Overview of Equitization of State-Owned Enterprises ("SOEs")
For years, the Vietnamese Government has looked for ways to reduce its direct ownership in key state companies and so to broaden private ownership. For many reasons, equitization and divestment have not yet occurred on schedule or as intended. Recently, slow progress in equitization and divestment of SOEs has been attributable to Covid 19--but Covid 19 is only a recent cause. More fundamental causes are overpricing of shares, reluctance of local management to act, and bureaucratic inertia. Schedules have been set, and deadlines missed. Most recently, many SOEs missed 2020 deadlines contained in Decision No. 26/2019/QD-TTg of Prime Minister and deadlines have been reset to 2021.
According to the report of the Department of Corporate Finance's information, up to May 2021, the accumulated value of divested state capital is 286.6 billion VND. From that the State Budget is said to have realized 2,165 billion VND. Remarkable divestment could occur in the Rubber Group, Viettel Group, Vietnam Education Publishing House, Vietnam Posts and Telecommunications Group, some of which are Government icons.
In the first 5 months of this year, amounts collected from equitization and divestment was 228 billion VND. But the expected revenue to the State Budget in 2021 is 40,000 billion VND, all according to projections in Decision No. 1950/QD-TTg dated 28 November 2020 of the Prime Minister. To reach this goal, Vietnam must attract significant foreign investment to equitize SOEs.
Necessary measures to attract foreign investment on equitization of SOEs
Attracting adequate foreign investment is key to SOE equitization. The expectation is that SOEs can develop more efficiently if they take advantage of the experience, management, technology, and financial capacity of foreign investors. Foreign investors' participation in SOEs is expected help to improve business efficiency, modernize corporate governance methods, and the SOEs will gradually approach international governance standards. SOEs have opportunities to improve their reputation and expand operations scale. According to State Capital Investment and Trading Company, with the current participation of foreign investors in existing SOEs, the affected SOEs have gained certain success. Frequently cited examples are Vinamilk and Binh Minh Plastic Joint Stock Company. Even so, attracting foreign investors in the equitization plan in past years has not been totally successful. Only a small number of SOEs have sold shares to foreign strategic investors through the formal process of equitization.
A number of reasons why many foreign investors view the equitization of SOEs as unattractive.
- A crucial reason for the marginal success to date is a lack of public and transparent information as it relates to the SOEs which are the target. Management of targeted SOEs don't always fully support equitization. Although regulations on disclosure and transparency of SOEs which intend to equitize are relatively adequate, the reality is that lack of transparency remains a major hurdle. Many SOEs' fail to comply with legal requirements and so transparency and information disclosure is thought to be limited. On the other hand, foreign investors will consider to invest and have invested in SOEs that disclose both financial and non-financial information in a transparent manner.
- Another is the valuation of SOEs which creates obstacles to strategic foreign investors. The equitization process normally takes a long time as authorities must deal with financial information, land use rights, labor issues, etc. Most of the delay comes from problems with valuation of the SOE's assets, especially the value of land use rights and intangible assets. Assets including land, are frequently valuated quite differently from a government standpoint and from a commercial standpoint. To attempt to settle obstacles involving land, recently the Ministry of Natural Resource and Environment issued Circular 03/2021/TT-BTNMT date May 12, 2021 which deals with the special issues which concern land use rights and the like when equitization is involved.
- Limits on the ownership ratio of foreign investors as well as the ownership ratio of the State in the SOE post-equitization is a main area of disagreement. Even after equitization, the State's ownership ratio remains high. As a result, the equitization may not have created a diverse ownership. It is unattractive for foreign investors to hold a minority stake in a company and feel they are unable to exert necessary control or even have an impact. They prefer to own a majority share in their investments and to be able to exert larger control.
- Many SOE candidates, before equitization are enterprises which are coping with difficulties, eg, losses, ineffective management, weak market position, etc. This is not normally attractive to strategic foreign investors. Foreign investors expect to enter into Vietnam's market by way of investing in enterprises which have a stable business. Even to the extent that investors are willing to invest in an SOE in difficulty, they expect to be able to have the necessary control to be able to make necessary decisions.
Several measures to attract foreign investment to equitize SOEs
- Improving transparency and disclosure by SOEs and agreement on an acceptable form of valuation are of critical importance for SOEs to achieve equitization. Toward this end, SOEs should be subject to the same high-quality accounting and auditing standards as are listed companies. Large SOEs should use internationally recognized standards and their accounts should be audited by independent external auditors.
- The Government continues to improve the legal and regulatory framework for SOE equitization, divestment and restructuring. Although the Government has promulgated regulations for equitization, the inadequacy of some provisions remains. It is necessary to have guidelines in order to settle obstacles which arise during negotiations. Using methodology used to settle on a price for an initial public offering of SOEs is one avenue. Often this is pure market judgement and not the result of an application of fixed rules. Sometimes rules based on an auction mechanism will work well.
- The Government must hasten to encourage foreign investors to participate in equitization of SOEs. Preferential but selective policies for foreign investors could work. For instance increasing the limits on foreign ownership or application of tax preferences. In a sign of positive movement, the Committee for Management of State Capital at Enterprises has been assigned the task to create a scheme to encourage foreign investment in the purchase of shares in SOEs. This was done under Resolution No. 58-NQ-CP dated April 27, 2020.
- Before equitization, the Government should work with SOEs to handle special or unusual difficulties, to remedy methods to reduce loss, to improve management capacity, and to provide a mechanism where even a minority owner has realistic levels of input.
- In those enterprises where there is no point for the state to hold capital, the Government can accelerate the process to divest completely from such businesses or to close the business. Of course, this is not a new idea, and the Government has followed such a course in many instances.
- The Government holds meetings, conducts workshops, and talks with SOEs and investors to find ways to support them to overcome obstacles from the equitization process. This is an opportunity for the Government to receive feedback and understand the approach of foreign investors. This gives the Government a basis to make appropriate changes, amendments to policies designed to accelerate equitization.
SOE equitization has brought positive changes. But as practiced, there are limitations, especially when the target investor is a foreign company. But SOE equitization is a prolonged process with many obstacles. The Government will need to continue to examine its approach, take more market-friendly measures to ensure that the SOE equitization objective can be achieved and, when foreign investment is the objective, find ways to interest foreign investors to participate in SOE equitization.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.