Overview of the SOE Reform in Vietnam pps

SOE Reform in Vietnam
Background Paper


















Prepared by Mekong Economics
November 2002

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Vietnam SOE Sector Study produced by Mekong Economics

Table of Contents
Recent Development of Vietnam’s SOE Sector 4
Salient Features of the SOE Sector in Vietnam 4
Economic Activities 4
Number of Enterprises 6
Capital Scale 6
Employment Size 7
Geographic Distribution 8
The Role of SOEs in the Economy 10
GDP Share of SOEs 10
Job and Income Generation 12
National Budget Share 12
Economic Performance of SOEs 13
Policy Framework for SOE Development and Reform 18
Overview of the SOE Reform in Vietnam 18
Milestones in the Process of SOE reforms throughout Party Congresses. 19
The Launch of Doi Moi at the Sixth Party Congress 19
The Seventh Party Congress 19
The Eighth Party Congress 19
Resolution of the 3
rd
Party Plenum of the 9
th
Central Party Standing Committee 20
Key Programs of SOE Reforms 25

Reforms in SOE Management Mechanism 25
Restructure of SOEs 25

Reorganization of General Corporations 26
Equitization of SOEs 27
Other Ownership Transformations 29
Debts and Assets Treatment 30
The SOE Reform Agenda: Achievements and Remaining Constraints 30
How are International Donors Supporting Reforms? 34
The SOE Reform: A Case Study of the Textile Sector 37
Ownership Structure of the Textile Sector 37
Restructuring in the Textile Sector 38
Bibliography 40
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Abbreviations

CP Government (used in legal documents)
CPV Communist Party of Vietnam
GDP Gross Domestic Product
GSO General Statistical Office
GCs General Corporations
HDBT Minister Committee (Government, now) (used in legal documents)
IMF International Monetary Fund
MOF Ministry of Finance
MOLISA Ministry of Labors, Invalids, and Social Affairs
ND Decree (used in legal documents)
NSCERD National Steering Committee for Enterprise Reform and Development
OOG Office of Government
OECF Overseas Economic Cooperation Fund
QD Decision (used in legal documents)

SOEs State-Owned Enterprises
SRV Socialist Republic of Vietnam
TTg Prime Minister (used in legal documents)
VND Vietnam Dong
WB The World Bank
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Recent Development of Vietnam’s SOE Sector
Despite the gradual shift towards a market economy that commenced in 1986, and in spite of the
emphasis on state owned enterprise (SOE) reform and privatization in the structural adjustment
programs formulated since the mid-1990s, the state sector continues to play a leading role in the
Vietnamese economy. The dominant position of the state sector is confirmed in official statistics and a
variety of studies on the Vietnamese economy. The following sections investigate the distinct features,
the role as well as the performance of Vietnam’s SOEs to have an overall outlook at recent development
of the sector.
Salient Features of the SOE Sector in Vietnam
Economic Activities
SOEs have involved in almost all economic activities of the economy. Regardless of firm size, SOEs
have biased towards some economic activities including manufacturing, construction and trade with the
considerable number of the establishments (see Table 1).
1
In terms of establishments, local SOEs tend to
be more concentrated in hotel, restaurant, transportation and communication than central SOEs.

1
Care should be taken in interpretation of these numbers because they are crude indicators. It means that with
these numbers, it is still difficult to assess truly the involvement of SOE sector in each economic activity
because firm size and industry-specific characteristics are not taken into consideration. An in-depth analysis of

SOE sector by economic activities may be of interest. Unfortunately, due to lack of data, we cannot do that.
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Table 1: The Number of SOEs by Economic Activities

Of Which
By Economic Activities SOE
Central Local
Agriculture and Forestry 801 141 660
Aquaculture 48 2 46
Minerals 135 63 72
Manufacturing 1,515 599 916
Electricity, water and gas 73 1 72
Construction 946 405 541
Trade and repairing 1,133 421 712
Hotel and restaurant 182 30 152
Transportation and Communication 246 95 151
Finance and credit 75 21 54
Other 377 99 278
Total 5,531 1,877 3,654
Source: GSO (2002b)

Moreover, it is found that SOEs have traditionally held the dominant role in the industries such as
energy, steel, non-ferrous metals, electric and electronic manufacture, chemicals, fertilizers, rubber, food
processing and printing (OECF, 1998, p.199). It might be due to the fact that the government has
continued a policy of state-led industrial development.
Figure 1: SOEs by Economic Activities in 2000
14%

1%
2%
28%
1%
18%
21%
3%
4%
1%
7%
Agriculture and Forestry
Aquaculture
Minerals
Manufacturing
Electricity, water and gas
Contruction
Commerce, repairing
Hotel and restaurant
Transportation and Communication
Finance and credit
Other

Source: GSO (2002b)
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In relative term, the largest share of SOE at the end of 2000 belongs to the manufacturing industries,
about 28 percent of the total (see Figure 1). Except for the agriculture and forestry, the construction
sector and the commerce and repairing sector settle at the next two top ones. The domination of

industries, construction and commerce in the structure of SOE sector implies that SOEs are
contributing much to the process of industrialization and modernization of the national economy.
Number of Enterprises
The number of SOEs has been decreased significantly since Doi Moi started. Notably, in 1991 the
government issued a decree on establishing and liquidating SOEs requiring that all state enterprises be
re-registered or closed (Decree 338-HDBT). As a result, the total number of SOEs was halved from
12,000 in 1991 to roughly 6,000 in 1994 with sharpest decline in local SOEs. Such a fast downturn is
attributable to about 2,000 mergers and 3,000 liquidations (CIEM, 2002).
The decline has kept going on recently. In 2000 the number of SOEs is 5,531 out of the total of 39,762
enterprises in the whole economy (GSO, 2002b). By the end of 2001, 37 SOEs had been sold, 4
contracted out and 61 entrusted to labor collectives (Nhan Dan, 2002). In addition, by the end of June
this year, the number of equitized enterprises was 780 (Vietnam Investment Review, 2002). With the aim
at acceleration of the SOEs reform, the number of SOEs will be much smaller than it is. As planned,
2,622 SOEs will be transformed with 1,319 equitized, 562 sold, contracted or leased, 351 merged, 368
liquidated and 27 converted to administrative units (Saigon Times Weekly, 2002). These transformed
SOEs are mostly small or loss-making ones.
Capital Scale
SOEs are to be more capital-intensive than their private sector counterparts (see Figure 2). It is
resulted from history of access to cheap capital in terms of equity injections from the government as
well as subsidized loans from the state banking system.

