Overview of the SOE Reform in Vietnam pps

SOE Reform in Vietnam Background Paper Prepared by Mekong Economics November 2002 Background Paper 2 Vietnam SOE Sector Study produced by Mekong Economics Table of Contents Recent Development of Vietnam’s SOE Sector 4 Salient Features of the SOE Sector in Vietnam 4 Economic Activities 4 Number of Enterprises 6 Capital Scale 6 Employment Size 7 Geographic Distribution 8 The Role of SOEs in the Economy 10 GDP Share of SOEs 10 Job and Income Generation 12 National Budget Share 12 Economic Performance of SOEs 13 Policy Framework for SOE Development and Reform 18 Overview of the SOE Reform in Vietnam 18 Milestones in the Process of SOE reforms throughout Party Congresses. 19 The Launch of Doi Moi at the Sixth Party Congress 19 The Seventh Party Congress 19 The Eighth Party Congress 19 Resolution of the 3 rd Party Plenum of the 9 th Central Party Standing Committee 20 Key Programs of SOE Reforms 25 Reforms in SOE Management Mechanism 25 Restructure of SOEs 25 Reorganization of General Corporations 26 Equitization of SOEs 27 Other Ownership Transformations 29 Debts and Assets Treatment 30 The SOE Reform Agenda: Achievements and Remaining Constraints 30 How are International Donors Supporting Reforms? 34 The SOE Reform: A Case Study of the Textile Sector 37 Ownership Structure of the Textile Sector 37 Restructuring in the Textile Sector 38 Bibliography 40 Background Paper 3 Vietnam SOE Sector Study produced by Mekong Economics Abbreviations CP Government (used in legal documents) CPV Communist Party of Vietnam GDP Gross Domestic Product GSO General Statistical Office GCs General Corporations HDBT Minister Committee (Government, now) (used in legal documents) IMF International Monetary Fund MOF Ministry of Finance MOLISA Ministry of Labors, Invalids, and Social Affairs ND Decree (used in legal documents) NSCERD National Steering Committee for Enterprise Reform and Development OOG Office of Government OECF Overseas Economic Cooperation Fund QD Decision (used in legal documents) SOEs State-Owned Enterprises SRV Socialist Republic of Vietnam TTg Prime Minister (used in legal documents) VND Vietnam Dong WB The World Bank Background Paper 4 Vietnam SOE Sector Study produced by Mekong Economics Recent Development of Vietnam’s SOE Sector Despite the gradual shift towards a market economy that commenced in 1986, and in spite of the emphasis on state owned enterprise (SOE) reform and privatization in the structural adjustment programs formulated since the mid-1990s, the state sector continues to play a leading role in the Vietnamese economy. The dominant position of the state sector is confirmed in official statistics and a variety of studies on the Vietnamese economy. The following sections investigate the distinct features, the role as well as the performance of Vietnam’s SOEs to have an overall outlook at recent development of the sector. Salient Features of the SOE Sector in Vietnam Economic Activities SOEs have involved in almost all economic activities of the economy. Regardless of firm size, SOEs have biased towards some economic activities including manufacturing, construction and trade with the considerable number of the establishments (see Table 1). 1 In terms of establishments, local SOEs tend to be more concentrated in hotel, restaurant, transportation and communication than central SOEs. 1 Care should be taken in interpretation of these numbers because they are crude indicators. It means that with these numbers, it is still difficult to assess truly the involvement of SOE sector in each economic activity because firm size and industry-specific characteristics are not taken into consideration. An in-depth analysis of SOE sector by economic activities may be of interest. Unfortunately, due to lack of data, we cannot do that. Background Paper 5 Vietnam SOE Sector Study produced by Mekong Economics Table 1: The Number of SOEs by Economic Activities Of Which By Economic Activities SOE Central Local Agriculture and Forestry 801 141 660 Aquaculture 48 2 46 Minerals 135 63 72 Manufacturing 1,515 599 916 Electricity, water and gas 73 1 72 Construction 946 405 541 Trade and repairing 1,133 421 712 Hotel and restaurant 182 30 152 Transportation and Communication 246 95 151 Finance and credit 75 21 54 Other 377 99 278 Total 5,531 1,877 3,654 Source: GSO (2002b) Moreover, it is found that SOEs have traditionally held the dominant role in the industries such as energy, steel, non-ferrous metals, electric and electronic