Private sector touted as main economic driver, State-Owned Enterprises (SOEs) are inefficient

NA Deputy Nguyen Ngoc Hoa comments on the proposed comprehensive economic restructuring plan during a group discussion of NA deputies from HCMC at the ongoing session of the legislature in Hanoi – Photo: TTXVN

HANOI, May 26, 2012. The National Assembly (NA) Economic Committee wants to promote the role of the private sector as the main economic driver, while reducing the role of the State economic sector.

This is given in a report that the committee delivered to NA deputies on Thursday. The report, reflecting the opinions of scholars and economists at a recent economic conference in Central Vietnam, stressed that the private sector should be considered as the main driver or important driver for economic growth.

Such a change will create breakthroughs in economic development, consistent with the trend of a market-driven economy, according to the report.

Innovative thinking about the role of the private sector has an important meaning for changing the mindset of the Government agencies on macroeconomic policy design and development.

Meanwhile, the State economic sector, currently defined as playing the leading role in the economy, is operating inefficiently.

The average loss of a State firm is 12 times higher than businesses in other sectors. The return-on-asset ratio of the State-run groups and corporations averages out at 20.8%, much lower than the foreign-invested sector.

The average ratio of pre-tax profit to equity only reaches 13.1%, much lower than the lending rates of commercial banks. Notably, up to 80% of the total pre-tax profits come from the four conglomerates, PVN, Viettel, VNPT and VRG, meaning the profit-to-equity ratios of the remaining State firms must be far lower than the average level.

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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.

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