LV Thạc sỹ_Improve CDM projects development consulting activities efficiency at PVFC

NATIONAL ECONOMICS UNIVERSITY ADVANCED EDUCATIONAL PROGRAM BACHELOR THESIS SOLUTIONS TO IMPROVE CDM PROJECTS DEVELOPMENT CONSULTING ACTIVITIES’ EFFICIENCY AT PVFC ACKNOWLEDGEMENT First of all, I would like to give a warm thanking to all the lecturers of Advance program of National Economics University in accordance with all the staff of PetroVietnam Financial Corporation - PVFC - for providing me with favorable conditions and enthusiastic supports to complete my thesis Especially, I would also want to express a sincere gratitude to my supervisor Dr …, who directly guided me in the process of writing my thesis Moreover, I also want to give special thanks to Mr …, Deputy Manager of CDM Department, for enthusiastically providing me with valuable instruction and explanations about the CDM Projects Development Consulting Activities at PVFC During month of internship at PetroVietnam Financial Corporation - PVFC, I have tried my best to collect necessary information and proposed some recommendations to improve the efficiency of CDM Project Development Consulting Activities at PVFC However, there are certain limitations and possible misconceptions due to the lack of time and information Therefore, I am willing to receive any comments and suggestions on my thesis Table of Contents LIST OF TABLES LIST OF FIGURES ABBREVIATION INTRODUCTION CHAPTER 1: PROJECTS DEVELOPMENT CONSULTING SERVICE 1.1 Overview of Projects Development Consulting Service 1.1.1 Consulting Service 1.1.2 Projects Development Consulting Service 1.2 Consulting Activities’ Efficiency 10 1.2.1 Evaluation Criteria 11 1.2.2 Influencing factors CHAPTER 2: CDM PROJECTS DEVELOPMENT CONSULTING SERVICE OF PVFC 16 2.1 General Introduction of PVFC 16 2.1.1 Foundation & Development History 2.1.2 Vision & Mission 2.1.3 Organizational Structure 19 2.1.4 Business Activities 2.1.5 Business Results from 2008 to 2011 2.2 Current Situation of CDM Projects Development Consulting Service at PVFC 26 2.2.1 Introduction of Clean Development Mechanism (CDM) 26 2.2.2 CDM Projects Development Consulting Activities at PVFC 33 2.3 Evaluation of Consulting Activities’ Efficiency 40 2.3.1 Current Situation & Limitations of CDM Projects Development Consulting Activities at PVFC… 2.3.2 Reasons for Consulting Activities’ Inefficiency .4 CHAPTER 3: SOLUTIONS FOR IMPROVING CDM PROJECTS DEVELOPMENT CONSULTING ACTIVITIES’ EFFICIENCY 3.1 Review of current situation 51 3.2 Solutions to improve efficiency of CDM Projects Development Consulting Activities 53 3.2.1 Short-term Recommendations .5 3.2.2 Long-term Recommendations 58 REFERENCES .61 COMMENTS 2 LIST OF TABLES Table 1: Qualitative Criteria 11 Table 2: PVFC's Mobilization Results 23 Table 3: PVFC's Loan Structure 24 Table 4: PVFC's Business Results (2008-2011) Table 5: 25 CDM Projects Development Consulting Process Table 6: .3 List of CDM Projects 41 Table 7: Priority Order 54 LIST OF FIGURES Figure 1: Project Development Consulting Process .9 Figure 2: Organizational Structure 19 Figure 3: The Kyoto Flexibility Mechanisms Figure 4: CDM Project's Life Cycle 32 ABBREVIATION CDM : Clean Development Mechanism UNFCCC : United Nation Framework Convention on Climate Change PVFC : PetroVietnam Financial Corporation UNCED : United Nations Conference on Environment and Development GHG : Greenhouse Gases IET : International Emissions Trading JI : Joint Implementation AAUs : Assigned Amount Units CERs : Certified Emission Reductions ERUs : Emission Reduction Units EB : Executive Board COP : Conference of the Parties PDD : Project Design Document DNA : Designated National Authority DOE : Designated Operational Entity INTRODUCTION The essential of the research In recent years, the phrase “climate change” has received special concerns from all human beings as a hot issue We have been gradually aware of the severe impacts of climate change on our daily life as well as the serious threats on our future The weather phenomena such as droughts, floods, especially the global warming are the most visible evidences of climate change In a near future, poor people in developing countries are subjected to the most severe impacts of climate change It can be said that climate change has been ruining the international efforts on fighting against poverty in developing countries In 1992, the leaders of 154 countries signed the “United Nations Framework Convention on Climate Change”, in which these countries commit to reduce their emission of greenhouse gases To enforce the implementation of these commitments, the United Nations created the Kyoto Protocol in 1997regulating on flexible mechanisms One of such flexible mechanisms is the “Clean Development Mechanism” (CDM) This mechanism allows developing countries receive financial aids and technologies from developed countries for implementing national policies on the environment while still ensuring sustainable development Realizing the benefits from this mechanism, Vietnam