VietNamNet Bridge – Chinese contractors have won bids for construction and installation projects in Vietnam thanks to the low prices they offer. However, they later raise the required prices, reasoning the input material price increases.

In principle, under these contracts, engineering, procurement and construction (EPC) contractors take full responsibility for the implementation of these projects. Upon completion and acceptance, investors then take over the works under the “turn-key” concept.

China – a hard guy to deal with

The Hai Phong 1 thermopower plant.

A Chinese contractor, the Dongfang Electric Corporation, won the bid for construction and installation of the Hai Phong 1 Thermopower Plant in the northern city of Hai Phong. The contractor was chosen because it reportedly offered the “most reasonable” price for the construction work.

However, in late 2008 and early 2009, the corporation continuously lodged complaints to Vietnamese ministries about the difficulties it was meeting due to exchange rate fluctuations.

With the Chinese yuan appreciating from yuan8.2/US$1 to yuan6.8/US$1, the contractor claimed it had incurred a loss of $100 million, asking the Vietnamese investors to accept a higher price for the work. The contractor stressed that it would have to stop work on the project, as it was running out of money.

According to Tran Huu Nam, General Director of the Hai Phong Thermopower JSC, the Chinese contractor, after winning the bid, invited Vietnamese enterprises to work for it as sub-contractors.

However, negotiations between the Chinese corporation and Vietnamese sub-contractors were very tough. The Chinese side did not accept the prices offered by Vietnamese enterprises, saying they were overly high if compared with its financial capability.

Some Vietnamese sub-contractors tried to accept the low prices set by the contractor in order to get jobs for their workers. However, they later had to give up halfway for various reasons. “Some of them gave up because they could not catch up with the pace, others gave up because the Chinese partner always delayed payment,” Nam said.

Modest benefit from Chinese implemented projects

Public investment projects always hope to help develop local economies, create GDP and generate jobs. However, analysts argue that Vietnam can only attain modest benefit from projects implemented by Chinese contractors because of the low localization ratios, i.e., the degree of locally made products or services vis-à-vis those that are foreign-supplied.

The Hai Phong 1 and Quang Ninh 1 thermopower projects, capitalized at over $2 billion, for example, did not create much “leverage” for the local economy at all. Dr Nguyen Chi Sang, Head of the Mechanical Engineering Institute, said the localization ratios at the power and cement projects, where Chinese worked as EPC contractors, were almost zero.

Then there are the two bauxite projects in the Central Highlands, which have garnered much attention in recent years. The localization ratio there is about two percent.  Yet according to Hatch, an Australian aluminum company, Vietnam is fully capable of making 50 percent of the equipment needed domestically.

Chinese contractors avoid using products and services from domestic sources. Instead, they bring everything they need from China to Vietnam, from unskilled laborers to screws.

Dat Viet