60438 The World Bank Asia Sustainable and Alternative Energy Program Vietnam State and People, Central and Local, Working Together The Rural Electrification Experience March 2011 The World Bank Asia Sustainable and Alternative Energy Program State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience Defne Gencer, Peter Meier, Richard Spencer, and Hung Tien Van March 2011 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience ©2011 The International Bank for Reconstruction and Development/The World Bank 1818 H Street NW Washington DC 20433 USA Telephone: (202) 473-1000 All rights reserved First printing: March 2011 Manufactured in the United States of America. Photo credits: Hung Tien Van This document is a product of the staff of the World Bank Group. The findings, interpretations, and conclusions expressed in this report are entirely those of the authors and should not be attributed in any manner to the World Bank, or its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the data included in this publication and accepts no responsibility whatsoever for any consequence of their use. The boundaries, colors, denominations, and other information shown on any map in this volume do not imply on the part of the World Bank Group any judgment on the legal status of any territory or the endorsement or acceptance of such boundaries. Contents Foreword .....................................................................................................................................vi Preface ........................................................................................................................................vii Acknowledgments ......................................................................................................................ix Acronyms and Abbreviations .....................................................................................................x Executive Summary ...................................................................................................................xi Part A. Vietnam's Rural Electrification Story A1 Background ............................................................................................................................2 A2 Recovery .................................................................................................................................7 A3 Preparation .............................................................................................................................8 A4 Taking Off.............................................................................................................................. 11 A5 Moving to Better Regulation ...............................................................................................20 A6 Focus on Quality and Regulation .......................................................................................27 A7 Consolidation for the Last Mile ..........................................................................................30 A8 The Road Ahead ...................................................................................................................36 Part B. Measuring the Impact of Rural Electrification in Vietnam B1 Background and Methodology ...........................................................................................40 B2 Findings of the Survey ........................................................................................................42 B3 Impacts of Rural Electrification on Households ................................................................48 iii iv Contents Part C. Lessons Learned from Vietnam's Rural Electrification Experience C1 Introduction ..........................................................................................................................58 C2 Lessons from Vietnam's Success in Rural Electrification .................................................59 C3 Recommendations to Other Countries in Light of Vietnam's Experience .......................68 C4 Lessons from World Bank Experience ................................................................................70 Appendix. The 1999 Rural Electrification Policy Paper ...........................................................75 Bibliography and Further Reading ...........................................................................................79 Boxes 1 Vietnam's Doi Moi Program ..............................................................................................................................9 2 Examples of Strong Demand and Willingness to Pay for Electricity Across Vietnam ......................................12 3 Methods Used for Financing the Rapid Growth in Rural Electrification, 1993­97...........................................15 4 Business Models for Rural Electrification........................................................................................................17 5 Key Provisions of Prime Minister's Decision on the Rural Electrification Proposal .........................................21 6 Government Decree on Electricity Activity and Uses--Key Provisions Concerning Rural Electricity ..............22 7 Electricity Law Provisions on Rural Electrification, 2004 .................................................................................23 8 Results of the First Rural Energy Project ........................................................................................................28 9 Tariffs Before and After Decision 21 ................................................................................................................31 10 Transfer of Network Assets Created under RE2 Project .................................................................................33 11 Service Agents ................................................................................................................................................35 12 Illustration of the Welfare Benefits of Appliance Ownership--the Case of the Electric Rice Cooker .............49 13 A More Qualitative Discussion of the Impact of Rural Electrification on Incomes ..........................................54 14 Rural Energy Project ICR Survey Findings on Rural Electrification and Poverty ..............................................56 Figures History of Rural Electrification in Vietnam ...................................................................................................... xiii 1 GDP and Electricity Consumption, 1985­2009 .................................................................................................3 2 Electricity Production and Consumption in Vietnam, 1971­2009 ......................................................................4 3 Per Capita and Total Electricity Consumption, 1976­2009.................................................................................4 4 , Per Capita Electricity Consumption and Per Capita GDP 1985­2009................................................................5 5 MV and LV Network Investments, by Funding Source, 1993­98 ....................................................................16 6 Main Actors in Rural Electricity Supply between 2000 and 2009 ...................................................................35 7 Electrification Status in Surveyed Provinces, 2002 .........................................................................................43 8 Changes in Household Energy Use over the Years .........................................................................................43 9 Electrification, by Province, 2005 ....................................................................................................................44 10 Appliance Ownership, by Years of Electrification ............................................................................................45 11 Fraction of Lumens Provided by Incandescent Lighting, by Expenditure Quintile ..........................................46 12 Monthly Electricity Consumption, by Expenditure Quintile .............................................................................46 13 Average Consumption, by Duration of Connection .........................................................................................46 14 Annual Energy Expenditure, VND 1,000, by Length of Electrification, 2008 ...................................................47 Contents v 15 Demand Curves for Lighting and Television Viewing .......................................................................................50 16 Maximum Capital Cost per Connection to Attain Minimum 10% ERR ...........................................................50 17 Returns to Education .......................................................................................................................................51 18 Returns to Education, Ethnic Minority Households ........................................................................................51 19 Returns to Education at the Commune Level .................................................................................................52 20 Annual Household Cash Income and Total Expenditure, 2002­08 ..................................................................53 21 Changes in Expenditure Shares, 2002­08 ......................................................................................................55 22 Poverty Rate in Vietnam ..................................................................................................................................55 23 Poverty Alleviation and Electrification..............................................................................................................56 Tables 1 Select Millennium Development Goal Indicators for Vietnam ...........................................................................3 2 Commune and Household Electrification Rates, 1996­2009 ............................................................................6 3 Per Capita and Aggregate Electricity Consumption in Vietnam, 1976­85..........................................................7 4 Results of EVN's Rural Electrification Pilot for Three Representative Communes ..........................................13 5 Electrification Rates, 1998­2004 .....................................................................................................................24 6 Electrification Costs: Results from the Rural Energy Project ..........................................................................25 7 Management Structure in the Rural Power Distribution Sector, as of January 2004 ......................................25 8 Communes Electrified and Households Connected under the Rural Energy Project......................................28 9 Electricity Access Rates, 2004­08 (percent) ...................................................................................................29 10 Tariffs Effective as of March 2010....................................................................................................................32 11 Reading and Study Time Spent by Children of Various School Ages ...............................................................52 12 Average Household Incomes .........................................................................................................................54 13 Percentage of Households Running a Home Business or Service .................................................................54 14 Poverty Rates in Communes Surveyed ...........................................................................................................56 The printed version of this report includes a DVD of the documentary film The Last Mile: Bringing Electricity to the Countryside of Vietnam, produced as part of the broader activity to record Vietnam's achievements in rural electri- fication. The documentary can also be viewed at http://www.youtube.com/watch?v=pmrEY0jwoXM. Foreword The 15 years that the Government of Vietnam and the World Bank have been work- ing together on the electrification of Vietnam have witnessed remarkable changes. From the early days of our collaboration, when the power system had just been uni- fied, through to today, when more than 95 percent of all households have access to electricity, there is a compelling story. It is not only a story of policies and institu- tions, or of financing and tariffs. It is also a story of Vietnam's growth as a nation and as a society built on the unifying force of electrification. From the beginning, the people of Vietnam have made clear their message that getting electricity into their houses has been of the utmost importance to them. They wanted it because they saw its potential to improve their lives in so many ways: at work, at school, in the hospi- tals, and at home. And Vietnamese people are not shy in demanding what they want from the communes, districts, provinces, and central ministries--and in the national assembly, leaders have heard the message. Our initial steps may have been faltering, and it would be wrong to suggest that it has been a completely smooth ride. There is more to be done to connect the 5 million people who still don't have a regular supply of electricity, as well as to improve the supply to those who do have it. Even as I write, many continue to strive to go the last mile and complete our electrification mission. I recommend this book to all those interested in bringing electricity to the people of the developing world and am happy to share Vietnam's experience with any and all who are interested. On behalf of the Government of Vietnam, I extend an invitation to all countries that want to learn more to come and see for themselves firsthand. We would be delighted to see you. Hoang Trung Hai Deputy Prime Minister vi Preface This book chronicles the development of Vietnam's rural · The first was an effort, funded by the Bank Budget electrification program. It tells the story of how the Viet- and the Asia Sustainable and Alternative Energy Pro- namese government conceived, developed, scaled up, gram (ASTAE), to document the history of Vietnam's and improved its program. It also discusses the role the rural electrification program. This activity was under- government, the country's main utility, local authorities, taken by World Bank staff with input from interna- local communities, and the country's international devel- tional consultants. opment partners played in the pursuit of the electrifica- · The second was an exercise funded by ASTAE, the tion agenda. Energy Sector Management Assistance Program (ESMAP), New Zealand Aid, and the Swedish Inter- The book provides an overview of the strategies that national Development Cooperation Agency (SIDA), fueled the impressive expansion of access to electric- and managed by Bank staff. This activity set out ity in Vietnam, the development of the institutions that to examine the impacts of rural electrification on implemented the program, and the passage of policies households in Vietnam, based on results from a and laws that made growth of such scale possible. It series of three longitudinal surveys undertaken in also discusses results from the ground, and particularly 2002, 2005, and 2008, as well as subsequent analy- the impacts of electrification on people's lives. It con- sis carried out by the Vietnam Institute of Sociology cludes with an attempt to draw lessons from Vietnam's and international consultants. This book summarizes experience. a selection of findings of the multiyear survey that were deemed relevant for its own purposes. A more This activity is intended to benefit multiple audiences in detailed and comprehensive publication presenting different ways. The target audience includes policy mak- the findings and analysis resulting from that exer- ers and electrification practitioners from other countries cise is also under preparation, and will be published facing a similar rural electrification challenge; World Bank separately. task teams working on similar operations; and deci- sion makers and practitioners in the energy sector in The book comprises three main parts: Vietnam. · Part A, made up of eight sections, provides an over- These lessons drawn and subsequent recommenda- view of Vietnam's rural electrification experience, tions are intended for policy makers in other developing which can be divided into six distinct periods. These countries facing the challenge of expanding access to sections are organized as follows: electricity who may want to learn from Vietnam's experi- · Section A1 provides the general background on ence. Takeaway messages from the World Bank's project the impressive achievements in the rural elec- experience in supporting the rural energy sector may be trification effort in Vietnam, and provides a brief of interest to World Bank staff developing similar proj- introduction to the government's efforts, which ects in other countries. Finally, this book may be useful are supported by the government's international for decision makers and energy sector practitioners in partners in the later years. Vietnam, through documenting the context of the overall · Section A2 discusses the period covering the electrification effort in Vietnam, providing an overview of postwar years from 1976 to 1985, when the issues, and discussing possible approaches for address- primary focus was recovering from the devasta- ing remaining challenges. tion of the war. · Section A3 introduces the government's efforts This book draws on investigations and analyses under- for scaling up rural electrification from 1986 to taken as part of two separate activities: 1993. vii viii Preface · Section A4 covers the period from 1994 to 1997 , period also covers the implementation of the when electrification accelerated significantly. RE2. This period also marks the beginning of the · Section A7 discusses 2009 onwards, along with World Bank's involvement in Vietnam and the the challenges associated with going the "last start of the preparation of the early projects in mile" in Vietnam's electrification program. the energy sector. · Section A8 discusses the tasks and challenges · Section A5 covers the period from 1998 to 2004, facing Vietnam's rural electrification program as when institutional change and regulation of the it goes forward. sector was initiated, in step with other reforms in the power sector. This period was also host · Part B summarizes a select set of findings from the to the implementation of the government's and multiyear survey and discusses the impact of rural the World Bank's Rural Energy Project (REP) and electrification on Vietnamese households. the beginning of the preparation of the Second Rural Energy Project (RE2). · Part C draws lessons from the experience of rural · Section A6 discusses the continued progress electrification in Vietnam, based on the information between 2005 and 2008, including a focus on presented in parts A and B. It discusses the lessons quality and ensuring efficiency in the sector learned from the perspectives of the government and investments in network rehabilitation. This and the World Bank. Acknowledgments The primary authors of this book are Defne Gencer, Peter " documentary film, "The Last Mile. They include Do Huu Meier, Richard Spencer, and Hung Tien Van. It also draws Hao, Vice Minister of Ministry of Industry and Trade; Le on material prepared by consultants Anil Malhotra and Tuan Phong, Deputy Director, Energy Department of Douglas Barnes, and a panel survey carried out by the Ministry of Industry and Trade; Do Van Chien, Vice Chair, Vietnam Institute of Sociology. People's Committee of Tuyen Quang; Nguyen Minh Hieu, Vice Rector, Electricity University; Nguyen Manh Hung, The book benefited from feedback provided by the Viet- Deputy General Director, EVN; Trinh Ngoc Khanh, Direc- nam energy team, particularly Anh Nguyet Pham, Beatriz tor of Rural Electrification and Business Department, Arizu, and Ky Hong Tran. The authors are especially thank- EVN; Nguyen Thanh Duy, Director of Power Company No. ful to reviewers Susan Bogach, Luiz Maurer, and Dana 2; Nguyen Phuc Vinh, Director of Power Company No. 1; Rysankova. The authors would like to recognize editor Nguyen Van Nhiem, Director, Power Service, Soc Trang; Rebecca Kary, graphic designer Laura Johnson, and con- Trinh Cong Huy, Worker, PC2; Nguyen Bach Hai, Power sultant Laurent Durix for their contributions to the pro- Service, Soi Tien; Tran Huy Quang, Farmer, Tuyen Quang; duction of this publication. Lien Hanh, Sawmill Owner, Yen Lac; Tran Van Lam, Shrimp Farmer; Soc Trang; Nguyen Ngoc Cam, Teacher, The authors would like to acknowledge the leadership of Soc Trang; and Duong Ngoc Kim, CEO of FIMEX Shrimp Hoang Trung Hai, Deputy Prime Minister. Processing Factory, Soc Trang. The authors are also thankful to Jennifer Sara, Vijay Jag- The team is greatly appreciative of ASTAE, ESMAP the , annathan, Junhui Wu, and Hoonae Kim of the World Bank Government of the Netherlands, New Zealand Aid, and for their encouragement in pursuing this topic. SIDA for providing the resources to make this activity and its results possible. The team working on the broader effort to document Vietnam's achievements with respect to rural electrifica- Unless otherwise credited, photos were contributed by tion would like to recognize all those who contributed Hung Tien Van. to this activity and the production of the accompanying ix Acronyms and Abbreviations ASTAE Asia Sustainable and Alternative Energy NGO Nongovernmental organization Program NPT National Power Transmission Company CEG Commune electricity group OPEC Organization of Petroleum Exporting CFL Compact fluorescent lamp Countries DEG District electricity group PC "Power Company" before February 2010 and "Power Corporation" thereafter DoIT Department of Industry and Trade PPC Provincial People's Committee DPO Development Policy Operation RARE Remote Area Rural Electrification ERR Economic rate of return RE2 Second Rural Energy Project ESMAP Energy Sector Management Assistance Program REP Rural Energy Project EVN Vietnam Electricity SIDA Swedish International Development Cooperation Agency FRR Financial rate of return TWh Terawatt-hour GDP Gross domestic product US¢ U.S. cents GOV Government of Vietnam Vhour Viewing hours GSO Government Statistics Office VAT Value added tax GWh Gigawatt-hour VHLSS Vietnam Household Living Standards HH Household Survey IBT Incremental block tariff VND Vietnamese dong IoS Institute of Sociology KfW Kreditanstalt für Wiederaufbau kLmh Kilolumen-hour Exchange Rates kV Kilovolt US$1 equivalent kWh Kilowatt-hour Effective dates Vietnamese dong LDU Local distribution utility December 31, 1986 80 December 31, 1988 2,800 LV Low-voltage December 31, 1994 11,003 MPI Ministry of Planning and Investment December 31, 1998 13,892 MTR Mid-Term Review December 31, 2005 15,893 MV Medium-voltage December 31, 2009 18,474 MW Megawatt December 31, 2010 19,498 x Executive Summary The rural electrification effort in Vietnam has been one of The preparation period (1986­93) saw the implemen- remarkable achievements, with the share of households tation of the Doi Moi reforms, which had a significant with electricity access growing from 2.5 percent in 1975, impact on all aspects of the Vietnamese economy. Dur- to 96 percent by 2009. Through a remarkable and unpar- ing this period, the household electrification rate grew alleled effort, the country succeeded in providing access from 10 percent to 14 percent. Although there wasn't to more than 80 million people over 33 years; the number a large jump in the proportion of households electrified of people with access to electricity grew from 1.2 million per se during this period, the policy decisions made and in 1976 to about 82 million in 2009. steps taken subsequently had major repercussions on rural electrification. Highlights included the increase in The efforts of Vietnamese authorities addressed a wide rural incomes as a result of Doi Moi, the development of array of challenges along the way and successfully bal- several large power plants across the country, the build- anced the sometimes-competing interests of local, pro- ing up of medium-voltage (MV) networks, and the start vincial, and central governments. Government programs, of the construction of the 500 kV transmission line run- combined with support from the government's develop- ning the length of the country, which would also serve as ment partners in the later years, created an institutional a unifying force. The foundations laid by these important structure for rural electricity supply, which bodes well for developments would enable significant progress in rural long-term sustainable development. electrification in the subsequent periods. Vietnam's rural electrification program and its priorities The taking off period (1994­97) witnessed remarkable have evolved over time. The issues encountered during growth in electrification, with the share of households the course of the rural electrification effort were con- with access to electricity increasing from 14 percent to stantly changing, and the challenges that had to be tack- 61 percent. A notable feature of the progress during this led were daunting. The country did not have one unified period was the strong demand-driven, bottom-up process master plan at the outset. It started one way, and has that characterized rural electrification. By all accounts, continually evolved in the way it tackled the challenges, people really wanted to gain access to electricity and which themselves were changing. The challenge of the they were prepared to pay for it. The local and central early stages--providing simple connections--evolved government authorities responded to the strong societal into one of securing quantity and quality of supply, demand for electricity. Indeed, by the mid-1990s, elec- while meeting ever-burgeoning urban and rural energy tricity access rates had become one of the key indicators demand. in the yearly socioeconomic development assessment of every commune, district, and province. Meeting the increase in demand for electricity access had become The History of Rural Electrification possible with the completion and coming into operation in Vietnam of the last unit of the Hoa Binh Hydropower station, as well as other relatively large power plants, and the 500 A brief summary of the various phases of Vietnam's rural kV transmission line, making additional energy available electrification experience is provided below. throughout the whole country. Other important develop- ments during this period included the establishment of During the postwar recovery period (1976­85), when Electricity of Vietnam (EVN)1 in 1995 and the setting of the household electrification rate grew from 2.5 percent clear nationwide electrification targets by the govern- to 9.3 percent, the Vietnamese economy was in the pro- ment in 1996. During this period, the government and cess of recovering from 30 years of almost continuous the World Bank began preparing their first energy sector war. The power system consisted of underdeveloped and project together. isolated systems, and electricity supply was only avail- able for cities and large industries. Providing electricity 1. When it was established in 1995, EVN's proper name was Elec- service to rural households was secondary to electricity tricity of Vietnam. Its name was changed to Vietnam Electricity in supply for productive uses, especially irrigation of agri- 2004, when it was converted into a holding company, referred to as cultural areas. " "corporation, in the Vietnamese context. xi xii State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience After a time of rapid growth in electrification, the most financed by a US$150 million IDA credit, was approved accessible sources of financing had been depleted, and during this period. As part of the preparatory work for this issues with the management and operation of rural elec- project, technical specifications for rural electricity sys- tricity networks had begun to emerge. There were inade- tems in Vietnam were developed, and these standards quacies in two important areas: institutional arrangements were formally adopted in the later years. and technical specifications for rural networks. The roles of EVN and its Power Companies (PCs) with regard to dis- There was a significant shift in the institutional arrange- tribution were limited to bringing electricity to commune ments and sources of financing for rural electrification. centers, and there was no national policy on how to con- EVN began a pilot program for operating LV systems, and nect households beyond that point, or what institutional started acquiring MV systems that had been financed by arrangements should be followed. Consequently, a wide other entities. Under the service agent model, created variety of operational and management arrangements , under REP local community members maintained LV for delivering electricity emerged. The flexibility provided systems on behalf of the PCs, carried out simple repairs, by the availability of multiple methods for financing and and handled collections. This helped ensure account- building LV networks contributed to the rapid pace with ability within local communities, minimize nonpayment, which these networks were built in such a short time. On reduce system losses, and significantly lower the costs the other hand, the variety of entities that were allowed of system operation and management for the PCs. to build the LV networks also meant that there was diver- gence in their institutional capabilities, and in the manner Meanwhile, the quality and reliability of electricity sup- in which the LV networks were managed, operated, and ply was emerging as an important issue. Between 2005 maintained. The low efficiency with which some of those and 2008, the government chose to focus on quality networks were run, combined with the lack of financial and regulation, in addition to continued expansion of controls on the operation of the system, in turn had an electricity access. This period could be characterized by effect on how much consumers ended up paying for elec- the enforcement of regulations, a shift in focus from net- tricity. There were no minimum technical requirements work extension to rehabilitation, and direct government for LV networks, which meant that those built around this support for extending electricity access, particularly to time were built according to divergent technical specifica- minorities and those in remote areas. The government's tions. This, in turn, was to lead to issues that had to be focus was not only on increasing electrification rates, but tackled in the subsequent periods. also on ensuring efficiency and addressing institutional shortcomings in the sector. During the next period, there was a move toward bet- ter regulation (1998­2004). Although the growth in elec- These concerns, in turn, would be the focus of the RE2 tricity access rates--from 61 percent of households to developed as part of the government­World Bank coop- 87 percent over the course of seven years--was slower eration on rural energy. As a result of the government's than during the previous period, this period was host to a actions and support from donors, there was a major over- series of fundamental changes in the sector, which would haul of the ad hoc management and operational arrange- pave the way for sustained success in the coming years. ments for rural networks through the creation of legally A significant feature of this period is more pronounced recognized local distribution utilities (LDUs). By the end government involvement in determining the course of of the period, 5,600 LDUs had emerged. While most of rural electrification, through defining strategies for the them had limited financial resources, these LDUs were planning, implementation, and management of rural facing pressure to continue investing, and over time, it electrification; setting the legal framework in the sector; was becoming evident that many of the newly formed and engaging with its international partners for the imple- LDUs were simply "too small to succeed" and could not mentation of its strategic priorities. In addition to impor- be financially viable in the coming years. Policy makers tant actions, such as the prime minister's Decision 22 began to recognize that consolidation of the operation of and government Decree 45, which set out institutional LV networks had to take place. and financial arrangements for the electricity system, this period also witnessed the passing of the country's first The period from 2009 onwards can be characterized as electricity law and issuing of a policy paper on rural elec- one of consolidation for the last mile, signifying the trification. Another critical government initiative at the focus on ensuring sustainability of the rural electricity time was the setting of a ceiling tariff for rural custom- supply business, while pushing for greater accountability, ers as a step toward establishing financial controls over working to determine the most appropriate strategies for the rural electricity supply business. The government and extending access to those without electricity, and ensur- the World Bank's Rural Energy Project (REP), which was ing the affordability of electricity for the poor. xiii History of rural ElEctrification in ViEtnam Timeline with main government actions and evolution of household electrification. Executive Summary xiv State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience An important milestone of this period was the prime min- of the MV distribution network over the medium ister's Decision 21, issued in February 2009, stipulating a term. Reliability of supply is of concern in some rural unified national tariff for all residential consumers, along- areas, since existing systems are becoming unable side an incremental block tariff (IBT) arrangement, with to meet existing and projected load requirements. a new lifeline block. The decision also allowed the take- In some instances, the MV systems have become a over of financially weak LDUs by the PCs, now renamed bottleneck in the power flow from the transmission power corporations. In fact, a significant consolidation of system to the LV systems in the communes. the rural electricity distribution and retail business took place, with smaller and financially weak LDUs being 2. Ensuring sustainability of the operation of rural absorbed by the larger PCs. The Vietnam Distribution electricity networks. Code was approved in 2010. It outlined the rights and Decision 21, issued in February 2009, made it possible obligations of PCs and their customers, including provi- for PCs to take over the management and assets of any sions concerning quality of service obligations and con- LDU that is financially weak. The challenge going forward sumer protection. will be to ensure that the transfer of the responsibility for managing and operating existing LV systems from finan- As of 2010, it was estimated that 99 percent of the com- cially weak LDUs is paced according to the absorption munes and 96 percent of the households in Vietnam capacity of the PCs. To ensure this, it may be necessary were connected to the grid. Going forward, the tasks to find the most effective ways of building institutional lying ahead include the rehabilitation of the electricity capacity in PCs, in order to equip them to manage and networks in about 3,000 communes, determining the operate rural electricity networks in an efficient and sus- most suitable way of achieving the target of electrifying tainable manner. all the country's households, ensuring sustainability of the operation of rural electricity networks, and continuing 3. Expanding access to those still without it. to make sure that electricity is affordable to the poor. About 1 million households, mainly in mountainous areas and on islands, are still without access to electricity. The objective of expanding electricity access to unserved The Way Forward rural and mountainous areas of the country was included in the National Energy Development Strategy issued in Going forward, a number of tasks need to be fulfilled as . December 2007 This strategy envisages that all rural part of Vietnam's rural electrification program. households will have access to electricity by 2020. The challenge will be identifying the most appropriate way 1. continued investment in existing distribution networks. of electrifying the remaining households, most of which In the years ahead, a significant amount will need to be are in poor, mountainous, or remote areas, and have low invested in the rehabilitation of existing LV systems to consumption levels. reduce losses and the upgrading of the MV networks to allow them to meet growing demand. 