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Monday, 26 August 2019 08:50
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Some recommendations for efficient performance of Vietnamese State-owned economic groups

(LLCT) - In the area of state-owned enterprises (SOEs), state-owned economic groups (SEGs) play an important role, especially in the current context of Vietnam’s economy. The practical operation of SEGs in the last 10 years has reached a number of outstanding and important achievements contributing remarkably to the socio-economic development of Vietnam. However, the SEGs still have many weaknesses and limitations, which are pressing Vietnam’s society. The Resolution No.12-NQ/TW dated June 3, 2017 by the 5th Plenum of the 12th Party Central Committee on continuing to restructure, innovate and improve the efficiency of SOEs stated that: “... to focus on the definitive reasons and solutions for the inefficient performance and prolonged losses of the economic groups, state-owned corporations, projects and investment projects of SOEs”, and by 2030 “to consolidate and develop a number of large-scaled state-owned economic groups for more efficient operation and better capacity to compete regionally and internationally in a number of key economic sectors and fields”.

This article is to present some recommended solutions for better and more efficient operation of Vietnamese SEGs, contributing to the successful implementation of Resolution No. 12 of the 5th Plenum of the 12th Party Central Committee.

Keywords: State-owned enterprises, State-owned economic groups, Vietnam.

1. Overview of current Vietnamese State-owned economic groups

It is well known that in March 2010, the Prime Minister issued a decision to establish 12 economic groups (EGs) on the basis of rearranging and reorganizing the State Corporations No.91. In October 2012, the Government summarized the pilot establishment of these economic groups. Due to the failure of pre-set goal achievements of the construction industry group and Vietnam urban and housing development, the Prime Minister issued Decision No. 1428/QD-TTg dated October 2nd, 2012, to terminate the pilot establishment of these two groups and turned them back to state-owned corporations. So far, there are 10 active SEGs in Vietnam(1).

- Among these 10 SEGs, there are 3 groups operating in the mining sector (PVN, Vinachem and Vinacomin); 2 groups operating in the field of telecommunications (Viettel and VNPT); and 3 groups operating in large-scaled international investment (PVN, Viettel, and VN Rubber). In particular, Viettel became the only enterprise in Vietnam with total foreign revenue exceeding 01 billion USD in 2017, the revenue from offshore investment activities reaching 1.25 billion USD.

- On December 14th, 2016, the ranking of VNR500 Vietnam’s largest enterprise in 2016 named 5 SEGs (PVN, Viettel, VNPT, Vinacomin and EVN).

In 8 years (from March 2010) or 6 years (from October 2012) until 2018, the existence and operation of Vietnam’s SEGs have made significant contributions to the overall socio-economic development as well as the international economic integration of Vietnam. However, there are still some issues that are challenging these SEGs, namely:

 (1) In recent years, the debt-to-equity ratio of private economic groups has remained stable at about 55%, while this ratio of SEGs experienced a rapid increase (from 1.92 in 2010 to 2.70 in 2013). These SEGs pay much attention to multi-sectorial business rather than their fundamental and core business areas, which results in their limited financial capacity and management, etc. The operational results and performance of many SEGs are not commensurate with their existing resources (natural resources, land, capital, technology, etc.). Many SEGs are involved in risky economic areas (such as finance, banking, real estate) experiencing a number of difficulties in management and supervision when the market suffers drastic fluctuations. There are still some groups that have not completed the divestment plan of investment out of their industry.

(2) Limitations on the scope of activities, links and motivational roles:

The operational scope of the majority of these SEGs mainly focuses on the domestic market, and their regional integration is still limited.

The linkage between different members of these SEGs is not close enough, which does not show the nature of economic groups.

These economic groups have not clearly shown their roles as the driving force to develop other economic fields and sectors. With the exception of Viettel with a number of innovations in corporate governance, creative stimulation, and strong competitiveness in the telecommunications market, EVN still holds a monopoly position, limiting the creation of a competitive electricity market. Vietnam National Oil and Gas Group (Petro Vietnam) and Vietnam National Coal - Mineral Holding Corporation Limited (Vinacomin) show their main operation in crude exploitation and exporting, and slow development to oil and mineral processing industry, etc.

