RESTRUCTURING VIETNAM’S STATE – OWNED ENTERPRISE IN THE CONTEXT OF MARKET ECONOMY AND INTERNATIONAL INTEGRATION Presenter A.Prof., Dr. Tran Xuan Cau.

RESTRUCTURING VIETNAM’S STATE –

OWNED ENTERPRISE IN THE

CONTEXT OF MARKET ECONOMY AND

INTERNATIONAL INTEGRATION

RESTRUCTURING VIETNAM’S STATE –

OWNED ENTERPRISE IN THE

CONTEXT OF MARKET ECONOMY AND

INTERNATIONAL INTEGRATION

Presenter A.Prof., Dr. Tran Xuan Cau

PRESENTATION CONTENTS

1. CURRENT OPERATION OF

THE STATE OWNED

ENTERPRISES (SOE)

CONTENTS

2. EXECUTION OF SOE’

RESTRUCTURING, FOCUSING ON STATE

GROUPS AND CORPORATIONS IN THE COMING TIME

THE CURRENT OPERATION OF STATE OWNED ENTERPRISES

Contents

3.The limitations of the current VN SOEs

1. SOEs identification

2.SOEs in the context of VN economy and

world economy

3


1. SOEs identification According to Article 4 in the Vietnam’s Law on Enterprise

in 2005: "Enterprise is an economic entity having its own name, assets, and stable transaction office; its business is registered following the legal regulations with the aim of carrying out business activities, whereas State-owned enterprises are enterprises in which the State owns over 50% of charter capital (i.e the capital which is contributed by members and shareholders in a given period of time and is recorded to the company charter) "


Independent State companies

State Corporation

Divided by size:(As Decision 90, 91 of Gov.,

1994)State economic

groups

1. SOEs identification

Divided according to the level of state ownership:

(According to the Project on Government Restructuring, 2012)

Enterprises with 100% state capital

Equitized enterprises with:- Over 75% of the state capital- 65% of the state capital- Over 50% of the state capital The SOEs which prolonge

losses and haven’t no ability to fix


1.Shaping VN SOEs DecisionThe basis of established

Number

State economic

groups (SEG)

Decision 91 March 7, 1994 of the Prime

Minister

Scale capital and the minimum

number of unit members

11

State Corporation

(SC)

Decision 90 March 7, 1994 of the Prime

Minister

Scale capital and the minimum

number of unit members

11 SC91

80 SC90


Bases established groups and corporation by Decision 90 and Decision 91 of the Prime Minister Article 2 of Decision 91 of the Prime Minister:

“Group shall have seven members and more business and legal capital (the minimum required capital levels as prescribed by law to established enterprises) at least VND1,000 billion". Article 5 of Decision 90/TTg of the Prime Minister:

“The corporation is state-owned enterprises having at least 5 units... All corporations have legal capital of over VND 500 billion, for a number of corporations in specific sectors, the legal capital may be lower but not less than VND 100 billion "


Have a limited liability company or joint-stock company

Have a capital of 1,000 billion VND or more and own more than 50% of capital rate of at least 5 other companies

To be Prime Minister allowed

The conditions listed in the draft of the Government dated November 15, 2011 on criteria for naming groups & corporations

The bases newly established groups by the Government's draft


Economic context

of Vietnam

The context of the world and

regional

economy

2. SOEs in the context of the VN economy and world economy


Attach to the reform process in Vietnam and international integration:Enterprises operate under the market-oriented mechanism, multi-sector economy is developed Non-state enterprises increased; FDI increasedVN’ economy integrate into the world economy The economy was operating under the market mechanism, had an autonomy in doing its own production and business activities, tied to market

VN’s economy was operating under the centralized mechanism. The majority was SOEs which had weak competitiveness and slow development

From 1990

1986-1990

Before 1986

a. State owned enterprises in the context of the economy of Vietnam


0

20

40

60

80

100

2001 2002 2003 2004 2005 2006 2007 2008 2009

SOE

NONE SOE

FDI

Source: Statistical Yearbook of the General Department of Statistics

Table 1: The different types of enterprises from 2001 to 2009


b. State owned enterprises in the context of the regional and world economy

THE CURRENT OPERATION OF STATE-OWNED ENTERPRISES

3. Current operation of SOEs and their limitation

a. Process of changes in SOEs Trends:- Number of SOEs decreased continuously reflects the growing trend of multi component economy.- Reduction in number but high level of concentration, big business efficiency, holding the sectors key


