ADB to loan Vietnam $ 630 million to reform large SOEs, spur growth

MANILA, PHILIPPINES. Dec 14, 2009. Viet Nam will get up to $630 million in financial support from the Asian Development Bank (ADB) to carry out further reforms of state-owned enterprises (SOEs) making them more efficient, profitable and transparent in a bid to spur economic growth and open up opportunities for the private sector.

The ADB Board of Directors approved a $ 630 million multitranche financing facility for the Viet Nam SOE Reform and Corporate Governance Facilitation Program. It continues ADB’s support to the government’s SOE reform agenda through financial and technical assistance.

The government has been equitizing SOEs, or converting them into joint stock companies with limited liability, since 1992, but the process has been relatively slow and confined mainly to smaller enterprises. The government is now planning to equitize and transform large general state corporations to improve their efficiency and unlock the full potential of their subsidiary companies. ADB assistance will facilitate this process by making corporations that are going concerns more attractive to strategic and other outside investors by strengthening their balance sheets, rationalizing corporate structure, streamlining management processes and increasing transparency to internationally acceptable standards.

“State-owned enterprise reform is critical to reducing the dominance of inefficient state production, promoting private sector development and enhancing economic growth in Viet Nam,” said Pradeep Srivastava, Senior Regional Cooperation Specialist in ADB’s Southeast Asia Department.

ADB’s new program will also provide training and other assistance to government institutions involved in the SOE reform process, such as the Debt and Asset Trading Corporation. The first tranche of $ 130 million will support transformation of the Song Da group of companies, which are involved in several different business segments related to infrastructure, and Southern Waterborne Transport Corporation, which provides logistics services.

“The outcome of the restructuring will be general corporations, made up of subgroups of companies that can operate independently, secure financial resources from capital markets on their own without having to rely on the government, and which will meet all the conditions for an eventual listing,” said Mr. Srivastava.

Turning major corporations into more profitable and efficient businesses will have multiple benefits including facilitating policies promoting equal treatment of SOEs and private companies, thus enhancing private sector development. The multitranche financing mode is being used as it gives ADB and the government the necessary flexibility to adopt lessons learned in the first stage of the program and to apply them to the subsequent stages.

Under the financing facility, ADB will provide $600 million from its ordinary capital resources (OCR) to strengthen the balance sheets of selected corporations through debt restructuring, with $ 30 million from its concessional Asian Development Fund (ADF) used to support operational and corporate governance improvements, and institutional strengthening. ADB’s funds make up almost 36% of the estimated $ 1.77 billion cost of SOE transformation till 2015 with the remaining balance expected to be financed from government contributions, internal resources of participating general corporations and strategic investors.

In the first tranche, ADB will provide an OCR loan of $ 120 million, and an ADF loan equivalent to $ 10 million. The terms and conditions of the OCR funds will be based on ADB’s LIBOR-based lending facility, while the ADF loan has a term of 32 years, including a grace period of eight years. Interest during the grace period is 1% per annum, and 1.5% for the rest of the term.

The Ministry of Finance is the executing agency for the program, with the financing facility to be utilized from December 2009 to December 2015.

Source: ADB News Release, Dec 14, 2009

Additional background

According to the Committee for Enterprise Reform and Development and the Ministry of Planning and Investment, state-owned enterprises hold 70% of the total real property in the economy, account for 20% of investment capital throughout society, and devour a staggering 60% of the credit in the commercial banking system, 50% of state investment capital and 70% of official development aid capital.

However, these same enterprises are responsible for only 25% of total sales revenues, 37% of pre-tax profits and 20% of the value of national industrial output. The rate of credit use by state-owned businesses to generate revenue is definitely higher than that of other enterprises. It takes VND2.2 in capital to create VND1 in revenue compared to VND1.2 in capital spent by businesses outside the state corporate sector and VND1.3 in capital expenditures by foreign enterprises operating in Vietnam.


OECD Guidelines on Corporate Governance of State-Owned Enterprises (SOEs)