ISEAS Perspective 2021/2 “Sino-US Competition in Infrastructure Development: Power Plants in Vietnam” by Le Hong Hiep

EXECUTIVE SUMMARY

• Vietnam needs to build more power plants to deal with its looming power shortage. Instead of tapping Chinese loans under the Belt and Road Initiative (BRI), it is working with American investors to build a series of power plants using liquified natural gas (LNG) imported from the United States.

• Vietnam’s decision is driven by its wish to use cleaner sources of energy and to reduce financial and fiscal risks for the country.

• These projects also strengthen Vietnam-US relations and help make bilateral trade more balanced.

• The American government is strongly endorsing these LNG-to-power projects for both economic and strategic reasons. The United States is particularly interested in presenting regional countries with an alternative to the BRI that is based on sustainable, high-standard, market-oriented private sector investments.

• The emergence of an alternative to the BRI is welcome news for regional countries as they will have more funding options for their infrastructure projects.

• Competition from the United States should encourage China to make BRI lending practices more transparent, sustainable, and compatible with international standards.

* Le Hong Hiep is Fellow at the ISEAS – Yusof Ishak Institute.

INTRODUCTION

As a fast-growing economy, Vietnam’s demand for new infrastructure has been increasing over the years. According to the Global Infrastructure Outlook, Vietnam’s investment needs for infrastructure projects between 2016 and 2040 amount to US$605 billion, in which power plants account for US$265 billion (44 per cent).[1] Facing delays in current power projects and difficulties in getting financing for new ones, Vietnam’s power shortage is estimated to reach 6.6 billion kWh in 2021 and 15 billion kWh in 2023, or 5 per cent of the country’s total power demand.[2] If this problem persists, it will pose serious constraints to Vietnam’s economic development.

Against this backdrop, China’s Belt and Road Initiative (BRI) should be an appealing source of funding that Vietnam can tap into. However, for various reasons, Vietnam has generally shunned BRI loans.[3] Instead, it is actively working with US investors to develop its energy infrastructure. By late 2020, at least two major power plants funded by US investors using US liquified natural gas (LNG) had been approved, and at least five more similar projects are in the pipeline.

Vietnam’s decision to tap American rather than Chinese capital for its power plants not only has important implications for Vietnam-US relations but also provides an indication of how America is responding to China’s expanding economic and geopolitical influence through the BRI. If these projects are successful, they will bring credibility to America’s approach and offer regional countries a viable alternative to the BRI.

VIETNAM’S SWITCH TO LNG-FIRED POWER PLANTS

As shown in Figure 1, as of early 2020, Vietnam’s total installed capacity of power generation was 54.88 gigawatts (GW), in which hydropower and coal-fired power plants account for 71.46 per cent. However, these traditional power sources have shown limitations.

Figure 1 – Vietnam’s power generation sources as of 2020 (per cent)

Source: EVN National Load Dispatch Center

In addition to the lack of suitable locations left to build new hydropower plants, criticisms against hydropower projects have intensified, especially following recent serious flood and landslide disasters linked to a hydropower project in Quang Nam Province. Meanwhile, air pollution concerns and the Vietnamese government’s strengthening commitment to green development have caused widespread public rejection of new coal-fired power plants. Provinces such as Bac Lieu, Binh Thuan, Long An, Nghe An and Ha Tinh have cancelled coal-fired power projects planned in their jurisdiction. International financiers have also pressured investors to withdraw from coal-fired power projects in Vietnam. For example, a group of investors recently urged Mitsubishi Corp. and seven other Japanese companies to withdraw from the Vung Ang 2 coal-fired power project in Ha Tinh Province.[4] As more international banks refuse to fund coal-fired power plants, getting financing for such projects have become increasingly difficult.[5] The most feasible source of funding for new coal-fired power plants now is from China. However, the borrower would have to use Chinese technology, which is generally seen as less advanced and more polluting.[6] The rising anti-China sentiments in Vietnam would also be a major challenge.

In order to diversify away from hydro and coal-fired power, Vietnam has created a lot of incentives for investments in the renewable energy sector. As shown in Figure 1, as of 2020, solar and wind power account for 11.05 per cent of Vietnam’s total power generation capacity. By August 2020, 23 GW of renewable energy had been added to the national power development plan, including 11.2 GW of solar power and 11.8 GW of wind power.[7] In the next few years, as these renewable energy projects are completed and put into operation, the share of renewable energy in Vietnam’s energy mix will further increase.

