Communist Review - The equitization of state-owned enterprises (SOEs) in the period 2016 - 2020 has basically achieved more positive results than the previous period as it has increased the equitization value instead of number of equitized SOEs. The evaluation of the equitization’s results is necessary to point out the causes and take appropriate measures in order to accelerate the equitization of SOEs in the coming period. It is recommended to focus on perfecting the legal framework, handling the financial situation of SOEs before equitization, solving problems in land use right, etc.

Some achievements

By implementing Resolution No. 12-NQ/ TW dated June 3^th, 2017 of the Fifth Conference of the 12th session of the Central Committee of the Communist Party of Vietnam on restructuring, innovating and improving efficiency of SOEs and the Party's policies on SOEs, entities and SOEs have taken several measures to innovate, develop and improve the efficiency of SOEs. The equitization of SOEs in the period 2016-2020 focuses more on identifying specific criteria and categories of SOEs for each year, each ministry, sector, and locality and focusing on improving the efficiency of SOEs. The equitization has achieved some specific results as follows:

Firstly, the equitization process in the period 2016 - 2020 has been accelerated, focusing on increasing the value of equitization and divestment instead of a sharp decrease in the number of equitized enterprises. Thus the value from the equitization and divestment during this period were higher than that of the previous period. From 2016 to the first 6 months of 2019, in Vietnam, 162 enterprises have completed equitization with a total redefined capital value of VND 205,433.2 billion, equal to 108% of the total value of state capital in equitized enterprises in the period 2011 - 2015 (189,509 billion dong). Although this stage has not yet ended, the values ​​obtained are all higher than the previous period. The total cumulative revenue from equitization and divestment from 2016 to now has reached more than VND 218,255,691 billion (1) (in 2016, it was VND 30,000 billion; VND 140,000 billion in 2017; VND 42,754,000 billion in 2018 and 5,501,691 billion VND for the first 6 months of 2019), 2.8 times higher than the total revenue from equitization and divestment of the whole period 2011 - 2015 (about 78,000 billion VND). There are 35/127 equitized enterprises on the list of equitization according to the Official Letter No. 991 / TTg-DMDN dated July 10th, 2017 of the Prime Minister on “Approving the list of SOEs to complete the equitization  for the period 2017 - 2020 ”. The divestment took place at 88 entities regulated by the Prime Minister's Decision No.1232/QD-TTg dated August 17th, 2017 on “Approving the list of SOEs that have their divestment from 2017 to 2020” with a book value of 4,801,432 billion VND, earning 9,115,042 billion VND.

By comparing data between different years, it is obvious that the year of 2017 was the most successful time in the equitization process with the highest number of equitized enterprises (69 enterprises), the total enterprise value was the highest (365,953 billion VND) of which the value of state capital was about 6.34 times higher than that observed in 2016. The divestment value in 2017 also was  15.52 times higher than the book value. The year of 2018 achieved positive results although the number of equitized enterprises  and the equitization value is lower than that in 2017 but it was still 2 times higher in term of enterprise value and 1.7 times higher in state capital value compared to 2016.

Secondly, the scale of equitized enterprises in this period is larger than before. In fact, there are many enterprises with capital scale of over 1,000 billion VND (accounting for 17%) according to the actual value of enterprises. In the list of equitized enterprises for the period 2016 - 2018, there are 8/147 equitized enterprises in 2016 (accounting for 5.4%), 13/147 in 2017 (accounting for 8.8%) and 4/147 in 2018 (accounting for 2.7%) with the capital scale of over 1,000 billion VND. The average charter capital of enterprises approved for equitization  was respectively more than 400 billion in 2016, more than 2,000 billion  in 2017 (5 times higher than 2016) and more than 800 billion in 2018 (2 times higher than that in 2016).

Thirdly, the most popular form of equitization is selling a part of state capital to strategic shareholders, to employees, to trade unions and at public auction. The equitization can also be completed by promoting competitive auctions in the market and listed companies after equitization. The State holds a part of the shares and implement divestment on schedule. Accordingly, the proportion of state capital in the total charter capital of equitized enterprises is high. The State maitains dominant power and carry out divestment until 2020 according to Decision No. 1232/QD-TTg.

