Attributes of a viable policy for the vietnam electricity sector opinions of stakeholders

128 Int J Global Energy Issues, Vol 41, Nos 1/2/3/4, 2018 Attributes of a viable policy for the Vietnam electricity sector: opinions of stakeholders Hung Nguyen National University of Vietnam, 144 Xuan Thuy Hanoi, Vietnam Email: nphung@vnu.edu.vn Abstract: The electricity sector has seen little changes for many decades in Vietnam, while those of the European and American countries have changed profoundly in the last three decades The current policy for the electricity industry of Vietnam is seriously flawed This research examines basic attributes of a viable policy for the Vietnamese Electricity industry and investigates preference of different stakeholder groups on potential policy reforms that would go toward providing a viable regulatory and business model for the industry That policy should include several features First, there should be an environment for greater private investments Second, non-naturalmonopolistic parts of the industry should be open to competition Third, electricity companies should be allowed to price for relevant profits Fourth, the current state-owned Electricity of Vietnam (EVN) should be given sufficient commercial flexibility to pursue additional revenue Keywords: electricity reform; electricity policy; public utilities Reference to this paper should be made as follows: Nguyen, H (2018) ‘Attributes of a viable policy for the Vietnam electricity sector: opinions of stakeholders’, Int J Global Energy Issues, Vol 41, Nos 1/2/3/4, pp.128–145 Biographical notes: Hung Nguyen is working for Vietnam National University as an adjunct professor as well as being a postal and telecommunication policy research analyst at the Vietnam Ministry of Information and Communications In the past, he spent time working as research assistant in the National Regulatory Research Institution (Ohio, USA) during doctoral study and as a short-term consultant in the World Bank’s Global Information and Communication Technology Department He holds a PhD degree from the Ohio State University (USA) and MSc degree from the University of Birmingham (UK) Context of the electricity sector in Vietnam and the rationale of the research 1.1 Industry development The Electricity sector has seen little changes for many decades in Vietnam, while those of the European and American countries have changed profoundly in the last three decades The Vietnamese Electricity sector was founded by the French Colony After the departure of the French 1954, the new Vietnamese Government nationalised all Copyright © 2018 Inderscience Enterprises Ltd Attributes of a viable policy for the Vietnam electricity sector 129 industries, including the electrical sector The then development of energy sector saw an undeniable policy copy from the Soviet The Government adopted Soviet-style administration of the economy, commanded and controlled industries through consecutive instituted five-year central planning The Central Government planned the developments of power capacity provisions to match with projected demands of the national economy; funded the infrastructure expansion projects, ranked the user categories by its value to the economy and allocated to them with the right amounts of electrical service and outputs There were no basic laws governing the power sector, legal documents passed since 1960s were largely in the form of decrees and directives that were often inconsistent with each other, all policies had to be approved at the level of the National Assembly (ESMAP, 2002) The Central Government operated the whole system (generation-transmission-distribution-sales) through local state agencies or state-owned enterprises (SOEs) They were not autonomous firms, just did what they were planned to do, and did not have to run for financial returns Since the Electricity was given strategic importance in the industrialisation plan, the Central Government allocated massive resources to the sector Though arguably worked well for the wartime when the resources were scared and should be mobilised by central efforts, the industry revealed to be badly afflicted by the economic inefficiency, shortage of capital investments, and chronic shortages in power supply The first sectorial restructure was the establishment of Electricity of Vietnam (EVN) in 1994 as a State-owned corporation combining electricity offices that had previously belonged to the Ministry of Energy The Electricity industry turned from an Administration into an enterprise The EVN plays dual roles of governing sector and providing electricity, not yet seeking for profits Pursuant to direction of the Prime Minister and the Ministry of Industry and Trade (MOIT), EVN prepared necessary facilities for the establishment and development of power market in Vietnam, concluded with the introduction of the first Electricity Law in 2004 The Electricity Regulatory Authority of Vietnam (ERAV) was established in 2005 as the industry regulator However, since both ERAV and most other major service providers are state organisations, they are practically not independent from the Government, having interrelated interests, making a case of conflict of interest Currently, the Electricity industry in Vietnam is still on a highly-regulated basis with limited competition and private sector involvement The Government still keeps responsibility for all functions of power system management and operation, with over 75% of generation, 100% of transmission and 100% of distributions belong to the state enterprises Table Ownership State Private Investors Power generation by ownership (%) Participants 2011 2012 2014 EVN (SOE) 50.7 49.8 59.5 EVN partly-owned 17.0 13.76 PVN (SOE) 12.3 10.08 VINACOMIN SOE) 4.8 5.74 BOT and other investors (Foreign Developers and local developers) 15.2 20.08 Source: EVN, 2011, p.12; EVN, 2016 39.76 0.74 2015 2016 60.27 61.2 12.99 11.5 4.37 4.6 22.37 22.7 130 H Nguyen Regarding access to electricity, the electrification is impressive with the proportion of households with access to electricity has risen from less than 50% in the late 1980s, to 75% during in 1990s, and to nearly 99% by 2016 (The International Bank for Reconstruction and