SOEs must scale back investment outside key sectors

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A file photo shows workers at Vinashin's Nam Trieu shipbuilding factory in Hai Phong City. State-owned shipbuilder Vinashin has been criticized for its large investments outside its main business scope.

The government plans to ask state-owned enterprises (SOEs) to reduce investment in areas outside their specialty in a move to increase their operational efficiency.

The Ministry of Finance is drafting a decree under which SOEs will be allowed to have a maximum of 15 percent of their total investment in non-core sectors, down from the current rate of 30 percent.

Dr. Tran Ngoc Tho, head of the Department of Enterprise Financing under the Ho Chi Minh City Economics University, discussed the issue with Thanh Nien Weekly.

Thanh Nien Weekly: Is it reasonable now to ask SOEs to cut their non-core investments?

Tran Ngoc Tho: We should narrow the scale of state conglomerates as there is a lot of both theoretical and practical evidence supporting the plan.

The global economic recession in 2008 and the European debt crisis have shown that firms that are too big could go bankrupt in a crisis. The national financial system cannot support big firms in case of a crisis.

Non-core investments of conglomerates are not highly effective. Thus, we should ask them to cut their investment outside their key businesses as soon as possible, although it is difficult to do it.

The transfer of investment, especially long-term investments, or those in the property or financial sectors, is not easy in the context of economic slowdown and a bearish stock market. How can this be managed?

The issue is how effective our regulations are. Despite the global economic recession, many firms are still succeeding in their initial public offerings (IPOs), and a lot of capital is waiting for investment opportunities.

The issue is not whether the economy's capital source is big or small, but how effective the policy is in attracting foreign and domestic investors.

So what should the policy be?

We should attract more foreign investment and offer tax incentives to direct the capital flow to the sectors we want.

We shouldn't give too much consideration to notions that it is impossible to cut non-core investment of SOEs, or that nobody wants to invest and buy shares in the current difficult context.

If SOEs cut their investment outside their key business en masse, wouldn't they suffer losses because they would have to sell at low prices?

We need to accept the trade-off. Conglomerates may suffer losses, but they would receive other benefits.

The move could benefit the economy as a whole, as it would expose the system to fewer risks. Right now, conglomerates are causing bad debts at banks.

If we restructure the SOEs by cutting their non-core investment, it means we would allow the participation of other economic sectors, creating a fair competition in the market.

However, most of SOE non-core investments could be bringing in profits?

Investment by SOEs in sectors outside their key business to reap huge profits is a risk to their own capital. They do not know the non-core business like they do their main work, so the profits are made on the basis of high risks.

Thus, if the non-core investment trend continues, the risk of collapse would be big in a crisis.

How should SOEs reduce their investment in non-core sectors?

There are many ways to cut the non-core investment, this may be via privatization, or mergers and acquisitions. I think we should carefully study the way and apply it in the process of restructuring SOEs in the coming time.

Firms should strengthen their image, and also clarify which fields they want to cut their investments in so that other investors know.

When the world economy is unstable, capital flow pours into only stable and safe places. Thus, we can succeed (in cutting non-core investments) only when we can introduce transparent projects to international and local investors.

How should we manage capital use by SOEs?

The most important thing is to ensure that information is transparent and publicized. If conglomerates make public their capital mobilization details and use it under international standards, like the way firms listed on the stock market do, it would be easier to monitor the movement of capital flows and issue timely warnings.

"˜DON'T WAIT FURTHER'

Economist Pham Chi Lan said the reduction of SOEs' non-core investment, despite difficulties, should be carried out for the firms' own good.

For instance, state utility Electricity of Vietnam (EVN) owes other firms like coal mining group Vinacomin and oil group PetroVietnam some VND10 trillion (US$476.2 million). EVN has not paid for buying electricity from them.

If EVN does not cut its non-core investments, it cannot have enough capital to pay its debts and facilitate its main business. Banks cannot meet its entire capital demand, she said.

State-owed companies usually depend on funding from the state budget, bank loans and the stock market. However, the government is cutting investment and tightening credit, so the SOEs would face more difficulties in capital mobilization, she said.

Instead, conglomerates that have poured large investments in the property market should try to recoup investment from the sector by offering reasonable prices, so that they have enough capital for their key business, Lan said, adding that businesses cannot just sit and wait for a market rebound to begin boosting sales.

If the government and banks continue to pour capital into the conglomerates, we would not reach the goal of inflation control, affecting the whole economy, she said.

It is time for SOEs to recoup their non-core investment to have enough capital for their main business. The government should strictly enforce them to do it.

SOEs continued to venture outside their main business scopes in the first eight months of the year with a combined investment of VND22.59 trillion ($1.08 billion). They expanded their business in non-core sectors, including securities, real estate and insurance, according to a report by a Party unit overseeing the SOE sector.

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