SOE REFORM & EQUITIZATION

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1 SOE REFORM & EQUITIZATION What is the Background? 1. The working group on state-owned-enterprise (SOE) reform was established to extend the work already been done by the working group on equitization; it has had only three meetings of the group, with participation by numerous donors and Government (e.g. NERC vice-chairman, MOF and MOLISA directors, etc). There has been limited NGO participation so far. The working group on equitization was established more than a year ago and has had regular meetings since then, exchanging views among donors, Government agencies and often consultants on various technical aspects of equitization. 1. What is the medium and long-term vision? 2. The Government envisages an efficient, competitive and financially healthy and growing SOE sector in its draft Socioeconomic Strategy; this covers not only utilities but also manufacturing and trading enterprises. For this purpose it is important for the SOE sector to limit its losses and its accumulation of non-repayable debt. At the same time, it will be necessary to make SOE managers more autonomous and more accountable, so that they are encouraged to take effective measures to make their enterprises more competitive and more efficient. This has become imperative in the face of Government s agreement to open up trade and investment under the ASEAN free trade arrangement (AFTA) and the United State bilateral trade agreement (USBTA) that are to be implemented over the next five to ten years. 3. SOEs account for 30 percent of GDP, 25 percent of total investment, 15 percent of non-agricultural employment and about 50 percent of outstanding domestic bank credit. Currently there are 5,300 SOEs (nearly 500 recently equitized) employing around 1.6 million people. A Government survey of enterprises in late 1997 found that around 60 percent of 5800 SOEs were not profitable and the debt-to-asset ratio of a large number of SOEs was excessive. This situation deteriorated over two years of slow growth, low domestic demand and inadequate competitiveness. This year there are signs of a strong recovery in SOE output. 4. This situation follows a significant contraction of the SOE sector over the last ten years in the number of SOEs (from in 1990 to 5300 today) and in actual SOE employment (from 2.5 to 1.6 million today). Their share of GDP and in industrial output has fallen too in the last ten years, mostly due to growth of the foreign-invested sector but also due to growth of domestic private sector, mainly of household enterprises 2. What is the strategy to achieve the vision? 5. In the words of Government s draft Socioeconomic Development Strategy ( ): Government plans to make efforts to complete the program of rearranging, restructuring, and reforming managerial mechanisms to improve productivity in SOEs within 5 years. This includes equitizing SOEs where the state will not hold majority shares, in order to create more incentives for more efficient performance. In the equitization process, priority will be given for workers to access stocks, and at the same time to open stocks for outside domestic and foreign investors. Implementing the policy of sale, leasing or contracting of small SOEs, for which the State does not need to maintain any ownership, will be part of 39

2 these efforts. Merging or declaring bankrupt all ineffective SOEs, transforming SOEs into joint stock or limited liability companies, separating owners rights and business autonomy of enterprises will be part of these efforts. Ensuring full autonomy and accountability in production and business activities for enterprise 6. These proposed efforts at SOE reform in the draft Strategy are closely connected to reforms in the banking sector and to Vietnam s integration with the world economy. Reform of the banking system, which is also part of the Strategy, will require SOEs to perform efficiently in order to have continued access to bank-credit. Implementing commitments to integrate with the rest of the world through AFTA and USBTA, will require SOEs to take steps to become competitive in order to survive and thrive in the new environment. 7. To summarize, the Government s three and five year SOE reform program, that is awaiting final approval, seeks to do the following: Diversify ownership through equitization (i.e. sale of state shares) and divestiture of SOEs (outright sale of entire SOE or free transfer of an entire SOE); Liquidate SOEs that are classified as ineffective or non-viable; Restructure large SOEs that remain in Government hands through various measures aimed at increasing autonomy, enhancing accountability, monitoring performing closely, developing pilot restructuring plans for three general corporations, and by, assessing operational performance through diagnostic audits of large and troubled SOEs and taking actions on that basis. Establish an adequate and effective social safety net for SOE workers that become redundant. 8. Diversify Ownership of SOEs. Equitizing and divesting SOEs is a major plank of the Government s strategy for SOEs. Measures aimed at enhancing effectiveness of equitization include removal of caps on shareholding of individuals and entities as well as timely announcements of details of proposed SOE-sales to allow greater participation. Government has also been piloting auctions and competitive-bid-tenders as alternative methods of equitization in Haiphong. 9. Most of the SOEs to be covered by this component of the reform-plan will be small and medium-sized SOEs (with capital of VND 10 billion or less). To date more than 450 SOEs have completed their equitizations. 3 Of these more than 60 percent have sold more than two-thirds of their shares to non-state shareholders. 10. Liquidate non-viable SOEs. Equitizing or divesting non-viable SOEs will be difficult and hence they will have to be liquidated to avoid SOE losses and accumulation of non-repayable debt. Identifying SOEs as non-viable is often not easy. To-date the progress in this area has been very slow; this is in part because of the reluctance of SOEs to identify 3 Completed equitizations are defined here as those SOEs which have sold more than 51% shares to nonstate shareholders, received a business license to operate under the Enterprise Law and have held the first shareholders meeting. This compares very well to the 17 that were completed by end

