Vietnam is on a two-year deadline to fast track the equitisation of its 432 government owned enterprises – a process that involves unloading or diluting the government’s stake in a state corporations through IPO’s (initial public offers) where shares are auctioned or through private placements. Essentially, by the end of 2015, most of the state run industry will have private partnerships in place.
Courtesy, the new investment laws, 2014 saw the 140 IPOs from Vietnam’s state-owned enterprises (SOEs); brought to auction at “unseen speed”, according to deputy director of the Ministry of Finance’s Corporate Finance Department Dang Quyet Tien.
The top ten of the 2014 SOE IPOs in Vietnam managed to raise a collective $306 million (table).
While 140 were auctioned in 2014, the remaining number to be listed in 2015 (listing) is 292 – roughly, about one IPO,per working day
Equitisation: the reasons, the laws, the urgency
The fast-tracked equitisation might not be the complete solution, but it does offer hope of an economic turnaround. and a smoother integration into the changing world economy
After years of stagnant operation and lack of guidelines for divestment, SOEs are now transforming themselves and will be in a better condition to utilise the free trade agreements that will be finalised this year; including those with South Korea, the EU, Russia-Belarus-Kazakhstan Customs Union, the Trans-Pacific Partnership (TPP) and ASEAN Economic Community.
The compelling official motivation behind this process of equitisation is a bit to improve the effectiveness of SOEs, which are riddled with problems of low productivity, high debts and extensive investment.
According to official government data, these SOEs use 60 per cent of the country’s credit but contribute only 30 per cent to the gross domestic product (GDP).
While the talk about privatisation has been going on for several years, not the actual going has been slow. Only 99 units were equitised during the three year period of 2011-13.
The main reason was the lack clarity in the legal framework. Vietnam’s existing laws such as the Law on Enterprise and the Law on Investment did not have provisions for equitisation. This was corrected in 2014, when the the Vietnamese Government issued three main documents specifically established to facilitate IPO of SOEs. (Decision 37/2014/QD-TTg, effective from August 2014, gives clear guidelines on categorising SOEs, helping the businesses easier in divesting, selling and listing shares, which are regulated in Resolution 15/NQ-CP issued on March 06 and Decision 51/2014/QD-TTg.)
According to Tien, the new legal framework, has been the main facilitator for the number of SOE IPOs in 2014.
Other supportive measures are being taken in tandem with the new laws, For example, the HCM City Stock Exchange and the city’s Reform Committee of Business Management have signed a memorandum of understanding to support local companies in equitising and listing shares.
Numbers speak: making IPOs possible
The change in laws has shown immediate result. Eight SOEs under the management of the Ministry of Industry and Trade divested from 43 units, collecting over VND 4.13 trillion ($193.9 million) – this is almost half of the total public sector divestment figure for 2014.
For December 2014, the HCM City Stock Exchange had 17 auctions, offering more than 253 million shares. totaling some VND2.6 trillion ($122 million). Meanwhile on the Ha Noi Stock Exchange, 51 IPOs were executed, paving the way for at least the same amount of SOEs to list in this year.
Among those that have already conducted successful IPOs include the national flag carrier Vietnam Airlines, Southern Airports Services, Ca Mau Fertiliser and Nghe Tinh Port – a member of the Vietnam National Shipping Line (Vinalines). Almost 100 per cent shares offered as part of the these IPOs, were sold.
Vietnam National Coal – Mineral Industries Group, Vietnam Rubber Group, Vietnam National Chemical Group and Vietnam Posts and Telecommunications Group (VNPT) also collectively garnered $124.5 million from their divestment initiatives.
Government departments are already making plans for the 2015 listings. Director of the Ministry of Transportation’s Corporate Management Department Dang Van Long revealed that entering 2016, there would be no wholly state-owned construction companies.
However, Pham Viet Muon, deputy chairman of the government office, noted that SOEs under the ministries of defense, health, national resources & environment and the Vietnam Cement Industry Corporation have had a limited success. Especially as the government stake in these sectors tends to remain on the higher side even after the restructuring and the divestment.
While there is a lot of international investor interest in the telecommunication service provider MobiFone, but as the state wants to hold a dominating position in such key industries, foreign investment shortly after the equitisation is predicted to be sparse.
The right direction, wrong results?
“Vietnam is going the right direction as it implements this process [SOE equitisation],” says Vivek Pathak, the International Finance Corporation’s director of East Asia – Pacific region.
According to him,“right direction” was to increase the effectiveness of corporate governance, once SOEs became partly state-owned or public, and to enhance competitiveness of those sectors.
“However, the results of SOE restructuring did not come up to expectation,” stated a Ministry of Finance report.
For example, no one registered to buy Dong Thap Trading Corporation shares even at the starting price of $0.28. The IPOs of Can Tho Port and Chan May Port witnessed less than 1 per subscription. While other port operators managed to barely sell half of the shares.
The complicated, multi-sector structure and scope of the corporations is one of the main deterrents in the process of equitisation, say government officials. For example, Vinalines that had a $3 billion debt crisis and 40 bankrupt affiliates had to restructure and consolidate its operations to core activities. Vinalines restructuring included withdrawal of capital from 37 companies to focus on three areas: shipping, port operation and maritime services.
While the Vinalines managed to both restructure, turn-around and divest, it is not very easy for, other SOEs that have failed to attract a diversity of buyers.
Apart from Vietcombank, Techcombank, property giant Vingroup, Kinh Do Confectionery and Imex Pan Pacific, which bought strategic stakes in the Vietnam National Textile and Garment Group (Vinatex), Vegetable Oils Industry Corporation and Southern Airport Services, there were few big names and fewer foreign investors.
Lack of foreign investors: slow listings, high debt
In recent years, SOEs have not been very quick to list their shares on exchanges, leaving the investors with no option to exit. This has been one of the main reasons that has kept the private and the foreign investor away from Vietnam IPO market.
However, the new Government directive (Decision 51/2014/QD-TTg, taking effect from November 2014) has made it mandatory for the SOE IPOs to start share trading on the unlisted companies market (UPCoM) within 90 days and to list shares on the stock exchanges within one year from receiving the new certificate of business registration.
Vietnam is also working on a punishment mechanism for firms that are late in listing and has set down the rules for IPO eligibility that mandates a company to have a ‘return on equity ratio’ of at least 5 per cent, while being profitable for the two year prior to the time of listing.
Another reason is high debts. According to a Ministry of Finance report, the total accounts payable of SOEs by the end of 2013 had surpassed VND1.5 quadrillion ($70.4 billion). In addition, the debt on equity ratio averaged at 1.45 times and reached three times for some enterprises.
Meanwhile, the State Securities Commission’s vice president Nguyen Thanh Long predicts that this year, the economy would continue to operate with challenges. Retaining growth, devaluation the domestic currency, curbing inflation and addressing non-performing loans of the banking system could keep the much-needed investment away from the SOE equitisation process.
However, some experts alleged that weak corporate governance or poor operation was not the main problem; as the strategic investors had the capacity to change that situation. “If the state still holds majority of shares in the businesses after IPO, it can hinder (investor interest) ” noted Do Thien Anh Tuan, lecturer for the Fulbright Economics Teaching Program.
“If the state is determined to retain controlling stakes, strategic shareholders will find little motivation to dedicate their resources for the development of the companies,” he explained.
Tuan also warned that if the process could not achieve everyone’s expectation, the Vietnamese economy would continue to sink in difficulties.
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