Development/The World Bank, 2011, p.xii; EVN, 2016; Asian Development Bank, 2011, p.v) This performance is higher to the world average (96%), comparable to East Asia and Pacific and to Latin America & Caribbean (99%), but lower to North America and the European Union (100%) That made a significant contribution to the national programs of hunger elimination and poverty reduction Power losses are improved from over 12% in 2003 down to under 8% in 2015 (EVN, 2016, p.18), compared to 5%, 6%, 9%, 7%, 16%, 14% of the China, France, the European Union, the USA, Latin America & Caribbean, and Middle East & North African respectively.1 The System Average Interruption Duration Index (SAIDI) decreased to 2,281 minutes/ customer, down 27% compared to 2014 System Average Interruption Frequency Index (SAIFI) reduced to 13.36 times/customer, down 26% Momentary Average Interruption Frequency Index (MAIFI) was times/customer, down 23% (EVN, 2016) Regarding power generation, about 4/5th of the total market shares belong to stateowned enterprises, including the EVN, PETROVIETNAM (the largest state petrol corporation), and VINACOMIN (the largest state mining corporation) The BOT and other licensed generating investors account for just over 1/5th of the market (EVN, 2016) The growths in capacity are high – during 2000 to 2014, the annual increases were between 12-15% That number for OECD countries and non-OECD countries was only 0.7% and 6.1% respectively (International Energy Agency, 2016) Regarding sources of electricity production, of the electricity generated, 46% is from hydropower, gas turbine energy accounts for 21%, coal fired 29%, imported and FOFO oil fire power make up the remaining 4% The composition of source shows both advantages and drawbacks Compared with the USA, China, OECD, and non-OECD, the proportion of higher-polluting coal source is lower, 29% compared with 33%, 69%, 40%, 47.8% (International Energy Agency, 2016; World Bank, 2017) Coal is cheaper but could potentially damage the environment The high dependency on hydropower is very risky – there have been periods of power supply shortages partly due to higher temperatures and drought conditions Though nuclear energy is considered as a greener solution to meet the power demand of the country in the future, and the Master Plan for the National Power Development already projected to put nuclear electricity into a portfolio with the first plant to be operational in 2020 (EVN, 2011, p.26), however the nuclear plan was recently cancelled due to budget crisis The shares of industrial generations from renewable sources were almost none, while that of the EU, OECD, US and China are 27.5%, 10.6%, 13%, and 13% respectively This is explained partly by the government’s budget crisis and absence of economical technology The coal-fired proportion is consequently planned to make up the shortage left, and will increase from 33.4% to 42.7% by 2020 (MOIT, 2015b) Regarding Transmission and Distribution systems, EVN owns and operates entire national power transmission grids and distribution systems, which covers almost all urban and rural areas, and sells electricity to end-users countrywide (EVN, 2016) In 2015, the MOIT issued the Decision 8266/QĐ-BCT on the Design of Vietnam Wholesale Electricity Market (VWEM) that prepares and sets up necessary conditions to put VWEM into action (MOIT, 2016a, p.8; MOIT, 2015) As of now, ERAV said VWEM is still in the design stage, far from the pilotage period, and cannot operate before 2019 Attributes of a viable policy for the Vietnam electricity sector Table 131 Compositions of power generation Sources 2011 2012 2013 2014 2015 US China OECD EU Hydropower 29 50.17 48.78 40.2 46 6.1 20 Coal fired 16 18.31 23.07 28.7 29 33 FOFO oil fired 3.44 3.43 3.5 Diesel 0.1 0.43 Gas turbines 46 27.65 Import and others 2.32 0.43 0.7 Nuclear 0 0 Renewable sources 0 0 24.29 NonOECD 12.8 19.1 69 40 47.8 ? 2.3 5.7 26 19.5 4.3 5.2 1 ? 21.5 21 33 20 2.1 18.3 13 13 10.6 ? 27.5 Source: EVN, 2011, p.16; U.S Energy Information Administration, 2016; International Energy Agency, 2016, p x EVN itself operates retail distribution services for all customers EVN accomplished almost all of connections EVN outsources part of its retail services to local authorities or local dealers who resell EVN electricity However, reports show that many of the smaller dealers face debt, non-payment by a substantial proportion of their low-income consumers, inefficient operations and lack of technical and managerial capacity.2 By the end of 2015, EVN had provided electricity to 23.68 million customers, marking an increase of 6.2 million compared to 2010 The annual customer growths were above 7% The average electricity consumption per capita reached 1,565 kWh, which was 1.6 times higher than that of 2010 EVN sells most of its electricity to its large industrial and construction customers (54%) and municipalities (i.e Residential, Office, and Public lightning, 35%) The sales to Agriculture, Forestry, Fishery customers account for only 2%, to Business & Services group 5%, and 5% to others (EVN, 2011, p.18; EVN, 2016, pp.16–23) Regarding pricing, retail prices to the residential sector are strongly depending on the income and the location of the household The average retail tariff is 7.31 cent/kWh, significantly lower to 10.04 of China, 11.81 of Thailand, and about 50% lower than the average of other Asian Pacific countries The average tariffs not cover average costs, electricity policy is to keep tariffs lower to facilitate economic developments The power tariff system of Vietnam has not reflected fully input factors, though in 2011, the Prime Minister issued the Decision 24/2011/QD-TTg that allows power tariff policy to change in accordance with market mechanism, in which the power tariff will be adjusted reflecting changes in basic input factors (e.g., fuel price, foreign exchange), as well as structure of power generation outputs (MOIT, 2016b) Contrast to the cases of the E.U and the USA, there has not been any M&A in the Vietnam’s Electricity sector 1.2 Major challenges indicating unavoidable reform Major problems that constrain the achievement of the Electricity sector include inefficient operations, un-matched