Prevent capital losses in equitization - Part 2: Let the state capital "give birth" money

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Manufacturing activities in a business. Source: Internet.

The dark and light picture

According to the Government's report at the fourth session of the National Assembly, in 2016, the total revenue of joint-stock companies reached VND 423,250 billion, equivalent to the total revenue in 2015 (for the same number of enterprises available in 2015). In 2016, joint-stock companies had a pretax profit of VND 31,723 billion, up 54% from the figure in 2015, given the same number of enterprises in 2015. Profit before tax/the average owner reached 25% etc.

According to the Steering Committee for Enterprise Renovation and Development at the regular meeting of the Government in November 2017, many state-owned equitized SOEs have been operating effectively and their budgets and income have been raised. Typically, Vietnam Dairy Products (Vinamilk), Central Seed JSC (Vinaseed) etc. These are the leading companies in terms of market capitalization as well as transparency and corporate governance. The equitization associated with the listing has also strengthened the social monitoring of the performance of enterprises.

The Government's report at the Fourth Session of the XIV National Assembly shows that SOEs and state-shared capital enterprises still play a key role in implementing the task of providing public utility products and services. Oil and gas sector, according to the report of Vietnam National Oil and Gas Group has completed the targets, tasks and plans in 2016, including some targets exceeded the level.

The business situation of the Vietnam Coffee Corporation is still facing many difficulties. Even though the turnover is lower than the same period of last year, the profit and budget of the Corporation in 2016 exceeded the plan set out and increased more than 2015, etc.

However, besides the companies doing business efficiently, many companies after equitization faced difficulties and losses. For example, in the field of producing and trading agricultural commodities, there are Northern Food Corporation and Southern Food Corporation.

Financial report of 2016 of Northern Food Corporation showed that the total revenue of the Corporation increased compared to 2015, but the target of profit and contribution of the Corporation decreased to only 65% and 80% compared with 2015. Particularly for the parent company, the target profit in 2016 increased 122% compared to 2015.

For Southern Food Corporation, the targets of revenue and remittance to the budget are all lower than in 2015; The parent company's profit target for 2016 is VND 161 billion, in the condition that the Corporation is in the process of equitisation and has not made provisions in accordance with regulations. As of 31st December, 2016, the parent company has accumulated losses of more than VND 798 billion etc.

Also "located" in the list of equitized enterprises operating ineffectively, business losses by not safeguarding the owner's equity is Vietnam Satellite TV Company with negative equity of VND 1.942 trillion, Public Tuyen Quang Cement Joint Stock Company lost VND 226 billion of its own capital, Quang Nam Food and Foodstuff Joint Stock Company has a chartered capital of VND 77.6 billion and Song Hong Coal Joint Stock Company is under the consolidated report of loosing VND 79.58 billion; Cao Bang Equity and Animal Feed Joint Stock Company lost VND 16.2 billion in its chartered capital, Refrigeration Electronics and General Service Joint Stock Company lost VND 6.9 billion in its chartered capital etc.

In the report of the Government to the National Assembly, the cause of "dark color" covered the ineffective enterprises on the one hand because the development of business strategies and plans have not been focused, therefore, the development investment of enterprises associated with the development of industries, fields and products is lack of predictability, lack of linkage to meet the requirements of general development.

In addition, the efficiency of business production and the contribution of many SOEs is still low, not corresponding to the state investment; debt, losses, large losses still occur; The SOE governance mechanism is slow to be reformed, ineffective and incompatible with international practices and standards; Publicity and transparency are limited. The responsibility of SOE managers is unclear.

On the other hand, the separation of State management functions and functions of state owned capital representation agencies in SOEs is slow. The mechanism for managing, supervising and exercising the rights and responsibilities of agencies and representatives of state owners is not clear and appropriate.

