SOE Reform in Vietnam

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					SOE Reform in Vietnam
Background Paper




Prepared by Mekong Economics

November 2002
Background Paper                                                                                                                                                                                                 2



Table of Contents



Recent Development of Vietnam’s SOE Sector .......................................................................4

Salient Features of the SOE Sector in Vietnam .............................................................................................................................................4
               Economic Activities .........................................................................................................................................................................4
               Number of Enterprises....................................................................................................................................................................6
               Capital Scale.......................................................................................................................................................................................6
               Employment Size..............................................................................................................................................................................7
               Geographic Distribution .................................................................................................................................................................8
The Role of SOEs in the Economy...............................................................................................................................................................10
               GDP Share of SOEs ......................................................................................................................................................................10
               Job and Income Generation .........................................................................................................................................................12
               National Budget Share ...................................................................................................................................................................12
Economic Performance of SOEs...................................................................................................................................................................13

Policy Framework for SOE Development and Reform ...........................................................18

Overview of the SOE Reform in Vietnam ...................................................................................................................................................18

Milestones in the Process of SOE reforms throughout Party Congresses. .............................................................................................19
               The Launch of Doi Moi at the Sixth Party Congress................................................................................................................19
               The Seventh Party Congress.........................................................................................................................................................19
               The Eighth Party Congress ...........................................................................................................................................................19
               Resolution of the 3rd Party Plenum of the 9th Central Party Standing Committee...............................................................20
Key Programs of SOE Reforms.....................................................................................................................................................................25
               Reforms in SOE Management Mechanism ................................................................................................................................25
               Restructure of SOEs ......................................................................................................................................................................25
               Reorganization of General Corporations....................................................................................................................................26
               Equitization of SOEs.....................................................................................................................................................................27
               Other Ownership Transformations.............................................................................................................................................29
               Debts and Assets Treatment.........................................................................................................................................................30
The SOE Reform Agenda: Achievements and Remaining Constraints...................................................................................................30

How are International Donors Supporting Reforms?.................................................................................................................................34

The SOE Reform: A Case Study of the Textile Sector...............................................................................................................................37
       Ownership Structure of the Textile Sector.................................................................................................................................37
       Restructuring in the Textile Sector ..............................................................................................................................................38
Bibliography ............................................................................................................................40




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Abbreviations



        CP                        Government (used in legal documents)
        CPV                       Communist Party of Vietnam
        GDP                       Gross Domestic Product
        GSO                       General Statistical Office
        GCs                       General Corporations
        HDBT                      Minister Committee (Government, now) (used in legal documents)
        IMF                       International Monetary Fund
        MOF                       Ministry of Finance
        MOLISA                    Ministry of Labors, Invalids, and Social Affairs
        ND                        Decree (used in legal documents)
        NSCERD                    National Steering Committee for Enterprise Reform and Development
        OOG                       Office of Government
        OECF                      Overseas Economic Cooperation Fund
        QD                        Decision (used in legal documents)
        SOEs                      State-Owned Enterprises
        SRV                       Socialist Republic of Vietnam
        TTg                       Prime Minister (used in legal documents)
        VND                       Vietnam Dong
        WB                        The World Bank




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Recent Development of Vietnam’s SOE Sector




Despite the gradual shift towards a market economy that commenced in 1986, and in spite of the
emphasis on state owned enterprise (SOE) reform and privatization in the structural adjustment
programs formulated since the mid-1990s, the state sector continues to play a leading role in the
Vietnamese economy. The dominant position of the state sector is confirmed in official statistics and a
variety of studies on the Vietnamese economy. The following sections investigate the distinct features,
the role as well as the performance of Vietnam’s SOEs to have an overall outlook at recent development
of the sector.



Salient Features of the SOE Sector in Vietnam



Economic Activities

SOEs have involved in almost all economic activities of the economy. Regardless of firm size, SOEs
have biased towards some economic activities including manufacturing, construction and trade with the
considerable number of the establishments (see Table 1).1 In terms of establishments, local SOEs tend to
be more concentrated in hotel, restaurant, transportation and communication than central SOEs.




1
  Care should be taken in interpretation of these numbers because they are crude indicators. It means that with
these numbers, it is still difficult to assess truly the involvement of SOE sector in each economic activity
because firm size and industry-specific characteristics are not taken into consideration. An in-depth analysis of
SOE sector by economic activities may be of interest. Unfortunately, due to lack of data, we cannot do that.


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Table 1: The Number of SOEs by Economic Activities


                                                                             Of Which
By Economic Activities                                  SOE
                                                                        Central      Local
 Agriculture and Forestry                                       801            141         660
 Aquaculture                                                     48              2          46
 Minerals                                                       135             63          72
 Manufacturing                                                1,515            599         916
 Electricity, water and gas                                      73              1          72
 Construction                                                   946            405         541
 Trade and repairing                                          1,133            421         712
 Hotel and restaurant                                           182             30         152
 Transportation and Communication                               246             95         151
 Finance and credit                                              75             21          54
 Other                                                          377             99         278
 Total                                                        5,531          1,877       3,654
Source: GSO (2002b)

Moreover, it is found that SOEs have traditionally held the dominant role in the industries such as
energy, steel, non-ferrous metals, electric and electronic manufacture, chemicals, fertilizers, rubber, food
processing and printing (OECF, 1998, p.199). It might be due to the fact that the government has
continued a policy of state-led industrial development.

Figure 1: SOEs by Economic Activities in 2000


                              7%
                   1%                   14%
              4%
                                                                Agriculture and Forestry

         3%
                                                                Aquaculture
                                                  1%
                                                   2%           Minerals

                                                                Manufacturing

                                                                Electricity, water and gas

                                                                Contruction
   21%
                                                                Commerce, repairing

                                                                Hotel and restaurant
                                                  28%
                                                                Transportation and Communication

                                                                Finance and credit

                                                                Other
                        18%        1%




Source: GSO (2002b)




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In relative term, the largest share of SOE at the end of 2000 belongs to the manufacturing industries,
about 28 percent of the total (see Figure 1). Except for the agriculture and forestry, the construction
sector and the commerce and repairing sector settle at the next two top ones. The domination of
industries, construction and commerce in the structure of SOE sector implies that SOEs are
contributing much to the process of industrialization and modernization of the national economy.


Number of Enterprises

The number of SOEs has been decreased significantly since Doi Moi started. Notably, in 1991 the
government issued a decree on establishing and liquidating SOEs requiring that all state enterprises be
re-registered or closed (Decree 338-HDBT). As a result, the total number of SOEs was halved from
12,000 in 1991 to roughly 6,000 in 1994 with sharpest decline in local SOEs. Such a fast downturn is
attributable to about 2,000 mergers and 3,000 liquidations (CIEM, 2002).
The decline has kept going on recently. In 2000 the number of SOEs is 5,531 out of the total of 39,762
enterprises in the whole economy (GSO, 2002b). By the end of 2001, 37 SOEs had been sold, 4
contracted out and 61 entrusted to labor collectives (Nhan Dan, 2002). In addition, by the end of June
this year, the number of equitized enterprises was 780 (Vietnam Investment Review, 2002). With the aim
at acceleration of the SOEs reform, the number of SOEs will be much smaller than it is. As planned,
2,622 SOEs will be transformed with 1,319 equitized, 562 sold, contracted or leased, 351 merged, 368
liquidated and 27 converted to administrative units (Saigon Times Weekly, 2002). These transformed
SOEs are mostly small or loss-making ones.


Capital Scale

SOEs are to be more capital-intensive than their private sector counterparts (see Figure 2). It is
resulted from history of access to cheap capital in terms of equity injections from the government as
well as subsidized loans from the state banking system.

Figure 2: SOEs vs. Total by Structure of Capital Scale
                                                                      (Unit: VND bil.)

     100
      90
      80
      70
      60
      50
      40
      30
      20
      10
       0
             <.5       .5-1     1--5       5--10    10--50   50-200    200-500   >500

                                       All Enterprises   SOEs




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                                    Source: GSO (2002b)



Table 2: Capital Structure of SOEs by Management Level (%)


                     Management Level                                   1991               1992          1993         1995
                     Central SOEs                                           79.4               77.1         76.7          74.1
                     Local SOEs                                             20.6               22.9         23.3          25.9
    Source: OECF (1998)

Central SOEs represent the larger proportion of total capital of the sector. Meanwhile local SOEs
account for only one fourth of the total capital (see Table 2). It might be due to government’s policies
toward central SOEs with larger production scale.

Employment Size

Before 1986, together with cooperatives, SOEs absorbed a huge amount of employment. Since Doi Moi,
the employment size of the state sector has been gone down significantly, mostly caused by the massive
downsizing program of the early 1990s. In Figure 3, for the first three years of the last decade, the
employment of SOEs shrunk sharply from about 2 million to just over 1.7 million. At that time, one
could witness the largest number of SOEs workers left their sector. From that time on, the employment
size of SOEs remained rather stable at around 1.8-1.9 million. Despite the massive downsizing, SOEs are
still over-staffed. A recent analysis based on plant-level data by Belser and Rama (2001) indicates that as
many as half of the workers would be redundant if SOEs were to operate fully as their private sector
counterpart.

Figure 3: Trend of SOEs Employment in the 1990s


                                    2,500
     Number of workers (thousand)




                                    2,000



                                    1,500



                                    1,000
                                            1990


                                                   1991


                                                          1992


                                                                 1993


                                                                            1994


                                                                                    1995


                                                                                               1996


                                                                                                      1997


                                                                                                             1998


                                                                                                                    1999


                                                                                                                           2000




                                                                                   Year


                                    Source: MOLISA (2001)




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    Figure 4: Structure of Labor Scale of the SOE Sector in 1994 and 2000



                  90
                       79.6
                  80          73.8

                  70

                  60
        Percent




                  50

                  40

                  30

                  20
                                              9.7
                  10                    6.6                      6.1
                                                           3.6
                                                                              0.3   0.4
                  0
                         <500           500-1000           1000-5000            >5000

                                       Number of employees                           Year 1994
                                                                                     Year 2000

    Source: GSO (2002b)
Together with the massive downsizing, SOE sector has been structured toward the larger scale
production. It is evident from Figure 4 that the percentage of SOEs that have less than 500 employees
has fallen from 79.6% in 1994 to roughly 73% in 2000. Moreover, in 2000, 6.5% of SOEs have more
than 1000 employees as opposed to 4% SOEs in 1994. This is regarded as a consequence of the merger
and dissolution of small SOEs in the last decade.


Geographic Distribution

In a country that is still massively rural, SOEs have concentrated in big cities and urban areas in the Red
River Delta and the Southern East (OECF, 1998). Most central SOEs are located in two poles of the
country, in which Hanoi and Hochiminh city are home to around a half of total central industrial SOEs
(Table 3). However, while the number of central SOEs in the two cities has tended downwards, the
number has increased in other provinces. This phenomenon requires an in-depth analysis of government
policies in the second part.




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Table 3: The Structure of Industrial SOEs by Provinces
                                                                Unit: number, unless otherwise indicated
                                   1995                           1998                    2000
 Locality               Central                           Central                   Central
                                          Percent                        Percent                 Percent
                         SOEs                             SOEs                      SOEs
 Hanoi                        172            31.3               166          28.9        160        27.8
 Haiphong                       27            4.9                 36          6.3          33        5.7
 Hochiminh city               125            22.8               118          20.5        117        20.6
 Other provinces              225            41.0               255          44.3        265        46.1
 Total                        549           100.0               575         100.0        575       100.0
Source: GSO (2000); GSO (2002a)



Figure 5: Local SOEs’ Employment by Regions




                          15%
                                                    22%                     Red River Delta
                                                                            North East
                                                                            North West
                                                                            North Central Coast
                   20%
                                                                            South Central Coast
                                                          13%
                                                                            Central Highlands
                                                                            North East South
                         5%                         3%
                                                                            Mekong River Delta
                              9%            13%



        Source: GSO (2001)

Regarding local SOEs, it can be seen from Figure 5 that this type of enterprises has distributed equally
between the north and south regions. Moreover, local SOEs have concentrated in Red River Delta,
Mekong River Delta and North East South. Each region accounts for around one sixth to one fifth of
total SOEs labor force. Surprisingly, this figure shows the under-representation of local SOEs in remote
and mountainous areas. The local SOEs’ employment in northern west and central highland areas is far
much lower than in other regions. Naturally, one can raise a question on the role of local SOEs in socio-
economic development of under-developed localities. It is said that the development of SOEs should
ensure socio-economic development evenly and equitably among geographical regions. But so far the
reality might not be as expected.




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The Role of SOEs in the Economy


As said above even under Doi Moi, SOEs have held the dominant role in the economic development.
To assess truly its role within the whole economy, it is of interest to look at its contribution to GDP, job
and income generation and national budget as well. In this paper, it is ignorant about the role of SOEs in
economic adjustment process due to lack of necessary data.


GDP Share of SOEs
As shown in Figure 6: Contributions of SOEs to GDP (At Current Prices), from 1986 to 1991, the
contribution of SOEs to GDP decreased moderately. From that time on, the role of SOEs has been
recovered. Then, in the last 1990s, SOEs contributed around 30% to GDP (at the current price). The
macroeconomic stabilization, high level of protectionism and FDI concentration on the state sector has
consolidated the role of SOEs in the economy.

Figure 6: Contributions of SOEs to GDP (At Current Prices)

       35

       30

       25

       20
   %




       15

       10

       5

       0
            1986   1987   1988   1989   1990   1991   1992   1993   1994   1995   1996   1997   1998   1999   2000   2001


                                                               year


Source: GSO (2000b); GSO (2002a)
Table 4 depicts a clearer picture of contributions of SOEs to GDP by sector. Notably, most of
GDP created by SOEs are attributable to firms working in industry, construction and service
sectors. Despite the declining share of SOEs in GDP in service sector, they still play a
considerable role with roughly 55% of GDP contribution. Meanwhile, those in the industry and
construction sectors have made upward GDP contribution over years though the growth rates
are not as high as their private sector counterpart. In contrast, SOEs play a far modest role in
the agricultural sector. This position has not been improved over the last decade.




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Table 4: GDP by Sector and Ownership 1995-1999 (% of GDP)



                                           1995              1996                1997       1998       1999
GDP                                        100.0            100.0                100.0     100.0       100.0
  State                                     40.2              39.9                40.5       40.0       39.7
  Non-state                                 59.8              60.1                59.5       60.0       60.3
Agriculture                                  27.2             27.8                 25.8     25.8       25.4
   State                                      1.2              1.3                  1.1      1.1         1.2
   Non-state                                 26.0             26.5                 24.6     24.7        24.2
Industry & Construction                      28.8             29.7                 32.1     32.5       34.5
   State                                     14.5             14.4                 15.4     15.4        16.0
   Non-state                                 14.3             15.3                 16.7     17.1        18.5
Services                                     44.1             42.5                 42.2     41.7        40.1
  State                                      24.6             24.3                 23.9     23.5        22.5
  Non-state                                  19.5             18.1                 18.2     18.2        17.6
Source: IMF (2000)
As government continues state-led industrial development, the contribution of SOEs to the industrial
output keeps being high. Although the number of state-owned industrial enterprises has been shrunk
considerably, their output still accounts for much more than one thirds of the gross industrial output.
However, their role has been declined over past years as shown in Figure 7. Accordingly, SOEs
accounted for more than 50% of industrial output in the mid-1990s, but their share had diminished to
nearly 40% by 1999. It was due to the declining number of industrial SOEs in the period, for instance
from 3,000 in 1988 to 1,821 in 1998 (UNIDO, 1999 and World Bank, 2001).

Figure 7: Share in Total Industrial Output by Ownership


       100%
        90%
        80%
        70%
        60%
        50%
        40%
        30%
        20%
        10%
           0%
                       1996                     1997                         1998               1999

                       SO Es   F o re ig n C a p ita l   N o n -s ta te (d o m e s tic )


Source: GSO (2001)




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Job and Income Generation

Before Doi Moi, SOE sector was a main source of labor demand, especially in urban areas. Since the
early 1990s, the sector has been restructured, thus its employment has been decreased, namely from 2.1
million to about 1.9 million over the last decade (MOLISA, 2001). As a result, SOEs have absorbed only
around 5% of total labor force in 2000 (Figure 8). In case the government continues its SOEs reform
program, the number of jobs created by SOEs is kept limited. Moreover, it should be noted that
Vietnam is a young country with more than 1 million people entering the labor market per year (GSO,
2001). With only 5% of total labor force, SOEs has truly played quite a modest role in term of job
creation.

Figure 8: Share of SOEs’ Labor in Total Labor Force


   8%
   7%
   6%
   5%
   4%
   3%
   2%
   1%
   0%
          1990


                   1991


                          1992


                                 1993


                                        1994


                                               1995


                                                        1996


                                                               1997


                                                                      1998


                                                                             1999


                                                                                    2000
Source: MOLISA (2001)

Put differently, it is argued that the government has used SOEs jobs as an income transfer (Bales and
Rama, 2001). Despite the common perception of SOEs workers being underpaid, a study by Bales and
Rama (2001) using the workers approach shows that SOEs workers, though having lower hourly wages,
are overpaid by 20% as compared with those in the private sector. Nevertheless pecuniary compensation
is only a half of the story. SOEs jobs also go along with valuable benefits such as higher job security,
more generous old-pension regime, more flexibility with lower effort level, which are difficult to
monetarily quantify.


National Budget Share
As shown in Table 5 the contribution of SOE sector to the national budget has been stable at about 23
percent, excluding that from oil. If the oil revenue is included, the contribution has reached as much as
over 40 percent recently. The SOE sector has accounted for a large share of value-added tax, special
consumption tax, corporate income tax, and natural resources tax (mostly from oil). If absolute terms is
taken consideration, the budget revenue from SOEs has raised remarkably in this period, from VND
6,189 billion in 1991 to VND 45,000 billion in 2002 or up by 7 times during one decade (MOF, 2002).




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 Table 5: Budget Revenues in Selected Years in Percent of Total Revenues

                                             1999                       2001                 2002 (projected)
                                                      Crude                     Crude                         Crude
                                  Total     SOEs               Total   SOEs              Total   SOEs
                                                       Oil                       Oil                           Oil
 Total                            100.0   23.1         15.9    100.0   22.9      23.3    100.0 23.0           19.4
 Value added tax                     15.1   52.1           0.0    13.1   48.8        0.0   14.5  49.9             0.0
 Special consumption tax              5.7   75.1           0.0     6.2   76.1        0.0     6.4 74.2             0.0
 Corporate income tax                18.5   39.3          36.8    24.8   39.1       38.8   24.4  42.9            32.9
 Natural resources tax                5.8    6.1          92.7     7.5    5.8       93.7     6.3  7.4            92.0
 Capital user charge                  2.0   99.4           0.0     1.5   99.3        0.0     0.0  0.0             0.0
 License tax                          0.5    5.0           0.0     0.4    5.0        0.0     0.4  4.8             0.0
 Net profit after tax                 3.7    0.0         100.0     6.6    0.0     100.0      5.5  0.0           100.0
 Others                               4.8   28.0           0.0     1.2    8.8        0.0     1.3  5.3             0.0
 Source: www.mof.gov.vn and Author's Calculations


 Economic Performance of SOEs


 This section aims to draw an overall picture of economic performance of SOE sector. However, care
 should be taken because data on the indicators are not always among consensus.

