INVESTMENT IN WIND ENERGY IN VIETNAM: THE RIGHT TIME HAS COME?

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1 INVESTMENT IN WIND ENERGY IN VIETNAM: THE RIGHT TIME HAS COME? OLIVER MASSMANN MANAGING PARTNER DUANE MORRIS VIETNAM LLC 2010 Duane Morris LLP. All Rights Reserved. Duane Morris is a registered service mark of Duane Morris LLP. Duane Morris Firm and Affiliate Offices New York London Singapore Los Angeles Chicago Houston Hanoi Philadelphia San Diego San Francisco Baltimore Boston Washington, D.C. Las Vegas Atlanta Miami Pittsburgh Newark Boca Raton Wilmington Cherry Hill Princeton Lake Tahoe Ho Chi Minh City Duane Morris LLP A Delaware limited liability partnership 1

2 AGENDA INVESTMENT AND CORPORATE FORMS MARKET STRUCTURE INVESTMENT INCENTIVES OBSTACLES FOR FOREIGN INVESTORS RECOMMENDATIONS 2

3 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. 3

4 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 4

5 MARKET STRUCTURE 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. 5

6 INVESTMENT INCENTIVES: MORE FAVOURABLE TARIFF FOR WIND ENERGY PROJECTS 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 Note: the Philippines is considering feed-in tariff for renewable energy projects with the rate of 23 US$ cents/kwh. 6

7 INVESTMENT INCENTIVES: MORE FAVOURABLE TARIFF FOR WIND ENERGY PROJECTS 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 7

8 INVESTMENT INCENTIVES: OTHER FINANCIAL AND FISCAL INCENTIVES 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 8

9 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 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. 9

10 OBSTACLES FOR FOREIGN INVESTORS 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. 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. 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. Grid and facility private ownership is unclear under the laws. 10

11 OBSTACLES FOR FOREIGN INVESTORS Government guarantees cannot be trusted:. 11 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. 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). 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

12 OBSTACLES FOR FOREIGN INVESTORS 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 12

13 RECOMMENDATIONS FOR INVESTORS Difficult time but opportunities await. For example, wind energy projects can be surprisingly lucrative if combined with wind farms, tourism and other services. Public private partnerships (e.g. - BOT) should be the first option. Sound financing structure, good business model and great legal assistance are keys to success. Accurate prediction of where the market is heading to, in the context of Vietnam s critical power shortage, should be considered. More pressure on the government to adequately address key issues on tariff increase, demonopolization of the power market and government guarantee. 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. 13

14 THANK YOU For further information, please contact Oliver Massmann at Duane Morris Vietnam LLC Pacific Place Unit V1307/1308, 13th Floor 83B Ly Thuong Kiet Street Hoan Kiem District, Hanoi Vietnam Phone: Fax: