Communist Review - The amendment of regulations on equitization and divestment is a complicated matter, reflecting and resolving the relationship between market rules and ensuring socialist orientation between state, market and society. However, this is a very fundamental problem of the economy that need to be promptly resolved in order to improve the operational efficiency of state-owned enterprises (SOEs) so that they are always an important material force of the state economy, contributing to promoting economic development and realizing social progress and justice, etc.

Compared with the set progress, Viet Nam’s equitization and divestment of the state capital in enterprises is quite slow. In the first half of 2020, only 6 enterprises were approved for equitization plans, 10 enterprises were divested, earning 678 billion VND. According to the updated equitization list of the 2016-2020 plan approved by the Prime Minister, up to now only 28% of the plan has been reached. There are various reasons, of which the impact of the COVID-19 pandemic is the objective one, which limits the purchasing power of the market and causes the stock value of listed companies to decline. In addition, enterprises that are equitized or divested are large scale ones with wide range of operations involving lots of land and complicated transactions. The typical subjective causes lie in the fact that it is required to ensure an adequate and close enterprise valuation so as to maximize the benefits of the State and to complete the approved master plan on land use before deciding to equitize. This is stipulated in Decree No. 126/2017/ND-CP dated November 16, 2017 by the Government, “On transfer of state-owned enterprises and one-member limited liability companies with 100% of charter capital invested by state-owned enterprises into a joint-stock company". Therefore, the order and procedures for equitization and divestment take longer.

The Committee for Management of State Capital at Enterprises (hereinafter referred to as the Committee for short) consists of the Viet Nam Coal and Minerals Group, the Viet Nam Posts and Telecommunications Group (VNPT), the Viet Nam Chemical Group, and the Northern Food Corporation, Mobifone Telecommunications Corporation, and Power Generation Corporation 2 (EVN Genco2). These are those in the list of equitization. Shortly after that, the Committee established the Equitization Steering Committee at each of these groups and corporations and drastically directed the implementation. However, for the past year and a half, it has mainly focused on the review, measurement and inspection of land and submission to localities for planning approval, and submission to management agencies for approval. As in the case of VNPT, there are up to 4,500 land points to be measured and checked. Up to now, about 4,200 points have been measured and checked. The corporation is striving to complete by the end of 2020 and move to the step of submitting for approval.

Among the above enterprises, the Committee strongly directed the case of equitization at EVN Genco2. EVN Genco2 is regarded as the only large scale enterprise (state capital of nearly 12 trillion and total assets of over 25 trillion) capable of completing equitization in accordance with Decree No. 126/2017/ND-CP and its progress is in line with the plan set out in 2020.

Handling 12 inefficient industrial and commercial projects

The Committee for Management of State Capital at Enterprises has taken over the responsibility of handling 12 ineffective projects from the Ministry of Industry and Trade since the end of 2019. Over the past 9 months, the Committee has drastically reviewed, reported and submitted to the Steering Committee to organize 4 meetings with specific contents. It has also submitted 16 reports to the National Assembly, to the Politburo, the Secretariat, and the Central Economic Commission for instructions.

Under the direct instruction of the Prime Minister, the Standing Deputy Prime Minister of the Government cum Head of the Steering Committee, the Committee has submitted, proposed and worked out the implementation roadmap as follows:

- Classifying 12 projects into 3 groups so as to develop appropriate solutions and direction. Specifically, Group 1 is a group of projects with signs of recovery, including Hai Phong DAP2 Project and Hai Phong PVtex Project; Group 2 is a group of projects that can be restructured for recovery, including Quang Ngai Biofuel projects, Dung Quat Shipbuilding Industry Company Limited, Ha Bac Nitrogenous Fertilizer and Chemicals Joint Stock Company, DAP 2 and 2 projects of Viet Nam Steel Corporation; Group 3 is a group of projects that cannot be restructured for recovery. They must be subjected to bankrupcy, dissolution, sale, or others to reduce damage to the State. This group includes Phu Tho Biofuel Plant, Binh Phuoc Biofuel Factory, Ninh Binh Fertilizer Company, and Phuong Nam Pulp Factory. The classification is dynamic, which means there is rotation between groups depending on the outcome of each project at the time of review.

- On the basis of such classification, it is proposed to remove Hai Phong DAP2 Project from the list for divestment in accordance with current regulations and the Decision No. 1468/QD-TTg dated September 29, 2017 by the Prime Minister on "Approval of the Scheme to deal with shortcomings and weaknesses of a number of projects and enterprises that are behind schedule and inefficient in the Industry and Trade sector". At the same time, it is proposed to remove Phu Tho Biofuel Plant Project and Binh Phuoc Biofuel Plant from the list for handling collateral and undergoing bankruptcy proceedings. Both have received contributed capital from the Viet Nam Oil and Gas Group at the subsidiary level; the contribution rate is between 29% and 39%, not enough to dominate and make decisions.