 Table 6: Some Key Financial Indicators of SOEs in 1997
                                                              Unit: VND billion, unless otherwise indicated
                                               The 100 largest     The 200 largest           Total*
   Total state capital                                   40,492              44,332               73,075
   Total fixed assets                                    62,548              67,354                   n/a
   Total turnover                                        56,523              77,644              267,523
   Total contribution to budget                          14,094              15,651               23,919
   Total debt                                            29,369              40,237              101,439
   Total bank loans                                      13,544              18,286                   n/a
   Total profit before tax                                3,275               4,942                 8,177
   Number of profit-making SOEs                               89                180                 2,196
   Debt-asset ratio                                          .47                 .52                   .58
   Fixed assets turnover ratio                             7.07                7.71                   n/a
   Gross Pretax Margin (%)                                   6.1                 7.5                   3.1
Source: IMF (1999)
 (*): The last column is derived from data set of 5429 SOEs
  n/a: not available

 Table 6 suggests that larger enterprises perform better than smaller ones. Accordingly about 90 percent
 of the largest enterprises show positive pretax profit while the average figure for the total SOEs is only
 40.4%. 100 largest SOEs have made as much as 58% contribution to the national budget among as many
 as 5429 state enterprises (Table 6). This superior performance may be partly due to the monopolistic


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position and preferential treatment by the State as well. Typical monopolistic SOEs are
telecommunications, transportation, construction, electricity, and public utilities, to name a few. These
enterprises enjoy monopolistic market power and are reportedly very profitable since the prices they
charge are very high. In addition, the banking system in Viet Nam has been under-developed and
suffered from burdensome regulations from the State, small sized firms including those in the State
sector usually face difficulties in approaching preferential credit from large State-owned or foreign banks.
They must turn to other sources including unofficial ones, which result in their higher production costs.
Meanwhile large SOEs, which have close relations with the banking system dominated by large state
commercial banks and have ability to get big, feasible and ambitious business projects, can easily access
to bank loans. This results in cost distortion against small SOEs. Besides loan-related cost, the
preference of highly skilled and well-educated labors to work in large firms also puts smaller ones in
inferior position.


However, more recent surveys on the state sector suggest that the performance of SOEs -both large and
small scale ones - seems to have worsened. A study by Mitsui and Wada (1998) reveals that while sales
and other growth indicators showed a large increase, the profitability of most SOEs has deteriorated
substantially with a half of SOEs in red. A closer look at conglomerates reveals a worse reality. Out of
the 17 largest conglomerates that represent 50% of total SOEs’ capital, 12 are in the red or breaking-
even (Saigon Economics Time, 2001). According to the results of the enterprises census at 1st April 2001
published by GSO (2002b), as many as 76.6% of SOEs are profit making in 2000 (see Figure 9).
However, data should be again taken with a grain of salt. The inconsistencies in data collected by various
sources and surveys are not uncommon. A survey by the Ministry of Finance and IMF shows that out of
5,800 SOEs in 1997, only 40 percent were reported to be profitable, 44 percent were temporary loss-
makers, and 16 percent were permanent loss-makers.

Figure 9: Financial Performance of SOEs in 2000




                                                          Loss-making
                                                              18%




                                                             Break even
            Profit-making                                        6%
                 76%




          Source: GSO (2002b)

There might be two major reasons for the weak performance of Vietnamese SOEs. One is that
Vietnam’s comparative advantages in many of the industries where import-substituting SOEs operate are



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 very weak. Another reason is that Vietnamese SOEs appear to be subject to soft budget constraints.
 Loss-making SOEs have systematically been rescued through the write-off of non-performing loans and
 cash injections from state-owned banks, the National Investment Assistance Fund, Social Security
 Funds, and other sources. For instance, IMF (1999) notes that several of the most severely indebted
 SOEs were able to increase their total outstanding debt by 50 percent or more in 1997, mainly by
 recourse to the state banking system. The softness of the budget constraint is particularly problematic
 because the incentives of SOE managers to maximize profit are poor. Financial profit is not always the
 only objective of SOEs nor is the remuneration of the managers directly related to the enterprise’s
 economic performance. Lacking individual profit-oriented owners, the objectives of SOEs are often
 defined by politicians, and may include a multitude of specific targets ranging from maximization of
 employment to regional policy objectives. This means the performance is difficult to monitor because it
 is hard to find appropriate performance measures for all objectives. In addition the weights of the
 different objectives are seldom specified.

 As analyzing the SOEs’ performance, it is impossible not to mention the credit, loan and indebtedness of
 the sector. The total credit to SOEs has continuously increased recently, from nearly VND 27 trillion in
 1996 up to VND 70 trillion in 2000 (See Table 7). However, the share of SOE sector’s credit has
 fallen since late 1990s on, from over a half to over 40 percent of total credit to the economy in
 2000.

 Table 7: Distribution of Credit, 1996-2000
                                                            Unit: VND billion, unless otherwise indicated
                                       1996              1997        1998          1999         2000
 Total credit to the economy             50,751            62,201     72,597       112,730      155,720
 To SOEs                                 26,810            31,222     38,076        54,335       69,918
     Percent of total (%)                 52.83             50.20      52.45          48.20       44.90
 To other sectors                        23,941            30,979     34,521        58,395       85,802
     Percent of total (%)                 47.17             49.80      47.55          51.80       55.10
Source: IMF (2002)

 As shown in Table 8, the percentage of overdue loans in the SOE sector has been around 8.5 percent
 sine 1997, next to joint ventures and private sector. However it should be noted that the SOEs’ overdues
 share to the total overdues of the economy, though sharply declining since 1994, was still at the high
 level of around 35% in 1997-1998.




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Table 8: Overdue Loans to Different Sectors
                                                                                           Unit: Percent
 Sector                              1994         1995           1996           1997        1998 Sep.
 % of total loans to the sector
 SOEs                                    9.1             6.9             7.8        8.6             8.5
 Cooperatives                           22.5            26.3            29.7       40.2            43.0
 Joint-stock companies                   4.5             3.7             7.4       34.3            37.6
 Joint ventures                          0.3             0.4             1.0        1.2             2.7
 Private sector                         11.7            12.7            14.9        8.1             7.4
 % of total overdues
 SOEs                                   58.8            49.7            44.2       34.8            35.5
 Cooperatives                            2.1             2.1             1.7        1.3             1.6
 Joint-stock companies                   3.4             5.3            11.8       45.7            46.1
 Joint ventures                          0.1             0.2             0.6        0.6             1.3
 Private sector                         35.7            42.7            41.7       17.5            15.6
Source: IMF (1999)
In terms of indebtedness, SOEs debt amounted to over VND 100 trillion (Table 6) and increased to
VND 382 trillion in 2000 (see Table 9).

Table 9: Some Indicators on Performance of SOEs in 2000
                                                                                       Unit: VND trillion
     Indicator                                            SOE            Central SOE       Local SOE
Net revenues                                                     373              246                127
Pretax profit                                                    16.3             13.5                2.8
Of which:
    Total Gains                                                  18.1             14.4                3.7
    Gains from business activities                               17.3             13.8                3.5
    Total Loss                                                    1.9              0.9                  1
    Loss from business activities                                 1.6             0.75               0.81
Total capital                                                   521.5             431                  90
Debt                                                             382              298                54.5
Own capital                                                      139              103                36.5
Source: GSO (2002b) p: 854-55, 1286-87, and 1380-81
As can be seen from Table 10 and Table 11, the debt/equity ratio of SOEs also raised from 138.8
percent in 1997 to as high as 274.8 percent in 2000, implying that SOEs have mobilized much debt.
Then the financial situation of SOE has been more risky recently




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Table 10: Key Financial Ratios of SOEs in 1997 (%)

                                                   Profit-           Temporary            Loss -
  Ratios                          Total
                                                   making           loss-making           making
  Number of SOEs                        5,429           2,196               2,393                840
  Debt/Equity                           138.8           116.7               176.6              278.0
  Debt/Assets                            58.9             53.9               64.1                84.9
Source: IMF (1999) Table IV.2

Table 11: Indicators of Indebtedness and Financial Performance of SOEs in 2000
                                                                                          Unit: percent
 Indicators                                               SOE            Central SOE     Local SOE
 Debt/Equity Ratio                                               274.8           289.3            149.3
 Debt/Total capital Ratio                                         73.3            69.1             60.6
 Net revenues/Total capital Ratio                                 71.5            57.1            141.1
 Net revenues/State capital Ratio                                268.6           238.8            347.9
 Pretax profit/Total capital Ratio                                 3.1             3.1              3.1
 Pretax profit/State assets Ratio                                 11.7            13.1              7.7
Source: Calculations from GSO (2002b)
Although some debt ratios have gone upwards, in terms of profitability in the SOE sector, the pretax
profit to total capital ratio was 3.1 percent and pretax profit to own capital ratio was 11.7 percent in
2000, which is a unwonted positive sign of performance in the sector.




Concluding Remarks

No one can deny the role of Vietnam’s SOEs in the transition process. However, to maintain its role in
the economy in the next period, the new phase of further SOEs reform should be required. Specifically,
until now SOEs still remain a leading role in the economy but their contributions have been declined
significantly over the last decade. Moreover, SOEs’ bad performances have been a serious problem that
the government should try its best to solve. Then, it is of necessary to explore the government’ policies
toward SOEs at the present and in the long-term vision. The following part will be for this concern.




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Policy Framework for SOE Development and Reform




Overview of the SOE Reform in Vietnam


SOE reform in Vietnam commenced at the time of Doi Moi reforms in late 1980s. The issuance of
Decision 217-HDBT dated 14/11/87 marked the first Doi Moi move towards a broad based SOE reform
program. Since then there have been many Party and Government decisions including resolutions,
legislation, decrees and ordinances towards SOE development and reform. In accordance with those
decisions, the government has implemented three major rounds of SOE reform over the last ten years.
The first round of SOE reform took place during 1990-1993 and concentrated on reorganizing and
strengthening business and production in the SOE sector in accordance with Decision 315/HDBT and on
establishment, re-registration, and liquidation of SOEs in accordance with Decree 388/HDBT. In the
second round that took place during 1994-1997, the government aimed at (i) reorganizing SOEs and
enterprise associations in order to establish general corporations (GCs) according to Decisions 90/TTg and
91/TTg; (ii) implementing the transformation of SOEs into joint-stock companies according to Decree
28/CP; and (iii) issuing the Law on State enterprises as the framework for enterprises to operate. The
third round taking place from 1998 up to present has speeded up the equitization process of SOEs
according to Decree 44/1998/ND-CP and Decree 64/2002/ND-CP, the restructure of SOEs according to
Circular 20/1998/CT-CP, and the transfer, sale, contracting and lease of SOEs according to Decree
103/1999/ND-CP. Decree 63/2001/ND-CP outlining the procedures for corporatisation of SOEs was
also issued..

Major contents of these rounds of SOE reforms include (i) reforms on mechanism and policies towards
SOEs, allowing SOEs to become more autonomous, self-responsible for their decisions and activities,
and making SOEs to operate according to market mechanism; (ii) reforms on enterprise's planning,
finance, personnel organization, and on the state administration with the tendency of eliminating “the
organism in charge” of state organizations; (iii) allowing mergers, liquidations, and bankruptcy for
permanent loss-making SOEs which the state should not hold the ownership; and (iv) organizing,
strengthening, and developing GCs to build large economic groups to develop key industries that the
state has to take control.

