Public Disclosure Authorized

Document o f
The World Bank

FOR OFFICIAL USE ONLY

Report No. 53 119-VN

Public Disclosure Authorized

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

AND
INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FOR A PROPOSED LOAN

IN THE AMOUNT OF US$200 MILLION

AND PROPOSED CREDIT

Public Disclosure Authorized

IN THE AMOUNT OF
SDR 73 MILLION ( U S $ l 11.8 MILLION EQUIVALENT)

TO THE

SOCIALIST REPUBLIC OF VIETNAM

FOR A

FIRST POWER SECTOR REFORM DEVELOPMENT POLICY OPERATION

Public Disclosure Authorized

March 8,20 10

Vietnam Sustainable Development Unit

Vietnam Country Management Unit
East Asia and Pacific Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official
duties. Its contents may not otherwise be disclosed without World Bank authorization.
 VIETNAM - GOVERNMENT FISCAL
YEAR
January 1 - December 31

CURRENCY EQUIVALENTS
(Exchange Rate Effective as o f February 28,2010)
Currency Unit Vietnamese Dong
U S $ l .oo 19,075 VND
S D R l .OO 1.53258 US$

WEIGHTS AND MEASURES

Systkme Internationale

ABBREVIATIONS AND ACRONYMS

I AAA 1 Analytical and Advisory Activities I M o F I MinistryofFinance I
I ADB I AsianDevelopmentBank I M o I T I Ministry o f Industry and Trade I
AfD Agence franCaise de DCveloppement MPI Ministry o f Planning and Investment
BOT Build, Operate, Transfer MOST Ministry o f Science and Technology
CFL Compact Fluorescent Lamp MtCO? M i l l i o n Tonnes of Carbon Dioxide
I CPI I ConsumerPriceIndex I MW I Megawatt I
I CPS I Country Partnership strategy I N L D C I National Load Dispatch Center I
I CPSPR I Country Partnership Strategy Progress Report 1 N P L I N o n Performing Loan I
DPO Development Policy Operation NPTC National Power Transmission Company
EPTC Electric Power Trading Company ODA Official Development Assistance
ERAV Electricity Regulatory Authority o f Vietnam OoG Office o f Government
I EVN 1 VietnamElectricity I PBR 1 Performance-Based Ratemalung I
1 FDI I Foreign Direct Investment I PC I Powercompany I
I GDP I Gross Domestic Product I R C M I Retail Competitive Market I
GEF Global Environment Facility SAV State Audit o f Vietnam
GHG Greenhouse Gas SBV State Bank o f Vietnam
GNP Gross National Product SDR Special Drawing Right
1 GSO I General Statistics Office I SEA 1 Strategic Environment Assessment I
I GWh I GigawattHour I SEDP I Socio Economic Development Plan (2006 - 2010) I
I IBRD I International Bank for Reconstruction and Development I SFR I Self-Financing Ratio I
IBT Incremental Block Tariff SMHP Strategic Multipurpose Hydropower Plant
IDA International Development Association SMO System and Market Operator
IFC International Finance Corporation SOE State Owned Enterprise
I IFRS I International Financial Reporting Standards I t/COz I T o n n i b f Carbon Dioxide
~ ~~

I
I IMF I International Monetary Fund I TNO I Transmission Network Owner I
I JICA I Japan International Cooperation Agency I T O U I Time O f Use I
kWh Kilowatt Hour VCGM Vietnam Competitive Generation Market
LSDP Letter o f Sector Development Policy VHLSS Vietnam Household Living Standards Survey
LDU Local Distribution Utility WCM Wholesale Comuetitive Market
I MDGs I Millennium Development Goals I WTO I World Trade Organization I
I MIGA I Multilateral Investment Guarantee Agency I I I
 FOR OFFICIAL USE ONLY

IDA PROJECT ABBREVIATIONS

DSM & EE Demand Side Management and Energy Effrciency Project (GEF TF051256)
PRSC Poverty Reduction Support Credit
PSRDPOl First Power Sector Reform Development Policy Operation
REDP Renewable Energy Development Proiect (Cr. 4564)
IRD I Rural Distribution Project (Cr. 4444) I
I RE2 I Second Rural Energy Project (Cr. 4000 and TF054464) I
SEIER System Efficiency Improvement, Equitization and Renewables Project (Cr. 3680 and GEF TF05 1229)
TD2 Second Transmission and Distribution Project (Cr. 4 107)

This document has a restricted distribution and may be used by recipients only in the performance o f
their official duties. I t s contents may not be otherwise disclosed without W o r l d Bank authorization.

Vice President: James W. Adams

Country Director: Victoria Kwakwa
Sector Director: John Roome
Sector Manager: Hoonae Kim
Task Team Leader: Richard SDencer
 VIETNAM
mRST POWER SECTOR REFORM DEVELOPMENT
POLICY OPERATION

TABLE OF CONTENTS

1. INTRODUCTION ........................................................................................................ 3
. I1. COUNTRY CONTEXT ............................................................................................... 4
Recent Economic Developments in Vietnam ......................................................................................... 4
Macroeconomic Outlook and Debt Sustainability .................................................................................. 9

I11. THE GOVERNMENT’S PROGRAMAND PARTICIPATORY PROCESSES .........11

The Macroeconomic Program................................................................................................................. 11
The Power Sector Reform Program ........................................................................................................ 12
Stakeholder Participation........................................................................................................................ 18

I V. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM..................................... 19

Link to Country Partnership Strategy ......................................... ;........................................................... 19
Collaboration with the IMF and Other Donors ....................................................................................... 19
Relationship with Other Bank Operations .............................................................................................. 19
Lessons Learned ..................................................................................................................................... 21
Analytical Underpinnings ....................................................................................................................... 22

V. THE PROPOSED OPERATION.................................................................................. 24

Operation Description............................................................................................................................. 24
Policy Areas ............................................................................................................................................ 27

V I. OPERATION IMPLEMENTATION ........................................................................... 31

Poverty and Social Impacts..................................................................................................................... 31
Environmental Aspects ........................................................................................................................... 35
Implementation, Monitoring and Evaluation .......................................................................................... 39
Fiduciary Aspects ................................................................................................................................... 39
Disbursement and Auditing .......................................................................................................... :.........40
Onlending ............................................................................................................................................... 40
R i s k s and Risk Mitigation....................................................................................................................... 40
 ANNEXES

ANNEX 1: Letter o f Sector Development Policy............................................................. .43

ANNEX 2: Program Matrix for the Vietnam Power Sector Reform
Development Policy Loan Programmatic Series ........................................... .48
ANNEX 3: Public Financial Management in Vietnam...................................................... 52
ANNEX 4: Country At-A-Glance, including Map (No. VNM33551) .............................. 61

The First Power Sector Reform Development Policy Operation was prepared by a team consisting o f

Richard Spencer (Task Team Leader), Beatriz Arizu de Jablonski (Senior Energy Specialist, Co-Task
Team Leader), Anh Nguyet Pham (Senior Energy Specialist), Ky Hong Tran (Energy Specialist),
Keiko Kubota (Senior Economist), Valerie Kozel (Senior Economist), Douglas J. Graham (Senior
Environmental Specialist), Robert J. Gilfoyle (Senior Financial Management Specialist), Cung Van
Pham (Financial Management Specialist), M a i Thi Phuong Tran (Financial Management Specialist),
Hisham Abdo Kahin (Senior Counsel), Sameena Dost (Senior Counsel), Peter Meier (Consultant),
Lien Thi Bich Nguyen (Program Assistant), Teri Velilla (Consultant).

Peer Reviewers: Ioannis Kessides (Lead Economist), Kari Nyman (Lead Specialist), Tonci Bakovic
(Chief Energy Specialist, IFC).
 LOAN, CREDIT AND PROGRAM SUMMARY

VIETNAM
FIRSTPOWER SECTOR REFORM DEVELOPMENT
POLICY OPERATION

Borrower Socialist Republic O f Vietnam

~

Implementing Agency Ministry o f Industry and Trade

Financing Data IBRD Loan terms: commitment-linked IBRD Flexible Loan with
variable spread. Final maturity o f the Loan i s 25 years including a
10.5 year grace period and level repayment o f principal.
IBRD Loan amount: US$200 million
IDA Credit terms: hard term, standard IDA service and commitment
charges. Final maturity o f the Credit i s 35 years, including a ten year
grace period. Credit amortization at 2.5 percent for years 11-20 and
5.0 percent for years 21-35.
IDA Credit amount: SDR73 million (US$111.8 million equivalent)

Operation Type Single-tranche programmatic operation, the first in a series o f three

planned operations.
~~ ~

M a i n Policy Areas The program is organized around four main policy areas essential to
the reform o f Vietnam’s power sector:
Development o f a competitive power market;
Power sector restructuring;
Electricity tariff reform; and
Improving demand side energy efficiency.

K e y Outcome K e y indicators o f the outcomes are:

Indicators Hourly operational reserve o f electricity generating capacity not
less than 10 percent at all hours from a 2008 baseline o f periods
with zero hourly reserve;
Contracts in place for 90 percent o f demand, for non BOT
generation based o n pricing methodologies and standard format
published by regulator, and the competitive generation spot
market price being published by the system and market operator.
Baseline is no such contracts, and no publication;
The number and diversity o f electricity generation companies i s
increased, with no single company owning more than 40 percent
o f capacity from a baseline o f 70 percent in 2008;
The system and market operator follows dispatch and system
operation rules to ensure no discrimination among generators, as
measured by an independent audit. Baseline is no audit because
no system and market operator in place;

1
 Annual tariff adjustments are approved by March each year with
updates o f up to five percent approved by Ministry o f Industry
and Trade;
Cross subsidies from industrial and commercial to residential
consumers are reduced by 50 percent. Subsidies to the poor are
targeted to l o w income consumers. Baseline: cross subsidies
from industrial and commercial consumers (of $370 million in
2007), an untargeted subsidy to all residential consumers for the
first 100 kilowatt hours (kWh) o f consumption, and local
distribution utility tariffs higher than Vietnam Electricity’s; and
0 Energy efficiency targets are established by law and Ministry of
Industry and Trade and the regulator has capacity to enforce
demand side management (DSM) programs and require power
companies to undertake energy efficiency actions. Baseline: no
energy efficiency law, no DSM program obligation on power
companies.

The objective o f the proposed program i s to support the Government

o f Vietnam’s implementation o f a market for electricity generation,
restructuring o f the power sector and reform o f tariffs that will
facilitate effective competition, transparency and predictability,
encourage timely generation investment, improve system operational
reserve and provide incentives for efficient use o f electricity.
The proposed programmatic series supports the Country Partnership
Strategy objective o f improving the business environment by better
meeting demand for reliable and cost efficient energy. I t also
contributes to social inclusion, environment management and
governance objectives.
~ ~ ~ ~~~~~~~~

All the supported reform actions have been implemented through

appropriate legal instruments and the danger o f their reversal i s low.
The four main areas o f risk identified for the operation are:
Waning ownership o f reform, mitigated mainly by the two-step,
pilot and implementation approach designed to build consensus
and clear exit points;
Complexity and novelty o f reforms, which introduce the concept
o f the economic regulator for the first time in Vietnam. Mitigated
by extensive capacity building;
0 Governance and corruption and resistance to greater
transparency. Reforms introduce transparency to mitigate this
risk; and
Unforeseen impacts o f tariff reform on either the poorest or
powerful interest groups. Considered low but will be monitored.

P115874

2
 IBRD/IDA PROGRAM DOCUMENT FOR A PROPOSED
FIRST POWER SECTOR REFORM DEVELOPMENT POLICY OPERATION TO
VIETNAM

I. INTRODUCTION

1. Vietnam i s implementing an ambitious long term reform o f i t s electric power sector, with the
intention o f discarding the model o f a vertically-integrated utility owned by the State in favor o f
a competitive market. The purpose o f the reform program i s to attract a broader range o f
participants to invest in the power industry. Transparency and competition are to be introduced,
tariffs will transition to recover costs, the main power utility will be restructured and demand
side efficiency will be promoted. The expected outcome i s that the power sector will be better
equipped to support economic growth and meet demand for power in terms o f quantity and
quality, while ensuring reasonable and fair costs to consumers, and efficiency.
2. The reforms focus on four key policy areas:
Introduction o f competition, starting with the introduction o f a transparent market in
which generators compete to supply and in which prices for generation are formed
transparently and competitively;
Restructuring o f the power sector to create arrangements that enable a market and
competition, and eliminate conflicts o f interest between generation and transmission and
system operation services;
Reforms to the mechanisms by which electricity retail tariffs are set, through introduction
o f tariff setting that reflects costs in the supply chain, including power purchase costs in
the competitive market for generation, and regulated network and system operation
services. The reforms will also improve the targeting o f subsidies for the poor; and
Improve the conditions for demand side energy efficiency by supporting the
Government’s efforts to establish a comprehensive legal framework.
3. The proposed operation, First Power Sector Reform Development Policy Operation
(PSRDPO1) i s planned as the first in a programmatic series o f three. The expected timing o f this
first operation i s that it will be completed by mid 2010. The second and third operations are
expected to follow in early 201 1 and early 2012. The first operation i s proposed to be in the
amount o f U S $3 11.8 million, o f which $200 million would be a loan from IBRD sources and a
credit o f 73 million Special Drawing Rights (SDR), equivalent to U S $1 11.8 million, from IDA
on hard terms. Each o f the two subsequent operations i s proposed to be loans in the amount o f
$200 million from IBRD sources and hard IDA funds if available. Timing, content and size o f
subsequent operations will track the progress o f the government’s reform program and
availability o f funding.
4. The operation i s consistent with the objectives o f the Country Partnership Strategy (CPS) for
2007 to 201 1 as reviewed in the CPS Progress Report (CPSPR) o f November 2009. As part o f
i t s first pillar, to improve the business environment, the CPS adopts the broad aim o f better
meeting demand for reliable and cost efficient energy. The strategy specifically notes the Bank’s
support to facilitate the restructuring o f the power sector. The broadening and deepening o f the
dialogue between the Government o f Vietnam and the Bank on power sector reform merits a

3
program that will complement the series o f Poverty Reduction Support Credits (PRSCs) that i s
the primary vehicle for policy dialogue in Vietnam and the solid investment program in the
power sector.

11. COUNTRY CONTEXT

Recent Economic Developments in Vietnam

Vietnam and the Global Financial Crisis
5 . The global financial crisis led to a slowdown o f economic growth in Vietnam. International
commodity prices declined in the third quarter o f 2008, export orders for garments and other
industrial products collapsed in the fourth quarter, and a slowdown in manufacturing became
noticeable. The impact was acute in the first quarter o f 2009, when GDP increased by 3.1
percent compared with the same period in 2008, more than 4 percentage points below the historic
trend.
6. The global financial crisis was the second major external shock to affect Vietnam in recent
years. In late 2007 and early 2008, in the aftermath o f i t s accession to the World Trade
Organization (WTO), Vietnam had been confronted with massive capital inflows. Attempts to
sterilize them were inadequate to prevent a boom in banking credit, an acceleration o f inflation, a
ballooning trade deficit and asset price bubbles. The bubbles were amplified by sizeable
infrastructure investments by central and provincial governments. The investment decisions o f
large state-owned enterprises (SOEs) and “Economic which took advantage o f their
access to finance to diversify into booming sectors, contributed to fanning the flames. The
impact o f overheating was further aggravated by the surge in the international prices o f food and
energy in early 2008.
7. The government responded to the overheating with a stabilization package. In March 2008,
it adopted the “eight groups o f measures’’ to bring inflation down and reduce the trade deficit.
This package combined the tightening o f banking credit, enhanced supervision o f vulnerable
banks, postponement o f non-urgent public investment projects, modest cuts in recurrent
government expenditures, and temporary interventions in international trade. The (unofficial)
crawling peg o f the dong to the U S dollar was not abandoned, but the floatation band was
broadened.
8. In the fall o f 2008, when the policy response was beginning to work, the government had to
change gear fkom stabilization to stimulus, as the effects o f global financial crisis on Vietnam
became evident. In November 2008, the “five groups o f measures” aimed at supporting
economic activities were announced. This time, the package included cuts and deferrals in tax
payments o f corporate and personal income tax as well as in value added tax for small and
medium enterprises. It also included a small program o f cash transfers to poor households for
the occasion o f the Lunar New Year. Other measures followed in February 2009, including a
short-term interest rate subsidy scheme for working capital, which was de facto used to re-

’ “Economic Groups” are groups o f enterprises each with distinct legal status, which are bound together through
mutual investments, capital contribution, merger, acquisition, reorganization or other forms o f affiliation; share
common long-term economic interests, technology, market andor business services; and constitute a consolidated
business entity in which the enterprises are organized into two or more levels, as parent companies and subsidiaries,
as set forth in the Enterprise L a w o f 2005 and Decree 139 o f September 5,2007.

4
finance enterprise debts contracted on very onerous terms during the stabilization period. This
scheme turned out to be instrumental in keeping credit flowing to the economy, and prevented
financial distress in the corporate sector.
9. Thanks in part to the stimulus package, economic activity i s recovering. In 2009, GDP grew
by 5.3 percent with the second half performance particularly strong (see Table 1). Construction
and services, two sectors buoyed by domestic demand, are leading the recovery, while
agriculture and manufacturing sectors are s t i l l growing below the historic trend. Agriculture has
been affected by unfavorable weather conditions in 2009 while manufacturing was hit very hard
by the effects o f the global financial crisis in the developed countries. GDP growth in the last
quarter o f 2009 reached 6.9 percent, year on year.
TABLE1: KEYEc NOMIC INDICATORS
2006 2007 2008eJ 2009 e l 2010 p/ 2011 pl
Output, Employment and Prices
GDP (% change previous year) 8.2 8.5 6.2 5.3 6.5 7.0
Industrial production index (% change, previous year) 17.0 17.1 14.6 7.6 12.5 14.5
Unemployment rate (%, urban areas) 4.8 4.6 4.7 6.5 5.0 4.5
Consumer price index (% change, period-end) 6.7 12.6 19.9 6.5 9.0 6.5
Public Sector
Official fiscal balance (% GDP, excl. off-budget items) 1.1 -2.2 -1.1 -6.2 -3.8 -2.3
General fiscal balance (% GDP, incl. off-budget items) -1.1 -5.3 -4.5 -9.7 -6.2 -5.1
Foreign Trade, BOP and External Debt
Trade balance (BOP definition, US$ million) -2,776 -10,360 -12,782 -8,307 -7,820 -9,411
Exports o f goods, (US$ million, fob) 39,826 48,561 62,685 57,096 64,115 72,405
Exports o f goods (% change, previous year) 22.7 21.9 29.1 -8.9 12.3 12.9
Key exports, (value, % change) - crude oil 12.1 2.7 23.1 -40.2 13.0 4.6
Imports o f goods, (US$million, fob) 42,602 58,921 75,467 65,403 71,935 81,816
Imports o f goods (% change, previous year) 22.1 38.3 28.1 -13.3 10.0 13.7
Current account balance (US$ million ) -163 -6,992 -10,705 -7,192 -7,320 -8,016
Current account balance (percent GDP) -0.3 -9.8 -1 1.9 -7.8 -7.2 -7.1
Foreign direct investment (BOP inflows, US$ billions) 2.4 6.7 9.3 8.4 8.8 9.3
Total external debt -DOD- (US$ billions) 19.1 23.8 29.6 34.0 38.1 41.1
As percent o f GDP 31.5 33.4 33.0 36.8 37.5 36.6
Debt service ratio (% exports o f g&s) 5.0 4.6 3.9 5.0 5.7 6.0
Financial Markets
Credit to the economy (% change, period-end) 25.4 53.9 25.4 37.7 25.0 25.0
Short-term interest rate (3-m deposits, period-end) 7.9 7.8 8.1 8.5 8.5 7.0
-
Stock market VN index (Jul2000 =loo) 752 927 316 495 ___ __-
jund (IMF), and World Bank.
e = estimate, p = projections.

The Government’s Finances

10. The government’s overall fiscal deficit i s estimated to be 9.7 percent o f GDP in 2009,
substantially above that o f previous years, as the stimulus package came on top o f an already
expansionary budget plan. In addition to the measures adopted to stimulate economic activities,
the fall in o i l prices and the slowdown in economic activities have resulted in a large decline in
government revenue. This decline was partially offset in the second half o f 2009, as both

5
international commodity prices and domestic economic activities became more buoyant (Table
2).
11. The external balance held up reasonably well during 2009 despite the global crisis. The
preliminary data indicate that Vietnamese exports declined by 9.7 percent in 2009, compared
with 2008. The decline i s less than in most other developing countries, but makes 2009 the first
year with negative export growth since the beginning o f Vietnam’s economic reforms in 1987.
The decline would have been larger if the sizeable gold exports o f early 2009 are not included.
An even more dramatic decline in imports, by 14.7 percent, succeeded in reducing the trade
deficit. Despite the faster recovery o f imports than exports in recent months, and the decline in
remittances, the current account deficit i s estimated to have decreased to about 7.9 percent o f
GDP in 2009, from 11.9 percent in 2008. FDI inflows are down, but Official Development
Assistance (ODA) increased in 2009, resulting in an estimated capital account surplus o f around
10.9 percent o f GDP in 2009.
TABLE2: GOVERNMENT BU ZETARY OPERATIONS
VND trillion unless otherwise noted 2007 2008 el 2009pl 2010 E/

Total revenues and grants 326.3 416.8 394.9 462.6

Revenues 320.3 409.5 388.9 456.6
Tax revenues 267.0 359.1 348.6 403.5
O i l revenues 77.0 88.8 58.8 66.3
Non-oil revenues 190 270.3 289.8 337.2
Non-tax and capital revenues 53.3 50.4 40.3 53.1
Grants 6.0 7.3 6.0 6.0
Budget expenditure 336.1 434.2 454.7 497.5
Current expenditure 231.8 298.3 339.5 390.8
Expenditure o n investment development 104.3 135.9 115.2 106.7
“Off-budget” expenditure and net lending 25.7 49.8 104.5 87.3
Net lending 7.0 22.8 34.3 48.1
ODA financed -3.0 9.0 13.4 11.9
VDB net lending 10.0 13.8 20.9 36.2
“Off-budget” investment expenditure 18.7 27.0 70.2 39.2
Plan 18.7 27 25.2 39.2
Stimulus 45.0
Overall fiscal balance -35.5 -67.2 -164.3 -122.2
I n percent of GDP -3. I -4.5 -9.7 -6.2
Source: Ministry o f Finance (MoF), IMF and World Bank staff estimates.

