PROJECT BRIEF
1. IDENTIFIERS:
PROJECT NUMBER PIMS 2057
PROJECT NAME Vietnam: Promoting Energy Conservation in Small and Medium Enterprises (PECSME)
DURATION 5 years
IMPLEMENTING AGENCY United Nations Development Programme
EXECUTING AGENCY Ministry of Science and Technology
REQUESTING COUNTRY Vietnam
ELIGIBILITY UNFCCC Ratified, 12 May 1994
GEF FOCAL AREA Climate Change
GEF PROGRAMMING FRAMEWORK Operational Programme No. 5
2. SUMMARY
The project comprises an integrated set of activities designed to address in a holistic fashion the barriers to widespread utilization of energy efficient management practices, operations and technologies in Small and Medium Enterprise (SME) sectors in Vietnam. SMEs are a key target for energy conservation in Vietnam as they now account for 95% of enterprises, provide 26% of employment, contribute up to 25% GDP and are expected to fuel Vietnam’s future employment growth. The five key SME sectors being addressed in the project are brick, ceramics, textiles, paper and food processing. The project will take the results of ten carefully targeted demonstration projects in the five SME sectors and apply them to a pipeline of 500 projects to be implemented during the project. The project will achieve its objectives by supporting an integrated set of six component programs comprising: policy and institutional support development; communications and awareness; technical capacity development; energy efficiency services provision support; financing support; and demonstrations. The successful implementation of the project will result in annual energy savings of 189.5 KTOE and 1,004.2 ktonnes CO2 annual emission reductions during the period 2005-2015.
3. COSTS AND FINANCING
GEF US$ 5,469,000
CO-FINANCING
Government Ministries US$ 1,100,000
Private US$ 19,100,000
Local Government Agencies US$ 2,600,000
Others US$ 500,000
TOTAL PROJECT COST: US$ 28,769,000
+ PDF-B (GEF + CO-FINANCING): US$ 458,250 (US$ 330,000 PDF-B grant)
TOTAL PROJECT COSTS INCL. PDF-B: US$ 29,227,250
4. OPERATIONAL FOCAL POINT ENDORSEMENT
Dr. Pham Khoi Nguyen, Chairman of GEF Vietnam, Ministry of Natural Resources and Environment (MoNRE)
Tel: 84-4-7734245; Fax: 84-4-7734245.
5. IMPLEMENTING AGENCY CONTACT
Manuel L. Soriano, GEF Regional Coordinator – Climate Change
UNDP-GEF, Regional Coordination Unit for Asia and the Pacific
Tel. No.: 60-3-20915153; Fax: 60-3-20923140; E-mail:
List of Acronyms Used
ADB / Asian Development Bank
APEC / Asia Pacific Economic Cooperation forum
ASEAN / Association of Southeast Asian Nations
Asia-BRESL / Asia: Barrier Removal to Cost Effective Energy Efficiency Standards & Labeling
CBC / Capacity Building Center for the Sustainable Development of SMEs
CIEM / Central Institute for Economic Management
CLASP / Collaborative Standards and Labeling Program
DOIs / Departments of Industry in Provinces
DOSTs / Departments of Science and Technology in Provinces
DSM / Demand Side Management
ECCs / Energy Conservation Centers (Hanoi, Haiphong, Danang, Cantho & HCMC)
EC&EE / Energy Conservation and Energy Efficiency
EDP / Foundation for Energy Development Planning (Netherlands)
EESPs / Energy Efficiency Service Provision/Providers
ELI / Efficient Lighting Initiative
GEF / Global Environmental Facility
GHG / Greenhouse Gases
GOV / Government of Vietnam
HCMC / Ho Chi Minh City
HUT / Hanoi University of Technology
IE / Institute of Energy (MOI)
IFC / International Finance Corporation (of the World Bank Group)
IHER / Institute of Heat Engineering and Refrigeration (HUT)
INCOMBANK / Industrial and Commercial Bank of Vietnam
IPMVP / International Monitoring and Verification Protocol
LGF / Loan Guarantee Fund
LPG / Liquefied Petroleum Gas
MDG / Millennium Development Goals
MEPS / Minimum Energy Performance Standards
MOC / Ministry of Construction
MOF / Ministry of Finance
MOI / Ministry of Industry
MOST / Ministry of Science and Technology (since 2003)
MOSTE / Ministry of Science, Technology and Environment (pre-2003)
MONRE / Ministry of Natural Resources and Environment
MPI / Ministry of Planning and Investment
NEA / National Environmental Agency
NEDCEN / Non-State Economic Development Center
NGOs / Non Government Organizations
PDF-B / Project Development Fund – Block B
PECSME / Promoting Energy Conservation in Small and Medium Enterprises (in Vietnam)
PFD / Project Framework Design
PMO / Project Management Office
SIDA / Swedish International Development Agency
SMEs / Small and Medium Enterprises
SMEDD / SME Development Department
SMEPC / SME Promotion Council
