Since 2001, the Vietnamese government has acknowledged the need to increase generation capacity in the electricity sector. With unprecedentedly , the electricity industry, however, commonly fails to deliver, especially during peak hours and dry seasons. It is reported that 鈥榠n the whole country there were 3,000 blackout incidents due to system overloading during the first 7 months of 2008鈥�, equivalent to 鈥�14 blackouts a day鈥� (). As a way to mitigate this chronic electricity shortage, the industry鈥檚 biggest player, Electricity Vietnam (EVN) has to buy in all that is produced domestically and import from neighbouring countries such as Laos and China. Yet, not only cannot EVN satisfy its primary objective of ensuring a secure electricity supply, but it also suffers significant annual financial losses of hundreds of million dollars. EVN claims that too low average pricing of electricity is the cause of this loss. In addition, audit reports reveal that EVN鈥檚 diversification policy had caused further losses.

The inefficiency in infrastructure investment and inadequacy in organizational management have caused anger amongst the public, creating an extremely negative attitude towards the traditional monopoly structure of the electricity sector. Utilising a popular measure, policy makers therefore choose to apply the 鈥榤arketisation鈥� or liberalization model that is, in theory, similar to the liberalization model that has been implemented in the UK and EU since the 1990s. The main reasons behind the policy are: 1) to assist the government in infrastructure investment; 2) to expose EVN to competitive forces through encouraging private and foreign investment which would force it to improve its financial and operational performance; and 3) to provide affordable and stably-priced electricity. These 3 major objectives are thought to be the outcomes of introducing competition to the traditional monopolistic market structure. This causal link is, however, usually assumed rather than discussed and tested.

Actors in the Electricity Sector: Government and Policy-making
Under the Electricity Law of 2004 and the Prime Minister鈥檚 decision in 2005, the sector is moving towards a competitive generation market (with a single buyer), a fully competitive wholesale market and a competitive retail market. However, the liberalisation process of Vietnam鈥檚 electricity sector has been slow and painful. The master plan for sector reform has been written and rewritten several times. However, there are critical contradictions between the co-existing policies. First, in 2007, the Prime Minister declared that due to national security, the Vietnamese government needs to hold 100% ownership in the electricity transmission lines and large generation companies, and at least 50% ownership in medium-size generation companies. The state-owned companies will take up major positions in the sector. EVN is destined to be the single buyer, while PetroVietnam (gas-fired) and Vinacomin (coal-fired) have monopoly control of key fuels for thermal power generation. The structure leaves the market that is open to entry too small or too unattractive for foreign and large domestic private companies. The decision effectively closes the door to a proper liberalised sector as laid out by the Electricity Law.

Second, there is contradiction between the establishment of a competitive generation market as outlined by the Electricity Law and the signing of dollar-pegged Power Purchase Agreements (PPAs) between EVN and foreign power producers. Under such PPAs, these producers do not face any competition even when the generation market is open. In Europe, it has been ruled that PPAs are incompatible with liberalised markets. These contradictions in government policy undermine regulatory stability and worries foreign and private investors. This incoherence of sector policies makes investment even more risky in a business environment, which is already seen as high-risk.

International Agencies and Policy-pushing
Erdogdu (2011), who examined the electric power sector liberalization in 63 countries, from 1982 to 2009, shows that despite economic differences, a number of developing countries are progressing towards complete reform at a similar pace to developed countries. The key reason for this is that they are more inclined to accept World Bank loans in order to expand their capacity, and liberalization of the electric power sector is one of the conditionalities of such loans (). A similar process can be observed in Vietnam. So far, the World Bank has made 16 loans to the energy sector in Vietnam, of which only 23% are for infrastructure purposes, while 77% is for sector reform (authors鈥� calculations based on World Bank data). The latest loan for a reform project, worth $200 million, was approved by the Bank in March 2012. The project especially targeted 鈥榚lectricity tariff reform鈥� and 鈥榙evelopment of a competitive power market and subsidy reduction鈥� (). The pressure on the (MOIT), the main recipient of World Bank loans, is therefore high, so that policy-makers are highly influenced by the constant background noise from the World Bank. Even though the Bank gives important assistance to the country for development projects, its policies and decisions are still controlled by major donors such as the US, UK and France, whose economic interests are built into these projects. It is not certain that the new policy proposal is also in the economic interests of Vietnam.

