Duane Morris Vietnam

Overview

Vietnam’s rapid development led at the same time to a continuous increase of energy requirement, both in the private sector and in the industry. Since then, the consumption of electricity has been rising by 15% per annum and, as a result, has considerably exceeded the economic growth rate. According to expectations, in 2020 it will rise sevenfold. According to the 7th Master Plan for the Development of Electricity, for the period from 2006 to 2025 investments amounting to VND 1,262,980 billion (US$ 74.32 billion) are required, which means on average more than US$ 3.7 billion per annum. In view of high requirement of more than 150 billion kWh, in 2015 Vietnam will probably import electricity from Laos or/and China. However, the implementation of targets of the phase from 2009 to 2015 of the Electricity Plan will be adversely affected by diverse unfavorable factors, as bottlenecks in power supply, difficulties in capital distribution, limited competences in the area of project management of many investors and contractors. In comparison to other countries in the region, the electricity market of Vietnam is far from being competitive and in particular has not yet solved the problems with regard to electricity selling price mechanisms. According to the 6th Master Plan, within the period from 2006 to 2015 investors should develop, independently from Electricity of Vietnam (EVN), about 54 energy projects which will be implemented in the form of IPB/BOT investments. However, only six projects have been completed yet, and they include the capacity of 2,059 MW, thus 5.6 percent of the Plan. In case of nine bigger projects with a total capacity of 15,275 MW, no investor has been found yet. According to the estimate of the Economic Committee, the lack of investment capital could slow down the development of the electricity sector in the remaining years of the Master Plan.

The most significant financial resources for the energy sector come from the national budget and from Official Development Assistance (ODA). Another important source is the EVN, with the capital coming from own funds as well as from various kinds of outside financing, including a big share in ODA and independent investments of state-owned enterprises (SOEs) as well as domestic and international private sector. The reason for many of the problems in the electricity sector is project financing. The total requirement for capital investments and payment of debts on the part of EVN between 2009 and 2015 amounts to VND 647,038 trillion. However, EVN can finance only VND 264,108 trillion and other investors outside of EVN also have only limited financial resources. Especially projects with a total investment volume of more than $ 1 billion often encounter financing difficulties.

In the years to come, the amount of foreign investments has to rise considerably in order to meet the growing demand: In consequence of the expected transition to a country with middle income status, the ODAs will probably be lower and for the period 2006 -2025 the 6th Master Plan envisages a necessary investment contribution by EVN of VND 665,389 billion (nearly US$39.2 billion). It results in a financing gap of estimated VND 597,591 billion that has to be filled by foreign and domestic private investors and other enterprises. The Master Plan already includes a list of projects that are to be implemented by way of private participation in the form of Build-Operate-Transfer projects (BOTs) or by way of Independent Power Producers (IPPs). At least in the short and middle term, until the conversion into a competitive energy market is completed, probably government loans, guarantees and subventions will be required as an incentive for investments and for a successful performance of a contract. The experiences with already existing project have shown that no-risk guarantees, including those for currency convertibility and performance risk on the part of Vietnamese partners are indispensable for raising of capital from bilateral banks, bilateral agencies and other private financing sources, thus for the creditworthiness of energy projects!

Recommendation:
In view of the fact that in the years to come private investments will be required, it is of great importance to continue working on a legal framework that is attractive to investors. In particular, Vietnam should reconsider the current dominance of EVN and, rather faster than planned before, establish (by 2024) a competition-based market with regard to generation of electricity, wholesale and retail industry. Until Vietnam’s regulatory environment has reached an internationally competitive level, we recommend the adjustment of energy prices and the maintenance of government guarantees in order to encourage foreign-financed investments and to reduce high risks related to large projects. Furthermore, we suggest that it should be made possible by law for foreign investors to apply international dispute settlement mechanisms.

Energy production

1. Energy prices
Compared both to the world and the region, energy prices in Vietnam are comparatively low: On 1 January 2009, the average selling price amounted to VND 842/kWh (less than US$ 0.05). In order to ensure profit and capital accumulation, the marginal price for development investments according to EVN in the long run must amount to 7.5 cent/kWh. For this reason, EVN is presently not able to make profits; it is rather principally dependent on loans from the budget. The enterprise has to cope with various difficulties, obtain domestic and foreign loans. It is due to low capacities to pay debts, as projects show low profitability and the electricity prices are low. In part, delayed privatization is to be blamed for this: At the present moment, only nine from 33 companies belonging to EVN have accomplished privatization, which had an impact on investments in projects under the 6th Master Plan for the development of electricity. As a result, EVN demanded the increase of electricity prices. Moreover, the Prime Minister has enacted a decision which paves the way for a gradual increase of prices, until they reach the market prices in 2010. This decision, however, has not been fully implemented yet.

