84711 Helping Vietnam to Achieve Success as a Middle-Income Country Improving Vietnam’s Sustainability Key priorities for 2013 and beyond Green Growth Demystified: Investing in Vietnam’s Inland and Coastal Waterways This note summarizes the findings of Blancas and El-Hifnawi (2013), a World Bank report on inland waterway transport and coastal shipping in Vietnam. Key messages 1. Vietnam’s inland waterway transport and coastal shipping sector faces significant under-investment in terms of both capital and maintenance expenditures. 2. The case for investment in waterborne transport goes well beyond the need to match demand and supply, as the sector offers significant economies of ship size. 3. Larger barges not only result in lower unit transport costs but also lower emissions of local pollutants and greenhouse gases per ton-kilometer—a major benefit to Vietnam, given the country’s disproportionate exposure to the risks caused by climate change. 4. Most of the expected benefits of investments in inland waterway transport will be intrasectoral rather than driven by modal shift away from the roads sector. Key actions 1. Corridor 1 of the Mekong River Delta network, linking Vinh Long with Ho Chi Minh City—and including the Cho Gao Canal, the network’s most pressing bottleneck at present— offers the highest economic returns to capacity expansion investments and should be seen as a development priority by the Government of Vietnam. 2. Besides Corridor 1 of the Mekong River Delta, investments in Corridor 1 of the Red River Delta, from Quang Ninh to Viet Tri, appear to be economically viable as well, albeit yielding slightly lower returns. 3. There is a strong economic case for establishing a Waterway Maintenance Fund to better pay for maintenance of the core sections of the national inland waterway network; this fund could be initially financed by vessel registration fees. 4. In the coastal shipping market, investments in a dedicated coastal shipping terminal at Haiphong port in Northern Vietnam appear to be economically attractive and should be further explored by the Ministry of Transport. Vietnam’s Twin Challenges countries of the late 1980s. In recent years, however, two major challenges have emerged. First, slower global Over the past 25 years, Vietnam’s record of economic growth, more intense competition for foreign direct growth and poverty reduction has been both investment, and smaller gains in domestic productivity breathtaking and unique among the least developed have made it more challenging for Vietnam to maintain Strengthening Competitiveness, Improving Sustainability, Increasing Opportunity Helping Vietnam to Achieve Success as a Middle-Income Country its earlier pace of economic growth. Second, more and provides the backbone for the movement of such frequent occurrences of severe weather events and growth-critical bulk commodities as construction Vietnam’s structural exposure to long-term climate materials, coal, fertilizer, and rice. Among all freight change risks have in effect turned protecting the modes, IWT is estimated to capture approximately 48 environment into a national priority. percent of national tonnage, slightly higher than road sector’s share of 45 percent. Tackling these twin challenges—of boosting growth and reducing emissions that cause climate change— Investments to promote the use of IWT and coastal matters because, although Vietnam’s poverty rates have shipping enable the use of largervessels. This generates dropped from approximately 60 percent in the early economies of scale in both unit-level transport costs 1990s to below 10 percent today, large segments of the and emissions. Modal efficiency and competitiveness population could fall back into poverty at lower levels can be further enhanced through better linkages of growth and employment generation than previously between waterways and other modes, such as drayage attained. And the near-poor are the most vulnerable to trucks for short-distance haulage, and through the cyclical economic downturns and the negative effects adequate provision of ancillary logistics services such of climate-related risks, such as more frequent flood- as warehousing. Improvements to the waterways, and causing storms (in the short term) and sea level rise the increased economic and trade activity that this can (in the long term). Furthermore, major sectors of the facilitate, can stimulate growth, create jobs, and reduce Vietnamese economy, such as rice and coffee cultivation poverty. and aquaculture, are weather-driven. Towards a More Balanced Can Vietnam Grow and Freight Transport Sector Protect the Environment at Inland waterways are a long-neglected link in Vietnam’s the Same Time? multimodal transport network. Under-investment in IWT and coastal shipping reduces competitiveness, Transportation is both a critical facilitator of growth, as it increases landed costs in supply chains and locks through productivity