Foreign Exchange and Inflation

12. Even though the capital account surplus was sufficient to cover the current account deficit,
international reserves declined in 2009, reversing the recent trend o f slow accumulation. The
increasing demand for foreign exchange by importers and the market expectations o f dong
devaluation led to a shortage o f foreign exchange, which was particularly severe in May-July,
and again in November. Economic Groups were among the entities holding on to their foreign
currency earnings. The market’s uncertainty regarding the level o f international reserves also

6
encouraged a precautionary demand for and hoarding o f gold and hard currency. These
developments resulted in depreciation pressures on the exchange rate, with the dong trading at
the weaker end o f the floatation band for an extended period, and the spread between interbank
and parallel exchange rates widening to between a few and more than 10 percent at various times
(see Figure 1).
FIGURE1: A WEAKENINGDONG

Source: SBV and World Bank

13. Since October 2009, the government has taken several measures to allay concerns regarding
foreign exchange shortage, inflation and credit growth. Headline inflation had come down
sharply from the peak o f almost 30 percent in the middle o f 2008 to single digit levels in recent
months. Even though the trend had reversed in the second half o f 2009 (Figure 2) headline
inflation ended the year at 6.5 percent, down from 19.9 percent in 2008. The nascent global
recovery has already started to increase prices o f primary commodities including food. An
expansionary monetary policy during the stimulus period has led to rapid credit growth, reaching
37.7 percent at year end, above the target o f 30 percent for 2009.
14. Policy changes adopted in November 2009 included raising the base rate from 7 to 8 percent
(Figure 3), devaluing the dong by 5.4 percent, and narrowing the flotation band from +5 percent
to f 3 percent. The interest rate subsidy scheme for working capital was terminated in December
2009 as originally planned, further contributing to monetary policy tightening. The dong was
devalued once more in February 2010, this time by 3.4 percent. Shortly after, the cap on lending
rates in dong was abolished in practice, if not in the law. Flexible interest rates should restore
the arbitrage between dollar and dong returns, and contribute to a smoother operation o f the
foreign exchange market.

7
 FIGURE 2: INFLATION
I 50
Year-on-yeaCPI

361
E
t
20

10

0
FMB h-08 Oa-08 F4b-09 b 4 9 Oa-09 Feb-li

Source; GSO
FIGURE 3: KEYPOLICY RATES

14

12

10

4 1
-----Re-rate -
I
2
i
o !
- Baserate

,
Discountrate

, I

Source; SBV

The Banking Sector

15. The banking sector was adversely affected by the succession o f asset price bubbles, monetary
tightening and growth slowdown. The real estate bubble o f end-2007 and i t s subsequent bursting
in early 2008 made i t difficult for several commercial banks to recover their loans. The rapid
disinflation in late 2008, at a time when interest rates were s t i l l very high, substantially increased
the debt service burden faced by enterprises because o f the rapid rise in real interest rates.
During the stabilization phase o f late 2007- early 2008, the SBV upgraded i t s supervision efforts,
and in parallel, raised minimum capital requirements. By the end o f 2008 all commercial banks,
including the nine small joint stock banks that seemed most vulnerable, had met the new
requirements. This process continues, with the minimum charter capital set at 3 trillion dong
(about $157 million at today's exchange rate) by end 2010. All banks need to submit plans on
how they will meet this target no later than March 2010. Banks which fail to meet this
requirement will be forced to merge with other larger banks, or will have their business licenses
revoked.

8
16. The profitability o f banks was generally good in 2008, reflecting relatively l o w credit costs
and a strong growth in the volume o f lending. Profitability was also boosted by sizeable capital
gains on government bonds, which many banks purchased when foreign investors fled Vietnam
in the first half o f 2008. These capital gains offset the low net interest rate margins, resulting
from the cap on lending rates, which was in force until February 2010. So far, profit figures
reported by listed banks for 2009 also remain upbeat.
17. The fraction o f bad debt (calculated based on days in arrears) for the banking sector was on
the rise until mid-2009 (generally a few percentage points), and has started to decline more
recently. N o n Performing Loans (NPLs), calculated using international standards based on
borrower risks, would be at a much higher level (2-3 times higher), but are not known with
certainty. In the absence o f the interest subsidy scheme, rapidly changing inflation and interest
rates combined with the weak orders due to the global financial crisis there would have been an
even more substantial deterioration o f bank portfolios. The increase in bad loans came after an
overall improvement in the quality o f lending as a result o f several years o f efforts by the State-
owned Commercial Banks (SOCBs) to clean up their portfolios in preparation for equitization.
The recent reversal o f this trend may suggest that the gradual recovery o f economic activities i s
helping enterprises cope with their financial obligations.
Employment
18. Assessing the social impact o f the growth slowdown i s difficult in the absence o f a reliable
and timely labor force survey, but there i s anecdotal evidence o f increased hardship during the
first half o f 2009, especially in industrial parks and in handicraft villages. Overall, it appears that
underemployment was more common than open unemployment. There are also disparities
across various segments o f the labor market and heterogeneity o f impacts across enterprises and
provinces. The market for semi-skilled and skilled workers recovered well after the Lunar New
Year (end January 2009). The picture i s different in the industrial parks that serve as the
platform for a large share o f manufacturing exports, where the workforce i s generally less
skilled. A survey o f such parks reveals that a significant minority o f enterprises was adversely
hit during the first half o f 2009.
19. The biggest diversity o f social impacts was across individual workers and households. Rapid
impact assessments relying on focus group discussions with workers suggest that major adverse
effects, such as falling into poverty, facing food shortages, having to pull children out o f school,
having to sell land, or becoming homeless, were relatively uncommon. However, there were
numerous job losses, frequent reductions in working hours and wages, reduced remittances, and
a shift towards informality. W h i l e job losses were widespread in industrial parks in late 2008
and early 2009, few took the form o f open layoffs. Non-renewals o f contracts and incentives for
voluntary departures were more common. Job losses were frequent among seasonal workers,
and among those on short-term contracts. However, in 2010 enterprises are once again
complaining about unfilled vacancies, suggesting that the labor market i s tightening.
Macroeconomic Outlook and Debt Sustainability
Outlook
20. The outlook for 2010 i s challenging. The stimulus program, while succeeding in
encouraging economic activities, has also contributed to increased external vulnerability during
2009. Expansionary monetary and fiscal policies contributed to the return o f a large current
account deficit, although smaller than that in 2008. Critical macroeconomic information such as

9
the real size o f the stimulus package and international reserves were not made clear in a timely
manner, which added to uncertainty and exacerbated the foreign exchange shortage. As the
world economy recovers, the government i s adopting a tighter monetary stance and fiscal
policies commensurate with the available financing. The measures adopted so far can be
grouped in three areas. First, a tighter credit growth target o f 25 percent for 2010 was
announced. The target i s among the lowest over the last decade. Second, government has
clarified the law on interest rate caps, allowing lenders and private sector borrowers to negotiate
interest rates. And third, a tighter budgetary stance was endorsed by the National Assembly.
21. The cap on lending rates was introduced in 2008 as a tool to address the overheating
economy. The cap was set at 150 percent o f the dong denominated base rate, which was to be
announced monthly by the SBV. T h i s decision replaced the previous practice o f allowing
negotiated interest rates for commercial lending activities. The cap was effective at containing
the overheating, but as the economy entered a disinflation phase, and the policy rate was lowered
to boost economic activity, it had the effect o f squeezing the interest rate margins for banks. The
base rate peaked at 14 percent in June 2008, with the corresponding lending rate cap o f 21
percent. With the base rate at 8 percent at present, the cap i s 12 percent and banks’ gross
margins are reduced by half compared with barely one year ago. The interest rate subsidy
scheme was a second-best solution to alleviate this problem, as i s the recent decision to allow
banks to circumvent the regulation. To address this problem more fundamentally, the SBV i s
including provisions in the two key banking laws to be passed in M a y 2010, and to go into effect
in 201 1. Article 15 in the draft Law on the State Bank o f Vietnam and Article 91 in the draft
Law on Credit Institutions would relax the cap on lending rates. The draft Law on Credit
Institutions also includes a provision that the SBV will have the power to stipulate an interest
rate management mechanism in case o f market disorders or disruptions. These measures will be
important as the loans contracted under the interest subsidy scheme begin to mature.
22. Balance o f Payments will continue to be a challenge for the authorities in 2010. The trade
deficit has been on a widening trend again since mid-2009. Remittances and foreign direct
investment inflows were more resilient than observers anticipated, but s t i l l declined compared
with 2008. The authorities have made efforts to ease the excess demand for foreign currency and
gold since December 2009. State-owned enterprises were instructed to render foreign currency
holdings back into the banking system. Administrative measures were introduced to tighten
supervision o f gold trading. Gold trading floors will be closed from March 2010 onwards,
because they allegedly encourage speculative behavior by the population. The devaluation o f the
dong in November 2009 and again in February 2010, and especially the recently decided
flexibility o f interest rates in dong, are also expected to bring some calm to the foreign exchange
market.
23. Despite the lower credit growth target, the inflationary pressure does not appear to be
subsiding. Even when the seasonal effects o f the Lunar New Year are taken out, prices are
clearly on an increasing trend, fueled in part by recent increases in gasoline and water prices.
Tradable goods carry a heavy weight in Vietnam’s consumer price index. The combination o f a
crawling peg for the dollar and increases o f commodity prices in world markets should result in
an acceleration o f inflation. The recent devaluation o f the dong will also add to the pressure, as
will the planned increases in the price o f electricity, in the minimum wage and in civil service
wages. The government i s aware o f this challenge, and the rebalancing o f economic policy in
end-2009 and early-2010 i s a step in this direction. But keeping inflation in the single digits in

10
2010 will be difficult; the government has taken some initiatives to control prices which do not
reassure the markets.
Debt Sustainability
24. The government i s expected to reduce the size o f the budget deficit gradually. The recently
approved budget plan for 2010, which translates into a projected overall fiscal deficit o f 6.2
percent, entails a substantial contraction compared with 2009, but s t i l l an expansionary stance
compared with previous years. The government i s expected to finance this deficit with a
combination o f bond issuance, including the proceeds o f a recently completed sovereign bond
offering o f $1 billion, and increased ODA. A t the Consultative Group meetingheld in December
2009, development partners pledged over $8 billion (including both loans and grants), a sharp
increase from $5 billion in the previous year. Even with the caveat that the pledged figures do
not directly translate into disbursements within the calendar year, the O D A hnds are expected to
help finance the budget deficit. In the past, the government has not monetized unhnded
expenditure but adjusted capital spending (including on-lending to lower levels o f government)
when financing fell short o f expectations.
25. Vietnam’s debt i s likely to stay sustainable if the current economic recovery continues and
the authorities revert to the fiscal deficit o f 3-4 percent in the next 2-3 years. A debt
sustainability analysis was conducted in early 2009 after the announcement o f the 2009 budget
plan, but before the specifics o f the fiscal stimulus package became clear. It found Vietnam’s
external debt position to be robust, with the total public external debt o f 25 percent o f GDP (30
percent including private sector) at the end o f 2008. With nearly two-thirds o f the debt
contracted on highly concessional terms, the ratio o f debt service to exports was projected to
remain at or below 5 percent in the coming years. The stress tests found that the two main risks
to debt sustainability were a one-time nominal depreciation o f the dong o f 30 percent and an
increase in debt-creating flows by 10 percentage points o f GDP, which would increase the
present value o f public debt by seven to eight percentage points by 2013. Both scenarios were
considered unlikely at the time, and are s t i l l unlikely, although the picture has changed somewhat
with the large fiscal deficits in 2009 and 2010. H o w quickly the government reverts to the
“normal” levels o f fiscal deficit and how it finances the deficit, as well as whether the new debt
i s incurred for productive purposes will be critically important to the continued sustainability o f
Vietnam’s debt. The next debt sustainability analysis, scheduled for April this year, will
incorporate all information available regarding the stimulus spending and projected orientations
o f the government.

111. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES

The Macroeconomic Program

26. The government’s macroeconomic vision i s articulated in several strategic plans and
documents, including the ten-year Socio-economic Development Strategy 200 1-2010 and the
five-year Socio-economic Development Plan 200 1-2006. There was a noticeable acceleration,
starting around 2001, in the government’s drive towards relying on market mechanisms,
developing a multi-stakeholder economy and hrther integrating with the region and the world.
These strategic plans and documents aimed at establishing a market economy with a socialist
orientation. They built on the successes o f the renovation process initiated in the late 1980s with
&i mbi, while also preserving the strong poverty-reduction focus.

11
27. The SEDP 2006-2010, approved in June 2006, emphasizes development outcomes and the
policy reforms needed to attain them, unlike previous five-year plans which focused on
quantitative targets as if the state was s t i l l in charge o f producing most goods and services. It
relies on data and analysis, rather than administrative reporting, to substantiate i t s diagnostics
and recommendations. I t has also led to the adoption o f a framework to monitor progress
towards attaining development outcomes. The process through which this SEDP was prepared
was more participatory than in the past. Extensive consultations were held, going beyond the
boundaries o f government, and involving businesses, grassroots communities, overseas
Vietnamese and development partners.
28. Other important policy developments have influenced this reform agenda. By mid-2003, the
government decided to aim for a rapid accession to the World Trade Organization (WTO). In
late 2003, a new anti-corruption strategy started to emerge, with the emphasis shifting from
punitive measures to increased transparency and strengthening o f the government systems. The
new comprehensive anti-corruption strategy was adopted in M a y 2009, setting out preventive,
demand-side solutions and monitoring mechanisms. The year 2004 saw the coming into effect
o f the new Budget Law, which makes the National Assembly and People’s Councils at all levels
responsible for resource appropriations. A banking reform roadmap was adopted in 2006 to
prepare the banking sector for liberalization in accordance with Vietnam’s W T O commitments.
The roadmap included revisions o f the Laws on SBV and on Credit Institutions, as well as
preparation o f Bank Supervision Law and Deposit Insurance Law.
29. The SEDP also emphasizes the linkages between macroeconomic goals, and sector-based
activities. These include: continued agricultural development to meet domestic demand but also
to add value by improvements in processing and production efficiency; industrial development
particularly the maintenance o f industrial growth and modernization; and development o f the
service sector. Each o f these has implications for the energy sector, which also i s treated within
this SEDP largely in terms o f ensuring that increasing demand i s met at least cost.
T h e Power Sector R e f o r m P r o g r a m
30. To ensure demand can be met, the government has decided to move the power sector towards
competitive and market based arrangements that also promote efficiency. The reform program
entails a major transformation o f the power market, sector structure, trading and purchase
agreements, generation pricing and regulation o f network services and retail tariffs in Vietnam.
The design o f the power market and the restructuring i s intended to change how projects are
financed, the interest and participation o f the private sector (both local and foreign investors),
how costs o f supply are determined and how they are reflected in tariffs. The goal i s to introduce
incentives and regulations to bring about improvements in quality o f service, the efficiency with
which energy i s used, and to enable existing and new investors to finance sufficient generation to
achieve adequate levels o f electricity generation capacity for security o f supply.
31. Adequate and sustainable investment in the power sector i s necessary to support economic
growth and poverty reduction in Vietnam. Vietnam has faced high levels o f demand growth for
the past decade, only falling to 10 percent in 2008 due to the global crisis before returning again
to the trend rate o f around 15 percent in 2009. This has eroded reserve margins to the point
where power shortages leading to load shedding have been an intermittent problem since 2005,
especially in dry years. Current estimates are that Vietnam could face a shortage o f about
1,200MW o f capacity in 2010. To achieve a 25 percent system reserve margin - a widely

12
accepted norm in the industry to achieve security o f supply and end periodic shortages -
Vietnam needs to pursue a large scale generation investment program.
32. Estimates vary o n the amount o f investment required for the power sector and depend mainly
o n forecasts o f demand growth. Estimates made in 2007 suggested that some $3-4 billion per
year was needed for the power sector as a whole, with about 70 percent being for generation.
Recent estimates suggest as much as $6 billion a year may b e needed. ODA has been a
significant source o f funding, running at about $1 - $1.5 billion per year, with the balance
coming from domestic resources, especially in recent years from several SOEs. ODA i s likely to
continue at current levels, though possibly o n increasingly hard terms: the power sector for
example i s leading the transition from IDA to IBRD. SOEs have indicated continuing interest in
investing in the power sector. Nonetheless, to ensure adequate levels o f investment at reasonable
prices will require diversification o f sources o f financing for generation, including private sector
investment, and diversification o f generation ownership to enable competitive prices, Vietnam
aims to achieve this through the development o f a competitive generation market.
33. The objective and the sequencing o f the program are set out in the SEDP, the National
Energy Development Strategy, the Electricity L a w and the Power Market Roadmap. The four
outcomes the government seeks are discussed below.
Market Reforms
34. The reform program will introduce increased transparency and competition in generation
prices, ensuring that power purchase costs transferred to consumers’ tariffs are fair. Introducing
incentives to improve generation efficiency, reliability and availability through competition
should also lead to better pricing and costs. Furthermore, the market framework will include
transmission grid, system operation and distribution network planning and operation procedures
and performance standards that will improve efficiency and reliability o f delivery o f power to
consumers. Quality o f service and performance obligations for consumers and transparent
connection and operation procedures as well as performance standards for N P T C and for N L D C
as the system and market operator (SMO) will be established.
35. Central to the reform and restructuring i s the Electricity L a w which was passed by the
National Assembly in November 2004 and which came into effect o n July 1, 2005. The
Electricity L a w establishes a new framework for the power sector, comprising:
0 The gradual development o f a competitive power market, starting with a market in which
multiple generators compete to generate and sell to a single wholesaler (the Single
Buyer), moving later to a wholesale competitive market with multiple wholesale buyers -
power companies and large consumers - and sellers - power generators - and, in time the
development o f retail competition enabling consumers to choose their supplier;
A planning process to select new generation investment to supply projected demand
consistent with security and reliability criteria and government energy policies that will
gradually evolve from the current centralized master planning process. The first step i s to
transfer oversight from Vietnam Electricity (EVN) to the Ministry o f Industry and Trade
(MoIT). In later stages o f reform, master planning is expected to give way to indicative
planning, based o n market information, leaving greater discretion to project proponents in
choice o f project location, technology and timing; and

13
 The establishment o f a new agency, the Electricity Regulatory Authority o f Vietnam
(ERAV), under the supervision o f the Minister o f Industry and Trade, as the economic
regulator o f the sector.
36. Prime Minister’s Decision 26 o f 2006 approved a Roadmap for the development o f the
competitive power market within the general framework defined in the Law. The Decision
envisages a three phase process, with each phase split into two stages: an initial pilot to test and
improve the design and then a stage for full implementation. It also sets pre-conditions to be met
for moving from one phase to the next and requirements to restructure the actors in the power
sector to match the needs o f the market. In more detail the phases and indicative timetable are:
Phase 1 (2005 - 2014): The transitional phase during which preparation and detailed
design, as well as trials lead to the creation o f the Vietnam Competitive Generation
Market (VCGM). The V C G M will introduce competition among generators to enter the
market based on allocation o f concessions to develop power plants identified in the
master plan. I t will also introduce competition to be dispatched (that is, to supply
electricity into the network). The full implementation stage will require all power plants
to be contracted to sell a set quantity o f electricity, initially 90-95 percent o f that
generated, but declining over time at a set price each year to a single wholesale licensee
(the Single Buyer), which will resell to PCs at regulated bulk supply tariffs. A centrally
administered spot market will manage competition for generation scheduling, dispatch
and ancillary services;
Phase 2 (2015 - 2022): Wholesale Competitive Market (WCM), in which generators will
be able to sell directly to wholesalers, the PCs or qualified large customers. In the pilot
stage, selected PCs and large customers will be allowed to contract directly with
generators and trade in the spot market. In the completion stage, all PCs and large
customers will enter and participate in the wholesale market and multiple wholesale
licensees will be allowed; and
Phase 3 from 2023): Retail Competitive Market (RCM), in which the PCs’ monopoly as
retailers to small and medium sized customers will be phased out. In the pilot stage,
customers in designated provinces and above a specified threshold most likely based on
annual consumption or peak demand will be allowed to contract with their chosen
supplier. During the full implementation stage, the number o f provinces will be
gradually extended and thresholds gradually reduced.
37. Coal-fired generation accounted for about 21 percent o f all electricity generated in 2009. In
i t s Notice o f August 11, 2009, the Office o f Government announced that the pricing o f coal for
electricity production would follow market principles from 2010. The price o f coal will
consequently rise, in stages, to about twice i t s former price. Both the expected increase in the
coal price to market levels and because the V C G M does not change the power system expansion
planning method, the policies supported are not expected to increase the amount o f coal fired
electricity consumed. Neither the existing fleet o f plants, nor those planned to enter service will
change as a result o f the first phase o f reforms, since the V C G M will have no role in technology
or fuel choice. The reforms to coal pricing and the introduction o f V C G M can be expected to
reduce the amount o f electricity generated from older, less efficient coal fired plant, in favor o f
the more modern ones; this i s discussed further in Section V I below.

