A FINANCIAL RECOVERY PLAN FOR VIETNAM ELECTRICITY (EVN) WITH IMPLICATIONS FOR VIETNAM’S POWER SECTOR Joel Maweni Jyoti Bisbey AUTHOR DISCLAIMER RIGHTS AND PERMISSIONS This volume is a product of the staff of the International Bank for The material in this publication is copyrighted. Copying and/or Reconstruction and Development / The World Bank. The re- transmitting portions or all of this work without permission may port was prepared with the support of AF Mercados Energy be a violation of applicable law. The International Bank for Re- Markets International of Spain, consultants to the Bank. construction and Development / The World Bank encourages 6JG ƂPFKPIU KPVGTRTGVCVKQPU CPF EQPENWUKQPU GZRTGUUGF KP dissemination of its work and will normally grant permission to VJKUXQNWOGFQPQVPGEGUUCTKN[TGƃGEVVJGXKGYUQHVJG'ZGEW- reproduce portions of the work promptly. tive Directors of the World Bank or the governments they rep- resent. The World Bank does not guarantee the accuracy of Copyright © 2016 the data included in this work. The International Bank for Reconstruction and Development/ The World Bank Group #NN VJG ƂPCPEKCN KPHQTOCVKQP ICVJGTGF HQT ƂPCPEKCN OQFGNKPI 1818 H Street, NW YCU RTQXKFGF D[ '80 *QNFKPIU 6JG ƂPCPEKCN FCVC JCU PQV Washington, DC 20433 DGGPCWFKVGFCPFJCUDGGPRTGUWOGFVQTGƃGEVCEVWCNDGJCX- USA ior of the group of companies. In modelling the future behav- All rights reserved. ior of EVN and its power subsidiaries, data gaps, where they First printing:February 2016 occurred, were resolved by the authors and their consultants Manufactured in the United States of America. based on their best knowledge and judgement. This report Photos: © EVN Vietnam. Used with the permission of Deltares. should not be used as the basis for making commercial deci- Further permission required for reuse. sions. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgement on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundar- ies. Cover photo © istock photo. A FINANCIAL RECOVERY PLAN FOR EVN CONTENTS Acknowledgements iii Annexes Foreword v Annex I: Options for Raising Capital by Divesting Assets 53 Acronyms vi Annex II: Risk Management Options 57 Glossary vii Annex III: Operational Performance of PCs 63 1. Overview ix Annex IV: Social and Fiscal Assessment of 1.1. The Financial Recovery Plan: Five Pillars ix  %QUVTGƃGEVKXG6CTKHHU  1.2. Financial Recovery Plan: A Framework Annex V: Market Feedback 71 for Implementation xii Annex VI: Summarized Stakeholders’ Comments 73 Annex VII: Key Regulations 75 2. Sector Context and the Need for a Financial Recovery Plan for EVN 1 2.1. Report Objective 1 2.2. Vietnam’s Legal and Regulatory Framework 2 2.3. Structure of EVN 3 2.4. Demand and Supply 4 2.5. Investment Needs 10 3. Situation Analysis of EVN 15 3.1. EVN Group 15 3.2. EVN Subsidiaries 17 3.3. Summary 23 4. Major Challenges Faced by EVN 25 4.1. Private Investment Needs 25 4.2. Inadequacy of Retail Tariffs 27 4.3. The Affordability of Power 28 4.4. Operational Improvements in EVN 29 4.5. Risk Management in EVN 30 4.6. Corporate Governance 32 4.7. Conclusion 32 5. Recommendations for a Financial Recovery Plan 35  +ORTQXKPI1RGTCVKQPCN'HƂEKGPE[  5.2. Designing and Implementing a New Investment Strategy 40 5.3. Developing a Sustainable Financing Strategy 42 5.4. Implementing Cost-based Tariffs 43 5.5. Improving Risk Management 44 6. Framework for Implementation of the Financial Recovery Plan 49 6.1. Implementing the Five Pillars 50 6.2. EVN’s Central Role 50 6.3. Role of the Subsidiaries 50 i BOXES, TABLES AND FIGURES Boxes Box 3.1: EVN’s 2012 Revaluation of Assets 17 Table 2.8: EVN Subsidiaries’ Investment (VND, billions) 13 Box 5.1: The Electricity Tariff Equalization Fund Table 3.1: Structure and Cost of EVN’s Debt 16 (ETEF) in New South Wales 46 Table 3.2: Impact of Assets Revaluation on Debt-Equity Box II.1: Stabilization Funds in Latin America, Ratios 17 Table 3.3: Comparison of Unit Investment the Argentina Case Study 57 Cost for Thermal Power Plants 18 Box II.2: Weather Insurance: Uruguay 58 Table 3.4: Other Operational Assumptions, by Technology 19 Figures Table 3.5: Financial Performance - Gencos (2013) 20 Figure O-1: Financial Recovery Plan (Top Priorities) xiii Table 3.6: Operational Indicators - NPT (2012) 20 Figure 2.1: Structure of Vietnam’s Power Sector 3 Table 3.7: Unit Cost of Transmission Assets Figure 2.2: Structure of EVN’s Power Business 4 According to PMP7 (2011–20) 21 Figure 2.3: Updated Electricity Demand Forecast 5 Table 3.8: Financial Indicators - NPT (2010-12) 21 Figure 2.4 Energy Demand Forecast Used in the Table 3.9: PCs – Benchmark Operational Financial Forecasting Model (GWh) 5 Performance (2012) 22 Figure 2.5: Generation Mix (by Capacity) 7 Table 3.10: PCs – Financial Indicators, 2012 and 2013 23 Figure 2.6: Generation Reserves Forecast (from PMP7) 9 Table 4.1: EVN’s Future Financial Performance (KIWTG)GPGTCVKQP4GUGTXGU 7PQHƂEKCN2/2   under Various Assumptions 28 Figure 2.8: New Capacity and Share of IPPs 11 Table 4.2: Share of Electricity in Total Household Figure 2.9: Investments in Transmission Grid Assets Expenditures (%) 28 in EVN’s Updated CAPEX Program versus PMP7 12 Table 5.1: Recommendations for Improving Figure 3.1: Consolidation of the EVN Group (EBITDA) 18 EVN’s Finances 35 Figure 3.2: Levelized Costs of Generation Table 5.2: Potential Parameters for use in Designing Technologies by Type, Location, and Load Factor 19 Performance Targets 38 Figure 4.1: Share of Power Generation Ownership Table 5.3: Impact of Divesting Non-Core Assets on (based on Installed Capacity), 2012 26 EVN Holding’s Financial Indicators 39 Figure 4.2: Tariff Paths at a Glance 29 Table 5.4: Summary of EVN’s Financial Challenges, Figure 4.3: Ln (Demand) to Ln (GDP) Elasticity 2014-20 (US$ million) 43 across the World, 1990–2010 31 Table 5.5: Implementing Cost-based Tariffs 44 Figure 5.1: How the Electricity Tariff Equalization Table 5.6: Recommended Communication Strategy 45 Fund Operates in New South Wales 46 Table I-1: Options for Financing Additional Investment 54 Figure 6.1 Action Plan (Top Priorities) 51 Table II-1: Risk Management Approach to Hydrology 59 Figure II-1: How Does Weather Insurance Work? 58 Table II-2: Alternative Strategies for Managing (KIWTG+8%QUVTGƃGEVKXG6CTKHHU  Forex Risks 60 Table III-1: Operational Performance of PCs, 2012 63 Tables Table IV-1: Household Consumption 68 Table IV-2: Share of Electricity Cost in Total Table O-1: Recommendations for Improving EVN’s Household Expenditures (%) 68 Finances x Table IV-3: Share of Electricity in Total Household Table 2.1: PMP7 Demand Forecast 4 Expenditures (with removal of IBT) (%) 68 Table 2.2: Installed Capacity, 2013–20 (MW) 6 Table IV-4: Options for Mitigating the Impact of Tariff Table 2.3: Total Installed Capacity and Capacity Increases on Affordability 69 Additions by Technology (MW,) 2013–20 7 Table 2.4: Load Factors and Outages 8 Table 2.5 Reserve Margins 9 Table 2.6: Energy Balances (GWh) 10 Table 2.7: Total Investment Cost, 2014–20 11 ii A FINANCIAL RECOVERY PLAN FOR EVN ACKNOWLEDGEMENTS This report was prepared by a task team led by Joel Maweni Support for this report came from the ASTAE. ASTAE’s (Energy Adviser, Team Leader and Principal Author) and mandate is to scale up the use of sustainable energy options comprising Jyoti Bisbey (Infrastructure Specialist and in Asia to reduce poverty and protect the environment by Co-Author), Hung Van Tien (Senior Energy Specialist and RTQOQVKPITGPGYCDNGGPGTI[GPGTI[GHƂEKGPE[CPFCEEGUU Co-Team Leader), Franz Gerner (Energy Sector Coordinator), to energy. ASTAE is funded by the Netherlands, Sweden, Lien Thi Bich Nguyen (Program Assistant), Hien Minh and the United Kingdom. Vu (Program Assistant) and Hoa Chau Nguyen (Program Assistant). AF Mercados Energy Markets International (EMI) of Spain provided consulting services for data collection and CPCN[UKUTGUGCTEJCPFƂPCPEKCNOQFGNNKPICPFRCTVKEKRCVGF in developing the Financial Recovery Plan. Chris Marquardt provided invaluable editorial support. This work was conducted under the guidance of Victoria Kwakwa (Country Director for Vietnam). Jennifer Sara, Julia Fraser and Keiko Sato provided valuable comments and guidance. Mohinder Gulati, Katharina Gassner, Artur Kochnakyan and Raihan Elahi served as peer reviewers and provided substantive quality enhancement support. The task team wishes to acknowledge the support and cooperation extended to it by representatives of EVN and its power subsidiaries, who provided detailed data regarding VJGKTQRGTCVKQPUCPFƂPCPEGUCPFFGXQVGFUWDUVCPVKCN amounts of time in discussion with the task team and AF Mercados EMI. 6JGVGCOHWTVJGTGZVGPFUKVUITCVKVWFGVQQHƂEKCNUQHVJG government of Vietnam’s Ministries of Finance (MOF), Industry and Trade (MOIT), and Planning and Investment /2+ CUYGNNCUVQVJG1HƂEGQH)QXGTPOGPVVJG+PUVKVWVG of Energy (IE), and the Electricity Regulatory Authority of Vietnam (ERAV) for the contributions they made to the study through sharing data and participating in workshops and numerous discussions with the task team and AF Mercados EMI. Further gratitude is owed to development partners and members of the private sector for sharing information and insights on both key energy sector development challenges and possible solutions. Finally, the task team wishes to acknowledge the generous ƂPCPEKCNUWRRQTVHQTVJGCPCN[VKECNYQTMNGCFKPIVQVJG preparation of the report from the Asia Sustainable and Alternative Energy Program (ASTAE) and the government of Australia, through the Department of Foreign Affairs and Trade. iii © istock photo iv A FINANCIAL RECOVERY PLAN FOR EVN FOREWORD For decades, the double-digit growth in Vietnam’s electricity phased over this period, the increases (about 40 percent demand has continued unabated, driven by increasing in aggregate) will not cause hardships to low-income WTDCPK\CVKQPKPFWUVTKCNK\CVKQPCPFITQYKPICHƃWGPEG households whose expenditures on electricity will be in the Successfully meeting this electricity demand has been an range of 2-4 percent of total household expenditure—that is, important driver of Vietnam’s development. At the same below the international benchmark of 10 percent. time, it has required substantial levels of investment in power r 6JGTGRQTVKFGPVKƂGUETKVKECNPQPVCTKHHEQORQPGPVUQH sector infrastructure and these are estimated to further VJGƂPCPEKCNTGEQXGT[RNCPKPENWFKPI C KORTQXGOGPVUKP substantially increase, to about US$7.5 billion per year QRGTCVKQPCNGHƂEKGPE[ D CPGYKPXGUVOGPVUVTCVGI[ E  during 2014–20. FGXGNQRKPICUWUVCKPCDNGFGDVƂPCPEKPIUVTCVGI[CPF F  Vietnam has relied on a predominantly public sector model improving risk management. HQTƂPCPEKPIRQYGTKPHTCUVTWEVWTGGZRCPUKQPPGGFU6JKU For Vietnam to be able to meet its future power needs ƂPCPEKPIOQFGNJCUEQOGWPFGTUVTCKPCUFGOCPFCPF TGNKCDN[CPFGHƂEKGPVN[KVKUETWEKCNVJCV'80oUƂPCPEKCN investment needs have continued to grow unabated. The health be restored and sustained. Implementation of maintenance of retail electricity prices below cost recovery the recommended Financial Recovery Plan would help levels over many years had the impact of depressing the to achieve this goal. EVN will need to take the lead for UGEVQToUECUJƃQYUNGCXKPI'80YKVJPQQRVKQPDWVVQ CEJKGXKPIKVUƂPCPEKCNUWUVCKPCDKNKV[DWVVJGTGEQXGT[RNCP increase debt in order to meet capital expenditure needs. will also require actions from other government agencies. Potential private sector investors, concerned about low #VVJGUCOGVKOG'80oUƂPCPEKCNUWUVCKPCDKNKV[KUETKVKECNHQT rates of return on equity and the sector’s ability to pay the successful implementation of the government’s broader for electricity generated, have been reluctant to invest. power sector reform roadmap and for the next step of Besides the rapid demand growth and the large investment creating the Wholesale Electricity Market. GZRGPFKVWTGPGGFU'80oUƂPCPEKCNRGTHQTOCPEGJCUDGGP adversely affected by risk factors including hydrology, fuel We hope the reader will get useful insights from this price hikes, and currency risks. report. We look forward to further supporting EVN and the IQXGTPOGPVHQTVJGDGPGƂVQHCƂPCPEKCNN[UWUVCKPCDNGRQYGT Based on a comprehensive analysis of the key drivers of sector that can meet the demands of Vietnam’s society and '80oUƂPCPEKCNRGTHQTOCPEGYKVJWPFGTN[KPICUUWORVKQPU its growing economy. on demand growth, investment expenditures, and scenarios of the trajectory of electricity prices to full cost recovery, the report makes the following key recommendations: • The proposed Financial Recovery Plan should be viewed Victoria Kwakwa as an integrated set of measures that are interdependent Country Director for Vietnam and mutually reinforcing. For example, improving reliability of power supply by reducing outages or improving voltage conditions will boost customers’ willingness to pay the full cost of service for electricity supply. Increases in tariffs will in turn enable EVN to invest in system improvements that will contribute to improved reliability of power supply. • An electricity tariff adjustment path to reach full cost recovery in the next three to four years is critical for sustainable power supply in Vietnam. If gradually FOREWORD v ACRONYMS ADB Asian Development Bank IPO initial public offering BOT build, own and transfer IPP independent power producer BST bulk supply tariff JPY Japanese Yen CAGR compound annual growth rate KPI key performance indicator CAPEX capital expenditure kV kilovolt CCGT combined cycle gas turbine LOLE loss-of-load expectation %( ECUJƃQY MIGA Multilateral Investment Guarantee Agency CPI consumer price index MPI Ministry of Planning and Investment D:E debt: equity MMBTU million British thermal units DSCR debt service coverage ratio MOF Ministry of Finance EPTC electricity power trading company MOIT Ministry of Industry and Trade (acts a single buyer) MOLISA Ministry of Labor, Invalids, and ERAV Electricity Regulatory Authority of Vietnam Social Affairs ETEF Electricity Tariff Equalization Fund MOU memorandum of understanding EVN Holding consolidated EVN group NLDC National Load and Dispatch Center EVN Vietnam Electricity (acts as system operator) EVNCPC Central Power Corporation O&M operation and maintenance (distribution company) OPEX operational expenditure EVNHCMPC Ho Chi Minh Power Corporation PC power company (distribution company) PDPAT Power Development Planning Assist Tool EVNHNPC Hanoi Power Corporation PetroVietnam Vietnam National Oil and Gas Group (distribution company) PM prime minister EVNNPC Northern Power Corporation (distribution company) PMP Power Master Plan EVNNPT National Power Transmission Corporation PPA power purchase agreement (transmission company) PSALM Power Sector Assets and Liabilities EVNSPC Southern Power Corporation Management Corporation (distribution company) SAIFI system average interruption FERFA foreign exchange rCVGƃWEVWCVKQP frequency index adjustment 5(4 UGNHƂPCPEKPITCVKQ FRP Financial Recovery Plan SMB small and medium business FSA fuel supply agreement SOE state-owned enterprise FX OR forex foreign exchange SPPA standard power purchase agreement GDP gross domestic product TNO transmission national operator genco generation company TPP thermal power plant HPP hydropower plant TSO transmission system operator IBT increasing block tariff USD U.S. dollar ICSID International Center for the Settlement of VAT value added tax Investment Disputes VBF Vietnam Business Forum IE Institute of Energy Vinacomin Vietnam National Coal and +(+ KPVGTPCVKQPCNƂPCPEKCNKPUVKVWVKQP Minerals Industry Group IFRS International Financial Reporting VND Vietnamese dong Standards VNEEP Vietnam National Energy IPART Independent Pricing and Regulatory  'HƂEKGPE[2TQITCO Tribunal vi A FINANCIAL RECOVERY PLAN FOR EVN GLOSSARY Build, own and transfer (BOT): Public infrastructure model which owns facilities to generate electric power for sale to under which the private sector designs and builds the utilities and end users. KPHTCUVTWEVWTGƂPCPEGUKVUEQPUVTWEVKQPCPFQYPUQRGTCVGU Load factor: An indicator of how steady an end user and maintains it over a period. electrical load is. It is measured by dividing the average Bulk supply tariff (BST): Tariff charged to distribution power by the peak power over a period. companies for bulk supply of power by EVN Corporate. Losses: Energy lost or wasted during the transmission of Creditworthiness: An evaluation of customer’s or trading energy from the generator to the end user. RCTVPGToUƂPCPEKCNCEEQWPVCDKNKV[ Mitigation strategies: The assessment of probable current Currency devaluation: Decrease in a currency’s value with and future risks by combining the probability of occurrence respect to other currencies. CPFVJGUGXGTKV[QHQWVEQOGHQTCPKFGPVKƂGFRTQLGEVTKUM Debt management: Implementation of a strategy to support and applying actions to alleviate the negative outcomes. a debtor to reduce his level of indebtedness or handle the Such action might be to assume, avoid, control, transfer, or FGDVKPCDGVVGTYC[QXGTCƂZGFRGTKQF6JKUOKIJVTGSWKTG monitor the implicit risk. restructuring the debt or assisting the debtor to repay Non-core assets: Assets which became dispensable for a liabilities more effectively. EQORCP[CUVJG[FQPQVOCMGCUKIPKƂECPVEQPVTKDWVKQPVQ Demand risk: Possible hazard for business entities commonly the core operations of the business. These assets are often based on an incorrect demand forecast which does not sold to pay off outstanding debts. match the consumer demand. This can lead to the under- Partial privatization: The constrained hand over of publicly or over-production of goods and consequently the loss of operated enterprises to the private sector or the contract RTQƂVUFWGVQUVQTCIGEQUVUQTVJGNQUVQRRQTVWPKV[EQUVHQT operation of a utility or service by a private entity. sales. Power corporation (PC): Name given to distribution Divestiture: The selling of assets by a regulated utility as companies in Vietnam. part of deregulation. In almost all cases, divestiture refers to Power purchase agreement (PPA): Contract between the generation assets being sold, for example, power plants. electricity generator as seller and a buyer. EVN Corporate: Includes dependent power plants, the Private sector responsiveness: The degree of sensitivity Electricity Power Trading Company (EPTC), the National of private entities on external alterations within the Load and Dispatch Center (NLDC), and corporate services. business environment, such as amendments in policies and Financial recovery:#RGTKQFQHKPETGCUKPIƂPCPEKCNUVCDKNKV[ regulations, which might directly or indirectly have an impact KPFKECVKPIVJGGPFQHCƂPCPEKCNFQYPVWTP+PVJKUECUGKV on their commercial activities. YQWNFOGCPVJGCEJKGXGOGPVQHƂPCPEKCNUWUVCKPCDKNKV[ Stabilization fund: Instrument implemented to protect Financial sustainability: Financial conditions which EVN EQPUWOGTUHTQOJKIJƃWEVWCVKPITGXGPWGUVTGCOUGCTPGFD[ should achieve to operate as an ongoing and viable the utility and hence avoid sharp variations in power prices. business. Standard power purchase agreement (SPPA): Format of Foreign exchange risk: The possibility of the loss of value power purchase agreement widely adopted in Vietnam for of an asset which is not held in the base currency of the short-term sale contracts. business entity due to adverse movement in the exchange Ton: Tonnes (1,000 kg). rate. Unbundling: Breaking up the three components of electricity Hedge: The initiation of a transaction in a physical or supply: generation, transmission, and distribution. ƂPCPEKCNOCTMGVVQTGFWEGTKUM Exchange rate: VND 21,000 = USD 1 Independent power producer (IPP): A private company vii © istock photo viii A FINANCIAL RECOVERY PLAN FOR EVN 1. OVERVIEW 6JKUTGRQTVUGVUHQTVJFGVCKNUQHCƂPCPEKCNTGEQXGT[RNCP not cover the full costs of power provision. Although EVN’s designed to help Vietnam Electricity (EVN), and the ƂPCPEKCNTGUWNVUKPYGTGOWEJDGVVGTVJGTGCUQPUHQT Vietnamese power sector more generally, to address a series the improvement—in particular, better rainfall—were largely of complex and interconnected challenges over the next 3 to QWVUKFG'80oUEQPVTQN9JKNG'80EQPVKPWGFVQDGRTQƂVCDNG 10 years. These challenges are operational and institutional in 2013, results were not as good as in 2012. CUYGNNCUƂPCPEKCNCPFYKNNNGCFVQHWPFCOGPVCNEJCPIGU '80JCUVJWUTGOCKPGFUWUEGRVKDNGVQCTGVWTPVQƂPCPEKCN over time in the way that EVN and the overall power sector FKHƂEWNVKGUKPVJGCDUGPEGQHOGEJCPKUOUVQOCPCIGVJGTKUMU operate. to which it is most vulnerable (hydrology, foreign exchange, The investment requirements of the power sector lie at the JKIJNGXGNUQHFGDVƂPCPEKPIFGOCPFHQTGECUVKPICPF heart of these challenges. Electricity demand is expected changes in input costs) and in the absence of a clear to double between 2014 and 2020. The investment government commitment to an adjustment path for tariffs requirements of about US$7.5 billion per year are far towards full cost recovery. in excess of what has been achieved in the recent past The report concludes that a crucial determinant of EVN’s (US$2.61 billion in 2012, with a small increase in 2013). ƂPCPEKCNYGCMPGUUKUVJGNGXGNQHRQYGTUGEVQTVCTKHHUYJKEJKU Moreover, the Vietnam government does not wish to make currently below cost. The report further recognizes the need further direct investments in the sector—while state-owned for a recovery strategy that includes both tariff and non-tariff companies such as the Vietnam National Oil and Gas OGCUWTGUVQJGNRTGUVQTGCPFUWUVCKP'80oUƂPCPEKCNJGCNVJ Group (PetroVietnam) and the Vietnam National Coal and The non-tariff measures should complement, not substitute Minerals Industry Group (Vinacomin), which have invested tariff increases. in power projects in the past, are similarly unlikely to invest. As a result, about 50 percent of total investment (or over 65 percent of investment in new generation capacity) from 1.1. THE FINANCIAL RECOVERY PLAN: FIVE PILLARS now on is expected to come from the private sector through The authors, therefore, have recommended a package of independent power producers (IPPs) and other private sector tariff and non-tariff measures that, taken together, make up participation arrangements. This implies a far more rapid VJGRTQRQUGFƂPCPEKCNTGEQXGT[RNCPHQT'806JGRCEMCIG approval and development process for IPP projects than has EQORTKUGUVJGHQNNQYKPIƂXGRKNNCTU K KORTQXKPIQRGTCVKQPCN ever been achieved before. The expected investment in IPPs GHƂEKGPE[ KK FGUKIPKPICPFKORNGOGPVKPICPGYKPXGUVOGPV over the period 2014 to 2020 is in excess of US$25 billion, UVTCVGI[ KKK FGXGNQRKPICUWUVCKPCDNGFGDVƂPCPEKPI implying a new generation project being approved and UVTCVGI[ KX KORNGOGPVKPIGHƂEKGPVEQUVDCUGFVCTKHHUCPF X  implemented every three to six months. improving risk management. Even with this enhanced level of private investment, 6JGPQPVCTKHHEQORQPGPVQHVJGƂPCPEKCNTGEQXGT[RNCPYKNN however, EVN will still have a substantial investment EQORNGOGPVVJGVCTKHHKPETGCUGUPQVQPN[VJTQWIJKVUƂPCPEKCN program, amounting to US$28 billion up to 2020. Investment impact, but also by making tariff increases more acceptable QPVJKUUECNGYKNNDGFKHƂEWNVVQƂPCPEGCPFYKNNPQVDG to consumers and more feasible to implement. Table achievable without adequate tariffs. 1YJKEJUWOOCTK\GUVJGƂXGRKNNCTUUJQYUVJGTGNCVKXG '80KPEWTTGFUKIPKƂECPVƂPCPEKCNNQUUGUKPDQVJCPF importance of individual measures in terms of impact on the 6JKUYCUFWGVQCXCTKGV[QHHCEVQTUEJKGƃ[ C VJG UGEVQToUƂPCPEKCNRGTHQTOCPEGYJKNGCNUQUJQYKPIVJGFGITGG low rainfall that caused a temporary shift away from lower of control that EVN has on each. cost hydropower towards more-expensive thermal power RRTQFWEVKQP D CUWDUVCPVKCNFGXCNWCVKQPKPVJG8KGVPCOGUG £°“«ÀœÛˆ˜}"«iÀ>̈œ˜> vwVˆi˜VÞ dong (VND) against EVN’s major borrowing currencies (the After analyzing possible ways to improving EVN’s ,CRCPGUG[GPCPFVJG75FQNNCT CPF E VCTKHHUVJCVFKF RGTHQTOCPEGVQTGFWEGEQUVUCPFKPETGCUGGHƂEKGPE[CPF 1 6JKUCOQWPVGZENWFGURTKXCVGUGEVQTKPXGUVOGPVHQTYJKEJVJGTGCTGPQTGNKCDNGƂIWTGU*QYGXGTVJGEQPUWNVCPVJCUGUVKOCVGFVJCVKPTGEGPV[GCTURTKXCVGUGEVQTKPXGUVOGPVYCUWPNKMGN[VQ have exceeded US$1 billion in any one year. OVERVIEW IX TABLE O-1: RECOMMENDATIONS FOR IMPROVING EVN’S FINANCES PILLAR IMPACT ON POWER LEVEL OF EVN SECTOR FINANCE CONTROL OVER PILLAR I. IMPROVING OPERATIONAL EFFICIENCY Appoint implementation leader Low High Technical management Low High Complete unbundling Low Medium Non-core assets divesture Low High Better governance Medium Medium Rehabilitate assets Low High Improve service quality Low High II. DESIGNING AND IMPLEMENTING A NEW INVESTMENT STRATEGY Encouraging private sector participation High Low Maintaining dialogue with private sector Medium Low Improving capacity in MOIT Medium Low Adopting dynamic approach to planning High Low Genco divestiture High Medium III. DEVELOPING A SUSTAINABLE DEBT MANAGEMENT STRATEGY Improving capital structure Medium Low IV. IMPLEMENTING EFFICIENT COST-BASED TARIFFS Implement cost-based tariff, including a reasonable return on High Low capital Implement full pass-through of non-manageable costs High Low V. IMPROVING RISK MANAGEMENT Stabilization fund High Medium Foreign exchange risks management Medium Medium Planning management Low Low Source: Authors’ analysis productivity, the report concluded that EVN is generally well • Improving corporate governance through such managed and meets international benchmarks in several measures as appointing private, nonexecutive directors key performance areas such as system losses, collection to the gencos and all EVN subsidiaries, accompanied of receivables, and operational and maintenance costs. by agreed programs of improvements and the 0QPGVJGNGUUUQOGNKOKVGFCPFITCFWCNGHƂEKGPE[ICKPUCTG FGXGNQROGPVQHOQFGTPƂPCPEKCNOCPCIGOGPVU[UVGOU achievable through the following actions: (including a framework for measuring and monitoring key performance indicators). • Enhancing technical management to reduce the incidents and duration of outages and to speed up While it is clear that these measures alone will not be project implementation, thereby realizing investment CFGSWCVGVQTGUQNXG'80oUƂPCPEKCNRGTHQTOCPEGEJCNNGPIGU DGPGƂVUOWEJOQTGSWKEMN[CPFTGFWEKPINGXGNUQHYQTM they do represent an important component of the proposed KPRTQITGUUQP'80oUDCNCPEGUJGGV ƂPCncial recovery plan. • Completing the unbundling of the generation Ó° iÈ}˜ˆ˜}>˜`“«i“i˜Ìˆ˜}> iܘÛiÃ̓i˜Ì-ÌÀ>Ìi}Þ companies (gencos) to promote arms’-length 6JGCWVJQTUKFGPVKƂGFVYQETWEKCNYGCMPGUUGUKPVJG EQOOGTEKCNTGNCVKQPUJKRUCOQPI'80oUEQORCPKGU approach to power sector investment planning that need • Divesting EVN of its non-core assets and improving to be addressed to improve the chances of better meeting UGPKQTOCPCIGOGPVCVVGPVKQPVQ'80oUEQTGDWUKPGUU future demand. First, while the 10-year process for sector • Rehabilitating some generation assets to improve planning produces a robust and comprehensive master WVKNK\CVKQPQHKPUVCNNGFECRCEKV[CPF plan, dynamic factors such as variances in demand require x A FINANCIAL RECOVERY PLAN FOR EVN OQTGHTGSWGPV DQVJCPPWCNCPFƂXG[GCT WRFCVGUCPF {°“«i“i˜Ìˆ˜} vwVˆi˜Ì œÃ̇L>Ãi`/>Àˆvvà corresponding changes in implementation plans. Either The authors recommend that the Vietnamese government the Ministry of Industry and Trade (MOIT) or EVN’s National adopt a clear tariff adjustment path towards full cost Power Transmission Corporation (EVNNPT) could be tasked recovery within three to four years. If tariffs are maintained to lead the annual updating process. at current levels in real terms—that is, adjusted at the rate QHKPƃCVKQP CUUWOGFCVRGTEGPVRGTCPPWO t'80oU Second, future planning for generation rests on the crucial ƂPCPEKCNRQUKVKQPYKNNFGVGTKQTCVG+VYKNNDGDCTGN[CDNGVQ assumption that the private sector will be willing to fund cover operating costs over the next 4 years to 2018. Under more than 65 percent of the required investment. This is far that scenario, EVN will be unable to contribute any funds from certain, and dialogue with the private sector needs to HTQOKVUKPVGTPCNTGUQWTEGUVQƂPCPEGECRKVCNKPXGUVOGPV DGKPVGPUKƂGFVQ C KFGPVKH[VJGQDUVCENGUVJCVKPXGUVQTUUGG expenditures. Its debt will become unsustainable. to their increased participation in the power sector and (b) determine steps to address their concerns. In parallel, this The authors have estimated that between now and 2018, dialogue can examine the willingness of the private sector retail tariffs increases of about 10 percent per annum (well to invest in EVN’s existing generation assets. One step that within the 10 percent maximum allowed under Circular will be necessary is to establish an independent system and 2165 each semester), consistently implemented every market operator so as to reassure private sector owners year, would enable EVN to achieve full cost recovery and about the fairness of the power market. ƂPCPEKCNUWUVCKPCDKNKV[D[6JGTGCHVGTVJGPGGFHQTRTKEG increases would be reduced and adjustments at the rate of ΰ iÛiœ«ˆ˜}>ÃÕÃÌ>ˆ˜>Li`iLÌw˜>˜Vˆ˜}ÃÌÀ>Ìi}Þ KPƃCVKQPVQOCKPVCKPVCTKHHUKPTGCNVGTOUYQWNFDGCFGSWCVG '80oUTGEGPVƂPCPEKCNEQPFKVKQPJCUDGGPHTCIKNGFWGKPRCTV A slower adjustment path to achieve full cost recovery a year to its highly leveraged capital structure (high debt-equity later (by 2019) would require a moderately slower annual ratios). Much of the available equity has been created tariff increase of about 8 percent. through a huge asset revaluation that was implemented KPCPFVJGEQORQUKVKQPQHKVUFGDVKPENWFGUCJKIJ #NVJQWIJVJGCPCN[UKUQHVJGCHHQTFCDKNKV[CPFƂUECNKORCEVU component of foreign currency denominated loans on QHVJGVCTKHHKPETGCUGUTGSWKTGFVQCEJKGXG'80oUƂPCPEKCN which foreign exchange losses are incurred when the VND sustainability indicates that there should be no obstacles depreciates against the loan currencies. In addition the to increases on this scale, in practice there may well be average term of the debt is short relative to EVN’s asset FKHƂEWNVKGU6JGTGKUDQWPFVQDGCPCFXGTUGTGCEVKQPHTQO base. both households and industrial consumers to the prospect of higher electricity prices. However, adverse reactions can be With its capital expenditure needs estimated at US$28 addressed by: (a) information campaigns, both centrally and billion, or almost US$4 billion per year for the period 2014- from distribution companies, to explain the case for price CPFYKVJCPGGFVQTGƂPCPEGUQOGQHKVUGZKUVKPI KPETGCUGUCPFVJGKORCEVQPSWCNKV[QHUGTXKEG D GZVGPUKQP borrowings every year EVN is likely to further increase its of cash transfer coverage by the Ministry of Labor, Invalids, borrowing in the coming years. Therefore, in the absence of CPF5QEKCN#HHCKTU /1.+5# CPF E KORTQXGFGPGTI[ UWUVCKPGFVCTKHHCFLWUVOGPVU'80oUƂPCPEKCNEQPFKVKQPYQWNF conservation and demand management initiatives. likely remain fragile. Even with constant tariff adjustments VJGRTQURGEVUQHƂPCPEKCNHTCIKNKV[YQWNFNKMGN[TGOCKPFWG 5. Improving Risk Management to uncertainties posed by the various risks that EVN faces '80HCEGUCPWODGTQHTKUMUVQKVUƂPCPEKCNUWUVCKPCDKNKV[ (hydrology, debt structure, foreign exchange, and demand over which it has limited or no control. As the company forecasting). ITQYUKPUK\GUQYKNNVJGƂPCPEKCNUKIPKƂECPEGQHVJQUG TKUMU6JGCWVJQTUJCXGKFGPVKƂGFUGXGTCNUKIPKƂECPVTKUMU The authors have, therefore, recommend that EVN should concerning hydrology, foreign exchange, high debt capital FGXGNQRCUWUVCKPCDNGƂPCPEKPIUVTCVGI[HQTKVUQRGTCVKQPU structures, demand forecasting, and changes in input costs. which comprises: (a) enhancing its capital structure to Hydrology risks arise, because EVN’s performance varies KPETGCUGKVUGSWKV[D[IGPGTCVKPITGIWNCTRTQƂVUYJKEJ substantially between wet and dry years. A stabilization fund CTGTGVCKPGFKPVJGDWUKPGUU D UGGMKPIIQXGTPOGPV could be created, managed by EVN, to which EVN could injection of additional equity to the extent that requisite appropriate up to 2 percent of revenues in wet years, with tariff adjustments, including rapid tariff responses to hikes funds being drawn down in dry years. Implementation of this in costs of operations (due to hydrology risks, exchange recommendation may need regulatory support, government TCVGƃWEVWCVKQPUGVE CTGPQVHGCUKDNG E UGGMKPINGPFGTU CRRTQXCNCPFCDCPMQTQVJGTƂPCPEKCNKPUVKVWVKQPVQUVCPF agreements to extend the repayment terms of some of its behind the scheme. As further backup measures, EVN NQCPUCPF F UGGMKPIVQQDVCKPNQPIVGTOHWPFUFKTGEVN[ should consider (a) rapid responses through tariffs during dry from capital markets, perhaps, with the Government years and (b) evaluating the possibility of insuring hydrology providing underwriting guarantees in the initial bond risks on international markets. offerings. OVERVIEW XI Foreign exchange risks arise primarily because much of of its actions is likely to be small. For example, EVN should EVN’s debt is and will continue to be denominated in foreign take the lead in creating an internal stabilization fund EWTTGPE['80UWHHGTUUKIPKƂECPVNQUUGUYJGPVJG80&KU YKVJKP'80CPFKPUGGMKPIEQPƂTOCVKQPHTQOVJG'4#8 devalued. Various measures are recommended to address that it meets the requirements of tariff directives. It should this risk, including rapid tariff responses to devaluations also make haste in carrying out the divestiture of non-core and consideration of the government accepting foreign assets required by the Prime Minister as well as committing exchange risks on loans for a fee. Looking at the longer to improving labor productivity in all its businesses. Most term, there may be scope for increased local borrowing and importantly, EVN should take the lead in developing a hedging risks in local forward currency markets when these communications strategy for the plan. This communications emerge as capital markets develop. Development partners strategy needs to explain the logic of the case for higher such as the World Bank and Asian Development Bank (ADB) tariffs along with other salient aspects of EVN’s performance may be able to help the government develop forward and the need for investment to improve service standards. foreign exchange markets (allowing for currency purchases ˆ˜ˆÃÌÀÞœvˆ˜>˜Vi CVCURGEKƂGFHWVWTGFCVGCVCPCITGGFGZEJCPIGTCVG DWV The Ministry of Finance has three roles in relation to EVN, as this will also require further moves toward a market economy shareholder, lender and key institution responsible for the in Vietnam to encourage private sector participation. FGXGNQROGPVQH8KGVPCOoUƂPCPEKCNUGEVQT6CMGPVQIGVJGT 6YQHWTVJGTTKUMUVQ'80oUƂPCPEKCNRGTHQTOCPEGCTGVJG these three roles are crucial for the successful mobilization of impact of exchange rate depreciation and unexpected UWUVCKPCDNGƂPCPEKPIHQTKPXGUVOGPV6JGTGCTGCPWODGTQH sudden price hikes for inputs such as imported fuel. possibilities. First, the MOF could change the terms on which These can be managed under the current regulatory it on-lends funds to EVN—by, for example, accepting the system provided that the pass-through mechanisms are foreign exchange risk on loans from development partners implemented in a timely manner and through the value and converting some of its existing loans into equity. chain from generation to retail consumers. The report also However, because these sorts of changes are against MOF recommends addressing the other two risks related to policy, they are unlikely to be acceptable. Second, it could variations in demand forecasts and EVN’s high debt capital inject fresh equity into the company. This is also against structures—as described under pillars 2 and 3, respectively. government policy, however, and the hope is that additional equity can be raised from the private sector. To achieve this, 1.2. FINANCIAL RECOVERY PLAN: A FRAMEWORK FOR it is vital that EVN should be permitted to make satisfactory IMPLEMENTATION RTQƂVU6JKUKUEWTTGPVN[PQVVJGRQNKE[QHVJG/1(YJKEJ does not expect EVN to make any return on equity. A A framework for implementation of EVN’s Financial satisfactory rate of return on equity is vital to EVN in two Recovery Plan (FRP) is proposed that comprises (a) a set of YC[UKVYKNNDQVJGPCDNGVJGEQORCP[VQUGNHƂPCPEGUQOG URGEKƂEVKOGDQWPFCEVKQPUVQDGECTTKGFQWVWPFGTGCEJ capital investment and encourage private investors to take a strategy pillar and (b) designations of responsibilities for stake in the company. implementation. Figure O-1 provides a visual summary of the FRP’s top priorities. 