State-owned Economic Groups: Unclearness in Governance

Waste of resources and effectively unfocused investment is a common fact in many State-owned economic groups in Vietnam. These chaebols are largely expected to spur economic development and lead the country out of the middle-income trap.

 

According to data from the Ministry of Finance, among 70 corporations and economic groups, 28 corporations have contributed a total of VND23,344 billion to establish securities companies, commercial banks, fund management companies, insurance companies and real estate companies. The money is equal to 8.7 percent of their owners’ equity. Particularly, Vinashin Group, the largest shipbuilder in the country, is reported to invest 1.1 times of its owner’s equity; Vietnam Tobacco Corp (Vinataba), 15.1 percent; and Southern Waterway Corp, 50.2 percent.

 

Dr Tran Dinh Thien, Director of Vietnam Economics Institute, said: To become a developed country with modern production, there is no other way than build a strong force of enterprises and entrepreneurs, where backbone force will be such big firms like Sony, Honda or Mitsubishi in Japan or Samsung or Hyundai in South Korea. “A well-known economic expert from Japan I had the opportunity to contact said that Vietnam can escape the middle-income trap if it is led by intelligent state and powerful business force,” said Thien.

 

The Government expects State-owned groups to become powerful businesses in 10 key economic sectors, which will lead the economy to grow. With such tasks, groups have received huge incentives in resources like access to land, capital and monopoly in some sectors.

 

But in the past few years, real estate, monetary and stock markets boomed, many corporations invested much in these sectors on speculation of obtaining quick earnings without due attention and focus to its core businesses.

 

The Posts and Telecommunications Group (VNPT), apart from its telecom and information technology-related products and services, has also expanded into other areas such as advertising services, property trading and offices for lease.

 

The Electricity of Vietnam Group (EVN), in addition to traditional operating areas of manufacturing and trading of electricity, public telecommunications and power engineering, has also stepped into real estate, finance and banking.

 

The Vietnam Rubber Industries Group (VRG) has jumped into mechanical engineering, seaport operation and management, shipping, manufacturing, construction material trading, real estate trading, hotel services, inbound and outbound travel services.

 

Vinashin Business Group also expanded into shipping services, hydropower production, financial and mechanical manufacturing, etc in addition to its traditional areas. 

 

In the world, investment diversity is a considerably successful trend and way. Sound and successful investments will help enterprises promote their position and achieve new goals but wrong or inefficient investments can deteriorate the image and even the brand of corporations.

 

State-owned economic groups attribute their unfocused investment to their efforts to make high and quick earnings in new businesses to support and recover investment capital from their traditional activities as they are primarily supporting public benefits. As a matter of fact, economic groups have to bear public responsibility and they will not invest on the viewpoint of business. For instance, the electricity, postal and telecommunication industries will not invest in remote areas to serve the people or improve the knowledge of the people. However, State-owned units have operated and controlled these sectors for long and received high preferences in land, credit and resources. Hence, their public responsibility is entirely reasonable.

 

In access to limited national resources, these groups also cause unfair competition when they raise funds or step into noncore business areas. They have more advantage when they mobilise resources, access to land and raise capital. The equitisation process is very slow although this is a very good channel to mobilize capital. Groups can also issue bonds or list shares on the stock market. Many groups have made in a very simple way but more dangerous: setting up joint stock banks. These banks will finance projects of these groups in return. If the State Bank of Vietnam did not tightened the rule on bank set-up, the number of banks will be higher.

 

Economic groups always cry for capital shortfall, and this is the truth, when their scales are small. But instead of focusing investment on core businesses, regarded as key sectors of the economy, they also jump into securities and real estate markets. Large sums of investment capital have been injected into noncore businesses. There is no guarantee for earnings from the reinvestment for core businesses.

 

Dr Tran Xuan Lich, Deputy Director of Central Institute for Economic Management (CIEM), said: “Currently, State-owned economic groups are dominating electricity, coal, mineral, oil, gas, telecommunication and rubber markets but the State management over State economic groups is still limited. Many threats are arising from State-owned sectors like limited competition, monopoly, market domination and weak State management effectiveness.”

 

Economic experts said the dark side of investment diversity is the loss of comparative advantages in core businesses and easy mistake due to dispersed resources, insufficient experience of managerial apparatuses and inadequate information update.

 

Economic experts seem to agree with each other on warnings over the control of capital injected into noncore sectors, cross investment and cross ownership, which will lead to unclearness in management in State-owned firms. This problem is very complex because, with the limited financial capacity, investment diversity will force them to seek new capital sources with strict commercial terms, which easily lead them to debt traps.

 

From noncore investments of State-owned economic groups, we can see that investment has been focused on the areas of infrastructure or nonproduction activities. Thus, their activities increase the amount of money in circulation and supply - demand difference, or doubling the monetary inflation threat structural inflation. The alliance among State-owned groups and corporations with state-owned commercial banks in loan, cross investment and noncore investment is mainly aimed at speculation to seek most profits. Inefficient investment is the cause for the return of inflation.

 

The Prime Minister has decided to allow the pilot establishment of several new State-owned economic groups. Thus, issues about investing activities by State-owned corporations and tighter State control over State-owned corporations are still hot topics this year. Dr Tran Dinh Thien said the year 2010 will be an important strategic milestone as Vietnam will prepare the 10-year socioeconomic development strategy for the period from 2011 to 2020 and the shorter five-year plan from 2011 to 2015. Major issues are expected to be focused in the next 10-year plan, including reforming State economic sectors, reviewing pillars for economy development and changing patterns growth, etc.