SOEs / State Owned Enterprises
TOE / Tonnes of Oil Equivalent
TOR / Terms of Reference
TPR / Tripartite Review
UNDP / United Nations Development Programme
UN-ESCAP / UN Economic and Social Commission for Asia and the Pacific
VCA / Vietnam Cooperative Association – formerly VICOOPSME
VCCI / Vietnam Chamber for Commerce and Industry
VECP / Vietnam Energy Conservation Program
VEEPL / Vietnam Energy Efficient Public Lighting
VGCP / Vietnam-Germany Credit Program
VINACEGLASS / Vietnam Ceramic and Glass Corporation
VICOOPSME / Vietnam Central Council for Cooperative Union and Small and Medium Enterprises
VSBK / Vertical Shaft Brick Kiln
VN DSM &EE / Vietnam Demand Side Management and Energy Efficiency
WB / World Bank
WU / Women Union
Background and Context
Overall Energy Supply and Pricing Policies
1. Vietnam’s gross domestic product (GDP) doubled in the 1990’s and its current GDP growth rate is around 7% p.a. - with good prospects for similar GDP growth rates in the next decade. Alongside this strong GDP growth, energy demand is expected to grow at a higher rate of 8.5% p.a. from 2001 to 2010, with electricity demand expected to grow at an even higher rate of 13-15% p.a.
2. A major contribution to this strong economic performance has been Vietnam’s transition from a centrally planned to a more market based economy since 1986 when the “Doi Moi” Program started. As part of this trend, Vietnam has also been increasing its market orientation in energy policy and pricing, and in particular has been opening up its electricity market for private investment.
3. In 2002, Vietnam produced 15 Million tonnes of coal, 16 Million tonnes of crude oil, 36,000 GWh of electricity and 3 Billion m3 of gas (natural gas and LPG). Vietnam is currently self-sufficient overall in energy. Primary energy use is expected to nearly double from 19.5 Million TOE (tonnes of oil equivalent) in 2000 to 37.5 million TOE by 2010, and by 2020 is expected to nearly double again to 72 Million TOE. Electricity demand is expected to more than double to 83-96,000 GWh/yr by 2010 and then more than double again to 200-250,000 GWh/yr by 2020.
4. Vietnam has significant, high quality and cost-competitive indigenous energy resources (coal, hydro electricity, oil, LPG, natural gas, fuel wood and crop residues) but these resources are generally struggling to keep up with rising domestic energy demand.
5. The investment demand of the energy sector is significant. By 2010, it is expected that this will amount to about 5% of GDP, and the investment demand of the electricity sector alone is already US$ 2 Billion p.a. After 2015, Vietnam could become a net energy importer if there are no new dramatic energy supply increases, putting pressure on Vietnam’s balance of trade.
6. In Vietnam, there is a steady transition to market oriented energy pricing. International markets now largely determine the price of oil products and LPG in Vietnam. Vietnam’s high-grade crude oil is exported and lower cost and lower grade refined products are imported - although this will soon change with completion of Vietnam’s first oil refinery. For LPG, international prices apply from the 30% of supplies that are now imported. For electricity, commercial and industrial tariffs already contain multiple steps that partly reflect peak demand constraints. Time-of-use meters and tariffs have been introduced for selected large consumers. The Government of Vietnam (GOV) has decided to steadily increase electricity tariffs step-by-step by up to 30% to cover the full marginal cost of the significant new generation, transmission and distribution capacity required. This rise in electricity prices will make energy conservation and energy efficiency (EC&EE) investments more profitable, but electricity price rises on their own are not expected to lead to significantly more EC&EE being realized due to the significant barriers to EC&EE that currently exist, including in the realization in practice of the various supportive GOV policies now in place.
7. Vietnam’s energy sector accounts for about 50 million tonnes of CO2 emissions p.a. CO2 emissions in 2000 were the main contributor to Vietnam’s GHG emissions[1] of 106 million tonnes CO2 equivalent p.a. This trend is expected to continue to 2010 when 117 out of 148 Million tonnes of CO2 equivalent emissions are expected to come from the energy sector, and by 2020 the energy sector contribution is expected to be 232 Million tonnes out of a total of 267 Million tonnes of CO2 emissions.
