State-Owned Enterprise Reform in Vietnam: Lessons from Asia 9789814377294

Citation preview

State-Owned Enterprise Reform in Vietnam

The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968. It is a regional research centre for scholars and other specialists concerned with modern Squtheast Asia, particularly the many-faceted problems of stability and security, economic development, and political and social change. The Institute's research programmes are the Regional Economic Studies Programme (RES), Regional Strategic and Political Studies Programme (RSPS), Regional Social and Cultural Studies Programme (RSCS), and the Indochina Programme (ICP). The Institute is governed by a twenty-two-member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. A ten-man Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic and administrative officer. The lndochina Unit (IU) of the Institute was formed in late 1991 to meet the increasing need for information and scholastic assessment on the fast-changing situation in Indochina in general and in Vietnam in particular. Research in the Unit is development-based, with a focus on contemporary issues of political economy. This is done by resident and visiting fellows of various nationalities. To understand the Vietnamese perspective better, the Unit also has a regular programme whereby scholars from Vietnam are invited to do research on issues of topical interest.

STATE-OWNED ENTERPmSE REFORM

IN VIETNAM

Lessons from Asia

Edited by

Ng Chee Yuen Nick J. Freeman Frank Hiep Huynh

I5ER5

INSTITUTE OF SOUTHEAST ASIAN STUDIES

Published by Institute of Southeast Asian Studies Heng :\iui Keng Terrace Pasir Panjang Singapore 119596 Internet e-mail: [email protected] vVWW: http://merlion.iseas.ac.sg/pub.html

All rights reserved. ~o part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or bv anv means, electronic, mechanical, photocopving, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies.

© 1996 Institute of Southeast Asian Studies, Singapore The resfumsibilityjmfarts and ojJinions expressed in thisjmblimtion ·resls exclusively with the autlum and their interpretations do not necessarily reflect the views or the poticv o( the Institute or its sujJjJortns.

Cataloguing in Publication Data Stated-owned enterprise reform in Vietnam: Lessons from Asia I edited by :'-:g Chee Yuen, Nick Freeman, Frank Hiep Huynh. Papers originally presented to an Indochina Roundtable on "State-Owned Enterprises (SOEs) Reforms and Restructuring in Vietnam: Lessons fi·om Japan and Southeast Asia", organiLed by the Institute of Southeast Asian Studies, Singapore, on 4-5 September 1995. l. Government business enterprises- Vietnam- Congresses. 2. Structural adjustment (Economic policy) -Vietnam - Congresses. 3. Government business enterprises - ASL"..N countries - Congresses. 4. Government business enterprises -Japan - Congresses. I. 1\g, Cbee Yuen. II. Freeman, ~ickJ. Ill. Huynh, Frank Cong Hiep. IV lndochina Roundtable (1995: Singapore). V. Other title: State-owned enterprises reforms and restructuring in Vietnam: Lessons from Japan and Southeast Asia. HC444 V66 1996 sls96-76713

J.

ISBI\ 981-3055-43-X ISSN 0129-1920

Typeset by Superskill Graphics Pte Ltd Printed in Singapore by Kin Keong Printing Co Pte Ltd

Contents Preface

vii

Section 1: Reforms of SOEs in Vietnam

l.

Problems and Prospects of State Enterprise Reform, 1996-2000 Phan Van Tiem and Nguyen Van Thanh

2.

Restructuring of State-Owned Enterprises towards Industrialization and Modernization in Vietnam 19 Nguyen Ngoc Tuan, Ngo Tri Long, and Ho Phuong

3.

Government Policies and State-Owned Enterprise Reform 1Vg;uyen Van Huy and Tran Van Nghia

38

4.

Legal Consequences of State-Owned Enterprise Reform Le Dang Doanh

63

3

Section 11: Asian Experience

5.

State-Owned Enterprise Reform: Lessons from Japan Kiyoshi Nakamura

6.

State-Owned Enterprise Reform in Indonesia: An Overview Faisal R. Harahap

7.

Role of Government and the Public-Private Sector Mix: The ASEAN Experience Mukul G. Asher

122

Corporatization as a Strategy of State-Owned Enterprise Reform fan Thynne

138

8.

77

102

Section Ill: Conclusion

9.

Concluding Remarks Ng Chee Yuen, Nick] freeman, and Frank Hiep Huynh

Index

153

165

Contributors Dr Nguyen Ngoc Tuan Vice Chairman Government Price Committee Hanoi Professor Dr Ngo Tri Long Vice Director Institute for Market and Price Hanoi Professor Ho Phuong Centre for Encyclopaedia Hanoi Mr Le Dang Doanh Director Central Institute of Economic Management Hanoi Dr Nguyen Van Huy Vice Chairman of Enterprise Reform Committee Office of the Government Hanoi Mr Tran Van Nghia Director Department of Enterprise Reform Office of the Government Hanoi HE Professor Dr Phan Van Tiem State Minister Chairman of Enterprise Reform Committee Office of the Government Hanoi Mr Nguyen Van Thanh Deputy Director Department of Enterprise Reform Office of the Government Hanoi

Dr lan Seaton Thynne Senior Lecturer and Director, Graduate Programme Department of Political Science and Public Policy University of Waikato New Zealand Professor Kiyoshi Nakamura School of Commerce Waseda University Tokyo Associate Professor Mukul G. Asher Department of Economics and Statistics National University of Singapore Singapore Mr Faisal R. Harahap Research Fellow Institute of Southeast Asian Studies Singapore Dr Ng Chee Yuen Visiting Senior Fellow Centre for Management of Technology National University of Singapore Singapore Dr Frank Hiep Huynh Senior Lecturer School of Economics LaTrobe University Melbourne Dr Nick J. Freeman Head, Indochina Research ING Baring International Bangkok

Preface

Vietnam became the newest member of the Association of Southeast Asian Nations (ASEAN) on 1 July 1995. Its membership marks the beginning of a new chapter in the rapidly developing Southeast Asian region. Barely three decades ago, in the 1960s, the region was classified as one of the most turbulent in the world, and ASEAN was established in 1967 in an attempt to help change that view. Today, Southeast Asia is regarded as one of the most economically dynamic regions in the world. Undoubtedly, the upheavals in the socialist bloc during the late 1980s, leading to the crumbling of many planned economies, have proven that the command system is not sustainable. These economies simply did not deliver the goods, material and immaterial, which had been anticipated. Consequently, there has been a recent trend of command economies changing towards market-oriented principles. The performance of the market economies of the ASEAN member countries and Japan, amongst others, has undoubtedly impressed Vietnam, to the extent that it is now trying to learn from their experiences. An added motive is the relatively handicapped position of Vietnam's integration with the other ASEAN economies; a substantial number of its state-owned enterprises (SOEs) are just too inefficient to compete in the international market-place. However, should Vietnam have refrained from joining ASEAN, and side-stepped the economic transformation that is now taking place, the prospect of an ever-widening gap with the ASEAN economies and the risk of being left in the backwaters of development would have been real. Vietnam has little alternative but to change its economic system to a more marketdriven one, and at the very centre of this change is the reform of its SOEs. But the successful transition from a command to a market-oriented economy is no easy task. The path is wrought with pitfalls and problems that can at times seem intractable. Whilst Vietnam has done much to reduce drastically the cumulative number of SOEs - undertaken by various means since 1986 the arguably harder task of transforming their operating structures has still to be done. In early 1994 the Institute of Southeast Asian Studies (ISEAS), an institution devoted to the generation, enhancement, and dissemination of research on the region and beyond, proposed a study on the reforms of SOEs in Vietnam, to help better facilitate the country's integration with the ASEAN economies. ISEAS holds the view that one of the critical bottle-necks in restructuring the Vietnamese economy - characterized by state allocation and production, through the pervasive public enterprise system - lies in subjecting SOEs to

viii

Preface

market forces, as well as a programme for their divestment (where appropriate), and a larger role for the private sector. Consequently, I SEAS submitted a project proposal on the study of reforms of SOEs in Vietnam, which was accepted for funding by the Sasakawa Peace Foundation (SPF). In this regard, we are thankful for the generosity of SPF and for its assistance in the co-ordination of the project. Undertaking this project was an educational experience in itself. How things are done in a transitional economy is clearly distinguishable from that of a market economy. For instance, this project required the approval of senior government; a clear indication that debate on key issues must be measured. In this regard, we are thankful to our counterpart, the Committee for the Reform of SOEs, which assisted not only in the selection of Vietnamese researchers - who gave us frank and honest views of the state of SOEs in Vietnam and the difficulties faced in their transformation- but also expedited this approval process. The study- which stems from a series of papers presented at a workshop gathering in September 1995 - is divided into three sections. The first section comprises four chapters by Vietnamese experts, which together give a domestic perspective of the SOE reform process undertaken in Vietnam. Given that the topic of each chapter overlaps those of the other chapters, it is unavoidable to find a degree of repetition on the issues covered and arguments presented. The repetitions observed should not, however, be regarded negatively, but rather viewed as an indication of the uniformity of these perspectives. The second section comprises another four chapters, dealing with the experiences of reforms in SOEs in Indonesia and Japan, and two specific issues: on the legal and administrative aspects of SOE reform; and the role of goYernment and private sector mix. These four chapters provide possible lessons for Vietnamese economic practitioners, in their attempt to reform SOEs in Vietnam. It was envisaged that this exercise would highlight some important issues, which could easily be neglected, or at the least clarifY some doubts practitioners may have, including the avoidance of pitfalls experienced by some countries and the adoption of more successful policies implemented in others. Finally, section three, which draws on the previous two sections - and on comments made during the workshop provides some concrete recommendations for consideration by Vietnam's economic reform planners.

SECTION I

REFORM OF SOEs

IN VIETNAM

1

Problems and Prospects of State Enterprise Reform, 1996-2000 Phan Van Tiem and Nguyen Van Thanh

I.

Introduction

State-owned enterprises (SOEs) have been operating in Vietnam for a long time. SOEs, together with non-corporate economic institutions- such as the State Bank of Vietnam, the national reserves, and the country's infrastructural system - constitute the state-managed economic system in Vietnam. They comprise all the capital, assets, and natural resources of the country, owned by the nation. The Government of the Socialist Republic of Vietnam is the sole representative of that ownership. The existing SOE system came into being with the founding of the Democratic Republic of Vietnam, in 1945. Since then, the country and its SOEs have passed through a series of wars and peace-time construction periods. Most notably, since 1975, the SOE system has consisted of enterprises from the north, enterprises taken over from the pre-1975 Saigon administration (in the south), and a number of nationalized private enterprises. Until now, SOEs have had a dominant share of the Vietnamese economy. According to the statistical review of 1 January 1990, Vietnam at that time had 12,297 SOEs in operation. However, as a result of economic reforms - including the crucial restructuring of SOEs- the number of SOEs was reduced to 6,264 by April 1994. The reform and restructuring of these SOEs towards market forces, albeit with continued state control, has not only reduced the total number of enterprises, but also considerably strengthened every aspect of the SOEs' performance. At the same time it should be noted that the contribution of the state enterprise sector to Vietnam's gross domestic product (GDP) has increased at a faster rate than the growth of the national economy's GDP growth rate in the five consecutive years between 1990 and 1994. As a result, the share of total GDP contributed by SOEs has increased considerably. Recently, SOEs have been the main driving force for high economic growth. Vietnam's SOEs have been developed primarily in the industrial, construction, trade, and service sectors of the economy. This reflects the historical character

4

Phan Van Tiem and Nguyen Van Thank

of Vietnam's economic structure, and is also the result of structural reforms enacted in recent years. Although it has experienced a period of reform and renovation, the SOE sector is not yet sufficiently developed to play its rightful role in Vietnam's mixed economy. The organizational structure and management mechanisms that currently exist in the SOEs remain inconsistent, and must be overcome. If the legal framework and macro-economic policies of the government are not completed and perfected, this inconsistency will become an obstacle in the development of the SOE sector. The development of both efficient SOEs and private enterprises is the driving force which would ensure the successful implementation of the sustainable economic growth strategy that Vietnam wishes to enact in the coming decades.

11.

The Seven Major Issues

The first major issue that must be tackled is the identification of the role of the SOE sector in the mixed economy, and the position of the state sector system amongst all enterprises, of all sectors, operating in Vietnam. This is the first important problem; the correct treatment of this will establish the basic direction for the process of reform and renovation of the existing SOEs, and the implementation of the industrialization and modernization process of the country in the future. The consistent direction of the Vietnamese Government is that reform and renovation of the SOE sector, at both the macro and micro levels, must contain a policy assuring the dominant role of the state sector, and that SOEs will play the leading role in Vietnam's mixed economy. However, this policy should not harm or prevent the development of enterprises outside the state sector, and their acquiring investment capital from private, collective, domestic, and foreign sources, and playing a full and active role in Vietnam's development. This leading role and position of the SOE sector reflects the past formation and development of the Vietnamese economy during the last fifty years. The practical experiences of economic development in many countries in East and Southeast Asia (including the ASEAN countries), especially over the last twenty or thirty years, depict the role of the state sector and SOEs in their economic development. During Vietnam's last ten years of renovation, the policy of a multi-sectored economy has paved the way for the strong development of mixed ownership enterprises, in which private capital (and especially foreign capital) has invested 70-75 per cent or more. But in fact, no private sector can substitute for the important role of SOEs, especially in the following areas: 1.

2.

supplying essential public utilities, especially in infrastructure and social services, national defence and security, for either no profit or low profit; the development of upland mountainous and remote areas, where the

Problems and Prospects of State Enterprise Reform, 1996-2000

3.

5

rate of return on capital is very low and large-scale investment is required, and investment recovery is highly risky, but yet these areas have an important role in the national development strategy; and in those key sectors which act as the locomotive pulling the whole economy towards sustainable high growth, yet the private sector has not played a major part.

It is forecast that the state, including the SOE sector, will, in the coming decades, play an essential role in providing Vietnam with economic prosperity and high, sustainable growth, which cannot be substituted by other (that is non-state) economic sectors. But there are four problems which have also been forecast. First, although the growth of GDP in nominal value produced by SOEs is increasing, this growth rate is lower than that being recorded in the private sector and in enterprises of mixed capital ownership. Thus, the SOEs' share of total GDP is decreasing, and should this trend continue, the mixed ownership enterprises will come to dominate. Secondly, the state is currently relying on the state sector and SOEs to influence the economy and direct Vietnam's socio-economic development. In the future, however, the direct influence of SOEs will decrease. Thirdly, in the coming one or two decades, the number of SOEs wholly owned by the state will also decrease. Fourthly, an increasing number of SOEs will be transformed into joint-stock companies or limited liability companies, in which the state has an equity stake of between zero and 51 per cent, depending on the specific SOE's importance. The second major issue is the need to overcome rapidly the problem of limited state capital for investment being spread across the entire state sector, which leads to piecemeal injections of small amounts of capital, and thereby low competitiveness. Thus, there is an urgent need to restructure Vietnam's SOEs, depending on their role and the positions of the specific SOEs in the future economic development of the country. This need was evident from the early years of doi rnoi (renovation), when the process of transition to a stateregulated market economy was agreed at the Sixth Congress of the Communist Party, held in December 1986. Delays in promulgating the master plan, strategies, and goals of state sector restructuring have been a major drawback in the country's renovation process. There is a lagged discrepancy between the role and status of Vietnam's SOEs. As a result, this delay has generated many of the difficulties and inconsistencies apparent in the renovation process, in both the near and long-term future. Measures aimed at overcoming these inconsistencies have not proved very effective. As a result, the scarce funds of the state budget are being distributed too widely across the industrial and trading sectors. The 1990 general statistical review recorded that there were more than 12,500 SOEs. A process of merging the SOEs, carried out for the five years between 1990 and 1994, reduced the number of SOEs by almost half, yet the amount of capital was still too small. More than half of the SOEs have a capitalization of under one billion dong

6

Phan Van Tiem and Nguyen t'czn Thanh

(approximately US$100,000). Indeed, in a number of economic and technological sectors, the average capitalization of the SOEs is less than 500 million dong (approximately US$50,000). Such a low capital base, even in relation to private enterprises operating in the same sectors and locations, is the biggest problem facing SOEs in the competitive market. Clearly, therefore, this poses major difficulties if the state sector is to play a leading role in the national economy. As the funds from the state budget remain scarce, the maintenance of a large number of SOEs, in all locations and all sectors, results in unacceptable levels of capital disbursement. To solve the problem of insufficient capital for the state sector, the first urgent measure is to develop promptly a capital market, on the basis of affirming the economic legality of the SOEs, granting them all possible opportunities to participate in the domestic and foreign capital markets, both through the credit system and through issuing shares, bonds, and other commercial papers. One important measure is to diversifY the ownership of the SOEs, transforming some into joint-stock enterprises or limited liability enterprises. But enacting this process has proved to be a very slow process. In the three years between 1992 and 1995, only five SOEs have been transformed through equitization (the sale of a limited number of shares). The delay in implementing the SOE equitization process - thereby diversifYing the ownership of some parts of the state sector- has been an important obstacle in trying to overcome the piecemeal, highly dispersed nature of funding for the state sector. Equitization can be undertaken in those sectors and branches of the state sector which are not important to the national economy, do not necessarily need state capital, or require only an element of share ownership to be held by the state. This is the basic master plan, on which the law to restructure the state enterprises was promulgated. The need for a legal framework was an urgent demand, which could not be delayed further. According to the 1992 Constitution, for the smooth restructuring of the state sector, it is necessary to have a law governing the transfer of part of the state's ownership of SOEs into mixed ownership, or completely withdrawing the state's ownership from SOEs where state participation is not necessary. The state capital that is withdrawn from these non-essential SOEs, and thereby freed up, can be redirected immediately towards state investment in those SOEs which are crucial to the economy, but which are currently performing inefficiently due to a lack of capital or an insufficient capital base. There is a need to liberalize the restrictive 'management control by line ministry' regime and other regulations which block the flow of state capital into SOEs, so as to give them more discretion in their own budgetary decisionmaking, as stated in the recently promulgated State Enterprise Law. The third major issue is the generally very low level of efficiency of capital performance throughout the state sector. This places a large restriction on the capacity for reinvestment in SOEs, and limits the ability to develop the state sector rapidly, in order that it maintains a dominant role in certain important sectors of the economy, particularly where there is increasing

Problems and Prospects of State Enterprise Reform, 1996-2000

7

competition from private enterprises (including joint ventures with foreign companies). The direct causes of this low level of efficiency are: 1. 2. 3.

as discussed above, the very widely dispersed and piecemeal manner in which state budget capital is allocated to SOEs; the obsolete technology- sometimes two to three generations behind other countries in the region- operating in many SOEs; and a management mechanism that does not create direct incentives for managers and employees working in SOEs.