 (3) State-owned enterprises and SEGs have been run with poor governance and lack of modern and innovative corporate governance standards which are in line with the international standards, especially standards and regulations in financial management, activities of the Board of Directors, and information transparency and disclosure. This fact represents 1/ Poor business performance and low contribution to the economic growth, resulting in the limited accumulation ability of these enterprises and economic corporations and their loan-based existence and operation; 2/ Poor financial situation; and high outstanding loans of these economic groups. In addition, other forms of support such as debt transfer to other state-owned corporations and groups, debt rescheduling (State guarantee to banks), and loan supplementation are some existing “soft” budget forms for state-owned enterprises and economic groups. This situation also results in increased government debt due to loan guarantees and hidden macroeconomic instabilities in long-term future, and 3/ Non-sectorial investment and cross-investment between businesses and banks, etc. makes it difficult to control bad debts, etc.

 (4) Currently the subject performing the function of state ownership (including the function of management and supervision) of SEGs includes many different organizations and individuals, the organization is still dispersed by different functions which have not yet fulfill the supervision responsibility, then affecting the efficiency of SEG management and supervision (the State Capital Management Committees in these enterprises were recently established on February 3rd, 2018 according to Resolution No.09 of the Government).

 (5) Limitations and weaknesses in the appointment, promotion, management and use of senior management officials/senior management personnel in SEGs.

There are hundreds of management officials in Stated-owned corporations and economic groups are weak in capacity, in which a large number of leaders of State-owned economic corporations and groups come to the prisons for their “intentional crime” against the state regulations on economic management causing serious consequences and crimes of corruption, etc.

*Causes: These above mentioned limitations and weaknesses of the economic groups are identified in both objective and subjective reasons, in many aspects:

1/ The legal framework related to these economic groups is not synchronous, a number of gaps and obstacles in the system of legal documents related to the operation of the economic groups have not been completed, the state administrative functions are not clearly separated from the function of state ownership to these economic groups.

2/ The determination of the objectives to establish the economic groups, structures of organization, management, and administration, and the identification of business lines seem to heavily concern about political factors, while overlooking economic issues and being too subjective, lack of objectivity. Moreover, these economic groups and their components are entitled to enjoy too many favors, privileges and preferences from the state budget.

3/ These economic groups are under the management of several different owners, however in fact these owner’s management is only in administrative terms, in which each ministry is assigned to manage one different area. There is no real and definitive owner. Due to the fact of too many owners, these economic groups become derelict. Moreover, the management of the owners has not been carried out thoroughly from beginning to end, from investment orientations and directions to implementation processes and results, etc. but mainly only work on some reports, or even no report.

4/ The training, fostering, use, and management of the leading cadres and managers of these economic groups have not met the requirements of survival and development of the economic groups.

2. Some recommendations for the efficient and sustainable operation of Vietnam’s SEGs

There may be many groups of solutions for these SEGs to operate more effectively and sustainably. Following are some of our recommended solution groups:

Firstly, completing the legal basis for the establishment, development and state management of SEGs

The legal basis for the operation and development of SEGs needs to be synchronous and innovative, open-minded and keep up with the process of the group expansion, suitable to handle smoothly the relationship of competition and monopoly over the group development process, in which greater importance should be paid to the competitiveness in order to survive in the market economy for enterprises, EGs.

Perfecting the legal basis for the name of economic groups.

Regarding this content, Articles 4 and 5 of Decree No. 69/2014/ND-CP and Article 188, Section 1, Chapter VIII (group of companies), the Law on Enterprises 2014 made it clear that an economic group is a group of companies, including a parent company, and other member enterprises and associates. An EG has its own name and brand. The type of EGs is not a type of enterprises, so they do not have any legal status, do not have to register for business operations, but it is their responsibility to publicize their establishment, reorganization, change of the number of member enterprises, the equity ratio of all member enterprises, etc. to the competition authority... which now is the National Competition Authority under the Ministry of Industry and Trade of Vietnam.

