According to the draft resolution on special mechanisms for the North-South high-speed railway project, submitted to the Ministry of Justice for appraisal, the Ministry of Construction has proposed a range of financial incentives, tax breaks, and specific regulations for projects implemented under the public-private partnership (PPP) model.

The draft suggests that to ensure the financial viability of business investment models, and based on feedback from firms like Vinspeed and Thaco, the government should allow investors to borrow up to 80% of total project investment (excluding site clearance costs) from the state budget at 0% interest for 30 years. The remaining 20% would be sourced by the investors themselves.

However, under the 2017 Law on Public Debt Management, there is no existing mechanism for the government to lend state budget funds to businesses. The Ministry of Finance therefore recommends that the proposal be submitted to higher authorities for review and approval.

The Ministry of Finance has also raised concerns. If the government borrows money and re-lends it to investors at 0% interest for up to 30 years, it would effectively bear the interest cost, increasing the government’s direct debt servicing obligations and possibly pushing these beyond safe thresholds, negatively impacting the country’s credit rating.

Moreover, interest-free loans could diminish repayment motivation. Without the pressure of interest payments, businesses may be less committed to repaying loans, making debt recovery challenging and deviating from market-based debt management principles.

The ministry further noted that requiring investors to repay the entire loan in a lump sum at the end of the term poses considerable risk, especially given the project’s large loan needs and the uncertainty of revenue recovery if financial outcomes underperform.

To encourage private participation in the project, the Ministry of Construction has compiled investor suggestions and forwarded them to relevant ministries for evaluation and policy development.

However, the Ministry acknowledged it lacks the expertise to assess the macroeconomic implications of such financial policies, and thus does not yet have a sufficient basis to report the proposal to the government.

Investor payback could take over 33 years

Regarding the state’s equity contribution ratio, the draft resolution stipulates it should not exceed 80% of the total project cost under the PPP model.

The Ministry of Construction analyzed international experience across 27 railway PPP projects and found that in many cases, state support levels were significantly higher than average due to project complexity and public service nature.

A preliminary pre-feasibility report estimates that if the PPP investor initially spends $6.57 billion (around 9.7% of total investment, including land clearance) on rolling stock and operational equipment, and continues to invest another $13.31 billion during the operational phase, the state will need to subsidize approximately $780 million in early operating losses through fare support.

Under this scenario, the projected payback period for investors is about 33.61 years.

If revenue decreases by 5%, the payback period would increase to around 41.18 years, and the government would need to provide $1.05 billion in support. A 10% drop in revenue would render cost recovery impossible.

Current PPP regulations limit the state capital contribution to no more than 70% of the project’s total investment. However, given the massive scale, technical complexity, and public welfare nature of the high-speed railway - which primarily serves social, national defense, and security goals - the financial return is expected to be low.

To enhance financial viability and attract private investment, the Ministry has proposed increasing the permissible state capital ratio to 80%.

Proposed tax incentives for imported equipment

Regarding tax incentives, the Ministry of Construction noted that current regulations only list products that can already be manufactured domestically but do not address cases where domestic production is insufficient in quality or quantity.

Given the project's complexity, the Ministry has proposed a preferential import tax policy, allowing tax exemptions for equipment not yet produced locally or that does not meet technical requirements.

Based on consultations with the Ministry of Industry and Trade, the proposal would exempt investors from import taxes on machinery, rail vehicles, spare parts, and materials used to build, renovate, upgrade, maintain, and operate railway infrastructure - provided such items are not manufactured domestically or fail to meet technical specifications.

Tam An