Attention must be paid to two problems. First, SOEs have not been classified into the two different forms: those in business for profit, and those in business for public benefit. Secondly, whilst there are many SOEs conducting business for public benefit, the government does not have in place the appropriate supporting measures for them, and those SOEs operating for profit enjoy the same support (subsidies) as the public utilities SOEs do. The forms of existing state subsidy include: no payment for land rental (including land in central cities which is of high rental value); low interest credit support through the state-run commercial banks; and an assessment of the fixed capital at well below the market value. These subsidies help make SOEs appear profitable, and the tax payment by SOEs to state revenues is also affected. Taking into account this subsidy element, the net profit (after tax) for all SOEs in 1993-94 was on average 5 per cent of total business capital, which is one index that indicates the very low level of capital efficiency in the state sector. If the number of SOEs with 100 per cent state capital is reduced, in the agriculture, forestry, fishing, commerce and services, light industry, and food processing sectors, then considerable capital will be freed up for the state to invest in the formation of modern SOEs, with sufficient investment to compete adequately in the market. The result of this contraction will be an improvement in the quality and dominant position of the remaining SOEs in Vietnam. The current low efficiency of SOEs is a consequence of the delay in restructuring the state sector, yet restructuring SOEs is crucial to the improvement of their efficiency. This restructuring is also the way to promote SOEs to play the leading role in the state sector, which has been determined by the Vietnamese Government as an essential part of its fundamental economic policies. The fourth major issue is the need to determine exactly the main elements of restructuring SOEs, and to define the planning and policies that will point the state sector in the right direction for the ultimate goal of state enterprise reform. The main elements of the restructuring of SOEs can be profiled briefly, as follows: I.

The concentration of all ex1stmg resources (particularly the capital owned by the state) in the state sector, development investment from the state budget, and credit (both inside and outside the country) for a number of SOEs in key sectors and branches of the economy, in order to assure essential infrastructural development and public services.

8

2.

3. 4.

5.

6.

7.

8.

Phan Van Tiem and Nguyen Van Thank

That government resources are invested with the priority given to technological change and modernization of those SOEs wholly owned by the state. On the basis of the master plan, withdraw state equity from those existing SOEs which do not require state support and investment. Through management reform inside SOEs, incentives should be introduced to bring economic interest to each manager and worker within the state enterprise sector. In particular, members of the board of directors of SOEs should be granted responsibility and full powers to manage the SOEs, through a management contract with representatives of the state. A division between the two forms of SOE must be made; between business-for-profit SOEs and business for public benefit SOEs, so that an appropriate management regime exists for each form of state enterprise. Also, some of the existing SOEs should be transferred to the businessfor-profit category. Renovating macro-economic policy by ensuring that the government institutions performing the role of administrative control (such as the ministries) over enterprises do not intervene directly in the business activities of SOEs, but rather influence their activities broadly through policies and laws. State administrations which directly control SOEs should be abolished. An improvement in the two existing laws pertaining to SOEs and those enterprises not wholly owned by the state, forming a Corporate Law that is applicable to all enterprises in all economic sectors, under the rule of law in Vietnam. The overall goal is to make SOEs perform as efficiently as those in the non-state sector. SOEs that are wholly owned by the state will be restricted to those performing a key role in the national economy (and improving the economic structure of the country), and those providing public utilities. The main feature of these two types of SOEs is that they operate in those sectors of the economy where business-for-profit companies are reluctant to enter. SOEs are also required in areas concerning the national interest (such as defence and security), where investment must come from the state budget.

The fifth major issue is addressing the concept of owner and manager of SOEs, which are currently not very well defined by the authorities, at all levels. Thus, there is no clear distinction between the investor function of the state and state economic management. Since there is a large number of SOEs, which account for a large part of the economy, government institutions and local authorities tend to intervene too much in the management of SOEs. For SOEs themselves, they have been granted a confusing status: the right to use capital to invest, yet insufficient legal power to do so. Thus, on the one hand SOEs have power beyond the regulated scope of the legal framework and government supervision, yet on the other hand they are subject to too

Problems and Prospects of State Enterprise Reform, 1996-2000

9

rigid restrictions, and lack the power and responsibility necessary for business decision-making autonomy and for creating new value. As a result, a common perception at present is that if an SOE is making a profit, it can benefit from that situation, but if the SOE is making a loss, the state - as investor- has to bear the burden. Some SOEs are looking for, and passively relying on, state subsidies. Put bluntly, the responsibility for business efficiency within SOEs is not institutionalized. Three major problems are encountered. First, there is a serious lack of capital for SOEs. Under the current reform programme SOEs need capital to intensifY and expand investment in order to raise production volume, strive for higher quality, and improve their competitiveness. But with a limited state budget, it is impossible for the state to provide SOEs with sufficient capital for this investment. Under the current regulations the state budget should be providing SOEs with 30 per cent of their working capital for implementation of the business goals assigned to them. Yet in recent years, most SOEs have been given only 5-10 per cent of the required capital. Moreover, the interest on credit and bonds is still high, the capital market has yet to be established, and there is no adequate legal framework for SOEs to harness the idle funds in the country. Secondly, the existing policies do not give incentives to the owners of funds to invest in business. At present, the employees of an SOE, though not investing capital in the enterprise, benefit from various interests, both economically and politically. They can participate in the management of the SOE, receive part of the earnings of the enterprise through a welfare fund or bonus fund, and even receive a significant income derived by means not determined by the state, none of which result from hard work. Yet if the employees contribute capital to the enterprise, as shareholders all these existing benefits may be lost. Instead, they will receive a dividend, which depends on the business results of the enterprise, and possibly take the risk of seeing the enterprise record a loss, which could cause their shareholding to reduce in value and thereby deplete their funds. Thirdly, the current management ability of directors and senior officers of SOEs does not meet the new demands of reform. The directors of SOEs are largely untrained in business management, particularly under the new market mechanism, and so they perform their management functions solely through experience, and learning on the job. Under these conditions there is an urgent need to transform quickly those SOEs which operate for profit into enterprises that are subject to market forces; to commercialize rapidly the business activities of SOEs; to bring state subsidies to an end; to affirm the legal entity of an enterprise; and to reorganize the state machinery. In order to implement this, it is necessary to apply two basic measures. First, the legal entity of the enterprise must be confirmed. It is necessary to reorganize the government agencies pertaining to SOEs, separating the function of economic administration and that of ownership over SOEs, and reducing state intervention in the day-to-day management of SOEs. In addition to the establishment of the Bureau of Capital and Asset

10

Phan Van Tiem and Nguyen Hzn Thanh

Management (under the Ministry of Finance) to fulfil the function of state management over SOEs- thereby transferring this responsibility from other state institutions that will now focus on the policy management of economic and technical sectors- there is also a need to establish independent business entities, which are self-regulating and self-financing, that will act as owners/ investors of government capital in SOEs (holding companies). These institutions will be responsible to the state, and law, for the efficient use of capital given to them for investments in SOEs' businesses. Adopting this method of conducting business, the relationship between the state and the SOE is more clearly determined, defining the dividing line between the state ownership function and the business function of the SOE. The regular intervention of state institutions in the operations of SOEs will be minimized also, with the existing owning and controlling agencies being abolished. Secondly, there is a need to transform the business-for-profit SOEs into companies subject to the Corporate Law, through a process of corporatization, equitization, and ownership diversification. This will create the conditions for the better mobilization of both domestic idle financial resources within Vietnam and external sources of development investment. The change in the management structure to a form more appropriate to the market mechanism will raise competitiveness, by more efficiently utilizing the capital and assets of the enterprises. Four desirable ends will be created from this: l. 2. 3.

4.

clarifY the legal status of the individual SOEs; help speed up the modernization of SOEs; foster new incentives within the enterprises, and thereby improve their productivity, quality, and efficiency, as a result of the structural change from a single shareholder (the state) to many shareholders; and better utilize the enterprises' assets and capital.

To achieve the aims discussed above, four processes will be employed, as follows.

1.

Corporatization of SOEs

This form of SOE restructuring has been applied in several countries, including China, Sri Lanka, and South Korea, as a means by which to change the management structure in those SOEs where the state needs to maintain its 100 per cent ownership. Under corporatization the state's capital in such SOEs is divided into different parts, with the government authorizing some state institutions or asset management enterprises to hold part of this capital. These institutions are known as owner-investor institutions or shareholding institutions of the state, and are quite different from the owning-controlling institutions- such as the line ministries- discussed earlier. These institutions are responsible for managing this element of the state's capital, and exercise the right of the owner-investor to participate in the enterprise's management,

Problems and Prospects of State Enterprise Reform, 1996-2000

11

according to the Corporate Law, by appointing their representatives to the board of directors, attending shareholders meetings, and other means permitted by the law. Corporatization does not change the fundamental ownership structure of the SOE, as the state still holds 100 per cent of the enterprise's capital; the enterprise remains a public enterprise. Through the government institutions, the state retains ownership of the SOE's capital; decides the SOE's broad direction and development strategy as well as its long-, medium-, and short-term plans; participates in managerial and organizational issues; and has a say in the disbursement of the SOE's profits. With this corporatization form, the basic management and operational structure of the SOE has changed, creating better supervision and control mechanisms. This should result in more efficient utilization of state capital and the control of any corrupt behaviour. Corporatization is creating an appropriate mechanism to improve the responsibility of the legal entities and persons authorized with managing the state's capital invested in SOEs, and should overcome the currently low level of efficiency encountered in SOEs' utilization of scarce state capital. However, there are some SOEs for which corporatization is not a viable option, such as those concerning national defence, security, and other sensitive fields.

2.

Issue of New Shares

For those SOEs in business-for-profit commercial sectors, public utilities, various financial sectors, ventures likely to attain high returns, and a few other fields - yet where they are not deemed essential for the national economy - the;e is the option of issuing new shares, in order that a public share company is established. Alternatively, such SOEs could admit new participants, so as to form a public limited liability company. Both processes would result in the inflow of new capital for investment and modernization of these enterprises. The issue of new shares should be restricted to a maximum of 40 per cent of an enterprise's total capitalization, with the state retaining a 60 per cent share of its total equity. With this 40-60 per cent equity division, the state retains control, and can decide important issues, such as the enterprise's direction of development, the appointment of managers, planning, and the distribution of income.

3.

Issue of Shares within the Existing Capital of SOEs

This process of issuing shares within the existing equity structure has been applied by a number of countries, and Vietnam has also adopted this way of transforming SOEs into joint-stock companies. So far, five SOEs have enacted this process, commonly referred to as 'equitization'. Those SOEs wishing to conduct this form of share issue must fall within the business-for-profit category

12

Phan Van Tiem and Nguyen Van Thanh

discussed above, and be making a profit at the time of issuing shares, or intend to do so after changes are made (such as altering the management structure, investing in new technology, altering the business profile, etc.). This form of state enterprise reform is particularly appropriate for small and medium-sized SOEs in Vietnam. Over the last three years, only five SOEs in Vietnam have attempted this process of issuing shares. There are a number of reasons why the number is so low: l. 2. 3. 4. 5. 6.

a lack of experience in enacting this process; the complicated procedures entailed; no institution in Vietnam exists with sufficient knowledge or power to undertake this process; the economic, legal, and social environments are not conducive to the implementation of equitization; many SOEs are not in the right condition to enact this process; and the interests of the managers and employees can conflict with the process of equitization.

These hurdles must be addressed in order to push forward with the equitization process. Past experience also shows that certain financial issues must also be clarified before equitization of an SOE is attempted. The valuation of an SOE - so that shares can be sold at the right price and the state can regain some of its capital- and settlement of any outstanding debt that the SOE may have, are problematic issues that must also be addressed. Experience has shown that for various reasons, it is not advisable to undervalue the SOE's market value, issuing the shares at a discount. Yet, incentives are necessary in the initial -;tages of equitization, which can be introduced through other policies, such as tax exemptions for the enterprise during an initial period and interest-free loans for employees to acquire shares.

4.

Ownership Diversification in SOEs

Ownership diversification can be attempted by vanous means. Three possibilities for Vietnam are as follows: l.

2. 3.

Selling the SOE in the form of a limited liability company, to one or a number of legal entities or persons, including the managers and employees of the SOE. In such a case, the employees may appoint a representative to participate in the management of the company. Issuing shares, as discussed above. Contract assignment or leasing of the SOE to the management and/ or employees of the enterprise or an external group of people (either Vietnamese or foreign), subject to certain limitations defined by the state.

Problems and Prospects of State Enterprise Reform, 1996-2000

13

The third possibility - contract assignment or leasing - entails two different forms. Under contract assignment the assignee may utilize the capital and assets of the SOE to conduct the same type of business activity as before, in order to implement a volume of work agreed in the contract. Under the leasing agreement the lease payment is agreed for a fixed period, and the lessee may utilize the capital and assets of the enterprise to enact whatever business is preferred, within the confines of the law. The assignee or lessee, however, is bound by various finance and other issues pertaining to the state's ultimate ownership of the enterprise. During the period of the contract, the lessee or assignee may make additional capital investment (for new machinery, for example) in the enterprise, which can be reimbursed on expiry of the contract or be transferred into shares, so that the assignee or lessee becomes a shareholder in the enterprise. This form of assignment or leasing contract may possibly change the production profile of the enterprise. Driven by the desire to make a profit, the assignee or lessee will try to ensure that the enterprise works efficiently and develops. This new force of production should strengthen the SOE, put it on a better financial basis for the state, and raise employment opportunities. For loss-making SOEs, reorganization is required. As and when they recover to profitable status, they too can be equitized, as described above. For those SOEs that are still unable to achieve profitable status after reorganization, they must be dissolved or declared insolvent under the Corporate Bankruptcy Law. The sixth major issue is the urgent need to train and retrain the managers of SOEs and other qualified employees. This will help in reforming the implementation of salaries, productivity incentives, insurance, and social benefits for the managers, executives, and employees in these enterprises. Vietnam's human resources are abundant and have even larger potential, but have not been appropriately exploited. Due to the recent transformation of the economic system, a number of problems have arisen, and tackling these problems- in a manner that is compatible with Vietnam's development plan - will help to harness this potential better. The proper training and management of human resources is an important factor in the restructuring of SOEs, prompting these enterprises to operate more efficiently, enhancing their chosen role in the economy, and helping to ensure sustainable and high growth in the coming years. During the ten years of renovation, a number of managers and directors of SOEs have been equipped with market economy expertise, understanding the art and science of business management. Most have learnt through practical experience in the competitive market-place, bringing real efficiency to enterprises by adapting them to the new mechanisms and economic forces. But many managers are incapable of managing SOEs, and this is one of the largest problems facing SOE reform. Some SOEs record chronic losses due to bad management, which lead them to the verge of bankruptcy, forcing their dissolution. Therefore, it is time to put in place a

14

Phan Van Tiem and Nguyen Van Thanh

training and retrammg programme for managers. There must also be recruitment rules, professional licences, and rules of practical and civil responsibility, as well as incentive regulations that reward those enterprise managers that show determination in bringing much-needed efficiency to SOEs. The important point is that the state must assign the standards and rules for the recruitment, appointment, and displacement of managers, and that the standard of benefits for managers should correspond to the extent of business efficiency they bring to the enterprises. These standards and rules will assist enterprise management teams to strive for improved self· development. The increasing competition between SOEs, domestically owned private companies, and foreign-owned investment projects ensures that qualified workers are familiar with technological progress and new training skills. The beginning of a labour market has brought with it numerous, new training courses for skilled workers, but the traditional large-scale training colleges have found it hard to meet the training demands of workers. Until now there has been an understandable delay in training and fostering managers, and there are no professional training schools or associations for directors. There are no funds to support workers wishing to change their profession through retraining. The seventh, and final, major issue is the continuation of the process of macro-economic renovation, creating a better economic and legal environment for the efficient performance of SOEs. Particularly since 1989, government decision-making and macro-economic policy have been broadly successful, bringing initially satisfactory results in restructuring the state enterprise sector. This economic stabilization has been brought about, at least in part, by measures to control the hyperinflation of 1986-89, and the subsequent relatively low inflation levels recorded in 1989-94 (for example, 17.3 per cent in 1992, 5.2 per cent in 1993, and 14.4 per cent in 1994). Price reform, which has transformed a price system determined by the state to a market price system (with limited state corrections), has been an important precondition in restructuring SOEs, and forced them to participate in a competitive market. Tax reforms of 1990-91 uniformly levied tax rates for all legal forms of business enterprise, belonging to all economic sectors, on the grounds of equal responsibility towards the national budget. Banking and credit reforms, including the in traduction of a two-tier banking system, effectively restrained widespread credit subsidies for SOEs. The state-controlled exchange rate regime was also abolished, changing to a market exchange rate, which led to the relative stabilization of the Vietnamese currency against hard currencies, most notably the U.S. dollar. For the continuation of SOE restructuring, there is a need for further reforms in price, taxation, and banking. Restricted fiscal, financial, and credit policies are necessary for macro-economic stability and combating high inflation (that is keeping inflation to a single digit). A second stage of tax reform is required, not only aimed at better refining the tax system as an

Problems and Prospects of State Enterprise Reform, 1996-2000

15

instrument for budget revenues, but also at creating uniform standards for all enterprises. The simplification of the current tax system is required, such as the application of VAT (value added tax) to avoid double taxation on production and distribution. In addition there is a need to unifY the corporate tax levied on the income of domestic enterprises and foreign investment companies; if there is any difference, it should be applied to retained earnings only, taxed at a lower rate. A whole range of policies directed towards SOEs must be corrected further, on the basis of preserving and expanding the investment capital for SOEs, by providing them with the authority to self-finance their activities, and that state control of these SOEs becomes similar to that in non-state enterprises. On the basis of SOE classification, business-for-profit SOEs should be commercialized further, aided by anti-monopoly regulations and measures to promote competition. To create the right economic environment for restructuring these SOEs, it is necessary to develop a capital market and, in the near future, establish a stock exchange in one or two centres of the country. Looking ahead, SOEs must take into account broad macro-economic policies and initiatives, which can create new directions for these enterprises. The Vietnamese economy can not only become more integrated with the surrounding region, in terms of trade and investment, but enterprises can also participate in this regional co-operation by establishing partnerships with companies in other countries, particularly within ASEAN. Vietnam aims to become a member of the World Trade Organization. This requires the design of policies that permit the right conditions for all domestic enterprises, including SOEs, to participate in the regional and international market, sharing a level playing field, where the rules of the game are readily understood. Any privileges- such as in the form of provisions, subsidies, or protectionwill not benefit the development of Vietnam's domestic enterprises, but rather such privileges will be an obstacle in the restructuring and equitization of the country's SOEs.

