Chapter 2 - Overview of Market for Environmental Technologies
Since the beginning of Vietnam's "renovation" period, which started in 1986, the government's stated goal has been for Vietnam to become an industrialized and modernized country by 2020. To achieve this goal, the government adopted policies that encouraged foreign investment and simultaneously sought to increase output of domestic industries.
From 1991 to 1997, Vietnam achieved extraordinary growth. Annual GDP growth averaged 8 percent during that period, making Vietnam the second fastest growing economy in Asia, after China. At one point in 1996, Ho Chi Minh City (formerly Saigon) had the fastest growing economy in the world.
Along with the benefits of industrialization have come the costs, including degradation of the environment. Vietnam is particularly vulnerable to environmental problems for simple reasons. Vietnam's 20th century history was defined by war, primarily on its own soil. Successive conflicts destroyed much of the country's infrastructure, leaving an already poor, underdeveloped nation in even worse condition. Following the reunification of the country in 1975, the government's centrally planned economic policies, especially the establishment of agricultural cooperatives, drove the country further into poverty. Therefore, the government has had little or no funds to upgrade urban infrastructure such as sewerage, drainage, and water supply. Pollution abatement has been a luxury, not a priority. Much of the existing infrastructure in the country's two largest cities, Hanoi and Ho Chi Minh City, has remained unchanged since being built early in the last century.
The same can be said for many of Vietnam's industries. Loss-making state-owned enterprises have been fighting for their survival, so installing costly waste treatment and prevention equipment has been, and remains, a low priority. Many of these enterprises use outdated equipment or second-hand imports which generate higher levels of pollution. Wastewater goes untreated and is dumped into local waterways. Enforcement of environmental regulations at state-owned enterprises is weak. While firms may be inspected and fined on occasion, they are rarely forced to close their doors. Company management, as well as inspection bodies, are aware that pollution is a problem, but both recognize that the SOEs do not have the funds to address the issue. Instead, companies try to keep the fines to a manageable amount, rather than pay for costly pollution-prevention equipment.
Air pollution is an acute problem, since many industries are located in densely populated areas. Vehicular emissions are the country's largest source of air pollution. If the government's decision to phase out leaded fuel by July 1, 2001, is implemented, this pollution source will at least become cleaner.
Some foreign manufacturers have also contributed to Vietnam's environmental degradation, capitalizing on the weak enforcement of the country's environmental regulations. In many cases, the fines imposed for violating standards is less than the cost of installing and operating waste treatment facilities. There have been some reported cases where waste treatment facilities have been installed but are not in use. No foreign manufacturer has been shut down because it violated environmental standards.
Over the past decade, urban migration has further strained an already overburdened urban infrastructure. Economic growth has been concentrated in Vietnam's largest cities, Hanoi and Ho Chi Minh City. In both cities, drainage and sewerage systems are combined, so when flooding occurs (as happens frequently) the population is exposed to highly polluted waters. Potable water supply in both urban and rural areas is inadequate, with large percentages of the population going without access to piped water or clean ground wells.
Solid waste collection and disposal is inefficient because of inadequate collection equipment. Landfills are reaching their capacity and many do not safeguard against contamination of surrounding areas. Medical and other hazardous waste are generally not treated separately from other solid waste.
Faced with these overwhelming and worsening environmental conditions, the government passed a Law on the Protection of the Environment in 1993. The law covers everything from requirements for environmental impact assessments to a list of prohibited activities and a system for addressing noncompliance with the law.
The government regulations opened a limited market for vendors of environmental services. Foreign investors and foreign-invested industrial zones, which (in theory) had to meet the regulations set by the law in order to receive investment licenses, became potential customers, especially during the early to mid-1990s, when investor interest in Vietnam was at its peak.
Since 1996, however, foreign investment commitments to Vietnam have dropped by over 60 percent. The difficulties of doing business in Vietnam, combined with the slow pace of policy reforms and the lingering effects of the Asian crisis, have deterred new investment. Accordingly, the number of new potential clients has dropped as well.
The market for environmental technologies in Vietnam today is being driven almost exclusively by overseas development assistance (ODA). Currently, there are more than 173 ongoing environment projects funded by 36 donors in Vietnam. The total financial commitment of these projects is over $1.4 billion. Forty-eight of these projects are funded by multilateral donors, and 125 are funded by bilateral ODA. In the pipeline are 57 projects valued at over $770 million. ODA commitments to the environment sector have increased six-fold since 1995.
Water supply, sewerage, and drainage projects will drive the market over the next two years. Limited access to potable water and exposure to raw sewage and polluted waters during flooding have become major health hazards to urban populations. Aid has been targeted accordingly.