Regarding the organizational structure of economic groups: According to Article 4, Section 3, Decree No. 69/2014/ND-CP, in a economic group, there are 3 levels of enterprises and structures as follows: (1) Economic group; (2) Parent company - (level I company); (3) Subsidiaries of level I companies (level II companies) and subsidiaries of level II companies (level III companies).

In addition, there are also different associated companies such as joint stock companies, limited liability companies, etc.

Therefore, an EG is a collection of multi-leveled companies and businesses. There are a number of relationships in these EGs: the relationship between the EGs and the State, the relationship between the EGs and their enterprises, the relationship between the economic corporations in the EGs; and the relationship between the EGs and other partners.

Good handling of the interests of different parties in these relationships is a decisive factor for the sustainable development of the SEGs. Regulating the relationship of interests in a rational and mutually beneficial way for all parties is the function of the State. In particular, the principle of democratic centralism and ensuring these EGs to operate following the market mechanism are two parallel factors to ensure their development.

Nowadays, the product value of state-owned enterprises/ EGs and corporations is following the trend of forming a value-added chain at an increasingly wide range both in terms of geography and business lines. Exploiting comparative advantages of each country and each economic unit plays an increasingly important role in this value chain. Therefore, the regulations, mechanisms and policies promulgated by the State to regulate enterprises, especially the state-owned EGs and corporations need to be increasingly reasonable in terms of all aspects, organizational structure, management forms or regulating the interests of all parties in the tripartite relationship among the State - Enterprises - Social organizations (including Business Associations).

Secondly,restructuring SEGs following the main and core business fields and product lines, in a large scale and at a trans-national vision

- Currently, Vietnam continues to restructure all state-owned enterprises, including these EGs in accordance with the spirit of the Resolution of the 5th Plenum of the 12th Party Central Committee on continuing to restructure, innovate and improve the efficiency of SOEs; and supporting small and medium enterprises. Accordingly, to continue to comprehensively restructure SOEs, SEGs in terms of organizations, human resources, strategies, financial management, technology, products, business lines, etc. for healthier financial environment and more efficient operation of each enterprise; at the same time, to find definitive solutions to handle all loss-making enterprises, inefficient and low efficient investment projects following the market mechanism, etc. It is the request of the 11th Party Congress: to promote to innovate, arrange, and improve business efficiency of state-owned enterprises, urgently restructure, business lines of State-owned economic groups and corporations focusing on some key sectors of the economy.

According to the experiences of Japan and South Korea, EGs are the “giants” that have a great impact on the national development speed. Korea is a typical model of the nation taking off by promoting the entrepreneurial spirit starting from President Park Chung Hee: such big names as Hyundai, Samsung, Posco, Daewoo have developed the Korean dragon after only 20 years of industrialization. Among the 10 best rated companies in the world in 2008, there were 2 Korean companies (Samsung and Hyundai).

Following that spirit, in our opinion, there are 2 things to do:

(1) To rearrange and merge the SEGs with the same field of activities, and similar product lines into a larger-scale economic groups which actively operate both domestically and internationally.

(2) To continue to divest and transfer businesses, sub-sector and non-core businesses of SEGs into appropriate economic and business sectors.

The responsibilities to rearrange and reorganize the SEGs are put in the “Committee for Management of State Capital at Enterprises”, established on February 3rd, 2018 under the Resolution No. 09/NQ-CP. Besides, the “Committee for Management of State Capital at Enterprises”, which “gathers” about 22 state-owned economic corporations and groups, with the total capital of millions of billion dong, owned by the entire Vietnamese people, cannot be an “administrative super-committee”, not a place to reserve the capital of the state-owned economic corporations and groups, but an organization that makes the state capital profitable for the likelihood of the nation and the people, rather than for any benefit of any group.

