The privatization of State-owned enterprises as a road to success?

A land-mark-initiative has been framed by the international business community: The idea has been expressed to promote privatization of State-owned enterprises in Vietnam; but one thing at a time:

Starting point is the current financial situation of the Vietnamese state coffers: Revenues from taxes have become smaller as the economy is going through a difficult time. In addition the WTO commitments have caused a severe reduction of import tax and duties. In this context the government has applied for an increase of the State budget deficit to rise from 4.8% to 5.3% of GDP in the previous year (in the 4th quarter 2013). Simultaneously, the gross market value of the 12 top State- owned companies among the top 20 largest companies listed on the Ho Chi Minh City Stock Exchange is said to be US$ 18.5 billion in market capitalization, approximately, accounting for 41% of the value of the entire HCMC Stock Exchange (as at 23 May 2014). The ownership of 50% alone in these 12 companies is worth US$ 6.3 billion.

Selling part of the State-owned shares in these companies could easily resolve the state budget deficit in the current difficult time, instead of cutting the mandatory minimum wage or maximizing revenue from other sources. This measure would not even cause any downside: Companies, after the sale, will still be subject to local Vietnamese regulations, operating in Vietnam, paying taxes and employing local people. A large number of the companies in which the government is the majority shareholder are not even operating or doing business in the areas classified as “sensitive” or “restricted” anyway, for examples, companies manufacturing consumer goods or fertilizers.

Any positive side-effect? State-owned enterprises have been treated more favorably in terms of policies and access to loans compared to the private sector. This creates an unfair playground between the two, hampers the development of the private sector, while the public sector is inefficient and does not offer good products or services. This also further impairs the competitiveness of Vietnamese companies’ goods and services as a whole when they entering regional and global markets. As a side-effect the privatization of State-owned companies would remove the impairment as described above.

Where is the catch? As outlined above, privatization of State-owned enterprises could significantly boost Vietnam’s economy. However, we highly recommend foreign investors to stipulate certain voting- and control rights respectively majority clauses, when investing in State-owned enterprises: Especially in Vietnam you should not bank on your part as copilot on the road to success.