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Insight
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Equitisation pulls firms into future
Update: 4-1-2006
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Vietnam’s equitisation process has gone through many stages of development in the last 20 years. University of Brussels CEB Dr Vuong Quan Hoang and Hanoi’s Emiscom R&D’s Do Phuong Lan look to the long winding road ahead.
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The equitisation drive is pushing Vietnam’s economy onto the global stage |
The last 20 years has seen the building of a new economy from the old-fashioned command economy of the past. Following the decisive abolition of the Soviet-styled rigid economic model, several markets started flourishing and some even bloomed. The equitisation programme represents an ever-critical concept among the reforming ideas of the Vietnamese economy and of the country’s whole economic reform history.
Have the past achievements
been enough?
The situation in the early 1990s in Vietnam was a picture of a nation with a big inflationary gap. Unlike what our prevailing theory indicates, not much growth was seen at that time. A huge workforce was employed by the state sector, comprising the national administration system and state-owned enterprises (SOEs). When the reforming government started talking about transforming this malfunctioning system of SOEs, state business was highly populated with over 12,231 established entities in late 1989.
History will never forget a handful of pioneering enterprises that ignited the equitising machine of the nation, which for the first time since 1946 had transformed themselves to become independent corporate enterprises playing with market forces and living on their own productive force. The departure from the resources of the state that perhaps marked a stepping stone for the now vibrant transforming process throughout the country began with the breath-taking Decision No. 143-HDBT, passed on May 10, 1990, three years after the launching of doi moi. However, the pilot scheme was fruitless. During its four years, from June 1992 to May 1996, only a handful of SOEs were equitised, including the Transport Union (Ministry of Transport), Hiep An Shoes Company (Ministry of Industry), Poultry Feed Processing Company (Ministry of Agriculture), Refrigeration Electrical Engineering (People’s Committee of Ho Chi Minh City), and the Long An Export Food Processing Company (People’s Committee of Long An province).
Clearly, this dismal result irked the government a lot, and an overhaul was needed. A more comprehensive plan to reform SOEs was implemented, through which several ways to reform SOEs were introduced, namely dissolving, merging, selling, leasing, and equitising. We have the following information about the results of this overhaul over the past few years, although the process is far from over.
The number of SOEs declined over time to 5,571 at the end of 2000, and 4,479 in 2003. About 3,100 SOEs disappeared because they were merged with others. About 3,350 SOEs were dissolved and 950 were leased or sold off. Some larger corporations were established to house many member enterprises. Statistics show that at the end of 2001, 17 large SOEs housed 1,605 member enterprises, occupying approximately 65 per cent and 61 per cent of state capital and workforce in all SOEs, respectively. Since then, a growing number of equitised companies have been re-corporatised in the form of shareholding entities every year; a fact that is shown in the table below.
The numbers may sound upbeat, with about 3,000 SOEs worth VND19,500 billion in equity being transformed. That, however, is only part of the picture. We could not deny the fact that the remaining SOEs currently hold a large pool of financial resources, be it equity or debt. The number of equitised firms has not substantially helped solve the economics of efficiency and of overhaul. Besides the effect of creating momentum for the non-state economy to keep on growing, equitisation naturally needs to solve remaining issues that may hamper not just the SOE sector but also the rest of the national growth engine.
Impetus and
remaining issues
In light of Vietnam’s next Communist Party Congress in 2006, we have seen a four-year period of stable economic growth. This year, the country could achieve a growth rate of over 8.4 per cent, representing a real impetus for predicting the future economic path. The SOE restructuring should be considered in this context of a more enabling business environment. Vietnam’s fledgling stock market has housed 31 listed firms, mostly equitised. For the first time, the government debt financing was offered successfully in New York, paving the way for an emerging bond investment vehicle. And, amid the year-end festive atmosphere, the most admired Vietcombank offered its convertible bonds to the public, a bold move forward in building a real public banking giant of the country. The entering of Vietcombank into the equitised firms, which would likely happen in 2007, marks a fanfare for the success of the nation’s 13-year equitisation programme.
Economists and business people are even thinking of a new stable surge in foreign capital inflows, evidenced by an injection of $5.7 billion in 2005, and growing indirect investments through acquisitions and buyouts of existing operations. These are all signs of a booming investment season is to come.
There have been two major issues that have been left unanswered. Firstly, the critical mass for the equitisation itself in terms of the importance of SOEs and of actual economic resources owned by SOEs. Like in 1946, when the nation first organised the industrial activities of the economy, industries that were likely to consume lots of resources were emphasised. Historians point to the mining industry following the special ordinance on January 21, 1950, which stipulated that “all mineral resources belong to the State of Vietnam”. Nowadays, we add more to the list of our resources: a market of over 80 million, land-use rights, and increasing hope for a better future. To this end, remaining SOEs continue to be entitled to vast resources owned by the State, be it hydropower plants or major airports throughout the country, worth VND270,000 billion ($16.9 billion) at the end of 2005. Yet, the economic efficiency in using these extremely valuable assets and economic benefits for the whole economy has still been difficult to justify.
On the other hand, economic life of post-equitisation enterprises has always been a concern. Outstanding problems that have been frequently cited are access to bank credits; thorny transformation of managerial responsibilities; problematic corporate governance; redundant employees; and abuse and mismanagement of assets. Equitised firms may face this set of problems in a number of years after equitisation until the restructuring and transformation to a stable generation of management will be complete. But a number of them quickly plunged into a new period of management crisis, for various reasons. A birth-death process should be universally applicable, and equitised companies are no exception. In general, transforming an enterprise is clearly seen as a painstaking exercise, which could lead to a rewarding future given proper transformations.
From manual-winding to
full-rotor automatics
The equitising mission has gone half way to success, at least in terms of size. From glitches in the early 1990s, an adjustment in 1996, and Decree 64/ND-CP in 2002, the mission reached a consensus by the government through the most recent Decree 187/ND-CP in 2004.
We interpreted this new development as an advance of watch movement technology from manual-winding to full-rotor automatics. One must admit that Decree 187/ND-CP has helped enable the equitising process in a big way. Auctioning has been formally introduced into actual practice. Clarity and better financial information disclosure were encouraged. The Vietnamese stock market, with two trading centres in Hanoi and Ho Chi Minh City, is specified as a determining factor in many important share floats. Using a manual movement, one has to wind the main-spring manually every time it runs out of energy. By doing it manually, problems can be solved periodically and sometimes are not solved at all. By adding necessary components to build a full automatic rotor, the movement is constantly given more energy, and the machine does not experience any erosion just because of time. A new equitising process with the above useful components is similar to such an automatic rotor, which are beneficial to not only to-be-equitised SOEs, but also financial investors, government agencies and financing agents. Investment renewals and better legal framework, such as Decree 187, should ensure the better and smoother process of equitisation in the years to come. In reality, we have seen the participation of renowned industrial names such as Vinamilk, Ho Chi Minh City Insurance, Song Hinh Hydropower Plant, and the upcoming Vietcombank.
In preparing for a successful Congress of the Communist Party in 2006, the Party Central Committee held a workshop very recently, in November 2005, to discuss experiences and the future of the extensive SOE reform. Of course, we would need some time for the mission to be completed successfully, perhaps further fine-tuning and calibration would be likely. However, the bold move and decisive determination have been seen to be successful. Thus, it is natural that we could predict a successful SOE reform over the next five-year economic plan of 2006-2010.
No. 742/January 2-8, 2006
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