Prioritize Government’s Investment till the end of 2021: Benefits construction enterprises
Assessing the outlook for Vietnam construction industry in the second half of 2021, promoting Government’s investment, especially in infrastructure, is expected to boost the construction industry in the next 5 years. According to Fitch Solutions, the value of the infrastructure construction industry will reach 158,167 billion VND by 2025, corresponding to a compound annual growth rate of 10% in the period 2020 – 2025. The strong commitment of the Government to invest in large infrastructure is the main driver for Government’s investment to be prioritized. Specifically, the total Government budget capital under the medium-term Government’s investment plan for the 2021-2025 period is 2,870 trillion VND (up 43% compared to the 2016-2020 period).
Specifically, in 2021, the total planned investment capital from the Government budget is more than 584 trillion VND. This budget excludes 16 trillion VND of national target program capital that has not been assigned by the Prime Minister. In which, more than 74 trillion VND of planned capital extends to 2021 from previous years and more than 510 trillion VND of planned capital allocated in 2021.
Challenges for Vietnam construction industry in the last months of the year
The burden of disbursing the Government’s investment capital
In the context of the Covid-19 epidemic negatively affecting the entire economy, causing supply chain disruptions, and weakening consumer imports and exports, Government’s investment will be a viable driver to achieve the growth target. However, the disbursement of the Government’s investment capital until July 31, 2021, only reached 36.71% of the capital plan in 2021 assigned by the Prime Minister, lower than the same period in 2020 (40.67%). Especially, the disbursement rate of ODA and concessional loans of foreign donors is very low (7.52%). With the low disbursement rate of the Government’s investment capital in the first 7 months of the year, the burden accumulated at the end of the year is very large. More than 2/3 of the capital needs to be disbursed in the second half of the year.
The main causes are due to site clearance and bidding; changes to policies and regulations; capacity of investors and contractors; the avoidance of payment of capital in installments, waiting for a one-time payment of investors, project management boards, and contractors; The specific nature of investment expenditure, the state budget year is 1 year. The capital plan is assigned at the beginning of the year, and the final settlement at the end of the year. Therefore, the implementation and construction plans of works and projects also depend on capital planning, etc.
Pressure from the “price escalation” of raw materials
The increase of raw material prices has put great pressure on Vietnam construction enterprises, especially when steel currently accounts for a large proportion with about 20% of the input costs of projects.
In the first half of 2021, the prices of many construction materials continuously increased. The domestic selling price of steel rose about 40%. The cement price with components of coal, electricity, gasoline, gypsum, additives… also increased rapidly, from 30,000-40,000 VND/ton. Some other key materials, such as sand, gravel, etc. had the same situation.
Along with that, the mining work also faced many difficulties due to the impact of the Covid-19 pandemic. The broken production chain along with the policy of cutting steel production in China to protect the environment, made the material supply significantly reduced.
In the first half of 2021, the business situation of many listed construction companies recorded a decline over the same period, including many giants in the industry. However, some companies still recorded impressive business results with strong growth, thanks to cost reductions and the development of other areas which brought great revenue.
Efforts to overcome difficulties of businesses
The fourth outbreak of the Covid-19 epidemic, which has lasted from the beginning of May until now, has caused many difficulties for construction businesses. There are no new buildings or there are constructions that cannot be constructed due to the social distancing requirements of the local government. If the project is on the list of permitted construction, it must meet the requirements of “3 on-site” (construction on site, on-site anti-epidemic, and on-site accommodation) or “1 road – 2 locations” (concentrated transportation route of workers from the construction site to the worker’s residence). These requirements have increased costs, which lead to the slow progress of many projects.
In particular, many contracts signed by domestic contractors with foreign enterprises have been delayed due to the lack of construction progress. Therefore, domestic enterprises have to compensate for a very high fee. Although the construction enterprises cannot operate but still have to pay interest on bank loans. In addition, the slow disbursement of the Government’s investment capital also makes the construction enterprises face difficulty in terms of capital.