improvements, and a primary in sources of supply chain unpredictability. In a world contributor of carbon emissions, through the use of where development has often been associated with fossil fuels. Yet, investments in more environmentally- road construction and increased use of motor vehicles, and economically-efficient modes of transport can policymaking and investments in waterborne transport shatter the oft-held belief that developing countries face tend to be given secondary priority. Not surprisingly, a tradeoff between curbing emissions and promoting the lion’s share of public spending in transportation in growth. Vietnam has been devoted to the roads sector. Some 80 In the particular case of Vietnam, a country blessed percent of transport investments go to expanding and with a vast network of rivers and canals, two large preserving the road network. river deltas, and more than 3,000 kilometers of coast The presence of structural disadvantages in the IWT line, investments in inland waterways can become sector has led to suboptimal policy making in waterway a strategic pathway toward a lower-carbon freight capacity expansion and maintenance. Yet over the past transport system that can also strengthen long-term 10 years Vietnam’s IWT carriers, aware of economies of prosperity. Waterborne transport—defined as inland ship size, have implemented a remarkable market-driven waterway transportation and coastal shipping—emits fleet scaling-up process. Such market responsiveness less greenhouse gases, uses less fuel, and causes fewer bodes well for the economic and environmental accidents and deaths per ton-kilometer than either impact of public investments in the expansion and trains or trucks. On average, barges can be four times modernization of the waterway network. Nevertheless, more fuel-efficient than truck transport. the average vessel carrying capacity of Vietnam’s river- Inland Waterway Transport (IWT) is also fundamental going cargo vessel fleet, of about 100 deadweight tons to the everyday functioning of the Vietnamese (DWT), remains low by international standards and far economy. It captures a significant share of the freight from the 1,000-DWT threshold, by which the majority market for both domestic and international itineraries, of economies of ship size are captured. Strengthening Competitiveness, Improving Sustainability, Increasing Opportunity Helping Vietnam to Achieve Success as a Middle-Income Country Beyond vessel sizes alone, Vietnam faces a number Outside of the Mekong Delta, economically justified of waterway sector management challenges. As more investments in capacity expansion are found at Corridor industries locate next to riverbanks, improvised berths of 1 of the Red River Delta in Northern Vietnam—linking simple design and low cost have also proliferated. While Quang Ninh with Viet Tri—albeit yielding slightly convenient to their owners, such informal landings lower economic returns compared to its Mekong tend to hamper navigation and safety, thus increasing Delta counterpart. In the coastal shipping market, it the costs of shipping. Aside from its incomplete is estimated that upgrading a container terminal at Hai network coverage, maintenance dredging is typically Phong Port to cater to domestic coastal shipments can conducted in piecemeal fashion, whereas longer-term achieve attractive economic returns—of approximately arrangements—such as those under performance- 13 percent—and drive modal shift away from the roads. based contracts—could lower the cost and improve the efficiency and effectiveness of waterway maintenance. To date, no public or public-private efforts have been Regulatory Enhancements in channeled towards modernizing the existing fleet of Waterborne Transport vessels and their engines, an avenue of policymaking that has shown positive impacts in Western Europe. Regulatory improvements are often effective complementary interventions to investments in These challenges suggest that Vietnam’s waterborne physical infrastructure. In the face of the deeply transport sector justifies larger funding envelopes and underfunded maintenance of Vietnam’s waterways, more targeted, bespoke policymaking, particularly the introduction of a Waterway Maintenance Fund relative to those of the roads sector. can yield economically efficient outcomes by better preserving the cargo carrying capacity of the major Economically Sound inland waterway corridors. Such fund could initially be financed by vessel registration fees, and eventually Infrastructure Investments in migrate to more targeted (although more operationally Waterborne Transport complex) fuel levies and/or traffic tolls. Another example of regulatory innovation in Ho Chi Minh City (HCMC) is the main transport waterborne transport is the testing, on a pilot basis, of an node of Southern Vietnam and the country’s primary engine modernization program. This can partially fund, international gateway. HCMC both