'Land for infrastructure' in Ho Chi Minh City: land ...

International Planning Studies

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‘Land for infrastructure’ in Ho Chi Minh City: landbased financing of transportation improvement Thanh Bao Nguyen, Erwin van der Krabben, Clément Musil & Duc Anh Le To cite this article: Thanh Bao Nguyen, Erwin van der Krabben, Clément Musil & Duc Anh Le (2018): ‘Land for infrastructure’ in Ho Chi Minh City: land-based financing of transportation improvement, International Planning Studies, DOI: 10.1080/13563475.2018.1477581 To link to this article: https://doi.org/10.1080/13563475.2018.1477581

Published online: 28 May 2018.

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INTERNATIONAL PLANNING STUDIES https://doi.org/10.1080/13563475.2018.1477581

‘Land for infrastructure’ in Ho Chi Minh City: land-based financing of transportation improvement Thanh Bao Nguyen

a

, Erwin van der Krabben

b,c

, Clément Musil

d

and Duc Anh Lee

a

Department of Civil Engineering, Ho Chi Minh City Open University, Ho Chi Minh City, Vietnam; bDepartment of Human Geography, Planning and the Environment, Institute for Management Research, Radboud University, Nijmegen, Netherlands; cResearch Institute for the Built Environment, University of Ulster, Belfast, Northern Ireland; d UMR AUSser (Joint Research Unit “Architecture, Urbanism, Society: Knowledge, Education, Research”) – Paris Belleville Architecture School, Paris, France; eHo Chi Minh City College of Construction, Ho Chi Minh City, Vietnam ABSTRACT

KEYWORDS

This paper explores how land-based financing mechanisms are currently used in Ho Chi Minh City as a public-private funding strategy. The Landfor-Infrastructure (LFI) mechanism appears as a solution to produce infrastructures. We found that the implementation of the LFI mechanism remains difficult, but eventually can lead to success. By ‘trial-errortranscend,’ the City managed to build two essential roads while the developers received attractive investment opportunities in urban development. This mechanism cannot, however, be seen as a panacea for the local authorities due to constraints to replicate it and potential undesired ‘side effects.’

Land value capture mechanism; urban transport; local finance; urbanization

1. Introduction For developing countries, the development of new infrastructure is a significant concern, as transportation, telecommunication, sanitation, and energy are essential for national economic development. Usually, the government assumes responsibility for financing and building infrastructure (Kingombe 2011), but still insufficient public finance often appears a main bottleneck in infrastructure provision. For a developing city like Ho Chi Minh City (HCMC), Vietnam, finding extra financial resources is crucial for speeding up transport infrastructure provision. The city faces a massive demand for new infrastructure, while traditional public funding such as state transfer and Official Development Assistance (ODA), provided by international donors, is limited. Like many other developing countries, Vietnam has initiated public-private partnerships to attract additional private sector funding since the introduction of the Doi Moi policies1 (Musil and Perset 2015). Local authorities particularly started to experiment Public Private Partnership (PPP) models for infrastructure provision. HCMC tested two forms of partnership: the internationally well-known Built Operate Transfer (BOT) model and the Build-Transfer (BT) model, which appeared as a particular local practice.2 This latter partnership form is often used to fund road construction through a land-based financing approach known as the Land-for-Infrastructure (LFI) mechanism (Đổi đất lấy hạ tầng in Vietnamese). When the LFI mechanism is applied, as it follows the components of the BT model, a private, semi-public or public company builds an infrastructure facility (i.e. road, highway, bridge). In exchange for the construction of this facility, the authorities provide a large tract of land (adjoining the new infrastructure or somewhere else in the city), convert the use of it to residential or CONTACT Thanh Bao Nguyen [email protected]; [email protected] City Open University, 35-37 Ho Hao Hon st, District 1, Ho Chi Minh City, Vietnam © 2018 Informa UK Limited, trading as Taylor & Francis Group

Department of Civil Engineering, Ho Chi Minh

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commercial and hand it over to the infrastructure investor who can then develop and sell this area for profit (Labbé and Musil 2014). The success of this mechanism is based on the mutual benefits that both authorities and private investors derive from it: the authorities manage to develop economic infrastructures without investing much public funds while the investors generate profits from the redevelopment and commercialization of acquired land. The LFI method used in Vietnam can be regarded a typical value-capturing mechanism and relates to an emerging trend to use land resources to finance cities (Alterman 2013; Suzuki et al. 2015). The infrastructure project will add value to land; this plus value is mobilized via the BT model and partially used to finance the infrastructure construction costs. In the international value-capturing literature, such a BT model is also referred to as a voluntary value capture model (Alterman 2011; Alexander 2012). This study critically discusses implementing such land value-capturing mechanisms, via the LFI model, in HCMC, to mobilize non-state funding for infrastructure construction in this fast-growing city and examines the pros and cons of land value-capturing mechanisms in what perhaps can be called a (unintended) ‘trial and error’ way of working. It aims to address the issue to what extent the LFI mechanism offers sustainable finance for infrastructure provision in HCMC, Vietnam. The paper builds on earlier work on the use of Land-for-Infrastructure financing in Vietnam by Labbé and Musil (2014) and critically assesses the use of the LFI model in two cases of road construction in HCMC. The two cases, respectively the Nguyen Huu Tho road and the Pham Van Dong road, reflect how HCMC tests and implements diverse land value capture mechanisms. The paper has been organized into seven sections. Section 2 provides an overview of the relevant infrastructure and transportation policies in Vietnam. Section 3 discusses relevant international value-capturing literature. Section 4 positions the use of the LFI mechanism in HCMC in Vietnam’s institutional context, provides an overview of experiences with LFI and BT models in HCMC since the 1990s. The case studies are analyzed in section 5, while a discussion of the case studies, in the wider context of infrastructure provision in Vietnam, takes place in section 6. Finally, section 7 delivers some thoughts and conclusions.

