3.2 Historical development of state monopolies in Vietnam
3.2.2 State general corporations (GCs) – the second stage towards the
3.2.2.1 Two Decisions No. 90 and 91 as the legal basis for state corporations
The next significant step on the pathway to state monopolies was marked by the
45 Unions of state run enterprises were later regarded as the initial form of state general corporations and state economic groups. See Vu Huy Tu et al, Co cau Lai Doanh nghiep Nha nuoc Theo Luat Doanh nghiep Nam 2005 [Restructuring State Corporations according to the Enterprises Law 2005] (National Political Publishing House, 2007) 17. For example, the Machines and Industrial Equipment Corporation was among the first corporations to be established in accordance with Statute 27. The Machines and Industrial
Equipment Corporation (MIE) was established on 12/5/1990 by Decree No.155/HDBT of the Council of Ministers. See <www.mie.com.vn>; Other examples are the Vietnam Civil Aviation Corporation, Vietnam General Rubber Corporation (GERUCO), the Vietnam Railway Corporation (VR); following Decision No.
575/QD/TCCB-LD dated April 10, 1990 of the Minister of Transport, the General Railway Administration (established in 1955 as a administration department) was reformed to become the Vietnam Railway Union.
See <http://www.vr.com.vn/English/history.htm>. It is noted that those corporations were named „General Corporations‟ (Tong Cong ty), but they were in nature a kind of union of state run enterprises, hence were organised and operated under Statute 27. Notably, they were later restructured to form GCs according to the Decree No.91.
46 The Decree was introduced under calls for the consolidation of the state enterprise sector from the late 1990s, when serious problems regarding state enterprises occurred under the effects of the world political situation, tougher budget constraints and increased competition. See Arkadie and Mallon, above n 39, 125- 126.
47 Communist Party of Vietnam, Documents of the 7th Meeting of Central Committee Section VII (National Political Publishing House, 1994) 90.
65 establishment of state general corporations (GC)48 in the equitisation (securitisation) process of SOEs.49 The Decisions No. 90 and 91/TTg50 were adopted during this time to consolidate state enterprises in order to rationalise state enterprise supervision and to facilitate the abolition of line ministry and local authority control over state enterprises.51 The two Decisions also put an end to the vagueness regarding procedures for re- registration of existing unions of enterprises and state enterprises.52 Particularly, Decision No. 91 was aimed at experimentally creating numerous large pilot state corporations following the model of business groups. Such pivotal GCs were believed to enable production synergies and the pooling of investments of member enterprises.53 For these reasons the corporations to be selected were leading companies and corporations in the same economic branches and in the same territorial areas. However, with compulsory criteria set forth in the decision, most of the GCs established by this Decision No. 91 were centrally run enterprises.54 Additionally, they had to „occupy important positions in the national economy, satisfy the needs of the domestic market and promise to expand their
48 This was due to the call for grouping state enterprises into large corporations mentioned in the Political Report of the 7th CPV Party Congress. See Arkadie and Mallon, above n 39, 132.
49 In May 1990, the government adopted Decision No. 143 aiming to undertake a pilot plan of equitisation for several SOEs, transforming them from state run enterprise (Xi nghiep Quoc doanh) to join-stock company (Cong ty Co phan) with initially seven SOEs. See Decision No.143/HDBT on 10/05/1990 of Council of Ministers on Summarising the Implementation of Decision No. 217 HDBT dated 14/11/1987, Decrees No. 50/HDBT dated 22/03/1988 and No.98/HDBT dated 02/06/1988 and Experimental Undertaking the Renovation of Management over State-run Enterprises. In 1993, the government formally encouraged other SOEs to prepare for the equitisation. The equitisation process consisted of the transformation of SOEs into joint-stock companies and the sale of numbers of shares in the companies to private investors. See Loc, above n 29.