Figure 2: SOEs vs. Total by Structure of Capital Scale
(Unit: VND bil.)
0
10
20
30
40
50
60

70
80
90
100
<.5 .5-1 1 5 5 10 10 50 50-200 200-500 >500
All Enterprises SOEs

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Source: GSO (2002b)


Table 2: Capital Structure of SOEs by Management Level (%)

Management Level 1991 1992 1993 1995
Central SOEs 79.4 77.1 76.7 74.1
Local SOEs 20.6 22.9 23.3 25.9
Source: OECF (1998)

Central SOEs represent the larger proportion of total capital of the sector. Meanwhile local SOEs
account for only one fourth of the total capital (see Table 2). It might be due to government’s policies
toward central SOEs with larger production scale.
Employment Size
Before 1986, together with cooperatives, SOEs absorbed a huge amount of employment. Since Doi Moi,
the employment size of the state sector has been gone down significantly, mostly caused by the massive
downsizing program of the early 1990s. In Figure 3, for the first three years of the last decade, the
employment of SOEs shrunk sharply from about 2 million to just over 1.7 million. At that time, one
could witness the largest number of SOEs workers left their sector. From that time on, the employment

size of SOEs remained rather stable at around 1.8-1.9 million. Despite the massive downsizing, SOEs are
still over-staffed. A recent analysis based on plant-level data by Belser and Rama (2001) indicates that as
many as half of the workers would be redundant if SOEs were to operate fully as their private sector
counterpart.
Figure 3: Trend of SOEs Employment in the 1990s
1,000
1,500
2,000
2,500
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Year
Number of workers (thousand)

Source: MOLISA (2001)

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Figure 4: Structure of Labor Scale of the SOE Sector in 1994 and 2000

79.6
6.6
3.6
0.3
73.8
9.7
6.1
0.4
0
10
20
30
40
50
60
70
80
90
<500 500-1000 1000-5000 >5000
Number of employees
Percent
Year 1994
Year 2000

Source: GSO (2002b)
Together with the massive downsizing, SOE sector has been structured toward the larger scale
production. It is evident from Figure 4 that the percentage of SOEs that have less than 500 employees
has fallen from 79.6% in 1994 to roughly 73% in 2000. Moreover, in 2000, 6.5% of SOEs have more
than 1000 employees as opposed to 4% SOEs in 1994. This is regarded as a consequence of the merger
and dissolution of small SOEs in the last decade.

Geographic Distribution
In a country that is still massively rural, SOEs have concentrated in big cities and urban areas in the Red
River Delta and the Southern East (OECF, 1998). Most central SOEs are located in two poles of the
country, in which Hanoi and Hochiminh city are home to around a half of total central industrial SOEs
(Table 3). However, while the number of central SOEs in the two cities has tended downwards, the
number has increased in other provinces. This phenomenon requires an in-depth analysis of government
policies in the second part.
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Table 3: The Structure of Industrial SOEs by Provinces
Unit: number, unless otherwise indicated
1995 1998 2000
Locality
Central
SOEs
Percent
Central
SOEs
Percent
Central
SOEs
Percent
Hanoi 172 31.3 166 28.9 160 27.8
Haiphong 27 4.9 36 6.3 33 5.7
Hochiminh city 125 22.8 118 20.5 117 20.6
Other provinces 225 41.0 255 44.3 265 46.1
Total 549 100.0 575 100.0 575 100.0
Source: GSO (2000); GSO (2002a)

Figure 5: Local SOEs’ Employment by Regions

22%
13%
3%
13%
9%
5%
20%
15%
Red River Delta
North East
North West
North Central Coast
South Central Coast
Central Highlands
North East South
Mekong River Delta

Source: GSO (2001)
Regarding local SOEs, it can be seen from Figure 5 that this type of enterprises has distributed equally
between the north and south regions. Moreover, local SOEs have concentrated in Red River Delta,
Mekong River Delta and North East South. Each region accounts for around one sixth to one fifth of
total SOEs labor force. Surprisingly, this figure shows the under-representation of local SOEs in remote
and mountainous areas. The local SOEs’ employment in northern west and central highland areas is far
much lower than in other regions. Naturally, one can raise a question on the role of local SOEs in socio-
economic development of under-developed localities. It is said that the development of SOEs should
ensure socio-economic development evenly and equitably among geographical regions. But so far the
reality might not be as expected.

