Which Financial Mechanism for Parent Company-Affiliate Model?

3:26:20 PM | 7/8/2005

Deciding on a proper financial mechanism for State-run corporations when transferring to the parent-affiliate model is one of top concerns of enterprises, in light of the ineffective performance of these State subsidy beneficiaries. This was the main topic of discussion at a talk on Financial Mechanisms for the Parent-Affiliate Model held by the Vietnam Chamber of Commerce and Industry recently.

According to Associate Prof. Dr. Nguyen Dang Nam, Deputy Head of the Financial Science Institute under the Ministry of Finance, the parent company is eligible to conduct both business and financial investment activities while the affiliate has the right to invest in other member companies (except reinvesting in the parent company). The affiliate is independent in deciding on the usage of its capital while the parent company is not permitted to intervene in the capital and assets it has invested in the affiliate.

The government has selected 34 State corporations for the pilot parent-affiliate model programme, of which it has already approved the operation regulations and financial mechanism of four.

However, some worry that the independence the affiliate company could create problems since many of the affiliates’ investment decisions may possibly be ineffective.

However, Dr. Tran Tien Cuong, Head of the Research Group on Enterprise Reform and Development (of the Central Economic Management Research Institute) said that there was no need to worry about this since all decisions of the affiliates must go through the executive board before implementation. Cuong revealed the plan on corporation arrangement by 2005, including three forms: rearrangement of self-accounting member enterprises, parent-affiliate model and economic groups.

Vietnam now has 18 corporations 91 and 74 corporations 90 with average capital ranging between VND500 and VND1,000 billion each. Each corporation has a minimum of five to seven affiliates.