Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 77606-VN

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROJECT DOCUMENT

FOR A

PROPOSED LOAN IN THE AMOUNT OF US$200 MILLION

TO

SOCIALIST REPUBLIC OF VIETNAM

FOR A

THIRD POWER SECTOR REFORM DEVELOPMENT POLICY OPERATION

May 27, 2014 Vietnam Sustainable Development Unit East Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

ii  

VIETNAM - GOVERNMENT FISCAL YEAR January 1 – December 31

CURRENCY EQUIVALENTS (Exchange Rate Effective as of April 30, 2014)

Currency Unit Vietnamese Dong

US$1.00 21,083VND

Weights and Measures Système Internationale

ABBREVIATIONS AND ACRONYMS

AAA Analytical and Advisory Activities MIGA Multilateral Investment Guarantee Agency

ADB Asian Development Bank MoF Ministry of Finance

ACT Avoided Cost Tariff MoIT Ministry of Industry and Trade

AfD Agence française de Développement MoST Ministry of Science and Technology

AMI Automated Metering Infrastructure MPI Ministry of Planning and Investment

AusAID Australian Agency for International Development MtCO2 Million Tons of Carbon Dioxide

BOT Build, Operate, Transfer MTIF Medium Term Investment Framework

BST Bulk Supply Tariff MW Megawatt

CfD Contract for Difference NHSOE Non-Honouring of State Owned Enterprises

CIT Corporate Income Tax NLDC National Load Dispatch Center

CPEE GEF Clean Production and Energy Efficiency Project (GEF Grant TF099859)

NPL Non Performing Loan

CPIA Country Policy Institutional Assessment NPT National Power Transmission Company

CPI Consumer Price Index ODA Official Development Assistance

CPS Country Partnership Strategy OoG Office of Government

CTF Climate Technology Fund PBR Performance-Based Regulation

DEP Distribution Efficiency Project (Cr. 5156) PC Power Company / Power Corporation

DPO Development Policy Operation PM Prime Minister

DSA Debt Sustainability Assessment PPA Power Purchase Agreement

DSR Demand Side Response PPP Public-Private Partnership

EEO Energy Efficiency and Conservation Office in MoIT PMDP Power Master Development Plan

EG Economic group PRSC Poverty Reduction Support Credit

EPTC Electric Power Trading Company in EVN PSRDPO1 First Power Sector Reform Development Policy Operation (Loan 7868 and Cr. 4711)

ERAV Electricity Regulatory Authority of Vietnam PSRDPO2 Second Power Sector Reform Development Policy Operation (Loan 8147 and Cr. 5082)

EVN Vietnam Electricity PSRDPO3 Third Power Sector Reform Development Policy Operation

FDI Foreign Direct Investment RCM Retail Competitive Market

FSAP Financial Sector Assessment Program REDP Renewable Energy Development Project (Cr. 4564)

GDP Gross Domestic Product RD Rural Distribution Project (Cr. 4444)

GEF Global Environment Facility RE2 Second Rural Energy Project (Cr. 4000 and GEF TF054464)

Genco Successor Generation Companies SAV State Audit of Vietnam

GHG Greenhouse Gas SEIER System Efficiency Improvement,

iii  

Equitization and Renewables Project (Cr. 3680 and GEF TF051229)

GNP Gross National Product SFR Self-Financing Ratio

GoV Government of Vietnam SMHP Strategic Multipurpose Hydropower Plant

GSO General Statistics Office SMO System and Market Operator

GWh Gigawatt Hour SOE State Owned Enterprise

IBT Incremental Block Tariff TD2 AF Second Transmission and Distribution Project – Additional Financing (Ln 8026)

IFC International Finance Corporation TOU Time Of Use

IFRS International Financial Reporting Standards VAT Value Added Tax

IMF International Monetary Fund VCGM Vietnam Competitive Generation Market

JICA Japan International Cooperation Agency VHLSS Vietnam Household Living Standards Survey

kWh Kilowatt Hour VNEEP Vietnam National Energy Efficiency Program

LDU Local Distribution Utility WBG World Bank Group

MDBs Multi-lateral development banks WCM Wholesale Competitive Market

MDGs Millennium Development Goals WTO World Trade Organization

Vice President: Country Director:

Sector Manager: Task Team Leader:

Co-Task Team Leader:

Axel van Trotsenburg Victoria Kwakwa Jennifer Sara Pedro Antmann Franz Gerner

 

4  

VIETNAM

THIRD POWER SECTOR REFORM DEVELOPMENT POLICY OPERATION

TABLE OF CONTENTS

SUMMARY OF PROPOSED LOAN AND PROGRAM ........................................................................ 5 1. INTRODUCTION AND COUNTRY CONTEXT (INCLUDING POVERTY DEVELOPMENTS) ..... 6 2. MACROECONOMIC POLICY FRAMEWORK ............................................................................... 8

2.1 RECENT ECONOMIC DEVELOPMENTS .................................................................................. 8 

2.2 MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ....................................... 13 

2.3 IMF RELATIONS ........................................................................................................................ 17 3. THE GOVERNMENT’S PROGRAM ................................................................................................ 17 4. THE PROPOSED OPERATION ........................................................................................................ 19

4.1 LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION ......................... 19 

4.2 PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS ............................... 20 

4.3 LINK TO CPS, OTHER BANK OPERATIONS AND RELATIONSHIP TO TWIN GOALS .. 28 

4.4 CONSULTATIONS, COLLABORATION WITH DEVELOPMENT PARTNERS .................. 29 

4.5 LESSON LEARNED .................................................................................................................... 29 

5. OTHER DESIGN AND APPRAISAL ISSUES .................................................................................. 29 5.1 POVERTY AND SOCIAL IMPACT ........................................................................................... 29 

5.2 ENVIRONMENTAL ASPECTS .................................................................................................. 32 

5.3 PFM, DISBURSEMENT AND AUDITING ASPECTS .............................................................. 32 

5.4 MONITORING AND EVALUATION ........................................................................................ 33 

6. SUMMARY OF RISKS AND MITIGATION ................................................................................... 34 ANNEX 1: POLICY AND RESULTS MATRIX .............................................................................. 36 ANNEX 2: LETTER OF DEVELOPMENT POLICY ....................................................................... 40 ANNEX 3: STATUS OF THE PROPOSED PRIOR ACTIONS FOR DPO3 ................................... 46 ANNEX 4: THE POWER SECTOR REFORM PROGRAM ............................................................ 48 ANNEX 5: BRIEF ASSESSMENT OF CURRENT EVN FINANCIAL SITUATION .................... 58 ANNEX 6: FUND RELATIONS ANNEX ........................................................................................ 62 ANNEX 7: GOVERNMENT OF VIETNAM UPDATE ON MACROECONOMIC DEVELOPMENTS IN THE FIRST FOUR MONTHS OF 2014 ...................................................... 65 ANNEX 8: AVERAGE ELECTRICITY TARIFF BY CUSTOMER CATEGORY ......................... 66

Third Power Sector Reform Development Policy Operation was prepared by:

World Bank Team: Pedro Antmann (Task Team Leader, Lead Energy Specialist, AFTG1), Franz Gerner (Co-task Team Leader, Energy Sector Coordinator, EASVS), Daisuke Miura (Energy Specialist, EASVS), Hung Tien Van (Senior Energy Specialist, EASVS), Son Duy Nguyen (Senior Operations Officer), Cung Van Pham (Senior Financial Management Specialist), Thi Ba Chu (Energy Specialist, EASVS), Valerie Kozel (Senior Economist, EASPW), Habib Nasser Rab (Senior Economist, EASPV), Lien Thi Bich Nguyen (Program Assistant, EACVF).

Peer Reviewers: Salvador Rivera (Lead Energy Specialist, ECSEG), David Reinstein (Senior Energy Specialist, SEGOM), Sudeshna Ghosh Banerjee (Senior Economist, SEGEN), Ashish Khanna (Lead Energy Specialist, SASDE) and Ani Balabanyan (Senior Energy Specialist, ECSEG). 

5  

SUMMARY OF PROPOSED LOAN AND PROGRAM VIETNAM

THIRD POWER SECTOR REFORM DEVELOPMENT POLICY OPERATION Borrower Socialist Republic of Vietnam Implementation Agency

Ministry of Industry and Trade (MoIT)

Financing Data

IBRD Loan terms: commitment-linked IBRD Flexible Loan with variable spread. Final maturity of the Loan is 29 year including 7 year grace period and level repayment of principal. All conversion option selected and the Front-end Fee and Premia for Caps and Collars to be capitalized. IBRD Loan amount: US$200 million

Operation Type Single-tranche programmatic operation; the third and last in a series of three operations

Operation Pillars and Program Development Objective(s)

The objective of the Vietnam Power Sector Reform Development Policy Operation is to support the Government of Vietnam in the design and implementation of a competitive market for electricity generation; to restructure the power sector and reform of electricity tariff system that will facilitate effective competition, transparency and predictability; to encourage timely investment in new generation capacity; to enhance power system efficiency and reliable operation; and to implement pricing and programs that promote the efficient use of electricity. The program is organized around four policy areas essential to the reform of Vietnam’s power sector: (i) development of a competitive power market, (ii) power sector restructuring, (iii) electricity tariff reform, and (iv) improving demand side energy efficiency.

Result Indicators

• Power system is operated with hourly reserve of electricity generating capacity not less than 10 percent. Baseline (2008): no reserves • Contracts in place cover 90 percent of demand, for non BOT generation based on pricing methodologies and standard form issued by Ministry of Industry and Trade, and the competitive generation spot market price being published by the system and market operator. Baseline (2009): no such contracts, and no spot prices • The number and diversity of electricity generation companies is increased, with no single company owning more than 45 percent of capacity. Baseline (2008): 70 percent • The system and market operator follows dispatch and system operation rules to ensure no discrimination among generators, as measured by an independent audit. Baseline (2009): no audit as system and market operator will be formally in place only after competitive generation market starts commercial operation • Annual tariff adjustments are approved each year; Baseline (2008): no annual update required • Cross subsidies from industrial and commercial to residential consumers are reduced by 50 percent and subsidies to residential target low income consumers. Baseline (2008): cross subsidies from industrial and commercial consumers (of US$ 370 million in 2007), an untargeted subsidy to all residential consumers for the first 100 kilowatt hours (kWh) of consumption, and local distribution utility tariffs higher than Vietnam Electricity (EVN); and • Energy efficiency obligations are established by law and the regulator has capacity to enforce and monitor load profiling and demand response programs by power corporations (PCs). Baseline (2009): no energy efficiency law, no load profiling or demand response program obligation on PCs.

Overall risk rating Moderate Operation ID P144675

6  

IBRD PROGRAM DOCUMENT FOR A THIRD POWER SECTOR REFORM DEVELOPMENT POLICY OPERATION TO

VIETNAM

1. INTRODUCTION AND COUNTRY CONTEXT (INCLUDING POVERTY DEVELOPMENTS)

1. The proposed Third Power Sector Reform Development Policy Operation to Vietnam (PSRDPO3), with an estimated IBRD loan amount of US$200 million, aims to support the completion of the first phase power sector reform program, within the general framework defined in the Electricity Law, and which focuses on implementing a competitive market for electricity generation; restructuring the power sector and reforming its electricity tariff system in order to facilitate effective competition, transparency and predictability; encouraging timely investment in new generation capacity; enhancing power system efficiency and reliable operations; and implementing pricing and programs that promote the efficient use of electricity.

2. The sector reform roadmap, specified in the PM Decision 26 in 2006 (amended as PM Decision 63 in 2013), defines a three phase gradual approach. In coordination with the restructuring of the power sector, establishment of a cost-reflective tariff system, and promotion of demand side efficiency measures, this phased approach aims to ensure stable power supplies with adequate level of investment, improve sector efficiency and performance and secure reasonable pricing levels.

3. The proposed PSRDPO3 will support full implementation of the first phase reform, and establish the basis for moving ahead to the next phase. More specifically, this phase will achieve: (i) full commercial operation of the Vietnam Competitive Generation Market (VCGM); (ii) effective incorporation of the recently created Gencos as participants in the VCGM, through owning and operating the power generation portfolio formerly belonging to the parent company EVN and managing related revenues and costs; (iii) definition of the timing for the separation of the Gencos into independent companies with no cross-ownership with the national transmission company and EVN as the Single Buyer; (iv) implementation of a set of regulations defining a more transparent and predictable electricity tariff system aimed at ensuring permanent recovery of total costs of efficient service provision; (v) definition and application of demand side response regulations; and (vi) implementation of at least one pilot Demand Side Response (DSR) program.

4. This is the third and last in a series of three operations. The first operation (PSRDPO1), approved in April 2010, supported the government’s policy actions setting the vision, key principles and foundation of the reform program and delegating authority for its implementation in a consistent and harmonized manner. The second operation (PSRDPO2), approved in February 2012, supported the development of the Vietnam Competitive Generation Market (VCGM), including market rules, institutional and contractual arrangements to enable the pilot phase required prior to starting the full commercial operation of the competitive market; approval and effectiveness of the regulatory framework to implement transparent and efficient generation contract pricing and transmission and retail electricity tariff setting mechanisms; the decision of generation restructuring; and the regulations mandating load research activities to enhance demand forecasting and the design of effective time-of-use (TOU) electricity tariffs.

7  

5. The outcomes and indicators of the whole PSRDPO series, described in Annex 1, were agreed at the approval of PSRDPO1, and have not changed throughout the series of operations. Most of the outcomes and indicators have either already been achieved, or are on-track to be achieved. Prior actions in this proposed final operation aim to reinforce and give sustainability to the overall achievements of the programmatic series, with a focus on the reform of the tariff system in order to ensure the financial viability of efficient operating companies and also to promote investments to increase system capacity.

6. The PSRDPO series is a central component of the World Bank energy portfolio in Vietnam, which includes various important lending and advisory programs. The Bank has been a trusted partner for many years and has been heavily engaged in the Vietnamese power sector development and reform process providing technical advice and financial support. The energy portfolio has gradually shifted from supporting basic electricity access (rural electrification) to improving the quality of service, increasing energy efficiency, promoting sustainable renewable energy development and the financial viability of the sector. The Bank is also supporting the green growth and climate change agenda and the country is in the process of setting mitigation and low carbon growth targets combined with a further push for development of renewables and energy efficiency. The PSRDPO series ending with the proposed operation has links with the following on-going projects and programs in the Bank’s energy portfolio in the country:

Distribution Efficiency Project (DEP, Cr. 5156): A pilot DSR program, whose startup is Prior Action 6 of the proposed operation, will be designed and implemented under the technical assistance component of the DEP.

The strategic options study for enhanced financial performance of Vietnam's electricity sector (P143150): This technical assistance aims to support EVN and its subsidiaries in developing a comprehensive strategy for addressing the current financial performance constraints.

Renewable Energy Development Project (REDP, Cr. 4564): PSRDPO has supported the pricing mechanism for multi-purpose hydropower plants, which are closely related to REDP, and the promotion of small new renewables by providing financing through commercial banks and technical assistance to MoIT for setting renewable energy regulations.

The Vietnam Climate Change Development Policy Operations series (CCDPO): CCDPO supports policy actions in energy efficiency under the climate change mitigation policy area, including setting the regulatory framework to implement and enforce the EE&C Law and increase energy efficiency in the industrial sector.

7. The PSRDPO series is also related with other World Bank Group (WBG) operations. IFC acted as a Transaction Advisor for 1,200MW Nghi Son 2 coal fired BOT power plant in central Vietnam helping MoIT to prepare project and bidding documents and supporting the selection process. IFC is also working with several private enterprises with regard to the equitization of renewable energy assets in Vietnam. MIGA has recently started evaluating EVN as a potential borrower under its Non-Honouring of State Owned Enterprises (“NHSOE”) guarantee programme, which was only approved by the Board in June 2013.

8. The Government’s development priorities are set out in its Socio-Economic Development Strategy (2011-2020), and the accompanying Socio-Economic Development Plan (2011-2015).

8  

The SEDS sets out goals for the coming ten years, and the SEDP specific policy actions and programs to achieve those goals. The SEDS has a long-term growth strategy focused on structural reforms, environmental sustainability, social equity, and emerging issues of macroeconomic stability to minimize short-term vulnerability. It identifies three areas of ‘strategic breakthrough’: (i) improved market institutions and administrative reforms for a more competitive and equitable business environment; (ii) development of human resources and investment in science and technology; and (iii) improved infrastructure.

9. The Bank has identified the following risks for this operation: government delay in approval of decisions defined in each prior action; social acceptance; and complexity and lack of readiness to implement. These risks are not considered to be significant, and will be mitigated by close monitoring of policy implementation process, providing necessary advice and guidance to the government, and working closely with concurrent lending projects and AAAs. Overall, the risk for this operation is rated as moderate.

10. The impact of electricity tariff adjustments to poor households will not be significant. The Poverty and Social Impact Analysis (PSIA) prepared for this operation suggests that electricity spending as part of total expenditures of poor households remains as low as 2%. A social tariff for households consuming up to 50 kWh/month and a direct cash subsidy of 30,000 VND/month for the poor protects vulnerable groups. The World Bank is supporting the GoV to improve the existing social safety net system1, through consolidation of different programs including the 30,000 VND/month cash transfer and other measures to achieve better protection to the poor. The PSIA analysis also shows that the difference in terms of the share of electricity expenditure is small between male and female headed households.

11. Looking ahead, a new series of reform measures will need to be implemented to enable the creation of a competitive wholesale market by 2015, as well as to address the financial sustainability of the sector. Among other aspects, the new series of reforms would need to include realistic approaches to address legacy debt in the power sector, as well as options for the divestment of EVN’s generation assets. The World Bank Group is actively engaged in all critical areas of sector reform, providing technical support in the design of the wholesale market, assisting EVN to improve its financial performance, and advising the GoV on a divestiture strategy for the Gencos by bringing in best international experience in the matter.

2. MACROECONOMIC POLICY FRAMEWORK

2.1 RECENT ECONOMIC DEVELOPMENTS

12. Macroeconomic stability continues to improve, underpinned by moderating inflation and strengthening external accounts. Inflation (y/y) has fallen from a peak of 23 percent in August 2011 to 6.0 percent in December 2013 and 4.4 percent in March 2014 (figure 1). Subdued credit growth and easing of food price increases contributed to this. The decline in core inflation (excluding food and energy prices) has been more gradual, down from about 14

                                                            1 The World Bank supports Vietnam’s social protection reform through Social Assistance System Strengthening Project (P123960). This program includes supporting the “Opportunity Program” to be piloted in four provinces after 2015, in which several social protections including the electricity subsidy of 30,000 VND/month will be consolidated to a single protection. Taking into account the timing of the new social assistance project, the poverty and social impact analysis for the PSRDPO3 assumes the 30,000 VND/month subsidy is applied during the period considered for the analysis.

9  

percent in August 2011 to 5.8 percent in March 2014, reflecting a series of increases in administrative prices. Pressure on the Vietnamese dong has eased and the exchange rates in the official and unofficial markets have converged after an adjustment of one-percent to the reference rate in July 2013 (figure 2). Stronger external trade and capital account flows have enabled foreign exchange reserves to build up to an estimated US$35 billion (roughly 3 months of import cover) as officially reported by the government in the first quarter of 2014, up from 1.6 months in December of 2011 (figure 3). Acknowledgement of these positive developments by financial markets has led to a decline in the sovereign risk on Vietnam’s credit default swap (CDS) – to levels seen just before the global financial crisis in 2009 (figure 4).  