4. continuing to make sure electricity is affordable to the poor. · Investment in the rehabilitation of existing LV sys- As the country expands access to a greater number of tems. Many of the small LV systems developed in people, chances are that there will also be a greater num- rural communes in the 1990s still remain relatively ber of poor people connected to the system. The prime weak. These systems need to be rehabilitated in minister's Decision 21, issued in February 2009, estab- order to reduce losses, and to increase the qual- lished a clear framework for providing for the poor. The ity and quantity of power supply. This would mean decision stipulates an IBT with a lifeline block with a lower that a significant amount of resources and effort will electricity price paid for the first 50 kWh of consumption. need to be dedicated to the rehabilitation of LV net- Also as part of the decision, the PCs were allowed to works in about 3,000 communes. Based on prelimi- recover operating costs through the tariffs charged to all nary estimates by EVN, bringing existing LV systems consumers in their territory, in effect, cross-subsidizing up to current Vietnamese standards may cost some- low-consuming households by other consumers. If, in where between US$2 billion and US$3 billion. the future, policy makers, for any reason, wish to make · Investment in upgrading MV networks. The growth subsidies more transparent, they will need to make a in LV systems and increased demand in rural areas determination as to how this can be achieved through a will also imply a greater need for the improvement new mechanism. Executive Summary xv There are hard choices that need to be made with respect · The survey showed that most of the appliance to Vietnam's rural electrification program going forward. uptake occurred in the first few years of electrifica- The country's policy makers have to determine how to allo- tion, with consistent growth in consumption for the cate the scarce resources among their various priorities. first few years (as the most desired appliances were They have to determine how to allocate resources among acquired), but stabilized after five to six years. Mean- investments in rehabilitating LV systems, upgrading MV while, in the survey findings, appliance ownership networks, and expanding electricity access to those did not appear to be as strongly correlated to income remaining without it, while also setting aside resources as some might have expected. Appliance ownership to continue to provide for the poor and build institutional increased across the board over the course of the capacity for sustainable management and operation of survey years. The survey showed distinct patterns of the rural networks. It is clear that improving the existing appliance ownership correlated to years of electrifi- cation. It was observed that the longer a household distribution systems would bring benefits to a larger num- was electrified, the more likely it was to have a color ber of people. On the other hand, completing the last mile television, a rice cooker, and a fan. of the access agenda and connecting the unserved popu- · The survey showed that, over the years, not only lations are an important priority for the government. The did the rate of electrified households increase, but question is how this can be done in a sustainable manner, also the amount of electricity used by electrified and where the resources will come from. households--and remarkably so. As households purchased larger appliances over time--starting with lighting and continuing on to radios, televisions, Impacts of Rural Electrification refrigerators, and electric fans--electricity consump- in Vietnam tion increased in all households. The survey found that even though household electricity consumption , Under the World Bank's REP a monitoring and evaluation grew for all expenditure quintiles, there was sig- plan was set up in order to quantify the social and eco- nificant variation in electricity consumption across nomic impacts of rural electrification, and to assess the expenditure quintiles. welfare effects of rural electrification under the project. · The survey showed a reliance on incandescent light- With funding support from SIDA and New Zealand Aid, ing among the poorest. Incandescent bulbs have a the Institute of Sociology of the Vietnamese Academy of lower initial cost, but normally have a higher lifetime Social Sciences was commissioned to conduct a longi- cost than compact fluorescent lamps (CFLs). tudinal survey of the beneficiaries of the project, cover- · As part of an exercise to estimate the economic ing rural households with varying social and economic benefits of electrification, demand curves for light- conditions. As part of the longitudinal survey, a panel of ing and television usage were derived. This analysis households was surveyed three times over a six-year showed that there was rather high willingness to period--the first in 2002, the second in 2005, and the pay for lighting, and up to quite high levels of light consumption. third in 2008. A representative sample of 30 households · In a self-assessment of the impact of electricity, was drawn from each of 42 communes in 7 provinces.2 rural households that gained reliable electric service for the first time reported higher levels of well-being. The survey and the associated analysis showed that The respondents felt that electricity had brought there were multiple benefits for rural households accru- great benefit to their lives. Over a wide range of indi- ing from REP and the broader rural electrification effort in cators, they indicated that their lives had improved Vietnam. The findings of the survey are largely consistent since electrified--more time for reading, entertain- with results from studies by other researchers and inter- ment, for television, and in higher expectations national development agencies. about educational outcomes for children, particularly for higher education. Other survey findings that merit attention and may inform · Even though the survey did not present strong future policy are summarized below. evidence that would establish causality between electricity and education of adults and children, the 2. Ha Giang (Northeast), Lai Chau and Hoa Binh (Northwest), Quang survey does indicate a correlation between electrifi- Binh (North Central Coast), Quang Nam (South Central Coast), Dac Lac (Central Highlands), and Soc Trang (Mekong River Delta). In 2004, cation and the ability of people to take best advan- Lai Chau was split into two provinces: Lai Chau and Dien Bien. tage of the education they have received. The survey xvi State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience shows a strong impact of electrification on the rela- by diesel users that electric equipment is much cheaper tionship between income and years of schooling, to run than diesel engines, which suggests that it may and it shows that this change occurs within a few be worthwhile for rural electrification projects to provide years of electrification. Indeed, the survey shows assistance for equipment replacement. However, such little difference between households electrified for schemes are likely to function only if power quality can more than 10 years, and households electrified for be assured. between 5 and 10 years. Moreover, according to commune-level results, there are statistically signifi- cant differences between electrified and unelectri- Lessons from Vietnam's Rural fied households in terms of people's ability to make Electrification Experience the best use of the education they have received, even when the impact of other infrastructure is con- Needless to say, some portions of the Vietnamese expe- trolled for. rience with rural electrification are specific to the social, · Similarly, although the causality in the relationship political, and cultural context of the country, and hence, between rural electrification and income was diffi- some parts of Vietnam's experience may not be easy to cult to establish in the context of this survey, it is replicate elsewhere. An example is the unique opportu- widely accepted that rural electrification can impact nity presented by the focus on unification of the coun- rural incomes through a variety of farm and nonfarm try after the war, which in turn contributed to the broad channels. Over the course of the survey, expenditure support for the 500 kV line to connect the northern and shares on food dropped sharply, while shares on edu- southern parts of the country. Another is the abundance cation and other discretionary items increased: this of generation resources that became available in the again follows the general international experience early 1990s, which, combined with the completion of the on the consequences of improvement in economic 500 kV line, made it possible to respond to the society's well-being. There were also remarkable changes in strong demand for electricity. income composition. · From survey results, it is difficult to be definitive Certain features of Vietnam's experience, especially the about the direct poverty reduction impacts of electri- ways in which the government managed to tackle the chal- fication, but there appears to be some evidence. lenges that emerged, can provide useful lessons for other countries. The lessons learned are organized in two parts, The results of the survey confirm some of the main one from the perspective of the government, which can assumptions made at the time of the REP design, namely, inform strategies of other developing countries in their that the welfare benefits of rural electrification signifi- efforts to expand access to electricity, and the other from cantly exceed the costs of extending the grid in most the World Bank experience, which can be of relevance remote rural areas; that once the grid had been extended during the development of projects in the future. to remote communes, the connection rates would grow rapidly over the early years; and that average electricity Vietnam's success in rural electrification can be explained consumption would increase over time. by a range of factors, including the following: The findings of the survey may also provide useful inputs · Unwavering government commitment that is respon- to a wide range of important decisions, from the prepara- sive to strong demand from society. tion of electricity consumption forecasts to determining · Long-term vision, gradual approach, prioritization, whether there is a need to provide subsidy for connec- and flexibility. tion to the poorest as part of a wider poverty reduction · Sharing of costs by all stakeholders and mobilization program. For instance, with the remaining unelectrified of various resources. households having significantly higher poverty rates than · Clear allocation of responsibilities among all levels of the electrified households, targeted assistance can be government, sector participants, and consumers. directed at these households to ensure that appliances · EVN's emergence as a strong champion for rural and light bulbs of appropriate design are provided (that electrification after 1999. is, fluorescent rather than incandescent bulbs), and that · Making technical choices suitable for sector status the costs of connection are reimbursed. Stimulating pro- and priorities. ductive use in rural areas remains a problem: the survey · Ensuring the economic and financial viability of rural notes the constraints in replacing diesel-powered equip- electricity supply while establishing and maintaining ment with electric motors, most notably the high first financial controls. cost involved in replacing equipment. It is well understood Executive Summary xvii Important lessons learned from Vietnam's experience are keep political pressure up to expand to unsuitable areas summarized below. Further detail is available in part C. at a minimum. Lesson 1: Vietnam's success can be credited to the Lesson 4: The presence of cost sharing among different unwavering national commitment to rural electrification. parties has been an important contributor to the success A significant feature of Vietnam's experience has been the of Vietnam's rural electrification program. In addition to bottom-up manner in which the drive for rural electrifica- making financing and building of rural systems easier, tion materialized. There was very strong demand for elec- cost sharing helped create a sense of ownership by the tricity across Vietnam, but strong demand is not unique parties involved. The provision of financial support by pro- to this country, and one can easily argue that strong vincial, commune, and district authorities, as well as by demand for electricity is present almost everywhere in the prime minister's office, was a critical element of suc- the world. What was distinctive about the Vietnamese cess in ensuring the rapid increase in access to electric- experience was how this strong demand translated into ity in rural areas. action and, eventually, results. The local and central gov- ernments listened to the people and were responsive to Lesson 5: A well-formulated and properly communi- their strong desire for electricity access. Local and cen- cated program with achievable goals and investments tral government authorities made rural electrification a from multiple sources has proved to be very effective. priority and mobilized their resources to make it possible. The issuance of policy documents outlining the principles Local authorities' responsiveness to the strong societal underlying this program was useful in formalizing the demand, and their choice to accord adequate priority government's commitment and sending a clear message to this issue, and the culmination of this into a national to all stakeholders that government resources would be agenda item were critical factors for success. There was available to backstop local resources. persistent dedication and collaboration between central government policy makers and provincial, district, and Lesson 6: An important factor in Vietnam's success was commune level authorities, as well as EVN and local that the responsibilities were shared among various communities. Once rural electrification targets were set, stakeholders. This collaboration-based approach can be and pledges to support rural electrification were made, credited with making it possible to move forward with policy makers stood by them and never backtracked from the rural electrification effort on all fronts, and possibly what was originally promised. much faster than what could have been achieved had the effort relied on the resources and capabilities of one cen- Lesson 2: The key to Vietnam's success has been flex- tral entity. That the government offered a lot of flexibility ibility, adaptability, and willingness to correct mistakes, in terms of constructing, managing, and operating local but above all to continue to move forward. The rural elec- electricity networks in the early years made a critical trification effort involved an evolving strategy that was impact on the expansion of access to electricity. anchored by very clear objectives, implemented gradu- ally, and fine-tuned over time to reflect changing priori- Lesson 7: The policy and regulatory measures introduced ties. The government maintained a strategic vision for by the government, equipping EVN with the mandate achieving its electrification targets, and the core tenet of and resources it needed to perform its leadership role this vision was achieving it through the extension of the in a commercially sustainable way, were critical compo- national grid. Different approaches were adopted for dif- nents of Vietnam's success in rural electrification. EVN's ferent periods, each with their own challenges. All of this emergence as a strong champion for rural electrification was done without losing sight of the overarching goal in the late 1990s was an important factor for ensuring that electrification is about national solidarity and is a the technical quality of the rural energy networks and high-level political goal. sustainability of rural electricity supply going forward. In the case of expansion of access through large-scale grid Lesson 3: Transformation in the rural sector needs to be extensions, a precondition of sustainability is to secure seen in a long-term context. A long-term vision, combining interest, commitment, and dedication from the country's steps to be taken gradually, based on a realistic assess- main utility(ies). This can be achieved by making it pos- ment of what can be achieved within one's means, has sible for the utility to participate in rural electrification been a critical factor of success. The communication with on terms that enable it to meet its commercial objec- stakeholders concerning the assessment of what can be tives. The utility should be equipped with a clear man- achieved in light of resources available can help maintain date and provided with the resources it needs to perform costs at reasonable levels, manage expectations, and its leadership role in electrifying rural areas through grid extension. xviii State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience Lesson 8: In Vietnam, the MV-LV split, and the presence and evaluation in general, will be useful inputs into future of multiple actors in the mid-1990s proved very effec- policy actions. These results, through validating (or tive in facilitating the rapid expansion of access, but the negating) initial assumptions and giving an indication of absence of uniform technical standards at that time also emerging implementation issues, can help ensure that led to issues that had to be addressed in the future. Uni- the policies and decisions reflect and address realities fied national technical standards were introduced in the on the ground. late 1990s, when electricity access rates had exceeded 60 percent, and they made a significant impact on improv- ing the quality of the power supply, which reduced tech- Lessons from World Bank nical losses, tariffs, and costs. Experience in Supporting Rural As electricity access levels change, so do sector priori- Electrification in Vietnam ties. Early on in a rural electrification effort, when access With the lifting of the trade embargo in 1994, the World rates are low, the priority is to deliver simple connections to as many people as possible. With higher electrifica- Bank began providing support to the government's vari- tion rates, focus can shift to ensuring quality of supply. ous economic development programs. The World Bank's There are trade-offs and long-term consequences associ- involvement in the power sector began in 1995, with the ated with various combinations of options for allocating preparation of the Power Sector Rehabilitation and responsibilities and technical requirements for building Expansion Project, followed by the Power Development rural networks. What matters is the selection of combina- Project in 1996. When the preparation of the Power Devel- tions that are appropriate and feasible, in light of the cur- opment Project began in 1996, 50 percent of Vietnam's rent circumstances, sector priorities, and capacity of the households had already gained access to electricity. sector participants. Technical standards are essential for ensuring quality of supply and long-term sustainability of The fundamental principle underlying the Government of a system. If there are multiple entities that can build and Vietnam and World Bank's partnership on rural electrifica- operate rural electricity networks, policymakers will need tion was the provision of support to the achievement of to be aware of the trade-offs involved and, based on the the government's objectives as part of a programmatic electrification status and sector priorities, determine the approach. At the outset of cooperation in the rural energy most appropriate time and manner to introduce uniform sector, four major projects were planned to assist the standards for rural networks. implementation of Vietnam's rural electrification pro- gram. During the design of the cooperation in the rural Lesson 9: As Vietnam's experience demonstrates, ensur- energy sector, the government, EVN, and IDA worked ing the sustainability of the rural electricity supply busi- together in formulating projects for the realization of the ness is critical. The culture of payment is likely to make government's priorities and identifying solutions to prob- a significant difference in ensuring the success of rural lems. The cooperation began with addressing the most electrification. Although the very culture of payment or urgent issues at the time, and carefully preparing for the specific institutional models applied in Vietnam may not subsequent and more difficult interventions. A brief sum- be directly replicable in other countries, the principles mary of these projects and their primary areas of focus of cost sharing, local involvement in management and is provided below. operation of rural electricity networks, and particularly bill collection, can be easily adopted by other countries. · In the case of the Rural Energy Project, approved in May 2000 and involving a US$150 million IDA credit, Lesson 10: While allowing reasonable returns to inves- the focus, consistent with government preferences, tors on the one hand, attention should be paid to making was entirely on rapid expansion of access to rural new connections and use of electricity as affordable as areas without electricity, and specifically on increas- possible on the other. When grid extension covers cus- ing the number of basic connections. It was decided tomers who cannot afford to pay for the full cost of con- that the issues of rehabilitation of distribution net- nections, there should be mechanisms to compensate works, quality of service, and institutional aspects the investors. would be taken up in later operations. · Indeed, with the Second Rural Energy Proj- Lesson 11: Results and information from the implemen- ect, approved in November 2004 and providing a tation of rural electrification efforts, as well as monitoring US$220 million IDA credit, the focus shifted to the Executive Summary xix rehabilitation of existing LV systems, while also be seen for what it is--ideally, a step in a longer-term addressing further expansion of access, especially in program. communes that were already connected, and devel- · Extensive time and resources should be set aside to opment of institutions to ensure service delivery at work out important aspects of project design, and the retail level. for consultations. · In 2008, the Rural Distribution Project was initi- · Engaging all stakeholders and ensuring their buy-in ated, with US$150 million in IDA financing. This five- early in the process is essential for the long-term year project was designed to improve the reliability success of rural electrification. and quality of the MV networks bringing electricity · It is essential to mobilize local experience and knowl- to local distributors and build the capacity of regional edge as much as international experience. PCs to act as independent participants in the power sector. Lesson 15: A key factor in the success in implement- · In May 2009, the provision of another US$200 million ing World Bank projects focused on rural electrification in the form of Additional Financing for the Second projects has been flexibility. A certain degree of flexibility Rural Energy Project was approved by the World needs to be built into the project scope and implementa- Bank's Board of Executive Directors. This additional tion arrangements. As long as the changes are consistent financing was intended for addressing a shortfall of with the objectives and principles agreed at the outset, financing resulting from increased costs associated the process for their review should be determined ahead, with original project activities, scaling up project cov- and should be kept as simple as possible. Project out- erage, and rehabilitating LV and MV networks in a come indicators should reflect the assessment of what greater number of communes. can be achieved. Some lessons from the World Bank project experience in Lesson 16: Another success factor for the implemen- Vietnam are presented below. tation of World Bank projects has been the building of effective partnerships between EVN and local authori- Lesson 12: The World Bank project experience with rural ties, and communities, and specifically through the electrification in Vietnam has shown that the establish- sharing of costs and responsibilities among stakehold- ment of a well-defined program, where fundamental ers. Cost-sharing arrangements need to be carefully principles, institutional arrangements, and the use of designed to ensure the ownership and dedication of the financing have been agreed on in advance, helps ensure related parties, but not surpass their payment capacity. efficiency and effectiveness during implementation. The It is important to determine the most appropriate ways programmatic approach that was adopted enabled the of combining different funding sources and allocating delivery of new projects in a relatively short period. costs proportionally. By contrast, it is advisable to allo- cate responsibilities in a way that will not hamper the Lesson 13: There should be a clear, yet flexible, roadmap coordinated construction, management, and operation of for achieving the government's objectives and for show- the systems themselves. ing how World Bank support should support them. This roadmap should be the basis for designing specific inter- Lesson 17: Participation of the local people needs to ventions. Instead of designing a large project to address encompass all elements of the project--from design to the whole set of issues in the rural energy sector, the operations. Ensuring local participation in all aspects of approach involving the phasing of individual projects and the project can help mobilize and maintain local support designing each project to address the most critical issue and commitment to rural electrification, while ensuring of the time, and then addressing remaining issues in a rapid pace of electrification, creating employment, later projects, has proved effective. Policy dialogue and building local capacity, and thereby laying the foundation investment operations are best run on separate but par- for the sustainable management and operation of the allel tracks, with each informing the other--hence the networks. importance of flexibility in the roadmap. Lesson 18: As a general rule, project design and imple- Lesson 14: During project preparation: mentation arrangements should make it as easy as possible for project implementing entities, and should · It is important to keep in mind that a single project be mindful of the resources and capacity of the parties can't solve all the issues in the sector, and it should involved. The implementation of all project activities by one entity, or by multiple entities with similar capabilities, should time and resources permit. Where addressing working in a highly coordinated manner, can help make the concern is not immediately possible because of the project implementation progress smoothly. In case of lack of resources, the presence of pressing needs for, mismatches between capabilities of different implement- and/or urgency of project activities, project implementa- ing agencies, efforts should be made to address them tion arrangements should be designed with a realistic through policy dialogue, technical assistance, and sup- view of what can be achieved in light of the institutional port during project preparation, to the extent possible, arrangements. 1 Part A Vietnam's Rural Electrification Story A1 Background Vietnam has witnessed remarkable change over the last and legal constraints? What roles did the central, provin- two decades. Rapid growth experienced at every level cial, and local governments play in these programs? of society has been the result, in part, of the govern- ment's commitment to liberalizing markets and invest- ing in social sectors and rural development. The building Rapid Growth in Socioeconomic of roads and other rural infrastructure; access to clean Development water, good health care, and improved primary school services; and the extension of grid electrification have all Vietnam has seen major economic growth over the past worked together to improve the quality of life for millions three decades. It is a densely populated country that, in of people in Vietnam's countryside. These complemen- the last 30 years, has had to recover from the ravages tary investments have proven synergistic. Roads have of war, the loss of financial support from the old Soviet helped rural people gain access to markets, grid electric- bloc, and the rigidities of a centrally planned economy. ity has enhanced education and the potential for more The seeds of this expansion were planted more than productive use of time and labor, and improved water two decades ago, with the launching of the renovation supplies have contributed to a healthier population. One process known as Doi Moi in 1986. Vietnam has since piece of this development agenda--providing grid elec- then witnessed a rapid transition to a globalized, market- tricity to Vietnam's rural people--has been a spectacular based social economy. The goal has been to adopt mar- success. One might even describe the program among ket mechanisms while preserving social inclusion. the best in the world. Since 1993, when the World Bank reengaged with Viet- Providing electricity to nearly all of Vietnam's rural popu- nam, gross domestic product (GDP) per capita has grown lation was achieved in a relatively short period, thanks in sixfold, and the poverty rate has been cut by three-quar- large measure to the commitment of Vietnam's govern- ters. Table 1 presents select key indicators. Living stan- ment and its partnership with the World Bank and other dards have risen fast, and the country is now moving into international donor agencies in the later years. The many middle-income status. difficulties included high costs, an institutional structure not yet oriented to rural electrification, lack of legal or Comprehensive policy reforms introduced over the past regulatory framework or laws, and multiple provincial and decade have succeeded in strengthening Vietnam's pub- local businesses already involved in electricity distribu- lic financial management and encouraging the participa- tion, using a variety of technical standards. tion of private firms in most sectors. To level the playing field, common regulations for corporate governance have Faced with this challenge, Vietnam succeeded in provid- been implemented. In addition, an ambitious equitiza- ing its rural people electricity quickly, with little dissent tion3 plan and restructuring effort have helped to trans- from all those with a vested interest in the status quo. How was this daunting task accomplished? What strate- 3. Equitization is the process of creating a joint stock company and gies did the government adopt to overcome the financial sale of shares to individuals and non­state-owned companies. 2 A1: Background 3 tablE 1 sElEct millEnnium DEVElopmEnt Goal The Power Sector as a Foundation inDicators for ViEtnam for Economic Growth The economic growth experienced during the past sev- 1993 2009 eral years is an impressive accomplishment, and it has GNI per capita played an important role in poverty reduction. But the 170 1,010 (Atlas method, US$) rapid economic growth is also at the root of many of the Poverty incidence rate (%) 58 14.5 issues in Vietnam's energy sector: growing GDP feeds increasing demand, while meeting that demand enables Under-5 child mortality 53 (1990) 24 GDP to continue to grow. (per 1,000 live births) Maternal mortality rate Since the early 1990s, electricity consumption has been 200 (1990) 56 (2008) (per 100,000 live births) growing at a rate almost double that of GDP growth. Fig- Net primary school ure 1 presents annual growth rates of total and per capita 77 (1990) 96 enrollment rate (%) GDP and electricity consumption since 1985. Sources: World Bank GDF&WDR Database, Millennium Development Goals Database. Figure 2 shows the evolution of electricity production and consumption in Vietnam during the past four decades. form many state-owned enterprises into more efficient As figure 3 shows, electricity consumption in Vietnam companies with better overall performance and financial is growing from a very low base. In 1995, total power status. To avoid a conflict of interest between manage- sales of 11.2 TWh amounted to only 156 kWh per per- ment and regulation, ownership rights increasingly have son per year. Even after growth in electricity use to 74.9 been transferred out of ministries and provinces. Such TWh--about seven times the 1995 level--by 2009, total reforms have been accompanied by Vietnam's accession per capita electricity consumption amounted to only 865 to the World Trade Organization, whose benefits have kWh per year, compared with an average of 1,883 kWh4 included lower trade barriers and the opening of service sectors to competition. 4. 2007 data. fiGurE 1 GDp anD ElEctricity consumption, 1985­2009 22 20 18 Annual growth rates of total and per capita GDP and electricity consumption (%) 16 14 12 10 8 6 4 2 0 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 Years GDP growth rate Per capita GDP growth rate Electricity consumption growth rate Per capita electricity consumption growth rate Source: World Bank staff based on EVN data and GDF and WDR databases. 4 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience fiGurE 2 ElEctricity proDuction anD consumption in ViEtnam, 1971­2009 100,000 Electricity consumption Electricity generation 90,000 Electricity production and consumption (GWh) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 Years Source: World Bank staff based on EVN data. per capita per year in East Asia and the Pacific and 1,606 dramatically--with 52 million people beginning to receive kWh per capita per year in low- and middle-income coun- electricity for the first time between 1993 and 2008. tries worldwide. As disposable incomes have grown from very low lev- As a result of the increase in the total urban popula- els in the mid-1990s, there has been strong growth in tion in Vietnam, and the success in rural electrification, energy use, particularly because of increased household the number of electricity consumers has increased appliance ownership. Figure 4 illustrates the evolution of fiGurE 3 pEr capita anD total ElEctricity consumption, 1976­2009 80,000 1,000 Total electricity consumption (GWh) Per capita electricity consumption (kWh per capita) Per capita electricity consumption (kWh per capita) 900 70,000 800 60,000 Electricity consumption (GWh) 700 50,000 600 40,000 500 400 30,000 300 20,000 200 10,000 100 0 0 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 20 20 20 20 20 Years Source: World Bank staff based on EVN data. A1: Background 5 fiGurE 4 pEr capita ElEctricity consumption anD pEr capita GDp, 1985­2009 1,000 800 Per capita electricity consumption Per capita electricity consumption (kWh per capita) 900 GDP per capita 700 GDP per capita (constant 2000 US$) 800 600 700 500 600 500 400 400 300 300 200 200 100 100 0 0 09 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 86 87 88 89 90 91 92 93 85 19 19 19 20 20 20 20 20 20 20 20 20 20 19 19 19 19 19 19 19 19 19 19 19 19 Years GDP per capita income in constant US$2,000 and per LV distribution to the main urban areas, and LV distribu- capita electricity consumption. tion in some rural areas. Distribution in the rural areas is managed by a mix of different entities, including PCs The current monthly average per capita electricity con- and local distribution utilities (LDUs), which are province-, sumption of about 25 kWh among residential users in district-, and commune-owned cooperatives or compa- rural areas is still relatively low. Per capita electricity nies supplying electricity at LV to consumers. Electricity consumption, both among urban and rural consumers, supply in rural areas is currently undergoing change to is certain to increase, as electricity use grows from make the system more commercially viable and finan- nascent levels in rural areas, and as heavy appliance use, cially sustainable. especially of air conditioners, begins to take hold among middle-income groups. A large share of electric power generation is supplied by EVN. However, in the past decade, the government has increasingly encouraged power generation by inves- Current Ownership Structure tors other than EVN. In 2002, non-EVN-owned capacity in the Power Sector totaled some 620 MW, accounting for just 7 percent of installed capacity connected to the system. In 2008, non- The main electricity provider is EVN, which owns about EVN capacity amounted to just over 5,000 MW, taking two-thirds of all generation capacity in Vietnam. Through grid connected non-EVN-owned capacity to 32 percent its subsidiary National Power Transmission Company of the national total. (NPT) and Power Corporations,5 EVN owns and oper- ates the transmission and MV distribution systems, the Rural Electrification: A Success Story 5. Until 2010, the designation "PC" stood for the three main Power Companies, which were subsidiaries owned by EVN. The major ones Rural electrification has been a critical component of were PC1 in the north, PC2 in the south, and PC3 in the center. After the government's program to eliminate poverty, redress February 2010, the Power Companies were transformed into Power imbalances in development, and improve overall welfare Corporations. PC1 made up the majority of the Northern Power Cor- levels by providing reliable lighting sources, better living poration, PC2 the majority of the Southern Power Corporation, and PC3 the bulk of the Central Power Corporation. Therefore, the term conditions, health care, and other services to the rural PC refers to Power Company before February 2010 and Power Cor- world. Dramatic increases in rural electricity access rates poration thereafter. 