In another classic case of decentralization overkill, Vietnam has an unwieldy steel industry on its hands, experts say.
The rampant development of steel mills, still continuing even as the industry tries to deal with a growing surplus, is wasting investment capital and will create huge environmental pollution problems, they add.
According to a recent report by the Ministry of Industry and Trade, Vietnam now houses 74 steel projects with a combined investment of nearly US$22.2 billion in 30 cities and provinces.
Up to 65 steel mills have operated or been built since 2007, much higher than the 23 projects envisaged by a development plan for the industry approved by the government three years ago.
The combined capacity of the 65 projects is nearly 35.3 million tons per annum, far exceeding the anticipated demand of 15 million tons of the product in 2015, and 20 million tons in 2020. According to the Vietnam Steel Association (VSA), local demand now is only around five million tons a year, but annual supply has already reached 7.8 million tons.
VSA chairman Pham Chi Cuong said local production capacity has far exceeded demand but many new projects continue to be approved.
"It's unreasonable to license foreign invested projects that only produce regular steel products without any new technology and equipment," he said. "This will lead to harsh competition and many factories will have to cut back on production despite high designed capacity."
Of the 65 steel projects, 32 have been licensed by local authorities without approval by the prime minister or the negotiation with the Ministry of Industry and Trade.
The license by local authorities for a project, which is outside the industry's development plant, will be considered a violation of investment regulations if it has an investment of more than VND300 billion ($15.79 million) and does not get an opinion from the ministry, or an approval from the prime minister if it exceeds VND1.5 trillion ($78.95 million).
According to the VSA, the development rush of steel plants was caused by an increase in prices since 2005, making the projects attractive to both local and foreign investors.
Other reasons for the current situation are the race among localities to attract investment and an overlap in project management among local authorities. For example, in Ba Ria-Vung Tau Province, the management board of industrial parks is in charge of licensing steel projects, while the Department of Industry and Trade supervises the implementation of the steel industry development plan.
"When participating in mapping out the plan, we have already carefully considered the factors of environment, natural conditions and production capacity. However, some localities are not following the plan, resulting in wasteful use of resources and environmental pollution," Cuong said.
Tran Thi Huong, director of the Department of Industry and Trade of Ba Ria-Vung Tau Province, said: "We are proposing the Ministry of Industry and Trade allows only qualified projects to avoid the supply and demand imbalance as well as stagnation in consumption of the products."
VSA vice chairman Nguyen Tien Nghi said most new local investors do not specialize in steel production. With capital in hand and expectations of huge profits that some producers have earned, their investment is more of a trendy thing. They do not really understand the fierce competition in the market, Nghi said.
Then there are some steel distributors and traders investing in the production, as they think they will not face difficulties in finding customers.
Nghi said the new investors were mostly local. Some foreign firms have expressed their interest, but no big foreign steel complex is coming into operation, Nghi noted.
Some major foreign projects that have been licensed have been delayed for a long time, he added.
The production of one ton of steel will release 2.2 kilograms of slag waste on average, Huong said. "With the current projects, we can treat the waste. But it will be very difficult if more projects are carried out."
Some experts also expressed their concern that some of the smaller steel projects will use outdated imported technology, causing serious environmental pollution, and that uncontrolled development of steel mills will also create a labor shortage for the industry.
The VSA has requested that the government revoke licenses of large steel projects that have been delayed for a long time. Cuong said steel projects require huge land areas and opportunities should be given to more capable investors.
The Ministry of Industry and Trade last August asked authorities nationwide to tighten regulations for investment in steel projects but "the situation has not improved since," he said.
Cuong suggested the government approves only projects to make steel products that Vietnam does not produce at present.
The Ministry of Industry and Trade has said it will intensify inspections of steel production and trade to see if they stick to the approved plan. It will also ask localities to stop licensing common construction steel projects and review some of the licensed ones.
After reviewing projects licensed by localities nationwide, the ministry will propose to the prime minister that feasible projects are added to the plan, and ask localities to revoke investment licenses for infeasible projects or projects that have stagnated without due reason.