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Thursday, 29 November 2018 11:53
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State ownership and state enterprises in the socialist - oriented market economy in Vietnam: Some policy recommendations

(LLCT) - In the renovation period, the Party and State have consistently pursued the policy of developing a multi-sector economy with many forms of ownership. State-ownership and State-owned enterprises (SOEs) play the leading role in ensuring that Vietnam's market economy develops in a socialist orientation. However, due to there is no clear separation between owners' representatives and State management functions, the lack of uniformity in the exercise of rights, responsibilities and obligations of State owners, etc., the operation of SOEs is ineffective. Therefore, it is necessary to supplement and perfect the legal framework for the implementation of State ownership rights and SOEs management; to enhance transparency in the function of representing the State ownership.

1. State ownership and State-owned enterprises in the socialist-oriented market economy in Vietnam

Marxism - Leninism founders affirmed the central importance of ownership, in which it mainly concerns capital goods. Accordingly, they asserted that all the revolutions called political revolutions, from the first revolution to the last revolution, were carried out to protect a certain type of ownership.

Modern theories of economics, though approaching ownership in one way or another, do not negate it. However, from different approaches, ownership issues have different perspectives. Whatever the approach maybe, the concept of ownership encompasses two things: economic content and legal content. Economic relations (or economic benefits) can only be made when they are legally guaranteed and asserted. However, over-emphasis on the legal form, regardless of the substance of the economic interests of the subject, will lead to a form of formal ownership. On the contrary, if attention is only paid to the economic aspect of ownership, the lack of legal assurance will lead to dereliction.

 Ownership occurred very early in history with various forms. State ownership is a complex issue, as the State acts as a proprietor just like other owners, but it also defines the institutional framework for the whole of society. In addition, State ownership is widely understood, including national ownership represented by the State. The structure of State ownership is examined in several respects:

-  On the subject: The State is both the owner of State-invested assets and the owner of assets represented by the State. Thus, the State simultaneously performs two functions, namely, the ownership function and State management function. However, for those objects of ownership represented by the State, it cannot be done at the same time by agency or by a single agency. The implementation must be delegated and decentralized among agencies and there must be a separation between the ownership of the State and the right of use of entities directly exploiting assets.

- On the ownership object: In addition to State-owned assets, there are also State-represented assets. Ownership of this group is peculiar, depending on the rules of each country.

- On the right to ownership: It is also a set of rights like those of any owner in the economy.

The core issue of State ownership and State-owned enterprises is the settlement of the beneficial relationship between the owner and the user in the whole process of economic ownership. In principle, no matter by what mechanism the economic system operates, there must be a system of institutions that binds the rights and responsibilities of both parties between the State and its stakeholders. This form of binding can be laws, and policies, etc.

Before Doi moi (Renewal period), Vietnam as well as many other socialist countries in the past, especially emphasized the role of ownership. Ownership comprised the economic relations determining the characteristics and nature of the relations of production.

Since Doi moi (1986), the Party and State have consistently pursued the policy of developing a multi-sector economy, considering all economic sectors to be an important component of the national economy. The economy of Vietnam now has many economic components and many forms of ownership. State ownership and the State economic sector make up a typical feature, play a key role and are one of the important factors to ensure that the Vietnamese market economy develops in a socialist orientation.

The role and position of SOEs in Vietnam are first identified and guided by the Party’s guidelines for state economic development and reorganization of SOEs. The Resolution of the 3rd Plenum of the Party Central Committee (9th tenure, 2001) stated: “SOEs play a key role in the economy, making important material tools for the State to orientate and regulate the macro-economy, to be the core force, making major contributions to the State economic sector to play the dominant role in the socialist-oriented market economy, and are the main force in international economic integration”. The position of SOEs under this Resolution is defined as “focusing on key sectors and key areas, occupying a large market share for major products and services. It is not necessary to keep a high proportion in all sectors and in all ranges of products of the economy”.

The 10th Party Congress had a certain revision of the position of SOEs, stating that “abolishing the monopoly and privileges of SOEs” and “focusing on some areas of infrastructure and production of important capital goods and services of the economy, as well as on some public sectors”.

The 11th Party Congress only affirmed the leading role of the SOEs without clearly and directly affirming the role and position of SOEs in the economy, such as the 3rd Plenum of the Party Central Committee (9th tenure, 2001) and other previous documents. In practice, the SOE sector is being rearranged and reduced in many ways in some areas where there is no need for the presence of SOEs, including the size of the sector (SOE sector or area) and the presence of SOEs (i.e, the number of SOEs doing business in the same sector).

The 5th Plenum of the Party Central Committee (12th tenure) clearly defined the guiding view of the process of restructuring, reforming and enhancing the efficiency of SOEs, namely: “SOEs should focus on key areas, essential areas and areas of national defense and security, and areas in which enterprises of other economic sectors do not invest. The SOEs must operate in a market economy manner, taking economic efficiency as the main criterion; self-reliance, self-responsibility and competition with enterprises of other economic sectors according to the provisions of law; ensure publicity, transparency and accountability of SOEs...”(1). 

The SOE sector has the largest contribution to budget revenue compared to other economic sectors. The contribution of SOEs to the total State budget revenues increased steadily from 19.3% (2006-2010) to 22% (2011-2015). SOEs have become an important tool to ensure the effective implementation of macro-stabilization policies, in dealing with market changes and curbing inflation. They make great contributions to the building and development of the socio-economic infrastructure system, economic restructuring and the implementation of national defense and security tasks and implementation of policies to ensure social security(2).

