).
Besides above financial problems, the city authority also favored the developer by
allowing them to resell 90A Ly Thuong Kiet st land to other developers (Luan, 2010). The law
regulates that the developer could not resell the project without basic investment to earn profit
on land. Most important thing, the state did not allowed “exchange land for infrastructure
model” in since Land Law 2003. The city keep USD 120 million contributing of GS for city
revenue is also not allowed, to avoid out of control activities between developer and local
authority.
Lessons learnt
The city has solved the financial crisis from clean lands. The city is willing to exchange some
attractive lands in the city center to lure developer for some urban development purpose.
Developer will pay both road construction and compensation cost for site clearance, and then
they would get the land and pay the different after subtraction. There is a risk that the
developer meets the difficulty in the market that they could not sell the land and they could not
have money to keep investing road construction like the Malaysia Developer, and then must
resell project or resell the lands they exchanged instead of developing it like GS did. Therefore,
the time of project would extend to another years. It will increase the final price of property
when selling to market.
Lack of competition in land auction is an issue in this case. According to the land, all of
the state land needs to be sold by auction. So holding the land for exchange was out of
regulation from central government. Totally in this project, it needs USD 340 million, but the
city rebated GS company USD 7 million for construction cost, plus 5 parcels of land in
different location at district 2, district 9 and district 10 with (land use rights in 50 years). The
reader may question whether the developer will lose money when the project has delayed for
so many years? The city have problem with appraisal. The value of land has increasing year
after year. The city should calculate the future price of land instead of price at the moment
signing contract or initial negotiation. It leads to that city could lose more than USD 40 million
(ref.). For example, the land in Thu Thiem of GS (district 2) was calculated USD 100 million
in 2006 but in 2014 it was around USD 125 million 2. Moreover, the city allowed the developer
extra rights, rights to sell instead of only rights to use. The developer could think about
speculating land, more profitable then investment action.
2
Authors estimated based on advertising price per square meter of near-by project
5
DISCUSSION:
VIETNAM
REFORMING
INFRASTRUCTURE
INVESTMENT
OF
Noticeably, this is not the state policy, just a creative solution from local authority. We question
risk of such model. This is not an excellent solution for public investment because of its
limitations we presented in lesson-learnt part. The state must do this public infrastructure.
Actually, the land for infrastructure method is a way of selling land for infrastructure. It is not a
principle of socialist ideology. Promotion for investment by reducing business tax is a better
way. Vietnam had several projects in “land for infrastructure” but failed in term of policy. For
Pham Van Dong road, the state spent a large amount in land acquisition. The limitations during
the implementing at this kind of projects display the limitation in the capacity of planners and
city authority. Besides the transportation infrastructure, there are still have electronic, water,
environmental, energy, and information systems that need a very large public investment in a
master plan. So errors in making urban planning lead to errors in realizing those plans. This is
one of reason of stalled developments (Quy Hoạch Treo) and out-of-plan developments (Xây
Dựng Không Phép). That is why the local government need private sector funding in public
investment to correct their mistake in making planning. Too much detailed planning in the past
is not suitable for new context of market economy because of a lack of participant of peoples,
developers. Let the developer and resident decide in detail what they want in a detailed city
design. The state plan is just general guidelines and take care of the public benefit of the
project. The urban economic should be an important reference in new urban planning in the
future.
The second case study, Pham Van Dong road, the way exchange between different
location lands to the developer opens up more opportunities for the developers to mobilize
capital to implement project. We found that the city compensates for the developers not only
the lands along the BT roads but also extra golden land in core urban area. It seems the city got
less than what they deserved. The city helped the developer circle capital to generate profit to
keep financing infrastructure project and state revenue.
Getting the land in advance could reduce the financial difficulty for developer with
long-time building the road. So the developer no longer concerns about a long delay in
highway’s land clearance. Even though the Pham Van Dong project exchanged land for the
highway construction, it does not conform the core principle of land-based financing in which
it lacks any direct land value appreciation from its respective infrastructure improvements (D.
Huynh & Ngo, 2010) .
