Equitisation- a dance to the music of time
Equitisation (read privatisation) has trundled on in its petty pace for a couple of decades now, and while the process may not continue until the last syllable of recorded time, it has the appearance of wanting to test the possibility. While many small State-owned enterprises (SOEs) have been equitised, the share of SOBs in the economy has barely budged. Large SOBs have been in the process of equitising for years, sometimes even more than a decade. It would appear, though appearances are often deceptive, that the Government is becoming peeved. Resolution 15 of the Government, issued on 6 March 2014, requires SOBs to sharpen up.
First, it sweeps away one of the convenient excuses for inaction, namely that the State should not sell at a loss. It explicitly allows SOBs to sell non-core businesses under par value or under book value.
If asset sales or equitisations are not carried out in accordance with the approved plan, the relevant managers will be held personally liable. This confirms the theme in an earlier notice, Notice 85 issued inFebruary 2014, in which the Prime Minister warned ministers and chairmen of people's committees and SOBs that they would be removed from office ifthey failed to restructure or equitise as required.
SOBs are instructed to reduce state ownership to 65 per cent or less (though this will not apply to certain sensitive sectors).
The result has been a flurry of activity. A number of major SOEs are preparing for initial public offerings (IPO), including:
- Vietnam Airlines, which is planning an IPO inSeptember 2014, and hopes to sell 20 to 30 per cent to strategic investors; and
- Vietnam National Textile and Garment Group (Vinatex), which is looking to sell 25 per cent to a foreign strategic investor.
Listing but not capsizing
Another favourite pastime when nothing much is happening is drawing up lists of what should happen. The latest one, which came out from the Government on 29 April2014, lists 127 national projects calling for foreign investment before 2020. While one might ungraciously argue that if the road blocks on a voyage are extensive enough, the destination does not need to be identified, the latter consists of:
- technical infrastructure: 51 projects in transport infrastructure (road, railway, aviation ports, and sea ports), energy infrastructure, urban infrastructure (transport, water supply, treatment of urban solid waste) and industrial park infrastructure;
- social infrastructure: 20 projects in education and training, hospital, culture, sports and tourism;
- agriculture: 44 fishery and forestry projects; and
- production and services: 8 projects. Notable projects include:
- The Nam Van Phong Oil Refinery Plant Project in Khanh Hoa- US$8 billion;
- The Long Thanh International Airport in Dong Nai- first phase US$5.62 billion;
- The 120km Bien Hoa-Vung Tau railway- US$5 billion;
- Ninh Binh to Thanh Hoa and Thanh Hoa to Nghi Son highways -US$1.867 billion;
- The 78km Bien Hoa- Vung Tau expressway- US$1.175 billion;
- The 148km Noi Bai- Ha Longroad- US$1.762 billion; and
- The upgrade of the HaNoi- HCM City railway- US$2.3 billion.
Oddly enough, the list contemplates projects being undertaken on a 'build-operate-transfer ' basis, even the selfsame Government is finalising a PPP decree that is set to abolish the BOT regulations (see below).
Banks -musical chairs
Since the bank restructuring process began in 2011, some activities have occurred:
- the merger of Tin Nghia Bank, De Nhat Bank and Sai Gon Bank to form Saigon Commercial Bank:
- the acquisition of Habubank by SHB;
- the merger of Western Bank with PetroVietnam Finance Company to form PVCombank; and
- the acquisition of Dai A Bank by HD Bank.
These deals reduced the total number of banks by five.But the SBV Governor's goal is to reduce the number of domestic commercial banks from 39 to about 15by the end of 2015. So there is a way to go. The direction has recently become clearer:
- In March 2014, Sacombank shareholders voted for a merger with Southern Bank;
- Mekong Development Bank and Maritime Bank each announced plans to merge with other credit institutions;
- Military Bank and VietCapitalBank are also consulting shareholders about plans to merge with other credit institutions;
- GP Bank is reported to be planning either a sale of a majority stake to a foreign bank or a merger with a domestic bank; and
- Vietinbank and Vietcombank are reported to have plans to acquire other credit institutions.
Meanwhile, certain domestic banks are reported to be seeking foreign strategic investors, indicating a perception of relative strength, including: Military Bank, HD Bank, VP Bank and BIDV. Unfortunately, the maximum they will be able to sell to a foreign investor is 20 per cent.This is not usually enticing due to the opacity of the sector in general in Vietnam, investors' capital constraints and poor experiences of prior bank investors.
Debt - r ducation
The fons et origo of the banking crisis was in the State-owned company sector. These companies could borrow without worrying too much about the viability of repayment.The root cause of this slightly (not terribly) original view of debtor obligations was partly political and partly systemic.The political aspect is a fascinating subject but well outside these Notes. The systemic backdrop was a consensus system through which no one was specifically responsible for anything.
