State-owned enterprises in Vietnam and Indonesia
Vietnam
Basic information
State-owned enterprises (SOEs)have monopolistic or otherwise dominant positionsin almost all major economic sectors. [2010 competitiveness report]They contribute approximately 40% of Vietnam’s GDP and 55.4% of the state budget. [Vietnam SOEs Equitization Slows Down in 2010] In an annual ranking of the country’s top 500 firms (measured by something referred to as “turnover,” which I’m investigating further), SOEs made up 46% of all entries, and took most of the top spots.[State enterprise dominates top 500 Vietnamese companies]. Vietnam National Oil and Gas Group (Petro Vietnam), Vietnam National Petroleum Corporation (Petrolimex), and Electricity of Vietnam (EVN)occupied the top three spots. Comprehensive lists of state-owned enterprises are not published frequently, but I have obtained one compiled by the World Bank which the EIU has reported on.
While there is less specific information available about the political influence of SOEs and their managers, several articles and reports mention it. Petro Vietnam, with 2011 revenues expected to be close to a quarter of the country’s GDP, may be the most influential. Its chairman won a parliamentary seat in habitually-rigged June 2011 elections. The head of the country’s biggest partly-privatized bank also won a seat. [Party wins big in Vietnam, but with a few twists] Overall, more businesspeople were elected to the rubber-stamp congress than ever before, suggesting that commercial interests may play a greater role. At the same time, there was concern among some officials about this, and it remains to be seen how relations with SOEs will change, if at all.
More information
Analysts, academics, and commentators have leveled many charges against the state-owned sector. Complaints about efficiency, overuse of government resources, and weak job creation are among the most common [several articles]. A 2010 report by the Asia Competitiveness Institute raised these and related criticisms, such as that SOEs receive preferential treatment from the central government in numerous forms, including:
- Access to subsidized credit
- Access to land
- Exclusively obtaining government contracts through preferential bidding or insider connections
- Exemption from prudential governance and financial management regulations
- SOEs taking a lion’s share ofinvestment but creating only modest revenues and employment (for comparison, private firms generated more revenue and more jobs while having much less capital than the state-owned sector).
[I have more information from the report about these issues.]
There are several other complaints. These cover SOE debt (which totaled to 40% of GDP in 2007), “too big to fail” mentalities among managers, and the costs that such large, anti-competitive players impose on more efficient market participants in terms of acquiring resources. [2010 competitiveness report]
[The following information comes from the same competitiveness report.]
While the government has talked about “equitization” (partial privatization), progress has been extremely slow and only smaller SOEs have tended to undergo this process. Larger SOEs are instead consolidated into “conglomerates” and put under the central government’s direct control. The government seems more interested in maintaining control than in spurring true efficiency gains and greater transparency.
One key reform would be separating the ownership and oversight functions played by the government. The current situation creates “serious conflicts of interest” as SOEs leverage connections with regulators which provide significant advantages for them relative to their rivals from other economic segments.
[Note that the report touches on several other important topics, such as comparisons between the state and private sector in terms of industrial production, breakdowns of state-sector investment, and the relationship between state-owned banks and SOEs. I could touch upon all of these in the final write-up.]
Other recent developments which I am exploring and representative excerpts from my research findings
SOE “diversification”
In recent years, SOEs have expanded their activities into finance by creating numerous offshoots in banking, securities and insurance. These are used to finance subsidiaries, many of them taking the form of partially privately-owned joint stock companies but controlled by the state-owned mother firm. [Vietnam, From Transitional State to Asian Tiger]
More on government relations
... the government of Vietnam does not want to let go of its role in the economy. In its 2001–2010 strategy for socio-economic development, Vietnam still charges the state sector with the leading role in the process of economic modernisation and industrialisation (although the private domestic and foreign-invested sectors are encouraged to expand). Up to this point, the state-owned enterprises have not been the source of growth in Vietnam’s process of economic transformation. In this regard, further and solid economic growth in Vietnam will also depend on how the government of Vietnam carries out the reform process of its state sector. [Vietnam, From Transitional State to Asian Tiger]
Other topics which I am exploring and have collected research on but which do not easily lend themselves to excerpts
Prospects for reform both before and after the announcement of the Strategy for Socio-economic Development for 2011-20. In short, there was speculation about reforms, but not as much seems to have come out of it.
The impact of the Vinashin episode, in which a large state-owned firm came to the brink of bankruptcy as a result of many of the criticisms listed above, as well as lax government oversight and manager overreach. This seems to have given some impetus to equitization efforts, although they slowed again amid weaker market conditions last year. The government was hesitant to sell ownership stakes in its firms amid a depressed market with lower prices.
Overall macroeconomic issues related to SOEs that foreign investors and firms should be cognizant of when expanding into Vietnam.