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The Role of SOEs in the Economy
As said above even under Doi Moi, SOEs have held the dominant role in the economic development.
To assess truly its role within the whole economy, it is of interest to look at its contribution to GDP, job
and income generation and national budget as well. In this paper, it is ignorant about the role of SOEs in
economic adjustment process due to lack of necessary data.
GDP Share of SOEs
As shown in Figure 6: Contributions of SOEs to GDP (At Current Prices), from 1986 to 1991, the
contribution of SOEs to GDP decreased moderately. From that time on, the role of SOEs has been
recovered. Then, in the last 1990s, SOEs contributed around 30% to GDP (at the current price). The
macroeconomic stabilization, high level of protectionism and FDI concentration on the state sector has
consolidated the role of SOEs in the economy.
Figure 6: Contributions of SOEs to GDP (At Current Prices)
0
5
10
15
20
25
30
35
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
year
%

Source: GSO (2000b); GSO (2002a)
Table 4 depicts a clearer picture of contributions of SOEs to GDP by sector. Notably, most of

GDP created by SOEs are attributable to firms working in industry, construction and service
sectors. Despite the declining share of SOEs in GDP in service sector, they still play a
considerable role with roughly 55% of GDP contribution. Meanwhile, those in the industry and
construction sectors have made upward GDP contribution over years though the growth rates
are not as high as their private sector counterpart. In contrast, SOEs play a far modest role in
the agricultural sector. This position has not been improved over the last decade.
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Table 4: GDP by Sector and Ownership 1995-1999 (% of GDP)

1995 1996 1997 1998 1999
GDP 100.0 100.0 100.0 100.0 100.0
State 40.2 39.9 40.5 40.0 39.7
Non-state 59.8 60.1 59.5 60.0 60.3
Agriculture 27.2 27.8 25.8 25.8 25.4
State 1.2 1.3 1.1 1.1 1.2
Non-state 26.0 26.5 24.6 24.7 24.2
Industry & Construction 28.8 29.7 32.1 32.5 34.5
State 14.5 14.4 15.4 15.4 16.0
Non-state 14.3 15.3 16.7 17.1 18.5
Services 44.1 42.5 42.2 41.7 40.1
State 24.6 24.3 23.9 23.5 22.5
Non-state 19.5 18.1 18.2 18.2 17.6
Source: IMF (2000)
As government continues state-led industrial development, the contribution of SOEs to the industrial
output keeps being high. Although the number of state-owned industrial enterprises has been shrunk
considerably, their output still accounts for much more than one thirds of the gross industrial output.
However, their role has been declined over past years as shown in Figure 7. Accordingly, SOEs

accounted for more than 50% of industrial output in the mid-1990s, but their share had diminished to
nearly 40% by 1999. It was due to the declining number of industrial SOEs in the period, for instance
from 3,000 in 1988 to 1,821 in 1998 (UNIDO, 1999 and World Bank, 2001).
Figure 7: Share in Total Industrial Output by Ownership
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1996 1997 1998 1999
SOEs Foreign Capital Non-state (domestic)
Source: GSO
(
2001
)

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Job and Income Generation
Before Doi Moi, SOE sector was a main source of labor demand, especially in urban areas. Since the
early 1990s, the sector has been restructured, thus its employment has been decreased, namely from 2.1
million to about 1.9 million over the last decade (MOLISA, 2001). As a result, SOEs have absorbed only

around 5% of total labor force in 2000 (Figure 8). In case the government continues its SOEs reform
program, the number of jobs created by SOEs is kept limited. Moreover, it should be noted that
Vietnam is a young country with more than 1 million people entering the labor market per year (GSO,
2001). With only 5% of total labor force, SOEs has truly played quite a modest role in term of job
creation.
Figure 8: Share of SOEs’ Labor in Total Labor Force
0%
1%
2%
3%
4%
5%
6%
7%
8%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000

Source: MOLISA (2001)
Put differently, it is argued that the government has used SOEs jobs as an income transfer (Bales and
Rama, 2001). Despite the common perception of SOEs workers being underpaid, a study by Bales and

Rama (2001) using the workers approach shows that SOEs workers, though having lower hourly wages,
are overpaid by 20% as compared with those in the private sector. Nevertheless pecuniary compensation
is only a half of the story. SOEs jobs also go along with valuable benefits such as higher job security,
more generous old-pension regime, more flexibility with lower effort level, which are difficult to
monetarily quantify.
National Budget Share
As shown in Table 5 the contribution of SOE sector to the national budget has been stable at about 23
percent, excluding that from oil. If the oil revenue is included, the contribution has reached as much as
over 40 percent recently. The SOE sector has accounted for a large share of value-added tax, special
consumption tax, corporate income tax, and natural resources tax (mostly from oil). If absolute terms is
taken consideration, the budget revenue from SOEs has raised remarkably in this period, from VND
6,189 billion in 1991 to VND 45,000 billion in 2002 or up by 7 times during one decade (MOF, 2002).

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Table 5: Budget Revenues in Selected Years in Percent of Total Revenues

1999 2001 2002 (projected)

Total SOEs
Crude
Oil
Total SOEs
Crude
Oil
Total SOEs
Crude
Oil

Total 100.0 23.1 15.9 100.0 22.9 23.3 100.0 23.0 19.4
Value added tax 15.1 52.1 0.0 13.1 48.8 0.0 14.5 49.9 0.0
Special consumption tax 5.7 75.1 0.0 6.2 76.1 0.0 6.4 74.2 0.0
Corporate income tax 18.5 39.3 36.8 24.8 39.1 38.8 24.4 42.9 32.9
Natural resources tax 5.8 6.1 92.7 7.5 5.8 93.7 6.3 7.4 92.0
Capital user charge 2.0 99.4 0.0 1.5 99.3 0.0 0.0 0.0 0.0
License tax 0.5 5.0 0.0 0.4 5.0 0.0 0.4 4.8 0.0
Net profit after tax 3.7 0.0 100.0 6.6 0.0 100.0 5.5 0.0 100.0
Others 4.8 28.0 0.0 1.2 8.8 0.0 1.3 5.3 0.0
Source: www.mof.gov.vn and Author's Calculations
Economic Performance of SOEs
This section aims to draw an overall picture of economic performance of SOE sector. However, care
should be taken because data on the indicators are not always among consensus.
Table 6: Some Key Financial Indicators of SOEs in 1997
Unit: VND billion, unless otherwise indicated
The 100 largest The 200 largest Total*
Total state capital 40,492 44,332 73,075
Total fixed assets 62,548 67,354 n/a
Total turnover 56,523 77,644 267,523
Total contribution to budget 14,094 15,651 23,919
Total debt 29,369 40,237 101,439
Total bank loans 13,544 18,286 n/a
Total profit before tax 3,275 4,942 8,177
Number of profit-making SOEs 89 180 2,196
Debt-asset ratio .47 .52 .58
Fixed assets turnover ratio 7.07 7.71 n/a
Gross Pretax Margin (%) 6.1 7.5 3.1
Source: IMF (1999)
(*): The last column is derived from data set of 5429 SOEs
n/a: not available