Figure 1: Headline inflation (y/y, %) 

 

Figure 2: VND/USD exchange rate 

 

Figure 3: International Reserves (months of imports) Figure 4: Credit default swap (bp)

Source: SBV, GSO, IMF and WB

Real sector

13. Economic activity remained relatively subdued in 2013. Real GDP growth picked up from 5.5 percent in Q3 to 6.0 percent in Q4 of 2013. Overall growth is estimated to have reached 5.4 percent in 2013 and 5.0 percent in the first quarter of 2014, compared to 5.3 percent in 2012. The services sector was the main driver of growth, contributing 2.8 percentage points to overall GDP growth whilst industry and agriculture contributed another 2.1 and 0.5 percentage points respectively.

0

5

10

15

20

25

‐1

0

1

2

3

4

Monthly (RHS)

Year‐on‐year

20,000

20,250

20,500

20,750

21,000

21,250

21,500

21,750

22,000

Free marketOfficial rate (SBV)Com. bank (mid)

0.0

1.0

2.0

3.0

4.0

2007 2008 2009 2010 2011 2012e 2013e0

100

200

300

400

500

600

700

Mar‐10 Mar‐11 Mar‐12 Mar‐13 Mar‐14

Sovereign spreads

CDS, 5 years

10  

14. On the production side, activity has been relatively slow in industry and construction due to weak domestic demand and previous stockpiling of factory inventories. This seems to be coming largely from domestic enterprises catering to the domestic market, whilst foreign invested export firms are still performing relatively well. The slowing domestic sector is reflected quite clearly in the Index of Industrial Production (IIP), which grew at 5.9 percent in 2013 and 5.2 percent in the first quarter of 2014 – a higher pace than the 4.7 percent increase in 2012 but much lower than the 8 percent increase in 2010-11.

15. Demand side components of GDP have also been growing at a modest pace, except net exports, which have grown quickly. Total investment was at about 30.4 percent of GDP for the whole 2013, about 12 percentage points below the peak in 2007. The decline in domestic private investment, from 16.4 percent of GDP in 2007 to around 11.5 percent in 2013, is worrisome. Household consumption has been lackluster since the onset of the global crisis, recording an average growth rate of 4.9 percent during 2009-2013, compared to 7.6 percent average during the previous 5 years. Business closures and layoffs over the past years took their toll on the labor market. The Nielsen Consumer Confidence Index indicates a recovery in consumer confidence in 2013 in Vietnam, remaining well above the average global consumer confidence level.2 However this has not yet translated into real spending - retail and wholesale trade growth continued to moderate in in the first quarter of 2014.

External sector

16. Vietnam’s export performance continues to be strong, growing at 15.4 percent in 2013, after 18.2 percent in 2012. Earnings from commodity exports are declining due to falling prices. Labor-intensive manufacturing exports such as garments, footwear and furniture continue to sustain rapid growth. But it is the high-tech sector (e.g. cell phones and parts, computers, electronics, automobile parts), which is showing the fastest growth. In 2013, exports of cell phones and accessories reached $21 billion, overtaking garments as the largest export item.

17. Import growth picked up in 2013. In 2012 lower demand for capital and intermediate goods, as well as weaker private consumption, caused imports to moderate at 6.6 percent growth. Imports grew at 16.1 percent in 2013. In particular, imports of machinery, equipment, raw materials and intermediate goods have risen faster in 2013 compared to 2012. A new cycle of investment and production may therefore be underway - offsetting to some extent the pessimism about domestic investment demand. There are some preliminary indications of a pick-up in fixed capital accumulation, which is likely to increase further in the coming year.

18. Although foreign direct investment commitments have remained steady, actual disbursements have declined relative to GDP. FDI disbursements have fallen from an average of 10.7 percent of GDP in 2007-09, to 8.4 percent in 2010-12, to an estimated 6.7 percent in 2013. Some sectors that saw significant FDI inflows during the economic overheating of 2007-2009 include housing, hotels and urban development. However, a shift has been underway, with a rise in FDI into manufacturing, retail and technology3.

19. Vietnam is expected to maintain trade and current account surpluses in the near-term (Figures 5 and 6). The current account recorded a surplus of 0.2 percent in 2011

                                                            2 The Nielsen GCCS is an online survey of over 30,000 respondents across 60 countries to measure consumer attitudes about the job market, spending intentions and changing habits (www.nielsen.com). 3 FDI reports prepared by the Ministry of Planning and Investment

11  

and 5.8 percent in 2012. In 2013, the current account is expected to record a surplus of 6.5 percent. The capital account surplus remains sizeable owing to consistent FDI inflows and Vietnam’s continued access to concessional financing. These developments have contributed to a build-up of foreign exchange reserves, which however are still below prudential levels for an economy that is as open as Vietnam’s and that maintains a system that is close to a crawling peg exchange rate regime. SBV had to intervene in mid-2013 to stabilize the dong and gold market. This internal flight to non-VND assets still suggests some fragility in VND sentiment.  

Figure 5: Trade balance (USD billion)  Figure 6: Balance of payments (% GDP) 

Source: GSO, SBV and WB

Inflation and monetary policy

20. Inflation has fallen and remains relatively stable. Headline inflation (y/y) was at 4.4 percent in March 2014, a steep deceleration from 18.1 percent in December 2011. The decline is largely due to the easing of food prices and the effect of stabilization measures. Food price inflation, which peaked in August 2011 at 34 percent, grew by 2.9 percent in March 2014 thanks to abundant supply of agricultural products, easing international prices and reduced growth in household consumption. However, there remain some upside risks to inflation during 2013/2014 if price of administered goods and services are adjusted to market levels, since user charges for many public services (healthcare, transport and education services) remain below cost.

21. Efforts by the authorities to support growth through easing monetary policy have had limited impact. Lower inflation in the past twelve months has provided the SBV the space to cut key policy rates by 800 basis points and lower the deposit rate cap on local currency accounts by 700 basis points. Most recently, on March 18, 2014, the State Bank of Vietnam cut its discount and refinancing rate by 50 basis points to 4.5 percent and 6.5 percent respectively (figure 7). Policy rates are now below the level at which they were when monetary tightening began in early 2011. Despite this, total credit to the economy from the banking system is estimated to have grown by only about 9 percent in 2013 compared to the annual target of 12 percent (figure 8).                      

      

‐20

0

20

40

60

80

100

120

140

2008 2009 2010 2011 2012 2013 Q1‐14

Exports (FOB)

Imports (CIF)

Balance

‐9.0‐11.0

‐6.5‐3.8

0.1

5.8 6.5

‐15.0

‐10.0

‐5.0

0.0

5.0

10.0

15.0

20.0

25.0

2007 2008 2009 2010 2011 2012e 2013e

Capital account

Current account

12  

Figure 7: Key policy rates (%)

Source: SBV                               

Figure 8: Growth in monetary aggregates (%)

22. Low credit growth can be attributed to several factors. First, the domestic private sector remains weighed down by low business confidence, thereby moderating the demand for credit. Second, with their balance-sheets impaired by rising Non-Performing Loans (NPLs), commercial banks have been cautious in extending further credit to the real sector. Third, the banks have been focusing on addressing NPLs which has also limited their liquidity due to the need to increase reserves and provisioning.

23. Under such circumstances, any further monetary easing is likely to have only limited impact on growth, unless banking sector reforms pick up. It will add to concerns surrounding credit quality and macroeconomic stability. In order to restore the functions of the credit market and make monetary policy more effective, restructuring of the banking sector (and the associated restructuring of SOEs) continues to be an imperative.

24. Important financial sector vulnerabilities remain, creating a drag on overall economic performance. Concerns about the overall quality of the banking sector portfolio remain, and the policy response thus far to stem further deterioration of the sector’s financial health has yet to confirm its effectiveness (discussed further below). NPLs in the banking sector continue be a major concern. There are concerns regarding quality of banking data (at both aggregate and bank level) and the limited disclosure of these statistics (by banks and SBV). The SBV reported an NPL ratio of about 4 percent as of December 2013. However, there is general acknowledgement that the actual NPL ratio would be higher if international accounting standards were applied.

25. Vulnerabilities in the banking sector likely present significant risks to overall macroeconomic stability. There is also a strong – and as yet not quantified – link between the financial performance of SOEs and State Owned Commercial Banks. High NPLs pose macro-fiscal risks as fiscal injections may be needed for recapitalization of banks. Foreign investors can play an important role in helping with recapitalization as well as NPL resolution for the banking system, once the extent of the required recapitalization is made more precise. The Bank, together with the IMF, SBV, and MOF, will seek to close these analytical gaps to better assess these vulnerabilities. There is a general need to strengthen the crisis management framework.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Mar‐11 Sep‐11 Mar‐12 Sep‐12 Mar‐13 Sep‐13 Mar‐14

Discount rate

Refinancing rate

0

10

20

30

40

50

Feb‐09 Feb‐10 Feb‐11 Feb‐12 Feb‐13 Feb‐14

Total credit

Total liquidity

Total deposit

13  

Fiscal policies and developments

26. Although the government in 2010-2011 successfully reigned in the fiscal stimulus implemented in 2008-2009, it is now facing serious fiscal challenges due to slowing revenue collection. The fiscal deficit in 2013 reached 5.3 percent of GDP by government accounting standards (5.6 percent of GDP by GFSM 2001) compared to planned target of 4.8 percent of GDP.4 It has therefore overshot the indicative deficit target of 4.5 percent of GDP (2011-2015) in its fiscal strategy, adopted through Prime Minister’s Decision 958 (2012). The primary deficit is estimated to have increased from 3.5 percent of GDP in 2012 to roughly 4.2 percent in 2013.

27. A combination of slower growth and tax relief for enterprises has led to lower buoyancy of Corporate Income Tax and Value Added Tax over the past two years. CIT and VAT constitute just over half of total revenue in Vietnam. In addition to this, collection of trade taxes has fallen due to slowing imports and tariff reductions, so has revenue from land sales, which is linked to lower domestic investment. Preliminary figures show that both SOEs’ and the domestic private sector’s CIT contributions (nearly 35 percent of total revenue) declined by 2 and 7 percent respectively in 2013. Foreign invested firms’ CIT contributions on the other hand have increased by 7 percent.

28. In response to these developments, and in line with its policy to enhance public investment efficiency, the government has continued to consolidate capital spending. Total capital spending (including off-budget) is estimated to have fallen from around 11.6 percent of GDP in 2010 to an estimated 7.8 percent in 2013. A number of policy measures have been implemented over the past two years to establish more discipline over the capital budget. Attention has been focused on completing ongoing projects; new projects are agreed only in exceptional cases.

29. The growth in recurrent spending has fallen in 2012-2013, though recurrent spending on the social sectors has remained a priority in the State Budget. The government has made efforts to spend more efficiently (discussed below in the outlook section), which has contributed to a drop in recurrent spending growth in real terms from 14 percent in 2011-2012 to 3.2 percent in 2012-2013. The ratio of capital to recurrent spending has declined from 62 percent in 2010 to an estimated 40 percent in 2013. This partly reflects the relative priority accorded by the government to the social sectors. Recurrent spending on social sectors as a share of GDP has steadily risen since 2010 from 8.4 percent to an estimated 9.4 percent in 2013.

2.2 MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY

30. The medium-term outlook remains favorable on balance, albeit with considerable downside risks. GDP growth in the baseline scenario is projected to rise modestly, to 5.5 percent in 2014 and 5.6 percent by 2015 (table 2.5). This assumes fiscal and monetary prudence and acceleration of structural reforms. The current account is expected to remain in surplus, although this is expected to narrow as imports pick up and exports of foreign-invested manufacturing companies start to moderate. Capital inflows are expected to pick up as investor confidence recovers, resulting in continued reserve accumulation.

                                                            4 By Government Finance Statistics Manual 2001 standards, covered in table 1 below, the deficit is estimated to have increased from 2.8 percent of GDP in 2010 to 5.5 percent of GDP in 2013. These are preliminary figures based on the government’s first estimates of 2013 fiscal outturn.

14  

Table 1: Vietnam’s Key Economic Indicators5 2010 2011 2012 2013e 2014/p 2015/p

Output, Employment and Prices

GDP (% change previous year) 1/ 6.4 6.2 5.3 5.4 5.5 5.6

Industrial production index (% change, previous year) 8.8 7.3 4.7 5.9 6.0 6.2

Unemployment rate (%, urban areas) 4.3 3.6 3.2 3.5 3.5 3.5

Consumer price index (% change, annual average) 9.2 18.6 9.1 6.6 6.5 6.3

Fiscal Balance (% of GDP)

Total revenue and grants 27.2 25.9 22.9 22.2 19.6 19.7

Total expenditure (including off-budget items) 30.0 26.9 27.7 27.8 26.0 25.7 General fiscal balance (including off-budget items) -2.8 -1.1 -4.8 -5.6 -6.4 -6.0

Foreign Trade, BOP and External Debt

Trade balance (BOP definition, $US billion) -5.1 -0.5 9.8 10.6 9.8 8.5

Exports of goods, ($US billion, fob) 72 97 115 132 152 175

Imports of goods, ($US billion, cif) 85 107 114 131 153 178

Current account balance ($US billion ) -4.3 0.2 9.0 11.1 8.3 5.7

Current account balance (% GDP) -3.8 0.1 5.8 6.5 4.5 2.8

Foreign direct investment (BOP inflows, US billion) 8.0 6.5 7.2 7.4 7.6 7.7

External debt - PPG (% of GDP) 2/ 29.5 27.2 28.0 28.5 27.7 27.3

Debt service ratio (% exports of g&s) 3.3 3.8 3.3 3.2 3.2 3.2

Reserves, including gold ($US billion) 12.4 13.5 25.4 28.4 --- ---

Reserves (in months of imports) 1.8 1.5 2.7 2.6 --- ---

Financial Markets

Credit to the economy (% change, period-end) 32.4 14.3 8.7 9.0 12.0 14.0

Short-term interest rate (3-M deposits, period-end) 14.0 14.0 9.0 6.5 6.0 ---

Stock market - VN index (Jul 2000 =100) 485 352 414 505 --- --- 1/ GDP based on 2010 price; 2/ WB estimates of Public and Publicly Guaranteed External Debt Source: GSO, SBV, MOF, IMF and WB 31. There is likely to be limited short-term impact from the US Federal Reserve’s ongoing tapering of its expansionary monetary policy. Vietnam did not experience the same market turmoil as other emerging market economies in 2013 when initial indications were made on tapering. Nonetheless, trade links with affected emerging market economies are not insignificant. Vietnam’s exports to the ASEAN 5 account for around 15 percent of total exports. Any knock-on real economy effects in these countries would be felt by Vietnam. Any further slowdown or rebalancing towards consumption spending in China would also impact Vietnam’s exports. On the other hand, positive developments in the US and the EU (together accounting for almost 40 percent of Vietnam’s exports) should help counter some of the regional trade effects.

32. The government is faced with crucial fiscal policy choices, as it seeks to balance the twin objectives of economic expansion and macroeconomic stability. The government will continue to face revenue challenges over the medium-term. Part of it will be due to counter-cyclicality because of projected moderate growth and tax breaks to stimulate economic

                                                            5 Revenue and expenditure to GDP ratios in table1 are on average between 1 and 2 percentage points of GDP lower than earlier estimates because GDP figures have been rebased from 1994 to 2010.  

15  

activity among small and medium enterprises. Though there will also be some short-term loss from cuts in the CIT rate, which over the longer-term may be offset by incremental investment.

33. To address slowing revenue, the government is working on strengthening tax administration. The revised Law on Tax Administration (November 2012) has introduced several new provisions to increase efficiency of tax administration, adopt Advance Pricing Arrangements (which should reduce loss from transfer pricing), and strengthen collections through improved tax audit and risk-based management. On tax policy, the government is expected to raise selected excise tariffs and adjust import tariffs on petroleum, and is looking at clearer requirements for SOEs to pay dividends to the State Budget6 – at the same time it needs to broaden the tax base and reduce exemptions.

34. The government is also paying more attention on spending consolidation. For capital spending, aside from policy measures mentioned above, there are now stricter provisions on spending of revenue collected over what was planned in the original budget. Ordinarily, provinces have discretion to spend a portion of the over-realized revenue on new capital projects. However, now these receipts have to be channeled to existing appropriations and for exceptional situations only such as natural disasters. If provincial authorities raise below what was budgeted, then they have to first find financing from existing sources (e.g. Financial Reserve Fund) before they can request additional transfers from the central government.

35. The government has introduced a number of policies to cut recurrent spending: (i) gradual reduction in subsidies and adjustment of administered prices; (ii) reduction in non-essential spending (e.g. workshops and seminars); (iii) cuts in the goods and services budget (e.g. government utility costs) by 20 percent; and (iv) generate 10 percent savings across the budget to finance salary reform costs.

36. The 2014 State Budget projects a similar deficit of 5.3 percent of GDP according to government accounting, but shows an increase to 6.4 percent of GDP according to GFSM 2001 estimates (see table 1). This difference is partly due to the projected increase in off-budget capital expenditure. Revenue projections in the 2014 State Budget are conservative, showing a 1 percent decline in total collections compared to the 2013 estimates. Overall spending in the 2014 State Budget is expected to grow at 3 percent in nominal terms from the 2013 estimated outturn, compared to an average of 16 percent growth in nominal terms in 2011-2013. But given the overall fiscal stance, there will be little fiscal space to absorb potential shocks unless some of the above structural revenue and spending efficiency measures are implemented.

37. The latest joint World Bank-International Monetary Fund Debt Sustainability Analysis (DSA) carried out in June 2013 assesses Vietnam at low risk of debt distress but there are important downside risks. Public debt (domestic and external) has increased slightly to around 56 percent of GDP in 2012 from 55 percent of GDP in 2011. Public sector debt dynamics over the medium to long-term have deteriorated somewhat compared to the 2012 DSA, largely on account of slower growth projections, lower revenue buoyancy and higher fiscal deficits. Debt sustainability indicators are projected to remain below their applicable debt thresholds. The increase to the 2013 deficit target will not change the overall rating of low level of debt distress.                                                             6 The government has issued Decree No. 204/2013/ND-CP dated December 5, 2013 providing guidance on budget execution and collection of dividends from enterprises where the state has shareholding.

16  

Figure 9: PV debt to GDP 

 

Figure 10: PV debt to export Figure 11: PV debt to revenue

Source: IMF, WB

38. The government will need to maintain its ongoing control over spending growth and implement measures to reverse the decline in revenue collection to ensure continued debt sustainability. The DSA results hinge on a baseline macroeconomic scenario in which government over the medium-term reduces the pace of spending considerably below historical levels. Even a small increase in the pace of spending growth will lead to a rapid deterioration in debt dynamics.

