Private sector growth not matched by quality

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Vietnam has been experiencing a huge private sector boom over the past decade, but experts say quality has not kept pace with the growth.

Since the introduction of the Enterprise Law ten years ago, private enterprises in Vietnam have grown at a fast pace and now account for 95 percent of enterprises in the country. Total assets of the private sector have surged 24 times and profits up 17 times.

According to Hanoi-based research group Economica, although many registered companies have turned inactive during the period, it should not be seen as a bad thing. Economists of the group described the process as a "creative destruction," which they said has made the economy healthier.

The group said in a recent report that the private sector has made good efforts to improve capital use. For every VND100 (0.5 US cent) of equity available, private enterprises were able to add VND398 to their assets and generate a profit of VND7 in 2008. But at the beginning of the decade, despite less fierce competition, they could only turn the equity to VND271 in asset value and earn a profit of VND4.4.

But the improvements in the sector have not met expectations, experts said.

Economica experts said the growth in financial performance of private enterprises was slower compared with their counterparts in the state-owned and foreign invested sectors.

Return on equity, for instance, increased from 4.4 percent in 2000 to 7.1 percent in 2008 at private enterprises. Meanwhile the ratio rose to 12 percent from 7.9 percent in the state-owned sector and from 19.8 percent to 23.9 percent in the foreign invested business sector.

According to the Economica report, titled "The Quality of Private Enterprises in Vietnam", most companies in the private sector are too small in terms of equity capital. While the average equity capital for the sector in 2008 was VND3.6 billion, the corresponding figures for the state-owned sector was VND242 billion and the FDI sector, VND76 billion.

Economist Le Duy Binh, head of Economica, said private enterprises do not perform as well as their state-owned peers. "Private enterprises need to make four or five moves to generate the same amount of profit that state-owned enterprises can make in just one move," he said.

Lawyer Vu Xuan Tien said the big question is why they have not grown as well as they should have.

Ten years is not long enough to develop a strong private sector, but private enterprises have their own weaknesses, he said.

Entrepreneurs come from different walks of life, were not trained to do business and had limited access to capital, Tien said, citing a recent study by the Vietnam Chamber of Commerce and Industry.

Another reason for the slow development was the lack of coordination among sectors, he said.

"Activities of enterprises in the three sectors are independent. Each of the sectors is just like an island.

"It hinders the development of not only the private sector but the economy as a whole."

Tien said it would take a long time for the country to have large private enterprises and major entrepreneurs.

"Restructuring the economy after the economic crisis is an urgent task, and the first step to take is to restructure the system of enterprises," he said.

There should be no island in the economy and enterprises should work closely together, Tien said.

"Larger and more capable companies should operate in key fields while smaller companies will become their satellites in a complete system."

But not all experts think that the Economica report reflects truthfully the financial performance of local private enterprises.

Nguyen Duc Tai, director of the State-owned Enterprises Club, said many private companies keep different records for tax agencies, shareholders and auditors. As a result, findings from the research may present just one side of the story.

Nguyen Dinh Cung, deputy head of the Central Institute for Economy Management, said the private sector should be more transparent about their activities for their own good.

"Only when financial transparency becomes a motivation for private enterprises to achieve fairness in the business community can we really know how effective they are."

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