Fear of Loss Puts Brake on Divestment

At the request of the Vietnamese Government, SOEs must complete divestment from non-core industries from now to 2015. It is just over two years from the deadline but many giant firms find it very hard to execute the order which requires State capital preservation from divestiture.

 

Ms Bui Thi Thanh Tam, General Director of Vietnam Northern Food Corporation (Vinafood1), said her company invested in three banks. However, Vinafood1 can only ensure capital preservation from the simultaneous divestment of three banks while it is too hard for them if retreats one by one.

 

In addition to banking sector, Vinafood1 is also struggling to take out it investment capital from the real estate market. Previously, based on its land fund advantage, Vinafood1 built several commercial centres, supermarkets and apartment blocks. Given the current lacklustre property market, Vinafood1 will surely suffer losses if they decide to make divestments.

 

Like Vinafood1, the Vietnam National Coffee Corporation (Vinacafe) is struggling to make an exit from non-core investments. Nguyen Nam Hai, General Director of Vinacafe, said: "We are divesting from non-core industries as scheduled. It is easy for us to sell the stake in profit-making companies like sugar companies and Intimex Supermarket but it will be very hard for us to do so in loss-making companies because of State capital loss.”

 

Mr Truong Thanh Phong, General Director of the Vietnam Southern Food Corporation (Vinafood2), said his company did not hurry to sell its interests in non-core industries. “We are investing in some non-core industries like banking. However, we do not plan to divest now in order to preserve the State equity and make a profit. Many investment projects have repaid bank loans and amortised equipment but they are now undervalued because of economic downturn,” he explained. “The most important thing is not to invest in non-core industries but we should consider the best time for divestiture.”

 

Executives of many other SOEs also affirmed the principle that the divestment value is impossibly lower than book value. They will not be able to sell overvalued assets while they dare not to sell undervalued assets because they will be blamed or accused of losing the State assets. This deadlock slams a brake on the progress of non-core business divestitures of SOEs and the 2015 deadline is likely to be missed.

 

In fact, it is not easy for SOEs to sell undervalued assets in the current market context. For example, last year, the Vietnam National Coal, Mineral Industries Holding Corporation Limited (Vinacomin) offered to sell all 5 million shares in Vietnam National Aviation Insurance Corporation (VNI) at a very low price of VND10,000 per share but it could not find a buyer.

 

Mr Hoang Xuan Vuong, Deputy Director of Corporate Finance Department under the Ministry of Finance, admitted that it was extremely difficult for any companies to withdraw the capital from the frozen real estate market. If they do not sell, their capital will be trapped in the inactive market while lending interest is still paid to banks but if they choose to sell, they will suffer huge losses, even half of the initial value, he added. On fears of responsibility, they do not dare to sell.

 

Ms Bui Thi Thanh Tam suggested "I think we should have a reasonable mechanism for enterprises to make divestments in a transparent manner. If my corporation has to divest and keep the book value unchanged, I don’t know when we can do it.”

 

An executive of a State-owned enterprise proposed that the Government consider allowing SOEs to make divestments even when these may lead to losses. But, the losses will be offset by profits made by such SOEs in the future. “The most important matter at the back of SOE restructuring is to keep up development. We should not insist on preserving the State capital to avoid slowing down the process of divesting non-core investments of SOEs,” the executive noted.