Private Investment in the VN Energy Sector: Status and Trend

                Private Investment in the Viet nam Energy Sector: Status and Trend 

Meeting the electricity requirement for a vibrant economic growth rate involves the compound annual growth rate of the electricity demand, which has been 13% since 2000; this has also resulted in the doubling of electricity consumption every six years. To keep pace with the energy demand, the electricity sector investment will need to accelerate substantially to around $8 billion–$12 billion annually for the period 2016–2030 (World Bank 2018), even if the energy mix further diversifies. Previously, over the period 2011–2015, the Vietnamese electricity sector achieved investments of $7.8 billion per year on average. This is a significant total figure within the constraints of the government budget. Over 80% of this investment has been concentrated in the power generation segment, and almost all of this has funded large coal-fired, gas-fired, and hydro-power projects. According to the government’s Revised Power Development Plan VII, the total investment needs in the power sector for the forecast period 2016–2030 are $152 billion–$185 billion, including one-third of the investment in the energy infrastructure. It is a major challenge to find a sufficient finance supply (World Bank 2018). Table 2 presents the investment growth forecasted over the period 2016–2030 compared with the previous period and based on three scenarios with regard to electricity consumption (low, medium, and high). It can be seen that, in all three scenarios, the annual investment rate growth has increased significantly for network investment. For example, during the period 2016–2020, the investment increased by 11.6% for the lowest electricity demand scenario and will remain the same amount over the period until 2030, requiring the mobilization of a huge amount of money for this sector, at least $152 billion. In terms of electricity generation, except hydro, for which the forecast is uncertain, the expectation is that the electricity sources will attract a large amount of investment. Coalfired electricity generation has an expected growth rate for annual investment of over 7% in 2016–2020, which will decrease gradually to roughly 4% by 2030. The high annual growth rate in the long term makes the total investment in coal power $75 billion–$92 billion; at the same time, the investment in renewables is likely to above 1% during the period 2016–2010 and roughly 2% by 2030. The long-term plan of the government somehow contradicts the emphasis on coal-fired electricity generation in the future, and it may put the country in an energy insecurity situation. ADBI Working Paper 1038 Dang and Taghizadeh-Hesary 6 Table 2: Investment in the Power Sector in Viet Nam’s Historical and Future Forecasted Data Average per Year in Investment Growth (%)

  To achieve the country’s climate change targets, large-scale gas developments of about 20 GW, demand side energy savings of 12 GW, and increased hydropower imports from the Lao People’s Democratic Republic of 5 GW by 2030 are necessary. If those investments are not forthcoming, imported coal will play an even greater role than currently planned. Furthermore, the balance of future investment is shifting slightly from generation toward the network infrastructure, which accounts for about a third of the total investment requirements, to keep pace with the rapid deployment of new energy generation projects, particularly renewables. Figure 4: Total Investment in the Power Sector over the Period 2016–2030 F in Generation and T&D Source: Government of Viet Nam (2016). 

The electricity sector has so far relied primarily on state-guaranteed debt to finance the bulk of its investment program through the national utility–Electricity of Viet Nam (EVN). During the period 2010–2015, EVN financed as much as 96% of its capital expenditure through debt, leading to a total debt amount of $9 billion in 2016. The Ministry of Finance backs part of EVN’s debt de facto, meaning that it is on-lent debt that it had borrowed it ADBI Working Paper 1038 Dang and Taghizadeh-Hesary 7 from a variety of IFIs, and part of the loans that EVN received directly came from a variety of domestic and international commercial banks, which the MOF backed through direct debt guarantees. Both categories of borrowing count toward public debt. In addition to the MOF, domestic commercial and private banks are major financiers of the electricity sector or EVN. Those organizations implemented borrowing typically on a corporate basis rather than a non-recourse project finance basis. Estimations show that five major banks (VCB, CTG, BIDV, TCB, and SHB) channel about 5% of the total outstanding loans to the electricity sector (World Bank 2018). However, this source of financing for the energy sector will be more limited because of the Single Borrower Limit requirement of 15% of the banks’ equity capital, which constrains the lending of many of the banks. Moreover, the sector concentration limits that banks set for prudential purposes further constrain their lending. The traditional model of depending mostly on government borrowing to finance the electricity infrastructure is unsustainable and no longer suitable. At a time when Viet Nam is strategizing substantial electricity investments, the country’s historical method of power sector funding will experience severe constraints for two major reasons. First, Viet Nam’s fiscal status has deteriorated in recent years, and the government is rapidly reaching its secured public debt threshold. With the sizable fiscal deficits in recent years, the public debt rose steeply from 51.7% of the GDP in 2010 to an estimated 63.3% of the GDP (the ceiling is 65% of the GDP) in 2016 and just reduced to 58.4% in 2018. Outstanding publicly guaranteed and on-lent debt to EVN already accounts for 4% of the GDP, and the scope to expand this further over the coming years is extremely limited given the public debt cap. In practice, this means that it will be challenging for the government to back EVN with additional funding or for EVN to borrow from commercial banks or international development finance institutions (IDFIs) with the support of a Ministry of Finance guarantee, as previously. Second, due to its recently gained middleincome status, Viet Nam has reduced access to concessional resources, particularly official development assistance (ODA) loan. As a middle-income country, it has already experienced a dramatic reduction in IDFI financing. The World Bank (2018) suggests that at least 75% of the energy investment requirement needs to come from the private sector until 2030. Currently, the private involvement in the energy sector in Viet Nam is negligible. From 1992 to 2016, Viet Nam attracted $13.8 billion to invest in infrastructure (including energy, transport, and water), of which the energy sector occupies a dominant share with $8.3 billion investment, equivalent to more than 60% of PPI capital. Notable projects in the energy sector include the Phu My 2.2 (gas build-operation-transfer (BOT) power plant, 2002), Nam Con Son gas pipeline (2002), Phu My 3 (gas-powered BOT power plant, 2003), and Mong Duong (coal-fired BOT power plant, 2011). In total, these projects accounted for 6.7 billion PPI, equivalent to 49% of the total PPI in Viet Nam in the period 1992–2016. The four projects mentioned above are in the form of BOT, foreign ownership accounts for the majority, and long-term international commercial debt and benefits from government commitments and guarantees protect the private participants but avoid some political and project-related risks, including converting the dong into US dollars and transferring it abroad. The Nam Con Son gas pipeline is the only project in the field of natural gas transmission and distribution that receives investment from the private sector ($1.3 billion)

Source : WorldBank