- Proposing and closely coordinating with state management agencies to find legal solutions to remove the deadlock on EPC contract settlement due to prolonged disputes with contractors including working out a plan to allow divestment when the EPC settlement has not been completed, which is applied for 5 disputed projects. This is a highly practical solution since these disputes are difficult to handle, or even when dispute settlement is required, it usually takes long time and does not match requirements and directions.

In addition, the Committee recommends that the Steering Committee continue to urge businesses to seek to negotiate and settle disputes, even prepare to participate in arbitration or court proceedings in accordance with the law.

In general, the 12 projects mentioned above are “tough cases”. Diagnosing the "disease" precisely is no simple task, and producing "a proper prescription" in hard and poor conditions of the enterprises is even more challenging. One positive point is that the Committee has reported and obtained the approval from both the Steering Committee and the Prime Minister to outline the aforementioned roadmap and direction.

Improving efficiency and removing barriers for state-owned enterprises

On the occasion of the National Day September 2, 2020 and preparing for congresses of Party committees directly under the Central Party Committee towards the 13th Congress of the Communist Party of Viet Nam, General Secretary – State President Nguyen Phu Trong, Chairman of the Subcommittee on Party Document of the 13^th National Party Congress, wrote an important article "To thoroughly carry out the preparatory work for, and successfully conduct the 13th Party Congress leading the country to a new phase of development". In the article, General Secretary – State President Nguyen Phu Trong emphasized two issues related to SOEs: Firstly, it is necessary to innovate and improve the operational efficiency of the state economic sector and SOEs. Secondly, the state economy, especially SOEs, is facing numerous difficulties and barriers.

Such problem has been posed for years, especially in recent terms. The emphasis on those issues by the General Secretary – State President in the current context is of extreme importance. Improving the efficiency of SOEs means that enterprises are profitable, their capital size increases, their market share is maintained and expanded, and especially their position in the domestic market is upheld while getting improved access to foreign markets. As for difficulties and barriers, SOEs are opined not to have fully exploited their advantages. This is truely a manifestation of difficulties and barriers. These difficulties and barriers have been identified clearly. They represent the mechanisms that state enterprises have spent a large amount of time and resources pursuing.

In order to implement the direction of General Secretary – State President Nguyen Phu Trong to improve efficiency and remove difficulties and barriers of SOEs, Viet Nam needs to concretize and well solve the following problems:

The first problem: improving the efficiency of SOEs. The existence of SOEs is an objective reality in all countries, including those with developed market economies. The difference lies only in the scale and field of operation. In Viet Nam, the State advocates withdrawing state capital and SOEs from the industries and fields where the private sector is capable of providing better, more efficient and competitive products and services. In other words, SOEs will mainly operate in industries and fields with lower efficiency. If this trend continues, the SOE number will continue to drop, and the business activities are conducted only in a few sectors that require state capital. However, the total value of state capital in these enterprises still remain high, focusing mostly on important groups and corporations, accounting for over 80% of the total assets and equity of the sector. Specifically, 6 groups alone (excluding Viettel Group under the Ministry of Defense) have a total asset value of more than 1.4 million billion VND.

Thus, the "problem" is how to preserve and develop the state capital in the long term when SOEs, with a large proportion of state capital, only operate in the industries that need state maintaining and having low efficiency. This is an enormous challenge. Return on assets (ROA) of the state economy sector in 2017 was 2.2%, significantly lower than the 2.9% average for the entire enterprise sector, far behind level of 7% of the foreign direct investment (FDI) sector. Return on equity (ROE) of the SOE sector was 11.4%, higher than 10% of the average ROE of enterprises, but far lower than 18.1% of the FDI sector.

To solve this conflicting "problem", Viet Nam is required to continue to promote restructuring, review and classification to re-arrange SOEs, focusing them more on essential fields, important areas for national defense and security, and those which do not receive investment from the other economic sectors. At the same time, it is necessary to consider and create favorable conditions for the development of production and business activities on the basis of "available" resources, according to the specific conditions of each group or corporation.

For example, in recent years, the Viet Nam Rubber Industry Group has recorded an average yearly profit of between 3,000 billion VND and 4,000 billion VND. However, the profit margin is only from 7.5% to 10%, below the average of the SOE sector (11.4%) and far below that of the FDI sector (18.1%). With the Group's rubber latex extraction productivity ranking first or second in Asia, the Viet Nam Rubber Industry Group is said to achieve its top efficiency in agricultural production. It is advisable to support and promote the Group to invest in the industrial zone. The Prime Minister should allow the Viet Nam Rubber Industry Group, with the support of localities, to invest in building industrial parks on the Group's rubber land according to the local land use planning.