39. In terms of contingent liabilities, government guarantees for external and domestic debt were at around 11 percent of GDP in 2012 (this is part of total public debt at 55 percent of GDP mentioned above). The level of guarantees increased by nearly 20 percent between 2011 and 2012. There are no major concerns at this stage, but the government is monitoring risks closely particularly because some of the guaranteed firms (mostly SOEs) are operating in sectors facing difficulties (e.g. cement, paper, electricity production); the quality of reporting from guaranteed firms is mixed; longer-term investment projects are funded by shorter-term loans guaranteed by the government; and several loan guarantees are for social projects, which have longer gestation period. For these reasons, the government is imposing tighter controls on issuance of debt guarantees and has also adopted a Medium-Term Debt Management Program.

40. Aside from explicit liabilities however, the baseline scenario in the DSA assumes no realization of other possible liabilities that may arise from banking or SOE-related shocks and/or reforms. Any systemic shock, recapitalization of banks by the government, or acceleration of SOE restructuring – all of which have associated fiscal costs – would contribute to a rise in debt. These costs would be beyond whatever fiscal space could be generated out of revenue increase or further efficiency gains given the current fiscal situation.

41. The medium-term macroeconomic framework has been updated and confirmed to be adequate to proceed with a Development Policy Operation (DPO). Government policy has been largely consistent with maintaining macroeconomic stability.7 Interest rate cuts in the past year, although quite aggressive, have remained in line with falling inflation. The SBV’s stance to build foreign exchange reserves on the back of strong export and FDI performances, adjusting the exchange rate as necessary, also seems appropriate. There are concerns over a growing fiscal deficit with slowing revenue collection, which in turn is linked to slower growth and tax incentives to the private sector. In response the government is strengthening revenue mobilization through                                                             7 The Government of Vietnam has provided an update on macroeconomic developments in the first four months of 2014 based on recent information available to the authorities, which is attached in Annex 7.

-20

-10

0

10

20

30

40

50

60

2012 2017 2022 2027 2032

Threshold

Historical scenario

Baseline

Extreme shock

-50

0

50

100

150

200

250

2012 2017 2022 2027 2032-100

-50

0

50

100

150

200

250

300

350

2012 2017 2022 2027 2032

17  

tax administration measures, and consolidating both capital and recurrent spending. The macroeconomic risks linked to the financial sector remain important. The SBV has taken preparatory steps to help address these, including by tackling short-run liquidity pressures, which until recently did heighten perceptions of risk in the financial sector. More work is needed to address the fundamental weaknesses in the financial sector, which is part of the Bank’s ongoing dialogue with the government.

2.3 IMF RELATIONS

42. The IMF maintains a regular policy dialogue through Article IV consultations, interim staff visits, and its resident representative office in Hanoi. It has not had a program in Vietnam since the Poverty Reduction and Growth Facility ended in April 2004 but does have a series of technical assistance support. There are a range of ongoing areas of joint work between the Bank and the Fund, which are of direct relevance to the EMCC. These include a joint work program on strengthening debt management, annual joint debt sustainability analysis, tax policy and administration reform, public expenditure management, banking sector supervision, and the Financial Sector Assessment Program (FSAP).

3. THE GOVERNMENT’S PROGRAM

43. The Government’s development priorities are set out in its Socio-Economic Development Strategy (2011-2020), and the accompanying Socio-Economic Development Plan (2011-2015). The SEDS sets out goals for the coming ten years, and the SEDP includes specific policy actions and programs to achieve those goals. The SEDS has a long-term growth strategy focused on structural reforms, environmental sustainability, social equity, and emerging issues of macroeconomic stability to minimize short-term vulnerability. It identifies three areas of ‘strategic breakthrough’: (i) improved market institutions and administrative reforms for a more competitive and equitable business environment; (ii) development of human resources and investment in science and technology; and (iii) improved infrastructure.

44. Consistent with the macroeconomic and development program, the vision of the National Energy Development Strategy guiding the power sector up to 2020 (issued by the Prime Minister in December 2007) is to reduce investment needs, strengthen energy security, control and mitigate environmental pollution in energy activities and foster socioeconomic sustainable development.

45. Within the framework of the Energy Strategy, the GoV is implementing an ambitious program to reform the nation’s power sector aimed to ensure its sustainable development. This translates into the need for a permanent supply of electricity to support economic growth through the provision of good quality electricity services to consumers in all categories at cost reflective prices, while also allowing fair revenues to efficiently performing sector investors. The expected outcomes of the reform program are the strengthened security and adequacy of electricity supply, the sustainable improvement in the quality of service provided to end users, efficiency in sector operations, and the achievement of a pricing system driven by efficiency and competition. These outcomes are to be achieved by attracting a broader range of participants to invest in and modernize the management and operation of the electricity industry; and through the transition to electricity tariffs that, on the supply side, enable the financial viability of efficiently managed and operated companies, and on the demand side, provide pricing signals on actual costs of service delivery to enable the efficient use of electricity.

18  

46. Initiated by the 2005 Electricity Law, the GoV’s power sector reform program follows a long term and gradual approach. It includes actions in four key policy areas: (i) development of the power market; (ii) power sector restructuring; (iii) electricity tariff reform; and (iv) promoting demand side energy efficiency.

47. Development in the four policy areas supported by this DPO series is moving forward and reaching positive achievements in terms of creating competition in generation and gradually adjusting the tariff level towards cost recovery. A more detailed description is provided in Annex 4 and summarized below:

Development of the Power Market: The Electricity Law and the Power Market Roadmap established three phases for the development of a competitive power market in Vietnam, starting with a competitive generation market to supply a wholesale Single Buyer. The roadmap envisages increasing competition in subsequent phases. The VCGM commenced operation in July 2012 with participation of generators representing approximately 35 percent of the total installed capacity of the national system.

Power Sector Restructuring: The power sector reform includes ownership diversification of generation facilities and elimination of cross-ownership. The government has adopted a gradual approach towards changes in the structure of the national electricity enterprise EVN, through the creation of affiliate companies in charge of operations in generation (3 Gencos), transmission (national utility NPT) and distribution and retail (5 power corporations (PCs)), system and market operator (SMO), with accounting, management and functional autonomy. GoV’s approach envisages the removal of cross-ownership of Gencos and SMO from other agents in the market currently owned by EVN in 2015-2016, as prescribed in PM Decision 63 of November 8, 2013.

Electricity Tariff Reform: The 2009 PM Decision 21 initiated the electricity tariff reform process, establishing both the principles of a market-based mechanism to annually adjust the tariffs for the period 2010-2012, and of a subsidy regime aimed to protect vulnerable and poor consumers. This decision was further reinforced by an updated 2011 PM Decision 24, which allows for the tariff to be adjusted during the course of a year to reflect changes in uncontrollable costs (fuel, rate of exchange, etc.). Through the application of these mechanisms, the average electricity tariffs have increased steadily and have started to be revised more than once per year. Even so, the current tariff revenues still do not reflect all cost items, such as foreign exchange losses and financing costs. In addition, while nominal average electricity tariffs have increased by 44% over the period 2010-2012, cumulative inflation over the same period amounted to 53% respectively. Hence, further real term increases in tariffs will be required to allow for full cost recovery and create an environment that would attract private investors.

The PM Decision 2165 from November 2013 approves an average electricity retail tariff bracket in 2013-2015 between a price floor of VND1,437/kWh (US cents 7.2/kWh) and a price ceiling of VND1,835/kWh (US cents 9.2/kWh) demonstrating the Government’s commitment to further adjust electricity prices. At the same time, the subsidized social tariff continues to protect low income customers, and its cost for the first 50kWh has been maintained at 993VND/kWh (4.9 US cents/kWh).

19  

Table 2: Average Electricity Tariff Approved Date Approved

March 2009

March 2010

March 2011

December 2011

June 2012

December 2012

August 2013

VND/kWh 948.5 1,058 1,242 1,304 1,369 1,467 1,509 US cents/kWh 4.7 5.3 6.2 6.5 6.8 7.3 7.6 Increase - 11.5% 17.4% 5.0% 5.0% 5.0% 5.0%

Implementing Demand Side Energy Efficiency: The Vietnam Energy Efficiency

Program (VNEEP), approved in 2006, has created a comprehensive set of government-led activities to improve energy efficiency and conservation. To promote efficient use of electricity and reduce consumption, the government has introduced time of use (TOU) electricity tariffs for medium and large customers, and developed an energy efficiency standard and labeling roadmap. A pilot DSR program using the TOU tariff will be implemented by the Ho Chi Minh City PC under the Distribution Efficiency Project (DEP) financed by the World Bank.

4. THE PROPOSED OPERATION

4.1 LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION

48. Program objectives: The objective of the Vietnam Power Sector Reform Development Policy Operation is to support the initial phase of the long-term sector reform within the general framework defined in the Electricity Law, including to implement a competitive market for electricity generation; restructure the power sector and reform its electricity tariff system in order to facilitate effective competition, transparency and predictability; encourage timely investment in new generation capacity; enhance power system efficiency and reliable operations; and implement pricing and programs that promote the efficient use of electricity. Accordingly, the program is designed with the following four policy areas: (i) implementation of the VCGM, as the first phase of the roadmap to incorporate full competition in the electricity generation segment; (ii) transition to power sector restructuring suitable for market competition; (iii) electricity tariff reform; and (iv) promotion of demand side efficiency.

49. The Sector Reform Roadmap, specified in the PM Decision 26 in 2006 (amended by PM Decision 63 of November 08, 2013), defines a three phase gradual approach. In coordination with the restructuring of the power sector, establishment of a cost-reflective tariff system, and promotion of demand side efficiency measures, the phased approach aims to ensure stable power supplies along with an adequate level of investment, improve efficiency of sector performance and achieve reasonable price levels.

Phase 1 (2005-2014): Introduction of competition among state-owned generators through the establishment of the VCGM, in which generators are scheduled for dispatch and sell to a Single Buyer.

Phase 2 (2015-2022): Expansion of competition at the wholesale level (Wholesale Competitive Market), allowing generators to sell electricity to multiple wholesale purchasers including PCs and qualified large customers.

20  

Phase 3 (from 2023): Full competition by the introduction of Retail Competitive Market, in which the PCs’ monopoly as retail suppliers of small and medium sized customers is phased out.

50. Scope and achievements of the two preceding operations: PSRDPO1 set the foundation of the first phase reform program, by providing the vision and key principles and delegating authority for its implementation in a consistent and harmonized manner. PSRDPO2 supported a more detailed regulatory framework, including the establishment of VCGM rules, including institutional and contractual arrangements, to enable the pilot phase required prior to starting the full commercial operation of the competitive market; approval and effectiveness of the regulatory framework to implement transparent and efficient generation contract pricing and transmission and retail electricity tariff setting mechanisms; the decision of generation restructuring; and the regulations mandating load research activities to enhance demand forecasting and the design of effective time-of-use (TOU) electricity tariffs.

51. Objective of the third operation: The proposed PSRDPO3 will support full implementation of the first phase reform, and establish the basis for moving ahead to the next phase of the reform by achieving: (i) the full commercial operation of VCGM, (ii) the effective incorporation as participants in the VCGM of the recently created Gencos, owning and operating the power generation portfolio formerly belonging to the parent company EVN and managing related revenues and costs, (iii) the definition of the timing for the separation of the Gencos into independent companies with no cross-ownership with the national transmission company and the Single Buyer, (iv) the implementation of a set of regulations defining a more transparent and predictable electricity tariff system aimed at ensuring permanent recovery of total costs of efficient service provision, (v) the definition and application of demand side response regulations, and (vi) the implementation of at least one pilot DSR program.

52. Looking Ahead: Overall, good progress was made on the power market restructuring and reform agenda since the PDO series was launched. Previously achieved policy actions under DPO1 and DPO2 and the prior actions agreed upon with the GoV for the proposed DPO3 demonstrate GoV’s continued strong commitment to the power market reform agenda. Looking forward, a new series of reform measures will need to be implemented to enable a move towards a competitive wholesale market by 2015 as well as to address the financial sustainability of the sector. These reforms would need to address measures to deal with legacy debt and options for the divestment of EVN’s generation assets. The World Bank Group (IBRD/IDA, IFC, MIGA) is actively engaged in all critical areas of sector reform, for example, through helping with the design of the wholesale market, providing technical assistance to EVN on improving its financial performance and advising the GoV on a divestiture strategy for the Gencos.

4.2 PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS

53. Consistent with the indicative triggers set at the approval of PRSDPO2, and taking into consideration relevant further developments, the proposed PSRDPO3 includes six prior actions, all of which have been agreed between the GoV and the Bank.

21  

Box 1. Prior Actions for the Third Power Sector Reform Development Policy Operation Prior Action 1: The commercial operation of the Vietnam Competitive Generation Market has been fully implemented. Prior Action 2: All Gencos have started commercial operations and registered as market participants in VCGM. Prior Action 3: The Borrower, through its Prime Minister, has issued Decision Number 63/2013/QD-TTg dated November 8, 2013 to set forth the roadmap and operational principles for a power wholesale competitive market through the separation of Gencos and the System and Market Operator into independent companies that are not cross-owned with other market participants. Prior Action 4: The Borrower, through Ministry of Industry and Trade, has issued Circular Number 12/2014/TT-BCT dated March 31, 2014 setting forth the methodologies for the establishment of annual retail electricity tariffs. Prior Action 5: The Borrower, through MoIT, has issued Decision Number 2600/QD-BCT dated March 27, 2014 to authorize a power distribution company to carry out a pilot demand-response program. Prior Action 6: At least one power company has begun to pilot a demand-response program.

54. The proposed PSRDPO3 allocates maximum priority to the definition and systematic and transparent application of a new system for electricity tariffs aimed at ensuring operational efficiency and financial viability in sector performance. The indicative text in the Program Document of PSRDPO2 referred exclusively to the setting of the allowed revenues for distribution network operations, which is just one of the components of the electricity supply chain. During preparation of PSRDPO3 it was agreed to expand the scope of this prior action to also include the establishment of all the regulations needed to define and effectively apply a consistent methodology and related procedures for annual setting of average level of electricity retail tariffs, based on allowed revenues to recover costs of efficient provision of electricity services, including energy purchases, transmission services provided by NPT, distribution and retail services, and sector administrative costs.

55. Detailed status of each prior action: The following paragraphs state the detailed development of each prior action, which are also summarized in Annex 3.

Policy Area A: Development of the Power Market

56. Background: The VCGM is the initial phase in the roadmap defined by the GoV for implementation of a power market, with the objective of: (i) ensuring adequate levels of investment to meet demand growth and avoid abrupt changes in the structure of the sector or its operation that could lead to interruptions in investment; (ii) attracting investment from new sources, including private and foreign sources; and (iii) increasing competition to improve efficiency and obtain reasonable prices.

57. Review of previous operations: The previous operations successfully supported the critical stages of VCGM preparation, namely both the market conceptual and detailed design. They also supported the establishment of mechanisms to address sales of energy produced in power plants whose participation in the VCGM was considered inconvenient or not appropriate. More specifically:

PSRDPO1 supported the conceptual design of the VCGM, which was officially decided by MoIT to be a cost-based gross pool, including bilateral contracts and a spot market.

PSRDPO2 supported the preparation of the detailed regulations required for commercial launch of VCGM including: (i) VCGM market rules; (ii) methodologies to determine standard power purchase agreements and pricing arrangements for generation stations,

22  

with the exception of BOT and SMHP plants; and (iii) the methodology for cost recovery requirement of SMHP.

58. Action in the proposed PSRDPO3: The objectives set in this policy area will be accomplished through the effective implementation of the VCGM and its full commercial operation. Consistently, the proposed PSRDPO3 supports the achievement of the following prior action:

Prior action 1: The commercial operation of the Vietnam Competitive Generation Market has been fully implemented. To be evidenced by: Settlement report on results of VCGM full commercial

operation.

59. Status: Prior action 1 has been achieved. The full VCGM commenced operation in July 2012 with participation of 48 direct trading generators with overall installed capacity of 11,630 MW, which corresponds to approximately 35% of the total capacity at the national level. The VCGM market monitoring report (incorporating the SMO settlement report), evidences accomplishment of the policy action. The report was prepared by an independent international consultant hired by ERAV and reviewed by the Bank’s technical team. That review concluded that the report provides clear evidence on the effective full commercial operation of the VCGM.

60. The VCGM is currently operating as it was designed, enabling competition among participating generators for supply to the national Single Buyer, while protecting both sellers and purchasers from uncertainty of future market prices. The VCGM spot market provides proper generation price signals in a way that both reflects daily supply and demand balance and impacts of seasonal change of hydropower resources. The VCGM has not created any adverse effect on the financial stability of market participants since the volatility of generation price in the spot market is well addressed through the contracts for differences (CfD) attached to the standard power purchase agreements (SPPAs) signed between generators and the Single Buyer purchasing electricity for supply to final consumers. ERAV maintained the share of market transactions under SPPAs between 90 ~ 95% of total amounts of energy traded, in order to protect both parties in those agreements (generators and the Single Buyer) from the uncertainty of future market prices. ERAV intends to increase the number of participants in the VCGM in the next two years while maintaining the coverage of SPPAs at non less than 60% of total energy traded.

Policy Area B: Power Sector Restructuring

61. Background: The transition to full competition envisaged in the Power Market Roadmap requires the elimination of cross ownership between agents participating in the different segments of the electricity supply chain. In particular, in a fully competitive market with multiple sellers and buyers, agents in each segment of the electricity supply chain are prevented from having control (or in some cases any kind of ownership) of companies operating in other segments. This also applies to the system operator and the market operator, unless specific arrangements ensuring equal rights on ownership and decision power to agents in all segments and the government are adopted.

62. Review of previous operations: Previous operations successfully supported key activities for the creation of a power sector structure suitable for future market competition, namely the separation of generation and system and market activities from EVN.

23  

For the PSRDPO1, the GoV defined the institutional arrangements to be adopted for the development of the power market in the country.

For the PSRDPO2, the GoV decided to instruct EVN to develop the proposal for the establishment of the three successor generation companies (Gencos), initially as fully owned EVN’s affiliates, and becoming independent companies at a later stage. EVN prepared detailed proposals for allocation among three new Gencos of power plants already in commercial operation and others planned to be commissioned by 2015, for which EVN has already started construction or obtained financing. MoIT Decisions No. 3203/QD-BCT, No. 3204/QD-BCT, and No. 3205/QD-BCT dated 1st June 2012 formalized the creation of the Gencos.

63. Removal of cross ownership between agents in the power market is not mandatory for proper operation of the VCGM, as this initial phase of the roadmap involves competition between existing generators for supply to the Single Buyer. Recognizing that circumstance, as well as the need to ring-fence EVN’s core businesses, Prime Minister Decision 1782/QD-TTg issued in November 2012 established that all Gencos, National Power Transmission Company (NPT) and the National Load Dispatch Center (NLDC) will remain as EVN’s affiliates in the 2012-2015 period. The Decision explicitly mandated EVN to divest in all its non-core businesses, including An Binh Commercial Joint Stock Bank, An Binh Securities Joint Stock Company, Global Insurance Joint Stock Company, Sai Gon Vina Real Estate J.S.C, EVN Land Capital and Viet Nam Electricity Construction J.S.C.

64. Actions in the proposed PSRDPO3: Building on the achievements of the previous operations, the PSRDPO3 aims at: (i) accomplishing the commercial operation of the three Gencos; and (ii) defining a timeline for Gencos and the SMO to become entities without cross ownership with the other market participants.