has actively participated in the Kyoto Protocol and facilitated the development of CDM projects Currently, there are many domestic and foreign organizations providing CDM projects development consulting service in Vietnam The PetroVietnam Finance Corporation is among organizations providing this type of service In addition to the main task of arranging capital for PetroVietnam’s projects, PVFC has been supporting the CDM projects development of companies within the petroleum industry with consulting service However, due to various objective and subjective reasons, PVFC’s consulting activities have not met the efficiency as expected Having recognized PVFC’s role in popularizing CDM in Vietnam as well as issues existing in PVFC’s consulting activities, I have decided to conduct a research on “Solutions for improving the efficiency of CDM projects development consulting activities at PVFC” Research Methodology In the process of researching, the method of qualitative and quantitative analysis is used as bases for all evaluations and implication:  Qualitative analysis: based on the collection of primary data through interviews with the CDM department’s staff about CDM consulting activities’ current performance in comparison with specific standards of evaluating the consulting activities’ efficiency, I have made identifications, interpretation and commentaries on the issues  Quantitative analysis: Given the limitations in term of time and the availability of information needed, this research is just able to conduct brief analysis on some key indicators of consulting activities’ performance Research Scope My research focuses on evaluating the efficiency of CDM projects development consulting activities at PVFC based on specific evaluation criteria As issues are identified, some feasible solutions and recommendations are proposed Research Structure The research consists of three chapters:  Chapter 1: Project Development Consulting Service The aim of this chapter is giving brief introduction of the Project Development Consulting Service as well as general knowledge of Consulting Activities’ Efficiency including evaluation criteria and influencing factors  Chapter 2: CDM Projects Development Consulting Activities of PVFC This chapter provides general information about the PetroVietnam Financial Corporation and further details about CDM Projects Development Consulting Activities at PVFC In this chapter, the Consulting Activities’ current performance will be described and analyzed in order to identify shortcomings or issues existed and possible reasons behind  Chapter 3: Solutions for improving CDM Projects Development Consulting Activities’ Efficiency In this chapter, some feasible solutions and recommendations are proposed in the effort of improving CDM Projects Development Consulting Activities’ Efficiency at PVFC CHAPTER 1: PROJECTS DEVELOPMENT CONSULTING SERVICE 1.1 Overview of Projects Development Consulting Service 1.1.1 Consulting Service Consulting service is the practice of providing advice to clients for a fee in order to help them solve a particular problem or range of problems within a certain area of business For financial companies, consulting service includes the following forms:  Capital Arrangement Consultancy Financial companies provide the most suitable and effective capital solutions for clients based on their capacity, available resources and their business plans’ feasibility Also, financial companies offer clients the most updated information on capital market’s condition as well as financial tools appropriate to their capital needs  Business Transformation Consultancy Financial companies conduct roadmap for clients’ business transformation (including construction of transformation scheme, new business model, transformation plan, regulations, etc.); assist clients in preparing and completing profiles and documents Besides, financial companies provide consultancy on business valuation in case of equitization  Stock Issuance Consultancy Financial companies provide consultancy on the decision of issuing stocks based on analysis of clients’ business performance as well as capital needs Financial companies can advise or represent clients to deal with relevant organizations and 50 As CDM projects are closely regulated under the Kyoto Protocol, the future of Kyoto Protocol after 12/2012 has significant impacts on CDM projects’ development If developed countries and international organizations could not come to agreement to create a new Protocol, the market for CERs would be greatly contracted Because the sale of CDM projects’ output - CERs- becomes uncertain, any projects that cannot be registered before 2012 will not be implemented It means that very few new projects are developed in 2012 or there are very few opportunities for PVFC to diversify its consulting projects’ structure Also, the ambiguous future is putting great pressure on PVFC to finish the registration for all current projects before 2013 or the projects’ profitability