Big SOEs Yet to Be Restructured

 

SOEs used to play a particularly important role in Vietnam and will continue to be the backbone of its economy. With the financial support of the Organisation for Economic Cooperation and Development (OECD), the World Bank (WB) and Asian Development Bank (ADB), many SOE restructuring periods have been carried out in Vietnam in recent years. However, according to the European Chamber of Commerce in Vietnam (EuroCham), SOE restructuring is in fact performed at a slower rate. The Government of Vietnam seems not to be willing with strategic SOE reshuffles. While small and loss-making SOEs have been merged or liquidated, the State still wants to retain control of big SOEs.

 

Currently, the State is now holing 100 percent of stake in some 800 SOEs, compared with 12,000 SOEs in 1990. According to recent official statistics, SOEs account for about 35 percent of Vietnam's GDP and about 30 percent of State revenue in 2013. Undeniably, SOE restructuring process in Vietnam since 1986 has produced certain successes. However, according to foreign investors, Vietnam should further accelerate SOE restructuring, which may help draw more foreign investment on improved economic competitiveness, speed up its integration into global economies and even gain the recognition of market economy status.

 

According to EuroCham, compared to private companies, the capital efficiency of SOEs is quite low. Debts incurred by SOEs are still weighing on the State Budget. Moreover, there are difficulties in separating functions of the State when the State is both an owner and a market regulator and there are difficulties in information disclosure to the public. In fact, SOEs continue to receive various privileges (e.g. access to capital, land and subsidies), resulting in market distortions and unfair competition between the private sector and the SOE sector. Although SOEs are legally and financially independent, the Government still keeps hold of control power, e.g. the right to appoint most members of the Board of Directors at SOEs. This has given rise to an unfair playground for private companies and SOEs. For example, in the pharmaceutical sector, foreign-invested firms are not always allowed to participate in bidding tends.

 

Although the Government of Vietnam is pursuing an ambitious plan of equitising 289 SOEs in 2015, SOE equitisation is yet to reach the highest efficiency and potential, according to EuroCham. For instance, the room for the private investor is generally considered too low to attract strategic investment from this sector (e.g. SOEs only sell 5-20 percent of stake to the market). In fact, foreign investors often only purchase SOEs’ shares if they can hold decision-making power in those concerns. However, instead, the State tends to hold the power to appoint all or a majority of Board of Directors members and SOEs continue to enjoy more preferences over than private enterprises. Moreover, in reality, SOEs only sell their stake to their employees. For these reasons, the foreign sector show little interests in investments into SOEs.

 

On June 27, the Prime Minister issued a decree amending and supplementing some articles of Decree No. 58 on detailed regulations and instructions for the enforcement of some articles of the Law on Securities. Importantly, the new ruling loosens foreign ownership limit, commonly known as foreign room, in listed companies and public companies. Accordingly, the foreign ownership limit of 49 percent in public companies operating in the fields and industries in which the State do not necessarily hold controlling shares is lifted.

 

Thus, foreign investors may hold up to 100 percent of stake in companies operating in most industries, except for some fields deemed sensitive like banking.

 

This information has exerted an immediate impact on the stock market. Many potential stocks surged and market liquidity soared. With this move, foreign investors are expected to show more interests in investments in SOEs in Vietnam.

 

However, according to EuroCham, equitisation and corporate governance reform at SOEs can only be effective when the Government of Vietnam shows a clear vision to this effect and when there is a true commitment to realise these reforms. Although the Government has made a great effort in corporate governance reform in SOEs in accordance with the new Law on Enterprises, it is necessary to create a level playing field for all sectors regardless of SOEs and private companies. The most important reform is the opening up of the energy market which is still being controlled by State monopolies. The competition in this market will enhance transparency and draw more abundant investment sources from both domestic and international investors.