In a state over Viet government businesses

David Koh, For The Straits Times

VINASHIN, a Vietnamese state-owned conglomerate, has been ordered to restructure. The July 1 order allows it to retain its shipping business but obliges it to divest some of its non-core and money-losing activities.

The restructuring is designed to transfer business activities - and debts - worth more than US $1 billion (S $1.37 billion) to other state companies such as Petrol Vietnam and Vinalines, a shipping company.

Vinashin's financial problems, which include debts totalling US $4.2 billion compared to total assets of about US $4.7 billion, have shocked policymakers.

Originally a shipbuilding company, Vinashin took advantage of its easy access to state funds over the last four years to become a multi-sector conglomerate. The government even issued bonds (to the value of US $750 million) and gave Vinashin large plots of land in many provinces to finance the company's expansion plans. But Vinashin's core business was severely affected when the global financial crisis set in. More than 160 contracts were cancelled at a loss of US $5 billion to US $6 billion.

Although Vinashin is unlikely to go bankrupt, the case does hold important lessons. Indeed, the timing of the Vinashin restructuring could prove to be a game changer. Vinashin is just one of a long series of state-owned enterprises that have got into trouble.

But the official draft of the revised Communist Party policy platform, the Manifesto, still proclaims state enterprises as the leading economic sector. Clearly, the Communist Party has to reconcile reality with its doctrinal proclamation.

In the last 20 years, the government has reduced the footprint of the state enterprises by a process called equitisation, shedding state ownership by selling shares to employees of the enterprises. The 3,400 enterprises that have been equitised actually took up only 19 per cent of all assets of state enterprises. Around 1,500 state enterprises remain and they control the other 81 per cent.

In the late 1990s, the government decided that some of these companies should be upscaled or combined, with additional funds from the government, to become conglomerates. The idea was to create home-grown global companies and avoid the domination of the economy by multinational corporations.

Unfortunately, these state conglomerates have not been successful. Some failed even in their basic mission, such as providing adequate electricity.

Critics of the 'leading economic sector' thesis are calling for changes to the Manifesto before it becomes Communist Party policy. Once passed, it is expected to remain unchanged for the next 10 or 20 years. The current Manifesto was adopted in 1991.

Critics range from those who believe the state should stay out of business, to those who believe that state ownership of business is not inherently bad, just poorly managed.

Yet party theoreticians are tied to the argument that if the leading state ideology is socialism, then state ownership must be substantial, and the state must have a leading role in production.

Being part of the 'leading economic sector' means that state enterprises will receive the greatest amount of help. Loans will continue to come from the government and government-linked institutions, and the private sector, both national and foreign, will continue to regard state enterprises as impossible to fail.

Yet state companies have consistently performed poorly in comparison to both the local and foreign private sectors.

Easy access to funding has encouraged both negligence and poor corporate governance among state enterprises.

In the case of Vinashin, the government noted that managers hid important transactions from it, including the purchase of old ships, as well as investments in areas not core to the company's business. Experts note that the efficiency of invested capital in Vietnam is half that of other countries in South-east Asia.

The government has also admitted that it lacked proper oversight. That certainly should make potential investors sit up and take notice. To what extent is false reporting common in the state sector? Is Vinashin the only offender?

Government officials have indicated that a continuing review of the conglomerates is likely, perhaps starting with Electricity Viet Nam (EVN).

In June, EVN came under heavy fire after Hanoi suffered daily and long power shortages, even though it received huge amounts of state money to address these shortages.

To avoid future mistakes, two things need to be done.

The first is to redefine socialism in a way that allows the market to determine the distribution of resources in productive activities. Is this likely to happen?

It is now six months to the party congress, and an abrupt turn is unlikely. What could happen is a minor change of wording in the Manifesto, so that state enterprises are not 'the leading economic sector' but simply 'one of the leading economic sectors'. The government could then reshape its strategy and oversight functions to prevent more collapses of these enterprises.

The second is to improve accountability in the state sector. The government should also insist that state conglomerates focus their energies on their core businesses, rather than go for quick and unsustainable growth in order to present rosy statistics in their reports.

The author is a senior fellow at the Institute of Southeast Asian Studies.