2005 2006 2007 2008 2009 2010

Number of SOEs 4.086 3.706 3.494 3.328 3.364 3.283

Share (%) 3,62 2,82 2,24 1,61 1,35 1,12

Labor (1000 persons) 2.037 1.899 1.763 1.725 1.735 1.688

Average proportion of business capital (%)

54,1 51,5 46,8 44,7 38,7 32,6

The proportion of fixed assets and long-term financial investments (%)

51,1 55,5 47,0 47,6 44,8 35,4

Table 2: Change of SOEs in recent years

Source: Statistical Yearbook of the General Department of Statistics 2010 and 2011


Table 3: Number of 100% state capital SOEs (as of October 2011)

Source: Report of the Central Steering Committee for Innovation and Enterprise Development

SOE (100% state-capital)

Sector and industry Whole country

Share (%)

Divided by sector: Security, Defense, Public utility 452 34,5Company of agriculture, forestry 249 19,0Business enterprises 608 46,5

By industry: Industry, Construction, Transportation 497 38,3

Agriculture, Forestry, Water Resources

341 26,0

Trade, Services and Tourism 471 35,7


Table 4: Centralization level of 100% state capital SOEs compared to other types of businesses

Source: Report of the Ministry of Finance

Total assets Equity Investment capital

State investment capital

Credit of banks

100% state capital SOEs

VND 1,800 trillion

VND 700 trillion

70% 50% 60%

Of which 11 SEGs

30% of total assets

51% equity 40% of employees of SOEs

CONTRIBUTION OF STATE OWNED ENTERPRISES

In 2011, 18 SEGs and SCs, especially the Vietnam Oil and Gas, the Military Telecom, and Textile and Garment Group, gained over VND 128 thousand billion profit, paid VND 200 trillion on the state buget, increase of 20% over the previous year.

CURRENT LIMITATIONS OF SOEs

3. Financial situation of the groups is weak, having potential risks

and imbalances

2. Investment is widespread and

inefficient.

5. A Number of mechanisms and policies is lately

promulgated and untimely responses to the reality and

solves the practical requirements

4. The organizational structure of groups is cumbersome, the number of

employees in the groups is high

2. 2. The limitations

of the SOEs

1. The SEGs, SC’s competitiveness is not high, not in line with the resources and preferential

advantages

6. - The implementation of the rights and

obligations of the state for SOEs is still

inadequate, awkward and inefficient.

•A number of mechanisms and policies is lately promulgated and untimely responses to the reality and solves the practical requirements; the consequences of some state corporations are not completely resolved.

1. The SEGs, SC’s competitiveness is not high, not in line with the resources and preferential advantages

Indicators Content The figure compares Reasons

GDP Contribution

Nearly 40%

Nearly 50% of the contribution is from exploiting national resources (oil, coal,

minerals)

SOE enjoy many

advantages but lacks the tight control of the State; hold the industry

which is not competitive

with or without

Economic efficiency

ICOR and capital turnover is low

In comparison with the non-state and FDI

enterprises

Efficiency of capital use

had to use up to 2.2 VND of capital to create 1 VND of revenue

None-state enterprises just use 1.2 VND and

FIEs use 1.3 VND

Profits Increased 105%The equity increased 140%, assets -125%

2. Investment is widespread and inefficient.

Year

Fiels

Total 2006 2007 2008 2009 2010

Total 77.200 6.114 14.441 19.840 14.991 21.814

Security market

8.294 707 1.328 1.697 986 3.576

Insurance 10.234 758 2.655 3.007 1.578 2.235

Real Estate 12.305 211 1.431 2.285 2.999 5.379

Investment budget

4.236 600 1.050 1.424 694 495

Bank business

42.104 3.838 7.977 11.427 8.734 10.128

Table 5: Investment outside of major business sector (billion VND)

