It’s clear that meeting Vietnam’s substantial energy demands over the coming years is a tall order even in the best of circumstances. It is hoped that renewable energy sources will play a large part in the country’s energy generation landscape, however, the dominance of large SOEs is blocking the entry of more efficient private operations and slowing down the pace of change.

Looking at recent trends in Vietnam’s energy sector, it seems that these state owned projects, backed by overseas development assistance, provide a costly and sluggish source of electricity.

Such projects can be up to 40% more expensive to build and take 5 years longer to power up than privately-developed plants. With demand surging, these kind of timescales will prove problematic if supply is to keep abreast of demand.

Bumps in the roadmap

Under the Electricity Law 2004 and Prime Minister’s Decision 2005, the Vietnamese government announced that the sector would move to a competitive generation market (with EVN as the single buyer) from 2005 to 2014, a fully competitive wholesale market from 2014 to 2022 and finally a competitive retail market from 2022 onwards. Unfortunately, the liberalisation process has been slow.

Vietnam’s power sector is currently dominated by Electricity Vietnam (EVN), an integrated state owned monopoly that covers all elements from generation, to distribution, to retail. Herein lies the problem.

Not only does EVN routinely miss its main objective of ensuring a stable electricity supply, but it also suffers significant annual financial losses in the hundreds of millions of dollars. In response, EVN claims that the average pricing of electricity is too low. In fact, the power giant is experiencing a number of issues involving management inefficiencies, delays in upgrading transmission and distribution systems and an inability to meet national demand without relying on significant imports.

Financially strong foreign investors have the opportunity to invest in EVN-funded distribution and transmission projects or BOT power generation projects, but that doesn’t go nearly far enough in introducing competition to the wholesale market. Crucially, while the government wishes to encourage foreign investment with BOT and PPP, procedures are often too complicated and information not easily available. Foreign firms considering Vietnam as a stepping stone into the Southeast Asian market, or as the next piece in an international energy portfolio, can find themselves facing contradictory information from diverse sources.

The public is well aware of the waste and inefficiencies that come with state-owned power projects. Poor investment in infrastructure and inadequate management have helped foster a negative perception of the electricity sector’s traditional monopoly structure.

The idea behind the country’s reforms therefore, is to expose EVN to competition by encouraging private and foreign investment, nudging the group to improve its financial and operational performance. The ultimate goal being to provide affordable and stably-priced electricity.

A distorted market

The ‘iron fist’ of EVN in Vietnam’s energy sector presents a formidable challenge to smaller private players. The barrier to entry is high, with the group easily accessing foreign capital, as well as land and business premises. Though current law does not discriminate against any entities leasing land, it is estimated that SOEs hold 70% of production and business sites.

Private firms in Vietnam struggle to join these markets as they lack the favourable business conditions of the SOEs and lack the scale or resources to fight it out. Energy is one of many SOE-dominated fields that lack competitiveness, and recently-issued template PPA drafts for renewable energy projects, dogged by claims of being ‘unbankable’, will do little to change that.

Not only does this situation distort the market and pose problems for reform, it does it at a premium. At the end of the day it is taxpayers who pay the price for the outsized influence of SOEs like EVN. If the continued dominance of SOEs suffocates the private sector and stifles innovative technology the highest price could be an environmental one. As is clear, weening Vietnam off coal is not an easy task and the country desperately needs a private push.

Three decades of Doi Moi

The last thirty years have seen Vietnam undertake pro-growth initiatives after a decade of post-war central planning. The liberalisation of markets, shrinking trade barriers and the promotion of private enterprise in specific sectors jumpstarted the economy and unlocked the potential of profit. The huge project has progressed gradually, with the privatisation of SOEs an example of later-stage reform.

The process inevitably puts financial and management practices under scrutiny, and in turn promotes economic growth by increasing accountability and incentivising efficiency. For success, it is important that Vietnam’s privatisation endeavours are partnered with internationally-recognised standards of transparency.

A higher level of transparency will help foreign investors see examples of ‘good governance’, and thus attractive propositions in Vietnam. On top of this, many of Vietnam’s SOEs are laden with debt ($39.22 billion in 2015) and structural inefficiency. A thorough understanding of the obstacles will help in continuing the reform process successfully.

If Vietnam wants to ensure a competitive energy market that fosters the kind of innovation needed to meet ambitious energy goals, transparency, accountability and a commitment to strong reforms are key. Efficiency-driven private sector projects, subject to greater market risk, will offer lower cost per MW and strive for quick construction.

If Vietnam wants to hit the energy targets it has set, the dominance of bloated giants like EVN will need to be curtailed, and favourable conditions given to private firms. This will allow for more efficient capital investment, more capable developers and more cost effective technology. Vietnam’s era of expensive energy should be brought to a close, especially when there are better solutions on the table.