A Vietnamese passenger rides an old train reserved for traders and their goods between Hanoi and Along. Photo: AFP

Vietnam is simultaneously constructing ambitious urban rail systems in Hanoi and Ho Chi Minh City, the country’s two largest municipalities, to pave the way for future growth and alleviate growing bottlenecks.

Foreign investment, international contractors and official development assistance (ODA) are all essential to drive the capital-intensive projects, opening the way for competition between China, Japan and others to steer Vietnam’s infrastructure development

With gross domestic product (GDP) growth hitting 7% last year and now the world’s 14th largest nation with a population of over 90 million, infrastructure has become an essential socioeconomic focus for the Vietnamese government as it looks to sustain fast growth.

Urban infrastructure primacy is enshrined in law, most recently updated by Prime Ministerial Decisions issued in 2013 and 2016 which give institutional directives for massive urban rail projects in Ho Chi Minh City and Hanoi, respectively.

Rapid urbanization has strained existing infrastructure, creating now world-famous traffic jams and increasingly severe air pollution in motorbike-dominant cities. Car ownership has recently skyrocketed, further compounding daily gridlock on narrow urban streets.

Vietnamese sources report that 8,000 motorbikes and 750 cars are added daily to the nation’s roads, underscoring the need for effective public transit and an overhaul of existing infrastructure. Congestion has become so bad that reports have surfaced that the municipality of Hanoi aims to ban motorbikes by 2030.

A motorcycle clogged Ho Chi Minh City traffic jam on a rainy day. Photo: iStock/Getty Images

Lacking local capacity, Vietnamese authorities are turning to the public-private-partnership (PPP) model for infrastructure development, which relies on both local and foreign capital as rising incomes result in fewer international aid dollars and the clout of state-owned enterprises wanes.

According to the Asia Development Bank, a multilateral lender, infrastructure needs in Southeast Asia will total US$23.6 trillion through 2030. China and Japan, the world’s second and third largest economies respectively, are already embroiled in a rivalry for regional economic dominance, with both pursuing extensive investment programs across Asia.

The so-called Ho Chi Minh City Urban Rail Project is now building one of the most expensive metros in the world, with six lines planned at a cost of around US$20.4 billion. The project is being funded by a diverse set of investors, though Japanese investment and ODA represent the bulk of the financing.

Japanese entities are covering investment and providing construction for Lines 1 and 3, with Lines 2 and 5 are being funded by the Asian Development Bank (of which Japan holds the largest proportion of shares), the European Investment Bank and the German Bank for Reconstruction. The Spanish government is also contributing funding to Ho Chi Minh City’s Line 5.

The ambitious project, however, has encountered numerous problems. Lines currently under construction are racked with chronic funding shortages and delays. Lines 4 and 6 in particular still have not had their budgetary proposals or funding requirements addressed.

Vietnam’s Prime Minister Nguyen Xuan Phuc (2nd L) and Japanese Prime Minister Shinzo Abe bow in front of their national flags in Tokyo on May 28, 2016. Photo: AFP/Koji Sasahara

The Ho Chi Minh City’s People’s Committee has taken initiative by reaching out to foreign investors as a provincial-level governmental authority, bypassing national authorities. Japan has maintained a committed interest in the project, with State Minister for Foreign Affairs Nobuo Kishi recently emphasizing the need for investment on a local level.

Japanese investors from various sectors have had a presence in the city for years and continue to swell in numbers. As such, Ho Chi Minh City has a pre-existing relationship with influential Japanese financial players, while Hanoi has no such existing local economic framework. Lines 1 and 2, despite the setbacks, are still scheduled to open in 2020-2021.

The Hanoi Urban Rail Project, planned to have nine lines at an estimated total investment capital of US$31.8 billion to be spent through 2050, is primarily funded and constructed by Chinese outfits. China recently pledged broadly to invest US$11 billion in Vietnamese infrastructure, though local Vietnamese firm Vingroup, the first Vietnamese firm to invest, is also contributing capital.

Hanoi’s Line 1 is being funded by Japanese ODA while Line 3 is receiving finance from the French government, the ADB and the European Investment Bank.

Vietnamese state media reports that the contractor for much of the project, China Railway Group Ltd, still owes US$25 million to Vietnamese subcontractors, the latest blow in confidence in already heavily-criticized Chinese contributions to the project.

Vietnamese and Chinese communist youths wave flags to welcome Chinese President Xi Jinping to Hanoi on November 6, 2015. Photo: AFP/Na Son Nguyen 

With the Chinese rail industry already plagued by concerns of safety and unreliability, unflattering images of wavy Chinese-constructed rail lines laid in Hanoi have been widely disseminated over social media. Safety concerns have been exacerbated by multiple accidents from falling debris, some resulting in property damage, deaths of a construction worker and passer-by, as well as several building-related injuries.

Dinh La Thang, Vietnam’s Minister of Transportation, said in 2015 that he wished he could replace the Chinese contractors but is unable to do so because of an agreement signed way back in 2008, and that he is often chided not to rely on Chinese ODA to complete the urban rail project. While the national-level Ministry of Transportation faces various institutional hurdles, local authorities are again proving more versatile.

This year, the Vietnam Tokyo Metro Company was founded to coordinate the tangled web of urban rail projects in the Vietnamese capital. The Communist Party’s Hanoi People’s Committee has meanwhile begun making overtures to Japanese financiers, similar to the moves made by Ho Chi Minh City provincial-level authorities.

Japan has lost out to China in various economic spheres in Southeast Asia in recent years, despite its long head-start in investing in the region. The two Asian giants are now competing for primacy in developing Southeast Asian regional “connectivity”, a competition that could be decided based on the perceived quality and reliability of each country’s finished work.

Both China and Japan regard such investment as a net benefit to their respective home economies and an opportunity to gain and sustain political influence in the region. While Japanese contributions gain in popularity and Chinese contractors are increasingly viewed with skepticism, final Vietnamese opinions will be made when the various lines begin operations next year.

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