2. Vietnam: infrastructure and transport policy While many countries have embraced PPP models to attract private finance for infrastructure provision, many studies also have pointed to the risks and potential problems for governments in working with private finance (Percoco 2014; Trebilcock and Rosenstock 2015; Reyes-Tagle and Garbacik 2016; Babatunde and Perera 2017; Durdyev and Ismail 2017; Osei-Kyei and Chan 2017). Obviously, one of the issues is that private investors require a return on their investments. The conditions to these returns on investments may be critical to the success of using a PPP model. During the preDoi Moi period, transport infrastructures in Vietnam were essentially funded by the State budget by following a central plan based economy process, like it was common practice in other Socialist countries. With the adoption of the economic reforms and the lifting of the U.S. trade embargo on Vietnam, ODA resumed to flow towards Vietnam in the early 1990s. The central government started to use international financial aid to rehabilitate and build new transport facilities. State bodies in charge of public works then smoothly opened the transport infrastructure market to the private sector (Nhi 2014). This latter point was notably confirmed by the adoption in 1997 of a first Decree (77/1997/NĐ-CP) that introduced PPP. Furthermore, with the privatization process of public companies launched in the 1990s, and known as equitisation (Gainsborough 2002), private or semi-private firms started to contribute private capital to public investments. Even with the consolidation of the PPP legal framework and the enforcement of the regulation regarding BOT,3 the authorities continued in parallel to provide arrangements in kind (e.g. with land resources). It is in this particular context that the ‘Land for Infrastructure’ model appears. The arrangement allowed the authority to transfer the valuable resource to an investor to incite its investment in public facilities. Investors showed interest in the alternative to BOT because uncertainty remained concerning the returns

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that they can generate with for instance a toll road. Though until 2012 between 45 and 80 PPP projects have been undertaken nationwide, only a dozen of these involve foreign investors (AFD 2012). According to the current National Social Economic Development Plan (2016–2020), the central government estimates to invest USD 45 billion to develop transport infrastructure at the national scale. However, current estimates project less than half of that amount to be available (VietnamNews 2015). The government can therefore not only rely on ODA. To fill the financing gap, it must continue to seek private investors through specific partnerships. To promote major mega infrastructures, a list of priority projects was approved in 2014 and calls for foreign direct investments (decision 631/QD-TTg). Locally, HCMC relies on ODA to finance transport mega-projects such as metro lines or bus rapid transit corridors (Musil and Simon 2014) but also uses public budget (provided by state transfer and local taxes) to invest in the construction and the maintenance of other transport facilities. Since 2009 Vietnam has been indirectly affected by the consequences of the American subprime crisis. The property market was then frozen, and many companies got into trouble (Kien, Zhang, and Zheng 2015). This situation had consequences for local budgets because the provinces’ income from land revenues stagnated. HCMC was not an exception to this. The reduced revenues disturb indirectly the local investment process into the transport sector. To diversify financing sources and ensure capital flows, the HCMC’s Department for Plan and Investment (DPI) launched an official ‘call for private investors’ in 2012 to invest into crucial projects; 2/3 of them transportation projects. The local needs in transport infrastructure are since critical. According to the HCMC transport plan adjusted in 2013 (Decision 568/QD-TTg, 2013), until 2020 the city expects to invest USD 35 billion in the construction of local infrastructures.

3. Land value capture international: literature review With the LFI model, HCMC aims to generate infrastructure funding by the privatization of land value. International organizations (and among them international donors) have encouraged Land Value Capture (LVC) as a funding source to support local improvements in urban infrastructure and services (Walters 2012). Internationally, a variety of ways exists to implement value capture and also a variety of ways to divide them into different groups. There is a considerable international literature on value capturing (Church 1990; Bowers 1992; Gihring 2001; Van der Krabben and Needham 2008; Gielen 2011). Alexander distinguishes three ways of implementing value capture (Alexander 2012): . . .

Compulsory capture, using mandated taxes or charges; Land endowment, realizing the added value by selling property rights; Voluntary capture, involving the private sector in realizing the added value.