will be unimaginable after 12/2012 51 CHAPTER 3: SOLUTIONS FOR IMPROVING CDM PROJECTS DEVELOPMENT CONSULTING ACTIVITIES’ EFFICIENCY 3.1 Review of current situation According to analysis above, it can be clearly seen that there is a remarkable number of limitations in CDM Projects Development Consulting Activities at PVFC These limitations raise several questions about the efficiency of the current business model It is the issue of the compatibility between PVFC’s capacity and the business model of CDM projects development consultancy At first, it is necessary to know whether this business model is suitable for a financial company like PVFC In general, the consulting service for CDM projects development is a popular service provided by financial companies in the world, especially in Europe, the biggest market for CERs However, it is hardly any financial companies in the world providing full-package consulting service Normally, those companies will specialize in certain steps of the projects development’s procedure The reason for this is the complexity of CDM projects development Being a full-package service provider requires human resources professional in various fields, good financial capacity and a broad network of relations Due to these high requirements, financial companies often focus on smaller but more specialized services, which are best fit to their capacity and expertise The most common choice is service related to CERs trading phase in the CDM projects’ life cycle The construction and registration of project profiles, which require expertise in law and technical issues, are normally left for dedicated consulting companies As a financial company with limited capacity and experience, the choice of providing full-package service is not optimal The initiation of this choice is the small scale of Vietnam’s market that makes the specialization in single service ineffective due to negligible commission fees However, the idea of full- 52 package service does not make the situation better Without the possession of factors needed, hardly services performed by PVFC can meet expected results The long delay in the registration’s project profiles is the clearest evidence for the inefficiency in consulting activities due to the shortage of human resource expertise in law On the other hand, even possessing enough necessary factors, providing fullpackage service does not guarantee a good profitability for PVFC The biggest obstacle is the length of projects’ life cycle A CDM project normally has its average life ranging from 7-10 years not to mention the projects’ designing and registering periods, which cost at least year to finish The first commission fees are received after the projects are approved by CDM EB for development It means consultants have to pay forward costs related to the procedure of getting the projects approved and wait for at least year to recover their initial investments For PVFC, the registration period for CDM projects has expanded to more than years in average that increases the probability of project registration to be failed as well as negatively affects the profitability of consulting activities Since there have not been complete regulations for CDM in Vietnam as well as the awareness of project owners about CDM is limited, the time risk is inevitable for any CDM consulting companies In a word, there lacks both subjective and objective factors allowing PVFC to operate effectively in providing full-package consulting service for CDM projects With current financial and human resources’ capacity, adjustments in term of business model and development orientation are vital for PVFC to improve the efficiency of its consulting activities 53 3.2 Solutions to improve efficiency of CDM Projects Development Consulting Activities 3.2.1 Short-term Recommendations Since 2012 is a critical year for CDM projects with no clear sign of how the carbon market will be after 12/2012, any big move during this year should be considered as very risky As a result, accepting new projects is highly not recommended at this moment Besides, projects having trouble with registration procedure should create sufficient burdens on PVFC as these projects should be approved before 2013 or all previous efforts will be gone away Half of them are evaluated as feasible to complete the registration before 2013 but the possibility of being approved for the other half is at doubt Especially, these projects have big contract’s value and also have been consulted by PVFC for such a long time so that failure in registering these projects before 2013 will be a waste of large amount of potential profits Therefore, from now to the end of 2012, PVFC should directed CDM Department’s staff to make the best efforts in completing the ratification for all current projects On the other hand, there should be priority order and backup plan for the projects having trouble in getting approvals before 2013  Priority Order Since projects are different in terms of current progress as