Private firms take lead in efficiency, but profits slump

Photo: Tuoi Tre

Though Vietnamese private firms take lead in investment efficiency, their profits are still much lower than those of state owned and foreign-invested enterprises, said a recent report.

While private businesses take the lead in terms of investment efficiency, their ratio of profit on total assets is still lower than that of SOEs and FIEs, according to the report on private economic sector development released by the Taskforce on the implementation of Enterprise Law and the UNDP on Wednesday.

The ratio of profit on total assets of private businesses is 1.5 percent, while the figures are 5.4 and 10.6 percent for SOEs and FIEs respectively.

To date, 500,000 enterprises have been established in Vietnam. If comparing the investment capital and the GDP of private businesses, SOEs and FIEs, one can see that the private sector has the highest investment efficiency.

In 2001, the ICOR index (Incremental Capital Output Ratio) of the private sector was 2.63, while the figure was 7.42 for SOEs and 6.29 for FIEs. The ICOR of the private sector was still the lowest in 2007: private businesses only needed VND3.74 to make a VND1 of profit, while SOEs needed VND8.28, and FIEs VND4.99.

Besides, the expenses private businesses have to pay to create jobs are also the lowest. In 2008, SOEs needed VND436.5 million worth of stockholder equity to create a job, while private businesses only needed VND224.1 million.

In 2009, the private economic sector provided jobs to 85 percent of laborers, while SOEs and FIEs 11.5 percent and 3.4 percent, respectively, of the total 47.7 million laborers.

The ratio of total turnover on total assets of the private sector is also higher than other economic sectors. In 2008, private businesses could create VND1.8 billion in turnover from VND1 billion. Meanwhile, with the same sum of money, SOEs created VND0.8 billion, and FIEs VND0.89 billion.

Le Duy Binh, Representative of the Taskforce on the implementation of the Enterprise Law, said that a lot of private businesses have reported loss.

Private businesses have to bear high expenses, therefore their profit is low. Private businesses, for example, have to pay high for leasing workshop premises, while SOEs and FIEs can lease land at lower fees, Binh added.

Besides, private businesses usually find it difficult to access bank loans because they do not have assets to mortgage for loans.

Related Articles

• Let businesses take the lead
• Widow of late Lao Party leader visits
• Lawmakers make field-trip to Vietnamese firms in Cambodia
• German Left Party leader visits Vietnamese-run mart
• Private sector plays greater economic role

State-owned sector fails as economic spearhead

Many SOEs hiding bankruptcy-threatening losses

A representative from Electricity of Vietnam collects the monthly payment from a household in Ho Chi Minh City. Experts have questioned the government’s strategy that gives state-owned enterprises the leading role in the economy.

The government should rethink its strategy of having state-owned enterprises (SOEs) lead the economy since they are not making contributions proportionate to resources invested in them, economists say.

Economist Pham Chi Lan said it has been wrong for the government to give SOEs the leading role in implementing its social and economic goals.

Lan said the government has indulged the sector with incentive policies in land, capital and monopolistic control in important industries like electricity and national resource exploration, but it has shown to be ineffective.

She said surveys had shown that the sector has created less jobs and benefits for the state budget than the non-state sector, and instead inflicted major losses through corruption and state asset appropriation by SOE leaders. The sector has also failed to make competitive products for the country.

The number of SOEs has reduced from 12,000 to 1,500 units over the last 20 years, and the main state-run enterprises are now key corporations like PetroVietnam, Vietnam Airlines, Vinashin, Electricity of Vietnam, Vietnam National Coal and Mineral Industries Group, and Vietnam Posts and Telecommunications Group.

Nguyen Dinh Cung, head of Central Institute for Economic Management, said SOEs have been assigned to use almost all the national resources but contributed less than 20 percent to the country’s annual exports, 20 percent to the state budget and accounted for just one third of the national gross domestic product.

Cung said the sector has suffered major losses for years and Vinashin, the shipbuilder that piled up VND86 trillion (US$4.4 billion) in debts compared to its total assets of over VND104 trillion, was an example. Five senior leaders of the shipbuilding corporation, including chairman Pham Thanh Binh, have been arrested.

