Wary SOEs go slow on disinvestment

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State-owned companies told to pull out of non-core sectors are afraid of being blamed for making losses while divesting

Two workers at a PetroVietnam plant in northern Vietnam

Divestment from non-core sectors, considered an essential step in the restructuring of state-owned enterprises, is being implemented far too slowly, experts warn.

The government ordered the divestment saying the main mandate for SOEs is to provide essential products and services to the economy, not earn profits.

But it also wants them to ensure that the disinvestment does not cause losses to the treasury or disorder in the market.

Economist Le Dang Doanh said the divestment is also necessary since non-core activities themselves could and have caused big losses to the companies.

In other countries, public firms have been successful with investments in multiple sectors because they have competent managers, he said, but in Vietnam, SOEs do not have personnel with sound knowledge of non-core sectors and so do not know how to control risks.

This leads to huge losses when the economy slows down, he said.

He cited the example of Electricity of Vietnam.

Government inspectors said that by 2011 EVN had invested more than VND121 trillion (US$5.7 billion) - or 150 percent its chartered capital - in "outside businesses" including in non-core areas, but failed to make any profits from them.

It had unreported losses of VND2.19 trillion ($103.8 million), they found.

"The divestment should have been done sooner since the government had [issued the order] a long time ago," Doanh said.

Bui Kien Thanh, another economist, said there is no question that divesting from non-core sectors so that they can focus on the main tasks set by the government is an essential task for SOEs.

"SOEs' investment in normal business sectors is unreasonable.

"It is unfair that they compete with private firms in normal business sectors since they get more incentives.

"It runs counter to market economy principles."

Despite the government's instructions, the disinvestment process has been very tardy, officials admit.

State-owned firms' investment in non-core areas stands at VND17.6 trillion ($830 million), mainly in the sectors of banking, property, and stocks, Le Hoang Hai, deputy head of the Ministry of Finance's Department of Enterprise Finance, said.

But both officials and industry observers admitted that disinvestment is a difficult task now because of the economic slowdown.

Minister of Planning and Investment Bui Quang Vinh said SOEs fear being held responsible for selling stakes in non-core sectors at a loss, calling it the main reason for the sluggish pace of disinvestment.

Power distributor EVN and telecom group VNPT have been unable to sell their stakes in ABBank and Maritime Bank respectively since they want the original prices they paid for them, though the equity market is in a slump now.

Likewise, the Vietnam National Coal Mineral Industries Corporation has not been able to sell its stake in SHB, another bank.

Phung Dinh Thuc, chairman of the Vietnam Oil and Gas Group (PetroVietnam), said: "Disinvestment with the principle that the stakes are not sold at lower prices than their original value is very difficult.

"There are tasks that can be carried out immediately, but there are others that need more time."

The group has to withdraw over VND5.8 trillion in non-core investments.

To accelerate the disinvestment process, the Ministry of Finance is considering allowing SOEs to sell their stakes at a loss.

Thanh said the non-core disinvestment should be accelerated, and firms should not wait for the stock market to recover to divest.

SOEs may have to sell their shares at lower than original prices, but it would enable the government, which is strained for cash, to use the money for other public projects rather than let it remain stuck in inefficient businesses, he said.

Under a three-year restructuring plan recently approved by Prime Minister Nguyen Tan Dung, all SOEs will have to withdraw their non-core investments by 2015.

SOEs have been asked to pull out of non-core areas and concentrate on their core business ever since the economy experienced a slowdown three years ago.

In 2009 the government issued a decree requiring SOEs to ensure that at least 70 percent of their total investment was in core areas.

The issue of divestment resurfaced with some urgency recently because many firms faced huge losses after investing in non-core sectors several years ago.

Mounting debt

Debts owed by the state-owned sector hit nearly VND1,350 trillion ($64.1 billion) in 2012, up 6 percent from the previous year and worth nearly half the country's GDP, according to a government report.

Of 127 groups and corporations, PetroVietnam ran up the largest debt of VND124 trillion, according to the report, which has been sent to the National Assembly.

Doanh said the debts would hinder the SOE reform process, suggesting that the government should let indebted firms who make repeated losses go bankrupt.

Thanh concurred, saying the massive debt is "not surprising."

The government's repeated efforts to assist firms by negotiating debt freezes with banks and injecting more funds every time they report losses only let the SOEs incur even bigger losses and pile up more debts, he said.

According to the report, state firms have continued to over-diversify, and experts said this puts them at the risk of going insolvent, especially if the economy treads water or deteriorates further. 

The report said non-core investments in banking and housing rose by 3 percent and 20 percent from 2011, but declined in stocks, and insurance.


The process of selling shares in state owned enterprises has slowed down significantly in recent years.

More than 800 SOEs were equitized in 2004-05, but the number dropped to just 13 in 2012 and three this year. Yet the government has set a target of 500 for the next two years. Economist Tran Quang A discussed this issue:

What do you think are the reasons for the slow pace of equitization?

I think the [constitutional] provision that the state economy "plays the dominant role" makes [the commitment of] equitizing and restructuring SOEs never deliver fully. It is only half hearted.

Second is the issue of benefits. The gentlemen who are directors or board members of SOEs, who are also government officials, have no motivation to support equitization since it would only spell trouble for them as equitization means more transparency and interference from outside partners, which would hurt their benefits.

The third reason is [responsible] people use the stock market as an excuse, saying sales of shares now would not fetch a fair price and so the government will suffer big losses. I think they are just making excuses and don't really want to do it.

What is the most important factor in restructuring SOEs?

Equitization is the most comprehensive measure. In businesses where the government holds big shares, it is only meaningful to sell 25-30 percent stakes. A few percent does not mean anything. In those SOEs that the government does need to hold [significant] stakes, 100 percent equitization. It can simply sell them all and take the money. That is the most thorough way. There are also other levels [of restructuring] like personnel restructuring and mergers and acquisitions.

Some experts say it is hard to sell SOEs due to their large debts and so argue against it. What is your opinion?

To sell debt-laden businesses, I think we even have to offer bonuses [to the buyers.] An SOE may have had an original value of US$3 billion but is now worth only $500 million, but still the government has to sell it. If we still expect "diamond" prices for such businesses, it will never be done.

What do you think about the government's target of equitizing 500 SOEs in 2014 and 2015?

I wonder based on what grounds it set such a target.

The interview was first published in Vietnamese in SGTT

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