Lack of transparency, the bane of SOE equitisation

These days, US-backed investment consultant BowerGroupAsia Inc.’s Vietnam office in Hanoi is actively seeking information about the upcoming equitisation of Vietnamese state-owned enterprises (SOEs) to serve its clients, which are US investors wishing to purchase stakes in big SOEs.

“However, the process proves very difficult, because the SOEs the government wants to pest capital from do not reveal any information,” the office’s managing director Nguyen Viet Ha told VIR.

Over the past few months, Indonesian businesses have also sought to buy stakes in big Vietnamese SOEs operating in the sectors of railway, oil and gas, electricity, and agriculture. They have worked with state-run Vietnam Railways on opportunities to provide training, equipment, and consultancy, including buying stakes from this SOE. However, no results have been achieved, even though Vietnam Railways plans to pest its two subsidiaries.

“Almost no information about the equitisation of these SOEs has been revealed, though we continuously hear that the government wants to pest from them,” an Indonesian Embassy representative told VIR.

Just over a week ago, the Ministry of Finance reported that in the first eight months of the year, the pace of SOE equitisation was slow. Only 10 SOEs saw their equitisation plans approved, with a total value of VND29.52 trillion ($1.3 billion), including VND15.27 trillion ($675.7 million) worth of state capital. Meanwhile, the total number of SOEs needing to be completely equitised this year is 85.

Lack of transparency

Recently, the mergers and acquisitions (M&A) market in Vietnam saw a successful deal, with Thai Beverage (ThaiBev) purchasing 53.59 per cent of equity in Vietnam’s leading brewer Sabeco for a record $5 billion.

“This deal reflects the fact that foreign investors are committed to the growing Vietnamese market for the long term, and that the Vietnamese government is making efforts to pest capital in non-core industries,” said Ha, who is also a senior expert on corporate equitisation.

However, she said, there is a general lack of transparency, making the process hard for investors.

According to her, in almost all cases where SOEs are about to begin equitisation, investors cannot access information about these companies – not even material on how the companies have been operating is provided to investors, and investors are not allowed to visit the factories either.

“For example, why did the Sabeco deal involve only ThaiBev? It is largely because no information from Sabeco was made public. Previously, many major investors from the US, Europe, and Japan wanted to buy stakes in Sabeco, but failed due to a lack of information, even though they sent professional experts to Vietnam to learn how Sabeco was operating,” Ha said. “The poor performance of many SOEs is also responsible for this lack of transparency.”

In May, the National Assembly (NA) saw heated debate, as never before, a specific report by the National Assembly Supervisory Delegation on Vietnamese SOEs’ compliance with regulations on managing and using state capital during 2011-2016 was reported to all NA members.

According to the report, information transparency at SOEs is almost non-existent. Many SOEs have been found to have seriously violated their obligations on managing and using state capital, as well as investment procedures, leading to great losses of state capital.

For example, PetroVietnam lost VND800 billion ($35.4 million) due to its illegal investment in OceanBank. Vinacomin may suffer from a loss of VND363.3 billion ($16 million) due to its ineffective overseas investment. In another case, Vinachem invested VND6.84 trillion ($302.6 million), or 53.8 per cent of the company’s financial investment capital, in five companies for the long term, and this investment “may be difficult to recoup.”

Some SOEs also face a high debt-to-equity ratio, including Ca Mau Shipping Industries One-member Co., Ltd. (153.92 times) and Nam Can Port One-member Co., Ltd. (17.69 times). Meanwhile, some have provided their subsidiaries with loans which could not be paid back, including Vinalines (VND457 billion or $20.2 million), Vinataba (VND60 billion or $2.65 million), and Rubber Industry Group (VND102 billion or $4.5 million).

State control remains

Tran Ngoc An, Vietnam’s Ambassador to the UK, told VIR that over the past few years, UK investors have come to Vietnam several times to seek investment opportunities. They are particularly interested in buying stakes in Vietnamese SOEs in the sectors of service, finance, insurance, IT, and high-tech consultancy.