manufacture, chemicals, fertilizers, rubber, food processing and printing (OECF, 1998, p.199). It might be due to the fact that the government has continued a policy of state-led industrial development. Figure 1: SOEs by Economic Activities in 2000 14% 1% 2% 28% 1% 18% 21% 3% 4% 1% 7% Agriculture and Forestry Aquaculture Minerals Manufacturing Electricity, water and gas Contruction Commerce, repairing Hotel and restaurant Transportation and Communication Finance and credit Other Source: GSO (2002b) Background Paper 6 Vietnam SOE Sector Study produced by Mekong Economics In relative term, the largest share of SOE at the end of 2000 belongs to the manufacturing industries, about 28 percent of the total (see Figure 1). Except for the agriculture and forestry, the construction sector and the commerce and repairing sector settle at the next two top ones. The domination of industries, construction and commerce in the structure of SOE sector implies that SOEs are contributing much to the process of industrialization and modernization of the national economy. Number of Enterprises The number of SOEs has been decreased significantly since Doi Moi started. Notably, in 1991 the government issued a decree on establishing and liquidating SOEs requiring that all state enterprises be re-registered or closed (Decree 338-HDBT). As a result, the total number of SOEs was halved from 12,000 in 1991 to roughly 6,000 in 1994 with sharpest decline in local SOEs. Such a fast downturn is attributable to about 2,000 mergers and 3,000 liquidations (CIEM, 2002). The decline has kept going on recently. In 2000 the number of SOEs is 5,531 out of the total of 39,762 enterprises in the whole economy (GSO, 2002b). By the end of 2001, 37 SOEs had been sold, 4 contracted out and 61 entrusted to labor collectives (Nhan Dan, 2002). In addition, by the end of June this year, the number of equitized enterprises was 780 (Vietnam Investment Review, 2002). With the aim at acceleration of the SOEs reform, the number of SOEs will be much smaller than it is. As planned, 2,622 SOEs will be transformed with 1,319 equitized, 562 sold, contracted or leased, 351 merged, 368 liquidated and 27 converted to administrative units (Saigon Times Weekly, 2002). These transformed SOEs are mostly small or loss-making ones. Capital Scale SOEs are to be more capital-intensive than their private sector counterparts (see Figure 2). It is resulted from history of access to cheap capital in terms of equity injections from the government as well as subsidized loans from the state banking system. Figure 2: SOEs vs. Total by Structure of Capital Scale (Unit: VND bil.) 0 10 20 30 40 50 60 70 80 90 100 <.5 .5-1 1 5 5 10 10 50 50-200 200-500 >500 All Enterprises SOEs Background Paper 7 Vietnam SOE Sector Study produced by Mekong Economics Source: GSO (2002b) Table 2: Capital Structure of SOEs by Management Level (%) Management Level 1991 1992 1993 1995 Central SOEs 79.4 77.1 76.7 74.1 Local SOEs 20.6 22.9 23.3 25.9 Source: OECF (1998) Central SOEs represent the larger proportion of total capital of the sector. Meanwhile local SOEs account for only one fourth of the total capital (see Table 2). It might be due to government’s policies toward central SOEs with larger production scale. Employment Size Before 1986, together with cooperatives, SOEs absorbed a huge amount of employment. Since Doi Moi, the employment size of the state sector has been gone down significantly, mostly caused by the massive downsizing program of the early 1990s. In Figure 3, for the first three years of the last decade, the employment of SOEs shrunk sharply from about 2 million to just over 1.7 million. At that time, one could witness the largest number of SOEs workers left their sector. From that time on, the employment size of SOEs remained rather stable at around 1.8-1.9 million. Despite the massive downsizing, SOEs are still over-staffed. A recent analysis based on plant-level data by Belser and Rama (2001) indicates that as many as half of the workers would be redundant if SOEs were to operate fully as their private sector counterpart. Figure 3: Trend of SOEs Employment in the 1990s 1,000 1,500 2,000 2,500 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Year Number of workers (thousand) Source: MOLISA (2001) Background Paper 8 Vietnam SOE Sector Study produced by Mekong Economics Figure 4: Structure of Labor Scale of the SOE Sector in 1994 and 2000 79.6 6.6 3.6 0.3 73.8 9.7 6.1 0.4 0 10 20 30 40 50 60 70 80 90 <500 500-1000 1000-5000 >5000 