6 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience tablE 2 communE anD HousEHolD ElEctrification ratEs, 1996­2009 (percent) 1996 1998 2000 2002 2004 2006 2007 2008 2009 Communes 62.2 75.1 82.0 89.8 94.3 97.4 97.89 97.89 97.89 Households 50.7 62.5 73.0 81.0 87.4 92.3 93.66 93.66 96.3 Source: EVN data and Bank staff estimates. and steady reductions in transmission and distribution to ensuring good quality and reliable supply of electricity. losses of EVN and its PCs have been particularly notable This change in focus meant that investments are now achievements. increasingly directed toward rehabilitation and network reinforcement. In 1996, just over half the country's households had been electrified, and about 30 million people still had no The World Bank has been a strong partner for Vietnam access to electricity, as presented in table 2. Today, the in rural electrification. Since 1996, the World Bank sup- household electricity access rate is more than 96 per- ported the Government of Vietnam through a long-term, cent, and network coverage is 98 percent at the district results-oriented program comprising consecutive rural level, a remarkable achievement. electrification projects. Consumption in rural areas is still rather low, with annual Rural electrification in Vietnam has received support from household electricity consumption in the 500­700 kWh bilateral donors and other international agencies. In 2004, range and total rural consumption less than 15­20 per- the Agence Française de Développement provided 19 cent of the country's electricity consumption. million to EVN for rural electrification efforts in southern parts of Vietnam. The Asian Development Bank decided The dynamics of GDP growth and rural electrification in 2009 to provide Vietnam with a loan of US$151 million are complex, involving many underlying forces. Among to help the country improve electricity services through these forces are the significant investments Vietnam has increased renewable energy in poor, remote communi- made in other rural infrastructure. Rural electrification, ties with ethnic minorities. Also in 2009, Kreditanstalt roads, education, and other programs have together con- für Wiederaufbau (KfW) of Germany provided 120 mil- tributed to higher incomes, more business opportunities, lion for the rehabilitation of rural networks. The Govern- and greater educational attainment. Higher incomes, in ment of Japan has been supporting rural electrification at turn, have made electricity and appliances more afford- the provincial level, while the Organization of Petroleum able, making it easier for the country to invest further Exporting Countries (OPEC) provided US$10 million to in rural electrification. This cycle of sustainability is Quang Nam Province for rural electrification. sometimes called the "virtuous circle of development. " Rural electrification itself has a significant independent In parallel with the investment activities, technical assis- and complementary effect on income and educational tance has supported two areas: institutional and organiza- opportunities, contributing further to the virtuous circle tional development in the Ministry of Industry and Trade, of development. Rural electrification is now also seen as EVN, its PCs and LDUs; and evaluation of the impacts of a source of national solidarity. rural electrification. In the latter work, the World Bank has partnered with other bilateral donors, notably the govern- ments of Sweden and New Zealand. The central plank of International Development Partners this work has been to conduct three panel surveys--in 2002, 2005, and 2008--to analyze the impacts of electri- Over the years, the focus of donor engagement, in fication over the longer term. Some findings of this sur- continued alignment with the government's priorities, vey are discussed in part B. shifted from connecting as many households as possible A2 Recovery between 1976 and 1985 micro-hydropower plants in mountainous areas. Figure 5 Electrification rate grows from 2.5% to 9.3% shows a typical substation constructed in the 1970s and 1980s for irrigation of rice fields. During this period, the Vietnamese economy was in the process of recovering from the impacts of the war, and Based on the estimates by regional electricity supply GDP per capita was less than US$200. The power sys- companies, the share of households with access to tem was rather underdeveloped. Power supply was only electricity grew from about 2.5 percent in 1975 to 9.3 available for cities and large industries, and was provided percent. by isolated systems. Average power consumption per capita was about 45 kWh in 1976 and increased to about Example of a substation supplying power to pumping stations 65 kWh in 1985, as presented in table 3. Rural electrification centered on vital rice cultivation areas, which required electric water pumping for irriga- tion and drainage, particularly in the northern parts of the country. The installation of irrigation pumps began during this period, and went on to replace manual or animal- driven methods over the years that followed. Extension of electricity service to rural households was " secondary to "productive uses. Most electricity lines intended for irrigation pumps in rice fields bypassed communities. Residential use of electricity in rural areas, where it existed, was a by-product of power supply for irrigation. Electricity was also available to towns close to the main line of the national grid, and those near mini- and Source: World Bank staff photo. tablE 3 pEr capita anD aGGrEGatE ElEctricity consumption in ViEtnam, 1976­85 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 Per capita electricity consumption (kWh) 45 50 53 52 47 51 53 54 62 65 Aggregate electricity consumption (GWh) 2,306 2,709 2,808 2,808 2,930 3,016 3,222 3,260 3,866 4,141 Source: EVN data and World Bank GDF & WDI Central Database, 2010. 7 A3 Preparation between 1986 and 1993 Availability of Energy Sources Electrification rate grows from 10% to 14% and the Development of the Transmission and Distribution System Critical Government Actions During this period, several large power plants were A major turning point came with the Doi Moi or Renova- beginning operation. These include the 400 MW Tri An tion Policy, introduced in 1986, which had a significant Hydropower Plant in the south and Hoa Binh Hydropower impact on all aspects of the Vietnamese economy (see Plant in the north, the largest power plant with 1,920 summary in box 1). MW installed capacity, and the last unit of Pha Lai Ther- mal Power Plant in the north, bringing the plant's total The overall economic improvement brought about by installed capacity to 440 MW. Doi Moi and subsequent actions by the government also had a significant impact on rural electrification, through The additional generation capacity becoming available increasing rural incomes, improving the affordability of meant that the additional energy could be distributed electricity service extension, and making credit available to the rural areas locally. Moreover, as the electricity so that households could borrow to pay for their share supply capacity in the north began to gradually exceed of new electricity connections. Agricultural sector reform the demand there, the government began to consider under Doi Moi, coupled with policies supporting trade, options for using this additional supply. led to a boom in farm exports and a dramatic reduction in rural poverty. As of 1998, two years after the introduction The government considered two options: (1) selling the of the Doi Moi policies, Vietnam had moved from being a excess power to China or (2) building a 500 kV line to rice importer to a rice exporter. transport the energy from the north to central and south- ern parts of Vietnam. With a total length of 1,487 km, Another important policy was introduced in 1990, when and requiring the crossing of rather difficult terrain, the the government exempted farmers from agricultural 500 kV line posed many challenges. After evaluating the taxes. Many agriculture cooperatives in turn decided to project from political, technical, and energy security per- use their savings resulting from this tax exemption for spectives, the government decided to proceed with the the construction of rural electricity networks. construction of this line in 1992. As discussed in section A4, the completion of this 500 kV line would, in turn, have a significant role in facilitating rural electrification. 8 A3: Preparation 9 box 1 ViEtnam's Doi Moi proGram The Doi Moi, a program of economic renovation, was launched by the Government of Vietnam in 1986. The reform program involved a set of measures to gradually move from central planning to market mechanisms and an opening up of the economy to trade and foreign investment. Major reforms implemented in the early years of the Doi Moi program included the following: · Agricultural sector reform: Agricultural collectives were dismantled and land was distributed among farming households; peasants were given land-use rights for 20 years; and these land use rights could be renewed, in addition to the option of being sold or mortgaged. · Price reform: Controlled prices for most goods and services were abolished. · Macroeconomic reform: Production and consumption subsidies were eliminated from the budget. Interest rates on loans to state firms were raised above the level of inflation. The use of credit for financing the budget was gradually brought to an end. · Increased integration with the international economy: The opening of Vietnam's economy to international markets was initiated with the unification of the country's multiple exchange rates, the devaluation of the dong, which was followed by gradual structural reforms in foreign trade and investment. · Financial sector reform: Economic stabilization was achieved through reducing the fiscal deficit and growth of credit to manageable levels. · State enterprise reform: The budget constraint for the state-owned sector was hardened. Fiscal subsidies were reduced and then eliminated. Loans for state enterprises were controlled more carefully and priced appropriately. These measures eventually led to a major restructuring of the sector. The reforms enacted in the years following the initiation of the Doi Moi program led to rapid growth and poverty reduction. Between 1992 and 1998, agricultural GDP grew by 4.5 percent, industrial GDP by 13.0 percent, and GDP in the services sector by 8.3 percent. " Sources: World Bank, Vietnam Development Report 2000, and IDA, "IDA at Work, February 2007. Moreover, with the rehabilitation of Da Nhim, and the Progress in Rural Electrification construction of Tri An and Hoa Binh hydropower plants, transmission system expansion at 220 kV and 110 kV From the mid-1980s onwards, network extensions were levels accelerated from 1988. In a comparatively short intensified with the construction of 35 kV distribution period, all three regions of the country experienced con- lines in the northern mountainous areas. The propor- siderable growth. In the north, the areas of the Red River tion of poor households with access to electricity grew Delta, north central, and northwest particularly benefited. to 13.9 percent in 1990 and around 49 percent in 1993. In the south, more than 250 km of 220 kV and 850 km of Although these official figures indicate that considerable 110 kV lines were built, while 1,650 MVA of transformer progress was made in rural electrification during those capacity were added, linking Ca Mau at the very south- years, the electrification effort had involved connecting ern tip of the country to the grid, in addition to improving households in areas already covered by the MV network service in the Mekong Delta region. In the central part of rather than extension of service to unelectrified areas. the country, the coastal areas between Vinh in Nghe An Province in the north and Cam Ranh in Khan Hoah Prov- The general improvement in the living standards of ince in the south were interconnected. rural populations, along with the increased availability of 10 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience power, particularly in the north, combined with the need The development of the transmission and distribution to increase rice production for exports, which in turn systems during this period created a favorable environ- fueled power demand for irrigation, led to the rapid ment for the development of the rural electrification for development of MV systems of 6/10/22 kV during this use by rural households in the next period. period. In 1988, the total length of MV lines was 17 ,137 km, and The Role of the Power Companies the total capacity of MV substations was 3,264 MVA. By the end of 1994, the total length of MV lines increased to Having recognized developments in rural electrification, about 33,822 km, and total capacity of MV substations regional PCs established rural departments of their own, reached 3,680 MVA. The MV system in the central and in order to coordinate the rural electrification process. the southern parts of the country developed even more During this period, PCs participated in rural electrification rapidly during this period. through the following: The main sources of funding for the MV system during · Development of the transmission system at 500/ this period were (a) the power sector; (b) the agriculture 220/110/35 kV levels and portions of the distribution sector for irrigation purposes; and (c) the agricultural system in rural areas at 6/10/22 kV levels for irriga- cooperatives, with assistance from local authorities in tion purposes. communes, districts, and provinces. Development of · Assisting cooperatives or other customers with the the 110 kV system played an important role in enabling construction of MV systems in the rural areas. further progress in rural electrification, since the 110 kV system served as the feeders for the MV system. In 1993, the PCs were not directly involved in the supply of power to residential consumers in rural areas. Through the course of this period, residential electricity use continued to be a by-product of the development of MV systems for irrigation and industrial purposes. A4 Taking Off between 1994 and 1997 available additional energy that could be supplied to rural Electrification rate grows from 14% to 61% areas. The period from 1994 to 1997 could be characterized by The 500 kV line was completed and began operation in (a) a boom in household electricity access rates; (b) a 1994. Stretching across the whole country, from north demand driven, bottom-up process; (c) a lack of required to south, the line had a significant impact from several institutional arrangements; and (d) the absence of techni- perspectives: cal specifications for rural networks. · It linked all the isolated systems into one, and thereby This period encompasses the fastest growth of rural elec- made the power system significantly more reliable. trification in Vietnam. However, the rapid development · It enabled the transportation of power from the during this period took place without the necessary pre- north to central and southern areas during the early paratory work in terms of institutional arrangements and period. technical requirements. The inadequacy of institutional · It created the necessary conditions for the rapid and technical arrangements, in turn, led to many conse- expansion of rural electrification efforts, particularly quences that have subsequently had to be tackled. for the south and central areas, in the following years. Strong Demand for Rural Electrification The numerous substations that were part of the 500 kV line also facilitated the connection of new villages to the There was extremely strong demand for access to elec- system, and thereby further increased electrification lev- tricity during this period. Electricity was the focus of els. The rapid development of the transmission and distri- day-to-day conversation among regular citizens. Some bution systems during the previous period (1986­93) also examples are presented in box 2. In addition, rural elec- contributed to the creation of the conditions necessary trification was discussed in every National Assembly for the development of the LV system. session. The electricity access rate became one of the key indicators in the yearly socioeconomic development assessment of every commune, district, and province. Institutional and Technical Aspects of Rural Electrification Development of the Power System From an institutional perspective, until 1995, the Minis- try of Energy was responsible for the administration of In 1994, the last unit of the 1,920 MW Hoa Binh hydro- the power sector, while planning and development of power station and of the 150 MW Thac Mo hydropower national electricity programs were under the auspices of station, both in the north, began operation, making the Institute of Energy. The three regional PCs--PC1 in 11 12 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience box 2 ExamplEs of stronG DEmanD anD WillinGnEss to pay for ElEctricity across ViEtnam There was extremely strong demand for access to electricity during this period. · It had become customary for people to talk about electricity everywhere. Some people had even replaced a normal greeting by the question "does your commune have electricity" or "is your house connected?" · When the construction works of a rural electricity network was set to begin in a commune, the groundbreaking ceremony would be accompanied by days of celebrations all across the commune. In addition to strong demand, people showed a high willingness to pay for access to electricity. , · According government statistics, the average monthly per capita income in rural areas was only VND 187 900, , or about US$17 in 1996. Accordingly, the average income of a five-member household in rural areas was about VND 1 million, or about US$85 per month, in 1996. · By contrast, households' contribution to the development of the MV and LV electricity networks during this period ranged between VND 1 and 2 million. · This meant that the share of new connection costs paid by households was equivalent to at least a full month's income, if not two times that. · In addition to the contribution toward the cost of new connections, the customers would also pay for the meter and service drop from the LV line to their houses. This additional expense usually amounted to another VND 1 million. · Regardless of the cost of connections, many households were eager to pay their share. For example, in an inter- , view conducted during the preparation of the REP when the head of a poor household was asked how he would " finance his share of the connection cost, he answered that it would be "simple, and that they would sell their piglets or chickens. Source: Government statistics; World Bank staff interviews. the north, PC2 in the south, and PC3 in the central region to one another. This required a certain level of system of the country--were responsible for generation, trans- management countrywide (dispatch and reserve man- mission, and distribution. Each had electricity offices at agement; fault clearing, correction, and other day-to-day their respective provincial and district levels. At the local operations; investment planning; and management over level, communes managed their electricity supply using the longer term). This was particularly important, given a wide variety of ad hoc distribution systems and techni- that the north and south had radically different systems cal standards. based on different standards. In other words, the cre- ation of EVN as a single entity was a direct consequence In 1995, the government initiated a major restructuring of of system integration. the power sector with the establishment of EVN, com- prising a general corporation and five PCs in charge of Immediately after its establishment, EVN started the the electricity distribution business. A rural electrification electrification of eight communes in different provinces department was set up under EVN, and rural electrifica- in Vietnam as a pilot. The purpose of this pilot electrifi- tion departments of PCs were strengthened. cation effort was to determine whether EVN could or should proceed with rural electrification and, if so, how it It is important to point out the linkage between the tech- should be done. nical and institutional aspects of rural electrification dur- ing this period. The creation of the 500 kV line from the As table 4 shows, the results of the pilot from three "typ- north to the south of the country forced the technical uni- ical" communes, considered representative of northern, fication of the system, since each of the previously inde- central, and southern parts of the country, the average pendent power networks now had to be synchronized cost per household in the southern areas turned out to A4: Taking Off 13 tablE 4 rEsults of EVn's rural ElEctrification pilot for tHrEE rEprEsEntatiVE communEs (1995 exchange rate: us$1 = VnD 11,100) a: VnD commune Dong thinh (north) Gio Hai (center) phuoc thinh (south) Province Bac Thai Quang Tri Tay Ninh Population 3,986 5,321 7,950 Number of households electrified 836 1046 1771 Total cost (billion VND) 6.18 6.23 6.57 Cost per household (million VND) 7.40 6.00 3.70 Electricity sold (kWh), June 1996 9,744 14,020 31,839 Household consumption (kWh/HH/month) 12 13.4 18 Losses (%) 10.20 8.40 12.70 Average tariff (VND/kWh) 452.7 461 491 Average yearly collections per household (VND) 75,408 102,480 105,984 Total yearly turnover (mil VND) 63 107.2 187.7 Payback period (if gross turnover is used)--years 98 58 35 b: us$ commune Dong thinh (north) Gio Hai (center) phuoc thinh (south) Province Bac Thai Quang Tri Tay Ninh Population 3,986 5,321 7,950 Number of households electrified 836 1046 1771 Total cost (US$) 556,757 561,622 592,072 Cost per household (US$) 667 541 333 Electricity sold (kWh), June 1996 9,744 14,020 31,839 Household consumption (kWh/HH/month) 12 13.4 18 Losses (%) 10.20 8.40 12.70 Average tariff (US$/kWh) 0.041 0.042 0.044 Average yearly collections per household (US$) 6.794 9.232 9.548 Total yearly turnover (US$) 5,676 9,658 16,910 Payback period - years 98 58 35 Note: Exchange rate as of February 1, 2011: US$1 = VND 19,490. Source: EVN. be about 50 percent of that of the northern and central of single-phase configuration for grid extensions, which areas. This difference in costs could be explained by the is less costly. The system in the north of the country, by divergence in technical standards used in the different contrast, was built based on Russian standards, which areas. More specifically, the network in the south was prevented PC1 and PC3 from using the less costly built according to U.S. standards, which enabled the use single-phase configuration for grid extension for rural 14 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience electrification.6 The relatively high cost per household prices over time, through progressively raising aver- electrified and low electricity consumption recorded age retail tariff and introducing a cost-based bulk translated into unsatisfactory financial results for EVN, transfer price for bulk power sales to the distribution which was now a commercial business entity. Therefore, companies. in light of the results of the pilot effort, EVN decided to · Enabling diversified participation and introduction of stop its rural electrification program. private sector participation in the sector. · The development of a rural electrification master plan. Critical Government Actions · Introduction of measures and systems for electricity demand-side management and load management in In 1996, the resolution of the Eighth Party Congress set Vietnam. a clear target for 100 percent of districts, 80 percent of communes, and 60 percent of rural households in Viet- , Also in 1997 the National Assembly decided to put the nam to be connected to the national power grids by the PCs directly in charge of managing rural networks. That year 2000. same year, the Ministry of Planning and Investment (MPI), in cooperation with EVN and other ministries, In 1997 the Ministry of Industry issued a "Power Sec- , developed the "Proposal for Rural Electrification up to tor Policy Statement. The policy statement elaborated " " 2000. This proposal set the objectives of rural electrifica- the government's policy objectives for the power sector, tion, reviewed the rural electrification program, and esti- outlined the reform strategy for meeting its objectives, mated the financing requirements for meeting the target and included a reform implementation plan.7 The policy set by the Party Resolution, issued during the Eighth statement listed the government's power sector policy Party Congress. For the first time the rural electrification objectives as providing electricity access to the national was proposed to be set as a National Program. The pro- economy and the entire population of Vietnam; increas- posal presented two options for the rural electrification ing the operating and technical efficiency of the elec- out to 2000: tricity sector to optimize the use of scarce investment resources; ensuring reliable electricity supply of good · Option 1 would involve the electrification of 3,424 quality; resolving the mismatch between market-based commune centers and the rehabilitation of networks production costs and state administered prices; clearly in 5,519 communes to achieve the target of con- delineating and separating state management functions necting 100 percent of communes and 80 percent and business management functions; and enabling Viet- of households in the lowland areas, and 80 percent nam to raise the necessary financing for power sector of communes with 60 percent of households in expansion. mountainous areas. The total investment required to meet the target was estimated about VND 37 trillion, Critical components of the strategy included the equivalent to about US$3.3 billion at 1996 exchange following: rates. · Option 2 would involve the connection of 1,520 · Structural reform and commercialization of sector commune centers, to increase the commune-level enterprises. access rate to about 80 percent, and supply power · Setting up of a legal and regulatory framework for for about 652,000 households, and rehabilitation the power sector. of networks in 2,269 communes to expand access · Gradually moving toward cost reflectivity of electricity to about 657 ,000 additional households; increasing household access to 60 percent, and improving qual- ity. With this more realistic target, the total financing 6. The North American system involves the use of a three-phase, requirement was estimated to be about VND 8.47 four-wire configuration, with the fourth (neutral) return wire grounded trillion, equivalent to about US$760 million. at numerous points along the line. The configuration allows the use of a single phase and the common return wire for step-down to low voltage. By contrast, in the configuration that was used in the north, Cognizant of the strong demand for rural electrification there was no common return, and therefore a single phase cannot and the government's desire to rapidly provide access be stepped down. to the rural areas, but deterred by concerns over the . 7 A copy of the policy statement is available in annex 12 of the Project Appraisal Document of the Transmission, Distribution and financial aspects of rural electrification and the limits Disaster Reconstruction Project (Report 17016­VN). on its own financial capacity, EVN developed a program A4: Taking Off 15 box 3 mEtHoDs usED for financinG tHE rapiD GroWtH in rural ElEctrification, 1993­97 Funds for rural electrification were mobilized from practically every possible source and in different ways: · Central government budget: Since the central budget during this time was very scarce, the limited funds avail- able were reserved for the connection of district centers, mountainous areas, and densely populated centers. · Provincial/district budget: Most of the funds from these sources were for the MV system. · Commune/cooperative budget: These funds were mainly for the development of LV systems in communes. · Electricity tariff surcharge: Under this approach, each kWh consumed by urban customers would be subject to a surcharge to support the development of rural networks. Ho Chi Minh City, Hanoi City, and some provinces have applied this method to mobilize funds for their rural electrification efforts. For example, Ho Chi Minh City collected about VND 760 billion (about US$60 million) in 1998. · Customer contributions: During this period, it was a must for customers to pay for a share of the cost of grid connection. The amount of the contribution varied across locations, depending on the availability of funds from other sources. In many cases, particularly at the beginning of this period, customers paid for 100 percent of the costs for the LV, and even part of the MV system. In almost all cases, the customer at the very least paid for the cost of the connection from LV lines to their house, meter, and of course in-house wiring. · Borrowing: Many agriculture cooperatives and communes borrowed from commercial banks to finance the development of the LV system in their areas. · International donors: From 1994 onwards, international donors and nongovernmental organizations (NGOs) started supporting rural electrification efforts. For example, from 1996 onwards, the Japanese government made funds available to some provinces, through MPI, and OPEC directly provided US$10 million assistance to Quang Nam Province. These sources become more and more in the next period. In most cases, the network in a commune was built using a combination of funds from these sources. One of the issues with the funding methods was that there were no guidelines on record-keeping on sources of funds and project expenditures. This situation led to many of the problems during next period, when new business models were adopted and some arrangements for managing LV networks required transfer of assets between owners. continued whereby the PCs would bring electricity to commune of a clear national policy, there had been a growth of centers, leaving it to the local agencies to provide con- diverse management structures in the rural electric- nections to households. Under this approach, the PCs ity distribution sector, and institutional responsibilities would invest in the MV system up to the 35 or 22/0.4 kV and authority varied across the country. The sources of transformers, thereby bringing electric service to com- financing and business models for rural electrification munes. Beyond the MV transformers, responsibility for during this period are summarized in boxes 3 and 4. mobilizing funds, purchasing, and installing the LV grid and for its operation and management belonged to local authorities; to provincial, district, commune, and agricul- ture cooperatives; as well as to customers themselves. Beginning of Government­World Bank As part of this approach, about VND 760.7 billion was Partnership in the Energy Sector invested into the power sector for the 35 and 22 kV sys- tems between 1993 and 1996. With the lifting of the trade embargo in 1994, the World Bank began providing support to the Government of This led to a wide variety of local organizational arrange- Vietnam's various economic development programs. The ments for delivering electricity. Moreover, in the absence World Bank's involvement in the power sector began in 16 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience box 3 continuED Moreover, because of the lack of a robust system for documentation, maintenance, and retention of records, reliable figures on total investment in rural electrification during this period are not available. Nonetheless, it is estimated that the total value of rural network assets in 1998 was more than VND 6,700 billion (about US$600 million), according to EVN data. Figure 5 shows the estimated breakdown of investment in MV and LV networks according to sources of funds. For the MV system, the largest source of funding was the provincial budget (40 percent), followed by customer contributions (35 percent), while central government and EVN and the power companies provided about 25 percent. For the LV system, the largest share source of funding was customer contributions (66 percent), at almost double the combined contributions from provincial budget (19 percent), and the central government, EVN, and PCs (15 percent). Overall, the customers paid for about half the cost (48 percent) of distribution system investments during this period. fiGurE 5 mV anD lV nEtWork inVEstmEnts, by funDinG sourcE, 1993­98 120 Government budget, EVN and PCs Provincial and surcharge 100 Contribution from customers 80 35% 48% Percent 66% 60 40 40% 31% 20 19% 25% 21% 15% 0 MV LV MV+LV Source: World Bank staff, based on EVN data. 1995, with the preparation of the Power Sector Rehabil- national rural electrification strategy and implementation itation and Expansion Project, followed by the Power plan to extend electricity service. The technical assistance Development Project in 1996. Through these two proj- was completed in mid-1999, and its findings and recom- ects and a series of technical assistance activities, the mendations were used in the preparation of the Rural World Bank was able to provide technical, institutional, Energy Project, which was approved in the year 2000. and capacity building support to Vietnam's electricity sector. The dialogue that took place during these activi- , In 1997 preparation for the Transmission, Distribu- ties led to the development of a reform strategy, which tion and Disaster Reconstruction Project began. The was agreed upon with the government under the Power objective of this project was to strengthen the country's System Development Project. The Power Development transmission and distribution system, and assist the Project is of particular relevance to rural electrification, government in its efforts to rehabilitate the power sys- as, in addition to financing new generation and transmis- tem, which had been damaged by the 1997 typhoon in sion capacity, the project supported the provision techni- southern Vietnam. The project, which became effective cal assistance for the preparation of a Rural Electrification in 1999, assisted EVN with the improvement of a series Master Plan. The technical assistance was aimed at of transmission lines and substations, which served as providing assistance to the government in developing a feeders for the rural distribution system. A4: Taking Off 17 box 4 businEss moDEls for rural ElEctrification The LV systems in the communes were managed and operated under one of four main groups of business models: 1. Management of the LV system directly by administrative authorities. There were variations of this model: · Commune electricity group (CEG): Under this model, commune authorities assigned some of their own staff to operate and manage the LV system in the commune. Commune authorities either directly signed contracts with the PCs or authorized CEGs to do so. In terms of operations, CEGs either directly managed retail sales to each household or managed the bulk sales to a group of households, which in turn elected representatives among themselves to handle retail sales to individual households in the group. · District electricity group (DEG): This model is similar to the CEG, but larger in scale, and at the district level. The DEG model was very popular during this period, and was applied in about 70­80 percent of the electrified communes. This model followed the Inter Ministerial Circular 18/TT-LB between the Ministry of Energy and State Pricing Board issued in 1992. This model had the following advantages: · During a period when rural electrification relied heavily on contributions from users, the direct involvement of local authorities facilitated the mobilization of the funds required for development. · CEGs and DEGs were able to work closely with Commune People's Committees, the lowest-level administra- tive body and, through them, communicate any issues to higher administrative levels or the PCs. · In many cases, commune administrative authorities were able to cooperate with the local PC branches for staff training. However, the CEG and DEG models also had their drawbacks: · , There was very limited technical and management capacity--for instance, by the end of 1997 only about 20 percent of CEG/DEG staff had gone through basic training. · No financial management and controls were implemented. · No technical standards were available or applied. Technical losses were in the 30­50 percent range. · Because of the absence of financial controls and the high losses, final users had to pay very high tariffs, and there appeared to be a large divergence among rates paid by individual users. The CEGs and DEGs enjoyed .5 a bulk tariff of VND 360/kWh, or about US¢3. However, according to 1998 data, only about 47 percent of the customers paid tariffs less than VND 700/kWh, about US¢6, and others had to pay much higher rates--in some cases up to VND 1,500/kWh, or nearly US¢13. The difference between reported tariffs among different end users may be because many communes reported tariffs up to the group of customers, while individual end users may have had to pay much higher rates because of further losses incurred during distribution within a group. 