The SOE reform process in Vietnam has obtained remarkable achievements such as introducing a new
management mechanism, reducing the number of SOEs, reducing state subsidies, and granting more
autonomy for firms in making decisions on business and production. As a result, a large number of firms


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have improved their performance, increased capital, and improves workers' benefits etc. The SOE sector
still plays an important role in the economy via their large contribution to state budget, export turnover;
and help ensure economic stability of the economy.
Next sections will focus on key Party and Government decisions and policies on the SOE reform over
the past years.


Milestones in the Process of SOE reforms throughout Party Congresses.



The Launch of Doi Moi at the Sixth Party Congress
Doi Moi was launched at the Sixth Party Congress in late 1986. Although the Congress represented a
critical turning point in policy direction, only limited details were provided about the specific policy
reforms that would be implemented to bring about desired changes. In a series of Party Plena following
the Party Congress, the details of Doi Moi were discussed. Therefore, first steps towards a broad based
SOE reform were only introduced when the Councils of Ministers issued regulations in Decision 217-
HDBT dated 14 November 1987 that aimed at putting into effect the Resolution of the 3rd Plenum of
the Sixth party Congress to give greater autonomy to SOEs and to introduce a socialist cost-accounting
regime. Details of this Decision will be presented in section.

The Seventh Party Congress
The Seventh Party Congress renewed the commitment to greater SOE autonomy. While the Party still
maintained that SOEs were to continue to play a leading role in the economy, there were also calls for
consolidation of the SOE sector, including the liquidation of non-viable enterprises, and the equitization
of non-strategic SOEs. The 7th Party Congress called for pilot activities to dissolve or change the
ownership of enterprises that did not need to be retained understate ownership. Resolution of the
Second Plenum agreed to converse a number of eligible SOEs into joint-stock companies and this
should be done on a pilot basis and under close guidance. Then in late December 1991, the National
Assembly approved a pilot equitization program and the government issued a decision to proceed this
pilot program.

The Eighth Party Congress
In the 8th Congress, it stressed the need for a greater focus on improving financial management of all
SOEs, to rely on profitability indicators to evaluate the performance of SOEs, while also using social
indicators to evaluate the efficiency of state public service enterprises. The 4th Party Plenum emphasized
that the immediate priorities were ensuring financial sector and macroeconomic stability, and coping
with the unfavourable impact of the regional economic crisis, including a renewed focus on SOE reform.
In the resolution of the 4th Party Plenum, priorities for enterprise reform included: accelerating the
equitisation program; developing the legal basis for small SOEs (less than VND 1 billion in capital) to be
merged, divested, leased, or contracted out under performance contracts incorporating State business
enterprises as limited liability or joint-stock companies under the Company Law; promulgating
regulations to deal with supervision of enterprises with monopoly powers; and introducing clear
regulations imposing compulsory auditing and publication of annual reports.



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Resolution of the 3rd Party Plenum of the 9th Central Party Standing Committee
The Third Party Plenum called for further acceleration of SOE reform. The direction viewpoint in this
resolution includes: continuing to reform, develop, and raise the efficiency of SOEs to help SOEs
implementing their role in maintaining the socialist orientation, stabilizing and developing Vietnamese
economy, politics and society; reforming the management mechanism; continuing reform, rearranging,
developing and raising the efficiency of SOEs are urgent as well as strategic missions; and raising the
party leadership at all levels of authorities, and at all industries and branches.

The future role of SOE sector includes: providing necessary public-utility goods and services for the
demand of national defense and security, being the key force in boosting the economic growth and
providing ground for the industrialization and modernization of the country with the socialist
orientation.

The orientation in rearranging and developing business and public-utility State enterprises: State holds
100% capital of business enterprises operating in state-monopoly fields; state holds dominate shares or
100% capital of state enterprises operating in some specific industries and domains (See Decision
58/2002/QD-TTg). These enterprises are providing the necessary commodities for production
development, and spiritual and material improvement of rural people, and people in mountainous,
remote, and deep areas.

State holds special shares in some necessary cases; and State converses 100% state capital business
enterprises into one-member liability companies with an owner is the State, or joint-stock companies in
which the shareholders are state enterprises. For existing public-utility SOEs, State holds100% capital of
Public-utility state enterprises operating in some specific industries and domains (See Decision
58/2002/QD-TTg). State holds dominant shares of Public-utility state enterprises operating in some
specific industries and domains (See Decision 58/2002/QD-TTg); and periodically the State adjusts the
enterprise-classification orientation in order to fit with the socio-economic development’s demand.
Amending and Supplementing Mechanism and Policies
    With respect to Business State Enterprises
Enterprises decide their businesses based on demand-supply relations in the market to meet the
objectives and their operational regulation. The budget subsidies to enterprises will be eliminated.
Priority policies for industries, areas, and goods and services encouraged to develop, regardless of
economic sector, shall be carried out.

Law on competition shall be issued to protect and encourage enterprises in all economic sectors compete
and cooperate in the general legal framework. Price-control and profit regulations, the competition
between state enterprises are needed in the fields in which state enterprises operate monopolistically.
The state issues efficiency-valuating criteria and SOE supervising mechanism. Accounting, auditing,
reporting, and information mechanisms shall be reformed. Business operation and enterprise finance
shall be performed publicly.

    About capital: enterprises can access and attract different sources to develop their businesses; they
    can actively treat the unused assets, and materials and goods that are accumulated stagnantly. The
    State has mechanism to create enough capital for enterprises in 5 years 2001-2005 basically. Fees of


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    using budget capital are not collected, accompanying by the conversion from capital providing to
    investment. State financial investment companies are experimentally set up to invest and manage
    state capital at enterprises. The State shall issue the Law on State capital uses invested in businesses.
    Enterprises are sovereign in profit distribution and establishment of different funds extracted from
    profits in accordance with general framework. The state will have policies treating with assets created
    by loans and these loans are paid by depreciations and profits created by these assets in orientation
    of harmonizing different interests to encourage enterprises to invest for development.
    About investment: The state increases the rights and responsibilities of SOE in investment decision,
    base on the approved development plans and strategies.
    About technology renovation and modernization: enterprises are applied the preferential regulation
    applied to contributors in technology innovating that contributes practical efficiency to enterprises;
    the costs are accounted into the production costs. The state has policies encouraging, helping
    enterprises in investing to innovate technologies.
    About laborers and wages: enterprises decide to labors recruitment and are responsible for policies
    with these laborers without jobs created by enterprises. Enterprises are sovereign in paying wages
    and awards base on productivity and enterprises' operation efficiency.
    About managers: enterprises actively choose and arrange managers base on examination; authorized
    state organizations issue decision appointing key managers of enterprises. The state has regulation to
    encourage spiritually and materially for them, accompanied by raising their responsibilities.
    About auditing and checking: Enterprises shall be audited and checked to provide the legal bases of
    enterprises' financial situation. State administrative organizations shall have the periodically auditing
    and checking programs and pre-announce to enterprises. Legacy-protected organizations only
    inspect and check enterprises when there are signals of legal violation. These organizations are
    responsible for the results.

    With regard to Public-utility State Enterprises
The State decides the organizational scale, financial policies toward public-utility enterprises base on their
demand and tasks. The Mechanism of capital provides and task assignment shall be converted into
mechanism of placing or bidding of public-utility goods and services. The state has preferential policies
toward public-utility goods and services regardless of enterprise types and economic sectors. Labor,
wages, and income management mechanism are carried out base on the quantity and quality of goods
and services placed or assigned by the State. The accounting mechanism shall be applied to these
enterprises.

    Excess Labor and Non-performing Loans Solutions
The mechanisms and policies toward labor excesses created by the rearranging and restructuring SOE
are supplemented. Enterprises shall check and set up the standard to determine needed laborers. Excess
laborers are retrained, or finding new jobs while still receive their wages; if they cannot find new job, they
can be applied the job-losing mechanism as prescribed by the Labor Code. Specific policies toward
laborers voluntarily retire before defined age are supplemented and amended. The government will have
money to implement the policies for excess laborers.
The Labor Code shall be amended and supplemented with orientation of applying the job-losing
mechanism to the excess laborers at the time of assignment, sale, contracting and lease of SOEs. Social
insurance policies shall urgently be supplemented; unemployment insurance policies shall be issued and
be joint-contributed by the State, enterprises, and laborers.



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    Non-performing Debts
Government defines the methods to solve completely enterprises' non-performing debts borrowed from
state budget and banks, accompanied by methods to prevent them from re-happening. The Debt and
asset management companies shall be set up to treat the debt and unused assets, creating conditions to
make the enterprises' finance healthy.



Reforming and Raising the Efficiency of General Corporations, and Setting up some Strong
Economic Conglomerates.
General Corporations must have large chartered capital, the capital can be mobilized from different
sources, of which the state capital is dominating; may be multi-industries, but they must have specialized
industry. There are interdependence in terms of finance, production, and market between their members.
GCs must have advance technology and management, high productivity, high product quality, ability to
compete in the domestic and international markets.

Vietnam should complete the rearrange existing GCs to make GCs: concentrate more resources in
dominating important industries and domains of the economy; be the regular force in ensuring basic
balances and macroeconomic stable; provide important and necessary products for the economy and
exports, contribute largely to the state budget; be the core in boosting the economic growth and actively
integration efficiently. General corporations shall operate in some specific industries (See Decision
58/2002/QD-TTg). Periodically according to the reality of economic growth, the list of industries will be
adjusted. Existing GCs that do not meet these conditions will be rearranged.
Experimentally implement the “mother company-facilitate companies” model, in which the GCs invest
in member enterprises that are one-member limited liability companies (corporations) or joint stock
companies that the general corporation hold dominating shares. The general corporations can also invest
in enterprises of other economic activities.

