Vietnam is planning to divest 406 state-owned enterprises (SOE) by 2020, with 135 scheduled for 2017 alone. Changes in foreign ownership limits, a growing economy, and a strong performing stock market have attracted considerable interest from foreign investors for earlier SOE’s divestments. However, a lack of transparency and the slow progress of divestments have been hampering investor sentiment.
Some of the big-ticket divestments include Vietnam Engine and Agricultural Machinery Corporation (VEAM), Airports Corporation of Vietnam (ACV), Vietnam Airlines, PVOil, and PVTex. Since its inception in 2006, SCIC has divested in over 900 enterprises. In 2016, SCIC divested from 60 business and in turn achieved an impressive 2.58x return.
Vietnam Engine and Agricultural Machinery Corporation (VEAM), a company under the Ministry of Industry and Trade (MoIT) is the only major SOE undergoing divestment this year. The minimum divestment target has been set at 52.47 percent with another 36 percent divestment by 2020. Other divestments in 2017 include 92.98 percent in Vietnam Sugar Corporation, 91 percent in Quang Ninh Clean Water JSC, and 95.59 per cent in Son Tay Water Supply company.
The Ministry of Construction and Ministry of Transport has the highest number of companies being divested, at six each in 2017. The Ministry of Industry and Trade (MoIT), the Ministry of Labour, Invalids and Social Affairs, and the Ministry of Health each have only one company being divested in 2017.
The State Capital Investment Corporation (SCIC), a state-owned holding company will divest in four SOEs, which includes Licogi Corporation (40.71 per cent), Dien Bien Construction Investment and Consulting JSC (64.5 per cent), Tuyen Quang Minerals JSC (51 per cent), and Tuyen Quang Mechanical JSC (39.24 per cent).
2018 and onwards
Major divestments planned for 2018 include 24.86 percent in Vietnam National Petroleum Group (Petrolimex), 46.88 percent in Vietnam Pharmaceutical Corporation JSC (VinaPharm), 20.62 percent in Viglacera Corporation, 81.71 percent in Hanoi Plastics JSC, and 46.9 percent in Thong Nhat Electromechanical JSC.
Others include, 53.48 percent in Vinatex, 57.92 percent in Vietnam Steel Corporation, 64.65 percent in Vietnam Plastics Corporation, and 20 percent in Vietnam Medical Equipment Company.
In the aviation sector, Airports Corporation of Vietnam (ACV) will be divesting 30.4 per cent in 2 phases, 20 per cent in 2018, and 10.4 per cent in 2020, while Vietnam Airlines will divest a minimum of 35.16 per cent in 2019.
Future potential divestments
Most companies in the agriculture and forestry sector have not been earmarked for divestment as of now, but are under consideration. Other enterprises under consideration include ones under the Ministry of Defence, the Ministry of Public Security, the People’s Committee of Ho Chi Minh City, and SCIC, as well as Habeco, Sabeco, Giao Thong Hospital, Vietnam Satellite Digital Television Co., Ltd., and Vietnam Television Tower Company.
Transfer of ownership issues
Prior to divesting its stakes in SOEs, the Vietnamese state first transfers ownership of key enterprises from the ministerial or provincial peoples committee level of governance to the SCIC, which then handles the sale of shares to private investors. Over the years, the process of transferring ownership from various ministries and committees has been a slow process. In most cases, ministries hold on to the SOE’s, arguing that the enterprises are necessary for the local economy, while sometimes, ministries only prefer transferring failing enterprises. In few instances, the SCIC has hesitated to acquire ownerships of struggling enterprises. Since 2013, 173 enterprise out of 234 SOEs transferred to the SCIC have failed to complete the transfer due to delays.
To reduce the delays, the government has asked people’s committees in each city and 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, MoF, and MoIT for progress.
For the past few years, foreign investors have shown considerable interest in Vietnamese assets, driven by a growing economy and a surging middle-class. On top of this, the lifting of foreign ownership limits in previously restricted sectors and lack of big-ticket domestic investors have opened up opportunities for foreign investment. With the recent announcement of 406 divestments, investors will have further clarity in making investment decisions and will increase the investment efficiency.
In spite of this, foreign parties have been quick to point to the slow pace of divestments, lack of financial transparency concerning the listed SOEs, and unrealistic SOE valuations as significant dampers on the opportunity. Because of these concerns, strategic investors are increasingly wary of acquiring smaller equity stakes, as it does not offer management control and allows the state to be the controlling stakeholder.
Going forward, SCIC has to offer larger stakes during divestments of its larger and profitable enterprises to attract considerable investment and increase corporate governance transparency.
Changes going forward
Moving ahead, the government needs to speed up the divestment process, increase transparency, and provide higher share for investors to attract foreign investment. Future divestments will provide the country the much-needed capital to address its expanding budget deficit, which has been increasing due to falling oil prices, rising expenditures, and high public debt.
Despite all the challenges and issues, investors ought to look out for big-ticket divestments in sectors driven by the growing domestic demand and rising urban income, such as consumer goods, energy, airlines, and telecom.
Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.