Competition and the Issue of Inefficiency
Bad managerial practices should be considered as one valid cause for the inefficiency of EVN and the bad image of state-owned companies in the public鈥檚 eyes. Another issue of inefficiency in the sector is the quality of the transmission system. The report by the Electricity Regulation Authority of Vietnam forecasted that in 2012, the electricity industry would be able to meet national demand. However, in major urban cities, there were still blackouts as a result of system overloading, which was designed for only 77% of the current generation capacity.

From 2001 to 2011, electricity supply grew in parallel with electricity consumption per capita. In 2012, there was a surge in power production but little change to actual electricity consumption (Figure 1). While system losses decreases consistently, the annual technical loss averaging 12% of output is still too high. In a World Bank鈥檚 report from 2011, Vietnam only ranks at 88 out of 125 countries on quality of electricity supply (based on system losses). Thus any efforts in increasing generation would be inadequate without properly maintaining and upgrading the transmission system.

Figure 1: Changes in Electricity Consumption, Production and System Losses in Vietnam from 2001 to 2012Sources: Consumption per capita and T&D losses data from World Bank Data Archive, Electricity Production data from Enerdata Yearbook, Calculation by Author

Since the beginning 2012, the government has tried to combat the issue of operational inefficiency by changing the organizational structure of EVN to avoid unprofitable businesses and lack of investment incentives. To avoid financial loss, it also increased the price. In response to public anger at the waste of taxpayers鈥� money on inappropriate investment, EVN鈥檚 Chairman was removed from his position. His bad managerial practices include losses in business diversification and significant overdue debts with PetroVietnam and Vinacomin. Possible cases of corruption are not yet revealed or officially judged. Any efforts in creating competition and improving efficiency will be wasted if the roots of the problems are ignored, such as bad management of the corporation, inadequacy in infrastructure investment and alleged corruption.

The number of participating generators increased from 29 to 77 in the first year after the creation of Competitive Generation Market (CGM) in 2012. However, the increasing number of generators does not necessarily signal the increasing competitiveness of the wholesale market as the sector is dominated by SOEs. In addition, from 2020, with two nuclear plants in operation, the share of generating capacity by nuclear is expected to increase from 1.5% in 2020, to 6% in 2025 to 20-25% by 2050 (). And as expected from the Prime Minister鈥檚 decision in 2007, these nuclear plants will be state-owned. The future structure of the market is almost pre-determined, hence making it unattractive for private investors.

The Issue of Affordability
In 2011 the Prime Minister agreed to adjust the electricity price on the basis of actual costs, resulting in gradual price increases until the average prices would truly reflect the costs. Within one year of the Prime Minister鈥檚 decision, the price increased by 15.28%. EVN estimated that the 2012 price was around 62% less than the market price, for some inputs like gas, less than the production costs and was at an unsustainable low level compared to other countries. Yet, there are three other factors that will continue to push up the price of electricity in the short and medium term.

Firstly, there is the annual increase in base salaries. The base salary increased by 26% in early 2012 to make up for inflation in 2011 of 25% and by 13.6% in 2011 to make up for inflation of 11.75% in 2010 (calculations based on , 2012). Input costs will increase and so will the electricity price. Secondly, the international price of oil, coal and gas inputs to electricity generation is likely to continue to rise, and the devaluation of the Vietnamese Dong will make these price rises even greater. Thirdly, the operation of new nuclear power plants in 2020, in contrast to what many people believe, will not reduce the price, because of the huge debt incurred in its construction will have to be paid off through the electricity price ().

Therefore, the retail price, if decided by the market mechanism, will sharply increase in the future – and it will constantly fluctuate under pressure of changes in input prices and the exchange rate. The clearest consequence of such increases is a continuous rise in living costs, which will hit poorest families the hardest. It will also increase costs for companies and so possibly have a negative effect on GDP.