50 Two Decisions were adopted on 07/3/1994 on the establishment of some GCs. While Decision No.90 aimed to establish state corporations with at least five voluntary SOE members and a minimum legal capital of VND100 billion, Decision No.91 aimed to form much larger corporations with at least seven SOE members appointed by the State and a minimum legal capital of VND1,000 billion. General Corporations established by Decision 91 were the ones occupying important positions in the national economy. They had to have at least seven members, 1000 billion VND of legal capital and to be separate entities created by and reporting to the Prime Minister. GCs according to the Decision 90 had to have at least five member
companies and 100 billion VND of legal capital and were created by and reported to the provincial People‟s Committees and various ministries. See United Nations Development Programme (UNDP) Vietnam, The State as Investor: Equitisation, Privatisation and the Transformation of SOEs in Viet Nam (206), 15
<http://www.undp.org.vn/undpLive/System/Publications/Publication-
Details?contentId=2079&languageId=1&categoryName=&CategoryConditionUse=>; Leila Webster and M Reza Amin, Equitisation of State Enterprises in Vietnam: Experience to Date (2008)
<http://www.ifc.org/ifcext/mekongpsdf.nsf/AttachmentsByTitle/PSDP+3/$FILE/PSDP-No-3-EN.pdf>.
51 Arkadie and Mallon, above n 39, 131-132; Mekong Economics, above n 37.
52 Arkadie and Mallon, above n 39, 132.
53 UNDP Vietnam, above n 50, 15.
54 The decision actually did not state clearly whether state general corporations had to be formed from state central or local run enterprises.
66 business relations abroad‟.55 The term „economic group‟ was then used to refer to those consolidated corporations.
With the creation of such GCs, new organisational forms were introduced, including holding company and parent-subsidiary models.56 However, due to the ambiguity of the term „economic groups‟, 18 of the first state corporations established according to Decision No.91 were not officially called „state economic groups‟ (Tap doan Kinh te Nha nuoc), but rather they were termed „State Corporations 91‟ (Tong Cong ty 91).57 In fact, the low level of capital consolidation, limited competitive capacity and the administrative methods were reasons for the failure of this model, even though they were expected to become „giants‟ in the Vietnamese economy.
3.2.2.2 Rationales for the establishment of state general corporations
In general, the establishment of GCs met the need for further SOE reform and the demand for deeper integration into the world economy. First of all, this was an important step in the SOE reform in which state enterprises were to be restructured and consolidated in order to create powerful and capable corporations to act in leading roles in the economy.
The formation of GCs was regarded as significant for improving the business performance of state enterprises58 and for gradually removing the direct intervention of line ministries and local administration.59 This was also expected to enhance the
55 Article 1 of the Decision No. 91/TTg of the Prime Minister on the Establishment of the Pilot Business Groups.
56 UNDP Vietnam, above n 50, 15.
57 Vo Thi Hoai, Hoan thien Cac Moi Quan he Phap ly Giua Cong ty Me – Cong ty Con Trong Cac Tap doan Kinh te [Enhancing Legal Relationships between Parent and Subsidiary Companies in the State Economic Groups] (LLM Thesis, Hochiminh City Law University, 2007) 32.
58 Arguments in support of state corporations focused on the economies of scale arising from larger state business entities, the increased scale needed for domestic enterprises with external competitors in domestic and international markets, the need to free state administrative resources to focus more on managing a reduced number of businesses better and the idea that large state businesses were essential for the state to play a leading role in the industrialization and modernization of the economy. See Arkadie and Mallon, above n 39, 131-132.
59 Khuc Hoang Giang, Mot so Van de ve Dia vi Phap ly Cua Tong Cong ty Nha nuoc Trong Nen Kinh te Thi truong o Viet Nam [Some Issues regarding the Legal Position of State General Corporations in Vietnam‟s Market Economy] (LLM Thesis, Hochiminh City Law University, 2000) 20.