100%-state-capital general corporations must have Managing Board. Managing Board represented for the
owner at general corporations, responsibility for receiving and keeping this capital intact. The Managing
board’s rights and tasks are as follows: (i) Submit to the Prime Minister (or Ministers, presidents of
People’s Committees of provinces and central-run cities) for approval: the plans of establishment,
division, merge, ownership conversion, dissolution of member units; issuing standard regulations;
appoint and relieve, recommend and discipline the chairman and members of Managing Board, general
director; approve the objectives, tasks, strategies, plans of medium- and long- term development of
general corporations, and investment projects that are to be approved by the government; (ii) Decide the
appointment of vice general directors, chief accountant, approve the director of member unit decided by
the general director; decide and be responsible for the investment projects under their management base
on approved strategies and plans, and for plans of management and business organization of general
corporations; decide the after-tax profit distribution; (iii) check and supervise members’ directors or
general directors in using and keeping intact and developing of capital, in implementing their obligations
with the State, and in implementing the Managing Board’s resolutions.

The government defines the wage and award for the Managing Board depending on the operation
efficiency of the general corporations.



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Set up some strong economic conglomerates base on state general corporations, in which other
economic sector can participate. These conglomerates operate in many industries, but they must have
specialized industry at high level and have large dominating role in the economy; have very large scale in
terms of capital; there are close relations among scientific technology, training, research and
development, and production; experimentally set up conglomerates in fields that have enough
conditions, advantages, and development ability to compete and integrate efficiently such as oil and gas,
telecommunication, electronic, and construction.

Boosting SOE Equitization

The objectives of SOE equitisation are: creating new type of enterprises which have many owners,
including most of labourers, efficiently using state capital and assets and mobilizing capital of the whole
society for the purposes of investment in renovation of technology; and facilitating shareholding
employees of enterprises and persons contributing capital to be real owners, changing the method of
management, raising the supervision of society; ensuring the harmonization among interests of State,
enterprises, and labourers. SOE equitisation cannot be SOE privatization.
Enterprises in which it is no longer necessary for the State to hold 100% of invested capital shall be
subject to equitisation, regardless of their business results. Authorized state organizations, base on the
rearranging and developing orientation of state enterprises and base on the situations of enterprises,
decide the conversion to joint-stock companies, in which the State hold dominating shares, special
shares, shares, or no shares.

The types of equitisation include issuing shares to mobilize additional capital; selling part of the value of
enterprise; separating a part of the enterprises to equitize; or selling the whole value of the existing State
owned capital. Equitisation of member units shall not adversely affect the business performance of
remainders of enterprises.
The state shall have policies to reduce the difference in terms of preferred shares for laborers among
equitised enterprises. Laborers shall hold preferred shares in a pre-determined period of time. Amending
and supplementing the priority mechanism of selling shares to laborers to deeply attract them to
enterprises; sell an appropriate proportion of shares to outside buyers. Using a part of enterprises’ capital
to form laborers’ shares, laborers would have the dividends but cannot draw the shares out of the
enterprises. Expanding the sale of shares of processing enterprises in agriculture, forestry, and
aquaculture to material providers and producers. Encouraging equitised enterprises to be labor-intensive,
and allowing transforming debts into joint-stock capital.

Amending the method of valuating the value of enterprises with regard to the market value; the value
will include the value of land-use rights. Experimentally implement selling share through bidding and
financial intermediaries.

Implement business assignment, contract, sale, lease, merge, dissolution, and declare bankrupt SOEs.
With enterprises of less than VND5 billions, the State does not have to hold 100% capital and they
cannot be equitised, depending on the conditions of each enterprises authorized state organizations shall
decide to sell, contract, assign, or lease. Assigned, sold enterprises are encouraged to converse into joint-
stock companies. Other methods are merging, dissolving and declaring bankrupt with inefficient state
enterprises that cannot apply these above-mentioned methods. Law on Enterprise bankruptcy should be


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supplemented and amended, allowing the people decided the establishment of enterprises to propose to
declare bankrupt. Boosting propagation, raising the laborers’ and society’s knowledge with the policies of
business assignment, contract, sale, lease, merge, dissolution, and declare bankrupt SOEs.


Renovating, raising the management effectiveness and efficiency of State and owner
organizations to SOEs.
The state management functions toward SOE should be clearly identified. State management functions
toward SOE include: create and complete the legal framework, issue management policies and
mechanisms toward business and public-utility enterprises; set up the plans and train key managers,
inspect and check the enterprises’ implementation of State’s policies and regulations.
Firmly finish the direct interference of state administrative organizations into the operation of state
enterprises; clearly fix the economic administrative rights of State and business administrative rights of
enterprises. State administrative organizations base on the legal framework and management
requirements to issue the system of legal documents to implement to state administrative functions to
enterprises of all economic sectors, including SOEs.

Second is clearly fixing the rights of State organizations implementing the ownership functions to SOEs.
The government manages and implements the owner’s rights to SOEs. The owner have following rights:
establish, merge, divide, and transform ownership, dissolve enterprises; issue the standard regulations,
appoint and relieve, recommend and discipline the key managers, decide the objectives, tasks, strategies,
plans of medium- and long- term development of enterprises; approve investment projects; decide the
after-tax profit distribution; (iii) check and supervise the implementation of objective and tasks assigned
by the state and the efficiency of enterprises.

The government authorizes ministries, devolves specifically to People’s Committees of provinces and
central-run cities, and Managing Board of General corporations to implement the State’s ownership
rights to SOEs, ensuring that if there are any state capital, there will be organizations or individuals that
are authorized to be the direct owner with clear tasks, rights, benefits, and obligations, regardless of
central of local state enterprises.

About training and using the SOEs’ managers: The government defines the standards of key managers
of enterprises, directs in building the system of training the directors of enterprises. The government
defines the interests and obligations of SOE managers, satisfactory encourages them spiritually and
materially based on their contributions, also defines clearly the disciplines of managers of inefficient
SOEs due to subjective reasons.

The government has issued the Acting Program attached to Decision 183/2001/QD-TTg to implement
this resolution. Main contents of this program are amending, supplementing mechanism and policies,
and implementing these policies. From now to 2003, there will be a number of policies related to this
resolution together with issuing and completing mechanism and policies related to implementation.




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Key Programs of SOE Reforms



Reforms in SOE Management Mechanism
There have many decrees, decisions, and resolution towards this problem. The first legal deed was
Decision 217/HDBT on 14/11/1987 making the 3rd congress’s Resolution of 6th Party more detail. This
decision was on transforming the operation of state economic units into socialist business accounting,
and implementing business self-control mechanism of SOEs. Later, the government issued Decree
50/HDBT on 23/03/1988 issuing the Regulation of State industrial enterprises, Decree 98/HDBT on
02/06/1988 on the role of labor in enterprises, and some other deeds.

The government experimentally implemented giving the rights on management and use of capital to
SOE in 1990. This program was expanded in 1991. In this period, the state changed from directly
control of capital into the direct control of labor staff and director. The government redefined to tasks,
rights and obligations of Ministries in state economic administration (according to Decree 196/HDBT on
11/12/1988 and Decree 15/CP on 02/03/1993) with the direction of reducing control functions to four
functions: establishment, merger and dissolution; assign director and vice director; supervision of the
business activities; and assignment of use right of capital and assets.

The 7th Party Congress has confirmed that the state regulated the economy by law, plans, policies, and
other instruments. In the Constitution 1992, the regulation of the economy by law was also confirms. All
economic sectors are equal in law and operation.

The issue of Law on State enterprise on 20/04/1995 marked an important change in the legal framework
for SOE operation and SOE reforms. Ministry of Finance was assigned to manage the state assets at
SOEs. Some national-scale GCs were established to reduce the state administration mechanism and
level. After that the government issued Decree 59/CP dated 03/10/1996, which is amended and
supplemented by Decree 27/1999/ND-CP dated 20/04/1999, issuing the regulation on financial
management and business accounting of SOE. The state now allots capital to enterprises instead of
providing capital as before. SOEs now have more rights and self-responsibility on managing their
businesses.

Restructure of SOEs
The Council of Ministers issued Decision 315/HDBT dated 01/09/1990 to correct and reorganize the
SOE business. This decision required enterprises to review their business functions and factors such as
their market, capital, labor, management organization, and enterprises finance. Enterprises, that were loss
making in the long time or could not implement their business missions even though all needed methods
to improve their efficiency had been done, can be declared dissolution.

Decree 388/HDBT dated 20/11/1991 regulated the establishment, reregister, and dissolution of SOE.
Long loss-making SOEs would be weeded out and previous massive- and extensive- established SOE
would be supervised. This decree had been carried out extensively. This defined the principles of SOEs
such as the minimum level of charter capital, smallest scale, business lines, and so on. Implementation of
this decree had showed the weaknesses of SOEs and proposed methods to improve this situation.



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Decree 156/1992/ND-HDBT amended and supplemented Decree 338/1991/ND-HDBT. Before
establishing a new state enterprise, an appraisal committee must be formed. This committee shall
carefully assess necessary conditions defined in Articles 4 and 5 of the Regulations issued with
338/1991/ND-HDBT. This committee has to be organized appropriately. It has to quickly analyze and
have to give its opinion in 40 days since the time of receiving the Paper of Enterprise Establishment.
The Establishment of enterprises with high value, high revenue, or special role in the economy will be
decided the Chairman of Committee of Ministers (The Prime Minister now). Ministers and presidents of
People’s Committees of provinces and central-run cities decide to establish of other state enterprises.
The establishment and dissolution of state enterprises must be performed in accordance with the Decree
156/1992/ND-HDBT and Decree 338/1992/ND-HDBT.

Decision 90/1994/QD-TTg on continuing to rearrange state enterprises was issued. Based on the
performance of the arrangement of State enterprises, and on the set up and registration procedures of
State enterprise in accordance of the regulation issued with Decree 338/1991/ND-HDBT, State
enterprises which did not perform the re-registration and set up procedures in the first round have to
continues to perform these procedures. State enterprises that have losses, or have no profit, or play an
important role in the economy therefore it is needed to maintain the State ownership, should be
rearranged by specific method to raise their business efficiency. Ministers or presidents of People’
Committees of provinces assess and have appropriate decision on State enterprises that do not have
enough conditions to continue and develop their business. New State enterprises can only be established
in key industries, or key domains that have large revenues, or in the sectors that private sector does not
meet the demand.

