Australia supports Economic Reform in Vietnam (Aus4Reform)

18/10/2018

Super commission to streamline SOEs

As large-scale state-owned enterprises (SOEs) in Vietnam are performing poorly, the establishment of a ministry-level commission for managing state capital at SOEs is expected to help them improve operational effectiveness tremendously.

Super commission to streamline SOEs

As large-scale state-owned enterprises (SOEs) in Vietnam are performing poorly, the establishment of a ministry-level commission for managing state capital at SOEs is expected to help them improve operational effectiveness tremendously.

 

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Over the recent decades, Raymond Mallon has witnessed the Vietnamese government’s ongoing efforts to introduce reforms to more efficiently manage state capital in SOEs.

He has been struck by the challenges faced in implementing approved reforms, noting the limited progress in the implementation of reforms that would enable more transparent systems of corporate governance and the clear separation of state ownership and regulatory functions. Action in these areas is important to ensure a more equitable and competitive playing field for all enterprises and to boost national investment, competitiveness, and employment.

A recent reform aims to directly address shortcomings in corporate governance, while also helping draw a clear line between state ownership in SOEs and the broader regulatory role of the government.

On September 29, 2018, Prime Minister Nguyen Xuan Phuc signed Decision No.131/2018/ND-CP on the functions, rights, and organisational structure of the Commission for the Management of State Capital at Enterprises (CMSC). The commission, established last February, will manage the state capital at 19 state-owned economic groups and corporations.

The government currently holds the stakes of SOEs with a combined book value of VND1 quadrillion ($44.247 billion). Their total assets are worth more than VND2.3 quadrillion ($101.77 billion).

The commission has also inked a memorandum of understanding (MoU) with Singapore’s Temasek Holdings to exchange business information and share experiences in modern capital management in accordance with market mechanisms.

A sound path

Under Decree 131, the commission exclusively represents the state’s ownership rights in wholly SOEs and in joint stock companies and limited liability companies with two or more members.

The commission is tasked with drawing up master strategies to develop enterprises under its management and thensubmitting these strategies to the government for approval. The CMSC is also entitled to make decisions on the SOEs’ charter capital.

At the CMSC debut on September 30, Prime Minister Nguyen Xuan Phuc said, “We have two paths: one is developing a professional and modern commission to boost reforms and the effectiveness of all SOEs, and the other is creating an old-fashioned bureaucratic agency which can burden the domestic business system and the whole economy. Which path should we take?”.

Then, on behalf of the government, he declared, “We will select the first path. Though it is more difficult, I believe that you all agree”.

Raymond Mallon, the advisor for the Australia-Vietnam economic reform programme (Aus4Reform Program) said, “The high-level commitment of the commission from the national leadership is a positive sign for success. The signing of the MoU with Temasek to learn from its experience is also another positive step. Temasek is widely viewed as a global model in the effective monitoring and management of state investment in SOEs”.

Mr. Raymond Mallon, the advisor for the Australia-Vietnam economic reform programme (Aus4Reform Program) 

 

Poor performance

Over the past few years, ministries have been developing their own SOEs whose operational effectiveness remains questionable. This has been undermining the economy’s competitiveness. Experts ascribed the lack of transparency to the poor performance of many SOEs.

Recently, the National Assembly Supervisory Delegation delivered to all National Assembly members the firstever detailed report on SOEs’ compliance with regulations on managing and using state capital during 2011-2016. The report showed mixed results in SOEs’ operations in the past six years, with many suffering from losses.

Specifically, in 2015, the return on equity (ROE) of SOEs was 2.1 per cent only, far lower than the 5.5 percent of foreign-invested enterprises (FIEs). Investment effectiveness at SOEs was also lower than in Vietnam’s privately owned enterprises (POEs) and FIEs, with the incremental capital output ratio (ICOR) in the 2011-2016 period of SOEs being 1.6, which is 1.86 times higher than POEs and FIEs.

Besides, in this period, the ROE of all SOEs reduced by 39 percent, and their return on assets (ROA) decreased by 30 percent.

A bumpy road ahead

While recognising that this reform is an important step forward, Mallon also notes that CMSC will face challenges in implementing its mandate. “Past attempts to strengthen state management at SOEs only generated mixed results. Internationally, many countries, including Australia, struggle to effectively manage SOEs,” he said.

A pressing challenge for some years, according to Mallon, will be identifying and recruiting suitably qualified and professional independent experts to work with the commission and to serve on the SOE boards, to ensure that SOEs operate transparently in line with international corporate governance standards.

There is an urgent need to ramp up efforts to train corporate governance experts and to build a corporate governance profession in Vietnam.

“The leadership of the committee can expect resistance to change from vested interests that benefit from the status quo. Strong high-level support will be needed to empower the leadership of the new commission,” Mallon said. “Transparency and professionalism will be critical to success. The leadership of the new commission needs to set clear performance targets, to monitor those targets, and hold the chairpersons and members of SOE boards of directors accountable for the performance of their SOEs”.

He also underlined that the publication of SOEs’ performance relative to targets is another way to motivate SOE managers. “The key lesson from experience in other countries is that the commission must be empowered to monitor and dismiss chairpersons and/or directors who fail to perform, regardless of their status,” he said. “The ongoing benchmarking of SOEs’ performance with regional norms is one way of objectively assessing the success of SOE management in improving their performance”.

Within framework of the Aus4Reform Program, Central Institute of Economic Management (CIEM) hold a workshop on reforming monitoring mechanism of the owner’s representative agency in Hanoi on July 19. Raymond Mallon also said that, “in order to implement the mechanism of supervision of SOEs, it is necessary to manage the representative office of the enterprise owner; consider management and reporting to make sure that the business owner representation agency is gradually improving and performing well the monitoring of SOEs; The management of data, information and transparency is clearly two elements that needed attention in the reform of the monitoring mechanism; There should be agreed standards and norms to facilitate comparative and accountability analysis; It is vital to establish corporate governance norms under the advice of all stakeholders. However, detailed practical proposals are still needed on the best approaches to achieve these results”.