revenues and lack of investment funds Talking about the Vietnam Electricity industry is almost talking about EVN alone and since EVN takes 132 H Nguyen dominant market share as well as playing both the roles of controlling and planning sector on behalf of the Government EVN is facing to all challenges common worldwide (see 2.2) 1.2.1 Foreseeable power generation shortages Vietnam has experienced an unprecedented surge in external capital flow, fuelling of credit, trade, and manufacturing boom, which in turn fuelled a significant growth of power demands for thousands of new factories added every year The urbanisation also contributes to that growth Power demand has reportedly outpaced supply by about 3% in the recent years Reports from MOIT reveal that the power supplies were occasionally unstable and credible, in many cases threating the national power security For example, the Southern zone of the country would very likely suffer power shortage from 2018, causing the regulation authority to interfere (MOIT, 2016b; ERAV, 2017a; Tuyến, 2017) Commercial usage is in a continuous sharp increase The surge of demand recent years prompted officials to slash power usage in the manufacturing sector, inciting public outcry The growth in sales is significant, reaching over 10% for recent years (14.5%, 10.49%, 11.43%, 9.3%, 11.58%, and 11.7% for 2010–2015) These growths are twice as much as the GDP growth (6.5–8.5%), whereas worldwide most national consumption growth is under GDP growth As of 2015, the electricity consumption per capital of Vietnam is just 1/5th the average of the Asian Pacific region,3 leading to growing belief that the demand growth will sustain 1.2.2 Poor productivity EVN reports shows that, in 2014, Vietnam’s Electricity productivity was 120 billion kWh for 110,000 staffs This was as low as 40%, 60%, and 10% of that of Thailand, Malaysia, and Singapore respectively Labour driven operations, secured jobs, lack of incentive for innovation, absence of return requirement, and high electricity loss rate are to be blamed In addition, a consumption of KWh generated on average 0.98 USD to the GDP, compared to USD of Western Europe, 3.2 USD of Japan, 1.8 USD of Middle Europe, and 1.7$ in the South-East of Asia (Philippines, Malaysia, Indonesia, and Thailand) 1.2.3 Severe financial status leading to shortage capital for development projects Severe financial status is a chronic problem for EVN According to annual reports of EVN during 2011–2016, largely because of soaring input prices, exchange rate depreciation, and under-cost tariff, EVN reported financial losses of approximate $250 million (VND 5.29 trillion), $789 million, and $283 million in 2011, 2014, and the first half of 2016 This makes financing power terminals and infrastructure unsecured Development demands are huge and soaring The EVN’s total investment amounted to 9.6% and 10.26% of nation’s total investment (EVN, 2013, p.48) The investment growth was high, reaching 47% (2013), 27.91% (2014) Two fourth of investment is for generation and one fourth is for transmission grid However, investments are falling behind, leading to delays in completing construction and starting commercial operation Attributes of a viable policy for the Vietnam electricity sector 133 of most of the new power plants, and consequently periods of power supply shortages Increasing costs of inputs and size of investment programs not matched by tariff increases are leading to a spiral of higher borrowing and debt service (e.g., total loan for developments from commercial banks was equivalent to $2.2 billion and from foreign lenders was $1.17 billion (EVN, 2013, p.48)), further reducing ability to finance its own investments Figure The electricity death spiral Chronic poor  financial  performances •Under‐cost tariff Supplies fail  behind  demands Defer of new  plants and  infrastructure Shortage of  funds for  investment Low  investments in  capacity, grid,  technology,  and training &  Higher debt  financing 1.3 Objectives of the research Around the world, Electricity the sector has been deregulated or even privatised, whereas the Vietnam’s regulatory framework reform of national Electricity has remained slow in the last decades Reform is unavoidable in coming years In this paper, we provide a preliminary assessment of stakeholders’ preference that the incoming regulatory policy should balance to reflect This paper would enrich the current literature on public management and deregulation, with the application on a very particular case of a public electricity monopoly that does not operate under most of the state laws regarding purchases and business law 134 H Nguyen 1.4 Methodology In addition to a literature review, I made a number of direct interviews with key middle managers from the EVN and ERAV A survey questionnaire was posted online to collect this opinion of people from different stakeholder groups in the Electricity sector (government agencies, state and private electricity enterprises, and business and household consumers) about the objectives and their priority in the incoming Electricity policy of Vietnam In total, the survey received 127 responses, of which 24% were middle managers from EVN, 3% were middle managers from electricity companies other than EVN, and the rest were from business and household consumers Conducting interviews with EVN and ERAV may introduce biases In fact, it is reported that to appear as modern leaders, most EVN managers would support publicly deregulation coupled with corporatising certain generation plants; however, internally and implicitly, those managers conduct corporatisation process of their enterprise intentionally slow for fear of losing position, getting lower total wages, and encountering fierce internal political resistance Online questionnaires are expected to help partly with such cases as the responses are kept anonymous, managers would answer more honestly Lessons from electricity reforms worldwide 2.1 Is electricity still a core value of Government? Electricity is one of the public utilities that provide essential services needed by every individual and institution in a society and are affected with a public interest Public utilities provide infrastructure