Prior action 2: All Gencos have started commercial operations and registered as market participants in VCGM. To be evidenced by:

a. Completion of transfer from EVN to Gencos of contracting arrangements regarding both the existing power plants (power purchase agreements) and projects currently under construction.

b. Submission of an unaudited financial statement of each Genco for the first nine months of 2013.

c. Commitment by GoV to submit 2013 audited financial statements of each Genco by June 2014.

Prior action 3: The Borrower, through its Prime Minister, has issued Decision Number 63/2013/QD-TTg dated November 8, 2013 to set forth the roadmap and operational principles for a power wholesale competitive market through the separation of Gencos and the System and Market Operator into independent companies that are not cross-owned with other market participants. To be evidenced by: Government decision defining the timing for the separation

of Gencos, and SMO into independent companies with no-cross-ownership with other market participants

65. Status: Prior action 2 has been achieved. Gencos started commercial operation on January 1st, 2013 with newly assigned generation assets, management teams, physical

24  

headquarters and offices. The three companies are registered as participants in the VCGM, with most of their power plants holding SPPAs with the Single Buyer included in the VCGM’s contracts database by the end of 2013.

66. In order to achieve effective establishment of Gencos as fully autonomous companies managing their revenues and expenditures, several actions concerning the transfer of physical and financial assets and liabilities from EVN to the new companies were implemented during 2013. EVN worked with the GoV to adjust and transfer to the Gencos the standard power purchase agreements (SPPAs) involving existing plants, as well as to define adequate arrangements to deal with the legal obligations and liabilities of the loan agreements signed between EVN and lending institutions related to those assets and others under construction.

67. At the end of 2013, the process for signature of SPPAs between power plants owned by the Gencos and the Single Buyer had been substantially completed. On the other hand, liabilities related to power plants owned by the Gencos were transferred to those companies, with the exception of some loan agreements for power plants construction being discussed between GoV, EVN and involved lenders. By the end of 2013, the three Gencos were running commercial operations and registered as participants in the VCGM, which evidences fulfillment of Prior Action 2.

68. The operational autonomy of the Gencos is evidenced by the preparation of their first financial statements. In December 2013 EVN submitted to the Bank an interim unaudited financial statement of each Genco for the first nine months of 2013. Those statements were reviewed by the Bank’s financial experts, and considered acceptable. Besides, in January 22 2014, EVN submitted a letter to the Bank committing to provide, by June 30 2014, the audited financial statements of each Genco for 2013, prepared in full accordance with the International Financial Reporting Standards (IFRS).

69. Status: Prior action 3 has been achieved. On November 08, 2013 GoV issued PM Decision 63/2013/QD-TTg, amending Decision 26, stating that the full commercial operation of the Vietnam Competitive Generation Market (VCGM), the Wholesale Competitive Market (WCM) will be implemented in two steps: (i) implementation of pilot WCM from 2015 to 2016; and (ii) implementation of full WCM from 2017 to 2021. Decision 63 sets specific preconditions to be met for the transition from VCGM to pilot WCM: (i) the power generation companies have to separate into independent generator entities, with no across ownership/benefit with the Single Buyer or transmission company or the SMO; and (ii) the SMO will become an independent entity with no cross ownership/benefit with other market participants.

Policy Area C: Electricity Tariff Reform

70. Background and the review of previous operations: Previous operations supported the core of the GoV’s electricity tariff reform program, which represents a deep transformation of the power sector and constitutes the first experience of economic regulation in basic infrastructure services in Vietnam.

PSRDPO1 supported the preparation of PM Decision 21/2009/QD-TTg, establishing a market based mechanism to adjust electricity tariff annually and delegated the approval authority to MoIT. This represented a significant qualitative change from historical practice of no application of tariff adjustments during several years.

25  

PSRDPO2 supported the preparation of actions to reinforce PM Decision 21 and address issues on its effective implementation. This included preparation of PM Decision 24/2011/QD-TTg (PSRDPO2), which allows for periodic tariff adjustments (up to every three months with a cap of 5%) to reflect changes in costs of service provision (fuel prices, rate of exchange VND) and recover costs incurred in the past. Besides, PSRDPO2 supported ERAV in implementing several regulations (41/2010/TT-BCT, 14/2010/TT-BCT and 03/2012/TT-BCT) aimed to set market-based generation, transmission and distribution tariffs following transparent mechanisms and procedures.

71. Complementing the new tariff setting and adjustment mechanisms, procedures to improve targeting of the poor in subsidization schemes were introduced in February 2011. PM Decision 268 created a special subsidized tariff that applies only to residential customers registered with their electricity retailer (PC or LDU, as applicable), with average consumption not exceeding 50 kWh per month on a rolling three month basis. Through PM Decision 269 approving the electricity tariffs to be applied in 2011, the increase in the price for that 1-50 kWh block represented a reduction in the subsidy provided from 50 percent to 20 percent of average cost reflective rate. But this reduction was compensated by creating an explicit subsidy of 30,000 VND/month to the registered poor. Gradual increases in general retail tariff over the past two years have not been applied to the special subsidized tariff.

72. The significant achievements in the improvement of the tariff system, both in terms of setting and adjustment of average level and better targeting of subsidies, reflect the strong commitment of GoV to the reform of the power sector in the country. However, these measures, while positive, are still insufficient to ensure the financial viability of the operating companies and to promote investments needed to increase system capacity. Further developments are needed to consolidate the tariff reform and ensure its sustained application. A transparently and systematically applied methodology for setting average level of electricity retail tariffs, allowing recovery of total costs of efficient service provision, is a key component of any reform program aimed at achieving the sustainable development of the power sector. It must be complemented by a well designed and implemented subsidization scheme (social safety net), effectively targeting poor and low income consumers. Achievement of this crucial milestone is viable in the current situation of the sector in Vietnam, and is a necessary condition to reach other objectives of the reform process, such as investment in new generation capacity, demand side energy efficiency actions, divestiture of Gencos, implementation of wholesale competition, etc.

73. Action in the proposed PSRDPO3: The proposed operation allocates maximum priority to the definition and transparent application of a new system for electricity tariffs aimed at ensuring operational efficiency and financial viability in sector performance.

Prior action 4:   The Borrower, through Ministry of Industry and Trade, has issued Circular Number 12/2014/TT-BCT dated March 31, 2014 setting forth the methodologies for the establishment of annual retail electricity tariffs. To be evidenced by: Circular issued by MoIT on methodologies for annual setting

of average level of electricity retail tariffs and procedures for their effective application.

74. Status: Prior action 4 has been achieved. On March 31, 2014, MoIT issued Circular 12/2014/TT-BCT “guiding the calculation of average electricity retail tariff”. Issuance of the Circular concludes the formal process started on January 22, 2014, when the draft document was

26  

posted on MoIT’s website for public consultation. The Circular describes the methodology, sequencing and procedures for annual approval of the average electricity retail tariff level. It defines the methodologies and procedures for the annual setting of the average retail tariff level (Allowed Revenues (AR) of the PCs for electricity supply to end users). The AR are determined to ensure the PCs will recover all reasonable costs of provision of electricity services to their customers, including energy purchases, transmission services provided by NPT, own distribution and retail services, and sector administrative costs. The Bank’s project team carried out a detailed review of the contents of the Circular and concluded the document is acceptable.

Policy Area D: Implementing Demand Side Energy Efficiency

75. Background: As part of VNEEP Phase 1 (2006-2010) activities, the Energy Efficiency and Conservation Law (EE&C Law) was drafted and enacted by the National Assembly in 2010. The GoV and the World Bank have agreed on a Climate Change Development Policy Operation programmatic series (CC DPO) that includes, under the climate change mitigation thematic area, policy actions aimed at developing and implementing regulations for the EE&C Law and measures for promoting energy efficiency and conservation in industrial sectors. Consistently, some of the triggers and benchmarks proposed in the PSRDPO series were transferred to the prior action for CC DPO1. In light of these developments, it was agreed that the power sector reform programmatic series would focus on measures to enhance electricity pricing to promote efficient use and demand response by electricity consumers, as these regulations fall under the responsibility of MoIT/ERAV.

76. Review of previous operations: Previous operations successfully supported the development of electricity pricing and demand data collection mechanisms, which are the prerequisites for implementing a pilot DSR program.

For PSRDPO1, TOU tariffs for industrial, commercial and irrigation customers were introduced through issuance of MoIT Circular 05/2009/TT-BCT in 2009. Besides, energy efficiency standards for some consumer goods utilizing large amounts of electricity were established in 2009.

For PSRDPO2, load research regulations for PCs were implemented through MoIT Circular 33/2011/TT-BCT. The regulations mandate periodic load research activities by PCs and the use of resulting load profiling and demand forecasts to set the average tariff and rates in each period (time of day) for consumers categories for which TOU tariffs are applicable.

77. Decision No. 1670/QD-TTg by the Prime Minister dated 8th November 2012 set the legal framework for the development of smart grid projects in Vietnam, in particular for the implementation of a pilot DSR program. The Decision provided a sound legal basis for PCs to implement pilot DSR projects based on the application of Automated Metering Infrastructure (AMI) to record and monitor consumption of large customers. The first pilot program will be implemented by Ho Chi Minh City PC under the Distribution Efficiency Project (DEP) financed by the World Bank.

78. Actions in the proposed PSRDPO3: The objective in this policy area will be achieved by the effective implementation of DSR programs. The proposed PSRDPO3 supports the following prior actions and associated milestones concerning those programs:

27  

Prior action 5: The Borrower, through MoIT, has issued Decision Number 2600/QD-BCT dated March 27, 2014 to authorize a power distribution company to carry out a pilot demand-response program. To be evidenced by: Issuance of MoIT Decision instructing PCs to implement

demand response programs

Prior action 6: At least one power company has begun to pilot a DSR program. To be evidenced by: Issuance of MoIT Decision committing to implement

specific pilot program in one power company

79. Status: Prior actions 5 and 6 have been achieved. On March 27, 2014 MoIT issued Decision 2600/QD-BCT “on approval of the pilot implementation plan for demand response programs”. The Decision approves the plan for implementation by PCs of pilot demand response programs in 2014-2015, defining the types of programs to be implemented, and clearly establishing roles and responsibilities of the involved sector agents (ERAV, EVN, PCs). In the Decision MoIT instructs EVN and its affiliate company Ho Chi Minh City PC (HCMPC) to complete implementation of two pilot demand response programs before the end of 2015 (expected duration of the programs 12 months). Consultancy services to support ERAV and HCMPC in the design and support in implementation of the pilot programs (financed by the World Bank through DEP) started in early February, 2014. Thus, the project team confirms that, through the issuance of Decision 2600/QD-BCT, prior actions 5 and 6 have been achieved.

Key Program Outcomes and Indicators

80. The program outcomes and indicators were defined to cover the wide range of goals that the GoV aims to achieve throughout the whole reform process. They were agreed at the timing of the PSRDPO1 approval, and have remained unchanged throughout the series of operations. They are described in Annex 1. Some outcomes are directly related to this operation, while for others there is an indirect link. For example, the outcome “increase in generation availability” aims to directly assess the effects of VCGM technical codes that are supported by the PSRDPO series, and also to indirectly confirm that investment in the generation sector is maintained during the VCGM commercial operations period.

81. Status: Most of the outcomes and indicators have been already achieved, or are on-track to be achieved. The indicator related to the level of cross subsidy in electricity tariffs deserves some specific comments. Tariff cross subsidization refers to the relationship between the rates paid by users in different tariff categories and the general average. Subsidizing users are those paying rates above the general average, while subsidized consumers pay rates below that value. From that perspective, tariff cross subsidization to low-consumption residential consumers has been consistently reduced from 2011. As shown in Annex 8, as per tariff rates applied in December 2013: (i) average tariff level is 1,473 VND/kWh; (ii) residential users consuming less than 100 kWh/month pay 1,384 VND/kWh; (iii) users consuming 150 kWh/month pay 1,451 VND/kWh; and (iv) commercial and medium and large residential consumers and pay rates well above the general average; (v) industrial consumers in all sub-categories pay rates close to the general average. Annex 8 also presents the historic evolution of the rates paid by selected groups of users in all categories, which shows the drastic reduction in tariff cross subsidization to small residential consumers implemented from 2011. A second aspect in subsidization refers to external funding, which is needed when average tariff level is below revenues required to ensure full cost recovery. In this case all electricity users are

28  

being subsidized. Determination of the average tariff level ensuring full cost recovery depends on some key parameters of the tariff system. Periodic determination of those parameters in the future will result from the effective systematic application of the regulations defined in the scope of prior action 4 of the proposed operation. An initial determination based on current values of the operating companies of the cost items considered for setting the allowed revenues, will be one of the most important outcomes of the ongoing financial assessment of the electricity sector in Vietnam financed by the Bank, which is expected to be concluded by mid-2014. The assessment will also provide clarity on the amount of the current financial deficit of the electricity sector due to unrecovered costs incurred in the past. Some preliminary findings of the assessment on current financial situation of EVN are presented in Annex 5.

Analytical Underpinnings

82. The Power Sector Reform DPO series has supported a comprehensive and consistent three-phase program, which did not have changes between tentative triggers identified at the end of each stage for the following phase and actual prior actions in that respective phase. In that context, the analytical underpinning for the preceding operations, described in detail in paragraphs 80 and 81 of the PD of DPO2, has also supported the preparation of the proposed operation.

4.3 LINK TO CPS, OTHER BANK OPERATIONS AND RELATIONSHIP TO TWIN GOALS

83. The proposed operation is consistent with the objectives of the new Country Partnership Strategy (CPS) between the GoV and the Bank for the period FY12-FY16. Linked to the CPS competitiveness pillar, it will contribute to enhance economic management and business environment in the power sector, as well as to improve the efficiency and quality of electricity infrastructure and services. Linked to the CPS sustainability pillar, the operation will contribute to climate change mitigation through tariff reform introducing efficient pricing and demand side response programs. The proposed operation will continue to strengthen the engagement and policy dialogue between the GoV and the Bank on the implementation of power sector reform as a tool for sustainable development and enhancement of energy efficiency. Links to other World Bank Group operations are addressed in the introduction section, paragraph 6 and 7.

84. The project is expected to boost shared prosperity by contributing to the creation of a more efficient and competitive power market and therefore overall growth of the Vietnamese economy. This expectation is based on the widely recognized role of rapid electrification and the development of electricity generation capabilities and network expansion in Vietnam’s growth success.

85. Vietnam’s growth since the early 1990s has been strongly associated with poverty reduction as well as improvements of the income of the bottom 40 percent. This pattern has been consistent and has continued in the most recent household survey data despite the global growth slowdown. Thus, it is likely that growth-enhancing policies and programs will continue to boost shared prosperity in Vietnam.

86. It is also likely that, as per the historical pattern, growth will continue to contribute to poverty reduction, as measured using Vietnam’s national poverty line. However, remaining extreme poverty (measured using the $1.25-a-day international poverty line) is now negligible in

29  

Vietnam, and thus growth overall as well as this project are not expected to have substantial effects on extreme poverty.

4.4 CONSULTATIONS, COLLABORATION WITH DEVELOPMENT PARTNERS

87. Consultations: The power sector strategy in Vietnam is formulated through a consultation process with relevant ministries and stakeholders. Most of the regulations associated with the electricity sector are issued as MoIT Circulars. MoIT sets out the procedures to assure the recommendations from individuals, companies, and other ministries are considered. The amended Electricity Law enacted in July 2013 requires formal consultation with MoF in the process for approval of any circular on tariffs.

88. Collaboration with other Development Partners: The World Bank is leading the power sector and market reform policy dialogue in Vietnam, in close collaboration with other donors. The World Bank, the Asian Development Bank (ADB) and the Agence Française de Développement (AfD) have cooperated closely and coordinated their support on power sector reform. ADB financed the initial technical assistance for the overall generation market design, and provides technical assistance and capacity building for NPT, in particular on financial modeling, transmission charges and regulations. AfD supports ERAV in reviewing and evaluating the VCGM. There are ongoing collaboration efforts with several donors to develop a strategy for a financial recover of EVN and its subsidiary companies.

4.5 LESSON LEARNED

89. Based on the operational experiences from PSRDPO1 and 2, the Government and the Bank have ensured maximum flexibility to adjust the number and contents of the prior actions to ensure changing policy and regulatory environment in the power sector can be fully incorporated while critical actions are implemented to further power sector reform and restructuring.

5. OTHER DESIGN AND APPRAISAL ISSUES

5.1 POVERTY AND SOCIAL IMPACT

90. Residential electricity tariffs have increased repeatedly since the launch of the tariff reform in 2009. In February 2011, the Prime Minister issued the Decision No. 24/2011/QD-TTg ‘On the adjustment of electricity selling price according to market mechanism’ of which allows the adjustment of electricity selling price according to market mechanism with the increase rate not above 5%. Since then, the retail electricity tariff for consumption increased by around 5% each time. Average tariff including both residential and non-residential customers has reached 1,509 VND/kWh (US 7.1 cents/kWh). In November 2013, the PM issued Decision 2165 which allows for electricity tariff to be increased up to VND 1,835/kWh (US cents 9.2/kWh) by 2015.

91. Social tariffs for low-income consumers, which were introduced by the PM Decision 268 in 2011, have remained at an affordable level. Since the Decision 268/2011/QÐ-TTg, poor households receive two supports for the electricity consumption. Firstly, poor households consuming less than 50 kWh/month are charged a tariff of 993 VND/kWh (US 4.7 cents/kWh). Secondly, each poor household receives 30,000 VND/month support in cash.

92. On average, Vietnamese nationals spend 2.1% (2.4% for poor) of their total expenditure on electricity payments, indicating the affordability of electricity. Households, both poor and better off, spend a relatively small and increasing share of household expenditures

30  

on electricity, from 1.8 percent of expenditures in 2010 to 2.1 percent in 2008. It should be noted that the total expenditure of households used to estimate the poverty rate includes imputed expenditure on durables and housing. In figures in Table 3, the total expenditure of households used to estimate the share of electricity expenditures do not include imputed expenditure on durables and housing.

93. However, consumption using home-production items are included. The share of household expenditures in electricity in 2010 and 2012 is lower than the share in previous surveys VHLSS 2002 to 2008 because of the difference in questionnaires on food consumption. For VHLSSs 2002 to 2008, households are asked about the total food consumption during the past 12 months. For VHLSSs 2010 to 2012, households are asked about the total food consumption during the last 30 days. The annual food consumption is estimated by annualized the monthly food consumption. As a result, the annualized food consumption in 2012 is higher than the annual food consumption in 2010. Urban households spend a higher proportion than rural households and poorer households spend slightly less (as a share of total spending) than the better off. Rich regions such as South East have a higher share of electricity spending than poor regions, but the share is still lower than 3%.

94. Gender Aspect: The difference in terms of the share of electricity expenditure is small between male-head and female-head households. The share of electricity spending in total expenditure is 2.0% for male-head households and 2.2 % for female-head households.