Specifically, in 2016, out of the total charter capital approved, the State holded 50%, 31% are sold to strategic shareholders, 2% to employees, 0.03% to trade unions and 18% sold at public auction. In 2017, this proportion was respectively 53%, 31%, 1%, 0.02% and 15%. In 2018, the portion of share holding by state was higher than two years ago (61%). Strategic investors holded  only 13% while sale by auction increased to 26%, sale for employees reached about 0.45% and 0.03% for trade unions.

Fourthly, by industry, equitized SOEs mainly operate in the sector of production and supply of public goods and services in terms of water supply and drainage, urban environment,…

Fifthly, by representatives of localities, SOEs that are set to carry out equitization for the period 2017-2020 in the provinces and centrally-run cities account for 70.4% compared to 29.6% in ministries and branches.

Limitations and causes

Firstly, compared to the set plan, both the equitization and divestment of SOEs are still slow and low. According to the list approved by the Prime Minister in Official Letter No. 991/TTg-DMDN, 127 enterprises must complete their equitization during the period of 2017-2020. However, by the end of the first 6 months of 2019, only 35 enterprises are equitized, reaching 27, 5%.

It is noticeable that the divestment process has been slow compared to the initial schedule. According to the list approved by the Prime Minister in the Decision No. 908/QD-TTg, 403 SOEs must be equitized from 2017 to 2020 while the actual number of SOEs that have divested  reached only 21.8% of the initial plan. In general, although more than 95% of SOEs have been equitized, the total amount of state capital sold out reached only some 8%.

Secondly, the legal framework for enterprises during equitization and post-equitization process has not been completed. Especially, the policies to attract strategic shareholders still have many inadequacies. In addition to the binding provisions on selecting strategic investor for each enterprise, there are also provisions on the shorter selection period of strategic shareholders than that of the equitization of large enterprises with complex asset structures. Besides, the rate of sale by public auction is still low, the State still dominates the ownership of shares making strategic investors afraid of the state eventual control after their investment. Thus, they are not very interested⁽²⁾. Furthermore, the margin deposit also increased to 20% of the value of shares registered to buy at the starting price (higher than the rate of 10% stipulated in the governmental Decree No. 59/2011 / ND-CP dated July 18th, 2011 on “Transforming enterprises with 100% state-owned capital into joint stock companies”). In some specific sectors (such as Port of Hai Phong Joint Stock Company, or Binh Dinh Pharmaceutical and Medical Equipment Joint Stock Company), the rules stipulate that the sale of assets is not allowed to foreign investors. This limits opportunities for selecting strategic investors.

Relevant regulations⁽³⁾ do not have specific and consistent criteria in determining the value of enterprises; It is not clear who is allowed to issue criteria (consulting company, labor relations representative or employer), which authority is competent to approve criteria for selecting strategic shareholders. Therefore, it can lead to the state of “breaking” the rules. Decree No. 126/2017/ ND-CP and Circular No. 40/2018/TT-BTC dated May 4th, 2018 released by the Minister of Finance on “Guidelines for initial share sale and management and use of proceeds from the equitization of SOEs and  single-member limited liability companies with 100% charter capital invested by SOEs transformed into joint stock companies” complement criteria for strategic investors with responsibilities and sanctions to ensure the fulfilment of commitments to strategic shareholders⁽⁴⁾. This somewhat reduces the risk that investors spend money to buy shares just for the advantage of real estate assets. Moreover, the non-transferring shares within 3 years causes difficulties for investors in case of force majeure or bankruptcy, dissolution.

Regulations on information transparency and accountability: The current policies regulate provisions on salary payment associated with enterprise efficiency, but they lack sanctions on pay for leaders and managers in loss-making SOEs. Many enterprises before and during the equitization process lacked accountability and transparency of information, especially those with financial problems or beneficiary enterprises of preferential advantages in business.

The delay in stock exchange listing of some SOEs after equitization is one of the reasons for the lack of accountability, transparency and slow reform of corporate governance in these enterprises. As of June 2016, there are 796 enterprises that have been equitized but have not been listed on the stock exchange although sanctions have been imposed. Besides, the rigid regulation that very small enterprises after equitization must hold an initial public offering (IPO) causes difficulties. These factors have slowed the equitization process.

