Econ
WB explores ways to maximize finance for Vietnam’s electricity and gas sectors
Private sector and commercial financing are among recommendations which the World Bank has made.
The World Bank has identified financing needs and constraints for the electricity and natural gas sectors in Vietnam from 2018 through 2035 and outlines a roadmap for seizing these opportunities as the country has experienced double-digit growth in energy demand and is calling for continued high levels of investment in the electricity and gas sectors.
Before
Vietnam’s traditional financing model for energy infrastructure has relied mostly on public investment by state-owned enterprises like Vietnam Electricity (EVN) and Vietnam National Oil and Gas Group (Petrovietnam or PVN) backed by government guarantees, with significant domestic and international private sector participation, the bank said in a 2018 report.
In electricity, the bulk of power generation and network infrastructure has been funded through the balance sheet of EVN. The Ministry of Finance (MOF) on-lends concessional, foreign currency-denominated resources from international financial institutions and development partners to EVN at less than concessional rates. The MOF also guarantees EVN’s direct borrowing from local and international commercial banks.
About 30% of generation capacity or 13 GW has been developed by the domestic and international private sector under build-transfer-operate (BOT) arrangements, often accompanied by government support in the form of a government guarantee undertaking (GGU) and guarantees, mainly for large thermal power plants financed by international investors. Only private sector investments in small hydropower plants (about 3 GW) have generally been made without any government support.
Natural gas, PVN has been primarily responsible for the development of the natural gas sector. In upstream exploration and production, it enters into production-sharing contracts with international oil companies. In the case of midstream gas pipelines, about half of all investments have been undertaken. The downstream gas sector has been financed and developed by PVN’s fully-owned subsidiary PV Gas.
Changes
The changing macroeconomic and sectoral context have made the traditional approach to financing electricity and gas investments is no longer sustainable.
Vietnam’s public debt ceiling is approaching the statutory limit of 65% of GDP. This means that there will be limited fiscal space available for either direct public borrowing or government guaranteed in some years to come.
At the same time, Vietnam’s middle-income status is reducing the availability of highly concessional financing.
Moreover, the power sector reform and liberalization process, the scaling up of renewables, and the planned privatization and divestiture of EVN’s generation subsidiaries create opportunities to explore new approaches to financing the energy sector.
Meanwhile, limited domestic gas reserves and current attractive LNG prices require the exploration of the potential use of floating storage and regasification units to speed up regasification terminal development and lowering financing requirements, increasing flexibility, and reducing risk associated with LNG to fill the supply and demand gap.
World Bank’s recommendations
Given the limited fiscal headroom and the reduction in highly concessional financing, it will be important for Vietnam to start mobilizing other sources of financing for the electricity and gas sector.
Commercial financing, aside from public funding and concessional financing from international financial institutions and development partners, the main source of financing will be from the private sector, which will typically provide financing on non-concessional.
Many commercial banks, both domestic and international, are willing to lend to well-structured projects, and there are also institutional investors like insurance companies that are beginning to look at the sectors for long-term strategies which matches their long-term liabilities.
Public-private partnership (PPPs) and independent power producers (IPPs), a partnership with the private sector to deliver infrastructure will cover (i) access to private sector financing (reducing the upfront funding burden on the state); (ii) technical skills; and (iii) efficiencies in terms of delivery (design, construction, and operation).
For that reason, the private sector can often design, build, and operate energy infrastructure at a lower overall cost and more efficiently than the public sector can, while also delivering the project on time and within budget.
Blended financing, it will be important for Vietnam to leverage its limited fiscal resources to try and maximize financing from other sources. Sometimes, the optimum approach may be to blend concessional financing with commercial financing to help encourage commercial financing to come into the project.
Vietnam's power grid
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Vietnam’s traditional financing model for energy infrastructure has relied mostly on public investment by state-owned enterprises like Vietnam Electricity (EVN) and Vietnam National Oil and Gas Group (Petrovietnam or PVN) backed by government guarantees, with significant domestic and international private sector participation, the bank said in a 2018 report.
In electricity, the bulk of power generation and network infrastructure has been funded through the balance sheet of EVN. The Ministry of Finance (MOF) on-lends concessional, foreign currency-denominated resources from international financial institutions and development partners to EVN at less than concessional rates. The MOF also guarantees EVN’s direct borrowing from local and international commercial banks.
About 30% of generation capacity or 13 GW has been developed by the domestic and international private sector under build-transfer-operate (BOT) arrangements, often accompanied by government support in the form of a government guarantee undertaking (GGU) and guarantees, mainly for large thermal power plants financed by international investors. Only private sector investments in small hydropower plants (about 3 GW) have generally been made without any government support.
Natural gas, PVN has been primarily responsible for the development of the natural gas sector. In upstream exploration and production, it enters into production-sharing contracts with international oil companies. In the case of midstream gas pipelines, about half of all investments have been undertaken. The downstream gas sector has been financed and developed by PVN’s fully-owned subsidiary PV Gas.
World Bank logo
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The changing macroeconomic and sectoral context have made the traditional approach to financing electricity and gas investments is no longer sustainable.
Vietnam’s public debt ceiling is approaching the statutory limit of 65% of GDP. This means that there will be limited fiscal space available for either direct public borrowing or government guaranteed in some years to come.
At the same time, Vietnam’s middle-income status is reducing the availability of highly concessional financing.
Moreover, the power sector reform and liberalization process, the scaling up of renewables, and the planned privatization and divestiture of EVN’s generation subsidiaries create opportunities to explore new approaches to financing the energy sector.
Meanwhile, limited domestic gas reserves and current attractive LNG prices require the exploration of the potential use of floating storage and regasification units to speed up regasification terminal development and lowering financing requirements, increasing flexibility, and reducing risk associated with LNG to fill the supply and demand gap.
World Bank’s recommendations
Given the limited fiscal headroom and the reduction in highly concessional financing, it will be important for Vietnam to start mobilizing other sources of financing for the electricity and gas sector.
Commercial financing, aside from public funding and concessional financing from international financial institutions and development partners, the main source of financing will be from the private sector, which will typically provide financing on non-concessional.
Many commercial banks, both domestic and international, are willing to lend to well-structured projects, and there are also institutional investors like insurance companies that are beginning to look at the sectors for long-term strategies which matches their long-term liabilities.
Public-private partnership (PPPs) and independent power producers (IPPs), a partnership with the private sector to deliver infrastructure will cover (i) access to private sector financing (reducing the upfront funding burden on the state); (ii) technical skills; and (iii) efficiencies in terms of delivery (design, construction, and operation).
For that reason, the private sector can often design, build, and operate energy infrastructure at a lower overall cost and more efficiently than the public sector can, while also delivering the project on time and within budget.
Blended financing, it will be important for Vietnam to leverage its limited fiscal resources to try and maximize financing from other sources. Sometimes, the optimum approach may be to blend concessional financing with commercial financing to help encourage commercial financing to come into the project.