The increase in the electricity price after the Prime Minister鈥檚 decision in 2011 shows that the government wants the sector to be able to finance itself. When the government budget is tightened and subsidies are re-allocated, negative economic and social impacts are likely to incur, hence offsetting the marginal financial gain by the withdrawal of subsidies. Simply, raising prices does not constitute an improvement in the economic situation.

The root causes of the sector鈥檚 issues need to be addressed thoroughly, as foreign and private investors do not have incentives to invest without government support. The leader in power market liberalisation – The UK government – has now embarked on reversing the its liberalization process, bringing the wholesale market back to central planning. While competition is commonly believed to be the product of liberalization and the driving force of an efficient market structure, the case of Vietnam illustrates that liberalization does not necessarily foster competition, and competition alone is not the only answer to the sector鈥檚 issues.

Works Cited

• (Accessed: June 2012)
• (ERAV)
• Erdogdu, E. (2011), The impact of power market reforms on electricity price-cost margins and cross-subsidy levels: A cross country panel data analysis, Energy policy, Vol. 39 (2011), pp. 1080-1092.
• (EVN)
• .
• Hall, David, Stephen Thomas, Violeta Corra (2009). (PSI) for a conference at Paramadina University, Jarkata, 19th January, 2010
• Lovells (2009). (Accessed: November 2011).
• (MOIT).
• Nguyen, X.T. and Dapice, D. (2010), Vietnam鈥檚 Infrastructure Constraints, Vietnam Program, Ash Institute for Democratic Governance and Innovation, Harvard Kennedy School.
• U.S. Commercial Service (2012), (Accessed: March 2013)
• World Bank (2012), (Acccessed: June 2012)
• World Bank (2013), .
• World Nuclear Association (2012), 鈥樷��.

Jenny Tue Anh Nguyen is a visiting Post-Doctoral Fellow at the Center for International Development, Harvard Kennedy School.

Photo: Street Wires in Hanoi, Vietnam. By Mike Hauser.

For years, policy-makers have used the , based on per capita gross national income, as the measurement of their country鈥檚 development. The aspiration to move up the scale assumes that: 1) economic growth is the international standard measurement of development; and 2) the more one produces, the better one鈥檚 quality of life will be. The history of political movements and economic policies has witnessed both successful and failed attempts to move up the scale. The countries that have accelerated their economic growth have been celebrated worldwide and the general perception is that the people in these countries now enjoy a more resourceful life. This attitude towards economic growth has created a presumption that pro-growth policies observed in more developed countries and actively promoted by international institutions could be applicable in other developing countries. Can this classification ever be misleading?

criticise the idea that GDP growth translates into better well-being and social welfare. Similar to this argument is on the repercussion of GDP growth for inequality. Alternative measurements have attempted to capture the social aspects of growth to compliment the GDP measure, such as the Human Development Index (HDI) and the Genuine Progress Indicator (GPI). But all these measurements are subject to data and methodological errors. They can paint a broad picture of macroeconomic policy outcomes but fail to detail local development.

In addition to the universal view of development as growth, a very specific perspective on how growth can be achieved has prevailed over the past three decades. Since 1990, developing countries have been under strong pressure to introduce market-oriented reforms in public service sectors as a universal model for economic growth. This process has mainly consisted of attempts at privatisation, but has also included the separation of vertically integrated companies to enable future liberalisation along the lines of the liberalised markets of the global North. This liberalisation is seen as a modernising reform, which is expected to enable countries to achieve economies of scale in production needed for economic and social development.

Since Vietnam鈥檚 1986 reforms, GDP per capita has grown at , , and daily lives have become full of high-tech products and services that none of us could have dreamt of before. The country has moved up from the low-income category to the lower-middle income category. Yet along the race, the country has not been able to equally improve lives of the most vulnerable. In many rural areas, household TVs rarely get switched on because electricity is too expensive. A family of five only uses a 5-litre tub of dirty water for all purposes for the whole day, equivalent to only . All the additional wealth the country had gained had not been transferred to the village; basic living standards could not be any more different between rural and urban areas. When access to fundamental services is not ensured, increased access to capital and goods may seem meaningless.