critically needed for the society to sustain and the national economy to grow In recent decades, Governments worldwide have adopted a variety of measures to provide electricity services to low-income households Subsidising access to consumption of electric services is major attempt to increase living standards, and allow households to devote scarce income to other purchases Electrification programs are also expected to help to cut indoor air pollution, fires, poisonings and other exposures commonly associated with some of the fuels that electricity often replaces Traditionally, electricity services are inherently a governmental function There has been a general belief that, because of its vital social and economic justifications, power services are best provided under a government monopoly In addition, for underdeveloped and developing countries, electricity plays a crucial role in economic modernisation, forcing Governments to take part to ensure sufficient electricity supplies to remove impediments to economic growth In addition, electricity has certain features of public goods – security of supply is a public good to the extent that it is regarded as a prerequisite for the economy to function (Harris, 2015, p.43) For various reasons, the power industries were seen as a vital service with the ability to provide monopoly rent, and so the state took over the role of performing them Public policy makers advocating equitable economic development argue against the privatisation of electricity often refer to concerns over the absence of governmental interference include (i) private electricity firms would concentrate their services on urban elites and often neglect the poorest populations, (ii) private firms motivated for profits will not have incentives to provide public services; and (iii) the process of deregulating electricity would lead to higher prices, hurting poorer groups (Victor, 2005) Attributes of a viable policy for the Vietnam electricity sector 135 To date, with the exception of the USA, the majority of electricity companies around the world are nationally based and government-owned entities 2.2 Challenges of public electricity enterprises and reform trend Like most public utility, in the majority of countries the electricity supply sector performed poorly under state control (Victor, 2005, p.24) Most electricity SOEs are run inefficiently, making large subsidies being paid for power inefficiency and ineffectiveness There are many reasons for poor performance in the public utilities First, services are delivered without competition, by centrally managed monopolistic public enterprises or government departments “State managers ran SOEs as bastions of political patronage (e.g., in creating jobs) and were not properly attentive to investment choices that affected the efficiency of the sector” (Victor, 2005, p.24) Consequently, the pressure on all parties to maximise efficiency is lacked Secondly, managers in charge of delivering services are rarely given the managerial and financial autonomy they need to their job and are not held sufficiently accountable for their actions Their inefficiency is often compensated for by budgetary transfers rather than rejected with disapproval Thirdly, user demands are not well perceived, leading to production decisions that are not in line with their preferences (World Bank, 1994; McNabb, 2005, pp.3–54; Victor, 2005, p.8) Finally, such problems made it difficult or impossible for the Government and the electricity SOEs to mobilise private capital In times of public budget contraction, state sources of capital finance were unable to keep pace To deal with the issues above, there have been reforms to promote market entry and to ensure fair competition between new entrants and incumbent firms The attempts to reform public utilities seek to remove, relax, and change the regulation of the traditional business of public utilities, as is evident in USA, Japan and in much of Western Europe, notably the UK (World Bank, 1994; World Bank, 2004) Practically, in reforming electricity, the first task is unbundling services for competition Historically, vertically integrated electricity regulation is justified by the natural monopolies concerns However, whereas the transmission and distribution of electricity feature natural monopolies, the generation and retail sales businesses in the industry not suffer from this problem, the wholesale and the retail market are naturally competitive, thus free competition should be promoted (Weber, 2005, p.3) The USA, Pakistan and Chile separated the electricity generation market (not a natural monopoly) from transmission and distribution (natural monopoly), and opened the market to more efficient generators The transmission agency handles the transport function, and generators and distributors are contracted directly for the power supply However, though separation makes regulation easier, vertical unbundling leads to the problem of determining prices and conditions for access to essential facilities that remain monopolies – e.g the transmission grid network Countries also seek to horizontally un-bundle activities by markets In a number of cases, horizontal unbundling into a number of producers has allowed more direct competition Decentralisation returns faster and more effective, efficient reactions of local units to local-specific demands In other cases, when it leads to regional monopolies, it allows for better performance comparisons and therefore more efficient regulatory monitoring (World Bank, 1994; World Bank, 2004) A major feature of this “new public management” is the introduction of market mechanisms into the running of public service organisations Once the Electricity sector has been unbundled, competition is used to increase efficiency and encourage new 136 H Nguyen investment Corporatisation is often the first stage in a process of privatisation, where the ownership of a former SOE is transferred partly or fully to private shareholders The private-owned corporation will then operate in a market place under normal commercial conditions This is likely to give the fullest scope for incentives to reduce costs, and hopefully return a dividend and an appreciating