SOE divestment a priority in CPTPP era

The Commission for the Management of State Capital in Enterprises will give a new push to SOE equitisation

Unlike the beginning of previous years when the government often underscored strong messages about improving the local business climate, the onset of 2019 in particular sees a big focus on strong action in accelerating the equitisation of state-owned enterprises (SOEs).

The actions include a large-scale meeting organised by the government and the Steering Committee on Enterprise Renovation and Development, and the prime minister’s hallmark Directive 01/CT-TTg on boosting SOE restructuring, equitisation, and divestment.

“The government wants equitisation to be sped up qualitatively. Those that intentionally delay this will be sanctioned,” said Deputy Prime Minister Vuong Dinh Hue at the meeting in Hanoi. “All processes must be conducted transparently.”

Hue, who is also head of the steering committee, said that in 2018 the process remained slower than the initial plan, affecting the country’s efforts to lure in more capital.

Last year, 53 SOEs failed to be equitised, and 129 enterprises were not divested as planned.

Snail’s pace

One of the reasons behind the government’s strong moves is to attract more capital from non-state sources. However, accelerating such equitisation also demonstrates Vietnam’s strong international commitments to create a level playing field for all businesses in the country under free trade agreements (FTAs), including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

Specifically, Vietnam committed that it would complete its plan to cut state ownership in many SOEs after the CPTPP takes effect. On January 14, 2018, the CPTPP came into force in the country.

In late 2016, the government set a target of reducing the number of wholly SOEs to 103 in 2020 from 583 in 2016.

Under the prime minister’s Document No.991/2017/TTg-DMDN on approving the list of SOEs that must complete their equitisation during 2017-2020, the number of SOEs that have to be equitised was 44 in 2017, 64 in 2018, 18 in 2019, and one in 2020. However, reality showed that the total number of equitised SOEs in 2017 was 69.

According to the Ministry of Finance’s Agency for Corporate Finance, in the 2011-2016 period, 570 SOEs were equitised, with the total value of VND797 trillion ($34.65 billion), including VND214 trillion ($9.3 billion) being state capital.

However, by late 2018, Vietnam had about 494 SOEs. Last year, the pace of SOE equitisation remained at a snail’s pace, with only 32 SOEs equitised and valued at over VND43.235 trillion ($1.88 billion), including VND24.78 trillion ($1.07 billion) worth of state capital. Meanwhile, the total number of SOEs needing to be completely equitised in 2018 was 85.

The Ministry of Planning and Investment estimated that the number of SOEs needing to be equitised this year is 54, which will include 50 managed by Ho Chi Minh City and Hanoi. These two localities failed to conduct any equitisation in 2018.

In 2018, Ho Chi Minh City was scheduled to equitise 39 SOEs, or 44 per cent of the total number of units in the city. However, in last October the city asked the government for permission to delay equitisation and divestments scheduled for 2018 until 2020.

Also last year, Hanoi also had to equitise 14 SOEs, or 16 per cent of its total. However, the city has also asked the government for more time for consideration.

A number of individual SOEs have also asked for delays, including MobiFone and Vietnam Paper. Last April, VTV Cable, one of Vietnam’s leading cable television companies, canceled its initial public offering (IPO) after only one bidder registered for the auction. Many other businesses, such as Petrolimex and construction materials producer Viglacera, also slowed down the sales of state-owned stakes.

The Steering Committee on Enterprise Renovation and Development reported that enterprises with 100 per cent state-owned charter capital are operating in 11 sectors of the economy. It is expected that by 2020, there will be only about 150 wholly state-owned enterprises, which include lottery companies, utilities, PetroVietnam, Electricity of Vietnam (EVN), and Viettel.

By late 2017, total equity at SOEs totalled at VND1.37 quadrillion ($59.6 billion), up 4 per cent against 2016. Their total assets were valued at over VND3 quadrillion ($130.4 billion), equal to 53.2 per cent of the total GDP of 2018, and up 3 per cent against 2016.

Thus, according to experts, if the speed of equitisation continues at a slow pace in 2019, it seems probable that Vietnam will not be able to meet regulations related to SOEs prescribed in the CPTPP.

According to the World Bank, the CPTPP is expected to stimulate and accelerate domestic reforms in many areas, such as competition, services, customs, e-commerce, the environment, government procurement, intellectual property, labour standards, legal issues, market access for goods, rules of origin, non-tariff measures, and trade remedies. Moreover, delivering commitments under the CPTPP will contribute to promoting transparency and support the creation of modern institutions in Vietnam.

CPTPP commitments

Under the CPTPP, all SOEs of member states have to operate equally under market mechanisms. Furthermore, they are banned from conducting anticompetitive practices, while having to make all their operational information transparent.

Specifically, under the deal’s Chapter 17, each member state “shall ensure that each of its designated monopolies does not use its position to engage in, either directly or indirectly, including through its dealings with its parent, subsidiaries or other entities, the party or the designated monopoly owns, anticompetitive practices in a non-monopolised market in its territory that negatively affect trade or investment between the parties.”

Also under this chapter, all SOEs of CPTPP member states have to ensure transparency in operation and information provision. Additionally, each party shall provide to the other parties or otherwise make publicly available on an official website a list of its SOEs no later than six months after the date of entry into force of the CPTPP for that party, and thereafter shall update the list annually. However, this regulation “shall not apply until five years from the date of entry into force of this agreement for Vietnam.”

Notably, on the written request of another party, a party shall promptly provide many types of information concerning an SOE or a government monopoly, provided that the request includes an explanation of how the activities of the entity may be affecting trade or investment between the parties.

Actions

More than two weeks ago, Prime Minister Nguyen Xuan Phuc promulgated Directive 01/CT-TTg on boosting SOE restructuring, equitisation, and divestment as a prime priority for the government to implement in 2019. The move, coming amid SOEs’ slow-paced equitisation as one of the economy’s biggest obstructions, was aimed to facilitate more private investment as part of the country’s commitments in FTAs.

The government has also established the Commission for the Management of State Capital in Enterprises, which will directly controls 19 SOEs including Vietnam Airlines, MobiFone, EVN, and others. The government’s intention is to be more effective in its control of state capital and to place control in the hands of the commission. Ownership is separated from the operations of companies with state capital.

“Spurred by the discovery of significant losses and illegal or inept management of state capital, the commission is the latest attempt by the government to rein in SOEs and to make them more responsive to the government’s objectives,” Sesto Vecchi, managing partner of US law firm Russin & Vecchi, told VIR.