The long awaited decree on transforming State-owned enterprises (SOEs) with 100 per cent State capital into joint stock companies has finally been released. The introduction of Decree No 59, which is an updated version of Decree 109, is considered a fresh start that will give the SOE equitisation process the boost it needs after two years of being at a virtual standstill.

SOE equitisation has been pursued as part of economic reform in Vietnam for many years. But as the process is not quite where it should be, the State still owns significant chunks of the country’s industry.

According to Mr Trinh Can, Managing Director of HSC, the push towards equitisation ran out of steam. “The SOE reform process has slowed down since the end of 2007, after the Initial Public Offering (IPO) of Vietcombank,” he said. “In 2008 there was only one major SOE equitisation, with Vietinbank. There has been nothing significant until recently, when we had the IPOs of PV Gas and Vietnam Steel.”

The drive to equitise SOEs has been influenced by the fact that SOEs have failed to operate efficiently. “Large resource-using SOEs have not performed well, causing instability in the economy such as high inflation, an inefficient banking sector, and low competitiveness,” said Mr Bui Huy Tuan, Credit Manager at the Central Credit Fund (CCF). “In short, Vietnam should review its SOE model.”

Making things even more difficult is that many large SOEs are thirsty for huge volumes of capital. Electricity of Vietnam (EVN), for example, is reported to be in debt to the tune of $400 million to the PetroVietnam Group, not to mention that it has also been urged to repay $80 million to the National Coal and Mineral Industries Group (Vinacomin).

When asked to comment on the EVN case, Mr Tuan said that the country should investigate the reasons enterprises have run into debt. “Keeping hold of loss-making enterprises could have a domino effect and have serious consequences for the economy,” he said. 

For Mr John Ditty, Chairman of KPMG in Vietnam and Cambodia, the problem with large SOEs is not a lack of capital but how they use it. “With proper management, capital can be better used that can bring more benefits both to the SOEs and society,” he said.

As for the positive signs, Mr Ditty believes that foreign investors welcome the continued efforts of the government to streamline corporate governance at SOEs, bringing more clarity into the responsibility of management and supervisory bodies. “Equitisation of a number of State owned commercial banks, such as Vietcombank and Vietinbank, has brought new and positive development to the banks,” he said. “We believe that with more SOEs being equitised, the efficiency of their operations can be improved.”

Restructuring inefficient SOEs into better performing ones and making State capital work effectively can be seen as the main drivers of the SOE equitisation process. Mr Tuan suggests the State treat SOEs, private enterprises and other enterprises equally. All enterprises have responsibilities under the Law on Enterprises (LoE). “In order to put the LoE into practice, preferential treatment should not be given to SOEs,” he said. “Regarding debt, we should bankrupt enterprises deeply in debt or insolvent.” 

The release of Decree 59, which contains more flexible regulations on selling stocks in SOEs to strategic investors, could provide more opportunities for investors, especially foreign investors that have had to wait quite a long time to be part of SOEs.

As the SOE equitisation process has been slower than expected, authorities find it appropriate for key aspects of the new decree to focus on regulations for selling stakes to strategic investors, one of the main hurdles in the equitisation process. 

For his part, Mr Can believes that Decree 109 was too rigid on the valuation and price offered to strategic investors and is no longer suitable to current market conditions. Moreover, under Decree 109 strategic investors could buy shares at a price no lower than the average IPO price.

This rule hampered the efforts of some enterprises to equitise because their average IPO price was too high. “Since finding good strategic investors plays an important role in the success of an SOE equitisation, we should give flexibility in allowing direct negotiations between the SOE’s management and potential strategic investors prior to the IPO’s auction, with final approval from the government, rather than wait for the public auction to determine the price for strategic investors,” he said. 

Thankfully, the new decree states that if direct negotiations or an auction is held among strategic investors when the IPO is yet to take place, the selling price to strategic investors will be negotiable among the relevant parties and must not be set lower than the initial starting prices approved by the government.

In order to avoid further delays and put more flagship enterprises into equitisation, it appears necessary to have specific regulations for large-scale SOEs. The new decree, to some extent, meets this requirement as it has specific regulations for SOEs with State capital of VND500 billion ($24 million) or more, operating in certain specific sectors such as insurance and banking and the parent companies of State economic groups.

“If these enterprises choose strategic investors before IPOs, authorities must approve the equitisation plans and report to the Prime Minister to select strategic investors, the selling method and the size of the stakes to be sold,” the decree states. Moreover, each equitised enterprises can only have three strategic investors at a maximum and the timeframe for such investors to hold their stake will be five years instead of the three years regulated in Decree 109. 

Time is needed to fully evaluate the efficiency of the new decree but analysts, generally, believe that it will speed up the process and create a balanced playing field for investors. “The market is anticipating the new version to be more open, especially on allowing equitised SOEs to negotiate with strategic investors prior to public auction and adjusting the valuation methodology,” said Mr Can. With the introduction of the new decree, Mr Can expects that SOE equitisation activities will go up a notch over the next 12 months.

The concern of many foreign investors still lies in the fact that they have too little influence on the management of the equitised enterprise. As a consultant, Mr Ditty believes that foreign investors are interested in buying into large SOEs if they see an opportunity to participate in the management and turn their expertise and industry knowledge into value both for the companies and themselves as the investor. “What they need is a clear structure that ensures that they will have a say in the daily life of the companies and will not just take a seat on the Board without any influence,” he said.

The new decree and its part in the equitisation process may well push SOE reform ahead. If this is the case, loss-making SOEs will go out of business over time and larger amounts of non-State capital can be pumped into the economy. These will coincide with Vietnam’s ambitious economic targets and benefit all.