2. Allocation of operating rights through bidding. This model was a form of leasing. The commune and custom- ers collected the funds, built the system, and contracted out the operation of the system. An entrepreneur would bid for the right to use the wires to deliver electricity. The wires were leased to the entrepreneur in return for regular payments to the system owner, which in this case was the commune. The entrepreneur would pay for the electric- ity bought and recover his costs for the purchase of electricity and for the payments for leasing the wire from the customers. The problem with this arrangement was that the entrepreneur had little incentive to maintain the system and every incentive to maximize the tariff from consumers, since any revenues above the costs would be retained directly by the entrepreneur. continued 18 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience box 4 continuED 3. Company/Enterprise: There were two main variations of this model: · Provincial electricity and water company or board, under the People's Committee. Some provinces, such as Baria Vung Tau, An Giang, Tra Vinh, Can Tho, and Vinh Long, set up a company or board under the People's Committee, to be in charge of the development and management of rural electrification and water supply in the province. This model can be seen as a variation of the model involving direct management by local administrative authorities. · This model had many more advantages than the CEG/DEG model. Thanks to the economies of scale, the companies/board could mobilize and coordinate various sources of funds, including debt financing. Most entities of this kind were financially sustainable, and were later incorporated in compliance with company law. · Company established under the company law. This model entails the development and management of rural electrification by a company incorporated in line with the requirements of the company law. During this period, there Hai Phong was the only province where this model was implemented. , 4. Power Companies: By 1997 there were about 30 communes where the PCs directly managed the LV system and handled retail sales. Dramatic Results combination of institutional, ownership, management, and technical arrangements is summarized below. Thanks to strong nationwide demand for rural electrifi- cation and government commitment, coupled with the While many more communes gained access to elec- availability of energy from newly built power plants and tricity during this period, access to rural households the unification of the system with the completion of the remained relatively limited, because of the focus on 500 kV line, household electrification rates grew dramati- electrification of commune centers. Because the major- cally during this period. At the beginning of this period, ity of the connections were paid for by end users, rural about 1.7 million households, corresponding to 14 per- electrification oftentimes excluded the poorest, who cent of the total, had access to electricity. By the end of could not afford to pay the connection costs. In fact, in 1997 the share of households with access to electricity , many communes, fewer than 50 percent of the house- increased to 61 percent of the total number of house- holds had access. holds. In other words, 6.2 million households were elec- trified during the course of the period, which meant that, Progress of the government's rural electrification on average, 1.6 million households gained access to elec- program was often hampered by poor institutional tricity each year. arrangements and lack of sufficient capital. Commune electricity groups (CEGs) and other organizational struc- It is important to note that during this period, electricity tures that had no legal status, minimal technical compe- consumption patterns were skewed toward urban dwell- tence, and little financing, carried out almost 90 percent ers, who represented about 20 percent of the popula- of rural electricity distribution, but had no means to raise tion, accounting for more than 86 percent of the total further capital. Financing further expansion was a major consumption. Urban household electricity consumption hurdle for development. was 6­10 times higher than rural households, which var- ied between 21 and 50 kWh per month. There were concerns with the technical quality of some LV systems built during this period. A large num- ber of the grids were poorly designed and constructed, Emerging Issues leading to heavy technical losses varying from 20 to 50 percent in some cases. When these grids fell into dis- Although this period was one of strong momentum and repair, there were often no funds for rehabilitation, or impressive results for rural electrification, it was also in some cases, even for routine operations and man- host to arrangements that were associated with issues agement. Moreover, there were no national standards that had to be tackled in the subsequent years. This for the wires and equipment. In many communes, the A4: Taking Off 19 Examples of divergent technical quality of rural systems Source: World Bank staff. households were permitted to buy their own equipment; losses resulting from the poor technical quality and man- the wires and equipment were often of inconsistent, and agement methods ended up having to be recovered from of low quality. the consumers. In some southern provinces, a system of intermediary agents had come up, where individu- During this period, no standards or specifications for the als bought power from the PCs and then sold it to the rural networks were available. Therefore, two approaches households at greatly enhanced prices to cover the cost emerged while building the new MV and LV systems: of connections. (1) use specifications of networks in urban areas or (2) use whatever material was available. The first option was Prices paid for using electricity varied considerably followed by richer communes and led to unnecessarily across various communes, and overall, rural consumers sophisticated technical specifications. Most of the com- paid much higher tariffs than their urban counterparts, munes, however, followed the second approach. The lack with tariffs roughly two to three times the nationally pre- of proper design, appropriate specifications for equip- scribed residential tariffs. Since there was no regulation ments and materials, and technical standards in turn led or financial control, in some areas, households on one to most of the systems developed in this period having side of the road paid much higher tariffs than households high losses, providing unreliable electricity, resulting in on the other side. safety issues, and in some cases, involving a high rate of accidents. The photos provide two examples of rural The divergent institutional arrangements and inadequate systems built with varying technical quality. technical requirements that prevailed at such a period of rapid growth in rural electrification meant further ampli- Prices paid for connections and energy use were fication of the scale of the issues that would need to be high and variable. The entity managing the local grid tackled in later years. purchased power at a fixed price. The cost of the high A5 Moving to Better Regulation between 1998 and 2004 Essential Government Decisions Setting Electrification rate grows from 61% to 87% the Course of Rural Electrification This period could be characterized by (a) a slowing down of This period was host to a series of important government annual electrification rates, (b) change in investment sources, interventions with regard to the country's rural electrifi- (c) stronger government role through setting up of the legal cation program. During this period, the Government of framework, and (d) active assistance from international Vietnam passed several decrees and regulations that out- donors. lined the main principles for reform of the rural electricity distribution sector. These principles were consistent with , By the end of 1997 61 percent of the country's house- those adopted in other parts of the sector: encourag- holds had been electrified. However, about 30 million ing diversification of ownership and management, and people still had no access to electricity. After booming increasing regulation. during the previous period, when rural household elec- tricity access increased by almost 12 percent points In 1998, the government approved a national program each year, Vietnam's rural electrification efforts entered a for poverty reduction, known as the "135 Program, for " slower period between 1998 and 2004. the 1,870 most disadvantaged communes in remote, isolated, and mountainous areas. One of the objectives Two major reasons explain the slower pace of rural of this program was the development of infrastructure electrification: services, such as electricity, roads, schools, and clinics in those communes. Many communes chose to use funds · All sources of financing that were available had been from this program for developing LV systems in their exhausted, as any commune and any household that communes. had the financial capacity had already been electri- fied. Almost all the local LV networks built to date A major action from the government was the setting of had been financed by the local communities and a ceiling price for rural household electricity use in 1998. were managed by CEGs or cooperatives. This decision can be seen as the first attempt to establish · There were issues with the planning, implementa- financial controls over the rural electricity supply business. tion, and management of rural electrification, which This decision allowed local distribution utilities (LDUs) to had to be addressed before the program could move take advantage of the subsidized bulk tariff of VND 360/ ahead. kWh and retain a margin for the operation of these sys- tems, while also setting a ceiling price of VND 700/kWh and preventing them from going over that price. 20 A5: Moving to Better Regulation 21 Another important decision came in February 1999, with the economies of the strategic zones. The alloca- the issuance of Decision 22, announcing the approval of tion of responsibilities for investment, management, " the "Proposal for Rural Electrification up to 2000, which and operation of rural electricity networks should had been prepared by the MPI.8 Decision 22, formally be based on maximizing the participation of local entitled "Prime Minister's Decision on the Rural Electri- authorities, people, and investors. " fication Proposal, had an important impact on Vietnam's · The cost of operation, maintenance, and depreciation rural electrification program. For the first time, the mech- of rural electricity infrastructure should be financed anism for allocation of responsibilities and financing of through the revenues from EVN, PCs, and the enti- rural electrification had been formalized; and the rural ties operating the rural networks. If such activities electrification effort was branded as one of "State and are deemed commercially unviable, the government " people, central and local, working together. The main shall provide subsidies. provisions of Decision 22 are summarized in box 5. · Supply of electricity to consumers in rural areas should be considered a commercial activity, except The government's determination to move forward with for areas where the government deems the provi- rural electrification culminated in the inclusion in the Fifth sion of subsidy necessary. The entities supplying Power Development Master Plan (2000­10) of a target electricity to rural consumers should be provided for achieving 90 percent rural household electrification by with adequate financial incentives to remain in busi- 2010. In the master plan's chapter dedicated to rural elec- ness and maintain an acceptable level of service. trification, the principles for the evaluation, development, and implementation of rural electrification projects were In addition, the master plan reiterated the allocation of outlined. According to the master plan: responsibilities established in Decision 22 and clearly stated that all rural electrification investments should · Rural electrification would be implemented gradu- meet national design standards for rural electricity net- ally, in line with available financial resources. works, which would be set by the Ministry of Industry · Priority would be given to electrification of areas that and overseen by EVN for compliance. have the potential to enhance agricultural productiv- ity, and industrial development, and to restructure In 2001, the government issued Decree 45 on "Electric- " ity Activity and Uses. Decree 45 had a chapter specifi- 8. The "Proposal for Rural Electrification up to 2000" was prepared cally dedicated to rural electrification, the main provisions by the MPI between 1996 and 1997 and the final report was issued , of which are summarized in box 6. . in 1997 It was approved by the prime minister in February 1999. box 5 kEy proVisions of primE ministEr's DEcision on tHE rural ElEctrification proposal Decision 22--1999 outlined the allocation of responsibilities and costs of rural electrification. According to this deci- sion, the costs of rural electrification would be allocated according to the following principles: · All costs associated with the MV system would be borne by EVN and supported through a combination of central government budget, retained capital depreciation funds, soft loans from the government, and overseas develop- ment assistance. · Costs associated with the main lines in communes would be covered out of local government budgets. · Costs associated with MV branches and/or service drop to customers' houses would be borne by the customers. · For remote or mountainous areas, or specific poor households, the government would share part of the costs for the LV lines and service drop. · Rural electrification involving MV and LV lines in Hanoi, Hai Phong, Da Nang, and Ho Chi Minh City, as well as in Dong Nai, Khanh Hoa, and Baria-Vung Tau Provinces, would mainly be financed from local budgets. As for the responsibility for the management and operation of these systems: · EVN would be responsible for managing the MV system up to the 22/35 kV substation outlet. · Local authorities, through LDUs, would be responsible for managing the LV systems. 22 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience box 6 GoVErnmEnt DEcrEE on ElEctricity actiVity anD usEs--kEy proVisions concErninG rural ElEctricity According to Clause 50, Chapter IV of Decree 45--2001, investment in and management of electricity networks in rural, mountainous, and island areas will be carried out based on the following principles: · Investments in rural electricity networks would be made in accordance with the principle of "State and people, central and local, working together" following different investment and management models. · Entities investing in rural networks in areas with difficult conditions could borrow from development investment funds at lower interest rates. · The ceiling price for residential electricity use in rural areas would be set by the prime minister; while the chair- men of the People's Committees of Cities and Provinces would determine the individual prices for different locations. · The distribution utilities purchasing electricity from the national grid for retail sale to rural households could be eligible for reduced taxes or tax exemption. According to Clause 51, Chapter VII: · EVN would invest in and operate MV distribution lines and substations, except in cases the prime minister agrees otherwise. · LV main lines would be financed by funds mobilized locally. · LV branches and service drop would be financed by end users. · The Government of Vietnam would provide financial assistance for LV main lines in remote, mountainous areas, and service drop for poor households. · For the areas inaccessible for the national grid, or where the connection is uneconomical, the development of an off-grid system with local energy sources, such as mini hydropower, solar power, diesel generators, or others will receive government financial assistance, and would be eligible for tax reductions or exemptions. Moreover, according to Decree 45, all entities operating EVN's Role in the in the power sector were required to obtain licenses. This Rural Electrification Program meant that entities operating under CEG, district electric- ity group (DEG), or other types of arrangements were During this period, EVN went beyond the allocation of required to obtain licenses and make any changes neces- responsibilities under Decision 22 and introduced a pilot sary to come in compliance with legal requirements. program for operation of LV systems. During the period from 1998 to 1999, EVN spent about VND 90 billion, or In December 2004, Vietnam's first Electricity Law was about US$6 million, to rehabilitate LV systems in 82 com- passed by the National Assembly of Vietnam. The Elec- munes, and took over the operation and retail sales to tricity Law reaffirmed the government's determination end users. This would contribute to addressing concerns to move forward with the rural electrification program, about the high cost and low quality of rural electricity acknowledged the difficulties of implementing the pro- supply. gram, and introduced measures to improve the electric- ity business in rural areas. The law included a chapter Consistent with the allocation of responsibilities under dedicated to "Electricity for Rural, Mountainous, and Decision 22, from 1999 onwards, EVN started another " Island Areas. The law's provisions of relevant for rural program to acquire the MV systems that had been . electrification are summarized in box 7 The Electricity invested in and built by other entities, such as agricultural Law also established the Electricity Regulation Authority bodies, cooperatives, local authorities or private compa- of Vietnam under the Ministry of Industry. nies. EVN spent about VND 400 billion, or nearly US$27 million, to acquire those MV networks. A5: Moving to Better Regulation 23 box 7 ElEctricity laW proVisions on rural ElEctrification, 2004 With respect to rural electrification, the Electricity Law: · required the mobilization of all potential sources of financing in order to speed up rural electrification. · created a favorable environment for the provision of electricity to remote, isolated, disadvantaged areas, as well as to areas with ethnic minorities. · made government financial assistance available to investors in the more challenging locations. · encouraged the development of renewable energy. The Electricity Law also specified a policy for support to investors and consumers in "disadvantaged areas:" · The government would assist electric service providers operating in locations where the investments are not financially viable, · The government would provide support to cover the cost of the service drop for the most disadvantaged and poorest households, which are certified by local authorities as such. · The government assistance could be in the form of support with capital costs, interest rates, and taxes. The law regulates the electricity tariffs in rural areas, and sets up the requirements for persons or entities operating in the electricity sector. World Bank Support to Government · How implementation capacity could be secured for Efforts for Rural Electrification a large project covering scattered areas. · What the appropriate business model would be As discussed earlier in this section, by 1998, the pace to ensure the viability and sustainability of the of rural electrification had slowed down, since the most program. accessible sources of financing had been depleted and issues with the management and operation of rural elec- A series of studies and technical assistance activities tricity networks had emerged. At the same time, there were carried out during project preparation, including was strong demand for increasing electricity access for continuation of technical assistance for the prepara- remote and mountainous areas and ethnic minorities. tion of the Rural Electrification Master Plan, which had started under the Power Development Project in 1996. During this time, the World Bank, at the request of the The Master Plan was completed in June 1999, and its government, began the preparation of a long-term pro- findings and recommendations were used as inputs to gram that focused on accelerating and improving access project design. Other significant outcomes from studies in rural areas in an economically viable and self-sustain- conducted during preparation were the establishment of ing way. technical specifications for rural networks, which would later become national standards, and completion of an The preparation of the first project took almost two years, analysis of various models for management and opera- in order to identify the most suitable way of addressing tion of rural networks, including cooperative, company, issues, such as the following: joint stock company, leasing, and service agent models. · Whether focus should be on rehabilitation of the In conjunction with the ongoing dialogue during the prep- existing system to reduce losses or on expanding aration of the project, the Government of Vietnam issued access to disadvantaged areas. a policy paper on rural electrification, clarifying the roles · Who would be in charge of implementing this of different parties and establishing the principles of rural effort. electrification investments, which were also reflected in . the design of the REP A copy of this policy paper is avail- able in the appendix. 24 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience The Rural Energy Project, financed by a US$150 million · were built according to technically sound specifi- IDA credit, was approved by the World Bank's Executive cations, Board of Directors in May 2000 and became effective · were accompanied by consumer willingness to con- the same year. The development objectives of the project nect and pay, and were as follows: · involved local participation in operations and mainte- nance after construction. · Expand rural access to electricity in 671 communes located in 32 provinces through grid extension, The cost sharing would involve the PCs financing MV where economically justified, to improve welfare, and LV systems, while provinces covered the cost of enhance income-earning capacity, and help alleviate land acquisition and compensation, and customers paid poverty. for service drop to their households. Since the program · Define and establish institutional mechanisms and involved the construction of the LV lines out to house- strategy for rural electrification in Vietnam that would holds at the connection level, and then turning them over facilitate to local companies, technical losses were expected to · a sustained program of continued rural electrifi- dramatically reduce to about 7­10 percent. Implementa- cation with increased local operation and man- tion of the project was completed in 2006; its results are agement, and conversion of CEGs to joint stock discussed in section A6. cooperatives or companies, · the long-term viability of the power sector Having observed the success that was being achieved through appropriate bulk supply tariffs and dis- , during the implementation of the REP the World Bank tribution margins, and and the Government of Vietnam decided to continue · continued implementation of power sector their cooperation, and initiated the preparation of RE2 reforms in accordance with the 1997 Policy Let- in March 2003. The project preparation efforts also led ter and Strategy. to the initiation of dialogue and support for institutional · Promote the application of renewable energy change and regulation in step with other reforms in the sources in areas inaccessible to the national grid and power sector. supplement the grid power supply. In addition to the World Bank, other international part- The project would be implemented by EVN through its ners, such as Japanese and French governments and PCs. EVN provided overall guidance to the project while OPEC, were also actively assisting the government's the three PCs took over the detailed implementation of rural electrification effort. the project. Rural electrification investments financed under the Results Achieved project had to meet certain basic principles. The project design principles required that investments By the end of 2004, all provinces, just over 94 percent of the communes, and more than 87 percent of the · involved local participation and cost sharing between households in the country had access to electricity, as consumers, local government, and the utility, presented in table 5. · were economically viable, · comprised project components that were cost-effec- However, despite this expansion, electricity consump- tive and required no operating subsidies, tion in rural areas, including for residential use, irrigation tablE 5 ElEctrification ratEs, 1998­2004 (percent) 1998 1999 2000 2001 2002 2003 2004 Commune 15.1 77.8 82.0 84.9 89.0 92.7 94.3 Household 62.5 69.7 73.0 77.4 81.0 83.5 87.4 Source: World Bank staff, based on EVN data. A5: Moving to Better Regulation 25 tablE 6 ElEctrification costs: rEsults from tHE rural EnErGy projEct cost per HH communes Households total cost cost per commune electrified connected (millions of us$) (thousands of us$) us$ % of estimated PC1 area (north) 529 232,955 91.40 173 392 58 PC2 area (south) 187 184,472 54.72 293 297 106 PC3 area (center) 260 137,900 55.21 212 400 62 Total 976 555,327 201.33 206 363 72 Source: Implementation Completion and Results Report for the Rural Energy Project. pumping, and other uses, accounted for about 19 per- tablE 7 manaGEmEnt structurE in tHE cent of the total electricity consumption in the country. rural poWEr Distribution sEctor, as of january 2004 Issues Remaining to Be Resolved number of share of total There was a need to secure financing to cover the cost management models communes (%) of further expansion of electricity access. In the case of CEGs* 4,842 62.8 , REP the average connection cost for households electri- EVN PCs 1,466 19.0 fied was US$363 per household. As shown in table 6, connection costs per household ranged from US$197 to Cooperatives 755 9.8 US$400, depending on where households were located. Companies owned by 408 5.3 These costs at project completion were nearly 30 per- province or district cent less than the original estimate. Unregistered agents* 233 3.0 Joint stock companies 5 0.05 In addition to further expanding access, another issue that still had to be resolved was the diversity of man- Private companies 1 0.01 agement and operational models that prevailed in rural Total 7,710 100 electricity supply during the period. Table 7 provides a *These arrangements have since been prohibited by the government. breakdown of the models for management and opera- tion of rural electricity networks at the time. During the course of this period, the CEG model contin- Moreover, while there had been general improvement ued to be the most common means of electricity supply in access to electricity in recent years, the quality and in rural areas. In 2004, only 19 percent of the distribution reliability of electricity supply were an emerging issue. networks in the rural communes were managed by the Investment climate surveys for Vietnam frequently cited PCs, while the rest were under various local authorities. power shortages and quality as an important issue, and There were small distribution entities serving limited rated poor power service as one of the top two infrastruc- numbers of customers--on average 1,300 households ture constraints and one of the top four of all constraints. each. As discussed earlier, this divergence led to signifi- A World Bank survey in 2006 found that 19 percent of cant variations in quality of rural networks, excessively manufacturing firms surveyed still described electricity high prices being charged for electricity supply to some supply as a major or severe constraint for their business, users, and the inability of the poorest rural households although they had been connected to the electricity grid. to gain access to electricity. Moreover, the majority of A pilot survey in rural areas revealed similar results. All CEGs had no legal status, and they were not subject to of these pointed to a need for a major and systematic any financial accountability or controls. As a result, they effort for ensuring the quality and reliability of electricity had little ability to raise finances for rehabilitation or supply. expansion. 26 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience The government recognized that in order to maintain for implementation of the rural electrification program. the pace of rural electrification, the most urgent issues Addressing these concerns would be the focus of the hampering development had to be resolved; namely, government and its international development partners the need for viable models for management and opera- in the coming years. tion of rural networks, and the need to secure financing A6 Focus on Quality and Regulation between 2005 and 2008 of the government's strong commitment to rural electri- Electrification rate grows from 87% to 94% , fication. Also in 2007 the Ministry of Industry carried out a "Survey and Evaluation of the Management Models in This period could be characterized by the following: (a) " Rural Areas. The objective of this exercise was to evalu- enforcement of regulations, (b) a shift in focus from network ate the effectiveness of existing models. As a result of extension to rehabilitation, and (c) direct government support this analysis, a set of recommendations was developed for extending electricity access, particularly to minorities and for the improvement of these models. Moreover, direct those in remote areas. funding from the central government budget would be provided for remote areas and minority populations. For At the beginning of this period, 87 percent of households instance, 85 percent of the Central Highland Project was in Vietnam had access to electricity. Through the govern- financed from central government budget and 15 percent ment's rural electrification program, 90 percent of the from EVN funds. country's households had been electrified by the end of 2005. By the end of the period, household electricity While these policy actions were being pursued by the access rate had increased to nearly 94 percent. government, it was also active in implementing its pro- gram of electrification through a series of projects, with The important issue of this period was the status of support from its international development partners. the networks built during the earlier periods. These , Prime among these was the REP which is discussed in networks had become obsolete, as they were unable the next section. to meet increasing demand, had rather high technical losses, and were in rather poor shape in terms of safety performance. Government Priorities Supported by the World Bank Critical Government Actions By the beginning of this period, the Government of Viet- In 2006, the Ministry of Industry issued its Decision 27 nam and the World Bank's REP was nearing completion. on licensing of entities operating in the electricity sector, The project was on track to having made a significant con- and Decision 32 for licensing of persons operating in the tribution to the achievement of the government's objec- electricity sector. tives for its rural electrification program, and exceeding the targets that had been set. By mid-2004, the project The Sixth Power Development Master Plan (2006­15) had helped connect more than 900 communes to the was approved in 2007 In that master plan, a target was . national grid, providing electricity to about 3 million peo- set for 95 percent of households to be provided access to ple. The final results from the project are summarized in electricity by the end of 2010. This target was a reflection box 8. 27 28 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience box 8 rEsults of tHE first rural EnErGy projEct , As a result of the first REP implemented between 2000 and 2006, 976 communes and about 550,000 households were connected, exceeding the original targets set at appraisal, as shown in table 8. tablE 8 communEs ElEctrifiED anD HousEHolDs connEctED unDEr tHE rural EnErGy projEct number of communes connected number of households connected appraisal estimate at completion appraisal estimate at completion PC1 area 347 529 147,150 232,955 PC2 area 120 187 166,667 184,472 PC3 area 204 260 81,184 137,900 Total 671 976 395,001 555,327 The project also contributed to capacity building for implementing agencies of EVN and PCs, during preparation and implementation stages. Moreover, a key contribution of REI was the development of technical specifications and standardization of the design and characteristics for rural electricity networks. The standards developed as part of the project promoted better network quality, reduced technical losses, and avoided the application of urban standards to rural areas, which are too expensive for low-density areas. The standards were later adopted by the Ministry of Industry. Early in the course of this period, it had become clear that financial sustainability, and enable future mobiliza- further improvements were needed, not only in increased tion of private funds. connections, but also for addressing the issue of losses · Capacity building assistance for the LDUs, provincial and efficiency, as well as institutional shortcomings in the authorities, participating regional PCs, and national sector. Addressing these concerns was, in fact, the focus authorities involved in the planning and regulation of of the next project developed as part of the government­ rural electrification. World Bank cooperation on rural energy. The project would dedicate significant attention to the The Second Rural Energy Project entailed a shift in repair and rehabilitation of existing systems for ensuring emphasis from a complete focus on additional new con- efficiency and to changing the institutional structures of nections to rehabilitation of existing systems, so that the rural networks, in addition to expanding access. these systems were able to supply adequate electricity for the needs of consumers for both productive uses and All LDUs had to be established as legal entities, have in daily life. technically sound investment and operational business plans, and have sufficient financial viability and sustain- The objective of the RE2, which became effective in ability. LDUs could be established in the form of (a) joint 2005, was to improve access to good, affordable elec- stock, joint venture, private, or public companies owned tricity services to rural communities in an efficient and by local authorities; or (b) cooperatives, such as electric- sustainable manner. The development objective of the ity, industrial, trading, or agricultural cooperatives. project, financed by a US$200 million IDA credit and US$5.25 million GEF grant, would be achieved through: Consolidation of the LDUs was a central area of focus of the RE2. One major requirement of the project was that · A major upgrading and expansion of rural power net- the LDUs in all provinces had to be developed in such works in about 1,200 communes. a way that they could be further aggregated into larger · Conversion of the existing ad hoc local electricity companies, if desirable in the future. management systems to LDUs as legal entities recognized under Vietnamese law, to improve man- In 2008, the Vietnam Rural Distribution Project was agement of power distribution in rural areas, ensure initiated, with US$150 million in IDA financing. This five- A6: Focus on Quality and Regulation 29 year project was designed to improve the reliability and tablE 9 ElEctricity accEss ratEs, 2004­08 (percent) quality of the MV networks bringing electricity to local distributors and build the capacity of regional PCs to act as independent participants in the power sector. 2004 2005 2006 2007 2008 Commune 94.3 95.9 97.4 97.89 97.89 Household 87.4 90.7 92.3 93.66 93.66 Results Achieved Source: World Bank staff, based on EVN data. By the end of 2005, as shown in table 9, 90 percent of the country's households had been electrified, which meant that the target set in the Fifth Power Master Plan There were essentially three models for management for 2010 was met five years ahead of time. By 2008, 94 and operation of rural electricity networks: percent of the households had access to electricity. 1. EVN, which provided electricity directly to the rural In addition to the expansion of access, there was a major households through the PCS. overhaul of the ad hoc management and operational 2. Rural cooperatives, which tended to cover only a arrangements for rural networks, as a result of the gov- single commune. ernment's actions, and support from donors. Moreover, 3. Joint stock companies, which provided power to one from an institutional perspective, all management and or more communes in the area. operation of rural electricity networks in 968 communes had been converted to legally recognized arrangements, By the end of this period, more than 5,600 LDUs were such as a cooperative or a company, or had been trans- operating in rural communes. ferred to the PCs in charge of those areas. All unregis- tered agents had been eliminated. Issues Remaining to Be Resolved focusing on quality Going forward, concerns remaining to be addressed included the financial capacity of LDUs, and the emerg- ing need for the consolidation of the industry. As noted earlier, more than 5,600 LDUs had emerged during the period. Some of the LDUs had low consumption of elec- tricity and operated on a narrow profit margin. In some cases, with only 1,000 households as customers, the revenue stream was inadequate to cover the cost of operations and upgrading. Technical skills were lacking and the margins did not permit the hiring of adequately trained staff. There were customer complaints, as some of the LDUs sought to cover their expenses by raising retail tariffs with the approval of the provincial authori- ties. Studies also suggested that many of them struggled with issues of capacity, quality of supply, and safety: an estimated 200 electricity-related deaths were reported in one province last year. They had difficulty raising new capital for expansion especially at the commune level. It was becoming evident that many of the newly formed " LDUs were simply "too small to succeed. Policy makers had begun to see that consolidation of the LV networks had to take place, given the size and lack of financial via- bility of many LDUs. Addressing these concerns would be the focus of the government and its partners in the coming years. The RE2 would also play a significant part in the consolidation of the LDUs. A7 Consolidation for the Last Mile 2009 onwards Critical Government Actions Electrifying the last 4% In an effort to regulate the rural electricity supply busi- This period can be characterized by (a) efforts to identify the ness, the government required LDUs to operate accord- most appropriate strategy for extending access to the remain- ing to a new set of performance criteria going forward. ing 5 percent of households without electricity, (b) consolida- The requirements included obtaining an electricity dis- tion of the rural electricity distribution and retail business, and tribution and retail supply license, developing a reliable (c) tariff reforms. and transparent system of accounts, entering into a sup- ply contract with each customer, issuing monthly bills As of 2009, 96 percent of the country's households, and and ensuring all customers had a certified power meter. 