Number of employees Percent Year 1994 Year 2000 Source: GSO (2002b) Together with the massive downsizing, SOE sector has been structured toward the larger scale production. It is evident from Figure 4 that the percentage of SOEs that have less than 500 employees has fallen from 79.6% in 1994 to roughly 73% in 2000. Moreover, in 2000, 6.5% of SOEs have more than 1000 employees as opposed to 4% SOEs in 1994. This is regarded as a consequence of the merger and dissolution of small SOEs in the last decade. Geographic Distribution In a country that is still massively rural, SOEs have concentrated in big cities and urban areas in the Red River Delta and the Southern East (OECF, 1998). Most central SOEs are located in two poles of the country, in which Hanoi and Hochiminh city are home to around a half of total central industrial SOEs (Table 3). However, while the number of central SOEs in the two cities has tended downwards, the number has increased in other provinces. This phenomenon requires an in-depth analysis of government policies in the second part. Background Paper 9 Vietnam SOE Sector Study produced by Mekong Economics Table 3: The Structure of Industrial SOEs by Provinces Unit: number, unless otherwise indicated 1995 1998 2000 Locality Central SOEs Percent Central SOEs Percent Central SOEs Percent Hanoi 172 31.3 166 28.9 160 27.8 Haiphong 27 4.9 36 6.3 33 5.7 Hochiminh city 125 22.8 118 20.5 117 20.6 Other provinces 225 41.0 255 44.3 265 46.1 Total 549 100.0 575 100.0 575 100.0 Source: GSO (2000); GSO (2002a) Figure 5: Local SOEs’ Employment by Regions 22% 13% 3% 13% 9% 5% 20% 15% Red River Delta North East North West North Central Coast South Central Coast Central Highlands North East South Mekong River Delta Source: GSO (2001) Regarding local SOEs, it can be seen from Figure 5 that this type of enterprises has distributed equally between the north and south regions. Moreover, local SOEs have concentrated in Red River Delta, Mekong River Delta and North East South. Each region accounts for around one sixth to one fifth of total SOEs labor force. Surprisingly, this figure shows the under-representation of local SOEs in remote and mountainous areas. The local SOEs’ employment in northern west and central highland areas is far much lower than in other regions. Naturally, one can raise a question on the role of local SOEs in socio- economic development of under-developed localities. It is said that the development of SOEs should ensure socio-economic development evenly and equitably among geographical regions. But so far the reality might not be as expected. Background Paper 10 Vietnam SOE Sector Study produced by Mekong Economics The Role of SOEs in the Economy As said above even under Doi Moi, SOEs have held the dominant role in the economic development. To assess truly its role within the whole economy, it is of interest to look at its contribution to GDP, job and income generation and national budget as well. In this paper, it is ignorant about the role of SOEs in economic adjustment process due to lack of necessary data. GDP Share of SOEs As shown in Figure 6: Contributions of SOEs to GDP (At Current Prices), from 1986 to 1991, the contribution of SOEs to GDP decreased moderately. From that time on, the role of SOEs has been recovered. Then, in the last 1990s, SOEs contributed around 30% to GDP (at the current price). The macroeconomic stabilization, high level of protectionism and FDI concentration on the state sector has consolidated the role of SOEs in the economy. Figure 6: Contributions of SOEs to GDP (At Current Prices) 0 5 10 15 20 25 30 35 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 year % Source: GSO (2000b); GSO (2002a) Table 4 depicts a clearer picture of contributions of SOEs to GDP by sector. Notably, most of GDP created by SOEs are attributable to firms working in industry, construction and service sectors. Despite the declining share of SOEs in GDP in service sector, they still play a considerable role with roughly 55% of GDP contribution. Meanwhile, those in the industry and construction sectors have made upward GDP contribution over years though the growth rates are not as high as their private sector counterpart. In contrast, SOEs play a far modest role in the agricultural sector. This position has not been improved over the last decade. [...]