67 competitive capacity of the corporations themselves and their member companies.60 Secondly, the form of GCs was to facilitate the process of consolidation of capital in state-owned enterprises. GCs were to play an important role in mobilizing and allocating capital. Capital contributed to corporations was to be invested reasonably in effective companies and projects, allowing corporations to concentrate on long-term projects and limiting the situation in which investment was scattered over every company. Being incorporated into a group, a company could supposedly diversify its operations, benefit from gaining more market share, have more flexible business strategies, avoid risk, have the chance to maximize its profits by reducing tax payments and the costs of share issuance and enhance the ability to pay debt service charges.61 Finally, GCs were to play an important role in the development and application of technology and science investment in all the corporations and in each member company.
3.2.2.3 Achievements and constraints of the state general corporation model
The formation of GCs shows the desire of the Vietnamese government to make SOEs more capable in the context of Vietnam‟s international economic integration, to fulfil the need for faster trade liberalization62 and to deal with the participation of transnational corporations. GCs are said to have brought positive effects.63 Those established in key industries of the economy are believed to have helped in promoting growth, stabilising socioeconomic conditions and ensuring their orientation and regulation by the state.64
60 Ibid. According to Giang, long-term development strategies made by state corporations would act as guidance for their subsidiaries, reducing the number of separate and closed operations of each member, reducing considerably the competition situation among them. This is significant because state corporations were formed by companies operating in the same areas.
61 Le Thi Lanh, Groups in Vietnam: Situation and Future Development (2001)
<http://www.ueh.edu.vn/tcptkt/english/2001/thang05/wlanh.htm>.
62 Hisaaki Mitsui, Vietnam's State Enterprise Reform; What Phase has it Reached? (1997), 48
<http://www.springerlink.com/content/l047247011j4vwpq/fulltext.pdf>.
63 Cuong, above n 28, 382; Tu et al, above n 45, 193.
64 Some corporations are reported to have exercised their intended functions and played a leading role in the economy. See Vu Huy Tu et al, above n 45, 192. Some corporations gained success in mobilising their own resources in association with external ones to carry out further investment, renovating technology,
expanding business scales, heightening competitive capacity and exploring domestic while accessing international markets. In key sectors (electricity, coal, petroleum, aviation, railway, etc), GCs showed their importance in stabilizing socioeconomic conditions, balancing foreign exchange, maintaining prices. An example is seen in the case of the Coal Corporation as it could mobilize the potentials of its members, increasing its outputs, applying the same sale prices for both the domestic and overseas market, making a profit one year after it was established. See Cuong, above n 28, 382.
68 Besides, they contributed remarkably to the state budget and to employment arrangements.65
The establishment of GCs, however, did not meet the objective requirements of economic development and did not achieve the expected targets. GCs were generally small-scale, as compared to those in the region and the world. Their business efficiency was still far from what was expected, despite receiving support and investments from the state.66 The role of GCs in terms of technology support and market creation was limited. Many of them continued to rely on state support. There was also a failure in the attempt to separate business functions from ownership and management functions. In fact, GCs still exercised management functions such as producing sectoral schemes, coordinating international relations and being involved indirectly in price-setting.
This lack of success was explained by the model itself,67 even though it was believed to be a copy of Japanese and Korean models.68 The establishment of GCs, in fact, did not clarify comprehensively the ownership issue. Besides, not many actual changes were made regarding organization and management issues, causing a „new wine in old bottles’
situation.69 Therefore, conflicts over the exercise of ownership rights were not resolved properly and properties invested in corporations and their members, in nature, belonged to
65 Tu et al, above n 45, 193.
66 Out of 18 general corporations formed by Decree No.91, 13 were believed to be making losses or achieving break-even. See Trang Thi Tuyet et al, Mot so Giai phap Hoan thien Quan ly Nha nuoc Doi voi Doanh nghiep [Some Solutions to Enhance State Management for Enterprises] (National Political Publishing House, 2006) 91.