share value Privatised public utilities typically undergo major corporate restructuring, and the gains (as a proportion of sales) are impressive However, a concern with corporatisation is that the former monopoly service provider may restrict output below a socially desirable level In addition, lessons from Electricity deregulation show considerable problems for pricing policies and restraint of competition, as well as labour policy Typically, analysis of reforms of the utility and service industries, it is necessary to examine not only product market aspects but also labour market aspects, and the interactions between them In a number of cases, Governments have rushed in and made product market reforms without making sufficient changes to the labour market first The labour market situation has then frustrated a lot of those reforms For countries taking the reform path, they expect the decentralisation to enable (i) lowered cost, (ii) engineering efficiency, (iii) innovation, (iv) individual participation (democratisation), (v) new entry in many guises, (vi) investment capital, and (vii) technological and other diversity (Mitchell, 2008; Harris, 2015, p.7; Victor, 2005, p.6) Through the introduction of competition and economic considerations, governments around the world have attempted to obtain more reliable and cheaper services for the electricity customers The European Commission with the Directive 1997 (EU, 1997) required the stepwise opening of electricity markets in the European Union, ending with a fully competitive market at the latest in 2010 The European Directives gives unified efforts of all country members to go to the same path Major points of this Directive include: (i) unbundling the incumbent providers (accounting, managerial, and legal levels); (ii) the creation of an independent authority for regulation; (iii) competition on generation and supply; and (iv) market openings in 2004 for professionals and in 2007 for all consumers At the same period, many states in the US also have taken steps towards competitive and liberalised markets (Steinhurst, 2011; Victor, 2005, p.46) The reforms changed the national electricity industries from a system exclusively owned and controlled by the central government to a system in which generators are decentralised and owned by various levels of government (provinces to localities), industrial entities, and private ventures, but the transmissions and planning system mostly remained at the state core Many of the reforming countries have so far focused on the establishment of wholesale competition, in which the transmission and generation activities are unbundled and the access to the transmission infrastructure for all generation companies are a nondiscriminatory Since generation is viewed as a competitive market, there are few reasons for public ownership and deregulation may be accompanied by privatisation (Weber, 2005, p.4; Victor, 2005) The liberalisation has its drawbacks, though In practice, most reform solutions chosen did not require forced divestiture, since there are often strong legislative and political barriers to such steps (e.g in Germany and California) In many cases, accounting and even legal separation between transmission and generation entities were not sufficient to ensure discrimination-free network access (Victor, 2005, p.46) Deregulation has considerably been slowed down in early 2000s, and the uncertainties Attributes of a viable policy for the Vietnam electricity sector 137 and risks inherent in liberalised electricity markets are much more in view The extent to which the traditional power company is suffering from deregulation is still open to debate The drawbacks of alternative ownership and operation models for the transmission grid are controversial (Weber, 2005) The electricity shortage and outage of California state are often cited as the preeminent example for the risks and difficulties associated with liberalisation Discussion on attributes of a viable Electricity policy to perform While deregulation has been the major theme in the electricity industry worldwide for decades, the Vietnamese Government is slow in this unavoidable path, sceptic about potential earns of private participation, and conservative about keeping electricity sector under strong governmental control Resistances to reform are high since stakeholders have not seen their voices reflected in reform discussions and proposals This part discusses the attributes of a viable Electricity policy and shows results of our investigation into the preference of stakeholders A reform would involve policy, regulation, markets, business models, technology, consumers (National Renewable Energy Laboratory, 2015) We start from the basic principle that a viable model for a public utility should produce three types of gains: (i) a reduction in subsidies, (ii) technical gains to suppliers (EVN and other private electricity investors), and (iii) gains to users (World Bank, 1994; World Bank, 2004) 3.1 Identifying stakeholder groups The current model’s decision makers include almost only the Government as the service provider and the final customers (EVN, 2011) If reformed following the deregulated model of the EU and the USA, the Electricity sector would have two segments of stakeholders The first is the competitive segments, including generation companies, trading companies, retail companies, holdings of vertically integrated companies, electricity customers The second is the regulated segments, including transmission companies and transmission system operators, distribution companies and distribution system operators, and regulators (Weber, 2005, p.11) The new Electricity policy should reflect the preference of all of these stakeholders groups 3.2 Reflect the voices of different stakeholder groups on the objectives of electricity policy A joint consultant study of World Bank and UNDP to Vietnamese Government on electricity stakeholders’ opinion about the main policy objectives for the Electricity sector in Vietnam suggests objectives belonging to levels of national goal (socio-economic development, highest level), sector goal (access and reliability/quality), and enterprise goals (financial viability, technical