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SOE Reform in Vietnam Background Paper Prepared by Mekong Economics November 2002 Background Paper 2 Table of Contents Recent Development of Vietnam’s SOE Sector .......................................................................4 Salient Features of the SOE Sector in Vietnam .............................................................................................................................................4 Economic Activities .........................................................................................................................................................................4 Number of Enterprises....................................................................................................................................................................6 Capital Scale.......................................................................................................................................................................................6 Employment Size..............................................................................................................................................................................7 Geographic Distribution .................................................................................................................................................................8 The Role of SOEs in the Economy...............................................................................................................................................................10 GDP Share of SOEs ......................................................................................................................................................................10 Job and Income Generation .........................................................................................................................................................12 National Budget Share ...................................................................................................................................................................12 Economic Performance of SOEs...................................................................................................................................................................13 Policy Framework for SOE Development and Reform ...........................................................18 Overview of the SOE Reform in Vietnam ...................................................................................................................................................18 Milestones in the Process of SOE reforms throughout Party Congresses. .............................................................................................19 The Launch of Doi Moi at the Sixth Party Congress................................................................................................................19 The Seventh Party Congress.........................................................................................................................................................19 The Eighth Party Congress ...........................................................................................................................................................19 Resolution of the 3rd Party Plenum of the 9th Central Party Standing Committee...............................................................20 Key Programs of SOE Reforms.....................................................................................................................................................................25 Reforms in SOE Management Mechanism ................................................................................................................................25 Restructure of SOEs ......................................................................................................................................................................25 Reorganization of General Corporations....................................................................................................................................26 Equitization of SOEs.....................................................................................................................................................................27 Other Ownership Transformations.............................................................................................................................................29 Debts and Assets Treatment.........................................................................................................................................................30 The SOE Reform Agenda: Achievements and Remaining Constraints...................................................................................................30 How are International Donors Supporting Reforms?.................................................................................................................................34 The SOE Reform: A Case Study of the Textile Sector...............................................................................................................................37 Ownership Structure of the Textile Sector.................................................................................................................................37 Restructuring in the Textile Sector ..............................................................................................................................................38 Bibliography ............................................................................................................................40 Vietnam SOE Sector Study produced by Mekong Economics 3 Background Paper Abbreviations CP CPV GDP GSO GCs HDBT IMF MOF MOLISA ND NSCERD OOG OECF QD SOEs