Vietnam’s State Owned Enterprises: Opportunities – June 2012

British Embassy Hanoi

Summary

Vietnam remains keen to emulate Japan’s Keiretsu and Korea’s Chaebol models for its state owned enterprise sector. But the model is not working well. Despite strong reform statements, ideology and vested interests make the process slow. We nevertheless hope that UK companies will be well placed to take advantage of future SOE (partial) privatization as identified in the current SOE reform proposal.

Detail

Vietnam continues wanting the state owned enterprise (SOE) sector to be the strongest driving force in the economy. To support this goal, during the 1990s and the early 2000s, Vietnam equitized (i.e. partially privatized) thousands of small and medium- sized SOEs and consolidated others into larger entities, called General Corporations. In 2005, keen to follow Japan’s Keiretsu and Korea’s Chaebol models, the Government created giant SOEs called State Economic Groups – a loose alliance of several SOEs with similar business interests – before the country’s accession to the World Trade Organization.

Like the Korean and Japanese counterparts, the Government gave large SOEs privileged access to capital (68% of the total available), fixed assets (55%), and bank credit (45%) as well as a high level of operational autonomy - they directly report to the Prime Minister. SOEs are also involved in national industrial sector planning, for example, Vinashin (the State owned ship building corporation) prepared the national shipbuilding industry strategy.

But their efficiency is reducing, while their problems are rising

But SOEs have become increasingly inefficient. Labour productivity of SOEs compared with the rest of the enterprise sector widened from 1:4 in 2000 to 1:10 in 2008. Between 2007 and 2009, the average return on equity (17%) was below that of foreign firms (27%). In 2011, four SOEs generated 80% of all SOE profits (oil, telecoms, mining, and rubber) – few of the remaining 1,300 are profitable.

Many SOEs enjoy near-monopoly status in critical sectors such as fertilizer (99%), coal (97%), electricity and gas (94%), telecommunication (91%), water supply (90%) and insurance (88%). They have also maintained their presence in several non-critical sectors such as cement (51%), beer (41%), textiles (21%) and chemicals (21%).SOEs create credit market distortions. Commercial banks tend to provide loans to SOEs rather than to more efficient small and medium sized private companies due to cross-ownership by SOEs, an implicit government guarantee for SOEs and political influence.

SOEs have also created a huge debt burden. Two large ones have recently defaulted on their debts: Vinashin (the state shipbuilder) and Vinalines (the state shipping company). Vietnam’s most indebted SOE ($11.4bn) EVN (the state electricity group) is running at a loss.

The ambivalent reform process

To its credit, Vietnam’s government has made strong policy statements on reform. SOE reform is one of three key areas of Vietnam’s restructuring programme. An SOE restructuring proposal has reportedly been submitted to the Prime Minister with the plan to implement it within 2013 - 2015. This proposal has been criticized by some commentators for being too general, not radical enough, and focusing mostly on partial privatization.

Moreover, despite reform statements, there have been limited actions taken so far:

Data disclosure: SOEs’ financial information is only provided to the National Assembly at a highly aggregate level which does not allow for any meaningful analysis. There is no clear policy on SOEs’ data disclosure.

Regulation: A superficial measure of cutting 5 – 10% operational costs of SOEs was announced in 2012. There is no modern corporate governance system.

Equitization (i.e. part-privatization): There is no clear plan on how to halve the number of SOEs to 650 by 2015.

Accountability: There are no measures on holding SOEs accountable for their actions.

Monitoring: There is no regulation on monitoring and evaluation of SOE performance available.

Comment

The Communist Party still expects SOEs to play the leading role in the economy, very much akin to the Chaebol used to in Korea. But there are differences which make it hard to replicate the success: Vietnam’s WTO membership makes it harder to protect SOEs from international competition (a key factor in the Chaebol’s early development). Nor do Vietnam’s SOEs seem to be learning how to compete in overseas export markets, another factor which drove the success of the Chaebol. Instead, Vietnam risks the worst of both worlds; inefficient firms dominating a domestic market. The patronage system they offer means they have interest groups strong enough to resist reform.

We do not expect the privatization of large SOEs in key industrial sectors such as oil and gas, and mining. For these sectors, there are real opportunities for British companies to develop partnerships with the SOEs. We are also exploring the potential for inward investment from SOEs to the UK. In addition UK companies should be well placed to take advantage of openings in the utilities or financial services sector when they are privatized under the Government plan.

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