and cost efficiency) (ESMAP, 2002, p.10) We asked respondents to rank these objectives by order of priority from to The results are summarised in the Table 138 H Nguyen Table Percentage of responses voting for each objective at each rank (unit: %) Objectives and values (1) Rank Top Bottom (2) (3) (4) (5) (6) (7) (8) Basis for Socioeconomic development 48 12 6 66 19 Basis for industrialisation program 38 16 8 57 19 Safe supply 14 12 11 11 19 32 37 Reducing burden to national budget 18 13 14 10 17 31 42 Good quality supply 13 13 10 16 20 31 46 Access to Electricity 10 10 21 14 12 6 11 30 23 Reliable supply 14 14 12 24 13 26 42 Technically and CostEfficient electricity Supplier 16 11 28 14 15 31 Financially viable electricity suppliers 13 24 10 13 20 13 43 (9) (10) (11) (12) Regarding major objectives that would shape the new Electricity policy, the survey shows conservative values are still pervasive “Infrastructure for Socioeconomic development” and “Infrastructure for industrialisation program” are the most important factors, with 66% and 57% responses place them at top priorities (read Column 11) “Access to Electricity”, “Safe supply”, “Reducing burden to national budget”, and “Good quality supply” have almost equal number of votes to top 3, around 30% In overall, for stakeholders, the political objective “Access to Electricity” is of higher priority to the market objective of “Financially viable electricity supplier” (43% responses place this objective at bottom 3, whereas that for the former is only 23%, see column 12) Surprisingly, in overall, “Reducing electricity burden to national budget” and “Financially viable electricity supplier” are of lowest ranks, with 42% and 43% responses placed them at bottom ranks (see column 12) 3.3 Ability to create of an environment for greater private investments The new Electricity policy must be able to attract private investments to fill the shortages of investment capital and generation supplies The demand growths are expectedly high In the period 2000 to 2014, annual increases were between 12% and 15%, while that of OECD countries and non-OECD countries was only 0.7% and 6.1% respectively (International Energy Agency, 2016) Increasing scales of investment program since the last decade amounting to USD 28 billion in 2020 are very difficult to finance and unachievable Due to high budget deficits, the Government would not be able to finance much capacity expansion, and would have no ways other than to open for more participations from private-owned power plants as they are the only alternative left Significant generation capacity Attributes of a viable policy for the Vietnam electricity sector 139 additions could happen only if the Government allow investors other than EVN to invest in power generation Deputy Prime Minister Trinh Dinh Dung disclosed that latest government estimation indicated that failure to attract additional foreign and private investments to the industry would lead to domestic supplies falling short of increasing domestic demands in after 2018, and he has personally called on private investors to participate in the implementation of power development projects (EVN, 2017a) That has certain implications 3.3.1 Deregulating the industry First and foremost, the new policy is to create an environment more profitable and competitive to attract new investors to the industry That policy is to establishing a framework to ensure market entry, including (i) ensuring that networks held by incumbents are opened to newcomers (by opening networks, promoting the building of alternative networks), (ii) ensuring fair access to the public-run facilities and improving the infrastructure of markets), (iii) preventing cross-subsidisation from monopolised operations to competitive operations, and (iv) ensuring neutrality in operating networks (i.e., setting a fair cost for network access) Secondly, there should be the enforcement of Anti-Monopoly Act to prevent anticompetitive activities and illegal practices (Crew, 1987; Crew, 1989; Crew, 1991) Our online survey regarding the regulatory model preference of stakeholders shows clearly the urgency of change For each stakeholder group, Liberalisation surprisingly is the most preferred, then Deregulation In overall, only a tiny proportion vote for State monopoly (18 out of 127 responses or 14%) Even within the EVN responses, most middle managers vote for Deregulation, even 23% of them vote for liberalisation; most representatives from electricity companies other than EVN, as expected, prefer liberalisation Table Stakeholders’ preference on institutional reform Stakeholder groups Liberalisation Deregulation State monopoly Total count Count % Count % Count % EVN 23% Other Electricity companies 75% Business Customers Households Grand Total Total % 20 67% 10% 30 100% 0% 25% 100% 67% 33% 0% 100% 43 49% 30 34% 14 16% 87 100% 57 45% 52 41% 18 14% 127 100% 3.3.2 Allowing to open non-natural-monopolistic parts of the industry to competition In case the Government still wants to keep EVN within its core functions, the Government should introduce more market mechanism into the sector The lack of competitive pressures leads to resistance in cost-minimising behaviour and the abuse of monopoly power In addition, most of the subsidies are captured by middle and high-income households By isolating the natural monopoly segments of an industry, unbundling promotes new entry and competition in segments that are potentially competitive (generation, retails) and where there may be productivity gains 140 H Nguyen The Government now and then discussed with different stakeholder groups about developing the sector through three stages of (i) competitive generation market, (ii) competitive wholesale market, and (iii) competitive retail market As of now, the progress is still somewhere in the first stage The Vietnam Competitive Generation Market (VCGM) with single buyer model begun in 2011 in experimental mode, came to full operations in 2012 (MOIT, 2014) However, as of 2015, though 46% of total power generation participate in VCGM, only 5% of power generated were purchased in VCGM, 95% were purchased through PPA with a fixed price for the whole life of the plant (EVN, 2016, p.34; Nhi, 