Policies on divestment in SOEs: Decision No. 1232 / QD-TTg shows that there is a quite big number of companies on the list of divestments for the period 2017 – 2020 that provide essential services to the people such as water supply and drainage. There are businesses that only retain a very small percentage of state ownership. With this small proportion, shareholders representing the state asset in these enterprises cannot have a voice in the decisions of the general meeting of shareholders. Therefore, essential services to ensure people's livelihoods may be affected in the future when these enterprises complete their divestment. In addition,  criteria of grouping enterprises to implement the government's goals is not really clear, leading to difficulties in delimiting public activities and for-profit businesses 

Some provisions in the Government's Decree No. 32/2018/ND-CP dated March 8, 2018 on “Amending and supplementing some articles stipulated in the Government's Decree No. 91/2015/ND-CP dated October 13, 2015 on state capital investment in enterprises and management and use of capital and assets in enterprises” and Circular No. 59/2018/TT-BTC dated July 16, 2018 of the Minister of Finance on “Amending and supplementing some articles of the Circular No. 219/2015/TT-BTC dated December 31, 2015 of the Minister of Finance on state capital investment in enterprises and management, use of assets in  enterprises” have delayed the divestment in enterprises after equitization. It is necessary to continue the implementation of Decision No. 1232 / QD-TTg which focuses on determining the value of land use rights and historical cultural value of enterprises, determining enterprise value in enterprises with low state ownership… Besides, these documents have no technical guidance on determining the value of advantages generated from land lease rights; It has not been clear about the ability to accept the valuation methods given by consulting organizations. Some inappropriate regulations between legal documents on equitization and the Law on Enterprises 2014 also slowed business registration to operate in the form of joint stock companies.

Thirdly, the role and awareness of the leadership in entities after equitization are still low. They are not determined in business innovation. They have not well respected the rules of transparency and accountability, the rules of law and market in disclosing interest groups in the equitization and divestment. The top leadership of equitized SOEs is unwilling to initiate the necessary changes in mind and management skills leading to stagnation of production activities and business. The way of operating and managing production and business activities in a number of affiliated entities still follow the old thinking that bases essentially on public subsidy. The decisions of the company's leadership - the representative of the state capital share depends on the ones of the government that base on the ask-give mechanism, affecting the sense of initiative of enterprises and leading to the technological backwardness. According to a survey conducted by the Central Institute for Economic Management (CIEM), to date, 23.3% of SOEs have not applied science and technology, over 25% believe that they are not concerned with technology and 24.8% say they do not change mind significantly since the Fourth Industrial Revolution took place.

Fourthly, the size of enterprises and enterprise restructuring before equitization: Many SOEs have not operated effectively before equitization, so their  efficiency were not improved after equitization. Of the 12 loss-making SOEs managed by the industry and trade sector, 9 projects were transferred to the Commission for the management of state capital at enterprises and 4 out of 19 groups transferred to this Commission suffered losses.

The 2017 data indicates that SOEs only account for 0.5% of enterprises, 9% in the number of employees, but up to 29% of the total assets and only generate 15% of net revenue. Thus, to create a unit value added, SOEs must use more capital resources than foreign direct investment (FDI) and domestic private enterprises⁽⁵⁾.

While the return on assets of SOEs is much lower than that of FDI and non-state enterprises, the incremental Capital Output Ratio (ICOR) of SOEs in the period 2011 - 2017 is much higher. Not only being capital intensive enterprises, SOEs are also characterized by land appropriation and labour intensity. Nevertheless, their added value is not commensurate with their ownership of resources. Many SOEs make profits not from their main lines of business but from the land lease. Actually, SOEs are using a large amount of high-value real estate assets that have not been fully entered in the accounts, thus reducing their efficiency.

If financial problems are not handled thoroughly before equitization, SOEs will face numerous difficulties after equitization (disputes over property, land, labor, subsidies, debts, etc). Especially in the period 2016 - 2020, most SOEs that are restructured, equitized and divested are quite big. They are often corporations and groups holding many subsidiaries, affiliates that play the key role of the State.