Ill.

1.

Opportunities, Problems, and Prospects for State Enterprise Reform and Restructuring in the Near Future

Opportunities

The strategy of developing a multi-sectoral economy (that is both state and private business) is formally recognized as a leading policy in the last ten years of reform, and which has stimulated Vietnam's economy, as evidenced by an average GDP growth rate of8.3 per cent. This strategy will be reinforced, and implemented more consistently, in the next ten years of reform. This is a major favourable condition in the restructuring of SOEs, in addition to being a key precondition for overall economic reform.

16

Phan Van Tiem and Nguyen Van Thanh

The country's broad legal framework for business has not been sufficiently integrated. However, over recent years Vietnam has introduced various important pieces of legislation, including: a Labour Code, a Company Law, a State Enterprise Law, the Foreign Investment Law, and a Bankruptcy Law. As a result of the Foreign Investment Law, for example, hundreds of SOEs have formed joint-venture operations with foreign parties. Over the last ten years, and particularly in the most recent four- or five-year period, the country's SOEs have been rapidly commercialized, with strict limits now placed on state subsidies. A further major step in restructuring SOEs will come with the impending reform of the land rent mechanism. Over the past ten years, the profile of the state sector has been diversified, through a variety of measures, including: the merging of SOEs; the dissolution of some SOEs; the introduction of assignment contracts; financial mobilization measures; establishing joint-venture companies; and so on. In a sense this tenyear process has been a useful rehearsal for the restructuring of SOEs in the future. Although the renovation and restructuring of the country's SOEs must come from practical experience within Vietnam, the experiences of other countries that have tackled this issue is very useful for Vietnam.

2.

Major Problems

The legal framework governing the direction of SOE restructuring, issues of state ownership and transferring ownership of SOEs, and turning SOEs into joint-stock companies or other forms of mixed ownership, is not adequate at present, and stems only from the pilot equitizations attempted to date. Also, Vietnam's capital market remains underdeveloped, and there has been no active preparation for the experimental operation of a stock exchange, in a process that has been delayed for too long. The establishment of a stock market, however, will bring incentives in the further restructuring ofVietnam's SOEs. In addition a master plan for the development of the state sector in the coming five, ten, and fifteen years- spanning all branches and sectors of the economy and all locations - has not been promulgated. Also, the limited ability to mobilize financial resources for the national budget means that it is currently difficult to meet the demand for expenditure, compounded by twodigit inflation, which causes problems in finding the necessary finance for restructuring SOEs. Finally, the psychology and training of both managers and employees in the state sector are not conducive to their voluntary participation in the restructuring of SOEs, and so they do not always respond positively to the measures implemented under SOE reform. When considering the above factors - both opportunities and problems - it is worth keeping in mind the following two issues. First, the process of economic transition in Vietnam, towards a market mechanism, must be

Problems and Prospects of State Enterprise Reform, 1996-2000

17

implemented and regulated by the state, in order to ensure that social problems do not arise as a consequence of the transition and to maintain stable growth. Secondly, the economic transition to a market mechanism cannot be undertaken by 'shock therapy' methods, taking giant steps in a short period. Such a policy would destroy the macro-economic stability which is a prerequisite for the development of the country.

3.

General Assessment of the Restructuring of SOEs

It has been affirmed that the economic renovation and transition towards a market mechanism undertaken by Vietnam over the last ten years will be applied even more vigorously in the future, in order to sustain and strengthen the progress made to date. Thus, the restructuring of Vietnam's SOEs- the most important part of the economic renovation process - will proceed widely over the next five years. The important role played by SOEs in the various sectors of the economy cannot be substituted by other forms of enterprise. Moreover, the efficient performance of these SOEs is an important factor in the growth of industry and the economic performance of the entire country. The success of the last ten years in reforming the state economic sector has been a decade of preparation for the next large step in restructuring SOEs further, in the coming five to ten years. Those SOEs that remain wholly owned by the state and those that continue to be partly owned by the state will continue to have a dominant position in the economy and will play a decisive part in driving economic growth higher. In order to meet the goal of becoming an industrialized country within twenty to twenty-five years, the existing reform and restructuring of Vietnam's SOEs will have to be accomplished in the coming five to seven years. A large part of the state budget and overseas development assistance is being invested in Vietnam's infrastructural projects, where overwhelming government m~ority control (or total control) is necessary, such as the telecommunications sector. Other sectors- such as rail, road, port, airport, and airline - have tended to change from simply being public utilities to more business-oriented operations. Under restructuring, some of these enterprises will be transferred to mixed ownership, with the state maintaining a majority stake. Through the process of corporatization, these infrastructurerelated enterprises should be able to enjoy higher internal rates of return and higher capital investment, through increased efficiency, and thereby become more attractive to foreign and private investors. Even though it is an unofficial forecast, the aim of restructuring Vietnam's SOEs within the coming five to seven years is a wholly feasible one. This target stems from decisions made concerning the country's master plan and legal documents approved by the National Assembly. The internal link between these elements is that all the stages of the development process must support each other. These include the commercialization of SOEs and the displacement

18

Phan Van Tiem and Nguyen Van Thanh

o1 state sunsiuies to tbe state sector. ;>.t tbis sta'i;e corpm:at\:z.at\cm. \s at an

experimental stage. These moves should help create favourable conditions for the equitization of an increasing number of SOEs, transforming them into mixed ownership, in which the state retains a dominant stake. For those SOEs that do not play a decisive role in the national economy and are too numerous, widely dispersed, and uncompetitive, they may be sold or leased, so as to raise new capital and foster new management capabilities. This will help the SOEs survive in the new market-place and avoid bankruptcy. The above discussion of restructuring SOEs is only part of the greater goal of economic reform, but it is the key factor in the larger renovation plan of the country, in Vietnam's bid to register sustainable growth in the coming twenty to twenty-five years and become an industrialized country.

2

Restructuring of State-Owned Enterprises towards Industrialization and Modernization in Vietnam Nguyen Ngoc Tuan, Ngo Tri Long, and Ho Phuong

I.

Introduction

Both in the immediate future and in the long term, Vietnam's state-owned enterprises (SOEs) will still play an extremely important role- and hold key positions - in various sectors of the national economy. However, the recent shift of the centrally planned economic system, towards a market-oriented economy under state control, has exerted a marked impact on the need to restructure the state sector, and there is an urgent need to improve the efficiency of these SOEs. Therefore, the main topic of this chapter is a study of the present status of SOE restructuring, as part of Vietnam's aim of advancing towards industrialization and modernization, and will address two key issues. First, an analysis of the present state of Vietnam's SOEs: by size, sectoral profile, and management and ownership structures. Based on this analysis, an evaluation of SOE efficiency can be made, from which we can have a sound basis to understand the process of restructuring Vietnam's SOEs. Secondly, the chapter will advance views on the orientations needed to restructure the SOEs, to achieve the aim of industrializing and modernizing Vietnam.

11.

Current State of SOEs in Vietnam

The current system of SOEs in Vietnam was formulated both through a process of industrialization and through the establishment of new SOEs, of which the latter was more important. A series of SOEs, spanning various sectors - run either by national ministries and general departments, or by provincial authorities - was set up in North Vietnam between 1960 and

20

Nguyen Ngoc Tuan, Ngo Tri Long, and Ho Phuong

1970, and this policy was initiated across the entire country after 1975. Since the late 1980s, however, a process of reforming and reducing the cumulative number of SOEs has been under way. By the end of 1989, there were 12,297 SOEs in operation in Vietnam, with a total capital value of 34,216 billion dong. Over the last three years, under the market mechanism, the country's SOEs have been revamped and re-registered under government decree No. 388/CP. And by June 1993, the total number of SOEs had dropped to 7,060, with a total capital value of 44,965 billion dong. Between June 1993 and April 1994, SOEs continued to be reformed, and the cumulative number of SOEs reduced further, to 6,264, with a total capital of 53,150 billion dong (approximately US$5 billion). Of these 6,264 SOEs, 1,956 were run by the central government and 4,308 by the local authorities. Generally speaking, those SOEs which were closed down or merged were very small in size- that is typically having less than 100 employees and a capital base of less than 500 million dong (less than US$50,000) -and most of them were loss-making and run by district authorities. The state sector played a crucial role in the Democratic Republic of Vietnam's national economy between 1956 and 1975, and a similarly important role across the Socialist Republic ofVietnam from 1976 to 1985. And although since 1986, and particularly after 1989, other economic sectors have developed, SOEs still occupy a very important position in the national economy, particularly in the fields of industry, transport, and communications. Although Vietnam's SOEs have gone through some reorganization, most are still of medium and small scale. As measured by size, 77 per cent of the existing SOEs are capitalized at less than 3 billion dong (less than US$300,000) each, and 50 per cent of SOEs have assets of less than one billion dong (less than US$100.000). Yet, 89 per cent of the existing SOEs are controlling all, or almost all, of the most important sectors of the economy. The dominance of SOEs is most marked in industry, and least evident in the agricultural sector. In commerce and the service sectors the role of the state sector is diminishing. Although Vietnam's SOEs employ only 6-7 per cent of the country's total labour force, they have attracted most of the skilled technicians, scientists, and trained managers. In general, the state sector has been rehabilitated and has maintained an annual growth rate higher than the average growth rate recorded by the national economy, in terms of value and quantity of important products (see Table 2.1). In addition, SOEs continue to be an important source of revenue for the state budget. In the four years between 1991 and 1994 (inclusive), transfers made by SOEs to the state budget increased rapidly, at an average rate of 49.3 per cent annually. Contributions by industry-based SOEs rose 69.2 per cent on average, whilst commerce- and services-related SOEs recorded 38.6 per cent annual growth over that period. Vietnam's SOEs are also major providers and suppliers of essential products, public goods, and services. Table 2.2 provides some statistics on the productivity of SOEs during the period 1988 to 1994. Over recent years, the government has been determined to close down

21

Restructuring of SOEs towards Industrialization and Modernization in Vietnam TABLE 2.1 SOEs and the Vietnamese National Economy (In percentages)

Annual growth rate: National economy SOEs Other sectors SOEs as ratio of total GDP SOE transfers as ratio of total budget revenues

1991

1992

1993

1994

6.0 8.6 4.7

8.6 12.4 6.8

8.1 11.6 6.2

8.8 12.8 6.7

33.1

39.6

42.9

43.6

43.6

60.5

61.0

62.3

SOURCE: Government statistics.

those SOEs which have been recording a loss for an extended period of time, and assist those SOEs which have not been excessively relying upon state subsidies and those SOEs eligible to establish business operations with foreign partners to achieve improved performance. As a result, the number of lossmaking SOEs dropped from over 50 per cent in 1989 to ll per cent in 1992 and 9 per ct>nt in 1994. Nearly 2,000 SOEs that were deemed not efficient, or

TABLE 2.2 Annual Production of Selected Products by SOEs in Vietnam

Product

Unit

1988

1990

1991

1992

1993

Growth 1994 1990-93 (%)

Electricity Clean coal Crude oil Rolled steel Tin cube Metal-cutting machine Small tractor Electric motor Fertilizer Cement P300 Carton Cigarette Beer

Billion KWh 6,213 Million tons 6.8 Million tons 1,000 tons 69.5 Tons 526

8,790 4.6 2.7 101 1,602

9,307 9,818 10,851 12,476 5.0 5.0 5.9 6 4 5.5 6.3 7 243 149 196 279 1,686 1,800 3,000

134 120 175 187.2 177.9

Pieces 966 Pieces 2,004 1,324 Pieces 1,000 tons 118 1,000 tons 1,665 1,000 tons 88 Million bags 981 Million litres 84

894 1,700 1,059 378 2,534 71 1,249 99.3

1,235 844 1,517 1,958 2,279 770 2,316 2,808 9,950 13,923 23,888 28,789 714 450 530 845 3,127 3,926 4,879 5,370 128 109 118 153 1,298 1,541 1,713 1,942 131 169 230 282

158.5 123.2 289.3 187.7 171.7 140.3 149.6 215.2

SOURCE: Government statistics.

22

Nguyen Ngoc Tuan, Ngo Tri Long, and Ho Phuong

no longer required by the market, have been closed down. However, most of these were very small SOEs, accounting for just 3.6 per cent of the cumulative capitalization of the country's SOEs, 5 per cent of total state sector revenue, and a mere 2 per cent of SOE transfers to the state budget. Not surprisingly, the closing down of these 2,000 SOEs did not have an adverse effect on the national economy. On the contrary, the closing down of these SOEs alleviated the burden of subsidies provided by the state. From this recent experience, it has become clear that Vietnam's SOEs are still a very important sector for the national economy, in terms of goods and services, and the state sector also provides a major (and stable) source of revenue for the state budget. Not only does the state sector play an important role in the national economy, but the SOEs have contributed in overcoming the critical period of socio-economic crises faced by Vietnam in recent years.

1.

A Profile of Vietnam's SOEs

We can examine two aspects of the structure of the state sector in Vietnam, since the enactment of Decision 388/HDBT until the present: by size of SOEs and by the ownership structure of SOEs since the promulgation of Decision 388. With regard to the size of SOEs, this can be determined in various ways, depending on the research objectives. For example, the classification of Vietnam's SOEs by size can be used in the determination of salary scales for state sector employees (as stipulated by the Ministry of Labour and Ministry of Finance's Inter-Sectoral Directive No. 21/LD-TT, of 17 June 1993). Using this approach, SOEs can also be classified according to the management profile, including such factors as: operating capital; technology standards; scope of operations; labour; and operating efficiency. However, in evaluating and analysing SOEs by size, as part of the bid to restructure the state sector, the following criteria should be employed: capital sources, labour, and technology. As has been noted above, Vietnam's SOEs have an important role to play in the country's national economy, and they make a decisive contribution in various economic tasks. Nonetheless, the size profile of the SOEs manifests many drawbacks, largely due to historical factors, which result in a negative impact for socio-economic efficiency. For historical reasons, most of Vietnam's SOEs are small in size and have little capital, and as a result, they are at a distinct disadvantage in a competitive market economy. If measured by the number of employees, most SOEs are small: 46.1 per cent of SOEs have less than 100 employees, 43.2 per cent have between 100 and 500 employees, and just 0. 7 per cent of SOEs have more than 3,000 employees. Therefore, just under 90 per cent of Vietnam's SOEs have less than 500 employees. Yet, Vietnam's SOEs provide most of the goods and services that require large-scale investment, employ about 20 per cent of the total work-force, and absorb almost all of the country's trained labour. Industrial SOEs alone employ 700,000 employees, accounting for 23 per cent

Restructuring of SOEs towards Industrialization and Modernization in Vietnam

23

of the work-force in the state sector and 2.4 per cent of the country's total labour force. Evidence shows that investment in industrial SOEs will not create much employment. Conversely, other economic sectors (that is the non-state sectors) can provide more jobs, with less investment. A similar situation has been discovered in the construction, transport, and commerce sectors. A classification of Vietnam's SOEs by their self-financed capital provides the following profile of the state sector: 1.

2. 3. 4.

49.2 per cent of SOEs have less than one billion dong (less than US$100,000) in capital; of these SOEs approximately a third are managed by the central government and two-thirds are run by local authorities. 26.6 per cent of SOEs have between one and three billion dong (approximately between US$100,000 and US$300,000) in capital. 16.3 per cent of SOEs have between three and ten billion dong (approximately between US$300,000 and US$1 million) in capital. 7.9 per cent of SOEs have capital in excess of ten billion dong (over US$1 million) in capital.

Most small-scale SOEs are found in the forestry and agricultural sectors. However, in industry and commerce, too, small and very small SOEs account for around 50 per cent of the total number. On average, the capital invested per worker in Vietnam's SOEs is 24.5 million dong (approximately US$2,400). The figure is 8.2 million dong (approximately US$800) for the construction industry, 8.1 million dong (approximately US$800) for forestry, and 13.9 million dong (approximately US$1 ,350) in the agricultural sector. Moreover, capital investment for different industries within the state sector is not rationally allocated. Certain industries require greater investment capital for technology upgrading, yet actual investment in these sectors is generally low; 30 million dong (approximately US$3,000) per worker, on average. The state sector's commercial enterprises take a major proportion of state capital, but their operating efficiency is very low. Little capital has been provided by the state for the agriculture, forestry, and construction SOEs, yet these account for 2,228 individual enterprises. When the economy began to shift towards the market mechanism, inflation aggravated the shortage of capital flowing to SOEs, a shortage of which had already become serious due to cuts in government subsidies. In a bid to alleviate this shortage of capital investment, various incentive measures and policies have been introduced, to encourage SOEs to develop their own business autonomy. Such measures include: l. 2.