attracts and alongside matching contributions by IWT carriers, the produces a large array of diversified commodities and purchase of new engines for a portion of the largest is directly connected to the complex inland waterway operational vessels in the national fleet. New engines network of the Mekong River Delta. Within this can provide significantly better emissions performance network, Corridor 1—from Vinh Long, at the heart of compared with current equipment, as confirmed by the Delta region, to HCMC—is Vietnam’s busiest and experience with similar public-private engine renewal most congested inland waterway corridor. In particular, schemes in Western Europe. it comprises the 29-kilometer Cho Gao Canal, the most pressing time and cost-bottleneck anywhere in Vietnam’s inland waterway network. Capacity Limited Potential for Modal expansion investments, such as capital dredging, waterway widening, bank protection works, and river Shift in Vietnam’s Freight training, can contribute to reducing congestion and Transport Market increasing transport efficiency at this strategic corridor. Nearly all benefits of investing in inland waterways will Out of all inland waterway corridors across Vietnam’s originate from intrasectoral efficiency improvements two river delta networks, the upgrading of Corridor rather than from modal shift away from the roads. There 1 of the Mekong Delta is expected to yield the most are two reasons for this. First, the inland waterway attractive economic returns to capacity expansion networks in Vietnam mainly run East-West. Given investments—estimated at 16 percent, inclusive of the Vietnam’s geographic characteristics, this limits the value of reduced environmental externalities. Upgrading length of waterway sections—and by extension reduces this corridor should be seen as a development priority. IWT lengths of haul (the average IWT length of haul is Strengthening Competitiveness, Improving Sustainability, Increasing Opportunity Helping Vietnam to Achieve Success as a Middle-Income Country only 112 km). Since trucks are inherently more efficient potential of Vietnam’s inland waterways as a driver of than vessels at short lengths of haul, there is a limited greener growth will require, inter alia, a re-balancing of amount of road freight volumes and commodity types the mix of public investment in transport towards the for which a shift to the waterways is economical. waterborne sector. Second, bulk commodities, the mainstay of waterborne transport, are already almost entirely captured by the IWT sector, leaving limited room for further gains away Reference from trucks. Blancas, Luis C. and M. Baher El-Hifnawi. 2013. Although limited, some shift is expected to be obtained. Facilitating Trade through Competitive, Low Carbon This is particularly true for improvements in coastal Transport: The Case for Vietnam’s Inland and Coastal shipping, where lengths of haul are much longer Waterways. Washington, DC: World Bank. compared to inland waterway shipments. Experience from Western Europe suggests that inland waterways, when efficiently connected to ports and roads, can carry For Further Discussion higher value, time-sensitive goods on a more consistent Luis C. Blancas is a Transport Specialist with the Sustainable basis. Given the length-of-haul limitation of Vietnam’s Development Department, East Asia and Pacific Region, of waterways, the importance of providing better the World Bank. He is based in Washington, DC and can be multimodal linkages becomes all the more critical if reached at lblancas@worldbank.org. IWT is to capture larger shares of containerized freight Huong Mai Nguyen is a Transport and Urban Development going forward. Analyst with the Sustainable Development Department, East Asia and Pacific Region, of the World Bank. She is based in Washington, DC and can be reached at hnguyen15@ A Path Less Travelled worldbank.org. Water borne transport offers a viable solution to This note is part of the Vietnam Transport Notes Vietnam’s twin development challenges. As Vietnam’s series, which seeks to share experiences about the multimodal transport network remains undeveloped transformation of the Vietnamese transport sector. Any along the physical, regulatory, and institutional findings, interpretations, and conclusions expressed dimensions, improvements to waterway connectivity herein are those of the authors and do not necessarily and capacity can generate substantial benefits to reflect the views of the World Bank. Neither the World shippers, carriers, and the poor. Though incremental in Bank nor the authors guarantee the accuracy in this scope, such interventions can trigger transformational document and accept no responsibility what so ever for changes in the IWT sector, such as the continued any consequence of their use. support of the vessel scale-up process but realizing the Strengthening Competitiveness, Improving Sustainability, Increasing Opportunity