Table 1 presents an overview of value capturing tools belonging to these three groups. For local, regional or national governments to make use of these tools, some institutional design must legitimate this, varying from planning law and tax regulation to more informally agreed upon negotiations between the public authority and private developer involved. For that reason, a value capture tool successfully used in one country cannot just be ‘copied’ into another jurisdiction without the proper institutional design. Probably, compulsory capture is most efficient in creaming off land or property value for funding public investments. However, there are some reasons to consider alternative mechanisms. First, the static character of such compulsory mechanisms and its inability to deal with unexpected changes in value to be captured (the statutory position of such devices may block quick adjustments to a changing reality). Moreover, second, the fact that a precise tool may prevent ‘smart’ solutions to be developed in negotiations between the public authority and the private developer that would benefit both sides.

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Table 1. Institutional design forms for value capture. Basic approach

Institutional design form (Existing agent) (New agent)

Compulsory capture General Property tax Local government Betterment fees Local government Bounded Impact fees Local government Special district (e.g. mass-transit, metro-parks)

Voluntary capture Land endowment

Benefit assessment district (BAD) (e.g. for transit-oriented development area) Business improvement district (BID) (e.g. for downtown/neighbourhood centre) Tax increment financing (TIF) Local government Public-private partnership (PPP) PPP – State-owned land and development rights

Value capture mechanism Variable rate on land to capture value increment attributable to public investments Proportion of land value increment Implicitly related to land value increment Tax on beneficiaries related to value increment and levy on local governments Tax on beneficiaries related to value increment Tax on beneficiaries related to value increment Earmark value increment-related increment of property tax in proclaimed area to fund public investments Land endowment – see below. Public contribution: compulsory capture mechanisms (above), regulatory incentives: zoning Share of profit from land development and realization of conferred development rights

Source: Alexander (2012, 168).

There are some countries with a long tradition in compulsory land value capture, like the United Kingdom, Germany, Nordic countries and the Netherlands. Their mechanisms and legislation stem from continuous adjustments and improvements of earlier systems of value capture responding to changing planning ambitions, new attitudes to PPP or a changing political context. For developing countries, lacking such a tradition and where LVC has not yet been institutionalized, it can be very challenging to introduce adequate value capture mechanisms. Land Endowment applies to value capture on state-owned land and can be based on a public land development model (Van der Krabben and Jacobs 2013). By assigning development rights to stateowned land, plus value will be created enabling the local authorities to sell development land against higher market value. The income from selling the land can then be used to cover the costs of public works. In countries like China and Vietnam, where all land is state-owned, land endowment is the main value capture mechanism. While many studies have reviewed China’s land-based financing system (Chang 2014; Hu and Qian 2017; Sun et al. 2017), research into Vietnam’s land-based financing remains limited. A Public-Private Partnership (PPP) forms the primary mechanism for voluntary value capture, usually formalized in a case-specific tailor-made institutional arrangement (Alexander 2012). Many countries in Asia such as Thailand, Indonesia, India, and Cambodia have invited foreign firms and contractors, additionally to ODA, to invest via PPPs in their infrastructure projects, in line with increasing international attention for PPPs in funding and constructing major infrastructure projects (ADB 2008). A standard PPP type used for this is the BOT (Built Operate Transfer) model, which we do not consider a land value capture tool (because it does not involve the capitalization of developer rights over land). Less familiar is the BT model (Built – Transfer), as it is currently used in Vietnam, which can be considered a land value capture tool. BT appears as an exciting leverage tool to fund urban infrastructure while its implementation remains complex in practice. Land for Infrastructure as a specification of the BT model can be considered a form of voluntary value capture. As compensation for constructing the infrastructure, investors receive attractive rights to develop the land. Because these private and semi-public firms and contractors, whether they are domestic or foreign, often have capital available potentially, they may be enticed by local political leaders with the ‘red carpet.’ Notwithstanding the scale and increasing significance of the BT phenomenon in PPP, there is relatively limited conceptualization and in-depth empirical

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investigation (Roehrich, Lewis, and George 2014). In the remaining of the paper, we mostly discuss the pros and cons of both voluntary value capture and land endowment mechanisms as applied in HCMC.