14
Restructuring
38. The current sector structure i s characterized by EVN’s dominant share and participation in all
segments of the supply chain. EVN currently controls about 70 percent o f all generation plant
although it has sold minority stakes in some power plants through an equitization program. All
power transmission assets are owned by EVN through i t s wholly-owned subsidiary NPTC.
Some 50 percent o f rural customers are served by locally-owned and operated distribution
utilities (LDUs) with the balance receiving service from EVN’s power distribution companies
(PCs). Generation outside EVN ownership includes about 12 percent o f power supplied from
two international build-own-transfer plant in operation at Phu My (for which IDA and MIGA
provided guarantees); PetroVietnam, the State-owned o i l company that owns about 12 percent o f
all generation capacity; and Vinacomin, the State-owned mining company that also owns power
plants. About five percent o f electricity i s imported from China, and more i s planned to be
imported from Lao PDR. Numerous locally-owned small hydro, coal- and gas-fired independent
power projects are under construction and the first are now entering service.
39. The government has set out its principles for restructuring o f the main participants in the
power sector to ensure that there i s fair and transparent competition and that conflicts o f interest
are addressed. These principles may be summarized as:
Separation o f the ownership o f power generation from the Single Buyer, to eliminate any
conflict o f interest between those who sell and those who purchase electricity. With the
introduction o f the W C M the monopoly o f the Single Buyer will be eliminated since
generators and large consumers will be free to enter bilateral contracts;
Separation o f monopolistic services (transmission, system operation and distribution
network services) from those that compete to ensure they provide transparent and fair
treatment to all market participants; and
Restructuring o f generation into successor companies o f similar size and competitive
capability to develop conditions for effective competition.
40. Initial restructuring w i l l enable competition and protect consumers and investors from the
conflict o f interest that currently exists with the same company, EVN, being the wholesale buyer
and seller o f electricity, the provider o f monopoly transmission and system operation services
and a major owner o f generation competing with other non-EVN generators. Transparent and
non discriminatory transmission, system operation and market administration will provide
generation investors, both non EVN SOEs and private, the level o f comfort required to enter the
market and to continue building new generation. Diversification o f ownership o f generation i s
expected to be achieved as other investors enter the market and EVN’s generation assets are
placed in subsidiary generation companies, which will be split from EVN.
41. The government has made clear its intention that there will be mixed public and private
ownership o f the sector. Generation ownership, which i s currently in State and in private hands,
will remain mixed. EVN i s carrying out a study on how to restructure i t s generation assets to
meet the longer term aspiration o f the Prime Minister’s Roadmap that requires that no single
entity will be allowed to control more than 25 percent o f generation capacity. Monopolistic
services, including the National Power Transmission Company (NPTC) acting as the
transmission network owner responsible for expansion and maintenance (TNO) and the National
Load Dispatch Center (NLDC) which will become the system and market operator (SMO), as
well as the large strategic and multipurpose hydropower plants (SMHPs) will remain in the

15
public sector. The Single Buyer - currently a unit o f EVN called the Electricity Power Trading
Company (EPTC) - and the power distribution companies (Power Companies - PCs) will remain
owned by the State, but the PCs are intended to be equitized in the longer term as performance
based ratemaking (PBR) tariff regulation i s completed and implemented, and to support the
development o f the WCM.
Tariff Reform
42. Electricity tariffs that are reflective o f efficient costs in the electricity supply chain provide
predictability for sustainable investment in the power sector, to finance much needed new
generation capacity, transmission upgrading and distribution improvements. A key target o f the
reforms i s to build investors’ perception that tariffs in the power sector will be sufficient to cover
generation, transmission, distribution and system operation costs. Tariff methodologies and
regulations must ensure that electricity market participants know that regulated tariffs will allow
them to recover costs over the lifetime o f their investment. Cost reflective tariffs need to be
accompanied with subsidy mechanisms ensuring protection for the poor, especially for rural
areas in Vietnam.
43. The reforms have to address two issues. First, the level o f tariffs must be maintained at a
realistic level. Tariffs have fallen in real terms over the past several years, despite increases in
January 2007 o f an average o f 8 percent to Vietnamese Dong (VND) 8 7 3 k W h and a further
increase o f an average o f 9.1 percent to VND 9 4 8 k W h in 2009, which reflects the actual cost o f
supply in 2008. Second, tariff setting must move away from the old system under which
increases have been promulgated by decision o f the Prime Minister, following a protracted and
untransparent process o f negotiation between EVN and the government and then within the
government itself. The system must be replaced with one that reflects actual agreed costs, to the
greatest extent possible assisted by market mechanisms that support price discovery, to provide
predictability for investors.
44. Cross subsidies, estimated at $370 million in 2007, from industrial and commercial to
residential consumers are to be gradually eliminated, and targeting o f subsidies to the poor
improved initially with changes in the structure o f the residential block tariff. A first and
significant step has been taken in putting all households on an equal footing, by extending the
existing uniform tariff policy for PCs to all the country by including the tariffs o f rural local
distribution utilities (LDUs). Reforms are also focused on ensuring that as much o f the subsidy
as possible reaches the poor. In the longer term, introduction o f greater generation competition
and consumer choice through retail competition will reduce the needs for tariff regulation and
government involvement in price setting. Such a change would require complementary
mechanisms to ensure continued protection for the poor which, ultimately, may be delivered
through other targeted social programs rather than through the current tariff schedule for
households.
45. The Electricity Law assigns responsibility for tariff decisions to the Prime Minister. The
Prime Minister’s Decision on electricity pricing in December 2006 (276/2006/QD-TTg)
formalized the transformation to market based cost reflective tariffs with the statement that:
“From 2010, the electricity retailprice shall be based on the market price”. More recently, the
Prime Minister’s Decision 21/2009 set out the principles to unbundle tariff setting into separate
generation (power purchase) costs, regulated transmission and distribution network services
revenue requirements, regulated system and market operation costs, and other costs.

16
46. Although tariff decisions should ideally be insulated from considerations other than strictly
economic and financial, the setting o f tariffs will continue to require government approval.
Reforms will provide significant improvements in the transparency and promptness with which
tariff decisions are made. Resetting will be on a regular annual cycle with changes scheduled for
March o f each year, based on cost and demand data and objective assessment o f their
reasonableness by ERAV. The Prime Minister has delegated to the Minister o f Industry and
Trade the approval o f average tariff updates if the proposed average retail tariff change i s below
five percent.
Improving Demand Side Efficiency
47. In recent years, the government has encouraged supply side efficiency and demand side
management, to reduce the shortages o f energy and the need for new investment in capacity.
This has generally shown positive results, with EVN’s compact fluorescent lamp (CFL) program
being evaluated to have resulted in reductions in consumption o f about 46 gigawatt hours (GWh)
per year and peak demand reductions o f 30 megawatts (MW). I t further targets a reduction o f
the peak demand o f 207 M W by 2012, and 450 MW by 2015 at day time peak load.
Nonetheless, reductions o f 6,000 GWh per year o f consumption are considered possible. The
National Strategic Program on Energy Saving and Efficient Use approved by the Prime Minister
in 2006 included targets on energy savings up to 2015 and instructed M o I T to draft and submit to
the National Assembly the Energy Efficiency Law during the period 2008 - 2010.
48. To promote reductions in electricity demand, the efficiency program i s expected to set
efficiency standards for electrical appliances and labeling. Tariff regulations which propose time
o f use (TOU) metering and electricity tariffs for all electricity consumers connected at medium
and high voltage, create pricing signals to reduce peak demand and energy consumption. In the
longer term, TOU metering w i l l be further developed to other consumers, and PCs tariffs will be
partly set on the basis o f demand side efficiency programs, as well as their own supply side
efficiency measures.
Managing Reform
49. One o f the major goals o f the market and tariff reform i s to enable adequate level o f
investment to end periods o f shortage that have been experienced in recent years as demand has
outstripped supply, and to continue to improve access to good quality electricity. Within this
consideration, the three phases o f reform over a twenty-year period reflect a pragmatic approach,
taking lessons from international experience, avoiding major changes that could disrupt
investments required to support growth, and the long time horizons the government adopts in its
planning. Design, sequencing and management o f reform are key factors that will contribute to a
successful outcome.
50. The two-step, pilot-and-implement method allows for learning by doing, analytical work and
consensus building at each stage to avoid unintended negative results, reversals or stalling o f the
program. I t i s well adapted to the circumstances o f Vietnam and i s a plausible and manageable
plan. As an example, there have already been trials o f different designs by EVN using its own
generation plant, which has significantly influenced the design o f the V C G M now being
prepared. The government has pressed ahead with the program despite the global instabilities o f
the past two years, demonstrating both the robustness o f the approach and i t s commitment to
reform.

17
51. The government increasingly depends on ERAV to manage the reform program because o f
i t s good track record. I t i s well staffed, with about 60 full time professionals organized in a
number o f functional departments, and a capacity building program. Staff are generally from
engineering or finance/economics backgrounds, with many from EVN. They have proven to be
committed to their work and have built knowledge through working hand-in-hand with
specialized international consultants. ERAV has benefited from substantial technical assistance
and training over the three years since i t s operationalization from the three main donors working
in the power sector and reform field: the Bank, the Asian Development Bank (ADB) and the
Agence franqaise de Dkveloppement (AfD). ERAV has been successful in proving i t s credibility
with investors and power sector stakeholders, and i s increasingly being called upon to share i t s
experience in international forums.
Stakeholder Participation
52. Led by M o I T and ERAV, stakeholder discussions have been extensive. Consensus i s
particularly valued in Vietnam and a consultation process has evolved for the power sector
reform proposals which are both extensive and inclusive. The process o f development o f
policies and regulations follows four steps. In the first step, ERAV, normally working together
with international consultants and technical working groups made up from existing electricity
sector participants, prepare draft proposals. In the second step, the proposals are provided in
advance o f consultation workshops to which electricity sector stakeholders and the press are
invited. The consultation workshops recommend changes to the draft proposals. As part o f the
reform, ERAV i s also establishing feedback mechanisms from consumers, including the
encouragement o f users’ groups, but these have not so far been active.
53. In the third step, each proposal i s redrafted and submitted to the Minister o f Industry and
Trade for approval and issue as a Decision. Before approval, the draft Decisions are consulted
within government and with the general public, normally through the M o I T web site. Based on
the feedback from this second round o f consultations, the Decision i s redrafted and resubmitted
to the Minister for approval. In addition to the redrafted Decision, ERAV provides a record o f
the comments received and where and how they have been incorporated into the Decision. They
are made available to the press and via a web site, often in both Vietnamese and English. Those
Decisions which must be approved by the Prime Minister or higher levels are processed in a
similar way, often with additional rounds o f stakeholder consultations.
54. M o I T has held more than 50 workshops over the past three years as part o f this consultative
process. In general, workshops are well attended by a diverse group o f stakeholders who
participate actively - though plainly different topics are o f interest to different stakeholders,
which include various departments o f EVN, current non-EVN electricity sector participants,
potential investors (both public and private), consultants and private individuals. Workshops are
almost invariably reported on television and in the press. Feedback from the second stage o f
consultation i s recorded and must be accounted for.
55. In addition to consultation to facilitate formal decisions, a more ad hoc process o f
consultation and feedback operates in Vietnam. The press pursues a lively debate on the power
sector, which i s unusually closely scrutinized; i t has had a significant influence on the scope o f
the reforms. A recent example o f this scrutiny led to a change in the way in which the Single
Buyer was set up in EVN. M o I T i s also open to feedback, particularly from large consumers
which are its natural constituency.

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 IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM

Link to Country Partnership Strategy

56. The proposed programmatic series i s a close fit with the Bank’s CPS for 2007 to 201 1, as
recently updated in the CPSPR (Report 51659-VN, November 24, 2009). In the four pillars in
the CPS, the reform o f the energy sector i s noted as supporting the first, namely to improve the
business environment by meeting demand for reliable high quality electricity. The program will
directly contribute to two CPS outcome indicators, on cost reflective tariffs and diversification o f
ownership. Moreover, the program contributes to the second pillar, strengthening social
inclusion, which includes expansion o f access to reliable and affordable electricity, the third,
which covers improvements to environment management and the fourth, improving governance.
57. NO specific development policy operation (DPO) was identified for the power sector at the
time o f preparation o f the CPS, but in discussing how to deliver the strategy, it was noted that
sector-level DPOs might be selectively introduced when policy reforms warrant such
intervention. The progress in reform in the power sector has been considerable in the intervening
period, and the dialogue i s now at a level where it cannot adequately be covered within the
wider-ranging PRSC series. The proposed PSRDPO 1 is one o f the first such sectoral reform
DPOs.
Collaborationwith the IMF and Other Donors
58. Three donors, ADB, AfD and the World Bank have cooperated in their support o f power
sector reform. ADB initially financed a major technical assistance project which proposed the
general market design, while AfD has financed capacity building o f the regulator through
training and through a resident advisor. ADB has also started to fund technical assistance to
NPTC, mainly on financial models and capacity building to file for annual transmission revenue
requirement and transmission charges. The World Bank has financed the development o f the
final market design, licenses, regulations and technical codes, as well as led the reform dialogue
with MoIT, and supported i t s efforts in donor coordination. In addition to flagging the proposed
PSRDPO series to these partners, the Bank has discussed it with Japan International Cooperation
Agency (JICA) and the policy actions it covers are being closely coordinated with a proposed
JICA-led climate change DPO.
59. Assessments on macroeconomic indicators and projections are discussed regularly with the
IMF. The Bank and IMF collaborate on annual debt sustainability analysis. The Bank has
discussed the proposed operation with IMF.
Relationship with Other Bank Operations
60. The World Bank Group’s support for the power sector i s based on a dynamic m i x o f
analytical and advisory activities (AAA), IBRD/IDA lending, guarantees and facilitating
involvement o f other parts o f the World Bank Group as needed. I t i s grouped around four
themes:
0 Efficient and sustainable expansion o f physical system capacity. The current portfolio
reflects the continued need to support expansion o f generation capacity and
improvements in supply side efficiency in the transmission and distribution systems.
Current projects supporting this area are the System Efficiency Improvement,
Equitization and Renewables Project (SEIER, Cr. 3680 and TF051229) and Second

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 Transmission and Distribution Project (TD2, Cr. 4107). IDA has also been the most
significant financier o f Vietnam's major and quite successful rural electrification and
rehabilitation program, with Second Rural Energy Project (RE2, Cr. 4000) and Rural
Distribution Project (RD, Cr. 4444) now under implementation. The Trung Son
Hydropower Project i s at an advanced stage o f preparation and will further support this
theme;
Fostering private sector participation. IDA has supported private sector participation
through a guarantee operation for the Phu My 2.2 B O T gas fired power plant (GU B-004-
0 VN). The Multilateral Investment Guarantee Agency (MIGA) has provided a
guarantee for the Phu My 3 B O T power plant. International Finance Corporation (IFC) i s
advising M o I T on the Nghi Son 2 B O T plant currently being bid;
Promoting renewable energy and energy efficiency. With GEF co-financing through
SEIER and now through the stand alone Renewable Energy Development Project (REDP,
Cr. 4564), the Bank i s supporting the development o f renewable energy, principally small
hydro (below 30MW). Through SEIER and the stand-alone GEF Demand Side
Management and Energy Efficiency Project (DSM&EE, TF 051256), the Bank i s
supporting improvements to demand side energy efficiency; and
Supporting sector reform. Through both recipient- and Bank-executed technical
assistance, the Bank has been involved in sector reform since the start o f the reform
process in about 1998. All the projects noted above include some element o f support for
sector reform, restructuring o f power sector operations and unbundling o f generation,
transmission and distribution and equitization. The current series o f PRSCs has also
provided an additional vehicle for dialogue. Outcomes achieved from this include the
further development o f policy for B O T power plants, separation o f power transmission
assets into NPTC and adoption o f pricing systems for renewable energy. Analytical work
supporting reform i s discussed further in the section on analytical underpinnings.
61. The strong program in the power sector i s characterized by an extensive policy dialogue
founded on solid analysis, closely integrated with investments. Portfolio performance i s
generally good, with high levels o f disbursement (21 percent in FY08, 25 percent in FY09, and
projected 20 percent in FY10) with high levels o f realism. All projects completed to date have
achieved satisfactory outcomes. The AAA program i s selective and integrated with the four
themes discussed above. Other financing instruments include the Global Environment Facility;
the Carbon Partnership Facility, for which the Bank i s now preparing the first operation for
Vietnam, to support investments made under REDP. A $300 million Clean Technology Fund
(CTF) Investment Plan for Vietnam was recently endorsed by the CTF Trust Fund Committee.
The Plan includes support for transmission system modernization, projects for which were
proposed by ADB and the Bank, energy efficiency proposed by ADB and IFC, renewable energy
proposed by IFC and urban transport proposed by ADB.
62. The Bank has also recently restarted work in the gas sector after a hiatus o f some years. This
new start i s occasioned by the importance o f gas as a source o f comparatively low carbon energy
for power generation. While the introduction o f the V C G M will not have an impact on demand
for gas, it i s important to move to a more market-oriented gas sector in time for the introduction
o f the WCM. In consequence a key action for PRSC9 i s the initiation o f work on a roadmap for
reform o f the gas sector, which will be further supported by the Bank's AAA program in the

20
coming years, and may be supported by investments if justified. T o build o n the decision to
adopt market based prices for coal for electricity generation, an action to ensure further reforms
to coal pricing i s being contemplated under the PRSC series. The reform o f the power sector
will provide useful benchmarks for the gas and coal sectors in the coming years.
63. The reforms will provide greater clarity about the investment needed to develop further and
strengthen the reliability o f Vietnam’s power system. For example, generation revenues and
priorities will become more clear and predictable when separate generation companies have been
created, contracts have been established with each generating plant and the market rules and
technical codes are implemented. Existing investors and potential new investors will have a
better understanding o f the likely returns o n projects, and financing options, so private sector and
W o r l d Bank Group support can be better designed. Likewise transmission investment needs,
financing and priorities will become clearer when ERAV sets and monitors transmission
regulations and performance standards for N P T C replacing the informal, internal arrangements
within EVN that are used at present.
64. SEIER will also continue to support the technical assistance and capacity building o f ERAV
during the current stage o f reform, to complete and enhance the regulatory framework and to
continue the general and tailored capacity building program. This will ensure expert advisor
support to address problems or concerns identified during the initial trials and practical
implementation, as well as continue to build increasing expertise in the details o f market rules
and tariff regulation. Additional financing for SEIER i s n o w being put in place to extend the
support to ERAV for a further three years, during which time it i s expected to become financially
and technically self-sustaining through the introduction o f a regulatory fee paid by licensees.
Lessons Learned
65. The design o f the proposed programmatic series and o f PSRDPOl has been informed by
W o r l d Bank experience in the design o f policy operations in Vietnam and in the power sector. It
has followed the good practice principles for conditionality (see B o x 1). I t draws particularly o n
the lessons from the PRSC series in identifying an area in which the leadership i s keen to move,
where the dialogue is well advanced and where capacity to develop and implement policy i s in
place. Such a window currently exists in the power sector in Vietnam; because economic
circumstances have brought supply and demand close to balance while also highlighting the need
to ensure that the power sector is an attractive destination for investment. Moreover, after a
considerable period o f gestation, nearly all the enabling legislation is n o w in place and draft
regulations are being completed.
66. There i s a rich and diverse dialogue centered o n expanding and upgrading power service and
supporting long-term reforms, backed by a program o f lending designed to support the
concomitant investment needs. This twin track approach o f policy development and lending
within a well-defined but flexibly-structured program has proved effective in achieving major
impacts in generation, transmission and distribution, private sector participation in generation,
rural electrification, renewable energy and demand side management.
67. The proposed operation is a further development o f this approach which will strengthen both
the policy environment and the ability o f the sector to meet its physical investment needs. In line
with emerging best practice, it separates investment operations from policy dialogue and reform.
This avoids the pitfalls o f hybrid policy and investment operations which have generally not
lived up to expectations.

