Government cold shoulder dampens private sector growth

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Workers at the Lien Phat Leather Shoe Factory in Binh Duong Province

Nguyen Anh Tu, manager of a mechanical firm in Hanoi’s Quang Minh Industrial Park, said his firm has halved its payroll since late 2012 due to a slump in orders.

It now employs only 30 workers, the same head count as when it opened in 2006. “It will be fortunate if our business does not have to shut down,” Tu said.

Another private company, this one trading electrical appliances in Hai Ba Trung District, has cut its workforce by 30 percent and reduced the number of items it trades since early last year, director Nguyen Phuong Hong said.

But their situation is much better than hundreds of thousands of private firms which have had to shut down in the past three years.

Vietnam reported 60,737 firms, mainly private ones, had closed down in 2013, 11.9 percent higher than in the previous year, according to the General Statistics Office.

This was in stark contrast with the status of some large-owned enterprises. Despite piling up debts of over US$2 billion, the state-owned Vietnam Oil and Gas Group reported a net profit of over VND1.5 trillion ($71.4 million) last year, double the 2012 figure.

Some economists said SOEs received much state support unlike private firms.

State-owned enterprises in the country account for half of all government investment and 70 percent of official development assistance but account for around 53 percent of the banking system’s bad debts, according to Ministry of Finance figures.

“Preferential treatment has been given to state-owned enterprises,” economist Bui Kien Thanh said.

“Domestic companies are not treated the same.”

Many state-owned groups have invested in sectors outside their major business areas, using their advantages to keep private companies at bay. This has limited the growth of the private sector even when state-owned firms face losses and are required to divest from non-core sectors.

Economist Le Dang Doanh said Vietnam has only a few large firms with advanced technologies, good management, and high competitiveness.

Another reason for the slow expansion of private firms, mainly small and medium-sized enterprises, is that they fail to focus on building a long-term business strategy. Their owners often work as managers, and even technicians, in the firms, he said.

Need more supports

Pham Chi Lan, another economist, said the government should facilitate both state and private firms in accessing resources, including capital and land.

“The government has pledged to ensure equality and create a level playing field, but so far private companies have not been given the resources.

“We cannot just make statements on paper and leave it at that.”

Echoing Lan, Nguyen Mai, former planning and investment deputy minister, said there must be a level playing field for all companies.

“With annual overseas remittances of $11 billion and 400 tons of gold held by local residents, private firms can grow strongly if the government creates a good investment environment.”

The state should have policies to encourage small and medium-sized private firms to enter supporting industries to supply large state-owned enterprises, he added.

HSBC said in a recent report that private firms account for 86 percent of jobs, while the state sector, which makes up one-third of the economy, employs a mere 10 percent of the workforce.

The health of the private sector is vital to Vietnam’s economic future, it said.

“Fostering domestic private firms is the key to stronger demand and GDP growth; but the National Assembly ended with little indication of changing the dominance of SOEs in the economy.”

Gradually the economy is stabilizing, but without significant progress in addressing bottlenecks in the economic structure, Vietnam risks moving sideways for years, it warned.

Thanh said the government sets aside large amounts of money for SOEs, but they operate inefficiently and do not make any products which can compete in the global market place.

The incremental capital output ratio (ICOR) for SOEs is estimated at 8-14, while for private and foreign invested firms it is only 5 or 6. ICOR refers to the additional capital required to produce the next unit, so the lower the number the more efficient a firm is.

“The government should facilitate the development of the private sector as it plays an important role in the economy,” he said.

HSBC said: “The semi-annual National Assembly meeting concluded with members affirming the state-owned sector’s importance to the strategic development of the country.

“The emphasis of the status quo, without prioritizing maximizing the benefits of FDI and support for domestic private firms, confirms our view that reform progress will be slow.”

State-owned enterprises dominate supporting industries in Vietnam, but they lack linkages with FDI firms and private SMEs, it said.

Given that domestic private firms are more agile and efficient in their operations, more support to promote their growth is needed, it said. Without that, the demand for semi-skilled labor in Vietnam will be limited for foreign firms, who will pack up and leave once Vietnamese workers are no longer competitive, it warned.

“The risks of stagnation are high if further progress towards more efficient public investment is not achieved.”

Vietnam has a GDP growth target of 5.8 percent this year, up from 5.42 percent last year, according to the Ministry of Planning and Investment.

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