3.

a policy on joint ventures and partnerships; a policy on specialized business operations and merging business operations; a policy on scaling down organizations and relocating labour within SOEs; and

24

Nguyen Ngoc Tuan, Ngo Tri Long, and Ho Phuong

4.

a policy on prolonging the depreciation schedule, in order to lower production costs.

Such policies have, to some extent, brought into play a new dynamism and creativeness amongst some SOEs. Yet there have been shortcomings and loopholes as well, including the following: Many SOEs have become distracted from- and in some cases, abandoned altogether - their main business operations, and shifted to other business interests and products. The most common example is a shift from production to trading activities, transport and tourism services, or setting up sales counters as a means to create jobs and generate income. As a result, production declines. Some of those SOEs with relatively large capital bases have shifted their investment into restaurants, hotels, and joint ventures. Yet at present, the government is unable to regulate such shifts in investment and business operations by SOEs. Those SOEs in financial difficulty have sold their fixed capital (such as machinery and equipment) for cash, in order to meet short-term working capital requirements. Others have leased out their land, at low rates, to employees, so that the latter can eke out a living independent of the companies, or even sold the land to other individuals and enterprises for a profit. SOEs in commerce, transport, and other service industries are witnessing a shrinking of their market share, in comparison with non-state enterprises. In addition, some non-state enterprises are penetrating SOEs. Surveys have shown that many state-owned retail commercial centres, transport companies, and tourism enterprises are state-owned in name only, with private persons operating the businesses, having rented the premises, equipment, facilities, and even the legal status of SOEs. This is a misuse of state assets for the parochial benefit of certain units or groups of people.

2.

Technology

With regard to technology, except for the 18 per cent of SOEs that have been equipped with new technology (that is since 1986), most SOEs have outdated technology. Surveys show that Vietnam's SOEs still use technology that is older than that of other countries, by two to four generations. The equipment in some SOEs was manufactured in 1939, or even before then. Most equipment in SOEs is replaced only after 14-15 years, whilst in other countries, equipment is commonly replaced after just five years. Further, many SOEs use equipment that has been supplied by different manufacturers, which leads to incompatibility problems, and as a result, they tend to produce at well below optimum capacity. According to surveys conducted by the government, nearly 26 per cent of the equipment in Vietnam's SOEs was provided by the Soviet

25

Restructuring of SOEs towards Industrialization and Modernization in Vietnam

Union, 24 per cent by Eastern European countries, 20 per cent by the ASEAN countries, 18 per cent by other countries, and 2 per cent was sourced domestically. Only 25 per cent of SOEs have integrated equipment. As government funding declines, the technological standards of production employed by the country's SOEs are deteriorating. Under the previous planned economy policy, when the exchange rates of the Vietnamese dong with the Soviet rouble and U.S. dollar were not at the market levels, a lot of equipment used by SOEs had depreciated fully, but was still operating. TABLE 2.3 Sectoral Structure of SOEs in Vietnam, 1992-93 (In percentages) Sector

Industry Agriculture Forestry Construction Transport Post Commerce I Services Others Total

Number of SOEs

Capital Sources

Revenue

1992

1993

1992

1993

1992

1993

34.7 10.1 6.5 l.S.8 3.6 0.1 27.0 2.2

34.6 10.1 2.2 16.2 3.8 0.1 26.7 6.3

48.7 8.3 0.9 4.9 10.6 2.0 20.8 3.9

44.8 8.0 0.9 5.4 9.4 1.7 24.7 5.0

26.7 2.0 0.4 4.6 3.2 0.9 57.8 4.4

26.5 1.4 0.4 5.7 2.8 60.2 1.9

100.0

100.0

100.0

100.0

100.0

100.0

1.1

SOURCE: Government statistics.

3.

State-Run and Locally Run SOEs

With regard to management structure, Vietnam's SOEs can be divided into two categories: centrally run SOEs and locally run SOEs. Within Vietnam, SOEs have been established under almost all national ministries and in almost all localities. Amongst those SOEs controlled by the state (that is centrally run), most of them are in the production and services sectors. Quantitatively, locally run SOEs account for the majority of the state sector and are spread across almost all the provinces and cities in Vietnam. However, because of uneven development levels across differing localities, the number of SOEs in each province or city varies. For example, the largest number of SOEs are located in Ho Chi Minh City, followed by Hanoi, whilst even such mountainous and deprived provinces as Ha Giang and Lai Chau have a relatively large number of SOEs. The distribution of SOEs is as follows: Number of SOEs in Ho Chi Minh City Number of SOEs in Hanoi

764 392

26

Nguyen Ngoc Tuan, Ngo Tri Long, and Ho Phuong

5 provinces and cities have over 300 SOEs each 6 provinces have between 200 and 299 SOEs each 20 provinces have between 100 and 199 SOEs each 11 provinces have between 50 and 99 SOEs each The remaining provinces have less than 50 SOEs each Number of SOEs in Cao Bang province 62 Number of SOEs in Lai Chau province 55 Number of SOEs in Ha Giang province 28 Number of SOEs in Dong Thap province 23 The province with the least SOEs is Tra Vinh, with 20. To date, the majority of locally run SOEs conduct business in the fields of commerce, services, agricultural processing, forestry, marine products, construction materials, small-scale engineering, textiles and garments, etc. Most are small in scale. Within the industrial sector, the number oflocally run SOEs dropped from 2,339 in 1985 to 1,920 by June 1994. There are few locally run SOEs in industries that require large amounts of capital or high technology, and many engage in commercial, catering, and tourist services. The historical development of the state sector, over the last thirty years, has given birth to a large number of SOEs. Whilst the SOEs are spread widely, both in terms of business activity and location, their common features are the small size, low technological standards, and level of inefficiency. In a bid to overcome this situation, the government has attempted in recent years to reform the state sector, through various measures and policies, with a view to improving the SOEs' efficiency, fully tap their potential, and better satisfY market demand. The weaknesses of the current SOE structure are manifest in various indicators. There are too many SOEs, in too many industries, and in too many locations. Although the government has controlled the previous 'inflation' in the number of SOEs, the existing number is still too large. Those SOEs run by the national government, currently numbering 1,971, belong to thirty-seven different ministries and central agencies. The Ministry for Agriculture and Food Industries, for example, operates 352 SOEs. Many central agencies also operate SOEs, even when the rationale for doing so is obscure; such as the Committee for Overseas Vietnamese, the Committee for Ethnic Mfairs, and the National Centre for Sciences and Technology. Vietnam's SOEs are active in a very wide spectrum of business activities across the national economy, many of which do not require SOE participation at all. In spite of recent government reforms of the state sector, most SOEs are still of medium or small scale, and are too many in number. As a result, their demands exceed the capital resources of the country. The state budget cannot meet 30 per cent of the working capital demand for Vietnam's operating SOEs, which forces the SOEs to resort to expensive borrowing (that is paying high interest rates on the loans). In general, the technology employed by many SOEs is obsolete, with the ratio of technolo6'Y renovation as low as 7-8 per cent per year. Less than 25 per cent of all SOEs are properly

Restructuring of SOEs towards Industrialization and Modernization in Vietnam

27

TABLE 2.4 Vietnam: Number of SOEs in Specific Industries Industry Production of construction materials Wood products and forestry processing Food processing Textiles Garments Horticulture Livestock breeding Afforestation Commerce Services Road transport

Number of SOEs

358

139 403 106 107 291 192 287 1,177 147 126

SOURCE: Government statistics.

equipped. Over 50 per cent of SOEs' fixed assets have depreciated more than 50 per cent, and only 26 per cent of SOEs have fixed assets that have depreciated less than 30 per cent. Consequently, their products are of poor quality and low competitive standard, particularly in comparison with imported goods. Most SOEs are not competitive in the international markets. In fact, a mere 15 per cent of the output from Vietnam's SOEs is suitable for export, whilst 70 per cent is good enough for domestic consumption, and 15 per cent is so substandard that it cannot be sold in any market. Yet these unmarketable products absorb as much as 10 per cent of SOEs' total working capital, thus exacerbating the existing scarcity of working capital. The sectoral and geographical structure ofVietnam's SOEs is also highly inappropriate, with a lot of overlapping, and a lack of co-ordination between the centrally run and locally run SOEs, even in the same location, thereby negating possible synergies and improved efficiency. This is all the more obvious in the commerce, export-import, and consumer products (such as beer, cigarettes, instant noodles, etc.) industries. Bluntly, Vietnam's SOEs do not have the proper infrastructure or technology.

4.

Pilot Equitization

In order to meet the requirements of the country's renovation policy and to tackle the shortcomings of the state sector, the government has planned to categorize the state sector. This process was initiated by Directive 143/HDBT of the Council of Ministers, on 10 May 1990, pertaining to the pilot equitization of certain SOEs, and Decision 202/CT, dated 8June 1992, concerning a pilot programme of corporatization of some SOEs. In reality, however, the

28

Ngu_yen 1Y,!!;OC Tuan, Ngo Tri Long, and Ho Phuong

equitization programme only really commenced in 1992. As the pilot eqmtiZation of selected SOEs progressed, the government issued Prime Ministerial Directive 84/TG, on 4 March 1993, relating to financial matters in the course of pilot equitization and other legal issues concerned in facilitating this process. Since June 1992 twenty-one SOEs have registered to be equitized in this pilot programme, of which only nine SOEs have actually started to equitize: two SOEs have been fully equitized, and now operate as share holding companies; two SOEs are currently issuing shares; and five SOEs are finalizing their equitization plans. As one can see, the pilot equitization programme has proceeded very slowly. Nonetheless, the process of equitization has led to some interesting observations, which policy-makers in the reform ofVietnam's SOEs should note. First, there is a lack of unanimity of views concerning the equitization process, with concerns that such a policy will weaken the state sector. At present, the chief executive officers and employees of many profitable SOEs do not wish to see their enterprises equitized. Secondly, there is a lack of integrated conditions, such as a legal framework, policies, and guidance on equitization. Thirdly, there is no unanimity on the correct method for evaluating the assets of SOEs seeking to equitize. Fourthly, equitization is a new concept for Vietnam, and to date there has not been sufficient evidence of the efficiency that equitization may bring, and as a result, it is difficult to evoke a popular willingness and support for this policy. The two SOEs that have already been equitized are both small, and cannot be said to represent SOEs as a whole.

5.

Low Operating Efficiency

In recent years business and production in the state sector have not developed sufficiently well. For example, the average rate of return on capital was 4.9 per cent in 1991,4.8 per cent in 1992, and around 5 per cent in 1993. Given the country's current level of two-digit inflation, these rates of return were too low. Most industrial production has obtained very low rates of return on capital employed. Industrial SOEs absorb 36 per cent of total capital and over 50 per cent of budget-financed capital for all SOEs, yet the average rate of return on this substantial amount of capital is only 4.6 per cent. The rate of return on capital for SOEs in the transport sector is 4.2 per cent, and just 2.5 per cent in the agricultural sector. Service industries have a better turnover of capital, yet the rate of return is also not high: on average it is 7.4 per cent for commerce and services, of which domestic commerce earns 6 per cent, foreign trade 6.4 per cent, tourism 17.2 per cent, and services 15.8 per cent. Of the 6,264 SOEs currently operating, only 12.5 per cent of production enterprises attained rates of return of 15 per cent or above, and only 4.3 per cent of service industries recorded rates of return in excess of 20 per cent. What is also noteworthy is that nearly 11 per cent of all SOEs are in deficit, and 12 per cent more are not making profit. This means that nearly one-

Restructuring of SOEs towards Industrialization and Modernization in Vietnam

29

quarter of all SOEs in Vietnam are currently unprofitable. The reasons for this low efficiency rate amongst Vietnam's SOEs are as follows. First, there is no clear delineation between those SOEs that are business-for-profit and those SOEs that are public utilities. As a result, the right type of management mechanism for each form of SOE_ h~s not been established. Secondly, taxation and credit policies for SOEs remammcomplete. The allocation, preservation, and development of capital are not based_ ~n the full autonomv and accountability of SOEs. Thirdly, based on a ng1d concept of state ~)wnership, for many years the organizational pattern of

SOEs was uniform, and could not respond to the needs of diversified business operations, unlike other forms of ownership. Fourthly, SOEs have not had a system to distribute profits. Profits earned by SOEs were distributed at whim, thus giving rise to inequity among SOEs. A common phenomenon has been the maximum distribution of financial gains to employees of SOEs. Fifthly, the contingent of state sector personnel and business managers have not adapted themselves to the market mechanism, and have not been retrained in a systematic way. Recruitment, appointment, training, and remuneration of personnel have not been in keeping with their responsibilities and accountability. And finally, the process of reforming Vietnam's SOEs has been conducted over a short period of time, within a difficult environment.

Ill.

Viewpoints and Tendencies in Restructuring SOEs in Vietnam

Looking ahead, Vietnam's SOEs will continue to play a very important role in obtaining high and stable economic growth, as the country's private sector remains small in terms of capital and management, particularly within the field of industry. According to government estimates, most of the official development aid (ODA) and foreign loans that the Vietnamese Government will borrow from international financial institutions will be invested first of all in infrastructure, and a certain proportion will be injected into a number of really important SOEs, which either already exist, or are to be established in new economic sectors (such as petroleum, petrochemicals, and metallurgy). As a result, SOEs will have an important role to play. However, SOEs are still laden with very fundamental weaknesses, as the country shifts towards a market economv. Therefore, it is inevitable that SOEs will be reformed and restructured. Vietnam joined ASEAN in July 1995. The danger of Vietnam lagging behind many other countries in the Southeast Asian region is a major challenge for the country, and that challenge has become an urgent issue, as other countries are on a path of rapid growth. For Vietnam, too, rapid and stable growth is one of the prerequisites for solving the country's economic problems. In turn, a precondition for economic growth is to achieve successfully industrialization and modernization. But first, it is necessary to clarifY whether industrialization is to be based upon an export-led strategy or an open

30

Nguyen Ngoc Tuan, Ngo Tri Long, and Ho Phuong

economy strategy, because the choice of strategy will influence the means by which Vietnam's SOEs are restructured. Export-led industrialization was successful in a number of countries in the 1960s, at a time when entry into international markets was fairly favourable. But the international trade situation has changed considerably since then. New agreement within the framework of the World Trade Organization (vVTO) and the emergence of regional economic co-operation have accelerated trade liberalization in the world as a whole, and in the region in particular. International competition is becoming more and more acute, and therefore, any export-led strategy should be adapted to the new situation. Particular attention should be attached to the investment structure and production of goods and services for which there is demand in both the domestic and international markets, and in which Vietnam has comparative advantages. With regard to items needed for domestic consumption, where production costs at home exceed those of external supplies, it is more profitable to import than to produce at home. That is one advantage of an open economy. Thus, industrialization should be based on an open economy and export promotion, whilst attention is given to the domestic market, which consists of a large population, with demands that are becoming increasingly diversified, and has a purchasing power that is growing day by day. An open economy-led strategy for industrialization by no means de-emphasizes import substitution for satisfying domestic demand. Yet, efficiency and competitiveness in international markets should be taken into account. Adopting the open economy industrialization strategy means accepting participation in the intensely competitive international market - both across the world, and particularly within the region - whilst Vietnam proceeds from a very low starting point, at a time when entry into the global market is far more difficult than it was in the past. Only by doing so will domestic producers be compelled to improve the quality of their products, thus accelerating economic growth, enhancing efficiency, and narrowing the development gap between Vietnam and other countries in the region. Here arises a question as to how the restructuring of SOEs should best be undertaken, so as to assist the state sector in increasing its competitiveness against imported goods. The restructuring of SOEs should be kept in line with the orientation of industrialization and modernization planned for Vietnam, and help achieve the objectives set out in the socio-economic development strategy for the period 1991-2000: to get the country out of economic crisis; to obtain economic and social stability; to eliminate poverty and underdevelopment; to improve the livelihood of citizens; to strengthen national defence and security; and to lay the groundwork for faster growth of the country's economy in the twenty-first century. Efforts must be made to increase the gross domestic product (GDP) by 2.5 times the 1990 figure, with heavy industry growing about 13-15 per cent per annum, and thus increasing industry's share of the national GDP to 40 per cent by the year 2000.

Restructuring of SOEs towards Industrialization and Modernization in Vietnam

31

The restructuring of Vietnam's SOEs must enhance their competitiveness and bring about the highest possible economic efficiency. Further, the restructuring of SOEs must be integrated within a comprehensive plan, with reasonable steps which suit the specific conditions of Vietnam. Establishing a reasonable structure for the state sector is intended to enhance the efficiency of the national economy as a whole, and that of SOEs in particular. Any restructuring ofSOEs must be accompanied by a reform of their management mechanism, because a reformed management mechanism will bolster the wider restructuring process of the state sector. The restructuring of Vietnam's SOEs - including a change in their individual sizes, sectoral profile, and technology levels, both across the country and within regions, as well as a change in their roles and the divestiture of some - must be undertaken along two orientations. First, restructuring the investment policies of SOEs, with a view to creating new capacity, with a more appropriate output. The operating capacity of most SOEs in key areas is still weak. Therefore, investment in SOEs should be channelled to areas where the private sector is either not interested in operating, or is unable to replicate the work of SOEs in these key sectors. Once SOEs start to operate successfully in these areas, they can attract investment from other (that is non-state) sources. This process will be conducted using plans for key areas and capital construction. Secondly, existing SOEs can be restructured by enhancing their capacity and efficiency in key areas, and reducing the operations of SOEs in areas where non-state sector enterprises can do a better job. This second process of restructuring can be carried out as follows. First, continue the reorganization and restructuring ofVietnam's SOEs, in order to enhance the efficiency of viable state enterprises, and ceasing the operation of small SOEs in scattered locations, with low levels of efficiency. Secondly, close down those SOEs in sectors where lOO per cent state ownership is not required and which continue to record a deficit or are insolvent, despite recent reforms. Thirdly, SOEs should be categorized according to their functions, such as business-for-profit SOEs and public utility SOEs. Fourthly, state corporations should be established in important economic sectors or locations, thereby accelerating the accumulation of investment capital, to develop productive forces over the next five to ten years. Fifthly, diversifY the ownership ofSOEs in areas where lOO per cent state ownership is not required and allow mixed ownership of some SOEs, with the government holding a dominant stake in the enterprises. In view of the present state of Vietnam's SOEs and practical experience of various state sector reforms, as well as the requirements of industrializing the country, the restructuring of SOEs should adopt the following guide-lines. First, SOEs should be maintained in the following areas only: 1.