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 BOX 1: GoOD PRACTICE PRINCIPLESON CONDITIONALITY

Principle 1: Reinforce ownership

The operation supports one o f the Government’s main reform objectives which enjoy wide national support. The basis
for the reform i s set out in legislation approved by the National Assembly and government endorsement supporting
legislation in the form o f decisions by the Prime Minister and other ministers. The development o f the V C G M i s an aim
o f the SEDP. The actions already taken represent considerable ownership among stakeholders and the proposed
operation supports actions based o n existing Government requirements. Further evidence o f the Government’s
ownership i s to be found in the Letter o f Sector Development Policy (see Annex 1).
Principle 2: Agree up front with the Government and other financial partners on a coordinated accountability
framework
The Bank’s support is summarized in a policy matrix (which is provided at Annex 2) which has been the focal point o f
discussion with the government Working Group charged with preparation o f the PSRDPO 1.
Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances
The operation adheres fully to the principles o f the Hanoi Core Statement o n Aid Effectiveness (Vietnam’s localized
version o f the Paris Declaration). The operation i s defined as a priority within Vietnam’s own government processes
and aid programming; and i s based on extensive preparation. I t i s aligned with Vietnam’s strategies and relies on
Vietnam’s country systems for policy- and decision-making as well as for disbursement and financial management; and
the outcomes set out in the policy matrix are measured against clear, mutually agreed indicators.
Principle 4: Choose only actions critical for achieving results as conditions of disbursement
The agreed policy matrix has only seven prior actions across the four selected policy areas. All o f these seven actions
have now been taken. Triggers for subsequent operations are also limited in number: eight for the second and seven for
the third operation.
Principle 5: Conduct transparent progress reviews conducive to predictable and performance-based financial
support
Joint progress reviews by MoIT/ERAV and the Bank o n reform have been conducted as part o f project preparation.
During the proposed operation, reviews w i l l be conducted twice per year, or if the progress warrants it more frequently.
Clear milestones have been set out in the policy matrix, and the triggers are expressed in concrete and transparent terms.

68. One o f the main lessons from power sector reform operations is the need to ensure that the
reforms do not induce shocks either to the supply or the demand side. In Vietnam consensus i s
crucial and is built from the bottom up. In consequence decisions take time, but an advantage i s
that proposals are thoroughly assessed prior to approval and the risk o f shocks inducing
opposition i s reduced because the main stakeholders and the public have been involved
throughout. The government has adopted a gradualist approach with the carefully prepared
phases set out in the reform roadmap. Nonetheless a degree o f flexibility i s needed to build
consensus, and the timings in the power market roadmap are taken only as indicative, to be
adjusted as necessary.
Analytical Underpinnings
69. The policy dialogue in the energy sector i s informed by extensive analytical work over the
past ten years. Foundation work supported preparation and passage o f the Electricity L a w (1998
- 2004), while work o n restructuring o f the electricity sector includes Restructuring the Power
Transmission Business (2005), and Equitization of the Power Sector (2006). The Bank provided
assistance to M o I T during the development o f the Roadmap for Reform of the Electricity Sector
which was issued as a Prime Minister’s Decision in 2006 and Conceptual Design of the
Competitive Generation Market (2008). These studies are the basis o n which the V C G M design
has been selected for the first phase. These principles o f market design and the consequent
contracting and pricing requirements have been a key policy area o n which Vietnamese policy
makers have focused. Government - World Bank dialogue has relied extensively o n the
analytical work undertaken.

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70. Support for the detailed design and implementation o f the‘reforms has included Electricity
Licenses (2006 and 2007), a policy note o n Restructuring for the Competitive Generation Market
(2008), development o f Market Rules for the Competitive Generation Market (2009), and Grid
Code (2009), Distribution Code (2009) and Metering Code (2008) and preparation o f Standard
PPA and Dispute Settlement and Enforcement Regulation for the Single Buyer Market (2009).
Support to pricing approaches and regulations include Bulk Power, Distribution Margin and
Retail Tariff Design Study (2005), Retail Tariff Methodology (2008), PC Tariff Calculation and
Model (ongoing), and TransmissionPricing Methodology and Model (ongoing).
71. Starting from agreed principles and objectives, and taking into consideration lessons learned
in relevant international experience, this analytical work developed conceptual market design
and tariff methodologies. Building from these, the details o f the V C G M design, rules,
regulations, procedures and models for tariff implementation are n o w being completed. In
particular, the technical codes and market rules set transparent and n o n discriminatory processes
to govern the relationships between different market participants and the service providers
(NPTC and the SMO), as well as with ERAV in its monitoring, enforcement and dispute
resolution regulatory role. The studies and international experts’ advice identified both synergies
and conflicts o f interest which have informed the restructuring options and needs as the power
market evolves, to create the credibility and transparency that will attract new players. In
particular, transitional arrangements have been assessed including accounting separation, ring-
fencing and establishing arms’ length relationships between market actors.
72. Additional work which i s o f relevance to the policy framework for the power sector has
included Framework for Thermal BOT Tenders (2009), Methodology for the Calculation of
Avoided Costs for the Avoided Cost Tariff for Renewable Energy (2008), Standardized Power
Purchase Agreement for Small Renewables to be Contracted by PCs (2008). The Bank has also
reviewed energy master plans and planning processes, particularly Power Master Development
Plan No.6 (2006) and the Gas Master Plan for Southern Vietnam (2008) based o n which it has
prepared Vietnam Gas Market Development Framework (2009). These studies have helped to
set out the sequencing and scope o f the operation, taking account o f other activities going o n
outside the planned power market reforms, to ensure that i t addresses key issues but i s not over
ambitious.
73. The government’s energy efficiency program has been designed with assistance from
analytical reports financed by the Demand Side Management and Energy Efficiency Project
including Final Evaluation of CFL Program Phases I and 2 (2007), Evaluation of Time of Use
Tariff Program (2007), E m ’ s Phase 2 DSM Program, (2008). M o r e recent technical assistance
has prepared Vietnam: Expanding Opportunities for Improving Energy EfJiciency (20 10).
Between them these studies have identified both the significant potential for energy efficiency
and the numerous policy and regulatory barriers, particularly when addressing demand side
management in a restructured power sector. They have contributed to the policy agenda for the
power sector (by improving pricing signals, as intended in the tariff reforms and the market
generation pricing) and in improving regulations for energy efficiency (in particular being
addressed by improving incentives for the Power Companies to promote energy efficiency).

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 V. THE PROPOSED OPERATION

Operation Description
Choice of Lending Instrument
74. The government recognizes that managing reform and ensuring success will have a financial
cost and in consequence i s seeking resources to finance the reforms. These costs include:
0 Public goods: Some o f the activities remaining in state hands necessarily have a public
function, including for example continued responsibility for strategic and multipurpose
hydropower plant which provides public goods in flood control and irrigation. Bringing
electricity to all households - and in many cases improving the supply - has a social
equity element, which although mainly covered through the cost recovery mechanism set
up in the new tariff methodologies will also incur administrative and management costs
when the cross subsidy scheme needed to maintain uniform tariffs i s introduced;
0 Capitalization of new entities: The sector restructuring means that some successor
companies have been or will be formed and become independent o f EVN (such as the
NPTC). Whereas before they were able to benefit from EVN’s financial umbrella, as
stand alone entities they are likely to be insufficiently capitalized to undertake the
investment program needed. New successor Gencos may also need capitalization; and
0 Financing gap: The reforms supported by the program will facilitate greater private
participation in generation activities but it will take time before the investments
materialize. During this time power demand will continue to grow and an adequate
reserve margin i s needed for supply security and to enable a well hnctioning electricity
market. Although a number o f other SOEs have been investing and financing power
generation a significant burden will remain on EVN and its successor companies, until
private sector finance begins to flow steadily.
75. In designing this program, several options for the lending instrument were considered. The
option o f continuing support through the current PRSC series was rejected because the sector
specific nature o f the dialogue in the power sector would not fit comfortably with the more
macro nature o f the PRSCs. Another choice was between continuing the approach o f investment
lending backed by an AAA program to promote reform and a DPO. The main reason for
diversifylng into a DPO i s because the reform and restructuring process has now matured to the
point where Vietnam will incur significant costs but these are not related to easily identified
investments suitable for support through either a Specific Investment Loan or an Adaptable
Program Loan series.
Program Objective
76. The objective o f the proposed program i s to support the Government o f Vietnam’s
implementation o f a market for electricity generation, restructuring o f the power sector and
reform o f tariffs that will facilitate effective competition, transparency and predictability,
encourage timely generation investment, improve system operational reserve and provide
incentives for efficient use o f electricity. The proposed series o f operations will support the first
o f the three phases o f power market reform set out in the road map: the introduction o f the
V C G M which provides for competition among generators.

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Sequencing of Operations
77. The first operation will be aimed at setting in place the key secondary legislation concerning
the design o f the VCGM, the main requirements for restructuring o f the power sector needed for
the V C G M to work in a fair and transparent way; for the tariff mechanisms to set and update
tariffs reflective o f efficient costs, and the establishment o f the necessary preconditions for the
government to take actions to improve energy efficiency. It w i l l also enable a pilot o f the final
design o f the V C G M final design to be run. These are key decisions concerning principles and
to authorize implementation, without which the subordinate entities o f government cannot act.
The first operation also supports substantive actions on tariffs, metering and efficiency standards
which are now being implemented.

BOX 2. PRIOR ACTIONSFOR VIETNAM

FIRSTPOWER SECTOR REFORM DEVELOPMENT POLICY OPERATION

Before presentation to the Executive Board, Vietnam agreed upon and implemented the following prior actions:

Prior Action 1: Through the Ministry o f Industry and Trade (MoIT), issued a Decision (No. 6713-QD-BCT
dated December 3 1, 2009) establishing design principles for the implementation o f the
Vietnam Competitive Generation Market (VCGM).
Prior Action 2 Through the MoIT, issued a Circular (No. 27/2009/TT-BCT dated September 25, 2009)
establishing metering systems standards and procedures for generation plants participating
in the VCGM.
Prior Action 3 Through the Office o f Government (OoG), issued a Notice (No. 232/TB-VPCP dated July
3 1,2009) establishing a sector structure to allow for the introduction o f the VCGM.
Prior Action 4: Through the Prime Minister, issued a Decision (No. 21/2009/QD-TTg dated February 12,
2009) (a) increasing the average tariff in 2009 to VND 948/kWh, and (b) implementing
transparent annual tariff-setting f i o m 20 10- 12 based on cost recovery principles, including
the unbundling o f the average retail tariff into power supply cost components and the
delegation o f tariff changes o f less than five percent to the M o I T .
Prior Action 5: Through the Prime Minister, issued a Decision (No. 21/2009/QD-TTg dated February 12,
2009) restructuring the residential block tariff system to establish the principle o f the
subsidy to the consumer as a percentage o f production cost and extend the subsidy
mechanism and residential tariff structure to local distribution utilities.
Prior Action 6: Through the Ministry o f Science and Technology (MOST), issued Decisions (No. 2740/QD-
B K H C N dated December 9, 2008 and No. 632/QD-BKHCN dated April 20, 2009)
establishing energy efficiency standards for consumer goods accounting for large quantities
o f electricity consumption.
Prior Action 7: Through the MoIT, issued a Circular (No. 05/2009/TT-BCT dated February 26, 2009)
introducing time-of-use tariffs for industrial zones and commercial, industrial, and
irrigation consumer categories.

78. The second and third operations would continue to support the government's reform
program. Based on the current path, the second operation would support putting in place
detailed rules required to implement the design, restructuring and tariff actions. The third would
be aimed at the startup o f the V C G M and moving to PBR regulation for PCs, the legal
establishment and operation o f the restructured entities in the power sector and the approval o f
implementing decrees for an energy efficiency law. The program, which is summarized in terms
o f prior actions for the first operation in Box 2, and indicative triggers for the second and third in
the continuation o f Box 2, will mirror the pace and substance o f the government's reform

25
program and so adjustments may be required to the timing, size and content o f the operations,
which will also depend on the availability o f financing.

BOX 2 (CONTINUED). INDICATIVE TRIGGERS FOR VIETNAM

POWER SECTOR REFORM DEVELOPMENT POLICY OPERATION

The indicative triggers proposed for the second operation, expected to be completed in early 20 11 are:

Trigger #1 D P L 2: M o I T issues Circular setting out market rules for VCGM.

Trigger #2 D P L 2: M o I T promulgates standard contracts and i t s pricing methodology for non-BOT generation,
and pricing for each SMHP.
Trigger #3 D P L 2: Prime Minister issues Decision on successor generation companies’ structure for VCGM.
Trigger #4 D P L 2: M o I T issues regulations to ring fence costs, revenues and information for NPTC, N L D C
and EPTC until they become independent companies.
Trigger #5 D P L 2: M o I T and Ministry o f Finance (MoF) issue joint Circular with procedures for retail tariff
annual adjustments.
Trigger #6 D P L 2: M o I T issues Circular with methodologies and procedures to determine transmission
revenue requirement and approve transmission charges.
Trigger #7 D P L 2: M o I T issues Circular with procedures to determine and approve SMO charges.
Trigger #8 D P L 2: Prime Minister sends Energy Efficiency L a w to National Assembly.

The indicative triggers proposed for the third operation, expected to be completed in early 2012 are:

Trigger #1 D P L 3: V C G M commercial operation implemented.

Trigger #2 D P L 3: SMO completes settlement for two months o f trading in the V C G M and SB completes
payments to generation.
Trigger #3 D P L 3: M o I T establishes each successor generation company with no cross ownership with
transmission or Single Buyer, except for SMHP.
Trigger #4 D P L 3: M o I T establishes SMO as a company with no cross ownership with other electricity
activities.
Trigger #5 D P L 3: M o I T mandates implementation o f PBR through approval o f three year revenue
requirements for each PC.
Trigger #6 D P L 3: M o I T issues implementation decree for energy efficiency law.
Trigger #7 D P L 3: M o I T Circular promulgates time o f use tariffs based o n load profiles.

Rationale
79. The proposed program o f DPOs complements the Bank’s investment and technical assistance
operations o f the past several years and those in the pipeline, which are also grouped around the
same four themes. By supporting the reforms it will lock in the progress made so far,
particularly in those areas o f market design (supported by SEIER), unbundling o f the
transmission system and development o f NPTC (supported by TD2), and the development o f the
PCs’ distribution operations and capacity to operate autonomously (supported by RE2 and RD).
80. Bank support for this program i s justified on four grounds: (a) the reform o f the power sector
has taken into account both national circumstances and international experience and as such
represents best international practice tailored to Vietnam’s conditions; (b) the need to ensure the
power sector’s ability to meet demand for electricity i s o f pressing importance as an input to
Vietnam’s economic growth and modernization; (c) this i s the first wide-ranging sectoral reform
which w i l l provide a model for reforms in other utility sectors; and (d) the operation i s an

26
effective way for the government and the Bank to continue and widen the dialogue on energy
sector reform.
81. The expected high level impact o f the operation will be to help meet the government’s
objective o f ensuring adequate electricity supply at least cost to support economic growth,
particularly within the industrial and commercial sectors, and improving efficiency in the power
sector. It will also better people’s lives by improving quality o f access and the targeting o f
subsidies, keeping them at sustainable levels. The proposed operation will address a number o f
issues o f concern, including: increasing investment needs in generation and diversifying
generation sources; improving transparency in contracting and pricing o f generation; ensuring
efficient and non-discriminatory monopoly services such as transmission and dispatch;
transparent, periodic and regulation-based updating o f tariffs; and the environment for energy
efficiency will be significantly improved.
Policy Areas
82. The policy areas supported by the proposed operation correspond with the government’s
program for reform. The policy matrix has been arranged around the following four areas.
Policy Area A: Development of the Power Market
83. The Decision o f the Prime Minister setting out the road map for power market reform
empowers M o I T to issue the general principles o f market design. The V C G M design has been
developed and under consultation for some time, taking into consideration international
experience, Vietnam specific conditions and lessons from the earlier trials. With this critical
decision by the Minister o f Industry and Trade taken, ERAV i s enabled to complete the detailed
design and market rules and necessary market procedures for the pilot market.
84. An intermediate step i s needed to put in place the market infrastructure and software required
for the VCGM. The market rules drafts under preparation have already gone through review and
comments through workshops, and a stakeholders’ working group organized specially by ERAV
to assess and recommend V C G M design and rules. Full commercial start-up o f the V C G M
following the pilot w i l l require software and other tools, but these cannot be developed or
adjusted until market rules are approved. During this period, V C G M contracts for non B O T
generation would be put in place, initiated by M o I T issuing standard contracts and pricing
methodologies to create transparency and ensure equal treatment for all interested investors. The
final step - the full implementation o f the V C G M with i t s spot market - will then take place once
all required software, websites and databases are adapted to the V C G M market rules and tested.
85. The following key policy actions are supported by PSRDPOl :
0 Prior Action I : The establishment o f the design principles for the implementation o f the
VCGM. T h i s key measure sets out that the V C G M will be a gross pool with cost based
caps on generation bids, market based hourly capacity payments, and standard contracts
and pricing for non B O T generation to ensure similar treatment o f investors. I t mandates
implementation o f the pilot V C G M for EVN power plants, and ERAV’s submission o f
market rules and regulations for Minster o f Industry and Trade approval (for full
implementation). Decision 67 13/QD-BCT o f December 3 1, 2009 has completed this
action satisfactorily and has delegated to ERAV the preparation o f detailed market design
and market rules for the VCGM; and

27
 0 Prior Action 2: The issuing o f metering systems standards and procedures for generation
plants participating in the VCGM. T h i s regulation - the Metering Code - i s required for
the spot market hourly settlement by the SMO, and contract invoicing and payment
between the Single Buyer and generators. The technical and verification standards will
ensure sales quantities are transparent and within similar quality requirements. The
Metering Code i s essential to ensure generators procure and install meters and other
equipment in time for the start o f the VCGM. Circular 27/2009/TT-BCT o f September
25, 2009 has completed this action.
86. Expected milestones which indicate progress o f the first operation are (a) EVN completing
proposed V C G M market rules and submitting them to the Minister o f Industry and Trade for
consultation and approval; and (b) M o I T issuing a Circular which promulgates the Grid Code.
Between them these milestones will indicate that M o I T can take the next steps which will enable
standard generation contracting and market participants to prepare for the initiation o f the
VCGM.
87. The second operation would support the final power market rules and implementation o f the
transition period with standard contractual arrangements, building upon the principles
established in the first operation. Indicative triggers for PSRDPO2 are: (a) the issuing by M o I T
o f a Circular setting out the market rules; and (b) M o I T promulgating standard contracts and
pricing methodologies for non B O T generators, including SMHP.
Policy Area B: Power Sector Restructuring
88. Although the power market roadmap has empowered M o I T to decide the power sector
structure, there have been different interpretations o f the restructuring required. Experience
during the trials for the first phase highlighted the perceived conflict o f interest resulting from
keeping generation, transmission, system operation and dispatch under the same ownership.
Generation investors other than EVN have also voiced concerns about the independence o f
dispatch decisions and delays and difficulties in agreeing contract prices with EPTC. The
practice has been that, except for BOTS, contracts are not negotiated until the generating plant i s
almost ready to start commissioning tests, creating risks for financiers and thus making financing
difficult for non-EVN private or SOE investors.
89. Clarity about the sector structure i s required to address concerns about conflict o f interest and
power market roadmap requirements. As a transition step until full restructuring can be
implemented and to accompany the implementation o f the contract market in Policy Area A,
NPTC, N L D C and Electric Power Trading Company (EPTC), the EVN unit in charge o f
generation contracting acting as the Single Buyer, will be ring fenced to ensure separation o f cost
and revenue accounting and to set up procedures to ensure information disclosure to non EVN
players. For V C G M start up, assessment and decisions are needed on generation - both SMHP
and non-SMHP successor independent generation companies. Once the portfolio o f successor
generators has been decided, the generation companies and the System and Market Operator
(based on existing NLDC) can be legally created with adequate assignment o f staff and
management, to start V C G M commercial operation.
90. The key policy action supported by PSRDPO1, namely Prior Action 3 i s the establishment o f
the sector structure to allow the introduction o f the VCGM, includes the principle o f creating
independent generation companies, assigning EVN the responsibility to propose the generating
companies structure, and requiring the ring-fencing o f N L D C until it can be created as a separate

28
entity. By assigning these tasks with a time-bound requirement for their completion, the
government has ensured a sector structure will be in place to permit the start up o f the VCGM.
This action has been completed satisfactorily with the issuing o f the Notice o f Prime Minister’s
Conclusions, dated July 3 1,2009, No. 232/TB-VPCP by the Office o f Government.
9 1. Milestones in the progress o f this policy action in the first operation are the completion o f
studies by EVN recommending the portfolio o f generating plant for each successor generation
company, and the studies’ submission to the Prime Minister for consideration, and issuing o f a
Circular by the M o I T on the calculation, review and approval o f the costs o f the SMO to ensure
adequate resources and staffing.
92. The second loan in the proposed series would support more detailed plans and timing for the
restructuring o f generation and ring fencing o f costs and revenues o f NPTC, N L D C and EPTC,
and the information provided by them to enable transparent cost recovery calculations for tariff
setting. Indicative triggers for PSRDPO 2 in this policy area are: (a) issuing o f a Decision by
the Prime Minister on the o f EVN successor generation companies and the portfolio o f
generation plants each will o w n and operate, including the allocation o f projects assigned to
EVN in the Power Master Development Plan; and (b) the issuing by M o I T o f Regulations to ring
fence NPTC, N L D C and EPTC.
Policy Area C: Electricity Tariff Reform
93. The implementation o f transparent, annual tariff setting based o n cost recovery principles -
also allowing for the implementation o f P C multiyear distribution P B R tariffs - requires
regulations setting the principles and general framework, and procedures for filing, assessment
and approval. This critical action will prove to investors the government’s willingness to enable
cost recovery and create transparency also for the public and other stakeholders o n cost
components o f each activity.
94. Reform i s based on unbundling the average retail tariff into power supply cost components:
the power purchase costs for generation; approved regulated transmission, distribution and
system operation costs; and other administration costs. Following the general principles on
allowed costs for the determination o f retail tariffs set in the Prime Minister’s Decision, ERAV
will develop detailed procedures and methodologies to cover all regulated activities, including
the transmission revenue requirement and charges for NPTC to be able to finance the expansion,
upgrade, and maintenance o f the transmission grid. Other changes planned include the first
implementation o f PC PBR, with a three year tariff period, later to move to a second, five year
tariff period. Methods to set N L D C and other administration costs (including ERAV’s
regulation fees) are also being drafted and should be issued as regulations by MoIT. To ensure
consistency between government policy on cost recovery tariffs and protecting poor consumers,
subsidy principles and mechanisms that are sustainable and better targeted are required.
95. ERAV studies have recommended moving towards multiyear distribution network tariffs that
create incentives for improving performance and quality. The government i s targeting
elimination o f cross subsidies between industrial and residential consumers, and seeking to
improve targeting subsidies to the poor (see also the section below o n poverty and social
impacts). At the same time the government has decided to maintain uniform national tariffs by
consumer category that will apply to all PCs. Implementation o f these arrangements will require
mechanisms to compensate for the differences in costs and revenues from tariffs between more
urban PCs and more rural PCs.