Table 6 suggests that larger enterprises perform better than smaller ones. Accordingly about 90 percent
of the largest enterprises show positive pretax profit while the average figure for the total SOEs is only
40.4%. 100 largest SOEs have made as much as 58% contribution to the national budget among as many
as 5429 state enterprises (Table 6). This superior performance may be partly due to the monopolistic
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position and preferential treatment by the State as well. Typical monopolistic SOEs are
telecommunications, transportation, construction, electricity, and public utilities, to name a few. These
enterprises enjoy monopolistic market power and are reportedly very profitable since the prices they
charge are very high. In addition, the banking system in Viet Nam has been under-developed and
suffered from burdensome regulations from the State, small sized firms including those in the State
sector usually face difficulties in approaching preferential credit from large State-owned or foreign banks.
They must turn to other sources including unofficial ones, which result in their higher production costs.
Meanwhile large SOEs, which have close relations with the banking system dominated by large state
commercial banks and have ability to get big, feasible and ambitious business projects, can easily access
to bank loans. This results in cost distortion against small SOEs. Besides loan-related cost, the
preference of highly skilled and well-educated labors to work in large firms also puts smaller ones in
inferior position.

However, more recent surveys on the state sector suggest that the performance of SOEs -both large and
small scale ones - seems to have worsened. A study by Mitsui and Wada (1998) reveals that while sales
and other growth indicators showed a large increase, the profitability of most SOEs has deteriorated
substantially with a half of SOEs in red. A closer look at conglomerates reveals a worse reality. Out of
the 17 largest conglomerates that represent 50% of total SOEs’ capital, 12 are in the red or breaking-
even (Saigon Economics Time, 2001). According to the results of the enterprises census at 1
st
April 2001

published by GSO (2002b), as many as 76.6% of SOEs are profit making in 2000 (see Figure 9).
However, data should be again taken with a grain of salt. The inconsistencies in data collected by various
sources and surveys are not uncommon. A survey by the Ministry of Finance and IMF shows that out of
5,800 SOEs in 1997, only 40 percent were reported to be profitable, 44 percent were temporary loss-
makers, and 16 percent were permanent loss-makers.
Figure 9: Financial Performance of SOEs in 2000

Source: GSO (2002b)
There might be two major reasons for the weak performance of Vietnamese SOEs. One is that
Vietnam’s comparative advantages in many of the industries where import-substituting SOEs operate are
Profit-making
76%
Loss-making
18%
Break even
6%
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very weak. Another reason is that Vietnamese SOEs appear to be subject to soft budget constraints.
Loss-making SOEs have systematically been rescued through the write-off of non-performing loans and
cash injections from state-owned banks, the National Investment Assistance Fund, Social Security
Funds, and other sources. For instance, IMF (1999) notes that several of the most severely indebted
SOEs were able to increase their total outstanding debt by 50 percent or more in 1997, mainly by
recourse to the state banking system. The softness of the budget constraint is particularly problematic
because the incentives of SOE managers to maximize profit are poor. Financial profit is not always the
only objective of SOEs nor is the remuneration of the managers directly related to the enterprise’s
economic performance. Lacking individual profit-oriented owners, the objectives of SOEs are often
defined by politicians, and may include a multitude of specific targets ranging from maximization of

employment to regional policy objectives. This means the performance is difficult to monitor because it
is hard to find appropriate performance measures for all objectives. In addition the weights of the
different objectives are seldom specified.

As analyzing the SOEs’ performance, it is impossible not to mention the credit, loan and indebtedness of
the sector. The total credit to SOEs has continuously increased recently, from nearly VND 27 trillion in
1996 up to VND 70 trillion in 2000 (See Table 7).
However, the share of SOE sector’s credit has
fallen since late 1990s on, from over a half to over 40 percent of total credit to the economy in
2000.
Table 7: Distribution of Credit, 1996-2000
Unit: VND billion, unless otherwise indicated
1996 1997 1998 1999 2000
Total credit to the economy 50,751 62,201 72,597 112,730 155,720
To SOEs 26,810 31,222 38,076 54,335 69,918
Percent of total (%) 52.83 50.20 52.45 48.20 44.90
To other sectors 23,941 30,979 34,521 58,395 85,802
Percent of total (%) 47.17 49.80 47.55 51.80 55.10
Source: IMF (2002)

As shown in Table 8, the percentage of overdue loans in the SOE sector has been around 8.5 percent
sine 1997, next to joint ventures and private sector. However it should be noted that the SOEs’ overdues
share to the total overdues of the economy, though sharply declining since 1994, was still at the high
level of around 35% in 1997-1998.
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Table 8: Overdue Loans to Different Sectors
Unit: Percent

Sector 1994 1995 1996 1997 1998 Sep.
% of total loans to the sector
SOEs 9.1 6.9 7.8 8.6 8.5
Cooperatives 22.5 26.3 29.7 40.2 43.0
Joint-stock companies 4.5 3.7 7.4 34.3 37.6
Joint ventures 0.3 0.4 1.0 1.2 2.7
Private sector 11.7 12.7 14.9 8.1 7.4
% of total overdues
SOEs 58.8 49.7 44.2 34.8 35.5
Cooperatives 2.1 2.1 1.7 1.3 1.6
Joint-stock companies 3.4 5.3 11.8 45.7 46.1
Joint ventures 0.1 0.2 0.6 0.6 1.3
Private sector 35.7 42.7 41.7 17.5 15.6
Source: IMF (1999)
In terms of indebtedness, SOEs debt amounted to over VND 100 trillion (Table 6) and increased to
VND 382 trillion in 2000 (see Table 9).
Table 9: Some Indicators on Performance of SOEs in 2000
Unit: VND trillion
Indicator SOE Central SOE Local SOE
Net revenues 373 246 127
Pretax profit 16.3 13.5 2.8
Of which:
Total Gains 18.1 14.4 3.
7
Gains from business activities 17.3 13.8 3.5
Total Loss 1.9 0.9 1
Loss from business activities 1.
6
0.75 0.81
Total capital 521.5 431 90