For the first time, there are three groups incorporating closely: Finding funding
(Department of Finance), site survey (Department of Architecture and Planning) and land sale
(Department of Natural Resource and Environmental). They work together to find a solution
on fund raising from the public land and agriculture land. In the second case, USD 291,8
million for acquiring land and road construction will be equal to how many lands to sell? There
are issues appearing here.
Package deal: Actually, the GS used Pham Van Dong road to negotiate with HCMC’s
PC in land price of the Metro city project (349 ha- USD 150 million capital) in the Nguyen
Huu Tho Case Study and GS Cu Chi golf course project (200ha-USD 42 million capital).
Three projects are in a package deal (Trần, 2011). So the conditions in implementing the Pham
Van Dong road might be one of the strategies to have an extra deal in land use rights fee with
the city authority for their two other projects. This is one of the challenging games between
developers and state. The property rights of Vietnam have been improved day by day. The
benefit of the developers, the state and the people are more just.
Financial issue: The GS paid USD 291.8 million to build the road. The city needs to
exchange five lands in the core urban area to have USD 228.6 million to compensate for GS.
So the city must have an extra land equal to USD 63.2 million to pay for GS. It is difficult to
appraise how much land value before and after the investment. In 2014, HCMC Institute of
Planning completed 1/2000 scale master plan (detail construction) so they could estimate land
value based on current and future use. It is true that the project needs co-operation in different
departments to have enough information of the land value. Another constraint here is the USD
120 million for land acquisition from GS went to general city revenue instead of preserving for
the project use because the city have more urgent needs to use it more than this project, which
would be done in another few years.
The city is doing trial land-based financing method in this case because this way has not
approved yet from the central government. There is only an exception for testing in big cities
like HCMC or Hanoi that municipality could keep and explore their own lands to trade
infrastructure.
Vietnam is building up a legal framework in PPP for public investment. Even, the past
BT, BOT, PPP projects faced difficulties in land acquisition, complete investment law,
financing mobilization, and transparent competition (Anh, 2012), the non-state sectors are still
eager to jump to this new kind of real estate investment. If the trial of HCMC is successful, this
model could open to apply for other Vietnamese cities when central government legalization is
out of law activities (Anh, 2014). The problems happening during the implementing in HCMC
will be a good experience to build up a new rule of land development to correct the errors
when applying land based financing model widely. The government’s intention in
promulgating new land regulation and decrees was to let market forces determining allocation
of land among developers.
Negotiations have become more transparent; and the government has become more
involved in the operational stages. However, the two cases demonstrate clearly that the
facilitation of major projects, especially those involving state local investment, reverted to
compensation set by the market. One reason is the commercial interest of the developer allied
to the political interest of the government, for whom government rates potentially offer a
profitable outlet in negotiations with city authority. The latter are often the winner in land
redevelopment projects and are often portrayed as the ‘smart guys’ to be relocated much better
house or good land.
6
CONCLUSIONS AND FURTHER WORK
We found that in finding capital for road construction, the city use different kind of lands to
negotiate, and sign contract with the developers. That is a crucial issue for the
State budget revenue (Figure 2). The city does not consider thosecost-benefit factors
systematically when making PPP infrastructure projects. Both of the developers and city
authority have problems in price negotiation.
Urban planning in Vietnam is still following top-down planning but central government
in Ha Noi leave room for local government action. Urban economic becomes objectives for
planning design. Private capital is an important influence on decision-making process due to a
lack of money for public investment from local government. Two case studies demonstrated a
trial way of making urban infrastructure from land, associated with the market. The land for
infrastructure method reduced state investment cost, and makes better urban landscape because
of synchrony new development.
This study could be more complete if we could have an opportunity to discuss with the
developers to understand why they want to join in this partnership, their strategy in negotiation
and difficulties during the corporation. Further studies should discuss the constraint of term
“land use rights and housing ownership” because in Vietnam people do not have right to own
land, but they only own the property on land. This concept makes the applying advance land
management and urban planning principle of the West to Vietnam impossible. Lastly, BT, PPP
will work only at the attractive real estate market. If considering applying for Vietnamese cities,
we have to answer if the real estate market is attractive enough. The real estate market “health”
is the issue (Medda, 2012). We do not aim to identify gainers and losers in this study, but
present a reality in finance of Vietnam infrastructure development.
5
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