In those sectors that serve as the infrastructure of the national economy, as these sectors are of decisive significance in the stability and

Ngu;'en Ngoc Tuan, Ngo Tri Long, and Ho Phuong

32

2.

3.

4.

1.

development of the country, and where other (that is non-state) participation is not possible. For example, in electricity generation, rail transport, aviation and maritime transport, postal services, and telecommunications. In a number of essential sectors of the national economy and public welfare, which require a state monopoly or a dominant role by the state, such as in crucial inputs, technical services, irrigation and water conservancy, military industry, etc. In order to ensure stable state revenues for the national budget, SOEs should keep monopolistic or dominant positions in those industries that bring considerable revenues, such as brewing, cigarette manufacture, and parts of the hotel industry. As the fiscal system becomes more effective, SOEs could gradually pull out of these industries. In industries that are likely to be unprofitable, or even loss-making, but provide a decisive role in supporting other sectors of the economy, such as production of agricultural inputs (fertilizer, pesticide, veterinary medicine, etc.), and geological prospecting.

State Corporations

SOEs should he oflarge and medium scale, equipped with modern technology, run at full capacity, well managed, and competitive in both the domestic and international markets. After several restructuring attempts many SOEs that have performed poorly have been closed down. Yet, efficient SOEs are so small and so few that they cannot justify the leading role of the state sector, and they are unable to provide sufficient partners for co-operation with foreign companies. Given this context, the setting up of large and mediumsized SOEs in sectors where they are needed is an urgent necessity. Aware of the significance of the scale of SOEs, on 7 March 1994 the Prime Minister issued a deci~ion on the experimental formulation of state corporations, which would operate as business groups (or conglomerates). The main contents of this decision were as follows: 1. 2. 3.

4. 5. 6.

selected state corporations to be established will be of fairly large size; members of a corporation will be integrated financially and in types of business; each corporation must consist of a minimum of seven enterprises, with total capital of at least 1,000 billion dong (approximately US$100 million); each corporation may set up a financial company to mobilize and allocate capital within the corporation; the corporation's board of directors will be composed of seven to nine members, who are appointed by the Prime Minister; the experimental formation of state corporations aims to:

Restructuring of SOEs towards Industrialization and Modernization in Vietnam

(a) (b) (c) (d) (e)

33

enhance the competitiveness of SOEs in the market; gradually abolish the regime whereby some state bodies control SOEs; eliminate administrative-bound economic parochialism and the differentiation between centrally run and locally run SOEs; improve the ability of SOEs to mobilize capital and allocate investment capital in keeping with the market mechanism; and strengthen the macro-economic management of the government over all economic sectors.

To achieve these objectives, we believe that the experimental formation of state corporations as economic groups should take into consideration the following fundamental issues. First, a suitable organizational model should be sought, so that these state corporations can achieve economic efficiency. Secondly, a state corporation should not necessarily consist of seven board members and have a minimum capital base of 1,000 billion dong; the reason being that these factors vary from one industry to another. These aspects can change over time, and from one place to another. Thirdly, in the past we have seen the failure of some SOE mergers, and therefore the operating principles of state corporations must ensure different conditions. Fourthly, the formation of major industrial groupings poses the danger of monopolies, and so it is imperative that an anti-monopoly act is prepared. Fifthly, the bigger the state corporations are, the more difficult they are to manage. So it is necessary to carefully select qualified and accountable managers to run these corporations. If state corporations can be established, and operate successfully, in both the business-for-profit and the public utility fields, Vietnam's SOEs will develop into two layers: the upper layer will consist of large SOEs and the lower layer will comprise medium-sized and small SOEs, with the latter serving as satellites to the larger state corporations. Taking into account the capital investment required to meet the market demands in a province, city, region, nation-wide, or overseas markets, state corporations - or economic groups - could be organized as follows: 1. 2.

national economic groups, made up of member enterprises operating across the country; and regional economic groups, made up of member enterprises operating within a number of provinces or cities.

The formation of economic groups should avoid three possible effects. First, it is necessary that these economic groups do not become 'miniministries', taking over the current functions of the state's ministries as managers of those centrally run SOEs. Any such tendency would run counter to the functions of the economic groups, or state corporations, as primarily being business operations, and not state-controlled institutions. Secondly, economic groups should not be allowed to become monopolies. And thirdly, economic groups should not be allowed to refuse compliance with state

34

Nguyen Ngoc Tuan, Ngo Tri Long, and Ho Phuong

instructions over economic activities, as given by ministries and other state institutions, as this would imperil state control. The reorganization of viable SOEs should also be accompanied by the establishment of new and needed SOEs. Parallel to the reform of existing SOEs, it is also necessary to set up new SOEs in the fields of infrastructure and heavy industry, including electricity, coal, petroleum, basic chemicals, cement, the postal service, aviation, railways, and so on. This will help facilitate the development of the economy. New enterprises in various other industries, commerce, and services are based mainly on other non-state sectors, with some participation by the national and state governments. There is also a need to abolish the regime of direct control over SOEs by state institutions. At present SOEs in Vietnam are placed under the control of some 500 owning institutions: thirty-five ministries, ministerial institutions, and agencies affiliated to the government; fifty-four provincial people's committees and cities affiliated to the government; and district people's committees also directly managing a small number of SOEs. Although the regime of owning institutions was useful in the old economic management mechanism, it has now become a bottle-neck to business and production, now that Vietnam has adopted a market mechanism regulated by the state. For example, owning institutions relax the function of state control, whilst also intervening too deeply in the day-to-day operations of many SOEs. This regime of owning institutions also currently divides the management of the state's assets in SOEs, thus spreading out widely the state's ownership of assets, thereby making it very difficult for the state to reallocate or concentrate its assets when necessary. The current system also makes it impossible for the Ministry of Finance to exercise fully its authority over managing SOE state assets, and to control the utilization, preservation, and expansion of state capital. Further, none of the owning institutions and functional agencies can be held clearly and fully accountable for the inefficiency of SOEs. As a result of this lack of accountability, the assets and working capital of SOEs have not been properly accounted for, and this has led to wasteful and inefficient use of resources, and even serious cases of embezzlement in many sectors and localities. The abolition of the owning institutions regime was initiated in 1989 and put into practice after the government issued Decree 196/HDBT on 11 December 1989. On 2 March 1990 the government enacted Decree 15/CP, which replaced the former decree. To abolish the owning institutions regime is a necessity and a correct policy. However, it is important to note that its abolition is by no means equivalent to the elimination of state control over SOEs in Vietnam. On the contrary, it is meant to ensure legitimate operating autonomy of SOEs, as stipulated by various laws, and at the same time allow the state control apparatus to correctly perform its functions and responsibilities, as provided for by the 1992 Constitution, other related laws of the National Assembly, and decrees of the government. A state institution's activities in the economic realm may only exercise its control over SOEs in certain domains and within

Restructuring of SOEs towards Industrialization and Modernization in Vietnam

35

the legal framework. All SOEs are to operate according to the law. In the eye of the law, SOEs are to be held accountable for their own decisions, without having to apply for permission from any owning institution. Should an SOE breach the law, it will be judged by the law. This is a fundamental principle for the exercise of the right of equality amongst all the different economic sectors, both state and non-state. There is also a need to divest some SOEs, along the lines of diversifying the ownership of medium- and small-scale state enterprises, as the present SOE structure calls for a reorganization of the state sector and a search for an appropriate ownership structure. The primary objective of restructuring Vietnam's SOEs is to enhance their socio-economic efficiency, and thus alleviate the financial burden on the government, and concentrate scarce resources to those SOEs which need investment. Restructuring SOEs is a means to assist them in implementing their leading role in the market economy of Vietnam, to update their technology standards, and make them better organized, so that they can dominate the market without having to occupy a large share of the various industries and without being too many in number. The ownership structure ofSOEs will be restructured as follows. The state will only maintain its lOO per cent ownership of SOEs where necessary and feasible. The government will invest in the remaining SOEs and hold a dominant position, which will vary from one enterprise to another. If there is no need for the government to maintain its investment or its dominant ownership in a particular SOE, that state enterprise will be divested and transformed into a shareholding company, a limited liability company, or a private company. Other forms of divestiture can also be applied, such as leasing parts of or whole SOEs. For divestiture to proceed, there is a need to categorize SOEs in Vietnam. As a general rule, those SOEs purely in the service of national defence and security or those providing public utilities will be maintained as non-profit enterprises, and will receive funding from the state budget. These are purely public utility enterprises. Business-driven enterprises will be classified into three categories. First, SOEs which continue to be 100 per cent state-owned; these are enterprises pertaining to national defence and security or providing public services in economic areas determined by the government. The government will determine the orientations and responsibilities of such SOEs as well as ensure funding, and take protective measures to prevent them from possible bankruptcy. These enterprises must conduct internal auditing, and will be subject to external auditing, are accountable for the preservation and expansion of the trusted capital, and have to discharge those duties assigned to them by the government. Secondly, those enterprises which can issue shares, yet the government will retain over 50 per cent of the shares (or below 50 per cent of the shares, but with 'golden shares'). These are enterprises occupying important positions in economic sectors or are capable of earning large revenues for the state budget. The government may provide some assistance through investment credits to these enterprises, yet they must

Nguyen Ngoc 1uan, Ngo Tri Long, and Ho Phuong

36

operate within the market system. And thirdly, the remaining SOEs will have their ownership determined by market forces and within the laws of the state. The forms of divestiture to be selected will be as follows: l.

2. 3. 4.

to equitize between 50 and lOO per cent of an SOE, or to equitize portions of the enterprise (by share issue); to sell all or part of the SOE; to lease out the SOE (to domestic or foreign business); and to mobilize investment capital from other SOEs and other economic sectors, so as to form limited liability companies (corporatization), or to attract foreign investment through joint ventures.

The twofold divestiture strategy from now until 2000-5 is as follows. First, to gradually reduce the number of SOEs further, by means of equitization, selling, or leasing. It is estimated that by 2000-5, the cumulative number of SOEs in Vietnam will be half the current figure and that most of the remaining SOEs will be of large or medium size. Secondly, with regard to the ownership structure, by the period 2000-5 the state will hold some 30-40 per cent of the capital of those enterprises to have been divested, with the remaining 60-70 per cent being held by the non-state sector. To this end, preparations for divestiture should be made immediately. And if favourable conditions exist, the state's ownership of such divested SOEs may be reduced even further.

IV.

Conclusion

The measures required for restructuring Vietnam's SOEs towards industrialization and modernization demand a number of conditions. Macroeconomic stability must be ensured, and the necessary conditions for a market economy to function properly must also be prepared. A capital market, stock market, convertibility of the domestic currency, and a functioning banking system must also be brought about. Macro-economic stability includes stable monetary and financial policies, trade regime, and tax and investment policies. These are the conditions necessary to create a stable environment, that will then allow investors and enterprises to invest in the long term. One of the most important objectives of the macro-economic policy must be to control inflation, and is an important prerequisite for all enterprises in general - and SOEs in particular - to operate efficiently. There is also a need to pursue further the country's economic restructuring towards industrialization and modernization, and increase the percentage of total GDP stemming from the industry and service sectors, whilst reducing agriculture's proportion of total GDP. In industry Vietnam must develop those sectors where it enjoys comparative advantages, promote exports, and substitute imports with products that can be produced efficiently within the country. The restructuring of industry should also include increasing the proportion of processing industries and manufacturing. Vietnam should also

Restructuring of SOEs towards Industrialization and ModPTnization in Vietnam

37

build a number of selected heavy industries, such as engineering, electronics, informatics, petroleum, cement, and steel. The service sector should be diversified, whilst also giving attention to improving the country's infrastructure, developing communication and transport links, increasing domestic and foreign trade, and expanding tourism and other services. There is also a need to create a legal framework for the divestiture of SOEs, by means of enacting laws, ordinances, or governmental decisions and resolutions. In addition, Vietnam needs to undertake the second stage of its tax reform, perfect the ordinance on accounting and statistics, reform the accounting system, and put the auditing system into practice. The experimental equitization programme should continue, with further trials at selling shares of eligible SOEs, in order to gain greater experience of this process. Further, the experimental equitization programme should address the issues of: which SOEs can be equitized; to whom can the shares be sold; and at what price should the shares be sold. For the purpose of divestiture, it is advisable that Vietnam's SOEs are categorized. Experimenting with the abolition of owning institution relationships between SOEs and ministries should also be pursued, and its replacement with an administrative apparatus that will focus on formulating strategies, plans and policies for SOE supervision, and the implementation of relevant laws. These experiments should be undertaken without delay, yet steadily. Vietnam should continue to perfect the policies, management mechanisms, and organizations pertaining to SOEs. It is essential that the contingent of chief executive officers and key personnel of SOEs are retrained, to tailor the management, accounting and statistical systems of SOEs to better suit the market mechanism. In the coming period the successful reorganization and restructuring ofVietnam's SOEs, along the above-mentioned guide-lines, will be a complicated and new endeavour. Therefore, it is imperative that a comprehensive plan is formulated and the appropriate steps are pinpointed, so as to ensure that this process develops smoothly, and Vietnam's economic growth targets are attained.

3

Government Policies and StateOwned Enterprise Reform Nguyen Van Huy and Tran Van Nghia

I.

Introduction

Reforming state-owned enterprises (SOEs) to improve the socio-economic efficiency of this important sector in the national economy was initiated some time ago in Vietnam, ranging from the reform of management in SOEs to the current renovation of policies and mechanism on a comprehensive and macro level. Yet, the reform only gained full momentum over the last ten years. The most salient feature of SOEs in Vietnam is that they used to operate in a highly centrally planned and subsidized environment. The state assigned to SOEs plans which had been approved by higher government levels, which included a system of targets, such as gross output, total value of production, main products, total payroll, profits, and transfers to the government budget. The government supplied the main materials, provided the markets for the products, and set their selling prices. In the late 1970s and early 1980s SOEs found themselves in difficulty because the operation plans assigned by the government prevented them from operating efficiently and also because of the drastic cut in foreign aid and shortage of material supplies. This situation compelled the government to formulate appropriate policies to involve SOEs in joining the efforts of the government to ensure employment for the workers. On 21 January 1981 the government enacted Decision 25/CP with an aim of providing guide-lines and measures to develop the initiatives and financial autonomy of SOEs in business operations. This can be seen as the first breakthrough against the centrally planned mechanism which had controlled the management and operations of SOEs until that point in time. The reform of planning and economic accounting systems in SOEs aims at the following targets: 1. 2.

to create the necessary flexible environment for SOEs to increase production and be profitable; to increase the financial autonomy of SOEs as well as motivate them to use all their equipment, material, and labour resources with the highest

Government Policies and State-Owned Enterprise Reform

3.

39

possible efficiency, thus reconciling the interests of the state with those of the enterprise and the workers, by motivating workers to increase their productivity and output, thereby increasing their income, improving their livelihood, and ensuring revenue for the government; and to create conditions for SOEs to fulfil the government's plan, while at the same time motivating SOEs to make full use of their resources to produce more products for society, thus helping to satisfY the market demand for goods and services.

To this end, the government has undertaken specific reforms in many aspects, such as classifYing SOEs according to their importance in the national economy, reforming the planning process, cost-accounting methods, and system of distributing profits, identifYing clearly the accountability and responsibilities of the chief executive officers (CEOs) of SOEs and assigning the state institutions concerned to work out the legal documents related to these matters. Given the fact that materials supplied by the state are limited, the government intends to concentrate on production factors for SOEs which are important to the economy, to ensure sufficient production factors for these SOEs to maintain stable operations. Those SOEs which are not assured of material supplies by the government must take their own initiatives and overcome difficulties to ensure employment and livelihood of their workers by seeking, on their own, replacement material supplies or change their production, such as to subcontract for other economic organizations or enter into joint ventures with other enterprises, including co-operatives, which are able to obtain material supplies. Those SOEs which fail to continue production will be allowed to suspend production temporarily. Yet they have to maintain their equipment in good order, find appropriate solutions with regard to the surplus labour, and keep the contingent of core technicians and skilled workers in anticipation of restoring the factories when conditions allowed. Some of the SOEs which cannot obtain materials and energy supplies and continuously ran a deficit can be closed down or divested into co-operatives if they have been originally co-operatives or private enterprises.

11.

