Evaluation of the impact of privatization on enterprises performance the case of vietnam

UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY THE HAGUE VIETNAM THE NETHERLANDS VIETNAM - NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS EVALUATION OF THE IMPACT OF PRIVATIZATION ON ENTERPRISE’S PEFORMANCE THE CASE OF VIETNAM A thesis submitted in partial fulfilment of the requirements for the degree of MASTER OF ARTS IN DEVELOP CONOMICS Supervisor : Dr NGUYEN TRONG HOAI Student : NGUYEN NGUYEN THUC OANH CHUONGTR !NH *QF * ;CD4 OT*O U40HQ@ K|Nô T@ Pữ T HOCHIMINH CITY, OCTOBER 2008 CERTIFICATION “I certify that the substance of this thesis has not already been submitted for any degree and has not been currently submitted for any other degree I certify that to the best of my knowledge and help received in preparing this thesis and all sources used have been acknowledged in this thesis.” NGUYEN NGUYEN THUC OANH Date: October, 2008 ' TABLE OF CONTENTS Table of Content i Acknowledgements iv Abstract v List of Abbreviations vi List of Tables vii List of Figures vii CHAPTER ONE: INTRODUCTION 1.1 Background and problem statement 1.2 Research questions 1.3 Research methodology .2 1.4 Research objectives and hypotheses 1.5 Research data 1.6 Research units and scope of data 1.7 Structure of the study CHAPTER TWO: LITERATURE REVIEW 2.1 Introduction 2.2Privatization: history and definition 2.2.1 History of privatization term 2.2.2 Definition 2.3 Privatization models 2.4 Objectives of privatization programs .9 2.5 Privatization & Performance 12 2.5.1 Fundamental economic theories 12 a Property Rights 12 b Principal-Agent Problem or Agency relationship 14 2.5.2 Empirical evidences 15 2.5.3 Summary 19 CHAPTER THREE: PRIVATIZATION PROCESS- THE CASE OF VIETNAM.21 3.1 “Equitization” terminology in Vietnam context 22 3.2 Major characteristics of Vietnam’s equitization program 22 3.3 Empirical studies for Privatization in Vietnam 27 3.4 Chapter remarks 28 CHAPTER FOUR: RESEARCH METHODOLOGY .29 4.1Research hypotheses 29 4.2 Methodology selection 30 4.2 Impact valuation methods .31 4.2.2 Multiple regressions .32 4.3 Model design 34 4.4 Sampling 35 4.4.1 Description of data collection 35 4.4.2 Statistical data description .35 a Structure of the sample 36 b Size of the samples 36 c Ownership structure 37 d Equitization modes 38 e Listing status .38 f Corporate governance 39 4.5 Chapter remarks 40 CHAPTER FIVE: DATA ANALYSIS AND FINDINGS 40 5.1 Introduction 41 5.2Results from the method of reflexive comparison 42 5.2 l Profitability .42 5.2.2 Output growth 47 5.2.3 Operating efficiency 49 5.2.4 Leverage 52 5.2.5 Employment and compensation 55 ' 5.2.6 Summary of impact valuation analyses 58 5.3 Regression analysis .59 5.3.1 Profitability .59 5.3.2 Efficiency .60 5.3.3 Leverage 60 5.3.4 Summary of regressions analyses 60 CHAPTER SIX: CONCLUSIONS AND POLICY IMPLICATIONS 61 6.1 Conclusions and policy implications from impact valuation .62 6.2 Conclusions and policy implications from OLS regressions „, 64 6.3 Research limitations 65 REFERENCES 67 APPENDICES 73 ACKNOWLEDGMENTS These acknowledgments must begin with, and I cannot thank enough, Dr Nguyen Trong Hoai, my supervisor, for scientific instructions and encouragements to undertake this project Behind my efforts are my parents, sister and husband whose daily patience, sympathies and encouragements were very essential I wish to express my enormous love and appreciation to my parents who have tacitly and unconditionally created the best conditions for me and to my husband who has shared with me the highs and lows in preparation of the thesis I am also grateful to several friends for providing the data as well as valuable ideas and comments ABSTRACT This paper studies impacts of equitization on firm operating performance in Vietnam By comparing financial results of 38 enterprises equitized in 2005 and early 2006 in pre and post privatization periods, the study has found dramatic increases in profitability and efficiency as well as sharp declines in leverage following equitization Unexpectedly, gains in output growth and decreases in employments are statistically insignificant Nevertheless, it is difficult to conclude that those improvements are sole impacts of equitization since the study is unable to control concurrent effects of structural reforms and economy-wide changes that are frequently encountered in the transition economies like Vietnam Notwithstanding the vague answer on impacts of equitization, the author gives