Thirdly, improving the innovative system of enterprise information, monitoring and management for economic

 Develop such a mechanism to enforce all state-owned economic groups and corporations to publicize all information and make all investment and financial activities of SEGs to be transparent through a system of semi-annual and annual financial statements certified by auditors which must be publicized promptly, truthfully and reliably on the mass media, electronic pages of these corporation and economic groups and state management agencies in accordance with the law.

Strengthening the mechanism to monitor these SEGs’ operation

- It is necessary to develop a mechanism of strict supervision which is audited independently, honestly, and accountable for State-owned enterprises using the state capital to the representative agencies of the owners and state management agencies and the people’s representative.

- It is possible to design the level of information transparency reasonably to ensure the harmony between maintaining the control of the State and society over these state-owned enterprises with their own business security. In our opinion, first of all, it is necessary to provide transparent information to the following subjects: state capital management and trading agency, according to the decentralization mechanism of information receipt and processing, which emphasizes the provision of information to the National Assembly, administrative management agencies, social organizations, and media press. It is necessary to expand the independence of the State Audit in making auditing decisions and publishing audit reports to the National Assembly and the press. To strengthen the role of the National Assembly’s control and supervision over some key state-owned enterprises using a large amount of state capital, to provide anti-corruption agencies with independent rights in investigating SOEs and SEGs which are related to embezzlement, corruption of state assets.

- To strengthen the work of inspection, examination, auditing and transparency publication of operational information of state enterprises; to promote the close cooperation between state inspection and auditing agencies to ensure the strictness in law enforcement as well as to protect their business operations from being disturbed.

 Encouraging the application of a modern enterprise management system for economic groups and businesses. A modern management system of economic groups and businesses shall cover: a management information system, a system of corporate governance reports meeting the national standards and step by step towards the international standards; the leadership and control of these EGs and businesses will be performed by CEOs and CFOs. The CEOs are responsible for the development strategy preparation and implementation. The CFOs are responsible to control the implementation of its financial strategy, performance management and risk control and as well as the supervisory representatives for the owners.

Fourthly,building and developing high quality human resources for the economic groups, especially the senior management officials/senior management personnel

President  Ho Chi Minh stated that: “Officials are the decisive factor in every revolution”. It can be said that, in the implementation of state institutions for SEGs, the high-level human resources of the economic groups shall play a decisive role.

Building and developing senior management personnel of SEGs in the direction of:

Focusing on the strategic orientation of human resource development, especially high-level human resources, namely:

- Determining the standards of senior management/ senior governance officials in accordance with the provisions of the law, at the same time supplementing necessary qualities for management officials.

- Developing human resources planning for senior management/ senior governance personnel and policies to foster talents of business development and enterprise management.

- Developing specific goals, criteria and procedures for appointing, dismissing, transferring and rotating senior management officials in line with the human resources of the leaders and managers of the groups and member enterprises.

Training and fostering the leaders and managers at the strategic level for SEGs and state-owned corporations.

In the team of leaders and senior managers at the strategic level of SEGs and state-owned corporations, the general directors and directors, etc. play a particularly important role, their management and executive capacity shall directly affect the existence and development of the SOEs and SEGs; the failure or success in the production and business activities of the SOEs and SEGs depends remarkably on the management and administration efficiency, in which the general directors and directors count the first. Thus, it is necessary to understand that the team of general directors and directors of SOEs and SEGs shall be economic people, rather than politicians, working as general directors and directors of SEGs and SOEs should be considered as a profession. It is important to train and foster these senior management and governance personnel with professional skills and professional capacity, etc. as well as their political quality, ideology, and morality, etc.

Along with the work of training and fostering, a great attention should also be paid to the work of retention and upgrading of senior management/ senior governance personnel, in the following directions: (1) Building a responsibility system which ensure the harmony of material and spiritual interests, legal, moral and social responsibility of senior executives; (2) Applying the theory of wage payment according to 2 tips: firstly, the development following the principle and requirement of the regulations on rank and the command level in each unit; and secondly, the encouragement of talent and virtue of individuals based on their own dedication and capacity.

