Mr Kelly Wong, Managing Director and Head of Investment Banking at the Ho Chi Minh City Securities Corporation (HSC) spoke about changes stemming from the Law on Enterprises that took effect on July 1.

What is your view on all enterprises in Vietnam being regulated by the Law on Enterprises from July 1? 

I think conformity of regulations for all enterprises - including state-owned enterprises (SOEs) - is a natural progression and a positive move for Vietnam. One of the key things is that while the regulations are effective from July 1 there will still be a period of transition for stakeholders and the immediate period right after the effective date will be a period of adjustment. While this period of adjustment is usually very challenging for enterprises, once we have successfully passed through it I think they will come out stronger and better prepared to face a unified playing field.  

Competitively, I think it will take some time for them to become efficient and effectively compete with private companies. While SOEs traditionally have major competitive advantages such as scale, niche markets, and scope, there will need to be a significant adjustment in their operations in order to specialise and increase productivity to generate higher profit margins.

How does this affect foreign invested enterprises (FIEs) in Vietnam? 

FIEs have been governed by the Law on Enterprises and the Law on Investment for some time now. Some have maintained their preferential status and the newer ones have been setup without it. The overall impact on FIEs would probably be expected to be minimal at the beginning, especially since they have had much more experience with the existing regulations. One of the key longer-term concerns is that when SOEs under the new regulations become more culturally privatised, increasing their efficiencies and taking advantage of their natural competitive advantages, they could easily organise enough capital and resources to dominate the growth of their respective industries. 

FIEs will need to upgrade their approach in Vietnam by taking advantage of more than the low cost of production and the export model of business, also investing more readily into technology and higher value production. Overall, the increasing competition and more level playing field should improve industries overall and, subsequently, the country.

I think the performance of SOEs is fairly relative and cannot be readily judged across industries. Most of the large SOEs enjoy fairly major competitive advantages and barriers to entry, where performance cannot be judged through peer analysis. Through the conversion into a limited liability company, I think there will be more accountability and transparency that will enhance the ability to attract better and lower-cost capital. Compared to their historical performances, these SOEs would be considered better performing, but only against their own historical results.

From a procedural perspective I think the conversion approach would be faster in order to achieve a proper legal status, but it doesn’t immediately solve the issue of divestment of government ownership. Additional steps would be required to complete valuation, convert to a joint stock company (JSC), and sell the shares to public or private investors. Comparatively, the approval process is similar, but while the traditional equitisation route is longer it includes a valuation, auction and also sale of shares to the public. Achieving a proper legal status quickly will be an important first step in allowing the SOE to begin it’s transformation into a private company, but a divestment by the government and the introduction of new shareholders will be necessary in order to drive the cultural changes that are required to operate like one.

For those SOEs that have been performing poorly, will the transfer speed up their restructuring and make them healthier? 

I do not think that restructuring or operational improvements of SOEs are dependent upon the equitisation process. I agree that this is a huge incentive to fix and improve the company’s situation in order to maximise valuations but is not a necessary requirement. The ability to improve performance needs to be driven internally, which makes the process more credible. Whether this internal force is an individual, the company’s leadership or the government, it needs to be readily accepted and pushed forward. Using the equitisation process as a primary driver of change can be difficult as it will not have the same credibility and accountability compared to an internally driven change. This would often result in only partial results and less ownership of the change.

With the transfer, what do you think of the chances for foreign investors to invest in equitised/restructured SOEs? 

I think the overall equitisation process offered good opportunities for all investors to invest in restructured and equitised SOEs. While foreign investors are a good source of capital for equitisations, domestic investors (especially financial institutions) are becoming more dominant in the local securities market. The equitisation process has brought many large and attractive investment opportunities to the market, giving the larger foreign investors more interesting targets to invest in. This is highly dependent on each person’s investment strategy, but the SOEs have helped to build a deeper investment market for Vietnam.

What should authorities do to make the transfer better and more effective? 

I think the existing process that is being used does what it’s intended to do. I would think that given the large number of SOEs there should be some flexibility built into the process. It would be interesting to potentially see some M&As between smaller companies during the equitisation process in order to create some scale and decrease the fragmentation in certain industries. I’m not suggesting we consolidate all the small companies, but some can be combined to make interesting investments. While I understand the process is more legal and procedural, there is an element of valuation creation and commercialism that investors may find interesting if there was some business or market strategy employed during the process.