Should Vietnam continue power subsidies?

Should Vietnam continue power subsidies?

Vietnamese enjoy the lowest electricity rates in the region. But they come at a cost.

Experts are urging the government to end its subsidies to the power industry to make the electricity market healthier and ease the burden on the state budget. Some argue, however, that such a move would only cause turmoil in the market.

Is subsidization bad policy?

A report on Vietnam’s energy situation, compiled by the UNDP (United Nations Development Program) and some Vietnamese research institutes, affirms that government aid to industry accounts for commercial and residential rates that are artificially low. The report strongly urges that the policy change.

“Because of these subsidies, funds in the state’s coffer are lower than they should be, and debts of state-owned enterprises in the power business are higher, putting a heavy burden on people,” the report reads.

The experts empha that electricity subsidies only bring benefits to the rich, not to the poor. They conclude that Vietnamese people pay a heavy price for the power subsidies.

They also said that a 20 percent cut in coal subsidies, 5 percent on petrol and 10 percent on electricity for would lower budget expenditures by 0.59 percent, 1.25 percent and 1.98 percent of GDP, for the first, second and third years of their implementation, respectively.

Koos Neefjes, the UNDP’s advisor on climate change issues, agrees that Vietnam should to allow power prices to rise, affirming that such a policy would be an effective way to encourage people and businesses to use energy more efficiently.

The suggestion on subsidy removal, to some extent, comes in line with the government’s moves taken recently with an aim to allow the market to determine the prices of some essential goods, including the fuel price.

If subsidies are removed – what then?

Pham Chi Lan, a well-known economist, expressed her concern that the report may encourage the government to focus on raising fuel prices, rather than restructure a market which has been distorted by monopoly interests. Specifically, PetroVietnam, EVN, and Petrolimex, all state-owned enterprises, are the only players in their respective business fields.

According to Lan, the energy sector in Vietnam has been governed by both state and business monopolistic powers, something seldom seen in other countries. Therefore, pricing reform, she emphad, must be accompanied by reform in state-owned enterprises and the power sector.

Lan does not agree with the report’s conclusion that the low price of power in Vietnam is attributable to the fact that the government controls the prices and imposes low environmental taxes. “Vietnam can generate electricity at low cost because it has rich natural resources. A lot of hydropower plants have been running for a long time and their depreciation period has finished,” she said.

Another expert, agreeing with Lan, warned that Vietnamese and Singaporean should not be expected to pay the same prices for electricity, noting that per capita Singaporean income is 35 times higher than that of Vietnamese.

“It is unreasonable to say the electricity price has remained unchanged over the last few years,” he said. “I myself have to pay more year after year,” he continued. “Meanwhile, the high inflation rate has caused consumers’ actual incomes to decrease by 70 percent”.

“A price increase at this moment will only benefit the monopolists, while it will put consumers at a disadvantage,” Lan concluded.

vietnamnet