Correction note, 5 July 2024: An earlier version of the article stated that the Song Hau 2 project can proceed after securing a US$980 million loan from the Export-Import Bank of Malaysia (Exim Bank). This is incorrect. Exim Bank has since responded to Eco-Business’s queries on 4 July to clarify that this loan is not from the bank. Singapore-based engineering service provider i-Power Solutions Pte Ltd will be providing the full sum of the US$980 million loan. The headline of the article and parts of paragraphs 1-12 have been edited to reflect Exim Malaysia’s replies. A follow-up article on the full press statement from Exim Bank on 2 July can be found here. We apologise for the error.
In the same week that Malaysia declared it would retire its entire fleet of coal-fired power stations over the next two decades to curb climate-wrecking greenhouse gas emissions, one of the country’s major development banks is facing scrutiny for being involved in financing arrangements for a new coal plant in Vietnam.
The 2,120-megawatt Song Hau 2 project in southern Vietnam, its construction delayed for over a decade as it struggled to attract financing, recently secured a US$980 million loan. The Export-Import Bank of Malaysia (Exim Bank), a development bank owned by the Malaysian government, had been involved in the equipment financing arrangements for the loan to be provided by Singapore-based engineering service provider i-Power Solutions Pte Ltd.
The bank is also the mandated lead arranger for a fund raising exercise of up to US$2.68 billion, one of the biggest of its kind to be raised by a Malaysian bank for an overseas project. It is unclear if the bank will be putting up any share of the loan, although in response to media queries, Exim Bank has said that the appointment as lead arranger “shall not be construed as a financing commitment or obligation on the part of Exim Bank.”
The deal to fund the coal plant in Hau Giang province has drawn criticism for undermining Malaysia’s climate commitments and jeopardising Vietnam’s US$15 billion Just Energy Transition Partnership (JETP) climate aid package.
Vietnam committed to wean itself off coal as part of its JETP agreement with rich countries in 2022. This agreement included a promise by Vietnam to limit its coal-powered generation capacity at 30.2 gigawatts by 2030.
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As a financial arm of the Malaysian government, Exim Bank should have seen the contradiction in its involvement in Song Hau 2.
Christina Ng, managing director and co-founder, Energy Shift Institute
Song Hau 2’s construction could torpedo the funding deal, said Christina Ng, the managing director and co-founder of Energy Shift Institute, an Australia-based energy think tank.
Besides casting a shadow over Vietnam’s climate pledges, which include the phasing out of coal after 2035 and carbon neutrality by 2050, the deal undermines Malaysia’s participation at the COP28 climate talks last year, when countries agreed to begin transitioning away from fossil fuels.
Malaysia’s minister for energy transition and water transmission had also pledged on Tuesday to halve Malaysia’s coal fleet by 2035 and retire all of its plants by 2044.
Its involvement in bankrolling Song Hau 2 showed inconsistency in the Malaysian government’s approach to energy investments and financing at home and overseas, “especially given the sensitivity around fossil fuel financing which has garnered heightened scrutiny around the world,” Ng told Eco-Business.
While most Malaysian commercial banks have policies in place that exclude coal after pressure from environmental groups to clean up their lending portfolios, development banks such as Exim Bank, which is wholly-owned by Malaysia’s finance ministry, have not been exposed to the same level of scrutiny, Ng said.
“As a financial arm of the Malaysian government, Exim Bank should have seen the contradiction in its involvement of Song Hau 2. If it goes ahead with this deal, it sends a signal that the government’s pledges don’t mean much – and that’s not a good look for a country that’s courting foreign capital,” Ng said.
“Any financial institution should rethink whether it should be involved in this deal, regardless of whether it has a coal exclusion policy. Their reputation is on the line,” Ng said.
A Malaysian bank executive speaking on condition of anonymity, said Malaysia’s involvement in the Song Hau 2 project should be a “wake up call” for Malaysia’s financial regulators, as to date there have been no significant cases of greenwashing or reputational impact from funding fossil fuels by Malaysian banks.
There was a need for a common understanding among banks and regulators on the red lines that should not be crossed, for example coal and deforestation, they said.
The risks of funding environmentally or socially problematic activities are identified in frameworks such as Malaysia’s Value-Based Intermediation Financing and Investment Impact Assessment Framework, which guides Malaysian banks on how to invest sustainably in line with Sharia principles. However, these are merely guidelines rather than legally mandated prohibitions, the executive added.
Ng also questioned whether the power Song Hau 2 will generate was actually needed, since considerable wind and solar capacity has come online in Hau Giang province over the past decade, as Vietnam’s changing regulatory environment has increasingly favoured renewables. China’s pledge to stop funding overseas coal plants in 2021 has also made it harder for Vietnamese coal projects to access foreign capital.
Vietnam is Southeast Asia’s leading nation for renewables capacity additions, although it remains a major coal user to feed rapidly increasing energy demand. Song Hau 2 is one of 16 coal plants under Vietnam’s Power Development Plan 2021-2030, which aims to generate 30-gigawatts of additional coal power. Vietnam’s government projects power consumption to grow 10-12 per cent annually through to 2030, and coal has taken a record share of the country’s energy mix this year.
According to the non-profit Centre of Research on Energy and Clean Air (CREA), once operational Vietnam’s new coal plants will cause 1,500 people to die prematurely from air pollution annually.
Song Hau 2 is a wholly owned subsidiary of Toyo Ink Berhad, a Malaysian ink company. The plant is to be engineered and built by a consortium made up of Malaysian conglomerate Sunway and Vietnamese firm Power Engineering Consulting Joint Stock Company 2.
Singaporean firm i-Power Solutions will arrange capital for equipment procurement. Construction of the plant has not yet started.
“Vietnam does not want to get a reputation for backing out of deals, but there is still time for all parties to come together and think about whether this project makes sense,” Ng said. “The deal could mean Vietnam losing billions of dollars towards its energy transition [by scuppering JETP].”