29
96. Two key policy actions are supported by PSRDPO1:
Prior Action 4: Increasing the average tariff in 2009 to VND 948/kWh, bringing it to the
level o f 2008 costs o f supply. The government has also introduced principles to recover
electricity costs based on unbundled components o f electricity activities. These
principles will apply from 2010 to 2012 and are expected to allow tariffs to remain at cost
recovery levels. The government has delegated changes o f up to five percent to the
Minister o f Industry and Trade. Between them, these increase the transparency and
predictability o f tariff updates and reduce the level o f political involvement in tariff
setting. P M Decision 21/2009/QD-TTgYo f February 12, 2009 on electricity price in 2009
and market-based electricity price 2010 - 2012 satisfactorily completes this policy action;
and
Prior Action 5: Restructuring the residential block tariff system to establish the principle
that the subsidy i s based on a percentage o f electricity production cost and extending the
subsidy mechanism and residential tariff structure to LDUs. The new residential block
tariff structure has reduced the upper limit o f the first block o f subsidized electricity
consumption to 50 kWh per month, applicable to all consumers regardless o f supplier.
These changes better target the subsidy to the poor, reducing the burden on other
consumers. P M Decision 21/2009/QD-TTg, o f February 12, 2009 on electricity price in
2009 and market - based electricity price 2010 - 2012 satisfactorily completes this policy
action.
97. The first milestone indicating progress in this policy area will be a Decision by the Prime
Minister promulgating the regulations that establish the calculation method and procedures for
appraisal and approval o f market-based annual tariff update. As a first step towards this, the
Prime Minister has approved an increase in tariffs o f 6.8 percent to take effect from March 1,
2010, bringing average tariffs to 1,058 VNDkWh. The method used to calculate this increase
was based on the principles set out in the P M Decision o f February 2009. A further milestone
will be that ERAV completes draft methodologies for calculating transmission operating and
capital expenditures for NPTC and submits them to the Minister o f Industry and Trade for
consultation and approval.
98. Depending on experience with implementation, possible triggers for PSRDPO2 are: (a) the
issuing by M o I T and MoF o f a joint Circular detailing procedures to establish retail electricity
tariffs and implement the annual market adjustment mechanism; (b) the issuing by MoIT of a
Circular on methodologies to approve transmission revenue requirements for NPTC and the
transmission charges to recover those revenues; and (c) the issuing by M o I T o f a Circular on
methodologies to assess and approve fees for the SMO.
Policy Area D: Improving Demand Side Energy Efficiency
99. Policy actions for energy efficiency must follow a slightly different track, for two reasons.
First, the actual implementation o f the energy efficiency measures must to some extent track the
reforms since one o f the key measures - to introduce more clear pricing signals for energy
efficiency - i s an important feature o f the reforms. Second, to ensure the Energy Efficiency Law
i s effective when it i s in place, a number o f preparatory tasks are needed. Hence in this policy
area the final task i s to put in place the enabling legislation in the form o f a law and
implementing decrees, and to ensure that time o f use tariffs are introduced. The intermediate

30
steps towards those actions ensure that up to date and high quality information i s available and
that stakeholders have sufficient time to prepare.
100. At the same time, measures need to be taken on data collection and metering to improve
load profiling for each tariff category and setting o f TOU tariffs. The proposed actions,
milestones and triggers are targeted at creating efficient price signals to end consumers to
promote demand side management and increase the availability o f energy efficient equipment.
101. Two key policy actions are supported by PSRDPOl:
Prior Action 6: The issuing o f energy efficiency standards for consumer goods that
account for large quantities o f electricity consumption today and which are expected to
increase in the future, particularly CFLs, refrigerators, air conditioners and fans. This
action has been satisfactorily completed by the issuing o f Ministry o f Science and
Technology Decision 27/40/QD-BKHCN o f December 9, 2008 and Decision 632/QD-
B K H C N o f April 20,2009; and
Prior Action 7: The creation o f time o f use tariffs for electricity prices for industrial
zones and commercial, industrial and irrigation categories o f consumers. The issuing by
M o I T o f Circular 05/2009/TT-BCT o f February 26, 2009 completes this action
satisfactorily.
102. Expected milestones o f progress in PSRDPOl are the submission by M o I T o f a draft
Energy Efficiency Law to the Prime Minister, and that ERAV completes a load research study
and submits draft procedures for the periodic implementation o f load research studies by the PCs
to MoIT.
103. Further development o f the policy framework for energy efficiency i s being undertaken,
and so indicative triggers for PSRDPO2 are more difficult to define than under the other three
policy areas. Moreover policy work i s being undertaken at a rapid pace, so indicative triggers
suggested at this point may become redundant before PSRDPO2 i s under preparation. One
possible indicative trigger i s the submission o f the draft Energy Efficiency Law to the National
Assembly.

VI. OPERATION IMPLEMENTATION

Poverty and Social Impacts

104. The high level o f electricity access across Vietnam means that large numbers o f the poor
have connections and therefore have the potential to be impacted by changes to tariffs and
service levels. Two reforms to the tariff will affect the poor:
Beginning March, 2009 the incremental block tariff (IBT) structure i s to be applied
equally in all rural and urban areas. The first 50kWh per month o f consumption i s
subject to a “lifeline” tariff. The tariff for this lifeline block i s set at 35-40 percent o f
average 2009 costs (excluding profits) and i s VND 600ikWh. The 51-100 kWh block i s
set at VND 865kWh, the average 2009 costs without profit. Higher blocks o f
consumption are above average costs (including profits) to provide the lower
consumption blocks’ subsidy; and

31
 0 From 2010 further changes to the subsidy mechanism are under discussion, including (a)
limiting subsidies to only those customers consuming less than 50 kWh and (b) targeting
subsidies to rural customers only.
105. These arrangements put residential consumers on a more equal footing regardless o f who
supplies them, and improve targeting o f subsidies. Previously only those householders which
received their supply directly from EVN’s subsidiary PCs received a lifeline tariff, which was for
the first block o f lOOkWh o f consumption per month and set at VND 550kWh. The second
block o f monthly consumption o f 100 - 15OkWh was also slightly subsidized. PCs supply all
consumers in urban areas and a growing number - currently about 50 percent - o f households in
rural areas. The 50 percent o f rural consumers not receiving supply from PCs are customers o f
local distribution utilities (LDUs), which are private sector or cooperative suppliers receiving
supply from PCs at medium voltage and onselling to consumers at low voltage. Until March
2009, tariffs were set by the LDUs with provincial government oversight. Formally these tariffs
were capped by the Prime Minister at VND 700/kWh, but anecdotal evidence suggests that many
LDUs charge more and that few, if any, apply subsidy for low income consumers.
Poverty and Social Impact of IBT Changes
106. The poverty and social impact analysis (PSIA) analyzed expected poverty and social
impacts o f changes to the March 2009 IBT including both the reduction in the coverage o f the
lifeline tariff and higher electricity prices. The analysis suggests the poor in Vietnam remain
well-protected despite the recent tariff adjustments and the narrowing o f the lifeline band, and
many rural consumers are likely to benefit from the introduction o f a unified system o f
, residential tariffs and the expected integration o f many LDUs into the PCs. For those continuing
to receive power from the LDUs, benefits are expected not only in terms o f lower electricity
prices but also improvements in the quality and reliability o f supply, and improved standards o f
safety.
107. There i s a widely shared view - buttressed by experience from many countries - that
aligning power tariffs with the economic cost o f supply i s regressive and almost invariably has
an adverse impact on the poor, unless adequate protection or subsidies are provided. However
this PSIA shows clearly that this i s not so in Vietnam, which has a number o f factors working in
i t s favor: very high coverage by the system, timely bill payment and l o w arrears, low levels o f
electricity consumption (particularly for lower income households), and generally low economic
costs o f supply.
108. An estimated 98 percent o f households were electrified by 20082, including 99 percent in
urban and 97 percent in rural areas. Access to electricity i s high even among Vietnam’s poorest
households: in 1998, less than half o f the poorest ten percent o f households used electricity,
compared with 88 percent in 2008. The PSIA estimated a subsistence threshold o f 40-45 kWh
for poor households in Vietnam, based on owning several lights, an electric fan, a rice cooker,
and a color television. In 2008, households below the poverty line consumed on average 42
kWh/month as compared with 103 kWh/month for households above the poverty line.
109. W h i l e most o f the poor in Vietnam are l o w consumers o f electricity, so are many o f the
non-poor. In 2008, 65 percent o f all households consumed less than 100 k W m o n t h , including

* 2008 Vietnam Household Living Standards Survey (VHLSS), households reporting electricity as their main source
o f lighting. EVN estimates 96 percent o f households are o n grid as o f June, 2009.

32
91 percent o f poor urban households and 99 percent o f poor rural households. Thus most o f the
electricity consumed by the poor was subsidized under the pre-2009 IBT lifeline. But so was the
consumption o f many o f the non-poor: in 2008, only 14 percent o f households in Vietnam lived
below the poverty line. Moving to a lower lifeline threshold reduces leakages albeit at some cost
to the poor: 30 percent o f households consume less than 50 k W m o n t h , including 60 percent of
poor urban households and 78 percent o f poor rural households.
110. Despite the tariff increases, electricity remains remarkably affordable to residential
consumers in Vietnam. In 2008, households in the poorest 10 percent o f the population paid on
average 2.9 percent o f total cash expenditures for electricity. In contrast, the wealthiest 10
percent o f households paid 3.6 percent. And the share o f total spending on electricity has been
falling in recent years despite rising consumption; the real price o f electricity (adjusted for
inflation) has in fact been falling.
Tariff Reform Scenarios
111. Electricity consumption i s not measured directly in the Vietnam Household Living
Standards Survey (VHLSS), but spending on electricity i s recorded. Electricity expenditures
were converted into kWh quantities using the relevant prices (IBT structure). The VHLSS does
not identify whether rural households are PC or LDU customers and so for this PSIA a unified
tariff structure i s assumed to apply to all rural consumers both pre and post-reform. This leads to
an over-estimate o f average rural consumption (because LDUs generally charge higher prices)
but ensures the PSIA has made a conservative assessment o f the coverage o f the reduced lifeline
tariff band. Electricity consumption i s held fixed at 2008 levels and monetary values are
adjusted, using the General Statistics Office (GSO) monthly consumer price index to March,
2009. The analysis uses electricity spending as a share o f cash consumption expenditures, a
measure o f affordability, as the criterion for comparison.
112. The PSIA developed three tariff scenarios that are assessed against a baseline o f actual
patterns o f consumption and electricity spending for 2008.
The first scenario simply compares the baseline against 2009 IBT adjustments.
0 The second scenario uses the 2009 IBT adjustments but limits those receiving the
subsidized rate (VND 600kWh) to rural consumers only. The lowest price band for
urban consumers i s set at the average cost o f supply without profits (VND 865kWh).
The third scenario uses the 2009 IBT adjustments, but assumes subsidies are “telescoped”
and only are provided to households which consume less than 50 k W m o n t h . In other
words, a consumer using 5 l k W m o n t h i s assumed to pay the unit tariff o f VND
865kWh for all 5 1kWh consumed.
113. The effects o f the different scenarios on different groups are shown in the table below.
Across all scenarios, and the key groups o f concern, namely poor and rural consumers, impacts
on affordability are small. This i s particularly the case for the first scenario, which models the
actual IBTs now in effect in Vietnam. The increase in tariffs was for the most part offset by
inflation, and the narrowing o f the lifeline tariff from 100 kwh to 50 kWh only increased the
share o f the poor’s spending on electricity by 0.2 percentage points. The other scenarios also had
only modest impacts on affordability.

33
 Baseline: Reform Scenarios (% spending o n electricity)
2008 V H L S S Scenario 1: Scenario 2: Scenario 3: 2009
(“A spending 2009 IBT 2009 IBT, Rural IBT, Telescoped
on electricity) only subsidy 50 kWh

Location
Urban 4.0 4.0 4.2 4.4
Rural 2.8 2.9 2.9 3.3
All Vietnam 3.2 3.2 3.3 3.6
Source: 2008 VHLSS, Staff Estimates
Coverage of the Urban Poor - Migrant Workers and Temporary Residents
114. W h i l e Vietnam’s tariff adjustments do not on average appear to have adverse
distributional consequences, specific groups s t i l l may be losing out. A study was conducted in
one l o w income, high-migrant neighborhood in each o f H o Chi Minh City, Hai Phong, and
Hanoi to assess service quality and affordability for migrant workers and other temporary
residents who live in apartment buildings or rooming houses in densely settled urban areas.
Interviews were conducted with residents in the buildings, landlords, and local officials from the
wards and districts. In nearly all cases, tenants pay electricity charges based on metered
consumption; electricity sub-meters were installed by the landlords in rented rooms and
apartments and connected to regulated EVN meters in the building. Electricity contracts are
organized between the owners o f the buildings and EVN, and not between EVN and individual
tenants or groups o f tenants.
115. In each o f the neighborhoods studied, the vast majority o f respondents are on low
incomes and consumes no more than 10-20 k w m o n t h . In Hanoi, landlord-imposed electricity
charges range between VND 1,000-2,500/kWh, with VND l7500-2,0O0/kWh being the most
common charge. Rates are lower in Hai Phong and substantially higher in H o Chi Minh City,
where landlord-imposed electricity rates range from VND 2,500-3,500/kWh. In addition to
metered charges, tenants also pay for electricity used for pumping.water. This class o f consumer
would therefore appear to be relatively unaffected by tariff changes resulting from reforms
implemented in 2009, since they are charged rates by landlords which are weakly linked to the
official rates and they do not receive subsidies through the lifeline tariff.
Future Analysis
116. Incomes will continue to rise in Vietnam, and expectations and lifestyles will change.
Vietnamese households will purchase more electrical appliances, use them more intensively, and
electricity consumption will continue to increase, including among the poor. Average
consumption by poor households has risen from 28.6 kWh per month in 2002 to 42.4 kWh in
2008. As this process continues to unfold, ERAV will need to monitor the effects o f the IBT
structure and subsidy mechanism and, if necessary, revisit it.
117. This analysis has been shared with the government. Further analysis will be carried out
to explore complementary mechanisms for delivering subsidies to the poorest and most
vulnerable groups (such as cash transfers, support provided through Ministry o f Labor, Invalids
and Social Affairs poor list and other targeted programs) rather than through lifeline tariffs.

34
Environmental Aspects
118. Plants that will enter service in the lifetime o f the V C G M have already been identified
and many are under construction. As a result, it i s relatively easy to forecast the environmental
consequences o f the reform program, by reference to the system expansion plan and dispatch
modeling. Two potential environmental consequences, on air emissions (local and well as
greenhouse gases) and on natural resources and forests have been reviewed during project
preparation. The policies supported by the operation are not likely to have significant effects on
Vietnam’s environment, forests or other natural resources.
Emissions
119. Power sector reforms potentially affect air emissions in two ways: in the short term by
changing the operation o f the existing system (including capacity expansions under construction
or committed), and in the medium to long term by changing the timing and type o f fbture
capacity additions. Table 4 summarizes the potential impacts on power sector operation and on
investment in each o f the reform areas.
TABLE4: POTENTIAL ENVIRONMENT
IMPACTS OF POWER SECTOR REFORMS
Short term Medium to long term
(efficiency improvements) (investment consequences)
Power Market development Strict merit order dispatch reduces Incentivizes the most efficient
(VCGM) coal consumption in the north and technologies (e.g. super-critical rather
reduces gas consumption in the south than subcritical coal projects).
- but may result in some substitution Accelerates the of old
from gas to coal. inefficient coal projects.
Sector restructuring None Level playing field and a predictable
regulatory environment increases
likelihood o f private investment,
particularly gas projects.
Tariff reform Reduction o f cross-subsidies slightly Cost reflective tariffs make private
increases industrial and commercial investment more likely, thereby avoiding
consumption, reduces domestic potentially damaging power shortages.
consumption, with net transmission
and distribution (T&D) savings since
industrial consumption avoids T&D
losses at l o w tension.
Improving demand side Peak shaving reduces higher Lower demand defers need for
efficiency peak T&D losses; demand thermal capacity expansion.
reduction reduces generation.

120. As a general principle, efficiency improvements are win-win for the environment and
economics. I t i s also clear that the most damaging local environmental impacts are those from
captive and standby generators whose emissions occur at or near ground level from short stacks,
in close proximity to densely populated areas and without state o f the art environmental controls:
a World Bank Environment Department assessment o f local air emission damage costs3
estimates these are between one and two orders o f magnitude greater than emissions from large

K. Lvovsky, G. Hughes, D. Maddison, B. Ostrp and D. Pearce, Environmental Costs of Fossil Fuels, A Rapid Assessment
Method with Application to Six Cities, World Bank, Environment Department, Paper 78, October 2000.

35
grid connected thermal generators. Local air emissions therefore differ greatly from greenhouse
gas (GHG) emissions, for which the location o f emissions i s o f no consequence to global damage
costs. Endemic power shortages consequent to lack o f generation investment therefore have
especially damaging health consequences. The general global experience i s that a more efficient
power sector will reduce emissionskWh generated and emissions/per kWh consumed. In most
cases gross emissions o f GHG will also reduce.
121. Although these consequences will generally apply to Vietnam as well, the impacts may
be complicated by substitution effects (from gas to coal). There i s evidence that strict merit
order dispatch would result in some (expensive) gas generation in the south being displaced by
some (cheaper) coal generation in the north, therefore increasing air emissions, though the
substitution i s constrained by the limit on transfer capacity o f the 500kV system connecting the
north and south o f the country. However, modeling results show that this effect i s more than
offset by the shift to generation to the more efficient coal projects in the north. That is, old
plants are dispatched less, and more modern and efficient plants are dispatched more.
122. Analysis o f the emissions impacts o f the reforms supported by the project has been
undertaken through a modeling exercise that i s grounded in the economic optimal expansion plan
for the power sector. The optimal expansion plan includes all large and medium sized
hydropower sites in Vietnam, which are largely already planned or under construction; a
significant expansion o f small hydro projects in part induced by the tariff reforms for small
renewable energy generators introduced in December 2008 and modest scaling up o f gas-fired
generation.
123. In the baseline, without policy reforms, a significant proportion o f the increase in
generation capacity over the 20 10 - 2020 time frame i s expected to come from coal, such that the
share o f hydro will fall from 39 percent today to 31 percent in 2020, and gas from 37 percent
today to 15 percent in 2020. In contrast, coal-fired generation i s expected to increase from 21
percent today to 51 percent in 2020. At the time o f the preparation o f Power Master
Development Plan 6 in 2004-2005, the then very high load forecasts anticipated that nuclear
power would also be required by 2020, together with pumped storage projects. However, more
recent assessments suggest both forecast and early economic viability o f nuclear power may be
unrealistic.
124. The main conclusions o f these modeling studies are that the policy reforms w i l l have the
following positive effects on the environment. They are summarized in Table 5:
0 Impact of strict merit order dispatch: This has been modeled by comparing actual 2008
dispatch with that predicted by strict merit order dispatch: gas generation decreases in the
south, but coal generation increases in the North, but there i s a net decrease in GHG
emissions (of 0.12 million tonnes COz per year - MtC02/y) because the dispatch shifts to
the more efficient coal projects. Heavy fuel o i l generation declines in all forecasts.
Impact of DSM and improved energy eflciency: Vietnam has some strongly positive
experience o f demand side management, particularly through the adoption o f time o f use
tariffs for commercial and industrial users, and expansion o f the use o f compact
fluorescent lamps. A recent study prepared for EVN estimated remaining DSM potential
at about 1,200MW at the evening peak and a reduction o f about 6,000 GWh o f demand.
T h i s estimate would translate into an estimated reduction o f emissions o f 3.8 MtCOz/y in
2020.