It is then crucial to think of economic policies as adaptable to different country contexts, rather than suggesting an alternative indicator that ranks or categorises countries across a uniform scale.

The Global Spread of Liberalisation and Its Legitimacy
The period between World War II and the 1970s saw regulatory stability in Western Europe and other OECD countries, which favoured public ownership in public infrastructure services that ensured social justice and addressed the strategic positions of these sectors for economic development (). Since the collapse of the Soviet Union and the rebirth of neoliberal policies led by the UK鈥檚 Margaret Thatcher and the US鈥檚 Ronald Regan, there was a strong argument against government intervention in retail sectors, and later in public infrastructure and services. This was based on a neoclassical model of public services liberalisation. Liberalisation in general consists of several elements including corporatization, unbundling, marketization, competition, deregulation and privatisation. Governments and municipalities usually expect privatisation and liberalisation to attract private investment, which in turn would benefit their own finances as they could use the proceeds of a sale to reduce their debts or deficits.

Starting in 1983 in Chile, an international wave of liberalisation of public services in developing countries was enabled by the strong endorsement of developed donor countries and prescriptive conditionalities imposed in development projects managed by the World Bank and other international financial institutions. , more than 90 countries accepted liberalisation of the energy market as a conditionality. The Bank has also increased its lending to healthcare, but continues to promote privatisation and commercialisation in healthcare in developing countries. Yet, this model only focuses on financial aspects (such as fees and insurance for private financing) . The spread of liberalisation policies in developing countries is associated with the 鈥榃ashington Consensus鈥�, a term . The consensus was a one-size-fits-all development model that promoted liberalisation, privatisation and deregulation in developing countries (see ).

It is gradually becoming clear that liberalisation has not led to improvements in private sector performance. The World Bank鈥檚 own evaluation of its efforts in 2009 shows that only a quarter of healthcare privatisation projects in sub-Saharan Africa were successful. in Abuja, Nigeria in 2008 revealed inequality in client treatment and poor standard of hygiene as well as involvement in counterfeit drug trading. This process has directly increased workload and changed working conditions for the already-insufficient healthcare labour force. Moreover, private investors are unlikely to find it profitable to invest in distribution networks in underdeveloped regions with only a few households (see ). Argentina and India also . Therefore, even after privatisation, governments continue to play a key role in in ensuring adequate service delivery, quality and investment. Governments often end up regulating the services via concessional loans or other purchasing agreements, or through renationalisation when multinational companies abandon the services.

The implicit view of many advocates of liberalisation is that the policy remains the best possible way of organising public infrastructure services, and is only obstructed by ideological motives and vested interests. There is clear evidence of another ideological factor at work, and that is public mistrust of the private sector. The initial waves of privatisation in the 1980s and 1990s attracted widespread public support as a reaction against the experienced inefficiencies, cost and unaccountability of many public sector institutions, especially in former communist countries. But by 2003 the World Bank and others acknowledged that privatisation had become deeply unpopular, observing that there was a decreasing faith in markets as a provider of solutions to infrastructure problems. Few politicians now supported privatisation, which was seen as benefiting the elites and corrupt interests at home and abroad, and as fundamentally unfair, both in conception and execution (see and ). By then, private sector interest in energy infrastructure had declined and many multinational companies had withdrawn, .

State intervention is a part of many successful economic development experiences. In the USA itself, industries rely on 鈥榗heap and abundant oil鈥�, which is subsidised by 30% of the . Japan rejected the neoliberal doctrines of the US advisers and went on to become the world鈥檚 biggest manufacturing and most technologically advanced economy in the 1990s. Even the most famous believers in this doctrine : Reagan 鈥榞ranted more import relief to US industry鈥� than former presidents, while Thatcher authorised the same public spending budget as her left-wing predecessors.