4. Land value capture mechanisms for developing transport infrastructures in HCMC: institutional evolution 4.1. Data collection This study aggregates data collected in the field from December 2014 to July 2015. Firstly, initial data were collected through a workshop organized by PADDI in cooperation with DONRE (Dept. of Natural Resources and Environment) and addressed to officials working in HCMC’s technical departments involved with land issues (section 4).4 We participated in the workshop. Data concerning the use of land to finance facilities in general and the two case studies that are discussed in the paper, in particular, was presented and discussed in the workshop. The description of the cases here is based on our interpretations of these presentations and discussions we had with participants. Next, data were enriched through secondary sources such as statistical publications, local press articles, and unpublished documents (section 5). To crosscheck and verify these data and settle the narrative of the cases, key persons were interviewed: four city officers linked to the study cases (from the Department of Natural Resources and Environment, Land Fund Development Center, Department of Transportation and the Department of Planning and Architecture), two local land experts, three local property developers and one international developer. 4.2. PPP for infrastructure finance in Vietnam To provide a context for the case studies in section 5, this section briefly addresses the recent interlaced history of the Land for Infrastructure model and Public-Private Partnerships used to fund urban infrastructures in Vietnam. Since the adoption of Doi Moi (Reform) and particularly the first law for calling foreign investment to date four periods are identified. 4.2.1. 1989–1997: arrangements between private and public sector in a ‘grey zone.’ To attract additional private funding for infrastructure investments, Vietnam started in the 1990s to explore public-private partnerships. Vung Tau Province was the first to make use of a ‘land deal’ as part of a PPP (Labbé and Musil 2014). HCMC also explored a specific arrangement to develop an industrial zone and a section of the Ring Road N°2 in the south of the city. For this purpose, the city established in 1993 a joint-venture, the Phu My Hung Corporation, as a collaboration of the Tan Thuan Industrial Promotion Company (municipal economic development agency) and the Central Trading & Development Group, headquartered in Taiwan. In this corporation, the city contributes 30% of the capital needed for the infrastructure project by supplying land. The public-private consortium developed an 18 km road infrastructure, the Nguyen Van Linh axis, connecting the National Road No1 to the Tan Thuan Industrial Zone, in the South of the city. In exchange, the Corporation received in 1994 ownership rights over 600 hectares of cleared land – today developed and known as Phu My Hung – that is a part of the Saigon South new urban area plan (2,200 hectares). This first act can be seen as the precursor project that led the government to amend the Land Law in 1998 to formally introduce and regulate the LFI exchange model. 4.2.2. 1998–2003: state-led development: first steps to sort out the land for infrastructure model The 1998 Land Law amendment paved the way to use the LFI model and the privatisation of stateowned companies and gave new opportunities to local government to fund infrastructure projects. HCMC launched a new initiative, with the first phase of the improvement of the provincial Road 25B

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(today known as part of Mai Chi Tho, plus Dong Van Cong and Nguyen Thi Dinh roads), District 2, East of the city. This project is a pure demonstration of the ‘trial and error’ approach by the municipality regarding new partnership models. The HCMC Voluntary Youth Company (VYC) – a subbranches group under the administration of Police department – was offered a contract. The funding for the second phase of construction of the provincial Road 25B would be based on the sale of land alongside the road. However, after the road had been completed, the intended sale of a substantial part of the land on offer failed. The VYC intended to sell plots as parallel front street lots that buyers could develop as shop houses. However, in the mean-time planning rules changed in this part of the city (District 2) to enable the development of the new Thu Thiem urban area – an urban planned development that should become the new administrative and commercial centre of the city. Consequently, for a while, the plots could not be sold. However, after the approval of the local master plan for the area, the VYC resold the land plots to developers that wanted to develop bigger plots of land located just a few metres back from the road alignment. While uncertainty affected the company at the end of the 1990s, it was nevertheless able to realize a huge profit, because of the change of planning rules and an increase of land prices after the announcement of the development of the Thu Thiem new urban area. 4.2.3. 2003–2013: trial and error: how to involve the private sector? The arrangement used to develop the Phu My Hung urban area in the 1990s was formalized under the BT model and became a benchmark for developing new transport projects in HCMC. The city intended to attract private partners to invest in public facilities by allowing them to develop land in a more integrated way. Both local and foreign real estate developers were targeted to become the pioneer developers of this type of ‘Land for Infrastructure’ mechanism. After the experiences of the successful Nguyen Van Linh axis and the mixed results of the provincial road 25B, the city did not initiate projects that exactly followed the same patterns. The local authorities instead started new experiments by applying a ‘development strip’ method and using the LFI mechanism by contracting a BT project with a foreign investor. These cases, known as Nguyen Huu Tho road and Pham Van Dong road, are detailed in the next section. Though the city authorities had obtained some expertise with land-based financing mechanisms, only few projects using land as a financial lever were launched during this decade. With the completion in 2013 of the Saigon bridge No.2 that was based on a BT contract as an exception, most PPP models for transport projects concerned BOT models (i.e. the Binh Trieu bridge No. 2 in 2003; the Phu My bridge in 2009; and the construction of 62 km highway’s section between HCMC and Trung Luong in 2010). 4.2.4. 2013-today: build transfer model promoted without any clear indications about the exchanges In 2013, after adjusting its transport development plan to 2020 and beyond, HCMC issued a document with 26 transport infrastructure projects (including bridges, elevated expressways, road improvement) calling for private sector investment (DPI 2013). Among them, 19 projects are expected to be financed through the BT model (including the LFI mechanism), while the remaining seven preferably should apply the BOT model (if BOT is not attractive enough, however, the BT model may be considered as well). Currently, one new bridge (Thu Thiem bridge n°2) is under construction. For this investment that is estimated at USD 145 million, 13.6 hectares have been transferred to the real estate developer Dai Quang Minh (VIR, 04/02/2015).