6JGNKOKVGFNGXGNQHFGXGNQROGPVQH8KGVPCOoUƂPCPEKCN UGEVQTKUCOCLQTUQWTEGQHFKHƂEWNV[HQT'80KPVJCVEGTVCKP The framework for implementing the FRP has implications ƂPCPEKCNRTQFWEVUUWEJCUNQPIVGTODQPFUCPFKPUVTWOGPVU not only for EVN, but also for all the main governmental for hedging foreign exchange risks, are simply not available participants in the power sector, who will all need to in the same way as they are in many other countries. The work together to implement the strategy and achieve development of such products is important for the future effective results. The four main governmental parties with success of EVN, and the MOF should assess how it can work implementation and support roles are as follows: YKVJ'80VQKORTQXGVJGEQPFKVKQPUKPNQECNƂPCPEKCNOCTMGVU 6ˆi̘>“ iVÌÀˆVˆÌÞ HQTVJGDGPGƂVQH'80CPFVJGUGEVQTOQTGIGPGTCNN[ #UVJGOCKPFKTGEVDGPGƂEKCT[8KGVPCO'NGEVTKEKV[YKNNPGGF ˆ˜ˆÃÌÀÞœv˜`ÕÃÌÀÞ>˜`/À>`i VQNGCFCPFEQQTFKPCVGVJGKORNGOGPVCVKQPRNCP5RGEKƂECNN[ The Ministry of Industry and Trade has a critical role to play KVKUCFXKUGFVQVCMGVJGNGCFD[CRRQKPVKPICUGPKQTQHƂEKCN KPCVVTCEVKPICFFKVKQPCNRTKXCVGƂPCPEGKPVQVJGRQYGTUGEVQT with responsibility for plan implementation. This should be To do this, it needs to be more active in promoting the need someone with the ability to network effectively with the other HQTRTKXCVGƂPCPEGCPFKPGPUWTKPIVJCVVJGVGTOUHQT+22U key actors in the Ministry of Finance (MOF), the Ministry of CTGUWHƂEKGPVVQCVVTCEVKPXGUVQTU+VUJQWNFDGENGCTCDQWV Industry and Trade (MOIT), and the Electricity Regulatory the volume of investment it is hoping to attract from private Authority of Vietnam (ERAV). investors and aim to attract both local and international EVN also needs to demonstrate leadership and commitment investors to the sector. by taking forward aspects of the plan over which it has UWDUVCPVKCNEQPVTQNGXGPKPECUGUYJGTGVJGƂPCPEKCNKORCEV xii A FINANCIAL RECOVERY PLAN FOR EVN iVÌÀˆVˆÌÞ,i}Տ>̜ÀÞƂÕ̅œÀˆÌÞœv6ˆi̘>“ For example, it will need to help devise a mechanism for The Electricity Regulatory Authority of Vietnam is a automatic pass-through of costs in retail tariffs and ensure technically competent regulator. However, it does not yet a fair and balanced market for generation plants. These enjoy full independence to regulate the power sector. are challenges that the ERAV can feasibly meet, with some In future, it will need to demonstrate that it can strike an additional technical assistance as necessary. In general appropriate balance between the interests of investors VGTOUVJG'4#8KUYGNNSWCNKƂGFVQTGIWNCVGVJGUGEVQTKP and power consumers, and it must be fully independent to accordance with the agreed market framework and should achieve this. Over the next few years there will be further be empowered to do so. challenges for the regulator as the power sector evolves. FIGURE O-1: FINANCIAL RECOVERY PLAN (TOP PRIORITIES) Action 1 Year 2 Year 3 Year 4Year 5 Year Responsible Support Stakeholders Appoint implementation leader EVN Technical management Manage capital expenditure more effectively Set KPI for EVN subsidiaries Timely review KPIs EVN ERAV Improve quality of supply (SIAIFI, SAIDI) Establish yardstick competition among companies Complete Unbundling Operational Efficiency Intensify efforts to complete unbundling of PCs and NPT Set bankable PPAs (adjust Circ 41), finalize loan agreements, etc. EVN ERAV Enforce Circular 46 Make NLDC fully independent Non-core assets divesture EVN MOF Improve governance Carry out a detail analysis of governance situation Improve financial management systems EVN Development partners Develop performance measurement systems to monitor and evaluate subsidiaries' performance Rehabilitate Assets Encouraging private sector participation Clear project apparisal mechanisms Reduction of adminstrative burden to the maximum extent New Investment Strategy Tender for negotiating prices Maintaining dialogue with private sector EVN MOIT / Private sector Improving capacity in MOIT Adopting dynamic approach to planning Preparation Genco divestiture (including definition of bankable PPAs, etc.) Implementation of Genco divestiture Improve capital structure MOF/Commercial Financing Strategy Extent maturity of existing loans with commercial banks EVN banks/ Development partners Agreement with IFIs and with MOF's support to extent maturities Implement Cost-based tariff including a reasonable return on capital Cost based Tariff EVN ERAV/MOIT Implement full (uncapped) pass-through of non-manageable costs Management Stabilization fund EVN Development Risk partners/MOF Foreign exchange risks Source: Own analysis OVERVIEW XIII © istock photo xiv A FINANCIAL RECOVERY PLAN FOR EVN 2. SECTOR CONTEXT AND THE NEED FOR A FINANCIAL RECOVERY PLAN FOR EVN 2.1. REPORT OBJECTIVE VQEQPƂPGVJGKTCEVKXKVKGUVQVJGKTEQTGCTGCUQHDWUKPGUU The implementation of the sector’s ambitious investment 6JGQDLGEVKXGQHVJKUTGRQTVKUVQTGEQOOGPFCƂPCPEKCN plan is therefore both vital to improved reliability and recovery plan for EVN, Vietnam’s state-owned power utility, JGCXKN[FGRGPFGPVQPUKIPKƂECPVN[ITGCVGTRTKXCVGUGEVQT comprising the courses of action that are most likely to lead participation. to a positive outcome for the sector—with investment needs met at a reasonable cost to consumers. The sector’s two main challenges in this regard are: (a) the country’s new regulatory structure, which is not yet fully 2.1.1. Background implemented: and (b) the fact that tariff increases continue There are many positive aspects to the Vietnam power to be subject to government approval. In the recent past, sector. Access to electricity is almost universal, with over 97 increases have been granted only when EVN was already in percent of households connected nationwide and over 99 ƂPCPEKCNFKHƂEWNV[CPFJCFKPEWTTGFƂPCPEKCNNQUUGU percent in urban areas. Power losses in transmission and distribution are at or close to best-practice international The future course for the sector is uncertain. With standards. All consumers are billed regularly and collection appropriate responses from EVN, the government—in rates are almost 100 percent. Operating costs are low by particular, the Ministry of Industry and Trade (MOIT) as the international standards and the costs of investment projects parent ministry —and the private sector, it appears possible are generally reasonable. Some private generation projects HQTVJGƂPCPEKCNCPFKPXGUVOGPVEJCNNGPIGUVQDGOGV have already been implemented—supplying power to EVN However, failure to act appropriately could lead to a range of under power purchase agreements (PPAs)—and there is potentially adverse outcomes. In a worst-case scenario, EVN further interest from investors. A good regulatory structure OKIJVDGWPCDNGVQOGGVKVUƂPCPEKCNQDNKICVKQPUKPYJKEJ was recently put in place that has the potential to ensure case responsibility for repayment of its loans would fall on reliable power supplies at competitive tariffs. the Ministry of Finance (MOF) as the guarantor of its loans. This scenario would probably be accompanied by major *QYGXGT8KGVPCOoURQYGTUGEVQTYKNNCNUQHCEGUKIPKƂECPV shortfalls in investment, leading to increased levels of supply EJCNNGPIGUQXGTVJGPGZVƂXGVQVGP[GCTU2QYGTFGOCPF interruption. is increasing rapidly at almost twice the pace of gross domestic product (GDP). This increasing demand, along 2.1.2. Sources with a quality of power supply that is not as good as it 6JKUTGRQTVDWKNFUQPVJGƂPFKPIUCPFCPCN[UGURTQXKFGFKP UJQWNFDGPGEGUUKVCVGUUKIPKƂECPVKPXGUVOGPVKPIGPGTCVKQP three previous unpublished reports on EVN done by AF- transmission, and distribution. /GTECFQUCPQXGTCNNFKCIPQUKUQH'80CƂPCPEKCNGXCNWCVKQP and projections report, and a social acceptance assessment. Traditionally, most power sector investment has come This report refers to them as “Tasks” 1, 2, and 3: from the public sector, both through EVN and through investments in power projects by state-owned enterprises />Σ]>˜œÛiÀ>`ˆ>}˜œÃˆÃœv 6 ]Vœ“«ÀˆÃi`̅i (SOEs) in the coal (Vinacomin) and gas (PetroVietnam) following: sectors. However, EVN has been able to fund its investment r #PQXGTCNNƂPCPEKCNFKCIPQUKUQHVJG'80ITQWRCPF RTQITCOQPN[YKVJFKHƂEWNV[KPTGEGPV[GCTU+VKPEWTTGF KVURQYGTUWDUKFKCTKGU ƂPCPEKCNNQUUGUKPCPFCPFCNVJQWIJKVYCU RTQƂVCDNGKPKVKPXGUVGFQPN[75DKNNKQPCVCVKOG r #DGPEJOCTMKPIQHMG[ƂPCPEKCNQRGTCVKQPCNCPF when its investment needs were around US$5–6 billion per VGEJPKECNRGTHQTOCPEGKPFKECVQTU [GCT+PRTQƂVUHGNNUNKIJVN[CPFKPXGUVOGPVKPETGCUGF • An assessment of EVN’s Investment Expenditure but was still well below the level of needs. 2TQITCO Moreover, the public sector is unlikely to be able to increase • An assessment of the recently created gencos its investment in the power sector given the general and strategic options for raising equity for generation thrust of government policy, which requires companies GZRCPUKQPCPF SECTOR CONTEXT AND THE NEED FOR A FINANCIAL RECOVERY PLAN FOR EVN 1 • A desk review of existing studies on the energy planning and sector policy, including the terms CHHQTFCDKNKV[ƂUECNKORCEVUQHVCTKHHKPETGCUGU and conditions for private investment in the sector. The MOIT acts as the parent ministry for EVN, the Electricity 5QOGQHVJGMG[ƂPFKPIUCTGKPENWFGFKPVJKUTGRQTVCPFHQTO Regulatory Authority of Vietnam (ERAV), and the Institute the basis for the report’s recommendations. of Energy (IE). EVN, the country’s principal power utility, />ÎÓ]>w˜>˜Vˆ>iÛ>Õ>̈œ˜>˜`«ÀœiV̈œ˜Ãœv 6 vœÀ has responsibility for power generation, transmission, and Óä£{qÓä]comprised the following: distribution. As the country’s regulatory agency, ERAV is responsible for establishing and supervising the power r #NKUVQHCUUWORVKQPU market, power planning, tariff regulation, and licensing. The r #ƂPCPEKCNGXCNWCVKQPQH'80*QNFKPICPFKVU IE undertakes demand forecasting and physical investment main subsidiaries, EVN Corporate, the National Power planning for the sector and publishes periodic investment 6TCPUOKUUKQP%QTRQTCVKQP '80026 VJGƂXGRQYGT plans. The MOIT interacts with various other government EQTRQTCVKQPU=2%U?CPFVJGVJTGGIGPEQU FGRCTVOGPVUYKVJKPVGTGUVUKPVJGUGEVQTKPENWFKPIVJG1HƂEG • A brief description of the current situation of the of Government, the MOF, the Ministry of Planning and companies and their forecast performance under various Investment (MPI), and the Ministry of Natural Resources and UEGPCTKQU Environment. r #HQTGECUVQHCPPWCNƂPCPEKCNUVCVGOGPVUHQTGCEJ The legal and regulatory framework for the sector is subsidiary and the holding company as well as key undergoing changes as part of a reform program that began ƂPCPEKCNKPFKECVQTUCPF in 2004, and it continues to be a work in progress. The thrust of the program is to transform a state-owned and controlled • Financial models. power sector into a sector that relies far more on market 6JGQDLGEVKXGYCUVQFGXGNQRCƂPCPEKCNOQFGNCDNGVQ forces, leading ultimately to a competitive retail market. The UKOWNCVGVJGEQPFKVKQPUPGGFGFHQT'80VQCEJKGXGƂPCPEKCN program’s main legal foundations are as follows: sustainability—in other words, to operate as an ongoing • The Electricity Law, which was approved in 2004 and and viable business. The conditions examined included ECOGKPVQGHHGEVKP tariffs, fuel prices, capital expenditure (CAPEX) levels, and QRGTCVKQPCNGZRGPFKVWTG 12': GHƂEKGPE[ • The Power Market Roadmap (Prime Minister’s &GEKUKQP  />ÎÎ]>ÜVˆ>>VVi«Ì>˜Vi>ÃÃiÃÓi˜Ì]was designed to assess whether Vietnam’s most vulnerable consumers • The establishment of ERAV by PM’s Decision, 2006, would object to the tariff increase needed to ensure DCUGFQPVJG'NGEVTKEKV[.CY   ƂPCPEKCNUWUVCKPCDKNKV[QHVJGEQWPVT[oURQYGTUGEVQT6JG r 6JG8KGVPCO0CVKQPCN'PGTI['HƂEKGPE[2TQITCO report found that, once the most abrupt tariff adjustment 80''22/oU&GEKUKQP CPF is accomplished, electricity expenses remain around 2 to r 6JG'PGTI['HƂEKGPE[CPF%QPUGTXCVKQP.CY 4 percent of household expenditures, which is below the enacted by the National Assembly in 2010. acceptable threshold for electricity expenditures. It contains the following: These legal documents assign responsibilities and delegate authority to line ministries, the ERAV, and relevant power r #FGƂPKVKQPQHVJGOGVJQFQNQI[WUGFVQCFFTGUU sector stakeholders to issue policies, regulations, and CHHQTFCDKNKV[CPFFCVCEQNNGEVKQP rules for the program’s implementation. In particular, the • An analysis of the existing subsidies in the Vietnam Electricity Law (2005) was followed by implementation RQYGTUGEVQT decrees and regulations and tariff-setting approvals drafted • A review of the international and local literature on by the ERAV and issued by the MOIT through MOIT circulars. CHHQTFCDKNKV[ Tariff and pricing regulations establish and mandate the principles, responsibilities, methodologies and procedures, r #PCPCN[UKUQHVJGEWTTGPVVCTKHHUVTWEVWTG and establish the date of effectiveness for implementation. r #PKFGPVKƂECVKQPQHCHHQTFCDNGVCTKHHNGXGNUFKXKFGF The Electricity Law (2005) and the PM’s Power Market by customer category (households, small and medium Roadmap (2006) established three phases for the DWUKPGUUGUCPFKPFWUVTKGU CPF development of competitive power markets in Vietnam. • Suggestions for potential sustainable mitigation 6JGƂTUVRJCUGKPVTQFWEGFEQORGVKVKQPCOQPIIGPGTCVQTU strategies. YJKNGTGVCKPKPICUKPINGDW[GTKPVJGUGEQPFRJCUGC 2.2. VIETNAM’S LEGAL AND REGULATORY FRAMEWORK wholesale competitive market (scheduled for 2015–2022) will be introduced wherein generators and wholesalers will Within the government of Vietnam, the main responsibility compete to sell to the distribution and retail PCs and eligible for the power sector rests with the MOIT and, in particular, NCTIGEWUVQOGTUCPFVJGƂPCNRJCUGGPVCKNUVJGITCFWCN its General Directorate of Energy. It is responsible for overall development of retail competition. To avoid unintended 2 A FINANCIAL RECOVERY PLAN FOR EVN FIGURE 2.1: STRUCTURE OF VIETNAM'S POWER SECTOR Gencos/IPPs Standard PPAs PPAs BOTs/SMHPs Power Market Ancillary Service Costs ERAV Regulatory Fees SMO Fees Single Buyer SMO (NLDC) (Incl. AS costs) Admin costs EVN (EPTC) Bulk Supply Tariffs (BST) Transmission charge Distribution Companies TNO (NPT) (PCs) Retail Tariffs Customers Source: ERAV. Note: BOT = build, own and transfer; EPTC = electricity power trading company; IPP = independent power producer; NPT = National Power Transmission; SMHPs = strategic multi-purpose hydropower plants; SMO = System and Market Operator, which is the National Load Dispatch Center (NLDC); TNO = transmission national operator. negative results, each market phase has been designed with are owned centrally. The EVNNPT owns and operates the a two-stage approach: an initial pilot to test and improve the high voltage transmission network (500 kV and 220 kV). The market rules and infrastructure, followed by a full commercial ownership and operation of the distribution (both medium operation stage. It is envisaged that tariff mechanisms will be CPFNQYXQNVCIG PGVYQTMTGUVUYKVJƂXG2%U adapted and improved during each power market phase EVN acts as the single wholesale power purchaser from the generators, and also carries out a number of other central 2.3. STRUCTURE OF EVN functions. The National Load Dispatch Center (NLDC) is EVN and its subsidiaries are central to the power sector. The responsible for load dispatch. EVN’s headquarters acts as main subsidiaries undertake the key activities of generation, a central treasury for “the group”. It also continues to own transmission, and distribution. EVN and its subsidiaries the multipurpose hydropower plants, which are outside collectively control about 66 percent of Vietnam’s installed the framework of the three generation companies. Finally, generating capacity. The three generation companies KVQYPUCPWODGTQHPQPEQTGKPVGTGUVUKPƂGNFUUWEJCU hold most of the capacity, but a number of multipurpose banking. hydropower plants (which provide both power and irrigation) SECTOR CONTEXT AND THE NEED FOR A FINANCIAL RECOVERY PLAN FOR EVN 3 SOURCE: ERAVFIGURE 2.2: STRUCTURE OF EVN'S POWER BUSINESS EVN Corporate EVN NPT EPTC NLDC PCs NPC MulƟ- Genco1 CPC purpose Genco2 SPC HPPs Genco3 HCM End-users HN - OperaƟon - OperaƟon - OperaƟon - Maintenance - Maintenance - Maintenance OperaƟon - Investment - Investment - Investment Maintenance new new new power transmission distribuƟon plants grid grid Organiztional structure Money flow Source: ERAV Note: HPP = hydropower plant; NPC = Northern Power Corporation; CPC = Central Power Corporation; SPC = Southern Power Corporation; HCMPC = Ho Chi Minh Power Corporation; HNPC = Hanoi Power Corporation. 2.4. DEMAND AND SUPPLY used and the results obtained in various recent projections: 2/22/2CPWPQHƂEKCNWRFCVGQH2/2CPFVJGPGY 2.4.1. Demand demand forecast prepared for this study. Table 2.1 shows the This section analyzes and compares three demand forecasts: forecast included in PMP7 in the base scenario. • The forecast used in Vietnam’s Power Master Plan The latest available information shows that the demand HQTVJGRGTKQF 2/2 RTGRCTGFD[VJG+' growth for 2011 and 2012 was lower than that forecast in r 6JGWPQHƂEKCNWRFCVGQH2/2CNUQRTGRCTGFD[ PMP7. The growth forecasts in PMP7 were based on a fast VJG+'CPF transition toward a highly electricity-intensive economy • The independent forecast developed by the (for an economy with Vietnam’s GDP per capita) and consultant for this study. much higher GDP growth rates than those that actually materialized after the slowdown in the economy following All three demand forecasts are based on an econometric the global economic crisis that began in 2008.3 Since current model that relies on GDP growth as the main explanatory demand is well below levels forecast in PMP7, in subsequent variable to build a simple regression model2 from historical years demand is unlikely to reach the levels projected in UVCVKUVKEUVJWUCNNVJTGGCTGEQORCTCDNGOGVJQFQNQIKECNN[ 2/2HQTVJKUTGCUQPCPGYFGOCPFHQTGECUV YJKEJVCMGU The main differences are (a) the historical data available into account the latest yearly consumption data up to 2013) FCVCHQTYCUCXCKNCDNGHQTVJGWPQHƂEKCNWRFCVGQH2/2 and the work done in this study) and (b) the GDP growth forecasts used to project demand. TABLE 2.1: PMP7 DEMAND FORECAST The latest demand projections produced by the IE in PMP7 2010 2015 2020 2025 2030 were reviewed to check consistency and adequacy. The trigger for the proposed investment envisaged in PMP7 is ENERGY 87,665 169,821 289,882 430,866 615,205 (GWH) the increasing load. The expected annual demand growth rate of 14.1 percent, while very rapid, is not impossible given 5-YEAR CAGR 14.1% 11.3% 8.2% 7.4% Vietnam’s recent growth rate of 11 percent on average in MAXIMUM 16,060 30,803 52,040 77,084 110,215 2011 and 2012. It is a more conservative rate than the 20 DEMAND percent average annual growth rate that was anticipated in (MW) PMP6 for the period 2006–10. (The actual annual growth rate 5-YEAR CAGR 13.9% 11.1% 8.2% 7.4% in that period was 14.3 percent.) Source: Own elaboration based on PMP7. This report analyzes the scenarios, models, and hypotheses Note: CAGR = compound annual growth rate. 2 The only difference is that the methodology used in PMP7, while considering disaggregated GDP growth by sector (primary, commercial, and industrial), is based on a global GDP growth rate in each case. 4 A FINANCIAL RECOVERY PLAN FOR EVN was prepared for this report.4 The new demand forecast is of PMP7 (see Updated PMP7 Forecast_Op1 in Figure 2.3) for an average growth rate of 11 percent until 2014 and 12 broadly matches the forecast prepared for this report. percent thereafter, against the 14.1 percent used in PMP7. #PWRFCVGFFGOCPFHQTGECUVHTQOCPWPQHƂEKCNCOGPFOGPV The breakdown of the demand is depicted in Figure 2.4. FIGURE 2.3: UPDATED ELECTRICITY DEMAND FORECAST 350,000 300,000 289,882 258,603 250,000 250,069 GWh 200,000 169,821 150,000 151,035 141,986 10,000 50,000 0 2000 2012 2004 2006 2008 2010 2012 2014 2016 2018 2020 New demand forecast PMP7 Forecast_Low Historic demand Updated PMP7 Forecast_Op1 FIGURE 2.4: ENERGY DEMAND FORECAST USED IN THE FINANCIAL FORECASTING MODEL (GWH) 300,000 250,000 200,000 150,000 10,000 50,000 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 PC1- HNPC - demand PC2- EVNHCMPC - demand PC3-EVNNPC - demand PC4- EVNPC - demand PC5- EVNSPC - demand Distr losses Embedded Generation Trans lossess Self Generation Source: Based on PMP7, information provided by the PCs and own analys. 3 Vietnam felt the impact of this crisis some years later: in 2011 and 2012, PMP7 assumed 7.5 percent GDP growth, when the actual GDP growth was 6.0 percent in 2011 and 5.0 percent in 2012. 4 The forecast was obtained by applying a simple regression technique to the commercial electricity demand to identify its relationship with GDP. The regression equation links the natural NQICTKVJOQHVJGFGOCPFCPFVJGPCVWTCNNQICTKVJOQH)&2YKVJCEQTTGNCVKQPEQGHƂEKGPV 4 QH6JGHQTGECUVRGTKQFHQTVJKUCPCN[UKUKUNKOKVGFVQ UGXGP[GCTU CPFYGEQPUKFGTVJG regression approach a reasonable one for short-term forecasts. SECTOR CONTEXT AND THE NEED FOR A FINANCIAL RECOVERY PLAN FOR EVN 5 6JGFGOCPFCUUGUUOGPVKUETKVKECNVQVJGƂPCPEKCN As already mentioned, the assumptions used for this projections for EVN because demand changes are the key HQTGECUVYGTGUKIPKƂECPVN[FKHHGTGPVFWGVQVJGUNQYFQYPQH XCTKCDNGVJCVEQWNFUKIPKƂECPVN[EJCPIGVJGTGSWKTGOGPVUHQT VJGINQDCNOCTMGVGEQPQO[.CVGN[VJGWPQHƂEKCNWRFCVGQH new investment in the coming years. EVN must respond to PMP7 by the IE would mean having total installed generation changes in demand by adjusting its investment program, capacity in the amount of 60 GW in 2020, which is 11 GW increasing investment if demand grows faster than expected, below the initial forecast of PMP7. This generation forecast and reducing investment if demand grows more slowly. In KUKPNKPGYKVJVJGXCNWGUWUGFHQTVJGƂPCPEKCNRTQLGEVKQPU RTCEVKEG'80FQGUOCMGCFLWUVOGPVUQHVJKUUQTVJQYGXGT To meet forecast power demand, installed generation in principle EVN is bound by the investment program set out capacity would need to more than double from 29 GW in the PMP. to 64 GW. Table 2.3 shows the new capacity projected to enter the system in coming years, according to the dispatch 2.4.2. Supply information and expected capacity additions provided by Vietnam’s power sector must respond to demand increases EVN for 2014–20. The new facilities will be based mostly on by developing the power supply infrastructure. PMP7 hydropower and coal resources. projected the expansion of generation assets using two pieces of software: STRATEGIST, a simulation tool The evolution of the generation mix is shown in Figure HQTQRVKOK\KPIF[PCOKERNCPPKPIRTQDNGOUCPF2QYGT 2.5. Coal-based facilities will be the predominant source Development Planning Assist Tool (PDPAT), a program that of power generation in 2020, while hydropower plants calculates and simulates generation mix. PDPAT served to (HPPs) will reduce their share to 30 percent (in 2013 almost calculate the country’s ability to meet load demand using 43 percent of the installed capacity was hydropower). The all safety criteria—that is, to calculate the amount of reserve penetration of other renewable energies is negligible. About needed for each interconnected subsystem, as well as for 53 percent of the total new additions will be installed in the the whole power system, to ensure power supply security, southern region, followed by 40 percent in the northern given the amount of supply interruptions expected for a region and the balance in the central region. given period (in other words, the loss-of-load expectation, or LOLE). If one of the subsystems lacks the reserve capacity to meet the load demand in a region, the amount of energy and capacity required from the nearby subsystem will be calculated. The LOLE criterion used in PMP7 was 24 hours of expected blackouts per year, which is equivalent to a 99.7 percent reliability rate. A combination of hydrological scenarios was built using a combination of four different rain levels to ascertain what amount of reserve capacity could be put aside. The various generation capacity forecasts are shown in Table 2.2. TABLE 2.2: INSTALLED CAPACITY, 2013–20 (MW) 2013 2014 2015 2016 2017 2018 2019 2020 PMP7 29,485 33,761 38,343 44,646 51,083 60,04 67,605 71,586 UPDATE OF PMP7 29,485 33,761 37,543 42,525 46,812 51,472 54,597 60,317 EVN MOST RECENT PLAN 29,026 35,242 39,265 44,515 46,932 50,314 53,914 64,423 Source: Own elaboration based on PMP7, unofficial update of PMP7 and EVN’s updated CAPEX program. Note: n.a. = Not available. © istock photo 6 A FINANCIAL RECOVERY PLAN FOR EVN TABLE 2.3: TOTAL INSTALLED CAPACITY AND CAPACITY ADDITIONS BY TECHNOLOGY (MW), 2013–20 2013 2014 2015 2016 2017 2018 2019 2020 TOTAL INSTALLED CAPACITY: 6,993 9,759 12,896 15,533 17,896 21,158 24,758 31,108 COAL-FIRED TPPS CAPACITY ADDITIONS BY EVN CORPORATE AND - - 2,004 1,574 900 1,424 375 - GENCOS CAPACITY - - 1,133 1,063 1,463 1,838 3,225 6,350 ADDITIONS BY IPPS TOTAL INSTALLED 13,849 14,826 15,516 17,964 18,018 18,138 18,138 18,644 CAPACITY: HPPS CAPACITY ADDITIONS BY EVN CORPORATE - - 156 208 – – – – AND GENCOS CAPACITY ADDITIONS - - 534 368 54 120 – 506 BY IPPS TOTAL INSTALLED CAPACITY: GAS-FIRED 6,979 6,855 6,855 6,855 6,855 6,855 6,855 6,855 TPPS TOTAL INSTALLED CAPACITY: 1,205 1,205 1,535 1,535 1,535 1,535 1,160 960 OIL-FIRED TPPS TOTAL 29,026 32,645 40,629 44,892 46,721 51,068 54,511 64,423 Source: EVN’s updated CAPEX program. Note: Data are as at the end of each year listed. HPP = hydropower plant; IPP = independent power producer; TPP = thermal power plant FIGURE 2.5: GENERATION MIX (BY CAPACITY) Source: EVN’s updated CAPEX program. Historically, available capacity accounts for over 95 percent outages (see Table 2.4), around 15 percent of the capacity of EVN’s overall installed capacity. Therefore, existing KUPQVCDNGVQRTQFWEGRQYGTGXGPVJQWIJVJKUXCNWGKUYGNN generators are available to generate very close to their aligned with international benchmarks, this can be improved maximum capacity. If unavailable capacity is added to total through more investment. SECTOR CONTEXT AND THE NEED FOR A FINANCIAL RECOVERY PLAN FOR EVN 7 TABLE 2.4: LOAD FACTORS AND OUTAGES According to EVN’s forecast, this situation shows steady KORTQXGOGPVWRVQYJGPEQCNƂTGFHCEKNKVKGUYKNNTGCEJ an average load factor close to 70 percent—because new CAPACITY EXPECTED TOTAL RQYGTRNCPVUYKNNDGOQTGGHƂEKGPVVJCPEWTTGPVRNCPVUCPF FACTOR CAPACITY OUTAGES the system as a whole will become more thermal-based, thus 2013 FACTOR 2020 2012 needing less reserves to offset low hydrological conditions. GENCO 1 41% 59% 10.0% The geographic distribution of generation capacity (which Coal 46% 69% is biased toward northern Vietnam) and the low capacity Hydro 40% 37% of the north-south transmission links may also result in the asymmetric distribution of the available reserve generation GENCO 2 46% 51% 12.2% capacity. This should be optimized to make better use of the Coal 60% 68% generation assets and provide a safer reserve margin in the southern region, where it is too low (below 10 percent). Hydro 41% 42% According to the IE’s analysis, in addition to being GENCO 3 47% 55% 8.9% asymmetrically distributed, the reserve capacity would be Coal 70% 67% excessive if PMP7 were to be executed as it is now, given the new demand forecast. This situation would result in some Hydro 51% 45% plants in the northern and central regions being operated Natural gas 66% 77% less than 1,000 hours per year by the end of the period Source: Own elaboration based on EVN’s expected dispatch and data on outages. 2015–20. In principle, the rescheduling of generation capacity The load factors currently observed in the Vietnamese CFFKVKQPURTQRQUGFD[VJG+'KPKVUWPQHƂEKCNWRFCVGUGGOU power sector are low. According to the analysis carried out adequate for resolving the issue described. It would bring KPVJGFKCIPQUKUTGRQTVVJGCXGTCIGNQCFHCEVQTQHEQCNƂTGF GSWKNKDTKWOVQVJGPQTVJUQWVJƃQYUCPFDCNCPEGIGPGTCVKQP IGPGTCVKQPCPFICUƂTGFIGPGTCVKQPKURCTVKEWNCTN[NQYKPVJG reserves, thus meeting the new demand during both wet case of the former (52.58 percent on average in 2011 and and dry seasons (Figure 2.7). 