favors to equitization in the sense of creating incentives for managers, in turn, encouraging them to be more focused on improved profit and efficiency targets From multiple regression analyses, the study points out determinants of changes in profitability and leverage including listing status, firm size, directorship changes, and privatization modes The OLS analyses lead to implications that the government should strengthen its managements over equitization process, impose mandatory requirements on getting listed after equitization, promote directorship replacements, reduce its holdings or shift the representative role of relevant authorities to State Capital Investment Corporation ABBREVIATIONS BOD : Board of Directors CEO : Chief Executive Officer CIEM : Central Institute for Economic Management CPI : Consumer Price Index HASTC : Hanoi Securities Trading Center HOSE : Ho Chi Minh Stock Exchange IPO : Initial Public Offerings OLS : Ordinary Least Square SCIC : State Capital Investment Corporation SIP : Share Issuance Privatization SOE : State Owned Enterprise TVEs : Township and villages owned enterprises VND : Vietnam Currency LIST OF TABLES Table 2.1: Various Privatization models Table 2.2: Summary of financial indicators used in MNR approach 15 Table 3.1: Number of equitized firms and average ownership structure in 1992 - 2006 26 Table 4.3: Summary of the hypotheses for impact valuation .30 Table 4.1: Variables’ definitions and their expected signs 33 Table 4.2: Variables’ definitions and their expected signs 34 Table 4.4: Size of samples 36 Table 4.5: Ownership structure .37 Table 4.6: Equitization modes .38 Table 4.7: Structure of Directors 39 Table 5.1: Tests of predictions for profitability of equitized firms 45 • Table 5.2: Tests of predictions for output growth of equitized firms 48 Table 5.3: Tests of predictions for efficiency of equitized firms 50 Table 5.4: Tests of predictions for leverage of equitized firms 53 Table 5.5: Tests of predictions for employment and compensation of equitized firms 56 Table 5.6: Regression results 59 LIST OF FIGURES Figure 1: Three layers of privatization definition .7 Figure 4.1: Structure of samples by sectors and regions 36 Figure 4.2: Listing status .38 Figure 4.3: Roles of non-executive BoD members 39 CHAPTER ONE INTRODUCTION 1.1 Background and problem statement Privatization has been widely promoted as a mean of restructuring the economy in both developed and developing countries from 1980s The program has been launched under expectation to create long term benefits to both firm and entire economy levels Over two decades since Thatcher’s government first introduced modern policy of privatization have provided efficient time for researchers building up theoretical frameworks as well as empirical evidences for privatization outcomes Nevertheless, nowadays, impacts of privatization remain one of the most controversial economic issues Recent reviews of impacts of privatization have shown the favor to privatization as an important tools to help allocate resources, restructure the economy and then facilitate the economic growth In • contrast, there are some authors pointing out some failure evidences and drastically criticizing methodologies employed to generate these conclusions They argue that performance changes may be mixed effects of privatization and contemporaneous events including more macroeconomic stability, fiscal prudence, freer capital movements, promotion of competition and regulatory changes (Parker and Kirkpatrick, 2005) Following the international trend, Vietnam launched the privatization program in 1992 as a major part of State-Owned Enterprise (SOE) Reform Program Privatization program, called as “equitization” in Vietnam, is an interesting case when the state retains the voting control and holdings of insiders are fairly substantial From theoretical point for view, performance of a privatized firm where the state remains the controlling role is not ' far different from that of a SOE (Boycko et at., 1996) Therefore, the program outcomes remain in question Unfortunately, the equitization program has been executed for over ten years, though, till now there are a limited number of empirical studies to evaluate appropriately the consequences of the program except reports of CIEM (2002 and 2005) and Truong et at (2003 and 2007) CIEM studies report improved firm’s performance following equitization by using descriptive analysis on 256 equitized firms across Vietnam during 1992 and 2003 , changes