Reform in the Planning Process of SOEs

This called for a reform in the planning process of SOEs. In the past the plan consisted of a single component, but now it has taken on three components: the component assigned by the government with assured material supplies, the component backed up by the enterprise itself, and the auxiliary production component of the enterprise. The component assigned by the government has to be backed up by assured material supplies so that the enterprise could fulfil that plan component. The extent of this plan component would be based on reasonable criteria and the ability of the enterprise; at the same

40

Nguyen Van Huy and Tran T\:m Nghia

time material supplies provided by the government would be announced in advance so that the enterprise would know how much materials would be provided and could seek additional supplies for its operations. If the assigned plan cannot fully utilize the capacity of the enterprise, the enterprise is permitted to work out its regular and supplementary production plan, the supplies for which would be bought by the enterprise with its own self-financed capital from its profits or bank loans, not from the government budget. In addition, tbe enterprise may set up an auxiliary production line to make products which were not in the original plan of the enterprise. This production line needs to be approved by the higher level, as do products covered in the plan component of the enterprise. The marketing of products in the first two plan components must be notified to the material-controlling agency and the state-owned commerce so that the products would be marketed according to a state plan. The enterprise is permitted to sell products produced in the auxiliary production plan to consumer co-operatives or other buyers, provided that state-owned commerce does not buy them or that the products are not governed by any trade agreement between state-owned commerce and the enterprise. As an incentive to the auxiliary production plan, the enterprise may retain 10 per cent of the products to distribute to its workers as bonus in kind. Plan targets may have to be adjusted down to suit the practical operations of SOEs. Those enterprises which can maintain stable production have to implement nine mandatory targets as stipulated by current regulations. Enterprises whose production has not been stable due to irregular supplies of materials have to abide by only five mandatory targets, namely the value of gross output (including production for export), output of main products (including products for export), total payroll, profits, and other transfers to the government budget, the main material supplies being ensured by the government. In order to ensure that priority is given to the plan component assigned by the government, enterprises which prioritize their own plan component, thus failing to fulfil the plan component assigned by the government, would be subjected to fines if they could not give an acceptable reason for the failure. Accounting and price-setting systems also differ between enterprises with assured material supplies and those which have to carry out the state plan while undertaking their own production plan with material supplies acquired on their own. In the former enterprises cost accounting according to unit costs purchased at government-set prices as stipulated by the temporary regulations is applied. For the latter enterprises, the cost structure is broken down to separate material costs purchased at market prices for the purpose of determining production costs and setting selling prices. Products produced in the plan component assigned by the government with material supplies assured by the government are sold at official government-set prices called

Government Policies and State-Owned Enterprise Reform

41

'industrial wholesale prices' (that is selling price equals an appropriate production cost plus some pre-set profit); commercial premium and retail prices are determined by the government-set price frames. For products in the plan component of the enterprise, the selling price equals material costs (negotiated with the suppliers) plus pre-set profit which usually ranges from two to four times that of products in the state plan component, depending on the sectors or enterprises. The regime for profit distribution in enterprises was also modified to give more incentives to workers. This also varies among the various plan components in the enterprise. With regards to the state plan component, the enterprise has to register the amount of quarterly profits to be transferred to the state budget on the basis of the approved annual plan. The enterprise could disburse in advance an amount of profits which would be accounted at the end of each quarter. If the enterprise over-fulfils the plan, it could retain 60-80 per cent of the surplus profits. The profits of an enterprise are still used to maintain three funds (production development fund, bonus fund, and welfare fund) as stipulated earlier. The last two funds have seen some changes, that is 70 per cent will now be injected into the bonus fund and the remaining 30 per cent into the welfare fund. ·while the bonus fund was capped at 1.5 times of an employee's monthly pay in the past, it has been doubled. Twenty per cent of the profits from the enterprise component of the plan go to the government, and the rest to the three funds: 20 per cent for the production development fund, 60 per cent to be paid out as bonus, and 20 per cent channelled to the welfare fund. Fifteen per cent of the net profits generated by the auxiliary production plan go to the government, while the enterprise may retain the remaining 85 per cent for the three funds, jointly decided on by the CEO and the trade union of the enterprise on the basis of negotiations and agreement. The income of employees is made up of payment from all these three sources. Distribution of individual income in the enterprise will follow principles set by the enterprise, yet it must ensure equitable distribution according to the performance of each employee, avoiding situations where producers of main products would get less than those who engage in auxiliary production. To ensure that SOEs could implement these changes, the government has delegated to CEOs the following responsibilities and authority: 1.

2.

The CEO can enjoy operating autonomously; must fulfil the plan assigned by the government, but take the initiative in formulating and executing the enterprise plan component and auxiliary production plan; and refrain from passively waiting for assistance from the government at higher levels. The CEO is entitled to utilize all the capital entrusted to him/her, as well as general additional funding from the profits of the enterprise and from bank loans to expand business and develop the enterprise.

42

Nguyen Van Buy and Tran Van Nghia

3.

The CEO has the authority to duly reward or punish the employees of the enterprise, to recruit labour in accordance with the business requirements of the enterprise and reject applicants introduced by their superior bosses if the applicants cannot meet the requirements of the enterprise and to promote their subordinates in accordance with the Charter of the enterprise. The CEO has the responsibility to facilitate the exercise of the right to collective ownership of employees in the enterprise and to work with the trade union to involve the employees in participating in the management of the enterprise, safeguarding political security, protecting the state's assets, ensuring good material and cultural life of the workers, and combating negativism in the enterprise.

4.

Ill.

Legal Framework for SOEs

Thanks to the above-mentioned guide-lines and policies, the necessary legal framework was established for the first time to allow SOEs to bring into play their initiatives and to join efforts with the government in improving the environment for the production and business operations of the enterprises. A5 a result, en masse closing down of major SOEs due to insufficient material supplies was warded off. This was also an opportunity for SOEs to make the first steps on the path to autonomy in production and business and adjust their operations to market forces. The SOE reform entered an active stage after the Fourth National Congress of the Communist Party when a multi-sector commodity economy, which would be driven by market forces while being regulated by the state and oriented towards socialist objectives, was officially adopted. To facilitate the operating autonomy of SOEs so that they could play their role and discharge their tasks well in the new situation, the government has since worked out the guide-lines and policies for reforming the structure and management of SOEs at each stage of their development. The first such government policy was Decision No. 217/HDBT, issued on 14 November 1987 on the promulgation of the policy for reforming planning and business accounting in SOEs. The contents of this Decision focused on the following ten aspects of management of SOEs: 1.

Planning: From that date on, SOEs had the autonomy to work out and implement on their own long-, medium-, and short-term operating plans which would be based on the guide-lines for socio-economic development set forth by the Communist Party, criteria set forth by the government, development plans of relevant sectors, mandatory targets of the state, their economic contracts, results of market research, results of business partnership, etc., and guidance of their senior management.

Government Policies and State-Owned Enterprise Reform

2.

43

Operating plans would be formulated under the guidance of the CEOs with the participation of the employees and finally decided on at the employees' general meetings on the principle of fulfilling all obligations to the government and the contracts already signed. For some specific cases, mandatory targets that SOEs had to meet were reduced to three or less targets. For example, catering service enterprises had to meet only one target which involved the transfers to the government budget; enterprises producing items not included in the government's list of main products and servicing enterprises had to meet two targets, namely gross output and transfer to the government budget. Enterprises producing items included in the government's list of main products and were provided material supplies by the government had to meet three targets: quantity and quality of main products sold to designated buyers, gross output (including export value if any), and transfers to the government budget. The government intended to manage SOEs by guide-lines and avoid interfering into their day-to-day operations. SOEs formulated their operating plans on their own, which consisted of the government plan components (or orders) with material supplies provided and the enterprise plan component. SOEs were obliged to carry out the government plan component and sell the products to designated buyers at prices sn by the government; and SOEs had to acquire material supplies for the enterprise plan component, and market their products at prices agreed upon with buyers. On average, 50 per cent of the profits (be they from the government plan component or from the enterprise plan component) would be transferred to the government budget (this percentage varied according to the sectors to which the enterprises belonged). and the remaining 50 per cent were retained at the enterprise. At least 3.:') per cent of the retained 50 per cent would go to the production development fund; and the rest would go to the bonus fund and the welfare fund at the discretion of the general meetings of employees. Material supplies: Initial steps would be taken to eliminate the system of providing material supplies, which would be replaced by a system of production factors and product procurement through economic contracts. Procurement of production factors would be based on the operating plans while making use of commodity-money relations. With regard to technical inputs controlled by the government, the government would assign mandatory targets for state-owned input trading firms to provide sufficient inputs at state prices to enterprises which produce critically essential products according to the government's plan or at the government's orders or for key construction projects. Production factor trading firms may sell the surplus production factors at prices which ensured profits. Highly efficient enterprises which made considerable transfers to the government budget were given priority to

44

3.

4.

Nguyen Van Huy and Tran Van N{!;hia

acquire the surplus production factors. Enterprises were permitted by the government to seek production factors at negotiated prices and through procurement contracts for their operations. In the meantime, SOEs and organizations with no function of production factor trading were strictly prohibited from trading production factors for the purpose of rent-seeking. Marketing of products: Products turned out under the mandatory plan (or on orders) of the government had to be sold to designated buyers determined by the government in line with the contracts already signed. Products outside the mandatory plan and products produced by enterprises on their own should be sold to state-owned production factor trading firms and state-owned commercial firms. If these firms declined to buy those products, they then could be sold to other trading firms or to consumers. SOEs that produced critically essential products in steady and large quantities according to mandatory plans and perishable products or products requiring special packaging that had to be recovered had to sell their products to state-owned material-trading firms or commercial firms and regular consumers according to the plans. Enterprises were accountable to the consumers for the quality of their products, and had to provide warranty for technical products. Financial-accounting regime: The most important reform was that enterprises were provided by the government with assets, including fixed assets and working capital, to enable them to fulfil the tasks assigned to them. The employees of the enterprises were collectively entrusted to directly manage and utilize the assets. Enterprises were obliged to utilize these assets efficiently. They had to preserve or increase the value of the assets with a view to expanding production. Enterprises had the rights and responsibilities to perfect their fixed asset structure, were authorized to lease or sell their unused equipment, buildings, storehouses, and depreciated equipment and assets. Depreciation costs would no longer be transferred to the government, but in general would be retained at the enterprises' disposal, except some new projects which required large capital investment and had just been commissioned. A part of the depreciation cost of these projects would be registered in the government budget. With regards to working capital allocated by the government at the initial stage, if the government should adjust prices, this working capital would be re-evaluated and additional capital allocation could be made if necessary. In addition to the allocated capital, an enterprise could generate additional capital through various means, such as reinvestment of profits retained at the enterprise, bank loans including loans in foreign capital, borrowings from other firms, public debts, and foreign loans, on the principle that the enterprise would be profitable enough

Government Policies and State-Owned Enterprise Reform

5.

45

to repay its debts, both principal and interest, to creditors and make its transfers to the government and expand production. In order to enhance accountability of SOEs in their operations, cost items were also clearly computed which would truthfully reflect reasonable cost items and also lay bare unreasonable cost items. On this basis, only the real buying prices of factors and energy, payment of interests on loans for in-depth investment and for working capital according to the plans and other expenses stipulated by the government could be accounted for under production cost; at the same time payment of interests on loans outside the plans and fines or expenses not conformable to financial regulations would not be computed in the production cost. Retained profits of enterprises would no longer be pre-determined profits as had been in the past. However, retained profits would equal total revenue minus total cost minus transfers to the government budget minus interest payment and minus fines. This way of calculating profit motivated enterprises to increase profits by reducing costs and avoiding fines. Policy on retained profits at an enterprise had to be agreed upon by the general meetings of employees and the CEO, yet transfer to the production development fund must not be lower than 35 per cent of retained profits. The enterprise was obliged to put aside 1 per cent of retained profits to form a financial reserve fund placed in the account of the trade union of the enterprise or corporation (if such an organization existed); and contribute a part of its welfare fund to that of the locality where the enterprise was situated. The specific level of contribution was determined by the government. Any other collection outside the financial regime stipulated by the government was strictly prohibited. Apart from this regime, the government also permitted pilot cases of enterprises which could determine their own income distribution policy (including salary, wages, and profits) where income to an enterprise equalled total revenue minus total cost, minus transfers to the government budget and interest and fine payments (if any). Transfers to the government budget were still governed by the regime of SOEs governing such transfers, that is collection of a part of the profits and other transfers according to regulations. However, the government considered reforming the regulations on transfers to the government budget which would replace budgetary transfers with taxes on capital, royalties, and dividends. Prices: With regards to products under price control, the enterprises proposed selling prices and defended their proposals before the pricing agencies at the corresponding levels. These agencies had to approve or disapprove the prices within twenty days (ten days for seasonal products)

46

6.

Nguyen Van Huy and Tmn Van Nghia

from the date of receiving the proposals. If the pricing agencies should fail to respond within the stipulated time frames, the enterprises concerned would be allowed to sell or buy products at the prices stated in the proposals and would not have to reimburse the differentials once the proposed prices were approved. With regard to important production factors or essential goods sold at subsidized prices to consumers, the selling prices at the factory gates must ensure reasonable profits for the enterprises. The government would subsidize distribution costs. Ifthese products were sold directly to the consumers, bypassing distribution, the government subsidy would go directly to the enterprises. Payment of subsidy would be scheduled so that the enterprises would be able to formulate their financial plans. Products of the same quality, sold to the same buyer at the same location would have the same price regardless of their input sources (that is inputs were either supplied by the government according to the plan or were acquired by the enterprise on its own). In the absence of a mechanism to make up for the higher input costs incurred, the enterprises could sell their products at retail prices while state-owned trading firms sold their goods at negotiated prices. For products not under price control, testing products, demonstration products, products produced individually to order, and material goods of inferior quality, the enterprises were fully authorized to bargain with buyers on the principle that the material costs and selling prices of such products must be lower than, or at most equal to, market prices at the time and place of the transactions. Monetary, credit, and payment issues: The government took measures to consolidate and set up equal-footing relations between banks and their SOE clients, reform credit mechanism, and improve payment methods for SOEs. SOEs could open a main account at a bank most convenient to them and subsidiary accounts in banks located near their clients. SOEs' cash in hand which was deposited in banks would accrue interest. According to the government's regulations on cash control, payments between firms were to be transacted through banks, whether the firms concerned were situated in the same location or apart from each other, except for small payments. SOEs had to submit their annual payroll registers at the banks where they had opened their accounts. Disbursement of salaries, wages, and bonuses estimated in quarterly cash plans had to conform with pre-set labour cost per unit of product and with the extent of plan implementation of the enterprise. Every month, the bank would disburse for the payment of salaries, wages, and bonuses at the request of the enterprise. The bank would clear the bills with the enterprise at the end of each quarter, and clear the accounts at year encl. Should the enterprise overdraw, it could borrow from the bank. The bank could accept or reject the loan requests of the SOE,

Government Policies and State-Owned Enterprise Reform

7.

8.

47

depending on the portfolio of the bank and profitability of the enterprise. At the same time, the bank could inspect or revoke the loan before maturity should the enterprise breach the credit contract. The lending rate was determined by the governor of the Central Bank for each type of loan and enterprise in conformity with the government's regulations on depositing and lending rates with differentiation between the normal lending rate and rate for overdue debts. Enterprises earning higher returns on loans, achieving higher turnover rates of capital, and able to pay back loans before maturity were charged lower lending rates by banks. For new projects or for expansion of production, projects according to state plans would not be directly financed by the government budget. Instead, they would get funding from banks which, in turn, obtained the funding from the government budget allocated by the government financial agency. Signing an implementation of economic con tracts: One of the operating principles of SOEs was to -act through economic contracts. Therefore, when an SOE did business with another partner, be it an entity in another economic sector, a military unit, or a government agency, it must carry out the deal by means of economic contracts. The enterprise could submit the signed contract to an economic arbitration office which would monitor and assist in the implementation of the contract. For economic contracts to conform with the !aw, the Economic Contract Act and Economic Arbitration Act had to be strictly observed. Breaches of economic contracts would be treated according to the law. Labour, salaries, wages, and social issues: SOEs could either hire workers in locations recommended by the labour offices or request the offices to recruit for them according to criteria set by the enterprises. Skilled workers could be hired from other locations if they could not be found or found in sufficient number in the lGcation where the enterprise was situated. The enterprise could rej ect any candida te recommended if that person was not qualified or recruitment was not needed by the enterprise. What was important in the field of labour was that from then on SOEs started to switch from recruiting employees on permanent payroll to signing work contracts with labour. Work contracts were signed between the CEO of an enterprise and the workers. The contracts could be indefinite, time-bound, seasonal, or job specific. Workers under indefinite contracts or time-bound contracts for more than one year were entitled to the rights, including interests and benefits, of employees on permanent p ayroll. Workers under seasonal or job contracts for less than one year would negotiate their remuneration with their employers. Enterprises could decide on the ways of paying out salaries, wages, and bonuses in line with their operating situation and on the principle

48

9.

Nguyen Van Huy and Tran Van J\lghia

of remunerating according to performance; they could choose to pay and promote their workers in conformity with the government's policy on salaries and wages. The CEO of an enterprise had the authority to fire employees on permanent payroll or cancel work contracts where the contractors violated government regulations or breached signed contracts. However, the CEO could not dismiss employees who were under medical treatment in hospital or in a sanitarium; and pregnant women or women on maternity leave. Fired employees had to be notified at least one month in advance and were entitled to all rights, even in the event of dismissal as stipulated by law. Every worker could earn an income corresponding to his or her work performance in the enterprise. The government only imposed a floor income but not an income ceiling. However, there was a policy to regulate enterprises with real incomes too much higher than the average level. Distribution in kind, no matter what the sources might have been, had been prohibited in all enterprises ever since the promulgation of the above policy. Enterprises had the obligation to pay social insurance in full and on time. The government would amend insurance regimes by gradually increasing the payment to the social insurance fund which would be incorporated into the cost structure of products, thus ensuring revenue for this fund. Export-import and economic co-operation with foreign partners: The government encouraged enterprises to develop goods for export, while stipulating preconditions for enterprises to trade directly with foreign partners, namely large volumes of export products of consistently high quality or uncommon products plus employees qualified in foreign trade practices. These enterprises had to balance exports and imports on their own, pay both principal and interest of their foreign debts, and make transfers to the state budget in foreign currencies. The government policy also allowed enterprises full or partial exemption for these transfers when they were still servicing their debts. Enterprises producing export goods according to the plan or on orders of the government were entitled to purchase materials from and sell products to suppliers and buyers designated by the government, and if the enterprises fulfilled their export planned targets and completed contracts signed with foreign partners, they could retain 10 per cent of the foreign currencies they earned. With regards to products in excess of the legal target, or outside the mandatory production plan, enterprises could retain from 70 to 90 per cent of the foreign currencies earned calculated on FOB prices, and the rest had to be transferred to the government budget. Enterprises not eligible to trade directly with foreign partners could sign trust export-import contracts with an eligible enterprise but also had to honour their commitment to the foreign partners.