Table 3: Share of electricity spending in the total household expenditures: 2012

Groups

VHLSS 2010 VHLSS 2012 Spending on

electricity (thousand

VND/year)

Share of electricity spend

in total expenditure

Spending on electricity (thousand

VND/year)

Share of electricity spend

in total expenditure

Rural 818.2 1.6 1348.2 1.9 Urban 2085.8 2.2 2838.9 2.4 Poverty Non-Poor 1384.2 1.9 2007.8 2.1 Poor 377.5 1.5 597.7 1.8 Gender of household head Male household head 1142.5 1.7 1777.7 2.0 Female household head 1382.2 2.0 1845.3 2.2 Proportion of female members in households (P) P = 0 (all male members) 582.3 1.7 1172.3 2.3 P > 0 & P < 0.5 1248.2 1.7 1909.5 2.0 P = 0.5 1218.3 1.9 1732.4 2.1 P > 0.5 & P < 1 1316.0 1.8 2015.4 2.0 P = 1 (all female members) 671.2 1.9 900.6 2.2 Total 1204.9 1.8 1795.4 2.1

Source: World Bank

95. Several tariff scenarios were studied to assess the impact of increases in electricity tariffs, considering (i) an already implemented 5% increase in July 2013, (ii) a possible other 5% increase before the Board date, and (iii) a possible modification of the social protection scheme with continuation or termination of the 30,000 VND /month subsidy. For all the scenarios, electricity kWh consumption of the base case is held fixed at the 2012 VHLSS levels and monetary values are adjusted to remove the inflation (using GSO’s official CPI). In these

31  

scenarios, the MOLISA poor households are allowed to low tariff and receive cash subsidy. The four scenarios are;

Scenario 1: There is only a 5% increase in tariff in 2013, i.e., the increase in July 2013. In this scenario, the MOLISA poor still receive 30,000 VND/month.

Scenario 2: A tariff increase in July 2013 and 5% increase in December 2013; poor households receiving 30,000 VND/month; tariff for the MOLISA poor is still 933 VND/kWh, and the inflation rate in 2013 is assumed to be 7%.

Scenario 3: A tariff increase in July 2013 and 5% increase in December 2013; MOLISA poor households do not receive 30,000 VND/month; tariff for the MOLISA poor is still 933 VND/kWh, the inflation rate in 2013 is assumed to be 7%. The electricity spending and its share in total expenditure also increased, but the increase rate is very small.

Scenario 4: A tariff increase in July 2013 and 5% increase in December 2013; poor households do not receive 30,000 VND/month; the inflation rate in 2013 is assumed to be 7%; tariffs for the poor is now increased by 5% in Dec 2013.

96. The scenario simulation analysis shows the share of electricity spending in the total expenditure slightly increases from the VHLSS 2012 baseline, but the impact is small. Scenario 1 shows that the electricity spending and its share in total expenditure just slightly increase to keep the kWh consumption unchanged. Without cash subsidy, the share of the electricity expenditure in total expenditure of poor households increases to 1.99 in Scenario 3 and 2.01 in Scenario 4. Although this share is higher than the share in Scenario 1 and 2, it is still quite low. On gender, the difference in terms of the share of electricity expenditure remains small between male-head and female-head households.

97. Additional simulation was carried out assuming even higher price increase in 2014, reaching an average 9 cent/kWh (26 % higher than the 2013 July price, and 20 % higher than the possible 2013 December price). The results indicate that the impact is still acceptable and electricity remains affordable for all income groups.

98. Migrants and temporally residents tend to suffer from higher informal electricity prices. They negotiate electricity prices with the owner/landlord, which is not based on government regulations. An increase in electricity prices usually poses severer effects on migrants and temporary residents than those paying in accordance with the regulated tariff. Those people are not accessible to low-income tariffs up to 50 kWh or the direct subsidy of 30,000 VND/month.

99. Research suggests that those groups are paying higher electricity costs than in the previous operations, but the consumption level remains low. The Vietnam Academy of Social Sciences recently conducted interviews with residents including migrant workers in Hanoi, Binh Duong, Bac Giang, and Tien Giang to assess the impacts of energy pricing reform in Vietnam. It revealed that, for example, migrant respondents working for industrial parks in Hanoi spend 60 to 80 thousands VND per month. In Hanoi, landlord-imposed electricity charges range between VND 3,000-4,500/kWh, with VND 1,500-2,000/kWh being the most common charge. Assuming basic monthly salary of 2 million VND, the share of electricity spending in total revenue would be around 3 to 4 percent. The research reports the spending is not serious in the month when they have extra working time and earn properly more than double the basic salary. However, in the laid-off situation, energy price increase make them worried about further expense increases.

32  

5.2 ENVIRONMENTAL ASPECTS

100. The implementation of the policy actions supported by Power Sector Development Policy Operation series are not likely to have significant effects on Vietnam’s environment, forests or other natural resources. The impact of the series was assessed in depth in PSRDPO1 and revisited in PSRDPO2 as required under Operations Policy 8.60 to determine if there are significant effects on the country’s environment, forests, and other natural resources. There are no negative impacts from the implementation of policy actions at the end of this DPO program, and some policy areas are neutral in terms of its expected impacts. The third proposed operation will complete this series.

101. The areas of policy intervention to be supported under this DPO are likely to have specific positive effects on natural resources or potentially neutral effects, including:

Development of the Power Market. Effective implementation of the VCGM and the full commercial operation and participation of the Gencos will trigger incentives for improving energy efficiency. This may create incentives to prioritize and speed up the commercial operation of most efficient thermal generation in the list of projects approved for the period 2011-2015.

Power Sector Restructuring. The policy area establishes the sector structure by accomplishing commercial operation of the three Gencos, diversify generation ownership and promote private investment. However, it does not affect generation built or its operation.

Electricity Tariff Reform. Cost reflective tariff level and elimination of subsidies will provide economic signals to reduce consumption and for the efficient use of electricity (e.g. energy efficient electrical appliances and technologies), leading to lower emissions and energy savings.

Implementing Demand Side Energy Efficiency. Enhanced design of TOU tariffs promote lower peak demand, thereby reducing higher peak transmission and distribution losses and use of less efficient generation. Demand response programs and performance based rate setting of PCs promote reduction of distribution network losses and lower energy consumption. These would help lower emission through reduction of peak demand, losses and energy consumption.

102. Vietnam has good environmental impact assessment regulations and processes, which have been strengthened by Bank support (the World Bank DPO on Public Investment Reform-2, PIR DPL 1, as well as in other related TA activities) and technical assistance. In addition, energy efficiency obligations are established by law and the regulator has capacity to enforce and monitor load profiling and demand response programs by PCs. The energy sector’s capacity in environmental management has also been enhanced along this process. The PMDP7 has been developed based on a strategic environmental assessment (SEA) of the power sector as required by the country’s Law on Environmental Protection.

5.3 PFM, DISBURSEMENT AND AUDITING ASPECTS

103. Public Financial Management. Vietnam’s public financial management (PFM) environment is considered adequate to support this operation. The most recent Country Financial Accountability Assessment conducted in 2007 concluded that ‘the financial management risk to

33  

proper use, control and reporting of funds that are managed through the Vietnam public financial management systems is assessed as moderate.’ The Government has maintained strong ownership of the PFM reform agenda and continues to lead a coordinated reform program in consultation with the development partners. While the financial management and accountability systems of the government have improved, the risks arising from weak implementation and compliance remain. The quality and extent of independent audit oversight can be further strengthened by updating the audit strategies and methodologies of the State Audit of Vietnam to align with international practices, and through the development of an effective internal audit function, which currently is only at an embryonic stage in Vietnam.

104. Dedicated Foreign Currency Bank Account (DA). To address the potential residual fiduciary risks related to the foreign exchange control environment, the Recipient/Borrower will open and maintain a DA at SBV in US dollars for the Recipient/Borrower’s use once the Loan is approved by the Board. The DA will form part of the country's official foreign reserves. However the Recipient/Borrower uses the Loan proceeds, they should always become a part of the country’s budget resources. Therefore, the Recipient/Borrower shall ensure that upon each deposit of an amount of the Loan into the DA, an equivalent amount is accounted for in the Recipient/Borrower’s budget management system, in a manner acceptable to IBRD. If after deposit in the DA, the proceeds of the Loan or any part thereof are used for ineligible purposes, as defined in the Loan Agreement, IBRD will request the Recipient/Borrower to refund the amount directly to IBRD. Amounts refunded shall be cancelled.

105. Reporting and Auditing. Through SBV, the Recipient/Borrower will report the exact sum received into the Deposit Account (DA), ensure that all withdrawals are for “eligible” expenditures, indicate to IBRD details of the Treasury account to which the Vietnamese dong equivalent of the Loan proceeds will be credited, confirm that the Loan proceeds were received into an account of the government that is part of the country’s foreign exchange reserves and that an equivalent amount has been accounted for in the country’s budget management system (normally within 30 days after disbursement), and submit a report on receipts and disbursements for the DA. The Government will, if considered necessary by IBRD, allow an independent external audit of the dedicated foreign currency DA.

106. Disbursement. The proposed operation will follow IBRD disbursement procedures for DPOs, and the Loan proceeds will be disbursed in compliance with the stipulated release conditions. Disbursement will not be linked to any specific purchases and no procurement requirements will have to be satisfied.

5.4 MONITORING AND EVALUATION

107. The PM Decisions and MoIT Circulars include a clear allocation of responsibilities in the implementation of power sector reform. MoIT, and in particular ERAV, are responsible for the drafting, consultation and approval of the regulations corresponding to the policy actions under the Power Sector Reform DPO series. The government has assigned to EVN the responsibility of designing and implementing the market IT systems. NLDC, as the SMO, is responsible for preparing the implementation procedures for the VCGM rules and Technical Codes, and to administer VCGM, including reporting on results.

108. As part of the continued Bank engagement in the power sector policy dialogue, MoIT and the Bank will jointly monitor implementation. With the assistance of international

34  

consultants, ERAV developed the market and technical codes monitoring arrangements and reporting forms for the SMO and market participants, NPT and PCs, which is responsible for providing the required information to monitor implementation and evaluate progress, and to determine outcome indicator. The Vietnam Grid Code and Vietnam Distribution Code create the basis for the objective monitoring of the performance of the power system. Technical codes target improving quality of supply, including operation the power system with adequate operational reserves to avoid system collapse. End of program outcome indicators are shown in the Policy Matrix at Annex 1.

6. SUMMARY OF RISKS AND MITIGATION

109. Main risks: Most of the outcomes and indicators of the whole PSRDPO series have been already achieved, or are on track to be reached. Practical experience with the reform program in Vietnam, in particular with the two previous operations in the series, show that the main risks are: government delay in approval of decisions defined in each prior action; social acceptance; complexity and lack of readiness to implement. The same previous experience shows that those risks can be properly mitigated and addressed by close monitoring of the policy implementation process, providing necessary advice and guidance to the government, and working closely with concurrent lending programs and AAAs. Taking into consideration those aspects, as well as the progress already achieved in the previous operations of the program, overall risk for this operation and for full accomplishment of the objectives and outcomes of the whole PSRDPO series ending with this operation is rated as moderate.

110. Risk of government delay in approval process (i.e., effectiveness) of operation and associated policy actions: Throughout this series of operations, the GoV has continued to approve in a timely manner all relevant regulations. The amended Electricity Law that became effective in July 2013 prescribes formal consultation with MoF in the process to approve any circular on tariffs. Although this adds another approval process, the risk of delays is mitigated by the fact that most of the regulations associated with the prior actions have been already drafted by ERAV. The Bank team will closely monitor progress and provide advice and support to ERAV to ensure timely implementation. In addition, the risk of delay in general tariff reform has been mitigated by the Government through the recent issuance of PM Decision 2165/QD-TTg (dated November 11, 2013) setting the retail tariff average level range to be applied until 2015, with a ceiling that is approximately 22% higher than the 2013 average tariff level.

111. Risk on social acceptance: Systematic application of the transparent cost-recovery tariff system resulting from accomplishment of prior action 4 of the proposed operation will lead to a continuous increase of average tariff level, following upwards tendency on country’s cost of electricity service provision (in particular electricity generation). There is a risk that social acceptance issues could cause delays in the application of the updated tariff system, which could affect overall efforts to achieve sustainability of the sector.

112. Tariff increases to the poor are mitigated by specific government’s decisions, including the application of a subsidized social tariff and direct subsidies to users with very low monthly consumption. PSIA study conducted for the PSRDPO3 indicated this social tariff effectively mitigated the impact on the poor customers. Also the tariff remains unchanged as 993VND/kWh. Potential impact to customers who are close but not entitled to the special tariff and subsidy will be mitigated by providing necessary guidance to the GoV based on the results of PSIA.

35  

113. Risk of financial viability of the power sector: EVN has been going through substantial financial challenges over the last few years, which have raised serious concerns from the GoV, the international donor community, and private investors about the overall financial sustainability of the sector. It also has led to other stakeholder questions about EVN’s efficiency, which is now being addressed through a broader GoV program of SOE restructuring, and divesting of non-core businesses. To strategically address the financing (and perceptions) challenge, the Bank and EVN initiated a technical assistance program to develop a comprehensive strategy for enhanced financing performance of EVN’s group of power companies, including EVN corporate, the Gencos, PCs and NPT. The study will not only provide a detailed diagnostic analysis of the financial and operational performance of EVN and its power companies but also carry out financial projections based on various scenarios of electricity demand growth, corresponding investment expenditure requirements and using various assumptions of required tariff increases. Ultimately, financial restructuring and recovery plans geared towards improvement of financial performance of EVN group of power companies based on tariff increase scenarios will be developed for endorsement by the GoV. In order to provide greater transparency and stakeholder buy-in to the process, EVN promoted the creation of a Government working group comprising all key ministries and invited the main international donors to provide oversight to the study. The work is progressing well and the study is planned to be finalized by June 2014.

114. Risk of complexity and lack of readiness to implement: The PSRDPO series introduced some actions with medium technical complexity, which have been successfully addressed in the two previous operations. In the proposed operation, those actions are: (i) production of financial statements for Gencos, and (ii) design and implementation of a pilot DSR program. The related risks are not very significant, and can be properly mitigated as:

Gencos already initiated procedures for incorporating their own financial management systems (independent from the parent company EVN). The companies will be able to issue the unaudited financial statements for the first three quarters of 2013 before the end of the year.

ERAV has hired a consultant to work closely with Ho Chi Minh City PC to define the scope, concrete contents, technical specifications and timeline of the DSR pilot program, to be implemented under DEP.

36  

ANNEX 1: POLICY AND RESULTS MATRIX

Prior Actions Results

Prior Actions under DPO1

Prior Actions under DPO2

Prior Actions under DPO3

Target End Series Baseline Status

Policy Area A: Development of Competitive Power Market Increase in generation availability due to market efficiency incentives and increase in quality of service due to application of technical codes. Enhanced transparency in generation contracting and pricing, creating predictability for investors. 1. Establishing of design

principles for the implementation of the VCGM. (MoIT Decision 6713/QD-BCT of December 31, 2009)

2. Establishing metering systems standards and procedures for generation plants participating in the VCGM. (MoIT Circular 27/2009/TT-BCT of September 25, 2009)

1. Establishing market rules for the VCGM, instructing EVN to draft market procedures, and delegating authority for ERAV to review and approve market procedures. (MoIT Circular, 18/2010/TT-BCT of May 10, 2010)

2. Establishing methodologies and procedures to determine and approve standard contracts and pricing for generation, except for BOT and Strategic Multi Purpose Hydro (SMHP) (MoIT Circular 41/2010/TT-BCT of December 14, 2010)

3. Establishing methodology

for cost recovery revenue requirement of SMHPs. (MoIT Circular 46/2011/TT-BCT of December 30, 2011)

1. The commercial operation of the Vietnam Competitive Generation Market has been fully implemented. (Report to support ERAV in monitoring operations of the pilot and full VCGM)

System is operated with hourly operational reserve at least 10 percent

System operated with 0% in some hours June, 2008.

Achieved. System was operated with hourly operational reserve margin at over 17.9% during January to June 2013. However, operational reserves strongly depend on availability of hydropower, and as such could be reduced during dry periods. Investments in all types of new generation capacity have been lacking in recent years due to insufficient tariff revenues.

Contracts in place for 90 percent of demand, for non BOT generation based on pricing methodologies and standard form issued by MoIT.

No spot or SB contract pricing methodology in 2009

Achieved. Contracts for 95% of generators participating in VCGM, and all the non-participating generators except BOT are under the pricing methodologies issued by MoIT.

VCGM spot market price disclosed to agents in SMO website to which the public has access.

(2009) None Achieved: Market data have been published on SMO website with access to market participants.

37  

Prior Actions Results

Prior Actions under DPO1 Prior Actions under

DPO2 Prior Actions under DPO3

Target End Series

Baseline Status

Policy Area B: Power Sector Restructuring The diversity of electricity generators increases, creating conditions that enable development of effective competition and allow the transition to wholesale competition. The SMO provides efficient and nondiscriminatory services following VCGM rules, codes and regulations. 1. Establishing a sector

structure to allow for the introduction of the VCGM. (OoG Notice No. 232/TB-VPCP of July 31, 2009)

1. Deciding to create Generation Companies (Gencos) with portfolio of EVN power plants, excluding SMHP, to later become independent successor companies with no cross ownership with transmission or Single Buyer (SB). (OoG Notice No. 77/TB-VPCP of April 5, 2011) (MoIT Letter 350/TTr-BCT of November 15, 2011) (PM Letter 138/TTg-ĐMDN of February 3, 2012)

1. All Gencos have started commercial operations and registered as market participants in VCGM. (MoIT Decisions 3023, 3024, 3025/2012/QD-BCT of June 1, 2012, and unaudited financial statements for each Genco for the first three quarters (January to September) of 2013)

2. The Borrower, through its Prime Minister, has issued Decision Number 63/2013/QD-TTg dated November 8, 2013 to set forth the roadmap and operational principles for a power wholesale competitive market through the separation of Gencos and the System and Market Operator into independent companies that are not cross-owned with other market participants. (PM Decision 63/2013/QD-TTg of November 8, 2013)

No single company owns more 45 percent of total installed generation capacity.

70% (December, 2008)

Achieved. Creation of the three Gencos results in individual shares of all the market participants below 45%.

SMO technical market audit by independent consultant firm completed and report on compliance published in SMO website.

(2009): None (no SMO).

Achieved. A market performance technical report was prepared by an independent international consultant hired by ERAV and reviewed by the Bank’s technical team.

38  

Prior Actions Results

Prior Actions under DPO1 Prior Actions under

DPO2 Prior Actions under

DPO3 Target End

Series Baseline Status

Policy Area C: Electricity Tariff Reform Tariff annual setting applying market based mechanisms, approved by MoIT. Periodic adjustments (up to quarterly and capped to 5 percent) to address changes in uncontrollable cost drivers (fuel prices, rate of exchange VND vs. foreign currencies). Phase out of cross subsidy between different tariff categories.

1. (a) increasing the average tariff in 2009 to VND 948/kWh, and (b) implementing transparent annual tariff-setting from 2010-12 based on cost recovery principles, including the unbundling of the average retail tariff into power supply cost components and the delegation of tariff changes of less than five percent to the MoIT. (PM Decision 21/2009/QD-TTg of February 12, 2009).

2. Restructuring the residential block tariff system to establish the principle of the subsidy to the consumer as a percentage of production cost and extend the subsidy mechanism and residential tariff structure to local distribution utilities. (PM Decision No.21/2009/QD-TTg of February 12, 2009).