Other economists said many SOEs have “hidden” big losses that threaten them with bankruptcy, like Vinashin.

Former Minister of Trade Truong Dinh Tuyen said many SOEs have expanded to other fields besides their core businesses, but weak management and strategies led to unsuccessful results.

Tuyen said leaders of the corporation and government officials had such “close” relationships that they were able to “distort” regulations and rules in an attempt to benefit them and cause losses to their competitors.

Economist Le Dang Doanh said SOE leaders are promoted unfairly, while talented but nonparty members are disqualified for promotions in the enterprises. Supervision was also ineffective because boards were set up by the leaders themselves, he said.

No exceptions

While the economists conceded that the state sector is an essential part of the national economy that helps the government achieve its social and economic goals, they said its inefficiencies are dragging the economy down.

They said the government has to change its policies toward the state-owned sector because it was threatening sustainable growth of the country.

Private and foreign sectors have contributed a major part to the country’s economic growth of 6 to 7 percent for years through yearly increases in exports, they said, adding that in contrast, SOEs have contributed to a bigger trade deficit by importing machinery.

Economist Nguyen Quang A said the ownership of SOEs, which accounts for half of the country’s total investments, should be restructured.

He said the government should retain state ownership of businesses involved in national security and public services while others undergo equitization.

Doanh said the national economy needed new mechanisms in governance which ensures a level playing field for state and non-state firms. The government should also allocate national resources and give support like allowing other businesses, not just SOEs, to issue bonds abroad.

The non-state sector should also benefit from foreign aid. No exception should be given to any business, said Doanh.

Vo Dai Luoc, director of Vietnam Asia-Pacific Economic Center said SOEs have been part of national development in developed and developing countries, but generally, governments supported businesses irrespective of their ownership.

Keiko Kubota, senior economist with the World Bank, said SOEs should be supervised through regular reports that they are required to put out. They also have to improve corporate governance.

Kubota said the government should constrain economic groups and large SOEs to areas that require technological upgrading and skills development in order to avoid sectoral losses.

Nguyen Quang A said the government has erred in introducing policies to develop SOEs without effective strategies to make them a strong pillar of the economy. Economists have for several years predicted and warned the government of the consequences of this approach.

Related Articles

• State-owned sector fails as economic spearhead
• Legislators review reports, plans for next five years
• Legislators review reports, plans for next five years
• Footwear industry submits strategy
• Party reports come in from provinces

State-owned sector fails as economic spearhead

Many SOEs hiding bankruptcy-threatening losses

A representative from Electricity of Vietnam collects the monthly payment from a household in Ho Chi Minh City. Experts have questioned the government’s strategy that gives state-owned enterprises the leading role in the economy.

The government should rethink its strategy of having state-owned enterprises (SOEs) lead the economy since they are not making contributions proportionate to resources invested in them, economists say.

Economist Pham Chi Lan said it has been wrong for the government to give SOEs the leading role in implementing its social and economic goals.

Lan said the government has indulged the sector with incentive policies in land, capital and monopolistic control in important industries like electricity and national resource exploration, but it has shown to be ineffective.

She said surveys had shown that the sector has created less jobs and benefits for the state budget than the non-state sector, and instead inflicted major losses through corruption and state asset appropriation by SOE leaders. The sector has also failed to make competitive products for the country.

The number of SOEs has reduced from 12,000 to 1,500 units over the last 20 years, and the main state-run enterprises are now key corporations like PetroVietnam, Vietnam Airlines, Vinashin, Electricity of Vietnam, Vietnam National Coal and Mineral Industries Group, and Vietnam Posts and Telecommunications Group.

Nguyen Dinh Cung, head of Central Institute for Economic Management, said SOEs have been assigned to use almost all the national resources but contributed less than 20 percent to the country’s annual exports, 20 percent to the state budget and accounted for just one third of the national gross domestic product.