52.87 percent in 2012). By contrast, the typical load factor This value of reserves is very well aligned with the demand QHCEQCNƂTGFRQYGTRNCPVKUPGCTN[RGTEGPVCPFCUKOKNCT HQTGECUVWUGFKPVJGƂPCPEKCNRTQLGEVKQPUCPFVJGFKURCVEJ NGXGNKUGZRGEVGFHQTICUƂTGFRQYGTRNCPVUGURGEKCNN[KPC scenario assumed in the analysis. Table 2.5 depicts a rough system with generation shortages where all power plants estimate of the reserve margins that the system will have should be dispatched at maximum levels (if allowed to do according to the demand forecast and expected new so by the transmission capacities and the requirements for ECRCEKV[WUGFKPVJGƂPCPEKCNRTQLGEVKQPU secure operation of the system). Having such low load factors means that the power plant investments might be larger than normally required, with JKIJGTNQCFHCEVQTU VJCVKUVJGRNCPVJCUVJGUCOGƂZGF costs but is generating less), meaning that investments take longer to be recovered. The exact reasons behind this situation cannot be assessed without carrying out detailed UKOWNCVKQPUQHVJGRQYGTU[UVGOJQYGXGTDCUGFQP operational information and the analysis of the generation and transmission investments carried out, it seems that there are two potential causes: • A shortage of generation capacity in the Southern region, combined with low transmission capacity in the M8PQTVJUQWVJNKPMCPF • High reserve generation requirements related to either security requirements or cycling requirements. Since the system relies heavily on hydropower generation, higher reserve margins are needed. Additional causes could include a shortage in fuel supply and/or technical constraints in operation inside the power © istock photo RNCPVUDWVVJGTGKUPQGXKFGPEGHQTGKVJGT 8 A FINANCIAL RECOVERY PLAN FOR EVN FIGURE 2.6: GENERATION RESERVES FORECAST (FROM PMP7) Northern + Central Southern Nationwide 70% 36.9% 37.7% 38.8% 41.7% 46.3% 57.3% 60.1% 53.4% 51.3% 36.0% 60% 50% 40% 30% 20% 10% 0 2013 2014 2015 2016 2017 2018 2019 2020 2025 2030 Source: PMP7. FIGURE 2.7: GENERATION RESERVES (UNOFFICIAL PMP7) Northern + Central Southern Nationwide 70% 60% 50% 36.9% 37.7% 35.9% 35.0% 34.0% 34.9% 29.3% 29.3% 25.2% 21.8% 40% 30% 20% 10% 0 2013 2014 2015 2016 2017 2018 2019 2020 2025 2030 Source: Unofficial update of PMP7. TABLE 2.5: RESERVE MARGINS 2015 2020 MAXIMUM DEMAND (MW) 27,355 48,014 RESERVE MARGIN (MW) 11,910 13,868 RESERVE MARGIN (%) 43.5% 28.9% Source: Own elaboration Table 2.6 shows the overall situation in the power sector and the projected match between supply and demand in the coming years. © EVN Electricity of Vietnam SECTOR CONTEXT AND THE NEED FOR A FINANCIAL RECOVERY PLAN FOR EVN 9 TABLE 2.6: ENERGY BALANCES (GWH) 2013 2014 2015 2016 2017 2018 2019 2020 DEMAND 124,614 140,919 156,854 174,704 195,591 218,718 244,404 273,496 PC1 -HNPC 11,273 12,739 14,395 16,266 18,381 20,770 23,470 26,521 PC2 - EVNHCMPC 17,651 19,240 20,972 22,859 24,916 27,159 29,603 32,267 PC3 - EVNNPC 33,500 38,023 43,156 48,982 55,594 63,099 71,618 81,286 PC4 - EVNCPC 10,954 12,277 13,760 15,423 17,286 19,374 21,714 24,337 PC5 - EVNSPC 39,980 44,577 49,704 55,420 61,793 68,899 76,823 85,657 DISTRIBUTION LOSSES 6,748 7,271 7,708 7,784 8,852 9,496 10,192 10,939 TRANSMISSION LOSSES 3,152 3,689 4,137 4,628 5,206 5,839 6,548 7,343 CONSUMERS NOT SUPPLIED BY PCS 1,356 3,103 3,022 3,342 3,563 4,082 4,436 5,146 SUPPLY 124,614 140,919 156,854 174,704 195,591 218,718 244,404 273,496 GENCO 1 14,838 20,544 22,766 27,328 33,675 37,461 38,530 36,863 GENCO 2 12,753 16,350 17,400 18,108 20,524 21,933 22,680 18,852 GENCO 3 27,787 30,441 35,401 37,922 42,661 48,269 49,726 50,894 EVN 22,496 25,312 25,296 29,419 30,061 32,257 33,505 33,678 EXISTING IPP BOT 36,310 37,070 37,465 39,767 40,439 42,327 41,668 41,034 NEW IPPS 4,934 5,160 12,483 16,117 22,188 30,428 52,251 86,132 EMBEDDED GENERATION 5,496 6,043 6,043 6,043 6,043 6,043 6,043 6,043 Source: Own elaboration based on data provided by EVN. 2.5. INVESTMENT NEEDS EQPƂTOGFD['80VQDGQPCXGTCIGENQUGVQVJQUGWUGFKP the simulations. All reference costs mentioned in PMP7 are 2.5.1. Generation within the technology benchmarks provided by international Financial projections of EVN and subsidiaries were built on organizations. the basis of the foregoing demand/supply scenario. Generation investment during 2011–20 in PMP7 will require The aggregate investment plan corresponding to the VND 970 trillion (US$46 billion), of which over VND 171 capacity requirements totals VND 1,100 trillion (about VTKNNKQPYKNNDGFGXQVGFVQVJGFGXGNQROGPVQHVJGƂTUV US$53 billion) for the period 2014–20 (Table 2.7). The plan PWENGCTRQYGTRNCPVUKP8KGVPCO*QYGXGTCNVJQWIJVJGƂTUV presented below covers all investment needs for the sector unit is planned to be operational at the end of 2020, in reality KTTGURGEVKXGQHKORNGOGPVCVKQPCPFƂPCPEKPITGURQPUKDKNKVKGU it is unlikely to be commissioned before 2020. In EVN’s latest 6JKUUGEVKQPDTKGƃ[UWOOCTK\GUVJGKPXGUVOGPVUHQTGECUVD[ update on its planned capital expenditure on generation, 2/2KPEQORCTKUQPVQVJG+'oUWPQHƂEKCNWRFCVGCPFVJG almost two-thirds of these investments are shown to have '80%#2':ƂPCPEKPIRTQITCO been postponed beyond 2020. The generation power plant projects included in PMP7 #EEQTFKPIVQ'80oU%#2':ƂPCPEKPIRNCPtCPFYKVJCTQWIJ have been costed at their individual CAPEX and OPEX (as estimate of the IPPs’ investments, assuming international FGUETKDGFKP2/2CPFEQPƂTOGFVJTQWIJKPVGTXKGYU 6JGUG benchmarks for the investment costs by technology, as costs were entered into the simulation software STRATEGIST shown inTable 2.7—new generation capacity will mean that to select the optimal power plant development and yield the total investment costs will amount to VND 800 trillion in year-by-year investments in generation assets. Although 2015–20. Out of this amount, almost VND 525 trillion (more VJGFCVCCTGRCTVN[EQPƂFGPVKCNCPFVJWUEQWNFPQVDG than 65 percent) will be invested by the private sector. accessed, PMP7 includes a table with typical values of unit Figure 2.8 shows the steady increase in the share of IPPs in costs for thermal generation plants by type that have been the generation mix in the next few years. 10 A FINANCIAL RECOVERY PLAN FOR EVN TABLE 2.7: TOTAL INVESTMENT COST, 2014–20 VND, BILLIONS TOTAL COST TOTAL COST (VND, (US$, 2014 2015 2016 2017 2018 2019 2020 BILLIONS) MILLIONS) GENERATION 60,604 147,153 120,015 103,730 111,897 164,467 86,738 794,605 37,838 IPPS 0 96,881 66,112 70,085 90,460 148,995 52,714 525,248 25,012 EVN CORPORATE AND GENCOS 60,604 50,272 53,903 33,645 21,438 15,472 34,024 269,358 12,827 TRANSMISSION 14,873 15,843 17,808 18,924 20,307 21,155 25,810 134,720 6,415 DISTRIBUTION 23,593 22,053 25,364 26,062 27,963 28,187 28,745 181,967 8,665 TOTAL 99,070 185,049 163,187 148,716 160,168 213,809 141,293 1,111,293 52,919 Source: Own elaboration based on EVN-updated CAPEX program. FIGURE 2.8: NEW CAPACITY AND SHARE OF IPPS Source: Own elaboration based on EVN’s updated CAPEX program. Moreover, coal will be the main fuel source for additional EVN’s updated CAPEX program has 13.8 percent less 500 kV generation capacity in the coming years. Given current circuit-km, 5.9 percent less circuit-km5 at 220 kV, basically the sustainability concerns, this might hinder the ability to raise same transformer capacity at 500 kV (-0.9 percent), and 16.5 funds for these plants. The World Bank Group will provide percent less transformer capacity at 220 kV than PMP7. ƂPCPEKCNUWRRQTVHQTPGYITGGPƂGNFEQCNRQYGTIGPGTCVKQP Investments in the transmission grid are higher in northern projects only in rare circumstances, such as meeting basic Vietnam. The reason for this seems to be that, under PMP7, energy needs in countries with no feasible alternatives. the government plans to locate most of the new power 2.5.2. Transmission plants in the north because of the higher availability of local Regarding the investments planned in transmission facilities, EQCNTGUQWTEGU$QVJ2/2CPFVJG+'oUWPQHƂEKCNWRFCVG VJGTGKUCPQVKEGCDNG CNVJQWIJPQVGZEGUUKXGN[UKIPKƂECPV  highlight the importance of expanding the capacity of the difference between what was approved in PMP7 and what north-central-south 500 kV link. This is a sound solution for has been included in EVN’s investment plan for 2012–20. enabling the transfer of excess generation capacity from 5 Circuit kilometers refers to the length of the actual path of revenue-producing circuits in service, as determined by measuring the length of the actual path followed by the transmission medium. SECTOR CONTEXT AND THE NEED FOR A FINANCIAL RECOVERY PLAN FOR EVN 11 FIGURE 2.9: INVESTMENTS IN TRANSMISSION GRID ASSETS IN EVN’S UPDATED CAPEX PROGRAM VERSUS PMP7 Source: Own elaboration based on EVN’s updated CAPEX program and PMP7. Note: MVA= megavolt-ampere. VJGPQTVJGTPTGIKQPVQƂNNVJGGPGTI[FGƂEKVKPVJGUQWVJGTP TGIKQPCPFVQHTGGEQCNCPFICUƂTGFRQYGTRNCPVUHTQO cycling duties. In the EVNNPT’s latest investment plan, capital expenditures in the transmission grid in the same period reach VND 135 trillion. Investments in transmission facilities are mainly driven by the development of transmission facilities connecting the northern region, where most generation is located, with the southern area of the country. Moreover, from 2018 onwards new investments are likely planned by the EVNNPT with the aim of accommodating the power output from a nuclear power plant, which is expected to be commissioned after 2020. 2.5.3. Distribution Investments in distribution networks are executed by the PCs based on regional master plans. According to the latest information provided by the PCs, total expenditures during 2014–20 will be around VND 180 trillion. 2.5.4. Summary According to its CAPEX plan for 2014–20 for all subsidiaries, EVN expects to borrow over US$27 billion (Table 2.8). The CPPWCNƃWEVWCVKQPUTGƃGEVGZRGEVCVKQPUCDQWVVJGVKOKPICPF cost of implementation of individual projects. 12 A FINANCIAL RECOVERY PLAN FOR EVN TABLE 2.8: EVN SUBSIDIARIES’ INVESTMENT (VND, BILLIONS) 2014 2015 2016 2017 2018 2019 2020 TOTAL TOTAL INVESTMENT 99,070 88,168 97,075 78,631 69,708 64,814 88,579 586,045 EVN CORPORATE 12,486 14,201 21,108 13,611 15,174 15,472 34,024 126,076 GENCO 1 13,088 12,681 14,368 3,834 1,607 0 0 45,578 GENCO 2 9,779 4,601 2,628 1,881 0 0 0 18,889 GENCO 3 25,251 18,789 15,798 14,318 4,657 0 0 78,813 PCS 23,593 22,053 25,364 26,062 27,963 28,187 28,745 181,967 NPT 14,873 15,843 17,808 18,924 20,307 21,155 25,810 134,720 Source: Own elaboration based on EVN’s updated CAPEX program. © istock photo SECTOR CONTEXT AND THE NEED FOR A FINANCIAL RECOVERY PLAN FOR EVN 13 © EVN Electricity of Vietnam 14 A FINANCIAL RECOVERY PLAN FOR EVN 3. SITUATION ANALYSIS OF VIETNAM ELECTRICITY 6JKUUGEVKQPGZCOKPGUVJGEWTTGPVƂPCPEKCNQRGTCVKQPCN 3.1.2. Financial Performance and technical performance of the EVN group, considering From 2008 to 2011 EVN suffered sustained losses that ƂTUVVJGQXGTCNNNGXGNQHRGTHQTOCPEGHQTVJGEQPUQNKFCVGF EQPVTKDWVGFVQCUGTKQWUFGVGTKQTCVKQPKP'80oUƂPCPEKCN company and then the performance of its various EQPFKVKQP+PCPF'80oUUGNHƂPCPEKPITCVKQ 5(4 t subsidiaries. VJCVKUKVUCDKNKV[VQƂPCPEGRNCPPGFKPXGUVOGPVUHTQOKVUQYP resources—was negative, and its debt service coverage ratio &5%4 tKVUECUJƃQYCXCKNCDNGVQRC[FGDVQDNKICVKQPUtHGNN 3.1. EVN GROUP well below the previous level of 140 percent, to around 70 3.1.1. Operational and Technical Performance percent. By 2011 the company was stretched, with debt In general terms, EVN’s performance standards are accounting for 85 percent of assets. very good in many respects. The level of losses in the distribution utilities ranges from 5.6 percent to 8.0 +P'80oUƂPCPEKCNRGTHQTOCPEGKORTQXGFUKIPKƂECPVN[ percent, which compares favorably with distribution HTQOCNQUUQHRGTEGPVQHKPEQOGKPVQCRTQƂVQH companies in developed countries such as Australia and 14 percent of income, an improvement of 26 percent. The the United Kingdom. In transmission, losses are in the VWTPCTQWPFTGƃGEVGFVJTGGOCLQTVTGPFUDGVYGGPCPF range of 2 percent to 3 percent, which is slightly high 2012: but understandable in view of Vietnam’s geography and • First, tariffs increased by 5 percent in December 2011, overloading on some lines. Invoices for power sales are July 2012, and December 2012. Other things being equal issued regularly and promptly and are almost always (including volumes of electricity supplied), revenue would fully collected. Productivity, though still low, has been therefore have increased by about 10 percent between 2011 TKUKPIUVGCFKN[tCUTGƃGEVGFKPHQTGZCORNGVJGPWODGT CPFKPHCEV'80CEJKGXGFCPKPETGCUGQHRGTEGPV of customers per employee. Operational expenditure in in revenue in 2012 with a 10 percent increase in tariffs, distribution is extremely low by international standards in implying an increase of about 14 percent in units sold. XKGYQHVJGNQYXQNWOGUQHGPGTI[DGKPIYJGGNGF6 this may However, the cost of sales increased by only 8 percent. If be due to the low cost of labor. costs had increased in line with the units sold, they would 6JGTGCTGCTGCUQHCEVKXKV[YJGTGUVCHƂPINGXGNUCTGCDQXG JCXGDGGPCTQWPF80&VTKNNKQPJKIJGTCPF'80oUƂPCPEKCN KPVGTPCVKQPCNPQTOU9JKNGVJKUOC[TGƃGEVVJGNQYEQUVU performance would not have shown the same improvement. of labor, low levels of outsourcing, and some non-core • Second, losses arising due to the depreciation of activities, continuing improvements in productivity would the Vietnamese dong against foreign currencies were seem possible. However, there is no indication that there are considerably lower in 2012 than in 2011, falling by more than CTGCUQHCEVKXKV[YJGTGUKIPKƂECPVKORTQXGOGPVUKPƂPCPEKCN 50 percent between 2011 and 2012 (from VND 16 trillion to performance can be achieved quickly through better VND 7 trillion). QRGTCVKQPCNRGTHQTOCPEG+PVJGƂPCPEKCNRTQLGEVKQPUKVJCU • Third, because there was greater use of hydropower in been assumed that operational performance will continue 2012, the unit costs of sales fell by 7 percent between 2011 to improve over time, with increasing demand resulting in and 2012. Moreover, if they had also increased in line with higher productivity. The assumptions built into the model VJGCXGTCIGKPƃCVKQPQHCDQWVRGTEGPVEQUVUYQWNFJCXG VQTGƃGEVVJKUCTGDCUGFQPUCXKPIUKPQRGTCVKPIGZRGPUGU been around VND 15.5 trillion higher. (excluding fuel), selling expenses, and administration costs. 5RGEKƂECNN[VJGUGEQUVUCTGCUUWOGFVQKPETGCUGKPNKPGYKVJ #MG[RQKPVVQPQVGJGTGKUVJGUKIPKƂECPVGHHGEVQHVJG KPƃCVKQPtDWVYKVJQRGTCVKPICPFUGNNKPIGZRGPUGUKPETGCUKPI changed hydrological conditions on EVN’s performance. As by 70 percent of the demand increase, and administrative an example, the saving of VND 15.5 trillion is equivalent to expenses increasing by 50 percent of the demand increase. the following: 6 Electric power is said to be wheeled when it is transmitted through or over transmission lines. S I T U A T I O N A N A LY S I S O F V I E T N A M E L E C T R I C I T Y 15 • A 9 percent increase in tariffs in 2012 OCPCIKPIKVUECUJƃQY#EEQWPVURC[CDNGKPETGCUGFHTQO 127 days of operating expenses in 2007 to 168 days in • A 12.4 percent revaluation of the Vietnamese dong VJGTGYCUCPKORTQXGOGPVVQFC[UKP6JKU in 2012 is well above commercial good-practice standards for • A 23 percent reduction in operating costs in 2012 paying suppliers, which would be a maximum of 90 days. (including fuel costs) Having accounts payable at such a high level can lead to • 3.5 percent of EVN’s total debt in 2012 such problems as suppliers refusing to extend further credit and insisting on cash payment. In practice, the delays in • 15 percent of the planned capital program for 2012 payments principally affected two other SOEs: EVN’s main '80oUTGUWNVUHQTUJQYVJCVRTQƂVCDKNKV[YCUOCKPVCKPGF suppliers, PetroVietnam and Vinacomin. The company made albeit at a slightly lower level than in 2012. Although the UWEEGUUHWNGHHQTVUVQKORTQXGECUJƃQYHTQOEWUVQOGTU EQORCP[DGPGƂVGFHTQOCNCEMQHGZEJCPIGNQUUGUKP and accounts receivable fell from 84 to 54 days of revenue tariff increases were limited to a rise of 5 percent in mid- between 2008 and 2013. 2013. EVN has had a high and rising level of borrowing, most of it 6JGKPƃWGPEGQHJ[FTQNQI[QP'80oUEQUVUCPFTGXGPWGU in foreign currency. Total debt increased from VND 86 trillion will fall over time because planned additions to capacity at the end of 2007 to VND 284 trillion in 2013. At the same are predominantly thermal rather than hydropower. As time, foreign currency debt increased from 64 percent of the shown earlier in Figure 2.5, the share of hydropower in the total in 2007 to 88 percent in 2012, though falling again to 63 generation portfolio is projected to decline from 41 percent RGTEGPVKP6JKURNCEGU'80oURTQƂVCDKNKV[CVKPETGCUKPI to 31 percent in 2020. risk from the depreciation of the Vietnamese dong. +PCFFKVKQPVQKORTQXGFRTQƂVCDKNKV['80JCUCNUQKPETGCUGF Much of EVN’s borrowing is short-term: around 45 percent of its equity through asset revaluations so that debt fell to KVUFGDVKUFWGHQTTGRC[OGPVKPVJGPGZVƂXG[GCTU*QYGXGT 62 percent of assets in 2012 and 50 percent in 2013. This the assets that EVN is acquiring have long lives of up to 25 improved the debt-equity ratios in the affected subsidiaries. years. There is therefore a mismatch between EVN’s assets $GECWUGQHKVUƂPCPEKCNRTQDNGOU'80JCFFKHƂEWNV[KP and liabilities. TABLE 3.1: STRUCTURE AND COST OF EVN’S DEBT VND TRILLION 2007 2008 2009 2010 2011 2012 2013 LOANS DENOMINATED IN USD 24 33 46 64 77 130 42 LOANS DENOMINATED IN JPY 28 38 43 49 74 79 129 LOANS DENOMINATED IN VND 31 41 59 78 64 29 107 LOANS DENOMINATED IN € 2 3 4 4 2 5 3 LOANS DENOMINATED IN K WON 1 1 1 1 1 1 1 LOANS DENOMINATED IN CNY – – – – – 2 2 % LOANS DENOMINATED IN VND 36.0% 35.3% 38.6% 39.8% 29.4% 11.8% 37% AVERAGE INTEREST RATE 4.6% 6.7% 4.9% 8.3% 9.3% 8.4% 6.1% TENOR < 1 YEAR 6 9 13 21 20 24 28 1 YEAR < TENOR < 2 YEARS 8 14 24 35 30 26 32 2 YEARS < TENOR < 5 YEARS 19 32 52 97 89 77 69 TENOR > 5 YEARS 54 61 64 42 80 118 154 % LOANS DUE < 5 YEARS 38.9% 47.4% 58.2% 78.5% 63.5% 51.8% 45% Source: Own elaboration. Note: K won = Korean Democratic Peoples’ Republic won. 16 A FINANCIAL RECOVERY PLAN FOR EVN 3.1.3. Governance The current governance arrangements in EVN leave BOX 3.1: EVN’S 2012 REVALUATION OF ASSETS responsibility for management and control largely with EVN headquarters. The boards of the subsidiaries are drawn EVN carried out an asset revaluation in 2012 for its exclusively from EVN management and make few decisions transmission and distribution companies. The impact in their capacity as boards. Appointments are made centrally. YCUVQKPETGCUGVJGCUUGVUoXCNWGUKIPKƂECPVN[#UC Assets and liabilities are allocated to subsidiaries based on result, EVN appears to have additional equity in its FGEKUKQPUD['80JGCFSWCTVGTUCPFECUJƃQYKUOCPCIGF DCNCPEGUJGGVCPFƂPCPEKCNKPFKECVQTUUWEJCUVJG centrally. There are no management information packages debt-equity ratio were improved. For EVN overall, KPRNCEGCPFVJGRTGRCTCVKQPQHƂPCPEKCNKPHQTOCVKQPKUUNQY the debt-equity ratio improved from 85:15 in 2011 to 70:30 in 2012. There were similar improvements for the with the completion of audited accounts taking up to a year. UWDUKFKCTKGUVJGFGDVGSWKV[TCVKQCV026HQTGZCORNG improved from 83:17 to 49:51. The impacts at the EVN 3.2. EVN SUBSIDIARIES distribution companies are as shown in the following table. 6JKUUGEVKQPGZCOKPGUVJGQRGTCVKQPCNƂPCPEKCNCPF technical performance of EVN’s main subsidiaries, which are TABLE 3.2: IMPACT OF ASSETS REVALUATION as follows: ON DEBT-EQUITY RATIOS • The three generation companies, known as Genco Subsidiary Debt-equity Ratio )GPEQCPF)GPEQ 2011 2012 • The National Power Transmission Corporation, '80026CPF Hanoi PC 81:19 52:48 r 6JGƂXGFKUVTKDWVKQPEQORCPKGUMPQYPCUVJG Ho Chi Minh PC 73:27 45:55 Hanoi, Ho Chi Minh, Northern, Central, and Southern Northern PC 77:23 59:41 Power Companies (PCs). Central PC 62:38 53:47 An additional subsidiary, EVN Corporate, is a company that Southern PC 65:35 48:52 carries out a range of residual EVN activities, such as acting as the single buyer of all generated electricity and having NPT 83:17 49:51 responsibility for the multipurpose hydropower projects. Source: Authors’ calculations based on financial data provided by EVN. EVN Corporate needs to become commercially focused in The revaluation did not generate any additional cash, the same way as other EVN subsidiaries to play an effective however. Under the existing regulatory regime, EVN role in the new unbundled structure for the industry. This has not been able to charge current cost depreciation will involve, for example, charging for the services of and increase retail tariffs because the recently issued the multipurpose hydropower plants, both in supplying regulation (MOIT Circular 12) is not clear on whether electricity and irrigation water. VJGYKPFHCNNRTQƂVQHCUUGVTGXCNWCVKQPUJQWNFDG considered in the tariff calculation or not. Discussions Earnings, before interest, taxes, depreciation and about these issues are taking place among EVN, the amortization (or EBITDA) for EVN Holding represent MOIT, and ERAV. the sum of earnings by the individual companies, net of Consequently, although there is no substantive impact, intercompany transactions. VJGCRRGCTCPEGQHVJGƂPCPEKCNTGUWNVUJCUKORTQXGF through a better debt-equity ratio. Following the revaluation exercise, EVN as a whole and all six subsidiaries now have a debt-equity ratio of better than 70:30, which is often taken as a benchmark for minimum capital adequacy in power utilities. This may improve the perception of EVN and its subsidiaries in the eyes of lenders who take a mechanistic approach VQƂPCPEKCNKPFKECVQTUDWVKVFQGUPQVCFFTGUU fundamental aspects of creditworthiness or valuation, not to mention the perception of more-sophisticated analysts. Most importantly, the improved debt-equity ratio may mislead EVN’s owner, the government, into believing VJCV'80oUƂPCPEKCNRQUKVKQPKUUGEWTGYJGPKPRTCEVKEG KVKUPQV+VYQWNFJCXGDGGPHCTOQTGDGPGƂEKCNVQ KORTQXG'80oUƂPCPEKCNRQUKVKQPVJTQWIJCECRKVCN injection, but the government has not done this for © istock photo many years. S I T U A T I O N A N A LY S I S O F V I E T N A M E L E C T R I C I T Y 17 FIGURE 3.1: CONSOLIDATION OF THE EVN GROUP (EBITDA) According to the available feasibility studies of individual plants, as of 2012 these plants’ net operating margin ratios Revenues Retail tariff x Demand barely reached best international standards, and in most PCs Costs ] OPEX ECUGUVJGTCVKQUYGTGPQVUWHƂEKGPVVQGPUWTGNKSWKFKV[KPFC[ Bulk supply costs to-day operations. Even though these ratios have improved Revenues recently, they are still far from levels at which they will attract NPT Transmission revenues Costs Revenues private investors’ interest. OPEX Demand EVN Other revenue The average unit cost of construction varies widely among Holdings Costs OPEX technologies. Several references may be found. In PMP7, Revenues SPPA prices x generation Fuels WPKVKPXGUVOGPVEQUVUHQT622UYGTGFGƂPGFCUUJQYPKP Gencos Costs IPPs Costs OPEx Table 3.3. Fuel costs Revenues Bulk supply revenues TABLE 3.3: COMPARISON OF UNIT INVESTMENT Corporate Other revenues Costs COST FOR THERMAL POWER PLANTS IPPs PPA + generation Gencos SPPA prices x generation Transmission costs BENCHMARK OPEX REFERENCE COST: INTERNATIONAL Source: Own elaboration. REFERENCE ENERGY AGENCY Note: Colors show the main inter-subsidiary transactions (red for bulk supply costs/revenues, green for transmission costs/revenue, and purple for generation costs/revenues). Transaction pricing is formally FUEL TYPE - COST IN PMP7 AND WADE regulated: bulk supply cost was recently regulated by Circular 12/2014, transmission tariffs are PLANT (US$/KW) (US$/KW) regulated by Circular 14/2009 and amendments, and standard power purchase agreements (SPPAs) are regulated by Circular 42/2010. EBITDA = earnings before interest, taxes, depreciation, and amorti- zation. GAS (CCGT) 1,020 550–1000 COAL-FIRED 1,400 600–2,400 3.2.1. The Generation Companies DIESEL -FIRED 600 400–1,500 "«iÀ>̈œ˜>>˜`/iV…˜ˆV> vwVˆi˜VÞ Although the operation of the generation plants across OIL-FIRED 1,200 900–1,300 the three gencos is satisfactory, there is some room for NUCLEAR 3,000 2,000–4,600 improvement. Available capacity accounts for over 95 Source: Own elaboration. percent of the overall installed capacity. Therefore, existing Note: CCGT = combined-cycle gas turbine; WADE = World Alliance for Decentralized Energy generators are available to generate very close to their maximum capacity. If unavailable capacity is added to $GECWUG*22RTQLGEVUVGPFVQDGXGT[UKVGURGEKƂECPCN[\KPI total outages, more than 15 percent of the capacity is them is best done by reviewing feasibility studies and the WPCDNGVQRTQFWEGRQYGTVJKUECPDGKORTQXGFVJTQWIJ cost of the materials and works involved. Overall, unit more investment. Genco 3’s plants are among the oldest KPXGUVOGPVEQUVUCTGPQVHCTHTQOKPVGTPCVKQPCNPQTOU in the system although their operational performance is the main problems are associated with delays in the reasonable. commissioning of the facilities and cost overruns. #OQPI)GPEQoUEQCNƂTGFRQYGTRNCPVUCTGEGPVQXGTJCWN As previously noted, PMP7 includes reference prices for the of the two units at the Pha Lai power station (the country’s capital and operational costs of thermal plants, grouped by largest coal .thermal power plant (TPP) caused them to technology. Table 3.4 shows reference levelized costs for WPFGTRGTHQTOSWKVGUKIPKƂECPVN[KPYKVJ2JC.CK Vietnam, grouped by technology and location. For the load out of work about 60 percent of the time. Even though factors observed in Vietnam (50–70 percent), the minimum Pha Lai 1 and 2 showed reasonably good performance in NGXGNK\GFEQUVKU75EGPVURGTM9J FQOGUVKEEQCNƂTGF 2013, the capacity factors of such plants have diminished in the north) and the maximum, for peaking units, is 10.98 since 2010. EVN is advised to consider carrying out major U.S. cents per kWh (thermal gas units in the south). refurbishments of these and similar power plants to improve their contribution to the system’s power generation. Considering that the most probable scenario in the south is the installation of CCGTs, the levelized cost of these units Similarly, since 2013, the utilization rate of the Ninh Bin would range between 6.69 and 8.24 U.S. cents per kWh RQYGTRNCPVJCUFGVGTKQTCVGFCPFKVUJQYUUKIPKƂECPV (for load factors ranging from 90 percent to 50 percent, underperformance. Again, although it is not possible to respectively). determine the underlying reasons for this, given the features of the plant, some rehabilitation may be needed. Even though there are some data limitations to analyzing the investment programs submitted by the gencos, on average, Utilization levels in some of the older coal plants are low construction costs related to their investments in new although this is related to the reserve margin needed by the facilities are mostly aligned with international norms. system. 18 A FINANCIAL RECOVERY PLAN FOR EVN TABLE 3.4: OTHER OPERATIONAL ASSUMPTIONS, BY TECHNOLOGY GAS COAL OIL DOMESTIC DOMESTIC COAL- COAL- DO- FIRED FIRED IMPORTED FUELED TECHNOLOGY (FUEL) THERMAL THERMAL COAL GAS OIL-FIRED GT (BIG) THERMAL (NORTH) (SOUTH) THERMAL TURBINE THERMAL LOCATION South South South North South South All All CRITERION EFFICIENCY % 52 34 35 41 41 41 34 36 FUEL CONSUMPTION kcal/kWh 1.658 2,535 2,463 2,102 2,102 2,102 2,535 2.394 RATE CALORIFIC VALUE OF FUEL kcal/kg 9,800 9,800 9,800 5,500 5.5 6,500 10,150 9,910 FUEL PRICE OF 5.26 5.26 5.26 637 BASE YEAR US$/unit (MMBTU) (MMBTU) 28.1 (ton) 38.1 (ton) 86 (ton) 785 (ton) (MMBTU) (ton) Source: PMP7. Note: Fuel costs are based on local prices as defined in PMP7. MMBTU = million British thermal units; DO = diesel oil. FIGURE 3.2: LEVELIZED COSTS OF GENERATION TECHNOLOGIES BY TYPE, LOCATION, AND LOAD FACTOR 30 25 20 CCGT - South GT - South Thermal - South 15 Domestic Coal fired - North Domestic Coal fired - South Imported Coal - South 10 DO fueled gas turbine Oil-fired thermal Nuclear - PWR 5 0 50 55 60 65 70 75 80 85 90 Load Factor (%) Source: PMP7. It is worth carrying out a detailed, case-by-case analysis to determine whether rehabilitation of existing generation CUUGVUVQKORTQXGVJGKTGHƂEKGPVQRGTCVKQPEQWNFDGOQTG economic than replacing them with new power plants. S I T U A T I O N A N A LY S I S O F V I E T N A M E L E C T R I C I T Y 19 ˆ˜>˜Vˆ>*iÀvœÀ“>˜Vi United Kingdom, Italy, and other European countries. Because the gencos are new, they have no records of past "«iÀ>̈œ˜>>˜`/iV…˜ˆV>*iÀvœÀ“>˜Vi RTQƂVCDKNKV[KUVJGƂTUV[GCTKPYJKEJVJGIGPEQUJCXG Table 3.6 compares key operational indicators for EVNNPT audited accounts, and 2014 accounts had not yet been to internationally acceptable ranges derived from the audited at the time of updating this report in April 2015. benchmarking exercise. Their future sustainability is highly dependent on their ability VQEJCTIGVCTKHHUVJCVEQXGTEQUVUCPFRTQXKFGUWHƂEKGPVECUJ ƃQYVQOGGVFGDVUCPFHWPFKPXGUVOGPV TABLE 3.6: OPERATIONAL INDICATORS - NPT (2012) The gencos fall short of this ideal in a number of ways. First, as mentioned, the companies have no trading history. 5GEQPF)GPEQoUƂPCPEKCNRGTHQTOCPEGKPYCU unsatisfactory. Looking ahead, while the base-case tariffs UJQYCFGSWCVGƂPCPEKCNRGTHQTOCPEGHQT)GPEQUCPF 2, there are problems at Genco 3, and all the gencos may EVN NPT BENCHMARK JCXGKPCFGSWCVGƂPCPEKCNRGTHQTOCPEGYKVJCNGUUHCXQTCDNG INDICATOR – 2012 LEVEL COMMENT evolution of tariffs. Finally, the governance structures of the ASSETS TO 25.34 9.39–49.71 NPT in the lowest companies need substantial improvement. All these issues ENERGY tier. Potentially can be addressed but it will take time. RATIO (US$/MWH) linked to old assets, )GPEQHCEGUVJGOQUVETKVKECNƂPCPEKCNUKVWCVKQPCOQPICNN low investment in the EVN subsidiaries. This is basically caused by its ambitious network growth, investment plan and the relatively low purchase prices of and lack of high- some power plants. end solutions. 2.33 1.09–2.50 Slightly high but TABLE 3.5: FINANCIAL PERFORMANCE - ENERGY within acceptable GENCOS (2013) LOSSES (%) levels. Positive historical evolution. ACCEPTABLE INDICATOR 2013 RANGE OPEX PER 5,805 761–45,413 In the lowest part GRID KM of the benchmark ACCOUNTS RECEIVABLE AS 63–160 60–80 (US$/KM) NUMBER OF DAYS REVENUE range. Linked to ACCOUNTS PAYABLE AS low salaries (in the 64–300 80–120 NUMBER OF DAYS country in general) OPERATING EXPENSES and long network WORKING RATIO 81–116% 60–80% (to match the country’s territory). NET OPERATING MARGIN -16–19% >5% EMPLOYEES 0.44 0.04–0.45 Very high ratio PER GRID KM due to low human CURRENT RATIO 0.5–1.2 >100% (#/KM) resource costs, low RETURN ON EQUITY -12–30% 5–20% automation levels, and few outsourced DEBT-TO-EQUITY RATIO 54:46–60:40 <75:25 activities. DEBT-SERVICE 0,7–2 >1.25 FAULTS 1.44 1.0–1.9 Within the range. COVERAGE RATIO PER 100 KM Good performance. SELF-FINANCING RATIO (#/KM) -7–25% >25% Source: Own calculations based on the financial data provided by EVN MEAN 52.25 30–65 Within the range. DURATION Reasonable OF FAULTS (MINUTES) performance, but 3.2.2. National Transmission Corporation, (EVNNPT) it has deteriorated EVNNPT has played a period of rapid growth in sales and over time. assets since its establishment in 2008. Its performance was assessed by benchmarking its key performance indicators OPEX/MWH 0.90 0.18–4.01 In the lowest part (US$/MWH) of the benchmark (KPIs) against international reference levels obtained from a sample of 10 specially selected transmission companies range. Linked to from India, Bangladesh, Colombia, Peru, Chile, Portugal, the low salaries (in the country in general). Source: Own elaboration. 