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Vietnam swallows bitter pill from Chinese-contracted $360mn steel project

Thursday, November 19, 2015, 16:56 GMT+7
Vietnam swallows bitter pill from Chinese-contracted $360mn steel project

A multimillion-dollar steel and iron plant in northern Vietnam remains a pile of rusted metal, eight years after the Vietnamese developer signed an EPC deal with a Chinese contractor for the megaproject.

The construction site of the Thai Nguyen Iron and Steel Plant in Thai Nguyen Province is now covered with weeds, and numerous pieces of equipment have rusted over after having been left unused for years.

The EPC contractor, China Metallurgical Group Corporation (MCC), has left after the developer, Thai Nguyen Iron and Steel JSC (TISCO), was no longer able to make payment in 2012.

TISCO is a subsidiary of the Vietnam Steel Corporation, and is the pioneer of the Vietnamese metallurgical industry.

In July 2007, TISCO and MCC closed an EPC contract for the Thai Nguyen plant, with a design capacity of 500,000 metric tons of iron and steel products a year, with a total investment of VND3.84 trillion, then equal to US$160.8 million.

Under an EPC (engineering, procurement and construction) contract, the contractor designs the installation, procures the necessary materials and builds the project.

The Chinese contractor was paid $35 million in advance to get work started, but ended up asking to increase the investment to VND8.1 trillion (then $298 million) in August 2008.

The total investment in the project is around $361.61 million against the current Vietnamese dong – U.S. dollar exchange rate.

The Vietnamese developer eventually accepted the capital increase proposal, even though the project would then cost nearly twice the initial investment.

In 2012, the developer faced a lack of finance, after disbursing more than VND4.5 trillion ($216.35 million) for the project.

The Vietnamese side had paid 93 percent of the procurement cost for the project, even though it should have been only 90 percent as per the contract.

The Chinese contractor then decided to stop implementing the project and returned to China, leaving behind a huge amount of equipment and machinery it had brought to the construction site.

The machines have now rusted over after being exposed to weather for the last three years.

“We were running out of capital and had no alternative source for additional investment, so the project has stalled since 2012,” Trinh Khoi Nguyen, head of the management board that oversees construction projects of the Vietnam Steel Corporation, admitted.

Even worse, the TISCO could not find an alternative contractor as the MCC had only brought the equipment and machinery to the project without devices to operate or control them.

The project suffered a huge cost overrun because the developer agreed to pay for equipment procurement on the basis of non-fixed prices when negotiating the EPC contract with MCC, according to TISCO deputy general chairman Do Trung Kien.

“TISCO accepted that it would cover the fluctuations on the equipment prices, rather than paying fixed rates,” Nguyen said.

“Unfortunately, machinery prices and foreign exchange rates all spiked sharply after the contract was signed.”

Kien said the TISCO is in talks with the MCC to have the Chinese contractor supply the controllers for the equipment and machinery it had brought to Thai Nguyen.

The Vietnamese developer is also seeking alternative contractors for the project via talks with some Chinese partners.

“It is expected that a new contract will be signed next month to restart the project,” Kien said.

“TISCO is inviting bids from qualified and experienced contractors and consulting firms for the project, and the MCC has also signaled that they want to extend the contract with us.”

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