The Prime Minister issued Circular 500/TTg dated 25/08/1995 about urgent organizing and restructuring
SOEs. This restructure and classification of SOEs aimed at implementation of Law on State enterprises,
accompanied by the cancel out state administration mechanism and levels to reduce the overlapping in
the state administration over SOEs.

The Prime Minister issued the Circular 20/1998/CT-TTg to speed up SOE restructure and reform. This
Circular required that SOEs would be urgently classified and organized; GCs would be consolidated and
completed; methods to strengthen finance situation and improve technology level would be
implemented; and management would be completed. All these methods were to raise the
competitiveness of SOE in the integration process.

In order to implement the Law on State enterprise, the government issued Decree 50/CP dated
28/08/1996, amended and supplemented by Decree 38/CP dated 28/4/1997, on SOE establishment,
reorganize, dissolution, and bankruptcy procedures. They also define the industries and domains that are
given priority in establishing SOE, the minimum level of charter capital.

Reorganization of General Corporations
The Prime Minister issued Decision 90/TTg dated 07/03/1994 to promote organizing, establishment, and
register of enterprise associations, corporations; to define in detail criteria in establishing SOEs and State
GCs. The conditions to be a state corporation are specifically defined. Group A’ s corporations should
have: at least 5 member that have relations of technology, finance, and development and investment
program; legal capital of over VND 500 billion; economic accounting; organization and operation


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regulations. Group B’s corporations are inefficient ones, but they needed maintained. Corporations of
Group B must be rearranged in order to be Group A’s. Other corporations will be merged or dissolved.

Decision 91/TTg dated 07/03/1994 decided experimentally establishing business conglomerates in some
industries and in Ho Chi Minh City. The choice must base on some corporations or large state
enterprises that have industrial and geographical relations, disregard of central management or local
management. They have to play important roles in the national economy. The principles in
establishment of conglomerates include: Limiting monopoly, and unhealthy competitive; at least 7
member; legal capital of at least VND 1000 billion. Even though Conglomerates can operate in different
branches, they have to have key branch. Prime Minister points the Managing Board of conglomerates.
The Law on State enterprises clearly defines the aim, relations and operational mechanism of members
of GCs

Decree 39/CP dated 27/06/1995 issuing standard regulation about organization and operation of State
GCs; rights and obligations of General Director, Board of Management; GCs members and labor; capital
management; GC finance; relations of GCs with state organizations and local authorities; and so on.

Equitization of SOEs
The 2nd Plenum of 7th Party Central Standing committee on 11/1991 proposed SOE equitizations. The
Plenum defined in detail that some enterprise that have enough conditions would be transform in to
joint stock companies and some new state joint stock companies would be established. This process
would be carefully implemented to draw experiences before expanding in larger scale. The 8th National
Assembly on 26/12/1991 indicated that experimental equitization some SOEs to draw experiences and
get more capital. The objective of capital was also confirmed in the Resolution of Nation-wide
Representative Meeting on 11/1994.

Decision 143/HDBT dated 10/05/1990 decided to experimentally transform some SOEs that have
enough conditions. Decision 202/CT dated 08/06/1992 decided to continue to implement this process.
Decision 203/CT dated 08/06/1992 had selected 7 SOEs for the government to direct the equitization
process, and assigned that each Ministries, provinces, and central-run cities had to select 1 or 2
enterprises to experimentally transform into joint-stock companies.

The Prime Minister issued Circular 84/TTg dated 04/03/1993 about implementing the experimental
equitization and methods to diversify ownership of SOEs. This circular indicated that the equitization
was not closely combined with the restructure of SOE, and dissolution methods were preferred rather
than diversification.

Decree 28-CP issued in May 1996 defined synchronously policies towards equitized SOEs. This decree
was amended and supplemented by Decree 25-CP (26/03/1997) and replaced by Decree 44/1998/ND-CP
dated June 1998. Decree 64/2002/ND-CP (19/6/2002) replaces Decree 44/1998ND-CP regarding the
equitization of State Owned Enterprises to joint stock companies. It seeks to create incentives and
dynamic management for enterprises through the equity ownership by many shareholders. This will
balance better the interests of the State, the enterprise and its employees.




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However, before Decree 64 was issued, Prime Minister issued Decision 58/2002/QD-TTG Decision
58/2002 on the criteria and classification of SOEs on 26 April 2002. This decision states that the State
shall hold 100% ownership of SOEs with state monopolies over: explosives, toxic chemicals, radio-active
materials, transmission of electricity and main cable communication. The State will also retain 100%
ownership of SOEs with size and profitability criteria in a wide range of areas SOEs doing business to
maintain the essential need for production development and enhancement of physical and spiritual living
conditions of people in rural mountainous and remote areas. Further, SOEs doing special business in
publishing, lottery and other areas decided by the Prime Minister and, lastly, SOEs in a range of range of
specified utility areas will also remain under 100% State ownership. SOEs not falling into any of these
five categories potentially fall within the scope of Decree 64. Decision 58 specifies some of the industries
where SOEs are to be equitized, handed over to employees’ collectives or sold. Decision 58 also draws
up criteria for GC90s and GC91s. Those failing to meet industry, size, profitability and modernity
criteria are to be reorganized towards merger or dissolution.
Decree 64/2002/ND-CP is a breakthrough to cranking up progress in the government’s slow-moving
equitization drive. The new decree makes around 10 major changes to the former Decree 44. The
reforms deal with issues such as the workforce at SOEs earmarked for equitization and equitized SOEs;
bad debts; initial public offering (IPO) requirements; founders’ obligations; asset evaluation
methods, land-use rights and other asset-related measures.

Decree 64/2002/ND-CP applies to SOEs and their affiliates currently operating under the Law on State
own enterprises. The equitization of affiliate units shall be implemented if following conditions are met:
independent accounting, no adverse effect on the enterprises’ performance as well as other part of
enterprises. Independent accounting enterprises which have State owned capital of less than VND 5
billion can also be assigned, sold, contracted or leased; the limitation on the percentage of shares that a
primary buyer can buy are removed. Equitized enterprises have to army and employ maximally the
laborer of enterprises at the time of equitisation. It shall use all resources that are equitized, inherit all
benefits and responsibility, members of corporation in which State holds more than 50% shares are still
considered as members of corporation. Financial treatment is clearly defined for each item such as
payables, receivables, borrowing and leasing, profit, joint-venture capital. The value of equitized
enterprises is the total value of assets of enterprise, but the profit-making ability of enterprises is also
considered. The basis for calculating the value of enterprise includes business advantages and reputation,
product monopolies etc. if any; and the profit-making ability determined by the profit-capital ratio of this
enterprise.
The valuation of an enterprise will be determined under the guidance of the Ministry of Finance taking
into account the specific business activities of the enterprise. The valuation is the basis, in the first
instance, for the determination of the share structure. The basis for determining the value of the
enterprise will be the accounting information in the enterprise’s books of account at the time of
equitization, the quantity and quality of assets, the asset specifications and their market price. In
addition, there is the value of the land use rights and value of the business goodwill.
If the planned number of shares for insiders has not been sold 2 months following the decision on the
approval of the equitization method, then the shares may be sold to outsiders. If, after a further month,
the shares are not sold, consideration will be given to the adjustment of the enterprise value.

There is a prioritisation in the parties to which shares should be sold: retained State owned shares,
employees (at a concessionary price), producers and suppliers of raw materials in agriculture, forestry and


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aquaculture processing enterprises (at a concessionary price) and outsiders with preference being given to
investors with advantages in technology, market access and managerial skills. The shares may be sold by
the equitized enterprise, a financial intermediary (mandatory for significant numbers of shares sold to
outsiders), through auction, commission or underwriting under the guidance of the Ministry of Finance.
Proceeds from selling State capital should be accrued to the Central Fund for State Owned Enterprise
Restructure or the Fund for State Owned Enterprise Restructure depending upon the authority that had
been responsible for the SOE in question. The prioritization for the use of such proceeds is: workers’
severance, support for (re)training, investing in SOEs where the State is the dominant shareholder,
settling overdue debts of insolvent SOEs, repaying the debts of SOEs where the proceeds from share
sales is insufficient to repay debts and lastly; financial support to SOEs to change technology, improve
competitiveness and business expansion. Equitized enterprises will enjoy a number of specified financial
benefits.

The right to buy shares is given to both Vietnamese and foreign organizations and individuals. However
foreigners are required to conduct business through accounts held in Vietnam. Foreigners are now
entitled to buy up to 30% of the charter capital of a company. Domestic investors are allowed to buy an
unlimited number of initial-public-offering shares as long as the requirements of the minimum number
of shareholders, dominant shares of the state in enterprises that the state must hold dominant shares can
be met.

Other Ownership Transformations
Decree 50/1996/ND-CP on the establishment, reorganization, dissolution and bankruptcy of state
enterprises defined that the establishment of a state enterprise must follow certain procedures; meet
some conditions such as capital. Establishments of State enterprise are approved by different prescribed
persons in line with law. The bankruptcy of a state enterprise must be handled in accordance with the
law of bankruptcy.

Decree 103/1999/ND-CP dated 10/09/1999 on assigning, selling, business contracting or leasing state
enterprises and Decree 63/2001/ND-CP dated 14/09/2001 about the transformation of SOEs into single
owner limited liability company were issued. They provided framework for SOE to be reformed.
Decree 63/2001/ND-CP allowed converting State enterprise, enterprise of political organization or socio-
political organizations into single owner limited liability companies. The above mentioned organizations
can be converted into single owner limited liability companies if they meet following conditions: Being
business enterprises with 100% of their charter capital held by the State, political organization or socio-
political organizations; not being subject to other kinds of ownership transformation. After conversion
into a single owner limited liability companies, it shall have only one organization being its owner or
authorized to be the company owner’s representative. The Ministers, the heads of the ministerial level
agencies attached to the government, and the presidents of People’s Committees of Provinces and
central-run cities, the Managing board of corporations 91 decide the list and plans for conversion of
independent enterprises set up by their decisions, and of member of state enterprises.

Decision 55/2000/QD-TTg decided to authorize the ministers, the heads of the ministerial-level agencies,
the heads of the agencies attached to the government, the presidents of People’s Committees of
Provinces and central-run cities, and the managing board of Corporations 91 to decide the sale, business
contracting and lease of state enterprise under their respective management which have possesses a State


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capital of over VND 1 billion and under VND 5 billion. The annual report on the plan and
implementing of the sale, business contracting or lease of this kind of state enterprise shall be reported to
the Prime Minister. The authorized persons shall have to coordinate with the concerned ministries,
branches and agencies in handling matters related to labor, finance, regime and policies towards the
enterprises being transformed in the above mentioned forms.