Slight changes are at least making their way onto paper. Decree 206 of the Government, on loan management applicable to 100 per cent SOEs came into effect on 1February 2014. Directors, chief accountants and chairpersons are now responsible for issuing procedures for debt control. Ifthey do not do so, they will subject to a 20 per cent cut in salary, though salaries are tiny to start with, so this has a cosmetic look to it.
The Decree also states that SOEs are only allowed to sell debts to economic entities licensed to purchase and sell debts. a rarefied group. The price of the sale has to be based on a valuation or market prices (if they exist). Directors will be liable for any breach of these principles.
Finance- a new front
As in most parts of the world, when banks come under pressure, financial activity tends to look for a more welcoming home. In Vietnam it is unlikely to move into the shade as much as in some other countries, but Decree 39 of the Government on 7 May 2014 showed some movement. This decree widened the scope of a finance company's banking operations by allowing it to issue guarantees and credit cards and to get into the factoring business.
Maritime -deep waters
The financial crisis has spawned endless compliance jobs around the world. Not to be outdone, Decree 30 of the Government dated 14April2014 requires all companies involved in maritime transportation services, shipping agency services and towage services to have experienced in-house legal counsel. It is a matter of conjecture whether this is because these activities are inherently risky or whether a new form ofnon-tariffbarrier has been discovered in a land where there is not yet an overflow of experienced legal talent.
Foreign investors' ownership interest in ajoint venture shipping agency or joint venture towing services company remains capped at 49 per cent. And as businesses providing maritime transportation services will obtain at best a five-year licence from the Vietnam Marine Bureau, the prospect for a sudden surge of foreign investor interest in these areas remains dim.
Pharmaceuticals -indigenous health kick
Foreign pharmaceutical companies have been under stress in China recently. The changes in Vietnam, by comparison, appeared benign. Local production accounted for nearly half of Vietnam's pharmaceutical requirements in 2012, mostly low-cost generics. while imports accounted for more than 70 percent of the pharmaceutical market by value. The National Strategy on Development of the Vietnam Pharmaceutical Industry, issued by the Prime Minister in January 2014, may change this. The national strategy sets the following targets:
- to produce in Vietnam 80 per cent of all medicines consumed by 2020.
- for at least 30 per cent of locally made medicines to use traditional materials.
- to ensure that 100 per cent of the country's medical needs are satisfied, and at least 20 per cent of materials required for locally-produced medicine are sourced in Vietnam.
- for locally-made vaccines to meet the needs of the National Expanded Programme for Immunisation, and for at least 30 per cent of the demand for paid vaccinations to be locally made.
Public-private partnership (PPP) - preparation problems
Pharmaceutical pills for the PPP preparation process might soon be in order. Prior editions of Indochina Notes editions have noted that the Ministry of Planning and Investment (MPI) is in the course of preparing a draft PPP decree (Draft Decree). Problems in it could cause difficulties in attracting private foreign capital into infrastructure.
- Abolition of BOT regulations. The Draft Decree will replace Decree 108 on BOTs. While there have not been many BOTs in Vietnam (and even fewer that have been project financed, which is their main purpose), at least they were a known quantity and investors
had a reasonable idea of the outlines of what was involved at the time of starting a development. The Draft Decree will terminate this possibility before it is clear whether and how a PPP will work. It would be better to abolish BOTs once PPPs have a solid track record (which may be years down a new road);
- Transition of existing BOT projects into PPP. There are a number of BOT projects under development at the moment, including power projects at Van Phong, Vinh Tan, Vung An, Quang Ngai, Long Phu, Duyen Hai and Nam Dinh. The issue ofwhatwould happen to these projects, on which developers have spent untold millions of dollars, if the BOT regulations were to be repealed, should be considered carefully. The Draft Decree leaves open untold numbers of questions;
- Foreign currency. One of the key bankability hurdles for many infrastructure projects is that they have to sell their output in Vietnamese dong, but the only long-term financing available is in dollars. Bankers have consistently stated that if there is no government guarantee of convertibility (at the same exchange rate) of dong into dollars, and of the availability and remittability of dollars, financing of a dong-revenue project on a project basis will not be available. Yet the Draft Decree seems to limit the availability of government FX guarantees;
- Governing law.Another consistent bankability issue has been the difficulty of using a well-known system of laws for the project documents. While Vietnamese law is of course widely used in Vietnam, it is not as developed as English law and does not give lenders
the certainty they need when lending on the basis of the assets and cash-flow of a project. The alternatives on this issue in the Draft Decree allow for the application of foreign law if it does not contradict the laws of Vietnam (option 1)or the Law on Investment (option 2). If these alternatives are carried through into the final Decree, there will be a major financing issue because the conditions are not likely to be provable without a legal opinion from the Ministry of Justice. Unfortunately, there is a clause on what legal opinions the Ministry of Justice can give - and it does not cover some of the documents that will need such a legal opinion;
- Project contract requirements. The Draft Decree is prescriptive in respect of the numerous specific contents that need to be contained in the Project Contract. This is perhaps inappropriate as PPP sectors are different; and
- Land. The Draft Decree is silent on the right to mortgage land use rights to lenders. The result is that no mortgage will be possible as the Land Law does not permit a mortgage of land if the rent has not been fully paid. This has been interpreted to mean that land that is exempt from land rent cannot be mortgaged. This is an important issue for banks.
