* World Bank says Vietnam PPP model "innovative"
* Investors concerned crony culture could emerge
* Bidding for second partner to be held next year
(Edits para 5 to make clear the company conducted the feasibility study)
HANOI, Nov 15 (Reuters) - For a firm short on capital with a background in textiles, property and bottling water, Bitexco wasn't the obvious choice to build a $757 million highway backed by the World Bank in Vietnam's first-ever public-private partnership.
There was no tender or bidding for the project, even though the communist government had committed to a level playing field in public-private projects. Investors say the no-bid contract - and the World Bank's support for it - has set a bad precedent for a country trying to shake off a reputation for entrenched graft, bureaucracy and vested interests.
The support was however described by World Bank officials as part of the push by Jim Yong Kim, the bank's president, to embrace private sector participation in development, especially in middle income countries like Vietnam, while ensuring safeguards remain in place.
Announcing the strategy last month, Kim said it would be impossible to eliminate poverty and meet the infrastructure needs of developing countries with public money alone.
The bank officials said the government chose Bitexco to build a 100-km (62-mile) stretch of a highway from Ho Chi Minh City to the coastal city of Phan Thiet after the company conducted a feasibility study. The World Bank's social and environmental safeguards will be met, and competitive pricing will be ensured, when bidding is held for a second partner, they said.
"This innovative approach will enable us to help Vietnam build the expressway faster, bringing economic development benefits to people sooner," said Victoria Kwakwa, Vietnam Country Director for the World Bank.
The World Bank has offered the government a grant and low-interest loans for the road project, the value of which are yet to be determined.
Several NGOs and other groups have cautioned that Kim's new strategy to partner with the private sector carries risks of poor governance if not implemented properly.
"In the strategy, the real emphasis is on partnering with the private sector and taking larger risks, with the hope of getting payoffs," said Jessica Evans, a senior advocate with Human Rights Watch in Washington.
"The bank's desire is in the right place. But unfortunately we just don't have the stringent mechanisms in place to ensure that there is the level of due diligence that is required, particularly for human rights."
In Vietnam, the lack of competitive bidding in the road project was criticised.
"I'm very disappointed," said a Japanese investor whose firm was interested in the project, speaking on condition of anonymity. "I expected the government would open this up with a fair chance for all private companies."
World Bank officials said the lender had insisted that Bitexco bid out for a partner to help in the project.
"Bitexco only has some construction experience, that's why we will have a bidding process to select the second investor who will bring not only the additional money but also must be the one with considerable experience and a high standard," said Mark Moseley, the World Bank representative overseeing the project.
Bitexco, best known for building an iconic skyscraper in Ho Chi Minh City, has held roadshows in several countries to seek partners for the road project.
Pre-qualification documents are to be submitted by Nov 29, with bidding likely to be take place next year.
It's not the first investment by Bitexco that has enjoyed the support of the government. It has been involved in construction of 10 hydropower plants with a total investment of $820 million, mostly from bank loans guaranteed by the government, which for a private firm is rare in Vietnam.
"Bitexco is one of the many companies in Vietnam with political colour but due to many factors, including involvement of multilaterals, the governance will be monitored by a lot of people which provides us comfort," said Rodrigo Franco, the president of Manila North Tollways, a company in the Philippines that has evinced interest in the project.
"We have heard reports about Bitexco's political connections but we think we are dealing with the government of Vietnam and its private sector and that is the important thing for us."
Manila North is a unit of Philippine conglomerate Metro Pacific Investments Corp, which in turn is a subsidiary of Hong Kong-based First Pacific Co.
Other investors have mixed feelings about the inaugural PPP deal. On one hand, it's a liberal leap from preferential treatment for state-owned enterprises (SOEs) that have stifled competition. The flip side, they say, is the PPPs could instead foster a culture of crony capitalism that foreign firms cannot compete with.
The government, however, says the inaugural PPP was fair and square, even though Bitexco was selected without competition.
"This is a pilot project," Vice Minister of Construction Nguyen Ngoc Dong told Reuters. "That's why it has its own special factors. We didn't break any regulations."
The PPP plan came into effect in January 2011 and is part of an economic "masterplan" launched by Prime Minister Nguyen Tan Dung to revive a once a promising Tiger economy that lost its bite due to heavy debt and spiralling inflation, with weak retail and credit growth plunging at least 120,000 firms into bankruptcy since 2012.
The plan states foreign and domestic tenders would be held for PPPs and bidding procedures must be "in line with international practice and ensure competition, fairness, transparency and economic efficiency." It made no mention of any pre-selection of firms.
The aim of PPPs is to ease the financial burden for infrastructure on the state in a country where public debt, including that of the cash-sapping SOEs, is equivalent to 95 percent of gross domestic product, according to a report commissioned by parliament's economic committee.
Bitexco's chairman Vu Quang Hoi said his firm would contribute 60 percent, or $90 million, towards the $150 million private investment in the highway.
The remaining $607 million, Hoi said, would come from the government. The World Bank said it would provide financial support for the project both directly and indirectly, through a grant to the government for its contribution to the project and through a low-interest loan, which the government would use to provide credit to Bitexco.
Hoi said Bitexco clinched the deal because of the groundwork it had put in beforehand and it had turned down more profitable projects to take the highway contract, because Vietnam "needs a pioneer" capable of delivering.
"We have a lot of experience building infrastructure for hydropower projects," Hoi told Reuters in an interview. "That's much more difficult than building an expressway."
However, the deal has left some foreign investors unimpressed at a critical time for Vietnam, which faces increased competition from other regional markets, some offering attractive incentives for international businesses.
"The Vietnamese government is ruining its last chance to gain the trust of foreign investors," said the head of a foreign business chamber in Ho Chi Minh City, who asked not to be identified. "To me, this look more like a donor-crony partnership than a public-private partnership."
(Additional reporting by Anna Yukhananov in Washington and Umesh Desai in Hong Kong; Editing by Martin Petty and Raju Gopalakrishnan)