Energy Development and Economic Reform in Viet Nam

Feature | 3 May 2011

The energy sector plays a vital role in Viet Nam's efforts to decrease poverty and spread the benefits of economic growth.

While Viet Nam has enjoyed the benefits of rapid economic expansion in recent years, the country's growing industry and services sector - as well as the emerging middle class - has led to a spike in energy demand.

"Electricity is an underlying input for economic growth and job creation," notes Xavier Humbert, Senior Energy Specialist in the Asian Development Bank's (ADB) Southeast Asia Department. "Any shortage of power will result in a slowing of the economy and underachievement in poverty reduction targets."

Like most countries, Viet Nam was affected by the recent global economic downturn. The Government of Viet Nam responded with a strong fiscal and monetary stimulus program, but has recently transitioned to a more balanced policy, which has helped stabilize financial and economic conditions in the country. These measures, along with the global economic recovery, have paved the way for solid economic growth. GDP increased by 6.8% in 2010, compared with 5.3% in the previous year, according to the ADB's Asian Development Outlook 2011.

Stable power supply drives growth

The government has recognized that a key aspect of returning the country to the strong economic growth of previous years is to maintain a stable supply of power to industry and consumers. They have responded to this challenge by creating an institutional and regulatory framework that mobilizes investment in a financially sustainable manner.

The 2004 Electricity Law provides the legal framework for transparent regulation and the creation of a competitive wholesale electricity market. The government's power sector restructuring plan created a competitive wholesale power market and regulatory body. It has also been active in working to set up a viable regulatory framework for the sector.

ADB has a broad-based portfolio in Viet Nam. Since resuming operations in 1993, ADB's cumulative assistance to Viet Nam has included 99 sovereign loans totaling $8 billion, 245 technical assistance grant projects amounting to $188.4 million, and 24 other grant projects totaling $139.1 million.

ADB has been particularly active in the energy sector, which made up 15.8% of its portfolio from 1999 to 2008, according to a country assistance program evaluation (CAPE) conducted by ADB to assess its work in the country. During the CAPE study period, from 1994 to 2008, ADB made eight loans to the Viet Nam power sector covering distribution, transmission, and generation with a total value of $1.869 billion. This included private sector loans for two gas-fired plants at Phu My, with a total value of $90 million and associated guarantees of $60 million.

During this same period, there were 26 technical assistance operations with a total value of $18.8 million. Some of ADB's technical assistance work during this period focused on addressing safeguard issues through building capacity for environmental assessment and looking at the impact of specific projects.

ADB delivers results

Throughout this period, and continuing today, ADB has maintained a dialogue with the government and its agencies, and with other development partners, on power sector policy and the reform process.

The CAPE study found ADB's program of support to the Viet Nam power sector to be "highly relevant" to the country's key development goal: the reduction of poverty through high economic growth. ADB was found in the study to be able to adapt its project activities to the fast-changing energy demand situation in Viet Nam and help the country remove power and other infrastructure bottlenecks in order to achieve business-led pro-poor economic growth.

The study rated the impact of ADB's assistance in the energy sector as "substantial," noting that most projects achieved their objectives. The report stated that although the overall socioeconomic impact of the program is difficult to assess precisely, electrification rates in the country increased dramatically, from 55% in 1992 to 93% in 2009. It is estimated that power investments of more than $3 billion a year are needed over the next decade to fully electrify the country.

Promoting inclusive growth

While supporting large infrastructure projects, ADB's work in the energy sector has also been focused on the promotion of inclusive economic growth and the protection of vulnerable populations. For example, in April 2009 ADB extended a $151 million loan to help Viet Nam expand and improve electricity services in poor and remote communities.

The Renewable Energy Development and Network Expansion and Rehabilitation for Remote Communes Sector Project is developing five to ten mini hydropower plants to serve communes in mountainous areas in the north and center of the country. It will also provide financial support to the government's ongoing rural electrification program, which is seeking to expand power coverage throughout the country, particularly in provinces with large ethnic minority communities.

The $197.6 million project is designed to increase access to reliable and affordable electricity supplies in order to improve the quality of life in the project areas and to increase the time available for families to earn a living and educate their children.

Two of ADB's larger projects in Viet Nam - financed through ADB's private sector department - helped finance the construction of the Phu My 2.2 and Phu My 3 power plants. ADB has also helped reduce energy losses in the transmission and distribution system, and lessen power outages, through the rehabilitation, upgrading, and expansion of electrical systems in key areas of the country.