5. Details of two case studies This section analyses the Nguyen Huu Tho and the Pham Van Dong roads project. Both are considered significant projects for HCMC’s further development, as they facilitate further regional

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Figure 1. Location of the two study cases in HCMC.

expansion. Figure 1 and Table 2, respectively, show the location in HCMC and some of the core characteristics of the projects. The two cases are considered vital infrastructure projects, as they facilitate further regional expansion, while they also clearly illustrate the success and failure of applying the LFI mechanism, without proper institutionalization of the model. Finally, with only few LFI-based projects yet implemented in HCMC, the selection of the two cases was also based on information availability. The results of the cases are not necessarily representative for private sector financing practices about infrastructure projects in Vietnam and should, therefore, be interpreted with care. Nevertheless, we believe they do provide unique empirical evidence of this kind of land-based financing of infrastructure. 5.1. Nguyen Huu Tho road – land value capture and ‘development strip.’ At the end of the 1990s, HCMC decided to build a new road to link the central area to the industrial port of Hiep Phuoc, crossing the District 7 and Nha Be District. Due to the high costs, it was decided Table 2. Main characteristics of the two projects. Name of project Owner Design and build contractor Capital (USD) Affected Households Location Project period Investment form Cost Recovery Length (kilometres)

Nguyen Huu Tho road

Pham Van Dong road

Ho Chi Minh City Municipality Related to public sector

Ho Chi Minh City Municipality Private

90 million (1999) 340 Suburban 2003–2008 (5 years) Public Sale of land along the road (‘development strip’ method) 7 km

340 million (2010) 3,812 Suburban + Inner city 2008–2015 (7 years) Build-Transfer contract Exchange plots of land located elsewhere in the city 13.7 km

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that land acquisition for the section running through the urban District 7 must be limited to the projected width of the roadway. However, for a stretch of more than 7 km of the roadway passing through Nha Be district, where land acquisition could take place at much lower costs, the authorities decided to form on both sides of the road two strips of 75 m width. Around 87 hectares of land were acquired. These plots would subsequently be sold by auction to developers. With the ‘development strip,’ the City aimed not only to cover the cost of construction of the road but also to generate additional profits to support other developments. The work started in 2003 and ended in 2007. The kick-start of this project was slow due to problems with land acquisition. This phase included the resettlement of nearly 350 households for a cost of USD 5 million. The original residents were relocated to new apartments, and some of them on site (Figure 2). In total, the road construction costs were estimated around USD 20 million. In 2008, the area of 87 hectares was divided into 31 lots, and then gradually auctioned. Subsequently, 24 zones were sold to private developers that immediately started to develop. This business has resulted in various commercial developments such as Gold House, Kenton residences and Dragon Hills. In addition to this ‘development strip,’ a new urban area has been planned. A South Korean company, Chaebol GS E&C, received an investment license in 2007 to develop a vast urban area (over 350 hectares) called ‘Metro City.’ This project that did not start yet is based on a land exchange model; in turn for the development rights, Chaebol is supposed to invest in a major improvement of the electricity network of this part of the district. The project, however, is still under negotiation due to issues regarding the land price and the land lease (limited to 50 years for foreign investors). According to the city’s announcement in 2014, the auction of land brought revenue of over USD 37 million to the municipal budget. With investments totalling USD 25 million, the city’s estimated gain is around USD 12 million. 5.1.1. Lessons learned The construction of the new road provided the city with a new suburban area. The apparent success of this operation was the direct effect of the city’s decision to acquire the land in an early stage of

Figure 2. Nguyen Huu Tho ‘development strip’ (in Musil and Perset (2015)).