Debt 382 298 54.5
Own capital 139 103 36.5
Source: GSO (2002b) p: 854-55, 1286-87, and 1380-81
As can be seen from Table 10 and Table 11, the debt/equity ratio of SOEs also raised from 138.8
percent in 1997 to as high as 274.8 percent in 2000, implying that SOEs have mobilized much debt.
Then the financial situation of SOE has been more risky recently
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Table 10: Key Financial Ratios of SOEs in 1997 (%)
Ratios Total
Profit-
making
Temporary
loss-making
Loss -
making
Number of SOEs 5,429 2,196 2,393 840
Debt/Equity 138.8 116.7 176.6 278.0
Debt/Assets 58.9 53.9 64.1 84.9
Source: IMF (1999) Table IV.2
Table 11: Indicators of Indebtedness and Financial Performance of SOEs in 2000
Unit: percent
Indicators SOE Central SOE Local SOE
Debt/Equity Ratio 274.8 289.3 149.3
Debt/Total capital Ratio 73.3 69.1 60.6
Net revenues/Total capital Ratio 71.5 57.1 141.1
Net revenues/State capital Ratio 268.6 238.8 347.9
Pretax profit/Total capital Ratio 3.1 3.1 3.1

Pretax profit/State assets Ratio 11.7 13.1 7.7
Source: Calculations from GSO (2002b)
Although some debt ratios have gone upwards, in terms of profitability in the SOE sector, the pretax
profit to total capital ratio was 3.1 percent and pretax profit to own capital ratio was 11.7 percent in
2000, which is a unwonted positive sign of performance in the sector.

Concluding Remarks

No one can deny the role of Vietnam’s SOEs in the transition process. However, to maintain its role in
the economy in the next period, the new phase of further SOEs reform should be required. Specifically,
until now SOEs still remain a leading role in the economy but their contributions have been declined
significantly over the last decade. Moreover, SOEs’ bad performances have been a serious problem that
the government should try its best to solve. Then, it is of necessary to explore the government’ policies
toward SOEs at the present and in the long-term vision. The following part will be for this concern.
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Policy Framework for SOE Development and Reform
Overview of the SOE Reform in Vietnam
SOE reform in Vietnam commenced at the time of Doi Moi reforms in late 1980s. The issuance of
Decision 217-HDBT dated 14/11/87 marked the first Doi Moi move towards a broad based SOE reform
program. Since then there have been many Party and Government decisions including resolutions,
legislation, decrees and ordinances towards SOE development and reform. In accordance with those
decisions, the government has implemented three major rounds of SOE reform over the last ten years.
The first round of SOE reform took place during 1990-1993 and concentrated on reorganizing and
strengthening business and production in the SOE sector in accordance with Decision 315/HDBT and on
establishment, re-registration, and liquidation of SOEs in accordance with Decree 388/HDBT. In the
second round that took place during 1994-1997, the government aimed at (i) reorganizing SOEs and

enterprise associations in order to establish general corporations (GCs) according to Decisions 90/TTg
and
91/TTg; (ii) implementing the transformation of SOEs into joint-stock companies according to Decree
28/CP; and (iii) issuing the Law on State enterprises as the framework for enterprises to operate. The
third round taking place from 1998 up to present has speeded up the equitization process of SOEs
according to Decree 44/1998/ND-CP and Decree 64/2002/ND-CP, the restructure of SOEs according to
Circular 20/1998/CT-CP, and the transfer, sale, contracting and lease of SOEs according to Decree
103/1999/ND-CP. Decree 63/2001/ND-CP outlining the procedures for corporatisation of SOEs was
also issued

Major contents of these rounds of SOE reforms include (i) reforms on mechanism and policies towards
SOEs, allowing SOEs to become more autonomous, self-responsible for their decisions and activities,
and making SOEs to operate according to market mechanism; (ii) reforms on enterprise's planning,
finance, personnel organization, and on the state administration with the tendency of eliminating “the
organism in charge” of state organizations; (iii) allowing mergers, liquidations, and bankruptcy for
permanent loss-making SOEs which the state should not hold the ownership; and (iv) organizing,
strengthening, and developing GCs to build large economic groups to develop key industries that the
state has to take control.

The SOE reform process in Vietnam has obtained remarkable achievements such as introducing a new
management mechanism, reducing the number of SOEs, reducing state subsidies, and granting more
autonomy for firms in making decisions on business and production. As a result, a large number of firms
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have improved their performance, increased capital, and improves workers' benefits etc. The SOE sector
still plays an important role in the economy via their large contribution to state budget, export turnover;
and help ensure economic stability of the economy.
Next sections will focus on key Party and Government decisions and policies on the SOE reform over