20 A FINANCIAL RECOVERY PLAN FOR EVN The average unit cost of transmission lines is in the upper TABLE 3.8: FINANCIAL INDICATORS - NPT (2010-2012) tier of the typical price range: 300–500,000 USD/circuit- km for a 500 kV line and 150–250,000 USD/circuit-km for ACCEPTABLE INDICATOR 2010 2011 2012 2013 RANGE CM8NKPG6JGUGƂIWTGUCTGCXGTCIGUCPFVJWUCTG affected by both: (a) the timing of construction phases and ACCOUNTS EQOOKUUKQPKPIFWTKPIsCPF D VJGCUUGVUDGKPI RECEIVABLE AS NUMBER 150 178 147 125 60–80 installed, including the number of circuits, type of towers, OF DAYS and line routing. REVENUE Although prices seem to be relatively high, their levels ACCOUNTS PAYABLE AS are not unreasonable for a country that has areas with NUMBER FKHƂEWNVCEEGUUCUKUVJGECUGQH8KGVPCO6JGWPKVRTKEGUQH OF DAYS 481.1 – 248 185 80–120 transformer substations are within acceptable ranges, both OPERATING EXPENSES at 500 kV and at 220 kV. WORKING RATIO 107.1% 129% 86.3% 99% 60–80% TABLE 3.7: UNIT COST OF TRANSMISSION ASSETS NET ACCORDING TO PMP7 (2011–20) OPERATING -7% -29% 13.7% 1% >5% MARGIN ASSET UNIT COST CURRENT RATIO 56% 49% 60.2% 1.3 >100% 500 KV LINES 356,256 US$/km RETURN ON 220 KV LINES 173,495 US$/km EQUITY -6% -2% 5.9% 0.5% 5–20% 500 KV DEBT/ SUBSTATIONS 35,494 US$/MVA EQUITY 80:20 83:17 49:51 54:46 <75:25 220 KV DEBT SUBSTATIONS 33,124 US$/MVA SERVICE Source: Own elaboration. Note: MVA= megavolt-ampere. COVERAGE 0.84 1.00 1.64 1.6 >1.25 RATIO Financial Performance SELF- From its inception in 2008 through to 2011, EVNNPT made FINANCING -9% 0% 20% 24.8% >25% RATIO losses and had unsatisfactory DSCR and SFR. The EVNNPT Source: Own elaboration. QXGTECOGPGVNQUUGUKPCEJKGXKPICPGVRTQƂVQH80& 1,200 billion on total revenues of VND 8,710 billion. In 2013, RTQƂVCDKNKV[YCUUWUVCKPGFYKVJCUNKIJVFGVGTKQTCVKQPCUC The PCs’ performance was assessed by benchmarking KPIs TGUWNVQHVJG'80026oUUWDUVCPVKCNDQTTQYKPIVQƂPCPEG observed in each against international reference levels its capital investment program. In previous years, the main obtained from a sample of specially selected distribution reason for the net loss was the large foreign exchange loss companies from Argentina, Australia, Brazil, Chile, Portugal, on the EVNNPT’s foreign currency debt (76 percent in 2012). the United Kingdom, and the Philippines. Because the company has been almost wholly reliant on The PCs are very successful at collecting full payment debt to fund its ambitious capital program, it now has high from their customers on a timely basis. Their collection levels of debt relative to its equity. Although the equity rates—over 99.5 percent in all cases except for the Central RQUKVKQPYCUKORTQXGFUKIPKƂECPVN[D[CPCUUGVTGXCNWCVKQPKP PC, where it was 99.15 percent—match those of their 2012 (see Section 3.1.2), this has not provided any additional international peers. The average collection period is very ECUJ6CDNGUJQYUMG[ƂPCPEKCNKPFKECVQTUEQORCTGFVQ short (around 10 days) as well, because they invoice three internationally acceptable ranges. times a month to industrial customers. Where interruption statistics are concerned, however—the 3.2.3. Power Companies System Average Interruption Duration Index (SAIDI) and the System Average Interruption Frequency Index (SAIFI)7 "«iÀ>̈œ˜>>˜`/iV…˜ˆV>*iÀvœÀ“>˜Vi —the PCs are in the upper tier (that is, worst performing) 6JGƂXGRQYGTFKUVTKDWVKQPEQORCPKGUJCXGUKOKNCT distribution companies when compared to their peer operational and technical performance levels. These are ITQWR0QPGVJGNGUUKVKUFKHƂEWNVVQCUUGUUYJGVJGTVJGUG UWOOCTK\GFKP6CDNGFGVCKNUHQTGCEJUWDUKFKCT[CTG interruptions result from the PCs’ underperformance or from provided in Annex III. broader system shortfalls. There is not enough historic data 7 6JG5#+&+KPFKECVGUVJGCXGTCIGQWVCIGFWTCVKQPHQTGCEJEWUVQOGTUGTXGFVJG5#+(+KUVJGCXGTCIGPWODGTQHKPVGTTWRVKQPUVJCVCEWUVQOGTYQWNFGZRGTKGPEG S I T U A T I O N A N A LY S I S O F V I E T N A M E L E C T R I C I T Y 21 TABLE 3.9: PCS – BENCHMARK OPERATIONAL PERFORMANCE (2012) RANGE OF INDICATOR PERFORMANCE BENCHMARK COMMENT ASSETS-TO- 28.06–64.58 54.33–416.37 Generally below the minimum of the benchmark range. Low ENERGY RATIO (US$/MWH) investments in assets in relation to the energy wheeled. AGGREGATE TECHNICAL, 5.56–8.04 4.99–12.52 Within the benchmark. Good loss levels. COMMERCIAL, AND COLLECTION LOSS (%) COLLECTION EFFICIENCY (%) 99.15–100.15 98.5–99.5 Excellent collection performance. SYSTEM 16.5–53.0 0.69–15 In the worst-performing tier for the benchmark. Considerable AVERAGE room for improvement, target SAIFI = 10 or lower. INTERRUPTION FREQUENCY INDEX (#) SYSTEM 2,988–9,797 17.08–432 Very far from the benchmark levels. Large room for AVERAGE INTERRUPTION improvement. Need to distinguish sources of interruptions. DURATION INDEX (MINUTES) OPEX (US$)/MWH 2.89–4.67 4.99–29.21 Low OPEX, below the benchmark minimum level. Linked to low labor costs but possibly also low budgets available for spare parts, maintenance, and quality programs. CUSTOMERS/EMPLOYEE 250–289 557–2,868 Out of the benchmark range. Very low ratio. Linked to potential QXGTUVCHƂPIVJGNQYCWVQOCVKQPNGXGNCPFNQYQWVUQWTEKPI rate. Source: Own elaboration. to analyze the evolution of SAIDI and SAIFI over the years electricity tariffs. The PCs’ report of larger net losses for 2011 except for 2011–12, during which the frequency and duration TGNCVGFVQVJGYKFGTƂPCPEKCNFKHƂEWNVKGUVJTQWIJQWVVJG'80 of customer interruptions slightly worsened. The SAIFI in ITQWRVJCPVQURGEKƂEFKHƂEWNVKGUYKVJKPVJG2%U#RQTVKQPQH the EVNNPC is more than double that of the other four the losses that originated in the EVN parent company (EVN distribution companies. Other studies in the country indicate Holding) in 2011 may have been assigned to the PCs. As a that maintenance of assets is generally adequate, but the result of the existing mechanism for setting bulk tariffs, the availability of spare parts is often limited (mainly due to the ƂPCPEKCNRGTHQTOCPEGQHVJG2%UKUPQVKPFGRGPFGPVQH'80 age of most assets), thus preventing timely repairs and/or and its other member companies. replacement of equipment. #NNƂXG2%UYGTGOCTIKPCNN[RTQƂVCDNGKPKPNKPGYKVJ The performance of the distribution companies in terms improved performance in EVN as a whole, with operating of system interruptions (both SAIDI and SAIFI) shows margins between 2.1 percent (Central) and 4.8 percent considerable scope for improvement. It may be that (Hanoi). The return on equity varied from 4 percent and maintenance spending, which is well below international 10 percent. Financial ratios such as the SFR and DSCR are benchmarks, is too low. Increases in maintenance stretched in some cases, but overall the companies were at spending—for example, on increased holding of spare CEEGRVCDNGNGXGNUQHRGTHQTOCPEGKP2TQƂVCDKNKV[HGNN parts or enhanced engineering skills—could reduce again in 2013 due to inadequate retail tariff adjustments. SAIFI and SAIDI in the future. However, it is impossible All the companies have had success at managing accounts VQTGCEJCFGƂPKVKXGLWFIOGPVCVVJKUUVCIG'80JCU receivable, which in 2013 were in the range of 11 to 17 strong engineering capabilities and the capacity to days’ revenue. They have also managed to reduce levels reach appropriate conclusions and increase spending if of accounts payable, which are now in the range of 36 to PGEGUUCT[KPVJGHWVWTG6JGƂPCPEKCNKORCEVYKNNDGUOCNN 93 days’ operating expenses. As a consequence, all the as maintenance spending is a small part of the costs of the EQORCPKGUJCXGJCFRQUKVKXGECUJƃQYHTQOQRGTCVKQPUKP power sector. the last few years. ˆ˜>˜Vˆ>*iÀvœÀ“>˜Vi The current ratio of all the PCs is somewhat low, which Financial performance is very similar across the PCs due to ECPKPFKECVGVJGRQVGPVKCNHQTNKSWKFKV[FKHƂEWNVKGU6JG2%U EVN’s management of the PCs through its setting of bulk provided some clues on current ratios presented in audited 22 A FINANCIAL RECOVERY PLAN FOR EVN ƂPCPEKCNUVCVGOGPVU  1PGMG[TGCUQPKUVJCVVTCFG 3.3. SUMMARY receivables by the end of the year are underestimated due In summary, EVN’s subsidiaries in generation, transmission, to the regulations governing power-meter reading, which do and distribution have generally strong operational and not allow for full accrual of all earned income. technical performance and are well managed. However, VJG[QRGTCVGWPFGTEQPUKFGTCDNGƂPCPEKCNEQPUVTCKPVU TABLE 3.10: PCS - FINANCIAL INDICATORS, 2102 because tariffs are low and the companies have low levels AND 2013 of equity. In 2010 and 2011, EVN was unable to meet its ƂPCPEKCNEQOOKVOGPVUVQHWGNUWRRNKGTUCPFFGHCWNVGFHQT 2013 ACCEPTABLE INDICATOR 2012 RANGE RANGE RANGE a period. Financial performance improved in 2012 but, as demonstrated by the 2013 results, these improvements can ACCOUNTS 12–23 11–17 30–60 RECEIVABLE AS only be sustained with a steady increase in tariffs. There are NUMBER OF EQPUKFGTCDNGƂPCPEKCNEJCNNGPIGUKPDQVJUGTXKEKPIGZKUVKPI DAYS REVENUE FGDVCPFƂPCPEKPIVJGNGXGNQHECRKVCNKPXGUVOGPVGZRGEVGF ACCOUNTS 38–98 36–93 40–120 in the period up to 2020. PAYABLE AS NUMBER OF +PVJGCDUGPEGQHTGIWNCTVCTKHHKPETGCUGU'80oUƂPCPEKCN DAYS condition could deteriorate rapidly, resulting in defaults not OPERATING only to fuel suppliers but also potentially to lenders. Such EXPENSES defaults are highly risky as they suggest the possibility of WORKING 86–95% 99–100% 60–80% insolvency, which would lead to more wide-ranging defaults RATIO and ultimately constrain the country’s economic growth. As NET 2.1–4.8% 0–2% >5% a result, lenders and suppliers tend to tighten credit terms OPERATING MARGIN CVRTGEKUGN[VJGVKOGYJGPVJGTGCTGECUJƃQYFKHƂEWNVKGU +PUWEJEKTEWOUVCPEGUPGYNQCPUCTGNKMGN[VQDGFKHƂEWNVVQ CURRENT 65–95% 75–105% >100% secure and the capital expenditures get deferred. Potential RATIO investors in IPPs will be unwilling to accept the credit risk of ROE 4,2–10% 0–3% 5–20% supplying EVN and will demand payments directly from the D:E 23:77–44:66 20:80–34:74 <65:35 government. DSCR 1,37–4,86 1,5–5 >1.25 These challenges are serious but they can be met. The next section discusses the way forward to avoid these potential SFR 8–120 % 37–125 % >25% issues. Source: Own elaboration. #NNVJG2%UIGPGTCVGFRQUKVKXGPGVECUJƃQYUHTQOVJGKT operations in all years between 2008 and 2013. This means that revenues from electricity sales covered all cash operating and maintenance expenditures and left a surplus that could be used to contribute to capital investments and debt repayment. While the level of debt within the PCs has progressively increased between 2007 and 2011, their capital structures have remained much more balanced between debt and equity than those of the gencos and EVNNPT. Moreover, in 2012, debt-to-asset ratios improved among all the PCs, CNVJQWIJVJKUNCTIGN[TGƃGEVUVJGCUUGVTGXCNWCVKQPGZGTEKUG mentioned earlier. In particular, the distribution companies Southern Power Corporation (EVNSPC) and Ho Chi Minh © EVN Electricity of Vietnam Power Corporation (EVNHCMPC) hold the lowest share of debt compared to the other businesses (though again, the improvement of this ratio in 2012 resulted mainly from asset revaluation). In 2013 there was a small increase in equity as a TGUWNVQHRTQƂVUDWVKPIGPGTCNKPXGUVOGPVUKPPGYCUUGVUCTG fully funded by loans. S I T U A T I O N A N A LY S I S O F V I E T N A M E L E C T R I C I T Y 23 © istock photo 24 A FINANCIAL RECOVERY PLAN FOR EVN 4. MAJOR CHALLENGES FACED BY VIETNAM ELECTRICITY At present Vietnam’s power sector as a whole, and EVN in BOT plants (including plants owned by other SOEs such RCTVKEWNCTHCEGUKZOCLQTƂPCPEKCNCPFQRGTCVKQPCNEJCNNGPIGU as PetroVietnam) account for 36 percent of the installed that need to be addressed in order to meet the rising power capacity, but out of this, less than 18 percent belongs to demand described in section 1. The challenges are both non-SOEs. The private sector’s role in the recently created complex and interconnected: gencos is negligible for Gencos 1 (less than 2 percent) and 3 (less than 7 percent). Only in Genco 2 is the private share of 1. Achieving the scale of private investment expected KVUIGPGTCVKQPRQTVHQNKQUKIPKƂECPV RGTEGPV  in the power sector to meet investment needs The scale of this investment will require major new projects 2. Addressing the inadequacy of the present level of to be approved and implemented every three to six months, retail tariffs which is a far more rapid rate of approval than usual: in 3. Overcoming political concerns over the affordability recent past, where major IPPs have only been approved of power every one or two years. 4. Achieving operational improvements at EVN This is feasible, however, as evidenced by several positive  'PJCPEKPI'80oUECRCEKV[VQOCPCIGƂPCPEKPITKUMU signs in the sector. A number of local and international in areas such as hydrology, foreign exchange, and debt companies and investors have shown interest in developing structure major power projects in Vietnam. The international interest includes a number of companies with extensive power sector 6. Improving standards of corporate governance JQNFKPIUGNUGYJGTGKP#UKCtƂTOUUWEJCU6CVC#'5,CMU This section will discuss each of these in turn. Sembcorp, SN Power, and CLP Holdings (formerly China .KIJV2QYGT CUUWEJVJG[CTGJKIJN[ETGFKDNGCURTQLGEV promoters. There are also interested local investors that may 4.1. PRIVATE INVESTMENT NEEDS be able to participate in the market. Although they have Over the next seven years, extensive changes are expected NGUUGZRGTKGPEGYKVJCPFƂPCPEKCNECRCEKV[HQTOCLQTRQYGT KPƂPCPEKPITGURQPUKDKNKVKGUHQTKPXGUVOGPVKP8KGVPCOoU projects, experience elsewhere in Asia shows that local power sector, particularly in generation. Between 2013 and investors’ capabilities can grow quickly in an encouraging 2020, it is expected that about 65 percent of generation environment. investment will be undertaken by IPPs and only 35 percent 6JGTGCTGCNUQƂPCPEKPIRQUUKDKNKVKGU(QTGZCORNGCFFKVKQPCN by EVN. The total expected value of private investment is funding may be available from import-export banks in China over US$25 billion (see Figure 2.7 in Section 2.5.1). and Korea for projects that employ plant and equipment Moreover, this investment will need to come wholly from the RTQXKFGFD[VJQUGEQWPVTKGUCNVJQWIJUWEJƂPCPEKPIECP private sector. This is because state enterprises that have be expensive and inevitably limits the choice of suppliers, invested in power projects in the past, such as PetroVietnam, it is the most likely source of funds for coal projects. Also, a can no longer do so because of a new government policy hydropower project has recently managed to secure funding that forbids SOEs from investing in non-core businesses. from an Austrian bank. Project promoters will seek various government guarantees However, there are a number of constraints on the capacity to protect their investments in these IPPs. The extent of of the private sector, both locally and internationally, to these guarantees is a matter for negotiation, but it will be invest in generation projects on the required scale. These FKHƂEWNVHQTVJGIQXGTPOGPVVQGZVGPFIWCTCPVGGUVQVJG constraints fall into four categories—the power market, scale of this investment without impairing its own credit conditions for power projects, capital markets, and the TCVKPICPFNKOKVKPIVJGƂUECNURCEGCXCKNCDNGHQTQVJGT performance of the MOIT—as follows: activities. 1. The power market is characterized by retail prices Nowadays, over 90 percent of Vietnam’s overall generation that are below cost, and investors understand this. They is in the state’s hands. As shown in Figure 4.1, IPP and CTGVJGTGHQTGPQVEQPƂFGPVQHPGIQVKCVKPICFGSWCVG M A J O R C H A L L E N G E S FA C E D B Y V I E T N A M E L E C T R I C I T Y 25 FIGURE 4.1: SHARE OF POWER GENERATION OWNERSHIP (BASED ON INSTALLED CAPACITY), 2012 17,5% 82,5% Private State Owned Enterprise EVN 1.5% 22% IPP+ BOT+Other 36% 45,8% 52.7% Genco 1 14% Genco 3 Genco 2 G1-Private 17% 11% G1-State Owned Enterprise G1-EVN Dependent 17,1% 20,1% 6,7% 62,8% 54.8% 38,5% G2-Private G2-State Owned Enterprise G3-Private G2-EVN Dependent G3-State Owned Enterprise G3-EVN Dependent Source: Own elaboration prices for generation projects. Although Circular 56 3. Power projects will need to raise funds in both provides for standardization of PPAs, investors will likely international and local capital markets. In current market continue to doubt the fairness of the power market until: EQPFKVKQPUJQYGXGTCP[RTQLGEVYKNNKPGXKVCDN[ƂPFKV C KORNGOGPVKPITGIWNCVKQPUCTGRWVKPRNCEGCPF D CP FKHƂEWNVVQTCKUGHWPFKPIKPKPVGTPCVKQPCNOCTMGVU6JG announcement is made on how existing different PPA terms and conditions agreed by the government will structures for IPPs, BOTs, gencos and multi-purpose play a vital role in making projects bankable. The local hydropower power plants are to be dealt with. This capital markets, which are not well developed and do EQPEGTPKUOCIPKƂGFD[VJGWPEGTVCKPV[TGICTFKPIVJG not have a large appetite for initial public offers, will be timing for the establishment of an independent system only a limited source of funds for the next few years. and market operator. 4. Another major matter of concern is the slow speed  6JGTGCTGHWTVJGTURGEKƂEEQPEGTPUQXGTVJG at which the MOIT negotiates with private investors for conditions applicable to power projects. These include BOT projects. It may take up to seven years to negotiate the availability of government guarantees, land use a BOT project, and there are lengthy intervals between conditions, and the adequacy of fuel supplies for plants. meetings to discuss potential projects. The ratio of Individual projects are likely to raise their own special EQOOKUUKQPGFVQ/17UVCIGRTQLGEVUKUXGT[NQYCVVJG issues. time of the preparation of this report, only two projects had been commissioned while MOUs for another three 26 A FINANCIAL RECOVERY PLAN FOR EVN had been signed (of which only one was actually under o Variable costs are based on fuel prices and the EQPUVTWEVKQP 6JKUTGƃGEVUNKOKVGFECRCEKV[KPVJG/1+6 GZRGEVGFGHƂEKGPE[QHGCEJVGEJPQNQI[ According to the authors’ analysis, new generation capacity Since fuel prices are one of the main drivers of the is needed urgently and the funding required from the private outstanding tariff increase, which is needed to achieve UGEVQTVQFGXGNQRKVKUUKIPKƂECPV+PVJGCDUGPEGQHUWEJ ƂPCPEKCNUWUVCKPCDKNKV[QXGTVJGPGZVHGY[GCTUVJGCWVJQTU investment, it is unlikely that the forecast demand will be simulated a sensitivity test in which fuel prices remain at met—and correspondingly likely that, over time, system today’s levels. security and reliability will be compromised. If for any reason +PCFFKVKQPVQVJGVCTKHHCUUWORVKQPUVJGƂPCPEKCNRTQLGEVKQPU (creditworthiness of EVN, the MOIT’s response speed, or lack CUUWOGOQFGUVKORTQXGOGPVUKPVJGGHƂEKGPE[QH of interest from private sector because of macro conditions) operations, as described in Section 3. private sector investment cannot be mobilized, a generation gap of up to 20 GW will emerge, with obvious consequences The results are shown in Table 4.1. They show that for the for quality of service. Under these circumstances, EVN will '80RQYGTITQWRVQCEJKGXGƂPCPEKCNUWUVCKPCDKNKV[KPHQWT have limited scope for funding the required new investment years to 2018 will require average retail tariffs increases internally, and most likely the government would need to of around 10 percent per year, factoring in the potential ƂPCPEGVJGGZRCPUKQPRNCPtYKVJVJGCUUQEKCVGFƂUECNEQUV HQTOQFGUVGHƂEKGPE[KORTQXGOGPVU+HVJGVCTIGVFCVGHQT CEJKGXKPIƂPCPEKCNUWUVCKPCDKNKV[KUFGNC[GFD[QPG[GCTVQ 2019 to further smoothen the adjustment path, the required 4.2. INADEQUACY OF RETAIL TARIFFS average annual tariff increase would be about 8 percent. 6JGƂPCPEKCNCPCN[UKUYCUECTTKGFQWVHQT C VYQQRVKQPU The alternative scenario, which is based on tariff increases at QTUEGPCTKQUQHVCTKHHKPETGCUGUCPF D CPFCPWODGTQH VJGTCVGQHKPƃCVKQPYQWNFNGCFVQCPWPUWUVCKPCDNGƂPCPEKCN sensitivity analyses. The base-case scenario addresses the outcome for EVN, such as insolvency and serious power current situation of the country and proposes a gentle but UWRRN[FGƂEKVUWPNGUUVJGTGKUOCUUKXGIQXGTPOGPVƂUECN EQPUVCPVVCTKHHCFLWUVOGPVRCVJYJKEJYKNNNGCFVQƂPCPEKCN support. sustainability in EVN in 2018. An alternative scenario was The last simulation shows that, assuming fuel prices remain simulated assuming average annual tariff increases at the ƃCVKPVJGPGZVHGY[GCTU YJKEJKUWPNKMGN[IKXGPVJGPGGF TCVGQHKPƃCVKQP RTQLGEVGFCVRGTEGPVRGT[GCT VQGXCNWCVG to import fuel in the near term), tariffs will increase at the VJGEQPUGSWGPEGUQHPQVKORNGOGPVKPIEQUVTGƃGEVKXGVCTKHHU UCOGCXGTCIGTCVGCUKPƃCVKQPGPCDNKPI'80VQTGCEJEQUV in the medium term. TGƃGEVKXGVCTKHHU 5GG(KIWTG The underlying assumptions of these scenarios are as 6JWUCENGCTEQOOKVOGPVVQGPUWTKPI'80oUƂPCPEKCN follows:8 viability through tariff increases that are in line with existing • PPAs are linked to the evolution of fuel prices. RQNKE[tCPFVJTQWIJOQFGUVGHƂEKGPE[KORTQXGOGPVUCU • It is envisaged that in the next 10 years, prices of discussed in Section 3—is critical for ensuring the sector’s indigenous fuel sources will rise to international levels ability to fund its huge investment program of US$53 billion KPVJGTGIKQP KPƃCVKQPGUVKOCVGUYGTGRTQXKFGFD[VJG during 2014–20. Private investors, who are expected to World Bank’s country economists). fund nearly 50 percent of the total investment program, will YCPVVQUGGCETGFKVYQTVJ['80CPFUQYKNNNGPFGTUYJQ • Tariffs are based on the following revenue will be expected to provide about US$21 billion in loans (70 requirements for all subsidiaries: percent of the expenditure) for the program’s public sector o For the PCs and NPT, tariffs are based on MOT component. The size of the program is unprecedented, and Circulars 12 and 14 (a brief description is included UQKUVJGTGSWKTGFƂPCPEKPI in Annex VII) using a 10 percent real (after tax) return on equity. o For the gencos: • For existing plants, current purchase prices are provided by EVN. • The cost of new power plants is based on the levelized costs. o The real rate of return on assets is assumed to be 10 percent, and the depreciation period 20 years. © EVN Electricity of Vietnam 8 Financing plans for new investments were provided by EVN. M A J O R C H A L L E N G E S FA C E D B Y V I E T N A M E L E C T R I C I T Y 27 TABLE 4.1: EVN’S FUTURE FINANCIAL PERFORMANCE UNDER VARIOUS ASSUMPTIONS 2015 2016 2017 2018 2019 2020 CASE 1: TARIFF INCREASE TO ENSURE FINANCIAL SUSTAINABILITY IN 2018 TARIFF INCREASE (%) 7.50 15.00 15.00 10.00 10.00 7.00 D:E (%) 59.4 62.3 62.1 61.3 59.5 59.1 DSCR 1.30 1.47 1.50 1.50 1.50 1.51 SFR (%) -1.1 10.8 17.4 26.5 27.4 45.4 CASE 2: TARIFF INCREASE CAPPED BY INFLATION (7%) YEAR D:E (%) 60.5 66.8 72.8 79.7 87.4 95.4 DSCR 1.19 1.14 0.86 0.68 0.46 0.36 SFR (%) -6.7 -14.2 -48.8 -95.0 -155.8 -331.3 CASE 3: TARIFF INCREASE TO ENSURE FINANCIAL SUSTAINABILITY IN 2019, ASSUMING FLAT FUEL PRICES TARIFF INCREASE (%) 7.50 10.00 10.00 9.70 7.00 5.00 D:E (%) 59.4 62.5 63.1 62.0 59.1 55.9 DSCR 1.30 1.45 1.40 1.44 1.46 1.65 SFR (%) -1.1 9.8 8.3 21.6 25.2 82.4 Source: Own elaboration. Figures in red color show performance indicators that are below industry benchmarks 4.3. THE AFFORDABILITY OF POWER International experience suggests that 10 percent is a reasonable threshold for electricity expenditures as a One of the main concerns over any program of power tariff percentage of total household expenditure. The results increases relates to the impact of increases on consumers, show that electricity expenditure will remain below 5 percent especially poor consumers. In the light of this concern, an of total household expenditures for the poorest decile of assessment was carried out of the social acceptance of cost consumers in Vietnam—meaning that the tariff increase recovery tariffs in Vietnam (a summary is presented in Annex TGSWKTGFVQGPUWTG'80oUƂPCPEKCNUWUVCKPCDKNKV[YQWNFPQV IV). jeopardize the social welfare of domestic consumers. Should Raising tariffs to a sustainable level (about 40 percent in the government wish to assist the poorest power consumers, 4 years) would lead to the following share (Table 4.2) of it should raise the level of cash transfer coverage by the electricity expenditure in a household’s total expenditure. Ministry of Labor, Invalids, and Social Affairs (MOLIS Total expenditures of households are assumed to follow the A). Such a policy would be fully funded by the extra tax increase in GDP per capita in all deciles, and the existing revenue from value added tax (VAT) on the higher power increasing block tariff (IBT) is modeled as of this writing.9 RTKEGUYKVJQWVCP[ƂUECNKORCEV TABLE 4.2: SHARE OF ELECTRICTY IN TOTAL HOUSEHOLLD EXPENDITURES (%) POOREST 10% DECILE 2 DECILE 3 DECILE 4 DECILE 5 DECILE 6 DECILE 7 DECILE 8 DECILE 9 RICHEST 10% 2012 1.7 1.9 2.0 2.0 2.1 2.2 2.2 2.1 2.2 2.0 2017 1.4 2.8 3.0 3.0 3.2 3.3 3.5 3.3 3.8 2.7 2020 1.4 3.2 3.4 3.4 3.8 4.0 4.2 4.0 3.4 4.1 Source: Own elaboration. 9 Under an increasing block tariff (IBT)scheme, users pay different amounts for different consumption levels via a step-wise structure: as energy use shifts to the next block of consumption, the tariff increases. 28 A FINANCIAL RECOVERY PLAN FOR EVN FIGURE 4.2: TARIFF PATHS AT A GLANCE percent of price, with the exception of the textiles sector RGTEGPV +VKUXGT[FKHƂEWNVVQCUUGUUYJGVJGTVJGUG Base Case price increases are likely to damage the competitiveness of the various sectors because each sector is unique. A better approach is to address how the cost impacts can DGOKVKICVGFVJKUCNUQTGSWKTGUCECUGD[ECUGCPCN[UKU but some common issues can be managed from the perspectives of the power sector policy. For instance, it KUYGNNMPQYPVJCVVJGTGKURQVGPVKCNHQTGPGTI[GHƂEKGPE[ measures in Vietnamese industries. So far, industrial energy use has increased almost at the same rate as GDP, and energy intensity (GDP/MWh) is DTQCFN[EQPUVCPV6JGKORCEVQHGPGTI[GHƂEKGPE[OGCUWTGU to date in the industry has been non-existent or negligible.10 Base case (fossil fuel prices remain static As of today, energy consumption of these industries is to some extent subsidized, and the removal of these subsidies would need to be offset, at least temporarily, by alternative mechanisms so as to not jeopardize the performance of these industries in the short term and to elicit support HTQOVJGNCTIGUVPWODGTQHUVCMGJQNFGTU'PGTI[GHƂEKGPE[ subsidies may help smooth the transition toward this tariff increase while improving sustainability in the use of energy sources in industries. These sorts of incentives could be introduced quickly to partially offset the price hike and avoid negative impacts, especially in export-oriented businesses. Since the government may gain about VND 85 trillion in cumulative extra revenue up to 2020, it seems there is ƂUECNURCEGVQƂPCPEGGPGTI[GHƂEKGPE[KPXGUVOGPVUKPVJG industrial sector. Subsidizing the electricity costs to improve Tarriff increases capped at inflation rate EQORGVKVKXGPGUUKUQPN[CUJQTVVGTORQNKE[UWDUKFK\KPI investments to improve competitiveness on a sustainable basis is a better policy in the medium term. Finally, it is worth saying that the tariff increase’s impact QPKPƃCVKQPKUKTTGNGXCPVKVKUQPN[CDQWVRGTEGPVCDQXG DCUGNKPGKPƃCVKQPHQTGCEJRGTEGPVKPETGCUGKPVCTKHHU Because the recommended tariff increase would be spread QXGTHQWTVQƂXG[GCTUVJGCPPWCNKPƃCVKQPCT[KORCEVYKNNDG very low. In any case, this impact should be compared with VJGƂUECNKORCEV CPFVJGEQPUGSWGPVGHHGEVQPKPƃCVKQPCPF GDP) of a deteriorating quality of service or the government being forced to bail out the power sector. Besides these customers, a tariff increase may have an 4.4. OPERATIONAL IMPROVEMENTS IN EVN impact on the industrial sector. From the consultant’s review of existing studies on this matter, it is apparent that the The report’s analysis compared EVN with other power proposed cumulative tariff increases (base case scenario) utilities in Asia and elsewhere in the world, including for industrial consumers would not have a huge effect on companies from Bangladesh, Brazil, Chile, Colombia, India, CP[URGEKƂEGZRQTVQTKGPVGFUGEVQT6JGVYQKPFWUVTKGUOQUV Pakistan, Peru, and the Philippines. The comparisons are affected by the price hike (water processing and gas) are in many cases favorable to EVN, which has low technical not subject to international competition and should be able losses, high levels of billing and cash collection, and low VQRCUUVJGKPETGCUGVJTQWIJVQVJGKTƂPCNRTQFWEVU(QT levels of operating costs compared to other comparable the export-oriented sectors, the cost impact is less than 3 utilities. In many of these areas, there is little or no scope 10 Recent studies—'PGTI['HƂEKGPE[KP8KGVPCO #IGPEG(TCPÃCKUGFG&ÅXGNQRRGOGPV CPFp8KGVPCO'PGTI['HƂEKGPE[q 'ODCUU[QH&GPOCTM tKPFKECVGCRQVGPVKCNGPGTI[ reduction of up to 50 percent in the cement industry, 35 percent in the ceramic industry, 30 percent in the textile/apparel industry, and 20 percent in the steel and food processing industries. 9KVJKPVJGPGZVƂXG[GCTUVJG8KGVPCOGUGIQXGTPOGPVCKOUVQNQYGTQXGTCNNKPFWUVTKCNGPGTI[EQPUWORVKQPD[VQRGTEGPVVJTQWIJVGEJPQNQIKECNWRITCFKPI EQORCTGFVQVJGDWUKPGUUCU WUWCNUEGPCTKQ 6JGTGJCXGDGGPUQOGUVGRUKPVGTOUQHTGIWNCVKQPKP8KGVPCOtVJCVKUVJG0CVKQPCN6CTIGV2TQITCOQP'PGTI[%QPUGTXCVKQPCPF'HƂEKGPV7UG80''2tDWVVJGTGUGGOUVQDG room for improvements and scaling up the current achievements. M A J O R C H A L L E N G E S FA C E D B Y V I E T N A M E L E C T R I C I T Y 29 for further improvement. Costs for capital projects are also and manage water levels in its dams, and thermal generation similar to those elsewhere in the world. Consequently, there is the only feasible response in a dry year. KUPQUEQRGHQTUKIPKƂECPVUJQTVVGTOEQUVTGFWEVKQPVJTQWIJ Over time, the importance of this risk is likely to diminish productivity improvements. because future additions to capacity are likely to be thermal 6JCVUCKFVJGTGRQTVJCUKFGPVKƂGFCPWODGTQHOGCUWTGU rather than hydropower (the majority of good hydropower VJCVECPJGNRGPJCPEGNCDQTRTQFWEVKXKV[QXGTVKOGVJGUG sites are already in use). However, it remain a risk that is CTGUGVQWVKP5GEVKQPCPFCNNQYGFHQTKPVJGƂPCPEKCN FKHƂEWNVCPFKORQTVCPVVQOCPCIG projections. The key point is that such operational 4.5.2. Debt Structure Risk improvements are not an alternative to tariff increases, but Too much of EVN’s debt, and in particular its local debt, is rather a complement to such increases that can help deliver excessively short-term. EVN’s shareholder, the government, more cost-effective power to consumers over time. KUVCMKPICNKOKVGFFKTGEVTQNGKPUWRRQTVKPI'80oUƂPCPEGU There have not been any equity injections into EVN for a 4.5. RISK MANAGEMENT IN EVN number of years. EVN faces a number of risks over which it has limited Indirectly, however, the government is heavily involved or no control. As the company grows in size, so will the because EVN is not seen as creditworthy in its own right in ƂPCPEKCNUKIPKƂECPEGQHVJQUGTKUMU+PVJGEQWTUGQHVJG international markets. As a result, government guarantees UVWF[VJGCWVJQTUKFGPVKƂGFHQWTRCTVKEWNCTN[UKIPKƂECPVTKUMU are in place for loans from development partners and concerning hydrology, debt structure, foreign exchange, and KORQTVGZRQTVDCPMU(WTVJGTOQTGVJGƂPCPEKCNRQUKVKQP demand forecasting. of EVN’s subsidiaries is even weaker, and they require additional guarantees from EVN headquarters for foreign borrowing. The gencos are in the weakest position of all: they do not yet qualify for any development partner funds through the MOF because they do not have the qualifying RGTKQFQHVJTGG[GCTUQHRTQƂVCDNGQRGTCVKQPU Loans from development partners are passed through the government to EVN, but the main impact of this is to introduce an interest rate premium since EVN bears the exchange risk on these loans. The only other support is through the subsidies paid to EVN for supporting rural CTGCUDWVVJKUJCUCXGT[NKOKVGFGHHGEV(KPCNN[VJGUK\GQH EVN’s debts and capital program provide important context since both are large and growing against the background of current performance. EVN is already trying to negotiate longer terms on some of its loans from local banks and is EGTVCKPVQEQPVKPWGVQHCEGFKHƂEWNVKGUKPMGGRKPIEWTTGPVQP its debt repayments. © istock photo 6JGUJQTVEQOKPIUKP'80oUFGDVUVTWEVWTGTGƃGEVVJG inadequacy of Vietnam’s capital markets rather than any lack 4.5.1. Hydrology Risk of capacity in EVN. Because the bond market is very limited, 6JGJ[FTQNQI[TKUMKUJKIJN[UKIPKƂECPV6JGXCTKCVKQPKP EVN is forced to undertake most of its local borrowing rainfall levels from year to year naturally affects the level through the local banks. This has an inevitable impact on of hydropower generation, and hence the need for more- EVN’s creditworthiness in that international banks, other costly thermal power. Hydrology is therefore a critical driver potential lenders, and suppliers will look at EVN’s repayment QH'80oUHWVWTGƂPCPEKCNRGTHQTOCPEGtCPFQPGQXGTYJKEJ obligations and capacity and conclude that there are risks in it has little if any control. There are and will continue to extending credit or entering into contracts with EVN in the be substantial variations in performance between wet and absence of a government guarantee. dry years. As the past two years have illustrated, EVN’s 4.5.3. Foreign Exchange Risk performance is far stronger in a wet year than a dry one: Although tariffs are in local currency, much of EVN’s debt changes in conditions led to an improvement of VND 15.5 and some of its costs are denominated in foreign exchange. VTKNNKQPKP'80oUƂPCPEKCNRQUKVKQPKPGSWKXCNGPVVQQXGT About 63 percent of EVN’s debt was denominated in foreign 10 percent of its revenue in that year. Long-term weather EWTTGPE[KPCEEQTFKPIVQ'80VJKUKUGZRGEVGFVQ forecasts may help EVN predict its likely costs over a future increase to over 70 percent by 2017. EVN suffers losses on year, but there is little if anything that EVN can do to plan these loans every time there is a currency devaluation, and 30 A FINANCIAL RECOVERY PLAN FOR EVN it has limited control over the risks. No market mechanisms in tariffs—it is impossible to estimate the scale of the exist that would allow EVN to manage these risks. potential reduction in demand. Thus, while there is evidence from international experience that in certain situations, 4.5.4. Demand Forecasting Risk YJGPHCEKPIUKIPKƂECPVUVGRKPETGCUGUKPGNGEVTKEKV[VCTKHHU Various factors affect the demand forecast. GDP growth is consumers react by adjusting their consumption patterns, QPGCP[TGFWEVKQPKPGPGTI[)&2GNCUVKEKV[tVJCVKUVJG there is also evidence of inelastic price elasticity over long percentage change in energy consumption that results RGTKQFUQHVKOGDGHQTGVJGKPƃGZKQPRQKPVKUTGCEJGF from a percentage change in national GDP—might affect the forecast. Currently, the energy/GDP elasticity is in the Therefore, for planning purposes, it is important to retain the order of 1.9. This is a very high value compared with other ƃGZKDKNKV[VQCFLWUVVJGTCVGQHKPXGUVOGPVVQOCVEJEJCPIGU economies (see Figure 4.3). International experience shows in demand when they do occur. The demand for electricity that, as the economy develops, elasticity eventually declines. may grow more or less quickly than the estimates in the However, international experience also shows that several PMPs and in EVN’s forecasts. However, in principle, EVN developing countries have maintained this high elasticity for continues to be bound to implement the PMP, which is only many years (for example, Turkey and China). It is impossible, formally updated every ten years. In the past three years, therefore, to estimate when the turning point will be power demand has grown far more slowly than shown in the reached. Reductions in elasticity are likely to take place over PMP, but EVN’s investment program has also fallen behind several years and, in many cases, require major investments schedule—and, as a result, there is a shortfall in capacity. in the productive sector (through changes in production However, if EVN had invested in accordance with the PMP, processes and technologies). it would now have too much capacity and face even greater FKHƂEWNVKGUKPOCPCIKPIKVUƂPCPEGU 6JGUJKHVVQYCTFEQUVTGƃGEVKXGVCTKHHUYKNNTGSWKTGCP aggregate increase in the price of electricity to end users of CDQWVRGTEGPVFWTKPIVJGPGZVHQWTVQƂXG[GCTU*KIJGT GNGEVTKEKV[RTKEGUEQWNFNGCFVQCUKIPKƂECPVUNQYFQYPKPTCVG of growth of demand for electricity. However, because there KUEWTTGPVN[KPUWHƂEKGPVFCVCQPRTKEGGNCUVKEKV[QHFGOCPF for electricity—the percentage reduction in electricity consumption that results from a one percentage increase FIGURE 4.3: LN (DEMAND) TO LN (GDP) ELASTICITY ACROSS THE WORLD, 1990–2010 3.00 2.50 Vietnam 2.00 Thailand 1.50 World 1.00 Great Britain .05 0 SWE BLR SVK SRB IRQ GEO CAN GBR ZAR ZMB UKR NZL SVN BIH HKG SSF COG HIC MLT MDA TTO BEL SAS AUT CRI EMU PAN KWT PAK ETH GRC KEN TGO JOR LKA PHL SDN ARG JPN EGY MEX MNA ARB BOL ITA TUR HND NPL GAB ECU BGD GTM PRY BRN Source: Own elaboration. 