Decree 27/1999/ND-CP amended and supplemented the regulation on financial management and business cost-accounting at State enterprises, issued together with the Government's Decree No.59/CP dated October 3, 1996 as follows: If necessary the State may allocate additional investment capital to an enterprise. The enterprise shall have to mobilize by itself more capital and take self-responsibility for such activities. The enterprise is obliged to receive, manage and efficiently use allocated capital and resources. The use of state allocated capital shall have to be preserved in accordance with the strictly regulations. The enterprise may more flexibly manage its capital, assets in order to use it more efficient.
The decree defined in detail principles for costs expenditures, losses, and profits of State enterprises as well as how to deal with these costs, profits, and losses.
Prime Minister issued Decision 172/QD-TTg dated 05/11/2001 debt treatment, including debts, tax and national budget payables. Subject to debt clearing are assigned/contracted enterprises that have payables larger than asset value, mergerred enterprises, equitized enterprises that are in financial difficulty, tax debts before 1998 due to objective reasons.
Ministry of Finance also had proposal to establish Financial Investment Company and Debt and Asset Management Company. They will help SOEs in finance management, orient in building some
independent financial activities such as Enterprise and Asset Valuation Company; provide more goods for stock market; help the government on making policies toward debt treatment and enterprises.
The SOE Reform Agenda: Achievements and Remaining Constraints
The climate for SOE reform has improved significantly in the last years thanks to strong endorsement by Party Plenum in August – September 2001 and subsequent government decrees and decisions of the Prime Minister to implement the Plenum resolution. Over the past few years, Vietnam has achieved encouraging results regarding reforms in SOE sector. The government has taken significant actions towards SOE reforms. Box 1 provides government actions regarding reforms in SOEs in recent years from 1998 to March 2002.
Box 1: Reforming State-Owned Enterprises, 1998 – March 2002 Government actions include
1998
Issuing Decree 44 to simplify the process of equitization and allow limited foreign shareholding in equitized SOEs;
Issuing Directive 20 to adopt a wider menu of reform options for SOEs, e.g. outright sale, transfer to employees competitive bidding, for purchasing SOEs on SOE shares, leases, management contract etc.;
Announcing annual targets for equitizations for 1998 – 2000;
Equitizing 52 SOEs;
1999
Completing classification of SOEs into three groups: profitable, temporary loss-makers and permanent loss-makers;
Issuing decree and regulations for outright sale, transfer to employees, and lease of small SOEs, without requiring conversion of SOEs into joint-stock companies as required for equitization;
Selecting 100 large troubled SOEs for independent diagnostic audits (i.e. operational reviews);
Equitizing 151 SOEs;
2000
Selecting three general corporations (Seaprodex, Vinatex, and Vinacafe) for developing specific action restructuring plans and completing preliminary consultancy work;
Expanding authority of provinces to decide on divestiture of SOEs with capital up to five billion VND instead of 1 billion permitted before;
Establishing an Assistance Fund for Restructuring and Equitizing SOEs to finance severance payments, early pension payments and retraining for redundant workers -- minimizing the negative social impact of SOE reforms on workers;
Adopting a comprehensive five-year SOE-reform plan with annual target for the first three years.
Equitizing 185 SOEs;
2001
Establishing a quarterly monitoring system for 200 large highly-indebted SOEs, and revising a decision to clarify reporting requirements and introducing sanctions against late reporting;
Issuing government’s instruction for a moratorium on establishing new SOEs by local People Committees and line ministries until further notice (Official Dispatch 574/CP of June 25, 2001);
Establishing the Financial Investment Company under the Enterprise Law, to represent the interests of the State as owner and co-owner of SOEs and issuing decree 63 on transforming SOEs into one- member limited liability companies are steps towards disentangling the complex ties between Government and SOEs (October 2001);
Equitized a total of 194 SOEs.
2002
Allowing managers of equitizing enterprises to purchase shares in excess of the number of shares subscribed by employees, requiring 30 days public notice prior to announcement of equitization, and clarifying potential conflicts between the SOE Law and the Enterprise Law (Decree expected to be issued by May 2002);
Issuing Decree 41/2002/ND-CP, April 2002 on the policies towards employees made redundant
because of SOE reform Source: World Bank (2002)
Over the past years the National Steering Committee for Enterprise Reform and Development (NSCERD) working together with People's Committees and line ministries have been developing a comprehensive program for SOE reform. The SOE reform program aims at reducing losses, and improving competitiveness. There are three broad types of measures: (i) Diversifying ownership through equitization and divestiture of SOEs, (ii) Liquidating SOEs that are classified as non-viable, and (iii) Restructuring large SOEs. In March 2001, the government adopted a five-year SOE reform plan, with annual target specified for three years (2001-03). During 2001-03, around 1,800 out of 5,571 SOEs will be subject to enterprise-specific reform measures, mostly through equitization (1,400), divestiture (140), or liquidation/closure (220); and additional 200 enterprises will face merger/consolidation (IMF, 2001).