36
 0 Impact of VCGM on old coal plants: Several older coal projects (Pha L a i 1, Ninh Binh
and Uong Bi 5 & 6) have considerably lower efficiencies compared with more modern
plants (such as Pha L a i 2 and Cam Pha), and there have been proposals for their
rehabilitation. But even with that rehabilitation, under strict merit order dispatch they
would have low plant factors, making rehabilitation uneconomic, and forcing their
retirement. Compared with 2008 dispatch levels, retirement rather than rehabilitation
would avoid some 3.6 MtC02/y by 2020.
Impact of cross-subsidies: Gradual reduction o f cross subsidies from industrial and
commercial categories to residential consumers are also expected to have an impact.
Assuming revenue-neutral reductions and constant price elasticities among different
consumer classes would result in increased demand from industrial consumers but equal
reductions in demand from residential consumers. Because industrial and commercial
users take power at higher voltages, transmission and distribution losses are reduced,
hence reducing generation needs. The corresponding reductions in GHG emissions are
estimated at about 1 Mt/C02 per year in 2020.
Impact of alternative load forecasts: The optimal capacity expansion plan responds to
changes in load forecasts by advancing or delaying new units. Studies show that the
timing o f thermal units i s affected more than the timing o f the hydro investments -
reflection o f the relatively l o w cost o f hydropower over thermal generation (particularly
when thermal generation fuels are priced at international price levels). Thus by 2020, all
o f the hydro projects in the pipeline get built under wide ranges o f load forecast, but
imported coal plants and nuclear projects are deferred to beyond 2020 and 2025,
respectively. It follows that if the impact o f reform i s to lower electricity demands, coal
projects would be the most affected - with consequent lowering o f both GHG and local
air emissions.
TABLE 5: AGGREGATEGHG SAVINGS FROMREFORM PROGRAM
C 0 2 emission savings Efficiency savings, as
(MtCO'/y in 2020) NFV2
($US million)
Merit order dispatch o f plant 0.112 113
D S M and improved efficiency 3.8 2300
Retirement o f old coal projects 3.6
Remove cross subsidies 1.o 700
'2008 rather than 2020, based o n actual 2008 dispatch
'at 10 percent discount rate over 30 year planning horizon.
Natural Resources and Forests
125. Power sector reform i s not expected to have any significant impact on natural resources
and forests. For reasons noted above, the development o f the rem.aining hydro resources will
proceed as planned even were electricity demand reduced, so the number and size o f hydro
projects, and their environmental impacts, i s not affected by power sector reforms.
126. It i s possible that if domestic gas becomes limited, beyond 2025 there may be '

development o f pumped storage projects in both the Northern and Southern regions together with
additional coal generation. But again this i s not a consequence o f power sector reform. Indeed,
to the extent that power sector reforms provides clearer signals about the value o f gas for power

37
generation, reforms may help the development o f additional gas resources, and thereby reduce
the need for pumped storage hydro projects (whose emissions are clearly higher than gas
generation because the pumping energy must come from coal generation).
127. All other things equal, coal projects (whether imported or domestic) will tend to be sited
in coastal areas, some o f which have high natural resource value. But the balance between such
coal projects and gas projects (whether LNG or domestic gas) will be largely a consequence o f
relative fuel prices that are dictated by international trends, and the pace o f reforms in the gas
and coal sectors: the reform program itself has a much more limited impact on this balance.
128. Because the reforms will support financial and economic efficiency, they may create
incentives to reduce compliance with environmental regulations for construction and operation
which are normally part o f the permitting process for large power plant. This issue will be
explored further during program implementation, through a strategic environment assessment
(SEA) o f the Seventh Power Master Development Plan. The completion o f the SEA i s a trigger
for a separate DPO, the Public Investment Reform D P L (Ln. 7838-VN).
129. A second impact on natural resources might result from large-scale fuel switching by
consumers away from electricity to other sources o f energy as a result o f increases in electricity
tariffs. Substitute forms o f energy, such as biomass for cooking or kerosene for lighting, may
cause impacts on forests and create high levels o f pollution, especially indoors. The risk o f this
effect i s considered negligible, because analytical work reveals that few people, and even fewer
o f the poor, use electricity for cooking so that substitution o f biomass for electricity i s unlikely.
Moreover, electricity expenditures, even in the poorest o f households tend to be small.
Empirical studies o f electricity use show people assign the highest priority to using it for lighting
and normally forgo other services provided by electricity (such as a fan or TV) rather than
substitute for it.
Conclusions
130. In summary, the environmental impacts o f the power sector reform program are likely to
be positive. The power sector reform program has no impact on the hydro development plan or
on the location o f new power plants. The V C G M makes more likely the early retirement o f the
inefficient old coal plants, and sends clear signals to encourage the most efficient generating
technologies (such as supercritical over subcritical coal projects). The DSM and energy
efficiency programs are strongly win-win. The level playing field created by sector reforms and
the move to cost reflective tariffs can only improve the ability to mobilize private sector
investment in both generation and the development o f domestic gas (which will minimize the
need for coal plus pumped storage to meet that portion o f the load that would otherwise be met
by combined cycle gas generation). The modeling results also suggest that the elimination o f
cross-subsidies results in net efficiency savings, and any decrease in consumption due to
increased cost-reflective tariffs again reduces demand and emissions.
13 1. The only reform impact that may increase GHG emissions i s the shift from gas to coal as
may be induced by strict merit order dispatch. But given the evidence from 2008, under V C G M
dispatch coal plants should be displaced slightly more, and gas plants slightly less. However,
modeling results also show that this effect i s more than offset by more efficient dispatch among
the group o f northern coal plants, with a small net decrease in GHG emissions.
132. This analysis has been shared with the government during preparation.

38
 Implementation, Monitoring and Evaluation
- 133. M o I T chairs a working group assigned to implement the reform program, which has as i t s
members the Office o f Government (OoG, the Prime Minister’s office), MoF, Ministry o f
Planning and Investment (MPI), State Bank o f Vietnam (SBV) and EVN. M o I T and in
particular ERAV will be responsible for the implementation o f the bulk o f the policy actions
under the PSRDPO series.
134. M o I T and the Bank will jointly monitor implementation. The program will be supervised
from the field office, with formal review meetings being undertaken every six months during the
program’s lifetime. Milestones indicating progress in implementing PSRDPOl and triggers for
PSRDPO2 are clear, will be monitored during implementation and, adjustments made, if
required.
135. Since the outcome indicators are all information required by ERAV for the execution o f
i t s role as the regulator, country systems will be used as the basis for monitoring. The outcome
indicators are shown in the Policy Matrix at Annex 2.
Power Sector Performance Monitoring Under Reform
136. Monitoring o f power sector performance and quality indicators and the application o f
retail tariffs i s the responsibility o f ERAV (EVN oversees and instructs the subsidiaries and
entities it owns, as a holding company, but this i s a business function covering costs, revenues,
and financial performance, not a regulatory function). The Grid Code and Distribution Code to
be approved and implemented as part o f the reforms supported by the proposed DPO series will
create the basis for the objective monitoring o f the performance o f the power sector in meeting
consumer needs.
0 The Grid Code includes performance indicators for (a) the transmission activity (NPTC)
including transmission outages and constraints and their impact in dispatch and supply;
and (b) for N L D C - to become the SMO in due course - in maintaining the demand-
supply balance, and instructing load curtailments when necessary. It i s expected that
these indictors and reporting will improve the transparency on load curtailment decisions
and their allocation; and
The Distribution Code includes performance indicators for the supply activity from the
grid connection up to end customer connection. These indicators should capture
interruptions caused by constraints, faults or other problems in the distribution system.
Fiduciary Aspects
Fiduciary Arrangements
137. The fiduciary risks o f the current public financial management systems (budgeting,
accounting, reporting, and auditing) are assessed as moderate. Since the IMF does not currently
have a program in Vietnam, it i s not possible to rely on i t s assessment o f the control environment
o f the SBV. However, the enactment o f the Audit Law in 2005 helps address the issues related
to audit and accounting arrangements. The Audit Law has established the State Audit o f
Vietnam (SAV) as an independent institution reporting to the National Assembly with the
Auditor General being appointed and dismissed by the National Assembly. Audit reports were
made public for the first time in 2006. The SBV i s subject to auditing by SAV on an annual
basis, but under the current laws, the audited financial statements and audit reports o f SBV are

39
treated as a national secret and are not published. A more detailed discussion o f public financial
management in Vietnam i s at Annex 3.
Dedicated Account
138. To address fiduciary risks in the foreign exchange control environment, the Borrower
will open and maintain a dedicated account in U S dollars for the Borrower's use once the Loan
and Credit are approved by the Board. The account will form part o f the country's official
foreign reserves. An equivalent amount will be credited to an account o f the government
available to finance budgeted expenditures. The Bank may request the government to provide
written confirmation that this has occurred. If after deposit in the account the proceeds o f the
Loan or Credit or any part thereof are used for ineligible purposes, as defined in the Loan and
Financing Agreements, the Bank will require the Borrower to refund the amount directly to
IBRD or IDA as the case may be. Amounts refunded to IBRD or IDA shall be cancelled.
139. The Bank will retain the right to seek an independent audit o f the account established in
SBV by an auditor acceptable to the Bank to seek reassurance on the accuracy o f the information
relating to transactions from this account provided by the Borrower, including accuracy o f
exchange rate conversion; and that funds in this account were not used to finance expenditures
excluded under the Agreement. The Government will be required to provide audited reports
within six months o f deposit o f the proceeds o f the loan and credit.
Disbursement and Auditing
140. The proposed operation will follow IBRD/IDA disbursement procedures for DPOs, and
the Loan and Credit proceeds will be disbursed in compliance with the stipulated release
conditions. Various measures have been taken to ensure that the overall fiduciary policies and
institutions are adequate to proceed with support from IBRD and IDA. Analytical underpinnings
for the operation include the 2002 Country Procurement Assessment Review, the 2005 Public
Expenditure Review and Integrated Fiduciary Assessment and the Country Financial
Accountability Assessment o f 2007. Disbursement will not be linked to any specific purchases
and no procurement requirements w i l l have to be satisfied.
Onlending
141. MoF has indicated its intention to onlend the proceeds o f the loan and credit to EVN in
U S dollars. It has confirmed that an amount equivalent to the loan proceeds will credited to an
account o f the government to finance budgeted expenditures, through a budget line specifically
for onlending. The onlending terms would be identical to those o f IBRD/IDA plus an onlending
fee on the outstanding balances o f the Loan and Credit as determined by Vietnamese regulations.
The current fee i s 0.25 percent. The Government i s responsible for the fiduciary risk associated
with the on-lending arrangement. The Government will provide written confirmation in a form
requested by the Bank that the proceeds o f the Loan were disbursed in accordance with the agreed
arrangements.
Risks and Risk Mitigation
142. Experience with power sector reforrn internationally, and with the reform program in
Vietnam suggest that there are perhaps four important risks to be considered with the proposed
operation. They are: waning ownership o f reforms; complexity and novelty; governance
transparency and corruption; and unforeseen social consequences.

40
143. Waning political support, or increased stakeholder resistance to reform may erode
ownership and progress o f the reform process and result in the sector becoming increasingly
unable to meet power demand growth. In part this risk i s mitigated by the design o f the reforms,
with the two-step, pilot and implement approach adopted in the roadmap. This i s designed to
build on the consensus driven approach to decision making in Vietnam, which itself i s an
important mitigant. There i s some risk from the political cycle - senior figures in government
will inevitably change over the lifetime o f the reform process, and the environment in Vietnam i s
fast-changing. This i s largely mitigated by the design o f the government's reform program in
three phases, and the DPO series reflects that mitigation by only addressing one phase at a time.
Ifthere are subsequent changes o f policy direction the reform program can accommodate them,
and the likelihood o f reversal i s considered low.
144. The role o f EVN - which throughout has been closely involved in the process - has been
largely positive. Its active participation in reform proposals has helped build ownership and
overcome resistance. I t will be important to continue to maintain good working relationships to
ensure that it does not become an obstacle to reform. This can be reinforced through the close
and continuing engagement between the Bank and all sector stakeholders through the investment
lending, AAA and DPO programs in the energy sector, much o f which supports the reform
process.
145. The reforms introduce new concepts, particularly that o f separation o f policy, regulation
and operation, into what i s a technically complex sector. W h i l e the technical and engineering
challenges are unlikely to present major difficulties, the novelty o f an economic regulator which
has not been tried before will challenge the capacity o f existing institutions and the willingness
o f government to let go. Because this i s the first occasion on which economic regulation has
been tried, failure also carries the risk that i t would be discredited for other infrastructure sectors.
The long timescale envisaged - and particularly in the transitional first phase - has done much to
mitigate this risk, because it has permitted the establishment o f ERAV and steady build-up o f i t s
capacity by a mixture o f direct capacity building and learning by doing. ERAV, as the champion
for power sector reform, has also been instrumental in building the capacity and understanding o f
other stakeholders including non-line ministries.
146. Corruption i s a significant and growing problem in Vietnam, and in a rapidly-growing
economy corruption vulnerabilities and opportunities for graft could outpace measures to combat
them for some time. Resistance to greater transparency for example in the contracting o f new
generation may delay or derail reforms. It must, however, be said that the levels o f corruption in
the power sector appear low, and an important mitigation w i l l be to ensure that they remain so.
The reforms themselves are, in many ways, the main mitigation since they support greater
transparency and competition.
147. Last, unforeseen consequences, as a result o f rapid increases in tariffs, have the potential
to derail the reforms. Based on the social impact analysis conducted for this operation, the risk
o f this being a broad-based social effect appears to be low and it i s quite unlikely that, barring
unexpectedly large increases in the costs o f fuel, there will be major discontinuities in the
trajectory o f tariff increases for the poor. The risk may be more significant for larger consumers
from industrial and commercial tariff categories which may object to continued cross
subsidization o f the household categories, or diminishing quality o f service, and consumer
groups may form. The main mitigation i s to continue to monitor service standards, and to ensure

41
that tariffs move towards reflecting cost o f supply, w h i c h in effect requires the prompt
introduction and even-handed enforcement o f the transmission and grid codes.

42
 ANNEX 1: Letter o f Sector Development Policy

MINISTRY OF INDUSTRY AND TRADE

THE SOCIALIST REPUBLIC OF VIETNAM

Hanoi, March 01, 2010

To: Mr. Robert B. Zoellick

President
The World Bank
Washington DC

SUBJECT: Vietnam's Electric Power Sector: Letter of Sector Development Policy

You will know that the Socio-Economic Development Plan for 2005-2010 sets out a path for
Vietnam's transition towards a market economy with a socialist orientation, and envisions
Vietnam will attain middle-income status. with a gross national income above US%l,OOO per
capita, by 2010. The focus o f our efforts has been on improving the business environment,
strengthening social inclusion, strengthening natural resource and environment management,
and improving governance. We have put in place and are maintaining an appropriate
macroeconomic framework which i s vital to the continued growth of Vietnam in the future.
An efficient and sustainable electricity sector i s vital to the achievement o f our vision for
Vietnam's continuing development. A well performing and sustainable power sector i s
necessary to support econoin,ic growth. the business environment. social inclusion and better
environmental performance. Moreover, improved governance o f the power sector will ensure
greater transparency and encourage greater participation by a broader range of stakeholders
including potential investors. For these reasons, and above all to ensure that there i s sufficient
financing to meet the enormous investment needs o f the sector, we have embarked on a
program o f reform o f the electric power sector in Vietnam.
Goals for Reform o f The Electric Power Sector
The Government recognizes that sufficient electric power i s needed to support Vietnam's
continued social and economic development. It also recognizes that, as part o f Vietnam's
transition to a socialist market economy. it should reduce its role in financing the power sector
and phase out subsidies to it, other than for limited social objectives. Rapid demand growth
over the past years has increased financing needs for the power sector that cannot be met from
domestic capital and local borrowing alone. In consequence, private sources of financing.
both local and international, need to play an increasingly significant role. We are thus
committed to a program o f power sector reforms, the main goals and principles o f which are:
Achieving competitive electricity prices and security o f supply through development o f
a power market. Security of supply will be achieved by ensuring adequate investment i s
made in time by those best able to do so at least economic cost. At the same time we
wish to avoid abrupt changes to the structure or operation o f the sector that may cause
disruptions i n investment or supply.

43
 Diversifying ownership and developing a fair and equitable framework for investment to
enable competition. We will increasingly rely on investment from non-traditional
sources and, in particular, from private investors, both local and foreign.
Introducing sustainable and efficient electricity tariffs, including social protection for
the poor. Predictable tariffs that fully recover costs are intended to encourage investors
by giving them confidence that they will be able to recover their costs over the lifetime
of their investment as long as they adequately maintain and efficiently operate it.
Fostering energy efficiency through demand side measures, because this will help bring
down the total investment required per unit of consumption, as well as improve the
environmental and social sustainability of the power sector.
The 2004 Electricity Law established a new framework for the modernization and the
introduction o f competition into Vietnam’s power sector, comprising:
The gradual development of a competitive power market, starting with a market in
which multiple generators will compete to generate and sell electricity to a Single
Buyer, which in turn will sell on to large consumers, namely power distribution
companies and some large industrial consumers. Later a wholesale competitive market
will be introduced, with multiple companies -generators and wholesale licensees -
competing to sell electricity to the power distribution companies and large consumers.
In time retail competition will be introduced, in which all electricity consumers will be
allowed to choose their supplier.
0 Gradually withdrawing from central planning o f new generation investment and

replacing i t with indicative planning based on projected demand. supply security and
power system reliability criteria, and government energy policies. For the time being,
the existing power master planning process will continue. but will be increasingly based
on market information.
The establishment o f a dedicated electricity regulatory agency. the Electricity
Regulatory Authority o f Vietnam (ERAV), under the supervision of the Minister o f
Industry and Trade. the first economic regulator in Vietnam.
The Prime Minister issued a Roadmap for Reform in January 2006 which sets out the reform
process running from 2005 to 2023. The Roadmap envisages a three phase process, with each
phase split into two stages: an initial pilot to test and improve the design and then a stage for
full implementation. It also sets pre-conditions to be met for moving from one phase to the
next and requirements to restructure the actors in the power sector to match the needs of the
market. We are now in a critical period o f Phase 1, which i s scheduled to run from 2005 to
2014. During this phase the reform program i s centered around four main themes: (a)
introduction o f competition between generators to supply the power market; (b) restructuring
o f the sector participants to create an enabling environment for the introduction of the market;
(c) reform o f the tariff mechanisms and structures; and (d) introducing measures to improve
energy efficiency. Idescribe our policy for each o f these in more detail in the following
paragraphs.
Introduction of the Power Market
The Vietnam Competitive Generation Market (VCGM) will introduce competition among
generators to enter the market to supply electricity and competition to be dispatched. The
VCGM design and its codes and rules are intended to set a level playing field, including
standard contracts with benchmark pricing to ensure equal treatment and conditions for
generation investors, independent of ownership. We see as crucial to economic development
and successful functioning o f the power market the need to maintain a sound mix of fuels
based on the resources available, choice o f appropriate modem technologies and selection of

44
sound investors with the capacity to implement and efficiently operate the projects they
sponsor. In consequence, VCGM i s designed to maintain a level o f control by the
government in the planning process.
We have already conducted considerable design work and a number o f trials o f the VCGM.
Based on these, MoIT has established design principles for the VCGM and has required EVN
to start a pilot run o f the design using its own power plant by the third quarter o f 2010. We
expect, provided the pilot goes smoothly, to introduce the VCGM for full implementation by
the mid o f 2011 and for i t to run for perhaps three to four years while we prepare the
conditions, framework and rules needed for the transition to the next phase, the wholesale
competitive market.
Vietnam has an abundance o f small hydropower and other renewable energy resources which
can be used for power generation and which have several advantages from the perspective o f
sustainable development o f the power sector. We have made specific provisions for power
plants o f less than 30 megawatts (MW) for which the transaction costs are too great to be able
to participate in the VCGM. We have introduced standard power purchase agreements and
avoided cost pricing for small renewables, which will support the development o f the small
hydro potential by the private sector. Power generation plant using wind and geothermal
resources are also exempted from participation in the power market even if they are greater
than 30 MW. Our policy i s to continue to support the development o f renewable energy in
Vietnam wherever i t i s economically viable and environmentally and socially sustainable.
Restructuring of the Power Sector
Implementation o f the market reform program will be accompanied with the gradual
adaptation o f the power sector structure, to create the environment that enables competition
and protects consumers and investors from the conflict o f interest that exists when the same
power company i s the wholesale buyer and seller o f electricity, the provider o f monopoly
transmission and system operation services, the dominant owner o f generation and that has a
role in expansion planning. Transparent and non discriminatory transmission, system
operation and market administration rules, pricing and regulations are being drafted and will
be issued to ensure that investors have the level o f comfort required to enter the market and to
continue building new generation.
Our policy is to eliminate real and perceived conflicts o f interest in the VCGM by ring
fencing the National Load Dispatch Center (NLDC) from the rest o f EVN before it transitions
to become the independent System and Market Operator (SMO); transferring the Institute o f
Energy, which carries out the planning function, from EVN to MolT; and by requiring the
creation o f independent generation companies. In addition the National Power Transmission
Company, which holds all EVN’s transmission assets, has been created as an independent
accounting unit within EVN, and will also be ringfenced and in the longer term be fully
separate. The Prime Minister’s Roadmap for Reform also limits the total amount o f
generation that may be owned by a single entity to 25 percent o f the total system installed
capacity and we will work towards this goal in the longer term.
The new regulatory framework will include transmission grid, system operation and
distribution network. Its planning, connection and operation procedures and performance
standards will improve the efficiency and reliability o f the power system. The new sector
structure will have separate licensing and regulation for each electricity activity (generation,
transmission, wholesale, distribution and retail supply) in the supply chain from electricity
production until delivery to end consumers. The corresponding licensing systems for
electricity investors and operators are in place, administered and monitored by ERAV.