95 percent of the rural households, had gained access These new regulations further challenged the smaller to electricity. There remained about 1 million households LDUs and eventually led to a process of further consoli- without access to electricity. dation of the LDUs. As standards of living improved, household consump- This period was also host to some important tariff tion also increased, and potential for industrial growth reforms that affected the poor, put residential consum- in these areas also became evident. Rural areas there- ers on a more equal footing, and improved the target- fore became more attractive for EVN and its PCs. By the ing of subsidies. An important milestone of this period beginning of this period, PCs were supplying electricity is Decision 21 on electricity tariffs, issued in February to all urban households, and a growing share of rural 2009. The most significant feature of Decision 21 was households, nearing almost 50 percent. The other half of that it stipulated a unified tariff for all consumers. Under rural consumers was served by LDUs. this decision: · The power tariff in rural areas would be the same as in the urban areas. · The ceiling price of VND 700/kWh for rural areas was eliminated. · The government allowed an increase in average power tariffs, as part of a move toward market mechanisms. In March 2009, tariffs would increase by 8.92 percent to VND 948.5/kWh. In March 2010, tariffs would increase by another 6.8 percent to VND 1,058/kWh. · From January 1, 2010, the power tariff would be unbundled, with the generation portion based on 30 A7: Consolidation for the Last Mile 31 the market price and with regulated transmission From 2010 onwards, further changes to the subsidy and distribution elements. mechanism have been under discussion, including (a) · The increases allowed in tariffs would be accompa- limiting subsidies to only those customers consuming nied by protection for poor consumers. IBTs were less than 50 kWh and (b) targeting subsidies to only rural introduced, and a new set of "lifeline blocks" was customers. introduced. The expected poverty and social impacts of changes to Further details on tariffs before and after Decision 21 are the IBT structure were analyzed as part of the Poverty summarized in box 9. Decision 21 also made it possible and Social Impact Analysis that was undertaken as part of for PCs to take over the management and assets of any the preparation of the First Power Sector Reform Devel- LDU that was not financially viable. PCs were allowed opment Policy Operation. The changes analyzed included to recover operating costs through the tariff charged to both the reduction in the coverage of the lifeline tariff all consumers in the PCs' territory, in effect, cross-subsi- and higher electricity prices. The analysis found that the dizing the remote and poor consumers with other low- poor in Vietnam would remain well protected despite the cost consumers. This was a critical factor in improving recent tariff adjustments and the narrowing of the life- sustainability of electrification investment in the more line band, and many rural consumers were in fact likely remote and poor regions. to benefit from the introduction of a unified system of box 9 tariffs bEforE anD aftEr DEcision 21 Prior to Decision 21: · EVN's retail customers paid a lower rate than the LDUs were allowed to charge. · The LDUs were subsidized through bulk power tariffs that apply to their wholesale purchase from EVN. The bulk electricity tariff paid by LDUs was around VND 390/kWh, or VND 429/kWh, including VAT (2.23 US cents and 2.45 US cents/kWh, respectively, based on February 2009 exchange rates). · Retail tariffs were set by the LDUs, with provincial government oversight. These tariffs were formally capped at VND 700/kWh (4 US cents/kWh, in February 2009 exchange rates). · The benefits of subsidized bulk power tariffs were supposed to be passed on to the end user, by virtue of the cap on the tariff. However, although retail tariffs were capped, anecdotal evidence suggested that many LDUs charged more than the VND 700/kWh ceiling, and that few, if any, applied a subsidy for low-income consumers. · Only households receiving electricity directly from PCs received a lifeline tariff, which was for the first 100 kWh per month consumption block. · The ceiling price for the first consumption block was set at VND 550/kWh (3.15 US cents/kWh, in February 2009 exchange rates). · The second block comprising consumption of between 100 and 150 kWh was also slightly subsidized. · The government did not provide any financing for subsidies; therefore, the system was entirely dependent on charges from other classes of consumers making up any shortfall from revenues from lifeline tariffs. Decision 21 stipulated the following: · The initial lifeline block would be subsidized and pegged at about 30­40 percent of costs. · The amount of consumption subject to the lifeline tariff was reduced to the first 50 kWh of consumption, com- pared with 100 kWh previously. · The tariff for the 51­100 kWh block was set at the breakeven cost, without profit. · Higher blocks of consumption were set above average costs, to subsidize the lower consumption blocks. continued 32 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience box 9 continuED · With the block tariff system, the margin left for an LDU varied depending on the volume of consumption. · An analysis of margins allowed for LDUs in each consumption block is presented in table 10. · Compared with the old fixed tariff, the margins for the first block will be reduced by VND 86/kWh with the 2009 tariff, and further reduced by VND 13/kWh with the 2010 tariff. · The bulk electricity tariff for LDUs continued to be subsidized, but the rates went up in 2009. · These changes would have a strong effect on small LDUs, especially those with less than 1,000 customers, each of whom consumed less than 60 kWh per month on average. Compared with the old fixed tariff, the margins for the first block will be reduced by VND 86/kWh with the 2009 tariff, and further reduced by VND 13/kWh with the 2010 tariff. · The bulk electricity tariff for LDUs continued to be subsidized, but the rates went up in 2009. · These changes would have a strong effect on small LDUs, especially those with less than 1,000 customers, each of whom consumed less than 60 kWh per month on average. tablE 10 tariffs EffEctiVE as of marcH 2010 a: VnD/kwh compared with old new bulk tariff margin (VnD 700/ compared with block new tariff with Vat for lDu (incl.Vat) margin left for lDu kWh ceiling price) margin of 2009 kWh VnD/kWh VnD/kWh VnD/kWh VnD VnD 0­50 660 475 185 ­86 ­13 51­100 1,104 828 276 5 ­10 101­150 1,335 975 361 90 ­13 151­200 1,753 1,350 404 133 ­9 201­300 1,894 1,459 436 165 ­10 301­400 2,028 1,562 466 195 ­12 >400 2,079 1,601 479 208 ­11 b: us¢/kWh compared with old new bulk tariff for margin (VnD 700/ compared with block new tariff with Vat lDu (incl.Vat) margin left for lDu kWh ceiling price) margin of 2009 kWh us¢/kWh us¢/kWh us¢/kWh us¢ us¢ 0­50 3.46 2.49 0.97 ­0.45 ­0.07 51­100 5.79 4.34 1.45 0.03 ­0.05 101­150 7.00 5.11 1.89 0.47 ­0.07 151­200 9.19 7.08 2.12 0.70 ­0.05 201­300 9.93 7.65 2.29 0.87 ­0.05 301­400 10.63 8.19 2.44 1.02 ­0.06 >400 10.90 8.39 2.51 1.09 ­0.06 A7: Consolidation for the Last Mile 33 residential tariffs and the expected integration of many MV lines, 150 MVA of transformer capacity, and 310,000 LDUs into the PCs. For those continuing to receive household meters. power from the LDUs, expected benefits were identi- fied, not only in terms of lower electricity prices, but also A significant amount of LV and MV assets had been cre- improvements in the quality and reliability of supply, and ated under the Second Rural Electrification Project. Box improved standards of safety. 10 provides an overview of the process for the transfer of assets created under the project. Moreover, the Vietnam Distribution Code was approved in 2010, and it outlined the rights and obligations of PCs The additional financing for the Second Rural Electri- and their customers, including provisions about quality of fication Project, in the form of a US$200 million IDA service obligations and consumer protection. credit, was approved in May 2009. The project develop- ment objectives remained the same, and this additional The government continued to work with the World financing enabled project outcomes to be scaled up so Bank and its other international development partners that 1,500 communes, or about 1.5 million households, to achieve its objectives for rural electrification. In 2009, receive good, affordable electricity, compared with the the Asian Development Bank approved a loan of US$151 original objective of 1,200 communes. million to help the country improve electricity services through increased renewable energy in poor and remote communities with ethnic minorities. Also in 2009, Ger- To support the government's continued efforts to move many's KfW provided 120 million for the rehabilitation forward with its reform agenda, the First Power Sector of rural networks. Reform Development Policy Operation (DPO), the first of a three-part government­World Bank program, was approved in March 2010. The series of operations under Scaled-up World Bank Support to the DPO program are intended to support the introduc- tion of the competitive generation market, which is the Government Priorities first stage of power market reform set out in the govern- The RE2, which began to be implemented in 2005, con- ment's reform road map. Accordingly, the objective of the tinued to contribute to the meeting of the government's overall program is to support the implementation of a mar- objectives in the sector. As of February 2009, when the ket for electricity generation, restructuring of the power project's Mid-Term Review (MTR) took place, the project sector, and tariff reform to facilitate effective competition, had made good progress toward meeting the develop- transparency, and predictability; encourage timely genera- ment objectives. As of the MTR, the project had sup- tion investment; improve system operational reserve; and ported the installation of 5,400 km of LV lines, 460 km of provide incentives for efficient use of electricity. box 10 transfEr of nEtWork assEts crEatED unDEr rE2 projEct In the project design, once the construction of the assets of the LV system is completed, it was expected that these assets would be transferred to LDUs. According to the process put in place, provincial authorities would advise the LDU of the value of the assets created by the project, based on the best estimates available. The LDUs would be expected to prepare business plans based on the asset value, actual consumption, losses, and the tariff structures stipulated by Decision No. 21. The business plan would be submitted to the provincial Department of Industry and Trade (DoIT). The DoIT would review the busi- ness plan, and if the business plan were sound, would then propose to the PPC to transfer the asset to the LDU, with the agreement that the LDU pay the PPC for the asset value. In case the business plan is (a) not satisfactory, and the financial viability of the LDU is not proven, or (b) the exist- ing LDU does not want to continue to manage and operate the LV system, or (c) the LDU does not meet the other requirements set by the present regulation, the DoIT will propose to the PPC transfer of management of the com- mune's LV assets to the PPC, and the PPC will have the obligation to manage the LV network and pay back to the PPC the financing provided by the province for the project. As reported by the implementing agencies, about 100 communes have expressed willingness to transfer the LV asset. 34 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience looking for a way for the last mile The First Power Sector Reform DPO, comprising a decisions, development in the energy sector, and the US$200 million IBRD loan and US$112 million IDA credit, economy in general, over the course of the last decade, was designed to support the four policy areas on the the organization of the rural electricity supply changed government's program for reform, namely, development dramatically. The most dramatic turning points came of the power market, power sector restructuring, elec- with the phasing out of the CEG/DEG model in the after- tricity tariff reform, and improving demand-side energy math of Decree 45 issued in 2001, and the introduction efficiency. Specifically, the operation aims to put in place of the LDU model in 2005 followed by the consolidation the important secondary legislation concerning the over time of smaller LDUs--which were primarily coop- design of the competitive generation market, the main eratives or joint stock companies--because of financial requirements for restructuring the power sector that are pressures and deliberate government actions to ensure needed for the competitive generation market to work financial viability of the sector. in a fair and transparent way, for the tariff mechanisms to set and update tariffs reflective of efficient costs, and A major impact of Decision 21 was to hasten the con- for the establishment of the necessary preconditions for solidation of management and operation of LV systems. the government to take actions to improve energy effi- The changes in tariffs had a strong effect on small and ciency. It will also enable a pilot of the final design of the financially weak LDUs, and created strong incentives for competitive generation market to be run. It also supports consolidation. Consolidation had begun as early as 2005, substantive actions on tariffs, metering, and efficiency when some smaller LDUs, generally cooperatives, sought standards. to be taken over by EVN. During this period, the takeover of LDU assets by PCs intensified, and some LDUs with low financial capacity began to merge, consolidating a Results to Date larger number of communes under a joint stock company structure at the district or provincial level. As of 2010, it is estimated that 99 percent of the com- munes and 96 percent of the households in Vietnam Figure 6 illustrates the evolution of the rural electricity have been connected to the grid. supply business between 2000 and 2009. While CEG/ DEGs accounted for around 60 percent of rural electric- A significant change in the organization of rural electricity ity supply in the early part of the decade, the sector was supply business is ongoing. As a result of government more or less evenly split between cooperatives and PCs A7: Consolidation for the Last Mile 35 fiGurE 6 main actors in rural ElEctricity supply bEtWEEn 2000 anD 2009 100 90 Others 80 Individual households 70 Share of rural electricity supply Single member limited Cooperatives liability and private co. 60 Joint-stock companies 50 CEG/DEG State-owned companies 40 Cooperatives 30 CEG/DEG 20 Power Companies Power companies 10 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Year Source: World Bank staff, based on EVN data. by the second half of the decade, and PCs eventually cost of further expansion of their networks. The primary ended up supplying three quarters of rural households by features of this model are explained in box 11. the end of the decade. Issues and Challenges box 11 sErVicE aGEnts The recent trend of consolidation in the rural electricity · Service agents are commune residents hired by supply business brought about a new set of operational PCs to handle collections and inspect the status of issues. The Provincial People's Committees (PPCs) that the infrastructure, such as meters and lines. took over the struggling rural LDUs are faced with the · They are used by the PCs in communes where the need to reorganize their distribution management sys- LV system is directly owned, managed, and oper- tem, and specifically, the handling of operational tasks, ated by the PCs. such as bill collection and safety inspections. As the LDUs that opt for being taken over by PCs are more likely · One agent can be in charge of 300­1,000 custom- to be the financially weakest and the most remote ones, ers and receive between US$30 and US$120 in the management of electricity supply in those areas is fees per month. expected to be more challenging for the PCs. · According to a recent estimate, the use of service agents reduces PCs' operating costs for meter Many of the PCs have already been experimenting suc- recoding, bill collection, and safety inspection by cessfully with the "service agent" model as one way of 30­50 percent. improving quality of service and safety, and reducing the A8 The Road Ahead Going forward, a number of tasks need to be fulfilled as operation of those networks, and making sure that elec- part of Vietnam's rural electrification program: tricity is affordable for the poor. These tasks are exam- ined in further detail below. · Continued investment in existing distribution net- works; · Ensuring sustainability of the operation of rural elec- Continued Investment in Existing tricity networks; Distribution Networks · Extending access to those still without it; and · Continuing to make sure electricity is affordable to In the years ahead, a significant amount of investment the poor. will be needed to rehabilitate existing LV systems to reduce losses and upgrade the MV networks to allow In addition to figuring out the most appropriate way to the growing demand to be met: extend access to the remainder of the population living without electricity, the country has to continue making · Investment in rehabilitation of existing LV sys- the required investments for rehabilitating and upgrad- tems. Many of the small LV systems developed in ing existing systems, ensuring the sustainability of the rural communes during the 1990s still remain rela- tively weak. These systems need to be rehabilitated in order to reduce losses and improve the reliability and quality of power supply. This means that a sig- nificant amount of resources and effort will need to be dedicated to the rehabilitation of LV networks in about 3,000 communes. Based on preliminary esti- mates by EVN, bringing existing LV systems up to current Vietnamese standards may cost somewhere between US$2 billion and US$3 billion. · Investment in upgrading MV networks. The growth in LV systems and increased demand in rural areas will also imply greater need for the improve- ment of the MV distribution network over the medium term. Reliability of service is of concern in some rural areas, as existing systems are becoming unable to meet existing and projected load require- ments. In some instances, the MV systems became a bottleneck in the power flow from the transmis- sion system to the LV systems in the communes. 36 A8: The Road Ahead 37 Ensuring Sustainability of tariffs charged to all consumers in their territory, in effect, the Operation of Rural Electricity cross-subsidizing low-consuming households by others. In 2010, further changes to the subsidy mechanism have Networks come under discussion, including limiting subsidies to only those customers consuming less than 50 kWh and Decision 21 of February 2009 made it possible for PCs to targeting subsidies to rural customers only. In the future, take over the management and assets of any LDUs that if policy makers for some reason wish to make subsidies is financially weak. The challenge going forward will be more transparent, they will need to make a determina- to ensure that the transfer of the responsibility for man- tion as to how this can be achieved and what kind of aging and operating existing LV systems from financially arrangements should be put in place. weak LDUs is paced according to the absorption capacity of the PCs. To ensure this, it may be necessary to find Hard choices need to be made with respect to Vietnam's the most effective ways of building institutional capacity rural electrification program going forward. The country's in PCs, in order to equip them with the ability to manage policy makers must determine how to allocate the scarce and operate rural electricity networks in an efficient and resources between its various priorities. They have to sustainable manner. determine how to allocate resources among investments in rehabilitating LV systems, upgrading MV networks, and expanding electricity access to those remaining without Extending Access to Those it, while also setting aside resources to continue to pro- Still without It vide for the poor and build institutional capacity for sus- tainable management and operation of rural networks. It About 1 million households, mainly in mountainous areas is clear that improving the existing distribution systems and on islands, are still without access to electricity. The would bring benefits to a larger number of people. On objective of expanding electricity access to unserved the other hand, completing the last mile of the access rural and mountainous areas of the country was included agenda and connecting the unserved populations is in the National Energy Development Strategy, which was a top priority for the government. The question is how . issued in December 2007 This strategy envisages that all this can be done in a sustainable manner, and where the rural households will have access to electricity by 2020. resources will come from. The challenge will be identifying the most appropriate way of electrifying these remaining households, most of which are in poor, remote, or mountainous areas. Going the last mile Continuing to Make Sure Electricity Is Affordable to the Poor As the country expands access to a greater number of people, chances are that there will also be a greater num- ber of poor people connected to the system. This means that large numbers of the poor people connected to the system have the potential to be affected by changes in tariffs and service levels. The Prime Minister's Deci- sion 21, issued in 2009, established a clear framework for providing for the poor, and stipulated an IBT with a lifeline block for the first 50 kWh of consumption. The PCs were allowed to recover operating costs through the Part B Measuring the Impact of Rural Electrification in Vietnam B1 Background and Methodology Introduction the effects of REP itself, but by including control groups comprising already electrified areas, as well as unelectri- Part B discusses the benefits and impact of electrifica- fied areas, it would be able to draw more general conclu- tion on rural households in Vietnam, and primarily relies sions about the longer-term impacts of electrification on on the findings of a longitudinal survey of beneficiaries poverty alleviation and rural development. of the World Bank's Rural Energy Project. That exercise was funded by ASTAE, ESMAP New Zealand Aid, and , The Institute of Sociology (IoS) of the Vietnamese Acad- SIDA, and was managed by World Bank staff. This sec- emy of Social Sciences was commissioned to conduct tion presents a summary of a select set of findings from , a longitudinal survey of the beneficiaries of REP cover- that study. A more detailed and comprehensive publica- ing rural households with varying social and economic tion presenting the findings and analysis resulting from conditions. that exercise is under preparation, and will be published separately. Methodology Background As part of the longitudinal survey, a panel of households was surveyed three times over a six-year period: the first Recognizing the significant contribution of electricity in 2002, the second in 2005, and the third in 2008. A to rural people's lives and livelihoods, the Government representative sample of 30 households was drawn from of Vietnam made monitoring and evaluation of its rural each of 42 communes in 7 provinces.9 energy projects a priority. Monitoring and evaluation would enable policy makers and international develop- The study was framed as a formal quasi-experiment with ment agencies to understand better the nature and treatment and control groups. Of the six communes in extent of household welfare benefits attributable to rural each province: electrification. · One commune had grid electricity since 2002 To this end, in 2001, an activity to examine the impacts and had expected to continue to use it [control of rural electrification on households was set up under group--electrified]. , the World Bank's REP with support from ASTAE, ESMAP , New Zealand Aid, and SIDA. The objective of the activity was to quantify the social and economic impacts of rural 9. Ha Giang (Northeast), Lai Chau and Hoa Binh (Northwest), Quang electrification and to assess welfare impacts of rural elec- Binh (North Central Coast), Quang Nam (South Central Coast), Dac Lac (Central Highlands), and Soc Trang (Mekong River Delta). In 2004, trification. This assessment would be done not only for Lai Chau was split into two provinces: Lai Chau and Dien Bien. 40 B1: Background and Methodology 41 · Two communes were outside the REP area, and energy surveys (Peru, Philippines, Sri Lanka, and Yemen) were expected to remain without grid electricity have been more limited cross-sectional surveys. throughout [control group--not to be electrified]. · Three communes were without grid electricity in The household surveys were complemented by surveys 2002 and were to receive electricity by 2005 under of important informants, including Women's Union rep- REP [treatment group--to be electrified]. resentatives, teachers, health workers, and community leaders. The composite database is a unique resource It was envisaged that such a formal "with and without, " on the impact of rural electrification that will be of great "before and after" research design would permit the interest to the broader research community--in other identification of the independent effects of electrification countries as well as Vietnam. on daily life and welfare in the sampled communes. Pat- terns of electricity use were examined for each group in These surveys showed that there were multiple benefits all survey years. For the group that gained access to elec- from the REP and the broader rural electrification effort for tricity between the survey years, it was possible to mea- rural households in Vietnam. Access to electricity created sure benefits precisely, because identical households conditions for economic development, particularly in the were compared before and after they gained access. south, job opportunities for local people, and increased household income. Access also helped improve social This unique feature contrasts with most past studies, and cultural life, reduced the burden of household chores which estimated benefits by comparing households with for women and children, improved public primary health and without electricity for a single period. Although lon- care, and improved children's education. Noteworthy gitudinal surveys have been conducted in other sectors, findings of the surveys are summarized below. The find- this was the first time that a longitudinal quasi-experi- ings of these surveys were consistent with results from mental survey design had examined the impacts of rural studies by other researchers and international develop- electrification--most recent World Bank­supported rural ment agencies. B2 Findings of the Survey Increased Household Electrification electrified by 2005, and by 2008 only one commune and Changes in Energy Use Patterns remained unelectrified.10 By 2005, 78 percent of house- holds surveyed had access to the national grid, 9 percent At the beginning of the study, the breakdown of the 1,262 had access to a minigrid, and the use of picohydropower households surveyed in 2002 according to electrification and diesel generators had all but disappeared, as shown status, was as follows: in figure 9.11 · 699 unelectrified households (55 percent); Although the originally envisaged control group (of · 322 connected to the national grid (26 percent); unelectrified communes and households) had already · 163 with picohydropower systems generating elec- become invalid at the time of the second survey, the data tricity for individual households using a small turbine nevertheless allows a wide range of important conclu- and generator placed in a nearby stream or river (13 sions about the benefits of rural electrification, and the percent). contribution of rural electrification to poverty alleviation, which are discussed below.12 The rest relied on minigrids or diesel generators. The electrification patterns showed considerable varia- 10. In 2005, only Ea Kiet in Dak Lak and Phuoc Nang in Quang Nam tion across the seven surveyed provinces, as shown in remained unelectrified; and in 2008, only Ea Kiet remained unelec- figure 7. trifed. Many of the communes that were unexpectedly electrified . were in fact electrified by the REP The explanation for this is that construction costs for REP were overestimated at the time of In 2002, only 26 percent of the households in the study appraisal in 2000­01 (in part because of the unexpected very low sample had grid electricity. By 2005, the share of study inflation in the early 2000s), and therefore the unused funds were sample households with grid electricity had climbed to reprogrammed to electrify additional communes. Thus, REP electri- fied 976 rather than 671 communes, and 550,000 households rather 87 percent, and by 2008, it had reached 95 percent. Fig- than the 395,000 expected at appraisal. ure 8 shows the changes in the energy sources used by 11. Although IoS researchers observed a number of solar PV panels households surveyed. in Soc Trang Province, none of the surveyed households reported a PV system, even in 2008. 12. The attrition rates are relatively low: Of the 1,262 households in The rapid switch to grid electricity affected the actual the original 2002 survey, 140 were lost in 2005 (11 percent), and a composition of the households surveyed in terms of further 41 (3 percent) by 2008; and of the 137 households added as energy use. Of the 14 communes that at the time of replacements in 2005, 12 were lost (9 percent). The literature sug- survey design--around 2001 and 2002--were expected gests this is a low attrition rate for panel data spanning six years. A detailed assessment showed that attrition bias was not an issue (for to be unelectrified by 2005, all but two were in fact details, see Khandker and others (2009). 42 B2: Findings of the Survey 43 fiGurE 7 ElEctrification status in surVEyED proVincEs, 2002 200 150 Number of HHs 100 50 0 Ha Giang Lai Chau Hoa Binh Quang Binh Quang Nam Dac Lac Soc Trang National grid Mini-grid Diesel Pico Other Unelectrified fiGurE 8 cHanGEs in HousEHolD EnErGy usE oVEr tHE yEars 100 80 2002 2005 2008 60 Percent 40 20 0 s ne s es te s s e ty al el al el d dle rie rie Ga en oo ici as av oli Co fu rco es te tte os n ctr rw elw Le s Di gy Ca a at Ga r Ba Ch Ke Ele olo be ll b Fu lum Bi ce y- d, Dr oo W 44 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience fiGurE 9 ElEctrification, by proVincE, 2005 200 150 Number of HHs 100 50 0 Ha Giang Lai Chau Hoa Binh Quang Binh Quang Nam Dac Lac Soc Trang National grid Minigrid Diesel Pico Other Unelectrified Increased Appliance Ownership the best-off quintile).13 The increase in use of color televi- sions can be attributed to the sharp drop in prices. These There are few surprises in the survey results for appli- can now be bought for less than US$50 (nearly VND 1 ance ownership, which increased across the board over million), and are evidently affordable to even poorer fami- the course of the survey years. Starting with lighting, lies. Fans are the second most common appliance (75 households purchased appliances such as radios, televi- percent), followed by rice cookers (55 percent). Once sions, refrigerators, and electric fans, thereby increasing again, even in the poorest electrified homes, 56 percent consumption of electricity. Ownership of durable appli- of households had fans in 2008. ances has increased dramatically over time in Vietnam, not only among better-off and urban households, but also For most appliances, it is observed that the longer a among poor households. household is electrified, the more likely it is to have a Indeed, the survey showed that a significant number 13. The appliance ownership rates reported in the survey may be compared to those reported in the VHLSS for national averages in of rural households that connected to the grid between rural areas: in all electrical appliance categories (television, com- 2002 and 2005 decided to use electricity in a variety of puter, and refrigerator), the national averages for ownership rates ways beyond lighting. There was a dramatic increase in are higher than in our survey--the gap has narrowed considerably the ownership of color televisions. By 2008, black and between 2002 and 2008. For example, in 2002, color television own- ership in the survey area was only 17 percent, as opposed to the white televisions and radios had almost disappeared: national average of 44 percent, but by 2008, color television owner- even in the poorest quintile, 56 percent had color televi- ship in the survey areas (79 percent) was much closer to the national sions (as against 83 percent overall and 95 percent in (rural) average of 84 percent. B2: Findings of the Survey 45 fiGurE 10 appliancE oWnErsHip, by yEars of ElEctrification 100 Color TV 83% 80 Fan 75% Fraction of HHs (%) 60 Rice cooker 54% 40 Water pump 30% 20 Flat iron Refrigerator 15% Car battery 14% 10% B&W TV 4% 0 Electrified less Electrified for Electrified for more All than 3 years (1) 3­6 years (2) than 6 years (3) color television, a rice cooker, and a fan.14 Figure 10 illus- percent relied exclusively on incandescent bulbs in 2002, trates appliance use in 2008 by the date of electrification: decreasing to just 4 percent in 2008. the categories are defined according to whether house- holds electrified in 2008 had already been electrified in Figure 11 shows the fraction of lumens provided by 2002 and 2005. Figure 10 shows that most of the appli- incandescent lighting by expenditure quintile: In 2002, ance uptake occurs in the first few years of electrifica- 53.1 percent of the lumens in the poorest households tion. For example, in the case of rice cookers, whether depended on incandescent bulbs, but only 28.1 percent a household has been electrified for between three and of lumens in the best-off group. By 2005, this fraction six years (56 percent), or for more than six years (58 per- declined across all groups, but was still above 30 per- cent), makes little difference. cent in the poorest group. As a result, the cost of lighting per lumen-hour in the poorest households is 50 percent A finding of some concern is that a significant fraction of higher than in the best-off quintile.15 the poorest electrified homes are still reliant exclusively on incandescent lighting: in 2002, 41 percent of electri- fied homes in the poorest quintile relied exclusively on Increased Household Electricity incandescent bulbs for lighting, which reduced to 19 per- Consumption cent by 2008. However, in the best-off quintile, only 12 The survey showed that, over the years, the rate of electrified households not only increased, but also the 14. In all southeast Asian countries where rice is the staple diet, amount of electricity used by electrified households recent years have seen a high growth in the use of rice cookers-- to which Vietnam is no exception. Rice cookers are relatively cheap increased remarkably. Household electricity consump- appliances, and clearly offer great convenience benefits. Already in tion increases as households acquire a larger number of 2002, 24 percent of our electrified surveyed households had rice electric appliances over time. According to survey results, cookers, increasing to 55 percent by 2008. However, the reported reduction in daily cooking times is modest (no more than 20 minutes per day). Some informants also noted that rice cookers save food 15. In 2008, the poor paid VND 27/kLmh, as opposed to VND 19/ because rice does not stick or burn. kLmh paid by the best-off. 46 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience fiGurE 11 fraction of lumEns proViDED fiGurE 12 montHly ElEctricity consumption, by incanDEscEnt liGHtinG, by by ExpEnDiturE QuintilE ExpEnDiturE QuintilE 160 60 2002 2005 2007 140 120 2002 2005 2007 50 100 kWh/HH/month Fraction of HHs (%) 40 80 35.4% 67 60 30 45 25.1% 40 41 24.0% 20 20 0 1 2 3 4 5 All 10 (poorest) (best off) 1 2 3 4 5 All Expenditure quintile (poorest) (best off) Expenditure quintile According to the survey, expenditure on electricity repre- sents a relatively small proportion of total energy outlays average electricity consumption grew from 41 kWh/HH/ in electrified households, accounting for just 12 percent month in 2002 to 67 kWh/HH/month in 2008, as shown of total energy expenditure in 2002, 13 percent in 2005, in figure 12. and falling to 10 percent in 2008. Part of the explanation is the reluctance (and high cost) of changing diesel pump The survey showed that household electricity consump- sets to electric motors for irrigation pumping. However, tion grew for all expenditure quintiles, and that there was the composition of expenditure in electrified households significant variation in electricity consumption across has stayed remarkably constant over time--fuelwood expenditure quintiles. In 2008, household electricity con- sumption in the poorest quintile was only 28 kWh/HH/ month (up from 18 kWh/HH/month in 2002), while it was fiGurE 13 aVEraGE consumption, by Duration 136 kWh/HH/month in the best-off quintile (up from 72 of connEction kWh/HH/month in 2002). The high consumption figures in the best-off quintiles reflect significant business use, 120 particularly for irrigation pumping. 