Other main elements of the reform plan are to (i) restructure three large general corporation
(SEAPRODEX, VINACAFE, and VINATEX which consist of 150 SOEs) with annual milestones over the next two years for improving corporate governance and overall competitiveness; and (ii) conduct operational reviews (i.e. diagnostic audits) using independent auditors for another 100 large SOEs to prepare the ground for their restructuring (IMF, 2001).
Figure 10: Types of SOE Reform, 2001-03 in Vietnam
Source: IMF (2001)
Diversifying ownership of SOEs through equitization and divestiture is a key part of SOE reform program. Most of the enterprises that are put for equitization and divestiture are small and medium scale with a stock of capital of less than VND 10 billion or US$ 700,000 and only around 10%
of targeted enterprises have capital stock higher than that amount (WB, ADB and UNDP, 2000). Yet, this choice may not be optimal as some of the large SOEs have the most serious problems of debt and performance but still remain in government's hands.
Since the beginning of 2001, around 249 enterprises have completed the reform process (see Table 1212). 200 of these were previously under the direction of Provincial and City People’s Committees, 33
Divestiture 7%
Merger and Transformation 11%
Equitization with state or special dominant shares 44%
Equitization with state -non dominant shares
27%
Liquidation/bankrup tcy
11%
line Ministries and 16 came under General Corporation 91s. These include 191 equitizations of which 136 were major equitizations where more than 65% of shares have been sold to non-State shareholders.
According to NSCERD, a further 173 SOEs are at various stages of the process. 126 of these are under the direction of Provincial and City People’s Committees, 36 line Ministries and 11 come under General Corporation 91s. These are made up of 146 equitization projects, 18 assignments, 5 sales, 3 management contracts and one merger. The elapsed time from the setting up of an SOE Reform Committee to the Registration of the new company now averages more than 500 days. The step in the process with longest elapsed time is valuation. Of the 146, 78 have completed the valuation stage.
Table 12: Summary of SOE reforms
2001 4M-02 Total
Total 182 67 249
Equitizations 133 58 191
State share less than 35% 96 40 136
State share more than 35% 37 18 55
Sales 8 4 12
Liquidations 15 0 15
Other measures 26 5 31
Assignment 25 4 29
Management Contract 1 1 2
Source: NSCERD
Liquidations: Liquidations have made the least progress so far. This is in part due to worry about the social impacts on workers but it is also in part due to the legal framework and procedures for liquidation remaining cumbersome, making it difficult to enforce creditor rights and for the authorities to declare bankruptcies. It will be necessary to streamline the legal framework for equitization if faster moves are to be made.
Restructuring Large SOEs: This program seeks to adopt a series of measures to encourage large SOEs to restructure and downsize in order to reduce losses, accumulation of unserviceable debts and
improving competitiveness. However, restructuring enterprises that remain under state control is the most challenging part of the reform agenda as getting these large SOEs to behave according to the rules of the market and restructure with a view to maximizing profits by cutting costs or raising their sales volumes is not an easy task. This did not happen in the reforms of the 1990s. Nonetheless, for the next round of reform the government plans to take the following measures with a view to changing
behaviours of SOE management: (i) imposing a hard budget constraint, (ii) making SOEs relatively more autonomous and their management more accountable for performance, (iii) assessing operational performance through "diagnostic audits" of 100 large and troubled SOEs, (iv) monitoring quarterly performance of another 200 or so large SOEs that are highly indebted, and (v) developing detailed restructuring-action-plans on a pilot basis for three GCs (SEAPRODEX, VINATEX, VINACAFE).
Despite significant achievements, the SOE reform has been still one of the more quarrelsome areas of 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
to accelerating SOE reform, 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 sate economic sector and state enterprises…many issues remain unclear, entailing conflicting opinions, yet practical experiences have not been reviewed for proper conclusions. There are many weaknesses and bottlenecks in the state administration of state enterprises...". This is also one of the main remaining problems in the SOE reform that needs to be addressed.
How are International Donors Supporting Reforms?
Over the past years a number of international donors have actively supported the SOE reform in Vietnam. Due to the unavailability of documents related to these activities, the paper is only in a position to provide a brief summary of chronology of SOE-related donors' activities in Vietnam (see Table 13).
Table 13: Chronology of SOE-related donors’ activities in Vietnam Donor &
Grant Amount Purpose (Implementing Agency) Status ADB
US$ 1,400,000
Enhancing institutional capacity of key agencies (MOF, SAGO, SBV, SSC) in diagnostic audit of SOEs and in review and approval of SOEs seeking to equitize and obtain public listing (MOF, SAGO and SSC)
Ongoing.