Source: Ministy of Finance, 2011

Inefficient in comparision with none-SE and FIEs

Indicator 2000 2005 2008

SOE None SE

FIE SOE None SE

FIE SOE None SE

FIE

The rate of payment of budget revenues

6,92 2,98 14,77 7,88 3,49 12,74 5,93 3,04 11,95

Gross profit / capital Dealers

2,35 1,80 8,79 3,21 1,49 11,24 2,77 1,34 9,66

The rate of Profit in Revenue

3,95 1,00 13,3 5,4 1,21 11,8 5,18 1,23 10,57

Table 6: Compared by performance indicators with other enterprises (%)

Source: General Statistics Office. Enterprise survey data, 2008

SOEs had more efficiency than none-Ses but much less than FIEs

3. Financial situation of the groups is weak, having potential risks and imbalance.

Total debt (billion

VND)

Share (%)

Compared to total

loans of 12 groups

Compared to total

outstanding loans of SOEs

Petro Vietnam 72,300 33.05 17.41

EVN 62,800 28.71 15.12

TKV 20,500 9.37 4.94

Vinashin 19,600 8.96 4.72

Total outstanding debt

of 12 large corporations 218,738 100.00 52.66

Outstanding loans to

SOEs 415,378 - 100.00

Table 7: The total outstanding debt of a large group in Vietnam (as of 9/2011)

Source: Ministry of Finance

4. The organizational structure of groups is cumbersome, the number of employees in the groups is high

LIMITATIONS- Cumbersome structure, many affiliates (example, EVN has 32 units, 39 subsidiaries, 14 affiliates, and three business units; PetroVietnam has 11 units, 4 corporations,19 ubsidiaries, 3 link units and 3 units of scientific research)- Concentration of employees-Such, in EVN there are near 10 thousand workers, in Vinchem - 2.7 thousand workers

REASONS- Do not have to

compete- State-backed

- Impact of subsidymanagement

mechanism in the past- The lack of business

management renovation

- The weakness of the state agencies in the management of SEGs

and SCs

CONSEQUENCES- Easily spiral out of control and management capacity of the SEGs and SC- Loose management, lack of unity and connection between the unit members in the economic groups and corporations

WEAKNESS OF THE STATE MANAGEMENT AGENCIES FOR SOEs

Investment widespread outside and loss of VINASHIN and VINLINES have appeared in the early 2000's. However, due to the stagnation of the inspection and supervision of state agencies, especially slow implementation of the state auditor, the consequence is often serious and difficult to overcome

1. A number of mechanisms and policies is lately promulgated and untimely responses to the reality and solves the practical requirements

WEAKNESS OF THE GOVERNMENT BODIES IN MANAGING SOEs

2. Inadequate, awkward, inefficient implementation of the rights and obligations of state owners in SOEs

CAUSES OF THE LIMITATIONS

The summary of the causes

1. Legal basis for implementation of the SOEs’ restructuring

2. The goal of restructuring SOEs:

3. Contents of SOEs’s restructuring

5. Difficulties and challenges of the process of restructuring SOEs

IMPLEMENTATION OF STATE-OWNED ENTERPRISES’ RESTRUCTURING, FOCUSING ON SEGs AND SCs

4. Roadmap of SOEs’ restructuring

6. Solutions to solve difficulties to implement SOEs’ restructuring

7. Considerations when restructuring SOEs

Legal basis for implementation of the SOEs’ restructuring

"Restructuring SOEs, focusing on SEGS and SCs 2011-2015," of the Prime Minister on 17 July 2012

1

3

4

5

The Decree No. 101/2009 of the Government on trial establishment, organization and management of SEGs

The Directive No. 03 of the Prime Minister dated on 17 January 2012, on promoting the state owned enterprises’ restructuring

2

The Closing Speech delivered by Mr. Nguyen Phu Trong, General Secretary of the Vietnam’s Communist Party, at the 3rd Central Conference, Intake XI on 10th October 2011 on the Decision to restructure the economy

The 5th Central Conference of the Party Central Committee, intake XI on 15 June 2012

MAIN CONTENTS OF THE DOCUMENTS

Improving the management of SOEs; promoting implementation of state owner, conducting transparent auditing and financial disclosure

The 5th Central Conference of

the PCC

Regulating operation and management SEGs and 11 major businesses of the SEGs

The Decree No. 01/2009 of the Gov.