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development and to bring it on the market in building plots that appeared to be attractive to private developers. Moreover, acquisition costs were limited, since it concerned mainly farmland. The project appeared to be successful in financial terms. However, still, comments were expressed that the master plan lacked sufficient social services and did not constitute ‘liveable’ neighbourhoods. The city funded the infrastructure project and the acquisition of additional land upon public budget, aiming to earn back the investment by selling parcels of development land to private developers. Obviously, such a development strategy is risky because the city must finance the infrastructure first, anticipating on the plus value of the land when it becomes available for development. The city succeeded in doing this. Land acquisition and compensation to original landowners in the early 2000s was cheap because compensation was based on the price of agricultural land (not taking ‘market value’ into account).5 When HCMC was ready to sell the land to private developers in 2008– 2009, the local real estate market was booming, and the land could be sold at full market value. 5.2. Pham Van Dong road, an unprecedented ‘land for infrastructure’ project The significant difference between Nguyen Huu Tho and Pham Van Dong road is the location of the plots included in the LFI arrangement. In the latter case, HCMC decided to make use of available public land in other areas of the city to use as land endowment to private developers in turn for constructing the road. Initially, this road project started in 1997, known as the Tan Son Nhat – Binh Loi transit axis, linking the airport to the ring road No2. At the end of the 1990s, the Central government approved an investment by a Malaysian company (the Multi-Usage Holdings Berhad) to build the road through a BOT contract. However, because the 1998 Asian financial crisis hit this company, it had to withdraw. In 2004, the HCMC municipality invited GS E&C, a South Korean Chaebol, to bid on the project. To attract this potential investor, the City then proposed to switch from a BOT to a BT contract. The original design of this thoroughfare foresaw a six-lane roadway combined with an average 60 m buffer zone on each side along the road, allowing new commercial and residential developments. This plan would have required, however, a costly relocation of thousands of households due to the highly dense areas the planned road would pass through (PADDI 2010). This excessive eviction imposed the City to reconsider internally its plan and to skip the buffer zone and then to concentrate only on the roadway construction. After three years of negotiation, the Contractor finally signed in 2007 a BT contract for a total value of USD 340 million. This cost included the civil engineering works (a 13.6 km road section plus a bridge over the Saigon River), a rather short period of maintenance of the infrastructure (only 3 years), as well as a USD 120 million package to support the land clearing process (more than 500 hectares to acquire), compensating the affected nearly 4,000 households. In exchange, GS E&C obtained from the city in total 102 hectares of land to develop – divided into five plots located in three different parts of the city, and with a plot size range from 1.7 to 91 hectares (Figure 3). As soon as the city started the first land acquisition procedure for this project, the BT model was under a first polemic regarding the land value appraisal that the foreign contractor received. The central government blamed the City of valuing the exchanged land at a price below its real market value (Thanh 2011). After conducting a second land appraisal led by the Central Government, the value of the land was almost US$ 100 million more than the value that was anticipated in the contract (see Figure 3). From 2006 to 2008, land prices in the city had substantially increased. Some reasons pressed the municipality to work with this foreign contractor. First, the city needed an experienced partner with high technical skills, being able to mobilize a large sum of money quickly, and with a long-term investment strategy for HCMC. At that time, GS E&C indeed signed two other major development projects: the construction of a golf course in Cu Chi district and the development of a new large urban area, the Metro City (already mentioned above). Also, when this contractor endorsed the BT contract, it immediately transferred funds to support the city in its land

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Figure 3. Pham Van Dong ‘land for infrastructure’ project (Source: Musil C.).

acquisition process, to launch the civil works rapidly. In return, GS E&C required immediate access to the development plots with the attached land use rights. The city agreed to transfer the first four plots, but negotiated to concede the last one (Land No.5, see Figure 3) only after 70% of the civil works would have been completed. 5.2.1. Lessons learned First, without a regulatory framework, involving, for instance, a third party to review the content of the exchange, the City’s position in its negotiations with investors is rather weak. In this case, the central government played this role as ‘external reviewer,’ but only a posteriori. Central government blamed the City afterward, but wasn’t able to interfere anymore. Second, in the PPP component of this project, the City and the developer do not share any risks. The City wanted to focus on its aim to have the road developed, and it did not want to share the risks of land development with GS E&C. On the other hand, the contractor negotiated to maintain the road for only two years (and three years for the bridge), which is an unusually short period. Third, the contractor obtained land without any further obligations and could do with it whatever it wanted to, speculating on making the most profit out of it. For instance, two plots were later on resold to another developer. 5.3. Synthesis of the organizational and funding mechanism of the case studies Both projects use land resource as financial leverage to build road facilities and take advantage of the LFI mechanism. Table 3 highlights the characteristics of both cases.

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Table 3. Synthesis of the key elements of ‘Land-for-Infrastructure’ case studies. Nguyen Huu Tho road Bidding process Infrastructure Project

Municipality negotiates agreement with a pre-selected contractor Municipality auctions development plots;

Municipality negotiates agreement with a pre-selected contractor Municipality offers land plots to the investor/contractor

Plots sold to and developed by several developers

Build-Transfer contract signed with a private investor/ contractor Investor/contractor receives ownership over development land and is more or less free to use it

Municipality finances the facility based on its budget prior property developments Income for the municipality depends on land sales

Private investor/contractor finances the infrastructure. In parallel starts the property development project Income for the investor/contractor depends on property sales

Municipality develops road facility at its own risk Developers hold commercial risks

After completion, the investor/constructor transfers the facility to the Municipality who owns and operates it. Investor/contractor holds commercial risks

Exchange Land Development Project Organizational structure Infrastructure Project Project lead by public bodies Exchange Land Development Project Financial structure Infrastructure Project Exchange Land Development Project Risk sharing Infrastructure Project

Pham Van Dong road

Exchange Land Development Project Urban Planning outcomes Infrastructure Project Municipality got infrastructure . New urban areas accessible by roads; Exchange Land Development Project . Fragmented commercial property developments; . Contribute to urban sprawl.

Social aspects outcomes Infrastructure Project Initial land use right owners compensated and relocated by the Municipality;

Municipality got infrastructure . Fragmented commercial developments spread over the city; Increasing density in existing urban areas where developers get plots and build high rise buildings; . Investor/constructor free to develop the project according to its desire; . Land use rights potentially re-sellable.

. .

Exchange Land Municipality needs to invest to provide Development Project social and public facilities; Source: by the authors.

