SOE equitisation lets down investors

10:00 | 09/06/2018
Even though the government has been trying its best to boost the equitisation of state-owned enterprises (SOEs) to attract private investors over the past few years, the poor performance and small sales percentage of many such enterprises have disheartened many interested parties.  
soe equitisation lets down investors
The equitisation of SOEs isn’t attractive enough to potential private investors, Photo: Le Toan

These days, representatives from Indonesia’s embassy in Hanoi are actively trying to find ways to connect Indonesian enterprises with Vietnamese firms. They have worked with state-owned Vietnam Railway Corporation on finding opportunities for Indonesian firms to provide training, equipment, and consultancy, or even buy stakes in the corporation.

The railway firm (VRC) is planning to restructure its two subsidiaries, which are valued at about VND1.3 trillion ($57.7 million) in total.

“Indonesian firms are interested in the equitisation of SOEs in many sectors including railway, oil and gas, electricity, and agriculture,” an embassy representative told VIR.

“However, the poor performance of many SOEs is discouraging not only to Indonesians, but to many other foreign investors, keeping them from purchasing stakes. Moreover, the particularly small rate of SOE stakes offered to foreign firms also makes it hard for foreign investors to engage in the operation of SOEs. This will prevent Vietnam from mobilising more foreign capital,” he stressed.

Poor performance

The National Assembly (NA) was heated up last week as never before had a report by the National Assembly Supervisory Delegation on SOEs’ adherence to regulations on managing and using state capital during the period 2011-2016 been presented to all NA members.

In addition to highlighting some successful SOE equitisation cases, the report also showed a disheartening picture of SOEs’ six-year operations, with many firms suffering from losses.

Specifically, in 2015, the return-on-equity (ROE) of SOEs was only 2.1 per cent, far lower than the 5.5 per cent of foreign-invested enterprises (FIEs). Investment effectiveness of SOEs was also lower than that of Vietnam’s domestic private enterprises and FIEs, with the incremental capital output ratio (ICOR) in the 2011-2016 period of SOEs being 1.6 and 1.86 times higher than those of domestic private enterprises and FIEs, respectively.

In addition, during the 2011-2016 period, the ROE ratio of all SOEs was down by 39 per cent, and their return-on-asset decreased by 30 per cent.

“Some SOEs have performed poorly, with great losses. Some SOEs – including PetroVietnam, Vinachem, EVN, and Vinacomin – have been found riddled with corruption and wastefulness, leading to state assets lost,” said the report.

According to the report, SOEs’ information transparency even barely exists. Many SOEs were found to have committed serious violations in managing and using state capital, as well as investment procedures, leading to great losses of state capital.

For example, PetroVietnam lost VND800 billion ($35.55 million) due to its illegal investment in OceanBank. Vinacomin may suffer a loss of VND363.3 billion ($16.15 million) due to its ineffective overseas investments. Vinachem put VND6.84 trillion ($304 million), or 53.8 per cent of the firm’s financial investment capital, in long-term investments in five companies, and this investment “may be difficult to recoup”, according to the report.

Some SOEs also face a high debt-to-equity ratio, including Ca Mau Shipping Industries One-member Co., Ltd. (153.92) and Nam Can Port One-member Co., Ltd. (17.69). Meanwhile, some have provided their subsidiaries with loans which cannot be paid back, including Vinalines (VND457 billion/$20.3 million), Vinataba (VND60 billion/$2.67 million), Rubber Industry Group (VND102 billion/$4.53 million), and Phu Rieng Rubber One-member Co., Ltd. (VND180.6 billion/$8 million).

Vu Tien Loc, chairman of the Vietnam Chamber of Commerce and Industry representing Vietnam’s business community, told the NA that the management and usage of state capital and assets in SOEs in the 2011-2016 period was “a sad situation”.

“SOEs should have played a leading role in the economy, but weren’t able to due to their ineffective operations. Their ICOR has always been far higher than those of domestic private enterprises and FIEs,” said Loc, who is also an NA member representing the northern province of Thai Binh.

“For example, in 2016, SOEs spent $10 to earn $1 worth of growth. However, domestic private enterprises and FIEs used only $5 and $6, respectively, to earn $1 worth of growth,” Loc said.

Moreover, SOEs’ ROE has been not only very low, but also decreasing, from 6.5 per cent in 2012 to 4.6 per cent in 2016. What is more, SOEs’ revenue only rose by a mere 3 per cent in the 2011-2016 period.

“Ironically, SOEs are performing poorly while the rest of the economy is bouncing back, with growth quality vastly improved. This means SOEs are generally going against the uptrend of the economy,” Loc said.

State control remains

For more than two decades, the government has been boosting SOE equitisation as a way to attract more private investment and improve SOEs’ competitiveness. However, the desired results have not been achieved.

According to the report, despite equitisation, the state currently remains a major holder of SOEs’ stake, with the amount of stakes offered for sale still very low. Many SOEs only offer a negligible rate of 1-2 per cent of total stake to private investors. This has made it hard to attract private capital.

In late 2016, there were 583 firms where 100 per cent of charter capital was still held by the state.

