Policy Design and Implement in Developing Countries Le Thu Trang (MET11305)

 Overview of SOEs in Vietnam  Role of Stakeholders  Effectiveness of SOEs  A case of Vinashin  Problems and solutions  Show failure of a project due to poor management, lack of regulations and planning.

 Establishment of Groups and State owned Corporations according to decisions of Prime Minister in 1990 and  As a key pillar of Vietnam’s economy to help Vietnam primarily become an industrial country by  As a tool to operate the economy.  Necessity: Investment of infrastructure and technology, lack of quality staff and managers and avoid competition from multinational corporations.  In 2011: 11 Groups and 85 State owned Corporations.

STATE OWNED CORPORATIONS 90 STATE OWNED CORPORATIONS 91 (GROUPS)  Established in 1990  Decisions by Ministries, Local Committees  Directors and Staff  appointed by Ministers, Head of Local Committees  Minimum capital: 500 billion VND (25million USD)  Business: Multiple areas  In 2006: Government started to privatize and equitize.  Establish in 1991  Decisions by the Prime Minister  Management Board: 7 members  appointed by the Prime Minister.  Minimum capital: 1,000 billion VND (50 million USD)  Business: Multiple areas  In 2006, they became industrial groups with additional capital from government. There are two different types of State owned Corporations in Vietnam:

 Electricity  Cement  Construction  Power  Petrol  Telecommunication  Ship Building  Coal and Mineral  ….  Cover most of business areas in the economy

Banking Stock Market Insurance Investment Fund Unit: billion VND

Stakeholders Roles Prime Minister -Appoint members of Board. -Approve investment projects of Groups and State owned Corporations. Related Ministries -Provide development strategies for SOEs. -Approve and comment the investment projects of Groups. Ministry of Planning and Investment -Provide development strategies for SOEs. -Approve and comment the investment projects of Groups. Ministry of Labor - Decide and manage salary and benefit for SOEs’ staff Ministry of Finance - Approve and provide capital for SOEs - Financial supervisory function

 Capital from government budget.  Loans with low interest rate (not officially announced).  Lower corporation tax rate.  Priority in participating government projects compared to private companies.  Easy access to state funds and real estate.  Lower price of electricity and water.

There is lack of regulations or legal framework for SOEs:  All Groups are in the trial procedure (trial and correction style).  In 2004, 8 Groups were established. 4 others were established in  There are only 4 articles in Law of Corporations 2005 about features, functions and responsibilities of SOEs. Detailed legal regulation is decided by Government.  However, only in 2011, Decree No 101 on trial establishment of Groups were issued.

Total assetsTotal DebtsCapital Revenue Profit before tax

 In 2011, there were 11 groups and 85 state corporations.  Contributed 34% of GDP (2010).  Most of SOEs had profits, however, some groups had big loss: EVN – 24,000 billion VND (1.2 billion USD), Vinashin – 5,000 billion VND (250 million USD),…  Rate of profit before tax on capital is 13,1% (compared to lending interest rate 15-20%)  80% profit from 4 Groups: Petro Vietnam, VNPT, Viettel, Vietnam Rubber Group.

 30/85 state corporation had rate of debts on total assets greater than 3.  7/85 state corporation had rate of debts on total assets greater than 10.  Total debt of SOEs is 50.4 Billion USD compared to 39.5 billion USD of own capital.  High potential risk

 Established in 2006 according to Decision signed by Prime Minister  Goal: to implement development strategy to develop ship building industry.  To become world number 4 shipbuilder by  Business areas: ship building, shipping and cargo services, import and export, other business areas.  60,000 employees and 28 shipyards

 1st Sep 2005: Prime Minister approved to provide a 750 million USD loan to Vinashin with 6.975% annual interest rate (compared to the annual lending interest rate from 15% to 20% for private sector).  2007, State Bank of Vietnam lended Vinashin 600 million USD.  Many other loans with 0% interest rate.  Provided large plots of land for Vinashin expansion.

However,  Loss: 5,000 billion VND (due to high speed passenger boat and 2 electricity plants without approval).  160 contracts were cancelled due to global crisis.  Big amount of debts: 4.4 billion USD and 600 million USD from foreign financial institutions (compared to 4.7 billion USD of total assets).  Went bankrupt.  Transfer business activities and debts to other Groups.

 Established more than 200 companies under management of Vinashin in many business areas.  Approved many projects without approval from Government.  Appointed many relatives to be managers and take individual benefits.  Provided erroneous reports to Government.  Intentionally violated state regulations on economic management.  Hide many transactions from Government.

 Scale of trial project (establishment of State Corporations and Groups) is too large (capital, business areas).  Regulations are cursory  responsibilities and obligations of each stakeholder are not clear.  Lack of distinguish between ownership and management of the Government.  Easy access to funding encourages both negligence and poor corporate governance among SOEs.  Poor capability of staff.

 Reform structure of the whole economy (Project of Ministry of Planning and Investment).  Detailed regulations about responsibilities and obligations of each stakeholder.  Privatize SOEs (since 2006 for state owned corporations) and require Groups to divest their non-core business activities.  Independent supervisor agency.  Improve transparency of investment, financial performance and management.  Improve equality between public sector and private sector.

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