A heavy load

IN 1894 Prince Henri d’Orléans published a book of his journey through France’s then-sprawling empire. His florid account was largely upbeat. Yet it soured along the northern coastline of Vietnam, where he lamented the “dilatory attitude of a red-tape administration” when it came to exploiting the area’s coal reserves.

Now red tape is again impeding foreign investment in Vietnam’s energy sector. The country’s electricity supply is fairly reliable—if compared with Myanmar and Pakistan. But daily life is punctuated by brownouts which analysts say will intensify unless officials reform a state-dominated power market and entice foreign companies to build more power plants. That also has sobering implications for the ruling Communist Party, which is trying to revive a slow economy and boost its sagging legitimacy.

In July an amendment to Vietnam’s 2004 electricity law reaffirmed a long-stated plan to create a competitive electricity market. But the government is scrambling to raise the roughly $5 billion in investment it needs each year to meet the soaring energy demands of Vietnam’s 90m people. The chief problem is the stranglehold that Electricity Vietnam (EVN) and other state-owned companies have over the power grid.

Vietnamese law requires EVN to sell much of its electricity at an unprofitable average of seven cents per kilowatt-hour. It means the company racks up debts with fellow state behemoths supplying coal and gas. A senior EVN executive recently told a state-run newspaper that losses between 2009 and 2011 exceeded $940m and that a 5% price rise in August will hardly improve things.

With energy demand growing by up to 14% a year, the situation cannot hold. The country is running down its easily exploitable reserves of coal and gas and by 2015 will become a net energy importer. Vietnamese investors do not have the money to bankroll the building of the sophisticated thermal plants needed to boost power output and replace Vietnam’s fleet of clunkers. (A plan to develop from scratch about 10,700 megawatts of nuclear capacity by 2030 is a pipe dream.) Yet given low electricity prices, few foreign investors see any profit in financing new plants.

Prices need to rise sharply, but cheap power is an essential component of the party’s social contract. Leaders worry that steep increases could spark unrest. The country’s poorest are increasingly sensitive to cost-of-living increases.

And so it remains unclear quite how far Vietnam will go with its plan to create a competitive and more transparent power market, one in which the state is supposed to play a less dominant role. Officials at EVN and other state-owned power producers benefit from state regulation, sometimes through corrupt practices, even as the companies they work for lose money. They have a vested interest in blocking structural reform. What is more, the government is wary of international financial exposure. It has not forgotten the fiasco at Vinashin, a huge state-owned shipbuilder. It ran up debt and in 2010 missed its repayment of a $600m loan arranged by Credit Suisse. The default forced a downgrade of the country’s sovereign debt.

Vietnam has so far been wary of giving generous incentives to foreign investors for power-grid development, says Oliver Massmann, a lawyer in Hanoi who specialises in energy. However, he warns, the lack of foreign investment in Vietnam’s energy future may mean that brownouts ultimately become rolling blackouts. That would compel international factory owners to consider migrating to Thailand, Indonesia and other countries in South-East Asia with more reliable supplies of power.

Meanwhile, an increasingly stressed electricity grid threatens to act as a brake on the economy at a time when many Vietnamese already blame the government for economic mismanagement. The last thing it wants is people taking to the streets in frustration over power cuts.