Power project circuit breaker shocks

As the government is taking its first steps to adjust power prices toward market levels, will foreign investors be more inspired to plug into power generation projects?

In a talk with VIR’s Nguyen Hanh, Tony Foster, managing partner of Freshfields law firm says that bureaucracy and power purchasing tariffs remain core concerns affecting the bankability of build-operate-transfer (BOT) power projects in Vietnam.

Under Decision 24/2011/QD-TTg, retail power prices could be adjusted as often as once every three months from June 1, 2011 depending on market conditions, instead of being fixed for a calendar year at a time as is the current practice. Does Electricity of Vietnam (EVN) having more pricing flexibility mean future BOT power projects will have more chance of successful price negotiations?

It looks like this decision was designed to make it easier to adjust retail prices, as raising electricity prices was always a political problem for the government given public pressure. Now it seems the government has passed a hot potato to EVN. But in my view, it is highly unlikely that the state utility will raise prices every time that prices of inputs rise by more than 5 per cent. The utility will have to be politically astute before implementing a price hike just like the government did. Also, it has to get the government’s approval anyway.

In respect of price negotiations, operating BOT power projects like Phu My 2.2 and Phu My 3, and new ones like Mong Duong 2 are locked in. Their investors have agreed to prices set for 20 years. The ones that haven’t agreed a price will actually go through the same process of agreeing a price. But as EVN now has more flexibility to increase retail prices, it has more ability to agree to a power price that will encourage investors to build projects. So, the new rule gives potential future investors a bit of comfort that the state utility will be able to pay for what it purchases, which is quite important. In a nutshell, Decision 24 will help to encourage development of private projects, but it doesn’t solve all the problems by any means.

Almost a decade after the success of the Phu My 2.2 and Phu My 3 plants, Mong Duong 2 is the only internationally-financed BOT power project deal inked. Does the matter rest upon purchasing prices?

The price is certainly a very substantial reason why BOT project negotiations are difficult to bring to a successful conclusion. It’s very difficult to get EVN to agree a realistic price with producers, because the price at which EVN sells to end-users is very low. Foreign exchange difficulties have been a bit of an issue, particularly recently. The declining scope of government guarantees on offer is also a factor.

But the core difficulty in the negotiations – and the reason that they take years – is that the government bureaucracy to approve a particular power plant is just too cumbersome. BOT projects are highly sophisticated projects and it’s very difficult for bureaucrats to understand them, and if they do not understand them they do not know if they are safe in their job when they approve them. A lot of bureaucrats have to approve a project, but many don’t know what they are approving and when they don’t know what they are approving they don’t approve it out of fear of making a mistake. So it just goes on and on while people go and talk to the poor prime minister who has to approve everything in order for anything to happen.

What about the government guarantee provision in output purchases, fuel supplies and infrastructure support?

Infrastructure related to a power project has been a concern in the development of such projects, but not a major issue until Nghi Son 2 [600MW, in central Thanh Hoa province, to be put up for a bid]. It’s been a major issue for the coal-fired Nghi Son 2 project. But in reality, for the Phu My plants, things worked relatively well with the exception of the transmission of power out of the projects, which was a temporary problem after the projects were built.

Regarding the fuel input, the government doesn’t really take responsibility except in the gas context. For the Phu My projects, the government did provide a guarantee of the upstream gas supply, but for particular reasons. But Nghi Son 2 and Mong Duong 2 [investors American corporation AES and Vietnam’s Vinacomin Group, 1,200MW, in northern Quang Ninh province, construction expected to commence in July this year], for example, are very different projects.

The scope of government guarantee for Mong Duong 2 is much narrower than that for the earlier Phu My 2.2 and Phu My 3 projects. Will such a precedent dishearten potential investors?

The Mong Duong guarantee is much narrower, but still OK. Where the problem is now is with the guarantee that has since been offered to the potential future power projects, particularly regarding foreign exchange. The fact that the Vietnamese government is trying to limit the amount of foreign exchange that it will guarantee for the conversion of project revenues has been a big issue for projects subsequent to Mong Duong. If the government wants to limit guarantees, it will make it more difficult for the investors to determine whether the rewards are worth the risks.

The government planned to hold an international bid for Nghi Son 2, which is expected to set the benchmark for future open tender BOT power projects. However, forms of contracts for the bidders were only reissued recently after prolonged delays. What was the barrier?

There had been several drafts going back to 2008. But the document wasn’t bankable, so banks refused to agree to lend money to the bidders. Hence, the government has had to revise the drafts again and again.

Is it a better way to select investors through competitive tenders, rather than on a negotiated basis, in your view?

I think it’s better for Vietnam to have direct negotiations with an investor because the Vietnamese government is so good at getting the lowest price possible. Power projects that are bid out by tender actually don’t result in lower prices in my view and do not occur any more swiftly.

Bidding here is very difficult because the government has to formulate a very accurate project. But as decision-making involves too many people, it is incredibly difficult for accurate documents ever to come out. So the winning bidder ends up spending years negotiating after the bid has been won (as happened in Phu My 2.2).

I know the World Bank disagrees and many others think there should be bidding for everything. But I have said for years and I have said it publicly that’s not a good idea at the current point in time for power projects in this country.

The government hopes to develop a competitive power generation market by 2014, where EVN will purchase electricity via competitive offerings. Will foreign investors dare to build power projects given such competition or will they shy away in fear of uncertainty?

You need to have an independent regulator before that’s going to work. I think Vietnam is quite a long way from foreign investors coming in to put $2 billion or so into the country to see what happens to the market and see if they can make money or not. To build a greenfield $2 billion project without some assurance about purchases of outputs is just not possible because a bank won’t lend as it won’t know whether it can get its money back.

What are your recommendations on the issue of allowing other players, besides EVN, in the market thereby developing a fully competitive market in terms of electricity generation, wholesale and retail markets by 2024 as planned?

In some countries, deregulation has worked well. In other countries, it hasn’t worked well. Therefore I would not rush deregulation in Vietnam. I am not sure that the institutions in Vietnam are yet ready for a completely open and free market. It would be safer to take whatever time is necessary, maybe beyond 2024 if necessary, to deregulate well rather than rushing it. If you rush and you do it badly it could be a disaster. Vietnam is always very cautious, and will only deregulate when it’s right. I certainly wouldn’t encourage deregulation until everyone is sure how it works.

The premier late last year approved the much anticipated legal framework for public-private partnerships (PPP) in Vietnam, effective from early this year. Is the PPP model promising for power projects in Vietnam?

It’s too early to say because all we have are very rudimentary pilot regulations. It’s certainly a good thing to have another possible legal construct for private sector involvement in the building of infrastructure, but only if it does not distract from the model which has already developed in the BOT context in the power sector. I am not sure what the PPP actually adds to what we already have in the power sector and so would expect to see it used more for other infrastructure fields than power.

What can be seen from the case of Hiep Phuoc power plant in Ho Chi Minh City, which is threatening to stop its power supply to Tan Thuan Export Processing Zone and Hiep Phuoc Industrial Zone if a big hike in the selling price is not allowed, citing $5 million monthly losses?

Hiep Phuoc demonstrates why it is necessary to have an independent energy regulator. Until that independent regulator is in place who can decide which power plants get what gas in what circumstances, it’s an example of why operating outside of the BOT regime is actually quite difficult and risky.  -VIR

Tags: Vietnam energy, Vietnam power projects