SRV TTg VND WB Government (used in legal documents) Communist Party of Vietnam Gross Domestic Product General Statistical Office General Corporations Minister Committee (Government, now) (used in legal documents) International Monetary Fund Ministry of Finance Ministry of Labors, Invalids, and Social Affairs Decree (used in legal documents) National Steering Committee for Enterprise Reform and Development Office of Government Overseas Economic Cooperation Fund Decision (used in legal documents) State-Owned Enterprises Socialist Republic of Vietnam Prime Minister (used in legal documents) Vietnam Dong The World Bank Vietnam SOE Sector Study produced by Mekong Economics Background Paper 4 Recent Development of Vietnam’s SOE Sector Despite the gradual shift towards a market economy that commenced in 1986, and in spite of the emphasis on state owned enterprise (SOE) reform and privatization in the structural adjustment programs formulated since the mid-1990s, the state sector continues to play a leading role in the Vietnamese economy. The dominant position of the state sector is confirmed in official statistics and a variety of studies on the Vietnamese economy. The following sections investigate the distinct features, the role as well as the performance of Vietnam’s SOEs to have an overall outlook at recent development of the sector. Salient Features of the SOE Sector in Vietnam Economic Activities SOEs have involved in almost all economic activities of the economy. Regardless of firm size, SOEs have biased towards some economic activities including manufacturing, construction and trade with the considerable number of the establishments (see Table 1).1 In terms of establishments, local SOEs tend to be more concentrated in hotel, restaurant, transportation and communication than central SOEs. 1 Care should be taken in interpretation of these numbers because they are crude indicators. It means that with these numbers, it is still difficult to assess truly the involvement of SOE sector in each economic activity because firm size and industry-specific characteristics are not taken into consideration. An in-depth analysis of SOE sector by economic activities may be of interest. Unfortunately, due to lack of data, we cannot do that. Vietnam SOE Sector Study produced by Mekong Economics 5 Background Paper Table 1: The Number of SOEs by Economic Activities By Economic Activities SOE Agriculture and Forestry Aquaculture Minerals Manufacturing Electricity, water and gas Construction Trade and repairing Hotel and restaurant Transportation and Communication Finance and credit Other Total 801 48 135 1,515 73 946 1,133 182 246 75 377 5,531 Of Which Central Local 141 660 2 46 63 72 599 916 1 72 405 541 421 712 30 152 95 151 21 54 99 278 1,877 3,654 Source: GSO (2002b) Moreover, it is found that SOEs have traditionally held the dominant role in the industries such as energy, steel, non-ferrous metals, electric and electronic manufacture, chemicals, fertilizers, rubber, food processing and printing (OECF, 1998, p.199). It might be due to the fact that the government has continued a policy of state-led industrial development. Figure 1: SOEs by Economic Activities in 2000 7% 14% 1% Agriculture and Forestry 4% 3% 1% 2% Aquaculture Minerals Manufacturing Electricity, water and gas Contruction 21% Commerce, repairing 28% Hotel and restaurant Transportation and Communication Finance and credit Other 18% 1% Source: GSO (2002b) Vietnam SOE Sector Study produced by Mekong Economics 6 Background Paper In relative term, the largest share of SOE at the end of 2000 belongs to the manufacturing industries, about 28 percent of the total (see Figure 1). Except for the agriculture and forestry, the construction sector and the commerce and repairing sector settle at the next two top ones. The domination of industries, construction and commerce in the structure of SOE sector implies that SOEs are contributing much to the process of industrialization and modernization of the national economy. Number of Enterprises The number of SOEs has been decreased significantly since Doi Moi started. Notably, in 1991 the government issued a decree on establishing and liquidating SOEs requiring that all state enterprises be re-registered or closed (Decree 338-HDBT). As a result, the total number of SOEs was halved from 12,000 in 1991 to roughly 6,000 in 1994 with sharpest decline in local SOEs. Such a fast downturn is attributable to about 2,000 mergers and 3,000 liquidations (CIEM, 2002). The decline has kept going on recently. In 2000 the number of SOEs is 5,531 out of the total of 39,762 enterprises in the whole economy (GSO, 2002b). By the end of 2001, 37 SOEs had been sold, 4 contracted out and 61 entrusted to labor collectives (Nhan Dan, 2002). In addition, by the end of June this year, the number of equitized enterprises was 780 (Vietnam Investment Review, 2002). With the aim at acceleration of the SOEs reform, the number of SOEs will be much smaller than it is. As planned, 2,622 SOEs will be transformed with 1,319 equitized, 562 sold, contracted or leased, 351 merged, 368 liquidated and 27 converted to administrative units (Saigon Times Weekly, 2002). These transformed SOEs are mostly small or loss-making ones. Capital Scale SOEs are to be more capital-intensive than their private sector counterparts (see Figure 2). It is resulted from history of access to cheap capital in terms of equity injections from the government as well as subsidized loans from the state banking system. Figure 2: SOEs vs. Total by Structure of Capital Scale (Unit: VND bil.) 100 90 80 70 60 50 40 30 20 10 0 <.5 .5-1 1--5 5--10 10--50 All Enterprises Vietnam SOE Sector Study produced by Mekong Economics 50-200 SOEs 200-500 >500 7 Background Paper Source: GSO (2002b) Table 2: Capital Structure of SOEs by Management Level (%) Management Level Central SOEs Local SOEs 1991 79.4 20.6 1992 77.1 22.9 1993 76.7 23.3 1995 