in regulation frameworks as well as economic circumstances Such performance gains could be due to mixed effects of equitization and regulatory reforms and changes in economy situation over the times Analysis of employee’s income in the previous sections provides a solid testimony about effects of external factors Unfortunately, based upon the available dataset and employed methodologies, we can not quantify or eliminate the concurrent impacts of those external changes occurring during the period of 2005 and 2007 when measuring the impact of equitization on firm performance Hold all factors together, it is concluded that impact of equitization on firm’s operating performance tums out ambiguous Although this study could not provide firm evidences that equitization is the sole factor driving mentioned-above improvements, we believe ownership changes play a critical role in promoting profitability and efficiency Privatization eliminates harmful effects of the situation that the state’s asset is considered as nobody’s asset The employee stock owning scheme via the , equitization program places manager greater focus on profit, leading positive changes in operating performance including profitability, efficiency and financial strength 6.2 Conclusions and policy implications from OLS regressions Regarding to the determinants of firm operating improvements post equitization, regression analysis points out that listing status and firms size are important determinants of profitability rises while directorate replacements and stock exchange listing are sources of efficiency gains Surprisingly, getting listed on stock exchange induces positive effects on leverage whereas that state holds voting control has a negative relationship with the firm’s leverage In consistent with our hypothesis, the study documents negative impacts of share issuance privatization method on leverage movement after equitization Particularly, regression analysis points out that listing status are an important determinant of improvements in profitability, efficiency and leverage as expectation This leads to a suggestion that the government should attach the request of stock exchange listing as a requisite element in the equitization decision By this mandatory requirement, the state may achieve two targets which comprises of promoting transparence and intensifying the liquidity for stock market, then fostering the development of capital market In contrary with our hypothesis, that the state retains controlling role in equitized firms has negative relationship with leverage This could be a result of shifting the state representative at 64 equitized firms to SCIC Equitized firms might be taken away the privilege of receiving low funding costs and then forced to face with hard budget constraint The result suggests a further reduction in the state holdings or shifting its controlling role at equitized firm to SCIC This suggestion aims at giving more autonomy for managers, reducing dependence of equitized firms on their parent firms or monitoring bodies, avoiding conflict of interests, diminishing monopoly and promoting competitiveness The result also indicates directorate replacement as an agent for efficiency gains Such relationship implies a proposal for encouraging directorship replacements following equitization, especially qualified CEO who is not the state’s representative By this mechanism, the rights to terminate bad performed CEOs of outside shareholders will be validated in reality 6.3 Research limitations Despite we attempt to provide in-depth understandings of results of Vietnam equitization program in the firm’s operating performance front, it still has some limitations which could be , premises for further researches The first weakness is at the data used to measure impacts of equitization Due to limitation on data access, we have to select samples from the list of firms equitized in 2005 The time length of post equitization period is really a short time for any restructuring after ownership switching Due to this weakness, the study possibly hasn’t measured completely effects of equitization on firm’s operating performance as expected In addition, a dataset with 38 samples is relatively small compared to numbers of SOEs equitized in 2005 as well as in 1992 — 2005 Further study with better data access would be needed to address these shortcomings Second, 2005 is one of the greatest landmarks during the time life of Vietnam equitization program As mentioned earlier, 2005 is the