SINDILE VABAZA: Lessons from Vietnam — how to solve the energy crisis

With ongoing rolling blackouts in the country, the optimisation and diversification of SA’s energy generation mix is fundamental to meeting various developmental goals and enhancing the crucially important security of energy supply. Taking into consideration the country’s growing population and the ageing power plant fleet, SA energy policymakers have to make critical decisions regarding the energy supply mix in the future.  

The supply mix is dominated by generation from fossil fuels such as coal, oil and gas (which presents significant issues with future trade with the EU). These are also major pollution contributors and especially affect air quality. SA is responsible for more than  50% of Africa’s emissions because of its extensive coal use, of which less than 40% is transformed into useful energy.

Functional SOEs and political leadership as a base for reform

In a 2020 article, The Second and Third Waves of State Capture, former Institute of Race Relations CEO Frans Cronje foresaw the nominal “privatisation” or private contracting of firms to rebuild critical infrastructure and services razed to the ground by the government as simply another mechanism of state capture, if it was overseen by the same nefarious political actors.

He went on to say: “The energy parastatal/municipal water works/public hospital/mining industry is failing. SA suffers an electricity/water/healthcare/mining crisis. Something must be done. New generating capacity/refurbished infrastructure/better healthcare administration/new mining investment must be brought on line to save the country.

“Large amounts of development financing must be raised, with business, government, labour and the international community (especially under wave three) working closely together. Collectively they will agree that the ‘private sector’, or at least private-public partnerships, must do the delivery as the capacity of the state is so eroded.

“Calls will go out for applications from suitably qualified firms to do the work or lead these partnerships. But these firms and the contracts they win will be surveyed by the same political leadership and through the same prisms of cadre deployment and transformation that led to the first wave of state capture.

“Put it quite bluntly; you can grow rich off looting Eskom into the ground, and then win the financing and tenders to supply the renewable energy that SA needs to keep the lights on. When anyone questions what is going on you can again throw the racism accusation at them (and in the case of renewable energy) the climate-change denialist accusation.

“What ends up happening is that, having exhausted the resources available from public institutions, the ANC’s political elite pivot under the guise of privatisation and reconstruction to keep the cash taps flowing.” 

Cronje’s warnings are well worth noting because of the entrenched interests at Eskom and the infighting happening within the governing party leading up to their elective conference later this year. Even energy minister Gwede Mantashe realises the state needs private sector involvement in solving the country’s energy crisis, but for the crisis to truly be averted the private sector will need a more supportive political environment to operate in, and that will most likely require voting the governing party out in 2024.

Vietnam offers a compelling case of a country that is steadily enacting market reforms in a heavily state-led environment but one in which there is a realisation that without consistent energy supply that can meet the demands of a growing economy. 

Vietnam has one of the most energy-intensive economies in the world. Since 2010 electricity consumption has increased by about 10% per annum. This is attributed to strong economic growth and increasing industrialisation, universal electrification and modernisation. Installed electrical capacity grew 10-fold, from 5GW in 2000 to 55GW in 2020. Access to electricity increased from 14% in 1993 to 99% in 2020. 

In other words, central to Vietnam’s steady progress in introducing legal and regulatory reforms to gradually open up the electricity market to competition without adversely affecting supply is a functional, vertically integrated, state-owned Vietnam Electricity (EVN) which is mildly profitable, and a political class that while not corruption-free understands the vast energy needs needed to power growth in their economy. 

Their careful and considered approach is clearly working. A 2019 World Bank report, Rethinking Power Sector Reform in the Developing World, notes that the implementation of market-orientated power sector reforms raises political challenges. Many countries announced reforms that did not subsequently happen, and some countries enacted reforms that later had to be reversed.

In practice, electricity reforms proved to be most feasible in countries that already espoused a broader pro-market ideology, and in political systems based on the decentralisation of power. Reform champions often played a crucial role in driving the change process, but broader stakeholder alignment proved to be equally important for reforms to be sustained in the longer term.

For example, in the Dominican Republic a far-reaching market-orientated reform was enacted in an unsupportive political environment and a turbulent macroeconomic context that eventually led to the renationalisation of the power utilities.  

A Vietnam electricity case study prepared for the Free Market Foundation by Lisa Harraway also notes: “The electricity law of 2004, amended in 2012 and 2018, and various decrees, resolutions, decisions and circulars continually being issued by the government, is formalising the shift of the electricity sector to a market economy with diversified forms of ownership and management.

“The Vietnamese government produces PDPs (National power development plans) which are used to shape policy choices to advance the sector. These plans forecast growth in demand and map out the development of the power industry to meet this demand. Laws require National Power Development Master plans to be adopted for 10 year periods. Plans are aspirational in nature and should be seen as a directional road map rather than a rigid master plan. Plans are revised as long as the investment makes socioeconomic sense.” 

As the World Bank report notes, privatised utilities operate at higher levels of efficiency while adopting better governance and management practices, including: transparent financial reporting, meritocratic staff selection and modern IT systems. However, transitioning to that requires broad political agreement and careful and considered reforms, and Vietnam demonstrates this.

SA has a potentially similar pathway to Vietnam in ensuring security of energy supply while attaining the 21st century targets of weaning the energy sector off coal and other so-called “dirty” inputs. 

• Vabaza, a contributing author for the Free Market Foundation, writes in his personal capacity.