74.1 25.9 Source: OECF (1998) Central SOEs represent the larger proportion of total capital of the sector. Meanwhile local SOEs account for only one fourth of the total capital (see Table 2). It might be due to government’s policies toward central SOEs with larger production scale. Employment Size Before 1986, together with cooperatives, SOEs absorbed a huge amount of employment. Since Doi Moi, the employment size of the state sector has been gone down significantly, mostly caused by the massive downsizing program of the early 1990s. In Figure 3, for the first three years of the last decade, the employment of SOEs shrunk sharply from about 2 million to just over 1.7 million. At that time, one could witness the largest number of SOEs workers left their sector. From that time on, the employment size of SOEs remained rather stable at around 1.8-1.9 million. Despite the massive downsizing, SOEs are still over-staffed. A recent analysis based on plant-level data by Belser and Rama (2001) indicates that as many as half of the workers would be redundant if SOEs were to operate fully as their private sector counterpart. 2,500 2,000 1,500 Year Source: MOLISA (2001) Vietnam SOE Sector Study produced by Mekong Economics 2000 1999 1998 1997 1996 1995 1994 1993 1992 1991 1,000 1990 Number of workers (thousand) Figure 3: Trend of SOEs Employment in the 1990s 8 Background Paper Figure 4: Structure of Labor Scale of the SOE Sector in 1994 and 2000 90 79.6 80 73.8 70 Percent 60 50 40 30 20 6.6 10 9.7 3.6 6.1 0.3 0.4 0 <500 500-1000 1000-5000 Number of employees >5000 Year 1994 Year 2000 Source: GSO (2002b) Together with the massive downsizing, SOE sector has been structured toward the larger scale production. It is evident from Figure 4 that the percentage of SOEs that have less than 500 employees has fallen from 79.6% in 1994 to roughly 73% in 2000. Moreover, in 2000, 6.5% of SOEs have more than 1000 employees as opposed to 4% SOEs in 1994. This is regarded as a consequence of the merger and dissolution of small SOEs in the last decade. Geographic Distribution In a country that is still massively rural, SOEs have concentrated in big cities and urban areas in the Red River Delta and the Southern East (OECF, 1998). Most central SOEs are located in two poles of the country, in which Hanoi and Hochiminh city are home to around a half of total central industrial SOEs (Table 3). However, while the number of central SOEs in the two cities has tended downwards, the number has increased in other provinces. This phenomenon requires an in-depth analysis of government policies in the second part. Vietnam SOE Sector Study produced by Mekong Economics 9 Background Paper Table 3: The Structure of Industrial SOEs by Provinces Unit: number, unless otherwise indicated 1995 Locality Central SOEs Hanoi 172 Haiphong 27 Hochiminh city 125 Other provinces 225 Total 549 Source: GSO (2000); GSO (2002a) 1998 Central SOEs 166 36 118 255 575 Percent 31.3 4.9 22.8 41.0 100.0 2000 Percent 28.9 6.3 20.5 44.3 100.0 Central SOEs 160 33 117 265 575 Percent 27.8 5.7 20.6 46.1 100.0 Figure 5: Local SOEs’ Employment by Regions 15% 22% 20% 13% 3% 5% 9% Red River Delta North East North West North Central Coast South Central Coast Central Highlands North East South Mekong River Delta 13% Source: GSO (2001) Regarding local SOEs, it can be seen from Figure 5 that this type of enterprises has distributed equally between the north and south regions. Moreover, local SOEs have concentrated in Red River Delta, Mekong River Delta and North East South. Each region accounts for around one sixth to one fifth of total SOEs labor force. Surprisingly, this figure shows the under-representation of local SOEs in remote and mountainous areas. The local SOEs’ employment in northern west and central highland areas is far much lower than in other regions. Naturally, one can raise a question on the role of local SOEs in socioeconomic development of under-developed localities. It is said that the development of SOEs should ensure socio-economic development evenly and equitably among geographical regions. But so far the reality might not be as expected. Vietnam SOE Sector Study produced by Mekong Economics 10 Background Paper The Role of SOEs in the Economy As said above even under Doi Moi, SOEs have held the dominant role in the economic development. To assess truly its role within the whole economy, it is of interest to look at its contribution to GDP, job and income generation and national budget as well. In this paper, it is ignorant about the role of SOEs in economic adjustment process due to lack of necessary data. GDP Share of SOEs As shown in Figure 6: Contributions of SOEs to GDP (At Current Prices), from 1986 to 1991, the contribution of SOEs to GDP decreased moderately. From that time on, the role of SOEs has been recovered. Then, in the last 1990s, SOEs contributed around 30% to GDP (at the current price). The macroeconomic stabilization, high level of protectionism and FDI concentration on the state sector has consolidated the role of SOEs in the economy. Figure 6: Contributions of SOEs to GDP (At Current Prices) 35 30 25 % 20 15 10 5 0 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 year Source: GSO (2000b); GSO (2002a) Table 4 depicts a clearer picture of contributions of SOEs to GDP by sector. Notably, most of GDP created by SOEs are attributable to firms working in industry, construction and service sectors. Despite the declining share of SOEs in GDP in service sector, they still play a considerable role with roughly 55% of GDP contribution. Meanwhile, those in the industry and construction sectors have made upward GDP contribution over years though the growth rates are not as high as their private sector counterpart. In contrast, SOEs play a far modest role in the agricultural sector. This position has not been improved over the last decade. Vietnam SOE Sector Study produced by Mekong Economics