Recommendations:
Although the general public interest and the affordability in view of the current stage of development have also to be taken into account, the gradual increase of energy prices is indispensable in order to promote energy efficiency and private investments. Only the combination of higher, but realistic prices and increased efficiency of service providers will enable enterprises to generate surpluses in order to finance capital expenditure, thus to operate at a commercially profitable and sustainable level. The market-oriented adjustment of current low prices for electricity should follow a clear schedule in order to enable investors and enterprises to balance the costs and make profits on a medium- and long-term basis.

2. Competitive tendering.
Although the latest revised tender regulations, in the event that there are several interested parties, appear to regard the competition-promoting tenders for infrastructure projects as necessary, currently existing projects have been implemented for the most part without such tendering procedure that promotes competition. However, the lack of tenders carries obviously the risk of a bad result, both for government agencies and for project partners and, besides, could lead to unfair distribution of risks.

Recommendations:
We recommend that the requirements for a clear and transparent competitive tendering procedure should be clarified in relevant statutes and regulations, and duly implemented. Moreover, clear and transparent complaint and dispute settlement mechanisms should be established in order to put potential disputes related to the acceptance of a tender out of the way. In view of complicated and arduous tendering procedure in case of large projects, we recommend to limit generally the extent of the projects.

3. The stability of statutory regulations and adherence to contract terms and conditions.
Projects in the energy sector tend naturally to be very complex and the costs of contract negotiation may reach millions, thus bring huge losses in case of failure of project implementation. Most common problems that arise after conclusion of a contract are in the majority of cases the failure of the Vietnamese partner to comply with provisions of the contract (as they have been approved by the Vietnamese government) in a timely manner as well as changes with regard to planned result of the contract and the time frame which arise due to frequent rapid amendments to the legal framework.

Recommendations:
In order to secure the interests of foreign investors, we recommend that the competent authorities make an effort to formulate the contract provisions clearly and to adhere to them within a reasonable period, in particular with regard to large and BOT projects in which the government agencies play a direct role. We also encourage the authorities to do their best in order to ensure transparency and to pay more attention to planning of statutes and regulations aiming at the improvement of advance planning of negotiations of major projects.

Electrical efficiency and safety

1. Safety with regard to electricity
In 2008, about 60% of fires in Vietnam caused by electrical defects resulted in serious damage to property and to persons. Such defects were caused by faulty electrical installations and by poor quality of electrical products/ equipment used. In the same year, more than 40% of electrical products sold in Vietnam were falsifications from China. In 2007, the Building Ministry made adjustments to the new Code TCXDVN394, inspired by the International Electro-technical Commission’s (IEC) Standard 60364 on protection- and security-oriented electrical construction and installations for buildings. This set of regulations has been implemented in 2008.

Recommendations:
With the participation of major international players, an independent national committee for electricity should be established and entrusted with the following tasks:
– issuing “Electrical and Automation Installation” manual as a basis for certification of all electricians;
– conducting examinations, at least on a three-year cycle in order to check the licenses of the
electricians;
– cooperation with insurance companies in order to establish a principle according to which a fire insurance policy can be issued only if the wiring in houses/buildings/factories has been done by a certified/licensed electrician;
– provision of consultations with regard to electrical standards.

The education of customs officials should be improved so that they are able to detect Chinese falsifications that are brought into the country. Moreover, measures should be introduced in order to make uncovering of officials and companies that facilitate the import of Chinese falsifications and taking action against them possible. Power companies adopt readily methods from other Asian countries and are prepared to provide training measures aiming at the improvement of understanding and awareness with regard to the trade of product piracy.

2. Electrical efficiency
In the last five years, the national production of electricity in Vietnam has risen by averagely 13%; on the other hand, the consumption of energy has increased by 15% per annum. Even the optimistic prognosis with regard to the growth of production capacities does not provide a solution of the problem of electricity shortage in Vietnam in the next five years. It is due to the minimum lead time of three to four years which is available for planning/construction/implementation of power plants. In order to counteract such an energy dilemma and at the same time not to affect the economic growth, the realization of a productive electric energy sector is a necessary step for the private and the public sector in Vietnam. There are indeed solutions for all market segments aiming at short-term reduction of consumption by 20 to 40%, however, most enterprises hesitate to invest by way of a return on investment/capital return (ROI) of two to three years. Government agencies held numerous seminars in order to increase the public awareness of energy efficiency and its possible environmental effects (e.g. mass displacement in consequence of rising sea level) in the longer term. In 2007, a set of regulations for the development of Energy Service Companies (ES-COs) was introduced. The government decided to introduce incentives for enterprises purchasing energy-efficient products, but the decrees have not come into effect yet.