well as strategic and economic roles, the priority order should be as following: 54 Table 7: Priority Order Estimated Order Projects amount of CERs generated Current State Obstacle 2,000,000 Preparing for international ratification Did not meet time schedule due to Project Owners’ late submit of necessary information about the Project 6,000,000 Submitting the methodology adjustment document to CDM EB for approval Project’s features not fully satisfy CDM’s conditions 500,000 - Completing document of project design - Assisting Project Owner on looking for buyers and signing ERPA Consulting Service for Ethanol Project in Binh Duong CDM Projects Development Consultancy for PVGas Consulting Service for Solar Electricity Project in Quang Nam - Factory’s construction is delayed due to shortage of investment - Difficult to find buyers due to project’s small scale - The Ethanol Project is put in the first priority since this is the most feasible project among the projects with the only problem of late submit of necessary information Spending more efforts in cooperating with project owner will solve the problem out For this project, the project’s profile is almost finished so that it is important to complete the registration for this project as soon as possible to have more time dealing with the other projects - The CDM Projects of PVGas is a project with the biggest contract’s value and has been consulted by PVFC for over years As a remarkable amount of efforts as well as expenses has been spent on the registration procedure, this project should receive special efforts to be approved before 2013 The problem of methodology’s incompatibility is quite troublesome and should not be 55 underestimated because another rejection from CDM EB will means a failure for the project to meet the deadline Therefore, careful adjustment of methodology and preparation of project’s profile are vital for the success rate of the project - The solar electricity project is a quite fresh one with lowest contract’s value so that it should be at the least priority Also, the delay in factory’s construction will significantly impact the completion progress of project’s profile The possibility for this project to meet the deadline is very low As a result, PVFC should provide consulting service perfunctorily while spending all efforts on finishing the other projects  Backup Plan In case of late registration, backup plan will be applied to reduce negative impacts of disorder of mechanisms and market in 2013 This backup plan depends on the prospects of carbon market after 12/2012 to design the most suitable adapting solutions Although there are still many debates on the continuity of Kyoto Protocol, there are some official information, signals and historical data that can be used to predict the future of carbon market Under the Kyoto Protocol, 37 industrialized countries, including EU Member States agreed to reduce their emissions on average to 4.2 per cent below the 1990 level by 2012 Subsequently, legislation created the EU ETS, which requires industries to make emission reductions while allows them to include a certain percentage of offset credits It is 8% in the UK and 21 and 22% in Spain and Germany respectively For installations in specific industry sectors, up to 50% of emission reductions can be achieved through offset credits However, the functioning of these carbon markets depends on a predictable and sufficiently high carbon price If the price falls too low, it ceases to be either a 56 disincentive to polluters, or an incentive to investors and speculators In 2011, carbon prices have fluctuated in two directions: Firstly, prices have been driven down by an over-allocation of permits to existing industry, exacerbated by post-2008 economic shrinkage, and a political decision to allow industries covered by the EU ETS to accumulate and roll over their permits year on year Polluting industries in the EU have accumulated enough permits to meet all their reduction targets until 2017, and perhaps as far as 2020 and beyond, without any need for further real reductions in output, or indeed for further purchases of offset credits via the CDM Secondly, the market for carbon allowances is created almost entirely by legislation, but no decision has yet been taken for a second commitment period with legally binding reduction targets to follow when the Kyoto Protocol’s first commitment period ends in December 2012 There is great uncertainty over future investments in some developing countries as CDM investors not know where demand will come from after 2012; and finally, the international community’s inability to agree on a post2012 Kyoto framework in Copenhagen (COP15) and Cancun (COP16) has seriously damaged the confidence of the private sector in the long-term viability of existing carbon markets Nevertheless, a more optimistic reading of the resolutions from Cancun justifies confidence that carbon trading can have a future with or without global binding agreements: + Parties at COP16 