Reforms Needed To Maximise Benefits Of Airport Privatisation

Vietnam's Ministry of Transport is awaiting approval from the prime minister of Vietnam, Nguyen Tan Dung, to partially privatise the country's state-owned airport operator, Airports Corporation of Vietnam (ACV). We believe that the plan to divest ACV is positive for the growth outlook of Vietnam's airport sector, but highlight that regulatory reforms are necessary to maximise the benefits of private sector participation.

According to Vietnam's Ministry of Transport (MOT), it is seeking to sell a 25% stake in ACV this year, with the government holding the remaining 75%. ACV currently manages 22 airports in Vietnam, with more than 50% of its revenues from the Tan Son Nhat and Noi Bai international airports.

We believe that the plan to partially privatise ACV is positive for the growth outlook of Vietnam's airport sector. In recent years, we have seen delays to several airport projects in Vietnam due to the lack of funds (see our Industry Forecast 'Transport Infrastructure - Q2 2014', January 16 2014). We have also seen the development of several airports - e.g. Dong Hoi airport - that have operated well below capacity and resulted in losses for ACV ( see our Industry Forecast 'Transport Infrastructure - Q2 2014', January 16 2014). Both scenarios took place despite the rapid rise in the number of international visitors into Vietnam and the increase in purchasing power among Vietnamese consumers ( see chart).

Growing Demand For Air Travel
Vietnam - International Visitor Arrivals And GDP per capita, US$

Reforms Needed To Maximise Benefits Of Airport Privatisation

Vietnam's Ministry of Transport is awaiting approval from the prime minister of Vietnam, Nguyen Tan Dung, to partially privatise the country's state-owned airport operator, Airports Corporation of Vietnam (ACV). We believe that the plan to divest ACV is positive for the growth outlook of Vietnam's airport sector, but highlight that regulatory reforms are necessary to maximise the benefits of private sector participation.

According to Vietnam's Ministry of Transport (MOT), it is seeking to sell a 25% stake in ACV this year, with the government holding the remaining 75%. ACV currently manages 22 airports in Vietnam, with more than 50% of its revenues from the Tan Son Nhat and Noi Bai international airports.

We believe that the plan to partially privatise ACV is positive for the growth outlook of Vietnam's airport sector. In recent years, we have seen delays to several airport projects in Vietnam due to the lack of funds (see our Industry Forecast 'Transport Infrastructure - Q2 2014', January 16 2014). We have also seen the development of several airports - e.g. Dong Hoi airport - that have operated well below capacity and resulted in losses for ACV ( see our Industry Forecast 'Transport Infrastructure - Q2 2014', January 16 2014). Both scenarios took place despite the rapid rise in the number of international visitors into Vietnam and the increase in purchasing power among Vietnamese consumers ( see chart).

Growing Demand For Air Travel
Vietnam - International Visitor Arrivals And GDP per capita, US$

In our opinion, both scenarios have arise due to a lack of private sector participation. As a state entity, ACV is driven by the whims of the government and not by market forces. This had led to the construction of airports projects that are not financially viable and do not provide a positive rate of return to ACV. With great private participation, we believe the Vietnamese government would be able to unlock a sizeable amount of capital for the development of new airports in Vietnam as well as increase the likelihood for airport projects to be driven by market forces.

According to the MOT, the partial divestment of ACV would raise around VND3.7trn (US$175.6mn) as the ministry valued ACV's chartered capital at VND14.69trn at the end of 2013. The funds raised from the sale of ACV are expected to be used as seed money for the development of new airport projects, such as the US$10bn Long Thanh international airport project and the Noi Bai international airport expansion project. Should these projects move forward and start construction works, this would boost the growth of Vietnam's airport infrastructure sector over the coming years. At present, we are forecasting real growth for the sector to average 2.4% per annum between 2014 and 2018.

Privatisation Presents Upside
Vietnams Airports Infrastructure Industry Forecasts

Regulatory Reforms Essential

However, we highlight that the privatisation of ACV is not the be all and end all in generating sustainable growth in Vietnam's airport infrastructure sector. Regulatory reforms are also necessary to eliminate existing hurdles to project execution such as permit approvals, environmental clearances and land acquisition. The Vietnamese government has made some progress in this regard, having recently strengthened its land regulations in November 2013 ( see 'Revised Land Law A Major Step In Tackling Corruption', December 9 2013) and announced a new resolution to eliminate unnecessary administration procedures for investment projects in February 2014. According to the Ministry of Justice (cited from Intellasia), the number of administrative procedures that companies have to follow from the beginning to the implementation phase will be cut down from 34 to 22. This would reduce the time taken to complete the entire administrative process by 50% and save companies up to VND1.3trn per annum.

Regulatory reforms are also needed to create a legal framework that ensures a competitive market and eliminates economic wastages. At present, ACV is operating as a monopoly in Vietnam's airport sector. This creates significant scope for corruption and rent-seeking as private investors that own ACV could focus on eliminating the competition and arbitrarily raise fees that are not in the public's interest.

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