2015) Unfortunately, the latest Government’s 2016–2020 Electricity Development Plan (February 2017) shows no indicator of commitment from the Government in this path The Government still expects EVN fully owns and operates distribution and retail companies in the period 2016–2020 Competitive retail market and privatisation of power retail sector “could be implemented” in 2020–2025, and only if further assessments show potential returns The power BOT companies cannot enter the competitive wholesale market before 2020 (Prime Minister of Vietnam, 2017/2/7th, p.4; MOIT, 2017) That plan thus is seriously flawed to most of private investors 3.3.3 Allowing electricity companies to price for profit Power tariff lower than production cost is one of the main reasons making power development projects unattractive to investors, leading to the power shortage over the past few years (EVN, 2016) Profit is the ultimate value of any business The reformed regulatory scheme should allow power tariff policy to change in accordance with market mechanism, in which the power tariff will be adjusted reflecting changes in basic input factors (e.g., fuel price, foreign exchange, inflation), as well as structure of power generation output It should allow shorter time intervals between two consecutive price decisions and lower minimal changing magnitude Without this, power companies would suffer periodical losses in time of global price volatility and exchange deflation Our interviews with stakeholders and document analyses show stakeholder preferences as summarised in Table For the Government, since the tariff is very politically sensitive, it always wants to keep it fully under control The power tariffs are maintained at lower levels as an instrument for social stability and for commercial and industrial customers to lower their input costs Higher power costs would make commodity prices increase, badly affecting not only life of poorer households but also the competitiveness of domestic manufacturers That is the reason that pricing regulation still plays a vital role in the case of Vietnam – we can relax regulation but cannot liberalise the market The Government could use a fund contributed by all electricity companies to subsidise poorer households and access to remote areas As of now, there is no clear commitment from the Government to an adjustment path for tariffs towards full cost recovery indicating that the Government is reluctant to change (Prime Minister of Vietnam, 2017/2/7th, p.4; MOIT, 2017) For the private electricity firms, media reports show support for them to have wider rooms to manoeuvre in pricing to gain higher profits, to shorten their investment payback period and to defend against dominant EVN Attributes of a viable policy for the Vietnam electricity sector Table Stakeholder groups preference on pricing Stakeholders Private investors Arguments  Making profits with higher autonomy of pricing is the ultimate value of stockholders  Need a protection mechanism against predatory pricing from the market dominant EVN  Lower tariff invites inefficient uses without fears of higher operating cost punishments, leading to electricity loss and inefficiency  Commercial and industrial consumers should not be affected because of price cross-subsidy Commercial and industrial consumers  State EVN 141 FDI should not receive subsidised tariff  Any price increase should lead to service quality improvement  Price should reflect the government budget status and market inputs  Increase price should not lead to increase wage  Cheaper price lead to non-efficient use of power  FDI are unwanted beneficiary of the Government’s power subsidy program  Need more autonomy in pricing to reflect the costs of inputs  Under-cost pricing lead to chronic financial performances, consequently shortage of investment funds in time of budget contraction For the market-dominant EVN, all stakeholder groups are concerned about the degree to which MOIT and EVN have freedom to operate, since EVN may practice predatory pricing policy EVN reported it would incur a loss of $577 million if without tariff increase of 7.5% in 2015 (MOIT, 2015b) The latest MOIT’s proposal (in April 2016) requesting to give EVN authority to self-approve tariff increases which are under 20% was highly criticised Vietnam Chamber of Commerce and Industry (VCCI) refutes MOIT and EVN arguments, suggesting EVN could self-approve tariff changes under 5%; any change magnitude higher than that should be approved by the Prime Minister The view of National Assembly show mixed opinion Mr Tran Duc Kien, Associate Head of the Economy Commission of the National Assembly, supported that electricity tariff has to be made inadequate due to social stability pressures, but also recognised that inadequate tariff was leading to inadequate capital recovery and build-up and consequently budget shortage in financing capacity development for electricity infrastructure, thus the Government should give EVN larger pricing authority (Nguyễn, 2016) 3.4 Commercialising EVN to improve performance To increase the performance of EVN, the Government should allow EVN to make faire profit to sustain The Government should reconsider the nature of EVN, it should not be an administration, it is enterprise, which has to turn a profit A self-sustainable EVN would help by reducing public subsidies, and increase its internal transparency to perform 142 H Nguyen First of all, lessons from public utility reforms worldwide suggest corporatisation would allow EVN to reform its compensation structure to dramatically improve governance These changes would convert the EVN's current semi-administrative structure into a corporate structure, which would make EVN not only break-even but also have sufficient commercial flexibility to pursue additional revenue For example, no longer being bound by government pay scales would allow EVN to attract senior managers with considerable business experience However, the Electricity Development Master Plan #7 indicates that private participation into the system could not be implemented before 2020 The Government did show expectation to privatise certain state-owned power generating companies (of EVN, PVN, and VINACOMIN) in the