Seaport Delay Highlights Shaky Vietnam Economy

By Mike Ives 25 September 2012

HANOI, Vietnam—All that remains of Vietnam’s plan to build a major deep-water port are 114 exposed pilings trailing into the South China Sea and a barge full of rusty machinery.

Foreign investors stayed away from the US $3.6 billion project and the indebted state-owned company overseeing it bungled the job. The government accused the company of “financial incompetence” and suspended the project this month. The prospects for ever reviving it are dim.

The abandoned port in southern Vietnam stands as a symbol of the inefficiency of the country’s Communist rulers and the need to reform a massive web of state-owned enterprises weighing down a once-booming economy.

Critics say it also shows how provincial governments and state-owned companies are allowed to pursue expensive, misguided and often corruption-laced infrastructure projects that result in riches for the few, but not economic growth that would benefit the country of 87 million people.

The government is asking foreign and domestic investors to bankroll its flagship Van Phong port now that the Vietnam National Shipping Lines, or Vinalines, is out of the picture. But analysts say that’s unlikely because the project, which was slated to have 37 wharves, isn’t near any important manufacturing bases in the region and was impractical from the start.

A better option, they said, would be developing road and rail around ports in greater Ho Chi Minh City and also developing a deep-water port near the northern city of Hai Phong. A proposed large port near Hai Phong has spurred controversy lately over escalating costs and potential dredging problems.

Vu Tu Thanh, Vietnam representative for the Washington-based US-Asean Business Council, said Vietnam has lost the reputation it enjoyed a few years ago for being among the most attractive destinations for investment in Asia. Would-be investors, he said, want the government to push through large-scale economic reforms that will weed out the most inefficient state businesses.

“There’s nothing inherently wrong about having state-owned enterprises involved in big, capital-intensive projects like ports,” said Thanh, whose advocacy group represents American companies in Southeast Asia. “The problem is: Do you have the right SOE there?”

“The typical answer in Vietnam is: You don’t.”

Vietnam has a coastline of 3,200 kilometers—longer than American’s west coast—and a prime location on the South China Sea, which includes some of the world’s biggest shipping channels. But its lack of connected infrastructure puts its ports at a competitive disadvantage compared with long-established global trade hubs such as Singapore, Shanghai and Hong Kong.

As a result, manufacturers here are often forced to first send containers to those larger ports from where they are then shipped to Europe and North America.

Businessmen and observers say the port sector is a good example of how political patronage and entrenched corruption are undermining the country’s development.

Vietnam has about three dozen seaports and several high-quality terminals that welcome international shipping lines, but no major port with swift connections to efficient roads and rail.

“All the coastal provinces want a deep-sea port,” said Nguyen Xuan Thanh, director of public policy programs at the U.S.-funded Fulbright Economics Teaching Program in Ho Chi Minh City. “The central government needs political support from these provinces, so they don’t say no to these proposals.”

“Everybody wants a piece of the action,” he said.

In 2010, state-owned ship builder Vinashin came close to collapse with debts of $4.5 billion, leading to a sovereign credit rating downgrade and sounding the alarm on a major pressure point in Vietnam’s economy. Last month, police arrested two former senior executives at one of the country’s largest banks. The banking industry has run up massive bad debts in recent years, many of them made to state-owned companies.

Vinalines has also come under scrutiny. In March, police arrested several of its executives and accused them of mismanagement in the purchase of a floating dock that resulted in losses of about $5 million. In May, government inspectors issued a report saying the company had five defaulted loans worth $1.1 billion and had bought 73 foreign vessels, many of which had run up millions of dollars in losses. Earlier this month, Vinalines’ former head, Duong Chi Dung, was arrested in a neighboring country after an international manhunt.

The problems at the banks and the state-owned enterprises have played a major role in Vietnam’s economy slowing from seven percent growth in 2010 to just over 4 percent in the first half of this year. Foreign investment is also down amid inflation and the inability of the country to build the roads, electrical grid and bridges businesses need to prosper.

“It’s very important that the government continues to put infrastructure very high on the agenda,” said Peter Smidt-Nielsen, general director for Vietnam and Cambodia at global shipping company Maersk Line.

“If you have growing trade and you don’t do anything about the infrastructure, you’ll have more and more delays and congestion, and that all leads to added costs for exporters and importers,” he said.