Some recommendations

Firstly, it is necessary to continue the improvement of legal framework on the equitization of SOEs and the restructuring of enterprises before equitization. In particular, it is essential to focus on researching regulations to increase the effectiveness and responsibilities of consulting organizations in determining the value of state capital and assets in enterprises for equitization and divestment so that in the future, we could think about hiring international consulting organizations to ensure objectivity. At the same time, it is recommended to stipulate regulations on hiring consulting organizations to sell state shares in enterprises on international stock markets to attract foreign investors.

Moreover, it is indispensable to consider regulations on real estate assets for enterprises that manage a lot of land and well-located land to assess their efficiency and to acquire land that has not been used before equitization. It is also imperative to add sanctions for enterprises to grab land allocated by the government.

It is also important to complete specific regulations on responsibilities and sanctions to ensure the fulfillment of commitments to strategic shareholders. The regulations on strategic shareholders need to ensure the suitability between the business lines of strategic shareholder and those of equitized enterprises. It is necessary to ensure the implementation of strategic shareholders’ commitments on social security issues, national brand name, national security in order to connect them to enterprises for a long period instead of short-term goals.

For the question of listing on the stock exchange after the IPO: It is necessary to require enterprises to comply with the regulations on post-IPO listing. At the same time, it is urgent to drastically implement sanctions for delays in equitization. After the regulated deadline, unlisted enterprises must report, explain the reasons for the delay and commit a deadline to resolve the problem. Furthermore, it is compulsory to bind the responsibilities of the head of enterprises as well as the representative of state capital in these enterprises. Equitized enterprises must be required to list on stock exchange within one year from the first initial public offering. In addition, it is possible to consider increasing administrative penalties to deter enterprise violations.

It is also important to review and perfect regulations in specialized laws including the Enterprise Law, Investment law, Law on management and use of state capital to invest in enterprise production and business, etc in order to create consistency among regulations.

Secondly, for completing the regulations on the divestment of equitized enterprises: It is needful to amend and complete Decree No. 32/2018/ND-CP and clarify the guiding contents in Circular No. 59/2018 /TT -BTC for the determination of intangible assets, especially cultural and historical values; the responsibility assignment between a hired valuation organization anh the owner for the valuation results. On that basis, it is necessary to amend and clarify the regulations for this content and specify clearly referable factors, the responsibility assignment for each related party.

Thirdly, it is mandatory to determine who can buy shares and the reasonable and legal share division in case of divestment or selection of strategic investors for equitized enterprises. In order to carry out successfully  SOEs equitization, the role of shareholders is crucial, especially the ones who are involved in management innovation. At present, a new way of implementing the equitization of SOEs is to directly negotiate with big potential investors. If it is not possible to find out the appropriate way to sell shares, the share split or even  the share slump can happen like many previous IPOs. Thus, the divestment roadmap of equitized enterprises and the selection of strategic investors will not be successful.

Fourthly, it is needful to raise the proper awareness about corporate governance, the role and mission of equitized enterprises. Accordingly, improving corporate governance is applying modern corporate governance principles according to international practices (by ensuring the independence of the director, the role of the board of directors and the interests of shareholders, information accountability and information transparency)./.

---------------------------

(1) Including Initial Public Offering and divestment through two stock exchanges (170,000 billion dong) and direct offering, sale for strategic shareholders...
(2) Decree No. 126/2017/ND-CP dated November 16^th, 2017 of the Government on “Transformation of SOEs and single-member limited liability companies with 100% state-owned enterprises investment to become a joint stock company”

(3) Decree No. 59/2011/ND-CP; Decree No. 126/2017/ND-CP

(4) Specifically: Investors who register to become strategic investors must have legal status, financial capacity, make profits for the last 2 years, do not make any accumulated losses; In particular, there must be a written commitment to maintain the main business lines and brands of the enterprise after equitization for at least 3 years, not to transfer the purchased shares for a period of 3 years and must have plan to support enterprises after equitization in transferring new technology, training human resources, ... and must compensate if they violate commitments

5) Thu Thuy: “Renovating and improving the efficiency of SOEs”, https://www.nhandan.com.vn/antuong/item/38359102-doi-moi-nang-cao-hieu-qua-doanh -nghiep-home-nuoc.html, November 25, 2016

Source: The Communist Review online, May 7^th, 2020