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Thursday, 24 November 2016 15:33
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State economic groups in Vietnam: Characteristics, roles and development trends

(LLCT) - Vietnam is on the path towards development and intensive integration into international economics. Vietnamese businesses are now faced with equal competition from powerful multinationals around the world, especially as the country has joined the World Trade Organization (WTO) and has started the Trans-Pacific Partnership (TPP). History has shown that powerful economic groups in both State and private sectors will the main driving force behind successful integration.

1. The formation and development of State economic groups in Vietnam

On the 7th of March 1994 the Prime Minister issued Decision 91/TTg on the pilot establishment of business groups, primarily through transforming or reorganizing state-owned corporations. However, it was not until the 3rd Plenum of the 9th Party Central Committee in September 2001 that the issue of establishing economic groups was specifically mentioned by the Party. The Resolution of the plenum called for “establishment of powerful economic groups based on state-owned corporations and participation of other economic and business sectors, conducting multi businesses, including highly specialized, dominant ones in the national economy”(1). Later, the Resolution of the 9th Plenum of the Party Central Committee (9th tenure) reiterated the policy for “active preparation for the formation of powerful economic groups, of which state-owned corporations constitute the core and which draw extensive participation from other domestic economic sectors and attract foreign investment”.

Thus, the state economic group model began to take shape with the Decision 91/TTg. Although this was the “first official document to establish criteria for such groups, it did not give a comprehensive description of their nature, characteristics, management and operation, thereby preventing state-owned corporations from evolving into economic groups”(2). Perhaps this was the reason that in 2003 - nearly 10 years after the idea of economic groups was officially announced - state-owned corporations were still not strong enough to serve as the basis for the formation of state economic groups.

Aware of the shortcoming in the legal framework for the establishment of state economic groups and faced with the tenuous status of state-owned corporations, the Government promulgated the 2003 Law on state-owned Enterprises and Decree 153/2004/ND-CP on state-owned corporations and their transformation based on the parent company-subsidiary company model. However, even this new legal framework was only considered an early legal precondition for the transformation of state-owned corporations into state economic groups because many of the important aspects of the group model, such as the legal status, financial system, internal management model of such groups, and the connection, authority, responsibility and duty of their members were not clearly identified.

In 2007, the Government issued Decrees 139/2007/ND-CP and 141/2007/ND-CP further clarifying issues related to economic groups. According to the decrees, economic groups are defined as groups of companies that function as independent legal entities and which are established on the basis of various forms of partnership, such as investment, contribution of capital, mergers, acquisition, and reorganization, among others, and which are interconnected on a long-term basis as far as economic benefits, technologies, markets and other business services are concerned. They also must consist of at least two levels of business in the form of a parent company and subsidiary company. Economic groups do not have their own legal status and do not have to register their business according to the Law on Enterprises. The organization of such groups is discussed and decided on by their founding companies.

In order to create a legal framework for state economic groups, the Government issued Decree 101/2009/ND-CP on the 5th of November 2009 on pilot establishment, organization, operation and management of state economic groups. Based on evaluations of the actual performances of such groups, the Government issued Decree 69/2014/ND-CP on the 15th of July 2014 on state economic groups and state-owned corporations. The decree consisted of more detailed regulations concerning the establishment, reorganization and closing of economic groups as well as their organization, operation, management, administration and ownership.

From 2005 to 2010, 12 economic groups were established with the Prime Minister’s approval. However, some of them, such as Vietnam Industry and Construction Group (VNIC), Vietnam Housing and Urban Development Group (HUD) and Vietnam Shipbuilding Industry Group, failed to fulfill their set objectives after a period of experimentation and were transformed into corporations. Currently, there are nine State economic groups in operation, namely Vietnam Electricity, Vietnam Oil and Gas, Vietnam Coal and Minerals, Vietnam Post and Telecommunications, Vietnam Textiles and Garments, Viettel, Vietnam Chemicals, Vietnam Rubber Industries, and Bao Viet Insurance.

2. The characteristics and roles of State economic groups in Vietnam

The characteristics of state economic groups in Vietnam

Firstly, state economic groups in Vietnam are formed mainly from the transformation or reorganization of state-owned corporations according to decisions of the Government. They operate under the parent company-subsidiary company model, not only inside Vietnam, but also outside of the country.