8. There are some very strong positives for energy conservation in Vietnam. The wide range of proven and available energy efficient technologies, management and operational practices will be assisted in their implementation in Vietnam by the strong and growing market orientation in energy pricing and the investment, production, marketing, banking and services sectors; strong international donor support for energy conservation projects (as Vietnam is very receptive to advice and there are generally strong implementation achievements). The growing integration of Vietnam into the world economy will also strongly focus SME attention on the management of all controllable input costs, particularly on energy costs which are one of the input cost areas most amenable to management.
Development of SME Sector in Vietnam
9. According to the Government Decree No 90 on SME Development Promotion, SMEs in Vietnam are defined as “independent enterprises with less than 10 Billion Dong[2] in paid-up capital or fewer than 300 employees.” In fact, some flexibility needs to be applied to this definition as an enterprise may be a clearly typical SME in character, but may utilize some very valuable land near the center of a major city or could utilize particularly antiquated capital equipment which requires many workers to operate.
10. The SME sector has grown in particular since 1986 when the GOV promulgated several policies including legislative measures to encourage the diversification of enterprise styles and the increase in size of allowable non-state enterprises. A number of legal documents supported this diversification including those on Corporate Law, Private Enterprises Law, Domestic Investment Promotion Law and Enterprise Law - which formally opened up the formation of new enterprises in Vietnam. A further boost came from the issuing of the new Enterprise Law in June 1999 - since then 72,000 new enterprises have been registered out of the 120,000 currently registered SMEs. According to Ministry of Planning and Investment (MPI) data, SMEs now contribute 25% of GDP and 26 % of employment in Vietnam.
11. Vietnam’s SME sector’s contribution will spur more than simply economic development - it will also be a key driver in achieving Millennium Development Goals (MDG). MDG goals of poverty alleviation, social development, and gender participation will be advanced by the SME sector’s creation of employment, advancement of skills, and increased opportunities throughout Vietnam.
12. However, the strong contribution to the advancement of these MDG goals is threatened by the widespread use of old technologies, poor management practices, lack of staff skills in efficient operation of energy consuming equipment, and inadequate investment in modern equipment that the full-scale PECSME project will address through an innovative and integrated barrier removal program approach.
13. With a predominantly young population of nearly 81 Million, which is still growing (albeit at a reducing rate), and nearly 75% of the population still living in rural areas, Vietnam clearly needs major increases in employment, preferably in rural areas and in smaller towns and cities. It is now widely recognized that the bulk of this future employment growth will have to come from SMEs, rather than from state owned enterprises (SOEs), as was the case in the past.
14. If electricity use by SMEs is not curbed, significant rises in electricity prices will be needed to fund consequential major electricity infrastructure investments. Since electricity use is typically 50% of energy costs, these electricity price increases will reduce the competitiveness of the entire SME sector, thus compromising the SME sector’s ability to contribute to MDG goals.
15. LPG, which is a fuel useful in higher efficiency combustion systems, is facing negative energy conservation investment implications from the high exposure of some SMEs to variations in the world LPG price. Note that the world price of LPG applies in Vietnam as around 30% of LPG is now imported - and the international price of LPG rose 35% in the 12 months to August 2003.
16. Particular energy supply constraints relevant to SMEs are already becoming apparent in limited supplies and rising prices of fuel wood; increasing importation of LPG; the relocation of polluting industries to outside cities (including due to inefficient and polluting coal use); limited pipeline infrastructure to distribute to SMEs the indigenous natural gas now available in the south of Vietnam; and the urgent need to use some traditional fuels in a more efficient manner - e.g., rice husks particularly in the Mekong Delta and a particular challenge to inefficient and polluting terracotta production, which is otherwise a cost competitive export opportunity for Vietnam.
17. Energy is a controllable cost for Vietnam’s SMEs, accounting for up to 45% of production costs. It is usually the largest single controllable production cost factor impacting on SME profitability.
18. The three strong national drivers for energy efficiency are that energy demand growth from ongoing strong economic development is putting pressure on Vietnam’s limited indigenous energy supplies, widespread energy waste is constraining SME competitiveness which in turn is holding back progress towards other important development goals such as poverty reduction, and there is a growing desire to reduce the local pollution impacts of inefficient energy
19. The GOV has now recognized the need to encourage SME development, and taken a number of practical steps to assist their development. Steps taken include issuing a decree in 2001[3] on SME development assistance. This decree established policy-making agencies, central and local sectoral and inter-sector management agencies, and coordinating, cooperating and supporting agencies for SMEs.
20. In particular, the SME development decree led to the development of the SME Development Department (SMEDD) and the SME Promotion Council (SMEPC), as well as the establishment of an Export Support Fund at the central level and Credit Guarantee Funds for SMEs in the provinces to access commercial bank funding sources. These developments were led by the MPI, which has the overarching role of supporting SMEs. However, many of these new agencies and activities are still going through elements of their establishment and development phases.