State trade monopoly: landmines ahead

February 28, 2017 | 16:25
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The Ministry of Industry and Trade (MoIT) recently proposed to establish a state trade monopoly in 20 goods and services categories. This seems to be contradicting the commitment to develop privately-invested and managed businesses and industry.

Participation of the state in business has a very long tradition in all economic systems. However, in market economies such activity is generally regarded as being contrary to the intended competitive development of private businesses.

The reason for this view is not so much that these activities of the state will limit the profitability of private business, but the consideration that a self-regulating market economy will be the most effective system of organising business. State-regulated business on the contrary is considered not effective, slow, and limiting progress.

The common and reasonable approach is to limit direct and indirect state intervention in business to situations where special reasons justify restricting private businesses. It is wholly irrelevant in any economic system whether the state acts on its own or via state-owned companies. Where the state is participating, a negative effect on the private businesses must be avoided. This is especially critical in the case of state-owned enterprises sharing business fields with privately owned companies.

The reasons for the state intervening in business must be of a public nature. In former times, earning profit was one of the major reasons for such state activity. That would not be acceptable by today’s perspective. The relevant reasons for intervention must be clear and restrictive. Public safety or protection of key functions of the state may be acceptable reasons. Intervening in business in cases where this is assumed to be benefitting the country is not a sufficiently clear condition. Such provision is too broad and is not considering that all legal business is benefitting the country.

A State intervention which is considered as justified must still pass the test whether the extent of intervention was required.

In short, the question “Is this really necessary?” is not only allowed, but necessary to make.

These considerations are pretty much the same under the various economic systems of today’s world. The answers will be very specific and not always consistent. Germany, for example, transformed in 2000 the administrative unit which was printing Passports, ID-cards etc. to a state-owned company and sold all shares to a private investor. The government considered the privatisation a major improvement. In 2009 all shares were bought back by the State and now the “Bundesdruckerei GmbH” is a fully state-owned company again. This example may show that balancing privatisation against State interference in business is not always easy.

It is beneficial that the MoIT intends to regulate the monopolistic activities of the State. This will allow the assumption that the State will not interfere in fields of business in monopolistic ways which are not included in the new regulation. It is also beneficial that the draft of the regulation is published and therefore open for discussion and modification.

The 20 goods and services categories are worth taking a closer look at:

  1. Goods and services for the purpose of national defence and security (specified by the Ministry of Defence and the Ministry of Public Security).
  2. Manufacture, sale, import, and export of industrial explosives.
  3. Production of gold bars.
  4. Import and export of raw gold to produce gold bars.
  5. The release of lottery.
  6. The import of cigarettes and cigars (except duty-free goods).
  7. Activities of the national reserve.
  8. Printing money and coinage.
  9. Issue of postage stamps in Vietnam.
  10. The manufacture, sale, import, export, transport, and storage of fireworks and relevant services.
  11. Transmission and operation of the national electricity system; construction and operation of multi-purpose hydropower and nuclear power.
  12. Operation of lighthouses and public navigable channels.
  13. Management, operation, and exploitation of coastal communication stations.
  14. Air traffic services, air aviation information alert service, search and rescue services.
  15. Management and exploitation of the infrastructure system of the national railways and urban railways invested by the state.
  16. Management and exploitation of irrigation systems, inter-provincial and inter-district irrigation.
  17. Provision of forestry services in special forests (except for forests assigned to economic organisations by the government).
  18. Publications (not including printing and publishing).
  19. Maintenance, management, and exploitation of the public postal network.
  20. Delivery of public services in the operation of press releases.

The variety of covered goods and services is very broad.

The organisation of the national currency is obviously an important task of the state, which makes it necessary to uphold a state monopoly on printing money and coinage as well as on the production of gold bars. This will also protect the public from counterfeit money and gold having less than the expected/regulated content of pure gold.

For other items, like the import of cigarettes, the benefits of a state monopoly is not so clear. Why is importing cigarettes by the state or a state-owned company better for public safety than having it done by a licensed private company? The system of controlling the quality of imported goods by customs and other specialised state agencies would be applied in both cases in the same way.

It is very important to define the reserved monopolies very restrictively and clearly. This should allow interested private investors to clearly understand the limitations of private business. It is also very important to regulate the ways of implementing state monopoly in an efficient way. This may be accomplished by:

- The operating the relevant business field by administrative institutions as administrative tasks, or

- Specialised state-owned companies in the form of private businesses under direct state control, or

- Granting the right to operate in a business area to privately owned companies under clear contractual conditions for a fixed time under the administrative control of the state.

Hopefully, the final decree will define the relevant goods and services categories very clearly and restrict them to what is really necessary and allow authorities to focus on implementing the purposes of the regulation and operate the state monopoly by including the services of private businesses where this is reasonable.

Gruenkorn & Partner Law Co. and WTS Tax Vietnam Co., Ltd. are both managed by Wolfram Gruenkorn. The full service for larger corporations, especially foreign invested corporations, is provided from licensing the foreign investment and company registration to on-going accounting by an integrated team of over 20 persons with offices in Ho Chi Minh City and Hanoi. Being the Vietnamese part of the international WTS group with presence in over 130 countries, this is the gateway to Vietnam for a very broad variety of companies from all over the world.

By By Wolfram Gruenkorn

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