the past years.
Milestones in the Process of SOE reforms throughout Party Congresses.
The Launch of Doi Moi at the Sixth Party Congress
Doi Moi was launched at the Sixth Party Congress in late 1986. Although the Congress represented a
critical turning point in policy direction, only limited details were provided about the specific policy
reforms that would be implemented to bring about desired changes. In a series of Party Plena following
the Party Congress, the details of Doi Moi were discussed. Therefore, first steps towards a broad based
SOE reform were only introduced when the Councils of Ministers issued regulations in Decision 217-
HDBT dated 14 November 1987 that aimed at putting into effect the Resolution of the 3
rd
Plenum of
the Sixth party Congress to give greater autonomy to SOEs and to introduce a socialist cost-accounting
regime. Details of this Decision will be presented in section.
The Seventh Party Congress
The Seventh Party Congress renewed the commitment to greater SOE autonomy. While the Party still
maintained that SOEs were to continue to play a leading role in the economy, there were also calls for
consolidation of the SOE sector, including the liquidation of non-viable enterprises, and the equitization
of non-strategic SOEs. The 7
th
Party Congress called for pilot activities to dissolve or change the
ownership of enterprises that did not need to be retained understate ownership. Resolution of the
Second Plenum agreed to converse a number of eligible SOEs into joint-stock companies and this
should be done on a pilot basis and under close guidance. Then in late December 1991, the National
Assembly approved a pilot equitization program and the government issued a decision to proceed this
pilot program.
The Eighth Party Congress
In the 8
th
Congress, it stressed the need for a greater focus on improving financial management of all
SOEs, to rely on profitability indicators to evaluate the performance of SOEs, while also using social

indicators to evaluate the efficiency of state public service enterprises. The 4
th
Party Plenum emphasized
that the immediate priorities were ensuring financial sector and macroeconomic stability, and coping
with the unfavourable impact of the regional economic crisis, including a renewed focus on SOE reform.
In the resolution of the 4
th
Party Plenum, priorities for enterprise reform included: accelerating the
equitisation program; developing the legal basis for small SOEs (less than VND 1 billion in capital) to be
merged, divested, leased, or contracted out under performance contracts incorporating State business
enterprises as limited liability or joint-stock companies under the Company Law; promulgating
regulations to deal with supervision of enterprises with monopoly powers; and introducing clear
regulations imposing compulsory auditing and publication of annual reports.
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Resolution of the 3
rd
Party Plenum of the 9
th
Central Party Standing Committee
The Third Party Plenum called for further acceleration of SOE reform. The direction viewpoint in this
resolution includes: continuing to reform, develop, and raise the efficiency of SOEs to help SOEs
implementing their role in maintaining the socialist orientation, stabilizing and developing Vietnamese
economy, politics and society; reforming the management mechanism; continuing reform, rearranging,
developing and raising the efficiency of SOEs are urgent as well as strategic missions; and raising the
party leadership at all levels of authorities, and at all industries and branches.

The future role of SOE sector includes: providing necessary public-utility goods and services for the

demand of national defense and security, being the key force in boosting the economic growth and
providing ground for the industrialization and modernization of the country with the socialist
orientation.

The orientation in rearranging and developing business and public-utility State enterprises: State holds
100% capital of business enterprises operating in state-monopoly fields; state holds dominate shares or
100% capital of state enterprises operating in some specific industries and domains (See Decision
58/2002/QD-TTg). These enterprises are providing the necessary commodities for production
development, and spiritual and material improvement of rural people, and people in mountainous,
remote, and deep areas.

State holds special shares in some necessary cases; and State converses 100% state capital business
enterprises into one-member liability companies with an owner is the State, or joint-stock companies in
which the shareholders are state enterprises. For existing public-utility SOEs, State holds100% capital of
Public-utility state enterprises operating in some specific industries and domains (See Decision
58/2002/QD-TTg). State holds dominant shares of Public-utility state enterprises operating in some
specific industries and domains (See Decision 58/2002/QD-TTg); and periodically the State adjusts the
enterprise-classification orientation in order to fit with the socio-economic development’s demand.
Amending and Supplementing Mechanism and Policies

With respect to Business State Enterprises
Enterprises decide their businesses based on demand-supply relations in the market to meet the
objectives and their operational regulation. The budget subsidies to enterprises will be eliminated.
Priority policies for industries, areas, and goods and services encouraged to develop, regardless of
economic sector, shall be carried out.

Law on competition shall be issued to protect and encourage enterprises in all economic sectors compete
and cooperate in the general legal framework. Price-control and profit regulations, the competition
between state enterprises are needed in the fields in which state enterprises operate monopolistically.
The state issues efficiency-valuating criteria and SOE supervising mechanism. Accounting, auditing,

reporting, and information mechanisms shall be reformed. Business operation and enterprise finance
shall be performed publicly.


About capital: enterprises can access and attract different sources to develop their businesses; they
can actively treat the unused assets, and materials and goods that are accumulated stagnantly. The
State has mechanism to create enough capital for enterprises in 5 years 2001-2005 basically. Fees of
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using budget capital are not collected, accompanying by the conversion from capital providing to
investment. State financial investment companies are experimentally set up to invest and manage
state capital at enterprises. The State shall issue the Law on State capital uses invested in businesses.
 Enterprises are sovereign in profit distribution and establishment of different funds extracted from
profits in accordance with general framework. The state will have policies treating with assets created
by loans and these loans are paid by depreciations and profits created by these assets in orientation
of harmonizing different interests to encourage enterprises to invest for development.
 About investment: The state increases the rights and responsibilities of SOE in investment decision,
base on the approved development plans and strategies.

About technology renovation and modernization: enterprises are applied the preferential regulation
applied to contributors in technology innovating that contributes practical efficiency to enterprises;
the costs are accounted into the production costs. The state has policies encouraging, helping
enterprises in investing to innovate technologies.

About laborers and wages: enterprises decide to labors recruitment and are responsible for policies
with these laborers without jobs created by enterprises. Enterprises are sovereign in paying wages
and awards base on productivity and enterprises' operation efficiency.
 About managers: enterprises actively choose and arrange managers base on examination; authorized

state organizations issue decision appointing key managers of enterprises. The state has regulation to
encourage spiritually and materially for them, accompanied by raising their responsibilities.

About auditing and checking: Enterprises shall be audited and checked to provide the legal bases of
enterprises' financial situation. State administrative organizations shall have the periodically auditing
and checking programs and pre-announce to enterprises. Legacy-protected organizations only
inspect and check enterprises when there are signals of legal violation. These organizations are
responsible for the results.


