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Tied up in knots

Released at: 08:39, 24/03/2014

Tied up in knots

The successful operation of the SCIC is impeded by a number of restraints. Mr Oliver Massmann, Partner at Duane Morris LLP

by Mr Oliver Massmann

The role of the State economic sector (via State-owned enterprises, or SOEs) as a “key pillar” of the economy was again restated in Vietnam’s new constitution. Reports reveal that SOEs account for approximately 40 per cent of the country’s output and enjoy preferential access to capital, land, business opportunities and other resources. On the other hand, SOEs contribute just 32.6 per cent to GDP and employ 14.7 per cent of the total workforce. Reports to the National Assembly reveal that the total bad debts of SOEs now stand at VND73,000 ($3.4 billion). Many believe the actual figure may be higher.

Many ambitious programmes have been implemented over recent decades with a view to improving the efficiency of SOEs. Among them are the equitisation of most SOEs on a nationwide scale and the creation of the State Capital Investment Corporation (SCIC), which was hoped to become a Vietnamese version of Temasek Holdings Pte, the successful business arm of the Singaporean Government.

To give you an illustration of the situation the following analyses the SCIC as one of the key game changers in the ambitious SOE reform.

Creating the SCIC

The SCIC was established under Decision No 151/2005/QD-TTg dated June 20, 2005 from the Prime Minister and was expected to serve as a driver to expedite economic reform in general and SOE reform in particular. The “super corporation” was assigned to receive and exercise “the rights to represent the owner of State capital invested in enterprises.” During the period from 2006 to 2013 the SCIC on one hand managed State capital in nearly 1,000 enterprises and arranged the sale of State capital in more than 600 shareholding companies to outside investors. On the other hand, it has poured more than VND10,000 billion ($475 million) into business sectors that it deems economically significant by way of merger and acquisition or direct investment, etc. As at September 30 the SCIC held a portfolio of VND14,000 ($670 million).

But it seems the SCIC still has a lot to do. Its role has swiftly shifted from “making investment” to the more conservative “maintenance and development” of State capital. Most of its profits are generated from a few enterprises, of which Vinamilk alone contributes 46.58 per cent, even though the milk production business is apparently not deemed to be a significant business sector, the objective at which investment by SCIC should theoretically arrive.

It is also estimated that a large part of SCIC’s profit comes from bank deposits, of some VND20,000 billion ($950 million). This also indicates that the SCIC does not have a specific plan to actively make any investments with this money. SCIC’s funds from its sale of State capital in SOEs to outside investors (i.e. the withdrawal of capital) add rather little value to its overall revenue (i.e. 4 per cent). In light of the above, there is obviously still a long way to go before the SCIC can call itself a Vietnamese version of Temasek and be an effective State-owned holding and investment vehicle.

Why so and how to fix it

In our view, the above status quo of the SCIC can be put down to a variety of reasons.

Firstly, according to the Capital Market Working Group under the Vietnam Business Forum (VBF), the SCIC is now playing multiple roles that could lead to conflicts of interest. For example, the SCIC, which has the role of supporting the market, may not obtain the optimum interest when it acts as an investor. If the SCIC makes investments it needs to follow regulations on information exposure like all other market members. The fact the SCIC was unable to “save” the Vietnamese stock exchange in early 2008 at the request of the government is a clear example of its conflicted roles. This situation is now aggravated by the fact that the newly-issued Decree No 151 again adds “to perform other tasks at the request of the government” and “to invest in projects requested by the government and the Prime Minister” to the SCIC’s other normal business functions.

Secondly, the operations of the SCIC have been to a great extent limited by the current legal framework. In fact, the SCIC has found itself in a dilemma in seeking a balance between its primary functions of “maintenance and development of State capital” and selling State stock at a low value, especially in businesses that have long suffered huge losses. In addition, the law does not give the SCIC the maximum liability in selecting the process of selling shares that it deems most appropriate. For example, the SCIC cannot immediately sell the State’s stock at an agreed price. Rather, such agreed price must be the last resort if its previous attempts to sell such shares by way of auction fail. The mandatory auction process, which is proven to be cumbersome and lengthy, can disappoint investors, especially foreign strategic investors (i.e. investors who commit to add value to target companies via the transfer of technology, the sharing of business management experience or the provision of assistance in expanding to new markets, etc.). While Decree No 151 promises many positive changes, it remains to be seen whether such changes will produce the expected results.

Another factor that complicates the SCIC’s business is its lack of independence in making business decisions. As required by Decree No 151, approvals from State bodies (for e.g. the Ministry of Finance or the Prime Minister) must be sought under specific circumstances. Such requirements will likely delay business transactions and potentially eliminate the activeness of SCIC’s management body. Furthermore, while the SCIC is intended to be closer to a normal business entity than an “economic orientation” tool of the government, its staff are mainly public servants from State management bodies who may have little experience in running a business.

Personally, I think the following measures are worth considering with a view to improving the efficiency of the SCIC’s operations.

The government’s willingness to give maximum liability in the decision-making process to the SCIC, including its selection of the most appropriate means of selling State stock in enterprises and exploring business sectors it deems appropriate. Please note that although Temasek is a State-owned entity it acts purely as a commercial entity. The Government of Singapore does not involve itself in the decision-making process with respect to Temasek’s investment. The government should be crystal clear about State ownership and the State management of a corporate entity.

The interests and objectives of the SCIC should not be confused with each other. If it wants to reach the level of Temasek the government must allow the SCIC to put profit as the top priority.

Employment of managers who have immense business experience, including foreigners. The fact that managers of a super corporation like the SCIC come from State bodies creates the conditions for potential corruption, “group interest” and, most importantly, a lack of good business management.

Improvements to the current legal framework, including legal instruments on specific activities of the SCIC and laws on the operations of SOEs and their equitisation. At this stage there is a vacuum with respect to specific regulations that deal with the operations of SOEs.

Such improvements will help facilitate SCIC’s sales of State stock in the SOEs under its management.

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