Vinashin trial an untested bitter pill

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Trial of giant shipbuilder executives will reveal how serious the government is about cracking down on corruption

This file picture taken on May 6, 2009 shows a ship under repair at Vinashin's Nam Trieu shipbuilding factory in Hai Phong City. Photo: AFP

As the government rolled its 200-odd shipping companies into one behemoth entity known as Vinashin in 2005, Pham Thanh Binh was at the helm, steering the giant conglomerate toward the goal of becoming the world's fourth largest shipbuilder by 2015. But three years before the Vinashin ship would have docked at its scheduled destination, its chairman ended up in another dock.

Binh and other eight executives stand accused of deliberately breaching state regulations on economic management. They have been indicted for causing losses of at least VND910 billion (US$43.96 million) with many "critical violations," the indictment said. They had mostly squandered the state budget on the purchase of an Italian-made high-speed passenger boat and the construction of two thermo-power plants, it added.

When Binh was arrested in August 2010, Vinashin had incurred debts piling up to VND86 trillion ($4.5 billion), around 4.5 percent of the country's gross domestic product in 2009. Analysts blamed the financial debacle on the fact that as the group expanded, it also diversified into non-core industries such as animal feed production, tourist resorts, the finance sector and beer production.

The trial of these former Vinashin bigwigs not including two more of the group's former leaders now on the run has garnered attention both at home and abroad. But following the trial's opening, analysts said the Vietnamese government still needed to prove its determination to shore up the ailing state sector and repair shattered international and public trust.

"I think [the trial is] quite high on the international radar because of the impact this case has had on the standing of the Vietnamese government and the economy," said David Koh, a Vietnam analyst at the Institute of Southeast Asian Studies in Singapore.

"Vinashin is supposed to be one of the best. Now it appears to be one of the worst. To what extent can state-owned enterprises be trusted by the international community, from now on?" Koh asked.

The four-day trial began Tuesday (March 27) in Hai Phong and foreign investors and hedge funds managers will be watching separate Vinashin court cases in both the northern Vietnamese port city and London "for indications that the investment climate in Vietnam is improving," said Carl Thayer, a Canberra-based Vietnam expert.

Pham Thanh Binh (C), former chairman of Vinashin. Photo: VNA

US hedge fund Elliott Advisers LP had filed a case against Vinashin in the UK High Court as the state-run shipbuilder defaulted on a syndicated loan a year earlier, the Wall Street Journal said in a December article, citing a court filing. Vinashin defaulted on a $600 million syndicated loan in December 2010, when the first repayment of $60 million was due, the newspaper said. Elliott told the Vietnamese shipbuilder on March 16 the hedge fund is canceling its lawsuit, DPA reported Wednesday (March 28), citing Vinashin chairman Nguyen Ngoc Su.

But Elliott was just part of a group of investors who invested in the loan, including, among others, Credit Suisse AG, Dublin-based Depfa Bank PLC and Malayan Banking Bhd, the Wall Street Journal said. Credit Suisse had arranged the loan in 2007.

Public privilege

As the Vinashin debacle unfolded in 2010, major ratings agencies said the company's problems were chiefly responsible for the downgrading of Vietnam's sovereign ratings.

Analysts said Vinashin was not the first and would not be the last major shake-up at a state-owned enterprise (SOE). Economists have blamed Vietnam's economic woes, including 18.13 percent inflation for 2011, on excessive investment in inefficient state-owned corporations, which gobble up capital and diversify from their core competencies into sectors such as property and stocks both of which have faltered.

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"The evidence suggests that the large SOEs operate inefficiently and have failed to develop their technological and managerial capabilities. Their productivity is growing very slowly and they are not internationally competitive," said Jonathan Pincus, dean of the Fulbright Economics Teaching Program in Ho Chi Minh City and a former economist for the United Nations in Vietnam.

"The reason for this, in my view, is that the large SOEs are not forced to compete and their operations are not sufficiently transparent. They have favored access to domestic markets and access to cheap land and credit. At the same time, they have not been forced to reveal details about their activities to the public, their ultimate owners," Pincus said.

"This has created a situation in which the managers of state companies have an incentive to maximize benefits to themselves rather than build strong, competitive companies."

Many argue that the solution to this problem is to dismantle monopolies, and force state companies to operate transparently.

"They must be divested of their easy access to bank credit, political protection and special privileges and converted into robust enterprises capable of surviving in today's global marketplace"¦ The Vietnamese government has got to face market reality," Thayer said.

"˜Sparing nobody'

In March 2011, the Party's Politburo decided not to take any disciplinary measures against members of the government in the Vinashin case.

Four months earlier, at a plenary session of the National Assembly, Vietnam's legislature, Prime Minister Nguyen Tan Dung had admitted that both he and the government were responsible for Vinashin's grave fiscal woes.

Dung made the mea culpa after the legislative body demanded the government be held accountable for the debacle. In a rare move, a prominent lawmaker even called for a vote of no confidence in PM Dung, who appointed Vinashin's former chairman Binh. But it was rejected by the house.

Though the lawmaker, Nguyen Minh Thuyet, has since retired, he is still watching the Vinashin trial closely, particularly as the Party presses ahead with its anti-corruption campaign in a bid to strengthen public confidence.

"Public trust can be regained if the anti-corruption agenda is strong and effective, sparing nobody," Thuyet said.

Last week, the National Assembly's Standing Committee debated a draft regulation that envisaged enabling lawmakers to cast a vote of no confidence in the country's leadership, including the President and the PM, on an annual basis.

Though the legislators have remained divided on the proposal, "on paper it sounds truly revolutionary," said Edmund Malesky, an associate professor who studies Vietnamese politics at the University of California in San Diego.

"The no-confidence vote would not even have to be successful to impact agenda setting and policy debates. If these votes were simply made public, it would provide National Assembly deputies with an enormous opportunity to sanction the government, if they were unhappy with its performance," Malesky said.

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