1. Establishing market based mechanism to adjust average electricity tariff, including annual update and adjustments during the year to reflect changes in generation costs. (PM Decision 24/2011/QD-TTg, April 15, 2011) (MoIT Circular 31/2011/TT-BCT of August 19, 2011)

2. Establishing methodologies to determine and approve transmission revenue requirement for NPT, and transmission charges.(MoIT Circular, 14/2010/TT-BCT of April 15, 2010) (MoIT Circular 03/2012/TT-BCT of January 19, 2012, amending and complementing Circular 14)

1. The Borrower, through Ministry of Industry and Trade, has issued Circular Number 12/2014/TT-BCT dated March 31, 2014, setting forth the methodologies for the establishment of annual retail electricity tariffs (MoIT Circular 12/2014/TT-BCT of March 31, 2014)

Annual tariff determination and periodic adjustment procedures approved

(2008): no annual setting. No periodic adjustments

Achieved. Prime Minister Decision 69 allows for 6 month adjustments with a threshold of 7 percent to reflect changes in uncontrollable cost items (fuel, currency exchange rate, market price, etc.). On March 31, 2014, MoIT issued Circular 12/2014/TT-BCT “guiding the calculation of average electricity retail tariff”. The Circular defines the methodologies and procedures for the annual setting of average retail tariff level (Allowed Revenues (AR) of the PCs for electricity supply to end users.

Level of cross subsidy from industrial and commercial categories to residential reduced at least 50 percent.

(2007) US$370 million cross subsidies from commercial and industrial to residential.

On track. Recent tariff adjustment shows the drastic reduction in tariff cross subsidization to small residential consumers implemented from 2011.

Subsidies targeted to the poor, in both urban and rural areas

(2007) Subsidies to all PC residential consumers for first 100 kWh, and LDU tariffs higher than EVN’s

Achieved. Mechanisms to improve targeting of the poor were introduced in February 2011, providing subsidized tariff for consumption up to 50kWh/month.

39  

Prior Actions Results

Prior Actions under DPO1 Prior Actions under

DPO2 Prior Actions under DPO3

Target End Series

Baseline Status

Policy Area D: Improving Demand Side Energy Efficiency Enhanced energy efficiency through legal framework, and adequate monitoring and enforcement mechanisms

1. Establishing energy efficiency standards for consumer goods accounting for large quantities of electricity. (MoST Decision 2740/QD-BKHCN, December 9, 2008 and Decision 632/QD-BKHCN, April 20, 2009).

2. Introducing time-of-use tariffs for industrial zones and commercial, industrial, and irrigation consumer categories. (MoIT Circular 05/2009/TT-BCT, February 26, 2009).

1. Establishing load research regulations for PCs. (MoIT Circular 33/2011/TT-BCT of September 6, 2011)

1. The Borrower, through MoIT, has issued Decision Number 2600/QD-BCT dated March 27, 2014 to authorize a power distribution company to carry out a pilot demand-response program.(MoIT Decision 2600/QD-BCT of March 27, 2014)

2. At least one power company has begun to pilot a demand-response program. (MoIT Decision 2600/QD-BCT of March 27, 2014, and consulting report to support ERAV in implementation of pilot demand response program(s) for power corporations)

Energy efficiency obligations established by law, and MoIT and ERAV have the capacity to enforce and PCs the authority to implement demand response programs.

(2007): no energy efficiency law, no formal demand response programs obligations on power companies

Achieved. Energy efficiency law has been approved in June 2010 and enacted in January 2011. Decision No. 1670/QD-TTg by the Prime Minister dated 8th November 2012 set the legal framework for the development of smart grid projects in Vietnam, providing a sound legal basis for PCs to implement pilot DSR projects. On March 27, 2014 MoIT issued Decision 2600/QD-BCT “on approval of the pilot implementation plan for demand response program”. The Decision approves the plan for implementation by PCs of pilot demand response programs in 2014-2015. MoIT instructs EVN and its affiliate company Ho Chi Minh City PC (HCMPC) to complete implementation of two pilot demand response programs before the end of 2015. Consultancy services to support ERAV and HCMPC in the design and support in implementation of the pilot programs started in February, 2014.

 

40  

ANNEX 2: LETTER OF DEVELOPMENT POLICY

  

41  

  

42  

  

43  

  

44  

  

45  

 

46  

ANNEX 3: STATUS OF THE PROPOSED PRIOR ACTIONS FOR DPO3

Indicative trigger in PSRDPO2

Proposed prior action in DPO3

Associated milestones

Status and Comments

VCGM commercial operation implemented

The commercial operation of the Vietnam Competitive Generation Market has been fully implemented.

SMO issues settlement report on results of first month of VCGM full commercial operation. ERAV prepares market monitoring report.

Achieved. The settlement and market monitoring report were submitted to the Bank to evidence accomplishment of this prior action. The Bank reviewed the report and asked the GoV’s team to provide a document describing actions taken on the recommendations made in the settlement and monitoring report. The document was received by the Bank, and considered acceptable.

Successor generation companies (Gencos) start commercial operation and register as market participants in VCGM

All Gencos have started commercial operations and registered as market participants in VCGM.

Completion of transfer from EVN to Gencos of contracting arrangements regarding both the existing power plants (power purchase agreements) and projects currently under construction.

Achieved. Gencos are fully running commercial operations, and are registered as participants in the VCGM in accordance with MOIT Decisions 3203, 3204, 3205/2012/QD-BCT. The transfer of assets and liabilities from EVN to Gencos is completed.

Submission of an unaudited financial statement of each Genco for the first nine months of 2013

Achieved. EVN submitted to the Bank the unaudited financial statements for each Genco for the first three quarters (January to September) of 2013. The Bank experts reviewed the reports, and found them acceptable.

Commitment by EVN to submit 2013 audited annual financial statement of each Genco by June 2014.

Achieved. On 22 January 2014, EVN submitted a letter to the Bank committing to provide the audited financial statements of each Genco for 2013 by June 30, 2014.

Establishing the timing for the separation of Gencos, into independent companies with no cross-ownership with transmission or the Single Buyer

The Borrower, through its Prime Minister, has issued Decision Number 63/2013/QD-TTg dated November 8, 2013 to set forth the roadmap and operational principles for a power wholesale

Government decision defining the timing for the separation of Gencos, and SMO into independent companies with no cross-ownership with other market participants

Achieved. PM Decision No. 63 issued on November 8, 2013, states that as preconditions for the transition from VCGM to pilot WCM, from 2015: (i) Gencos have to separate into independent generation entities, with no cross ownership with Single Buyer or SMO or transmission company; and (ii) the SMO will become an independent entity with no cross

47  

competitive market through the separation of Gencos and the System and Market Operator into independent companies that are not cross-owned with other market participants.

ownership with market participants.

Establishing Performance Based Regulation (PBR) to set distribution network tariffs of each PC, with multi-year allowed cost revenue requirement.

The Borrower, through Ministry of Industry and Trade, has issued Circular Number 12/2014/TT-BCT dated March 31, 2014, setting forth the methodologies for the establishment of annual retail electricity tariffs

Circular issued by MoIT on methodologies for annual setting of average electricity retail tariff level and procedures for their effective application (so called “Circular 2”) 

Achieved. On March 31, 2014, MoIT issued Circular 12/2014/TT-BCT “guiding the calculation of average electricity retail tariff”. The Circular defines the methodologies and procedures for the annual setting of the average retail tariff level (Allowed Revenues (AR) of the PCs for electricity supply to end users). 

Establishing regulations for PCs to implement demand response programs

The Borrower, through MoIT, has issued Decision Number 2600/QD-BCT dated March 27, 2014 to authorize a power distribution company to carry out a demand-response program

Issuance of MoIT Decision establishing regulations for PCs to implement demand response programs

Achieved. On March 27, 2014 MoIT issued Decision 2600/QD-BCT “on approval of the pilot implementation plan for demand response programs”. The Decision approves the plan for implementation by PCs of pilot demand response programs in 2014-2015, defining the types of programs to be implemented, and clearly establishing roles and responsibilities of the involved sector agents (ERAV, EVN, PCs). 

PC starts pilot of demand response programs within their licensed area

At least one power company has begun to pilot a demand-response program

Issuance of MoIT Decision setting the timeline for each PC for full development of its pilot demand side response program.

Achieved. In Decision 2600/QD-BCT MoIT instructs EVN and its affiliate company Ho Chi Minh City PC (HCMPC) to complete implementation of two pilot demand response programs before the end of 2015 (expected duration of the programs 12 months). Consultancy services to support ERAV and HCMPC in the design and support in implementation of the pilot programs started in February, 2014.

48  

ANNEX 4: THE POWER SECTOR REFORM PROGRAM

1. The vision of the National Energy Development Strategy guiding the power sector up to 2020 (issued by the Prime Minister in December 2007) is to ensure adequate investments in the energy sector, strengthen energy security, control and mitigate environmental pollution in energy activities and foster socioeconomic sustainable development.

2. The GoV continues to be fully committed to the effective implementation of the power sector reform program through a phased gradual approach. The main legal foundations are:

Power Market Roadmap (PM Decision, 2006)

Formalization of Organization and Functions of the Electricity Regulatory Authority of Vietnam (ERAV) created by the Electricity Law (PM Decision, 2006)

Vietnam National Energy Efficiency Program (VNEEP, PM Decision, 2006)

Energy Efficiency and Conservation Law (enacted by National Assembly in 2010)

Electricity Pricing and Adjustment Mechanism (PM Decision, 2009 and 2011)

3. Two key legal decisions were passed since PDO2, including a) Electricity Law (Effective in 2005, amended in July 2013); and Restructuring of EVN in the 2012-2015 period (PM Decision, 2012).

4. The legal documents framing the reform program allocate responsibilities and delegate authority to line ministries, the electricity regulator ERAV and relevant power sector stakeholders to issue policies, regulations and rules for its implementation. In particular, the Electricity Law was followed by implementation decrees, regulations and tariff setting decisions drafted by ERAV and issued by MoIT through MoIT Circulars.8 Tariff and pricing regulations establish and mandate the principles, responsibilities, methodologies and procedures, and define date of effectiveness for implementation. An amendment of the Electricity Law approved by the National Assembly in December 2012 which became effective in July 2013 formalizes participation of the Ministry of Finance (MoF) in the process to prepare and approve Circulars on tariff setting and adjustment. This implies and additional time period required for discussions between MoIT and MoF to the time formerly required by ERAV and MoIT to prepare regulations.

5. In the face of growing power demand and financing challenges, there is continued government commitment to electricity pricing reform, to implement and strengthen a market that can deliver sufficient generation at competitive prices and to enhance the role of demand side energy efficiency. As a consequence of the success of the rural electrification program9, economic development and increasing use of electricity appliances, electricity demand continued to grow fast between 2008 and 2012, at an average annual rate of around 12 percent. With a generation mix based on hydropower, gas, coal and oil fired thermal generation; investments in the power sector have been insufficient to keep adequate reserves levels, leading to power shortages during dry hydrology and high peak demand periods. The country experienced significant shortages in 2010 due to extreme summer temperatures, drought conditions that reduced hydro generation, and delays in completion of construction and commissioning of new power plants. Current contingency reserves10 are scarce based on expensive oil fired generation.

                                                            8 For the implementation of the Electricity Law around 44 MoIT Circulars have been issued in developing the regulatory framework and tariff setting. 9 By 2010, 97.4% of households were electrified including 99.8% in urban and 96.4% in rural areas.     10 Contingency reserves correspond to power plants used only in extreme conditions, such as faults, droughts, unexpected constraints in fuel supply, etc.

49  

Operational reserves are volatile in Vietnam as they strongly depend on hydrology and could be severely reduced during dry periods. Blackout and brownouts could become a common phenomenon over the next years if some of the planned thermal power plants to not come online, and reserve margins could drop below 10%. The situation is especially challenging in the southern part of the country where demand is growing rapidly and most of the new plants are located.

6. Major goals of the power sector reform program are to ensure adequate level of investments, improve energy efficiency, achieve reliable and high quality of electricity supply and ensure financial viability of sector. In the medium term, the GoV’s main goal and focus is to strengthen supply security to support sustainable economic growth through encouraging the participation of investors other than EVN, including private agents, in power generation, establishing mechanisms for transitioning to cost reflective tariffs, and enhance the regulatory framework to promote energy efficiency. Accordingly, the power sector reform program covers complementary policy areas, namely the introduction of competitive power markets, the restructuring of the sector to enable competition, the adjustment of tariffs to reflect efficient costs and market based prices, and the promotion of efficient use of electricity.

7. Gradual adoption of competition and market based arrangements along with transition to cost reflective tariffs will promote efficiency, and thereby contribute to meeting demand in a sustainable manner. Efficient cost reflective tariff setting mechanisms will provide the predictability required to finance new generation capacity, transmission upgrade and distribution rehabilitation, and adequately maintain existing infrastructure. The introduction of efficient and performance based tariff regulation for monopoly network activities (transmission and distribution) will ensure that only reasonable and efficient costs are transferred to tariffs paid by consumers, and promote quality and reliability of transmission and distribution services. On the demand side, cost reflective tariffs, combined with time of use pricing and demand response programs, will promote the efficient use of electricity. In the longer term, the result will be a major transformation of the sector structure, of the arrangements for the selling and buying of electricity, of generation pricing and how projects are selected and financed, and the integration of consumer choice and demand response programs. Within these objectives, the GoV prioritizes a gradual approach that does not disrupt investments and avoids large tariff increases that may negatively affect macroeconomic stability.

8. The first phase of the reform program, which is supported by this DPO series including the proposed operation, covers the introduction of competition in electricity generation through the implementation of a market that includes efficiency incentives; the adoption of technical codes for transmission and distribution operators and users setting quality and reliability performance standards; the unbundling of the electricity supply cost components to create transparency on how the prices for each electricity activity are determined and transferred to retail electricity tariffs; and the incorporation of time of use tariffs and demand response programs to promote efficient use of electricity. Developing competition in generation primarily involves the restructuring of that sub-sector and the commercial operation of the VCGM. Combined with transparency in tariff setting and incentive-based regulations to improve reliability of supply and quality of service, the key objectives of this first phase are to implement market and tariff mechanisms in order to attract new generation investment, including domestic and foreign private sector participation, and to achieve energy savings.

9. The first phase of the reform program introduces competition among generators to participate in the economic dispatch, while continuing the GoV’s centralized power sector planning practices that decide on power generation projects to be built to cover forecasted demand meeting supply security and reliability criteria and government energy policies.

50  

The Electricity Law establishes that new investment in the power sector should result from centralized planning by the government. The MoIT is responsible for preparing and reviewing the national power development master plan (PDMP) every five years and submitting it for Prime Minister review and approval. The PDMP7, with projections from 2011 to 2020 (Prime Minister Decision July 21, 2011) identifies the generation projects approved to start commercial operation between 2011 and 2015, which is the period that corresponds to the VCGM phase of the roadmap. PMDP7 states as its general objectives to achieve supply and energy security, diversify sources of investment, protect natural resources and the environment, increase share of renewable energy, enhance efficiency, and gradually move towards a competitive electricity market.11 Generation projects listed for the initial years of the VCGM period (2011 – 2013) are already under construction or have achieved financial closing.

10. The government has special programs for the development of small renewable energy power plants, through priority connection, priority dispatch and tariff support mechanisms. Priority dispatch ensures that renewable energy cannot be displaced by other generation competing in the market. Special support tariffs provide predictability and a price above the expected market price. Since 2009, the GoV’s renewable energy support program provides for a non-negotiable standardized power purchase agreement (SPPA) with prices based on avoided cost tariff (ACT) for small renewable energy power plants (installed capacity not exceeding 30 MW). On June 29, 2011, the GoV issued the mechanism to promote wind power (PM Decision 37/2011), which includes a feed-in-tariff for the producer, a subsidy from the Vietnam Fund for Environmental Protection to the buyer, and a SPPA.

11. MoIT Circulars are approved only after considering comments from the relevant ministries and stakeholders. Most of the regulations associated with the electricity sector are issued as MoIT Circulars. MoIT sets out the procedures as shown below to assure the recommendations from individuals, companies, and the other ministries are considered. The amended Electricity Law applied in July 2013 requires involvement of MoF in tariff Circular approval, which implies a period for discussions between MoIT and MoF that must be added to the time needed by ERAV/MoIT to prepare draft regulations.

Table A4-1: Procedures for Issuing MoIT Circular No. Contents Time Period 1 Establishing the working group to develop the draft Circular 2 The draft Circular is published on the drafting ministry’s website

requesting comments from relevant stakeholders. The draft is also sent

officially to the involved ministries, ministry-equal organs and government

divisions requesting comments

At least 60 days

3 The amended draft, incorporating received comments, is sent to Ministry’s

Legal Department for considering and accepting

No more than 7 working days

4 Amending and submitting the draft to Minister for approving and issuing

Development of Competitive Power Market

12. The Electricity Law (2005) and the Prime Minister’s Power Market Roadmap (2006) established three phases for development of a competitive power market in Vietnam, starting with a competitive generation market to supply a wholesale Single Buyer. In the second phase, a wholesale competitive market (WCM, scheduled for 2015–2022) will be

                                                            11 PMDP7 identifies also transmission investment. Distribution network plans are defined mainly in Provincial Power Development Plans.

51  

introduced for generators and wholesalers to compete to sell to the distribution and retail power companies (PCs) and eligible large consumers. The final phase entails the gradual development of retail competition. To avoid unintended negative results, each market phase has been designed with a two stage approach: an initial pilot to test and improve the market rules and infrastructure, followed by the full commercial operation stage.

13. The DPO series including the proposed operation supports the effective start-up of the first market phase. That phase focuses on the development of transparent and cost-reflective electricity tariffs for generation, transmission, distribution and retail, and to apply technical and performance standards for transmission, system operation and distribution, along with non-discriminatory procedures in technical codes. The conceptual design of the VCGM was decided by the MoIT on December 31, 2009, as a cost-based gross pool (prior action PSRDPO1). The first technical code setting the requirements and procedures for the commercial metering of power generation (Vietnam Metering Code) was approved in September, 2009 (MoIT Circular, prior action PSRDPO1). Detailed market rules for VCGM, instructing EVN to draft market procedures, and delegating authority to ERAV to review and approve market procedures, were issued in May 2010 (MoIT Circular, prior action PSRDPO2). To facilitate future transition to the wholesale market, the technical codes and tariff framework applicable during the first phase have been designed considering multiple buyers, with provisional conditions on their application during the wholesale Single Buyer phase. The main characteristics of the VCGM design are:

In 2011, EVN held 66 percent of installed generating capacity (including multi-purpose hydropower plants) directly and through its subsidiaries. Other generators include Vietnamese SOEs and local private investors who owned 17 percent of power generation capacity as independent power producers (IPPs), and foreign investor build-own-transfer (BOT) power plants accounted for about 13 percent of generation capacity.

Strategic Multi-purpose Hydropower Plants (SMHPs)12 and small generation (less than 30 MW) do not participate directly in the VCGM. SMHPs are scheduled by the National Load Dispatch Center (NLDC) acting as system and market operator (SMO) based on a hydrothermal optimization model that incorporates compliance with environmental, flood control, irrigation, and other priority water use requirements. The SMHPs are paid cost-based annual regulated revenues (prior action PSRDPO2).

