For the last few years, equitisation continues to be a focus for the Vietnamese government. The government hopes that equitisation will increase the efficiency and improve the management of the State-owned enterprises (SOE) which have been suffering from inefficiency for years. In addition, the much required capital raised from divestments will also assist the government to reduce its growing debt and fund infrastructure projects. In August 2017, the government released Decision No.1232/2017/QD-TTg approving a list of 406 state-owned enterprises to be divested during 2017-2020.
2017 Divestment Policy
The new decision not only lists the 406 approved companies marked for divestments but also includes mechanisms to accelerate and increase the efficiency of the divestment process. This has been included to address issues faced by investors during previous divestments, such as delay in the transfer of ownerships and lack of clarity in valuation.
There is also a provision allowing the rate of divestment and number of divested entities to increase in the next four years depending on the market.
Divestments until now
The number of SOEs has decreased drastically from 6,000 in 2001 to 700 in 2016. The number of industries with State investment has dropped from 60 in 2001 to 19 in 2016.
Divestments in 2016
In 2016, 56 enterprises were approved for equitisation. The total value of these firms was US$ 1.5 billion (VND 34 trillion), of which the State capital was valued at US$ 1.07 billion (VND 24.4 trillion). The stakes sold to investors were worth US$ 307.7 million (VND 7 trillion), those sold to workers were worth US$ 17.16 million (VND 388 billion), and shares sold at public auctions were worth US$ 189 million (VND 4.3 trillion).
Businesses under State Capital Investment Corporation (SCIC), state-owned holding company were able to earn more revenues than expected such as Bao Minh Joint Stock Company (148 percent higher than the planned revenue), Binh Minh Plastic Joint Stock Company (131 percent), Vietnam Construction and Import-Export Joint Stock Corporation, and Vinaconex (114 percent).
Return on equity for firms such as Vinamilk and FPT Telecom were also higher than expected, at 42 and 29 percent respectively.
Divestments in 2017
As of September 2017, total revenue from divestment is expected to add VND 19 trillion (US$ 835.2 million) to the budget based on the value of the share of state capital expected to be divested from 135 enterprises. Based on share prices on the stock exchange, it can reach up to VND 29 trillion (US$ 1.28 billion).
The total number of approved SOEs stands at 375, with a total capital of VND 108.5 trillion (US$ 4.8 billion). Total capital expected to be divested during 2017-2020, stands at VND 64.5 trillion (US$ 2.8 billion). These figures exclude SOEs belonging to the Ministry of National Defence, Ministry of Public Security, Ho Chi Minh City People’s Committee, the State Capital Investment Corporation (SCIC), and SOEs selling capital under the PM’s separate decisions. If we include the SOEs under the mentioned government agencies, then the total state-owned capital can be over VND 100 trillion (US$ 4.4 billion) at least.
In here, we will discuss the major divestments in the shipping, oil & gas, beverage, and airlines industry.
Shipping and Ports
Vinalines, the country’s largest shipping company is aiming to reduce its stake in ocean shipping companies, but will maintain ownership in marine logistics companies to ensure the development of marine logistics network and reduce losses in ocean shipping companies. In addition, the company is also divesting its stake in ports.
Vinalines’ seaports earned VND307 billion ($13.58 million) in profit in the first half of 2017, while marine logistics companies earned VND838 billion ($37.06 million) in profits. Ocean shipping companies witnessed a loss of VND904 billion ($39.98 million).
Vinalines is due to make an initial public offering (IPO) in December this year and make its debut as a joint stock company in April next year. Currently, it owns a fleet of ships with a capacity of more than two million tonnes, accounting for 25 percent of the nation’s total capacity.
Oil and Gas
Vietnam National Oil and Gas Group (PetroVietnam) will complete the divestment from several subsidiaries by 2020. They are allowed to retain their entire holdings in only the parent company PetroVietnam, National Southern Spill Response Centre (Nasos), and PetroVietnam Manpower Training College.
Subsidiaries being divested until 2019 include PVI Holdings, Phuoc An Port Investment and Exploitation Oil and Gas JSC, Green Indochina Development JSC, SSG Real Estate JSC, PetroVietnam Trade Union Finance JSC, PetroVietnam Construction Joint Stock Corporation, and PetroVietnam Maintenance and Repair JSC. In addition, stakes in PetroVietnam Gas Corporation, PetroVietnam Transportation Corporation, Binh Son Refinery and Petrochemical Co., Ltd., and PV Power will also be reduced to less than 50 percent.
In addition, stakes in PetroVietnam Gas Corporation, PetroVietnam Transportation Corporation, Binh Son Refinery and Petrochemical Co., Ltd., and PV Power will also be reduced to less than 50 percent.
