New losses report reignites state sector criticism

More than a year after shipbuilder Vinashin shook the economy with news of its gargantuan debt, local auditors have said that the problems of state sector economics are not yet a thing of the past.
According to a report on 27 major state-owned enterprises published by the State Audit last week, some of Vietnam’s largest state-owned enterprises suffered major losses in 2009.

Construction company Song Hong Corporation, for instance, lost 20.6 billion dong, or nearly US$1 million. Vietnam Post, a member of telecom giant VNPT, posted losses of 1.02 trillion dong, state auditors said.

Deputy General Director Le Minh Khai said some of the companies also broke financial management rules, with violations ranging from false tax declarations to dishonest reports of expenses.

For economists like Pham Chi Lan, a former government advisor, the losses were hardly a surprise.

“There have been talks after talks about how state-owned enterprises like Vinashin, Song Hong and Vietnam Post made losses,” she told Thanh Nien. “I just think every time we touch a state corporation we will find loopholes and gaps.”

“To sum up, there are three major problems,” Lan said. “First, state companies have been given much preferential treatment including access to resources, credit, land and markets, but they don’t make the best use of such treatment. Second, they are not managed effectively by the government. Finally, the government is not yet clear whether it should play the role of an owner or a supervisor when dealing with these companies.”

Telecom firm Viettel is a rare example of a state-owned company that has successfully expanded overseas, while many others do not have the motivation to compete globally, she said.

“The companies have the privilege of operating in key economic sectors, so they only care about the domestic market. The problem is they have not even done a good job and continue to be protected by the government against both foreign and private sectors.”

A private firm will go bankrupt due to bad business, but a state-owned company with losses will be rescued by the government, Lan said.

Economic groups

Vietnam launched its “state conglomerate” model in 2005, gradually turning major companies like PetroVietnam and Vinashin into so-called economic groups.

The goal was to have the groups spearheading the economy and make them stronger to prepare for competition against foreign players later.

Lan believed what started out on a trial basis ended up growing out of control as many groups ventured into different sectors at a fast pace. It’s time to stop forming more groups and to spend some time reviewing the model, she said.

Hanoi-based shipbuilder Vinashin almost collapsed with debts of 86 trillion dong as of June 2010. Experts have criticized the group for its poor management, leading to aggressive expansion in activities outside its main business scope.

The company is going through a restructuring, as ordered by the government, so that it can focus only on ship building and repair contracts.

Other state companies have also made their first reform attempts.

Tuoi Tre newspaper last week cited Song Hong Corporation Chairman Nguyen Quang Man as saying that the company has been restructuring its business and debt portfolio. The loss of 20.6 billion dong in 2009 was not actually “worrisome” as it has since been reduced, he said.

The newspaper also said machinery producer Lilama, which had a loss of 103 billion dong, is retreating from secondary businesses as some of its subsidiaries operated inefficiently.

The Ministry of Finance has said it will introduce new regulations to tighten control over the use of state capital as well as other reforms in the state sector.

Non-core businesses

Among the anticipated regulations is a rule that will halve the amount of capital that state-owned enterprises can use to invest in non-core activities. State companies will be allowed to earmark only 15 percent of their capital for businesses beyond their main functions. The current ratio is 30 percent.

Lan, however, worried that even the 15 percent ratio is too high because it means a large group could still have trillions of dong to invest in non-core sectors.

“If it’s not what they’re good at, the groups are likely to make losses, while other companies may fare better in those sectors,” Lan said.

According to state auditors, not all of the 27 state enterprises that have been reviewed had a bad business year in 2009. Some companies like oil group PetroVietnam and garment producer Vinatex continued to grow, proving they are capable of leading the state sector.

But when it came to non-core activities, especially investments in the stock market, the results were much less than desired. None of the 27 companies managed to generate any profit from investing in stocks.

Economist Nguyen Duc Thanh said in an interview with Tuoi Tre last week that the latest findings by the State Audit once again showed that reforming the state sector is necessary and should not be delayed.

Thanh, who heads the Vietnam Center for Economic and Policy Research at the University of Economics and Business in Hanoi, said it’s not unusual for companies, irrespective of their ownership, to report losses. There are many factors that can affect their business, including economic conditions or capital problems, he added.

However, the losses at major state companies shed more light on how inefficient they really are, Thanh said.

“I believe by restructuring and selling shares at some companies the government can have money for more important sectors, make the firms more independent, and reduce the risks for the state itself,” he said.

The government should also stop guaranteeing debts for state companies and start treating the state sector the same as others, Thanh said.

He warned that an unfair business environment could hinder the development of other sectors and discourage investors.

“There have been signs that foreign capital is flowing out of Vietnam to other regional countries where the business environments are better,” he said.

If Vietnam loses its appeal as an investment destination, it will be left behind, Thanh said.

Tags: Vietnam companies, Vietnam enterprises, Vietnam SOEs