45
Tariff Reform
Our policy i s to introduce electricity tariffs that are reflective o f efficient costs in the
electricity supply chain, to provide predictability for sustainable investment in the powcr
sector. This will support investors in making decisions to finance much needed new
generation capacity, transmission upgrading and distribution improvements. Electricity
activities in the VCGM will be regulated or subject to competition to eliminate existing
inefficiencies and achieve reasonable costs, and to transfer part o f cost reductions due to
efficiency gains to tariffs for the benefit o f consumers.
The Prime Minister’s Decision No 276 on electricity pricing in December 2006 formalized
the transformation to market based cost reflective tariffs with the statement that: “From 2010.
the electricity retail price shall be based on the market price”. More recently in 2009, the
government has set out the principles to unbundled tariff setting into separate generation
(power purchase) costs, regulated transmission and distribution network services revenue
requirements, regulated system and market operation costs and other costs.
In March 2009 we increased average tariffs to the level equivalent to 2009 actual costs. We
are preparing tariff regulations that will annually update costs and transfer them to tariffs and
at the same time introduce performance and quality o f service standards and incentives for the
transmission and distribution systems. We expect there to be a transition period during which
the new approach will be introduced and refined, and for the time being, the Prime Minister
will retain final decisions over the increment tariff increases over five percent.
A key part o f the government’s poverty reduction program i s to increase electricity access and
quality o f supply in rural areas, at efficient and reasonable tariffs. Our policy i s to provide
quality o f access and pricing through a uniform national tariff which all households enjoy.
As part o f our effort to target subsidies to the poorest members o f society, we have reformed
the incremental block tariff system. Starting in March 2009 we reduced the ‘‘lifeline’’ tariff
amount to 5OkWh per month and fixed the price at from 30-40 percent o f the cost o f supply.
A l l other consumption i s at least at the cost o f supply, and our analysis suggests that this
considerably reduces the leakage o f the subsidy to the non-poor. We will continue to monitor
the effects o f this policy and refine it as necessary.
Energy Efficiency
The government has encouraged both demand and supply side efficiency with positive results.
The National Strategic Program on Energy Saving and Efficient Use approved by the Prime
Minister in 2006 included targets on energy savings up to 2015. Notable successes have
included the completion o f an energy efficiency and conservation bill, which was submitted to
the National Assembly in October 2009, the formation o f central and local energy efficiency
and conservation centers to effectively implement activities o f the National Energy Efficiency
and Conservation Program across the country. and the introduction and application o f solar
water heaters in households and organizations.
Almost 3,000 solar water heaters were installed within the framework o f the program. EVN’s
program encouraging the use o f compact fluorescent lamps was evaluated to have resulted in
reductions in consumption o f about 46 gigawatt hours per year and peak demand reductions
o f 30 MW. It m e r targets a reduction o f the peak demand o f 207 M W by 2012, and 450
M W by 2015 at day time peak load. In 2009, almost 500 large businesses were surveyed in
terms of energy efficiency and conservation, more than 200 businesses had their energy use
audited, and more than ten experimental energy efficiency and conservation projects were
implementedin the fields o f plastics, beer, liquor, textiles, garments, lighting and others.
,Nonetheless we recognize the need to scale up our efforts in the area o f energy efficiency
because i t will help to reduce the rate o f growth o f demand for electricity, thus improving the

46
sustainability o f the power sector and of Vietnam's economic growth. The Ministry of
Science and Technology has introduced standards for electrical appliances that account for
large amounts o f household consumption, and the Ministry of Industry and Trade has
introduced time o f use tariffs for electricity consumers connected at high and medium voltage.
We intend to continue to broaden the reach of energy efficiency regulations through pricing
and other mechanisms, with the aim of achieving the national target for energy efficiency of
five to eight per cent o f the total energy demand from 2006 to 2015.
Conclusion
A number o f key policy decisions have already been taken and OUT government i s ready to
move forward to complete the rest of the reform program for the implementation of the
VCGM. Todate:
MoIT has issued a Decision (6713-QD-BCT dated December 31, 2009) to set up the
detailed design and principles for the implementation of the Vietnam Competitive
Generation Market.
MoIT has issued a Circular (27/2009/TT-BCT dated September 25, 2009) to ensure that
plant metering systems in power generation plants meet minimum standards and
procedures.
The Office o f Government has issued a Notice (232lTB-VPCP dated July 31. 2009) to
establish broad principles for the power sector structure to allow for the introduction of
Vietnam Competitive Generation Market.
The Prime Minister has issued a Decision (21/2009/QD-TTg dated February 12. 2009)
to increase average tariff in 2009 and to establish principles for electricity cost recovery
including unbundling tariffs, annual updates of tariffs, and delegating approval of
changes in tariffs of less than five percent to MoIT.
The Prime Minister has issued a Decision (21/2009/QD-TTg dated February 12, 2009)
to restructure residential block tariffs and to establish principles for subsidy as a
percentage o f production cost.
Ministry o f Science and Technology (MOST)has issued Decisions (2740lQD-BKHCN
dated December 9.2008 and 632/QD-BKHCN dated April 20,2009) to establish energy
efficiency standards for consumer goods that account for large quantities of electricity
consumption.
MoIT has issued a Circular (05/2009/TT-BCT dated February 26, 2009) to introduce
time-of-use tariffs for industrial zones, and irrigation, industrial, and commercial
property categories.
On this basis, we request World Bank support for our power sector reform program by
approving the First Power Sector Reform Development Policy Operation and the commitment
o f $313.5 million. We firmly believe that the policies set out in t h i s letter merit the full
support of the World Bank and the internationalcommunity.

With kind regar?

Sincerely

Do Huu Hao
Vice Minister o f Industry and Trade

47
 ANNEX 3: Public Financial Management in Vietnam

Background and Analytical Underpinnings

1. This operation provides general budget support to the Vietnamese Government and will be
executed through the Government’s public financial management (PFM) systems. This annex
summarizes the current state o f these systems and the ongoing reforms with a view to assessing
the attendant fiduciary risks with respect to the proceeds o f this development policy loan.
2. Vietnam has set itself the goal of becoming a middle income country by 2010 with promoted
social inclusion and public governance: Public financial management reform i s one o f four
focus areas within the Government o f Vietnam’s Public Administration Reform (PAR) Master
Program for the period 2001-2010. Other focus areas include organizational restructuring, pay
and employment reform and institutional development. The Initiative includes five priorities,
namely budget management, revenue management, debt management, SOE fiscal risk
management and public asset management.
3. Over the past decade Vietnam has made continuous efforts to establish a sound public
financial management system in the country: With the adoption o f the first organic budget law in
1996 and its revision in 2002, a solid legal framework for public resource management has been
put in place. A centralized treasury system has been set up with branches extending from the
center to all provinces and districts to provide basic essential financial services to all government
agencies. Steady progress has been achieved in making the budget more predictable and pro-
poor and the budgeting process more transparent and participatory. Substantial efforts have also
been made in recent years to improve transparency in the use o f public resources through
provision to the public o f increased information on detailed government spending as well as
wider disclosure o f government expenditure policies, regulations and procedures. Vietnam has
been recognized for i t s relatively prudent fiscal policy.
4. Despite positive progress, considerable challenges remain: Although fiscal trends have been
positive, a number o f threats to fiscal sustainability exist. These include government bonds
issued off-budget to finance infrastructure projects, education facilities and to recapitalize
SOCBs, contingent liabilities arising from the operations o f the Vietnam Development Bank,
banking sector and other sub-national development funds as well as off-budget balance
borrowing o f provinces. In the absence o f a formal commitment control in public expenditure
management, some provinces and ministries made capital expenditure commitments off-budget
resulting in balances in excess o f their budget and fund availability. That led to the built-up o f
considerable amount o f capital expenditure arrears that are not fblly resolved yet. In addition,
the re-lending from Government’s borrowings can become Government’s obligations if they are
not managed properly. This calls for an urgent need to put in place legal and institutional
frameworks to comprehensively manage public debt and monitor government commitments and
contingent liabilities.
5. The composition of public expenditure remains imbalanced in favor of capital expenditure
that negatively affects the eficiency in the use of public resources: Processes for prioritizing
expenditures remain ineffective. The absence o f a credible multi-year fiscal framework means
that expenditure planning i s conducted without reference to medium-term resource constraints.
Prioritization i s carried out separately for capital spending (by the Ministry/Department o f

52
Planning and Investment) and for recurrent spending (by the Ministry/Departments o f Finance),
with significant imbalances between the two.

6. There are shortcomings in Vietnam’s public financial management information systems and
public accounting regulations: The lack o f a fully consolidated budget makes i t difficult to
monitor total revenues and expenditures, as well as the true fiscal position. Extra-budgetary
funds and on-lent official development assistance are not consolidated into the budget. The lack
o f common accounting structures results in numbers which are inconsistent and hard to compare.
The lack o f integrated, electronic data recording and reporting results in laborious manual
consolidation and manipulation o f data from multiple satellite databases, and in financial
reporting which i s neither timely nor accurate. These deficiencies contribute to the poor flow of
budgetary information between government ministries, provinces, donors and the public. W h i l e
progress has been made with regard to adopting international private sector accounting standards
with 26 Vietnamese accounting standards consistent with international accounting standards
having been developed and issued, these standards have not been kept up to date, whilst public
sector accounting standards are s t i l l lacking, existing government accounting regimes are
incomplete and accounting practices have yet to be aligned with international standards.
7. Although the country’s public financial management system has a range o f internal oversight
roles and mechanisms, the focus o f the various internal oversight functions i s o n inspection
rather than systematic review to provide regular and timely feedbacks to management on internal
control systems and the use o f public resources. Internal auditing i s recognized as a key element
o f a sound public financial management system which helps organization increase effectiveness
and efficiency in addition to improving financial controls and procedures. Effective internal
auditing i s yet to be developed to provide regular timely review and feedback to management on
internal controls in the use and management o f public resources.
8. There are signijkant weaknesses in revenue administration: Vietnamese Customs are still
considered unresponsive, inconsistent and vulnerable to corruption. A long-term vision with
clear strategic goal i s lacking. The Customs Administration will need to change significantly,
shifting i t s mindset from a culture o f domestic protection and control o f all transactions to one
that facilitates foreign trade and promotes private sector development. The tax administration i s
presently characterized by l o w compliance and vulnerability towards corruption. Five key areas
o f tax administration have been identified to need special attention: (1) the fragmentation o f the
legal framework related to tax administration; (2) the absence o f effective coordination and
information sharing between the tax administration and other government agencies; (3)
taxpayers’ lack o f knowledge about the tax laws and compliance procedures; (4) inadequate
professional skills and staff training; and (5) ICT system lagging behind the requirements o f a
modern tax administration. Tax laws and policies will need further reform to broaden the tax
base, reduce the number o f rates and exemptions.
9. Independent scrutiny of PFM has increased, with external oversight of budgetary affairs by
the National Assembly @A) and the recently independent State Audit of Vietnam (SAV): The
NAYi t s functional committees and deputies have been given greater prominence in examining,
decision making and oversight o f the state budget. Encouragingly, the SAV audit report has
been made public for the first time, triggering serious debates on the usage o f state budgets. The
capacity o f these institutions especially the SAV however i s weak, which limits audit coverage
and the scope o f audits and precludes reviews o f value for money. It i s difficult for the SAV to

53
manage the increased coverage and scope o f works including compulsory audit for 100 percent
o f SOEs.
10. Price control mechanism has not been very effective in controlling price abuse or dumping
due to monopoly and collusion: The price valuation profession has only recently been
established and i s finding it difficult to meet growing demands for valuation services. The legal
framework for price control i s also new and s t i l l incomplete. I t s implementation i s being
hampered by a lack o f a strong information base. Developing a complete legal framework for
price management and building sufficient valuation capabilities will clearly constitute a near to
medium priority for the government.
11. Financial market supervision has been fragmented and government bond market is still
under-developed At present, there are many agencies participating in supervision o f the
financial market, leading to overlapping responsibilities and ineffective market management and
supervision. There i s a need to clarify and consolidate market supervision function into one
single agency and to separate the state management function from the supervision function.
Vietnam's government bond market i s s t i l l o f a small scale and characterized by a maturity
structure skewed towards the short-term and low liquidity. The number o f market participants i s
relatively small and supporting infrastructure, such as depository and clearing as well and
information systems, i s yet to be developed. Considerable efforts, therefore, would be required
to develop a full-fledged government bond market and coordinate it with development o f other
related markets such as capital, security, money and real estate.
12. Governance and anti-corruption: Since the adoption o f the Law on Anti-Corruption, several
detailed implementing guidelines have been issued, anti-corruption measures have started to be
implemented by ministries and provinces, and the detection and punishment o f corruption cases
has been energized. The enforcement aspect o f anti-corruption has been strengthened through
the creation o f specialized units in all the key anti-corruption institutions, through improved
coordination among institutions, and their decentralized units at the provincial level.
13. Projects and activities supporting P F M reform of the Bank At the policy level, the series o f
Poverty Reduction Support Credits (PRSCs) has been nurturing constant policy dialogue on the
strategic elements o f a broad and cross-cutting reform agenda including P F M modernization.
Meanwhile, these operations have been strengthening coordination among line ministries and
government agencies, and triggering chances to reach endorsement on reforms at the highest
decision-making level. At the technical level, there are currently three active Bank-funded
projects in P F M area, namely the Public Finance Management Reform, Customs Modernization
and Tax Administration Modernization projects. In addition, there are two Multi-donor Trust
Funds (MTDF) established to attack one o f the main bottlenecks in the implementation o f reform
in Vietnam -- limited government capacity -- which mainly finances the needs o f technical
assistance and capacity building activities, and analytical and diagnostic work laid out in the
government strategy.
14. I n addition, a series of AAA works have been undertaken to provide sound analytical
underpinnings to the implementation o f the Government-led P F M reform program. These
include the joint IMF-World Bank study o f 1999 "Towards Fiscal Transparency"; the joint 2000
Government-donor Public Expenditure Review; the 200 1 Country Financial Accountability
Assessment; the 2002 Country Procurement Assessment Report, and mostly recently are the joint
government-donor 2004 Public Expenditure Review and Integrated Fiduciary Assessment and
the 2007 Country Financial Accountability Assessment (CFAA). The CFAA 2007 proposes a

54
set o f recommendations to help the government design and continue implementing reforms and
capacity building programs to modernize and strengthen public financial management and
enhance transparency and accountability arrangements in support o f sound economic
management and improved governance.
Key PFM Issues - Recent Developments and the Way Ahead
15. Vietnam is pursuing many initiatives to strengthen its financial management and
accountability arrangements, systems and controls: There has been substantial progress on
budget execution and treasury management (with the Treasury and Budgetary Management
Information System, TABMIS, being piloted and i t s associated reforms being undertaken), on
budget development and decentralization (greater coherence through the pilots o f the forward-
looking medium term expenditure frameworks, MTEFs, and budget allocation norms), on
revenue management (with clearer allocation rules and decentralized responsibilities, and with
the productivity o f some taxes now close to OECD levels), on debt management (with the
adoption o f the first-ever Public Debt Management Law and the establishment o f the Debt
Management Office consolidating the management o f domestic and external debts), on external
auditing (annual audit report and selected individual audit reports o f the SAV being disclosed
publicly), and on accessibility o f financial information (with legislation and the environment
established for greater financial accountability and transparency).
16. Steady progress is being made in establishing the legislative framework to support P F M
reforms; however the key challenge i s to substantively implement the improvements and
enhancements that have been progressively introduced through legislative reforms and
development work in recent years. The cross cutting issues o f strengthening strategies for
decentralized P F M and developing and implementing action plans to strengthen capacity and
accountability for public financial management in line ministries and agencies at all levels o f
government are also priority areas for action in the short to medium term.
17. Key stakeholders to the budget process remain committed to further reform through an
evolving and pragmatic reform agenda: The focus o f Government reform i s on the: (i)
expansion o f budget coverage in line with internationally accepted norms and further unification
o f the budget; (ii)roll-out the integrated financial and budgetary management system nationwide
(with pilot at selected ministries and spending units) with streamlined business processes; (iii)
adoption o f International Public Sector Accounting Standards (IPSAS) for public accounting and
further improvement o f the chart o f accounts; (iv) scale up the MTEF and MTFF pilots to other
sectors and provinces and mainstream it into the annual budget cycle; (v) introduction o f
Treasury Single Account (TSA) for more effective cash management; (vi) improvements to debt
management, asset management and O D A management; (vii) improved management o f capital
expenditures; (viii) expansion o f external audit coverage and quality and legislative oversight;
(ix) improvements to internal control (with priorities given to internal audit); (x) more
comprehensive accounting and timely financial reporting based on internationally recognized
standards and practices; and (xi) increased transparency and accountability in the procurement
process o f public investment.
18. PFM Legal and Institutional Framework New laws and implementing decrees and
instructions are replacing old ones and legislative gaps are being filled. Since 2004,
implementation o f the 2002 State Budget Law and the 2005 Accounting Law has been in
progress and a State Audit Law has been enacted. As recommended in the 2004 Public
Expenditure Review and Integrated Fiduciary Assessment, the State Audit Law has provided

55
independence for the state auditing body and enhanced transparency by creating the legal basis
for audit reports to be made publicly available. Implementation o f the State Audit Law i s
steadily proceeding. However, some confusion and overlap in budget responsibilities remain in
the budgeting system which i s limiting the participation o f sectors in resource planning,
budgeting and budget management and confuses accountabilities between the national and sub-
national levels. With the redevelopment o f the government accounting systems and regimes, the
Accounting Law i s no longer adequate and needs revision, and the basis for accounting needs to
be better defined. The State Budget Law and Accounting Law should be comprehensively
updated to provide a comprehensive and consistent basis for modern P F M and to serve as the
platform for continued P F M reforms, enhanced transparency and accountabilities.
19. Budget Development: To be an effective instrument o f policy, the budget should be as
comprehensive as possible. Vietnam’s budget coverage i s reasonably comprehensive but s t i l l
incomplete compared to international practices. The major expenditures o f spending units o f
government at central, province, district and commune level are reflected in the State Budget.
Budget gaps arise from the lack o f clarity in the state budget coverage o f user fees and charges o f
many service delivery units, lack o f integration or disclosure o f the financial positions o f public
financial funds, untimely and sometimes inadequate incorporation o f donor financing, and off-
budget government bonds. Budget execution variations arise fkom such practices as revenue
underestimation particularly for crude o i l revenues, keeping the state accounts open after year
end with post year expenditures recorded against previous year unused budgets, and over
implementing construction and development plans. Separate preparation o f the recurrent and
capital investment budgets hampers effective management o f resources and the composition o f
public expenditure remains unbalanced. The introduction o f forward looking budget plans
through piloting an MTEF in several sectors and provinces and adopting budget allocation norms
has supported greater coherence. The MTEF pilots should be scaled up and mainstreamed in the
annual budget cycle.
20. Budget Execution: In State Budget expenditure management, the legal framework for
decentralization o f state budget expenditure i s being implemented with decrees on autonomy and
accountability to budget spending units. Major public finance management systems are being
upgraded and replaced. A new integrated computerized financial management system called
TABMIS i s being implemented with r o l l out starting in 2008 - TABMIS will provide the
capability to record and control commitments, improve cash flow management and arrears
management, and strengthen expenditure management and controls. An updated and improved
Chart o f Accounts i s being developed for implementation in 2008 which will provide
consistency o f classification o f revenues and expenditures in budgeting, accounting and reporting
with expenditures classified on an administrative, economical and functional basis. A roadmap
for adoption o f international public sector accounting standards has been issued, which will
provide the basis for preparation o f whole o f government financial statements in line with
international practices. Assignment o f responsibility for developing, controlling and overseeing
public accounting, financial reporting and the operation o f TABMIS i s needed to consolidate and
lead the substantial improvements in budget execution accounting and reporting and most
importantly to maintain coordination and consistency in future developments.
2 1. Reforms in the management o f revenue are progressing with clearer allocation rules and
decentralized responsibilities; however classification o f revenue in line with international
standards needs to be introduced and enhanced consultation on revenue targets i s needed to
improve the quality o f revenue budgets.

