Vietnam’s high-speed rail hits the brakes on foreign funding

The Vietnamese National Assembly has approved the creation of a high-speed rail network that will deliver significant economic benefits to the country. Rather than rely on foreign funding, Vietnam intends to largely fund the project through domestic sources, including governments bonds and low-interest loans. Doubts over the feasibility of this autonomous strategy raise questions about the appropriate balance between foreign reliance and economic security.

On 30 November 2024, Vietnam’s National Assembly rubber-stamped a high-speed rail network that will traverse 20 provinces, linking Hanoi to Ho Chi Minh City in five and a half hours. Vietnam has announced that, in the ‘spirit of independence and self-reliance’, it will not use foreign loans to fund the US$67 billion project by 2035. Instead, it will use the state budget, low-interest loans and government bonds.

This funding strategy represents a departure from Vietnam’s traditional economic hedging strategy — its calculations of the risks and rewards of accepting investment from larger powers. Hanoi will continue shielding itself from Chinese influence and potential debt traps, while building a pathway to greater autonomy and self-sustainability.

Chinese-funded projects invoke wider security considerations for Vietnam. Hanoi is wary of providing Beijing with greater clout over sensitive issues, such as territorial disputes in the South China Sea, and eroding its political and economic autonomy. And Chinese-backed projects such as the Cat Linh–Ha Dong tramline have seen delays, ballooning costs, allegations of poor-quality construction, and lax safety and labour standards.

Infrastructure projects funded by other international donors — including the Tran Hoang Na Bridge, the Nhon-Hanoi Station metro project and the North-South Expressway — have similarly encountered problems.

This explains why Hanoi has historically turned to Japan to finance major infrastructure projects. Japan provides over half of Vietnam’s official development assistance (ODA), much of which is earmarked for public transport infrastructure. Despite noteworthy successes such as the Nhat Tan Bridge and the Noi Bai International Airport expansion, Japanese-backed projects are not immune from complications.

Vietnam’s high-speed rail has evolved in close step with Japan. Though a Japanese-backed high-speed rail project failed in 2010, the Japan International Cooperation Agency provided the funds for the current plan’s pre-feasibility report and Tokyo has remained vocal in its commitment to fund Vietnam’s high-speed rail.

Problems associated with ODA and foreign concessional loans have led to bureaucrats lambasting the complex rules and conditions attached to foreign aid disbursement. While these problems are not solely the donor’s fault, the strict conditions erode Hanoi’s ability to make autonomous decisions.

Vietnam has already laid the groundwork for a more self-sustainable funding model. The 2019 law on public investment provides the Ministry of Finance with the responsibility for assessing ODA and concessional loan impacts from foreign donors and determining domestic financial mechanisms.

Amendments to the railway law in 2017 also made domestic investment easier, offering easy access to land and funding, cheap loans and tax incentives. In 2020, the Vietnamese government adopted a comprehensive plan to modernise its colonial-era railway network to better handle freight transport. The plan also maintains that passenger fares should be reasonably priced, capping high-speed rail tickets at 75 per cent of airline tickets.

Some analysts wonder whether public investment alone can deliver such an ambitious project. These concerns are not unfounded, given administrative paralysis stemming from the intense crack-down on corruption, as well as potential complications from General Secretary To Lam’s plans to merge and eliminate certain state and party agencies.

Vietnam can cite the US$13.38 billion Long Thanh Airport as a success story in its emerging, independent approach to infrastructure. The state-owned Airports Corporation of Vietnam is the principal investor in what will be the country’s largest airport, serving as a regional cargo and passenger hub. The project is on track to be completed nearly a year ahead of schedule.

For the high-speed rail project, the door is ajar for foreign assistance should the need arise, with provisions to prevent ceding too much autonomy in place. Under the investment plan, Prime Minister Pham Minh Chinh is responsible for issuing government bonds and mobilising ODA and foreign loans in case of delays. Any international bids must include commitments to technology transfer and human resource training to ensure operations, maintenance and long-term management of the high-speed rail stay in Vietnamese hands. Hanoi has already asked Japan to provide railway engineering scholarships for Vietnamese citizens.

It is too early to determine the government’s approach. Will it rely solely on domestic sourcing, or will it adopt a hybrid strategy combining domestic and foreign sources? Regardless, the safeguards suggest an intent to shield the project from outside interference and prioritise domestic investors and companies.

The Vietnamese Communist Party identifies infrastructure projects as a springboard to become a high-income nation by 2045. Vietnam spends roughly 6 per cent of GDP — the highest in Southeast Asia — on infrastructure development, including the ambitious upgrading of its 1290 kilometres of national highway to 5000 km by 2030.

The benefits of high-speed rail are self-evident. It is expected to add an additional 0.97 per cent of GDP growth and give citizens a clean and efficient means of traversing the country. Vietnam’s approach should ensure that it maintains strategic autonomy over the project. Vietnam’s experience with the high-speed rail could also increase its influence in facilitating greater regional railway connection between the Greater Mekong Subregion. Regional partners may look to emulate its self-sustainable model.

Vietnam’s high-speed rail project represents more than just infrastructure development – it signals a fundamental shift in the nation’s economic strategy. After three decades of carefully balancing foreign influences, Vietnam is charting a bold new course toward genuine economic independence. Whether this ambitious self-funding model proves sustainable for a US$67 billion project remains an open question, and success is far from guaranteed. Yet if Vietnam does succeed, its approach could reshape how developing nations approach major infrastructure projects, demonstrating a new path to strategic autonomy that sidesteps the traditional constraints of foreign funding.

By Nicholas Chapman – Eastasiaforum.org – January 9, 2025