Is Creating Markets for Private Participation the Only Answer?
Achieving public benefits from a liberalised system depends on a system of regulation, which is expected to create incentives to make up for the relative lack of pure market mechanisms for competitiveness. As noted earlier, the efficacy of regulation even in Northern countries has been called into question, and the regulation of company behaviour is .

The experience of Chile is worth examining. In 1982, during its military dictatorship, it became the first country in the world to introduce unbundling, privatisation and liberalisation. It is generally regarded as a good example of a liberalised system with as good a system of regulation as one can expect. However, the experience shows a stream of problems associated with the inability of regulators to deliver expected benefits. The problem of under-investment gradually became apparent, as the regulatory system effectively 鈥溾��. This led to a serious energy crisis in 1998-99, initially triggered by a drought, whose effects were compounded by technical failures, delays and problems with the coordination and transparency of the private generating companies. The crisis highlighted 鈥�.鈥� The investment problem continued: from 2000 onwards there was very little investment in new capacity, and another energy crisis arose in 2007-09 when the impact of a drought and gas shortages was worsened by the unavailability of three key power plants, leading to a 1000% increase in prices. The government had to to subsidise fuel and electricity prices, and make heavy use of expensive diesel generators. The 2009 report on Chile concluded that the experience of 2007/08 showed that Chile still has real problems with security of supply, and that 鈥溾��.

Assumed to follow automatically from the operation of the market mechanism centred on profit-seeking firms is the realisation of efficiency gains. However, this widespread belief that the private sector is always more efficient than the public sector is not supported by empirical evidence. This evidence includes , which compared dozens of public and private services operators all over the world, and found no significant systematic difference between public and private in terms of efficiency. More recent studies confirm this in the electricity, water and healthcare sector in developing countries. A found that levels of efficiency in the region were quite independent of the degree of vertical integration or the presence of a private actor. A more , the Public Private Infrastructure Advisory Facility (PPIAF), did find that private infrastructure services companies were more likely to cut jobs, and show productivity gains because of this. However, the study found no evidence of any benefits for the sectors in terms of higher investment, and indeed there was evidence both of higher prices and of actual reductions in numbers of household connections. Any productivity gains were thus distributed to owners as increased returns on capital. Furthermore, the review concluded that: 鈥淢ost cross-country papers on utilities find no statistically significant difference in efficiency scores between public and private providers. As for the country specific papers, some do find differences in performance over time but these differences tend to matter much less than a number of other variables.鈥�

An Unrealistic Vision
Liberalised systems of the North are themselves now the subject of controversy. In the USA and Europe, expectations of lower prices have been disappointed and replaced by resentment at high prices. In addition, an increasingly prevalent view is that the system is unable to deliver the kind of investment needed for dealing with climate change. While the institutions of liberalisation look set to remain, its benefits are no longer taken for granted (see and ).

Although the experiments with privatisation and liberalisation have been costly and their effects not desirable, the image of the state has been distorted by venture capitalists who focus on their private gains and on general lack of confidence in the state. Regulating markets may be an instant relief to the undesirable symptoms of the already liberalised markets but what should be considered as a long term strategy is how to construct a generation-to-generation growth of the core services to provide the foundation for a better society and its social participants. This task is simply too important, too big and too risky to leave in the hands of the profit-seeking private sector and market forces. highlights that 鈥榤arkets are, in the end, man-made devices for utilitarian purposes, not a force of nature that we should not try to resist. If they end up serving the interests of only a tiny minority, as is increasingly the case, we have the right – and indeed the duty – to regulate them in the interest of greater social good鈥�. The global historical evidence has shown that this universal model of liberalisation for growth has not led to the expected results. To the extent that there was ever a trend of global liberalisation movements in the 1990s-2000s, the current trend is rather static or in some countries, a reverse trend. There is no need for developing countries which have not liberalised to feel out of line: they are very much part of the mainstream.

Jenny Tue Anh Nguyen is a PhD student in Economics at the University of Greenwich.