Super commission to streamline SOEs

09:00 | 11/10/2018
As large-scale state-owned enterprises (SOEs) in Vietnam are performing poorly, the establishment of a ministry-level commission for managing state capital at SOEs is expected to help them improve operational effectiveness tremendously. Nguyen Dat reports.
super commission to streamline soes
The super commission will manage state ownership in state-owned enterprises
super commission to streamline soes

Over the recent decades, Raymond Mallon has witnessed the Vietnamese government’s ongoing efforts to introduce reforms to more efficiently manage state capital in SOEs.

He has been struck by the challenges faced in implementing approved reforms, noting the limited progress in the implementation of reforms that would enable more transparent systems of corporate governance and the clear separation of state ownership and regulatory functions. Action in these areas is important to ensure a more equitable and competitive playing field for all enterprises and to boost national investment, competitiveness, and employment.

A recent reform aims to directly address shortcomings in corporate governance, while also helping draw a clear line between state ownership in SOEs and the broader regulatory role of the government.

On September 29, 2018, Prime Minister Nguyen Xuan Phuc signed Decision No.131/2018/ND-CP on the functions, rights, and organisational structure of the Commission for the Management of State Capital at Enterprises (CMSC). The commission, established last February, will manage the state capital at 19 state-owned economic groups and corporations (see box).

“The commission stands ready to take over the management of the 19 SOEs from October 1, and is likely to take on more in the future,” said CMSC chairman Nguyen Hoang Anh.

The government currently holds the stakes of SOEs with a combined book value of VND1 quadrillion ($44.247 billion). Their total assets are worth more than VND2.3 quadrillion ($101.77 billion).

The commission has also inked a memorandum of understanding (MoU) with Singapore’s Temasek Holdings to exchange business information and share experiences in modern capital management in accordance with market mechanisms.

A SOUND PATH

Under Decree 131, the commission exclusively represents the state’s ownership rights in wholly SOEs and in joint stock companies and limited liability companies with two or more members.

The commission is tasked with drawing up master strategies to develop enterprises under its management and then submitting these strategies to the government for approval. The CMSC is also entitled to make decisions on the SOEs’ charter capital.

“The commission will supervise the use of state capital in enterprises, and will not intervene in their operations. The supervision will help enhance the accountability of SOEs,” said Deputy Minister of Planning and Investment Le Quang Manh.

All SOEs will continue to operate under the law and report their results to specialised bodies related to different sectors like finance, banking, environment, and industry and trade.

At the CMSC debut on September 30, Prime Minister Nguyen Xuan Phuc said, “We have two paths: one is developing a professional and modern commission to boost reforms and the effectiveness of all SOEs, and the other is creating an old-fashioned bureaucratic agency which can burden the domestic business system and the whole economy. Which path should we take?”

Then, on behalf of the government, he declared, “We will select the first path. Though it is more difficult, I believe that you all agree.”

Mallon, the advisor for the Australia-Vietnam economic reform programme, told VIR, “The high-level commitment of the commission from the national leadership is a positive sign for success. The signing of the MoU with Temasek to learn from its experience is also another positive step. Temasek is widely viewed as a global model in the effective monitoring and management of state investment in SOEs.”

Sebastian Eckardt, a senior economist from the World Bank in Vietnam, told VIR that, “The CMSC is a positive initiative. It not only reflects good OECD (Organization for Economic Cooperation and Development) corporate governance practices for SOE management, but also has great potential to contribute to the government’s ultimate objective of enhancing performance and productivity in the SOE sector and the economy more broadly.”

According to Eckardt, separating ownership and regulatory functions is important for two main reasons. First, it mitigates potential conflicts of interest in sectors where the government operates as an owner and a regulator and can help level the playing field and enhance competition between enterprises, regardless of their ownership. Second, having a dedicated ownership agency also allows the government to professionalise the management of its assets and to ensure value maximisation and performance, while reducing potential fiscal risks.

“Given the still significant size and large number of SOEs in Vietnam, it is more realistic and feasible to proceed with a differentiated model where different specialised agencies excise the ownership function for different segments of SOEs,” Eckardt said.

POOR PERFORMANCE

Over the past few years, ministries have been developing their own SOEs whose operational effectiveness remains questionable. This has been undermining the economy’s competitiveness. Experts ascribed the lack of transparency to the poor performance of many SOEs.

Recently, the National Assembly Supervisory Delegation delivered to all National Assembly members the first-ever detailed report on SOEs’ compliance with regulations on managing and using state capital during 2011-2016. The report showed mixed results in SOEs’ operations in the past six years, with many suffering from losses.

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

Besides, in this period, the ROE of all SOEs reduced by 39 per cent, and their return on assets (ROA) decreased by 30 per cent.

“Some SOEs have performed poorly with great losses,” said the report.

According to the report, information transparency was virtually non-existent at SOEs. Many SOEs have been found to have committed grave violations while managing and using state capital and investment procedures, leading to great losses of state capital.

For instance, PetroVietnam lost VND800 billion ($35.4 million) due to its illegal investment in OceanBank, while Vinacomin may suffer from a loss of VND363.3 billion ($16 million) due to its ineffective overseas investments.

Vu Tien Loc, chairman of the Vietnam Chamber of Commerce and Industry, said that the management and usage of state capital and assets in SOEs during 2011-2016 was “a sad situation.”

“SOEs should have played a leading role in the economy, but they could not due to ineffective operations. For example, in 2016 SOEs spent $10 to earn $1 worth of growth. However, POEs and FIEs used only $5 and $6, respectively, to earn $1 worth of growth,” he said.

A BUMPY ROAD AHEAD

While recognising that this reform is an important step forward, Mallon also notes that CMSC will face challenges in implementing its mandate.

“Past attempts to strengthen state management at SOEs only generated mixed results. Internationally, many countries, including Australia, struggle to effectively manage SOEs,” he told VIR.

A pressing challenge for some years, according to Mallon, will be identifying and recruiting suitably qualified and professional independent experts to work with the commission and to serve on the SOE boards, to ensure that SOEs operate transparently in line with international corporate governance standards.

There is an urgent need to ramp up efforts to train corporate governance experts and to build a corporate governance profession in Vietnam.

“The leadership of the committee can expect resistance to change from vested interests that benefit from the status quo. Strong high-level support will be needed to empower the leadership of the new commission,” Mallon said. “Transparency and professionalism will be critical to success. The leadership of the new commission needs to set clear performance targets, to monitor those targets, and hold the chairpersons and members of SOE boards of directors accountable for the performance of their SOEs.”

He also underlined that the publication of SOEs’ performance relative to targets is another way to motivate SOE managers.

“The key lesson from experience in other countries is that the commission must be empowered to monitor and dismiss chairpersons and/or directors who fail to perform, regardless of their status,” he said. “The ongoing benchmarking of SOEs’ performance with regional norms is one way of objectively assessing the success of SOE management in improving their performance.”

According to Eckardt from the World Bank in Vietnam, whether the CMSC can work effectively will depend on the quality of implementation.

“Good governance principles suggest that having a defined ownership policy with clear objectives, transparent and merit-based appointment of qualified management, and some degree of operational independence are all important ingredients in this regard.” he said.

Based on MasterCMS Ultimate Edition Ver 2.8 2018