ADB
US$ 1,600,000
Formulate and implement a strategy and practical method for corporatization of SOEs; Implement and enforce the adoption of international best practice in corporate governance (NSCERD).
Ongoing.
ASEM 1 European (WB administered) US$ 100,000
Social safety net program to deal with labor displaced by SOE reform (CIEM in coordination with NSCERD)
Completed
ASEM 4 European (WB administered) US$ 439,000
Acceleration of equitization and restructuring SOEs in the Ministry of Transport.
Completed
ASEM 5 European (WB administered)
US$ 1,470,000 +US$ 400,000
Support implementation of SOE reform in three line ministries (industry, agriculture, and construction) and two provinces /municipalities (Hanoi and one other). (NSCERD)
Phase I completed, extended to a Phase II – ongoing
Australia agency for international development US$
Improve SOE governance by 1. limited audit procedures of SOE finance 2. assessment of validity of SOE management’s assets and entering in large scale transactions
Completed
Australia agency for international development US$ 352429
To undertake a pilot equitization of SOEs in Hai Phong as a model for further equitization in Hai Phong and other provinces in Vietnam
Completed
Danida (Demark) US$ 894296 NERC
To assist the NERC in formulating and implementation of SOE reform program.
Including strategy development, classification criteria, legislation, labour and debt issues, training for NERC officials
Completed
Danida (Denmark) administered US$ 3,100,000
Support to Industry Restructuring and Enterprise Development by implementing equitization plans and providing post equitization assistance (Ministry of Fisheries).
Approved and ongoing. Expected completion: 2002;
an extension is d
expected Danida (Denmark)
(WB administered) US$ 390,000
Advisory services, public awareness campaign, the establishment of a MIS for SOEs, and capacity building in NERC (NSCERD)
Completed in January 2000.
Danida (Denmark) (WB administered) US$ 340,000
Advisory services on implementation of the decree on divestiture, and establishment and use of Support Fund for Equitization and Restructure (NESCERD)
Under
implementation.
Expected
completion: July 2000.
Danida (Denmark) administered US$ 1,700,000
Support to capacity building in NSCERD in the SOE reform process (NSCERD).
Project to start in July 01 and run through 2004.
DFID (UK) UK£ 1,800,000
Pilot restructuring of three general corporations – Vinatex, Vinacafe, and the Seaprodex (NSCERD)
Approved initial phase; consultants prepared inception report.
GTZ (Germany) administered US$ 5,600,000
Support to restructuring SOEs in agriculture (Quang Tri Province, Tan Lam area) by providing advise in implementing equitization plans (People’s Committee Quang Tri, CREM)
Under
implementation.
Expected
completion: 2003.
IFC administered /Danida (Denmark) US$ 410,000
Dak Lak pilot project to equitize and divest 51 SOEs, using the auction process for equitization.
2000 - ongoing
IFC administered US$ 782,000 AusAID
& US$ 180,000, IFC
Support a pilot divestiture program for small SOEs in Haiphong People’s Committee, using the auction process for equitization.
Completed, never finalized
Japanese Int’l Coop Agency -- SOE part US$ 250,000
Study on Economic Development Policy in the Transition Toward a Market Oriented Economy in Vietnam (MPI)
Phase II 1997 – 1998, follow-up is ongoing.
Japan PHRD (WB administered) US$ 218,000
Data collection and monitoring system for SOEs under SAC-preparation. It is also financing a survey of 350 SOEs (GDMSCAE, Ministry of Finance)
Completed in June 1999.
Japan PHRD, AusAID, Danida
US$ 7,900,000
Diagnostic audits to assess financial health and performance of selected SOEs, and recommend restructuring plans to turn around enterprises.
Expected completion:
December 2003.
SIDA (Swedish) US$ 1526007
Institute of Economic Research in HCM city 2002-2003
UNDP US$901647
To support PER activities and preparation of a project supporting SOE reform in three state corporations: VINATEX VINACAFE and
Completed
corporations: VINATEX, VINACAFE, and SEAPRODEX (NERC)
UNDP US$ 2027100
The project aims to improve the financial management and performance of State enterprises in Vietnam and accelerate the equitization of state enterprises
1999-2002
UNDP US$2,145,800
“Strengthening the Capacity of the General Department for the Management of State Capital and Assets in Enterprises” by setting up a MIS for SOEs and valuation (GDMSCAE, Ministry of Finance)
Ongoing. Expected to run through June 2002.
UNDP US$ 2901073
To improve the basis for greater macroeconomic stability through the development of more efficient SOEs
Completed
WB
US$ 439000
Support the process of SOE reform, equitization liquidation with methodology development, SOE selection, valuation, and classification. Drafting documentation required for reform and an SOE reform action plan for medium term (Ministry of Transportation and Communication)
Completed
The SOE Reform: A Case Study of the Textile Sector