All remaining generators compete in the VCGM by bidding to be scheduled for economic dispatch and sell all energy injected to the grid in a short-term (hourly priced) gross power pool. The Single Buyer bids in representation of BOT generation with long term traditional PPAs (prior action PSRDPO2). Bids have cost-based caps for each technology and type of power plant. Hourly market prices are determined as energy marginal price (resulting from bids) plus a price representing fixed costs of the best new generation entrant.

All energy in the VCGM is bought by the wholesale Single Buyer (EVN Electricity Power Trade unit - EPTC), which resells to distribution companies (PCs) serving end users at regulated bulk supply tariffs (BST).

The market Standard Power Purchase Agreement (SPPA) is designed as a financial contract to hedge hourly market price risk. To reduce volatility of power purchase costs for the Single Buyer and increase predictability of generation cash flow, the SPPAs initially cover 95 percent of forecasted demand.

                                                            12 The SMHP are large hydropower plants with multipurpose reservoirs, which have the ability to manipulate market prices.

52  

14. The full VCGM commenced operation in July 2012 with participation of 48 direct trading generators with total capacity of 11,630 MW, which corresponds to approximately 35 percent of the total national system capacity13 (proposed prior action PSRDPO3). VCGM spot market provides proper generation price signals that both reflects daily supply and demand balance and impacts of seasonal change of hydropower resources. So far, the VCGM has not created any adverse effect on financial stability of participating agents, since the volatility of generation price in the spot market is well addressed by the stability provided by the contracts for difference (CfD) attached to their SPPAs with the Single Buyer. ERAV maintained the share of market contracts covered by the SPPAs to 90 ~ 95% of total amounts of energy traded, in order to protect both parties in those agreements from the uncertainty of future market prices. The GoV intends to increase the number of participants in the VCGM in the next couple of years while maintaining the coverage of SPPAs at non less than 60% of total energy traded.

Restructuring of the Power Sector

15. In order to enable the development of effective competition and the emergence of reasonable and fair generation prices and power purchase costs in future phases of the implementation of the power market, the power sector reform includes diversification in ownership of generation facilities and elimination of cross-ownership in different segments and related conflicts of interests. The power sector reform program specifically envisages the separation of generation ownership to develop competition and address commercial conflict of interest of EVN as owner of power plants competing with new entrants. Under the group holding structure, EVN parent company directly owns the SMHP, the NLDC that provides system operation and dispatch services and is the system and market operator (SMO) in the VCGM, and EPTC that acts as Single Buyer. Through its network subsidiaries (NPT and five PCs), EVN owns the transmission system and most of the distribution networks. Although the generation subsector has evolved to include other investors (the share of non-EVN owned generation capacity has reached 32 percent by 201214), EVN continues to be the dominant owner of generation. However, most of the medium to large power plants where EVN has ownership, with the exception of SMHP, have been transformed into Joint Stock Companies for their partial privatization with EVN retaining majority ownership (equitization), which introduces non-EVN participation in existing power plants.

16. The government has adopted a gradual approach towards changes in EVN structure, starting with the creation of subsidiaries that allow accounting (cost), management and functional separation. In 2008, the National Power Transmission Company (NPT) was created as a 100% EVN-owned subsidiary responsible for transmission investment and maintenance. The distribution business owned by EVN has been grouped into five subsidiary Power Corporations (PCs) with sufficient scale and technical strengths to become wholesale buyers in the second phase of the power market reform. Additionally, PCs have been absorbing low voltage networks formerly owned and operated by financially weak local rural distribution units (LDUs), in order to improve performance in service provision in rural areas through rehabilitation and loss reduction.

17. Following the above restructuring, the Office of Government required the creation of generation companies (Gencos) with portfolio of EVN power plants (OoG Notice, prior action PSRDPO2). Then, MoIT Decisions No. 3203/QD-BCT, No. 3204/QD-BCT, and No. 3205/QD-BCT dated 1st June 2012 instructed the scope of business and list of generation plants

                                                            13 The figures are as of December 2012. 14 As of July 2012, generation capacity with no EVN charter capital reaches 7,610MW of the national total capacity of 23,493MW.

53  

belonging to each Genco as an subsidiary company of EVN. Gencos started operations on the 1st January, 2013 with newly assigned management teams and physical headquarters and offices (proposed prior action PDRDPO3). The GoV agreed with transfer of ownership of all the power generation plants (24 operating power plants and 19 projects under construction) from EVN to Gencos. Consequently, new SPPAs associated with existing plants will be signed between the created Gencos and the Single Buyer, and all legal obligations and liabilities of the loan agreements signed between EVN and lending institutions related to assets transferred to the Gencos will be adjusted to reflect the new scenario. Financial autonomy of Gencos will be confirmed with the preparation and submission of their first audited annual financial statements.

18. The gradual approach adopted by the GoV to reform of EVN does not envisage implementation of cross-ownership removal before 2015. Prime Minister Decision 1782/QD-TTg dated 23rd November 2012 directed EVN to divest all its non-core business, while affiliate companies running major core business will remain under the ownership of the group in the 2012-2015 period. This implies that until 2015 Gencos, the Single Buyer and the NPT will remain as EVN’s affiliates. This decision reinforces gradualism and pragmatism in the implementation of the reform process, but does not affect its fundamentals and consistency. On the one side, elimination of cross-ownership is not needed while the initial VCGM phase develops. On the other side, this period should be used for the effective implementation of reforms in other key areas (in essence the tariff system) that are crucial to achieve financial sustainability of the sector as a whole, and of the efficient companies operating in all its segments. Generation companies unbundled from EVN are unlikely to be attractive to prospective investor if their main financial assets are PPAs with financially distressed buyers (EPTC and/or the PCs). The financial viability of those buyers fully depends on the permanent and transparent application of a clear and predictable pricing system for electricity supply to end users allowing service providers to collect revenues sufficient to recover all costs incurred to efficiently run their businesses. Thus, GoV’s approach for the 2012-2015 based on ring-fencing and strengthening EVN’s affiliates in charge of core businesses in the electricity sector, while at the same time implementing the reforms in the pricing system needed to give financial viability and attractiveness to those companies seems fully consistent. It also recognizes that, in the short term, the macroeconomic scenario faced by the country, although showing significant improvements from recent years, needs further consolidation to attract participation of new agents in infrastructure, in particular in the electricity sector.

19. The GoV is in the process of issuing a new timeline for independence of Gencos and the SMO. The Government decision will state that following the VCGM being fully implemented, the Wholesale Competitive Market (WCM) will be implemented in two steps: (i) pilot WCM from 2105 to 2016, and (ii) full WCM from 2017 to 2021. As the precondition for the transition from VCGM to WCM, the amendment will also state that (i) the power generation companies have to separate into independent generator entities, with no across ownership/benefit with the Single Buyer or transmission company or the SMO; and (ii) the SMO will become an independent entity with no cross ownership/benefit with other market participants.

Electricity Tariff Reform

20. The key component of the electricity tariff reform program defined by the GoV involves the design and effective application of clear mechanisms allowing operating companies to collect tariff revenues considering total costs of efficient service provision. The reform program includes a transition period (“glide path”) to gradually but systematically move towards achievement of cost-reflective tariff levels. A “social safety net” (subsidization system) aimed at protecting low-income electricity users will be established. Effective implementation of the tariff reform program is a necessary condition for the operational and

54  

financial viability of the power sector and its sustainability. It will significantly enhance transparency and predictability in sector operations, while properly balancing the interests of investors and consumers. Tariff regulations are expected to provide generation investors with reasonable comfort that wholesale purchasers (Single Buyer and PCs in future phases of the power market) will recover power purchase costs and, therefore, will be able to pay generators in the competitive market. At the same time, efficient regulations and disclosure of costs should protect customers through ensuring that only fair and reasonable costs are transferred to tariffs.

21. Prior to the start of the tariff reform program, electricity tariffs were not adjusted on a regular basis. Several years could pass with no tariff increase, as it happened between 2002 and 2006. Prime Minister Decision 21 (February 2009) initiated the electricity tariff reform process, establishing both the principles of a market based mechanism to annually adjust the tariffs for the period 2010-2012, and of a subsidies regime aimed to protect poor consumers (prior actions in PSRDPO1). The decision introduced a market based mechanism to adjust electricity tariff annually and delegates the approval authority to MoIT. Tariff setting regulations for transmission and distribution services follow international practices: efficient operational expenditures (OPEX), plus capital expenditures (CAPEX) and a return on equity. For generation, electricity retail tariff mechanism is based on power purchase costs (price of contracts, and for SMHP, regulated annual revenues). Before the end of each year, EVN submits to ERAV a tariff proposal for the next year, including costs and other required information. After ERAV review, the final tariff increase proposal (typically two or three scenarios) is recommended by ERAV to GoV, including supporting documentation. Through Decision 21, the GoV defined the adoption of national uniform tariffs that apply to customers of all PCs and LDUs, and purchase of power by PCs to the Single Buyer at differentiated bulk supply tariffs to compensate the cost differences in service provision. This approach has addressed the concern that households supplied by LDUs were paying higher electricity prices than those supplied by PCs, which could negatively affect economic development of rural areas and create an excessive burden on rural poor households. The residential block tariff was restructured to formalize a reduced lifeline block (1-50 kWh monthly consumption) with a subsidized (below cost) tariff rate, and the remaining blocks of incremental consumption with tariff rates at or above costs to cross subsidize the first block (prior action PSRDPO1). This increasing blocks tariff (BT) approach, used in many countries, has the advantage of ease of implementation and ensures financial sustainability, as the rates in high consumption blocks provide the funding to cover the deficit of revenues collected in the subsidized first block. Besides, Decision 21 instructed to improve the targeting of the subsidy, as non-poor households also benefit from the subsidy in their first 50 kWh consumption.

22. Key features of the tariff reform program included in Decision 21 were reinforced by the issuance of Prime Minister’s Decision 24 in April 2011, directing electricity retail tariff to be adjusted during the course of a year to reflect changes in uncontrollable elements (prior action in PSRDPO2). Electricity tariffs can be adjusted quarterly to reflect changes in the so-called “basic input parameter”. Computation of this parameter is based on elements directly defining the cost of electricity generation, which the generation companies are unable to control, such as price of fuels, foreign exchange rate, and structure of generation output. Application of the quarterly adjustment mechanism is delegated to MoIT for price changes up to 5 percent, and requires specific PM Decision for higher hikes. The quarterly adjustment mechanism also allows collecting revenues to recover costs arising from past gaps between actual costs and allowed revenues, created by delays or omissions in the application of tariff adjustments. Other cost components in the electricity supply chain (transmission, distribution, system operation and administration) shall be adjusted annually, as part of the tariff setting process defined by Decision 21. Finally, a fund for stabilization of electricity tariffs is

55  

created to moderate to the largest possible extent the impact of price volatility on quarterly adjustments. Resources for the fund come from tariff revenues collected by the distribution companies. Also, ERAV implemented regulations including 41/2010/TT-BCT, 14/2010/TT-BCT and 03/2012/TT-BCT aiming to transform generation, transmission and distribution tariffs to become market-based and transparent (prior actions PSRDPO2).

23. Through the application of these mechanisms, the average electricity tariff has increased steadily and was revised more than once annually. The table shows that average electricity tariffs increased by more than 50% during 2009-2013. Implementation of contents of Decisions 21 and 24 led to a very significant achievement in the reform of the tariff system for electricity services in Vietnam. Not many emerging countries have adopted mechanisms for annual setting and quarterly adjustment of electricity tariffs.

Table A4-2: Average Electricity Tariff Approved Date Approved

March 2009

March 2010

March 2011

December 2011

June 2012

December 2012

August 2013

VND/kWh 948.5 1,058 1,242 1,304 1,369 1,467 1,509 US cents/kWh 4.7 5.3 6.2 6.5 6.8 7.3 7.6 Increase - 11.5% 17.4% 5.0% 5.0% 5.0% 5.0%

24. In terms of cost recovery, the current tariff level is generally sufficient to recover all the operational costs. As shown in the below table, the tariff level was nearly equal or slightly above the total operational cost including cost of sales15, selling expenses, and general and administration expenses over the last few years. The level of recovery has significantly improved in 2012. This is because of the expanded use of the existing and new hydropower plants, and relative fall of dominance in fossil-fuel based power generations, which decreased power purchase and fuel consumption, and prevented the increase in cost of sales from 2011 level.

Table A4-3: EVN Unit Sales Revenue and Supply Cost

Source: Derived from the consolidated EVN financial statements

25. However, the current level of tariff does not well reflect cost items including foreign exchange losses and financing costs, indicating the timely reflection of cost fluctuations through the implementation of the general retail tariff regulations needs to be improved. Although PM Decision 24 introduced the tariff adjustment mechanism against not only fuel and material cost, but also exchange rate fluctuation, recent tariff adjustments were not able to absorb the exchange loss. Also, the finance cost, which is the total interest on borrowing, was not included in the adjustment mechanism.

26. The consolidated EVN income statement showed the consecutive net profit loss during 2008 to 2011, in which the loss was significant in both 2010 and 2011. On the other hand, EVN

                                                            15 Cost of sales refer to the cost of electricity supply including generation, power purchase, transmission, distribution, and therefore include cost items such as fuel, materials, salaries for the relevant employees, depreciation, power purchase, maintenance & repairs etc.

2007 2008 2009 2010 2011 2012

Unit Revenue (VND/kWh) 962 953 1,046 1,130 1,297 1,404

Cost of Sales 795 817 881 1,075 1,137 1,099Selling Expenses 30 34 36 34 36 30General and Administration Expenses 44 45 51 52 55 54Total cost 869 896 969 1,161 1,228 1,182

56  

recorded net profits in 2012. This evolved from the fact that (i) the cost of sales were controlled due to better utilization of hydropower plants, and (ii) the foreign exchange losses were reduced because of the stabilization of foreign exchange rate between VND and USD&JPY.

27. Further progress is needed, particularly in the annual determination of the allowed revenues of the companies operating in each segment (proposed prior action PSRDPO3). Is important to separate the process for future determination and periodic adjustment of tariffs, which should aim to keep them aligned with future costs to be incurred by operating companies, from the approaches to address recovery of costs incurred in the past.

28. Current procedures, based on application of EVN on behalf of its affiliates is not adequate and lacks transparency, as it allows the holding company to allocate costs and revenues among its affiliates without following objective criteria. It is crucial to evolve to a system for individual determination of allowed revenues of each operating company, based on its own application before ERAV prepared according to clear, transparent and publicly disclosed rules and procedures, followed by direct discussions between both parties and publicity of the outcomes of each and all stages in the process.

29. The subsidized social tariff continues to protect low income customers. Since its introduction in 2011 by Prime Minister Decision 21, the level of social tariff for the first 50kWh was maintained at 993VND/kWh despite consecutive price adjustments.

Improving Demand Side Efficiency

30. Demand side energy efficiency activities in Vietnam’s power sector began in 1997, through the World Bank funded study on “Demand-Side Management Assessment for Vietnam”, which recommended that energy efficiency and the demand side should play a significant role in managing the growth of electricity demand in the country. Under projects funded by the Swedish International Development Cooperation Agency (SIDA) and by the World Bank and GEF, technical support was provided to EVN to build capacity to determine customer load profile and growth (load research activities), and to pilot demand side management and demand control programs. However, load research is yet to be implemented as a continuous activity, and demand side programs failed to attract interested customers. Hence the for sector regulation for effective load research and demand response programs.

31. The Vietnam Energy Efficiency Program (VNEEP), approved in 2006, has created a comprehensive set of government-led activities to improve energy efficiency and conservation (EE&C). VNEEP Phase 1 (2006-2010) was successful in providing a national platform for implementing a variety of EE&C activities, the preparation and approval of the Energy Efficiency and Conservation Law (EE&C Law), and achieving 3 percent energy savings by 2010 (the target was 3 - 5 percent). The EE&C Law calls for energy savings in all economic sectors and the society as a whole, and puts MoIT in charge of promoting and establishing energy efficiency and conservation measures in power and industrial sectors. Strengthened by the authority and obligations in the EE&C Law, the government confirmed the 5 - 8 percent energy savings target for VNEEP Phase 2 (2011-2015), but recognized the need to enhance existing rules and to introduce new effective regulations and monitoring.

32. To promote efficient use of electricity and reduce consumption, the government has introduced time of use (TOU) electricity tariffs for medium and large customers, and developed an energy efficiency standard and labeling roadmap (prior actions PSRDPO1). A significant change in PDMP7 was its focus on enhancing efficiency of pricing and demand side measures. Lowering electricity demand elasticity ratio from the current 2.0 to 1.0 by 202016

                                                            16 This refers to ration between electricity demand growth and GDP growth.

57  

is a specific target in the plan, which would considerably reduce power generation investments required after 2015. Currently, TOU electricity tariffs are set based on an assumed general load profile, and increasing average tariffs by a percentage for the peak demand period and reducing them by a different percentage for low demand hours. The efficiency of the TOU pricing signals can be enhanced by reflecting the load profile of each customer category. The MoIT Circular 05/2009/TT-BCT provides for the case of TOU customers without TOU metering, establishing that the normal hour tariff will apply17. As such a situation does not allow to provide the expected signals to demand side management, the PCs have developed metering investment plans to ensure all the required metering is in place as fast as possible. The Bank’s Distribution Efficiency Project (DEP) will support lending for such investments. The MoIT Circular 33/2011/TT-BCT establishes load research regulations for PC (MoIT Circular, prior action PSRDPO2).

33. In November 2012, PM Decision No. 1670/QD-TTg concerning the approval of smart grid development projects in Vietnam was issued with the aim of developing smart grid in order to improve quality and reliability of electricity supply, creating conditions for reducing power generation and network investment, enhancing rational exploitation of energy resources, enhancing energy security and contributing environmental protection and socio-economic development. The decision stipulates a smart grid road map which is divided into three phases:

Phase 1 (2013-2016): Equip Supervisory Control and Data Acquisition (SCADA) systems and Energy Management Systems (EMS) for NLDC and PCs as well as install devices to collect and monitor operational data from substations and power plants connected with 110kV and above. Implement pilot projects using advanced metering infrastructure (AMI) including those applied to selected big customers. Develop related regulatory framework including load research procedures, technical standard, and mechanism to encourage final customers to participate in pilot programs.

Phase 2 (2017-2022): Use lessons learned from the Phase 1 and expand the equipment implementation to below 110 kV and pilot DSM programs toward residential customers. Implement AMI to big customers in all PCs. Develop associated regulatory framework.

Phase 3 (after 2022): Deploy SCADA/EMS systems nationwide and implement AMI to residential customers in all PCs and provide customers with the opportunities to trade in retail electricity market. Implement smart grid applications and disseminate the use of renewable energy widely in distribution grid with the TOU electricity price mechanisms. Develop associated regulatory framework.

34. As part of the above phase 1, a pilot DSR program will be implemented by Ho Chi Minh PC under the Distribution Efficiency Project (DEP) financed by the World Bank (proposed prior action PSRDPO3).

                                                            17 During the time sellers (electricity companies) are unable to install three –price electric meters, electricity sales prices for off-peak hours apply. 