However, as renewable energy sources are not stable due to changing weather conditions, Vietnam still needs more stable sources of energy to serve as baseload power. In this regard, LNG-fired power plants provide the most promising option as they are seen as much cleaner than coal-fired power plants while safer and less difficult to develop than nuclear power plants. Currently, Vietnam is planning 10.4 GW of gas-fired power by 2028, most of them use imported LNG. The key challenge, however, is to get funding for these projects.

THE ROLE OF AMERICAN INVESTORS

Vietnam has developed more than 10 gas-fired power plants, but most of them (except for the Phu My 2.2 and Phu My 3 projects in Ba Ria – Vung Tau Province) are developed by domestic investors. All these plants use gas from Vietnam’s gas wells in the South China Sea. As the domestic gas supply is rather limited while new gas development projects have been delayed, Vietnam finds engaging American investors to build new power plants using LNG imported from the United States a convenient option for various reasons.

First, engaging American investors will help strengthen US-Vietnam relations. This is an important consideration, given that Vietnam is keen to maintain strong ties with the United States for both economic and strategic benefits. The United States is currently Vietnam’s biggest export market, while strategic cooperation with Washington is important for Vietnam’s efforts to balance against China in the South China Sea.

Second, importing LNG from the United States will help reduce America’s trade deficit with Vietnam, which stood at $55.8 billion in 2019.[8]  This large and swelling trade deficit has been a major source of resentment for the administration of President Donald Trump. In December 2020, the US Treasury labeled Vietnam as a currency manipulator and accused Vietnam of manipulating its currency to gain “unfair competitive advantage in international trade”.[9] Importing US LNG for its power plants will therefore enable Vietnam to achieve the dual goals of addressing America’s trade concerns and improving its energy security.

Third, working with US private investors will reduce financial and political risks for the Vietnamese government. Unlike Chinese loans under the BRI which are normally arranged through government-to-government agreements and require government guarantee, most LNG-to-power projects in Vietnam are proposed by private investors under the independent power producer (IPP) model. Under this model, the Vietnamese government only needs to commit to buy electricity from such projects at an agreed price. Financial arrangements for the construction of the projects will be made by the investors, which helps reduce the fiscal burden on the Vietnamese government.

Fourth, as Washington is providing support for the LNG industry to turn America into a major LNG producer and exporter,[10] importing US LNG can be a sustainable option for Vietnam in terms of pricing and supply capacity. Moreover, US investors, with their proven financial and technical track record, can better ensure that their projects are implemented successfully without the problems normally associated with China-backed infrastructure projects, especially cost overruns and project delays.

Table 1- Vietnam’s major LNG-to-power projects related to American investors

	Project name	Capacity	Investment value (US$)	American investor	Status
1	Son My 2	2.2 GW	1.7 billion	AES*	Approved, commissioned in 2024
2	Bac Lieu LNG	3.2 GW	4 billion	Delta Offshore Energy	Approved, phase 1 commissioned in 2023
3	Chan May LNG	4 GW	6 billion	Pacific Rim Investment and Management Inc.*	Proposed, phase 1 commissioned in 2024
4	Long Son LNG	3.6 GW	4.39 billion	General Electric*	Proposed, phase 1 commissioned in 2025
5	Hai Phong LNG	4.5 GW	5.09 billion	ExxonMobil*	Proposed, phase 1 commissioned in 2026
6	Long An LNG	3 GW	2.88 billion	General Electric*	Proposed, phase 1 commissioned in 2025
7	Mui Ke Ga	3.6 GW	4.2 billion	Energy Capital Vietnam, Excelerate*	Proposed, phase 1  commissioned in 2028

* These projects are not wholly-owned by American investors, and there are local or third-country partners involved.

Source: Author’s own compilation

As of December 2020, more than 20 LNG-to-power projects have been proposed in Vietnam. Among these, two have been approved to be developed by American investors. As shown in Table 1, some other projects that have entered advanced stages of their application are also associated with American investors. In the next few years, more America-backed projects are expected to be announced.

AN EMERGING ALTERNATIVE TO THE BRI?

These projects have been considered favorably by not only Vietnam but also America. A primary example is the Bac Lieu LNG-fired power plant. This project is developed by Delta Offshore Energy, a special purpose vehicle established in Singapore but owned by three American shareholders. In September 2019, the US Department of Commerce (DOC) added the project to the US Commercial Advocacy Program, which enables the project to enjoy certain benefits, including lobbying efforts led by US government agencies. Shortly after that, the project was approved by the Vietnamese government and added to the national Power Development Plan 7 in December 2019. It has since been highlighted as a marquee project of US-Vietnam energy cooperation. At the Indo-Pacific Business Forum held in Hanoi in October 2020, under the witness of Vietnamese Deputy Prime Minister Pham Binh Minh and US Ambassador to Vietnam Daniel J. Kritenbrink, Delta Offshore Energy signed a master teaming agreement with three other American firms (Bechtel, General Electric and McDermott) to prepare for the execution of the project.

