New Communist Party resolutions to cut down SOEs

Dysmorphic market

Mai Huy Tan, 72, is starting a plant that would burn household garbage to produce electricity. This is the second time he started a company. The first time, at the age of 52, he has been very successful with the Duc Viet sausage brand.

With his hefty business experience, he still cannot quickly realise his aspiration to replace the current practice of burying garbage. His equipment was imported from Germany, but “the procedures are very complicated,” he said. He also said that there is strong opposition out there, but he did not want to call names.

Economists were less squeamish about throwing around names as to his opposition. They said public services providers, including garbage treatment, make a lot of profit. Hanoi authorities spend VND8 billion (US$352,000) a day or VND3 trillion (US$132.24 million) a year on garbage treatment.

Out of the 5,400 tonnes of waste produced in Hanoi each day, 4,000 tonnes are treated at Nam Son solid waste processing complex in Soc Son district, operated by Hanoi Urban Environment One Member Co., Ltd. (URENCO) since 1999. The company has just started operation of an industrial waste-to-power plant at the Nam Son complex. The plant cost about VND612 billion ($27 million), but currently only treats 75 tonnes of garbage a day. Where is the opportunity for projects the likes of Tan’s?

Nguyen Dinh Cung, director of the Central Institute of Economic Management (CIEM), said that according to the three resolutions issued on June 3 by the 5^th plenary meeting of the 12th Communist Party of Vietnam (CPV) Central Committee, “state-owned companies will withdraw from areas where private sector companies are able to join. The administrative interference mechanism and the practice of giving state-owned companies state capital to compete with other companies will stop, then companies will compete in terms of efficiency, creativity, and technology.” 

Benefit for state-owned companies

According to Resolution 12, by 2030 most state-owned companies will be owned by shareholders other than the state, and they will primarily operate in the joint stock company form. The number of state-owned companies will be small and their operations will be limited to some fields.

Nguyen Quoc Hiep, chairman of GP Invest, who has been working at SOEs for 20 years, said, “During the 20 years managing leading state-owned companies in the construction industry (from 1987 to 2007), I did not do as much as I wanted to. Meanwhile, at GP Invest, in just 10 years I did a lot of things. Our shareholders since 2007 have got a 190% return on their investment.”

Hiep used to manage Vinaconex Corporation, then Constrexim. He used to be very excited about the reform and equitisation plans for SOEs.

According to Hiep, managers at SOEs do not earn more when the companies do well. Therefore, none of the managers feel the need to be creative or push reforms. “There is no room for risk,” he said, “that is why these companies can never have a breakthrough.”

For more than 10 years, the leading names in construction were Vinaconex, Song Da Corporation, as well as Licogi and Lilama in industrial construction. They were all SOEs. Now the three most prestigious contractors of 2017, according to Vietnam Report, were Coteccons, Hoa Binh Corporation, and Unicons—all private sector companies. In the top 10 there is only one SOE, Urban Infrastructure Development Investment Corporation (UDIC).

“Even when SOEs are equitised, if the state holding remains high, the mindset will stay. Managing these companies is very difficult,” Hiep said.

Pham Duc Trung, head of the Research Department on Enterprise Reform and Development at CIEM, said that the government should separate the state’s regulatory function over all types of companies (state-owned or private sector) and its function as the owner of the state capital at SOEs.

Resolution 12 stipulates that by 2018 there should be a government agency that would represent the state capital at SOEs.

This body will be responsible for explaining their efficiency in managing the state capital. “This mechanism will stop the relationship between government regulatory agencies and SOEs. SOEs will have to follow market economy mechanisms and there will be no discriminatory treatment between SOEs and private sector companies,” Trung said.

Hope for the next period

Some economists are saying that these three resolutions will solve the main weaknesses of the Vietnamese economy.

Tran Dinh Thien, director of the Vietnam Economic Research Institute, said “A reform of state-owned companies is all that the economy needs right now. The private sector cannot grow if the state-owned sector does not shrink and if the market economy mechanisms are not complete.”