Secondly, according to Decrees 139/2007/ND-CP and 141/2007/ND-CP, the core of a state economic group is a parent company, surrounded by its subsidiary companies. However, the subsidiary companies have their own legal status while the parent company does not, thus a single legal framework regulating the organization of a group of interconnected companies - given that these companies have the right to decide on their own connections - can become a coercive measure or even an impediment to their development.

Thirdly, as one of the Government’s macroeconomic tools, state economic groups in Vietnam operate in key or essential industries of the economy where the private sector or others find it hard to perform well due to their limited financial capabilities or managerial experience.

Fourthly, the internal relations of a state economic group are designed based on the parent company - subsidiary company model, consisting of three levels. The parent company is one in which the State holds 100% of its capital or where it is the dominating owner according to the Prime Minister’s decisions; the subsidiary companies of a first-level company are dominated by the first-level company and organized as joint stock companies or limited liability companies with one or more than one member, corporations consisting of a parent company and its subsidiary companies, joint ventures, or subsidiary companies overseas; and the subsidiary companies of a second-level company are dominated by the second-level company.

Fifthly, the management and supervision of state economic groups are conducted by the following methods: reporting from the management board of the parent company; auditing at the parent company and its subsidiary companies; regular and irregular reporting from the parent company; and examination, supervision and evaluation by relevant agencies in accordance with the law.

Finally, in regard to the connection between state economic groups and ministries, industries and the Government, the State is the owner in such cases. The Government exercises the right of state ownership over parent companies and state capital. Thus, the Prime Minister decides the establishment of parent companies, their reorganization, their disbandment and the transfer of their ownership at the request of line ministries and on the recommendation of related ministries and industries.

The roles of State economic groups in Vietnam      

As the socialist-oriented market economy is being built in Vietnam, state economic groups are expected to play the following important roles:

Firstly, they serve as a macroeconomic regulatory tool and form the backbone of the national economy.

In a multi-component economy, state economic groups hold important areas or industries, play a pivotal role in the national economy, and encourage the development of the economy in accordance with the Party’s and State’s guidelines. In addition, such groups contribute to the development of the national economy by influencing economic growth and tax revenues, creating foreign currency revenues and large revenues for the state budget, limiting trade deficits, creating the strength of the economy and contributing to accelerate national industrialization and modernization. They also serve as an economic backbone, create jobs, increase people’s living standards, and help to solve issues related to social security and national defense.

Secondly, such groups carry out socio-political tasks assigned by the State.

Because many organizations and industries are not attractive to investors if their profitability is low and the recovery of capital takes a long time, many private businesses do not wish to engage with this organizations and industries, or their engagement depends heavily on natural conditions and infrastructure. The State, therefore, establishes economic groups and entrusts them with activities of public benefit in order to achieve its socio-economic goals. In fact, in Vietnam, state economic groups are an important force for producing or trading many essential goods to meet people’s demands and ensuring food and energy security and national defense, protecting the nation’s sovereignty and environment.

Thirdly, state economic groups help to increase the competitiveness of the market and that of their individual subsidiary companies.

In fact, state economic groups boast the most advanced and powerful economic partnership model in the country. Because they are large in scale and possess abundant human resources, dominating market shares and outstanding technologies, these groups hold a distinctive position over businesses in the same area. Interest is most important to partnerships and cooperations between companies of a state economic group because the state economic group model brings interest to both the group itself and its subsidiary companies. These subsidiaries always receive support for their development through the trademark of the group, in forms of capital contribution, technology transfer and training, and management of labor. This support will facilitate fast, sustainable development of the companies, which in turn will encourage the development of the entire group and add to the nation’s socio-economic strength.               

Finally, state economic groups aim to bring sufficient profits for the State.

As businesses that seek profits in the market, state economic groups must make use of state capital to create added profits for the state budget. At the same time, they must create jobs and legal incomes so as to improve their employees’ lives. Moreover, given their advantages in terms of size, distribution of labor, specialization and coordination, they can avoid overlap in production and increase the effectiveness of their use of machinery and equipment to achieve high socio-economic efficiency.

3. Challenges to, and development trends of, state economic groups in Vietnam

The recent performance of state economic groups in Vietnam shows that this model has achieved significant results - they have managed to effectively serve as the State’s macroeconomic regulatory tool. Basically, they hold key industries or fields of the economy. Their capital size continues to increase and they have cemented their specific roles in the country’s socio-economic development. Not only have they brought about large economic benefits for the country - accelerating its national industrialization and modernization, making a considerable contribution to tax revenues, creating foreign currency revenues and large state budget revenues, limiting trade deficits - but they have also created jobs, improved people’s standards of living, and ensured social security and national defense.

