Rail monopoly plans off track

Vietnam’s rail transport sector continues to be of interest to foreign investors,Photo: Le Toan

Ups and downs

Last week, a mission of the French Embassy in Vietnam led by deputy economic counsellor Laurent Chopiton held a meeting with state-owned giant Vietnam Railways (VNR) in a move to pave the way for future business and investment co-operation between VNR and French businesses. As planned, SNCF and other French firms will discuss the possibilities of partnership with VNR next week. Earlier, the likes of Siemens, Lotte Group, and Russian firms also professed to strong interest in Vietnam’s railway industry.

The recent growing interest among international businesses is attributed to the government’s due attention along with VNR’s changed mindset towards market conditions, especially its recently articulated intention to give up its monopoly in cargo transport.

“Certainly, surrendering any monopoly aspects will help attract foreign investment to the sector. Thus, any decisions to delay it will not be happy news to investors,” Thomas J. Treutler, managing director of the Vietnamese branch of Tilleke & Gibbins Consultants Ltd., told VIR.

However, in the latest update of the 2017-2020 restructuring and divestment plan sent to the Ministry of Transport (MoT) recently, VNR made a series of changes, with the most obvious being the delay in the merger of Hanoi Railway Transport JSC (HARACO) and Saigon Railway Transport JSC (SARATRANS).

Accordingly, VNR proposed that the MoT seek the government’s permission for it to maintain the existing operation model of HARACO and SARATRANS. After 2020, based on the business performance of the two units in the 2016-2020 period, the giant will create a plan to restructure their operations towards divesting the entire state stake in the railway cargo transport.

Echoing Treutler’s view, Vaibhav Saxena, consultant at Vietnam International Law Firm, said that the delay in surrendering monopoly in railway cargo transport may affect immediate interest among foreign investors, but foreign investors who are willing to take this risk will have a bright business prospect with a state participated project. “In the future, with the surrender of state monopoly, foreign investors stand a fair chance to make looming profits by structuring the deals well,” he added.

Why the changes?

The move by VNR is at odds with what the giant proposed in three previous schemes, being the merger of the two units into one joint stock company in the 2017-2020 period. This JSC would then be separated into one specialising in passengers, in which VNR would hold a controlling stake, and another focusing on cargo transport with VNR possibly divesting the entire stake.

According to Deputy Minister of Transport Nguyen Ngoc Dong, it is reasonable to uphold the operation model of HARACO and SARATRANS because VNR has not provided enough grounds for the change.

“Many problems remain unsolved in VNR’s plan for the two units, including labour restructuring, the possible loss of state stake value and more. We need more time to assess how efficient the change would be,” Dong told VIR.

In fact it had taken months for VNR to demonstrate the necessity of the merger, after years of low operational efficiency at HARACO and SARATRANS – the sole operators of cargo transport in the railway industry.

As shown in the Ministry of Finance’s Document No.9280/BTC-TCDN recently sent to the MoT, both firms showed poor performance, while their competiveness plummeted below that of aviation, road, and waterway transport. Specifically, last year VNR’s total revenue rose by 15 per cent on-year to reach VND7.77 trillion ($343.8 million), but profits declined by 16 per cent to VND145 billion ($6.4 million), mainly because of a loss of VND88 billion ($3.89 million) at HARACO. SARATRANS performed better than its Hanoi peer, but results remained lower than expected.

“These two firms are offering the same products and services and compete with each other, thus increasing the employed labour force but decreasing their productivity, competitiveness, and operational efficiency,” VNR chairman Vu Anh Minh explained.

Despite the facts, the giant’s reasoning still failed to persuade the MoT. Thus, it had to accept the delay to speed up approval of the overall restructuring plan.

Minh, however, admitted that the latest change in the proposal would possibly pull back the restructuring plan towards increasing professionalism in cargo and passenger transport. “Nations which have separated the passenger and cargo transport businesses in their railway networks have proved efficient, according to the World Bank and international organisations,” he added.

VNR once bet it all on this merger, which was expected to result in a breakthrough in VNR’s future operations. The company has reported low profits of around VND150 billion ($6.64 million) for the past three years.

The giant also hoped to breathe new life into private investment on the back of the new restructuring of HARACO and SARATRANS to promote the development of cargo transportation, thus enabling it to compete with other transport segments, including aviation and road. However, it is worthy to note that both firms were previously one entity before being separated within the current operation models since 2016. However, their business performance remained lower than expected. This proved that careful consideration into any changes is necessary, especially with business results recently improving.

In August 2018, SARATRANS made revenue of over VND173 billion ($7.65 million), up 22.4 per cent on-year, while HARACO also reported an on-year rise of 12.3 per cent in revenue.