period 2016–2020 with the state still keep dominant shares (i.e., EVN holds at least 51%) The Government could even consider reducing its share to levels under dominant proportion and split power generation companies from EVN if further assessments show positive performance indicators (MOIT, 2017) In order to so, the Government has to establish mechanisms to regulate electricity companies in the competitive wholesale market, and require EVN to separate distribution costs from the retail costs The current absence of the Government’s commitment to an adjustment path for tariffs towards full cost recovery indicating that the Government is not yet ready to change In addition to this, allowing EVN to outsource a portion of its network and operations to outside low-cost but competent vendors is way to improve performance Nowadays, almost every governmental organisation outsources (Kettl, 1988, p.158; Savas, 2000) This contract-based relationship has proliferated, as the government is increasingly relying on outsourcing to improve the program effectiveness and expand the range of services delivered to its citizens (Kelman, 2002, pp.305–306) The Public-PrivatePartnership (PPP) could be in forms of Concession Contracts, Build-Operate-Transfer (BOT), Design-Build-Own Projects, Management Contracts/Operation & Maintenance Agreements, Performance Contracts The Government is suffering from EVN typically operating without facing the disciplines of a competitive capital market thus perform poorly, lack transparency, corrupted by its owned managers and follow unfair and uncompetitive practices (ERAV, 2016a) Performance-based management principles and practices of private sector would help public utilities to deliver greater transparency and accountability in operations with increased participation by individuals, consumer groups and local communities in the design and delivery of services (McNabb, 2005) 3.5 Providing EVN with larger autonomy to control its major input of labour The new policy should make EVN be able to continuously increase productivity EVN expects to increase productivity by 8–10% in 2017 by increase (EVN, 2016, p.18), which requires downsizing workforce and operating costs while keeping generation and customer growths (EVN, 2017c) Electricity industry has traditionally been big employers in the public labour force Naturally, power services are labour intensive in retail service, and generally high in capital costs There are as many as 67,000 EVN employees who are tasked only with recording power use at households countrywide for billing purposes While many countries have adopted technology to automatically bills consumers for their electricity use, EVN employees mostly have to go from home to home to read the electricity meters, and return several days after that to collect the power bill payments Attributes of a viable policy for the Vietnam electricity sector 143 Such a labour driven production has several implications It is hard to markedly improve efficiency and performance of EVN Any incremental or marginal approach to improve performance would rely extensively on the labour policy only However, restrictive labour regimes are keeping wage costs high and limit the flexibility of the EVN in employing labour in the most efficient manner Organisational and operational efficiency is hard to achieve since secure public jobs coupled with the high formalisation and standardisation of operations procedures give little incentive to employees to work innovatively and effectively The situation is even worse because of overstaffing is common in EVN Third, not only are overstaffing and overpaid problematic, highly unionised labour also generates further problems Interviews with state managers reveal that EVN labour are organised into unions and in many cases, they will try and block any sector reform movement, largely out of a fear that such reforms could mean a loss of jobs or other drawbacks for power workers Our survey found that for the 29 managers from EVN, 41% fear for their job, about 2/3rd fear facing tougher competition, 56% fear for salary down, and 72% are concerned that the privatised electricity firms would fail to provide adequate accessibility to poorer groups in the society Table The concerns of EVN people on the future reform Degree of Concern Job loss Tougher competition Salary down Inadequate universal accessibility 14% 21% 17% very low 10 34% low 24% 24% 24% 10% concern 17% 16 55% 28% 10% high 21% 7% 14% 24% very high 3% 0% 14% 11 38% Total 29 100% 29 100% 29 100% 29 100% Thus, to implement labour reform successfully, the Government should have program to help EVN staffs who lose jobs to find new jobs Conclusions The current policy for the Electricity industry of Vietnam is extremely flawed This research proposes basic attributes of a viable policy for Vietnam Electricity industry, and analyses current status relating to potential policy reforms that would go towards providing a viable regulatory and business model for the industry The overarching principle is that the Government must relax or remove certain regulatory barriers in order to give sufficient commercial flexibility to new electricity entrants to pursue additional revenue The new policy should also provide an institutional framework which offers EVN a viable business model, with a view to encourage the EVN to operate in a more business-like fashion 144 H Nguyen References Asian Development Bank (2011) Energy for all: Viet Nam’s success in increasing access to energy through rural electrification, Asian Development Bank, Mandaluyong City, Philippines Brown, T and Potoski, M (2003) ‘Transaction 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alternative left Significant generation capacity Attributes of a viable policy for the Vietnam electricity sector 139 additions... The electricity shortage and outage of California state are often cited as the preeminent example for the risks and difficulties associated with liberalisation Discussion on attributes of a viable. .. comparable to East Asia and Pacific and to Latin America & Caribbean (99%), but lower to North America and the European Union (100%) That made a significant contribution to the national programs