Private capital key to Vietnam’s future energy development: WB
Private capital key to Vietnam’s future energy development: WB
The changing macroeconomic and sectoral context in Vietnam requires a new approach to financing electricity and gas investment, according to a new World Bank (WB) Group report, titled, “Maximizing Finance for Development in Vietnam’s energy sector.”
The study, released on Monday, highlights the poor viability of the traditional financing model, which relies mostly on public investment from State-owned enterprises.
Importantly, it presents an action plan for unlocking new sources of finance, especially from the private sector, based on a comprehensive analysis of investment needs as well as constraints in the regulatory environment including the capital and foreign exchange markets.
“Given the limited fiscal space and the reduction of concessional financing available going forward, it will be important for Vietnam to step up mobilizing alternative capital resources for the electricity and gas sectors,” said Ousmane Dione, the WB country director for Vietnam.
He added that the Government should comprehensively address the constraints currently impeding the flows of domestic and cross-border private capital into two of the most strategic segments of the Vietnamese economy.
Vietnam’s electricity sector requires new investments of some US$10 billion annually frontloaded through 2030, higher than the average of US$8 billion for the 2011-2015 period. Meanwhile, the envisaged expansion of the gas sector calls for an accumulated investment of some US$20 billion between 2015 and 2035.
While Vietnam Electricity Group (EVN) and Vietnam Oil and Gas Group (PVN) play a critical role in developing new infrastructure, the vast majority of new gas and electricity investments will need to come from private players, the report argued.
It noted that moving in this direction is in line with the Government’s strategy and objectives of financing the energy sector in the future.
“We observe a great interest from private investors to participate in the vast, growing energy market in Vietnam, especially in renewables and liquefied natural gas development. They are willing to invest as long as the projects are well-structured and bankable,” remarked Franz Gerner, WB’s lead energy economist and the study’s lead author.
He added, “What investors need is a transparent and stable regulatory environment, which incorporates a proper risk-sharing mechanism among all parties.”
To remove constraints and maximize financing available for electricity and gas investments in Vietnam, the report proposes a well-coordinated policy effort based around three pillars.
The first pillar is to develop a major public-private partnerships and independent power producers program for new power generation, as part of the development of Power System Development Plan 8, to build investor confidence.
To achieve the kind of scale-up of the program needed to deliver the next wave of energy investments, there will need to be a well-designed programmatic approach rolled out over the next few years, especially for power generation.
The second pillar is to enhance the financial standing and creditworthiness of EVN and PVN to enable them to access commercial finance without government support.
Corporate finance will remain a key channel for injecting investment into the sector, but this will increasingly need to be based on the strength of the company’s own balance sheet without resource to the State.
The WB suggested that all State-owned energy companies should work toward improving their financial performance, bringing in private sector financing and expertise, and obtaining positive credit ratings with the objective of gradually raising their own debt finance without State support.
Meanwhile, the third pillar is to increase the availability of local currency financing, which is critical for both project financing and corporate project financing. There is a pressing need to strengthen the domestic commercial banking sector while deepening and broadening domestic capital markets.