56
 22. There are positive controls in the government payroll system with segregation o f personnel
and payroll functions and maintenance o f continuous employee records. However, with no
standard specialized payroll system operating within government the payroll i s calculated
manually and processed in bulk by an agency. Systematic and regular (monthly) reconciliations
between personnel staff records and payrolls need to be introduced to ensure validity o f payroll
changes and early detection o f errors and fraud. In the longer term, implementation o f modern
computerized personnel/payroll systems i s recommended to enhance the control o f payroll
expenditures which constitute a significant proportion o f the government recurrent budget
expenditures.
23. Internal auditing as a key internal control o f P F M has been recognized in the State Audit Law
but little progress and coordination to support its implementation in terms o f law and
implementation guidance has yet emerged.
24. Asset Management: The Government’s P F M reform program highlights that state assets
budget resources and human resources need to be managed in an integrated way for efficient and
effective service delivery, and reforms are being gradually introduced. The legal framework and
market principles in asset management and requirements for management reporting systems are
being defined. However, asset management reform has been slow. Initially attention i s needed
to develop consistent and comprehensive asset accounting and asset management policies in line
with international standards and practices for future reforms. Further study i s needed to define
the government’s accounting and asset management requirements and to determine and
implement the most appropriate system solutions for fixed asset accounting and reporting and for
asset management which can be integrated as part o f the government’s financial management
system. A comprehensive reform program for asset management i s needed starting with passing
o f the Law on State Asset Management.
25. Debt Management: The 2004 Public Expenditure Review and Integrated Fiduciary
Assessment recommended that assignment o f responsibility for management o f debt be clarified
and arrangements for monitoring and managing other fiscal risks be strengthened. Since 2004,
the capacity o f M O F to record and manage total government debt has been strengthened, with a
clear division o f debt management functions across government agencies. However much
remains to be done. The draft Law on Public Debt Management needs to be introduced to
achieve a unified legal framework for debt management; a Debt Management Office in M O F
should be established to UnifL government debt management functions; systems and criteria for
debt recording should be developed in line with international standards; an early warning system
to closely monitor local government and SOE debts i s needed; a domestic debt recording and
information system should be implemented; and a TSA should be introduced for more effective
government funds management. The priority i s to establish a Debt Management Office. 4
26. ODA Management: O D A plays in important role in Vietnam’s poverty reduction and growth
and O D A disbursements constitute an increasing portion o f the annual budget. The legal
framework for financial management o f ODA i s fairly comprehensive and a range o f reforms
have been introduced in recent years to enhance the effective use and management o f ODA.
Harmonization o f government and donor practices and requirements to reduce transaction costs
, i s a high priority. As O D A i s part o f the government revenue and expenditure, budgeting,

Ths recommendation has been implemented: the Government issued the Decree 118 dated 27/11/2008 regarding
the hnction, organization and tasks o f MOF, in which the Bureau o f Debt Management and External finance i s
established.

57
accounting, reporting and oversight follow the state budget management requirements. Areas for
improvement include better aligning government and donor budgeting approval cycles, bringing
on-budget all O D A (particularly on-lent ODA), revising the government chart o f accounts to
enable O D A to be effectively recorded and reported through the government accounting system,
more timely accounting for O D A in the government accounts, and institutionalizing systematic
M&E tools for use by donors and government. Mechanisms need to be developed to encourage
all donors to provide timely information in line with the government budget approval calendar
and to use the government Development Assistance Information Database. Testing o f the
capability o f the new TABMIS system for budgeting, accounting and reporting O D A through
government systems i s a priority.
27. Financial Reporting and Transparency: Vietnam has increased levels o f fiscal transparency.
Budget plans and budget execution accounts are being made available publicly, and there i s
increasing compliance with reporting regulations. However there i s s t i l l room for improvement,
particularly in relation to consistency in quality o f reports and their timeliness. To enhance the
quality o f financial reporting, consistency between budget and accounting classifications needs
to be maintained. The number o f budget execution reports needs to be rationalized. Content and
presentation o f financial information needs to be improved in line with existing government
regulations in the publicly available budget execution reports to make them more informative.
The Government should start producing and issuing annual financial statements in line with
international practices. The State annual accounts and financial statements need to be issued
more timely than the current 18 months after year end to enhance their relevance.
28. Accessibility of Financial Information: Good progress has been made in establishing
legislation and the environment for greater financial accountability and transparency o f financial
information. Regulations on financial disclosures o f the State Budget Law, Accounting Law and
State Audit Law have been issued increasing the scope and range o f required disclosures by
entities at all levels o f government. Information i s being made available on public accessible
websites. However, implementation remains the challenge. To further increase transparency,
the content o f budget documentation and the final accounts could be enhanced by including
analysis, explanations and information in line with international practices. Disclosure o f
financial information, particularly spending at unit level should be actively monitoring to ensure
compliance with the enhanced disclosure requirements. Published financial reports should be
timely and a calendar for disclosures issued publicly.
29. Accounting and Auditing Framework Given the importance o f accounting and auditing, in
both the public and private sectors in the continued growth and development o f Vietnam, the
government plays a leading role in regulation o f the accounting and auditing systems, regimes,
standards and professions. Accounting and auditing standards for enterprises have been issued
but are now out o f date and incomplete when compared to international standards. Mechanisms
for maintaining up-to-date standards and consistency between the standards and regulated
accounting regimes need to be set up. Considerable reliance i s placed on independent auditing to
provide effective review o f financial information o f enterprises, however there appears to be
overlap in the regulation o f the auditing profession. Legislative support i s needed for the
regulation and oversight o f the accounting profession in Vietnam. A Report on the Observance
o f Standards and Codes, reviewing the accounting and auditing framework (including financial
reporting standards) has been carried out to determine divergence from international standards
and practices. When published this study i s expected to provide policy recommendations to

58
develop a comprehensive country action plan for the long term development o f high quality
accounting and auditing in Vietnam.
30. External oversight: Since 2004, there has been steady strengthening o f external oversight.
The State Audit Law 2005 established the SAV as an independent supreme audit institution
reporting to the National Assembly with publication o f summaries o f the SAV annual audit
reports occurring, as recommended in the 2004 PER-IFA. K e y challenges remain in
implementation o f the state auditing function, with the need for SAV to update i t s organization
and staffing requirements and i t s audit strategies and methodologies more in line with
international practices so as to be able to provide effective audit coverage o f the public sector.
Greater attention needs to be given to assessment o f financial systems and functioning o f internal
controls as well as providing opinions on the reliability o f government financial statements.
Audit reports on the State Accounts needs to be more timely. Oversight by the National
Assembly and Provincial People’s Councils has continued to strengthen. In line with the 2004
PER-IFA recommendation, a Finance and Budget Committee was created in 2006 to improve the
oversight o f the budget estimates and final accounts. The time reserved for scrutiny by the
National Assembly, PPCs and committees should be longer to provide adequate time for quality
scrutiny and discussion. The comprehensiveness and quality o f budget information and financial
reports as well as the cooperation between committees and government oversight bodies needs to
improve to strengthen information sharing and quality o f analysis and decision making.
3 1. Financial Management Human Resource Capacities: Within the MOF, there i s s t i l l a lack o f
experienced technically qualified and experienced managerial staff to meet the reform challenges
o f the Ministry. The M O F i s moving towards developing a human resource management system
which i s synchronized, fair and transparent. Financial management capacity constraints i s a key
cross cutting issue within sectors and sub-national government and support i s needed to
implement decentralized P F M accountabilities and reforms.
32.Monitoring Framework Progress and impact o f the PFM reforms and development
initiatives are difficult to measure as baseline performance measures have yet to be established.
The Public Expenditure and Financial Accountability (PEFA) Measurement Framework provides
a recognized measurement o f the performance o f the public financial management o f
government. Although the Government has agreed in principle to introducing this measurement
framework though a self assessment process, no decision on timeframe and a firm commitment
o f resources for the assessment has been made. It i s strongly recommended that the government
prepare a PEFA measurement framework as soon as possible to establish baseline measurements
to provide the basis for soundly based measurement o f P F M performance and progress o f the
P F M reforms.
33. There is strong ownership in the Vietnam government of the P F M reform agenda: The
government actively engages with donors and demonstrates a strong commitment to P F M reform
in Vietnam. The “Single Document” issued in 2007 articulates the government’s strategy for
mobilizing both national and international resources to advance reform in PFM. Support to the
implementation o f reforms i s coordinated through the P F M partnership group which overarches
the activities o f government, donors, and working groups, meeting half yearly to discuss
progress.
34. Conclusion: The overall financial management risk to proper use, control and reporting o f
funds i s assessed as moderate, in line with the outcome o f the most recent CFAA. The Vietnam
P F M systems are therefore considered adequate to support this operation. Additional fiduciary

59
arrangements are proposed, including a dedicated foreign exchange account and the Bank
retaining the right to subject this account to audit.
Vietnam Electricity
35. MoF has indicated its intention to onlend the proceeds o f the loan and credit to EVN in U S
dollars. During preparation and supervision o f ongoing investment projects implemented by
EVN, aspects o f financial management reviewed have included: organization and staffing;
planning and budgeting; flow o f funds, funding channels and treasuryhanking operations;
management o f special accounts and disbursements; internal controls; accounting policies;
reporting and monitoring; and external audit. These have been acceptable and implementation
has been consistently satisfactory, although there have been some dimensions, such as special
account monitoring which have been rated as moderately satisfactory from time to time.
36. EVN’s audited financial statements are prepared on an International Financial Reporting
Standards (IFRS) basis. EVN incurred a net loss o f VND 7,319 billion ($438 million) in 2008 on
net sales revenue o f VND 63,732 billion ($3.82 billion). This i s EVN’s first loss since it began
IFRS reporting in the mid-1990s. The loss was primarily due to a VND 10,126 billion ($606
million) foreign exchange loss on EVN’s foreign currency debt, occasioned by the impacts o f the
financial crisis. Largely because o f i t s weaker cash flow performance, EVN did not meet either
the self-financing or debt service covenants. In consideration o f the mitigating circumstances o f
the financial crisis, the Bank agreed to waive the SFR and DSCR covenants for 2008.
37. Based on preliminary data for the first six months o f 2009 - the latest data available - net
profit over the first half o f 2009 has improved compared with 2008. Furthermore, it i s likely that
any new foreign exchange losses resulting from exchange rate changes in 2009 will be
significantly less than that incurred in 2008. Over the course o f 2009, the Dong was more stable
against the Yen and Dollar. Due at least in part to improved operating cash flows, EVN’s cash
balance improved by about 15% over the first six months o f 2009. EVN’s short term
investments improved even more significantly, by about 40% over that at year-end 2008. As a
result, EVN’s shorter-term liquidity position was considerably better by mid-2009 in comparison
with the end o f 2008.

60
 ANNEX 4: Country At-A- Glance, Including Map
Vietnam at a dance w9109

East
POVERTY and SOCIAL Asia 6 Low-
Developmentdianond
Vietnam Pacific Income
'2008
Population, mid-year (millions) 86.2 1931 973
Life expectancy
GNIpercapita(At/asmethod, US$) 890 2,631 524
GNI (Atlas method, US$ billions) 76.6 5,061 510
T
Average annual growth, 2002-08
Population (%) 13 0.8 2.1
Laborforce(%) 2.2 12 2.7
1capita
' +
l enro:-i primary
M o s t recent e s t i m a t e (latest year avallable, 2002-08)
Poverty (%of population belo wnational poverty line) 29
Urban population (%of totalpopulation) 26 44 29
Life expectancyat birth (pars) 74 72 59
infant mortality(per ZOOOlive bidhs) P 22 78
Child malnutrition (%of children under5) 20 13 28 Access to improvedwatersource
Access to an improvedwatersource (%ofpopulation) 92 87 67
LIeracy (%ofpopulation age 93 64
Gross primaryenrollment (%of school-age population) 02 in 96
Male 05 nz t12
Female 99 la 95

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

' 1988 1998 2007 ' 2008
Economlcratbs'
GDP (US$ billions) 25.4 27.2 68.6 89.8
Gross capital formationlGDP li.8 29.0 43.1 411
Exports of goods and ServiceslGDP
Gross domestlc savingslGDP
Gross Uational savingslGDP
3.9
..
..
44.8
217
24.0
76.9
26.2
34.6
78.2
24.6
29.4
I Trade

Current account balancelGDP -2.6 -3.9 -tl.2 -119

Interest paymentslGDP 0.0 16 0.9 0.6
Total debtlGDP 2.4 82.5 34.8 29.1
Total debt servicdexports 9.1 2.2 19
Present value of debtlGDP 30.0 22.7
Present value of debtlexports 36.9 28.7
Indebtedness
1988-98 1998-08 2007 ' 2008 2008-12
(average annualgowih)
GDP 8.0 7.4 6.5 6.2 6.3
GDP percapita 5.9 6.1 7.2 4.9 5.1
Exports of goods and services 8.9 14.0 , 113 5.0 3.1

STRUCTURE o f t h e ECONOMY
' '
(%of GDP)
Agriculture
Industry
1988

46.3
24.0
I998

25.8
32.5
2007

20.4
415
2008

22.1
39.7
Growth of capital and GDP (%)
I
Manufacturing 8.1 li.l 214 211
Services 29.7 417 38.2 38.2
Household final consumption expenditure .. 70.6 66.7 69.3
General gov't final consumptionexpenditure
Imports of goods and services 15.0
.. 7.6
52.2
6.1
92.7
6.2
94.7
03
-0cF
04 05 OB
-GDP
07

I
(average annual g o wih)
1988.98 1998-08
2007 ' 2o08 I Growthofexportsandlmports(%)
30
I
Agriculture 4.0 4.0 3.8 4.1
Industry a.7 9.9 D.2 6.1
Manufacturing 6.3 116 13.3 9.9
Services 6.6 6.9 6.9 7.2
Household final consumption expenditure 7.1 li.5 9.0
-10
General gov't final consumption expenditure .. 6.6 8.9 7.5
Gross capital formation
Imports of goods and services
22.4
8.5
117
15.0
24.2
27.6
6.5
7.6
-ExpI1s &Imporb

I
Note: 2008 data are preiiminaryestimates.
This tablewas produced from the Development Economics LDB database.
'Thediamonds showfour keyindicators in thecountry(in bo1d)comparedwith its income-groupaverage. Ifdataaremlssing, thediamondwill

61
 Vietnam

P R I C E S and GOVERNMENT F I N A N C E

Domestlc prices
' 1988 1998 2007 ' 2008

(%change)
Consumer prices 374.2 7.2 7.3 7.3
Implicit GDP deflator 4no 8.8 8.2 217
G o v e r n m e n t finance
(%oFGDP. includes current grants)
Current revenue
Current budget balance
Overall surplusldeficit

TRADE
n3
-2.8
20.0
5.0
-0.5
25.1
5.0
-2.2
26.0
5.8
-11 I 03
-WP
04 05

deflator -
OB 07
CPI "I
' '
(US$ millions)
Totalexports (fob)
1988

733
1998

9,360
2007

48,561
2008

62,685
Export and Import levels ( U S mill.)

80,000
I
Rice 884 1490 2,894
Fuel 140 8,488 0,357 80,000
Manufactures 4,350 28,783 33,953
40.000
Total impprts (cif) 14Q ?I500 62,682 80,713
Food 1 3 7 20,000
Fuel and energy 946 7,70 1097
Capital goods 3,513 l7,350 2,268

"I
Export price index (2000=X)O) 97 151 174 02 03 04 05 OB 07

Import price index (2000=?JO) 07 131 152 mExpciis lmpcfts

Terms o f trade (2000=00) 90 115 114

BALANCE o f PAYMENTS

(US$ millions)
' 1988 1998 2007 ' 2008
Currentaccount balance toGDP(%) I
Exports of goods and services ?I965 54,591 69,781
Imports o f goods and services 13,481 65,845 83,398
Resource balance -1516 -?I254 -13,6l7
Net income -668 -2,138 -4,400
Net current transfers l7 1Q3 6,430 7,3Q
Current account balance 659 -1061 6,992 -0,705 -12

Financing items (net) 2,640 l7.83 qso -15

Changes in net reserves -1579 -0,201 -485
Memo:
Reselves including gold (US$ miNions) 1765 21578
Conversion rate (DEC, /ocalAJS$) 606.5 13,268.0 16,666.2 16,450.0

E X T E R N A L D E B T and RESOURCE FLOWS

(US$ millions)
'
1988 1998 2007 ' 2008
Compositionof 2008 debt(USSmill.)
Totaldebt outstanding and disbursed 617 22,458 23,865 26,158
IBRD 0 0 0 0
IDA 60 851 4,549 5,074
Total debt service 3 10% 1249 1344
IBRD 0 0 0 0
IDA 0 5 64 75
Composition o f net resource flows
Official grants 79 236 657 776
Official creditors -1 1044 1279 185
Private creditors 0 -366 -88 -77
Foreign direct Investment (net inflows) 8 1671 6,700 9,579
Portfolio equity(net inflows) 0 0 6,243 -578 -.
11.741
World Bank program
Commitments 427 973 1097
Disbursements 254 748 592 A - 18RD E - Bilateral
Principal repayments 1 30 37 8 - IDA D - O W mrlSlateral -
F Rivate
Net flows 253 78 555
C-IMF -
G Shcrt-tmm
Interest payments 5 34 38
Net transfers 248 684 57

Note:This table was produced from the Development Economics LDB database W9IO9

62
MAP SECTION
 IBRD 33511R1
102°E 104°E To 106°E 108°E 110°E
To To Babao
Kunming

VIETNA M
Kaiyuan
To
Tiandong CHINA
Ha
Giang Cao Bang
4
PROVINCE CAPITALS 5 To
Lao Cai
Re Nanning
Lai Chau Town
1 d 9
NATIONAL CAPITAL 3 Bac Can
8 22°N
22°N To
RIVERS Tuyen
Quang
10 Lang
Son
Hepu
Bla 7 Thai
2 c k Yen Bai Nguyen
MAIN ROADS 13
Dien Son La Viet Tri 12 Vinh Yen 14
RAILROADS Bien Phu 11
Bac Giang
15
6 Bac Ninh
To HANOI 17 Hai Duong Ha Long
PROVINCE BOUNDARIES Muang Xai
Hoa Binh 16 18 19 Hai Phong
21 Hung Yen 20
INTERNATIONAL BOUNDARIES
Ha Nam 22 23
Thai Binh
Nam Dinh
Ninh Binh 25
Ma 24
20°N 26 20°N
To
PROVINCES: Luang
1 Lai Chau 32 Da Nang LAO Prabang
Thanh Hoa

2
3
Dien Bien
Lao Cai
33
34
Quang Nam
Quang Ngai
PEOPLE'S 27
Gulf
4 Ha Giang 35 Kon Tum D EM . REP. of Hainan I.
(China)
5 Cao Bang 36 Gia Lai
A Vinh
Tonk in
6 Son La 37 Binh Dinh
7 Yen Bai 38 Phu Yen

n
Ha Tinh

n
8 Tu Yen Quang 39 Dac Lac 28

a
9 Bac Can 40 Dac Nong 18°N To 18°N
Khammouan

m
10 Lang Son 41 Khanh Hoa
11 Phu Tho 42 Binh Phuoc
12 Vinh Phuc 43 Lam Dong Dong Hoi

C
29
13 Thai Nguyen 44 Ninh Thuan

o
14 Bac Giang 45 Tay Ninh

r
d
15 Quang Ninh 46 Binh Duong Dong Ha
To

il
16 Ha Noi 47 Dong Nai Savannakhet 30
17 Bac Ninh 48 Binh Thuan THA ILA ND Hue

le
18 Hung Yen 49 T.P. Ho Chi Minh

r
19 Hai Duong 50 Ba Ria-Vung Tau 31
32 Da Nang

a
20 Hai Phong 51 Long An 16°N 16°N
21 Hoa Binh 52 Tien Giang
22 Ha Nam 53 Dong Thap Tam Ky
33
23 Thai Binh 54 Ben Tre
24 Ninh Binh 55 An Giang Quang Ngai
25 Nam Dinh 56 Vinh Long 34
26 Thanh Hoa 57 Tra Vinh Ngoc Linh
(3143 m)
27 Nghe An 58 Kien Giang
35 Kon Tum
28 Ha Tinh 59 Can Tho
29 Quang Binh 60 Hau Giang 37
30 Quang Tri 61 Soc Trang 14°N
Central 14°N
Pleiku
31 Thua Thien Hue 62 Bac Lieu 36 Quy Nhon
63 Ca Mau
Highlands
38
Tuy Hoa
CAMBODIA 39

Buon Ma
Thuot
41
40 Nha Trang
Gia Nghia
12°N To Da Lat 12°N
Kampong Cham 42
To Dong
Xoai 43 44
Kampong
Chhnang Phan Rang-
45 Thap Cham
Mekong

Tay Ninh
47
Thu Dau46
Mot 48
Bien Hoa
Gu l f 51
49
Ho Chi Minh City
Phan Thiet
53
of 55 Cao Lanh Tan An 50
Th a i l a n d Long Xuyen 52 My Tho
Vung Tau
Phu Vinh Long Ben Tre
VIETNAM Quoc 59 56
10°N Rach Gia Can Tho 54 10°N
lta

58 60 Tra Vinh
Vi Thanh 57
De

This map was produced by

61 Soc Trang
the Map Design Unit of The
g

World Bank. The boundaries, 62 n

ko
Bac Lieu
colors, denominations and
Me
Ca Mau
any other information shown 0 50 100 150 200 Kilometers
on this map do not imply, on 63
the part of The World Bank
Group, any judgment on the
legal status of any territory, 0 50 100 150 Miles
or any endorsement or
acceptance of such
boundaries.
104°E 106°E 108°E

JANUARY 2010