Banking, finance and capital markets
Borrowing -double trouble
Shakespeare's view was "neither a borrower nor a lender be". Vietnam, however, has been grappling with the tax leakage that may arise when you are both.The SBV's Circular 12 on foreign loans, which became effective as of 15 May 2014, may limit the ability of foreign companies to charge their Vietnam subsidiaries high interest rates on inter-company loans. The new regulations still allow related parties to agree on the cost of inter-company loans, but the SBV now has the right to set ceiling rates either on an ad hoc or on a systematic basis.
At the end of 2013, the Government also issued Decree 219 on management of foreign loans. This stipulated that foreign borrowings must not exceed the limit approved by the prime minister for the year. The idea is to limit the economy's vulnerability to the aggregate risks of foreign currency borrowings. But it may also be used to limit the amount that foreign invested companies can borrow from their foreign affiliates.
Investment accounts for the indirect
Non-resident foreign investors, depending on their choice of innamorata, need either a direct or an indirect investment account. Circular 5 of the State Bank ofVietnam (SBV) dated 12 March 2014 (Circular 5) updates the principles for the latter:
- All indirect investments in Vietnam by non-resident foreign investors must be conducted in VND via one (and only one) indirect investment capital account (Indirect Investment Account) held by the investor at an authorised bank. Indirect investment activities include investments in listed and non-listed shares, capital/equity interests, securities and valuable papers. Under the previous circular, foreign investors were required to open a capital contribution account (CCA) for investments in unlisted shares, and a specialised account at a securities company for investments in listed shares;
- Circular 5 does not apply ifthe foreign investor purchases shares in a company in which it directly participates in management and operations. The concept of direct participation in management and operation has remained undefined for years;
- Circular 5 allows 90 days from 28 April 2014 to rename the account (from CCA to Indirect Account) and to transfer all outstanding balances in specialised accounts to Indirect Investment Accounts. Mter the expiry of such period, no indirect investment activities can be conducted through the CCA or specialised account;
- Foreign investors are prohibited from transferring the balance in their Indirect Investment Accounts into term deposits or savings deposits. If an investor wishes to remit capital or profit, it is entitled to use the VND in its Indirect Investment Account to purchase currency from a bank; and
- If a foreign investor conducts both indirect and direct investment activities at the same time, such investor must also have a direct investment account. Presumably, such direct investment accounts will be the subject of additional regulations of the SBV.
Itwill be a long time before the derivatives identified by Warren Buffet as "financial weapons of mass destructionD are allowed in Vietnam. But two years ago, the Prime Minister approved the strategy for development of the Vietnamese securities market for the period 2011 to 2020. One of the goals was to develop a derivatives market. On 11March 2014, the Prime Minister issued Decision 366 on the strategy for development of the Vietnamese derivative securities market. The roadmap contains three segments:
- 2013 to 2015: completion of legal framework and related facilities;
- 2016 to 2020: trial operation of derivative securities market; and
- 2020 and afterwards: completion and improvement. The key features of the landscape include:
- The derivatives market will be organised as a unit under a stock exchange. This is
consistent with the plan to merge the Hanoi and Ho Chi Minh Stock Exchanges;
- The centre for clearing and settlement of derivatives will be a central counterparty clearing house under the Vietnam Securities Depository (VSD);
- Derivative securities will be traded separately from bonds and shares; and
- At first, the derivative securities being traded in the stock exchange will be futures contracts based on market indices and Government bonds. Futures contracts based on shares and options contracts based on securities market indexes, Governments bonds and shares will be traded subject to the stability of the market. In the long term, derivatives may expand to include option contracts based on shares and bonds, and futures contracts based on bonds, money and commodities.
Vietnam has been de-dollarising. The latest salvo was Circular 32 of the SBV, which came into effect on 10 February 2014. Circular 32 restates the basic principle that inthe territory of Vietnam, unless specifically provided otherwise, all transactions and payments must be
made inVietnamese Dong.
Under Circular 32, contracts that are expressed in foreign currency, or that are effectively in foreign currency as a result of a conversion mechanism, are not legal even ifpayment is made inVietnamese currency. As there is no grandfathering clause for contracts that were entered into before the date of the Circular and which have not been completed, such contracts have to be converted into Vietnamese Dong contracts inorder to be legal.
Circular 32 lists circumstances under which the use of a foreign currency is permissible. These include the payment of salaries to foreign individuals working in Vietnam. Under any circumstances not specified by Circular 32, approval from the SBV is required on a case-by case basis for the use of a foreign currency.