Government Policies and State-Owned Enterprise Reform

10.

49

Collective ownership of employees of enterprises: From then on, the government entrusted the assets and capital invested in an enterprise to management by the employees of the enterprise who could utilize these assets and capital to carry out their business operations on the principle of business autonomy. Thus, the collective ownership of the employees stipulated in Decision No. 182/CP of the government was further clarified by descriptions of the obligations of the employees' general meetings and the Enterprise Council. Employees' general meetings were held once or twice a year. The general meetings served as a means by which the workers collective decided on production plans of the enterprise in line with the guidelines for socio-development laid down by the Communist Party and the plans and policies of the government. At the general meetings decisions were made on the utilization of capital resources of the enterprise as well as measures to improve the working conditions and the livelihood of employees, including training for employees. The Enterprise Council was a permanent organization elected at employees' general meetings to supervise the implementation of decisions of the meetings. The council could convene extraordinary employees' general meetings when necessary to seek ways and means to improve the efficiency of the enterprise. Decision No. 217 /HDBT was the first legal document on the Resolution of the Third Plenum of the Party Central Committee (Sixth Congress) on shifting SOEs to socialist cost-accounting regime, reforming economic management mechanism the essential feature of which was the confirmation of the autonomy of SOEs. It was a landmark in the reform and further expanded the autonomy of SOEs. The reform started with a pilot programme at three factories: Tran Hung Dao Engineering Factory, March 8th Textile Mill, and HaNoi Brewery in the 1960s which led to policies manifested in Decision Nos. 25/CP and 26/ CP of the government enacted on 21 January 1981; Decision No. 146/ HDBT enacted 25 February 1982 which revised Decision No. 25/CP; Resolution No. 156/HDBT of the government enacted 30 November 1984 on the reform of management in SOEs (draft); Resolution of the Politburo of the Communist Party of Vietnam dated 8 April 1986; and Decision No. 76/HDBT of the government dated 26 June 1986 promulgating temporary legal regulations on the autonomy of SOEs. Since the enacting of Decision 217 /HDBT, the role and operations of SOEs were drastically changed. Therefore, the government enacted Decree No. 50/HDBT on 22 March 1988 which replaced the old SOE charter promulgated in conformity with Decree No. 93/CP of 8 April 1988 by a new SOE charter, and later on Decree No. 98/HDBT of2June 1988 on the right to collective ownership by employees in SOEs. The old SOE charter asserted the important position of SOEs as producer of wealth, economic units which contributed to the gross

50

Nguyen Van Huy and Tran Van Nghia

national product (GNP) and accumulation of capital, and a social organization. The new SOE charter gave further emphasis to the position of SOEs, and asserted that SOEs were economic units, essential links of the socialist national economy, engaged in planned production of goods. With a view to satisfYing increasing demand of society, SOEs were seen as legal entities and independent accounting units where employee collectives exercised their management right and implemented the socio-economic development guide-lines and policies of the Communist Party and government and organized their social activities. The following were the operating principles of every SOE: l.

2. 3.

Complying with the guidance of the Communist Party and the unified management of the government; and exercising business autonomy within the law. Management with one man in charge on the basis of collective ownership exercised by the employee collective. Applying a socialist cost-accounting regime, while handling in a correct manner the relationship between the interests of society with those of the employee collective, of which the employees' interests served as the direct motivating force.

The new SOE charter stressed four new basic tasks of an SOE. First, to formulate and implement the production plans; enhance efficiency unceasingly and expand production, producing more and more goods and services for society; balance its own accounts; and fulfil its obligations towards the state budget and local government by tapping fully its potentials, using technological advances. Second, to apply the principle of distribution according to work done and social equity; and organize properly the livelihood and continuously enhance the education and skill levels of its employees. Third, to expand economic co-operation with partners in all economic sectors and with foreign partners; and play the key role in the state sector, thus making an active contribution to the national economy and to the socialist transformation. Fourth, to safeguard the enterprise, provide security and social safety, and fulfil its obligations to national defence; and abide by the law and financial regulations, and make true reports in line with the regulations of the government. What was fundamentally different from the past with regard to the enterprise's assets was that the government entrusted them to the employee collective, headed by the CEO, to manage and utilize for developing production in conformity with the objectives and responsibilities assigned to the enterprise and unceasingly expand the operations of the enterprise with the highest possible efficiency. In addition to aspects such as planning, accounting, finance, credit management, pricing, technological development, supplies of inputs and marketing of products, labour and wages, social activities, economic eo-

Government Policies and State-Owned Enterprise Reform

51

operation, export-import, and co-operation with foreign partners in the spirit and wording of Decision No. 217 /HDBT, the new SOE charter also addressed the questions of leadership, management within an SOE, and the relationship between the enterprise and its higher levels, with government agencies and local authority; and the right to collective ownership by employees and the role of the CEO. Decree No. 98/HDBT of the government dated 2 June 1988 further established the right to collective ownership by an enterprise's employees on the basis of exercising operational autonomy stipulated in the SOE charter, Constitution, and relevant laws, under the guidance of the Communist Party and the directive of the government. The right to collective ownership was exercised by means of employees' general meetings, the Enterprise Council, and the Employee Inspection Commission, aiming at overfulfilling the business plan of the enterprise, handling correctly the interests of society and the employees, and ensuring the comprehensive development of each member of the employee collective. The relationship between individual employees and the employee collective was manifested in their responsibilities and rights in the enterprise. They were assured of the necessary conditions to fulfil their responsibilities with high efficiency and good quality work. Employees were remunerated, rewarded, and entitled to other interests according to the result of their work and the mcome of the enterprise. They were entitled to training so that they could develop themselves comprehensively and were assisted to develop their creativeness for innovations. They also had the right to participate in formulating technical-economic norms, business plans, and in the management of the enterprise. It was their right to make recommendations, appeals, or denouncement as stipulated by the law. When they moved to new jobs, they were entitled to benefits enshrined in the current policies of the government. They also had the right to information relating to operations of the enterprise, including policies and regulations of the government. The main forum where the employees could exercise their right as masters of the enterprise was the employees' general meeting, held once or twice every year to discuss and decide on important matters such as development strategies, business plans of the enterprise, income distribution policy of the enterprise within the framework of government policies, and welfare of the employees; to elect the members of the Enterprise Council and Employee Inspection Commission; to cast their votes of confidence on the CEO, etc. The Enterprise Council was a permanent organization operating between the two general meetings of employees. It consisted of seven to twenty-one members with a term of two years, elected by the general meeting to supervise the implementation of resolutions passed by the general meeting, make the necessary recommendations on policies and measures that might be needed to implement those resolutions, and handle matters within its power and report them to the next general meeting. The Employee Inspection Commission consisted of five to fifteen members,

52

Nguyen Van Huy and Tran Van Nghia

with a term of two years and was elected by the general meeting to supervise and inspect the operations and distribution of profits in the enterprise. The CEO was a representative of both the government and the employee collective. He/she was authorized to manage the day-to-day operations of the enterprise according to the plans and policies of the government as well as the resolutions of the employee general meetings. He/she was accountable and responsible to the government and the employee collective for the operating results of the enterprise. In order to improve the legal leeway for SOEs to operate, between 1988 and 1990 the President of the State Council promulgated Ordinance on Accounting and Statistics Principles on 29 September 1988, Ordinance on Economic Contract on 29 September 1989, and Ordinance on Economic Arbitration on 12 January 1990. The government also enacted additional regulations on organization, operations, financial/accounting principles for enterprises, etc. With regards to SOEs joined in unions of enterprises, the government enacted Decree No. 27 /HDBT on 23 March 1989 to replace the old union of SOEs charter stipulated in an earlier Decree No. 302/CP dated l December 1978. The new charter provided for two new models of unions of SOEs. First, a union of SOEs was formulated on the principle of willingness of its members, that is member SOEs willingly merged fully or partially in business operations where they deemed that a union would be more efficient than individual enterprises operating alone. Each member of the union still retained its legal status and acted according to its own charter and the resolutions of the board of directors of the union. The board of directors was the supreme organ of the union, consisting of CEOs of the union member firms. The union was headed by a CEO elected by the board of directors and approved by the government agency that decided on the formation of the union. The assets of the union did not include the assets of its member firms. In case it was necessary to mobilize the assets of member firms for the purpose of fulfilling the operating plan of the whole union, the union needed to obtain the consent of the member firms concerned and had to return those assets to them, including the principal plus interest payment. Expenses of the union would be financed partly from profits of service firms decided by the board of directors. A union could be on a national or regional scale at the discretion of the relevant minister and with the approval of the Prime Minister. If all members of a union were locally run SOEs, the chairman of the People's Committee of the relevant province would decide on its formation, with the approval of the relevant minister. Second, unions were to be formed in special technical-economic sectors (such as electricity, civil aviation, railways, and postal services) which had high levels of capital accumulation and called for centralized management as a condition to obtain high efliciency for each member and the whole union. These unions operated according to plans and a centralized accounting regime. Member firms did not have full legal status

Government Policies and State-Owned Enterprise Reform

53

and were placed under a centralized management mechanism of the union. However, they could engage in additional business activities should those operations not hinder their main business operations. Unlike unions formed on the basis of willingness of members, assets of special unions, including fixed assets, working capital, and all the funds of member firms, belonged to the union. To deal with joint ventures among enterprises, the government enacted Decree No. 28/HDBT on 22 March 1989, providing for the charter of joint ventures, and Decision No. 38/HDBT on 10 April 1989 on economic cooperation in production, distribution, and services. The charter on joint ventures stipulated the principles relating to the formation and operation ofjoint ventures and the right of SOEs to contribute capital or mobilize financial resources for business operations aimed at higher efficiency. Joint ventures were set up on the basis of willingness of partners, regardless of ownership forms (state, collective, individual household, small business, or private firms) .Joint ventures were to operate with autonomy and comply with the SOE Act. Each SOE could enter into several joint ventures at a time. The board of directors was the supreme organ of a joint venture, consisting of representatives of shareholders and no more than one-third of the board members would be representatives of employees appointed by the trade union. The board of directors elected and dismissed the CEO and chief accountant. If over 50 per cent of the shares of a joint venture were owned by the government, its CEO and chief accountant had to be appointed and dismissed by the relevant minister or the chairman of the relevant provincial People's Committee. The SOE was authorized to mobilize private capital with the repayment schedule agreed upon by the capital owner and the CEO of the enterprise and institutionalized in the contract. The SOE was obliged to repay the capital and pay out dividends as stipulated in the contract. Owners of 30 per cent of the mobilized fund were entitled to send one representative to the board of directors of the SOE and to sell their ownership rights. The Decision on economic co-operation stipulated economic relations by means of economic contracts between enterprises of different economic sectors, regardless of ownership forms. Economic co-operation could be of different forms, such as associations of producers and consumers; product groups; sectorial council of producers and consumers; regional council of producers and consumers; and import-export unions. Depending on the organizational forms and business requirements, the partners determined the extent and types of co-operation, whether based on types of work, types of technology, or types of goods and services. The accounting system in SOEs was further improved by Decree No. 25/ HDBT of the government on 18 March 1989 which provided for the charter on the accounting regime in SOEs and Decree No. 26/HDBT of the same date providing for the charter on chief accountants in SOEs. The charter specified the qualifications, functions, authorities, and responsibilities of

54

Nguyen Van Huy and Tran Van Nghia

chief accountants, the procedure for appointment and dismissal of chief accountants, and the relations between the chief accountants and the CEOs in SOEs. For export--import operations and foreign exchange management, the government enacted Decree No. 161/HDBT dated 18 October 1988, which provided for the charter on foreign exchange management. The charter stipulated that all economic units (including SOEs) and individuals who earned foreign currencies from export and import transactions or service provision had to open accounts at the Commercial Bank for Foreign Trade; economic units and individuals who needed foreign currencies for their business operations were allowed to buy foreign currencies at the exchange rates determined by the Commercial Bank for Foreign Trade. Foreign currency transactions outside this bank were prohibited. Decision No. 218/CT dated 18 August 1989 by the chairman of the Council of Ministers (currently the Prime Minister) stipulated on the regime of selling foreign currencies to central funds, abolishing the regime of transfers of foreign currencies stipulated in Decision No. 217 /HDBT and Decision No. 177 /HDBT dated 15 June 1985. Since then the regime of transfers of foreign currencies had been replaced by the regime of foreign currency selling and buying. All export firms and service companies had to sell the foreign currencies they earned (including the foreign currencies earned inside the country) to the central foreign currencies fund. The proportion of foreign currencies to be sold varied from business types and after a proportion was retained at the enterprises to cover production cost and to expand exports. Regulations on the management of export-import business which were issued together with Decree No. 64/HDBT on 10 June 1989 further concretized regulations on imports and co-operation with foreign partners which had been stipulated in Decision No. 217 /HDBT and the charter of SOEs. These legal documents not only concretized but also amended some provisions in Decision No. 217 I HDBT. With regards to depreciation, Decision No. 217 /HDBT stipulated that all depreciation of fixed assets would be retained by the enterprise, except that part of the depreciation of projects with large investment and those recently commissioned would be transferred to the state budget. Decision No. 93/ HDBT dated 24 July 1989 stipulated that all economic projects in all state sectors funded by the state budget had to depreciate 70 per cent of their fixed assets within the first three years of operation and the amount depreciated would be transferred to the state budget; the remaining 30 per cent was to be transferred to the capital investment fund of the enterprise. On average, SOEs of various sectors paid some 50 per cent of depreciation to the state budget and retained 50 per cent for their capital investment fund. That was a contingency measure applied up to late 1994; from early 1995 all depreciation was retained at SOEs. Decision No. 195/HDBT issued on 2 December 1989 further stipulated that assets at SOEs had to be recorded as inventory and evaluated before

Government Policies and State-Owned Enterprise Reform

55

transferring to the management of SOEs; the regime of providing input supplies to SOEs was to be abolished and replaced by the regime of selling and buying inputs via economic contracts even for the state plan component at SOEs; financial institutions and the relevant higher authorities would determine the rate and period of depreciation of fixed assets acquired through funding from the state budget. The portion of depreciation retained at SOEs for the development investment fund was governed by Decision No. 93/ HDBT mentioned above and had to be deposited in an account at the development bank, which could be withdrawn only for purchasing fixed assets for production expansion and only after the feasibility study of the project which required the bank withdrawal was appraised and approved by the relevant higher authorities; enterprises had to fulfil their financial obligations to the state budget before they could set up their own funds. Subtraction from transfers to the state budget, from depreciation or prolonging of the depreciation schedule when selling prices were lower than production costs was strictly prohibited. It was stipulated that the growth rate of salaries and wages had to be lower than the growth of productivity so as to ensure that the income of workers corresponded to their performance, to avoid breaches of financial regulations and prevent individual and collective interests from overriding national interests. After the enacting of Decision No. 217 /HDBT to expand the autonomy of SOEs, the number of SOEs increased drastically, of which a number were set up by district governments and were not economically viable. A number of SOEs managed to increase their income considerably, thanks to their initiative and dynamism; yet quite a number of SOEs were losing money. That situation called for continued reform and strengthening the management of SOEs. Decision No. 144/HDBT issued on 10 May 1990 aimed at strengthening the management of SOEs and regulating enterprises with high income. Decision No. 315/HDBT issued on 1 September 1990 focused on the reorganization of the operations of SOEs. To this end, the government ordered the relevant organizations which directly controlled SOEs to review and evaluate the operating efficiency of all SOEs and, for the money-losing enterprises, determine the reasons for the losses. On the basis of such analyses, corrective measures were to be sought and accountability of SOEs' management and that of the relevant controlling organizations were to be identified. If an SOE continued to make losses after all these had been done and became insolvent, that SOE could be closed down according to procedures stipulated in this Decision. Directive No. 316/CT issued on 1 September 1990 aimed at entrusting the user right and responsibility to preserve capital to SOEs. This was an issue of important significance which could not be applied to all SOEs at one go, but had to be experimented first at one or two SOEs in each sector or location before it could be applied en masse. In preparation for the entrusting of assets, the assets of SOEs needed to be re-evaluated at current prices including fixed assets and current assets- and the working capital and other

56

Nguyen Van Huy and Tran Van Nghia

funds determined. Once the assets had been entrusted to the managers of the SOEs, they were obliged to utilize them efficiently and preserve and develop these assets. Decision No. 317 /CT issued on 1 September 1990 on the restoration of discipline in wages and bonus payments in SOEs aimed at ensuring the principle of distribution according to work done in SOEs, overcoming the whimsical distribution of wages and bonuses which exceeded work performance in SOEs. Ways to calculate labour cost were determined for products whose prices were set by the government or by the enterprise, products under irregular production, and miscellaneous products whose labour cost was difficult to determine. The bonus fund would be financed from profit, as were transfers to the state budget and contributions to the production development fund and welfare fund. Disbursement of any other financial resources for personal consumption within the enterprise was strictly prohibited. The bonus fund must not exceed 50 per cent of the payroll. The way wages and bonuses were paid to employees must be set up by the enterprise and approved by the employees' general meetings. Remuneration and bonus distribution in an SOE must be approved by the immediate higher level of the SOE. The salary and bonus of the CEO were determined by the Enterprise Council or at the employees' general meetings and should reflect the operational efficiency of the enterprise; yet they must not exceed by threefold the average salary and bonus in the enterprise. To correct deviations in remuneration and bonuses and to restore discipline in the financial managementofSOEs, the chairman of the Council of Ministers enacted Directive No. 408/CT on 20 November 1990 regarding continuous revamping of financial management and accounting in SOEs. The Directive's contents were to strengthen the inspection and auditing by government agencies in order to ensure that SOEs complied with accounting and financial principles, discover and address violations, and at the same time give instructions on what SOEs should do to strengthen accounting and financial work. Specifically, SOEs had to comply with required bookkeeping practices, ensure the accuracy of the records, and must not leave any revenue unrecorded. Enterprises were obliged to utilize resources economically and with high efficiency. They were allowed to distribute to employees only the portion of profits after they had paid their dues to the government budget, and see to it that the growth rate of the income of employees must not exceed the growth rate of productivity and that the bonus to the CEO was approved by the relevant organization. Together with the revamp of management of SOEs, it was imperative to strengthen the role of the state-controlled apparatus, and overcome the situation where state control was neglected while the government intervened too deeply in the day-to-day operations of the enterprises. Decree No. 196/ HDBT dated l1 December 1989 redefined the responsibilities, authorities, and tasks of the ministries in exercising state control of economic life. The direct superior state control agencies of centrally run SOEs are the ministries,

Government Policies and State-Owned Enterprise Reform

57

and the counterpart for locally run SOEs are the provincial People's Committees. Ministries and provincial People's Committees could issue decisions to set up, break up, or merge SOEs, delegate the right to use production factors, assets, and capital to SOEs, and control and inspect the operations of SOEs, but could not intervene in the day-to-day activities of SOEs. To carry the SOE reform forward, the government has reviewed the implementation of the policies enacted under Decision No. 217 /HDBT so as to formulate new policies to help SOEs to bring into full play their operating autonomy and heighten their efficiency. Decision No. 143/HDBT dated 10 May 1990 instructed relevant sectors and localities to review the implementation of Decision No. 217 /HDBT, Decree No. 50/HDBT, and Decree No. 98/HDBT and to experiment in reforming the management of SOEs. What is noteworthy in Decision No. 143/HDBT is that the government advanced the idea of setting up a board of directors as an experiment in some SOEs, equitizing SOEs, and leasing out SOEs, and prepared legal documents to cover the bankruptcy of SOEs.

