Vietnam Grapples with Fraud Risk in State Firm Clean-Up

Vietnam is seeking to deter fraud as it considers a plan that allows state-owned enterprises to sell stakes below book value, part of efforts to accelerate a cleanup of the sector and regain investor confidence.

“Selling stakes below book value is necessary to quicken the restructuring process of state companies,” Nguyen Duc Kien, deputy head of the National Assembly’s Economic Committee, said in an interview yesterday. “However, it needs to be conducted cautiously to avoid loopholes for fraud and losing state money. We can start with stake sales of non-core businesses of SOEs.”

Prime Minister Nguyen Tan Dung plans to complete a revamp of Vietnam’s state-owned enterprises by 2015 to spur growth as the economy is set to expand below 7 percent for a seventh straight year in 2014. The state companies use up about 50 percent of public investment, tie up 60 percent of bank lending and account for more than half the nation’s bad debt, Deputy Finance Minister Truong Chi Trung has said.

Vietnam’s finance ministry is working on regulations to allow state companies to sell stakes below book value and will submit a proposal to Dung early in 2014, Deputy Finance Minister Vu Thi Mai said on Dec. 3. It plans to include provisions to enable SOEs to sell more of their holdings in non-core businesses, according to Mai.

The benchmark VN Index rose 0.9 percent as of 11:29 a.m. local time. It climbed about 22 percent last year, the biggest advance among major Southeast Asian indexes. A similar gain is expected this year as rising exports, strong foreign investment flows and reforms encourage investors, according to a report this week from Viet Capital Securities.

‘Ineffective’ Investments

Holdings of non-core assets including property and stocks, accounted for up to 12 percent of the registered capital of state firms, Deputy State Auditor Le Minh Khai said in July 2012. The government hasn’t released any details since then.

Vietnam Electricity, a state-owned utility, had invested 121.7 trillion dong ($5.8 billion) in non-core businesses by end-2011, surpassing its 77 trillion dong of registered capital, the state inspectorate said in a report yesterday. The company recorded losses of 2.2 trillion dong tied to such “ineffective investments,” Vietnam News reported Oct. 10, citing a state inspectorate report.

The government had earlier said it plans tougher rules to accelerate the restructuring of SOEs. These would include “strong and suitable” measures such as firing chief executives who delay stake sales, Dang Quyet Tien, deputy general director of the finance ministry’s corporate finance department, said in a July interview.

Crony Investors

The proposal to allow the sale of holdings below book value may trigger fraudulent transactions unless the government draws up strict guidelines, said Le Dang Doanh, an economist who has advised two prime ministers, including Dung.

“Companies may take advantage of this to sell stakes at cheap prices to their crony investors,” Doanh said. “In order to prevent corruption, transparency is crucial throughout the stake-sale process. The government needs to hire independent advisory companies to cross-check the process, from evaluating and pricing the stakes to holding auctions.”

Vietnam plans to reduce the number of state-owned companies to 600 in 2015 and 300 in 2020 from about 1,200 now, Deputy Prime Minister Hoang Trung Hai said last month. The state inspectorate uncovered 80 fraud cases involving public funds last year, according to an official report in November.

The People’s Court of Hanoi in December sentenced Duong Chi Dung, former chairman of Vietnam National Shipping Lines, or Vinalines, as the state-owned company is known, and Mai Van Phuc, its former general director, to death for embezzlement.

Governance Issues

“Corruption and conflict of interest issues are embedded in the fabric of the state sector,” Steven Winkelman, chairman of the American Chamber of Commerce, said Dec. 3. “Without addressing fundamental governance issues, progress will remain challenging,” he said, adding that investors need to see more evidence of the government’s willingness to reform SOEs.

Vietnam this week issued a decree allowing overseas investors to take bigger stakes in the nation’s lenders in a bid to bolster the ailing banking system. Separately, Dung is also considering raising foreign ownership caps at listed companies.

“We will push ahead with the privatization process, particularly stake sales in non-core businesses in 2014-2015,” Trade and Industry Minister Vu Huy Hoang said in Hanoi today.

Vietnam forecasts economic growth of 5.8 percent this year, quickening from a 5.42 percent pace in 2013. Exports may rise to $145.4 billion this year from $132.2 billion last year, the trade ministry said today.

“We wouldn’t want to miss a chance now to draw foreign investment to Vietnam, with investors seeking alternatives to countries such as China, Thailand,” Kien said.

— With assistance by Nguyen Dieu Tu Uyen

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