Privatization of State-Owned Enterprises in Vietnam: Opportunities and Challenges
It has been a difficult month for the management of Vietnam Southern Food Corporation, also known as Vinafood 2. Earlier in July, Vietnam’s Ministry of Agriculture and Rural Development completed an inspection of Vinafood 2’s operations and identified various malpractices and violations in the management and sale of assets. Moreover, also in July, the company failed for a second time to complete its Initial Public Offering (IPO). The IPO deadline has since been extended and Vinafood 2 has three additional months in which to go public.
Vinafood 2 is among 137 state-owned enterprises (SOEs) that the Vietnamese government wants to privatise between 2017 and 2020. The SOEs will undertake IPOs, with the government divesting a portion of its stake in each to the public. However, the privatisations have not progressed well so far. Vinafood 2, Vietnam National Textile and Garment Group (Vinatex), Vietnam Electricity (EVN) and Vietnam National Coal and Mineral Industries Group (TKV) are among the large SOEs that have been forced to delay their IPOs.
The privatisation of SOEs, if undertaken with careful forethought and planning, must be viewed as a positive development that can mutually benefit both the private and public sectors. Privatised SOEs provide opportunities for investors. In Vietnam, the rapidly expanding middle class is creating fantastic growth opportunities for firms, including SOEs, in sectors such as food and beverages, construction and telecommunications. Furthermore, the capital and management experience brought to the table by shareholders can help further drive growth within privatised SOEs. In fact, some privatised SOEs, such as Vietnam Dairy Products (Vinamilk) and Phu Nhuan Jewelry (PNJ), have displayed sustained growth following their IPOs. Financial institutions such as VinaCapital and TCC Asset Ltd have acquired stakes in healthy privatised SOEs, and are eyeing the next wave of such companies looking to undertake IPOs. For the government of Vietnam, the privatisation of SOEs reduces the distraction of managing such large companies, while selling stakes also helps make up the current budget deficit.
However, not all SOEs make attractive investments. Inefficient management is a key cause of poor performance in many SOEs. For example, TKV in recent years invested in a number of projects that have since proven either unprofitable or have run significantly behind schedule. In 2015, TKV’s total debt reached VND100,000bn (US$4.4bn), while its subsidiaries accumulated a total loss of VND1,407bn (US$61.9m).
A lack of transparency is also a key concern. Although the government’s Decree №81/2015/NĐ-CP required some 620 SOEs to publicise information, including financial and corporate governance data, at least 380 had failed to fully comply as of 31 December 2016, according to the Ministry of Planning and Investment. This lack of clarity creates uncertainty over the true performance and fair value of SOEs. In March 2017, VinaCapital said that it had decided not to invest in two SOEs, Habeco and Sabeco, because its assessment had shown that the companies were not growing at a justifiable rate. Another source of concern is suspicious and non-transparent activities undertaken by SOEs. In the case of Vinafood 2, the malpractices and violations uncovered by the Ministry of Agriculture and Rural Development pose legal risks for any investors in the firm.
Conflicts of interest may be another reason for the slow pace of privatisation of Vietnamese SOEs. Incumbent executives may fear losing their positions of power within the firms after privatisation, when financial institutions invest and take a more active role in management. Therefore, there has been speculation that privatisation could in some cases have been deliberately delayed by the incumbent executives of the SOEs. As such, Nguyen Hoang Hai, vice-chairman of the Vietnam Association of Financial Investors, has recommended that incumbent executives within SOEs be excluded from the IPO process to avoid conflicts of interest.
Investors are also concerned about ownership and corporate governance of the SOEs following privatisation. For example, it may prove impossible for investors to become dominant shareholders if the government decides that it still wants to hold a considerable stake in a company post-privatisation. For example, in the cases of Vinafood 2 and TKV, the government aims to retain 51% and 65% ownership respectively. In Vinamilk, the government remained the largest shareholder, with a 39.33% stake, as of July 2017. With small ownership percentages limiting voting power, it will be difficult for investors to influence strategy and decision-making within privatised SOEs to the extent they desire, making the firms less attractive overall. As a case in point, Vietnam Airlines’ IPO in 2014 failed to attract foreign investors because it offered up just 3.5% of the firm, while the government retained a 84% stake.
The privatisation of Vietnam’s SOEs will be a long and challenging process. Efforts to eliminate possible conflicts of interest and inefficiency within SOEs will take time, effort and determination. Meanwhile, financial and other business information must be publicised as an essential step toward improving transparency. Most importantly, the government must consider reducing its ownership in privatised SOEs to ensure that they are truly private and can attract the right investors.
The Datarama platform monitors and analyses the growth and performance of state-owned enterprises in Emerging Asia. Contact us at info@datarama.com to find out how we can help you capitalise on investment opportunities in the region.
Written by Datarama Analyst Hieu.