18 100 Monthly consumption, kWh/HH An analysis of electricity consumption rates by year of connection shows consistent growth for the first few years (as the most desired appliances are acquired), but 80 12 stabilizes after 5­6 years (figure 13). The very high con- 47 177 37 sumption rates for a group of households (mainly in the 334 60 52 147 south) electrified in the mid-1990s are a result of irriga- 26 43 56 18 tion pumping use.16 21 40 5 Number of households 16. A detailed statistical analysis at the provincial level shows that 20 income is the dominant determinant of consumption level. In a mul- 0 5 10 15 tivariate analysis, in the presence of the income (or expenditure) vari- Years connected ables, duration of connection is significant in only one province. B2: Findings of the Survey 47 and kerosene expenditures have declined slightly,17 and electrified and unelectrified households are much greater LPG increased slightly, but diesel and gasoline expendi- than the changes over time in electrified households. Die- ture shares have changed little over time. sel consumption is certainly consistently higher in unelec- trified households and gasoline consumption lower--the Indeed, as shown in figure 14, gasoline and diesel domi- latter largely an income effect, as electrified households nate household energy expenses (a pattern already have higher income, which allows greater discretionary observed in 2002). However, the differences between spending on personal transportation. However, what is also clear from this comparison is that remote rural 17 The continued use of kerosene for lighting after rural electrifica- . households are much more likely to be sensitive to gas- tion in poor areas is not unique to our survey, and has been reported oline and diesel price increases than to electricity tariff in a number of other countries. In Vietnam, the explanation is that increases. kerosene and candles are used primarily for emergency lighting dur- ing brownouts and power failures. fiGurE 14 annual EnErGy ExpEnDiturE, VnD 1,000, by lEnGtH of ElEctrification, 2008 500 400 Annual expenditure, VND 1,000 300 200 100 0 Before 2002 2002­04 2005­08 In electrified In unelectrified communes communes Electrified Unelectrified Leaves Fuelwood Wood waste Charcoal Biomass residue Kerosene LPG Diesel Petrol Dry cell Car battery Candles Coal Electricity B3 Impacts of Rural Electrification on Households The rapid shift to grid electrification for the households about educational outcomes for children (particularly for surveyed in rural Vietnam has resulted in a better qual- higher education). ity of life for many rural families. Electrification relieved the financial burden on rural households by reducing their Electric lighting was the first priority of rural households reliance on kerosene for lighting and batteries for oper- covered by survey, out of all uses. Not so long ago, remote ating larger communication devices. The increased own- villages in Vietnam shut down at sunset. Adults returned ership of time-saving home appliances, in turn, meant home before dark and children went to bed not much less time dedicated to household chores and more later. The alternative to electric lighting was the use of spare time for reading, socializing, and leisure, as well kerosene lamps and candles, which were inadequate for as productive activities. Moreover, the availability of elec- reading, cooking, and other household activities. Once tricity contributed to greater school enrollment for rural residents connected to the electricity grid, an immediate youth, increased farm productivity, and higher household benefit was higher levels of household lighting at lower incomes. cost than kerosene. For households that adopted grid electricity, the switch Households' Self-Assessment of the from kerosene lamps to electric lighting was life-changing. Impact of Various Uses of Electricity Electric lighting was less polluting and safer to use. It pro- vided significantly higher quantities of reading and space Over the entire span of years covered by the surveys, light, the outcomes of which can eventually translate unelectrified households expressed an overwhelming into higher household income. Having more light avail- desire for access to the national grid. In 2008, 100 per- able meant that rural families used more hours of light cent of the households in the one remaining unelectrified each day. As household productivity grew, people pur- commune expressed a desire to be electrified; however, chased more electric lamps and used them longer. See of unelectrified households in electrified communes, the the example in box 12. proportion who desired electrification was somewhat lower at 76 percent. Although the self-assessment of health status requires caution, in all three survey years, the proportion of who Rural households that gained reliable electric service for described themselves as having better health was higher the first time reported higher levels of well-being. There in electrified households than in unelectrified house- is little question that the respondents thought that elec- holds: and the proportion of described themselves as tricity had brought great benefit to their lives, and over a having worse health was lower in electrified households. wide range of indicators they indicated that their lives had For example, in 2005, 43 percent of households in elec- improved since electrification--more time for reading, trified homes described themselves as in better health entertainment, and television, and in higher expectations (as opposed to 35 percent in unelectrified households). 48 B3: Impacts of Rural Electrification on Households 49 box 12 illustration of tHE WElfarE bEnEfits of appliancE oWnErsHip--tHE casE of tHE ElEctric ricE cookEr Rice is the main staple in the diet of every Vietnamese. Most rural families eat rice once or twice a day. But without grid electricity, rice preparation is a time-consuming process since most rural households still rely on traditional bio- mass stoves to cook their daily meals. The panel study found that rice cooker ownership surged over the course of the survey period in all households that gained access to grid electricity. Rural households, and particularly women, who are often in charge of household cooking, benefit from electric rice cookers in several ways. Using biomass stoves to cook rice takes longer and has to be supervised by a household member to prevent the dish from burning. This means that women have less time to engage in more productive activities, such as reading or running a home-based business. Moreover, members of the household have to spend more time walking in order to collect biomass fuels from already depleted woodlands, and inhale more smoke emit- ted from inefficient stoves. Because it allows a household chore to be completed in a shorter time, which in turn frees up time for productive or leisure activities, and requires much less effort and supervision and eliminates indoor air pollution related to the use of biomass stoves for rice cooking, an electric rice cooker is a very useful appliance for rural households. Since it also helps mitigate indoor air pollution and associated health impacts, it can also arguably improve the productivity of the " household members when they go to work in the "productive sector. The cooker, however, is often classified as a consumer good and, thus, "not productive. " Quantification of Benefits around 70 US¢/kWh. This is consistent with similar valu- ations estimated in other countries. As part of the analysis of survey findings, demand curves for lighting and television usage were derived in order to This level of economic benefit permits not just a reas- estimate the economic benefits of electrification. , sessment of the economic returns of the REP19 but more importantly, can serve as a useful input into the process The economic benefits of electrification can be esti- of determining how best to meet the government's elec- mated by the examination of the demand curves for ser- trification targets and provide cost-effective electrifica- vices provided by electricity--such as lumens of lighting tion to the remaining unelectrified households. or hours of television viewing. The economic benefits of a given level of consumption are given by the area under Recent programs to promote off-grid electrification the demand curve (willingness to pay). For example, in in remote areas--such as the World Bank­supported the case of lighting, before electrification, consumers Remote Area Rural Electrification (RARE) program--have paid about VND 6,100/kLmh for kerosene, but only VND encountered significant cost increases. For example, the 17­55/kLmh provided by electricity (depending the mix district of Muong Te, which is one of the most remote of incandescent and fluorescent bulbs used). The eco- areas in Vietnam, located in Lai Chau province, was one of nomic benefits of electrification are then derived from the areas selected for off-grid electrification, because of the change in consumer surplus. Although these calcu- the prohibitive costs of grid electrification of the remote lations depend on some further assumptions about the communes in the district. Three new off-grid schemes, shape of the demand curves between these points, the based on hydropower and the rehabilitation of four exist- methodology is generally recognized as providing a rea- ing schemes, are currently underway under RARE. The sonable estimate of the economic benefits involved.18 cost estimates for off-grid electrification in Muong Te doubled between 2006 and 2008. Figure 15 shows the estimated demand curves for light- ing and television viewing based on the survey data: the Figure 16 shows the maximum cost per household con- resulting estimate of the willingness to pay for lighting is nection to still attain a 10 percent economic rate of return 18. This methodology and its application to World Bank rural elec- 19. The REP Implementation Completion Report, prepared in 2007 , trification projects has been reviewed (and approved) by the Bank's .6 reported an ERR of 27 percent, based on earlier estimates of WTP Independent Evaluation Group (IEG 2008b). of around 30 US¢/kWh. 50 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience fiGurE 15 DEmanD curVEs for liGHtinG anD tElEVision ViEWinG Lighting TV viewing 1,000 8,000 800 6,000 VND/1,000 lumen hours VND/viewing hours 600 4,000 400 B = 65,970 2,000 200 C = 3,689 0 0 0 20 40 60 80 100 120 0 100 200 300 400 Viewing hours/month 1,000 lumen hours/month (ERR)--that is, a function of the level of consumption Rural Electrification Impact on and the economic benefit per kilowatt-hour consumed. Education For the poorest and most remote areas, monthly con- sumption is estimated to be about 30 kWh/HH, for which Impact on adult education. The returns to education the maximum capital costs are calculated at around are well established in the development economics lit- US$1,800 per connection. In some of the most remote erature: the more years of schooling, the higher the areas, connections to the grid could cost as much as 10 income as an adult. The question for the evaluation of times this amount. For example, connecting the most REP was the extent to which this relationship is affected remote households in Muong Te has been estimated by electrification. to cost more than US$10,000 per household. For these areas, minigrid or off-grid solutions appear more attrac- Indeed, the survey shows a strong impact of electrifica- tive, since they are likely to exceed the 10 percent hurdle tion on the relationship between income and years of rate. In Muong Te, RARE program connection costs are schooling, most unmistakably in the case of five or more in the range of US$700­1,000/HH. years of schooling (and in the northern provinces across all levels of schooling).20 Moreover, this differential occurs within a few years of electrification--there is little differ- ence between households electrified for more than 10 fiGurE 16 maximum capital cost pEr connEction years, and households electrified for between 5 and 10 to attain minimum 10% Err years. The benefit of being in an electrified household is clear (figure 17). 8,000 This differential is true for minority ethnic groups (account- 6,000 70 kWh/HH/month ing for 77 percent of households), as well as for the sec- Capital costs/HH, US$ 60 ond income earner in a household, and is not limited to 50 the (mainly male) heads of household (see figure 18).21 4,000 40 30 The hypothesis that the better-educated reach their full 2,000 potential when they get electricity may appear compel- ling, but correlation does not imply causation. Better 0 0 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1 20. The distribution of years of schooling shows a median of 7 years Willingness to pay, US$/kWh (average of 8.4 years); the mode (accounting for 25 percent of heads of households) is 9 years. 21. Heads of household are predominantly male (79 percent). The second earner is predominantly female (81 percent). B3: Impacts of Rural Electrification on Households 51 roads, better access to mobile phones, or even health Whether the observed correlations are a consequence of clinics--which have often arrived at about the same time having more time for productive activity, or being able to as the grid--may have the same impact we attribute to work more productively, or having more time and oppor- electrification. tunity for further betterment is hard to judge, but what the hypothesis says is that rural electrification enables One way of controlling for these other factors is to exam- more educated individuals to realize that the benefits of ine the differentials at the commune level--at which level that additional schooling is persuasive: A better-educated all households would benefit equally from better roads, individual who spends evenings in the dark is not living the arrival of mobile phone coverage, or a new health to his full potential. clinic. The number of observations at the commune level is much smaller, so statistical significance is also lower, The impact on children's education. While the impact but the same patterns are observed at this level (with of electrification on already educated adults is clearly statistically significant differences in returns to education revealed by the survey, the question of whether electri- between electrified and unelectrified households in most fication results in better study outcomes for children is communes). less clear. Obviously, most of the better-educated adults who have been shown to benefit from electrification Figure 19 shows the relationships for a selection of com- were themselves educated in unelectrified homes--and munes of different types of electrification. In most cases almost certainly in homes that did not have the distrac- (and in all three cases shown here), the returns to edu- tions of television. cation (that is, the slope of the trend lines) are greater for electrified households than for unelectrified homes. Though it is not possible to make definitive statements about ultimate educational outcomes, over a range of indicators the survey provides evidence of the positive fiGurE 17 rEturns to EDucation benefits of electrification:22 8,000 · In rural areas, primary school enrollment is virtually Unelectrified Electrified >10 years universal, regardless of whether a child lives in a Annual income, VND 1,000 6,000 Electrified household with or without grid electricity. · But once children make the transition from primary 4,000 to middle school, school attendance improves sig- nificantly for households that have some form of 2,000 electricity, and school attendance at all levels of households with either grid or off-grid systems is 0 much higher than for those without any electricity 0 1 2 3 4 5 6 7 8 9 10 11 12 at all. Generally, households with some form of elec- Years of education tricity attend school at about a 10­15 percent higher rate than those without electricity, depending on the age group. Middle school attendance increased from fiGurE 18 rEturns to EDucation, EtHnic minority 76 percent to 88 percent between 2002 and 2005. HousEHolDs · High school attendance is much lower for all survey groups, but lower still for those without electricity. 20,000 Households with some form electrification (national Unelectrified grid, isolated grid, picohydro) had attendance growth Electrified rates above 10 percent. By contrast, the house- Annual income, VND 1,000 15,000 holds without electricity in 2005 increased their high school attendance by only 4 percent. 10,000 · Overall, children growing up in households with electric lighting spent more time reading or studying than their peers living in homes without any electric- 5,000 ity, as shown in table 11. 0 0 1 2 3 4 5 6 7 8 9 10 11 12 22. Because primary school enrollment was already virtually univer- Years of education sal in 2002, electrification has no observable impact on school atten- dance for children aged 6­13 years. 52 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience tablE 11 rEaDinG anD stuDy timE spEnt by fiGurE 19 rEturns to EDucation at tHE cHilDrEn of Various scHool aGEs communE lEVEl school age Commune 1: electrified by PICO hydro C Household electrification primary middle High 8,000 14,000 status in 2002 (6­12) (13­15) (16­18) 1 2 12,000 Reading or study time (minutes per day) 1 Annual income, VND 1,000 Annual income, VND 1,000 6,000 Grid 82 100 108 11 10,000 Isolated system 68 67 82 1 8,000 4,000 4 1 No electricity 59 73 78 6,000 3 1 3 3 4,000 All households sampled 67 80 90 2,000 1 1 2,000 2 2 2 0 0 · More than 95 percent of families whose children 0 2 4 6 8 10 12 0 2 gained more time to study at home because of elec- Years of education trification believe that the additional time devoted for Commune 17: electrified by national grid study has improved their children's performance at 25,000 school. The proportion of children spending most of Commune 1: electrified by PICO hydro Commune 25: electrified by mini-grid their evenings studying is much higher for electrified 20,000 3 Annual income, VND 1,000 8,000 14,000 households. Commune 1: electrified by PICO hydro Commune 25: electrified by mini-grid 1 8,000 2 1 12,000 15,0001 14,000 Annual income, VND 1,000 Annual income, VND 1,000 Having higher levels of lighting in the household appears 6,000 1 11 10,000 2 1 to encourage more children to attend school, especially in 12,000 1 10,000 6 Annual income, VND 1,000 Annual income, VND 1,000 6,000 the higher grade levels. Other recent research, with 1 the 8,000 11 10,000 1 4,000 4 2 same data using more advanced modeling techniques, 1 6 5,000 6,000 2 1 1 1 8,000 3 1 1 3 3 as basically confirms these results, 3such 4,000 Khandker and 1 4 3 2 16 1 4,000 1 1 others (2009). Clearly, grid electricity in the household 2,000 1 6,000 0 1 1 3 1 1 3 2,000 0 3 2 4 6 8 1 is no guarantee that children will stay on in school, but it 3 1 2 2 5 4,000 1 1 2,000 Years of education is an important complement to educational programs in 0 0 2 1 1 1 2,000 2 2 improving school attendance in the higher grade levels. 0 2 4 6 8 10 12 0 2 4 6 8 10 5 12 1 2 Unelectrified Electrified Years of education 0 Years of education 0 0 2 4 6 8 10 12 0 2 4 6 8 1 Years of education Commune 17: electrified by national grid Years of education Income and Expenditure Patterns 25,000 Commune 17: electrified by national grid The survey results reflect the significant progress in eco- 20,000 25,000 3 Annual income, VND 1,000 nomic development over the past decades, which has extended even to the remote rural areas covered by the 20,000 3 Annual income, VND 1,000 15,000 4 survey. 10,000 15,000 6 4 Results from the surveys conducted over six consecu- 2 1 10,000 6 tive years showed that people's incomes went up con- 5,000 2 1 1 2 3 siderably, especially in the period from 2005 to 2008, 1 1 2 1 5,000 2 as shown in figure 20. Over the course 0 of the survey 1 1 3 1 0 2 4 6 8 10 2 121 period, median household income recorded in each sur- 1 Years of education0 1 vey doubled compared to the previous survey, from VND 0 2 4 6 8 10 12 6.3 million in 2002 to VND 11.2 million in 2005 and VND Unelectrified Electrified Years of education 24 million in 2008. Unelectrified Electrified Household expenditures in the surveyed communes, by province, increased between 2002 and 2008 by 140 per- cent to 320 percent--with the highest increases occurring B3: Impacts of Rural Electrification on Households 53 fiGurE 20 annual HousEHolD casH incomE anD total ExpEnDiturE, 2002­08 50,000 Mean income 45,000 Median income Mean expenditure 40,000 Median expenditure 35,000 VND thousands 30,000 25,000 20,000 15,000 10,000 5,000 million).24 When one examines the average income of all households (across all quintiles), except those in Soc 0 Trang, the association of higher incomes with electrifica- 2002 2005 2008 tion is clear, as shown in table 12: the better the electri- Year fication, the higher the income. Whether this association also implies causation, however, cannot be answered from the income data alone.25 in the poorest provinces, and the lowest increases in the two provinces that were the best-off in 2002.23 Although the causality in the relationship between rural electrification and income is difficult to establish in the It is difficult to attribute the changes in rural income and context of this survey, it is widely accepted that rural expenditure patterns specifically to rural electrification. electrification can impact rural incomes through a vari- Most of the changes in expenditure and income patterns ety of farm and nonfarm channels. Electricity impacts are attributable simply to the overall increase in eco- farm incomes primarily through increasing productivity, nomic well-being. Indeed, as noted above, expenditures through switching from manual to machinery powered for electricity in electrified households account for only irrigation, adoption of electricity operated equipment for a small percentage of total household expenditure, and harvesting and processing. An example is presented in the principal determinant of whether a household is elec- the photo, which shows a business, located in Tuyen trified is distance (and hence cost) from the electrified Quang Province, that switched from processing rice and commune center, rather than household income. corn manually to using light machinery. In 2002, the average household income of unelectrified 24. Similar patterns are observed in the expenditure data (see World households (VND 20.7 million) was marginally higher than Bank 2010). 25. The relevant question is whether households connect to the grid electrified households (VND 20.2 million), although this is (if available) because they already have higher income to afford the explained by much higher-than-average incomes in Soc connection cost and the cost of appliances when the grid arrives, or Trang Province, where significant numbers of wealthy whether they gain higher incomes as a consequence of being electri- farmers distort the averages. However, if one looks just fied. Application of more advanced multivariate statistical techniques (in which many other factors can be held constant, and the impact at the incomes of the poorest quintile, the difference of electrification alone can be isolated) is made difficult because of is sharp. Unelectrified households in this quintile had the early loss of the control group (because so many households an average income of VND 1.74 million, one-third lower were electrified by 2005, and almost no unelectrified households than electrified households in the same quintile (VND 2.8 remain in 2008), and because in the early phases of electrification in the 1990s, communes targeted for electrification were indeed those that had higher incomes--and also were less remote. Khandker and 23. In nominal terms, average household incomes increased from others (2009) attempted to unravel the data with sophisticated sta- , VND 19.0 million in 2001 to VND 44.1 million in 2007 an increase of tistical methods. They found that the biggest impact was on cash 232 percent. In real terms (at constant 2001 prices), the increase by farm incomes, but with little impact on nonfarm income--explained 2007 was to VND 32.7 million, an increase of 72 percent: the aver- by the farm productivity improvements associated with pump irriga- age annual rate of 9.5 percent is somewhat higher than the national tion. This is a promising area of further research using the database average GDP growth rate. now at hand. 54 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience tablE 12 aVEraGE HousEHolD incomEs tablE 13 pErcEntaGE of HousEHolDs runninG (millions of VnD) a HomE businEss or sErVicE (percent) 2002 2008 unelectrified Electrified Unelectrified 6.6 37.5 2002 17.3 21.2 PICO system 10.9 none 2005 9.8 21.1 national grid 12.5 44.5 2008 12.7 20.2 The availability of electricity also creates opportunities for again follows the general international experience on the new businesses in manufacturing and services in farm consequences of improvement in economic well-being. areas, such as agricultural and forestry products manu- facturing, agricultural production services, and leisure Changes in income composition were no less remark- and entertainment services, and hence, creates jobs. able. In 2002, 72 percent of income in the surveyed Moreover, availability of electricity helps improve produc- household was derived from agriculture, only 11 percent tivity and allows increased operating hours for existing from wages and salaries, and 11 percent from business. nonfarm businesses, as seen in box 13. By 2008, however, the share from agriculture dropped to 56 percent, while that for wages and salaries increased The survey showed that household expenditures fol- to 17 percent, and that from business to 13 percent. low the classic pattern. In 2002, the poorest spend the largest proportion of their expenditure on food The percentage of households that reported a home (60 percent), and the best-off the smallest (23 percent). business or service (table 13) was significantly higher for Energy expenditures account for a very small propor- electrified homes (20.2 percent in 2008) than for unelec- tion across all quintiles (between 2 and 3 percent), trified homes (12.7 percent). although agricultural expenses include diesel for irriga- tion pumping, and transport expenses include gasoline (for motorcycles). Poverty Alleviation As shown for selected provinces in figure 21, over Poverty levels in Vietnam have fallen dramatically over the course of the survey, expenditure shares on food the past decade (figure 22). This is reflected in the survey dropped sharply, while shares on education and other results. Although in 2002, 75 percent of households fell discretionary items (including appliances) increased. This below the poverty threshold, by 2008 this had fallen to box 13 a morE QualitatiVE Discussion of tHE impact of rural ElEctrification on incomEs Several personal accounts from farmers about the ways in which their lives were affected by rural electrification were gathered during interviews conducted during an evaluation of the First Rural Energy Project. Some examples are presented below: · Phan Thanh Liem, an orchard grower in the Mekong Delta, increased returns in a short time by switching from manual to grid-powered irrigation. This allowed him to grow higher-return fruit trees, such as orange and pomelo, whose fruits could be exported. · Along the coast, shrimp farmers switched from diesel- to grid-powered machinery, which reduced production costs by about a third, and began using electric turbo fans, so that shrimps could be raised at a higher density. · In the north, sawmill owners such as Lien Hanh increased productivity up to 10 times by switching from hand- saws to machines. · Tran Huy Quang, a farmer in Tuyen Quang, realized significant returns after switching to cassava-processing machinery. B3: Impacts of Rural Electrification on Households 55 fiGurE 21 cHanGEs in ExpEnDiturE sHarEs, 2002­08 30 20 Change in share of total expenditure (%) 10 0 -10 Ha Giang Q. Nam H. Binh -20 -30 Other Agriculture Energy Transport Education Clothing Food 33 percent. These poverty rates are still very much higher than the national rural averages reported by the Vietnam fiGurE 22 poVErty ratE in ViEtnam Household Living Standards Survey (VHLSS)--35.6 per- 70 cent in 2002 and 18.7 percent in 2008--although the gap has narrowed. In 2002, the poverty rate in sampled house- 60 Ha Giang Q. Nam H. Binh holds was 2.1 times the national average for rural areas, 50 but only 1.75 times the national average in 2008.26 Percent poor 40 However, the survey reveals little difference in poverty 30 rates between electrified and unelectrified households. In both 2002 and 2005 there was little difference, but 20 by 2008, while the percentage of electrified households 10 in poverty fell further to 32 percent, the percentage of unelectrified households in poverty remained at 47 per- 0 cent (figure 23). 1993 1996 1999 2002 2005 2008 Year The general reduction of poverty in the surveyed com- munes is testimony to the success of the government's , Source: VHLSS 1993, 1997 2002, 2004, 2006, 2008 VHLSS; 2008 poverty rates are preliminary World Bank estimates; all others from poverty alleviation program. While the benefits of the Government Statistics Office. 26. The Vietnam Household Living Standards Survey (VHLSS) is a series of nationally representative household surveys conducted by the Government Statistics Office (GSO) for the first time in 1993, economic growth have accrued to all segments of soci- then in 1997/98, 2002, 2004, 2006, 2008, and 2010. The 2008 ety, it is the poorest groups--in this case, in the remote, VHLSS, published in August 2010, covers more than 9,000 house- rural areas, where minority ethnic groups constitute a holds located in all provinces of the country. The VHLSS includes detailed information on household incomes and expenditures, pov- significant proportion of households-- that have ben- erty status, ownership of durables, including electrical appliances, efited the most. and access to electricity, including monthly electricity payments. The results from the 2010 VHLSS have not yet been published. 56 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience At the same time, the results underscore the importance to have changed over the years and is now more gener- of providing the poorest households with assistance in ous for households classified as poor (box 14). connection costs. The survey finds that connection costs vary greatly, a reflection of the differences in distances of the more remote households to the commune connec- reporting connection costs of more than VND 2 million. By contrast, tion points.27 The policy of providing assistance appears the average connection cost to local minigrids was VND 755,000 (median VND 500,000). These connection costs are similar to the costs of pico-generators that were widely used in the northwestern . 27 The average among the 815 households that provided an estimate provinces: in 2002, the average reported cost for pico units is VND of connection cost to the national grid was VND 550,000 (median 555,000 (about US$35), with a median of VND 400,000. About 10 VND 400,000). Reported costs vary widely, with18 households percent of the units cost more than VND 1 million. fiGurE 23 poVErty allEViation anD box 14 rural EnErGy projEct icr surVEy finDinGs ElEctrification on rural ElEctrification anD poVErty 80 A separate, short survey was carried out in order to Unelectrified Grid in 2002 assess the impact of the REP on poverty in the poor- Grid since 2002 est communes in the northern areas of Vietnam. The 60 survey involved in-depth interviews in six communes in three districts in three provinces. This participatory Percent poor 40 survey also confirmed the benefits of rural electrifi- cation. In all the communes surveyed, poverty rates significantly declined over the project implementation 20 period, as shown in table 14. 0 tablE 14 poVErty ratEs in communEs surVEyED 2002 2005 2008 Year commune 2000 (%) 2004 (%) Chieng Hkeo 14.1 11.9 Note: The most recent poverty threshold is based on a benchmark of 2,100 calories per person per day, applied to per capita incomes Chieng Trung 40 36 rather than per capita expenditures (as used previously). In 2006, the Government of Vietnam set its official poverty lines at VND Tu Vu 32 18 260,000 per person per month for urban areas and VND 200,000 for rural areas. The poverty thresholds used in Figure 5 are based on Phuong Mao 33 24 this definition, adjusted over time using the midyear consumer price index. Since annual income and expenditure questions asked about Tro Quang 31 17 , these during the "past year" and since the surveys were conducted Thai Nien 28.5 9.9 in spring of each year, the thresholds apply to the year previous to the survey year (so the VND 159,000 threshold in the 2002 survey Source: Vietnam Rural Energy Project, Implementation Completion is the value that applies for 2001). and Results Report, 2007. Part C Lessons Learned from Vietnam's Rural Electrification Experience C1 Introduction The rural electrification effort in Vietnam has been one support for the 500 kV line to connect the northern and of remarkable achievements, with the share of house- southern parts of the country. Another is the abundance holds with electricity access growing from 2.5 percent in of generation resources that became available in the early 1975 to 96 percent by 2009. Through a remarkable and 1990s, which, combined with the completion of the 500 unparalleled effort, the country succeeded in providing kV line, made it possible to respond to society's strong access to more than 80 million people over the course of demand for electricity. 33 years--from 1.2 million people having access to electricity in 1976 to about 82 million people having it in Certain features of Vietnam's experience, especially the 2009. ways in which the government managed to tackle the challenges that emerged, can provide useful lessons The government's efforts addressed a wide array of chal- for other countries. Bearing in mind the uniqueness of lenges along the way, and successfully balanced the Vietnam's circumstances, the decisions and approaches sometimes competing interests of local, provincial, and that are highlighted can be adopted and tailored to other central governments. Government programs, combined country contexts. In an effort to derive lessons from Viet- with support from development partners in the later nam's experience, part C discusses factors that led to years, created an institutional structure for rural electric- the success of rural electrification in Vietnam and high- ity supply, which bodes well for long-term, sustainable lights important strategic and practical choices made at development. critical junctures. The lessons learned are broken down into those that involve lessons from the perspective of Needless to say, some portions of the Vietnamese expe- the government, and that can inform strategies of other rience with rural electrification are specific to the social, developing countries in their efforts to expand access political, and cultural context of the country, and hence, to electricity, while the latter part involves lessons and some parts of Vietnam's experience may not be easy to conclusions from World Bank experience, which can be replicate elsewhere. An example is the unique opportu- of relevance during the development of projects in the nity presented by the focus on unification of the coun- future. try after the war, which in turn contributed to the broad 58 C2 Lessons from Vietnam's Success in Rural Electrification The following is a discussion of the strategies, imple- which had been the focus of the electrification efforts in a mentation approaches, and practical choices that can resource-constrained environment. The implementation help explain Vietnam's success in extending electricity of Doi Moi policies contributed to a general improvement access to a significant portion of its population in a rela- in the living standards of rural populations, through allow- tively short time. ing greater business opportunities, increased educational attainment, and higher rural household incomes. As Viet- Vietnam's success in rural electrification can be explained nam became more engaged in international trade, and by a range of factors, including the following: moved from being a rice importer to a rice exporter, there was need to increase rice production for exports, which · Unwavering government commitment that is respon- necessitated increased quantities of electricity supply for sive to strong demand from society; irrigation. The demand from rural households, coupled · Long-term vision, gradual approach, prioritization, with the growing needs of agriculture and industry, made and flexibility; electricity a priority for the country. · Sharing of costs by all stakeholders and mobilization of various resources; In anticipation of the wide range of benefits from elec- · Clear allocation of responsibilities among all levels of trification, as summarized in part B, rural households government, sector participants, and consumers; in Vietnam grew increasingly eager to gain access to · EVN's emergence as a strong champion for rural electricity. Over time, the strong demand for electricity electrification after 1999; access became embedded in the fabric of societal life in · Making technical choices suitable for sector status the country, and it had become customary for people to and priorities; talk about electricity everywhere, as discussed in section · Ensuring the economic and financial viability of rural A4. Higher rural incomes also rendered electricity supply electricity supply while establishing and maintaining and appliances more affordable for rural households over financial controls. time. However, it is important to note that, even before the significant increase in their incomes, rural people had These factors and their implications are explored below. a rather high willingness to pay for electricity. The presence of very strong demand for electricity is not Unwavering Government unique to Vietnam, and one can easily argue that strong Commitment in Response to demand for electricity is present almost everywhere in Strong Demand from Society the world. What was distinctive about the Vietnamese experience was how this strong demand translated into Up until the Doi Moi reforms of 1986, household elec- action and, eventually, results. The local and central gov- tricity access in rural areas had been a by-product of ernments listened to the people, and were responsive to electricity supply for agricultural and industrial sectors, their strong desire for electricity access. 