Privatization has its pitfalls in Vietnam

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Moves to restructure the burdensome state sector could spur more corruption, predatory capitalism, experts say

A Vietnam Airlines' Airbus A330-200 landing at the central city Da Nang's airport.  The Vietnamese government has chalked out concrete plans to privatize a number of major state-owned enterprises - including national carrier Vietnam Airlines - this year, but analysts say privatization alone, without complementary reforms and regulatory changes, is very risky. PHOTO: AFP

The Vietnamese government has chalked out concrete plans to privatize a number of major state-owned enterprises (SOEs) this year, but analysts say the move is not a magic bullet and will only work if done carefully.

This plan exhibits Vietnamese leadership's desire to shore up inefficient SOEs, which have gobbled up capital and diversified from their core competencies into sectors such as property and stocks with dismal results.

SOEs soak up about 50 percent of state investment, tie up 60 percent of bank lending and account for more than half of the nation's bad debt.

But they contribute just around 30 percent of the country's annual gross domestic product growth, according to the Ministry of Planning and Investment.

In a New Year article that has been highly cited, Prime Minister Nguyen Tan Dung highlighted the urgent need to "restructure the state sector, mainly focusing on the equitization"¦ of SOEs". Vietnam looks to wrap up the overhaul of its SOEs by 2015.

Equitization is the term Vietnam uses to describe the process of issuing shares to partially privatize state-owned businesses in which the government will still hold the majority stake.

The Ministry of Finance said in a statement on January 15 that Vietnam plans to sell stakes in a number of SOEs this year.

Among the companies planned for equitization are national carrier Vietnam Airlines, Vietnam Automobile Industry Corp., Waterway Transportation Corp, Vietnam National Textile and Garment Group (Vinatex) and Viglacera Corp., the leading maker of building and construction materials.

This move apparently aims to allay concerns over the speed of equitization in Vietnam. There were more than 800 enterprises equitized in 2004-2005 compared to 13 in 2012.

But while the SOEs have long been considered the bane of the economy that is set to expand below 7 percent for a seventh straight year in 2014, whether their privatization will be a workable solution is another question, given Vietnam's status quo, analysts say.

"Privatization is always a risky business because it can create enormous opportunities for corruption and rent-seeking," Pietro Masina, an associate professor of economics at the University of Naples "L'Orientale" in Italy, told Vietweek.

"In Vietnam, many SOEs operate in a monopolistic or oligopolistic regime and this is a further concern as a private monopolist is generally worse than a public one," Masina said.

"˜Pauperize the rest'

For years, the government has followed the South Korean chaebol-style development path, considering SOEs the vanguard of the economy to steer overall economic growth.

But what has been a success story in South Korea has been difficult in Vietnam due to the privileges that the Vietnamese government has dished out to SOEs, which have almost unfettered access to credit and land, analysts say.

So privatization alone, without complementary reforms and regulatory changes, is very risky, analysts say. The country's current policies towards the capital market, trade and competition will have to change along with SOE privatization, they say.

They express concerns that the privatization process in Vietnam may actually become - like in the former Soviet Union and in many Latin American countries - a new source of widespread corruption leading to an equally distorted market.

"Past experience in the former Soviet Union and elsewhere - and even in Vietnam itself - makes it clear that that privatizing SOEs without also changing these features will simply transfer opportunities for rent-seeking and corrupt activities into other hands," Ian Coxhead, an economics professor at the University of Wisconsin-Madison who has studied Vietnam's economy extensively, told Vietweek.

The analysts point to a further risk in that a private takeover, especially one operated by a foreign company, may aim to eliminate competition. In this case, privatization may have very negative effects for the Vietnamese workers and industrial development.

By and large, "privatization without legally instituted regulations on company operations and for the benefit of workers - as happened in the former Soviet Union - will indeed create an economy that works only for the top 1 percent and pauperizes the rest," said a Vietnamese economist who spoke on condition of anonymity due to the sensitivity of the issue.

"My view is that privatization must not be a "˜one size fits all' process," he said. "How it takes place is the most important concern, not that it takes place.

"Vietnam's leadership should get corruption at top political and management levels under control, before moving to privatize the SOEs. If not done, the country will never be able to regulate its economy again."

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