Falling giants

Vietnam’s ailing state-owned enterprises may continue to cause turbulence if reform needs are not addressed

By Khac Giang Nguyen

State-run companies in Vietnam currently only seem to garner negative headlines. On December 12 last year, Hanoi People’s Court sentenced to death Duong Chi Dung, former chairman of Vinalines, a giant public shipping company. Duong was charged with “deliberately violating state regulations on economic management”, which resulted in a loss of at least $16 million.

Duong was not the first boss of a state-owned  enterprise (SOE) charged with accusations of mismanagement. Just a year ago, Pham Thanh Binh, former CEO of shipbuilder Vinashin, was sentenced to 20 years in prison. The manager drove the public company into insolvency, resulting in a debt load of $4 billion.

The trials serve as lively evidence for calls to reform the lagging public sector. Yet although the government has consistently affirmed a “comprehensive restructuring plan”, not much progress has been made, a team of World Bank economists said in December.

The current 12 ‘super’ SOEs, as they are labelled in Vietnam, were initially established with good intentions. Looking at the South Korean economic miracle with admiration, the government wanted to build ‘iron fists’ to boost the economy like the Koreans did with the help business conglomerates — known as chaebols — such as Samsung and Hyundai. However, only six years after its launch, the grand project has turned into apparent failure. Apart from the 12 biggest, Vietnam has roughly 1,200 public companies, accounting for one-third of its gross domestic product (GDP).

Instead of being a strong pillar for the country, the SOEs dragged down economic growth and were the main actors to be blamed for Vietnamese economic turbulence in recent years. “State-owned enterprises could be seen as the main reason to cause the huge non-performing loans in the banking system and create imbalances in the economy,” said Dinh Tuan Minh, an economist from Vietnam Economic and Policy Research.

“Inefficiency in SOEs has led to budget deficits, high inflation and an imbalanced economy,” the Asian Development Bank (ADB) commented in its policy recommendation to the Vietnamese government. Following the establishment of big public companies, Vietnam suffered from rampant inflation, peaking at 20% in 2011, which was the highest rate in Asia. Its public debt rose from $26 billion in 2006 to $78 billion last year, according to The Economist’s global debt clock.

SOEs are also no job creators. According to HSBC, a British bank, SOEs only hire 13% of Vietnam’s total workforce. It is the private sector who employs the most — up to 86% of those employed. Other economic indicators, including export activities, operational efficiency and growth rates, all paint a pessimistic picture of the state-run business sector, not to mention their infamous widespread corruption, such as in the case of Duong.

“Corruption and conflict-of-interest issues are embedded in the fabric of the state-owned enterprise sector,” said Steven Winkelman, chairman of the American Chamber of Commerce in Vietnam. Strong commitment to reform these companies is a crucial condition for Vietnam to join the Trans-Pacific Partnership, he added, referring to the ambitious trade pact that many
Vietnamese judge to be a remedy for its persistent economic problems.

Under both domestic and international pressure, the Vietnamese government put public-enterprise reform on the agenda in 2011. The state-run firms law expired that year, theoretically putting them into competition with private and foreign players. At the same time, a massive privatisation plan was introduced, with the target to reduce the number of state companies from roughly 1,200 to 300 by 2020.

Yet it is easier said than done. The World Bank said that only 56 public firms were privatised by September 2013, a much slower pace than one would expect given the mid-term target of a reduction to 600 by 2015. In addition, the program only touches small- and medium-sized SOEs, while it barely addresses the 21 biggest public firms, which account for 42% of the total corporate revenue in Vietnam, according to an ADB report.

Foreign investors are not impressed by that speed. SOEs are the “key concern” for European enterprises doing business in Vietnam, said Preben Hjortlund, president of the European Chamber of Commerce in the country.

“State companies generally receive favourable treatment – through loans, access to land, limited profit targets – but are inefficient. This is hampering the growth of the economy,” he stressed at the Vietnam Business Forum, a meeting of the biggest foreign investors in Vietnam.

Apart from these problems, there is still a light at the end of the tunnel. Inflation is expected to hover slightly above 7% in 2014, according to the ADB, a huge plunge compared to the peak in 2011. In November, foreign direct investment jumped 54% year-on-year, while exports surged 16%, according to the country’s Ministry of Industry and Trade.

GDP growth, however, stays below 6% for the third year consecutively, the lowest expansion in almost two decades, which the World Bank dubbed “the longest spell of growth” for the nation, once considered a new Asian tiger.

“Vietnam has done well in ensuring macroeconomic stability over the past year,” said Victoria Kwakwa, the World Bank’s country director for Vietnam. “The focus should now be on slow-moving structural reforms to reposition Vietnam on a higher growth trajectory.”

Vietnam expert Dinh added: “If the government continues to maintain the scale of state-owned enterprises at the current level, it’s hardly possible for the economy to grow healthily in the long term.

Reforming them is therefore the key for Vietnam’s future success.” Still, it remains unclear whether the Vietnamese government intends to do anything serious about it. As recently as December last year, the National Assembly approved a revised constitution that continued to affirm the dominance of state-owned enterprises in the economy.