SOEs Reform at Snail Pace

SOEs Reform at Snail Pace

Privatisation (or its equivalent term equitisation as used in Communist Vietnam) is an important Government measure to reform inefficient State-owned enterprises (SOEs) but progress remains slow with only 60 per cent of the plan realised after ten years of implementation.

Privatisation Brings about Benefits for Enterprises

Vietnam has completed privatisation of 1,557 SOEs to date. Initial reports from ministries, branches and localities show that almost all privatised SOEs are operating more effectively. A survey of 500 privatised enterprises indicates that turnover has grown by 43 per cent, legal capital is up 150 – 200 per cent, tax payments are up 16 per cent, and profits are up by as much as 243 per cent, while the income of labourers has increased by 54 per cent. The importance of labourers in enterprise is heightened as they become real owners of enterprises in all aspects, from building plans to production, accumulation and distribution of profits, to the voting and supervision of the directorate.

Why Are Enterprises Indifferent to Privatisation?

According to Ho Xuan Hung, Deputy Head of the Management Board on SOEs Reform and Development, SOEs are not being mindful of equitisation partly because of the slow issuance of guidance documents and impediments posed by policies such as the minimum sale of 30 per cent of remaining shares to the public through intermediary financial institutions, and complicated calculation processes for an enterprise’s value. The issuance of enterprise shares and bonds in stock market, the role of minor shareholders, State management of equitised State corporations, the value of land use rights, and trademarks are also factors which curb the progress of reform.

Most SOEs remaining on the equitisation list are of small and medium size and operate with outdated equipment. Most of the shares are traded within the company while few are sold out. Only a few highly-capitalised enterprises are performing profitably such as the Vietnam Dairy Products Co. (VND1.5 trillion), Lam Son Sugarcane Co. (VND92 billion), La Nga Sugarcane Co. (VND82 billion), Bien Hoa Sugar Co. (VND81 billion), and less than 10 percent of equitised SOEs are capitalised at over VND10 billion each.

Dr. Dinh Van An, Head of the Central Institute for Economic Management, pointed out a lack of regulations to guide the process, procedures and methods of equitising State corporations and enterprises having complicated organization structures. In particular, there are yet to be clear regulations and strong sanctions for commercial banks and credit institutes to handle loans for privatised enterprises. There is also an absence of regulations for dealing with enterprises which intentionally make a loss on State assets during their reform process.

Five Targets to Gear up Privatization Process

• Expanding the field and scale of SOEs which should be privatised, including some large corporations and enterprises in the sectors of electricity, metallurgy, chemicals, fertilizer, cement, construction, road transport, aviation, navigation, telecommunications, bank and insurance
• Evaluating enterprises, including the value of land use right (in principal, decided by the market)
• Publicising the trading of shares
• Removing business privilege and monopoly of SOEs
• Renovating State management of SOEs; establishing State-run financial investment companies and administration agencies to perform the function of an ownership representative of State funds in enterprises of all sectors

Hung commented that to speed up privatisation, there should be a focus on changing the attitudes of the workforce from labourers through to the directors, creating a consensus throughout the enterprise. On the other hand, there needs to be a complete legal framework which helps speed up the restructure of SOEs that need not be 100% State-owned holdings and improve their self-regulation and performance efficiency. Continuing to select some State corporations and large SOEs for equitisation in fields that the State needs not hold 100% capital is necessary, such as the Bank for Foreign Trade of Vietnam, Bank for House Development of Mekong Delta, Vietnam Electronics and Informatics Corporation, Vietnam Construction and Import-Export Corporation, and the Trade and Construction Corporation.

The Management Board on SOE Reform and Development proposes re-evaluating the potential of medium and large-sized enterprises through audit by financial advisory organizations. State corporations should hire foreign evaluation organizations and go on bourse at the same time, while small enterprises should go through auction or an evaluation council. Equitisation should also incorporate administrative reform, minimizing complicated and unnecessary procedures for enterprises.

Following is some comments of officials and businessmen about the privatisation progress:

Representative of Ministry of Industry: “Enterprise Evaluation Is Complex”

Valuing an enterprise is the most complicated and time-consuming aspect of the privatisation process. The real value of an enterprise is calculated based on the inventory, classification and evaluation of its assets according to market prices and the quality of assets at the time of evaluation. This is a rather subjective assessment by each enterprise and the evaluation council because there is no firm basis for appraising an assets’ quality and its price on the market.

The separation of land use right value from the value of an enterprise being privatised is unreasonable, especially for those who possess an ideal venue for business. But for some, the inclusion of land use right value will increase legal capital for firms where the profit is limited, which leads to low dividend. At present, local enterprises form partnerships with foreign firms based mostly upon the value of land use right but there are no guidelines for evaluating these forms of deals or loss-making joint ventures.

Director General of Vietnam Auditing Company Ha Thi Thu Thanh: “Reasonable Method of Enterprise Evaluation Needed”

Almost all enterprises are employing the method of net present value in their asset valuation process to calculate the value of enterprises being privatised, while few apply the method of discounted cash flow or DCF, i.e. valuing an enterprise based on its business cash flow or future production activities. This can be seen as a weak point in the valuation of SOEs since the net present value method does not factor in the potential value of an enterprise but only its real asset value at the time of evaluation. It is suggested that the method should be amended to suit a more realistic calculation. Whether the value of land and land use right should really be included in the value of an enterprise that goes to privatisation, for instance, has remained on the discussion table among ministries and relevant branches.

Fifteen days is currently allowed for enterprise valuation, which is considered unfeasible for ensuring the quality of the assessment. Within such a time, valuation can only be made based on the accounting books while taking inventory and handling financial and other issues requires more time, at least one month, to ensure the quality and accuracy of the final figures.

Chief of State Auditing Agency Do Duong Binh

Equitised SOEs Face Hindrances in Accessing State Soft Loans

Equitised enterprises must jump more hurdles but be eligible for less lending from banks than that when they were 100 per cent State owned. As a result, for small SOEs who need bank loans, equitisation means they will face difficulties when investing in and expanding their operations.

State auditors have found some SOEs on the equitisation list have attempted financial tricks to move their loss burden to the State while awaiting their turn to privatise (this can often take up to 18 months after valuation). Three affiliate companies of the Vietnam National Sea Products Corporation (Seaprodex) for example, reported losses of VND1-1.2 billion during the transformation period (after valuation but before privatisation) while inspection results show that they actually operated profitably.

At present, enterprise valuation remains subjective. Some factors like business advantage, trademark, and land use right value have not yet been counted in the valuation, which can cause losses to the State and enterprise workers.

• Reported by Lan Anh