Jeremy Mullins, March 3, 2016
Close associates of Communist Party chief Nguyen Phu Trong favor reforming the bloated state-owned enterprise sector, which hogs resources and damps private enterprise. The hole in revenues could also push Hanoi to sell stakes in some prized assets.
|EPA, Luoing Thai Linh|
The economic conditions are in place to persuade Hanoi to open some of its biggest, most profitable state-owned firms to private interest. The Vietnamese government needs the cash, the country’s robust growth is a standout in the region, and a recent change in leadership provides a chance to reinvigorate the reform process.
Still, the Communist Party of Vietnam is not known for moving quickly or decisively and its past record on divesting state assets has underlined its reluctance to share management control.
Although the government has an ambitious list of companies to privatize this year, investors remain cautious.
“One has become somewhat skeptical of what’s actually happening with the equitization process,” said Kevin Snowball, CEO of Vietnam-focused PXP Asset Management.
Equitization in Vietnam is the first step in privatizing a wholly state-owned firm. Once it becomes a joint stock company, the state sells stakes to private investors. The process is a crucial part of Hanoi’s drive to reform its bloated and creaky state-owned enterprise (SOE) sector. The intent is to list the companies on a stock exchange later, although in practice this hasn’t always been the case.
Inefficient Vietnamese state enterprises hog resources and underperform their privately owned peers. The hope is that privatization will force the companies to improve on many metrics, including governance, while generating much-needed revenue for state coffers.
In previous years, foreign investors have been disappointed by the miniscule stakes offered, mostly in smaller firms, a reflection of the entrenched resistance in the single-party communist state to sharing control.
In 2014, state carrier Vietnam Airlines sold less than 4% of its shares. Some 98% of that stake was said to have gone to its two main creditors, Vietcombank and Techcombank – the sale failed to attract any foreign institutional bidder, according to media reports. Earlier this year, the airline sold a further 8.8% stake to Japan’s ANA Holdings.
Snowball said the companies offered tend to have two other drawbacks besides their small size – a lack of transparency and ambitious pricing.
The government’s privatization targets for 2016 include MobiFone, the second-largest mobile network provider in the country, which hopes to grow revenue by 10% this year, as well as trading company SATRA, Vietnam Rubber Group, a plantation giant, and Song Da Corp., the contractor for some of the largest hydropower plants in the country.
In December, Minister of Information and Communications Nguyen Bac Son told local media the privatization of MobiFone could raise VND20 trillion (about $900 million), exceeding the VND15 trillion raised through all the 558 stake sales from 2011 to 2015, a huge windfall for the squeezed state budget.
However, details such as the size of the stake to be divested, the price, and the timing are pending. A stake sale in MobiFone was first mooted in 2005 and then delayed many times, often without reason.
Hanoi’s reluctance to sell stakes in major firms stems from several factors.
According to Vietnam experts, many government officials have a vested interest in preventing privatizations. Others do not understand the steps involved in bringing a company to market or are worried about making a mistake in the share pricing and risking scorn.
Snowball relates an instance when a state firm wanting to privatize showed its lack of familiarity with the process by saying it would hold the road show, which usually involves traveling across the country to make presentations, at its own office.
Alexander Vuving, a professor at the Daniel K. Inouye Asia-Pacific Center for Security Studies in Hawaii attributes the slow pace of SOE reform to “rent-seeking interests” involving the government bureaucracy and major SOEs.
“Most leaders of the SOEs do not want reform because they will lose privileges, sometimes even monopoly positions, and the many tangible and intangible benefits they enjoy under the current system,” he said.
In an interview with Viet Nam Economic Times in October, Dang Quyet Tien, deputy director of the Ministry of Finance’s Corporate Finance Department, said the human resources factor made privatization difficult. “Leaders from many SOEs don’t want to give up their power. In addition, for quite a few of them, their weaknesses have been exposed to the public during the equitization process, particularly those who have invested outside their main core business,” he said.