However, the separation of objectives, tools, methods, organizational apparatus and staffs performing the function of owner representation with the function of state management has not been clearly achieved. The dispersal and inconsistency in implementation, the lack of expertise and specialization in exercising the rights, responsibilities and obligations of State owners, the lack of financial sanctions for agencies and individuals fulfilling the assigned function of representatives of State ownership have made the SOEs’ operation not as efficient as expected. Therefore, the Party emphasized the need to continue restructuring, reforming and improving the efficiency of SOEs. In the implementation of the resolutions of the 10th, 11th and 12th Party Congresses, from 2006 to present, many ministries, industries and localities have concentrated on directing the restructuring of SOEs.

However, the process of restructuring SOEs is slow and inadequate. Only about 8% of State capital have been sold after equitization and capital withdrawal, the State still holds dominant shares in many enterprises. As reported by the Ministry of Finance (2016), on average, the State still holds 81% of charter capital in the companies, outside investors hold 9.5%, strategic investors hold 7.3%, workers and trade unions hold 2.2%. Equitization of SOEs has failed to reduce the State involvement in the economy as the relationship between enterprises and public officials continues to be maintained even when the enterprise has been equitized(3).

The number of SOEs, although decreasing, is still present in almost all sectors of the economy, including those in which the private sector has the potential to invest in development, with competitive markets such as hotels and catering, goods, service business assets, trade, construction, processing, manufacturing, etc. With the advantage of market position and scale available, SOEs can easily dominate private sector business opportunities, creating a common perception among private domestic firms that it is difficult to compete with SOEs, which makes the private sector in the country not utilize most of its potential. This, on the one hand, does not create competitive pressure for SOEs; on the other hand, there is no incentive to compete in the market, causing “distortions” of different types of markets.

2. Some policy recommendations

Firstly, the legal framework on the implementation of State ownership rights and management of SOEs should be supplemented and improved.

The Resolution of the 5th Plenum of the Party Central Committee (12th tenure) confirmed that the State is the representative of the owner of SOEs in the direction of: (1) exercising the rights and responsibilities of the representative of the owner of the State in respect of SOEs, shares and contributed capital of the State in the enterprise; (2) approving and supervising the implementation of business strategies and plans of enterprises in line with the socio-economic development plan and industrial development planning; (3) coordinating with relevant agencies to strictly comply with the law on organization and personnel of enterprises.

Accordingly, it is necessary to promulgate legal documents on the implementation of ownership rights and State ownership of SOEs soon. It should regulate the assignment and decentralization of SOEs management and State ownership representatives in SOEs; enact regulations on the rights and responsibilities of organizations and individuals assigned or decentralized to represent State ownership in SOEs; make provisions on monitoring the implementation of State ownership rights at SOEs (regulating the content of supervision by State owners, supervisors, powers and responsibilities of supervisors; the basis for monitoring and evaluation of SOEs, owners’ representatives and representatives for State capital) and regulations on penalties for acts detrimental to the interests of the owner government.

Secondly, transparency in the performance of State ownership representation should be enhanced.

The relevant subjects (organizations and individuals) should be clearly and transparently set out to perform the functions of representing the State owner, including: list of agencies and titles, powers, tasks, obligations, responsibilities, evaluation and explanation mechanisms of these objects (including organizations and individuals).

A mechanism should be set up to assess the performance of the function of representing State ownership of State-owned agencies, organizations and individuals and for transparency of information and reports on SOEs, processes to organize, arrange, equitize and transform SOEs, to invest in state capital.

At the same time, State management agencies should strengthen the monitoring mechanism in combination with examination and evaluation, gradually replacing the traditional mode of inspection, examination and direct intervention, which contains ethical risks (group and individual interests).

Thirdly, a SOE information and data system should be set up as a basis for the performance of the monitoring function of the owner of the state enterprise.

A reliable, up-to-date, transparent information system for SOEs should be set up. The SOE information system includes: list of SOEs, main business sectors, state capital, investment, results and business efficiency.

A system of criteria and methods for monitoring, controlling and evaluating State ownership of SOEs should be developed. It clearly and specifically stipulates: monitoring, control and evaluation mechanisms (at representative levels, up to authorized representatives at enterprises with full State capital, and representatives of State capital in enterprises with a part of State capital); monitoring content, supervisors, powers and responsibilities of supervisors.

Fourthly, the governance capacity of the State ownership representative and the representative of state capital should be strengthened.

SOE’s management personnel, especially capital representatives, authorized representatives at all levels of enterprises, including authorized representatives of State-owned enterprises, should be evaluated and reviewed. The mechanism of selection, screening and use of authorized representatives of state owners and representatives of capital should be reviewed. Management personnel, authorized representatives and capital representatives should be restructured.

A mechanism should be formulated for evaluating the performance of the function of representing the State owner of State-owned agencies, organizations and individuals for State enterprises and State capital in enterprises.

The regulations on mechanisms of information, reporting, accountability, evaluation mechanism and evaluation criteria for capital representatives and authorized representatives at all levels and enterprises, and representatives of state owners at state agencies, should be supplemented and completed.

Responsibility of the authorized representatives of state owners for SOEs should be strengthened. This liability may be in a binding contract of interest and liability between the authorized representative and the owner of the State enterprise. Specifically, the rights and obligations of the owner shall be clearly determined by the representative and the rights and obligations must be approved by the owner before the voting or decision is made. A mechanism should be set up for dealing with the consequences when the authorized representative performs improperly under a binding contract involving damage to the interests of state shareholders. Authorized representatives at the enterprise do not perform the function of state administrative management.

_________________________

Endnotes:

(1) CPV: Document of the 5th Plenum of the Party Central Committee (12th tenure), Office of the Party Central Committee, Hanoi, 2017, p.63.

(2) http://www.qdnd.vn.

(3) Ministry of Planning and Investment - World Bank (2016): Vietnam Report 2035.

 

Dr. Tran Hoa Phuong

Institute of Political Economics, Ho Chi Minh National Academy of Politics

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