59 60 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience Providing electricity to a significant portion of Vietnam's Long-Term Vision, Gradual Approach, rural population was achieved in a relatively short time, Prioritization, and Flexibility thanks in large measure to the unwavering national com- mitment to rural electrification as part of a recipe to allevi- Vietnam's rural electrification effort involved a systematic ate poverty and achieve balance between rural and urban and long-term vision, implemented through a gradual development. Decision makers recognized the strong program, focused on tackling the most immediate chal- societal demand for electricity, and by the early 1990s, lenges first, and maintaining flexibility while determining electricity access rates had been made a key indicator the specifics in later stages. for the yearly socioeconomic development assessment of every commune, district, and province. The government made a strong commitment to provide electricity to people in rural parts of Vietnam, and elabo- Local and central government authorities made rural rated on how it intended to achieve its objectives through electrification a priority, and mobilized their resources to long-term plans, sector strategies, and policy papers. A make it possible. The central government's commitment central part of this long-term vision was that the coun- to rural electrification was built into its five-year plan try's electrification target would be achieved primarily and 10-year strategy. In 1999, the Ministry of Industry through grid extension. issued a policy paper outlining the objectives and prin- ciples to be followed in rural electrification. This paper The efficiency and sustainability of the program was built provided clarity and a clear direction for the government's up through a systematic staging of sequenced inter- approach and helped accelerate the program in its initial ventions, designed based on the resources available. stages. The same year, the allocation of responsibilities Similarly, institutional changes were achieved through for rural electrification was formalized for the first time, systematic and gradual steps, implemented over the and rural electrification program was branded as one of long term. "State and People, Central and Local, Working Together. " The Electricity Law was approved in 2004. In subsequent Vietnam's priorities and challenges have evolved over years, the provincial governments issued the necessary time, which was reflected in the country's rural electrifi- regulations. cation effort. The issues encountered during the course of the rural electrification effort were constantly changing Lesson 1: Vietnam's success can be credited to and the challenges that had to be tackled were daunting. unwavering national commitment to rural electrifica- There was not one unified master plan at the outset; Viet- tion. A significant feature of Vietnam's experience has nam started one way, and has continually evolved in the been the bottom-up manner in which the drive for rural way it tackled the challenges, which themselves were electrification materialized. Local authorities' respon- changing. siveness to strong societal demand and their choice to accord adequate priority to this issue were critical In Vietnam's experience, the focus was to fix the most factors for success, and the culmination of this into immediate problem, and set others aside to be dealt a national agenda item was a key factor for success. with later. The challenge of the early stages--that of Government commitment at all levels--central, provin- providing simple connections--evolved into one of cial, and local--has been a key component of the Viet- securing quantity of supply and quality, while meeting namese experience with rural electrification. There was ever-burgeoning urban and rural energy demand, as rural persistent dedication and collaboration among central electrification made progress. Several examples of this government policy makers and provincial, district, and preference and choices made during the course of the commune level authorities, as well as with EVN and program are provided below and are discussed in detail local communities. Once rural electrification targets elsewhere in this book: were set and pledges to support rural electrification were made, policy makers stood by them, and never · Prioritization of productive uses versus house- back-tracked from what was originally promised. holds. Initially, there was a focus on productive uses, in the resource-constrained environment of the postwar years. The shortage of generation capacity focused attention on the industrial and agricultural sectors. This was linked to a straightfor- ward question of national survival at a time when the resources and options available to the country were rather limited. Policy makers gave priority to C2: Lessons from Vietnam's Success in Rural Electrification 61 electrifying areas with high potential growth in pro- were dissolved or absorbed into other entities, as ductive uses of electricity, since these areas were was the case of the transition from the CEG model expected to provide a large amount of new revenue to LDUs, which are now being absorbed by PCs or for the companies involved. In addition, these pro- are being consolidated. ductive uses of electricity would eventually translate into greater household income in the newly electri- Lesson 2: The key to Vietnam's success has been flex- fied areas, leading to greater consumption, which, ibility, adaptability, and willingness to correct mistakes, in turn, would promote the overall financial viability but above all, continuing to move forward. The rural of rural electrification. The focus on productive uses electrification effort involved an evolving strategy that indeed had a significant impact. Following the eco- was anchored by very clear objectives, implemented nomic growth resulting from the Doi Moi years, and gradually, and fine-tuned over time to reflect chang- aided by the availability of new generation and the ing priorities. The central government, in collaboration 500 kV line, the country was able to gradually shift with various levels of local authorities and stakehold- its focus to household electrification. ers, continually assessed how to move the program · Quantity versus quality of supply. Up until the forward. Different approaches were adopted for dif- late 1990s, there was an apparent focus on obtain- ferent periods, each with their own challenges. It has " ing "supply of any sort. This was a deliberate choice proved useful to provide for flexibility in the design and in light of the strong desire of rural populations to implementation of rural electrification programs. All of obtain electric service, and their accompanying will- this was done without losing sight of the overarching ingness to pay for connections without necessarily goal that electrification is about national solidarity and being concerned about the quality of service in the is a high-level political goal. earlier days. This ability to take advantage of the will- ingness to pay, by households that were able to pay in the initial stages, allowed the expansion of cover- The Vietnamese government maintained a long-term age with limited financial resources. Moreover, the vision in its rural electrification effort. An important fac- rapid growth in electrification was made possible by tor for success was the setting of targets for a gradual the availability of multiple arrangements for build- program, based on a realistic analysis of what could be ing, managing, and operating rural energy supply achieved, given the resources available. networks, without minimal technical requirements on the equipment or material to be used, or require- In the mid-1990s, the government carried out an exercise ments for the maintenance of the systems. How- to estimate the costs and benefits of gradually provid- ever, over the years, consequences of this approach ing electricity to rural communes. As part of this effort, began to emerge, as discussed in parts A and C. cost estimates per household electrified and electricity · Electrification of commune centers versus house- consumption were recorded, and the MPI undertook a holds. Over time, the focus of rural electrification similar analysis of the costs and benefits of rural electrifi- efforts shifted from more economically active areas, cation options in its "Proposal for Rural Electrification up commune centers, and being financed through cus- " to 2000, which was completed in 1997 and approved in tomer contributions to a large extent, to less devel- 1999. As discussed in section A5, the Fifth Power Devel- oped areas, isolated villages, and being financed opment Master Plan (2000­10) contained an estimate of through greater support from the government and investment needs associated with power system invest- its international partners. ment and expansion to meet the 90 percent household · Design of rural networks. There was also a shift electrification target. in the way rural networks were conceived of and implemented; moving from an environment with The findings of the various analyses were communi- no planning, and no technical standard, with losses cated to the public. This way, communities in rural areas nearing 50 percent; to a setting where government were given a sense of the cost of system expansion, priorities were clearly articulated, and technical stan- and when they could expect to receive electricity in light dards for rural electrification introduced, and losses of the resources available. This enabled the program to declining to around 7 to 10 percent. build a good foundation and maintain the costs of rural · Institutional arrangements. In the initial stages electrification at reasonable levels. The preparation of a of rural electrification, Vietnam worked with exist- plan based on objective principles helped manage expec- ing structures, such as agricultural cooperatives and tations and enabled the program to build a good foun- communes. Over time, new institutions were set up, dation and maintain the costs of rural electrification at and when they no longer met the objectives, they reasonable levels. 62 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience The clear communication of how much the government The central premise of the cost-sharing approach was the was setting out to do enabled the management of expec- mobilization of multiple funding sources, instead of rely- tations of what could be achieved. In the end, program ing solely on central government resources for financing implementation exceeded expectations. Thanks to care- rural electrification investments. Sharing of costs associ- ful planning and appropriate allocation of system respon- ated with building new LV and MV networks was a main sibilities to the central government, the provinces, and factor underlying the rapid way in which Vietnam man- local utilities, grid expansion in rural areas moved much aged to expand access to such a large proportion of its faster than the pace anticipated in the system plans. population. Not only was it pivotal to solving the problem of financing of the remaining investments, but also the government's support to local entities helped ensure the Lesson 3: Transformation in the rural sector needs to continuation of the success of the rural electrification be seen in a long-term context. A long-term vision, program in Vietnam. Cost sharing by local communities, combining steps to be taken gradually, based on a real- in particular, ensured a sense of community ownership, istic assessment of what can be achieved within one's and sustained local commitment to the proper operation means, has been a critical factor of success. The com- and maintenance of rural electricity systems. munication with stakeholders, concerning the assess- ment of what can be achieved in light of resources available, can help maintain costs at reasonable levels, Lesson 4: The presence of cost sharing among differ- manage expectations, and keep political pressure up ent parties has been an important contributor to the to expand to unsuitable areas at a minimum. success of Vietnam's rural electrification program. In addition to making financing and building of rural systems easier, cost sharing helped create a sense of ownership in the parties involved. The provision of Sharing of Costs and Mobilization of financial support by provincial, commune, and district Multiple Sources of Funding authorities, as well as by the prime minister's office, was a critical element of success in ensuring the rapid The dedication and commitment of central, provincial, increase in access to electricity in rural areas. district, and commune authorities translated into the sharing of costs and responsibilities for the management and ownership of rural electricity networks across differ- In addition to various sources of financing within the coun- ent levels of government and the people. try, the Vietnamese government successfully mobilized financing from its international partners. Experience in A combination of multiple sources of financing was used other countries has shown that international development for building and expanding rural electricity systems, with agencies prefer projects that have clear objectives, where the relative share of each changing over time. These funds are disbursed for the purposes agreed, and can be included (a) customer contributions; (b) commune, dis- shown to have met objectives. Indeed, the presence of a trict, province, and central government budgets; (c) clear program with achievable goals and cost sharing by special surcharges from urban customers; (d) private multiple sources has proved to be very effective in ensur- investors; (e) borrowing; (f) retained depreciation from ing the availability of external financial resources for sup- EVN; and (g) international donors. porting Vietnam's rural electrification program. The ways in which costs were shared among stakehold- The government's financial commitment to rural elec- ers changed over time. Before 1999, all capital costs trification, along with the establishment of a special associated with MV and LV systems were paid for by con- rural electrification department within EVN, contributed sumers and local authorities. From 1999 onward, along to better coordination of program implementation and with the transfer of responsibility over MV networks to achievement of program objectives. The issuance of EVN, EVN began paying for MV assets, and thereafter, policy statements and other official policy documents started taking over LV systems as well. EVN's share of was useful in formalizing this commitment and sending a capital costs for rural electrification has been increas- clear message to all stakeholders about it. ing over time. In various policy documents issued in the late 1990s, the central government committed to using The rural electrification program was driven by the central its own resources to supplement those of provincial and government, while its international partners supported local communities, in order to share some of the costs the rural electrification program by providing the needed of rural electrification, particularly for connecting remote finances to accelerate program expansion, especially and poorer households. after the most readily available local resources had been C2: Lessons from Vietnam's Success in Rural Electrification 63 exhausted. The involvement of Vietnam's international to be very effective in facilitating the rapid expansion of partners provided not only financial resources, but also access. enabled the sharing of international experience, technical capabilities, and expertise on program management. Lesson 6: An important factor in Vietnam's success in rapidly increasing the number of households with Lesson 5: A well-formulated and properly commu- access to electricity was that the responsibilities were nicated program with achievable goals and invest- shared among various stakeholders. This collaboration- ments from multiple sources has proved to be very based approach can be credited with making it pos- effective. The issuance of policy documents outlining sible to move forward with the rural electrification the principles underlying this program was useful in effort on all fronts, and possibly much faster than what formalizing the government's commitment and send- could have been achieved had the effort relied on the ing a clear message to all stakeholders that govern- resources and capabilities of one central entity. The ment resources would be available to backstop local government's offering a lot of flexibility in terms of resources. constructing, managing, and operating local electricity networks in the early years made a critical impact on the expansion of access to electricity. Clear Allocation of Responsibilities among All Stakeholders EVN's Emergence as a Strong Vietnam's rural electrification success has relied on a Champion for Rural Electrification cooperative approach involving commitment and support from all levels of the society. The engagement of all lev- As discussed in section A4, soon after its establishment, els of government in decision making and implementa- EVN conducted a pilot activity involving the electrification tion of the program has been a critical factor of success of eight communes in different provinces in Vietnam. EVN for the continuity and sustainability of rural electrification stayed out of the rural electricity supply business because in Vietnam. The process involved major political deci- of the apparent unprofitability of the business. Although sions, working with provinces and local decision makers the company had recognized the strong demand for rural to ensure fairness, sharing of financing needs and man- electrification and the government's desire to rapidly pro- agement responsibilities, and ensuring significant social vide access to rural areas, EVN was deterred by concerns and economic impact. over the financial aspects of rural electrification and the limits on its own financial capacity. Local communities and decentralized distribution compa- nies were an important part of the way the rural electri- A major turning point came with the issuance of some fication challenge was tackled. The principle of sharing critical government decisions, including the 1999 policy responsibilities, conceived early on, has led to a success- paper, the 135 Program for Poverty Reduction, Decision ful rural electrification program that will pay dividends 22, Decree 45, and the Electricity Law, through which the well into the future. government clarified the division of institutional responsi- bilities in the rural electricity supply business, introduced The country relied on both central and decentralized principles for financing investments and covering costs, support for the implementation of its rural electrifica- and instituted financial controls on the sector. Decision tion program. The central government and provincial 22, issued in 1999, clarified the allocation of responsibili- and local authorities agreed on a locally centered institu- ties for management of rural electricity networks, clearly tional framework, involving rural communities closely in delineated EVN's role and responsibilities, and assigned the management and operation of local LV networks, to EVN in charge of MV networks. Decree 45, dated 2001, build a large, financially sustainable customer base. This provided for various means of government support for cooperative approach has led to many benefits involved rural electrification investments, and required the licens- in accelerating the program. ing of rural electricity suppliers. Decree 45 also provided measures for ensuring the financial viability of rural elec- Especially until the late 1990s, the government allowed trification for EVN, through sharing of costs, lower inter- a very flexible approach to the organization of the sec- est rates, and certain tax benefits. tor. The separation of responsibilities for MV and LV sys- tems, as well as the multiplicity of entities being allowed Through these actions, the central government made it to build, manage, and operate rural networks, proved possible, and even more importantly, profitable, for EVN 64 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience to participate in rural electrification. The government's ini- that time, some issues had to be dealt with in the long tiatives equipped EVN with the mandate and resources it term. The rapid buildup of networks in the mid-1990s needed to take the lead in rural electrification in a finan- was carried out without even minimal uniform technical cially sustainable way. The resulting change of course standards for equipment and materials used. This eventu- in the organization of the rural electricity supply sector ally led to issues with system performance, including low had considerable impact on the pursuit of the access efficiency, large losses, low quality of supply, and even agenda. major issues with safety, resulting in costs that had to be recovered. In the medium term, these included the costs EVN's decision to get involved in the rural energy sup- associated with the purchase of additional electricity to ply business, after the initial delay, was a significant compensate for high losses in low-efficiency systems, step toward ensuring that the rural networks met cer- backup generation equipment and fuel, devices for com- tain technical requirements, since the rural networks pensating for low quality power supply and replacement, had to comply with EVN's system requirements. Initially, and/or repair of damages to end user equipment because the company was actively involved in the development of poor reliability. In the longer term, the additional costs of MV networks. By the early 2000s, EVN had become included the costs of repairing low-quality equipment the driving force for program expansion, providing about and rehabilitating networks, as well as transaction costs three-quarters of the capital costs necessary to extend associated with moving between different organizational electricity in rural areas. arrangements. In most cases, the additional costs ended up ultimately being borne by rural households. Therefore, this situation, combined with the lack of financial con- Lesson 7: AThe policy and regulatory measures intro- trols, rendered new connections and the use of electric- duced by the government, equipping EVN with the ity expensive for some households. mandate and resources it needed to perform its lead- ership role in a commercially sustainable way, were The introduction of national technical standards in the late critical components of Vietnam's success in rural 1990s was a major turning point that eventually brought electrification. about improvements in power supply quality, alongside a significant reduction in technical losses, costs, and tar- In the case of the expansion of access through large- iffs, which in turn helped provide significant long-term scale grid extensions, a precondition of sustainability is savings. The two photos (following) contrast examples of to secure interest, commitment, and dedication from rural systems built without and with technical standards. the country's main utility(ies). This can be achieved by A significant development in this regard were the techni- making it possible for the utility to participate in rural cal specifications developed during the preparation of the electrification on terms that enable it to meet its com- . World Bank­financed REP The technical specifications mercial objectives. The utility should be equipped with developed at that time, and later adopted by MOI, stan- a clear mandate and provided with the resources it dardized the design and characteristics of rural networks, needs to perform its leadership role in electrifying rural promoted better network quality, reduced technical areas through grid extension. losses, and avoided the application of urban standards, which were unnecessarily sophisticated and expensive for low-density areas. In the later years, with the design and building of a distribution system that complied with Making Technical Choices Suitable national standards, and using suitable equipment, tech- for Sector Status and Priorities nical losses were reduced in some cases from 40­50 percent down to 8­10 percent, further helping to reduce The fastest development of rural networks in Vietnam effective tariffs, increase consumption, and provide sig- took place in the mid-1990s, and at that time EVN was in nificant long-term savings. While developing MV net- charge of MV systems up to the commune level, while works in a certain area, EVN helped build local capacity the responsibility for building, managing, and operating through providing training to local people and assisting LV networks was assigned to local authorities and com- local authorities in system planning and design. munities. This separation of responsibilities between MV and LV networks was a well-intended, practical, and In general, there can be various combinations of enti- effective way of sharing the costs of rural electrification, ties involved in, and technical requirements for building and indeed delivered strong results. However, because rural networks. If there is one national utility building the there were no uniform national technical standards at rural network, the need for uniform national technical C2: Lessons from Vietnam's Success in Rural Electrification 65 Examples of systems built without and with technical standards standards can be a less pressing concern, as the util- requirements for building rural networks. What mat- ity would be highly likely to use consistent technical ters is the selection of combinations that are appropri- practices and equipments while building its network. In ate and feasible, in light of the current circumstances, case there is more than one actor, there are choices to sector priorities, and the capacity of the sector be made with respect to technical standards. The first participants. is allowing these multiple actors to build rural networks without uniform technical standards. The second option Technical standards are essential for ensuring the sup- is requiring the multiple actors to build rural networks ply quality and long-term sustainability of a system. If according to uniform technical standards. There are trade- there are multiple entities that can build and operate offs and long term consequences associated with each rural electricity networks, policy makers will need to option. As Vietnam's experience shows, the first option be aware of the trade-offs involved, and, based on the can be faster, cheaper, and more effective in increasing electrification status and sector priorities, determine access in earlier stages of a rural electrification program, the most appropriate time and manner to introduce when the priority is rapidly increasing the number of con- uniform standards for rural networks. nections, the latter options can be more suitable after the initial challenge of connecting people is overcome, and focus can shift to quality and regulation. Ensuring the Economic and Financial Viability of Rural Electricity Supply... Lesson 8: In Vietnam, the MV-LV split, and the pres- ence of multiple actors in the mid-1990s, proved very Ensuring the economic and financial viability of rural elec- effective in terms of facilitating the rapid expansion of trification is often difficult, but it is essential. Being able access, but the absence of uniform technical standards to ensure the financial viability of rural electrification is a at that time also led to issues that had to be addressed challenge faced by numerous rural electrification initia- in the future. Unified national technical standards were tives across the world. In fact, extension of electricity introduced in the late 1990s, when electricity access supply in many developing countries has been hampered rates had exceeded 60 percent, and made a significant by the fear that rural programs will put a strain on the impact in terms of improving power supply quality, financial viability of the PC implementing the program. reducing technical losses, tariffs, and costs. This fear is not unwarranted, because many programs that started with good intentions ended up financially As electricity access levels change, so do sector pri- draining the companies involved. Such experiences have orities. Early on in a rural electrification effort, when prevented many utilities from spending enough time and access rates are low, the priority is delivering simple resources maintaining the systems, undertaking repairs, connections to as many people as possible. With and addressing issues immediately. The result for those higher electrification rates, focus can shift to ensuring with an electricity connection is poor service, including quality of supply. There are trade-offs and long-term widespread brownouts and blackouts. Supply outages consequences associated with various combinations are an obvious way to reduce the costs associated with of options for allocating responsibilities and technical rural electrification, but they also lead to a reduction in 66 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience benefits. Another way utilities have dealt with the high caused by the lower prices charged to rural consum- cost of rural electrification has been to impose high con- ers. Therefore, bill collection for rural electricity runs nection charges on new customers. In some countries, rather smoothly, and there is not a large issue with charging customers as much as US$500 for a connection nonpayment of electric bills. is not unheard of. Such a high connection fee obviously pays the distribution company for the upfront costs of The culture of payment is likely to have a significant bear- the investment, but it also means few rural or poor peo- ing on the success of rural electrification. Although it may ple can afford new service. not be possible to replicate Vietnam's strong culture of payment in other countries, nevertheless, the practice of This was also experienced in Vietnam in the early years local involvement in management and operations of rural following EVN's establishment in 1995. As discussed in electricity networks, and particularly bill collection, can section A5, after an analysis it carried out, EVN initially be easily adopted by other countries. The service agent did not want to engage in rural electrification because of model that was adopted in the early 2000s is a good illus- the relatively high cost per household electrified and low tration of the way in which this can be done. The service electricity consumption recorded, which would translate agent model helped ensure accountability within local into unsatisfactory financial results for EVN. Only after a communities and minimize nonpayment, in addition to series of policy statements by the central government reducing system losses and lowering system operation provided assurances for financial support to the system and management costs for the PCs. Overall, the involve- and clarified the organization of the sector, did EVN get ment of local people in the management and operation more engaged in the business. of the LV system played an important role in ensuring the success and sustainability of the scaling-up of electricity The resolution of concerns over the financial viability of access. rural electrification involved a variety of approaches: Lesson 9: As Vietnam's experience demonstrates, · The country's approach to organizing rural electricity ensuring sustainability of the rural electricity supply supply and the insistence on some measure of cost business is critical. The culture of payment is likely to sharing among various stakeholders helped reduce make a significant difference in ensuring the success the initial investment burden on the EVN and PCs to of rural electrification. Although the culture of payment a certain extent, and allowed them to remain finan- or specific institutional models applied in Vietnam may cially viable while extending MV networks. not be directly replicable in other countries, the princi- · Starting in 1999, a series of policy statements and ples of cost sharing, local involvement in management decisions by the central government articulated a and operations of rural electricity networks, and par- variety of options for supporting EVN, including cen- ticularly bill collection, can be easily adopted by other tral government budget, retained capital deprecia- countries. tion funds, soft loans, and funds from international development agencies. · Once connected to the grid, electricity customers were required to pay for the continued operation of ... While Establishing and the system. This approach allowed the distribution Maintaining Financial Controls companies to become more oriented toward provid- ing service to their paying customers, rather than In Vietnam's case, once households were connected, building the system with subsidies and then poorly however, they were responsible for paying their electric- maintaining them because of poor revenue flows ity bills in full. As discussed in part A, the lack of finan- from consumers. For example, for the communes cial controls, especially in the early 1990s, led to some electrified under the REP financed by IDA, this cul- rural households being faced with very high electricity minated in a requirement that at least 60 percent of prices. In some cases, the poor could not get electricity, households in a commune would connect when the or it was available at a higher cost than they could afford. project was completed and pay the requisite opera- In other instances, households on different sides of the tional tariffs, thereby providing cash flow right from same street would pay different prices for electricity. the start. · Local management of bill collection, by entities In the later years of the program, assistance became that are part of the local communities, combined available for poor households that could not fully afford to with the widespread culture of payment present in pay for their connections. Essential actions in this direc- Vietnam, enabled the avoidance of financial drains tion are the introduction of tariff ceilings for rural areas, C2: Lessons from Vietnam's Success in Rural Electrification 67 and the government's announcement of its intention to have transferred these LDUs to the PCs. However, provide financial assistance for LV main lines in remote, the main explanation is that the survey results sim- mountainous areas, and service drop for poor house- ply reflect the national picture. The years between holds with Decree 45. 2002 and 2008 were characterized by many periods of national shortages and rotating power cuts that The issuance of Decision 21 in 2009, when a single were suffered in rural as well as urban areas. nationwide tariff was introduced, was one of the impor- · The targeting of direct assistance to poor house- tant steps toward improving the sustainability of electrifi- holds will be crucial in the last mile. The survey cation investment in the more remote and poor regions. showed that the remaining unelectrified households With this decision, the PCs were allowed to recover have a significantly higher poverty rates than the operating costs through the tariff charged to all consum- electrified households. Therefore, it will be important ers in their territory. In effect, this meant that the tariffs paid by relatively lower-cost consumers cross-subsidized to direct targeted assistance at these households the remote and poor consumers. to ensure that appliances of appropriate design are provided and that the costs of connection are reim- bursed. There is strong support in the literature that Lesson 10: While allowing reasonable returns to connection subsidies have better targeting perfor- investors, on the one hand, attention should be paid mance than lifeline rates. to making new connections and use of electricity as · Stimulating productive use in rural areas remains affordable as possible. When grid extension covers a problem. The survey points to the constraints in customers who cannot afford to pay for the full cost of replacing diesel-powered equipment by electric connections, there should be mechanisms to compen- sate the investors. motors, most notably the high initial cost involved in replacing equipment. It is well understood by diesel users that electric equipment is much cheaper to run Setting Future Policy in Light than diesel engines, which suggests that rural elec- of Results from Implementation trification projects should include providing assis- tance for equipment replacement, perhaps through Actual results from implementation of rural electrifica- some combination of equipment leasing scheme, tion can be useful in informing future policy actions. For preferential buyback of diesel engines, or an electric- example, during the panel survey discussed in part B of ity surcharge for nondomestic use. However, such this book, feedback gathered from households has gen- schemes are likely to function only if power quality erated some interesting policy lessons that can inform can be assured. future actions: Lesson 11: Results and information from implementa- · The reliability of supply in the remote areas pres- ents some significant problems, as reflected in tion of rural electrification efforts, and monitoring and continued expenditures for candles and kerosene. evaluation in general, will be useful inputs into future To some extent, these problems are the result of the policy actions. These results, through validating (or shortcomings in the LDUs that were responsible for negating) initial assumptions and giving an indication supply in many of these areas in earlier years, prob- of emerging implementation issues, can help ensure lems that have been recognized in the design of the that the policies and decisions reflect and address follow-on activity, the RE2, and in the reforms that realities on the ground. C3 Recommendations to Other Countries in Light of Vietnam's Experience Following is a summary of the recommendations that can Recommendation 4: Engaging all stakeholders and be derived in light of a review of Vietnam's rural electrifi- ensuring their buy-in early in the process is essential for cation experience. This list is by no means an exhaustive long-term success of rural electrification. list of all steps that need to be taken while embarking on a rural electrification program, but rather a reflection Recommendation 5: It is advisable for decision mak- of the major themes that emerged from a look back to ers to institute arrangements for sharing costs, in order Vietnam's remarkable accomplishments and an effort to to mobilize the various financial resources to finance understand the factors underlying these achievements. a large-scale rural electrification effort. Cost-sharing arrangements need to be carefully designed to ensure Recommendation 1: When embarking on a rural electri- the ownership and dedication of the related parties, but fication program, the government should make a strong not surpass their payment capacity. commitment to a long-term plan focused on gradually achieving what is possible with the resources available. Recommendation 6: While the sharing of costs is a The availability of a long-term vision, founded on the prin- must, policy makers should deliberate carefully on the ciple of living within one's own means, can help ensure most suitable arrangements for the allocation of respon- the sustainability of rural electrification. Once that com- sibilities for building, managing, and operating rural mitment is made, however, the government should networks. adhere to the objectives it set out to achieve and the actions that were promised. Recommendation 7: If decision makers wish to under- take large-scale grid extension, it is crucial to find a way Recommendation 2: The government's commitment to ensure interest, commitment, and dedication by the to a long-term and gradual rural electrification effort, the country's main utility(ies). In order to ensure this, govern- principles and priorities, and the expected outcomes ments should allow the utility(ies) to participate in rural must be clearly communicated to all stakeholders, in electrification on terms that enable it to meet its com- order to clearly set its course and manage expectations. mercial objectives. The utility should be equipped with a clear mandate and provided with resources it needs for Recommendation 3: The focus of rural electrification performing its leadership role in rural electrification. efforts should change over time, as results are achieved. There should be a strong commitment to forward move- Recommendation 8: If policy makers are interested in ment, flexibility, adaptability, and willingness to make and involving multiple entities in the rural electrification effort, correct mistakes. The design of a rural electrification pro- it is advisable to enable and encourage bottom-up solu- gram should leave room for midcourse changes, provided tion. In Vietnam, bottom-up solutions were the center- they are consistent with predetermined principles. piece of the rural electrification story, and involvement of local communities, communes, districts, and provinces was a major driving force, especially in the early years. 