... determined by the profit-capital ratio of this enterprise The valuation of an enterprise will be determined under the guidance of the Ministry of Finance taking into account the specific business activities of the enterprise The valuation is the basis, in the first instance, for the determination of the share structure The basis for determining the value of the enterprise will be the accounting information... economic reforms in Vietnam Although acceleration of the SOE reform has been called for recently, the pace of SOE reform in Vietnam has been slow compared to the speed of reform in other countries such as China (IMF, 1999) One of the big remaining problems is that in spite of official commitments Vietnam SOE Sector Study produced by Mekong Economics Background Paper 34 to accelerating SOE reform, resolutions... resolutions of both the 8th and 9th Party Congresses maintained that the state was to continue playing a leading role in economic development In addition, the lack of national consensus on the direction of SOE reform was clearly recognized in the resolution of the recent 3rd Plenum of the 9th Party Congress "a high degree of unanimity of perception is yet to be obtained regarding the role and position of the. .. standards of key managers of enterprises, directs in building the system of training the directors of enterprises The government defines the interests and obligations of SOE managers, satisfactory encourages them spiritually and materially based on their contributions, also defines clearly the disciplines of managers of inefficient SOEs due to subjective reasons The government has issued the Acting Program... implementing their role in maintaining the socialist orientation, stabilizing and developing Vietnamese economy, politics and society; reforming the management mechanism; continuing reform, rearranging, developing and raising the efficiency of SOEs are urgent as well as strategic missions; and raising the party leadership at all levels of authorities, and at all industries and branches The future role of SOE. .. information in the enterprise’s books of account at the time of equitization, the quantity and quality of assets, the asset specifications and their market price In addition, there is the value of the land use rights and value of the business goodwill If the planned number of shares for insiders has not been sold 2 months following the decision on the approval of the equitization method, then the shares... in the sector Concluding Remarks No one can deny the role of Vietnam s SOEs in the transition process However, to maintain its role in the economy in the next period, the new phase of further SOEs reform should be required Specifically, until now SOEs still remain a leading role in the economy but their contributions have been declined significantly over the last decade Moreover, SOEs’ bad performances... outstanding debt by 50 percent or more in 1997, mainly by recourse to the state banking system The softness of the budget constraint is particularly problematic because the incentives of SOE managers to maximize profit are poor Financial profit is not always the only objective of SOEs nor is the remuneration of the managers directly related to the enterprise’s economic performance Lacking individual profit-oriented... that the government should try its best to solve Then, it is of necessary to explore the government’ policies toward SOEs at the present and in the long-term vision The following part will be for this concern Vietnam SOE Sector Study produced by Mekong Economics Background Paper 18 Policy Framework for SOE Development and Reform Overview of the SOE Reform in Vietnam SOE reform in Vietnam commenced at the. .. auditing and publication of annual reports Vietnam SOE Sector Study produced by Mekong Economics Background Paper 20 Resolution of the 3rd Party Plenum of the 9th Central Party Standing Committee The Third Party Plenum called for further acceleration of SOE reform The direction viewpoint in this resolution includes: continuing to reform, develop, and raise the efficiency of SOEs to help SOEs implementing . and Reform Overview of the SOE Reform in Vietnam SOE reform in Vietnam commenced at the time of Doi Moi reforms in late 1980s. The issuance of Decision 217-HDBT dated 14/11/87 marked the first. in the sector. Concluding Remarks No one can deny the role of Vietnam s SOEs in the transition process. However, to maintain its role in the economy in the next period, the new phase of. raise the efficiency of SOEs to help SOEs implementing their role in maintaining the socialist orientation, stabilizing and developing Vietnamese economy, politics and society; reforming the