67 Although it was once believed to be a copy of the Japanese Kereisu and Korean Chaebol models, it possessed differences. See Arkadie and Mallon, above n 39, 132; Dwight H Perkins and Vu Thanh Tu Anh, Vietnam's Industrial Policy. Designing Policies for Sustainable Development (2008)
<www.vdf.org.vn/Doc/2008/VDFConf_Presentation3_PaperEng.pdf >; Jonathan Pincus and Vu Thanh Tu Anh, „Vietnam feels the Heat‟ (2008) 171 Far Eastern Economic Review <http://www.viet-
studies.info/kinhte/VN_feels_heat_FEER.htm>; Harvard Vietnam Program, John F Kennedy School of Government, Choosing Success: The Lessons of East and Southeast Asia and Vietnam's Future (2008)
<http://www.fetp.edu.vn/Research_casestudy/PolicyPapers/PP001_Choosing_Success_E.pdf>.
68 According to Brian Van Arcadie, GCs did not either own their member entities or become holding companies as they were not subject to the existing Company Law. In fact, they were more administrative in nature, similar to the enterprise groups (jituan) in China. See Arkadie and Mallon, above n 39, 132.
According to Dwight H. Perkins and Vu Thanh Tu Anh, Japanese and Korean models were independent from the government. They had been developed from private companies and backed up by their government to attain internationally competitive capacity. In a number of cases, like the Korean POSCO, which was primarily a state owned enterprise, they also attained a high degree of independence from government ministries. In contrast, state general corporations appeared to be an import substitution model, enjoying protection from foreign imports and continuing subsidies. See Perkins and Anh, above n 67.
69 Tu et al, above n 45, 26.
69 the state. The total capital of corporations was accumulated from the state invested capital into each member.
State general corporations, rather than being created by the internal demand of development of each enterprise, were formed by means of administrative decisions of the state.70 Their lack of close relations between subsidiaries or between themselves and the general corporation,71 and their voluntary status and the freedom for making decisions by member companies were ignored or denied.72 The role of corporations in coordinating the relationship with member companies was limited and based mostly on administrative decisions.73
GCs maintained close links with their former line ministries and thus they can be viewed as the successors of formerly subdivided branch ministries.74 Therefore, general corporations, despite their legal status, seemed to continue operating under the direction of the ministries concerned. In fact, unfortunately, when the format of GCs was upgraded to EGs some years later, those characteristics remained unchanged. The close relationship was illustrated by the management apparatus of the newly formed GCs.75
The capital of most GCs was generally limited and the ability to accumulate capital was weak, because they were inherited from state companies which were basically small in scale and limited in capital development. Besides, as most GCs were formed on the basis of core enterprises in specific areas, they were only specialising in these specific ones.76
70 Ibid 91.
71 As argued by Lanh, the formation of such groups can only be reasonable when there is a need for cooperation between companies to meet requirements posed by the development process. See Lanh, above n 61.
72 Huan, above n 18.
73 GCs exercised direct functions in the day-to-day management of enterprises. Thus it became another layer of bureaucracy without producing any value added from their member contributions. The loose linkage between corporations and members is explained by the lack of financial connection and unclear definition regarding capital, assets, rights and obligations between them. See Tuyet et al, above n 66, 91.
According to the general corporation model, most member companies were legal entities; hence the regulation of capital transfer from one member to another would only be conducted by documents of GCs, thus having little effect. See Tu et al, above n 45, 196.
74 Mitsui, above n 62, 148.
75 In particular, the staff of branch ministers concerned were now assigned to become CEOs of those corporations . See Mitsui, above n 62.
76 For example, specific GCs could be found to be the former Vietnam Electricity Corporation, Vietnam National Chemical Corporation, Vietnam Steel Corporation, Vietnam National Salt Corporation… See Tu et al, above n 45, 196.
70 GCs were established according to business branches and divided into geographical regions, causing other negative effects.77 It limited customer‟s options for products and services and also restrained corporations from participating in other areas.