A solar power project. Viet Nam needs US$150 billion to invest in power projects in the next 10 years, equal to half the country’s current gross domestic product (GDP). — VNA/VNS Photo

Viet Nam needs US$150 billion to invest in power projects in the next 10 years, equal to half the country’s current gross domestic product (GDP), which raises demand for international financing.

Dang Huy Dong, head of the Institute for Planning and Development, provided this estimate and emphasised given the current size of the domestic capital market, for at least the next five years, the economy cannot meet the capital requirements for the development of the power sector.

Dong made this statement at the seminar on International Financing for Independent Power Projects on Wednesday in Ha Noi.

Since 2015, Viet Nam has transitioned to a low-middle-income country which reduces its access to concessional sources of finance from development partners such as Official Development Assistance (ODA).

“Therefore, capital can only be mobilised from international financial institutions,” Dong said.

The international capital market is very large with tens of thousands of billions of US dollars, more than enough to satisfy Viet Nam’s capital need. However, Dong said such capital flows are highly competitive, running on supply-demand principles and certain standards, which requires borrowers to comply.

“Capital, like other commodities, is traded at different prices. The cost of capital is mainly determined by the risk of the investment; high risk, high cost requires high return and vice versa,” Dong said.

In February this year, the Politburo issued Resolution No. 55-NQ/TQ on Viet Nam’s strategic orientations for energy development through 2030 and with an outlook to 2045.

To meet the target of a total capacity of all power sources reaching 125-130GW and total power output of 550-600 billion kWh by 2030, the resolution has laid out the task of researching and completing the funding mechanism for the power sector.

Nguyen Duc Hien, vice chairman of the Central Economic Commission, said attracting private and foreign direct investment in the power industry as well as in independent power projects includes many difficulties while funding from the State budget and ODA sources is limited.

Hien said loans from domestic credit institutions are restrained because energy projects require large capital sources but the central bank’s requirements on credit policy hamper lending to this sector. In addition, foreign direct investment (FDI) in the power sector also has some problems in the field of foreign exchange management such as foreign currency conversion, money transfer and exchange rate risk.

“Finding and reaching international financial and credit institutions for power projects, especially independent projects, is a necessary requirement,” Hien said.

With a total investment of nearly $13-15 billion per year, the size of the Vietnamese market is attractive enough for investors, Hien said but noted Viet Nam needed to attach importance to the role of the national credit rating as it will help the Government, financial institutions and businesses reduce the cost of raising capital in international markets.

International capital flows only move to countries that meet three criteria, including large market size; profitability at an attractive level; and low risk.

Hien said the country should standardise the regulation on power purchase agreements (PPA) in accordance to international practices because this is the most important factor that determines the cost of capital. The regulation also should have a reasonable risk-sharing and allocating mechanism, avoiding pushing risks to investors.

Besides, the electricity pricing mechanism also needs to be appealing enough to investors, ensuring essential profitability to attract international capital flows, Hien said. — VNS