For more than 15 years, Vietnam’s state-owned enterprises (SOEs) have undergone a remarkable reform process that reflects the strong commitment made internationally by the country regarding integration into the global economy. But equitisation plans, an important part of the reform process, have slowed recently and raised major concerns about the overall process. Much of the concern centres around large SOEs, as they have been the slowest to reform.   

In theory, the purpose of equitisation is to call on non-state investment capital and this is why the government encourages domestic and foreign investors to become engaged in the process. Foreign investors are always been on the alert, waiting to seize the investment opportunities offered by the SOEs equitisation plans, because it’s one of the shortest ways for them to access markets and utilise available distribution networks, customers and human resources. 

Until now, though, most equitised enterprises have been of small and medium size and not sufficiently attractive to foreign investors. According to Ms Dinh Thi Quynh Van, a Partner in Tax and Legal Services at PricewaterhouseCoopers Vietnam (PwC Vietnam), this results in a situation where although the number of companies being equitised is large, the amount of capital involved is small. “In our view, equitisation should be aimed at large companies, including holding companies,” she said. “For example, instead of equitising five subsidiaries, it is better to equitise the holding company. It is more cost-effective and also more attractive to investors.” 

Technical challenges also hinder the speed of the equitisation process. According to Mr Adam McCarty, Chief Economist at Mekong Economics Ltd, an economic consulting company, technical challenges such as the lack of international accounting and auditing standards, weak annual corporate report regulations, and poor valuation services are slowing down the reform process. Investors can’t be confident when putting their money down unless transparency in terms of company valuation and information provision is ensured.

Past experience also shows that a broad belief exists that the entire economy could be controlled and regulated by foreign investors if they acquire key business sectors during equitisation. It is partly for this reason that opportunities for foreign participation in certain industries are not fully clear, even if there are stronger rights for foreign equity partners in the equitisation process. As Ms Van explains, due to restrictions on foreign participation in equitised SOEs, particularly in sensitive sectors such as banking and insurance, shareholder rights for foreign strategic investors are limited. “This is not because foreign investors do not have the same rights as domestic investors, but because their participation is restricted,” she said. “In other words, foreign investors are only minority investors and thus have little say in the decision making process.”

Meanwhile, Mr McCarty is of the opinion that equitisation is a solution for corporate restructuring because the country could bring in internationally competitive companies as strategic partners. But he also recommended giving the foreign partners, especially minority ones, a stronger voice in managerial control. “The government should reconsider the policy allowing joint venture partners with minority shares of at least 10 per cent to be on the board,” he said.

Pressure from time limits could, to some extent, result in stronger action. When authorities first approved the idea of transforming SOEs into one-member limited liability companies, in 2006, not much was seen from either the authorities or the SOEs as they were fairly unhurried. But as the State Enterprise Law expired on July 1, all SOEs not yet equitised or were transformed. Notably, PetroVietnam was the first among large State-owned groups announcing its change into the form, in June, and it was followed by the Vietnam Post and Telecommunications Group (VNPT), the Army Telecommunications Group (Viettel), and others.

Given the current situation, a question to be asked is whether these companies will be truly stronger after the conversion. Ms Van believes that the key issue is not with the legal structure of the company, but how the company is run or managed after the conversion. “Many people expect that SOEs will operate more effectively after the conversion into a one-member limited liability company,” she said. “But this will not be the case if the companies continue to operate in the same way.” On a similar note, Mr McCarty said that “being stronger is about efficiency and productivity and if changes improve that then they are stronger. Mostly that comes from competitive pressures that force change and reform. Increasing competition is the key, not changing the name as such.” 

Overall, analysts believe that in spite of the remaining barriers, the process still holds opportunities for both domestic and foreign companies, especially when State giants are up for equitisation. The story of the sluggish equitisation plans of local telecom companies is an example of how long term foreign investors still continue to concentrate on State telecom giants, despite any impatience. “While many foreign investors constantly complain about the slow pace of equitisation at Vietnam’s telecom enterprises, we understand and will persist in our style of being patient and cooperative,” said Mr Patrick Choy, Senior Vice President of Singapore Technologies Telemedia, a foreign telecom company that recently secured 15 per cent stake in VNPT Global.

Although changes have been made, the question of when the equitisation process will be completed cannot be answered just now. According to Dr Tran Tien Cuong, Director of the Department for Enterprise Reform and Development at the Central Institute for Economic Management (CIEM), equitisation shouldn’t be rushed because haste could possible hurt reform efforts. “The equitisation of large State corporations often meets difficulties due to their cumbersome structure,” he said. “So if the country rushes ahead it could not only miss out on the benefits but also face concerns about loss of State property.”

The transformation of SOEs into one-member limited liability companies is only considered a transitional step towards full transformation into joint stock companies. It’s true that more time is needed to examine its effectiveness, but Dr Cuong described the move as just a technical step and there will be not much difference in term of opportunities for investors. Of a similar mind, Ms Van from PwC Vietnam does not see any difference between the equitisation of an SOE versus the equitisation of a one-member limited liability company. “We do not think that opportunities for foreign participation in the equitisation process before or after the conversion will be better or worse,” she said.