PetroVietnam reported a revenue of VND247 trillion ($10.8 billion) in the first six months of 2017, up VND31.5 trillion ($1.3 billion) compared to the same period last year, including an after-tax profit of VND13.1 trillion ($572.8 million), up VND2.6 trillion ($113.6 million).
Vietnam Airports Corporation (ACV) and Vietnam Airlines (VNA) are going to divest large stakes for future funding requirements. ACV will sell off 20 percent of its state stake in 2018 and 10.4 percent in 2019, while VNA will sell 35.16 percent in 2019, thus reducing state ownership in the firms to 65 percent and 51 percent, respectively.
These divestments offer a chance for foreign investors to enter the aviation market. There already is a considerable interest from investors for both the entities. The aviation industry in Vietnam contributes US$6 billion annually to the GDP and grew 29 percent year on year in terms of passengers in 2016.
Already Paris Aeroport has become ACV’s strategic investor and ANA has acquired 8.8 percent stake in VNA for VND2.38 trillion ($108 million).
The two state-owned breweries, Saigon Beer Alcohol Beverage Corp. (Sabeco) and Hanoi Beer Alcohol Beverage Corp. (Habeco) have already attracted considerable interest from foreign investors. The beer market grew 9.3 percent in 2016 in comparison to previous year.
Already firms such as Heineken, San Miguel, Thai Beverage Public Company, Asahi Group Holdings and Kirin Holdings have shown interest.
Later in the year, the government will release further details about their divestment plans.
Other major divestments include Vinamilk, Vietnam Southern Food Corporation (Vinafood), Vietnam Urban and Industrial Development Investment Corporation (IDICO), Vietnam Rubber Group (VRG), companies under Vietnam Electricity Corporation (EVN), Song Da Corporation, and MobiFone.
Changes in divestment policy
The 2017-2020 plan is different in various aspects from the 2011-2015 plan. In the 2011-2015 plan, only SOEs in real estate, securities, finance/banking, insurance, and investment funds were allowed to be divested. This led to revenues from sales to be confined within the SOEs and only changed the investment portfolio of SOEs.
In contrast, for 2017-2020, the divestment will lead to a change in the state’s portfolio of assets. From now onwards the sales revenue from divestments will be directed towards public investments projects unlike in 2011-2015, when revenue was held by the SOEs, leading to an increase in the state capital in the business.
In the recent divestment policy, the government has also added a provision to divest in instalments, with the rate fixed at 20 to 36 percent of the total holding. This has led to an increase in the number of divested SOEs.
The major investment hurdles faced by foreign investors include unfair valuations, unable to acquire a controlling stake, and delays in transfer of ownership.
Investors have often highlighted the delay in the process of transferring stakes from ministerial or provincial people’s committee level to SCIC that handles divestments. To reduce delays, the government in their recent decision, has asked the people’s committees in each city/province to report prior to the 25th of the last month of each quarter as well as on December 25 each year, to the Steering Committee for Enterprise Innovation and Development, Ministry of Finance (MoF), and Ministry of Industry and Trade (MoIT) for progress.
According to a recent study by the Central Institute for Economic Management and the American Chamber of Commerce (AmCham), divestments in SOE has been slower than expected as it has failed to attract strategic shareholders, especially international investors. Investors have highlighted the limitation in foreign ownership as the major reason to not invest.
In addition, the lack of transparency in the divestment process, unreasonable evaluation of enterprises, poor management, existing company liabilities, and incompetent staff were highlighted as the other factors affecting investor’s sentiments.
Need to do more
The government needs to attract strategic shareholders, especially international investors to invest in the SOEs. This will not only bring in the much need foreign capital, but also lead to value addition such as newer technologies, administrative skills, and access to newer markets, which will lead to a more sustainable growth.
To do so, the government has to increase transparency regarding regulations, reduce red tapism, and incorporate international practices for determining the business value and transaction cost of shares to ensure clarity. The government has to ensure that sufficient time is given to foreign investors for their due diligence prior to bidding to increase chances of investment. Foreign investors are the key to these divestments, bringing in the much-needed capital.
Equitisation offers investors an opportunity to enter the market in major industries such as food & beverage, telecommunications, aviation, energy, shipping, and retail and invest in companies with a dominating market share.
Investors should ensure clarity about management control, corporate governance practices, technology transfer, organizational structure, and future options for increasing stake in the SOEs.
In addition, investors should carefully identify the decision makers to influence negotiations. Decision makers in SOEs not only includes the management members, but also the government officials in agencies overseeing the divestment process.
Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.
This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.