11 Equitization is the term used in Vietnam to describe the transformation of a state-owned corporation into a joint stock company and sale of part of the shares to private investors without necessarily transferring majority share ownership to the private sector. M A J O R C H A L L E N G E S FA C E D B Y V I E T N A M E L E C T R I C I T Y 31 4.6. CORPORATE GOVERNANCE 4.7. CONCLUSION The rationale behind EVN’s current unbundling of the #NNVJGEJCNNGPIGUUGVQWVCDQXGCTGUKIPKƂECPVKPKUQNCVKQP power sector is to create independent companies with Taken together they are a major threat to EVN’s future responsibility for generation, transmission, and distribution. XKCDKNKV[6JGUGVJTGCVUCTGCORNKƂGFD[VJGIQXGTPOGPVoU These companies will eventually be able to operate as reluctance or inability to come to EVN’s assistance in the self-contained entities within an independently regulated GXGPVQHFKHƂEWNVKGU6JGIQXGTPOGPVJCUEQOOKVVGFVQ power sector. In due course, EVN hopes to introduce avoiding further direct investment in the power sector, RTKXCVGƂPCPEGKPVQKVUIGPEQUVJTQWIJGSWKVK\CVKQP11 These CPFKVUƂPCPEKCNRQUKVKQPIKXGUKVNKVVNGKHCP[ƂUECNURCEG objectives are sound, but they will require arm’s-length to reconsider this position and make, for example, major contractual structures and effective corporate governance in injections of equity capital. As such, it is vital that the CNNQHVJGUWDUKFKCTKGUDGHQTGVJGHWNNDGPGƂVUECPDGGPLQ[GF challenges be effectively met. The next section sets out recommendations for achieving this. The contractual arrangements between the gencos and EVN do not enable the gencos to operate at arm’s length The EVN group is not under any immediate threat of from EVN. Until very recently, the PPAs under which the KPUQNXGPE[*QYGXGTKVJCUKPTGEGPV[GCTUHCEGFECUJƃQY gencos operate were short-term and updated every year, problems that forced it to delay payments to fuel suppliers. which means that they did not provide a reliable revenue A prolonged delay in granting tariff increases, coupled with stream that could have enabled the gencos to borrow a series of poor years for hydrology (that is, with continued KPFGRGPFGPVN['80JCUƂPCNK\GFVJGEQPXGTUKQPVQNQPIGT NQYTCKPHCNN EQWNFRNCEG'80KPCHCTOQTGUGTKQWUƂPCPEKCN term PPAs and the ERAV is working on improving Circular position in which its liabilities would exceed its assets and it DQVJGNGOGPVUECPJGNRVJGETGFKVYQTVJKPGUUQHVJG would face insolvency. gencos. At EVN headquarters, further restructuring is Other power utilities in Asia have faced this situation required to bring operations to a commercial basis with the and adopted a range of different approaches. In the separation of the NLDC into an independent entity and the Philippines, the government established an asset and liability establishment of PPAs for multipurpose hydropower plants. management company called Power Sector Assets and At present, corporate governance may be improved Liabilities Management Corporation (PSALM) to oversee throughout EVN. Although EVN staff have received training what was, in effect, a managed default on the power on appropriate approaches to corporate governance, sector’s debts, with the government injecting funds to implementation remains a key challenge. meet liabilities. Subsequently, the Philippines renegotiated its debts to development partners to reschedule them. In principle, boards of directors are responsible for the In Bangladesh, new companies were set up to manage governance of their companies. The shareholders’ role in the assets of the power sector—along with the liabilities governance is to appoint the directors and the auditors of predecessor companies that, unable to meet their and to satisfy themselves that an appropriate governance debt repayments to government, had defaulted. Thus the structure is in place. The responsibilities of the board Dhaka Electricity Supply Authority was replaced by the include setting the company’s strategic aims, providing Dhaka Electricity Supply Company and the Dhaka Power the leadership to put them into effect, supervising the Distribution Company. management of the business, and reporting to shareholders on their stewardship. The board’s actions are subject to laws, In both cases, the governments had to accept the loss of regulations, and the shareholders in a general meeting. UKIPKƂECPVUWOUDGECWUGVJGKTRQYGTUGEVQTUYGTGWPCDNGVQ In particular, corporate governance relates to the role of meet their liabilities and the governments were called on to the board and should be distinguished from the day-to- make loan guarantees. In the case of the Philippines, power day operational management of the company by full-time tariffs had to be increased to among the highest in Asia to executives. NKOKVVJGKORCEVQPRWDNKEƂPCPEGU'80oUEWTTGPVNKCDKNKVKGU are less onerous, however, and the recommendations in However, because all the subsidiaries are effectively Section 5 are designed in part to prevent such a scenario branches of EVN, they lack boards and senior management from occurring in Vietnam. structures that meet good practice standards. Accounts CTGUWDLGEVVQCWFKVSWCNKƂECVKQPUCPFFQPQVEQORN[HWNN[ with the IFRS. Financial management systems and internal controls are weak. Proposals to improve governance and remedy these shortcomings are set out in section 5. Given the relatively short life of the newly created generation companies, an appropriate governance structure is the greatest need. 32 A FINANCIAL RECOVERY PLAN FOR EVN © istock photo M A J O R C H A L L E N G E S FA C E D B Y V I E T N A M E L E C T R I C I T Y 33 © istock photo 34 A FINANCIAL RECOVERY PLAN FOR EVN 5. RECOMMENDATIONS FOR A FINANCIAL RECOVERY PLAN This section sets forth a number of detailed ƂUECNCPCN[UKUQHVJGKORCEVQHVCTKHHCFLWUVOGPVU+PVJGUG TGEQOOGPFCVKQPUVJCVVCMGPVQIGVJGTEQORTKUGCƂPCPEKCN GCTNKGTTGRQTVUVJGMG[RGTHQTOCPEGFTKXGTUYGTGKFGPVKƂGF TGEQXGT[RNCPFGUKIPGFVQJGNRKORTQXGVJGƂPCPEGUQH'80 current performance was benchmarked with comparable and the Vietnamese power sector more generally. WVKNKVKGUTKUMHCEVQTUURGEKƂEVQ'80CPFKVUQRGTCVKPI GPXKTQPOGPVYGTGKFGPVKƂGFCPFCPCN[\GFCPFHWVWTG #UOGPVKQPGFKP5GEVKQPVJGƂPCPEKCNTGEQXGT[RNCP performance was simulated under various scenarios and was developed on the basis of work carried out during a QRVKQPUHQTKORTQXGOGPVUEQPUKFGTGF6JGƂPCPEKCNTGEQXGT[ FKCIPQUVKECPCN[UKUCƂPCPEKCNGXCNWCVKQPCPFCUQEKCNCPF TABLE 5.1: RECOMMENDATIONS FOR IMPROVING EVN’S FINANCES IMPACT ON POWER SECTOR LEVEL OF EVN CONTROL PILLAR FINANCES OVER PILLAR 1. OPERATIONAL EFFICIENCY Appoint implementation leader Low High Technical management Low High Complete unbundling Low Medium Non-core assets divesture Low High Better governance Medium Medium Rehabilitate assets Low High 2. NEW INVESTMENT STRATEGY Encouraging private sector participation High Low Maintaining dialogue with private sector Medium Low Improving capacity in MOIT Medium Low Adopting dynamic approach to planning High Low Genco divestiture High Medium 3. DEVELOPMENT OF SUSTAINABLE FINANCING STRATEGY AT EVN Improving capital structure Medium Low 4. IMPLEMENTATION OF COST-REFLECTED TARIFFS Implement cost-based tariff, including a reasonable return on High Low capital Implement full pass-through of non-manageable costs High Low 5. RISK MANAGEMENT Stabilization fund High Medium Foreign exchange risks management Medium Medium Planning management Low Low Source: Own elaboration. R E C O M M E N D AT I O N S F O R A F I N A N C I A L R E C O V E R Y P L A N 35 plan pulls together measures for revenue enhancement, 6JGCWVJQTUJCXGCNUQKFGPVKƂGFVYQQRRQTVWPKVKGUHQT EQUVQRGTCVKQPCNVGEJPKECNGHƂEKGPE[FGDVKPXGUVOGPV managing capital expenditure more effectively. First, some and risk management into a coherent plan for EVN and the QNFGTEQCNRNCPVUJCXGNQYNGXGNUQHWVKNK\CVKQP6JKUTGƃGEVU Vietnamese authorities to consider for implementation to both their status as backup plants for years of poor rainfall CEJKGXGVJGUGEVQToUƂPCPEKCNUWUVCKPCDKNKV[QDLGEVKXGU and, to some extent, their condition, which could be improved by rehabilitation investment. Some investment 6JGTGEQOOGPFCVKQPUCTGPQVOWVWCNN[GZENWUKXGTCVJGT for plant improvement in EVN’s capital program has been they tend to reinforce one another in that implementation DWKNVKPVQVJGƂPCPEKCNRTQLGEVKQPU9JKNGVJGKORCEVQHUWEJ of any one of them is likely to facilitate the implementation improvement is small, it contributes to the total performance and effectiveness of the others. The recommendations are enhancement package. ITQWRGFKPVQƂXGMG[RKNNCTUCUUJQYPKP6CDNG Second, levels of capital work in progress are very high This section discusses each of the pillars in turn. It should throughout EVN. It is clear that too many projects are being be noted that the recommendations are aligned with the started before other projects are completed. Placing the guidelines and provisions established in Prime Minister’s OCPCIGOGPVQHVJGECRKVCNRTQITCOQPCOQTGGHƂEKGPV Decision 1782/2012. To facilitate decision making in the footing could reduce the level of capital work in progress future and ensure better overall performance, EVN should CPFKORTQXG'80oUQXGTCNNGHƂEKGPE[ periodically review this recovery plan and adjust it if necessary. +Õ>ˆÌÞœv-iÀۈVi In addition to the reliability of the supply, a key parameter to be assessed is the quality of consumer service. This includes 5.1. IMPROVING OPERATIONAL EFFICIENCY the accuracy of metering and billing, time required to make Analysis of the operations of the various EVN subsidiaries new connections, procedures, and time required for an determined that they are generally well run and meet increase in load. These issues may be evaluated through international performance benchmarks. Levels of losses are technical measures such as interruption frequency and low and EVN invoices for its sales and collects revenue well. FWTCVKQPXQNVCIGƃWEVWCVKQPUCPFNQCFUJGFFKPI Costs of operation are also generally low. However, a range Of all the key performance indicator (KPIs), quality of service QHCTGCUYJGTG'80ECPKORTQXGKVUQRGTCVKQPCNGHƂEKGPE[ is one of the most relevant because: (a) current levels are YCUKFGPVKƂGFOQUVN[TGNCVGFVQCUUGVOCPCIGOGPV+PCNN YGNNDGNQYCEEGRVCDNGUVCPFCTFUCPF D CPKPETGCUGKU cases, improvements are likely to be gradual and limited, but needed to show that tariff increases are paying off. To they are nevertheless worthwhile as EVN aims to offer a cost- enhance the quality of service in Vietnam, EVN should effective service to consumers. consider implementing state-of-the-art equipment to There are six measures that EVN can take to improve its make the grid “smarter”—though more-CAPEX-intensive operations. These are: (a) the appointment of a leader to measures may also be needed, such as increasing the VCMGVJGƂPCPEKCNTGEQXGT[RNCPHQTYCTF D DGVVGTVGEJPKECN number of substations. SAIDI is not only related to CAPEX OCPCIGOGPV E HWNNWPDWPFNKPI F VJGFKXGUVKVWTGQH but also to internal organization and management. EVN can PQPEQTGCUUGVU G CUUGVTGJCDKNKVCVKQPCPF H DGVVGT learn from successful peers on how to manage interruptions governance. OQTGGHƂEKGPVN[+PCP[ECUGKVKUKORGTCVKXGVJCVVJGSWCNKV[ of service improves in parallel with the increase in tariffs. x°£°£° Ƃ««œˆ˜Ì“i˜Ìœv>-i˜ˆœÀ 6 "vwVˆ> 6JGTGEQOOGPFCVKQPUVJCVOCMGWRVJKUƂPCPEKCNTGEQXGT[ Generation, Transmission, Distribution, and Supply Indicators plan will require input from a number of ministries A number of KPIs that are normally used to characterize the and agencies as well as EVN itself. To ensure that the performance of a generation, transmission, or distribution recommendations are implemented in a coordinated company are available from international experience. The CPFEQORTGJGPUKXGOCPPGTCUGPKQT'80QHƂEKCNUJQWNF key task, however, is to identify a subset of such indicators be appointed and given responsibility for taking all the that may be used to characterize the desired performance recommendations forward. QHCEQORCP[QRGTCVKPIWPFGTVJGURGEKƂEEQPFKVKQPUQH 5.1.2. Technical Management 8KGVPCO&KHHGTGPVKPFKECVQTUJCXGVQDGFGƂPGFHQTGCEJ '80JCUXGT[JKIJNGXGNUQHUVCHƂPIKPCTGCUUWEJCUUCNGU business branch of the company. (Section 3.2 outlines and administration. This is understandable in that the cost of performance indicators and reference values proposed by employing workers is low and levels of outsourcing with EVN the authors.) are low so that almost all activities are carried out in-house. i˜iÀ>̈œ˜˜`ˆV>̜Àà However, EVN can progressively improve labor productivity The three categories of performance indicators for over time by expanding its labor force at a slower rate than generation companies relate to the following: VJGITQYVJKPRQYGTFGOCPF6JGƂPCPEKCNRTQLGEVKQPUJCXG assumed this. 36 A FINANCIAL RECOVERY PLAN FOR EVN • Power plant availability and maintenance of such indicators, normally used by the regulator to performance. Examples of such indicators are the overall FGVGTOKPGCEQORCP[oUGHƂEKGPE[CPFVQUGVVCTKHHU availability (in percentage terms), forced outage rate accordingly. (FOR), the equivalent forced outage rate (EFOR), and so • Debt coverage and the payment procedures to the on. debtors. • 7PKVCT[GHƂEKGPE[QHGCEJIGPGTCVQTCPFVJGGPVKTG • Security of O&M activities. An example is the power plant. Probably the most important in this subset number of accidents (fatalities/injuries) per kilometer of is the heat rate of thermal stations. high-voltage line. • Operation and maintenance (O&M) costs, in -Õ««Þˆ˜`ˆV>̜Àà comparison with similar power plants either in Vietnam Supply indicators relate to the following: or other countries, and the debt coverage. • 'HƂEKGPE[KPOGVGTTGCFKPIRTQRGTKPXQKEKPICPF /À>˜Ã“ˆÃȜ˜>˜`-ÞÃÌi“"«iÀ>̈œ˜˜`ˆV>̜Àà collection. Examples of such indicators include average The three performance indicators for the NPT, as the number of estimated bills per thousand customers, transmission service provider, relate to the following: number of complaints regarding invoicing, average time • Transmission network availability and/or required to answer these complaints, average level of disconnections produced to customers originated in account receivables, and percentage of bad debts. this network.12 Examples of such indicators include the • The level of technical and non-technical losses, number of faults per kilometer of high-voltage line, total covering both the percentage of these losses and their duration of the interruptions, and power (in MWh) not evolution. delivered due to transmission network unavailability. 'HƂEKGPE[QHVJGRTQVGEVKQPU[UVGOKUCNUQKPENWFGFKP Summary this category. Most of the above mentioned indicators are aimed at KPETGCUKPIVJGGHƂEKGPE[KP'80oUQRGTCVKQPUCPFTGFWEKPI • Total OPEX, expressed as a ratio of the size of energy use as far as possible. EVN is committed to the the network (km of high-voltage lines, number of GPJCPEGOGPVQHGPGTI[GHƂEKGPE[OGCUWTGUKPVJGRQYGT substations, and so on) and CAPEX associated with sector, and adequate monitoring of KPIs will help it network expansions.13 International information is a accomplish this. good source for benchmarking these indicators. Debt service coverage indicators are also in this group. When determining the values of the parameters needed to adjust tariffs, the regulator should take into account the • Security of O&M activities. Examples are accidents HCEVQTUKPƃWGPEKPIVJGXCNWGUQHVJGUGKPRWVRCTCOGVGTU6JG (fatalities/injuries) per km of high-voltage line or similar. ERAV should complement its existing regulatory framework ˆÃÌÀˆLṎœ˜˜`ˆV>̜Àà with incentive measures to reduce losses, enhance technical The various distribution indicators relate to the following: RGTHQTOCPEGCPFKORTQXGSWCNKV[QHUGTXKEG6JGƂPCNCKO QHCNNVJGUGKPKVKCVKXGUKUVJGCEEQORNKUJOGPVQHGHƂEKGPV • The quality of service provided to the end users. operations and improvement in the use of energy. This category includes the three ‘parameters’ of quality of service: quality of the supply (absence of The effectiveness of the regulatory incentives in SOEs KPVGTTWRVKQPU RQYGTSWCNKV[ XQNVCIGRTQƂNGCDUGPEG depends ultimately on the corporate governance framework QHƃKEMGTCPFJCTOQPKEUCPFXQNVCIGURKMGU CPF applied to these companies. MOIT and ERAV should jointly commercial quality (time required to make a new set targets for some of the KPIs, such as operating costs and connection, number of complaints, and proper answers losses in the networks. They could calculate some of the to claims). Most of these indicators are relatively input parameters (using as the reference value the average standard since their formulas and method of calculation of the actual value in the last few years) and then adjust this are regularly published by the regulatory institutions. value according to improvement objectives. An example of The major problems with them have to do with the how this calculation would work for the distribution losses is procedures and IT systems that should be established in as follows: the companies to calculate the values. • The regulator carries out a benchmarking study • Technical losses. These losses are relatively on the loss factors in different countries and factor controllable by the operators and, therefore, these evolution across time on these losses. The sample of KPFKECVQTUCTGFKTGEVN[TGNCVGFVQVJGKTCXGTCIGGHƂEKGPE[ countries should ideally include countries similar to Vietnam in terms of weather and other factors. • OPEX and CAPEX. There is an important range 12 +PFKECVQTUTGNCVGFVQFKUEQPPGEVKQPVQEWUVQOGTUCNVJQWIJKORQTVCPVVQDGVTCEMGFCPFOQPKVQTGFCTGTGNCVKXGN[FKHƂEWNVVQDGPEJOCTMUKPEGVJG[JGCXKN[FGRGPFQPVJGPGVYQTM architecture, which is an issue not totally under the control of the NPT (as transmission service provider). 13 6QVCNƂZGFEQUVUQHVJGGZKUVKPIVTCPUOKUUKQPPGVYQTMCTGCXCTKCDNGVJCVKUPQVEQPUKFGTGFTGNGXCPVHQTCPGHƂEKGPE[CPCN[UKUUKPEGCUYKVJGZKUVKPIIGPGTCVKQPCUUGVUKVFGRGPFUQPRTGXKQWU investments decided in a completely different environment. R E C O M M E N D AT I O N S F O R A F I N A N C I A L R E C O V E R Y P L A N 37 • Based on the loss factors and technical TABLE 5.2: POTENTIAL PARAMETERS SUBJECT TO considerations, the regulator should consult with PERFORMANCE TARGETS stakeholders on the loss factors attainable in Vietnam’s PCs and the length of time for convergence from the PARAMETER COMMENT current values to the target. GENERATION • Once a long-term target and a period of Non-fuel cost Non-fuel costs are mainly O&M costs convergence are set, the annual allowed value of losses but also staff costs in the power plants, should be set annually, taking into consideration the administrative costs, and so on. These costs OC[DGTGFWEGFYKVJGHƂEKGPVOCPCIGOGPV previous year’s actual value. of the procurement of external (and internal) services. • Similarly, it may be agreed that: (a) distribution OPEX per kWh sold should decrease by 10 percent in Plant energy Fuel consumption in a power plant VJGPGZVƂXG[GCTUCPF D GCEJ[GCTCPCFLWUVOGPV GHƂEKGPE[ depends both on technical and operational factors. Since both the responsibilities, to factor for the actual OPEX should be incorporated into maintain and dispatch the plants, still lie the tariff calculation. with EVN, it is important to provide a signal to improve these parameters. This is a very simple and easy-to-implement example TRANSMISSION designed to show how companies can be induced to improve performance. Obviously, more complex calculations Transmission Given that the transmission remuneration are possible, but the report suggests giving priority to the losses is set in a separate piece of regulation, the only external parameter available to set a application of simple incentives rather than developing performance target is the losses factor. complex methodologies for setting performance targets that Transmission losses may be reduced in may not be applied because of their complexity. the long term by improving the planning and development of the network and in Table 5.2 shows a list of potential parameters that can be VJGUJQTVVGTOD[QRGTCVKPIGHƂEKGPVN[VJG subject to performance targets. network. 5.1.3. Unbundling DISTRIBUTION EVN could intensify its efforts to unbundle the organization Operating These costs are not related to investments into a group of independent companies. The distribution costs but with the normal day-to-day activities of the company. These costs include the and transmission companies have already made substantial expenditure in thousands of small decisions progress down this path. However, many activities remain and some bigger ones. Regulators are not to be completed at the gencos, where unbundling only able to decide if all the small cost items were prudently incurred, so they need to began in 2013. More broadly, the PPAs needed to give the rely on providing the right incentives and companies autonomous revenue streams are not in place information disclosure mechanisms to HQTVJGFGRGPFGPVRQYGTRNCPVUCPFYJGTG22#UCTGKP RTQXKFGGHƂEKGPE[ICKPU RNCEGVJG[OC[PQVDGUWHƂEKGPVN[NQPIVGTOQTCFGSWCVGVQ Because operating costs are recurrent, support independent operation by the gencos. Resolution past information is useful to forecast future expenditure. At the same time, of these shortcomings, which will take some time, is the comparisons with other utilities provide precondition for enabling the new companies to borrow on a benchmark of whether there is room to their own behalf without guarantees from EVN headquarters. reduce these costs. The main measures required to accelerate this process are as Losses Distribution losses may be reduced by follows: proper management, mostly for commercial losses. • Finalize fuel supply agreements (FSAs) with existing SECTOR ADMINISTRATION AND ANCILLARY SERVICES plants. Operating The logic that applies to operating costs • Adjust Circular 41 along the lines proposed in this costs in distribution also applies to operating plan (see section 5.4). costs in sector administration and ancillary services. However, in this case, it may be • Finalize loan agreements with the gencos. OQTGFKHƂEWNVVQJCXGGZVGTPCNDGPEJOCTMU QPVJGGHƂEKGPVNGXGNQHEQUVU • Assess the current capital structure and ensure Source: Own analysis CTGCUQPCDNGNGXGNQHFGDV+HEWTTGPVƂIWTGUCTGPQV sustainable, alternative mechanisms such as equity injections or debt rescheduling have to be evaluated. a commercial entity rather than as a residual cost center for The multipurpose hydropower projects also need to be activities that cannot be located elsewhere. This requires placed within a commercial framework, with PPAs in place the actual implementation of Circular 46, which establishes and appropriate arrangements made for users to pay for the framework governing the operation of multi-purpose irrigation services. EVN Corporate needs to be operated as hydropower plants. 38 A FINANCIAL RECOVERY PLAN FOR EVN Finally, the NLDC needs to be made independent and would be small in the short term, no allowances have been allowed to demonstrate its independence in managing load KPEQTRQTCVGFKPVJGƂPCPEKCNOQFGNKPI dispatch operations. It is a common international practice to 5.1.5. Asset Rehabilitation completely unbundle dispatch centers from the utilities, and A number of power plants are in an unsatisfactory condition doing so is of the utmost importance in ensuring greater and, as a result, suffer excessive levels of unplanned investment from the private sector. outage. Rehabilitating these plants could help improve 5.1.4. Non-core Assets EVN’s performance in a cost-effective way. An assessment is The extent of EVN’s non-core activities is expected to needed as soon as possible. decrease in accordance with government policy. In July 5.1.6. Better Governance 2012, the PM stated that EVN and other SOEs must dispose None of EVN’s subsidiaries currently meets standards of of non-core assets by 2015. EVN must sell a number of good governance for commercial companies. Corporate subsidiaries and associated entities. The book values as governance is a complex subject with extensive literature. provided by EVN in VND billions (2012) are listed as follows: The London Stock Exchange has produced an excellent • An Binh Joint Stock Commercial Bank: 757.1 practical guide on the subject that is widely followed by • Global Insurance Company: 80 companies in the United Kingdom.14 Stock exchanges around the world produce similar, though generally less • An Binh Security Joint Stock Company: 114 detailed, guidance and often have formal governance • Power Finance Joint Stock Company: 1,000 requirements in their listing rules. The sale arrangements are restrictive. EVN must sell the The governance requirements of the Vietnam stock assets for no less than their book value. It is unclear what exchanges are less rigorous and are under development. sanctions will apply if EVN fails to meet the deadline or EVN personnel have been given training in corporate achieve the required price. IQXGTPCPEGDWVVJKUKUPQV[GVTGƃGEVGFKPEWTTGPVRTCEVKEG These sales, if achieved at the required price, will provide in the various subsidiaries. As a matter of process, EVN limited capital funding and have a negligible impact on subsidiaries should seek to learn not only from the London '80oUƂPCPEKCNUWUVCKPCDKNKV[#UUWOKPIVJCVVJGUGPQPEQTG Stock Exchange guidelines, but also from other countries entities are sold at their book value in 2015, this will lead to with well-developed stock exchanges and corporate a non-operating income of VND 2 trillion, which accounts for governance codes such as India and France. 3.2 percent of equity and less than 2 percent of the cash of The distribution and transmission companies have taken the company at the end of the year. some steps toward better governance through the creation However, there is a wider point, which is that the sale of boards of directors with some decision-making powers. of these assets will enable EVN’s management to focus However, the process has not begun in the gencos. There attention on its core business rather than on activities such is much more to be done in all the companies in terms of as insurance and banking projects. This ought to lead to implementing programs of good governance. To move some improvement in EVN’s overall performance. gencos into the private sector, either wholly or in part, they will need to have a board of directors that operates in accordance with normal commercial practices and standards TABLE 5.3: IMPACT OF DIVESTING NON CORE ASSETS ON EVN HOLDINGS’ FINANCIAL for the private sector. INDICATORS (2015) The role of the board should include setting policy and strategy, monitoring management and company WITHOUT SELLING SELLING NON-CORE performance, selecting the chief executive, devising NON-CORE ASSETS ASSETS compensation strategy, reviewing budgets, and ensuring D:E 63.4 : 36.6 63.3 : 36.7 ƂPCPEKCNUWUVCKPCDKNKV[*QYGXGTKPVJGUJQTVVGTOVJGDQCTFU DSCR 1.4 1.4 YKNNNCEMVJGUMKNNUCPFƂPCPEKCNU[UVGOUTGSWKTGFVQFQCP[ QHVJGUGVCUMUGHHGEVKXGN[#UCƂTUVUVGRKVKUUWIIGUVGF SFR 3.8 3.8 that EVN should recruit several non-executive directors Source: Own elaboration. and appoint them to board positions with one or more of the various subsidiaries, so they can act as mentors to the board and assist its members’ effectiveness. Placing the Within its subsidiaries, EVN also undertakes a number governance of all the companies on a proper commercial of other activities (such as running guest houses and HQQVKPIYKNNDGVKOGEQPUWOKPIVJGRTQEGUUECPDGIKP engineering activities) where services could be bought, thus immediately but will take two to three years to produce conserving capital for and focusing management attention results. on core activities. Since the direct impacts of these measures 14 http://www.londonstockexchange.com/companies-and-advisors/aim/publications/documents/corpgov.pdf R E C O M M E N D AT I O N S F O R A F I N A N C I A L R E C O V E R Y P L A N 39 As part of this process, EVN subsidiaries should develop CPFƂPCPEKCNU[UVGOUYKNNTGSWKTGGZVGTPCNCUUKUVCPEGCPF performance measurement systems to monitor and evaluate UJQWNFDGUWRRQTVGFQRGTCVKQPCNN[CPFƂPCPEKCNN[D[ their performance. This should include KPIs set and reviewed development partners. regularly by the board to assess overall performance at the companies (see section 5.1.2). It should also include 5.2. DESIGNING AND IMPLEMENTING A NEW lower-level indicators to assess the performance of groups INVESTMENT STRATEGY of staff, individuals at the level of business units, and The government is advised to develop and implement an (from a technical standpoint) individual feeder lines in the investment strategy for the power sector that envisages distribution system or of a generation unit within a genco. a hugely increased role for the private sector in power Moreover, these KPIs can be adjusted over time with the aim IGPGTCVKQP6CDNG KP5GEVKQP KFGPVKƂGFRTKXCVG of ensuring ongoing improvement in EVN’s operations. investment requirements for the period 2014 to 2020 as 6JGFGXGNQROGPVQHGHHGEVKXGCEEQWPVKPICPFƂPCPEKCN US$25 billion. Private investment in Vietnam on this scale is management systems should also be a priority at all WPRTGEGFGPVGF9JKNGVJGTGCTGPQHQTOCNƂIWTGUKVUGGOU the subsidiaries. EVN is in the process of launching new unlikely that private investment has ever previously reached CEEQWPVKPICPFƂPCPEKCNOCPCIGOGPVUQHVYCTG1TCENG US$1 billion in a single year. Between 2013 and 2020, private Financials, to replace its existing in-house system, FMIS. The investment is expected to average over US$4 billion per year. UQHVYCTGJCUDGGPHWNN[VGUVGFKPVJG*GCF1HƂEGCPFKUKP There will likely be some doubts regarding the feasibility of a pilot phase in the subsidiaries. The transition period has achieving such a huge increase in investment, especially in taken longer than usual because the new software needed to light of the current policy environment. As a result, major TGƃGEVTGEGPVEJCPIGUKPVJG/KPKUVT[QH(KPCPEGoUCEEQWPVKPI changes in policy will be required. These policy reforms fall RQNKEKGUHQTEQTRQTCVGU6JGƂTUVITQWRSWCTVGTN[ƂPCPEKCN KPVQƂXGOCKPCTGCU reports produced by Oracle Financials is expected at the end of 2015. 1. Encouraging greater private sector participation Furthermore, EVN’s accounts are subject to a number 2. Maintaining dialogue with the private sector QHTGEWTTKPISWCNKƂECVKQPUHTQOVJGKTCWFKVQTUDGECWUG 3. Increasing the MOIT’s capacity to manage private they do not fully comply with the IFRS. In addition, the sector projects EQPUWNVCPVUoGZRGTKGPEGEQNNGEVKPIFCVCHQTVJGƂPCPEKCN 4. Moving forward with divestiture of the gencos OQFGNHQTVJKUUVWF[UJQYGFVJCVƂPCPEKCNFCVCCTGQHVGP unreliable and only available after lengthy delays. The 5. Adopting a dynamic approach to planning report recommends a review to identify the most effective 5.2.1. Encouraging Private Sector Participation way forward to address all these weaknesses. The starting The challenges involved in reaching a target of US$4 billion point should be an analysis of all the areas where EVN’s per year of private investment are considerable. Higher accounts and information systems fall short of IFRS and other tariffs are part of the solution, along with increased capacity good practice standards. This should be followed by the at the MOIT and improved regulation, which are discussed development and implementation of a prioritized program further below. However, it is also likely to be necessary to of improvements. The adoption of a reliable enterprise improve incentives for the private sector to invest in power resource planning system at all the major EVN subsidiaries projects. These incentives will need to be carefully tailored is likely to be a major part of this program. Selection and to be as attractive as possible to private investors while implementation of such a system will be time-consuming protecting the interests of the Vietnamese government. This and may well take two to three years. However, it will yield in turn will require regular dialogue between the government UKIPKƂECPVNQPIVGTODGPGƂVUKPVGTOUQHRTQFWEKPITGNKCDNG and the private sector, which is further discussed in section CPFVKOGN[ƂPCPEKCNKPHQTOCVKQPVJCVYKNNEQORN[HWNN[YKVJ 5.2.2. the IFRS and inform company management of all aspects of its activity, from setting tariffs to devising appropriate risk The government’s dialogue with the private sector management strategies. must be accompanied by a willingness to consider and implement policy changes in cases where this is vital to 5.1.7. Summary securing investment. The key concerns of investors that 6JGUGUKZOGCUWTGUHQTKORTQXKPIQRGTCVKQPCNGHƂEKGPE[tVJG were consulted during the course of this study relate to CRRQKPVOGPVQHCNGCFGTVQVCMGVJGƂPCPEKCNTGEQXGT[RNCP guarantees on the remittance of funds, the availability of forward, better technical management, full unbundling, fuel, security of land titles, and access arrangements (these the divestiture of non-core assets, asset rehabilitation, and issues are discussed further in annex V). The dialogue with better governance—can largely be undertaken internally KPXGUVQTUPGGFUVQDGCEQPVKPWQWURTQEGUUVJCVKFGPVKƂGU by EVN (although some of them may require approval from various points of concern and maps out options for the government—for example, to appoint external non- solutions. The government should understand that the more executive directors). However, improvements to accounting TKUMUKVYKUJGUVQRNCEGQPKPXGUVQTUVJGOQTGFKHƂEWNVKVYKNN 40 A FINANCIAL RECOVERY PLAN FOR EVN be for investors to raise loans and equity—and the higher repayments of the IPP instead of the whole duration of the likely price of power will ultimately be. Investor requests the PPA. It must be noted, however, that this would mean HQTIWCTCPVGGUOC[TCKUGSWGUVKQPUCUVQVJGƂUECNURCEG CUMKPIGSWKV[KPXGUVQTUVQVCMGQPCJKIJGTTKUMVJG[YQWNF CXCKNCDNGVQVJGIQXGTPOGPVHQTUWEJIWCTCPVGGUJQYGXGT consequently require a higher return on investment, and this UWRRQTVHTQOKPVGTPCVKQPCNƂPCPEKCNKPUVKVWVKQPU +(+U KPVJKU would affect power prices. area may well be possible. 