Research and analysis

Vietnam: state-owned enterprise reform

Published 14 November 2014

This research and analysis was withdrawn on 1 August 2016

This publication was archived on 4 July 2016

This article is no longer current. Please refer to Overseas Business Risk – Vietnam

This publication was archived on 4 July 2016

This article is no longer current. Please refer to Overseas Business Risk - Vietnam

Summary

State-owned enterprise (SOE) restructuring is one of the key structural reforms which Vietnam needs to undertake if it is to realise its growth potential. The long-term trend is positive, but the pace remains too slow, despite efforts to remove bottlenecks. Forthcoming IPOs of major SOEs will represent an acid test.

Detail

The need for reform

Vietnam’s efforts to restructure and reduce SOEs date back to the 1990s. By some metrics, progress has been impressive. In 2001, SOEs employed 60% of total capital to generate 38% of GDP. By 2012, these figures had fallen to 38% and 33% respectively. But SOEs continue to act as a drag on economic performance, and to exacerbate problems with public investment, the banking sector and fiscal sustainability. Unproductive SOEs control access to, and implement, the majority of development and infrastructure projects, decreasing the efficiency of public investment. SOE borrowing to invest in non-core businesses is likely to account for many of the non-performing loans held by Vietnam’s banks, which have lent excessively to SOEs on the assumption that the loans will be guaranteed by the state. And contingent liabilities linked to SOEs’ borrowing are not fully accounted for in national fiscal statistics.

With little monetary and fiscal room to stimulate growth, Vietnam’s leaders therefore recognise progress on SOE reform as one of the keys to improving economic performance in the run-up to the 2016 Party Congress. Additional impetus for reform comes from competition as a result of integration into the global market. The ongoing EU-Vietnam Free Trade Agreement (FTA) and Trans-Pacific Partnership (TPP) negotiations contribute to these pressures.

Equitisation, divestment and efficiency

There are two key elements to the government’s reform programme: reducing the level of state ownership by “equitisation” and divestment, and improving SOEs’ efficiency. Progress on both has been slow. Equitisation refers to the privatisation of a wholly-state-owned enterprise by selling a part or all of the assets and liabilities of the SOE to the private sector, thus transforming the SOE into a joint-stock company. Just 71 SOEs have been equitised so far out of 432 SOEs targeted for 2014 and 2015. And only 2.23 trillion VND (£64 million) has been received from IPOs of equitised SOEs this year, less than half of the targeted return.

Major obstacles to the equitisation process are vested political interests, and the diversity of SOE ownership structures. With both line ministries and local governments often involved in ownership and regulation of SOEs, conflicts of interest are common. 54% of SOEs are managed by local governments, 27% are under line ministries, and the rest (19%) are classed as “economic groups and general corporations”. As a result, there is a wide spectrum in political appetite for restructuring.

Finally, SOEs have found it hard to divest non-core assets as a result of difficult conditions in the wider economy over the last few years. Out of the 20 trillion VND (£570 million) that the government aims for SOEs to divest from their non-core businesses in 2014 and 2015, only 3.5 trillion VND has been withdrawn so far.

Will the speed of reform pick up?

The government is trying to address specific bottlenecks. One hindrance to equitisation/divestment has been a ban on SOE managers selling stakes at lower than face value (which often bears little relation to true market price). This is changing – the government has recently started allowing state stakes to be withdrawn at below face value. Additionally, the State Capital Investment Corporation (SCIC) has been authorised, as a last resort, to buy shares and become the strategic investor where an IPO fails. The State Bank of Vietnam (SBV) will be involved too, to acquire divestments from the financial and banking businesses of SOEs.

At a strategic level, the government acknowledges that foreign participation is essential to accelerating the reform process; the domestic investor base is simply too small to be able to take significant stakes in large and complex SOEs. However, although Vietnam is doing more to market the investment opportunities arising from equitisation, this has not yet translated into convincing action to address the likely concerns of foreign investors.The government may need to consider raising the 49% limit on foreign ownership; or adopting other measures which recognise the added value foreign investment brings through technology and knowledge transfer. With the state set to retain a majority stake in most large equitised SOEs, many foreign investors wonder whether there is really any scope for minority shareholders to drive through improvements in corporate governance and efficiency post-equitisation.

Upcoming IPOs for gigantic and profitable SOEs such as Mobifone and Vietnam Airlines represent a key test of progress. Some of these IPOs have already been delayed several times, with investors cautious about complex ownership structures and lack of full disclosure.

What this means for the UK

It is in our interests to see Vietnam succeed with this agenda, for a number of reasons. A reduction in state ownership of economic assets and production will not only improve Vietnam’s overall growth prospects, but should offer foreign (including British) companies better market access in specific sectors traditionally blocked by SOEs. And of course, an increase in the tempo of equitisation and IPOs will create opportunities for UK financial and legal service providers, particularly if some of the larger and better-run companies decide to make an effort to fulfil international disclosure requirements and pursue listings on AIM or the London Stock Exchange.

Disclaimer

The purpose of the FCO Country Update(s) for Business (”the Report”) prepared by UK Trade & Investment (UKTI) is to provide information and related comment to help recipients form their own judgments about making business decisions as to whether to invest or operate in a particular country. The Report’s contents were believed (at the time that the Report was prepared) to be reliable, but no representations or warranties, express or implied, are made or given by UKTI or its parent Departments (the Foreign and Commonwealth Office (FCO) and the Department for Business, Innovation and Skills (BIS)) as to the accuracy of the Report, its completeness or its suitability for any purpose. In particular, none of the Report’s contents should be construed as advice or solicitation to purchase or sell securities, commodities or any other form of financial instrument. No liability is accepted by UKTI, the FCO or BIS for any loss or damage (whether consequential or otherwise) which may arise out of or in connection with the Report.