: Super User; Vietnam; 17 April 2012; Hits: 1428

Vietnam Must Press on with Reform of State Enterprises

JUST how serious is Vietnam about restructuring its state enterprise sector? In the wake of the stiff sentences handed out to executives of troubled state-owned shipping giant Vietnam Shipbuilding Industry Group (Vinashin) last month, the answer might seem obvious. Unfortunately, things are not quite so clear cut.

On March 29, Vinashin’s former chairman Pham Thanh Binh was jailed for 20 years for violating state regulations on economic management, while seven other defendants received sentences ranging from 10 to 19 years. A ninth defendant was convicted on a lesser charge involving the misuse of state assets, and sentenced to just three years in prison.

When the case first surfaced in 2010, it focused attention on the parlous state of the country’s state-owned enterprises (SOEs).

State-owned groups control about two- thirds of the nation’s capital and assets. Many are widely regarded as being badly managed, and reported to enjoy close relations with government officials.

Not surprisingly, their failure can have important political implications. After the scandal at Vinashin broke, Prime Minister Nguyen Tan Dung, who had earlier been a strong supporter of the company, issued a rare public apology in a televised broadcast.

Since then, the government has embarked on a major reform of the state enterprise sector.

Last year, Vinashin almost went bankrupt with debts totalling US$4 billion (S$5 billion). At the trial, however, the prosecution focused on losses of just 910.5 billion dong (S$55 million), involving two power-plant projects and the purchase of a high-speed vessel.

Few details regarding other financial problems facing the company emerged.

Even in crisis, it seems, the full story is rarely made known. In July 2010, however, the Ministry of Transport did hint at the true nature of the problem, issuing a statement saying that the company had over-diversified and failed to manage its cash flow and debt properly.

In February this year, Finance Minister Vuong Dinh Hue said that the government intended to introduce new regulations giving the Finance Ministry greater control over state enterprises.

The problem of over-diversification is already being addressed. Earlier this year, PM Dung removed the head of the country’s ailing state electricity generator after the company diversified into the mobile phone business instead of focusing on building up badly needed generation capacity. More successful state firms such as Vietnam Oil and Gas (PetroVietnam) have also been instructed to withdraw from high-profile real estate ventures.

But is the message really getting through?

Government pressure has resulted in a string of state enterprises issuing public statements to the effect that they intend to cut spending by 5 per cent to 10 per cent this year in response to the economic difficulties facing the country. The companies involved include the Vietnam Insurance Group (Bao Viet), the Vietnam Textile and Garments Corporation (Vinatex), the Housing and Urban Development Group (HUD) and Vietnam Coal and Mineral Industries Group (Vinacoal).

These SOEs said that they would reduce spending on services, electricity, water, telephone charges, stationery, petrol, conferences and workshops. Such commitments are widely considered to be the first moves in a restructuring process that could eventually see several such enterprises floated on the local stock market.

The lavish ceremonies announcing the austerity measures, however, cast doubt on the level of commitment. Many companies hired special venues to make the announcement, inviting guests from other provinces and cities, and lavishing them with gifts after the ceremony.

The Finance Minister has not openly criticised such ceremonies, but he has hinted that they are unnecessary. After one such event in February, he was reported as saying that other enterprises did not need to hold them. What was important, he said, was for the board of directors of the enterprises concerned to issue an instruction to its subsidiaries, and then supervise its implementation.

Efforts to convert SOEs into public limited companies as a prelude to a stock market listing have, meanwhile, been experiencing delays. Low stock market prices have allowed those opposed to reform to argue that premature listings could lead to state losses.

Fortunately for Mr Dinh, it is an argument that may soon lose its persuasiveness. Thanks partly to improved macroeconomic conditions, foreign investors are once again showing interest. Indeed, the Vietnamese stock market was the third-best performing in the world in the first quarter of this year. Inflation is falling, and the country’s central bank recently eased interest rates in order to stimulate more growth.

It is now up to the political leadership to press ahead with planned reforms.

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Key Political Risks

Vietnam has a relatively stable government, but there are growing concerns about the health of the nation's banking sector. The main external risk relates to territorial disputes with China over islands in the South China Sea.

WATCH OUT FOR:

Signs of instability in the banking system. According to the central bank, bad debts now total 8.6 per cent of outstanding loans, double figures published in March 2012.
The extent to which senior officials are willing to promote greater accountability and transparency in ailing government enterprises, and the degree to which the local media is permitted to report corruption cases.
Territorial disputes in the South China Sea that lead to a revival of anti-Chinese sentiment, including major demonstrations.
Efforts to improve relations with the United States in the hope that this would help counterbalance Chinese influence.
Social unrest arising out of land disputes and the corruption of local officials.