When it was launched in June 2007, managers of the $100-million Vietnam Azalea Fund (VAF) primarily targeted the fund’s investments into state-owned enterprises (SOEs) being equitised, in addition to privately-owned entities. To date, though, according to Mr Thomas Lanyi, Director of Mekong Capital - VAF’s manager - its targets have not been realised. “Our expectations about equitisations have not been met, in terms of the number of companies being equitised and the process under which the few viable opportunities were handled,” said Mr Lanyi.

This partly explains the slow handling of SOEs into the State Capital & Investment Corporation (SCIC)’s management umbrella - the step prior equitisation. According to SCIC’s June report, as at the end of 2009 the corporation had taken over only 911 SOEs, with a total book value of VND7,060 billion ($371 million), accounting for 1.8 per cent of all State capital in the SOE sector. By the end of 2009 it also had sold the State stake in 315 SOEs with a book value of VND680 billion ($35 million), retrieving VND1,536 billion ($80 million) for State coffers. Significantly, the corporation completed equitisation at some 24 SOEs during this period.

As the SOE equitisation process has been slower than expected, while there has been a need to synchronise the management of all type of enterprises under one legal norm, the Law on Enterprises (LoE), the government has decided to transform all non-equitised SOEs into the one-member limited liability company (LLC) format - a move to speed up the process itself and quickly create a “level playground” for all, analysts say. “My understanding was that all SOE’s were already operating under the LoE,” said Mr Andy Ho, Managing Director of VinaCapital. “I think there are a few areas that SOE’s operate under special guidelines, but I have always assumed the LoE applies to all. To the extent that SOE’s will now operate 100 per cent under the LoE, I think that it is great because we all can now compete on the same playing field.”

For Mr Warrick Cleine, Managing Partner of KPMG Vietnam, adopting a common corporate law across different types of entities and different sectors of the economy is an important step in Vietnam’s modernisation and integration process. “Vietnam’s entry into the WTO heralded a wave of legal and administrative reform that supports the concept of ‘national treatment’,” he said. “Broadly, this means that foreign and Vietnamese entities are treated the same, and we are now seeing this roll through the commercial, tax and other administrative regimes. The extension of the ‘national treatment’ concept to the State and private sectors is important as it simplifies business.” From his perspective as a consultant, Mr Cleine believes that both State and private investors in any company need to be protected, and the rights of those investors compared to the rights and obligations of management need to be clearly defined. “All business sectors like to believe they are operating on a ‘level playing field’, and this contributes to that belief,” he said.

The transformation of SOEs could be viewed as a “chance” for all, though opportunities for foreign investor to take part in SOE equitisations may take longer to be realised. For example, the transfer of some Vinashin entities into PetroVietnam’s management mean foreign investors cannot participate for now, and any future opportunities are still on hold. “I believe it is a positive development for laws to be consistent and while different companies (of different legal entity status) may require different regulation, a single source of reference, such as the LoE, may be adequate,” said Mr Lanyi from Mekong Capital. “Vietnam’s legal system suffers from some contradictions and would benefit from rationalisation and clarification. The LoE is a well drafted set of regulations, which will serve its purpose well.”

Analysts agree that the transformation is necessary and positive, but its economic effect should be considered carefully. “I am not sure if the economics will improve by turning an SOE into an LLC,” said Mr Ho from VinaCapital. “The difference now is that the State has limited liabilities as the one and only shareholder. But the State is still the sole owner, as it was before the transformation.” However, the good sign is that, according to the SCIC report, most SOEs it has taken over are small-size, with over 85 per cent having average registered capital of less than VND10 billion ($520,000). SCIC plans to take over some 400-500 SOEs during the equitisation process between now and 2015 with a total book value of VND80-90 trillion ($4.2-4.7 billion) in the first phase. The second phase will start from 2015 through to 2020, with the remaining large State corporations. “Over time, as Vietnam partially and wholly equitises its enterprises, and as foreign investors come and go from the share registers of Vietnamese companies, maintaining a distinction between State and private capital in a business is less important,” said Mr Cleine from KPMG Vietnam.

Undoubtedly, the SOE transformation and its part in the equitisation process benefits all. While the State could retrieve capital then invest in public infrastructure, equitised enterprises grow faster and more effectively and investors can maximise their investments. According to the SCIC report, as at the end of 2009 capital growth of the 911 SOEs it has taken over increased 36 per cent, with State capital rising 26 per cent compared with previously. In terms of efficiency, their revenue is up 44 per cent, and net profits increased 105 per cent. This encourages foreign investors a great deal. “One of the key areas for VinaCapital to invest in is the equitisation of SOEs,” said Mr Ho. “We believe this process, if done appropriately, can bring tremendous upside potential and value to investors in Vietnam and abroad.”

But analysts recommend the LoE be clarified. According to Mr Cleine, the law contains a range of corporate governance measures designed to protect various stakeholders in a company, and this includes the State, whether it is a full or only partial investor. “The real test in relation to corporate governance, however, comes in how individuals and individual entities apply the rules,” he said. “It is important that State agencies responsible for regulating enterprises understand good principles of corporate governance and apply them evenly to both the State and private sectors. A robust corporate sector is vital to Vietnam’s economic prosperity.”

From a broader view on SOE equitisation, Mr Cleine said that one of the many challenges to the equitisation process is the legal regime under which the affected entities are incorporated. This, he explained, affects the corporate governance of the entity, financial transparency, application of the tax and accounting regime, and so on. “By clarifying and standardising the corporate law regime applicable to SOEs being equitised, investors have more faith and knowledge on what they are buying,” he said. “This will ultimately support the equitisation process, obviously in conjunction with addressing other challenges such as valuation and governance.” 

Mr Lanyi from Mekong Capital said that in recent years, when companies have been equitised, the shares were placed at the highest price possible. “However, in many cases it many be best for the long-term success of the companies, and the Vietnamese economy overall, if the equitisation process focused more on getting the best strategic investors who legitimately add value as investors in the equitised company rather than getting the shareholders who will pay the highest price,” he said. For Mr Andy Ho, the key to making SOEs more competitive, efficient and more profitable is to enable management to own shares in the business, so that their interest is aligned with the State.