Like in China, Vietnam’s SOEs have proliferated far beyond their initial purpose of serving essential segments of the economy, moving into areas such as securities trading and real estate.
Market reforms that started in 1986 allowed a growing role for private enterprise, propelling per capita income from about $100 then to over $2,000 at present. Last year, GDP grew 6.7% despite headwinds from China’s slowdown and weak global demand. While foreign direct investment has helped Vietnam’s growth, its major companies have remained off-limits for private investors.
The number of wholly state-owned companies has shrunk significantly – from over 12,000 in 1990 to 949 by the end of 2013 – as Hanoi sold off or shuttered smaller firms. However, the sector continues to crowd out private enterprise and soak up resources.
Vietnamese SOEs often have preferential access to capital, and some have built up significant liabilities. They can also benefit from favorable regulations and enforcement and some have fragmented and overlapping management and weak corporate governance.
In a classic example of mismanagement, Vinashin, a huge shipbuilder, defaulted on $600 million in foreign loans in late 2010 after amassing total liabilities of $4.5 billion while expanding into non-core areas. At the time of the default, Vinashin’s liabilities equaled about 4.5% of the country’s GDP, according to KPMG, which advised the firm on its restructure.
Foreign investors have failed to show much enthusiasm for a share in the companies, deterred by their opacity and the state’s sizable stake even after privatization, which makes change difficult.
Still, there are a few success stories. Vinamilk’s privatization began in 2003 and the company is now among the largest listed firms in the country. In 2014, Vinamilk reported pre-tax profit of VND7.6 trillion, more than 12 times the 2005 number of VND605 billion, based on its annual reports.
The state still owns some 45% of Vinamilk but according to reports is planning to sell its entire holding. Vinamilk is also trying to raise its foreign ownership limit. The government last year introduced new rules allowing companies to do so although investors say the rules need to be more transparent.
Some experts say a renewed push to privatize state assets is necessary as lower prices for commodities, including oil and rubber, leave a hole in state revenues. There aren’t many avenues for Hanoi to raise money. Vietnam has set a debt ceiling of 65% of GDP and estimates the measure at 64.9% this year. By some calculations that include government guarantees for state owned companies, the ratio is already well above the ceiling (Vietnam Sovereign Bond Sales Flag).
Besides infrastructure needs, Vietnam is also spending more on defence as tensions mount in the South China Sea – it is now the world’s eighth largest arms importer.
Accelerating the privatization push would bring other benefits. It would reinforce investor confidence in the program and help broaden and deepen capital markets when the companies eventually list on the stock exchanges.
In public, Vietnam’s leaders have kept up the exhortations to reduce the number of SOEs and reform them. Prime Minister Nguyen Tan Dung has been particularly vocal, calling SOE reform the government’s central task and demanding “drastic measures,” according to local press reports.
Yet some have questioned Dung’s accomplishments – the government continually missed privatization targets under his watch – and his ouster at last month’s Communist Party congress may be a positive, they say.
Duong Vuong, deputy managing director of VinaCapital, said that between 2011 and 2015, the government achieved 76% of its privatization target but many of the stake sales underwhelmed.
Vuving said that Dung sat on top of this “vast network of rent-seeking interests,” and now that he is retiring, SOE reform will have a chance to accelerate.
Nguyen Phu Trong, who fended off a challenge from Dung to continue in the powerful Community Party chief post, is seen as a consensus builder.
According to Vuving, many in the ruling elite in the Communist Party view Trong as working for the common good.
Vuving said that while Trong has been a strong advocate for the state’s leading role in the economy, his close associates are in favour of SOE reform and may be able to influence him.
He added that Vuong Dinh Hue, chief of the Party’s Central Economic Commission, prime minister designate Nguyen Xuan Phuc and transport minister Dinh La Thang have all emerged as champions of the economic reform process.
VinaCapital doesn’t expect the privatization drive to slow this year. However, whether it accelerates depends in part on the government’s funding gap, with the fiscal deficit currently over 5% of GDP, said Duong Vuong.