agreed to contribute annually US$100 billion into a Green Climate Fund as of 2020 to assist developing countries’ climate change mitigation activities, support adaptation, technology deployment and capacity building initiatives Much of this is expected to come from scaled-up carbon markets 57 + The continued reforms of the project-based instruments, the Clean Development Mechanism (CDM) and Joint Implementation (JI), hold the promise of a real reduction in delays and a simplification of procedures + Outside the COP negotiations, numerous plans for the establishment of regional and national market mechanisms have emerged or are clearly continuing despite delays and setbacks: from Australia, New Zealand, South Korea and emerging economies like India, Brazil and China, to Japan’s preparation of a new bilateral offset credit mechanism, and Western Climate Initiative States and Provinces in a linking of subnational emission trading schemes across North America These developments show that carbon trading is still widely viewed as a costeffective climate change mitigation policy But the current state of the market and its future success is still, to some extent, dependent on post-2012 international agreements and their fulfillment In the post -2012 world, Europe will continue to be the global leader on emissions trading and carbon markets It seems probable that any serious move towards linking regional and national trading schemes to create the beginnings of a world market, in substitution of the Kyoto vision of a UN - driven global system, will start with or involve Europe Despite quite optimistic prospect of CDM, there is still uncertainty about CERs price, which is the most concerned issue of both CDM project owners and Consulting companies It is quite certain that in Phase III of the EU ETS from 2013 to 2020, there will be significant restriction in the use of CERs and JI as credit offsets It means there will be a sharp decline in demand for CERs from this largest carbon market Due to the imbalance between supply and demand for credit offsets, CERs’ price is expected to decrease in 2013 and be more unstable In order to secure the profitability of CDM projects, there are two strategies needed to be applied as following: 58  For projects able to register before 2013: PVFC should quickly look for CERs’ buyer and sign Emissions Reduction Purchase Agreement to fix the selling price before it will greatly fluctuate in 2013  For projects unable to register before 2013 (particularly the solar electricity project in Quang Nam): PVFC should try to sign an ERPA for the project before 2013 if possible In 2013, if the project has not signed the ERPA yet, PVFC should consider of direct financing for the project and trading its CERs later in the secondary carbon market Since this is a small project, it does not require a big investment but promises higher profit if PVFC acts as an investor and sell CERs at the optimal prices In case the investment capital available is limited, PVFC can still find a domestic or international partner as co-investor to support financing this project 3.2.2 Long-term Recommendations In Vietnam, manufacturing enterprises have been gradually aware of CDM and its benefits According to recent statistics announced by the Standing Office of Vietnam Steering Committee for United Nations Framework Convention on Climate Change and Kyoto Protocol, there are more than 100 CDM projects registered and developed by then end of 2011 This is a good number of projects for a consulting company to implement specialization in consulting activities With the advantage of good reputation, it is obviously feasible for PVFC to provide specialized consulting service for a broad range of project owners As analyzed above, providing full-package consulting service can be considered as ineffective business model and beyond PVFC’s capacity Therefore, specialization on particular consulting activities should be the best choice for PVFC in long term as the market has developed to a favorable level However, the question here is in which part of CDM projects development’s consulting service PVFC should specialize 59 In general, CDM projects development’s consulting service is divided into two major parts: the consulting service for technical procedures, legal issues and the consulting service for CERs trading As a financial company, PVFC should perform best in CERs trading due to its staff experienced and professional in the finance sector Therefore, in long term, PVFC should gradually contract its consulting activities to focus only on providing consultancy for CDM projects’ CERs trading However, there is a big obstacle for this type of business model CDM project owner often prefer a sole consultant providing full-package service instead of hiring many consultants for each step of project development In order to satisfy customer’s preference, PVFC should develop a good network of partners to still be able to provide full-package consulting service through the cooperation