For the past three years, donors and the government have channeled most urban-development ODA to rehabilitate infrastructure and water supply in Hanoi and other northern cities. Now, most attention is focused on Vietnam's largest city, Ho Chi Minh City. There are four major ODA-financed urban environment projects underway or in the planning stages. While the projects are focused on drainage and sewerage, some also contain air pollution and solid waste management components. These projects are financed by the World Bank, the Asian Development Bank, the Japan International Cooperation Agency (JICA), and the Belgian Administration for Development Cooperation (BADC).
Because so much of the activity in the environment technologies sector is now centered on ODA-financed projects in Ho Chi Minh City, Table 2.1 provides a useful reference for ongoing and upcoming opportunities in the sector.
Local companies are becoming more viable sales prospects, but the market remains limited. Citizen pressure to reduce waste emissions at manufacturing plants and the government "black books" of environmental polluters have raised awareness at local companies of the need to reduce pollution. Approaching these companies directly with viable financing schemes, such as bilateral aid or grants, has proven to be a successful market entry strategy for environmental equipment suppliers.
Contracts for ODA-funded projects make up the largest market for environmental technologies. Since technology needs vary from project to project, it is difficult to assess sales trends and opportunities for any given product. The descriptions of ongoing and upcoming ODA projects in the following chapters include examples of the types of technologies being imported.
What is clear is that the primary environmental technologies market is equipment for water treatment, water supply, and water purification. These products are imported on a regular basis for ODA projects, and also for local industries, businesses, and consumers. For instance, the market for pumps, valves, water meters, and spare parts has grown steadily over the past four years. Almost none of this equipment is produced domestically, and local consumers are familiar with the advantages of international brands.
Vietnam imports nearly all of the key equipment needed for waste treatment and pollution control. For wastewater treatment equipment, local environmental service companies and end users import pumps, control systems, motors, aerators, and filters.
An interesting niche market for environmental technologies has been local environmental service companies and research institutions. These institutions are part state-owned enterprise, part academic institution, and part government ministry. They can be responsible for everything from issuing environmental impact assessments, to environmental monitoring, to selling pollution control equipment, to foreign enterprises. While sales volumes to these uniquely Vietnamese "conglomerates" may be less than those to ODA-funded projects, they have proven to be a consistent market.
In addition to purchasing imported pollution-control equipment, these institutions have been consistent buyers of monitoring and analysis equipment. These institutions import equipment for taking and analyzing soil, water, and air samples, as well as laboratory equipment such as pH meters, spectrophotometers, and centrifugal machines.
Competitive Situation and U.S. Market Share
As is the case in numerous industries in Vietnam, U.S. companies are playing “catch-up ”in the environmental technologies and services markets in Vietnam. Over the past fifteen years, Denmark, Finland, Holland, Japan, Sweden, Australia, and France have been the countries most active in financing bilateral aid projects to the environment sector or co-financing multilateral aid projects. Government grants from these countries are financing feasibility studies and “master plans ”for environmental improvements and pollution prevention in Vietnam. Companies from these countries then win the design contracts and subsequent engineering and equipment contracts.
U.S. bilateral aid to the sector has been relatively slow in coming. This is largely because the focus of U.S.-Vietnam bilateral relations over the past five years has been on re-establishing diplomatic ties and normal trade relations. In general, U.S. policy on bilateral aid has shifted away from big project funding in recent years, so it is unlikely that U.S. grants to environmental projects in Vietnam will ever reach the levels provided by European countries.
Therefore, projects funded by multilaterals such as the World Bank, ADB, and UNDP offer significant opportunities for U.S. firms. Several American companies have successfully bid for consulting contracts to ODA-funded projects, among them Parsons, Black and Veatch, and Camp Dresser McKee.
In addition, some American companies have won contracts to sell equipment to the primary contractor on environmental projects. For example, it is likely that key equipment needed for an air quality monitoring project in Ho Chi Minh City will be sourced from the United States, although the primary contractor is a Danish company.
U.S. participation in Vietnam's environment sector is increasing via the participation of the United States-Asia Environmental Partnership (US-AEP), which established offices in Hanoi and Ho Chi Minh City in 1999.
The United States has not yet provided bilateral aid in the form of loans or grants to the environment sector. A new source of financing for U.S.companies is available via the Overseas Private Investment Corporation (OPIC). OPIC provided its first financial support to a U.S. investment project in Vietnam in December 1999. In late 2000, following the visit to Vietnam by President Clinton, OPIC extended a loan to the Ho Chi Minh City pharmaceutical company OPV, and announced a $200 million loan facility for joint ventures with at least 25 percent U.S.ownership. The U.S.Export-Import Bank is operational in Vietnam, but to date it has not provided any funding.
U.S. products such as water pumps, water filtration and purification equipment, and control systems enjoy a strong reputation among local buyers. Products from the United States, Europe, Japan, and Australia are preferred over imports from other Asian countries because they are perceived to be of higher quality and durability. However, the significantly higher prices of U.S.-made products remains a barrier in a market that is extremely price sensitive.