Initial land clearance plan oversized and overpriced; Municipality had to reduce it; Initial land use right owners compensated and relocated by the Municipality but with the private investor/ constructor funds;

No additional requirements to developer to provide social facilities

6. Discussion The focus of this paper is on urban road infrastructure produced and financed through a ‘Land for Infrastructure’ exchange model. This section discusses the outcomes of the case studies in the broader context of transport infrastructure provision in Vietnam.

6.1. Why has the role of the private sector in infrastructure finance been limited so far? To attract more private capital for funding of public facilities is an intense simultaneous desire of both central and local governments in Vietnam (Huyền 2017). However, the reality is still different. Investment projects in the form of build-transfer contracts increased sharply to reduce the budget deficit and public debt. However, BT projects are easily mistreated by investors seeking to make huge profits and occupy land at a low cost. Moreover, this tool reinforces the position of the developers as ‘speculators.’ While they are building the expected equipment, they have the option to keep the land in stock and speculate on future value increase. As land markets in Vietnamese cities are very immature, opaque, and depending mostly on rumours, speculation can be very profitable. The land prices in BT contracts are usually lower than market prices as they are negotiated between

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just two parties, rather than through bidding. We demonstrate in this article that an external ‘appraisal’ by the Central Government (Ministry of Finance) is necessary. As highlighted with the previous cases, the form of PPP using LFI can work only under two conditions. First, the City must have ready-to-build-on land available. This condition was fulfilled in the Nguyen Huu Tho case – due to mainly agriculture land to acquire – but appeared to be problematic in the second case, in which the length of the negotiations jeopardized the project. Second, selecting strong developers with sufficient financial resources is a requirement to ensure long-term investment. 6.2. Does the ‘land for infrastructure’ mechanism offer an effective value capture strategy to provide additional funding for substantial infrastructure investments? In principle ‘Land for Infrastructure’ (LFI) can generate significant revenues for additional funding of infrastructure. It can be used as an alternative to the more common BOT models, in which toll fees usually generate the additional funding. Two comments, however, must be made regarding the use of this specific instrument. First, the efficient use of the LFI model obviously requires a flourishing property market, with skilled developers (domestic and international) and large urban development projects available. For Vietnam, it means that the system might work well in cities as HCMC, Hanoi, and coastal cities that potentially can develop new tourism resorts, but probably less likely in smaller cities. Second, the LFI mechanism still requires city policies that go beyond the law because it is used in a ‘grey zone.’ To further institutionalize the mechanism, the Vietnamese Government has now promulgated two decrees (No. 15/2015/ND-CP and 30/2015/NĐ-CP) related to PPP. Decree 15 helps to clarify the process for preparation and implementation of BT projects, provides a framework for unsolicited projects, and removes the limit on state support for individual projects (previously under Decision 71, state support was capped at 30%). Decree 30 defines the choice of investors in LFI projects and states that projects involving land must be based on a bidding process. The decrees help to create a level playing field for investors to mobilize financial sources to back up Vietnam’s development. 6.3. Does application of ‘land for infrastructure’ value capture strategies improve urban planning implementation and bring benefits for all? With the BT projects, open competition is often absent or lacks transparency. The developer who will get the project is the one who has the better connections with the Local governments and managed to set up a favourable agreement. While land auction was introduced into the 2003 land law, it is rarely used to allocate land to developers. Item 3, Article 155 of Viet Nam’s Land Law 2013 states that the State assigns land to developers to develop projects. Still, according to Viet Nam News (24/10/ 2017), there is not any regulation indicating what kind of parcel may be allocated or how its price should be determined. It is a common problem for cities in developing countries that negotiations with the private sector for contributions to funding infrastructure may place them in an awkward position, in which they must balance goals associated with an efficient urban planning and maximizing income from value capture. Urban planning concerns a variety of issues, including notably a fair treatment of original land tenants (or occupants) and the provision of social facilities in a plan (including affordable housing). One might argue that the ‘Land for infrastructure’ model leads to a financialisation of urban planning and may jeopardize these planning goals. 6.4. Which alternative value capture strategies may be considered for infrastructure funding? McCluskey and Trinh (2013) have argued that present property taxation in Vietnam – as alternative value capture strategy – is unsustainable and does not generate sufficient revenue. Although recent

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tax reform has improved the income basis for the government, further steps must be taken to solve several existing structural problems (Wells-Dang, QuangTu, and Burke 2015). Alternatively, HCMC may consider a public land development model (a land endowment model; see Table 1). The Nguyen Huu Tho road project is in fact based on such a model. However, the conditions for applying such a model can probably be improved. Van der Krabben and Jacobs (2013) show how Dutch cities have successfully used this model to achieve high quality of plans, to finance all infrastructure works and to guarantee sufficient space for social housing. Third, particularly in the United States, a municipal bonds market provides funding for cities. Creating such a municipal bonds market in Vietnam may help to further open the capital market to Vietnamese cities (Hakkala and Kokko 2007). A wellknown alternative example of such a municipal bonds market has been in use in the city of São Paulo, Brazil since 1995 (Smolka 2013). This city has been thriving in creating substantial revenue by issuing bonds (CEPACS: Certificates of Additional Development Potential) used to acquire additional building rights combined with changes in land uses. CEPACS are sold by electronic auction in the São Paulo Stock Exchange Market.

