The National Assembly's Economic Commission said state-owned firms act as a barrier to the government's attempts to resolve bad debts and revive economic growth, and called for strong measures to downsize the sector.
The commission said in a November 21 report titled "Challenges are Ahead" that SOEs' ineffective performance contributed a great deal to high bad debt levels.
It estimated they accounted for over 11.8 percent of the total bad debts as of 2012 end, or VND24.95 trillion (US$1.19 billion).
This figure excludes troubled shipbuilder Vinashin's bad debts of VND19.8 trillion owed to local banks as of 2010. The firm had come close to a collapse with total debts of $4 billion to local and foreign banks.
The report said it was a hard task for the sector to clean up its bad debts. Vietnam's bad debts were estimated as of August end at 4.64 percent on total loans of VND3,290 trillion ($155.85 billion).
Private firms can easily sell assets and shares at market prices to raise money to pay bank debts, but SOEs are not allowed to make losses on such transactions.
So they often seek help from the government, requiring the budget-deficit cap to be increased from the current 4.8 of gross domestic product to 5.3 percent next year, the report said.
"It indicates that it is really a hard challenge dealing with bad debts of the state sector."
It warned that the government's bond issuances at high interest rates could result in raising the interest rates in the banking system, stymieing businesses' recovery.
SOEs, despite getting easy access to credit and beneficial policies compared to private firms, have been performing worse in recent years, which is among the reasons for the stagnant economy, it said.
It blamed the poor performance on incompetent management due to the unwieldy size of the SOEs with their numerous subsidiaries.
As of 2011 state-run businesses had 4.5 times and 61 times higher capital on average than foreign and domestic private firms.
The lack of proper oversight threatens them with financial risk and collapse, it said.
The commission said the country needs to take strong measures to scale down and reduce the number of state firms.
It proposed doing away with the "rigid" policy that the government should fully own or hold a dominant share in businesses in certain industries, saying it is slowing down structural reforms.
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