With regard to Public-utility State Enterprises
The State decides the organizational scale, financial policies toward public-utility enterprises base on their
demand and tasks. The Mechanism of capital provides and task assignment shall be converted into
mechanism of placing or bidding of public-utility goods and services. The state has preferential policies
toward public-utility goods and services regardless of enterprise types and economic sectors. Labor,
wages, and income management mechanism are carried out base on the quantity and quality of goods
and services placed or assigned by the State. The accounting mechanism shall be applied to these
enterprises.


Excess Labor and Non-performing Loans Solutions
The mechanisms and policies toward labor excesses created by the rearranging and restructuring SOE
are supplemented. Enterprises shall check and set up the standard to determine needed laborers. Excess
laborers are retrained, or finding new jobs while still receive their wages; if they cannot find new job, they
can be applied the job-losing mechanism as prescribed by the Labor Code. Specific policies toward
laborers voluntarily retire before defined age are supplemented and amended. The government will have
money to implement the policies for excess laborers.
The Labor Code shall be amended and supplemented with orientation of applying the job-losing
mechanism to the excess laborers at the time of assignment, sale, contracting and lease of SOEs. Social
insurance policies shall urgently be supplemented; unemployment insurance policies shall be issued and

be joint-contributed by the State, enterprises, and laborers.
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
Non-performing Debts
Government defines the methods to solve completely enterprises' non-performing debts borrowed from
state budget and banks, accompanied by methods to prevent them from re-happening. The Debt and
asset management companies shall be set up to treat the debt and unused assets, creating conditions to
make the enterprises' finance healthy.

Reforming and Raising the Efficiency of General Corporations, and Setting up some Strong
Economic Conglomerates.
General Corporations must have large chartered capital, the capital can be mobilized from different
sources, of which the state capital is dominating; may be multi-industries, but they must have specialized
industry. There are interdependence in terms of finance, production, and market between their members.
GCs must have advance technology and management, high productivity, high product quality, ability to
compete in the domestic and international markets.

Vietnam should complete the rearrange existing GCs to make GCs: concentrate more resources in
dominating important industries and domains of the economy; be the regular force in ensuring basic
balances and macroeconomic stable; provide important and necessary products for the economy and
exports, contribute largely to the state budget; be the core in boosting the economic growth and actively
integration efficiently. General corporations shall operate in some specific industries (See Decision
58/2002/QD-TTg). Periodically according to the reality of economic growth, the list of industries will be
adjusted. Existing GCs that do not meet these conditions will be rearranged.
Experimentally implement the “mother company-facilitate companies” model, in which the GCs invest
in member enterprises that are one-member limited liability companies (corporations) or joint stock

companies that the general corporation hold dominating shares. The general corporations can also invest
in enterprises of other economic activities.

100%-state-capital general corporations must have Managing Board. Managing Board represented for the
owner at general corporations, responsibility for receiving and keeping this capital intact. The Managing
board’s rights and tasks are as follows: (i) Submit to the Prime Minister (or Ministers, presidents of
People’s Committees of provinces and central-run cities) for approval: the plans of establishment,
division, merge, ownership conversion, dissolution of member units; issuing standard regulations;
appoint and relieve, recommend and discipline the chairman and members of Managing Board, general
director; approve the objectives, tasks, strategies, plans of medium- and long- term development of
general corporations, and investment projects that are to be approved by the government; (ii) Decide the
appointment of vice general directors, chief accountant, approve the director of member unit decided by
the general director; decide and be responsible for the investment projects under their management base
on approved strategies and plans, and for plans of management and business organization of general
corporations; decide the after-tax profit distribution; (iii) check and supervise members’ directors or
general directors in using and keeping intact and developing of capital, in implementing their obligations
with the State, and in implementing the Managing Board’s resolutions.

The government defines the wage and award for the Managing Board depending on the operation
efficiency of the general corporations.
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Set up some strong economic conglomerates base on state general corporations, in which other
economic sector can participate. These conglomerates operate in many industries, but they must have
specialized industry at high level and have large dominating role in the economy; have very large scale in
terms of capital; there are close relations among scientific technology, training, research and
development, and production; experimentally set up conglomerates in fields that have enough

conditions, advantages, and development ability to compete and integrate efficiently such as oil and gas,
telecommunication, electronic, and construction.

Boosting SOE Equitization

The objectives of SOE equitisation are: creating new type of enterprises which have many owners,
including most of labourers, efficiently using state capital and assets and mobilizing capital of the whole
society for the purposes of investment in renovation of technology; and facilitating shareholding
employees of enterprises and persons contributing capital to be real owners, changing the method of
management, raising the supervision of society; ensuring the harmonization among interests of State,
enterprises, and labourers. SOE equitisation cannot be SOE privatization.
Enterprises in which it is no longer necessary for the State to hold 100% of invested capital shall be
subject to equitisation, regardless of their business results. Authorized state organizations, base on the
rearranging and developing orientation of state enterprises and base on the situations of enterprises,
decide the conversion to joint-stock companies, in which the State hold dominating shares, special
shares, shares, or no shares.

The types of equitisation include issuing shares to mobilize additional capital; selling part of the value of
enterprise; separating a part of the enterprises to equitize; or selling the whole value of the existing State
owned capital. Equitisation of member units shall not adversely affect the business performance of
remainders of enterprises.
The state shall have policies to reduce the difference in terms of preferred shares for laborers among
equitised enterprises. Laborers shall hold preferred shares in a pre-determined period of time. Amending
and supplementing the priority mechanism of selling shares to laborers to deeply attract them to
enterprises; sell an appropriate proportion of shares to outside buyers. Using a part of enterprises’ capital
to form laborers’ shares, laborers would have the dividends but cannot draw the shares out of the
enterprises. Expanding the sale of shares of processing enterprises in agriculture, forestry, and
aquaculture to material providers and producers. Encouraging equitised enterprises to be labor-intensive,
and allowing transforming debts into joint-stock capital.