5.2.2. Maintaining Dialogue with Private Sector To gain approval to invest in the power sector, foreign There is already a channel of communication between the investors must currently negotiate with EVN to get a PPA. government of Vietnam and private sector power investors in Extensive negotiations are also required with multiple the form of the Infrastructure Working Group of the Vietnam authorities—from the government and ministries (MOIT, Business Forum (VBF). The Group is well established and MPI, Ministry of Natural Resources and Environment, MOF, brings together a range of private sector interests. However, and State Bank of Vietnam) to local authorities (People’s KVUYQTMPGGFUVQDGFGGRGPGFCPFKPVGPUKƂGFUQVJCV Committees at the provincial, district, and commune obstacles to private investment in the power sector can levels)—to get an investment license. In total, these steps be kept under constant review and tackled as they arise. ECPVCMGHTQOQPGVQƂXG[GCTUVQEQORNGVGDGHQTGKPXGUVQTU Formal dialogue should take place on a regular basis, at can move to the next step. Streamlining this negotiation NGCUVSWCTVGTN[YKVJURGEKƂEEQPVCEVUDGVYGGPFGUKIPCVGF process will be vital to fostering private sector participation. individuals at EVN, the MOIT, and the VBF to ensure day-to- +PCFFKVKQPVJGHQNNQYKPIURGEKƂEOGCUWTGUUJQWNFDGVCMGP day continuity. to further encourage private sector participation in power 5.2.3. Improving Capacity to Manage Private generation: Sector Projects • Establish clear and straightforward licensing In the consultants’ interviews, a number of project promoters procedures were critical of the pace at which the MOIT is negotiating IPP investments. In particular, they complained of long • Establish clear project appraisal mechanisms for the intervals between negotiation meetings with the MOIT. With following: the expected huge increase in numbers of IPP projects as a o Timeline result of future power investment programs, this is a source of concern. The numbers and caliber of staff will have to be o Evaluation criteria (avoid consideration of improved to meet the objective of promoting more projects  VJQUGRTQLGEVUYJKEJCTGPQVƂPCPEKCNN[ more quickly. viable) Capacity can also be increased by adopting more- o Land use uniform formats for contracts. At present, each contract o Infrastructure use PGIQVKCVKQPRTQEGGFUQPVJGDCUKUQHCURGEKƂEUGVQH • Reduce the use of permits as much as possible contract documents. Greater standardization will speed up processing. At present the right to develop and operate power plants is conferred to investors on the basis of unsolicited bids. The 5.2.4. Moving Forward with the Divestiture of Gencos alternative approach of competitive tendering is detailed Partial divestiture of the gencos is planned as part of in MOIT’s regulations for procuring privates investors but EVN’s future development, and initial planning work for hardly followed. The latter approach is more likely to attract this divestiture is now in progress. The terms on which the FGXGNQRGTUYKVJVJGTGSWKTGFVGEJPKECNCPFƂPCPEKCNECRCEKV[ gencos may be sold are necessarily uncertain at this stage CPFYJQCTGVJGTGHQTGDGVVGTRNCEGFVQQHHGTGHƂEKGPVRQYGT because there has been no evaluation to date of investor prices than unsolicited bidders. The government is advised interest in purchasing stakes in the gencos. Options for the to implement its existing competitive bidding as the default divestiture process are now being studied under funding approach for securing private sector investment. from the World Bank, and the recommendations of this study '80KUPQVCUWHƂEKGPVN[ETGFKDNGQHHVCMGTYKVJQWVUQXGTGKIP will inform the decisions of the government and EVN in this guarantees. Rather than abruptly ending sovereign regard. guarantees, the government should gradually reduce its The government should move forward with two initiatives. use of them. The underlying principle is that sovereign (KTUVKVKUKORGTCVKXGVQƂPCNK\GVJGWPDWPFNKPICUFGUETKDGF guarantees will no longer be needed once the power market in Section 5.1.3. Second, regulation should be adjusted KUƂTON[GUVCDNKUJGFCPFƂPCPEKCNN[UQWPFCPFETGFKDNG to make the current standard power purchase agreement players exist at all levels of the industry. EVN has to enhance (SPPA) bankable. This will require amendments to Circular 41 its creditworthiness to boost private investors’ appetites. to cover at least the following provisions: In the interim, the government’s policy could be to provide • Ensure that SPPAs are automatically adjusted every sovereign guarantees only for the duration of the loan year. R E C O M M E N D AT I O N S F O R A F I N A N C I A L R E C O V E R Y P L A N 41 r 5GVNQPIGTRGTKQFUCPFƂZGFSWCPVKVKGUVQKPETGCUG treatment of embedded generation plants, which are KPXGUVQTEQPƂFGPEG permitted for units with a capacity of up to 30 MW. The PPA arrangements for these sorts of plants are based • Ensure the enforcement of all provisions set out in on feed-in tariffs (most of these facilities are renewable PPAs. energy plants including hydropower). These schemes have 5.2.5. Adopting a Dynamic Approach to Planning proved attractive to local investors and could be a good In the longer term, the government of Vietnam needs entry point for local investors to build up their capabilities to decide how it plans to ensure the adequacy of future to promote larger schemes. To encourage increased generation capacity. Currently, it is wavering between an investment, the government should consider both improving approach based on BOT IPPs with market interventions the contractual terms and increasing the ceiling from, say, RTKEGECRCPFƃQQTU CPFCEQPUQNKFCVKQPQHVJGIGPGTCVKQP /9VQ/9 YJKEJYQWNFDGLWUVKƂGFKPVJGNKIJVQH power market, with expansion based on merchant plants.15 overall system growth). Of course, although these would be At present there are a number of differences in status worthwhile improvements, they would represent only a minor between generation projects run by EVN Corporate (the contribution to the private sector investment requirement of multipurpose hydro projects) and the projects run by the US$4 billion per year. gencos and IPPs. The multipurpose hydro projects are simply cost centers and have no PPAs. The projects run by 5.3. DEVELOPING A SUSTAINABLE FINANCING STRATEGY the gencos do have PPAs whose duration has recently been As discussed earlier in Section 3.1.2, EVN is currently in a increased from 1 to 10 years—which, while an improvement, RTGECTKQWUƂPCPEKCNUKVWCVKQP+VUFGDVVQGSWKV[TCVKQKUJKIJ is still short of the industry standard of 20 to 25 years. Private and much of the equity has been created through an asset investors may consider these PPAs to be unattractive as they revaluation. The level of foreign debt remains high, although give no long-term assurance over prices. The IPPs do have in 2013 it decreased from almost 88 percent of total debt proper PPAs but these are negotiated with the MOIT on a to 63 percent. However, the potential for foreign exchange case by case basis. losses remains substantial, and EVN will have no control over ÃÌ>LˆÃ…>˜˜`i«i˜`i˜Ì-ÞÃÌi“>˜`>ÀŽiÌ"«iÀ>̜À losses arising on this debt when the currency is devalued. Over the next few years, in addition to the planned rapid The term of the debt is short relative to EVN’s asset base, growth in the IPP market, EVN is planning to equitize although this ratio improved in 2013 as well. According to its gencos and introduce private capital to them. These VJGƂPCPEKCNUVCVGOGPVHQTCTQWPFRGTEGPVQH'80oU CEVKXKVKGUYKNNPGEGUUKVCVGUKIPKƂECPVEJCPIGUKPVJGOCTMGV DQTTQYKPIUCTGFWGHQTTGRC[OGPVYKVJKPƂXG[GCTU(KPCNN[ for power and arrangements for load dispatch. Establishing VJGTGEGPVKORTQXGOGPVKP'80oUƂPCPEGUJCURTGFQOKPCPVN[ an independent system and market operator will go part way TGƃGEVGFJKIJGTNGXGNUQHTCKPHCNNYKVJEQPUGSWGPVJKIJGT VQYCTFIKXKPIRTKXCVGUGEVQTQRGTCVQTUITGCVGTEQPƂFGPEG levels of hydropower generation, which may not be that the system and market operator will dispatch their sustained in future. plants in a fair manner. In addition, the structure of the PPAs 6CDNGUWOOCTK\GU'80oUƂPCPEKCNEJCNNGPIGUVJTQWIJ will need to be addressed. An industry structure in which 2020, with the increased tariffs assumed in the base-case similar terms are in place for all projects, whether private ƂPCPEKCNRTQLGEVKQPU-G[RQKPVUVQPQVGCTGCUHQNNQYU or wholly or partly private, is likely to give the greatest • EVN’s capital needs over the period 2014 to 2020 encouragement to private developers. are US$28 billion, or almost US$4 billion per year. iÛiœ«>,œLÕÃÌ>ÃÌiÀ*>˜ r +PCFFKVKQPVQDQTTQYKPIVQƂPCPEGECRKVCN A key aspect to the future development of the power sector GZRGPFKVWTG'80CNUQPGGFUVQTGƂPCPEGUQOGQHKVU and the attraction of foreign investors in generation is a existing borrowings every year so that total borrowing robust master plan that is readily available to all parties. usually exceeds capital expenditure. All these changes will require more-frequent adjustments to the planning process. MOIT or NPT, as the transmission • The majority of new borrowing comes from foreign system operator (TSO), should lead this process in close sources, peaking at 74 percent of requirements in 2016. consultation with EVN and other stakeholders (at least twice Thereafter, local borrowing takes an increasing share of C[GCT VQDGKPCRQUKVKQPVQƂPGVWPGCPFTGFGƂPGRNCPUHQT the total. the power system. The plan should be thoroughly updated • Total debt increases from US$14.6 billion in 2014 to GXGT[ƂXG[GCTUYKVJCPPWCNTGXKUKQPUVQTGƃGEVCEVWCN US$28.2 billion in 2020. demand growth and new developments in the sector. These variables clearly demonstrate that the improvement ,iVœ˜Ãˆ`iÀ̅i/Ài>̓i˜Ìœv “Li``i`i˜iÀ>̈œ˜*>˜Ìà KPƂPCPEKCNRGTHQTOCPEGYKNNTGOCKPHTCIKNGGXGPKHVJG On a minor scale, one possible area where the government base-case tariff increases are assumed. This is due to the could consider a revised regulatory approach is in the uncertainty posed by the various risks (hydrology, debt 15 Merchant RQYGTRNCPVUFKHHGTHTQOVTCFKVKQPCNTCVGDCUGFRNCPVUKPVGTOUQHJQYVJG[CTGƂPCPEGFCPFYJGTGVJG[UGNNVJGGNGEVTKEKV[VJG[IGPGTCVG#OGTEJCPVRQYGTRNCPVKUHWPFGFD[ investors and sells electricity in the competitive wholesale power market. 42 A FINANCIAL RECOVERY PLAN FOR EVN TABLE 5.4: SUMMARY OF EVN’S FINANCIAL CHALLENGES, 2014–20 (US$, MILLIONS) CHALLENGE 2014 2015 2016 2017 2018 2019 2020 TOTAL CAPITAL EXPENDITURE DURING YEAR 4,718 4,198 4,623 3,744 3,319 3,086 4,218 27,907 DEBT REPAYMENT DURING YEAR 1,646 1,647 1,711 1,972 2,299 2,412 2,515 14,200 GROSS NEW BORROWING DURING YEAR 6,241 3,938.76 4,048.71 1,687.83 1,803.32 1,135.09 2,754.70 21,609 …OF WHICH NEW FOREIGN BORROWING 61% 65% 74% 62% 54% 45% 49% – EVN’S CLOSING STOCK OF DEBT 14,656 18,088 22,129 24,116 26,438 28,219 32,394 – Source: Own elaboration. structure, foreign exchange, and demand forecasting) disincentive to potential private investors in the gencos, who EVN faces, as described in the previous section. Most of would see that their lending needs were being met by the these risks will likely intensify rather than diminish over government (rather than directly by the market) and would the period to 2020 (hydrology is the exception due to a be uncertain as to whether such a privileged arrangement change in generation mix). It is therefore vital that EVN would continue after their investment took place. Second, it seeks responses to those risks and is supported by the would not help develop the local capital market in the same government and other agencies in making appropriate manner as a corporate bond issue. changes. The recommendations for doing so are described in the following sections. 5.4. IMPLEMENTING COST-BASED TARIFFS 5.3.1. Capital Structuring The report’s analysis shows that implementing sustainable The most important step EVN can take to enhance its capital tariffs would lead to an average increase of around 10 structure is to increase its equity by generating regular percent in the average retail tariff up to 201816 (under the RTQƂVUYJKEJCTGTGVCKPGFKPVJGDWUKPGUU6JGJKIJGT assumptions taken in the analysis, see section 4.2). Higher revenues arising from the implementation of cost-based tariffs are not only vital for EVN but for attracting private VCTKHHU UGGUGEVKQP KPEQODKPCVKQPYKVJOQTGGHƂEKGPV investors into the generation sector. Investors are well aware operations, will help in this respect. In addition, it would that current retail tariffs are below cost-based levels and, as be clearly helpful if the government could agree to inject UWEJOCMGKVFKHƂEWNVHQT'80VQDGCTVJGEQUVQH+22UYJKEJ additional equity, although this is not consistent with the are priced in market terms. For EVN, the higher tariffs will government’s current thinking. Creating additional equity imply both that the investment program of US$28 billion VJTQWIJCUUGVTGXCNWCVKQPUKUQHNKOKVGFDGPGƂVCUKVRTQXKFGU over the period up to 2020 will become a reality and that it no cash. will have adequate funding to improve the quality of service EVN cannot increase the length of its loan terms without towards international standards. assistance from lenders. Loans from IFIs are already on The government should move ahead in two complementary comparatively long terms, so it is in local debt that most actions, as shown in Table 5.5. progress can be made. Very sensibly, EVN is already seeking agreement from its bankers to extend the term of some of its 6QRTQRGTN[KORNGOGPVEQUVTGƃGEVKXGVCTKHHUVJGIQXGTPOGPV loans. In addition, it should seek to obtain long-term funds will need to: directly from capital markets. EVN and its subsidiaries are the • Enforce the current regulatory scheme under sorts of organizations that should be able to attract long- the ERAV for PCs and the NPT (Circulars 12 and 14) term funding from markets. At present these markets are to ensure distribution and transmission business are EQORCTCVKXGN[RQQTN[FGXGNQRGFKP8KGVPCOJQYGXGT'80 TGYCTFGFYKVJCTGCUQPCDNGTGVWTP can act as a catalyst to introduce longer-term bonds to the • Amend current regulation (that is, Circular 41) to local market, working in cooperation with the government. CVVTCEVRTKXCVGECRKVCN The government’s assistance might, for example, include offering underwriting guarantees to ensure that initial bond • Carry out electricity tariff adjustments (to ensure issues by EVN are successful. '80oUƂPCPEKCNXKCDKNKV[ YJGPPGGFGFCPFVQVJGGZVGPV VJG[CTGPGGFGF Alternatively, the government could itself issue longer- term bonds and simply on-lend the proceeds to EVN. r 5GV22#UKPNKPGYKVJKPVGTPCVKQPCNUVCPFCTFU However, although this has the advantage of providing a • Allow market prices (that is, results of tendering quick solution, it has two disadvantages. First, it could be a 16 6JGCXGTCIGVCTKHHKPETGCUGYQWNFDGCDQWVRGTEGPVRGT[GCTKHVJGCEJKGXGOGPVQHƂPCPEKCNUWUVCKPCDKNKV[KUFGNC[GFD[QPG[GCTVQ R E C O M M E N D AT I O N S F O R A F I N A N C I A L R E C O V E R Y P L A N 43 TABLE 5.5: IMPLEMENTING COST-BASED TARIFFS ACTION RATIONALE STAKEHOLDERS ROADMAP +ORNGOGPVGHƂEKGPV 'PUWTGƂPCPEKCNUWUVCKPCDKNKV[QH ERAV/MOIT/MOF Empower the ERAV to enforce current regulation cost-based tariffs. EVN and attract private capital. including a reasonable return on capital. Remove distortions to generation pricing. Ensure that SPPAs are automatically adjusted every year. 5GVNQPIGTRGTKQFUCPFƂZGFSWCPVKVKGU Adopt full pass-through Pass-through to customers non- MOIT/ERAV Ensure that pass-through is automatic and there are no mechanisms in retail manageable cost such as foreign delays in adjustments. tariffs. GZEJCPIGHWGNCPFKPƃCVKQP Increase the cap levels so that more automatic increase is allowed. Remove MOIT/MOF approval to maximum extent possible. RTQEGFWTGU HQTPGYIGPGTCVKQPKPXGUVOGPVCPF future, thus helping to ensure the involvement of the private sector in the future development of the power sector. A r &GXGNQRHWTVJGTVJGRTKPEKRNGUQHGHƂEKGPE[UVCVGFKP tentative communication strategy tailored to the main Decision 69/2013 by amending Decision 24/2011, which stakeholders is summarized in Table 5.6. states that the MOIT shall base its adjustments of the GNGEVTKEKV[TGVCKNVCTKHHUQPVJGCPPWCNƂPCPEKCNTGRQTVUCPF audits of EVN and the economic and technical norms. 5.5. IMPROVING RISK MANAGEMENT The report’s recommendations for addressing the risks A pass-through mechanism is currently envisaged in existing described in Section 4.5 are as follows: rules. However, pass-through mechanisms are not considered unless tariff variations exceed 7 percent. Additionally, in 1. Create a stabilization fund such cases, EVN should obtain authorization from the MOIT 2. Reduce the exchange risks associated with foreign to adjust electricity tariffs. This threshold is high and has borrowing CPGHHGEVQP'80oUƂPCPEKCNU+VJCUCEVWCNN[DGGPKPETGCUGF HTQOCHQTOGTRGTEGPVKFGCNN[KVUJQWNFJCXGOQXGFKP 5.5.1. Creating a Stabilization Fund the opposite direction, lowering the limit to 3 percent for 6JGƂTUVCPFOQUVWTIGPVCEVKQPKUVJGGUVCDNKUJOGPVQHC automatic adjustments of tariffs. The authorization by the stabilization fund to manage the risks that EVN faces—in MOIT should be kept only for very large variations that particular the hydrological risks and, in the near future, may have an impact at a macro level (that is, more than 15 the fuel price risk. A stabilization fund in tariff regulation percent), which is unlikely to happen, mostly if a stabilization is already envisaged but has not been implemented. HWPFKUƂPCNN[GUVCDNKUJGF+PECUGVJGUVCDKNK\CVKQPHWPF Stabilization funds can be used to mitigate a variety of risks, UGGUGEVKQP KUƂPCNN[GUVCDNKUJGFVJGVJTGUJQNFOKIJV including fuel price and foreign exchange risks. Since the remain at current levels and the fund will be used to partly risks associated with poor hydrological conditions have QHHUGVVJGUGƃWEVWCVKQPUKPEQUVU potentially greater adverse impacts, they could be a prime candidate for the use of a stabilization fund in the initial In the longer term, the ERAV’s role as an independent years, during which hydro-based generation will continue to regulator will evolve. It will be necessary to ensure that play a large role in the generation mix. EVN’s tariffs strike a balance between the interests of stakeholders, primarily consumers, producers of electricity, In setting tariffs, EVN should plan for an average year for and macroeconomic managers. This in turn means that the rainfall in which it would make some use of thermal plants ERAV will want to ensure that EVN seeks and achieves the when hydropower schemes run dry. This would need to be GHƂEKGPE[KORTQXGOGPVUVJCVCTGEQPUKFGTGFHGCUKDNGQXGT approved by the ERAV/MOIT. At the year-end, if there has time. been heavy rainfall and EVN has used less thermal plant GPGTI[VJCPGZRGEVGFVJGP'80YQWNFDGRTQƂVCDNGCPF Communicating the tariff increases is critical to ensuring the regulator would approve an arrangement under which smooth implementation of such adjustments. Key the company would appropriate up to 2 percent of its stakeholders such as government institutions, civil society, revenue to a stabilization reserve fund. By contrast, in dry politicians, development partners, media, and the consumers years when EVN makes a loss, there would be a drawdown at large must be made aware of the reform process. A from the stabilization fund to cover any losses. focused communication strategy will enable greater cooperation between public and private companies in the In the immediate future, administration of the fund would DGVJGTGURQPUKDKNKV[QHCUGPKQTQHƂEKCNYKVJKP'80oUEGPVTCN 44 A FINANCIAL RECOVERY PLAN FOR EVN TABLE 5.6: RECOMMENDED COMMUNICATION STRATEGY STAKEHOLDER MESSAGE CHANNEL GOVERNMENT Communicating new roles and mandates in the sector, especially with Direct communication INSTITUTIONS regard to new generation procurement and negotiation and announcement to key stakeholders Communications of expectations for progress during the recovery plan Workshops or strategy Investment promotion and opportunities review meetings for close Communication on timing of reforms and impact on the economy collaboration Support for EVN turnaround and the proposed changes to the ownership and company structure POLITICIANS Communicating development of the recovery plan designed to meet Direct communication KFGPVKƂGFPGGFU Actionable plans tied to reform strategy and dedicated functions to promote transformation Focus on fair and competitive procurement Long-term planning to promote security of supply DEVELOPMENT Communication and involvement of the reforms process Meetings PARTNERS PRIVATE SECTOR Communication of market/regulatory changes to promote greater Cooperative investment cooperation promotion with timely announcements from the Communication of new developments, including the formation of a MOIT and EVN procurement cycle and development of new processes for procurement Participation in conferences GENERAL PUBLIC +PHQTOKPIEWUVQOGTUQPVJGFGXGNQROGPVQHEQUVTGƃGEVKXGVCTKHHUCKOGF Newspaper, radio, and at improving quality of service delivery television ƂPCPEGHWPEVKQP6JKUYQWNFJGNRVQKPUVKVWVKQPCNK\GVJG comments from its auditors, lawyers, and the regulator. A stabilization fund mechanism in the short term. In the UGPKQTƂPCPEGQHƂEKCNYKVJKP'80PGGFUVQVCMGTGURQPUKDKNKV[ medium-to-long term the fund could be devolved to EVN’s for driving this proposal forward. subsidiaries. The fund would be established within EVN and funds retained internally. However, EVN would need to put in RNCEGDCEMWRCTTCPIGOGPVUHQTFT[[GCTUYJGPECUJƃQY would be tight and the company would need to draw on the stabilization fund. This can be achieved most effectively with support from a commercial bank, which would be committed to providing EVN with the necessary short-term funding in dry years. The government may need to make an initial contribution to the fund, although ideally this would be reimbursed relatively quickly. The arrangements for the fund will require scrutiny by EVN’s auditors, lawyers, and the regulator to ensure that they comply fully with Vietnamese accounting and tax laws and are consistent with regulatory directives. EVN must take the initiative in putting forward proposals for the operation and governance of the fund because it has by far the greatest interest of any stakeholder in seeing the fund established. © EVN Electricity of Vietnam EVN may need to modify its proposals in the light of R E C O M M E N D AT I O N S F O R A F I N A N C I A L R E C O V E R Y P L A N 45 BOX 5.1: THE ELECTRICITY TARIFF EQUALIZATION FUND (ETEF) IN NEW SOUTH WALES Figure 5.1: How The Electricity Tariff Equalization Fund Operates long-term marginal cost of generation. The ETEF in New South Wales mechanism is designed so that retailers supplying Operation of the ETEF customers at regulated rates must contribute to $MWh pool price exceeds the fund when spot market prices fall below this generation cost component in reference price and are compensated by the fund IPART price — retailers compensated when spot market prices rise above it. out of ETEF NSW pool To ease the transition to the ETEF regime, the price government made an initial contribution of $A 50 million to the fund. In addition, generators were called on to contribute to the fund. The government’s contribution was transferred back to the treasury after six months, as planned. While the regulated generators were required to put money into the energy cost fund a few times, they tended to be repaid within a component in IPART few weeks. recommended price The fund offers a potential model for developing countries, but only when a number of preconditions for the successful development of competitive electricity markets have been met. The stabilization fund would not lead to any overall KPETGCUGKPCXGTCIGVCTKHHUKVYQWNFLWUVOCMGVJGO ƃWEVWCVGNGUUFTCOCVKECNN[DGVYGGPFT[CPFYGV years. Once it has been established, EVN can pool price less than generation cost component in IPART price — surplus paid into ETEF consider whether it provides enough tariff stability or whether further measures are required to supplement the fund. Possible measures include (a) It is widely agreed that electricity users need to be establishing, within tariff regulations, a procedure protected against wholesale price volatility through whereby EVN can have a special tariff increase in stable, predictable retail rates. The Australian state of the event of a particularly dry year when the fund New South Wales has used a transitional mechanism KUGZJCWUVGFQT D WUKPICPKPUWTCPEGKPUVTWOGPV to provide such protection. Lessons learned from this Insurance policies are a new mechanism for experience could be of interest for Vietnam. managing hydrology risks and have recently been implemented in Uruguay, with assistance from the All standard retailers in New South Wales are World Bank (see Annex II). government owned and, like other retailers, purchase energy through the national electricity market. They The adoption of mechanisms such as a have to offer small users a regulated electricity tariff stabilization fund or an insurance scheme will that includes a regulated energy cost component, require government and regulatory agreement. both of which are set by the state’s Independent EVN should take the initiative in putting forward Pricing and Regulatory Tribunal (IPART). proposals and demonstrating that they are in the best interests of both consumers and EVN. In setting the regulated energy cost, IPART was directed by the government to take into account the 5.5.2. Reducing Foreign Exchange Risks EVN should be active in trying to promote them. Two (QTGKIPGZEJCPIGTKUMUCTGRCTVKEWNCTN[UKIPKƂECPVVQ'80 different mechanisms may be appropriate to mitigating such because much of its borrowing is from foreign sources. In the risks in the short and long terms: longer term, increased local borrowing can help to reduce • In the short term, allowing pass-through this risk. However, in the period to 2020, this risk remains mechanisms—and linking their usage to tariff high. There are currently no hedging mechanisms available ƃWEVWCVKQPUtKUEQPUKFGTGFVJGOQUVTGCUQPCDNG in the local markets that can help mitigate this risk, although approach. This measure has been adopted in some such options may emerge over the next several years and countries, such as Kenya, to pass through to consumers 46 A FINANCIAL RECOVERY PLAN FOR EVN the increased costs arising from currency depreciation YJGPGXGTEWTTGPE[ƃWEVWCVKQPUJCXGGZEGGFRTGFGƂPGF bands. This requires estimating the foreign cost component of the tariff (CAPEX and fuel, primarily) and allowing for adjustments to this component of the retail VCTKHHYJGPGXGTVJGƃWEVWCVKQPUGZEGGFVJGFGƂPGF bands. • In the longer term, development partners may be able to assist in the development of market mechanisms. However, they will only be successful if Vietnam makes further progress toward becoming a market economy with a range of willing private buyers and sellers who wish to participate in the market. © istock photo R E C O M M E N D AT I O N S F O R A F I N A N C I A L R E C O V E R Y P L A N 47 © EVN Electricity of Vietnam 48 A FINANCIAL RECOVERY PLAN FOR EVN 6. FRAMEWORK FOR IMPLEMENTATION OF THE FINANCIAL RECOVERY PLAN 6JKUUGEVKQPTGEQOOGPFUURGEKƂECEVKQPUVJGIQXGTPOGPV strategy needs to explain the logic of the case for higher QH8KGVPCOUJQWNFVCMGVQKORNGOGPVVJGƂPCPEKCNTGEQXGT[ tariffs along with other salient aspects of EVN’s performance plan outlined in section 5, including the time frame for its and the need for investment to improve service standards. implementation. The MOF has three roles in relation to EVN. First, it is EVN’s The action plan is based on the government’s overall owner. Second, it is a lender to EVN. Third, it is responsible policy that the power sector must accelerate its progress HQTVJGFGXGNQROGPVQH8KGVPCOoUƂPCPEKCNUGEVQT6JGTGCTG on structural reforms in line with Circular 1782/2012. The a number of ways in which MOF could combine these roles importance of the structural reform policy and its associated to catalyze the scale of investment the sector needs, but sector performance improvement goals is now more evident this will require MOF to accept some changes to its current than ever given that, in the coming years, the private sector policy positions. First, the MOF could change the terms on will be required to undertake the vast majority of investment which it on-lends funds to EVN—by, for example, accepting in the generation sector. Such investment will only be the foreign exchange risk on loans from development achieved if private investors are convinced by improved partners and converting some of its existing loans into sector performance, progress in restructuring and regulatory equity. However, because these sorts of changes are against reforms, and the government’s sustained commitment to MOF policy, they are unlikely to be acceptable. Second, staying the course on policy reforms. it could inject some fresh equity into the company. This is also against government policy, however, and the hope is The action plan has implications for all the main that additional equity can be raised from the private sector. governmental participants in the power sector, and they will To achieve this, it is vital that EVN should be permitted to PGGFVQYQTMVQIGVJGTVQCEJKGXGGHHGEVKXGTGUWNVU9GƂTUV OCMGUCVKUHCEVQT[RTQƂVU6JKUKUEWTTGPVN[PQVVJGRQNKE[QH consider, therefore, the roles of the four main participants: the MOF, which does not expect EVN to make any return on EVN, the MOF, MOIT, and the ERAV. equity. A satisfactory rate of return on equity is vital to EVN EVN, although more affected by the action plan than any KPVYQYC[UKVYKNNDQVJGPCDNGVJGEQORCP[VQUGNHƂPCPEG of the other actors, has limited direct control over some some capital investment and encourage private investors to of the required actions. To ensure that the plan is taken take a stake in the company. forward as broadly as possible, EVN should take the lead 6JGNKOKVGFNGXGNQHFGXGNQROGPVQH8KGVPCOƂPCPEKCNUGEVQT KPCRRQKPVKPICUGPKQTQHƂEKCNYKVJTGURQPUKDKNKV[HQTRNCP KUCOCLQTUQWTEGQHFKHƂEWNV[HQT'80KPVJCVEGTVCKPƂPCPEKCN implementation. While this may not be a full-time role it will products, such as long-term bonds and instruments for require substantial time commitment and would need to be hedging foreign exchange risks, are simply not available WPFGTVCMGPD[CPQHƂEKCNYJQECPPGVYQTMGHHGEVKXGN[YKVJ in the same way as they are in many other countries. The the other key actors, the ERAV, MOIT, and MOF. development of such products is important for the future EVN also needs to show initiative in taking forward aspects success of EVN, and the MOF should assess how it can work of the plan over which it has substantial control and even in YKVJ'80VQKORTQXGVJGEQPFKVKQPUKPNQECNƂPCPEKCNOCTMGVU ECUGUYJGTGVJGƂPCPEKCNKORCEVQHKVUCEVKQPUKUNKMGN[VQDG HQTVJGDGPGƂVQH'80CPFVJGUGEVQTOQTGIGPGTCNN[ small. It should therefore take the lead in creating an internal The MOIT has a critical role to play in attracting additional UVCDKNK\CVKQPHWPFYKVJKP'80CPFUGGMKPIEQPƂTOCVKQPHTQO RTKXCVGƂPCPEGKPVQVJGRQYGTUGEVQT6QFQVJKUVJG/1+6 the ERAV that it meets the requirements of tariff directives. It needs to be more active in promoting the need for private should also make haste in carrying out the divestiture of non- ƂPCPEGCPFKPGPUWTKPIVJCVVJGVGTOUHQT+22UCTGUWHƂEKGPV core assets required by the PM’s directive and in committing to attract investors. It should be clear about the volume of to improving labor productivity in all its businesses. investment it is hoping to attract from private investors and Most importantly, EVN should take the lead in developing a aim to attract both local and international investors to the communications strategy for the plan. This communications sector. F R A M E W O R K F O R I M P L E M E N TAT I O N O F T H E F I N A N C I A L R E C O V E R Y P L A N 49 The MOIT is unlikely to obtain investment on the scale VJGTGEQOOGPFCVKQPUCTGECTTKGFHQTYCTFVJKUTGURQPUKDKNKV[ required without improving the incentives on offer to should represent the entirety, or at least a major part, of investors. To ensure these incentives are adequate, the that individual’s job description. EVN’s senior management MOIT needs to engage in regular dialogues with the private should keep track of progress and be available to take UGEVQTVJGTGCTGKPUVKVWVKQPCNOGEJCPKUOUCNTGCF[KPRNCEG implementation decisions and address bottlenecks as that can help with this. Finally, the MOIT will need additional necessary. capacity to negotiate more rapidly and more effectively with potential investors. Greater standardization of paperwork will help achieve this. 6.2. EVN’S CENTRAL ROLE The ERAV is a technically competent regulator. However, it As indicated in Figure 6.1, in the short term most actions does not yet enjoy full independence to regulate the power envisaged in the plan will need to take place at EVN’s sector. In future, it needs to demonstrate that it can strike corporate headquarters. Actions such as the creation of a an appropriate balance between the interests of investors UVCDKNK\CVKQPHWPFQTVJGFGXGNQROGPVQH8KGVPCOoUƂPCPEKCN and power consumers, and it must be fully independent to sector to permit longer-term borrowing and FX hedging, achieve this. Over the next few years there will be further will inevitably need to be handled centrally. EVN continues challenges for the regulator as the power sector evolves. VQDGCPKPVGITCVGFEQORCP[YKVJƂPCPEKCNTGUWNVUVJCVJCXG For example, it will need to help devise a mechanism for to be consolidated at year-end. It therefore makes sense for automatic pass-through of costs in retail tariffs and ensure EVN to continue to use a single accounting system with a a fair and balanced market for generation plants. These common chart of accounts. Moreover, unbundling continues are challenges that the ERAV can feasibly meet, with some to be a work in progress at EVN and the subsidiaries are additional technical assistance as necessary. In general not yet ready to take full control of their affairs, in a way that VGTOUVJG'4#8KUYGNNSWCNKƂGFVQTGIWNCVGVJGUGEVQTKP many expect to be possible in a few years’ time. For this accordance with the agreed market framework and should reason, under the general activities envisaged in the coming be empowered to do so. years for EVN Corporate, are included the relevant activities to be developed by the subsidiaries. 