of consultants specialized in different parts of CDM project development In further future, maybe in the next years, PVFC should orient to become a CERs trader Being a CERs trader means that PVFC will act as focal point to buy CERs from CDM projects and then trade in the secondary market for higher market price This type of business activity can be operated parallel with the consulting service for CERs trading Yet, being a CERs trader is a higher evolvement as PVFC will have opportunities to earn greater profits instead of fixed and low commission fees when providing consulting service The only problem here is the high requirement of capital Currently, PVFC is reluctant to allocate capital for CDM Department to run a trial for this type of business model as the market’s potential is still ambiguous However, when the domestic market keeps on expanding and the government starts to provide incentive policies for CDM projects’ development activities, the business opportunities for PVFC are very promising and being the first CERs traders in Vietnam should make the most advantage of those opportunities Besides, approaching to international environment funds with low interest rate has been easier so that the implementation of CERs trading 60 is totally feasible Therefore, PVFC should approve of the transformation to CERs trader as soon as possible to be the leader in Vietnam’s CDM market CONCLUSION The Clean Development Mechanism (CDM) is a good move of the global community to cope with negative impacts of climate change as well as create economic benefits in term of financial aid for developing countries like Vietnam As being the first financial company to provide CDM projects development consulting service in Vietnam, PVFC has achieved some promising business results and experience in this new business field However, there are still a number of limitations and inefficiency in PVFC’s consulting activities that require serious efforts to improve In this research, the most basic concepts about CDM and general information about CDM projects development consulting service at PVFC are introduced Based on data about CDM projects’ current situation, limitations showing the inefficiency in PVFC’s consulting activities are clearly identified As existing problems are specified, this research recommends some feasible solutions to improve the efficiency of CDM projects development consulting activities at PVFC When conducting this research, I have applied my knowledge in finance, collected information from reliable source as well as combine with opinions from CDM consulting specialists at PVFC to achieve the best research results as possible However, due to constraints in time, practical experience and availability of information, some logical mistakes or misconceptions are unavoidable Therefore, it is my pleasure to receive comments and feedbacks from instructors and PVFC’s staff to improve my research’s quality 61 REFERENCES REPORTS: CDM Projects’ Progress Reports PVFC’s annual reports (2008, 2009, 2010, 2011) PVFC’s financial statements (2008, 2009, 2010, 2011) BOOKS & ARTICLES: Ajmal, M.M and NordStrom, K and Helo, P (2009) Assessing the effectiveness of business consulting in operations development projects International Journal of Productivity and Performance Management Vol 58 No Derwent, H and Motty, M (2011) Carbon trading: achievements, key lessons and future forecasts International Emissions Trading Association (IETA) Ecosecurities (2007) Guidebook to Financing CDM Projects UNEP Risoe Centre, Denmark WEBSITES: http://www.pvfc.vn http://en.wikipedia.org http://cdm.unfccc.int http://www.noccop.org.vn http://www.cdmpipeline.org/ http://www.iges.or.jp/en/index.html 62 COMMENTS 63 CỘNG HH̉A XĂ HỘI CHỦ NGHĨA VIỆT NAM Độc lập - Tự - Hạnh phúc GIẤY NHẬN XÉT THỰC TẬP GIAI ĐOẠN II: Từ ……………….…đến …………………… Họ tên: …………………………………………… MSSV: ………………………… Sinh ngày: …………… tại………………………………………………… Hiện học lớp: ……………………………………… Khóa:……………………… Chương tŕnh Tiên tiến CLC - Trường Đại học Kinh tế Quốc dân Công ty (Ngân hàng): ………………………………………………….xác nhận sinh viên …………………………………………đă thực tập công ty (ngân hàng) khoảng thời gian từ ngày …………………đến ngày …………………… Trong tŕnh thực tập, sinh viên ………………………………… đă chấp hành tốt nội quy công ty (ngân hàng) có nhiều cố gắng việc hồn thành nhiệm vụ giao …………., ngày…… tháng…….năm 2012 Xác nhận sở thực tập Cán hướng dẫn thực tập 64 ... (CDM) 26 2.2.2 CDM Projects Development Consulting Activities at PVFC 33 2.3 Evaluation of Consulting Activities? ?? Efficiency 40 2.3.1 Current Situation & Limitations of CDM Projects Development. .. indicators of consulting activities? ?? performance Research Scope My research focuses on evaluating the efficiency of CDM projects development consulting activities at PVFC based on specific evaluation... Development Consulting Activities at PVFC? ?? 2.3.2 Reasons for Consulting Activities? ?? Inefficiency .4 CHAPTER 3: SOLUTIONS FOR IMPROVING CDM PROJECTS DEVELOPMENT CONSULTING ACTIVITIES? ?? EFFICIENCY