Economy needs to focus on industries with key advantages (SOEs)

Jun 6, 2012. Nguyen Tu Anh from the Department for Economics Research spoke to the publicationThoi Bao Kinh Te Sai Gon (Sai Gon Economic Times) about the troubles of Vinashin and Vinalines.

What lessons can we learn from the losses at these State-owned corporations?

It’s a critically important lesson on management. A large flow of funds was poured into these State corporations and they somehow became unmanageable. They incurred losses but no one knew.

Does that have anything to do with the strategy to pick certain sectors as top priorities for development?

In the past, we picked too many sectors as priorities. These sectors weren’t chosen based on competitive advantages: for example, the auto industry.

You were one of the members who drafted the plan to restructure the economy, which suggests the continued development of some spearhead industries such as logistics, ship building and goods transportation. Why’s that?

Viet Nam has a long coastal line and we’re also at the heart of very busy transportation routes. Our economy has a high level of openness with the average percentage of imports-exports per year reaching above 160 per cent of GDP. That’s something some countries only dream about.

Why not take advantage of these conditions to develop the shipping industry and seize at least some market share in goods transportation? I think after Vinashin and Vinalines we should not give up but rather we must look more critically at the governance issue.

Does that mean the Government should continue pouring money into State-owned corporations? According to the Ministry of Transport’s industrialisation and modernisation master plan until 2020, with a vision until 2030, the Government would spend another VND100 trillion (US$4.8 billion) on Vinalines.

With the spearhead sectors that have a pervasive effect on the economy, we should continue to invest but the method has to be changed.

First, we need to have a large-scale reform of the State-owned companies to bring about transparent management and tightened supervision, thus making sure money will not be wasted. A large-scale reform that creates a fairer market economy means making the game fairer for both the private and State companies. For example, we should only continue putting money into Vinalines when these conditions are assured. That’s exactly what we suggested in the plan to restructure the economy.

The question remains how can we motivate State-owned corporations to increase their efficiency?

For sectors in which private stakeholders want to participate, it’s necessary to gradually withdraw State funds through equitisation and transform them into private companies.

In areas where the private sector cannot provide, but which can have huge benefits to society, we need a different model. We’re researching to recommend a separate mechanism for this kind of State enterprises.

True, the system has to motivate State enterprises to operate effectively. Such models continue to be analysed and we can look to Singapore where State companies have a much higher level of efficiency.

So after all, should we put all the resources into creating spearheads?

That’s not our final goal. The final goal is to master advanced technology, core technology in certain sectors, so the economy can have a higher level of independence. That would enable us to have a fairer share of the global supply chain, something that we don’t have currently.

There have been some arguments that we need to create major State corporations, the “iron fists” of the economy, to reach that goal. Reality has shown that the “iron fists” have become “cotton fists”.

The Government should only create the lever to push the development of certain sectors which obviously must have advantages the market can see. That’s when funds can be marshalled, whether from the private or public sector. Through that process, companies can really grow and create real spearhead for the economy.

Vietnam Investment Review, Jun 6, 2012

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.