Economist points finger at poor management for state firms' inefficiency

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A file photo of a ship built by the state owned shipbuilding group Vinashin at the launching ceremony. The debt-ridden shipbuilder was restructured and renamed Shipbuilding Industry Corp. in November 2013.

Bad management is one of the main reasons for State-owned enterprises' inefficiency, which has led to big debts and prolonged losses, economist Bui Kien Thanh tells Vietweek.

Debts owed by state firms hit nearly VND1,350 trillion (US$64.1 billion) last year, or nearly half the country's GDP, according to a government report. What do you think about this?

Bui Kien Thanh: The debt size is not important. Many state-owned enterprises (SOEs) could need huge capital for their business development. For example, Vietnam Oil and Gas Group (PetroVietnam) could require large funds for its projects to explore for oil abroad. Thus, big debts are not a problem.

We should consider what purposes the debts are used for, whether they are used effectively or not.

SOEs often operate in key sectors and for public interest - like electricity, running water, and oil and gas. Thus, they may require large capital. However, we should consider how much debt is acceptable. Lending should be carefully considered in case of firms with prolonged losses.

SOEs should not invest in businesses to earn profits and [should do so] only for public interest. It will be unfair if they compete with private firms in doing business to earn profits. It will be unreasonable if the state holds major stake in SOEs which do business for profits. The state's investment purpose is not to earn profits. The state should let private firms do business in fields they can. The privatization of SOEs will help reduce the credit they get.

How do you assess the effectiveness of SOEs' borrowing?

It is low. SOEs often require investment of 14-15 dong to create products worth 1 dong, while private firms need only 4-5 dong. Thus, SOEs' investments are ineffective.

How is SOEs' ability to service debts?

The repaid debts figure does not show anything. The government has repeatedly helped SOEs by negotiating with banks to freeze their debts and inject more capital every time they report losses.
This lets them incur even bigger debts the next time. SOEs could continue borrowing from banks until they cannot repay the debts. Then again the government will help them.

Thus, we will not know the actual SOE debt figures or their repayment capability.

Some SOEs have foreign debts worth VND315.8 trillion. What do you think about this?

It is a large debt, and we should review how it has been used. We should improve monitoring of the use of ODA funds and review all projects which use foreign debts to minimize corruption. We have to assess our overseas debt repayment ability now and over the next 10 or 20 years. We have to calculate whether our foreign currency earnings are enough for the debt repayment. It is very important.

What criteria should Vietnam use to assess SOEs' business effectiveness?

We should use all criteria that firms around the world use to assess their effectiveness. We should study similar firms in the world to know how they operate, what targets they set, and what technologies they use, etc. Experts should study each specific case to assess its business effectiveness.

To be appointed to a leadership position in an SOE, you have to be a Party member. This causes situations where the nominated person could be unsuitable for the position.

However, our management of SOEs is very poor. It is a reason for their inefficiency. Many SOEs have invested in non-core sectors, which has caused losses. So their management should be improved.

What are the other reasons for the inefficiency of SOEs?

It is the poor quality of managers. To be appointed to a leadership position in an SOE, you have to be a Party member and in a list of cadres who are to be nominated. This causes situations where the nominated person could be unsuitable for the position. This has affected the management of SOEs.

The failure to closely monitor SOEs by relevant agencies is another reason for their poor operation. Leaders of SOEs and ministries should take responsibility for their inefficiency.

Another reason is that SOEs rely too much on government support. Private firms are dissolved or go bankrupt if they face prolonged losses, but SOEs do not. The government does not let SOEs go bankrupt even if they run up big debts and prolonged losses. It is a reason for their poor operations.

How should the government deal with the issue?

The most important thing is that we have to improve the government's management [of SOEs]. The selection of contractors for SOEs' projects should be carefully monitored to minimize wrongdoing. 

We should not have persons with poor qualifications in high positions; we should assign the right persons to the right positions.

SOEs with extended losses should be dissolved or allowed to go bankrupt. Keeping them in operation will merely increase the burden on the economy. At that time it will be more difficult for us to deal with the consequences.

We should not keep them in business because of fears workers will lose jobs. That is a social issue and not related to the firms' business aspect.

While it is natural for a business to have debts, state-owned enterprises, with a few exceptions, have been highly inefficient.

The reason is that there are fundamental problems with businesses owned by the state -- such as conflicts of interest and moral hazard. Those problems grew bigger when SOEs expanded their business.

Their management did not evolve fast enough to meet new demands. SOEs expanded too fast into many fields that it was hard to monitor their operations. Soon they found themselves in the red.

Vo Tri Thanh,
deputy director of the Central Economic Management Research Institute (CIEM)

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