Debts and Assets Treatment
Decree 27/1999/ND-CP amended and supplemented the regulation on financial management and
business cost-accounting at State enterprises, issued together with the Government's Decree No.59/CP dated
October 3, 1996 as follows: If necessary the State may allocate additional investment capital to an
enterprise. The enterprise shall have to mobilize by itself more capital and take self-responsibility for
such activities. The enterprise is obliged to receive, manage and efficiently use allocated capital and
resources. The use of state allocated capital shall have to be preserved in accordance with the strictly
regulations. The enterprise may more flexibly manage its capital, assets in order to use it more efficient.
The decree defined in detail principles for costs expenditures, losses, and profits of State enterprises as
well as how to deal with these costs, profits, and losses.

Prime Minister issued Decision 172/QD-TTg dated 05/11/2001 debt treatment, including debts, tax and
national budget payables. Subject to debt clearing are assigned/contracted enterprises that have payables
larger than asset value, mergerred enterprises, equitized enterprises that are in financial difficulty, tax
debts before 1998 due to objective reasons.

Ministry of Finance also had proposal to establish Financial Investment Company and Debt and Asset
Management Company. They will help SOEs in finance management, orient in building some
independent financial activities such as Enterprise and Asset Valuation Company; provide more goods
for stock market; help the government on making policies toward debt treatment and enterprises.


The SOE Reform Agenda: Achievements and Remaining Constraints


The climate for SOE reform has improved significantly in the last years thanks to strong endorsement by
Party Plenum in August – September 2001 and subsequent government decrees and decisions of the
Prime Minister to implement the Plenum resolution. Over the past few years, Vietnam has achieved
encouraging results regarding reforms in SOE sector. The government has taken significant actions
towards SOE reforms. Box 1 provides government actions regarding reforms in SOEs in recent years
from 1998 to March 2002.

Box 1: Reforming State-Owned Enterprises, 1998 – March 2002

Government actions include
1998
    Issuing Decree 44 to simplify the process of equitization and allow limited foreign shareholding in
    equitized SOEs;




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    Issuing Directive 20 to adopt a wider menu of reform options for SOEs, e.g. outright sale, transfer
    to employees competitive bidding, for purchasing SOEs on SOE shares, leases, management
    contract etc.;
    Announcing annual targets for equitizations for 1998 – 2000;
    Equitizing 52 SOEs;


1999
    Completing classification of SOEs into three groups: profitable, temporary loss-makers and
    permanent loss-makers;
    Issuing decree and regulations for outright sale, transfer to employees, and lease of small SOEs,
    without requiring conversion of SOEs into joint-stock companies as required for equitization;
    Selecting 100 large troubled SOEs for independent diagnostic audits (i.e. operational reviews);
    Equitizing 151 SOEs;


2000
    Selecting three general corporations (Seaprodex, Vinatex, and Vinacafe) for developing specific
    action restructuring plans and completing preliminary consultancy work;
    Expanding authority of provinces to decide on divestiture of SOEs with capital up to five billion
    VND instead of 1 billion permitted before;
    Establishing an Assistance Fund for Restructuring and Equitizing SOEs to finance severance
    payments, early pension payments and retraining for redundant workers -- minimizing the negative
    social impact of SOE reforms on workers;
    Adopting a comprehensive five-year SOE-reform plan with annual target for the first three years.
    Equitizing 185 SOEs;


2001
    Establishing a quarterly monitoring system for 200 large highly-indebted SOEs, and revising a
    decision to clarify reporting requirements and introducing sanctions against late reporting;
    Issuing government’s instruction for a moratorium on establishing new SOEs by local People
    Committees and line ministries until further notice (Official Dispatch 574/CP of June 25, 2001);
    Establishing the Financial Investment Company under the Enterprise Law, to represent the interests
    of the State as owner and co-owner of SOEs and issuing decree 63 on transforming SOEs into one-
    member limited liability companies are steps towards disentangling the complex ties between
    Government and SOEs (October 2001);
    Equitized a total of 194 SOEs.

2002

    Allowing managers of equitizing enterprises to purchase shares in excess of the number of shares
    subscribed by employees, requiring 30 days public notice prior to announcement of equitization, and
    clarifying potential conflicts between the SOE Law and the Enterprise Law (Decree expected to be
    issued by May 2002);
    Issuing Decree 41/2002/ND-CP, April 2002 on the policies towards employees made redundant



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    because of SOE reform
Source: World Bank (2002)

Over the past years the National Steering Committee for Enterprise Reform and Development
(NSCERD) working together with People's Committees and line ministries have been developing a
comprehensive program for SOE reform. The SOE reform program aims at reducing losses, and
improving competitiveness. There are three broad types of measures: (i) Diversifying ownership through
equitization and divestiture of SOEs, (ii) Liquidating SOEs that are classified as non-viable, and (iii)
Restructuring large SOEs. In March 2001, the government adopted a five-year SOE reform plan, with
annual target specified for three years (2001-03). During 2001-03, around 1,800 out of 5,571 SOEs will
be subject to enterprise-specific reform measures, mostly through equitization (1,400), divestiture (140),
or liquidation/closure (220); and additional 200 enterprises will face merger/consolidation (IMF, 2001).
Other main elements of the reform plan are to (i) restructure three large general corporation
(SEAPRODEX, VINACAFE, and VINATEX which consist of 150 SOEs) with annual milestones over
the next two years for improving corporate governance and overall competitiveness; and (ii) conduct
operational reviews (i.e. diagnostic audits) using independent auditors for another 100 large SOEs to
prepare the ground for their restructuring (IMF, 2001).

Figure 10: Types of SOE Reform, 2001-03 in Vietnam




                                                                  Equitization with
                                                                  state or special
            Equitization with                                     dominant shares
            state -non dominant                                   44%
            shares
            27%




                       Merger and
                       Transformation
                                      Divestiture       Liquidation/bankrup
                       11%
                                      7%                tcy
                                                        11%


Source: IMF (2001)
Diversifying ownership of SOEs through equitization and divestiture is a key part of SOE
reform program. Most of the enterprises that are put for equitization and divestiture are small and
medium scale with a stock of capital of less than VND 10 billion or US$ 700,000 and only around 10%
of targeted enterprises have capital stock higher than that amount (WB, ADB and UNDP, 2000). Yet,
this choice may not be optimal as some of the large SOEs have the most serious problems of debt and
performance but still remain in government's hands.

Since the beginning of 2001, around 249 enterprises have completed the reform process (see Table
1212). 200 of these were previously under the direction of Provincial and City People’s Committees, 33



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line Ministries and 16 came under General Corporation 91s. These include 191 equitizations of which
136 were major equitizations where more than 65% of shares have been sold to non-State shareholders.

According to NSCERD, a further 173 SOEs are at various stages of the process. 126 of these are under
the direction of Provincial and City People’s Committees, 36 line Ministries and 11 come under General
Corporation 91s. These are made up of 146 equitization projects, 18 assignments, 5 sales, 3 management
contracts and one merger. The elapsed time from the setting up of an SOE Reform Committee to the
Registration of the new company now averages more than 500 days. The step in the process with
longest elapsed time is valuation. Of the 146, 78 have completed the valuation stage.

Table 12: Summary of SOE reforms

                                                            2001         4M-02        Total
Total                                                              182           67        249
Equitizations                                                      133           58        191
    State share less than 35%                                       96           40        136
    State share more than 35%                                       37           18         55
Sales                                                                8            4           12
Liquidations                                                        15            0           15
Other measures                                                      26            5           31
    Assignment                                                      25            4           29
    Management Contract                                              1            1            2
Source: NSCERD

Liquidations: Liquidations have made the least progress so far. This is in part due to worry about the
social impacts on workers but it is also in part due to the legal framework and procedures for liquidation
remaining cumbersome, making it difficult to enforce creditor rights and for the authorities to declare
bankruptcies. It will be necessary to streamline the legal framework for equitization if faster moves are to
be made.

Restructuring Large SOEs: This program seeks to adopt a series of measures to encourage large SOEs
to restructure and downsize in order to reduce losses, accumulation of unserviceable debts and
improving competitiveness. However, restructuring enterprises that remain under state control is the
most challenging part of the reform agenda as getting these large SOEs to behave according to the rules
of the market and restructure with a view to maximizing profits by cutting costs or raising their sales
volumes is not an easy task. This did not happen in the reforms of the 1990s. Nonetheless, for the next
round of reform the government plans to take the following measures with a view to changing
behaviours of SOE management: (i) imposing a hard budget constraint, (ii) making SOEs relatively more
autonomous and their management more accountable for performance, (iii) assessing operational
performance through "diagnostic audits" of 100 large and troubled SOEs, (iv) monitoring quarterly
performance of another 200 or so large SOEs that are highly indebted, and (v) developing detailed
restructuring-action-plans on a pilot basis for three GCs (SEAPRODEX, VINATEX, VINACAFE).
Despite significant achievements, the SOE reform has been still one of the more quarrelsome areas of
economic reforms in Vietnam. Although acceleration of the SOE reform has been called for recently,
the pace of SOE reform in Vietnam has been slow compared to the speed of reform in other countries
such as China (IMF, 1999). One of the big remaining problems is that in spite of official commitments


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to accelerating SOE reform, resolutions of both the 8th and 9th Party Congresses maintained that the
state was to continue playing a leading role in economic development. In addition, the lack of national
consensus on the direction of SOE reform was clearly recognized in the resolution of the recent 3rd
Plenum of the 9th Party Congress "a high degree of unanimity of perception is yet to be obtained
regarding the role and position of the sate economic sector and state enterprises…many issues remain
unclear, entailing conflicting opinions, yet practical experiences have not been reviewed for proper
conclusions. There are many weaknesses and bottlenecks in the state administration of state
enterprises...". This is also one of the main remaining problems in the SOE reform that needs to be
addressed.




How are International Donors Supporting Reforms?


