Mr. Hoang Quoc Vuong, Chairman of the Board Management at EVN, met with local media recently to talk about plans to equitize the Corporation.
The government has directed Electricity of Vietnam (EVN) to equitize its Power Generation Corporation (Genco) and its different bodies (Genco 1, Genco 2, and Genco 3). The three Gencos began operations in 2013 and are not on the list of corporations where the State needs to hold a controlling stake. In August 2014 the Ministry of Industry and Trade (MoIT) approved initial plans to equitize Genco 3, with a valuation to be conducted by January 1, 2015. The plan aims to conduct an initial public offering (IPO) in March 2016 and then hold the first shareholder’s meeting a month later.
The blueprint for EVN’s equitization is that, after Genco 3, the other two Gencos are to be equitized and operate independently of EVN.
Challenge from huge assets
The three Gencos manage about 7,000MW of power and their property assets are substantial, which may be something of a disadvantage in the equitization process.
IPOs of high value enterprises encounter certain difficulties. The capital of the three Gencos is much higher that of other recent SOE equitizations. In particular, Genco 3 manages about VND80 trillion ($3.81 billion) in assets, with State capital of nearly VND13 trillion ($619.04 million).
EVN has discussed the equitization of Genco with foreign investors who are already investing as BOT contractors in power projects in Vietnam, but they are reluctant to participate in buying shares of a large parent company like Genco. Equitizing its subsidiaries would attract more foreign investors, as information on performance would be easier to acquire and the associated risks would be less.
In the long term, investments in power plants appear to be attractive, especially when electricity prices are in the process of being adjusted in accordance with the market mechanism.
Power plants are investments in infrastructure and investors must be prepared for a long haul of 10-15 years. They can be quite profitable, though not to the same extent as in other fields, but in the long term they are less risky.
EVN has decided not to equitize each power plant, as it did previously, because while the better performers can easily attract investors, those that struggle for whatever reason fail to do so and require ongoing support from the State.
When establishing Genco, MoIT gave it a mix of power plants that were working well and others that were not. The upcoming equitization is therefore for Genco 3 as a whole, rather than for each individual plant.
Barriers from monopoly
While electricity prices have not been full adjusted according to the market mechanism, this remains the priority of the government, with prices for electricity transmission and distribution heading along a path of gradual adjustment.
Power purchase agreements between EVN power plants are being negotiated and signed in accordance with the guidance in Circular No.41/2010/TT-BTC from MoIT.
The purchase price of electricity in contracts is set at a level that ensures profitability for the power plant, but may still not be very attractive to investors. The return on equity at State companies producing power is 10 per cent, while in the private sector it is 13 per cent.
In recent years EVN has invested less capital in many power projects. The three Gencos therefore face difficulties from debt / equity levels not meeting the requirements of lenders, and they must seek assistance from EVN. Additionally, due to the financial difficulties facing EVN, many of its plants provide electricity prices lower than stipulated in Circular No.41.
Gencos are actually unattractive to investors compared with other sectors undergoing equitization. Nonetheless, EVN intends to actively proceed with Genco 3’s IPO in March 2016.
Equitizing while maintaining energy security
The equitization of the three Gencos must ensure that power plants continue to operate normally, because it relates to the security of electricity supply in the country.
EVN is therefore working closely with the World Bank to assess the overall financial situation of the three Gencos to identify and adopt solutions that will make them more financially sound and more attractive when they conduct IPOs.