Commenting on the event, which also witnessed the signing of a memorandum of understanding (MOU) to develop the Hai Phong LNG power project and a joint venture agreement for the development of the Son My LNG import terminal, the US embassy in Hanoi stated that “the United States is committed to helping Vietnam meet its growing energy needs”.[11]

The US government’s support for America-led LNG-to-power projects in Vietnam is a telling example of how the US is countering China’s BRI. Since the BRI’s launch in 2013, China has been able to use the initiative to advance its economic and strategic agenda across the region at the expense of the United States and its allies. A key factor causing many regional countries to embrace the BRI was that BRI was almost the only game in town. The LNG-to-power projects that the United States is backing in Vietnam therefore provides early evidence that Washington is taking concrete actions to present regional countries with an alternative to the BRI.

Towards this end, the United States and Vietnam signed in November 2019 a Cooperation Framework to Strengthen Infrastructure Finance. The initiative was designed to achieve the two countries’ mutual goals of supporting infrastructure development through market-oriented, private sector investments. The agreement is said to support the broader US Government Indo-Pacific Strategy by complementing initiatives such as the Enhancing Development and Growth through Energy (Asia EDGE) and the Infrastructure Transaction and Assistance Network (ITAN). [12] At the regional level, Washington has also signed similar agreements with South Korea, Taiwan, Indonesia, Singapore and Thailand.

The participation of private investors like Delta Offshore Energy, ExxonMobil, AES or General Electric makes America’s approach to assisting the region’s infrastructure development markedly different from the BRI, as the implementation of the BRI has so far been dominated by Chinese state-owned enterprises. Moreover, while most BRI projects use loans arranged through government-to-government agreements or provided by Chinese state-owned banks, America-backed projects use market-based financing arrangements negotiated between investors and international creditors. In the energy sector, America’s promotion of LNG-to-power projects also contrasts with the BRI’s approach, which has mainly focused on hydro or coal-fired power plants. In Vietnam, Chinese investors and contractors have built many coal-fired power plants, and the BRI’s only energy project in the country so far is the 1.2 GW Vinh Tan 1 coal-fired power plant in Binh Thuan Province.

America is also working with Japan to support Vietnam’s energy infrastructure development under the Japan-US Strategic Energy Partnership. In a joint statement at a trilateral forum on LNG held in December 2020, the two countries pledged to provide financial assistance for Vietnam to build LNG-fired power plants and receiving terminals.[13] Japanese investors are also actively investing in such projects on their own or in collaboration with American partners. For example, during US National Security Advisor Robert O’Brien’s visit to Vietnam in November 2020, Mitsubishi, General Electric and their Vietnamese partners signed an MOU to develop the Long Son LNG power project. In the same month, Tokyo Gas, Marubeni and Vietnamese partners also signed an MOU to build the Quang Ninh LNG-fired power plant.

The collaboration between America and its allies and partners therefore highlights another major difference in the approaches of America and China to international infrastructure development. While China has funded BRI projects mostly by its own money, America has tried to pool resources from its allies and partners. In the long run, this approach together with the market-based financing mechanism will make America’s strategy more sustainable. Washington has strengthened collaboration with its allies for not only project financing but also standard setting. A primary example is the Blue Dot Network (BDN), an initiative announced in November 2019 by the United States, Japan, and Australia to provide assessment and certification of “quality infrastructure investment that is open and inclusive, transparent, economically viable, financially, environmentally and socially sustainable, and compliant with international standards, laws, and regulations”.[14] Another goal of the initiative is to mobilize private capital for infrastructure development projects across the Indo-Pacific. As Vietnam’s LNG-fired power projects appear to meet the above criteria, it is likely that they will soon be certified as BDN projects.