7. Conclusion This study addressed the issue whether the ‘Land for Infrastructure’ (LFI) mechanism, based on the Build-Transfer (BT) model provides an effective value capture strategy for Vietnam. HCMC faces an urgent need for extending its infrastructure network to facilitate further sustainable urban development. With a regulatory framework still ‘under development’ one may argue that the Land for Infrastructure mechanism offers a welcome and productive financial instrument for funding infrastructure. The mechanism enables the city – in addition to other income sources – to use the surplus value from urban development for funding large infrastructure projects. We found, however, that the implementation of the LFI mechanism remains difficult, but eventually can lead to success. By ‘trial-error-transcend,’ the City managed to build two critical roads (Appendices) while the developers received attractive investment opportunities in urban development. Moreover, it has helped HCMC to bind foreign investors for a more extended period to the city, attracting substantial amounts of foreign capital. Despite the complications of using the LFI mechanism, all interviewees indicated that they were satisfied with what had been achieved in the two cases. The mechanism has been efficient in using the development gain that results from urban development to finance critical road infrastructure for HCMC (in addition to other sources). However, the case studies – and the ‘trial and error’ way of applying various public, private partnership models over a period of two decades – also seems to have kept HCMC in a rather weak position in its negotiations with the private sector, while the lack of transparency may have scared away potential (international) investors as well. An important step forward, regarding this transparency of the infrastructure investment market and the use of public-private partnership models, forms the recent issue of new regulation in 2015 (Decrees No. 15/2015/ND-CP and No. 30/2015/NĐ-CP) governing private-public partnership investment projects according to international standards. The paper debated the availability of alternative value capture mechanisms. Institutionalizing these mechanisms may help to keep the City more in control and can offer more transparency to the private sector. However, the implementation of such mechanisms requires, among other things, time, political will, a proper regulatory framework, and expertise. Finally, we believe that this study and the empirical evidence presented in the paper contributes to our understanding, internationally, of the pros and cons of working with PPP models to attract private sector finance for infrastructure provision in developing countries. While these models have proven to be successful in raising private capital for critical infrastructures, these models sometimes are problematic as well. The conditions set by private investors about the required returns on investments do not always favour sustainable urban development. The present paper particularly addresses situations in which development rights over land (and related development gain) is brought into the partnership model, as compensation for the private company’s investment in the infrastructure.

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Moreover, the outcome of negotiations between the public and private stakeholders in such PPP models is sometimes influenced by the fact that these processes have not yet been sufficiently ‘institutionalized.’

Notes 1. The Doi Moi means renovation in Vietnamese and refers to a series of reforms introduced in mid-1980’s, marking a shift from a centrally planned economy to a ‘socialist-oriented market economy’. 2. According to the Vietnamese law, BOT refers to an investment signed by a State body and an investor in order to construct and operate an infrastructure for a fixed duration. Upon expiry of the duration, the investor shall transfer such facility to the authorities. Concerning the BT, the agreement also includes a State body and an investor but upon completion of construction the investor shall transfer the facility to the State body and the authorities shall create conditions for the investor to implement another project in order to recover the invested capital and gain profits (Saladini et al. 2009). 3. Several regulations had been adopted regarding the use of PPP notably introducing more international standards and transparent bidding processes to attract (foreign) private investors (Decrees 02/1999/NĐ-CP; 78/ 2007/NĐ-CP; 108/2009/NĐ-CP; decision 71/2010/QD-TTg, and recently decree 15/2015/NĐ-CP). 4. PADDI stands for ‘Ho Chi Minh City Urban Development Management Support Centre’; it is a decentralized cooperation project between the Lyon metropolitan area and the Rhône-Alpes Region (France), and Ho Chi Minh City Municipality. The workshop took place from December 8th to 12th, 2014. Between 2007 and 2017 PADDI organized training workshops to train HCMC’s people committee technical officers. The general objective of the training workshops is the transfer of knowledge. PADDI’s workshops introduce to the participants new concepts, techniques and methods in terms of urban management to be used (or applied) in the context of Ho Chi Minh City. 5. Compensation prices are based on the ‘Land Pricing Framework’, which can be considered a state-stipulated price chart to determine compensation prices paid.

Acknowledgements The authors would like to thank community members and experts who kindly contributed their time to discuss these projects with us, and we hope they will ultimately be the beneficiaries of any policy reforms related to Land-based Financing. Any mistakes or errors, of course, are the authors’ alone.

Disclosure statement No potential conflict of interest was reported by the authors.

Funding The research is partially supported by the Ho Chi Minh City Open University (Project No. E2018.06.1).

ORCID Thanh Bao Nguyen http://orcid.org/0000-0001-8703-7372 http://orcid.org/0000-0002-2566-890X Erwin van der Krabben https://orcid.org/0000-0001-7521-372X Clément Musil

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Appendices Appendix A. Nguyen Huu Tho Road

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Appendix B. Pham Van Dong Road

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