Last updated: Friday, June 14, 2013
Transportation Enterprises: United to Form Strength?Posted: Wednesday, May 16, 2012
Economic restructuring is being comprehensively carried out by all economic sectors. In the proposed reform of the transport sector, Vietnamese transportation companies face a series of spin-offs, mergers and transformations.
A major hardship for restructured transportation companies is unfavourable financial health. Most of them are facing unpaid loans and deferred payments of customers, while their working capital falls short.
After 10 years of reorganising and reforming State-owned transportation companies, the Ministry of Transport has basically completed the equitisation of State-owned independent companies and member companies affiliated to State-owned corporations. In general, their performances improve after going public. Especially, the State capital increases 20 percent, revenues and profits expand 10 percent, and worker wages climb 10 percent annually. The reorganisation and equitisation of State-owned enterprises was inhibited by financial difficulties, unclaimed debts and limited working capital.
The ministry said it had 438 wholly State-owned enterprises, including 16 corporations, as of January 1, 2001. They mainly operated in traffic, civil, industrial, irrigation and defence construction; industry; consulting services; transportation; and traffic infrastructure construction.
As of October 2011, as many as 324 companies were privatised, including two corporations and 64 companies transformed into one-member limited liability, 37 companies merged, four companies sold, and one collapsed. During the process of reorganisation and renewal, they settled early retirements for 13,632 workers and unemployment allowance of VND550 billion. The privatisation helped companies to expand State assets, increase sales and profits.
Mergers can be good, but...
The amalgamation of Cienco 5 (located in Da Nang City) and Cienco 4 (Vinh City, Nghe An Province), both affiliated to Civil Engineering Construction Corporation (Cienco), was a remarkable SOE restructuring plan stated in the Ministry of Transport’s Document 2818/BGTVT - QLDN sent to the Prime Minister. An official said the ministry wanted this merger will form a larger entity responsible for investing in traffic work construction in central Vietnam.
It remains unclear which brand will be chosen for the new entity with a registered capital of VND420 billion. The new corporation will have 56 member companies, including eight road construction and management companies expected to be taken from Vietnam Road Corporation.
Secondly, the Ministry of Transport planned to move eight road management and repairing companies belonging to Road Management Zone 2 to Cienco1 and six road management and repairing companies belonging to Road Management Zone 7 to Cienco6. All are wholly State-owned companies with a registered capital from VND5 billion to VND20 billion, responsible for providing public utility products and services required by the State. If this proposal is approved by the Prime Minister, the Directorate for Roads of Vietnam (DRVN) will no longer hold any public utility companies. Road management, repair and maintenance will be undertaken by State management agencies rather than companies as now. They will have to compete for the work according to Decree 18/2012/ND-CP on Road Maintenance Fund.
Besides, in 2012, five out of 16 project management units (PMU) will be converted to enterprises, including PMU1, Ho Chi Minh Road PMU, PMU2, PMU 85, and Marine 3 PMU. The destinations of these five PMUs are transportation infrastructure project investment, consulting and management companies like Mekong Delta Transport Infrastructure Project Development Investment and Management Corporation converted from PMU My Thuan in 2011.
Earlier, in February 2012, the Vietnam Airports Corporation was established from the merging three airport operating corporations.
Before that, according to Decision 6454/2011/BGTVT-TTCB, the Ministry of Transport will build a group operating mainly in the northern region, with the core components being Cienco 1, Cienco 8 and Thang Long Construction Corporation and a similar group for the south, comprising of Cienco 5 (current headquartered in Da Nang City), Cienco 4 (Nghe An province), and Cienco 6 (Ho Chi Minh City). This is the DN assigned by the Government exercise the rights and obligations of the owner.
In the documents submitted to the Prime Minister, Minister Dinh La Thang proposed: "The groups will undertake large-scaled infrastructure investment projects and public tasks in difficult regions; accumulate capital to enhance capacity and competitiveness.”
But too cumbersome
It is obvious that merging road repair companies will form relatively bulky entities. Although this model already existed in the subsidy period, it came to an end after some years of establishment because it exposed apparent weaknesses due to cumbersomeness, overlapping functions.
Moreover, according to experts, the merger of Cienco companies to form an entity with larger capacity also needs to be carefully considered. In fact, financially weak and poor-performing Cienco companies are now a burden for investors because they are huge loss makers. Therefore, if there are no financial measures, the combination of Cienco companies will likely result in the formation of debt and loss-making businesses. Besides, after many years of disoriented development, Cienco companies carry out the same businesses, and possess similar technologies, and construction capacity. Thus, it is quite difficult to single out a superior entity to lead the rest when a business group is formed.
For that reason, if there are new solutions and roadmaps, possibly the merger or combination of Cienco companies or public utility companies with limited construction strengths will cause a mechanically enlarged scale rather than create strong “punches” in the competition with foreign contractors in the local market as the Ministry of Transport wishes.