CONCLUSION

US-China strategic competition has expanded to different areas, including funding infrastructure development projects in developing countries. Bilateral competition in this domain has particularly intensified since 2013 when China rolled out its BRI. Until recently, China has been successful in promoting the BRI partly because the United States lacked a coherent and viable strategy to compete with the BRI. However, the case of America-backed LNG-to-power projects in Vietnam provides early evidence that Washington is taking concrete steps to counter the BRI in an effective manner. A comprehensive strategy to help regional countries build quality infrastructure in line with America’s economic and strategic visions is also taking shape. This will present a formidable challenge to the BRI at a critical juncture when the BRI itself is facing significant international and domestic setbacks, leading to Beijing’s decision to scale back the initiative and adopt a more conservative approach.[15]

The availability of an alternative to the BRI should be welcome news to regional countries as they can thus avoid dependence on any single source of funding. Competition from the United States and its allies will also force China to become more responsible and make its BRI lending practices more transparent, sustainable, and compatible with international standards. If the United States and its allies can successfully implement its infrastructure development financing model in Vietnam and replicate it in other countries, Washington can strengthen its strategic and economic position in the Indo-Pacific and counter China’s expanding influence more effectively. For Vietnam, the participation of US investors brings a critical source of funding at a time when the country desperately needs to build more power plants to deal with its looming power shortage. If these LNG-to-power projects are successful, Vietnam may also consider engaging American investors in other infrastructure projects as well. In the meantime, the priority for both Vietnam and the United States is to make sure that these LNG-to-power projects are successful. One challenge Vietnam may face along the way is how to manage the possible increase in its electricity retail price given that LNG-fired power is relatively more expensive than coal-fired or hydro power. If this challenge is addressed properly, there are good reasons to believe that Vietnam-US cooperation in the development of energy infrastructure will strengthen over the next decade.

ISEAS Perspective 2021/2, 19 January 2021.

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ENDNOTES

[1] Global Infrastructure Hub, “Global Infrastructure Outlook – Infrastructure investment needs – 50 countries, 7 sectors to 2040”, July 2017, https://d2rpq8wtqka5kg.cloudfront.net/389138/open20170919030300.pdf

[2] “Từ 2021, mỗi năm Việt Nam sẽ thiếu hàng tỉ kWh điện”, Tuổi Trẻ, 9 November 2019, https://tuoitre.vn/tu-2021-moi-nam-viet-nam-se-thieu-hang-ti-kwh-dien-20191109084941987.htm

[3] For an analysis of Vietnam’s perception of the BRI, see Le Hong Hiep, “The Belt and Road Initiative in Vietnam: Challenges and Prospects”, ISEAS Perspective, 2018 (18).

[4] “Ditch Vietnam coal-fired plant, investors tell Mitsubishi and banks”, Nikkei Asia, 29 November 2020, https://asia.nikkei.com/Spotlight/Environment/Ditch-Vietnam-coal-fired-plant-investors-tell-Mitsubishi-and-banks

[5] “Banks Shunning Coal Financing Bodes Badly for New Plants in Asia”, Bloomberg, 25 February 2020, https://www.bloomberg.com/news/articles/2020-02-25/banks-shunning-coal-financing-bodes-badly-for-new-plants-in-asia

[6] Author interview with Vietnam energy expert, November 2020.

[7] “113 dự án năng lượng tái tạo đã cơ bản được giải tỏa công suất”, Vietnam Electricity, 4 September 2020, https://www.evn.com.vn/d6/news/113-du-an-nang-luong-tai-tao-da-co-ban-duoc-giai-toa-cong-suat-6-12-26358.aspx

[8] Office of the US Trade Representative, “Vietnam”, undated, https://ustr.gov/countries-regions/southeast-asia-pacific/vietnam

[9] “U.S. Treasury labels Switzerland, Vietnam as currency manipulators”, Reuters, 16 December 2020, https://www.reuters.com/article/usa-currency-manipulation-idUSKBN28Q1SF

[10] “The US is helping the natural gas industry make a profit — at the expense of the environment”, The Texas Tribune, 12 December 2018, https://www.texastribune.org/2018/12/12/us-helping-private-natural-gas-companies-make-profit/

[11] Facebook page of US Embassy in Hanoi, 29 October 2020, https://www.facebook.com/usembassyhanoi/posts/3930934623602037

[12] US Department of the Treasury, “United States and Socialist Republic of Viet Nam Sign Cooperation Framework to Strengthen Infrastructure Finance”, 7 November 2019, https://home.treasury.gov/news/press-releases/sm829

[13] “Vietnam teams with Japan and US for low-carbon electricity”, Nikkei Asia, 4 December 2020, https://asia.nikkei.com/Business/Energy/Vietnam-teams-with-Japan-and-US-for-low-carbon-electricity

[14] US Department of State, “Blue Dot Network”, undated, https://www.state.gov/blue-dot-network/

[15] For example, according to data compiled by researchers at Boston University, BRI lending by the China Development Bank and the Export-Import Bank of China decreased from a peak of US$75 billion in 2016 to just US$4 billion in 2019. See “China curtails overseas lending in face of geopolitical backlash” Financial Times, 8 December 2020, https://www.ft.com/content/1cb3e33b-e2c2-4743-ae41-d3fffffa4259

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