Vietnam Development Report (VDR) 2012 is prepared by the World Bank in close collaboration with the Donor Working Group in Vietnam. One of the focus of VDR 2012 is the discussion of the restructuring of State Owned Enterprises in Vietnam, excerpts of which are highlighted below. Full report can be accessed here.

(i) SOEs are less efficient than non-state and foreign firms. Evidence shows that SOEs are inefficient users of inputs such as land, bank credit, labor, and other fixed assets relative to non-state and foreign enterprises. This has a significant economic cost. For example, during the last decade, if capital usage by SOEs had grown at the same pace as that of foreign enterprises, all else being equal, Vietnam’s total outstanding bank credit at the end of 2010 would have been 102 percent of gross domestic product instead of 125 percent— which would have meant less rapid growth of credit in recent years. Similarly, more economical usage of land by SOEs could have significantly increased the availability of land and kept real estate prices more affordable for the rest of the economy. Vietnam, still being a poor country from a global perspective, needs to use its precious resources such as land and credit more efficiently.

(ii) Equitization has been good for SOEs. Studies have shown that SOE performance has changed positively after equitization. The pace of equitization was slow until 1997, with only 17 SOEs equitized, mostly through selling stakes at deeply discounted prices to workers and management in small SOEs. However, the equitization process gained speed after 2000, with a series of legislative and administrative measures including a five-year SOE reform plan adopted in 2001. As a result, the number of firms equitized increased significantly—to 856 in 2003 and 813 in 2004.

(iii) Rethinking industrial policy. While industrial policy can potentially be a powerful tool for developing an economy, carrying out an industrial policy does not necessarily mean using State Economic Groups (SEGs) as a tool. Indeed, it will involve a different set of policies from simply aggregating companies under a single umbrella. The Japanese Keiretsus and the Korean Chaebols  that Vietnam has tried to emulate were privately owned, were largely the result of business activities rather than administrative measures, were international market-oriented  and, most important, functioned in different times. Furthermore, industrial policy loses relevance when SEGs are asked to accumulate an increasing number of unrelated affiliated enterprises and financial institutions.

(iv) Too big to fail, too big to save. The ever increasing size of SEGs and the complex cross-holding of charter capital across and within enterprises makes it difficult for the state to assess inherent risks involved in their activities and the contingent liabilities arising from them. 36 The financial risks from the SOEs can easily spill over to the broader economy, given the strong links between them and some of the JSBs. At the same time, the total liabilities of the SOEs exceed the government’s own debt, thereby posing enormous fiscal risk for the government. Thus, on one hand, the SEGs have become too big to fail, while on the other hand, they are now too big to save. This poses both a considerable risk to the macroeconomic and financial stability of the country and a contingent burden on future taxpayers.

(v) The changing role of the state in the economy. The involvement of the state in the production of goods and services is generally justified on  three grounds: (a) market failure, that is, the market fails to provide the goods or services because the private return is lower than the social return; (b) the private sector is underdeveloped and lacks capital or skill to deliver certain goods or services; and (c) during periods of unprecedented economic or financial crises, the government is sometimes forced to temporarily bail out insolvent or illiquid enterprises or banks in the national interest. In the case of Vietnam, as the discussion in section II shows, the SOEs are producing goods such as beer, milk, sugar, and textiles, and services such as brokerage firms, hotels, and  real estate companies, that are in direct competition with privately owned companies. There is little justification for the state to remain involved in these areas, especially given its inability to monitor SOE activities and improve their corporate governance.

(vi) An uneven playing field. The SOEs tend to get preferential access to banking credit, procurement contracts, and research and development compared to their peers in the private sector. For instance, the government on-lent nearly US$2 billion from an international bond issuance and overseas development assistance to SOEs during 2010. The research and analysis under taken by more than 300 research institutes under the control of government ministries are exclusively used by the SOEs. Some even accuse the SEGs of influencing and interfering with important government policy decisions. Unlike the private sector, the SOEs face a soft budget constraint, meaning that the state bails them out when they are in financial stress.  Under these circumstances, SOEs, despite their operational inefficiencies, can out-compete and crowd out the private sector (USAID 2010). Since no country has become a modern, industrialized country without the private sector playing a dominant role, Vietnam’s long-term goal is best served by creating a level playing field for both state and privately owned enterprises.

(vii) Slow to embrace modern corporate governance and transparency. Vietnam’s SOEs cannot become industry leaders if they do not adopt sound corporate governance practices. SEGs and SOEs are subject to the 2005 Law on Enterprises, but for many, the administrative re-registration of  type  of enterprise is yet to be  accompanied by adherence to the provisions of the law, including those that mandate corporate governance (for example, a Control Board and a Board of Management), improved transparency (for example,  disclosure of timely operational and financial information, including their ownership structure, financial statements, and audit reports), and protection of minority shareholders.

(viii) Weak and incomplete corporate framework. The initial legal framework for the establishment and operation of SEGs can be traced to Article 149 of the 2005 Law on Enterprises. Detailed instructions on implementing the law are described in Decree 139/2007/ND-CP, promulgated nearly two years after the first pilot SEG was established; and Decree 102/2010/ND-CP, promulgated nearly five years after the first pilot SEG was established. The legal framework provided by these three regulations, however, is inadequate. Decree 139 defines SEGs as being of “big scale” without defining “big.” Similarly, Decree 102 says SEGs will have a “parent-subsidiary model,” but by that definition, many more SOEs, and not just the 12 established so far, should have been characterized as SEGs. Star ting July 1, 2010, all SEGs have been registered as one-member limited liability companies (except Bao Viet) and are supposed to operate under the 2005 Law on Enterprises. However, there is considerable confusion in interpreting various articles in the Law on Enterprises and their applicability to the SOEs.

(ix) Lack of vision and clarity regarding their roles. It is often said that SOEs have multiple objectives and missions as: (a) an instrument of industrial policy, (b) a tool for regulating and stabilizing the macro economy, (c) a tool for meeting the social objectives of the government, (d) a source of competition against foreign enterprises, and (e) the foundation of the economic mechanism of the socialist-oriented market economy. However, in reality, SEGs and GCs do not have a clear vision and do not identify how their mission is consistent with the development goals of the country. They are expected to perform social functions, yet they do not show their social responsibilities and values in their business strategy and operation. They are required to be a tool for stabilizing the macro economy, yet they are among the factors that have contributed to macroeconomic instability in recent years. They are required to concentrate on solving strategic problems of development, yet they tend to pursue short-term interests, seeking financial gains and rent, where available.

(x) Leveraging SOE reform to develop the private sector. If the government is committed to private sector growth, then the SOE portfolio can be used as a powerful tool to support this policy. SOE reform creates both market and investment opportunities for the private sector. When SOEs that compete with the private sector are divested, a more level competitive playing field is often the result. Where full privatization is not feasible or desirable, the contracting out of selected services by SOEs to the private sector can enable smaller local firms, either on their own or in a joint venture with offshore parties, to bid for the new services. Similarly, equalization and public-private partnerships can help accelerate commercialization and increase efficiency, provided there are robust governance arrangements, full transparency, and arms-length relationships with government shareholders.