68 C3: Recommendations to Other Countries in Light of Vietnam's Experience 69 Recommendation 9: If multiple entities are allowed to Recommendation 12: In the early stages of a rural build, manage, and operate rural networks, it is critical for electrification program, decision makers may wish to decision makers to be aware of the trade-offs involved in undertake a comprehensive analysis to determine prior- the various options and their long-term consequences. It ity areas. Prioritization of productive uses of electricity in will be important for decision makers to carefully weigh the early stages of a rural electrification program can be the benefits and costs of introducing some kind of mini- a very effective way of driving the development of the mal technical standards for rural systems and equipment system, recovering costs, generating revenue for future specifications. What matters is the selection of combina- system expansion, contributing to the overall financial tions that are appropriate and feasible, in light of the cur- viability of rural electrification, and supporting broader rent circumstances, sector priorities, and capacity of the economic development. The focus on productive uses in sector participants. a resource-constrained environment--as was the case in the early stages of Vietnam's experience, when the MV · In the early stages of a rural electrification effort, backbone was developed with a clear objective of provid- when the priority is to expand access to electricity ing energy for irrigation and other productive uses, and rapidly, allowing multiple entities to build rural net- to increase output--was a very practical choice and had works, without imposing uniform technical require- significant impact. ments, as was the case in Vietnam until the late 1990s, is likely to provide the fastest expansion of Recommendation 13: Once basic constraints with access. However, while choosing this approach, deci- respect to availability of supply are overcome, priorities sion makers should be aware of the costs that may can shift to household electrification, in order to capture be incurred in order to address the consequences of the full potential benefits from rural electrification. It is these decisions in the medium and longer term. advisable to make connections as easy as possible for · If decision makers wish to focus on the longer-term households, both physically and financially. This can be sustainability of rural electrification, particularly in the achieved through allowing flexible payment mechanisms more advanced stages of a rural electrification effort, and enabling users to finance their share of connection they may wish to explore the possibility of introduc- costs. ing some kind of minimal technical standards that should be adhered to by the multiple entities while Recommendation 14: It is also crucial to ensure afford- building rural networks. In this case, decision mak- ability of the connections and energy use by the poor. ers should expect to move more slowly, as was the Decision makers may wish to consider options for ensur- case in Vietnam after 2004. ing the financial viability of supplying to poor and/or remote areas, and compensate investors when custom- Recommendation 10: As a general principle, policy mak- ers cannot afford to pay for the full cost of connection. ers should carefully design and institute mechanisms for Depending on the circumstances, affordability of new adequately compensating entities involved in rural elec- connections and electricity use can be ensured through trification and ensuring the financial sustainability of the several channels, including through setting prices or rural electricity supply in the long term. through subsidies. However, timing, phasing, and target- ing of such measures will be important, to make sure Recommendation 11: As the rural electrification program those who are willing and able to pay contribute their advances, decision makers may wish to establish some share of the connection costs. degree of financial control over the entities involved in the rural electricity supply, while allowing a reasonable Recommendation 15: Policy makers may wish to iden- return. tify the most suitable way to institute and/or enhance the culture of payment in their countries. This can be achieved through local participation, cost sharing, instilling a sense of ownership in the management and operation of the network, and creating local employment. C4 Lessons from World Bank Experience In this section, lessons from the World Bank experience Supporting Government Priorities as in supporting Vietnam's rural electrification program are Part of a Gradual Program discussed. It is important to note that the main accom- plishments, and therefore the spotlight, belong to the The fundamental principle underlying the government of government's program. When the World Bank began Vietnam and World Bank partnership on rural electrifica- working with the government on rural electrification, tion was the provision of support to the achievement of access to electricity had already been provided to more the government's objectives as part of a programmatic than 50 percent of the country's households. This section approach. The program design was done in collaboration focuses on lessons learned from the World Bank's expe- and through continued discussions. The government, rience in supporting the realization of the government's EVN, and IDA worked together in formulating projects for objectives, and in particular, assisting with the daunting the realization of the government's priorities and identify- task of extending electricity access to the remaining ing solutions to problems. half of the country's rural households, through a series of investment projects, technical assistance, and policy dialogue. Lesson 12: The World Bank project experience with rural electrification in Vietnam has shown that the Several lessons have been learned from the World Bank's establishment of a well-defined program, where fun- experience in supporting the achievement of the govern- damental principles, institutional arrangements, and ment's priorities for rural electricity in Vietnam. Three the use of financing have been agreed on in advance, central themes emerge: helps ensure efficiency and effectiveness during implementation. The programmatic approach that was · Supporting government priorities as part of a gradual adopted enabled the delivery of new projects in a rela- program that involves a long-term commitment to a tively short period. series of projects and that may change in strategy and design; At the outset of cooperation in the rural energy sector, · During preparation, engaging all stakeholders and four major projects were planned to assist the imple- ensuring their buy-in early in the process and mobi- mentation of Vietnam's rural electrification program. lizing local experience and knowledge; and The cooperation would begin with addressing the most · At project design, focusing on flexibility, buy-in from urgent issues at the time, and carefully preparing for the all stakeholders, local participation and commit- subsequent and more difficult interventions. A brief sum- ment, and cost sharing, and aligning implementa- mary of these projects and their primary areas of focus tion arrangements with institutional realities and are provided below. capacities. 70 C4: Lessons from World Bank Experience 71 · In the case of the Rural Energy Project, approved in and for consultations with policy makers, local authori- May 2000 and involving a US$150 million IDA credit, ties, project beneficiaries, and people that will be affected the focus, consistent with government preferences, by the system. For example, in the case of REP prepara- was entirely on rapid expansion of access to rural tion, the team responsible for project design visited more areas without electricity and specifically on increas- than 100 communes in 30 provinces over a period of 9 ing the number of basic connections. It was decided months before finalizing the design of the project. that the issues of rehabilitation of quality of supply and institutional aspects would be taken up in later In preparing specific rural electrification projects, the operations. role of prior, informed consultations cannot be overem- · Indeed, with the Second Rural Energy Project, phasized. Consultations are a critical input to garnering approved in November 2004 and providing a US$220 community support and involvement in project prepara- million IDA credit, the focus shifted to the rehabili- tion and implementation. During the preparation of REP , tation of existing LV systems, further expansion of extensive consultations took place, and written commit- access, and development of institutions to ensure ments were obtained from rural residents, communes, service delivery at the retail level. districts and provinces. The layout of the distribution lines · In 2008, the Rural Distribution Project was initi- was certified by those affected. The practice of document- ated, with US$150 million in IDA financing. This five- ing major stakeholders' commitments to the project and year project was designed to improve the reliability associated implementation requirements can be a useful and quality of the MV networks bringing electricity step toward assuring that project design is workable, and to local distributors and build the capacity of regional can help avoid issues during implementation. PCs to act as independent participants in the power sector. It is crucial to engage local experts for their experience · In May 2009, the provision of another US$200 million and knowledge early on, alongside international experts in the form of Additional Financing for the Second during project design. Especially for rural electrification Rural Energy Project was approved by the World projects, conventional ideas will benefit from fine-tuning Bank's Board of Executive Directors. This additional based on local conditions and constraints of the country financing was intended to address a shortfall of context. An emerging lesson has been not to follow oth- financing resulting from increased costs associated ers blindly, but rather to find one's own way based on with original project activities, and to scale up proj- international experience and the wisdom of the people ect coverage and rehabilitate LV and MV networks in who know the local circumstances. a greater number of communes. It is also important to focus on the essential objectives to be achieved in a single project, which, as noted above, Lesson 13: There should be a clear, yet flexible, road- should be seen as part of a longer-term program. This map for achieving the government's objectives and point is clearly demonstrated by the series of rural energy for showing how World Bank support should support projects in Vietnam, where the earlier projects focused them. This roadmap should be the basis for design- on accelerating access to the rural areas, while the later ing specific interventions. Instead of designing a projects spent more effort on rehabilitation of the exist- large project to address the whole set of issues in the ing systems. rural energy sector, the approach involving the phas- ing of individual projects and designing each project to address the most critical issue of the time, and Lesson 14: During project preparation: then addressing remaining issues in later projects, · It is important to keep in mind that a single proj- has proved effective. Policy dialogue and investment ect can't solve all the issues in the sector, and it operations are best run on separate but parallel tracks, should be seen for what it is--ideally, a step in a with each informing the other; hence the importance longer-term program. of flexibility in the roadmap. · Extensive time and resources should be set aside to work out important aspects of project design, and for consultations. Project Preparation · Engaging all stakeholders and ensuring their buy- in early in the process is essential for the long- Investment in preparation before designing a project is term success of rural electrification. essential. Extensive time and resources should be set · It is essential to mobilize local experience and aside to work out important aspects of project design, knowledge as much as international experience. 72 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience Project Design and Implementation compensation for land acquisitions. The PCs took respon- Arrangements sibility for construction of the initial projects up to the households and provided their contribution in the form Allowing for flexibility in project scope and imple- of training local staff. All households in the communes mentation arrangements. The lesson learned from involved in the project had to make a written commit- experience in designing and implementing World Bank ment to cover their share of initial capital investments projects supporting rural electrification is that flexibility and regular payments to cover the operating costs of is essential, both in term of physical scope and approval, the electricity networks. Provincial authorities provided to allow for fast adjustment to unexpected conditions-- support to the poorest households. International donors cost savings--that may arise in implementation and provided long-term soft loans. increase the benefit of the project. For example, under , the REP there were numerous subcomponents that had Lesson 16: Another success factor for the implemen- to be implemented in difficult areas through the course tation of World Bank projects has been the building of of a long period. During the implementation of REP the , effective partnerships among EVN, local authorities, need for rapid adjustments emerged, and changes had to and communities, and specifically through the sharing be made along the way. of costs and responsibilities among stakeholders. Cost- sharing arrangements need to be carefully designed Lesson 15: A key factor of success in implementing to ensure the ownership and dedication of the related World Bank projects focused on rural electrification parties, but not surpass their payment capacity. It is projects has been flexibility. There needs to be a cer- important to determine the most appropriate ways tain degree of flexibility built into the project scope and of combining different funding sources and allocating implementation arrangements. As long as the changes costs proportionally. On the other hand, it is advisable are consistent with objectives and principles agreed to allocate responsibilities in a way that will not ham- at the outset, the process for their review should be per the coordinated construction, management, and determined ahead, and should be kept as simple as operation of the systems themselves. possible. Project outcome indicators should reflect the assessment of what can be achieved. Ensuring local community involvement. A project that ensures some form of early returns to the local com- Incorporating cost sharing and clear allocation of munity has a greater chance of success. It is essential responsibilities into project design. In the case of REP, to have a strong focus on involvement and buy-in from the primary responsibility for the implementation of the local stakeholders, both in terms of tailoring the project project was assigned to EVN. EVN provided overall guid- to their needs and requiring their contribution. ance to the project, while the three PCs took over the detailed implementation of the project. The use of EVN Keeping the local community involved in all phases of the and the PCs helped both expedite the project implemen- works associated with the project is a useful means of tation and the corresponding expansion of access to the ensuring local participation and commitment to the proj- rural households, while also ensuring compliance with ect. This can be achieved through providing opportunity national standards that would enable the reduction of for participation in construction contracts or making sure technical losses. After construction, however, the PCs that adequate numbers of people join the project imme- were to increase participation in the management of LV diately after completion. networks through joint stock companies, service agents, or cooperatives. Providing for local participation in the construction and operation of the new rural electricity supply networks Rural electrification projects have a relatively lower finan- was an important element of success under the REP The. cial rate of return (FRR) than other investment projects. project was designed in a way to ensure local participa- Rural electrification projects are strengthened through tion in all phases of the work. the sharing of costs and allocation of responsibilities among stakeholders. Therefore, these projects should · Design of LV systems. All layouts of distribution be designed in a way that allows, if not encourages, lines passing through a given commune required the mobilization of funding from other sources. For approval by the commune leadership. On comple- instance, under REP financing and other contributions , tion of the distribution lines, the local leadership had were required from multiple parties. PPCs agreed to pay to sign off on its adequacy and quality. They also C4: Lessons from World Bank Experience 73 indirectly monitored the construction, as they were Lesson 17: Participation of the local people needs required to connect to the system as soon as it was to encompass all elements of the project--from completed and begin paying for the electricity. The design to operations. Ensuring local participation in all decision to decentralize decisions on such aspects aspects of the project can help mobilize and maintain to the local agencies proved effective in successfully local support and commitment to rural electrification, implementing the project and exceeding the targets while ensuring a rapid pace of electrification, creating that had been originally set for the number of com- employment, building local capacity, and thereby lay- munes and households electrified. ing the foundation for the sustainable management · Construction of LV systems. It had been decided and operation of the networks. that contracts for construction work would not be awarded as turnkey projects to a single contractor, Keeping sight of the ultimate benefits of rural electri- but instead, the focus would be on maximizing par- fication. As discussed in part B, the results and impacts ticipation by local entities. During the construction of rural electrification projects in Vietnam were the focus of individual local networks, local participants were of a multiyear panel survey. Findings of the survey con- given an opportunity to bid for construction contracts firmed some of the main assumptions made at the time or provide other services in support of construction. of the REP design: Local authorities were given the authority to approve the completion of all local contracts by the contrac- · That the welfare benefits of rural electrification tors. As a result of this approach, more than 600 con- significantly exceed the costs of extending the tracts were assigned to local contractors. Although grid in most remote rural areas: In fact, the invest- this high number of small contracts meant that a ment costs per household were only US$340. significant amount of resources would be required · That once the grid had been extended to remote for supervising these contracts, the decision to pro- communes, the connection rates would grow ceed with multiple contracts enabled a very rapid rapidly over the early years: By 2008, 21 out of pace of electrification, while the decision to engage the 42 communes in the survey and all the sur- local contractors provided employment to the local veyed households were connected; in the com- communities, built capacity for future activities, and munes where the lowest connection rates had been helped ensure local support for the successful oper- observed, 79 percent of sampled households were ation of the rural networks. connected. · Management and operation of LV networks. · That average electricity consumption would After the completion of construction, it was agreed increase over time: While real incomes in the sur- that the communes would participate in the opera- vey communes grew at an annual rate of 9.5 per- tion and maintenance of the local systems. The PCs cent, average electricity consumption rose by 8 provided training to a large number of local people, percent per year. who then became "service agents" responsible for routine technical and commercial operations and Aligning project scope and implementation arrange- maintenance, such as meter reading, billing, collec- ments with institutional realities. As a general rule, tions, monitoring of rights-of-way, and minor repair project design and implementation arrangements should of in-house wiring. This approach combined several make it as easy as possible for project-implementing enti- benefits: (a) reduction in operating costs; (b) addi- ties, and should be mindful of the resources and capacity tional employment opportunities for local residents; of the parties involved. (c) better routine right-of-way checks; (d) faster com- munication in case of emergency; (e) greater owner- Recent project experience has shown that the institu- ship by the commune and a high level of payment; tional realities on the ground have a significant impact on and (f) an increase in the safety awareness of the the extent to which rural electrification projects can be community. implemented and reach their objectives. Under the RE2, the strong commitment and close A case in point is the separation of responsibilities for MV involvement of local authorities in the project imple- and LV systems, which was conceived with the best of mentation was also very beneficial, especially in terms intentions as a way of sharing the costs of rural electri- of making the project site clearances much easier and fication. However, this approach, which had proved very ensuring continued engagement of local people in proj- effective in terms of facilitating the rapid expansion of ect implementation. access, also led to practical implementation difficulties 74 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience that had been neither foreseen nor intended. The sepa- desirable, or timely to attempt to make changes in the ration of responsibilities between MV and LV systems institutional framework, projects should be designed had a significant impact on the implementation of the with those implementation challenges in mind. RE2. At the time of project preparation, around 2003 and 2004, the rehabilitation of MV and LV networks and the As discussed under lesson 13, the phased approach, improvement of management of LV systems had become involving a series of individual projects, each designed to critical issues in need of being addressed. At that time, the most critical issue of the time, while leaving issues EVN was in charge of the MV networks, while the LDUs that cannot be immediately addressed to later projects, were in charge of LV networks. EVN was not in a position and conducting policy dialogue in parallel, has been to be able to absorb the LV systems because of its finan- effective. cial and institutional capacity. Because of the separation of the responsibilities for building, managing, and oper- As a general rule, project design and implementation ating the MV and LV systems, project implementation arrangements should make it as easy as possible for also had to be split into two separate parts. Project activi- project-implementing entities, and should be mindful of ties dedicated to MV systems would be implemented by the resources and capacity available. PCs, while project activities involving LV systems would be implemented by the provinces. Lesson 18: As a general rule, project design and imple- mentation arrangements should make it as easy as This separation of the responsibilities for the MV and LV possible for project-implementing entities, and should portions of the project led to challenges during imple- be mindful of the resources and capacity of the parties mentation because of the divergence in capabilities of, involved. The implementation of all project activities by and hence project implementation speed by, the PCs and one entity, or by multiple entities with similar capabili- the LDUs. This resulted in delays in implementation of ties, working in a highly coordinated manner, can help some components. The MV and LV system investments make project implementation progress smoothly. envisaged under the project required a lot of coordina- tion, and sometimes issues during implementation, with In case of mismatches between capabilities of differ- respect to ensuring consistency of system design and ent implementing agencies, efforts should be made to timing of construction. Overall, the project resulted in a address them through policy dialogue, technical assis- lot of coordination being needed by all parties involved. tance, and support during project preparation, to the extent possible, should time and resources permit. A practical takeaway emerging from this experience is Where addressing the concern is not immediately that, in designing projects, task teams have to be aware possible because of lack of resources, the presence of the trade-offs involved with respect to the realities on of pressing needs for, and/or urgency of project activi- the ground and the timetable for preparation and imple- ties, project implementation arrangements should be mentation of investment projects. If task teams become designed with a realistic view of what can be achieved aware of potential issues that can potentially lead to in light of the institutional arrangements. implementation difficulties, and if it is not feasible, APPENDIX The 1999 Rural Electrification Policy Paper This is a lightly edited English translation of the original government of Vietnam policy paper. Socialist Republic of Vietnam Basic Principles Independence--Freedom--Happiness The purpose of rural electrification is to deliver electric- ity efficiently and reliably to rural consumers in order to Policy on Rural Electrification improve their standard of living and ability to earn income. The following principles will guide the valuation, develop- Objectives of the Policy ment and implementation of the rural electrification in Vietnam: Expanding electrification in rural, mountainous and island areas (hereinafter referred to as rural electrifica- · Rural electrification includes the extension of power tion) is a key element of the Government of Vietnam's grid to those areas that have no access to electricity overall strategy to combat rural poverty and provide for and upgrade of the existing rural power system. more equitable growth. Around 60 million (or 80%) of · Rural electricity supply will be based on both grid- Vietnam's population of 75 million is rural. By the end of based and off-grid systems. 1998, while 75% of the rural communes have access to · Rural electrification should be undertaken gradually electricity, only half of the rural households are actually in line with available financial resources. The provi- connected. An estimated 25 million Vietnamese are still sion and allocation of investment, maintenance living without electricity. By the end of 2000, the Govern- service, and power supply must ensure the level of ment plans to have 80% of rural communes and 60% of financial caution in respect of debt and internal gen- the rural households connected. erated capital of Electricity of Vietnam, Power com- panies and other related revenue earning entities. To achieve this rural electrification target the consistent · Priority should be given to those areas which have application of a common policy is required at all levels. the capacity to enhance the pace of agricultural pro- The adoption of a common set of principles and poli- ductivity, modernization and economic restructuring cies will maximize the impact from the limited resources of strategic areas. available such as financial, human resources etc. Based · The responsibilities for investing, managing and oper- on other decisions and documents issued by the Prime ating rural electricity networks and providing supply Minister, this document reflects the Government of Viet- and service functions should maximize the use of nam's policy towards the upgrading and expansion of local authorities, local people and local investors. rural electricity networks in the nation and the provision of acceptable levels of service to all rural consumers. 75 76 State and People, Central and Local, Working Together: The Vietnam Rural Electrification Experience · The costs of operations, maintenance and the eco- · that the selection should be done following a pro- nomic depreciation of rural electrification infrastruc- cess whereby local groups, i.e. local community and ture and supply should be financially recovered households, will have an opportunity to participate. from the revenues earned by EVN, PCs and other operating entities in Vietnam's power sector. The 2. investment in rural Electrification Government of Vietnam should provide a transpar- The policy for investment in rural electrification is as ent subsidy for investment in rural electrification follows: networks and supply infrastructure when these are deemed commercially unviable by revenue earning · The medium-voltage distribution network down to entities in Vietnam's power sector. the output side of the 6­35/0.4 kV distribution trans- · Electricity supply for rural consumers should be con- former will be the responsibility of Electricity of sidered a commercial service; except for those areas Vietnam the national Power Companies (PCs). The Government has subsidy policy when it is deemed low-voltage distribution network from the output to be socially necessary and consistent with the of the 6­35/0.4 kV distribution transformers to the objective of equitable development. All entities who main lines outside homes will be the responsibility are responsible for the final delivery of electricity of local authorities. service to rural consumers should have an adequate · The connection cost from the low voltage lines out- financial incentive to continue in business and main- side homes to the consumer meter as well as inter- tain an acceptable level of service. nal home wiring will be undertaken by consumers. · The Power Companies (PCs) could invest in the low- voltage distribution network using funds directly The Policy Framework for Rural Electrification provided by the Government. In case of investment 1. project selection criteria provided by loan funds, the PCs will only conduct The selection of unserved areas and individual communes the project when financial rate of return (FRR) is for electrification should be consistent with the Govern- 10% and up. ment's socio-economic development objectives and · The consumer meter will be financed by the entities should include, among others, the following principles: that are assigned responsibility of operating the low- voltage network for providing the service of electric- · that communes should have a potential for eco- ity supply to the consumer. nomic development so as to ensure that energy con- · The People's Committee of the Province and central sumption will be sufficient to justify the investment cities will be responsible for all land, contributions in economic terms that are defined as below: from local budget and steering of site clearance and · The methodology for conducting the economic resettlement meeting the requirements for con- evaluation of any rural electrification project will struction of the medium voltage and low voltage be based on regulations to be issued by the systems. Government. · A rural electrification project is defined as the 3. Ensuring appropriate Design standards and capital investment decision for a medium-volt- construction Quality age and low-voltage system including all asso- All rural electrification investment from the medium-volt- ciated downstream investments. A typical rural age level down to the consumer meter will have to meet electrification project would therefore cover nationally promulgated design standards. Ministry of multiple communes. Industry will issue nation-wide applied design standards · Only those rural electrification projects--would for rural electricity networks. be selected for investment if they are able to demonstrate a minimum economic internal rate Electricity of Vietnam will undertake the responsibility of return (EIRR) of 12%. of certifying/ensuring that the medium and low-voltage · Especially difficult communes selected for rural network invested by the PCs meets national design electrification under a specific project should standards. achieve a minimum EIRR (probably 8%). · Those communes that have EIRR below the Departments of Industry in the provinces and central cities above criteria will be electrified under a specific will undertake the responsibility of evaluating rural elec- decision by the Government. tricity network projects that are designed and invested · that the connection of communes to the grid should by other investors to meet national design standards and be the least-cost solution to supply electricity; existing regulations. An agreement on design standards Appendix: The 1999 Rural Electrification Policy Paper 77 with Electricity of Vietnam or the PC(s) if an electricity These avoided cost capacity and/or energy payments will network needs to be connected to the national grid. be linked to the load profiles and location at which this power is supplied to the network. Electricity of Vietnam The Power Companies and local network owners/opera- will specify and proclaim the principles for establishing tors are obliged to meet the nationally promulgated these avoided cost payments. design standards. 7. incentives for off-grid supply 4. Diversifying ownership and management responsibilities For some mountainous communes and island areas not for rural Electrification networks and supply being able to connect to the national grid, respective The Government of Vietnam encourages the diversifica- provinces will establish the on-spot/local generation proj- tion of investment and management forms in the provi- ects suitable with the specific conditions of each location sion of electricity to consumers. such as diesel, small hydro power, solar power, etc. · Foreign and local investors are encouraged to invest The Government will encourage foreign and local inves- in generation of power to supply rural electrification tors participating in investment, local generation busi- networks. nesses for electricity supply to consumers, especially in · The Government will not limit the participation of remote areas where the national grid cannot reach. entities and individuals in owning, managing rural network and supply businesses, provided that these 8. retail price activities are in compliance with legal regulations. The Government through its assigned price setting Different operation and management schemes will authority will establish a ceiling price for retail supply to be encouraged and applied depending on the local rural consumers. situation providing the mechanisms are transparent and incentives appropriate. This retail price ceiling will be readjusted/increased if the · The low-voltage network developed by the PCs may overall financial subsidies made available through the dif- be leased or sold to a business entity that may have ferential pricing of bulk power to urban and rural power sufficient operating capacity and be assigned the distribution companies are inadequate to sustain accept- responsibility of operating the low-voltage network. able financial performance for EVN, the PCs and other rural electricity supply business entities. (This financial 5. incentives for local rural Electricity supply businesses performance is as follows: self-financing ratio is 30%, To encourage local investment, management and opera- debt service ratio is 1.5 and debt/equity ratio is 60:40.) tion of rural electrification networks and supply busi- nesses, local entities and individuals participating in The mechanism of subsidizing the price of electricity to these activities will be ensured as to the following: rural consumers should ensure that there are incentives for: (i) efficient purchase of bulk power by the supply · To purchase bulk power at the low voltage output entity; and (ii) entities responsible for electricity delivery side of the PCs' 6­35/0.4 kV distribution transform- to cover costs ers at the price level defined by the Government. · To be offered an adequate return on invested equity 9. funding arrangements for rural Electrification or an adequate distribution margin to cover the costs The Government of Vietnam will ensure the following of operation, maintenance and a reasonable profit. when providing funds to EVN, PCs and other business entities for investment in rural electrification: 6. Encouraging Decentralized on-Grid Generation supply To encourage investment in economic decentralized gen- · Refundable or partially refundable capital sources eration in the low voltage grid, the PCs will offer avoided from multilateral and bilateral loans will be allocated cost capacity and/or energy payments to potential decen- as special budget funds aimed at investing in rural tralized generators (avoided cost capacity and/or energy electrification once the investment is determined payments are the highest price that the power purchaser appropriate. can afford to buy electricity from outside generation · Loan funds can be on-lent at the preferable interest source instead of their self investment, generation and rate to the PCs and only served for rural electricity transmission to the consumers). projects of special purpose, although these projects are economically feasible but having financial rate of return below 10%. 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