Over the past years a number of international donors have actively supported the SOE reform in
Vietnam. Due to the unavailability of documents related to these activities, the paper is only in a position
to provide a brief summary of chronology of SOE-related donors' activities in Vietnam (see Table 13).




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Table 13: Chronology of SOE-related donors’ activities in Vietnam

        Donor &
                                       Purpose (Implementing Agency)                          Status
      Grant Amount
 ADB                           Enhancing institutional capacity of key agencies          Ongoing.
 US$ 1,400,000                 (MOF, SAGO, SBV, SSC) in diagnostic audit of
                               SOEs and in review and approval of SOEs seeking
                               to equitize and obtain public listing (MOF, SAGO
                               and SSC)
 ADB                           Formulate and implement a strategy and practical          Ongoing.
 US$ 1,600,000                 method for corporatization of SOEs; Implement
                               and enforce the adoption of international best
                               practice in corporate governance (NSCERD).
 ASEM 1 European               Social safety net program to deal with labor              Completed
 (WB administered)             displaced by SOE reform (CIEM in coordination
                               with NSCERD)
 US$ 100,000
 ASEM 4 European               Acceleration of equitization and restructuring            Completed
 (WB administered)             SOEs in the Ministry of Transport.

  US$ 439,000
 ASEM 5 European               Support implementation of SOE reform in three             Phase I completed,
 (WB administered)             line ministries (industry, agriculture, and               extended to a
                               construction) and two provinces /municipalities           Phase II – ongoing
 US$ 1,470,000
                               (Hanoi and one other). (NSCERD)
 +US$ 400,000
 Australia agency for          Improve SOE governance by 1. limited audit                Completed
 international                 procedures of SOE finance 2. assessment of
 development                   validity of SOE management’s assets and entering
 US$                           in large scale transactions

 Australia agency for          To undertake a pilot equitization of SOEs in Hai          Completed
 international                 Phong as a model for further equitization in Hai
 development                   Phong and other provinces in Vietnam
 US$ 352429
 Danida (Demark)               To assist the NERC in formulating and                     Completed
 US$ 894296                    implementation of SOE reform program.
                               Including strategy development, classification
 NERC
                               criteria, legislation, labour and debt issues, training
                               for NERC officials
 Danida (Denmark)              Support to Industry Restructuring and Enterprise          Approved     and
 administered                  Development by implementing equitization plans            ongoing. Expected
 US$ 3,100,000                 and providing post equitization assistance (Ministry      completion: 2002;
                               of Fisheries).                                            an extension is
                                                                                               d


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                                                                                      expected
 Danida (Denmark)              Advisory services, public awareness campaign, the      Completed in
 (WB administered)             establishment of a MIS for SOEs, and capacity          January 2000.
                               building in NERC (NSCERD)
 US$ 390,000
 Danida (Denmark)              Advisory services on implementation of the decree      Under
 (WB administered)             on divestiture, and establishment and use of           implementation.
                               Support Fund for Equitization and Restructure          Expected
 US$ 340,000
                               (NESCERD)                                              completion:    July
                                                                                      2000.
 Danida (Denmark)              Support to capacity building in NSCERD in the          Project to start in
 administered                  SOE reform process (NSCERD).                           July 01 and run
 US$ 1,700,000                                                                        through 2004.

 DFID (UK)                     Pilot restructuring of three general corporations –    Approved     initial
 UK£ 1,800,000                 Vinatex, Vinacafe, and the Seaprodex (NSCERD)          phase; consultants
                                                                                      prepared inception
                                                                                      report.
 GTZ (Germany)                 Support to restructuring SOEs in agriculture           Under
 administered                  (Quang Tri Province, Tan Lam area) by providing        implementation.
 US$ 5,600,000                 advise in implementing equitization plans (People’s    Expected
                               Committee Quang Tri, CREM)                             completion: 2003.
 IFC administered              Dak Lak pilot project to equitize and divest 51        2000 - ongoing
 /Danida (Denmark)             SOEs, using the auction process for equitization.
 US$ 410,000
  IFC administered             Support a pilot divestiture program for small SOEs     Completed,      never
 US$ 782,000 AusAID            in Haiphong People’s Committee, using the              finalized
                               auction process for equitization.
 & US$ 180,000, IFC
 Japanese Int’l Coop           Study on Economic Development Policy in the            Phase II 1997 –
 Agency -- SOE part            Transition Toward a Market Oriented Economy in         1998, follow-up is
 US$ 250,000                   Vietnam (MPI)                                          ongoing.
 Japan PHRD                    Data collection and monitoring system for SOEs         Completed in June
 (WB administered)             under SAC-preparation. It is also financing a survey   1999.
                               of 350 SOEs (GDMSCAE, Ministry of Finance)
 US$ 218,000
 Japan PHRD, AusAID,           Diagnostic audits to assess financial health and       Expected
 Danida                        performance of selected SOEs, and recommend            completion:
 US$ 7,900,000                 restructuring plans to turn around enterprises.        December 2003.

 SIDA (Swedish)                Institute of Economic Research in HCM city             2002-2003
 US$ 1526007
 UNDP                          To support PER activities and preparation of a         Completed
 US$901647                     project supporting SOE reform in three state
                               corporations: VINATEX VINACAFE and


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                                corporations: VINATEX,           VINACAFE,        and
                                SEAPRODEX (NERC)
 UNDP                           The project aims to improve the financial                1999-2002
 US$ 2027100                    management and performance of State enterprises
                                in Vietnam and accelerate the equitization of state
                                enterprises
 UNDP                           “Strengthening the Capacity of the General               Ongoing. Expected
 US$2,145,800                   Department for the Management of State Capital           to run through
                                and Assets in Enterprises” by setting up a MIS for       June 2002.
                                SOEs and valuation (GDMSCAE, Ministry of
                                Finance)
 UNDP                           To improve the basis for greater macroeconomic           Completed
 US$ 2901073                    stability through the development of more efficient
                                SOEs
 WB                             Support the process of SOE reform, equitization          Completed
 US$ 439000                     liquidation with methodology development, SOE
                                selection, valuation, and classification. Drafting
                                documentation required for reform and an SOE
                                reform action plan for medium term (Ministry of
                                Transportation and Communication)




The SOE Reform: A Case Study of the Textile Sector



Ownership Structure of the Textile Sector

As presented in Table 14 the state sector in textiles still claims a lion share of total output at around 55%
on average in late 1990s, in which central SOEs account for around 43% on average. The share of local
SOEs has been declining slightly. Although private enterprises have strongly emerged since the 1990s
after the economic reform commenced, the output share of non-state sector has been decreasing slightly
and stood at around 24.8% on average. Consequently, foreign invested firms have increased their output
share steadily over this period and made up 20.3% of total output on average.




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Table 14: Output Distribution by Ownership of Textile Industry (%)

                             1995      1996      1997       1998      1999     Prel. 2000 Average
Total SOEs                     56.8      58.5       55.4      50.3      54.3       53.8       54.9
  Central SOEs                 43.6      45.9       43.7      40.6      42.4        40.2      42.7
  Local SOEs                   13.2      12.6       11.7       9.7      11.9       13.6       12.1
Domestic Non-SOEs              25.9      25.3       24.6      22.6      24.7       26.0       24.8
   Private companies            1.5        2.1       2.1       1.4       1.3        n/a        1.7
  Households                   21.6      19.2       16.7      15.4      16.3        n/a       17.8
  Cooperative                   1.8        1.5       1.3       1.1       1.4        n/a        1.4
  Mixed Ownership               1.0        2.5       4.5       4.7       5.6        n/a        3.7
Foreign Invested               17.3      16.2       20.1      27.1      21.0       20.2       20.3
Total                         100.0     100.0      100.0     100.0     100.0      100.0      100.0
Source: Derivation from GSO (2001)
In terms of employment, the state sectors claims 39.1% of total employment in the sector while the non-
state and foreign sectors take up 50.8% and 10.1%, respectively (GSO, 1999).


Restructuring in the Textile Sector
Major restructuring of SOEs was commenced in the 1990s and especially urgent when the export
markets in the Soviet Union and Eastern Europe were collapsed. In fact, the timing of enterprise reform
under Doi Moi varied between enterprises. In the 1990s emphases were placed initially on loss making
enterprises and there was a range of closures, consolidations, and some equitizations. Equitization is a
part of the SOE reform program. However, equitized firms have to face some disadvantages they did
not have to face when they were state-owned. For example, one of the major disadvantage for an
equitized company is its lost of access to loan finance at the normal preferable rate of 3-5% for state
companies, and it is having to borrow from a commercial bank at 0.57% monthly (Thoburn et al, 2002).

The state sector has achieved significant successes in export performance. An important factor in the
state sector's export successes has been the focus of the restructuring in the 1990s in encouraging textile
SOEs to move forwards into production of garments. The production of garments using firm's own
fabrics had been pioneered in 1987 and rapidly become common. Textile companies appear to have
found international buyers for their garments than their textiles. Yet, it should be also noted that the
success of major textile SOEs in producing garments that can be exportable has been helped by their
privileged access to investment funds, and by the resulting opportunity to replace obsolete equipment
(Thoburn et al., 2002).

In terms of employment, in the 1990s Vietnam experienced large falls in state textile employment. The
large contraction in the overall textile workforce is down by a third during the 1990s (GSO, 2001). Much
of the reduction in workforce had been organized through early retirements. Sometimes, workers were
induced to retire by the enterprise offering jobs to their children. Interestingly, SOEs that had retrenched
workers had production increased while the workforce had been reduced (Thoburn et al, 2002).




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In the textile sector, VINATEX is the national textile and garment corporation formed in 1995, covering
42 companies and a fashion design institute. All centrally SOEs come under Vinatex. Vinatex claims to
have 95.7% of Vietnam's capacity in spinning, 45% in weaving, 28.8% in knitting, and 14.7% in sewing.
Vinatex takes up 30.6% of total output of Vietnam's textiles and garments and 28% of export turnover
(Bui, 2001). It is notable that while acceleration of equitization process is called for with regard to
garment enterprises, state ownership is to hold key function in this area. This implies that there may not
much change in ownership structure (i.e. transformation of ownership) for textile sector. Instead, other
measures of reform such as assignment, contracting out or restructuring textiles SOEs should be
expected to implement in the years ahead.




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Background Paper                                                                                          41



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