investment incentives

INVESTMENT IN WIND ENERGY IN VIETNAM: THE RIGHT
TIME HAS COME?
OLIVER MASSMANN – MANAGING PARTNER
DUANE MORRIS VIETNAM LLC
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AGENDA
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INVESTMENT AND CORPORATE FORMS
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MARKET STRUCTURE
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INVESTMENT INCENTIVES
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OBSTACLES FOR FOREIGN INVESTORS
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RECOMMENDATIONS
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INVESTMENT AND CORPORATE FORMS
• No foreign ownership restriction for foreign
investment in energy in Vietnam
• Available investment forms: 100% foreign invested
company, joint venture or public private partnership
in the form of BOT contract.
• Corporate forms: limited liability company, joint
stock company, private company or limited
partnerships.
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WHY BOT IS THE BEST INVESTMENT FORM FOR
ENERGY PROJECTS?
• Easier to negotiate more favorable electricity rates.
• Easier to obtain more government guarantees,
especially in terms of EVN’s obligations to purchase
all electricity from the project.
• More fiscal and financial incentives.
• Precedent large-scaled BOT power projects in
Vietnam: Phu My, Vung Ang, Nghi Son
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MARKET STRUCTURE
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EVN is the state monopoly in transmission and distribution in power
sector. It purchases all electricity generated from on-grid independent
power projects.
EVN owns half of power production plants in Vietnam. It is in a
difficult financial conditions, EVN’s debts only to PetroVietnam and
Vinacomin have amounted to 9 trillion VND (more than 400 million
US$).
The consumer electricity tariff is regulated by the Electric Regulatory
Authority of Vietnam (ARAV). EVN, in principle, cannot purchase
electricity from independent power plants at the rates higher than the
consumer rates.
Most of wind energy projects are developed by independent producers.
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INVESTMENT INCENTIVES: MORE FAVOURABLE
TARIFF FOR WIND ENERGY PROJECTS
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Decision No. 37/2011/QD-TTg dated 29 June 2011 on new
tariff for wind energy projects in Vietnam:
• EVN has to purchase electricity from on-grid wind energy
projects at VAT-excluded price of 7.8 US cents/kWh
• EVN has take-or-pay obligations towards wind energy
developers
• Term of wind energy PPAs is 20 years
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Note: the Philippines is considering feed-in tariff for renewable
energy projects with the rate of 23 US$ cents/kWh.
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INVESTMENT INCENTIVES: MORE FAVOURABLE
TARIFF FOR WIND ENERGY PROJECTS
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BUT: How can the government help EVN cover losses from purchasing
electricity from wind energy projects?
• Currently: The government subsidizes 207 VND/kWh for all electricity
EVN purchases fom wind energy plants.
• The Government cannot continue subsidizing EVN as currently.
Solution ?
• The government will have to adopt a feed-in tariff for wind energy in
particular and renewable energy in general.
• The basics of a feed-in tariff mechanism is that the additional costs for
production of energy will be divided among electricity users to assure a
stable cash flow for renewable energy developers
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INVESTMENT INCENTIVES: OTHER FINANCIAL AND
FISCAL INCENTIVES
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Machines and materials, that are not produced domestically and
imported as fixed assets of the projects, are entitled to import
duties exemption.
Wind energy projects are considered as projects in a special priority
sector for investment and entitled to low corporate income tax
rates, exemption, and reduction in accordance with the applicable
corporate income tax law.
Wind energy operators are also subject to exemption and reduction
of land use fee and rental in accordance with the regulations
governing projects in special priority sectors for investment.
These incentives are also applicable to off-gird wind energy
projects
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INVESTMENT INCENTIVES: THE LEGAL FRAMEWORK
IF MOVING TOWARDS DEMONOPOLIZATION
• Dismantling generation companies from EVN: In
notification No. 174/TV-VPCP (25 July 2011) of the
Government Office, EVN must submit a proposal on
establishment of generation companies (GENCO) from
its production entities to the Prime Minister in 2011.
Production companies of EVN amounts to nearly 50%
of generation capacity of the whole market.
• The pilot electricity generation market auction has been
operated since July 2011, after a lengthy delay.
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OBSTACLES FOR FOREIGN INVESTORS
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The increase of wind energy tariff for IPPs is encouraging, but not enough to
guarantee bankability of the projects. As long as customer electricity rates are
low, EVN cannot agree on a higher price for electricity from wind energy
projects.
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Large payment for relocation fees. Wind power construction projects are usually
set to be located at the coastal areas with the residence of a large number of
households.
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As long as EVN remains the monopoly in the sector, there is no guarantee of
fair price for wind energy projects as well as fair competition in the market.
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Grid and facility private ownership is unclear under the laws.
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OBSTACLES FOR FOREIGN INVESTORS
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Government guarantees cannot be trusted:
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In Vinashin default on a US$60 initial payment on a syndicated loan to the
international lender: the government argues that a comfort letter issued by
the Government when the loan was issued in 2007 does not constitute an
implicit guarantee and declines its obligations for repayment of the loan.
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Vietnam only has detailed regulations on government guarantee for foreign
loan and bond issuance. There is no specific regulation on other
government guarantees, including guarantees for performance of stateowned companies (e.g. – EVN).
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Given the foreign exchange reserves of Vietnam is too low (US$16.5 billion
– July 2011), any government's guarantee on foreign currency availability
and transfer for power projects is of little value
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OBSTACLES FOR FOREIGN INVESTORS
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Other macroeconomic issues:
– Inflation rate: more than 22%, only second to Venezuela.
– Recent catastrophic devaluation of Dongs
Seeking loans for power projects in Vietnam may be difficult
because of the unreliability of government guarantees and bad
financial conditions of some state-owned companies.
Corruption, red tape and absence of an impartial court system
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RECOMMENDATIONS FOR INVESTORS
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Difficult time but opportunities await. For example, wind energy projects can be
surprisingly lucrative if combined with wind farms, tourism and other services.
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Public private partnerships (e.g. - BOT) should be the first option.
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Sound financing structure, good business model and great legal assistance are keys to
success.
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Accurate prediction of where the market is heading to, in the context of Vietnam’s
critical power shortage, should be considered.
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More pressure on the government to adequately address key issues on tariff increase, demonopolization of the power market and government guarantee.
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Vietnam’s market is extremely in need of financing and EPC capability. There are rooms
for cost-effective and high quality EPC contractors and resourceful lenders.
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THANK YOU
For further information, please contact Oliver
Massmann at [email protected]
Duane Morris Vietnam LLC
Pacific Place
Unit V1307/1308, 13th Floor
83B Ly Thuong Kiet Street
Hoan Kiem District, Hanoi
Vietnam
Phone: +84 4 3946 2200
Fax: +84 4 3946 1311
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