Lawyer in Vietnam Oliver Massmann THE WORLD BANK REPORT ON RETAIL TARIFF INCREASE SOLUTIONS TO RECOVER ELECTRICITY OF VIETNAM

1. Lawyer in Vietnam Oliver Massmann THE WORLD BANK REPORT ON RETAIL TARIFF
INCREASE SOLUTIONS TO RECOVER ELECTRICITY OF VIETNAM
For the past few years, Vietnam has made the transition from a predominantly agricultural to a mixed
economy with substantial development of commercial and industrial activities. Rapid growth in
population and improvements in living standards together with the Government’s effort to improve access
to electricity throughout the country have led to growing increase in the demand for electricity. This now
poses a major challenge for Vietnam to maintain sustained growth of the power sector and to achieve
energy security. Meanwhile, Vietnam’s electricity demand continues growing at double-digit number.
Electricity infrastructure capacity is limited, operation of certain power projects has been delayed, and
private investors are reluctant to invest in the sector due to their concern of low rates of return on equity
and low feed-in-tariff. These factors, among others, have left the Electricity of Vietnam (EVN) with no
option but to increase debts to cover its operation needs. This article studies and proposes some solutions
to improve EVN’s operation in the coming years.
Current situation of the Vietnam’s power market
As of December 31, 2015, the total generation capacity in Vietnam’s interconnected power system was
141.34 billion kWh, an increase of 11.6% compared to 2014. During the period of 2011-2015, electricity
generation output increases by 11%/ year on average. Meanwhile, according to World Bank’s report in
2014, Vietnam is one of the most energy intensive economies in the world, and more energy intensive
than other countries in the Southeast Asia at the same level of development.[1] Electricity demand has
grown at a rapid pace averaging 15% per year from 2008 to 2010 before dropping to 9% in 2011 due to
the macroeconomic situation.[2] Electricity demand is expected to be twice as much as GDP growth
between 2014 and 2020. The Power Development Plan VII (PDP VII) projects a strong increase in power
demand to 2030.[3]
Amended PDP VII sets the target of electricity output in 2020 to be 235 -245 billion kWh, 352 – 379
billion kWh in 2025 and 506 – 559 billion kWh in 2030. In this amended PDP VII, in 2020, the targeted
total capacity of power plants is 60,000 MW, in which electricity output from renewable energy sources
will account for 9.9%. These numbers in 2025 will be 96,500 MW and 12.5% respectively. In 2030, a
target of 129,500 MW being the total capacity of power plants and 21% of electricity output generated
from renewable energy sources is also set.
Total investment in the power sector was US$2.6 billion in 2012 and slightly increased in 2013. This is
relatively small compared to the investment requirements of about US$7.5 billion per year. Meanwhile,
the Vietnam Government as well as state-owned enterprises in the sector is unlikely to invest more due to
prohibition from investing in non-core businesses by state-owned enterprises. In addition, the total
investment cost from 2014-2020 corresponding to the capacity requirements totals US$53 billion. Thus,
most of the expected total investment during 2014- 2020, which is of about US$25 billion should come
from private sector. EVN will then still need a substantial investment program, which is hard to be
financed until 2020.

2. The role of EVN in the power market and its financial problems
EVN and its subsidiaries play a vital role in the power sector. Key activities of the subsidiaries are
generation, transmission and distribution. EVN acts as the only off-taker from the generators. It incurred
significant financial losses in both 2010 and 2011.
EVN’s operation results in 2012 were much better, from a loss of 12% of income in 2011 to a profit of
14% of income. The profitable results maintained in 2013, although the result in 2013 was not as good as
in 2012 and investment was still far below the level of needs. EVN has also had a high and rising level of
borrowing in foreign currency. EVN is in a total debt of VND86 trillion in 2007, increasing to VND284
trillion in 2013. Total debt is expected to increase from US$14.6 billion in 2014 to US$28.2 billion in
2020.
The reasons behind EVN’s unstable, inefficient and risky operation are largely beyond EVN’s control. In
particular, we have to name hydrology, substantial devaluation in the Vietnamese dong against EVN’s
major borrowing currencies, lack of strong Government’s commitments in adopting tariffs to cover full
cost of power provision as main challenges to the power sector in general and EVN in particular.
In contrast, EVN’s subsidiaries in generation, transmission and distribution have a quite strong
operational performance and are well managed. However, low tariffs and low level of equity have put
them under considerable financial constraints.
These financial and investment challenges could be solved by appropriate actions from EVN, the Ministry
of Industry and Trade – the parent ministry and the private sector. In the worst scenario that EVN could
not fulfil its financial obligations, the Ministry of Finance – the guarantor of EVN’s loans must bear the
payment responsibility for the loans, resulting in possible decrease in investment and increased levels of
supply interruption accordingly.
EVN is not under immediate threat of insolvency. However, if the current delay in payment to its fuel
suppliers due to a prolonged delay in increasing tariffs and a series of years with low rainfall continue,
EVN could be placed under a much more serious financial pressure. Where its liabilities exceed its assets,
insolvency is unavoidable.
EVN’s challenges and solutions
Challenges Solutions
Achieving sufficient level of private investment in
the power sector to meet investment needs
(1) Improving regulations on guarantees on the
remittance of funds, licensing procedures, project
appraisal mechanisms, negotiation process with
EVN and reducing the numbers of required permits
as much as possible;
(2) Maintaining dialogue with private sector;
(3) Improving the MOIT’s capacity to manage IPP

3. projects; and
(4) Divesting GENCOs.
Addressing the current low retail tariffs to enable
EVN to improve the electricity system, which in turn
improves the reliability of power supply
(1) Setting PPAs in line with international
standards;
(2) Allowing market prices for new generation
investment;
(3) Amending current regulations to attract more
private investment; and
(4) Carrying out electricity tariff adjustments to the
extent necessary. The tariff adjustment path should
be phased over the next 3-4 years (about 40% in
total) so that EVN could achieve full cost recovery
and financial stability by 2018.
Improving operational efficiency at EVN
(1) Appointing a senior EVN leader to coordinate
among ministries and agencies to move the financial
recovery plan forward;
(2) Better technical management by (i) maintaining
a reasonable number of working staff to improve
labor productivity; (ii) making use of older coal
plants during poor rainfall season and efficiently
managing capital program; (iii) enhancing service
quality;
(3) Fully unbundling EVN into independent
companies;
(4) Disposing non-core assets and focusing only on
core business;
(5) Rehabilitating assets; and
(6) Improving governance.
Enhancing EVN’s capacity to manage financing
risks
(1) Increasing revenues arising from the
implementation of cost-based tariffs;
(2) Negotiating with lenders to extend the loan
terms;
(3) Establishing a stabilization fund to manage the
risks that EVN faces; and
(4) Reducing foreign exchange risks.
We note that these above recommendations are not mutually exclusive. In other words, implementation of
any single recommendation could facilitate the implementation and effectiveness of the others. Moreover,
these recommendations are not exhausted considering the on-going changes in Government policies and
power market situation.
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Please do not hesitate to contact Mr. 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.

4. THANK YOU !