Cung said the sector has suffered major losses for years and Vinashin, the shipbuilder that piled up VND86 trillion (US$4.4 billion) in debts compared to its total assets of over VND104 trillion, was an example. Five senior leaders of the shipbuilding corporation, including chairman Pham Thanh Binh, have been arrested.

Other economists said many SOEs have “hidden” big losses that threaten them with bankruptcy, like Vinashin.

Former Minister of Trade Truong Dinh Tuyen said many SOEs have expanded to other fields besides their core businesses, but weak management and strategies led to unsuccessful results.

Tuyen said leaders of the corporation and government officials had such “close” relationships that they were able to “distort” regulations and rules in an attempt to benefit them and cause losses to their competitors.

Economist Le Dang Doanh said SOE leaders are promoted unfairly, while talented but nonparty members are disqualified for promotions in the enterprises. Supervision was also ineffective because boards were set up by the leaders themselves, he said.

No exceptions

While the economists conceded that the state sector is an essential part of the national economy that helps the government achieve its social and economic goals, they said its inefficiencies are dragging the economy down.

They said the government has to change its policies toward the state-owned sector because it was threatening sustainable growth of the country.

Private and foreign sectors have contributed a major part to the country’s economic growth of 6 to 7 percent for years through yearly increases in exports, they said, adding that in contrast, SOEs have contributed to a bigger trade deficit by importing machinery.

Economist Nguyen Quang A said the ownership of SOEs, which accounts for half of the country’s total investments, should be restructured.

He said the government should retain state ownership of businesses involved in national security and public services while others undergo equitization.

Doanh said the national economy needed new mechanisms in governance which ensures a level playing field for state and non-state firms. The government should also allocate national resources and give support like allowing other businesses, not just SOEs, to issue bonds abroad.

The non-state sector should also benefit from foreign aid. No exception should be given to any business, said Doanh.

Vo Dai Luoc, director of Vietnam Asia-Pacific Economic Center said SOEs have been part of national development in developed and developing countries, but generally, governments supported businesses irrespective of their ownership.

Keiko Kubota, senior economist with the World Bank, said SOEs should be supervised through regular reports that they are required to put out. They also have to improve corporate governance.

Kubota said the government should constrain economic groups and large SOEs to areas that require technological upgrading and skills development in order to avoid sectoral losses.

Nguyen Quang A said the government has erred in introducing policies to develop SOEs without effective strategies to make them a strong pillar of the economy. Economists have for several years predicted and warned the government of the consequences of this approach.

Related Articles

• State-owned sector fails as economic spearhead
• Legislators review reports, plans for next five years
• Legislators review reports, plans for next five years
• Footwear industry submits strategy
• Party reports come in from provinces

ADB supports SOE reform in Vietnam

The government and the Asian Development Bank on Monday signed a US$630 million financing facility to help accelerate reforms of state-owned enterprises (SOEs) in the country.

The multi-tranche facility aims to improve the efficiency of SOEs and enhance corporate governance to spur Vietnam’s economic growth, the Manila-based bank said in a statement.

ADB said it will provide $600 million from its ordinary capital resources to strengthen the balance sheets of selected SOEs through debt restructuring.

Another $30 million from the Asian Development Fund will be used to support improvements in their operations and corporate governance, as well as their and related institutions’ institutional capacity.

The Ministry of Finance will be the executing agency for the program, and the facility is to be utilized by December 2015, the bank said.

Under the financing facility, training and other assistance will also be provided to government institutions involved in the SOE reform process.

The transformation of SOEs in Vietnam started in 1992, but ADB said the process “has been slow and confined mainly to smaller enterprises.”

“ADB assistance will support some SOEs to become more efficient, profitable and transparent with better corporate governance,” the bank said in its statement.

“Enhancing corporate governance of SOEs is a key for Vietnam to enhance the efficiency of its economy and to achieve higher economic growth through reducing inefficient state production and promoting private sector development,” said ADB Country Director, Ayumi Konishi.

Related Articles

• ADB supports SOE reform in Vietnam
• Good response to reforms of People's Councils
• Vietnam Air accepts web check-in for int’l flights
• Preparations for congress reviewed
• Vietnam cheers China on 61st National Day