The Government also said that many SOEs have not fully implemented the regime of reporting and supervising enterprises with owners' representative offices and financial agencies according to regulations, thus synthesizing reports to the Government and the National Assembly. The Ministry of Finance still faces many difficulties in operating its business nationwide. And most importantly, the mechanism for dealing with the responsibility of the head of the offense as well as the handling of violations of SOE monitoring and evaluation has not been fully implemented, serious implementation of regulations on publicity, transparency is not high ...

Right using source of capital

Talking about how state capital is used for post-equitization, economic expert Nguyen Minh Phong said that, "the fact is, not many people know how the money after the equitisation is used by enterprises.” The most obvious example of this is the loss-making project at Vietnam Oil and Gas Group (PVN). It is the "disappeared" VND 800 billion of capital contribution to OceanBank, or the trillions VND projects of this corporation etc. Only when the incident broke, did people know that the capital of PVN had "evaporated”.

Obviously, the amount of post- equitization state-owned money depends on the intended use and the estimated budget and the management mechanism. Therefore, it requires enterprises to have a good budget, if anything, spending without goals and without long-term plan will waste capital very quickly. Because when we finished selling out, the SOEs will have disappeared in only a short time etc."

Analysis on how to manage and use state capital to invest in production and business activities in effective enterprises, Mr. Dang Quyet Tien, Director of Enterprise Finance Department, Ministry of Finance said, in the immediate future, the Government should soon issue the Decree on the transfer of SOEs to joint stock companies; Issue a Decree approving the charter of operation of economic groups, State Capital Investment Corporation (SCIC) etc.

According to Dr. Nguyen Minh Phong: "The state does not "give birth" money, but mainly it is spent for public benefit. How to not lose, invest well and create the counterbalance, the macro balance, that is the benefit. This is not money that directly "gives birth”, but "gives birth" to the investment environment, conditions for investment link, or the foundation for development etc. This is the way to manage and use good money".

Referring to this issue, Dr. Luu Bich Ho, former director of the Development Strategy Institute, Ministry of Planning and Investment, said: "When equitized, enterprises need to continue to develop to invest in infrastructure. To avoid losses, they need to check, monitor closely, follow the law, and not allow something to happen and then go to the inspection etc.".

Also according to Dr. Luu Bich Ho: "We are currently facing many difficulties in infrastructure (roads, urban infrastructure, environment etc.). We can not demand investment in infrastructure such as in production and business. Therefore, in order to manage and make good use of capital, it is necessary to have a list of projects that need to be invested. The use of capital must meet the requirements and objectives. Who keeps the capital is not important, if transferred to the Development Assistance Fund it is also acceptable. However, the most important purpose is to keep and develop it, the state has more resources to continue to invest and develop.

To manage the money well after equitisation, Dr. Luu Bich Ho said that it was necessary to set up a specialized committee soon and assign the committee to manage it, referring to a clue. He also agreed with the source of money after equitization to the Enterprise Development Fund will help the capital to be used more effectively. However, the fund also needs to be clearly monitored, controlled, transparent and not to be handed over.

Discussing how to properly manage capital after equitisation, Dr. Nguyen Minh Phong proposed four solutions: "First, there must be plans, goals, rules, and procedures to use the capital strictly under the Public Investment Law. Secondly, there must be a plan to sell the "best price", not "sold out" like the case of Vietnam Featute film Studio last time. This is a very important solution for equitisation to have enough capital, instead of equitisation with the cheap price. Third, the project, the process of expenditure must be strictly controlled and be explicit, must have inspection and audit. Fourth, the most important requirement is to capture personal responsibility. From the stockholder, the supervisor, to the person who started using equitisation, including the auditing sector must also make mistakes if they do not do well etc." - Dr. Nguyen Minh Phong analysis.

Dr. Nguyen Minh Phong added that it is necessary to separate the capital for the public interest and capital for business profits. This separation is to avoid ambiguity, avoid the "twilight" in the management. In particular, the management responsibilities of the private sector must be clear etc.