Recommendations:
We recommend establishing an Energy Efficiency Board reporting directly to the Prime Minister and responsible for advancing special action plans and standards with regard to this subject. The board should be responsible for establishing “Green Building” principles as well as propose measures for enterprises in order to limit the use of electricity in main duty cycles. Furthermore, it should be competent for the enactment of regulations on energy quality for energy users and providers. International companies are definitely prepared to put forward suggestions for the improvement of the energy efficiency market in Vietnam. In particular, reference to existing IEEE/IEC standards (IEEE 519 1995, IEEE1159-1995, IEC61000-4-30, etc.) should be made, as they are already used in neighboring Southeast Asian countries. Finally, we suggest that the government makes an effort to make the expansion of the energy efficiency market in Vietnam possible by increasing the number of ESCO and simplifying the administrative application procedure for the formation of new ESCOs as well as by establishing measures to support newly formed companies.

Fuel distribution
Since 1 January 2009, foreign invested enterprises are authorized to provide distribution services with regard to all legally imported and domestically manufactured products (in the commission, wholesale and retail sectors). The distribution services sector is opened for the distribution of the following nine product fields in the retail trade, but not for foreign enterprises: rice, sugar, tobacco, processed oil and crude oil, pharmaceutical products, gunpowder, journals and magazines, noble metals and rocks as well as audio and video equipment. The fuel supply chain in Vietnam is divided into three levels: (i) importers, with the Ministry of Trade determining import quotas; (ii) wholesalers; and (iii) retailers. Since 1 May 2007, wholesalers and retailers are allowed to fix fuel prices within a small trade framework that is regulated and controlled by the government.

Recommendations:
Investor Group recommends that the government reconsiders its position with regard to the distribution of processed oils and oil products by respectable international enterprises, so that it permits fuel distribution. The exclusion of processed oils and oil products is unreasonable. Generally, the presence of foreign suppliers brought numerous advantages for Vietnamese consumers. Especially the admission of foreign fuel suppliers will also bring an increased benefit for Vietnam, namely, for the following reasons:
• Improved safety, reliability and quality of products and services
Leading foreign suppliers have many years of experience in fuel distribution and have been continuously improving the safety of their services and products. For instance, correct additives used by these suppliers in petrol would clean the engines better, thus extend the life of the engines. Petrol is a volatile and dangerous product and can have disastrous effects in case of an accident. High safety standards of leading foreign suppliers will reduce the probability of such accidents. Moreover, the admission of foreign fuel suppliers will force domestic enterprises to improve the safety and quality of their own products and as a result bring benefits for domestic consumers.

• Economic benefit for Vietnam
For different reasons, foreign enterprises bring economic benefit for Vietnam:
• o Additional revenue/taxes: Improved safety and product quality will boost the demand, thus increase the revenue of the Vietnamese government. For instance, most international airline companies currently do not refuel in Vietnam because of concerns about the safety and quality of domestically available products. Instead they refuel outside of Vietnam when they fly to or out of the country. It is not an ideal course of action for the airlines because as a result they are forced to fly heavy airplanes, which entails reduced fuel efficiency. The admission of fuel distribution by leading international enterprises would strengthen the confidence of airline companies that they can obtain high-quality fuel, comparable to airports of other countries, within Vietnam. This increased confidence would at the same time enhance the probability that in future the purchasers/dealers switch to Vietnamese suppliers.

• o Prices: Enhanced competition would cut prices, which would be advantageous for consumers. Vietnam will continue in the next decades to import oil products even for the few refineries which the country plans to build in the near future. Most international companies with internal supply networks, including high-class refineries in the region, have though the capacity to deliver fuels directly, i.e. without the involvement of a third party, to Vietnam, thus to reduce the fuel prices for local consumers.

Closing remarks

This is the first time that the subject “renewable energies” was mentioned in the Master Plan for the Development of Electricity; therefore, the Planning Committee had modest experience in the area of renewable energies. The Ministry of Industry and Trade has drawn up a detailed development plan for renewable energies that is to be added to the Power Master Plan. (Power Master Plan 7)

Please do not hesitate to contact Oliver Massmann under omassmann@duanemorris.com if you have any questions on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC.

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