However, no deal between these UK investors and Vietnamese SOEs has been reported so far. Experts said that besides a lack of SOE transparency, one of the key reasons is that while the government wants to equitise SOEs, it also wants to retain control over a majority stake.

According to the report, SOEs only offer a negligible rate of 1-2 per cent of total stake to private investors. This has made it hard to lure in private capital. As of late 2016, there were 583 SOEs in which 100 per cent of charter capital was held by the state.

During 2011-2016, 426 enterprises completed their initial public offerings (IPOs). After the IPOs, the total charter capital of these companies was VND184.254 trillion ($8.15 billion), 81.1 per cent of which was still held by the state. Other stake holders include strategic investors (7.3 per cent), employees (1.6 per cent), trade unions (0.6 per cent), and other types of investors (9.4 per cent).

To break down the figures of SOEs in which 81.1 per cent of the stake was held by the state, 70 enterprises had the state occupy over 90 per cent of charter capital, including 15 groups and corporations – such as Petrolimex (95 per cent), VnSteel (93.6 per cent), Vietnam Airlines (95.5 per cent), Airports Corporation of Vietnam (92.5 per cent), Lilama (98 per cent), and Viglacera (93 per cent).

In addition, 82 enterprises had over 65 per cent of their stake held by the state, including Ha Tinh Trade and Mineral Corporation (83 per cent), Binh Dinh Export-Import Service, Investment, Production Corporation and Investment (86.8 per cent), Cienco 8 (78.4 per cent), and Vietnam Livestock Corporation (78 per cent).

“All of this information means that if the government continues holding the majority of the stakes in SOEs, it would never succeed in SOE equitisation and no private investors want to engage in this equitisation,” Ha of BowerGroupAsia told VIR.

Currently, about nine deals between large SOEs and foreign strategic investors have been completed. The largest one is the Sabeco deal, followed by the 2013 deal involving Japan’s Bank of Tokyo-Misubishi UFJ acquiring 20 per cent of VietinBank’s stake for $743 million.

The remaining deals have had only small stakes sold to foreign investors, such as Carlsberg’s 17.08-per-cent stake ($115 million) in Habeco, Mizuho’s 15-per-cent stake ($550 million) in Vietcombank, ANA’s 8.77-per-cent stake ($109 million) in Vietnam Airlines, HSBC’s 18-per-cent stake ($350 million) in Bao Viet Insurance, JX Nippon and Energy’s 8-per-cent stake ($117 million) in Petrolimex, and Itochu’s 5-per-cent stake in Vinatex.

Tony Foster, managing partner of Freshfields Vietnam, said that foreign investors could pour billions of dollars into purchasing stakes from many SOEs, but they do not know how to do it in Vietnam.

“It is because everything remains unclear. Why are large SOEs’ strategic sales still stuck? Foreign investors are facing many difficulties in participating in SOE equitisation. The biggest ones include pricing, the lack of transparency, the small percentage of stakes for sale, and unclear assets/rights,” Foster said.

Prime Minister Nguyen Xuan Phuc this week will meet with SOEs at a conference in Hanoi to solve SOE-related issues, including equitisation.

Ha hoped the prime minister would “find a way out” for Vietnam’s slow pace of SOE equitisation. “Many professional investors are eagerly awaiting opportunities for them to join in the equitisation,” she stressed.

The Ministry of Finance reported that Vietnam currently has over 500 SOEs – including seven groups, 57 corporations, and 441 other enterprises managed by ministries and localities. It is expected that by 2020, there will be about 150 SOEs, including lottery and utility firms, and three groups, namely PetroVietnam, EVN, and Viettel.

About 571 SOEs were equitised in the 2011-2016 period. The most recent figures were 63 equitisations in 2016 and 69 in 2017.