The Viet Nam Chemical Group is also in the same situation. Currently, 70% of the group's capital resources are invested in fertilizer production. However, this not only produces no profits, but also causes the groups to suffer from a capital deficit due to excessive borrowing costs. Fertilizer production and trading are inefficient due to many reasons including the provisions of Law No. 71/2014/QH13 "Amendment and supplementation of a number of articles of the tax laws", which have stipulated that fertilizers are not subject to value-added tax, leading to the group 's businesses not being refunded. Nevertheless, if the tax rate is 0%, they will be refunded like other fertilizer importing businesses. Meanwhile, the remaining 30% of the group's resources generate the main source of income, about 500 billion VND per year. This comes from the production of basic chemicals, detergents, battery cells, and car tires, etc. However, these are the fields which are required capital divestment.

In such context, in 2 or 3 years, the income source of the Viet Nam Chemical Group will no longer be available; the group's activities will soon be weakened, while other businesses are growing up.

The above two examples require the State to conduct reform over SOEs in the direction of both narrowing and  expanding investments in order to obtain an efficiency index in accordance with the market mechanism. This "new" and "expanding investment” should only be based on available advantages. To preserve the State interests, it should also be allowed to make investment in urban projects if that land is under the use of state-owned enterprises.

The second problem: removing difficulties and barriers for SOEs. With the establishment of the Committee for Management of State Capital at Enterprises, it has gradually become clear that the two following groups of institution are hindering SOEs business activities: firstly, state management institution on enterprises and their fields of operation; secondly: institution that exercises state ownership at enterprises.

Regarding state management institution, the current typical hindrance is investment regulations. Investment-related laws including the Law on Investment, the Law on Construction, the Law on Public Investment, the Law on Land, the Law on Forestry, and the Law on Environmental Protection all have reasonable and logical contents. However, in reality, enterprises have to synchronously implement all these laws, leading to the increasing volume of procedures, many of which are overlapping or even conflicting. From 2015 and 2016 onwards, various major investment projects have still been in the process of license application, including the 500kV Van Phong - Vinh Tan transmission line project going through 4 provinces. Having been prepared for 3 years, this project is now delayed since it fails to comply with the Forestry Law which has been in effect since 2019.

State management regulations are of great necessity, creating a common operating framework for enterprises. It is also imperative, however, to synchronize all legal provisions, combining them into a uniform process so as to facilitate enterprises to both comply with them and save time and costs.

These barriers have existed for years. Agreeing with the recommendations of the Committee for Management of State Capital at Enterprises, the Government adopted Resolution No. 75/NQ-CP, dated May 21, 2020 "On handling problems for some investment projects of enterprises whose owners are represented by the Committee for Management of State Capital at Enterprises”, which was subsequently legalized by the National Assembly in the Law on Investment, the Law on Construction and the Law on Public Investment amended recently. However, many have not been completely resolved.

As regards the institution exercising the state ownership over enterprises, according to the current regulations, there are 5 classes of agencies involved in the exercise of ownership rights as follows:

- Government: issuing general regulations as decrees.

- Prime Minister: deciding on a number of important specific corporate issues such as leaders, strategies, and ownership transformation.

-  Ministries such as the Ministry of Finance responsible for the corporate financial mechanism, approval of financial statements, and distribution of profits; the Ministry of Planning and Investment in charge of classification and arrangement of enterprises, appraisal of business strategies and establishment of enterprises; the Ministry of Labor - Invalids and Social Affairs in charge of labor plan and annual salary fund; the Ministry of Home Affairs responsible for personnel management of enterprises.

- Ministries managing enterprises by industry and large investment projects.

- Capital management representatives including members of the State Capital Management Committee and more importantly direct capital management representatives at each enterprise since they are those who are authorized in terms of state capital and directly run enterprises and manage their production and business activities.

In the current context, that numerous agencies participate in exercising the State's ownership has brought about a number of benefits, creating transparency and consensus. Nevertheless, it is vital to establish a focal agency to synchronize and unify the participation of parties, requiring them to follow the same trend and aim for the same goal.

From the above analysis, it is essential for Viet Nam to consider and promptly amend and better the institution of management and utilization of state capital in production and business of enterprises. At the same time, the Committee for Management of State Capital at Enterprises functions as the focal point to assist the Prime Minister in coordinating and implementing ownership management regulations in the direction of synchronization and uniformity. In the immediate future, the Central Committee for Enterprise Innovation and Development should be transferred to the Committee for Management of State Capital at Enterprises so that the Prime Minister and Deputy Prime Minister can direct the Committee to perform this focal and coordinating function.

This article was published in the Communist Review No. 954 (November 2020)