Regarding the use of senior management officials/ senior governance personel of EGs:

- Developing a specialization mechanism appropriate to the forte and multi-functional cooperation of senior managers on the basis of attaching importance to openness and transparency in their dedication and enjoyment and always following the positive emulation spirit.

- According to Viettel’s experience, it is necessary to build a comprehensive and balanced management hierarchy for the senior management team. This is reflected in the 3-in-1 leadership style (leadership, executive, expertise) and daily administration of the senior executives.

3-in-1 leadership style (leadership, executive, expertise): It is normal when the specific ratio of these above three areas change on each stage of development, and the size of each unit. Viettel leaders are knowledgeable, able to decide operational orientation and open-minded so that people can participate, able to arrange proper assignments to suitable persons while keeping their eyes on the whole progress of their work, able to evaluate and give comments, to train their employees, and to solve difficulties when needed. The leaders (whether the general directors, directors, or heads of the departments) must outline the strategies and directly organize the implementation of their strategies, and detect, train and arrange suitable personnel to serve their effective implementation. Strategy and implementation are a process of birth and results. Directors must be the real leaders, close to reality to lead their organizations. They should create suitable, consensus and creative working, management and leadership environment for the senior management team (which is a good working environment, open with full of advancement opportunities and of course, even severe elimination).

Developing an incentive system, motivating senior managers dare to think, dare to do, dare to be responsible for the development of their enterprises.

The selection, appointment and arrangement of the leading management staff of SEGs and SOEs must be consistent with the production and business characteristics and requirements.

Currently, the leading and senior management staffs of SEGs are considered as a type of state officials who are selected and appointed by some competent state management agencies according to a very strict procedure. However, the problem here is not only the selection and appointment procedures, but also the regulations on the powers, responsibilities and rights of the leading and senior management staff of SEGs and SOEs.

To overcome these limitations: (1) it is necessary to expand the examination of the recruitment of key positions in SOEs and SEGs and the regime of signing labor contracts with personnel on management and administration of SOEs and SEGs. The selected people shall not necessarily be government officials in the limited area of staff planning but need to be expanded to those outside the state payroll; (2) It is necessary to follow the principle that “Any property should be given to those with proper ability to effectively manage it”. The competent state management agency and the person expected to be appointed will thoroughly study all terms and conditions of the management contracts regarding their powers, rights and responsibilities as well as specific sanctions for any failure to follow these committed terms and conditions; (3) At the same time, it is important to renew the whole process, to clearly define the rights and responsibilities of organizations and individuals related to the review and decision of key leaders of SOEs and SEGs, especially such personal appointed to the position of the Chairman of the Board of Directors / the Members’ Council and the Directors (Conclusion of the 6th Plenum of the 11th Party Central Committee) and it is a must to fight against any negative cases, group interests, corruption in the appointment procedures of leaders, business managers in SOEs and SEGs.

_______________________

Endnotes:

(1) They are: 1) Vietnam Post and Telecommunications Group (VNPT); 2) Vietnam National Coal - Mineral Holding Corporation Limited (Vinacomin); 3) Bao Viet Finance – Insurance Group (Bao Viet); 4) Vietnam National Textile and Garment Group (Vinatex); 5) Vietnam Rubber Group (VRG/VN Rubber); 6) Vietnam Electricity (EVN); 7) Vietnam National Oil and Gas Group (Petrovietnam - PVN); 8) Viettel Military Industry and Telecoms Group (Viettel); 9) Vietnam Chemical Industry Group (Vinachem); 10) Vietnam National Petroleum Group (Petrolimex).

Reference:

Proceedings of the Scientific conference “Developing and perfecting the development institutions of SEGs in the context of international integration” jointly organized by: Vietnam National Oil and Gas Group, Editor Committee of Communist Magazine and Scientific Councils of Central Party agencies in Hanoi in November 2018.

Prof., Dr. Chu Van Cap

Institute of Political Economy,

Ho Chi Minh National Academy of Politics

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