6.1. IMPLEMENTING THE FIVE PILLARS 6.3. ROLE OF THE SUBSIDIARIES 6JGMG[CEVKQPUHCNNWPFGTVJGHQNNQYKPIƂXGRKNNCTUQHVJG Financial Recovery Plan, as outlined in Section 5: This is not to say that EVN’s subsidiaries do not have an KORQTVCPVTQNGKPVJGKORNGOGPVCVKQPQHVJGƂPCPEKCN r +ORTQXKPIQRGTCVKQPCNGHƂEKGPE[ recovery plan. They are the customer-facing and production • Designing and implementing a new investment WPKVUQH'80CPFVJGKTHWVWTGYKNNDGJGCXKN[KPƃWGPEGFD[VJG strategy plan’s success or failure. They can also provide invaluable advice during the implementation of the recovery plan on r &GXGNQRKPICUWUVCKPCDNGFGDVƂPCPEKPIUVTCVGI[ topics such as the appointment of non-executive directors r +ORNGOGPVKPIGHƂEKGPVEQUVDCUGFVCTKHHU and the development of new accounting systems. • Improving risk management Moreover, there are a number of areas where the distribution Figure 6.1 shows at a glance the recommended actions and transmission companies can take the plan forward for each pillar, the rationale for the actions, the suggested independently. partnership arrangement, and the timeline. The partnership The EVNNPT is in many ways the most advanced of the EVN arrangements are provided as appropriate because some subsidiaries along the path to full unbundling. It already has actions can be implemented wholly or largely by EVN on CPQRGTCVKQPCNDQCTFCPFCEQPUKFGTCDNGNGXGNQHƂPCPEKCN its own while others require wider involvement from the autonomy. EVN should aim to build on this position by using government and/or other parties. the EVNNPT as the forerunner in improving its subsidiaries As shown in Figure 6.1, the suggested time frame for and encouraging the company to take the initiative in acting EQORNGVKPIVJGRTQRQUGFCEVKQPUKUVJTGGVQƂXG[GCTU6JKU autonomously. One possibility would be for the EVNNPT is ambitious and will be achieved only if EVN moves rapidly to take the lead in appointing a non-executive director CPFHQTEGHWNN[VQVCMGVJGƂTUVUVGRUKPKORNGOGPVCVKQP+V to its board. The EVNNPT is also well placed to take full will require commitment from across EVN and support from responsibility for negotiating with the ERAV over its tariff the government and the regulator. The scale of the effort is applications and ending any EVN Corporate involvement in considerable and will involve input from many individuals the development of its tariff proposals and applications. DQVJKPUKFGCPFQWVUKFG'80#UGPKQT'80QHƂEKCN FKTGEVQT Thereafter, the EVNNPT can take forward its status as an QTJKIJGT RTGHGTCDN[YKVJƂPCPEKCNGZRGTVKUGUJQWNFDG independent company in a number of ways. It can: designated and given the responsibility for ensuring that 50 A FINANCIAL RECOVERY PLAN FOR EVN FIGURE 6.1: ACTION PLAN (TOP PRIORITIES) Action 1 Year 2 Year 3 Year 4Year 5 Year Responsible Support Stakeholders EVN Appoint implementation leader Technical management Manage capital expenditure more effectively Set KPI for EVN subsidiaries EVN ERAV Timely review KPIs Improve quality of supply (SIAIFI, SAIDI) Establish yardstick competition among companies Complete Unbundling Operational Efficiency Intensify efforts to complete unbundling of PCs and NPT EVN ERAV Set bankable PPAs (adjust Circ 41), finalize loan agreements, etc. Enforce Circular 46 Make NLDC fully independent EVN MOF Non-core assets divesture Improve governance Carry out a detail analysis of governance situation Improve financial management systems Development EVN partners Develop performance measurement systems to monitor and evaluate subsidiaries' performance Rehabilitate Assets Encourage private sector participation Clear project apparisal mechanisms Reduction of adminstrative burden to the maximum extent Tender for negotiating prices EVN MOIT / Private sector New Investment Strategy Maintaining dialogue with private sector Improving capacity in MOIT Adopting dynamic approach to planning Preparation Genco divestiture (including definition of bankable PPAs, etc.) Implementation of Genco divestiture Improve capital structure Financing MOF/Commercial Strategy Extent maturity of existing loans with commercial banks EVN banks/ Development partners Agreement with IFIs and with MOF's support to extent maturities Cost based Implement Cost-based tariff including a reasonable return on capital Tariff Implement full (uncapped) pass-through of non-manageable costs EVN ERAV/MOIT Management Stabilization fund MOF/Commercial EVN Banks/ Risk Foreign exchange risks Development Partners Source: Own analysis • Develop its governance framework in the light of • Develop management information systems international best practice and, in particular, develop to measure and monitor performance, both at the DQCTFRQNKEKGUCPFRTQEGFWTGU EQTRQTCVGNGXGNCPFHQTNQYGTNGXGNDWUKPGUUWPKVUCPF • Identify, measure, and set targets for KPIs (some • Set targets for productivity improvement—in of these indicators can be drawn from the list of particular, improvements in labor productivity and KPVGTPCVKQPCNEQORCTCVQTUKFGPVKƂGFGCTNKGTKPVJKU reductions in the frequency and duration of outages. TGRQTV  F R A M E W O R K F O R I M P L E M E N TAT I O N O F T H E F I N A N C I A L R E C O V E R Y P L A N 51 The distribution companies have similar opportunities as the EVNNPT in taking forward the restructuring plan independently from EVN Corporate. While they are slightly behind the EVNNPT in their readiness to operate as independent companies, their position is broadly similar and they can proceed along a similar path. The distribution companies should also aim to appoint one or more independent non-executive directors in the near term, and they should take more of a lead in submission to the ERAV (while recognizing that they are in a different position from the EVNNPT). Because retail power prices are set nationally, submissions and negotiations with the distribution companies will have to be coordinated between them and cannot be conducted independently. However, the distribution companies as a group can take a more central role in putting forward tariff proposals. They can follow a similar approach to the EVNNPT’s in taking forward their position as independent companies, and the proposals suggested above are applicable to them. In addition, there CTGVJTGGRQKPVUVJCVCTGURGEKƂEVQVJGFKUVTKDWVKQPUGEVQT • The distribution companies are involved in a number of non-core activities, such as running guest houses. They should each develop a plan to withdraw from these activities so as to focus their investment programs on core activities in the power sector. • The distribution companies all have very high levels of frequency and duration of power interruptions. Addressing these interruptions should be a key part of their KPIs and targets for the next few years. • All the distribution companies should identify areas where their performance does not meet international benchmarks and develop proposals for improvement. The gencos are well behind the other subsidiaries in their readiness to operate as independent companies. As mentioned earlier, there are several issues that hinder the actual unbundling of these companies. Nevertheless, the gencos can help EVN ensure a smooth restructuring process by: • Identifying areas where their performance does not meet international benchmarks and developing RTQRQUCNUHQTKORTQXGOGPV r 'PFGCXQTKPIVQKORTQXGVJGKTGHƂEKGPE[CPF explore, jointly with EVN, rehabilitation activities that OC[DGPGGFGFKPURGEKƂERNCPVUCPF • Negotiating loan agreements and enhancing, to the extent possible, current borrowing conditions. © EVN Electricity of Vietnam 52 A FINANCIAL RECOVERY PLAN FOR EVN ANNEX I: OPTIONS FOR RAISING CAPITAL BY DIVESTING ASSETS The privatization of existing power sector assets is another transfer of its existing assets into the venture. Some plants potential way of attracting investment and there are a already have other investors, and in such cases it may be number of ways in which this could be accomplished. possible to sell some of EVN’s shares to the partners. EVN could, in principle, invite private participation in its Second, EVN must decide if it is willing to sell hydropower distribution and transmission companies. At present, this plants or thermal plants, or both. In general terms, EVN option is not under consideration by the government and has taken the lead in investing in hydropower plants while has not been considered in this report. However, given accepting a greater role for the private sector in developing the progress that has been made in establishing new thermal plants through IPPs. However, there are examples corporate and governance structures for the distribution and QHJ[FTQRQYGTRNCPVUYKVJRTKXCVGƂPCPEKPI6JGTGEGPV transmission businesses, it would probably be easier to bring example of the Thuong Kon Tum hydropower plant shows RTKXCVGƂPCPEGKPVQVJGUGEQORCPKGUVJCPKPVQVJGIGPEQUKP VJCVKPPQXCVKXGƂPCPEKPIUVTWEVWTGUECPYQTMKPVJKUUGEVQT the short term. as well as in thermal generation. There are also potential The privatization of generation activities could be advantages to EVN in selling some hydropower capacity in accomplished in several different ways. Certainly the easiest that it could reduce the company’s exposure to hydrology approach in the short term would be to sell stakes in risk. This is discussed further below. KPFKXKFWCNIGPGTCVKQPRNCPVUVJKUEQWNFDGFQPGKPCPWODGT Third, EVN needs to consider the terms on which it might of ways. If EVN wishes to follow this approach, there are dispose of plants. This is not just a question of price but several decisions it needs to make. In general terms, the also the other contractual arrangements and, in particular, authors suggest that EVN identify which plants it is willing the PPA. One possibility would be to make a trade sale of to consider selling and then consider the best approach assets or shares, with a PPA in place to give the purchaser on a case-by-case basis. There is little expertise in carrying assurance of a revenue stream. The terms of the PPA would out this sort of work in EVN as a whole and it is doubtful need to be evaluated carefully. If the PPA offers favorable whether it is feasible to build capacity quickly in all three of terms for the sale of electricity, then it will be possible to the new gencos. EVN should therefore review this issue at obtain a good price for the shares or assets, but this will be the corporate level. The decision process should include at the expense of higher prices for consumers. Alternatively, substantial dialogue with potential investors to see what VJGUCNGRTKEGEQWNFDG\GTQQTUGVCVCƂZGFNGXGNCPF their interest is regarding types of plants and sale processes. bidders invited to enter prices into a PPA. During the course of this study, several investors indicated potential interest in purchasing plants from EVN. Additional Fourth, EVN should consider if there are plants that could be investors may well come forward if EVN develops an active sold with associated conditions, for example, related to the marketing campaign for asset sales. rehabilitation of the plant. This approach could be applicable to circumstances such as the older thermal plants, where First, EVN must decide whether to sell whole plants or some rehabilitation is required for the plants to operate at retain a minority stake in any plants it sells. In general, full capacity. It would also be potentially applicable to the KPXGUVQTUƂPFKVOQUVCVVTCEVKXGVQCESWKTGGPVKTGRNCPVU further development of additional hydropower capacity at or majority stakes so that they can carry on their business sites where there is scope for growth. WPKORGFGFCPFTGCRVJGHWNNDGPGƂVUQHKORTQXGOGPVUKP the performance of the plant. However, there are situations In the longer term, EVN could try selling a stake in one or where a sale of a smaller stake in a plant has advantages for more of the newly created gencos. Such sales could be both sides. For example, if EVN is trying to attract additional accomplished either through the sale of a stake in a genco investment to a TPP to carry out rehabilitation, it may be to a strategic investor or through an offer for sale on the possible to develop contractual arrangements whereby the local stock market. Neither option looks straightforward PGYKPXGUVQTOCMGUCPKPXGUVOGPVVJTQWIJƂPCPEKPIRNCPV in the short term. There seems to be little interest from rehabilitation, with EVN retaining a stake in exchange for the strategic investors, especially if the stake on offer is only a A N N E X I : O P T I O N S F O R R A I S I N G C A P I TA L B Y D I V E S T I N G A S S E T S 53 minority one. The option of sale on the stock exchange also attract capital as there is a shortage of capital in general. CRRGCTUFKHƂEWNVCU8KGVPCOoUECRKVCNOCTMGVUFQPQVCRRGCT Table I.1 summarizes these options. VQJCXGUWHƂEKGPVNKSWKFKV[VQUWRRQTVCUCNGCPFOCTMGV interest appears to be below the level at which it was when the initial bunch of power initial public offerings (IPOs) was developed. There is some trading in the listed PCs but it is limited. Experts in the local capital market have suggested to us that an IPO of generation assets would mean excellent business and should be carefully designed and marketed to TABLE I.1: OPTIONS FOR FINANCING ADDITIONAL INVESTMENT OPTION PROS/CONS TIME FRAME SALE BY EVN OF • Gencos are not independent of EVN. #VNGCUVƂXG STAKES IN THE years and RECENTLY • Loan agreements for assets are with EVN and not gencos. probably CREATED • Lenders are not likely to be willing to lend to gencos with existing capital structure. longer GENCOS • Corporate structure of gencos is unlikely to be attractive to external investors. • Tariff agreements are not attractive to investors. • Market reforms are a work in progress and investors will want to see them made oper- ational before investing. • Strategic investors are looking for controlling stakes of the companies. • Financial investors that are not looking at controlling stakes (such as Dragon Capital, CAFIC [China]) may be options to explore in case of small stakes. • Market conditions for IPOs seem to be weak. SALE BY EVN • Sales of generation plants with existing independent shareholders may be fairly easy Six months to OF STAKES IN through an offer on the local stock exchange but the available funding from this source is two years INDIVIDUAL likely to be limited. GENERATION PLANTS • Sale of plants that do not have external shareholders at present would take longer. • Trade sales of some or all shares to companies in the sector would be potentially attractive for plants needing rehabilitation. However, any potential buyers will want to do extensive due diligence, especially if the plant is run-down. • Newer plants could be sold through share offerings. • Satisfactory PPAs will need to be in place to make the sales attractive and will have a OCLQTKPƃWGPEGQXGTRTKEGQDVCKPCDNG r(WGNRTKEGUCTGPGIQVKCVGFD['80JGCFSWCTVGTUKVKUPQVENGCTVJCV(5#UCUUWEJCTGKP place. • The valuation gap between EVN and the buyer may be an issue. • Strategic investors are looking for controlling stakes in the companies. • Financial investors that are not looking at controlling stakes (such as Dragon Capital or CAFIC [China]) may be options to explore. • Because market conditions for IPOs seem weak, there may be an overall ceiling on amounts that can be raised from this source in the next two years. SALE BY EVN • Sales of transmission and distribution companies are not current government policy. Two to three OF STAKES IN years OTHER • Companies are not structured in a way that would enable sale to the private sector. POWER SECTOR • Tariffs are not set independently by the regulator. COMPANIES, IN TRANSMISSION r6JGVCTKHHUCTGKPGHHGEVOGEJCPKUOUHQTCNNQECVKPICXCKNCDNGECUJCPFRTQƂVNQUUGU AND within the EVN group. DISTRIBUTION • Information systems in companies need to be improved and put on commercial terms. • Market conditions for IPOs seem to be weak. 54 A FINANCIAL RECOVERY PLAN FOR EVN OPTION PROS/CONS TIME FRAME MORE • Development partners are generally lending EVN as much as they are pre- Six months to BORROWING pared to. two years FROM DEVELOPMENT • Most IFIs17 are unwilling to fund coal projects. PARTNERS AND EXPORT CREDIT • Export credits may be available but will limit procurement options. AGENCIES • Both development partners and export credit agencies are looking to see DGVVGTQXGTCNNƂPCPEKCNRGTHQTOCPEGHTQO'80 • Export credit agencies have numerous opportunities in other markets and may not prioritize Vietnam. MORE r#XCKNCDKNKV[QHNQECNƂPCPEGKUNKOKVGF Immediate BORROWING FROM LOCAL • Long-term borrowing is particularly hard to access. FINANCIAL INSTITUTIONS BOND • Limited experience. One to two ISSUANCE years • Illiquidity, lack of depth, and small size of the local bond market according to expert opinions. • May need government guarantee if issued in hard currency and in the international markets. Multilateral hedging tools may be available. FURTHER • Companies such as PetroVietnam and Vinacomin should focus on their core business One to three INVESTMENT BY according to new government policy. years OTHER SOES • Funding for these SOEs is no more readily available to them than it is to EVN. BOT r2TQVTCEVGFRTQEGUUGUHQTƂPCNK\KPI$16CTTCPIGOGPVUYKVJDKFFGTUCTKUKPIHTQOKP One to three DEVELOPMENTS particular, negotiations over pricing, infrastructure sharing agreements (transport of the years (ideally) coal), and land use. • Policy uncertainties over, for example, availability of government guarantees. • Experience of long negotiations. The MOIT is trying to negotiate too many projects at the same time. • The BOT format is changed for every project and standardized formats are missing. • A foreign lender cannot hold a mortgage over lands or assets in Vietnam. • Vietnam is not a member of the International Center for the Settlement of Investment Disputes (ICSID). GREATER SELF- • Limited scope for reducing costs Immediate FINANCING • Political challenge of agreeing to higher retail tariffs 17 /QTGQXGTQHƂEKCNFGXGNQROGPVCUUKUVCPEG 1&# YKNNPQVDGCFGSWCVGVQOGGVVJGUGEVQToUNCTIGƂPCPEKPIPGGFUCPFOQTGTGEQWTUGPGGFUVQDGOCFGVQRTKXCVGUGEVQTUQWTEGU A N N E X I : O P T I O N S F O R R A I S I N G C A P I TA L B Y D I V E S T I N G A S S E T S 55 © istock photo 56 A FINANCIAL RECOVERY PLAN FOR EVN ANNEX II: RISK MANAGEMENT OPTIONS BOX II.1 STABILIZATION FUNDS IN LATIN AMERICA: This annex suggests options for managing hydrology risk, THE ARGENTINA CASE STUDY foreign exchange risk, and demand risk. HYDROLOGY RISK In Argentina, the distribution companies supplying the There are a number of ways to manage hydrology risk. First, end consumers pay a stabilized “seasonal” price that is CNNRCTVKGUECPCEEGRVVJCVVCTKHHUJCXGVQKPETGCUGUKIPKƂECPVN[ adjusted quarterly in the spot market. These seasonal in years when there is inadequate rainfall. Second, a prices are reset at least every six months on the basis stabilization fund could be established either within or of the operation forecasted by CAMMESA (Market externally to EVN. Third, EVN could endeavor to pass the Operator) taking into account likely marginal cost, capacity requirements to cover the demand, reserves, risk to the private sector through the terms of contracts for quality of service, and optimal hydrothermal dispatch. generation projects. Fourth, EVN could insure against years These prices may be amended every three months, of low rainfall on international markets. RTQXKFGFVJCVUKIPKƂECPVEJCPIGUJCXGVCMGPRNCEG6JG +PETGCUKPIVCTKHHUUKIPKƂECPVN[KPFT[[GCTUYQWNFDGCUWKVCDNG seasonal prices are approved by the government. way of passing risks from EVN to consumers. However, When the spot market prices exceed the forecast both the higher levels and increased variability of tariffs are seasonal price, the stabilization fund is used to cover unlikely to be popular with consumers. A strategy that aims VJGFGƂEKVHQTRQYGTIGPGTCVKQPEJCTIGU9JGPVJG[CTG to smooth tariffs between wet and dry years is preferable. lower, the difference is collected into the fund to offset future deviations. A tariff stabilization fund has been suggested in the past for EVN but it has not been implemented. Actually, the The fund is managed by CAMMESA following recent regulation tariff—Circular 12—includes a component, government rules on fund governance. It is important to mention that in the case of Argentina, the board of so far not fully implemented, governing the mechanism the market administrator was equally shared by the whereby funds are either used to replenish the Electricity Association of Gencos, distribution companies, large Tariff Stabilization Fund (+) or withdrawn from the fund to consumers, the TSO, and the government, which chairs. stabilize the electricity tariff (-) following the guidance of Governance and adequate management of this fund are the MOF and MOIT. There have been successful examples crucial. In the case of Argentina, the fund ran out of cash of stabilization funds in similar situations to Vietnam, for when the government intervened in retail electricity prices example, in the power sector of some Latin American immediately after the massive devaluation of the local countries with hydro-thermal power systems. (See Box II.1 for currency in December 2002. the Argentina case.) However, stabilization funds have a mixed record internationally since funds are often used for other purposes investment. However, it would have to make arrangements and not available when required. One way in which a YKVJCDCPMQTQVJGTƂPCPEKCNKPVGTOGFKCT[VQGPUWTGVJCVKV stabilization fund could be implemented would be for it could borrow from them in dry years when it would have to to be handled within EVN. Retail tariffs would be set by draw down the reserve. the regulator on the basis of normal rainfall and hydro An external stabilization fund could be managed either generation. In the event of a good year for hydro, EVN by the Vietnam government or by a bank. Funds would be would be permitted to appropriate an amount equivalent passed over to the fund in wet years and repaid in dry years to (say) 2 percent of revenue to a stabilization reserve. This in the same way as for the internal fund. The holder of the YQWNFPQVDGVTGCVGFCUCRTQƂVCPFJGPEGYQWNFDGNGUU fund would need to demonstrate proper stewardship of the NKCDNGVQCVVTCEVEQOOGPVUVJCV'80YCURTQƂVGGTKPI+PVJG funds so as to reassure customers that resources collected in event of a dry year, EVN could draw down the stabilization wet years could be repaid in dry years. reserve. While the reserve is in credit, EVN could use the TGUQWTEGUQHVJGUVCDKNK\CVKQPHWPFVQUGNHƂPCPEGECRKVCN EVN could also try to pass some of the hydrology risks to the ANNEX II: RISK MANAGEMENT OPTIONS 57 private sector. A private hydropower operator, for example, would not be paid in dry years but would have to bear costs BOX II.2 : WEATHER INSURANCE: URUGUAY and recover these costs in wet years. Similarly, merchant thermal plants that were not used in wet years would not In Argentina, the distribution companies supplying the be paid in wet years. Some of these arrangements may be end consumers pay a stabilized “seasonal” price that is FKHƂEWNVVQCEJKGXGKPVJGUJQTVVGTOKPVJCVHQTGZCORNG adjusted quarterly in the spot market. These seasonal investors are unlikely to construct merchant power plants in prices are reset at least every six months on the basis the immediate future. However, initiatives such as the sale of of the operation forecasted by CAMMESA (Market some EVN hydropower capacity on suitable terms can help Operator) taking into account likely marginal cost, reduce risks to EVN. capacity requirements to cover the demand, reserves, quality of service, and optimal hydrothermal dispatch. The possibility of using insurance to manage hydrology risks These prices may be amended every three months, has only recently been achieved. For instance, it has been RTQXKFGFVJCVUKIPKƂECPVEJCPIGUJCXGVCMGPRNCEG6JG supported by the World Bank in Uruguay.(see Box II.2) seasonal prices are approved by the government. This scheme allows UTE to overcome its vulnerability to When the spot market prices exceed the forecast weather conditions (drought years) and potential hikes in seasonal price, the stabilization fund is used to cover fossil fuel prices. VJGFGƂEKVHQTRQYGTIGPGTCVKQPEJCTIGU9JGPVJG[CTG lower, the difference is collected into the fund to offset In addition to these mechanisms, hydrological risk may be future deviations. transferred through contracts to HPPs. The fund is managed by CAMMESA following Table II.2 shows the main advantages and disadvantages of government rules on fund governance. It is important the above-mentioned approaches. to mention that in the case of Argentina, the board of the market administrator was equally shared by the Association of Gencos, distribution companies, large FOREIGN EXCHANGE RISK consumers, the TSO, and the government, which chairs. '80HCEGUUKIPKƂECPVGZRQUWTGUVQHQTGKIPGZEJCPIG (:  Governance and adequate management of this fund are risks because so much of its debt burden is denominated in crucial. In the case of Argentina, the fund ran out of cash foreign currency. When the Vietnamese dong is devalued it when the government intervened in retail electricity prices creates a loss for EVN. Although the Vietnamese dong is on immediately after the massive devaluation of the local a generally downward trend against international currencies currency in December 2002. FIGURE II.1: HOW DOES WEATHER INSURANCE WORK? Strike ] Strike Rainfall index NO PAYOUT Rainfall index ] Strike Rainfall index PAYOUT BASED ON Oil Prices 58 A FINANCIAL RECOVERY PLAN FOR EVN TABLE II.1: RISK MANAGEMENT APPROACH TO HYDROLOGY RISK MANAGEMENT ADVANTAGES DISADVANTAGES APPROACH STABILIZATION FUND • Ensures stable tariffs over seasons • Extra administrative cost Reasonably simple to implement locally • Never the right time to introduce r2TQVGEVUEQORCP[ƂPCPEGUFWTKPI drought WEATHER INSURANCE • Takes risk outside power sector • May lead to higher tariffs r2TQVGEVUEQORCP[ƂPCPEGUFWTKPI • Complex contracts which require de- drought tailed hydrological data • Limited precedents TRANSFER TO PRIVATE • Relief for EVN from risk management • Requires divesting of assets or SECTOR liabilities sophisticated asset management contracts FULL PASS-THROUGH TO • Follows the spirit of Vietnamese • May lead to temporary price hikes for CONSUMERS regulation although it is constrained by the which political and social acceptability is tariff increase caps challenging DGECWUGQH8KGVPCOoUEQORCTCVKXGN[JKIJKPƃCVKQPTCVGVJG FX risks could also be borne by consumers, by making the rate of its depreciation is unpredictable and varies from pass-through of losses to consumers rapid and automatic. year to year. One of the main reasons why EVN has such a This would require some changes to existing regulatory major exposure to FX risks is the denomination of so much mechanisms but would still be consistent with the principles of its borrowing in FX. Funds from development partners of regulation. EVN subsidiaries would be allowed to are loaned to the Vietnam government, which then on-lends increase tariffs automatically in response to movement in the to EVN. Then, EVN is expected to bear the FX risk. This is exchange rate. common practice in most developing countries although Kenya has adopted a much-applauded model which allows governments have often borne FX risks in practice because the utility to transfer exchange rate related increases in costs power utilities have defaulted. directly to consumers through tariff surcharges. This has The simplest way for EVN to eliminate these FX risks would EQPVTKDWVGFVQVJGEQUVTGƃGEVKXGPGUUQHVJGVCTKHHCPFVJG be to increase its local-currency borrowing. However, this is ƂPCPEKCNUWUVCKPCDKNKV[QHVJGWVKNKV[*QYGXGTKVCNUQNGCFUVQ not likely to be feasible in the short-to-medium term. The erratic tariff increases that are absorbed by households and TGUQWTEGUCXCKNCDNGQPVJGNQECNOCTMGVCTGDQVJKPUWHƂEKGPV companies. Tariff surcharges to cover exchange rate losses and too short term. Moreover, power sector equipment have peaked at 11–12 percent in single months in times has to be imported and as such has to be paid for in FX. of crisis.18 These consequences are no fault of the utility, However, the potential to move toward increased local the government, or the consumers. Faced with the need borrowing should not be dismissed, and this is a further to manage the exchange rate risk, a choice must be made reason for EVN and government to work to increase the between transferring the cost to consumers for free or to the opportunities for local longer-term borrowing. government or capital markets in exchange of an insurance The government could help EVN avoid this risk by bearing premium. the risk itself, for a fee. There are precedents for this sort of Another way of managing this risk would be to establish arrangement elsewhere in the world. For example, in the forward currency markets in Vietnam in which EVN could 1970s, the U.K. government encouraged its water industry hedge its risks. Such markets operate in many developing to borrow from foreign governments and bore the exchange countries but not in Vietnam at present. Such markets are risk on the resultant loans for a fee. Similarly, in the past generally promoted by banks but they can only operate the Central Bank of the Philippines has established swap effectively in a market economy where there are businesses facilities whereby it absorbed the exchange-rate risk that which wish to manage currency risks in both directions. EVN UJQWNFJCXGDGGPDQTPGD[DCPMUCPFGPFWUGTPQPƂPCPEKCN wants to guard against the possibility of depreciation of corporations. the Vietnamese dong. The likely counterparty could be, for example, an exporter with costs denominated in Vietnamese 18 The tariff in Kenya includes a variable Foreign Exchange Rate Fluctuation Adjustment (FERFA) to cover exchange rate losses suffered by the utility. Between November 2008 and March 2013, the FERFA averaged 5.7 percent of the aggregate tariff for domestic users, assuming average consumption. It peaked at 12.5 percent in October and November 2011 and again at 11 percent in late 2012. ANNEX II: RISK MANAGEMENT OPTIONS 59 dong that wished to ensure that it earned adequate revenue to cover its costs. With the value of the Vietnamese dong currently managed by the Vietnam government, the scope for developing a market is likely to be limited in the short term. However, banks should be encouraged to take opportunities in this area forward. Development partners may be able to offer technical assistance to support this process. TABLE II.2: ALTERNATIVE STRATEGIES FOR MANAGING FOREX RISKS RISK BORNE BY ADVANTAGES DISADVANTAGES GOVERNMENT • Stability in power prices • Possible cost to taxpayer ON-LENDS ON LOCAL CURRENCY • Government manages exchange rate • $GPGƂEKCTKGUCTGRQYGTEQPUWOGTUYJQECP CHARGING A • Government may be forced to accept risk afford to pay PREMIUM anyway if EVN defaults on loans • Government already facing exchange risk on other foreign borrowings EVN AS OF TODAY • Forces EVN to evaluate tradeoff be- • Unpredictable cost over which EVN has little tween local and foreign borrowing control in current markets • .GCFUVQƃWEVWCVKQPUKPƂPCPEKCNRGTHQTOCPEG FULL PASS- • 2NCEGUEQUVQPDGPGƂEKCT[QHRQYGT • May lead to price hikes whose political and THROUGH TO sector activities social acceptability is challenging CONSUMERS • /GEJCPKUOHQTEQUVTGƃGEVKXGVCTKHH • Follows the spirit of Vietnamese regu- lation HEDGING IN • Ideal solution when market conditions • Proper market conditions should be in place. CAPITAL MARKETS permit Even then, markets will enable hedging of only • Good experience elsewhere in the short-term risks world (for example, South Africa) • Counterparties needed DEMAND RISK 6JGƂPCNOCLQTCTGCQHTKUMKUFGOCPFTKUMVJCVKUVJGTKUM that the demand for electricity will grow either more quickly or more slowly than expected. EVN has to respond to changes in demand by adjusting its investment program— increasing investment if demand grows faster than expected, and reducing investment if demand grows more slowly. In practice, EVN does make adjustments of this sort. However, in principle, EVN is bound to the investment program set out in the Power Master Plan (PMP). The PMP is a sound document with a well-thought-out program of investments. *QYGXGTVJGRNCPKUOQFKƂGFKPHTGSWGPVN[YKVJCHWNN update every ten years and only one revision between full updates. The separation of the planning of the system from the management of the sector is unsound and it would be preferable for the plan to be revised and updated regularly, every one to two years, by key sector players such as MOIT and EVNNPT. Otherwise, there is a risk of the plan becoming increasingly separated from reality as demand grows faster or slower than expected. 