In the 2011-2016 period, 426 enterprises completed their initial public offering (IPO). After these IPOs, total charter capital of these firms was VND184.254 trillion ($8.2 billion), of which 81.1 per cent was held by the state. Other stake holders include strategic investors (7.3 per cent), employees (1.6 per cent), trade unions (0.6 per cent), and other types of investors (9.4 per cent).

Breaking down the figures of these SOEs after their IPOs shows that 70 firms have the state occupying over 90 per cent of charter capital, including 15 groups and corporations such as Petrolimex (95 per cent), VnSteel (93.6 per cent), Vietnam Airlines (95.5 per cent), Airports Corporation of Vietnam (92.5 per cent), Lilama (98 per cent), and Viglacera (93 per cent).

In addition, 82 firms have over 65 per cent of stake held by the state, including Ha Tinh Trade and Mineral Corporation (83 per cent); Binh Dinh Export-Import Service, Investment, and Production Corporation (86.8 per cent); Cienco 8 (78.4 per cent); and Vietnam Livestock Corporation (78 per cent). In addition, the state also held more than 50 per cent of stake in 96 other SOEs, including Vinatex (53 per cent), Vietnam Pharmacy (65 per cent), and Vietnam Forestry Corporation (51 per cent).

Small percentages on offer

The Indonesian embassy representative told VIR that the equitisation process may prove to be “meaningless”, as the majority of SOE stakes were still kept by the state, which should perform the function of a regulator and facilitator, not that of a trader.

“The government needs to clarify SOEs’ operations and equitisation. What can foreign investors do after they buy their stakes? Foreign investors want to see whether their rights can be protected after a stake purchase. They need to have the management rights to protect their investment in the enterprises,” the representative said.

He said that if the government wishes to maximise revenue from equitisation and increase investor confidence, “it is particularly necessary to deliver a transparent equitisation and divestment process, with all information about enterprises provided to investors.”

According to NA members, many SOEs still only sell 1-2 per cent of their charter capital, with some calling it “hardly even equitisation” and even “meaningless”.

“If the state continues to control the stakes, the performance of enterprises cannot be changed, because they are still managed by old people who are often unwilling to sell the stakes to private investors,” said deputy Leo Thi Lich representing the northern province of Bac Giang.

Deputy Tran Van Minh representing the northern province of Quang Ninh stressed that with such low stake rates being on offer, SOEs will not be able to attract private investors, especially strategic ones.

“If investors have a larger ownership rate, they can further pursue the reform of SOEs. It is extremely important to increase the ownership rate of strategic investors, who can bring in healthy financial sources and high technologies, as well as access to strong markets. This will ultimately benefit the state budget,” Minh said. “Reality shows that over the past few years, not many deals involving strategic investors have been made.”

Currently, about eight deals between large SOEs and foreign strategic investors have been completed. The largest equitisation case in Vietnam so far was in 2013, with Japan’s Bank of Tokyo-Misubishi UFJ acquiring 20 per cent of VietinBank’s stake for $743 million.

The remaining deals have had small stakes sold to foreign investors, such as Carlsberg’s 17.08 per cent stake ($115 million) in Habeco, Mizuho’s 15 per cent stake ($550 million) in Vietcombank, ANA’s 8.77 per cent stake ($109 million) in Vietnam Airlines, HSBC’s 18 per cent stake ($350 million) in Bao Viet Insurance, JX Nippon and Energy’s 10 per cent stake ($117 million) in Petrolimex, and Itochu’s 5 per cent stake in Vinatex.

Many have proposed that the government review the equitisation of all SOEs, including NA deputy Mai Thi Anh Tuyet from the southern province of An Giang.

“Only SOEs operating in key sectors of the economy should be kept, and the remaining SOEs should be transformed into joint stock companies,” Tuyet said.

Tony Foster, managing partner of Freshfields Vietnam, said foreign investors stand ready to spend billions of dollars on stakes in hundreds of Vietnamese SOEs, but they do not know how to do it.

“It is because everything remains unclear. Why are large strategic sales still stuck? Foreign investors are facing many difficulties in participating in SOEs’ equitisation. The biggest obstacles are prices, the lack of transparency in the processes, the small percentages for sale, and unclear assets and rights,” Foster said.

“For example, the time it takes to complete equitisation is too long, while the stakes on sale remain too small. It has also been suggested that the government remove the foreign shareholding cap of 49 per cent to attract more potential investors that may be interested in the controlling rights of certain companies,” he said.

The Indonesian embassy representative suggested that Indonesian firms are waiting for the government to lift the cap to 50 or 51 per cent.

“The existing cap of 49 per cent is preventing foreign stake purchases, money flows, and especially governmental effort to achieve successful divestment of its SOEs. It is also causing difficulties for the government in mobilising more capital from private investors, which is sorely needed, considering the limited state budget,” he said.

According to the Ministry of Finance, results from the equitisation of 350 SOEs in 2015 showed that one year after equitisation, these firms saw an increase in pre-tax profits (49 per cent), charter capital (72 per cent), total assets (39 per cent), and revenue (29 per cent). For example, Vinamilk saw its revenue rise 10-fold, with equity increasing 13-fold.

By Nguyen Dat

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