Vietnam Tries to Tame Its Corporate Offspring: Southeast Asia

Vietnam’s state coal miner may make it onto a list of the world’s top mining companies by just one measure: its workforce. With almost 140,000 staff, it has more than BHP Billiton Ltd. and Rio Tinto Plc combined.

Vietnam National Coal Mineral Industries, known as Vinacomin, had about $4 billion in sales last year, compared with a combined $123 billion for BHP and Rio Tinto, the world’s biggest mining companies. The difference in productivity shows the challenge facing Vietnam’s ruling Communist Party as it pledges to overhaul state enterprises.

The government says it will prepare a roadmap by June for the restructuring of its biggest companies to help revive an economy that grew at the slowest pace in 13 years in 2012. While the changes proposed include altering the constitution to lessen the role of the state enterprises, their size and influence have stymied previous efforts to make them more market-driven.

“It’s difficult to impose meaningful reforms,” said Jonathan Pincus, an economist with the Harvard Kennedy School’s Vietnam Program in Ho Chi Minh City. “They have resources, they have influence on the party, on local government.”

While the ruling Communist Party has missed a series of its own deadlines in the past, the stakes are higher this time. Entry into the World Trade Organization in 2007, as well as negotiations to join the Trans-Pacific Partnership, are forcing the country to open up to competition, while the 89 million population has come to expect rising living standards after two decades of growth averaging more than 7 percent.

Master Plan

Prime Minister Nguyen Tan Dung last month approved a master plan to restructure the economy and speed up share sales of state-owned companies by the end of 2020. The central bank said today the government will set up a committee to overhaul the banking system by 2015, and introduce new measures to monitor troubled lenders.

Deputy Finance Minister Truong Chi Trung said on Feb. 1 that the government plans to sell all state firms’ non-core units by the end of 2015, while retaining majority stakes in most of them.

“They’ve talked about this repeatedly,” said Marc Faber, publisher of the Gloom, Boom & Doom report. “They are serious, but implementation is another story.”

Plans to find ways to improve the efficiency of the state sector date back to the 1990s. In January 2011 the prime minister’s Government Office promised to speed up share sales in the enterprises. At the start of 2012, Dung urged faster restructuring.

No Sale

A year ago, the State Securities Commission said the government would accelerate share sales in state-owned enterprises, especially bigger ones. The same day, Vietnam National Textile & Garment Corp. said it would hold an initial public offering six months later.

Vinatex hasn’t held an IPO yet, nor has Vietnam Mobile Telecom Services Co., which said in 2007 it planned to do so.

“The reason deadlines keep getting missed is because of the enormity of the challenge,” said Dominic Scriven, the Ho Chi Minh City-based chief executive of fund manager Dragon Capital. “Carrying through with this will challenge the status quo.”

To weaken the power of the government companies, the Communist Party has proposed amending the constitution to remove language that stipulates the state sector will “assume the leading role” in the economy.

“That would be a positive step,” said Raymond Burghardt, a former U.S. ambassador to Vietnam. “But I still don’t see the people who truly understand reform as being in control.”

Price Controls

A draft decree seeks to improve transparency by requiring state companies to make more information public, such as project lists, bank loans, employee wages and total debts. Chief executives could also be fired if their company loses money two years in a row.

Still, allowing fair competition would threaten the revenue streams of state enterprises and reduce the government’s ability to control inflation by capping prices of goods such as coal.

The government’s “Master Plan on Economic Restructuring in 2013-2020” lacks details about implementation, HSBC Holdings Plc said in a note this month. “Concrete actions to improve the efficiency and accountability of the state sector are missing,” the report said.

“Vietnam’s lost a lot of goodwill and confidence in the market because people don’t think they’re serious about taking action on state-owned enterprises,” said Deepak Mishra, the Hanoi-based lead economist for the World Bank.

Stock Slump

After reaching a record 1,170.67 in March 2007, the Ho Chi Minh City Stock Exchange’s VN Index tumbled by 80 percent over the next two years, and as of March 14 was down 59 percent since its peak. The Vietnamese dong has lost 0.5 percent against the U.S. dollar over the last year, compared with a 5.3 percent appreciation by the Philippine peso and a 3.9 percent gain by the Thai baht.

Coal miner Vinacomin illustrates the government’s difficulties. Standard & Poor’s cut the company’s credit rating in November, partly because “loss-making” sales to state-owned Vietnam Electricity may grow to 40 percent by 2014, from 25 percent in 2011. Vinacomin sells coal domestically at below-market prices according to S&P.

Vietnam Electricity, or EVN, fired its chairman last year after losing as much as 13.3 trillion dong ($635 million) in two years. The company is building a 33-story, twin-tower headquarters of glass and steel next to the centuries-old traditional houses of Hanoi’s old quarter.

Executive Arrests

The problems facing state companies came to the forefront in 2010, when Vietnam Shipbuilding Industry Corp. defaulted on a $600 million loan. In 2012, eight former executives of the company were sentenced to prison for economic mismanagement, including the company’s ex-chairman.

The proposed overhaul may also lead to large-scale job losses. The government expects “the private sector is going to pick up the surplus,” said Paul Nguyen, chief executive officer of, an online career website. Investment by foreign manufacturers, especially from Japan, will help absorb some of the workers, he said.

They include Japan’s Brother Industries Ltd., which plans to open a sewing machine plant next year that will employ about 400 workers, and Shiseido Co., which expects to more than double its local workforce to about 860 by 2016, after shifting some production from Japan.

Dairy Sale

The party has had some success in restructuring state enterprises. Vietnam Dairy Products Joint-Stock Co., known as Vinamilk and founded in 1976, began selling shares to investors in 2003 and is now the second-biggest company on the main bourse. The government still holds a 45 percent stake.

“Where the government sells down its stake and the right corporate alignment and incentives are put in place, privatized companies can be successful,” said Scriven, whose funds hold shares in Vinamilk.

Power Engineering Joint-Stock Co., a former unit of Vietnam Electricity, sold shares in 2005, when it had 74 billion dong in annual sales. Last year, revenue rose to about 400 billion dong, said Chairman Le Minh Hai.

“Our company’s operations became a lot more efficient,” Hai said. “Our employees are much more motivated to work now.”

Vietnam Airlines Corp., the national carrier, appointed advisers for an IPO to sell between 20 percent and 30 percent, the Vietnam Investment Review reported in January.

No Control

“The way they’ve done it in the past has been to equitize, not privatize, which typically means selling 10 or 20 percent with no ability for the new investors to exercise control, and with the previous management staying in place,” said Louis Taylor, Vietnam chief executive for Standard Chartered Plc.

Full privatization “would require relinquishing of state control over many industries, and I’m not sure that’s on many people’s agenda,” Taylor said.

Often, the shares are sold to local authorities, government ministries, or other state companies, said Pincus.

“What was once an ideologically motivated decision to retain industrial and commercial power in the state sector has been cemented in place by interests that profit from the absence of both market competition and administrative discipline,” he said.

The kinds of changes required, such as introducing more competition, creating independent regulatory agencies and enforcing corporate governance codes mandating independent directors, would challenge the concentration of economic power in the hands of a loyal political elite, according to Pincus.

“You have to watch out that what you think might be some kind of reform of the state-owned enterprises doesn’t actually become a new form of crony capitalism,” said Burghardt, the former U.S. ambassador.

— With assistance by Jason Folkmanis

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