60 A FINANCIAL RECOVERY PLAN FOR EVN © istock photo ANNEX II: RISK MANAGEMENT OPTIONS 61 © istock photo 62 A FINANCIAL RECOVERY PLAN FOR EVN ANNEX III: OPERATIONAL PERFORMANCE OF PCS Operational performance is very similar across PCs. Even TABLE III.1: OPERATIONAL PERFORMANCE OF PCS, if the PCs seem to be overstaffed, the OPEX/MWh ratio 2012 is similar and low in all the companies. It is particularly low in the case of the EVNSPC. The OPEX observed in EVNHNPC Vietnamese PCs is lower than would be expected for VALUE WVKNKVKGUQHVJGKTEJCTCEVGTKUVKEUVJKUOC[DGECWUGFKP INDICATOR IN 2012 BENCHMARK COMMENT part by the country having low costs but also due to the ASSETS TO 43.13 54.33–416.37 Below the minimum ƂPCPEKCNFKHƂEWNVKGURTGXGPVKPIVJGQRVKOCNCNNQECVKQPQH ENERGY RATIO of the benchmark resources for maintenance. According to the experience of (US$/MWH) range. Low investments in assets the consultant in Vietnam, the maintenance actions carried in relation to the out are considered adequate in most of the cases, but energy wheeled. the availability of spare parts is limited, mainly due to the AGGREGATE 7.08 4.99–12.52 Within the age of most assets, thus preventing timely repairs and/or TECHNICAL, benchmark. Good replacement of equipment. COMMERCIAL, loss levels. AND The value of assets in the PCs has increased sharply due to COLLECTION the asset revaluation carried out between 2011 and 2012. LOSS (%) The EVNCPC had the highest assets-to-energy ratio in COLLECTION 100.1420 98.5–99.5 – 2008 (and it still does), with US$69.75 per MWh compared EFFICIENCY 19 (%) to US$41.29 per MWh in the EVNNPC, the second in the ranking. The stability of the ratio over time is probably due SAIFI (#) 16.50 0.69–15 In the worst- performing tier for to the fact that the starting level was already high (meaning the benchmark. that either the network was mainly formed by new assets Room for or that there was enough extra capacity to absorb part of improvement, target SAIFI = 10 or lower. the extra demand over the years). In addition to this, the EVNCPC had the lowest revaluation of assets in 2011–12, a SAIDI 9,797 17.08– 432 Very far from the 22 percent increase, and the EVNNPC the second highest, (MINUTES) benchmark levels. Worst performance, with 25.7 percent. followed by the EVNNPC. Large room Regarding the PCs’ operations, their interruption for improvement. statistics—the SAIDI and SAIFI—put them in the upper tier Need to distinguish (worst performing) of PCs when compared to their peer sources of interruptions. ITQWR0QPGVJGNGUUKVKUFKHƂEWNVVQCUUGUUYJGVJGTVJGUG interruptions are actually caused by underperformance of OPEX (US$)/ 4.67 4.99–29.21 Low OPEX, below the MWH benchmark minimum the PCs or due to shortfalls in the system. The SAIDI and level. Linked to SAIFI are high and there is not enough historic data to low labor costs but analyze the evolution over the years except for 2011–12 possibly also low budgets available within which the frequency and duration of customer for spare parts, interruptions slightly worsened. The SAIFI in the EVNNPC is maintenance, and more than double that of the other four PCs. quality programs. 5WOOCTK\KPIVJGƂPFKPIUQP2%UoQRGTCVKQPUVJG CUSTOMERS / 252 557–2,868 Out of the EMPLOYEE benchmark range. EVNHCMPC is overall the best-performing utility. The fact Very low ratio value. that it serves an eminently urban area contributes to this fact. Linked to potential Moreover, all the PCs have very similar ratios of customers/ QXGTUVCHƂPIVJGNQY automation level, and employee and OPEX/MWh, which is particularly low in the low outsourcing rate. case of the EVNSPC. 19 Also called the rate of riseVJKUKUFGƂPGFCUVJGXCNWGQHKPXQKEGUQDVCKPGFFKXKFGFD[VJGXCNWGQHDKNNUKUUWGF 20 6JKUKUJKIJGTVJCPRGTEGPVDGECWUGQHVJGTGEQXGT[QHFWGCOQWPVUHTQOVJGRTGXKQWU[GCT RGTEGPVEQNNGEVKQPGHƂEKGPE[KP  A N N E X I I I : O P E R AT I O N A L P E R F O R M A N C E O F P C S 63 TABLE III.1: OPERATIONAL PERFORMANCE OF PCS, 2012 EVNHCMPC EVNNPC INDICATOR VALUE BENCHMARK COMMENT INDICATOR 2012 BENCHMARK COMMENT IN VALUE 2012 ASSETS TO 51.67 54.33–416.37 Below the minimum ENERGY RATIO of the benchmark ASSETS TO 35.98 54.33–416.37 Below the (US$/MWH) range. Low ENERGY minimum of the investments in assets RATIO (US$/ benchmark range. in relation to the MWH) Low investments in energy wheeled. assets in relation to the energy AGGREGATE 8.04 4.99–12.52 Within the wheeled. TECHNICAL, benchmark. Good COMMERCIAL, loss levels but room AGGREGATE 5.56 4.99–12.52 Within the AND for improvement. TECHNICAL, benchmark. Very COLLECTION COMMERCIAL, good loss levels. LOSS (%) AND COLLECTION COLLECTION 99.85 98.5–99.5 Excellent LOSS (%) EFFICIENCY (%) performance. COLLECTION 99.7 98.5–99.5 Excellent SAIFI (#) 53.00 0.69–15 Out of the EFFICIENCY performance. benchmark, poor (%) performance. Worst performance level SAIFI (#) 22.31 0.69–15 Out of the in SAIFI among the benchmark, poor Vietnamese PCs. performance. Large room for Large room for improvement, target improvement, SAIFI = 10 or lower. target SAIFI = 10 or lower. SAIDI 9,005 17.08–432 Very far from the (MINUTES) benchmark levels. SAIDI 2,988 17.08–432 Very far from the Large room for (MINUTES) benchmark levels. improvement. Large room for Second worst improvement. performance, after Need to EVNHNPC. Need to distinguish sources distinguish sources of of interruptions. interruptions. OPEX (US$)/ 3.89 4.99–29.21 Low OPEX, below OPEX (US$)/ 4.39 4.99–29.21 Low OPEX, below the MWH the benchmark MWH benchmark minimum minimum level. level. Linked to Linked to low low labor costs but labor costs but possibly also low possibly also low budgets available budgets available for spare parts, for spare parts, maintenance, and maintenance, quality programs. quality programs, etc. CUSTOMERS/ 258 557–2,868 Out of the EMPLOYEE benchmark range. CUSTOMERS/ 260 557–2,868 Out of the Very low ratio value. EMPLOYEE benchmark range. Linked to potential Very low ratio QXGTUVCHƂPIVJGNQY value. Linked automation level, and to potential low outsourcing rate. QXGTUVCHƂPIVJG low automation level, and low outsourcing rate. 64 A FINANCIAL RECOVERY PLAN FOR EVN TABLE III.1: OPERATIONAL PERFORMANCE OF PCS, 2012 EVNCPC EVNSPC INDICATOR VALUE BENCHMARK COMMENT INDICATOR VALUE BENCHMARK COMMENT IN 2012 IN 2012 ASSETS TO 64.58 54.33–416.37 Close to the ASSETS TO 28.06 54.33–416.37 Below the minimum ENERGY RATIO minimum of the ENERGY RATIO of the benchmark (US$/MWH) benchmark range. (US$/MWH) range. Low Low investments in investments in assets assets in relation in relation to the to the energy energy wheeled. wheeled. AGGREGATE 5.64 4.99–12.52 Within the AGGREGATE 7.10 4.99–12.52 Within the TECHNICAL, benchmark. Very TECHNICAL, benchmark. COMMERCIAL, good loss levels. COMMERCIAL, Good loss levels AND AND but room for COLLECTION COLLECTION improvement. LOSS (%) LOSS (%) COLLECTION 100.1521 98.5–99.5 On par with best COLLECTION 99.15 98.5–99.5 Good EFFICIENCY performers EFFICIENCY (%) performance. (%) SAIFI (#) 21.40 0.69–15 Out of the SAIFI (#) 24.13 0.69–15 Out of the benchmark, poor benchmark, poor performance. performance. Large room for Large room for improvement, improvement, target target SAIFI = 10 SAIFI = 10 or lower. or lower. SAIDI 7,047 17.08–432 Very far from the SAIDI 4,558 17.08–432 Very far from the (MINUTES) benchmark levels. (MINUTES) benchmark levels. Large room for Large room for improvement. improvement. Need to distinguish Need to sources of distinguish sources interruptions. of interruptions. OPEX (US$)/ 2.89 4.99–29.21 Low OPEX, below OPEX (US$)/ 4.18 4.99–29.21 Low OPEX, below MWH the benchmark MWH the benchmark minimum level. minimum level. Linked to low labor Linked to low costs but possibly labor costs but also low budgets possibly also low available for spare budgets available parts, maintenance, for spare parts, quality programs, maintenance, and etc. quality programs. CUSTOMERS/ 289 557–2,868 Out of the CUSTOMERS/ 250 557–2,868 Out of the EMPLOYEE benchmark range. EMPLOYEE benchmark range. Very low ratio value. Very low ratio Linked to potential value. Linked QXGTUVCHƂPIVJGNQY to potential automation level, QXGTUVCHƂPIVJG and low outsourcing low automation rate. level and low outsourcing rate. 21 *KIJGTVJCPRGTEGPVDGECWUGQHVJGTGEQXGT[QHFWGCOQWPVUHTQOVJGRTGXKQWU[GCT EQNNGEVKQPGHƂEKGPE[QHRGTEGPVKP  A N N E X I I I : O P E R AT I O N A L P E R F O R M A N C E O F P C S 65 © EVN Electricity of Vietnam 66 A FINANCIAL RECOVERY PLAN FOR EVN ANNEX IV: SOCIAL AND FISCAL ASSESSMENT OF COST-REFLECTIVE TARIFFS #EEQTFKPIVQVJGƂPCPEKCNRTQLGEVKQPURTGRCTGFHQTVJKU TGRQTVVQOCMG'80ƂPCPEKCNN[UWUVCKPCDNGCXGTCIGTGVCKN tariffs would need to rise by a cumulative 40 percent by 2018 and thereafter rise at a rate slightly lower than the forecast KPƃCVKQPTCVG FIGURE IV.1: COST-REFLECTIVE TARIFFS The methodology used for the analysis involved the follow- • Analysis of the current pricing for the household ing: category increasing block tariff (IBT) and recalculation of the share of electricity expenses in total household ex- • A focus on consumer affordability rather than on penses. Alternative pricing options are analyzed as well. access to subsidies (because access to electricity in Viet- nam is high, coverage is not an issue). • Recalculation of the current tariffs for SMB and KPFWUVTKGUCPFVJGGHHGEVUQPƂPCNIQQFURTKEGUCPFQP r +FGPVKƂECVKQPQHVJGEWTTGPVNGXGNQHCHHQTFCDKNKV[QH KPƃCVKQP power prices for households. r +FGPVKƂECVKQPQHVJGPGGFHQTOKVKICVKQPOGCUWTGU r +FGPVKƂECVKQPQHVJGRQVGPVKCNGHHGEVUQHCRTKEGJKMG CPFKFGPVKƂECVKQPQHCNVGTPCVKXGU in the different small and medium business (SMB) and industrial sectors, focusing on the export-oriented indus- The latest tariffs (excluding VAT) for households are shown VTKGUKPYJKEJVJGKPETGCUGVQTGVCKNRTKEGUKUOQTGFKHƂEWNV in the following table. The column on the right shows the QTKORQUUKDNGVQDGCT6JGCIITGICVGGHHGEVQPKPƃCVKQP domestic tariffs, which would be in place in 2017 based on is analyzed as well. VJGKPETGCUGUTGSWKTGFVQCEJKGXGƂPCPEKCNUWUVCKPCDKNKV[ r +FGPVKƂECVKQPQHCHHQTFCDKNKV[VJTGUJQNFUDCUGFQP existing literature and international experience. A N N E X I V : S O C I A L A N D F I S C A L A S S E S S M E N T O F C O S T- R E F L E C T I V E T A R I F F S 67 TABLE IV.1: HOUSEHOLD CONSUMPTION BLOCKS DATE 1/3/2010 1/3/2011 20/12/2011 1/7/2012 21/12/2012 31/7/2013 2017 0–50 KWH 600 993 993 993 993 993 (LIFELINE) 1,589 0–100 KWH 1,004 1,242 1,242 1,284 1,350 1,418 2,269 101–150 KWH 1,214 1,304 1,369 1,457 1,545 1,622 2,595 151–200 KWH 1,594 1,651 1,734 1,843 1,947 2,044 3,270 201–300 KWH 1,722 1,788 1,877 1,997 2,105 2,210 3,536 301–400 KWH 1,844 1,912 2,008 2,137 2,249 2,361 3,777 401+ KWH 1,890 1,962 2,060 2,192 2,307 2,420 3,872 The evolution of domestic tariffs in Vietnam in recent years abrupt tariff adjustment is accomplished in 2017, it can be shows that subsidies to the poorest category of consumers seen that electricity expenditure remains around 2 to 4 have been increased since lifeline tariffs have remained at percent of household expenditure. International experience the same level since 2011. suggests that 10 percent, or even 5 percent, is a reasonable threshold for electricity expenditure as a percentage of Table IV.1 shows the share of electricity expenditure in overall household expenditure. This tariff increase would total expenditure after the tariff increase. The consultant not therefore jeopardize the social welfare of the poorest analyzed this share assuming that (a) the total expenditure domestic consumers. of households remains constant and (b) total household expenditure increases in line with the increase in GDP/ At present, the household tariff structure involves a sharply capita. +$6)GPGTCNN[CPGHƂEKGPVVCTKHH UWDUKF[HTGG UVTWEVWTGHQT households involves setting a decreasing block tariff or The purpose of this analysis is to assess whether the tariff a linear tariff rather than an IBT. The consultant therefore KPETGCUGPGGFGFVQGPUWTGƂPCPEKCNUWUVCKPCDKNKV[QHVJG FGƂPGFCPCNVGTPCVKXGRTKEKPIUEJGOGWPFGTYJKEJCNNTGVCKN Vietnamese power sector will trigger affordability issues VCTKHHUEQPXGTIGVQVJGJQWUGJQNFPCVKQPCNEQUVTGƃGEVGF among the most vulnerable consumers. Once the most CXGTCIGVCTKHHQH80&RGTM9J VJCVKUCƃCVQPG part tariff for all households). This tariff change would lead TABLE IV.2: SHARE OF ELECTRCIITY IN TOTAL to the following share of electricity expenditure in total HOUSEHOLD EXPENDITURES (%) expenditure. WITH FORECAST WITHOUT INCREASE IN FORECAST TOTAL INCREASE IN TABLE IV.3: SHARE OF ELECTRICITY COST EXPENDITURES TOTAL IN TOTAL HOUSEHOLD EXPENDITURES (WITH EXPENDITURES REMOVAL OF IBT) 2012 2017 2020 2017 2020 2017 2020 POOREST 1.7 1.44 1.43 2.67 3.87 POOREST 10% 2.42 2.41 10% DECILE 2 3.35 3.73 DECILE 2 1.9 2.84 3.17 5.29 8.59 DECILE 3 3.50 3.91 DECILE 3 2.0 2.97 3.41 5.54 9.23 DECILE 4 3.44 3.83 DECILE 4 2.0 2.96 3.39 5.52 9.17 DECILE 5 3.61 4.02 DECILE 5 2.1 3.18 3.78 5.93 10.23 DECILE 6 3.67 4.10 DECILE 6 2.2 3.33 3.98 6.21 10.77 DECILE 7 3.69 4.12 DECILE 7 2.2 3.53 4.23 6.58 11.44 DECILE 8 3.41 3.81 DECILE 8 2.1 3.30 3.95 6.15 10.70 DECILE 9 3.60 4.02 DECILE 9 2.2 3.79 3.44 7.06 9.30 RICHEST 10% 3.09 3.45 RICHEST 2.0 2.73 4.10 5.09 11.10 10% 68 A FINANCIAL RECOVERY PLAN FOR EVN ANNEX IV: SOCIAL AND FISCAL ASSESSMENT OF COST-REFLECTIVE TARIFFS Without the existing cash subsidy (MOLISA), the share of proposed, the household electricity spending increases the electricity expenditure in total expenditure of poorest slightly as a percentage of total expenditure but remains households increases to 2.4 percent in 2017. Even though well within below the limits of acceptability. However, the this approach would phase out current subsidies, as shown following are the effects: in the previous exhibit, the share of electricity expenditure r 6JGKORCEVQPKPƃCVKQPKUPQVPGINKIKDNGYKVJCP for the poorest segment of society would remain well within increase of about 1.2 percent in 2015 and 2016 above acceptable limits. Removal of the subsidized tariff for the DCUGNKPGKPƃCVKQP poor increases the share of electricity expenditure but still meets acceptable thresholds. • The removal of the subsidies that are currently in place for the domestic category should be carefully Based on existing studies, we found that the proposed analyzed. The analysis showed that no real issue of cumulative tariff increase for industrial consumers would not CHHQTFCDKNKV[KUKFGPVKƂGFGXGPHQTVJGRQQTGUVUGIOGPV JCXGCJWIGGHHGEVQPCP[URGEKƂEGZRQTVQTKGPVGFUGEVQT QHVJG8KGVPCOGUGUQEKGV[JQYGXGTKPOCP[ECUGU The two industries most affected by the price hike are not perception of unaffordability is even more important subject to international competition (water processing and than affordability as such. This could be partially gas) and should be able to pass though the increase to their mitigated by a good communication strategy by the PCs ƂPCNRTQFWEVU(QTVJGGZRQTVQTKGPVGFUGEVQTUVJGEQUV CPFIQXGTPOGPV+PCP[ECUGKVKUFKHƂEWNVVQCFFTGUU impact is less than 3 percent of the price, with the exception this issue properly and it may lead to damage to EVN’s QHVJGVGZVKNGUUGEVQT RGTEGPV +VKUXGT[FKHƂEWNVVQ image and increase in non-technical losses. assess whether these price increases are likely to damage the competitiveness of the various sectors as each sector • The effect which this price increase will have on is unique. A better approach is to address how the cost export-oriented industries and the potential removal KORCEVUECPDGOKVKICVGFVJKUCNUQTGSWKTGUCECUGD[ECUG of subsidies within these industries might require the analysis, but some common issues can be managed from implementation of certain mitigation measures. the perspectives of the power sector policy. For instance, We believe that deepening two existing policies will KVKUJKIJN[NKMGN[VJCVVJGTGKURQVGPVKCNHQTGPGTI[GHƂEKGPE[ GCUGVJGUQEKCNCEEGRVCDKNKV[QHEQUVTGƃGEVGFVCTKHH measures in Vietnamese industries. • Increase the MOLISA cash transfer temporarily in It is worth mentioning that business tariffs currently subsidize the case of the poorest segments of the population. KPFWUVTKCNTCVGUKPECUGVJGUGUWDUKFKGUCTGTGOQXGFtQPVQR r +PETGCUGCPFURGGFWRGPGTI[GHƂEKGPE[UWDUKFKGU of the price increase—the effect on some energy-intensive in the case of export-driven industries. consumers (textiles, and leather and leather products) that are within tradable goods industries should be carefully Best practices in subsidy provision are already in place in explored. Although we believe the case for subsidies is Vietnam, such as the IBT and conditional cash transfers NKOKVGFYGJCXGKFGPVKƂGFCPFTGXKGYGFVJGOCKPOKVKICVKQP based on the MOLISA list. We suggest a higher coverage instruments. The instruments are tabulated below. of the MOLISA subsidy to channel all subsidies through TABLE IV.4: OPTIONS FOR MITIGATING THE IMPACT OF TARIFF ADJUSTMENTS ON AFFORDABILITY IBT WITH LIFELINE SUBSIDIES IBT WITH CONDITIONAL SET BY FLOATING CASH ENERGY TAX REBATES CONSUMPTION LIFELINE TRANSFERS EFFICIENCY GLIDE PATH FOR EVALUATION CRITERIA LEVEL SUBSIDIES (MOLISA-LIKE) SUBSIDIES PRICING INDUSTRIES COVERAGE ūūū ūūū ūūū ūū ūūū ūūū TARGETING ūū ūūū ūūū ūū ū ūūū PREDICTABILITY ūū ū ūūū ū ū ūū PRICING DISTORTION ū ūū ūūū ūū ū ūūū ADMINISTRATION COST ūūū ūū ū ūūū ūū ūū In summary, the overall impact of the cumulative price a conditional cash transfer and remove the current IBT. In increase until 2017 does not jeopardize the affordability of this scenario, the MOLISA poor would receive around VND electricity for households or the productive sectors. The 68,000 per month—more than twice as of today and the simulations show that under the tariff increase scenarios annual cost of the policy would be VND 1.35 trillion (2017). CHAPTER TITLE 69 5WDUKFKGUECPRNCEGCJGCX[DWTFGPQPIQXGTPOGPVƂPCPEGU weakening the potential for economies to grow and reducing the potential to invest in social equity. However, the tariff increase proposed by the consultant will lead to higher VAT perceived by the government as well as an increase in VJGRTQƂVVCZRCKFD['80#TQWIJGUVKOCVKQPQHVJGQXGTCNN VAT collection from electricity sales to households can be around VND 15 trillion. On top of this, according to the ƂPCPEKCNRTQLGEVKQPUKPRTQƂVVCZGUYQWNFTGCEJCNOQUV VND 20 trillion and increase over time. In conclusion, the potential impact from extending the MOLISA in Vietnam would be negligible in comparison with the impact of setting EQUVTGƃGEVKXGVCTKHHUKPVJGEQWPVT[ 6JGUGEQPFKUUWGYJKEJJCUDGGPKFGPVKƂGFYKVJKPVJKU analysis is the impact of this tariff increase on energy- KPVGPUKXGKPFWUVTKGU'PGTI[GHƂEKGPE[UWDUKFKGUOC[UOQQVJ the transition toward this tariff increase while improving the sustainability in the use of energy sources in industries. So far, industrial energy use has increased almost at the same rate as GDP. An increase or steady path of the energy intensity indicator (GDP/MWh) means that presently, the KORCEVQHGPGTI[GHƂEKGPE[OGCUWTGUKPVJGKPFWUVT[JCU been nonexistent or negligible. Recent studies indicate a potential energy reduction of up to 50 percent in the cement industry, 35 percent in the ceramic industry, 30 percent in the textile or apparel industry, and 20 percent in the steel and food processing industries. Within VJGPGZVƂXG[GCTUVJG8KGVPCOGUGIQXGTPOGPVCKOUVQ lower overall industrial energy consumption by 5–8 percent through technological upgrading. 6JGOCKPVQQNVJGIQXGTPOGPVJCUHQTKPƃWGPEKPIVJG KORNGOGPVCVKQPQHGPGTI[GHƂEKGPE[KPKPFWUVTKGUKUKPEGPVKXG based regulation. These incentives in a relatively short period could offset the price increase to some extent and avoid negative impacts, especially in export-oriented business. Moreover, as previously mentioned, there seems VQDGƂUECNURCEGVQƂPCPEGGPGTI[GHƂEKGPE[KPXGUVOGPVU in the industrial sector. The question is whether is better to go on subsidizing the electricity cost to improve competitiveness, which is short-term policy, or subsidize investments to improve competitiveness on a sustainable basis. © istock photo 70 A FINANCIAL RECOVERY PLAN FOR EVN ANNEX V: MARKET FEEDBACK This annex summarizes the feedback received from Myanmar in particular was referenced as a major source of interviews with existing and potential investors, advisors, opportunity. ƂPCPEKGTUCPFOCTMGVRCTVKEKRCPVUKPVJGRTKXCVGUGEVQT +PVGTXKGYUYGTGEQPFWEVGFKPEQPƂFGPEG6JGRQKPVUPQVGF in the annex were raised by more than one interviewee and CONDITIONS FOR PROJECTS are considered representative of market opinion at the time 6JGFGVCKNGFURGEKƂEEQPFKVKQPUHQTRQYGTRTQLGEVUOC[ of the interviews. vary from project to project. However, a number of generic The market climate for private power investment varies over comments were made in interviews: time and levels of investor interest can rise and fall quickly. • Projects will require government guarantees that However, in general terms, there is substantive interest funds can be fully remitted from projects. PM’s Decision in power sector investment in Vietnam. There are several 72, which established a foreign exchange cap of 30 investors who are interested in projects where they can have RGTEGPVKUCPKUUWGJQYGXGTHQTXGT[NCTIGUVTCVGIKE management control, either through direct investment in projects, there is room for negotiations. an IPP or through the purchase of assets from EVN. There • Projects require proper legal title to the land on is lesser interest in portfolio investment, that is, in acquiring which they are constructed. minority stakes in EVN companies without management control. • Projects require guarantees of fuel supply and availability. Comments fell into four categories: r 6JGVTCPURQTVQHEQCNYKNNCNUQJCXGVQDGƂPCPEGF • The power market • A foreign lender cannot hold a mortgage over lands • Conditions for power projects or a factory in Vietnam. In the past, companies have a • Capital markets used a security agent structure to get around this, but • The performance of the MOIT the State Bank is saying this will not work. It is at best ambiguous. Vietnam is not a member of ICSID. THE POWER MARKET • In the case of existing projects, governance is a big Investors appreciate that market reform is in progress. issue. Many people involved in the process commented However, the ERAV is not perceived to be an independent that it is not even clear that EVN is paying what is written regulator at this stage and there is consensus that tariffs in the SPPA to the power plants, and currently FSAs are are set by government rather than through independent not signed for each power plant. regulation. In addition, investors are convinced that retail tariffs are too low to cover costs and hence there are doubts It is possible that investors can be attracted to invest without QXGTVJGYKNNKPIPGUUQHVJGCWVJQTKVKGUVQQHHGTUWHƂEKGPVN[ meeting these conditions, but this will certainly lead to attractive tariffs in PPAs. JKIJGTRTKEGUKP22#UVQTGƃGEVVJGCUUQEKCVGFTKUMU With EVN controlling so much of the generation market, investors are concerned that the market may be rigged CAPITAL MARKETS against them. The NLDC’s independence is an important The general perception of investors is that Vietnam’s capital way of ensuring fair load dispatch, thereby encouraging markets are poorly developed. The stock exchange is investment. available and some power projects are quoted on it and International investors take a long-term perspective and do traded with fair liquidity, but investors feel that the climate not expect immediate success in negotiations. However, for new IPOs is not favorable. IPOs were very easy in the past they do not look only at Vietnam. They are generally VJCVKUOQTGVJCPƂXG[GCTUCIQ OCP[EQORCPKGUYGPVVQ pursuing a number of opportunities in the region and market and raised a lot of money. Now, however, the market their appetite for investment could be diverted elsewhere. A N N E X V: M A R K E T F E E D B A C K 71 is illiquid and not willing to pay as much as in the past. Some experts state that the government had decided to list some SOEs (or part of them, because of a PM decision about focusing on core business) and the process was deferred to avoid a failure. From an international standpoint, the country is not investment grade as it was downgraded. The IQXGTPOGPVKUQPN[KUUWKPIDQPFUKPNKOKVGFSWCPVKVKGUVJGTG is no big international appetite for a Vietnamese capital market at the moment. Only foreign banks with bank licenses can lend in local currency but maturity is short (consumer lending). Only large state banks lend for infrastructure projects. Sometimes these banks are forced to lend to infrastructure projects. Project ƂPCPEGKP8KGVPCOKUPQVGZCEVN[YJCVKVKUUWRRQUGFVQDG in most cases, it requires collateral from investors. According to some experts, bond issuance backed by the government could be the simpler and faster way to move ahead. Regarding equity, for not very large projects, local investors and regional investment funds and sovereign funds such CAFIC (China) may be available. For larger projects, only industrial foreign companies have the ability and the willingness to participate. PERFORMANCE OF THE MOIT Investors believe the MOIT is capable of negotiating IPPs. However, they consider that there is considerable scope for speeding up the approval process (that is, the KPXGUVOGPVEGTVKƂECVGKUUWRRQUGFVQVCMGFC[UDWVVQQM UGXGPOQPVJUKPQPGURGEKƂEECUG 6JGTGCTGVQQHGYUVCHH dealing with IPPs and, as a result, there are long intervals between meetings with potential investors. The process could be speeded up if the MOIT adopted standard contract FQEWOGPVCVKQPTCVJGTVJCPPGIQVKCVKPIGCEJ+22HTQOƂTUV principles. Another criticism of the MOIT is that it seeks to progress projects in every region rather than going with those projects that are most ready to move. Also, they change staff too often. High-level authorities push for the project to move ahead but the mid-level bureaucracy delays because of the details. However, according to some people involved in negotiations, the main reason for these delays is that there is no incentive for mid-level managers to sign off on projects (and many signatures are needed) and they face a lot of risks (being accused of corruption). Other developers have a different view: they state that the context of negotiation of old BOT projects was totally different in the past as BOT was NKPMGFVQVJGWUGQHICUƃCTKPIVJGRTQDNGOUYGTGOQTGFWG to the ignorance of the government about BOTs. But even in VJQUGECUGUKVVQQMHQWT[GCTUHQTCRTQLGEVCPFRQNKVKECNYKNN is critical. © istock photo 72 A FINANCIAL RECOVERY PLAN FOR EVN ANNEX VI: SUMMARIZED STAKEHOLDERS’ COMMENTS This annex summarizes comments made by stakeholders at a this should have led to a review of the chairman’s position. study review workshop on October 21, 2014. There were concerns over results in each part of the Genco 3 found the presentation in alignment with its industry—generation, transmission, and distribution—as thinking. The key issue is to make Genco 3 ready for CNNPGGFVQDGUWUVCKPCDNG+VKUPGEGUUCT[VQCUUGUUƂPCPEKCN equitization, which requires increases in tariffs (perhaps a indicators for each component. They wanted an opinion 5 percent increase every six months). A communications on whether margins are high enough in distribution and strategy is needed to address the concerns of the transmission. government and people over increases in power tariff. The Gencos are heavily dependent on hydrology and coal. Price following aspects of Genco 3’s current situation were raised: adjustments are needed so that power prices respond to • Genco 3 needs US$5 billion for investment. fuel price changes. r 9KVJCRTQƂVTCVGQHRGTEGPV)GPEQFQGUPQV JICA emphasized the need to resolve the asset/liability IGPGTCVGGPQWIJRTQƂVVQKPXGUV mismatch. Development partners cannot take currency risk by offering local currency loans so there is a need to develop • The balance sheet shows 82 percent debt and 18 the local hedging market. percent equity. EVN will import coal, so power prices need to take into Projects cannot proceed without EVN and government CEEQWPVEQCNRTKEGƃWEVWCVKQPU guarantees. Investors will want to earn a return on their investment that exceeds what they can earn in a bank AFD stated that 2012 was a year with better results and account. 2013 also seemed to have reasonable accounts. Tariffs have not yet gone up in 2014. How urgent is the need The MOF noted that there were various recommendations for tariff increases and would it be possible to develop a for the ministry and some for other agencies and wanted to communications strategy before the tariff increases? see recommendations grouped by agency. ADB commented that the results are not a surprise and 6JGQXGTCNNGPXKTQPOGPVKP8KGVPCOKUFKHƂEWNVCPFKVKU the model is useful. Although EVN’s hands are tied and recognized that 80 percent of EVN debt is denominated in more support is needed from the government, they are not foreign currencies. However, it would not be fair to transfer sure about the government assuming foreign exchange risks to the government. Loans are passed on to EVN on risk. A tariff methodology is needed. ADB remains willing the same terms and currency as they are received. The MOF to support but cannot fund, for example, subcritical coal is also unwilling to consider debt restructuring for EVN. technology. However, they are willing to support operational Nevertheless, restructuring is currently taking place for improvements. EQORCPKGUKPƂPCPEKCNFKHƂEWNV[YJKEJFQGUPQVKPENWFG'80 . 6JG/1(CEEGRVUVJGFKHƂEWNV[QHTCKUKPINQPIVGTODQPFU QPVJGNQECNOCTMGVYJGTGVJGNQPIGUVVGTOKUƂXG[GCTU Regulations are still being drafted to permit longer-term bonds, with the implementation of long-term capital markets RNCPPGFHQT6JG/1(EQOOKVVGFVQOCMGCPQHƂEKCN response. 6JG2/oUQHƂEG wanted to see analysis extended beyond CUVJKUKUPQVUWHƂEKGPVN[NQPIVGTOtKVTGEQOOGPFGF looking forward to 2030 and starting 2013. Queries were raised on whether EVN made losses from 2008 to 2011 as A N N E X V I : S U M M A R I Z E D S TA K E H O L D E R S ’ C O M M E N T S 73 © istock photo 74 A FINANCIAL RECOVERY PLAN FOR EVN ANNEX VII: KEY REGULATIONS TABLE VII.1: KEY REGULATIONS REGULATION MAIN CONTENT PM DECISION 1782/2012 ON THE • Line of business that EVN should retain. RESTRUCTURING PLAN FOR EVN • Business that EVN should divest and timeline. 2012–15 • Restructure corporate governance, focusing on improving internal management regulations; rear- range the organizational structure, the management, and administration; complete rules on personnel issues, accelerate the training of human resources, and strengthen internal controls. PM DECISION 69/2013 ON • It deals with intra-annual adjustment of average retail tariffs. Replaces PM Decision 24/2011. THE MECHANISM TO ADJUST THE AVERAGE • Changes in input parameters (fuel, FX) are monitored every semester. If the adjustment needed is RETAIL PRICE OF ELECTRICITY less than 7%, it is automatic; if between 7 and 10%, it requires MOIT authorization; and if higher than 10%, MOF approval is needed. r5VCDKNK\CVKQPHWPFVQQHHUGVXCTKCVKQPUCETQUU[GCTUKUFGƂPGF PM DECISION 854/2012 ON r+VKPENWFGUFGVCKNGFKPHQTOCVKQPCDQWV%#2':HQTVJGRGTKQFFGDVUGTXKEGRC[OGPVƂPCPEKCNPGGFU APPROVAL OF THE BUSINESS PLAN change in organization, and so on. AND DEVELOPMENT INVESTMENT PLAN FOR 2011–15 FOR THE EVN GROUP MOIT CIRCULAR 41/2011 ON STAN- • Stipulates generation pricing methodologies, procedures for establishment and issuance of gen- DARD GENERATION eration price range for new generation, and procedures for review and approval of PPAs. POWER PURCHASE CONTRACTS r2TKEGQHPGY622GPEQORCUUGUDQVJCƂZGFRTKEGCPFCXCTKCDNGRTKEG(KZGFRTKEGUVCPFUHQTVJG total investment cost of generation (annuity-like calculation) and variable price stands for fuel costs, variable O&M costs, and any other costs incurred by the plant in its day-to-day operations. The level- K\GFƂZGFRTKEGUJCNNDGCFLWUVGFCEEQTFKPIVQXCTKCVKQPQHGZEJCPIGTCVG6JGXCTKCDNGRTKEGQHVJGT- mal generation is adjusted according to the fuel price. r2TKEGHQTJ[FTQKPENWFGUCƂZGFEQORQPGPVCPFCPCFJQEHQTOWNCHQTKPFGZKPIKV MOIT CIRCULAR 12/2014 ON • It includes three main components: RETAIL TARIFFS AND BSTS • AXGTCIGTGVCKNVCTKHHFGƂPKVKQP: Recognized costs in the average retail tariff, including stabilization HWPFUCPFGZRQUVTGXKGYCTGFGƂPGF • &KUVTKDWVKQPVCTKHHECNEWNCVKQP%QUVRNWUYKVJGZRQUVTGXKGYKPENWFKPI rVQVCNCNNQYGF1/EQUVUQHVJGƂXG2%UKP[GCT0 rVQVCNCNNQYGFFGRTGEKCVKQPEQUVUQHVJGƂXG2%UKP[GCT0 • total allowed costs for payments to generators under 30 MW which are embedded in the FKUVTKDWVKQPPGVYQTMUQHVJGƂXG2%UKP[GCT0 ')  rVQVCNTGVWTPCNNQYGF[GCTKP0(KPCPEGEQUVU KPENWFKPIHQTGZNQUUGU KP[GCT0CPFVCZGUKP year N. • Bulk supply tariff: The components and the adjustments of the tariff that EVN Corporate charges VQVJG2%CTGFGƂPGF#PCUUWORVKQPKUVJCVVJGPCVKQPYKFGWPKHQTOTGVCKNVCTKHHKUVQDGOCKPVCKPGF The uniform national residential tariff requires cross-subsidies between PCs which is funded through an adjustment to the BST for each PC. MOIT CIRCULAR 46/2011 ON Stipulates how to calculate the tariff for SMHPs. It is a cost-plus approach, including depreciation al- TARIFF FOR SPHPS lowances and interest payments. No return on equity is considered. Not fully implemented. MOIT CIRCULAR 14/2009 ON Stipulated a cost-plus approach, including the same components as in the case of distribution (Cir- TRANSMISSION TARIFFS cular 12/2014). MOIT CIRCULAR 3/2013 ON Regulates the functioning of the competitive generation market. MARKET RULES A N N E X V I I : K E Y R E G U L AT I O N S 75