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Slow going

Released at: 08:25, 24/03/2014

Slow going

Mr Pham Duc Trung, Deputy Director of the Research Department on Enterprises' Reform & Development under the Central Institute for Economic Management (CIEM), spoke with VET's Minh Tien about the reform of SOEs in 2013 and what lies ahead.

by Minh Tien

Mr Pham Duc Trung, Deputy Director of the Research Department on Enterprises’ Reform & Development under the Central Institute for Economic Management (CIEM)

How would you assess the reform of State-owned enterprises (SOEs) over previous years and in particular last year?

The process of arranging, renovating and improving the operational efficiency of SOEs has been underway in one shape or form since the 1990s. The number of SOEs has been reduced significantly and many have adapted well to the market mechanism and gradually improved their competitive capacity. Nevertheless, the divisional structure of SOEs remains disjointed and irrational, with operating efficiency still limited compared to resources provided, which greatly affects development quality and the competitive capacity of the entire national economy.

Under such circumstances the Prime Minister introduced Decision No 929 in July 2012, approving the SOE reform programme for the 2011-2015 period with the goals of advancing the reform of the whole economy by improving development quality and the competitive capacity of SOEs. After a year and a half the government, along with ministries and provincial authorities as well as the SOEs themselves, endeavoured to push the process forward by renovating management and operating mechanisms. Over 70 SOEs have been approved for reform with particular plans for State divestment and public equitisation.

However, the results of this reform have not met requirements. Amendments to the legal framework were not completed in a timely manner. The structure of ownership and divisions has not changed considerably. Competitive capacity, technology levels, and the effectiveness and efficiency of management mechanisms have not improved. The equitisation process and the task of divestment from non-core businesses have not been as good as what had been anticipated for 2013. Among the three focuses in economic reform, SOE reform is a step behind compared to public investment reform and financial and banking reform. Meeting targets for the 2011-2015 period as contained in Decision No 929 is a major challenge and there is substantial anxiety regarding failure, especially with the current rate of progress.

What are the reasons behind the sluggishness?

Equitisation and divestment face substantial difficulties due to unfavourable events in the financial market and the real estate market. The purchasing power of potential investors in these two sectors has been severely affected. Nevertheless, problems also stem from the policies themselves as well as the regulations regarding equitisation and divestment of State-owned capital.

It’s worth noting Government Decree No 71/2013, which regulates that State divestment must follow “the principle of capital preservation”, where the retail price of assets must not be lower than the listed price on their books. This regulation was meant to preserve the State’s capital, but it placed divestment and equitisation at an impasse as purchasing power in the market as a whole remains weak. Moreover, as divestment involves the disposal of assets, products, land and even entire projects, implementation becomes less feasible.

We must also realise that the SOEs themselves are not overly attractive due to their modest business results and inadequate management mechanisms. Enterprises in sound sectors with good business results were not on the list for equitisation in 2012 and 2013. The reform of SOEs clearly illustrates a mindset of selling “bad” enterprises first and “good” ones later, or even keeping the latter intact as 100 per cent State owned.

Decision No 929 has set reform targets in various matters, from industrial structure to the improvement of management mechanisms and financial discipline. In reality, however, the focus has been largely on equitisation, with other matters given insufficient attention. This is why positive changes have not been seen in the reform process regarding these other issues.

It is also important to mention transparency and the responsibilities of State ownership and accountability to minor shareholders. Some ministries and institutions lack proper supervision and this has had a substantial negative effect on the reform process at subordinate enterprises. Many SOEs have managed to delay their equitisation and divestment of State-owned shares, which is not a recent occurrence and has been seen since the very first days. The root causes for such behaviour are the various advantages afforded by policies for SOEs compared to other economic sectors.

How can Vietnam foster the process in the coming years?

Ways to foster the reform process are contained in Decision No 704 and Decision No 929 from 2012 as well as Decision No 339 and Directive No 11 from 2013 regarding approved projects and related documents and guidelines. The only issue is implementing them with greater determination with more responsibility being shouldered by the government, ministries, provincial authorities and, especially, assigned officials at the SOEs. The Prime Minister has emphasised strict sanctions for any SOE executives that delay or discourage the process, such as dismissal or demotion.

In the long term, in order for the process to reach its target of “restructuring resources for efficiency and effectiveness”, we need to continue cutting the number of SOEs. The 6th plenum of the 11th Central Committee of the Communist Party of Vietnam concluded that “SOEs should only focus on the sectors of national defence and security and natural monopoly” and just a few other sectors. Many SOEs will have to divest from other economic sectors and invest and develop their core business. However, the most important thing is to apply the market mechanism and notions of fair competition on SOEs, along with improving the business environment and enhancing market setups.

There are a range of opinions regarding the issue of creating fair competition between SOEs and other economic sectors. Where do you stand?

SOEs exist in almost every economy in the whole, in sectors such as energy, transport and telecommunications. In rational circumstances, SOEs can be used to regulate the market, as the US government did during the 2008-2009 period. But SOEs have never been officially considered a market regulator like other tools such as laws, fiscal policies, etc.

In Vietnam the reality is that SOEs are incapable of regulating a market effectively or efficiently. Conversely, the sector has enjoyed favourable access to national resources but never been pressured to improve their operational efficiency. Worse still, they can even misuse these State resources without any strict punishment.

It is not necessary to discuss the importance of SOEs yet again. However, the Prime Minister’s New Year Message of 2014 clearly stated that “the State must create a level playing field based on a market regime, strictly control and remove monopolies as well as mechanisms and policies that lead to unfair competition. Laws, mechanisms and policies must create the best conditions for individuals and businesses to expand production and business activities. Natural resources and national capital must be channeled to deserving stakeholders who can produce the greatest benefits for the country.”

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