58  

ANNEX 5: BRIEF ASSESSMENT OF CURRENT EVN FINANCIAL SITUATION

EVN Financial Performance in 2012

1. Profit and Loss: EVN recorded a net profit in 2012 for the first time after four consecutive years of net losses. According the Consolidated Financial Statements of EVN, the net sales in 2012 reached 147,846 billion VND (US$6.99 billion), increasing 20.5% from 2011. This result can be explained by the combination of higher amounts of electricity sold and increase in electricity tariffs. Current procedures allow for annual tariff setting based on costs declared by EVN, as well as for periodic adjustments (up to quarterly, with a cap of 5%) to address changes in uncontrollable cost drivers (depreciation of VND, fuel prices). Financial results in 2012 were achieved with one tariff setting and one adjustment, which also contemplated partial recovery of costs incurred by EVN. Net profit in 2012 was in essence due to favorable hydrologic conditions, which made possible to increase output of EVN’s own hydropower generation, and to reduce both power purchases from third parties and fuel consumption to run its own thermal plants. This resulted in reduced generation cost, which has a strong impact on average tariff levels.

2. Main causes of net loss in the last four years, particularly in 2011, were the combination of limited output from EVN’s hydropower plants requiring substantive complement from thermal plants (both owned by EVN and by third parties) and foreign exchange loss. The total foreign exchange loss in 2011, which constitutes most of the “other operating expenses” item in the below table, was significant due to the rapid depreciation of VND against foreign currencies, in particular USD and JPY. Financial results of 2011 and 2012 highlight the big impact of annual amounts of hydropower generation, a factor inherently volatile and uncontrollable.

Table A5-1: Consolidated EVN Profit and Loss Situations

Source: Derived from the consolidated EVN financial statements

3. Balance Sheet: Significant increase in equity was made primarily by the revaluation with the amount of VND 63,633 billion (US$3.0 billion) of property, plant and equipment of some subsidiaries. EVN recognized an amount of VND 63,633 billion into revaluation reserves as a result of revaluation of property, plant and equipment performed in 2011, based on the assessment by an independent valuing agency in compliance with regulations issued by the MoF and the GoV.

(VND billion)2007 2008 2009 2010 2011 2012

Net Sales Revenue 57,003 63,732 78,975 96,944 122,724 147,846Cost of Sales (47,137) (54,593) (66,493) (92,287) (107,598) (115,711)Gross Profit 9,866 9,139 12,482 4,657 15,126 32,135

Investment revenue 1,202 1,569 1,356 1,776 2,030 1,572Selling Expenses (1,758) (2,273) (2,724) (2,883) (3,390) (3,161)General and Administration Expenses (2,594) (3,010) (3,883) (4,437) (5,220) (5,645)Other Operating Income 627 1,277 1,342 762 1,778 14,070Other Operating Expenses (1,590) (10,592) (6,173) (8,101) (15,471) (6,682)Operating Profit 5,753 (3,890) 2,400 (8,227) (5,417) 32,290

Finance Cost (2,304) (3,047) (3,457) (6,065) (9,996) (10,995)Profit before Tax 3,449 (6,937) (1,057) (14,292) (15,413) 21,295Income Tax (859) (382) (376) (216) (264) (856)Net Profit after Tax 2,590 (7,319) (1,433) (14,508) (15,677) 20,439

59  

4. However, the audit could not confirm the reliability of the revaluation of reserves. The auditors were unable to check the reliability of the revaluation results since they could not obtain sufficient appropriate evidence about the competence, capabilities and objectivity of the independent valuing agency. However, revaluation of assets will not have an impact on tariff level if a “cash needs” approach for setting allowed tariff revenues is applied, as stated in the draft circulars prepared by ERAV.

5. The auditors expressed that EVN’s current liabilities raise doubt about the Corporation’s ability to continue as a going concern. The audit opinion on the financial statements states that “As at 31 December 2012, the Corporation recorded accumulated losses of VND’000 18,611,347,703 (31 December 2011 of VND’000 38,329,934,449). The Corporation’s current liabilities exceeded its current assets by VND’000 20,449,686,857 (31 December 2011: VND’000 11,398,080,897). These factors raise doubt about the Corporation’s ability to continue as a going concern.” It seems clear that a specific approach to address accumulated losses is needed, provided that an adequate tariff system ensures that no additional losses are accumulated in the future.

Table A5-2: Consolidated EVN Balance Sheet

Source: Derived from the consolidated EVN financial statements

(VND billion)2007 2008 2009 2010 2011 2012

Current AssetsCash and bank balances 13,278 11,861 18,576 25,753 23,472 29,648Short-term Investments 8,546 4,890 6,918 3,911 2,329 3,680Trade and other eceivables 13,856 15,339 15,537 22,687 32,524 28,232Other Current Assets 6,174 7,654 7,354 7,734 6,907 7,715Total 41,853 39,744 48,384 60,085 65,233 69,274

Non-Current AssetsNet Fixed Assets 92,548 92,104 121,754 181,985 188,468 258,232Construction in Progress 37,345 54,642 61,704 22,275 48,509 98,960Construction Materials & Supplies 8,071 10,705 13,551 16,181 12,231 92,259Other Non-Current Assets 4,982 6,997 8,650 9,497 8,781 19,322Total 142,847 164,448 205,029 241,038 257,988 376,514

Total Assets 184,700 204,192 253,413 301,123 323,221 445,789

Current LiabilitiesPayables 17,040 20,136 26,152 34,011 41,762 49,433Short-Term Loans 1,077 936 1,345 4,657 7,300 6,110Current Portion of Long-Term Debt 6,467 8,582 12,559 20,959 20,314 23,801Other Current Liabilities 1,884 2,167 4,119 5,936 7,254 7,460Total 26,468 31,821 44,175 65,562 76,631 89,724

Non-Current LiabilitiesLong-Term Debt 81,157 107,543 139,132 173,823 198,293 220,833Other Non-Current Liabilities 212 296 276 313 355 18Total 81,369 107,839 139,407 174,137 198,647 220,852

EquityEquity Holders of the Parent 73,174 61,310 64,670 55,582 42,863 128,536Minority Interest 3,689 3,223 5,160 5,841 5,080 6,677Total 76,863 64,533 69,830 61,424 47,943 125,213

Total Liabilities & Equity 184,700 204,192 253,413 301,123 323,221 445,789

60  

Cost Recovery and tariff level

6. Average tariff level in 2012 allowed recovery of all the operational costs and some additional revenues. For 2012, as shown in the table below, the tariff level was slightly above the total operational cost including cost of sales 18 , selling expenses, and general and administration expenses. Cost recovery through tariffs was significantly improved in 2012. This is explained by the increased use of the existing and new hydropower plants, which made possible to reduce own fossil-fuel based power generation and power purchases from third parties, resulting in a significant decrease in cost of sales from 2011 value. Revenue collected per unit actually sold is very close to average tariff approved by the GoV, indicating effective performance of the PCs in revenue collection.

7. However, the current tariff level is sometimes insufficient to fully recover cost items such as foreign exchange loss and financing costs, indicating that timely pass through of changes in those costs into retail tariffs as prescribed in existing regulations is not always applied. Although PM Decision 24 introduced the tariff adjustment mechanism to address fluctuations in fuel cost, material cost, and exchange rate, recent tariff adjustment was not able to fully reflect change in those cost drivers. As a result, the consolidated EVN income statement showed consecutive net profit loss from 2008 to 2011, with high losses. As already described, favorable hydrologic conditions and stabilization of foreign exchange rate allowed EVN to achieve net profit in 2012.

Table A5-3: EVN Unit Sales Revenue and Supply Cost

Source: Derived from the consolidated EVN financial statements

Subsidiaries

8. Gencos: With limited aggregated information, financial evaluation of recently created Gencos is still underway. Gencos were only EVN cost centers in the past and have only been corporatized in 2012. Hence, there are no financial statements available to date and only initial balance sheets were analyzed. Several issues can be highlighted:

Net operating margin achieved by these plants barely has reached best international standards;

In most cases, current financial ratios are not enough to ensure liquidity in its day-to-day operations;

Even though return ratios have been improved recently, they are still well below thresholds which may trigger private investors’ appetite in most plants. Few plants seem to be really profitable;

Acceptable threshold in DSCR (around 1.25) is not reached in many power plants.

                                                            18 Cost of sales refers to the cost of electricity supply including generation, power purchases, transmission, distribution and retail, and therefore includes cost items such as fuel, materials, salaries for the relevant employees, depreciation, power purchase, maintenance & repairs etc.

(VND/kWh)2007 2008 2009 2010 2011 2012

Unit Revenue 962 953 1,046 1,130 1,297 1,404

Cost of Sales 795 817 881 1,075 1,137 1,099Selling Expenses 30 34 36 34 36 30General and Administration Expenses 44 45 51 52 55 54Total cost 869 896 969 1,161 1,228 1,182

61  

9. NPT: Financial performance of NPT has improved due to the asset revaluation and more revenue from transmission business. The ongoing study on strategic options for enhanced financial performance of EVN preliminarily suggests NPT’s financial performance for 2012 improved to a great extent due to a tariff increase of approximately 10% and higher amounts (11%) of electricity transmitted. In recent years NPT has financed around 90% of the capital investment through debt, and faced problems to comply with various financial covenants. The ratio of debt to equity was 88:12 in 2011, but was improved in 2012 due to the fixed asset revaluation. However, asset revaluation does not imply a fundamental change in NPT’s financial performance.

10. The key issue facing NPT is the financing of its continuing large investment programme. The transmission tariff which NPT currently receives leaves it barely profitable even in good years. With no available cash equity injections, NPT is dependent on profits for the self-financing of its investment programme at keeping its debt equity ratio at a reasonable level. The profit levels achieved in the past five years are inadequate going forward. On the operational side, NPT is a transmission company which is operating within acceptable levels compared to international peers. The only caveat is that the operational expenditures are relatively high, linked to a large number of employees. Overstaffing is probably linked to poor automation and lack of modern communication and organizational structure.

11. Power Corporations (PCs): There are some indications for better financial performance when compared with Gencos and NPT. One of the findings of the ongoing study on EVN’s financial performance is that all the PCs generated positive net cash flow from their operations between 2008 and 2012, meaning cash receipts from electricity sales covered all operating and maintenance expenditures. In terms of debt, PCs are more balanced between debt and equity than for Gencos and NPT, partly due to their relatively less capital intensive nature. But these observations do not imply little concern about potential financial difficulties. Also, PC’s financial performance is strongly affected by not only the retail tariff but also the mechanism for setting bulk supply tariff, which is the price paid by the companies for electricity purchased to the Single Buyer to supply their customers.

The Bank’s engagement towards the financial viability of EVN

12. The PSRDPO3 will contribute to the long-term financial viability of the power sector by supporting the regulatory environment towards achieving a cost reflective tariff system. This is complemented by various important lending and advisory programs, namely the strategic options study for enhanced financial performance of Vietnam's electricity sector (P143150), which aims to support EVN and its subsidiaries in developing a comprehensive strategy for addressing the current financial performance constraints. The Bank is providing TA to EVN and the GoV to define a strategy for the divestiture of the Gencos.

 

62  

ANNEX 6: FUND RELATIONS ANNEX

 

 

 

 

63  

 

 

 

64  

 

65  

ANNEX 7: GOVERNMENT OF VIETNAM UPDATE ON MACROECONOMIC DEVELOPMENTS IN THE FIRST FOUR MONTHS OF 2014

 Thanks to great efforts of the Government in comprehensive economic reforms, Vietnam economic development has gained significant progress, especially in recent months. Along with strengthened and accelerated SOEs equitization with strong determination from the Government and positive results of banking sector reform, especially weak bank resolution, macro-economy has achieved a lot of encouraging and positive outcomes as the followings:

- Economic growth has a strong signal of recovery and remains stable. GDP growth accelerated gradually quarter by quarter in 2013 (Q1/2013 – 4.76%, Q2/2013 - 5.00%, Q3/2013 - 5.54%, Q4/2013 - 6.04%). The first quarter GDP growth in 2014 was 4.96% yoy which is the highest compared to that of 2012 and 2013 (4.76% and 4.75% respectively). This reaffirms the steady recovery acceleration trend.

- Inflation has been successfully subdued. While average CPI in 2013 was recorded the

lowest rate at 6.6% within a decade, y-o-y average CPI for the first 4 months of 2014 was 4.72% and April CPI was 4.45%, record low level in last 4 years. This is a positive signal that CPI for the whole year 2014 would lower than the targeted number (7%), and even as low as 5-6%.

- Exports continued to maintain growth momentum. Though commodity trade deficit in

2013 was about US$ 863 million, commodity trade balance became surplus at US$2.05 billion in the first 4 months of 2014. Commodity trade surplus for only April 2014 reached US$ 810 million which is nearly equal to the trade deficit of 2013;

- Monetary market remained stable. Interest rates continue its declining trend, contributing to solve difficulties for business and production activities. Exchange rate continues to stabilize. Spread between exchange rate in interbank market and black market has been narrowed. International reserves recorded the highest level at around US$ 35 billion by the end of April 2014, increasing by around 40% over last 6 months. Gold market continues to stabilize;

- NPL ratio reported by credit institutions continues its steadily declining trend, falling

from 4.73% (10/2013) to 3.79% (12/2013) and down to 3.86% (2/2014). NPL problem is expected to be solved basically in 2014 that would relieve pressure on liquidity for banking system.

- Budget revenues in the first 4 months is encouraging at 36.9% of budget plan, increasing by 14% (y-o-y) while budget expenditure is 32.9% of budget plan, rising by 7.5%.

66  

ANNEX 8: AVERAGE ELECTRICITY TARIFF BY CUSTOMER CATEGORY

Table A8-1: Electricity Tariff by Category, 2009-2013 (VND/kWh)

2009 Feb 2010 Feb 2011 Feb 2011 Dec 2012 Jun 2012 Dec 2013 AugOff-peak hours 835 898 1,043 1,102 1,158 1,217 1,277Low-load hours 455 496 646 683 718 754 792Peak hours 1,690 1,758 1,862 1,970 2,074 2,177 2,284Off-peak hours 870 935 1,068 1,128 1,184 1,243 1,305Low-load hours 475 518 670 710 746 783 822Peak hours 1,755 1,825 1,937 2,049 2,156 2,263 2,376Off-peak hours 920 986 1,093 1,164 1,225 1,286 1,350Low-load hours 510 556 683 727 773 812 852Peak hours 1,830 1,885 1,999 2,119 2,224 2,335 2,449Off-peak hours 955 1,023 1,139 1,216 1,278 1,339 1,406Low-load hours 540 589 708 767 814 854 897Peak hours 1,900 1,938 2,061 2,185 2,306 2,421 2,542

2009 Feb 2010 Feb 2011 Feb 2011 Dec 2012 Jun 2012 Dec 2013 AugOff-peak hours 645 690 956 1,013 1,088 1,142 1,199Low-load hours 255 281 497 526 568 596 626Peak hours 1,220 1,269 1,415 1,500 1,581 1,660 1,741Off-peak hours 670 717 1,023 1,084 1,142 1,199 1,259Low-load hours 265 292 521 553 595 625 656Peak hours 1,280 1,331 1,465 1,553 1,635 1,717 1,803

2009 Feb 2010 Feb 2011 Feb 2011 Dec 2012 Jun 2012 Dec 2013 AugHospitals, kindergartens, preschools, general education schools

950 1,009 1,117 1,184 1,252 1,315 1,3791,000 1,063 1,192 1,263 1,334 1,401 1,471

1,060 1,124 1,217 1,290 1,362 1,430 1,5001,110 1,177 1,291 1,369 1,443 1,516 1,590

1,090 1,159 1,242 1,316 1,389 1,458 1,5311,135 1,207 1,291 1,369 1,444 1,516 1,590

2009 Feb 2010 Feb 2011 Feb 2011 Dec 2012 Jun 2012 Dec 2013 AugOff-peak hours 1,540 1,648 1,713 1,808 1,909 2,004 2,104Low-load hours 835 902 968 1,022 1,088 1,142 1,199Peak hours 2,830 2,943 2,955 3,117 3,279 3,442 3,607Off-peak hours 1,650 1,766 1,838 1,939 2,046 2,148 2,255Low-load hours 960 1,037 1,093 1,153 1,225 1,286 1,350Peak hours 2,940 3,028 3,067 3,226 3,388 3,557 3,731Off-peak hours 1,725 1,846 1,862 1,965 2,074 2,177 2,285Low-load hours 995 1,065 1,142 1,205 1,279 1,343 1,410Peak hours 3,100 3,193 3,193 3,369 3,539 3,715 3,900

2009 Feb 2010 Feb 2011 Feb 2011 Dec 2012 Jun 2012 Dec 2013 AugFirst 50kWh 600 600From 51kWh to 100kWh 865 1,004First 50kWh (for low-income) 993 993 993 993 993From 1kWh to 100kWh 1,242 1,242 1,284 1,350 1,418From 101kWh to 150kWh 1,135 1,214 1,304 1,369 1,457 1,545 1,622From 151kWh to 200kWh 1,495 1,594 1,651 1,734 1,843 1,947 2,044From 201kWh to 300kWh 1,620 1,722 1,788 1,877 1,997 2,105 2,210From 301kWh to 400kWh 1,740 1,844 1,912 2,008 2,137 2,249 2,361Over 401kWh 1,790 1,890 1,962 2,060 2,192 2,307 2,420

less than 6kV

6 kV or higher

Commercial customers

less than 6kV

Industrial customers

22 kV or higher

6 kV to 22kV

Administrative and non-business units

110 kV or higher

22 kV to 110kV

6 kV to 22kV

less than 6kV

6 kV or higher

Administrative customers

6 kV or higher

Irrigigation customers

less than 6kV

less than 6kVPublic Lighting6 kV or higherless than 6kV

2009 to 2010

2011 to 2012

Residential customers

67  

Table A8-2: Estimated Average Paid Tariff (VND/kWh) for Selected Customer Class19

Figure A8-1: Graphic Presentation of Table A7-2 (Estimated Average Paid Tariff (VND/kWh) for Selected Customer Class)

                                                            19 Using the Table A8-1, the Bank team estimated the average paid unit price (VND/kWh) for selected customer classes. In calculation, the team used the following assumptions including (i) residential customer with monthly consumption of 100, 200, 300, and 400 kWh, respectively, and (ii) commercial and industrial customers with uniform daily load profile.

Customer Category 2009 2010 2011 2012 2013Industrial/ 110kV or higher 883 936 1,071 1,178 1,289Industrial/ 22kV to 110kV 929 985 1,118 1,228 1,343Industrial/ 6kV to 22kV 980 1,034 1,149 1,269 1,388Industrial/ less than 6kV 1,020 1,073 1,193 1,322 1,446Commercial/ 22kV or higher 1,594 1,685 1,752 1,913 2,096Commericial/ 6kV to 22kV 1,918 2,016 2,094 2,282 2,499Commercial/ less than 6kV 2,009 2,110 2,155 2,348 2,571Residential/ 50kWh 600 600 1,189 1,272 1,384Residential/ 100kWh 733 796 1,205 1,272 1,384Residential/ 150kWh 867 933 1,238 1,324 1,451Residential/ 200kWh 1,024 1,096 1,341 1,444 1,587Residential/ 300kWh 1,223 1,302 1,491 1,615 1,777Residential/ 400kWh 1,352 1,435 1,597 1,734 1,909

Average General Average 949 1,049 1,232 1,348 1,473

Industrial

Commercial

Residential