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Cash in hand

Released at: 08:21, 24/03/2014

Cash in hand

Mounting pressure on a number of fronts may prompt Vietnam to launch a new wave of SOE equitisation.

by Thong Dat

A person in debt and struggling to cut their spending often tosses up whether to sell some of their valuables. A similar situation faces Vietnam, though the country seems strangely resistant to the idea of equitising its State-owned enterprises (SOEs). But it may have to put some of its best SOEs on the table, firstly to raise cash and secondly and more crucially to spark market interest and bolster investor confidence.

Budget relief

Investors have good reason to hope for a fresh wave of equitisation. Vietnam seems to need the money, as it had to raise its budget deficit ceiling last year to tide the economy over. Sluggish economic growth over the last few years has put more pressure on an already strained budget, and with the situation remaining tight at least into the near future, how to raise revenue is still a major question for authorities. Equitising SOEs would no doubt help a great deal. For years the government has promised greater equitisation but is clearly unwilling to lose its influence over these enterprises. Considering the current budget difficulties, however, the government can no longer afford to be overly choosy regarding revenue sources and for this reason more SOEs are expected to be up for sale shortly.

According to Mr Dominic Scriven, CEO of Dragon Capital, the SOEs equitisation process is even more urgent now as State coffers remain limited despite the need for public spending and investment. The total value of the State assets in eleven companies among the 20 largest listed companies on the Ho Chi Minh City Stock Exchange (HoSE) is $14.8 billion. “Selling parts of these companies will easily compensate for the State budget deficit in the current difficult time, instead of cutting the minimum wage or resorting to other extreme measures,” said Mr Scriven.

His thoughts are echoed by the Vietnam Association of Financial Investors (VAFI), who proposed the government equitise large SOEs as a measure to ease pressure on the State budget. VAFI has said that allowing major SOEs like MobiFone and Viettel to go public or by selling the State stake in those like Sabeco and Habeco would give the State budget $5 billion. “By retaining the State stake the assets of these SOEs are not being used effectively at a time the government must borrow money for public investment,” said Mr Nguyen Hoang Hai, General Secretary of VAFI. “The government also faces the risk of State assets shrinking in value, given the ongoing poor corporate governance.”

Local authorities are typically in less of a hurry to sell a meaningful stake in SOEs in crucial industries. Rather, they settle for selling a small stake in the stock market. This practice raises money and fosters some accountability, but it passes up the huge potential benefits that foreign strategic investors can bring. And it’s reasonable for foreign investors to argue that a large number of companies in which the government holds a major share are not engaged in sensitive lines of business, even by Vietnam’s current definition.

Of a similar mind, Mr Le Xuan Nghia, Director of the Institute for Business Development, said that the government should sell stakes in corporations where it does not have to maintain ownership, as it did with Vinamilk, and quicken the equitisation of other effective SOEs. “Once profitable SOEs are equitised then more indirect foreign investors will come,” he said. Still, to persuade authorities to gradually remove restrictions on and protections for SOEs, a less hasty approach is needed. Mr Scriven, who is also Head of the Capital Market Working Group at the Vietnam Business Forum, suggests that the first step would be reducing State stakes down to between 35 and 50 per cent.

TPP impacts

Another reason why SOE equitisation should be pushed up is that it is one of the major points in negotiations over the Trans-Pacific Partnership (TPP), which is a clear target for Vietnam in the near future. The country’s hope of concluding negotiations in the round of talks held in Singapore late last year were dealt a blow by issues such as intellectual property rights and SOE reform, according to Deputy Minister of Industry and Trade Tran Quoc Khanh, who headed Vietnam’s delegation at the negotiations.

To say that the country joining the TPP is at threat because a lack of progress in SOE reform may be an overstatement, as the deal doesn’t hinge on equitisation. It appears, however, that negotiators want to set certain rules for the operation of SOEs, aimed at creating a more level playing field for private enterprises, both domestic and foreign, in ways that would eventually require SOE reform. There is no maximum percentage of SOEs in the economy or anything similar, said Mr Nghia. “The only requirement is the existence of transparency and equal treatment, which can bring opportunities to all types of enterprises,” he said. “For example, the draft TPP requires SOEs be absolutely transparent with their budgets. Their transactions and financial situation must be made public.”

Vietnam wants the TPP to be finalised as soon as possible, so it should abandon its timidity and adopt a bolder policy for equitising more SOEs. “The TPP negotiations have put pressure on SOEs to restructure if they want to be players in the global game,” said Mr Nghia. “And, clearly, authorities understand that the best way to restructure SOEs is to equitise them. With the participation of foreign strategic partners, SOEs would be more accountable and their efficiency improved.”

In order to survive amid the greater competition once the TPP is signed, SOEs must be reoriented towards being more profitable and to achieve that goal they must undergo significant change. Authorities and SOE leaders may fear that any major change could be too much of a shock for the State sector, which is used to operating in a less competitive environment. Fortunately, parties to the TPP have reached consensus on issues relating to SOEs, agreeing on a five-year grace period for Vietnam and three other countries to adjust relevant policies. This means that Vietnam has more time and will not have to implement any strict requirements on SOEs as soon as the TPP is signed.

Restoring investor confidence

Economists hold the view that to restore confidence among foreign investors it is necessary for Vietnam to push for a faster and more effective SOE equitisation process. This can only come when more successful and well-managed SOEs are available to foreign investors, allowing them to be truly confident when putting their money down.

The case of Vinamilk is clear evidence of how equitised SOEs can become successful after allowing foreign participation to increase to 49 per cent. The dairy giant has recorded average annual growth of 35 per cent and each year pays around VND1,000 - 1,500 billion ($47.6 - $71.4 million) in dividends to the State budget. “Vinamilk has come a long way since it planned its equitisation in 2003, thanks to real innovation in corporate governance and fundamental changes in business thinking,” said Mr Nghia. “A large commitment of State resources, deep internal restructuring and assistance from foreign strategic investors helped it to greatly improve its performance.”

It’s true that foreign investors are interested in large and successful SOEs but it’s also true that there are far too few such investments available. After charming investors for more than a decade, the last few years have seen investor confidence in Vietnam head south, due largely to high bad debts and loss-making SOEs battering the economy. There is no better way to win back investor confidence than to resume the sale of leading SOEs.

The pressure on Vietnam to speed up the SOE equitisation process is clearly significant. If the government is serious about bringing spending down in line with revenues then equitisation is a particularly useful tool. It would allow the country to balance its budget and improve economic efficiency by boosting the competitiveness of SOEs and by introducing foreign capital, skills and technology to newly-equitised assets.

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