Amending the method of valuating the value of enterprises with regard to the market value; the value
will include the value of land-use rights. Experimentally implement selling share through bidding and
financial intermediaries.

Implement business assignment, contract, sale, lease, merge, dissolution, and declare bankrupt SOEs.
With enterprises of less than VND5 billions, the State does not have to hold 100% capital and they
cannot be equitised, depending on the conditions of each enterprises authorized state organizations shall
decide to sell, contract, assign, or lease. Assigned, sold enterprises are encouraged to converse into joint-
stock companies. Other methods are merging, dissolving and declaring bankrupt with inefficient state
enterprises that cannot apply these above-mentioned methods. Law on Enterprise bankruptcy should be
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supplemented and amended, allowing the people decided the establishment of enterprises to propose to
declare bankrupt. Boosting propagation, raising the laborers’ and society’s knowledge with the policies of
business assignment, contract, sale, lease, merge, dissolution, and declare bankrupt SOEs.

Renovating, raising the management effectiveness and efficiency of State and owner
organizations to SOEs.
The state management functions toward SOE should be clearly identified. State management functions
toward SOE include: create and complete the legal framework, issue management policies and
mechanisms toward business and public-utility enterprises; set up the plans and train key managers,
inspect and check the enterprises’ implementation of State’s policies and regulations.
Firmly finish the direct interference of state administrative organizations into the operation of state
enterprises; clearly fix the economic administrative rights of State and business administrative rights of
enterprises. State administrative organizations base on the legal framework and management
requirements to issue the system of legal documents to implement to state administrative functions to
enterprises of all economic sectors, including SOEs.

Second is clearly fixing the rights of State organizations implementing the ownership functions to SOEs.
The government manages and implements the owner’s rights to SOEs. The owner have following rights:
establish, merge, divide, and transform ownership, dissolve enterprises; issue the standard regulations,
appoint and relieve, recommend and discipline the key managers, decide the objectives, tasks, strategies,
plans of medium- and long- term development of enterprises; approve investment projects; decide the
after-tax profit distribution; (iii) check and supervise the implementation of objective and tasks assigned
by the state and the efficiency of enterprises.

The government authorizes ministries, devolves specifically to People’s Committees of provinces and
central-run cities, and Managing Board of General corporations to implement the State’s ownership
rights to SOEs, ensuring that if there are any state capital, there will be organizations or individuals that
are authorized to be the direct owner with clear tasks, rights, benefits, and obligations, regardless of
central of local state enterprises.

About training and using the SOEs’ managers: The government defines the standards of key managers
of enterprises, directs in building the system of training the directors of enterprises. The government
defines the interests and obligations of SOE managers, satisfactory encourages them spiritually and
materially based on their contributions, also defines clearly the disciplines of managers of inefficient
SOEs due to subjective reasons.

The government has issued the Acting Program attached to Decision 183/2001/QD-TTg to implement
this resolution. Main contents of this program are amending, supplementing mechanism and policies,
and implementing these policies. From now to 2003, there will be a number of policies related to this
resolution together with issuing and completing mechanism and policies related to implementation.
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Key Programs of SOE Reforms
Reforms in SOE Management Mechanism

There have many decrees, decisions, and resolution towards this problem. The first legal deed was
Decision 217/HDBT on 14/11/1987 making the 3rd congress’s Resolution of 6th Party more detail. This
decision was on transforming the operation of state economic units into socialist business accounting,
and implementing business self-control mechanism of SOEs. Later, the government issued Decree
50/HDBT on 23/03/1988 issuing the Regulation of State industrial enterprises, Decree 98/HDBT on
02/06/1988 on the role of labor in enterprises, and some other deeds.

The government experimentally implemented giving the rights on management and use of capital to
SOE in 1990. This program was expanded in 1991. In this period, the state changed from directly
control of capital into the direct control of labor staff and director. The government redefined to tasks,
rights and obligations of Ministries in state economic administration (according to Decree 196/HDBT on
11/12/1988 and Decree 15/CP on 02/03/1993) with the direction of reducing control functions to four
functions: establishment, merger and dissolution; assign director and vice director; supervision of the
business activities; and assignment of use right of capital and assets.

The 7
th
Party Congress has confirmed that the state regulated the economy by law, plans, policies, and
other instruments. In the Constitution 1992, the regulation of the economy by law was also confirms. All
economic sectors are equal in law and operation.

The issue of Law on State enterprise on 20/04/1995 marked an important change in the legal framework
for SOE operation and SOE reforms. Ministry of Finance was assigned to manage the state assets at
SOEs. Some national-scale GCs were established to reduce the state administration mechanism and
level. After that the government issued Decree 59/CP dated 03/10/1996, which is amended and
supplemented by Decree 27/1999/ND-CP dated 20/04/1999, issuing the regulation on financial
management and business accounting of SOE. The state now allots capital to enterprises instead of
providing capital as before. SOEs now have more rights and self-responsibility on managing their
businesses.
Restructure of SOEs

The Council of Ministers issued Decision 315/HDBT dated 01/09/1990 to correct and reorganize the
SOE business. This decision required enterprises to review their business functions and factors such as
their market, capital, labor, management organization, and enterprises finance. Enterprises, that were loss
making in the long time or could not implement their business missions even though all needed methods
to improve their efficiency had been done, can be declared dissolution.

Decree 388/HDBT dated 20/11/1991 regulated the establishment, reregister, and dissolution of SOE.
Long loss-making SOEs would be weeded out and previous massive- and extensive- established SOE
would be supervised. This decree had been carried out extensively. This defined the principles of SOEs
such as the minimum level of charter capital, smallest scale, business lines, and so on. Implementation of
this decree had showed the weaknesses of SOEs and proposed methods to improve this situation.