3 themselves as non-viable but in part it is also because the legal framework and the procedures for bankruptcy and liquidation are vague and unclear. There is need to streamline the framework and the procedures before liquidation can be implemented effectively. The Government plans to establish an Asset Management Company (AMC) for banking reform, but its not clear whether recovery of bad debts can involve liquidations as well. The plan thus envisages a gradual rise in the number of liquidations that will be implementable in this period. 11. Restructure SOEs that remain in Government control. Most of the large SOEs under the General Corporations will remain in Government control under this three and five year SOE-reform program. For reasons of national security and special interest, large enterprises, strategic enterprises, utilities, including public service SOEs, will remain under full state ownership. However various measures are contemplated aimed at improving efficiency and competitiveness. There will be mergers where possible as well as downsizing through removal of non-core operations. Corporate governance will be improved through corporatization of enterprises, increased autonomy and accountability of managers. There will be operational reviews or diagnostic audits and regular monitoring of SOE performance through an improved information-system. Reforms of private sector and integration with the rest of the world will expose these enterprises to greater competition and banking reform will harden their budget-constraints. 12. Establish social safety net for SOE workers. A major concern for the Government is the potential of labor redundancies arising from equitization, liquidation and restructuring. The Government has provisions under the labor law to provide compensation for redundancy, but is considering a more generous separation package comprising a severance payment, an option for early retirement, and retraining. A Restructuring Fund has already been established using proceeds from equitization, and further streamlining of the Fund rules is in process. Government s reform plan envisages a potential redundancy of workers over the five-year period. On average this will amount to 10 percent of the annual additions to the labor force and the total costs are unlikely to exceed USD 500 million for five years, and donors are willing to finance all of this cost. 3. What is the current and future role of different donors? 13. Donors have been providing technical assistance and advice for the formulation and initial implementation of the SOE reform plan (see Annex for details). Advisory services and technical assistance for formulating the reform program has to date focussed on the following specific areas: assessing the current situation of SOEs and classifying them to determine measures to addressing their problems; revising decrees on equitization, divestiture, liquidation and so on; supporting the national Enterprise Reform Committee; conducting operational reviews (or diagnostic audits) of large and troubled SOEs by independent consultants; implementing SOE reform in line ministries and people s committees; 41

4 developing pilot restructuring plans for three General Corporations; and, developing a management information system to monitor SOE performance regularly. 14. Most of this assistance has been targeted at the National Enterprise Restructuring Committee, line ministries and people s committees with some going to Ministry of Finance. 15. Donors also plan to provide assistance to finance the costs of debt-restructuring of the SOE sector. This is to be done in conjunction with gradual re-capitalization of SOCBs over several years. 16. An assessment of the technical assistance that will be needed for implementing the banking reform program over the next three-to-five years is planned to be undertaken under the auspices of the working group. 4. What are the key monitorable indicators? 17. The following monitorable indicators have been proposed in different areas of reform: (a) Diversifying ownership Share of employment and debt covered by SOEs that have been equitized/divested; Number of equitized and divested SOEs that have sold more than 65% shares to non-state shareholders; Number of equitized and divested SOEs where outsiders (i.e. not employees or managers) have bought more than 51% shares; and, Total number of SOEs equitized and divested. (b) Liquidating non-viable SOEs Share of employment and debt covered by SOEs that have been liquidated; and, Total number of SOEs liquidated. (c) Restructuring SOEs that remain in Government control Number of SOEs where diagnostic audits have been completed; and, Number of SOEs that have been downsized in terms of employment. (d) Establishing social safety net for SOE workers Number of SOE workers that have received financing from the Restructuring Fund; Number of SOEs whose workers have received financing from the Fund; and, Number of workers receiving early retirement package. 42

5 Annex: Donors Current Support for Formulation & Implementation of Reforms Donor & Grant Purpose(Implementing Agency) Status Amount ASEM 1 European US$ 100,000 Designed social safety net program to deal with labour displaced by SOE reform (CIEM in coordination with NERC) Completed ASEM 4 European US$ 439,000 ASEM 5 European US$ 1,470,000 Acceleration of equitizing and restructuring SOEs in the Ministry of Transport Support implementation of SOE reform in three line ministries (industry, agriculture and construction) and two provinces/ municipalities (Hanoi and one other). (NERC) Consultants recruited. Work begun Recruitment of consultants in process Rest of table missing 43