World Bank representative Masami Kojima raised doubts about oil refinery losses and Vietnam Electricity's price calculation at the conference about energy subsidies in Vietnam held on September 13.
The World Bank's report released at the conference aimed to help Vietnamese authorities understand more about energy, how the market could be affected by fewer subsidies and how to achieve the best energy efficiency via the control of energy production and consumption.
Kojima started by saying that not all subsidies were bad. Some subsidies are common even in countries with strong energy sector such as cross-subsidies from urban users to people in rural area. Subsidies also help boost new energy sources such as solar, wind or bio energy. However, the most important question is if the cost is justified by the profit and how to make sure that the subsidies won't distort the market in the long term.
Binh Son Refining and Petrochemical Company, the operator of Dung Quat Oil Refinery, is the only Vietnamese oil refinery company that went into operation since 2009. It uses the domestic crude oil and commenced commercial operations in 2010. It has the scale to compete in the market and achieve good results.
Dung Quat Oil Refinery
Production costs should be cheaper than other imported products from Singapore or South Korea where they have to import crude oil then export to Vietnam. But Binh Son reported that they still struggled to meet healthy financial standards. In addition, it doesn't have to pay corporate income tax in the first four years and only 5% in the next nine years. In the coming 17 years later, it also only has to pay 10% of the tax.
The government issued a decision allowing Binh Son Company to annually retain of money equivalent to 3% of import duty on petrochemical products, 5% on import tax on LPG products and 10% of import duty on petroleum products and 7% on other products.
If Binh Son had not been allowed to retain the money, it would have to incur over USD1bn in losses. But all the subsidies and preferential treatment helped reduce losses to just USD50m and the disparity is the huge tax money that the government lost.
"The situation at Binh Son is hard to comprehend," she said.
Kojima said the Binh Son case begged the question of why so many preferential treatments and subsidies resulted in inefficiency. She urged the authorities to reconsider the plan to open a second oil refinery plant so that it wouldn't suffer the same problems as Binh Son.
Asides from huge incentives, state-owned firms like Binh Son, Vietnam Electricity (EVN) or Vietnam National Coal and Mineral Industries Group (Vinacomin) also have easier access to the bank loans. EVN had government guaranteed when taking loans to keep electricity prices low. Vinacomin can pay taxes late and has been given priority to sell coal to EVN as the global coal prices dropped sharply.
According to Kojima, the low electricity price is the most distorted and the government must re-consider the usage of fuel stabilisation fund, huge incentives to oil refineries and power companies. She also advised to give different price tags to the natural gas and coal and prepare to deal with the next fuel price shock.
In respond, the representative of Vietnam Oil and Gas Group (PetroVietnam) said more in-depth research would show that Binh Son Company had difficulties with transportation fees as they couldn't control it. Binh Son uses sweet crude oil from Bach Ho Oil Field but when the world prices drop, Binh Son still have to pay for the sweet crude oil which is more expensive than sour crude oil. That's why the costs were higher, he claimed.
Meanwhile, representative of the General Directorate of Energy said some researches of the World Bank hadn't been updated as Vietnam had been implementing measures to increase the energy prices.
"If the prices aren't increased, the state budget will not be able to cover the losses. Even the coal prices have been adjusted. About the electricity prices, our goal is to provide enough power for economic development so ODA is being given to develop projects in remote and rural areas," he said.