‘Some SOEs devalue their properties to profit from equitization’

The equitization of Saigon Shoes Company and the Vietnam Feature Filmstudio (VFS) is one example that has drawn the public’s attention. The mutual problem of these enterprises is that the Government can only gain low profit against the actual value due to their equitizations’ devaluation.

To dig deeper into the issue, TheLEADER had an interview with Pham Duc Trung, Head of the Corporate Development and Reform Department of the Central Institute for Economic Management (CIEM).

What do you think about the equitization process of SOEs in Vietnam in recent years?

Pham Duc Trung: First of all, it is necessary to affirm that equitization has become one of the most important solutions to reform SOEs in Vietnam.

Up to now, the Government has equitized more than 4,500 enterprises, contributing to a sharp reduction in the number of SOEs.

However, the equitization of SOEs has revealed some drawbacks, some of which have not been solved. Notably, the number of SOEs’ equitizations is high but the share of the state sold to investors is still low (only about 10 per cent), which has not reached the target of attracting social investment in enterprises.

The divestment of state shares from weak SOEs is struggling to reach the goal of restructure state capital investment in production and business.

Thus, it can be seen that the SOEs equitization process only meets the requirements of the quantity not quality. Why does it happen?

Pham Duc Trung: The first objective problem is a weak financial and equity market.

A second and more subjective issue is a poor regulatory framework and inadequate institutions that directly affects the equitization process.

When it comes to enterprise valuation, regulations on selling shares, attracting strategic shareholders and handling financial debts, the legal and institutional framework is still inadequate.

Moreover, many SOEs are simply not attractive to investors. The general rate of return of SOEs is not low, but most of them are concentrated in some large corporations that have not yet equitized. The remaining businesses are not very profitable. Therefore, in short term, investors do not achieve profit targets; in the long run, strategic investors get into many problems.

The public has raised concerns about some cases of SOEs divestment due to their equitizations’ devaluation. How do you think about this issue?

Pham Duc Trung: During the equitization process since 1992, there have been some cases of equitization causing loss of state assets, especially in the case of favorable position, belonging to "prime land" area.

Failing to properly calculate the state capital at enterprises, especially the value of the right to use the property owned by the entire people, has reduced the actual value of state capital, the national budget from SOEs’ equitization and creates opportunities for self-seeking interests of some relevant subjects.

The cause of this situation is due to some loose regulations and law enforcement.

The legal provisions on the value of SOEs’ land use rights have obviously remain inadequat. Accordingly, land rent paid annually by enterprises is not included in the value of equitization. Thus, businesses have dodged regulations by choosing the form of land lease to be priced land by zero, reducing the value of the business.

Another cause is the brand value regulation. Decree 59, Circular 127 issued in 2011 by the Ministry of Finance provides guidance on how to determine the brand value (on the basis of actual costs for the creation and protection of trademarks).

However, on the SOEs’ equitization process, brand value cannot be determined because the actual branding costs cannot be assessed. Many firms, before equitization, were not interested in branding or did not carry out brand assessment. Besides, the brand-related law in Vietnam has not been completed.

After equitization, many businesses have converted the purpose of land use rights to build offices and buildings to make profit. What is your opinion on this situation?

Pham Duc Trung: Here comes the story of corporate governance. In fact, in the equitization plan, there is usually no organization or individual who can hold the absolute ownership of the business.

However, after equitization, in many ways, they acquire shares, turn the equitized enterprise into a company of several large shareholders. After that, they changed their business operations and the use of assets, creating the abovementioned phenomenon. That is the story of transparency and corporate governance.

From now to 2020, the country will equitize nearly 140 SOEs, many of them are holding "golden land". In your opinion, what should the Government do to make the equitization process effective and attractive to strategic investors?

Pham Duc Trung: Actually, the number of nearly 140 equitized enterprises is not too big. In 2005, the Government had equitized nearly 800 enterprises. The figures were 180 and 220 in 2014 and 2015 respectively. It can be predicted that it will complete the transfer of 137 SOEs into joint stock companies according to the plan.

The issue is to improve the quality and fulfill other objectives of equitization of SOEs. To do so, it is necessary to carry out many synchronous and basic solutions, such as lowering the state’s shares amount and expanding investors’ sectors to make the process more attractive and diverse.

Particularly, the Government should improve the transparency of the equitization process in general, the valuation of enterprises and the determination of the value of state capital in particular in order to avoid losses of state assets at enterprises, including prices land use rights, land allocation rights and land lease rights.

The issue here is not only related to the revision of policies on equitization but also to a broader scope, involving many institutional reforms, laws on business, investment, land and planning.

Thank you very much!