first year when the government implements compulsory requirements of public bidding and information announcements as well as retrenches special treatments for employment share ownership scheme Therefore, this study tends to suffered from potential endogenous biases arising from selection of firms to be equitized Third, the study is also being suffered from methodology used Obtaining ownership dummy variables limits evaluation of 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Estimation Command: LS EBTOE SIZE STATE LISTED C Estimation Equation: EBTOE = C(1)*SIZE + C(2)*STATE + C(3)*LISTED + C(4) Substituted Coefficients: EBTOE - -1.166571024*SIZE - 1.599050676*STATE + 2.887160352*LISTED + 13.38548697 Dependent Variable: EBTOE Method: Least Squares Date: 08/16/08 Time: 09:44 Sample: 32 Included observations: 32 Variable SIZE STATE LISTED C R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood Durbin-Watson stat Coefficient -1.166571 -1.599051 2.887160 13.38549 0.311366 0.237584 2.589322 187.7285 -73.71421 0.980194 Std Error t-Statistic 0.403766 -2.889222 1.286567 -1.242882 1.077493 2.679516 4.207410 181408 Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic) Prob 0.0074 0.2242 0.0122 0.0036 0.810552 2.965447 4.857138 5.040355 4.220074 0.013947 73 - APPENDIX OLS REGRESSION ON EARNINGS BEFORE TAX ON ASSETS (EBTOA) Estimation Command: LS EBTOA LISTED SIZE STATE C Estimation Equation: EBTOA = C(1)*LISTED + C(2)*SIZE + C(3)*STATE + C(4) Substituted Coefficients: EBTOA = 2.792630928*LISTED - 1.015757891*SIZE - 1.992152943 *STATE + 12.30320735 Dependent Variable: EBTOA Method: Least Squares Date: 08/14/08 Time: 22:41 Sample: 30 Included observations: 30 Variable Coefficient Std Error t-Statistic Prob 2.089300 -2.025882 -1.205330 2.278354 0.0466 0.0532 0.2389 0.0312 LISTED SIZE STATE C 2.792631 -1.015758 -1.992153 12.30321 1.336635 0.501390 1.652786 5.400042 R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood Durbin-Watson stat 0.213187 0.122401 3.174816 262.0658 -75.07913 0.647407 Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic) 0.900580 3.388990 5.271942 5.458768 2.348229 0.095792 74 - APPENDIX OLS REGRESSION ON EARNINGS BEFORE TAX EFFICIENCY (EBTEFF) Estimation Command: LS EBTEFF LISTED DIREC C Estimation Equation: EBTEFF - C(1)*LISTED + C(2)*DIREC + C(3) Substituted Coefficients: EBTEFF - 1.718756414*LISTED + 1.756612566*DIREC + 0.7511124263 » i Dependent Variable: EBTEFF Method: Least Squares Date: 08/18/08 Time: 20:48 Sample: 30 Included observations: 30 Variable Coefficient Std Error LISTED DIREC C 1.718756 1.756613 0.751112 R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood Durbin-Watson stat 0.210493 152011 1.808675 88.32525 -58.76559 0.406510 0.706169 0.938966 0.578886 t-Statistic Prob 2.433917 1.870795 1.297513 0.0218 0.0722 0.2054 Mean dependent var S.D dependent var Akaike info criterion Schwarz criterion F-statistic Prob(F-statistic) 2.017843 1.964109 117706 4.257825 3.599284 0.041144 75 APPENDIX OLS REGRESSION ON DEBT TO ASSETS (DTEST) Estimation Command: LS DTEST EQTY LISTED STATE C Estimation Equation: DTEST - C(1)*EQTY + C(2)*LISTED + C(3)*STATE + C(4) Substituted Coefficients: DTEST = -0.2447981635*EQTY + 0.2064798169*LISTED - 0.1948457754*STATE + 0.05283239324 Dependent Variable: DTEST Method: Least Squares Date: 08/17/08 Time: 19:35 Sample(adjusted): l Included observations: l after adjusting endpoints Variable Coefficient Std Error t-Statistic EQTY LISTED STATE C R-squared Adjusted R-squared S.E of regression Sum squared resid Log likelihood Durbin-Watson stat -0.244798 0.206480 -0.194846 0.052832 0.110978 -2.205816 0.078964 2.614863 0.097940 -1.989447 0.084177 0.627635 0.269150 Mean dependent var 0.187944 S.D dependent var 0.195127 Akaike info criterion 1.028009 Schwarz criterion 8.811533 F-statistic 0.478145 Prob(F-statistic) Prob 0.0361 0.0144 0.0569 0.5355 -0.033263 0.216533 -0.310422 -0.125391 3.314421 0.034856 76 ... folds The first section provides definition of equitization, the privatization version of Vietnam The second one summarizes key characteristic of Vietnam privatization program The third section... for its economic worth As a conclusion of Megginson and Netter (2001), privatization is one of the most important elements of the continuing global phenomenon of the increasing use of markets... paper adopts the definition of privatization as equitization or partial privatization for the case of Vietnam 3.2 Major characteristics of Vietnam? ??s equitization program • Equitization in Vietnam