The Project Restructuring SOEs, of the P.M

Grouping of SOEs and solutions for each group, specifying content and requirements SOE restructuring

The goal of restructuring state-owned enterprises

The goal of restructuring state-owned enterprises

Contents of SOEs’s restructuring

22

33

11Review and respecify the tasks of the business and main business

Develop strategy to 2015, Vision to 2020 which are in line with the strategy of the industry, market demand, the ability of capital and managerial capacity

Develop plans to reorganize business, and restructuring of membership units


55

66

44Develop a financial plan to implement the main assigned tasks, give up an investment outside the industry

Promote the link among the member enterprises: the parent company focuses to develop a development strategy, renew the organization, management, technology and product, develop market

Apply the principles of corporate governance in accordance with the international corporate governance convention; improve internal audit controls mechanism, improve the management


By early August, 7 out of 11 SEGs submit to the government a scheme to restructure their groups.

- Actual deployment of the main contents of the restructuring scheme in the economic groups and corporations:

-Business management model- Finance investment- Corporate governance system- Human Resource Development

During 8 recent months, 53 economic groups and state corporations have completed and submitted their scheme in which 9 were approved

The limitations in the construction of the scheme of SEGs and SCs

Inconsistency of basic topics related to restructuring content Serious about assessing the situation; restructuring the content is simple,

asynchronous Scheme write very detailed full, the Viet Nam Oil and Gas Corporation: page 155,

but the group write very short, only chemicals group summary with 31 pages Lack of detail on some of the content, such as finance, corporate governance,

human resource development "If SOEs in general and SEGs in particular have not yet trully perceived about the

restructuring and restructuring has not yet their demand, they still use casuistry”

(Source: Mr. Vo Tri Thanh, Deputy Director of CIEM , "Restructuring SOEs: A weighty achievement and casuistry project", Vietnam Economics Times, No. 194, 14 August 2012, p.5 )

Contents of direction of the Government for SOE restructuring

Roadmap of SOEs’ restructuring



Vietnam mainly ongoing passive restructuring

The difficulties and challenges facing the process of restructuring SOEs

Difficulties

22

55

33

44

11

The difficulty and instability of the world economy in recent years

The national financial system is not strong enough to effectively support the restructuring of enterprises

It is not easy to have full recognition and unified action in the political system, especially the heads of SEGs and SCs, for restructuring

Group interests are interfered

The settlemen and placement of employment and redundant labor within SOEs in the restructuring process

The national financial system is not strong enough to effectively support the restructuring

According to the Minister of Finance Ministry, Mr. Vuong Dinh Hue, VND 55,000 billion to 65,000 billion (equivalent to USD 24 billion to USD 32 billion) are estimated to be needed to restructure SOE including debt restructuring, settlement of losses and redundant labor… This is a matter of concern because it will increase public debt, create a burden for the economy but according to Mr. Hue "we need to make a patient stronger prior to treat the diseases and it is the same in every country”Is it more effective or should we treat the disease before taking a supplement?

Group interests are interfered

“Group interest” means a group of people who have common interest affecting the agencies, who may make decisions in favor of themselves and those interests and decisions go against the interests of the collective. The groups interests cause disorder and economic losses of the country. At the conference "SOEs’ Restructuring" organized by the Academy of Finance (MOF) in November 15, 2011, many argue that "The restructuring SOEs will be extremely difficult because it touchs the benefits of powerful groups”

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Difficulties in dealing with employment and redundant labor

Organizational restructuring and staff will narrow the production and focus on major business; organizational structure more compact and human resources will reduce, so redundant capacity to work will be happenThe Challenge- Policy regime for workers is inadequate- Unemployment rate is high and Unemployment is great- Life of workers is difficult For every SEGs and SCs:- Limited awareness of leaders as well as the employees on the benefits of the restructuring- Psychology afraid to change- Weak management capacity of leades, - Capital shortage.

Some solutions to solve difficulties to implement SOEs’ restructuring

Considerations when restructuring SOEs

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RESTRUCTURING VIETNAM’S STATE – OWNED ENTERPRISE IN THE CONTEXT OF MARKET ECONOMY AND INTERNATIONAL INTEGRATION Presenter A.Prof., Dr. Tran Xuan Cau.

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