However, despite these positive effects, state economic groups in Vietnam have a number of negative points. There is skepticism about their actual roles and economic efficiency. In fact, these groups face many difficulties, including the following:

Firstly, their objectives and efficiency of operations do not fulfill the requirements of State investment resources. Many such groups, instead of focusing on their primary areas and carrying out their essential economic and political tasks, have made investments in other areas while their financial capabilities are limited. Some groups have invested in risky areas such as finance, banking and real estate even though they lack capital for their primary focus. As a result, they have caused a serious detrimental effect to the nation’s socio-economic efficiency.

Secondly, supervision and control within state economic groups remains ineffective. As a result, losses that occur during their production and business have not been discovered, addressed, or prevented in a timely manner. The restructuring and equitization of many State economic groups in the 2012-2014 period were slow and did not meet the requirements for the transformation of state-owned enterprises.

Thirdly, the inspectional mechanisms of state economic groups are subpar. The fact that the entire management of state capital in such groups is entrusted to their representatives can lead to uncontrollable risks. Many aspects of the administration of such groups have operated slowly, especially in terms of publicity, transparency, and owner accountability.  

Fourthly, the reorganization of labor as part of the restructuring of state economic groups is rough and the quality of human resources inadequate. The management mechanisms of state owners, ministries and provinces are limited, leading to unclear procedures or methods for exercising certain rights, especially regarding annual approval of development strategies, lists of investment projects under groups A and B, and financial reports of state-owned enterprises.

Finally, economic groups have only been recognized on paper. Official regulations have yet to meet the development requirements of these groups, causing new elements of the economy to operate blindly. There has also been a distinct lack of macro-level orientation; state management and line management still overlap in terms of authority. These are some of the contributing factors to the recent scattered, ineffective investments by state economic groups in Vietnam.

In the face of existing problems for state economic groups, the restructuring process is of critical importance. Measures in the coming time must take into account the following considerations:

Firstly, it is necessary to increase the registered capital of state economic groups based on a re-evaluation of their assets according to current market prices. The State must make additional investments so they may become more proactive and powerful. At the same time, the investment portfolios of these groups must be restructured to ensure the quality, progress, and operation of fundamental investment projects.

Secondly, while formulating their business strategies, state economic groups must concentrate on their primary areas of business and avoid investing in areas that are not their specialized areas. They should avoid competition between themselves and ensure their development conforms to the country’s socio-economic development strategies, protecting its economic security.

Thirdly, the restructuring of human resources must go hand in hand with the modernization of business administration, particularly standards for accounting business results, statistical accounting, and prevention of risks in state economic groups’ investment activities.               

Fourthly, it is necessary to increase investment in the production and trading of common goods in order to meet the essential needs of the people and ensure social security and national defense.

Finally, laws and policies on state economic groups must be revised and completed. Suitable policies should be drawn up, such as for ownership, management and distribution relations between the State and those corporations selected to form economic groups. In addition, the State must introduce regulations concerning the formation and development of economic groups of all forms of ownership in order to create a favorable legal environment for their development.

____________________

(1) CPV: Resolution by the 3rd Plenum of the Party Central Committee (9th tenure), National Political Publishing House, Hanoi, 2001, p. 21

(2) Tran Tien Cuong et al.: Economic Groups: Theories and International Experience Applicable to Vietnam, Transport Publishing House, 200

References:

1. Assoc. Prof., Dr. Nguyen Huu Dat and Dr. Ngo Tuan Nghia (co-editors): Economic Groups in Encouraging Economic Restructuring, Social Sciences Publishing House, Hanoi, 2013

2. Nguyen Thi Ha Dong: State Management of Economic Groups in Vietnam, PhD thesis in economics, Vietnam Academy of Social Sciences, 2012

3. Ho Chi Minh National Academy of Politics: General report “State-owned Enterprises - Successes and Costly Lessons”, Political Theory Publishing House, Hanoi, 2014

4. Dr. Dinh La Thang: “On State economic groups in Vietnam after Nearly Five Years’ Trial”, Electronic Communist Review, Issue no. 22 (214), 2010

5. Prof., Dr. Pham Quang Trung: The State Economic Group Model in Vietnam to the Year 2020, National Political Publishing House, Hanoi, 2013 

MA. Nguyen Thai Binh

Ho Chi Minh National Academy of Politics

 

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