1.

Equitization of SOEs

Equitization of SOEs is experimented only in SOEs which meet certain conditions and is aimed at the following objectives. First, to ensure the state's ownership of the state capital and assets, to preserve and develop the assets and capital of the whole nation whose representative is the government. Second, to facilitate employees' exercise of the right to ownership of the enterprises and strengthen the bonds between employees as shareholders and the enterprises. Third, to mobilize the idle capital of the enterprises' employees and the public for economic development in the interests of the state. Eguitization could be in two forms: equitization by public offering and equitization by government-employee partnership. SOEs to be equitized by public offering must meet the following conditions. First, it must be a truly viable and profitable enterprise and has adopted cost accounting. Second, the equitization must be endorsed by the employee collective. Third, a number of employees of the enterprise can afford to buy shares. A governmentemployee partnership enterprise is jointly owned by the government, as representative of the people's ownership of capital and assets, and the employee collective, owners of labour and technology. They form a partnership in business and generate profits which will be divided between them according to the shares after tax or transfers to the state budget and disbursement of fines, if any, as stipulated by the law. The distribution of profits is executed between the government as the owner of production factors and the employee collective. It is not a matter between a master and a wage earner where the master can distribute the profits at his whims. The principle to evaluate the labour share is the labour cost of product produced in the enterprise. The

58

Nguyen Van Huy and Tran Van Nghia

value of the labour share thus evaluated is acknowledged by the government as far as accounting is concerned, because the employees must have worked for fifteen days before they get paid. The Decision also instructed on the procedures for the experimental equitization ofSOEs using the above-mentioned approaches and applied first and foremost to medium-sized and small enterprises. Large and important SOEs will not be equitized for the time being. The Decision also instructed on the reorganization and operations of equitized enterprises, including general meetings of shareholders, employees' general meetings, board of directors, and audit commission. Experimental equitization of SOEs must comply with specific principles and regulations. First, it is imperative to clearly identify the responsibilities and authority of each direct state control agency, which are: to work out the basic objectives of the enterprise; select and dismiss the chairman of the board of directors, appoint outsider members of the board at the recommendations of such agencies as financial institutions, banks, and local governments, and appoint economists and professionals to the board; determine the depreciation schedules for fixed assets of the enterprise; approve the charter of the enterprise; and decide on the sale of assets, merger, or liquidation of the enterprise.

2.

Management Apparatus of SOEs

The management apparatus of SOEs consists of the employees' general meeting, the board of directors, and the CEO. The employees' general meeting will no longer decide on big issues as it used to, but just make recommendations on the development strategies of the enterprise and on the operating plans, and evaluate the performance of the enterprise. It also discusses and gives suggestions on the measures to carry out the operating plans or to handle problems that may arise in the operation of the enterprise and elects representatives to the board of directors. The board of directors is the management body of the enterprise with half of its members as outsiders appointed by the higher state control agency, including the representative of that agency who serves as the chairman. Other members of the board are financial specialists appointed by financial institutions and technological, economic, and banking professionals recommended by state control agencies or appointed by the local People's Committee, if necessary. The remaining half of the board comprises representatives of the employees elected by the employees' general meetings. The CEO is required to pass some examinations and is appointed by the board of directors. The CEO may or may not be a member of the board of directors. The CEO represents the enterprise in the eye of the law to deal with other partners in business activities. He/she is the only person authorized to handle the day-to-day activities of the enterprise and is accountable to the board of directors for the performance of the

Government Policies and State-Owned Enterprise Reform

59

enterprise. The salary and bonus of the CEO are determined by the board of directors according to his/her performance. The CEO may be penalized according to the law if his performance leads to serious losses of the enterprise's assets or capital or even bankruptcy. Once penalized as such, he/she will not be allowed to serve as CEO for the next five to ten years. What was advanced in Decision No. 143/HDBT were new and urgent issues which further clarified the guide-lines for the SOE reform in the years that followed. The government continues to enact many additional legal documents in an effort to improve the legal framework for the operation of enterprises, including SOEs.

3.

Reform of Tax System

The tax system also underwent a major reform. Transfers to the state budget and payment of all profits to the government were replaced by taxes. On 8 August 1990 the Revenue Tax Code, the Act of Special Consumption Tax, and the Act of Profit Tax were promulgated and came into force from 1 October 1990. Mter an experimental period the chairman of the Council of Ministers enacted Directive No. 138/CT on 25 April 1991 to widely delegate the right of use of capital and responsibility for its preservation to SOEs. Decision No. 332/HDBT dated 23 October 1991 by the Council of Members (currently the government) specified the preservation and expansion of capital of SOEs as follows: the original values of fixed assets and fixed capital must be reevaluated at current prices twice every year, once at mid-year and the other at year end; the working capital must also preserve its value and constantly be adjusted against inflation so that it could be accounted for in the production cost. The balance sheet must also be adjusted for inflation. Mistakes committed by the enterprise that led to losses of the assets assigned to it must be compensated for from its production development fund or its retained profits. If losses were attributed to objective circumstances, the value of the assets could be adjusted down correspondingly.

4.

Financial Management of SOEs

Most of the SOEs faced severe shortage of working capital. Decision No. 378/ CP of 16 November 1991 aimed at finding a solution to this problem. Authentic and registered SOEs were provided with legal capital not exceeding 30 per cent of the working capital requirement in the working capital plan already approved. The enterprises had to borrow from banks and other domestic or foreign sources to cover the shortage. In order to enhance the supervision and inspection of state control agencies over SOEs' operations and better manage the state assets and capital at SOEs,

60

Nguyen Van Huy and Tran van Nghia

the government has recently established the General Department of State Capital and Assets Management, which is affiliated to the Ministry of Finance. However, earlier the government had issued Directive No. 331/CT dated 23 October 1991 on perfecting the financial management apparatus at SOEs. First of all, it is imperative to perfect the financial management apparatus at the Ministry of Finance, other economic ministries, and provincial People's Committees. At the same time the Ministry of Finance must formulate and disseminate manuals on financial management at SOEs in keeping with the new requirement. It is imperative to provide the personnel needed for the financial management apparatus of SOEs, to retrain financiers and accountants, dismissing those who are not qualified. In the process of restructuring SOEs, the government urges SOEs to reregister and favours the closing down of insolvent ones, thus having managed to regain control over the SOEs which were set up en masse in the earlier years. This policy was reflected in Decree No. 388/HDBT dated 20 November 1991 on the regulations for setting up and closing down SOEs; and Directive No. 393/CT dated 25 November 1991 and Circular No. 34/CT of28January 1992 guiding the implementation of the above Decree No. 388/HDBT. The restructuring of SOEs started at the grass-roots SOEs. Only on 7 March 1994 did the government issue Decision No. 90/Ttg on the restructuring of SOEs and Decision No. 91/Ttg on the experiment with a number of economic groups. The experimental equitization of SOEs was decided on in Decision No. 143/HDBT dated 10 May 1990, yet it was not implemented in the two years that followed. That is why on 8 June 1992 the chairman of the Council of Ministers issued Decision No. 202/CT and Decision No. 203/CP to push this experiment forward. It was followed by Decision No. 84/Ttg of the Prime Minister datt>d 4 March 1993 on the experimental equitization of SOEs and on measures to diversify the ownership of SOEs. This decision emphasized and clarified the three objectives of the experiment and publicized a list of SOEs under direct instruction of the government for experimental equitization. In addition, it instructed each ministry and each province to select from two to four SOEs for the experiment. The Prime Minister also issued Decision No. 361/Ttg on 20 June 1995 on the formation of a Preparatory Commission for Stock Market to facilitate the setting up of a capital market and for the issue of shares. Until recently, SOEs were governed by decrees and decisions of the government and of the Prime Minister. On 20 April 1995 the National Assembly approved the SOEs Act which constitutes the highest legal document and is very important to the organization, management, and operations of SOEs. The Act clearly defines the ownership of SOEs. This has been discussed and put into practice for a long time in various forms, yet it is not clearly defined and consequently it has prevented SOEs' management from being

Government Policies and State-Owned Enterprise Reform

61

efficient. In the Act the government is defined to exercise the right to ownership of SOEs and it can delegate a part of that right to ministries and provincial People's Committees. The SOEs can manage and utilize (but are not the owners of) public assets assigned to them for business purposes. The Act also articulates the responsibilities and authority of the government in exercising state control and ownership over SOEs. At the same time the Act also provides for the rights and obligations of SOEs; the establishment, restructuring, and closing down of SOEs; the organization and management of SOEs with and without boards of directors; the organizational structure and operations of state corporations whose formation is decided on by the Prime Minister and those formed on a voluntary basis by member SOEs; and the management of the capital of SOEs invested in other enterprises. Thus, together with the Private Company Act, the Company Act approved by the National Assembly on 21 December 1990, the Bankruptcy Law on 30 December 1993, and the Law on Domestic Investment on 22 December 1987, the SOEs Act has helped to complete the set of fundamental laws on organization and operations of different basic enterprises. The Co-operative Act is under preparation for submission to the National Assembly by the end of 1995 or middle of 1996. Policies for SOE reform formulated by the state at both micro and macro levels over the past period, particularly in the last ten years, have been constantly amended for improvement, in keeping with the move towards a market economy governed by regulations of the state. The new mechanism has brought about heartening results and strengthened the role of the state economic sector, thus contributing to the stabilization and development of the national economy. Vietnam's GDP recorded an annual growth rate of 8.3 per cent over the five years from 1991 to 1995, in which the state sector has seen a rapid growth, from 7.9 per cent in 1991 to 12.7 per cent in 1994, while the non-state sector's growth was less than half of the state sector, from 4. 7 per cent in 1991 to 6.6 per cent in 1994. The GDP growth rate over this period is considerable when compared with 6.4 per cent in the 1981-85 period and 3.9 per cent in the 1986-90 period. The shifting from a centrally planned and subsidized mechanism for SOEs to a market mechanism, the lessening and eventual elimination of the 'owning regime' which puts an end to the intervention by government agencies in the operations of SOEs, the expansion of autonomy of SOEs, and the reduction of SOEs from 12,297 enterprises in early 1990 to 6,264 enterprises in April 1994 have helped to improve the performance of SOEs. SOEs' efficiency has increased; the number of loss-making SOEs dropped from 35 per cent in 1990 to 20 per cent in 1992 and 9.7 per cent in 1994. The contribution of SOEs to GDP increased from 29.4 per cent in 1990 to 40.4 per cent in 1994 and accounted for some 63-67 per cent of the state budget. Although the number of SOEs has been reduced by half, the way SOEs were closed down,

62

Nguyen Van Huy and Tran Van Nghia

combined with mergers of SOEs, provided a good solution to the surplus labour, thus avoiding social chaos. Income of SOE employees in 1994 was 2. 68 times as much as that in 1991.

IV.

Conclusion

The above-mentioned achievements have asserted the correctness of the renovation, which is irreversible. However, these are only the initial attainments. Renovation is intended to overcome old habits and practices. It must not only disempower outdated thinking, but also build up new concepts suitable to the new environment and new conditions. This takes time and effort. The market mechanism is new to SOEs in Vietnam. To improve SOEs' performance, not only are comprehensive policies needed, but strict observance of those policies is also required for the state sector to overcome its current shortcoming, which is a low rate of returns, that is 5.1 per cent, while employing 70 per cent of the national physical assets and 5.6 per cent of the labour force, most of whom are skilled workers and well-trained technicians and managers. Although the reform has obtained good results, much is to be done to help SOEs surmount numerous difficulties, such as obsolete technology; shortage of capital; absence of capital and labour markets; incomplete financial, banking, and credit systems; the likelihood of recurrent inflation; a complicated tax system laden with overlapping codes; incompetent managers who have not been trained properly to operate in a market economy; lack of plans for SOE reforms; lack of transparency and consistency of policies; slow equitization of SOEs; inadequate legal framework; and lack of clarity of the ownership of SOEs. The SOE reform is immensely facilitated by Resolution No. 10/NQTU dated 17 March 1995 of the Politburo of the Communist Party of Vietnam which pointed out that from now to the year 2000 the state economic sector, whose essential part is the SOEs, will continue to be strengthened, so that it can bring into full play its leading role in the national economy. Proceeding from the successes we have recorded and the experiences of other countries, particularly those in our region, the reform charted in the above-mentioned Resolution of the Politburo is bound to strengthen the achievements already attained and record new successes, thus improving the performance of SOEs so that they can live up to their role in the national economy.

4

Legal Consequences of StateOwned Enterprise Reform Le Dang Doanh

I.

Introduction

Vietnam began the first steps of its reform of state-owned enterprises (SOEs) in the early 1980s. This subsequently evolved into a massive and fundamental reform of SOEs, towards a greater degree of market orientation in the late 1980s and early 1990s. At first, the reform of Vietnam's SOEs was primarily in the area of management and planning, thereby providing more autonomy for SOEs within the framework of a centrally planned economy and the gradual reduction of state subsidies and allowances. Until the implementation of the doi moi (economic reform) programme in 1986, whilst there had been some renovation of the state sector, SOEs were still operating within an environment without market competition. At that time the economy simply consisted of the state and collective sectors, with no private sector. Under such conditions, the management of SOEs was a purely administrative exercise. Without the pressure of competition, SOEs found no motive for the revision and improvement of regulations intended to make them more operationally eflicient. Instead, SOE managers tended to concentrate all their efforts on fulfilling mandatory targets assigned to them, and dutifully obeying directives or orders stemming from the resolutions and decrees of the ruling party and government. To implement the economic renovation process, and develop a multisectoral economy, is to develop a wide range of production factors, including: SOEs, family and collective enterprises, individuals' businesses, private limited companies, shareholding companies, joint ventures with foreign firms, and so on. Economic reform, therefore, is to change from a centrally planned economy into a market-oriented, multi-sectoral economy, operating under a market mechanism. Enterprises with different forms of ownership structure are encouraged to develop and compete in this market environment. In such a context, a demand arises for a better defined and more appropriate legislative framework, in order to ensure the equality of all enterprises before the law, and the concretization of the legal provisions needed to regulate the economy and the various enterprises (including SOEs). Consequently, both doi moi and the reform of Vietnam's SOEs have prompted a legislative need to establish

64

Le Dang Doanh

a legal framework to govern the operations of the state sector. At the same time the reform of the state sector has helped in developing the legal system to meet the demands of doi moi itself, by providing greater autonomy to SOEs.

11.

Impact of Legal Provisions on SOE Reform

The reform of the state sector in the early stages was aimed mainly at implementing the provisions and regulations of the government, as presented in various decrees and resolutions. However, in the period since 1990 SOE reform has become more closely linked with legislative reform, particularly with regard to the laws pertaining to economic activity and operations. Fully aware of the importance of creating favourable conditions for Vietnam's SOEs to operate autonomously, prior to the commencement of doi moi in 1986, the government decided to reduce gradually the centrally planned economic system. The government issued Decree No. 25/CP in 1981, to allow SOEs to develop three production plans: l. 2. 3.

a plan assigned to the enterprise by the state; a plan drawn up by both the government and the enterprise; and a plan created and implemented by the enterprise alone.

The third plan was intended mainly as the secondary or complementary production plan, to fully utilize the resources and potential of the SOE to meet market demand and help fulfil any insufficiency in the state plan. It is worth noting that Decree No. 25/CP of 1981 was the first pilot scheme aimed at renovating the bureaucratic and subsidized, centrally planned system, at the micro-k;el, and was perhaps the first move towards the market economy for Vietnam's state sector. The following elements of legislative reform have reduced dramatically the impact of the centrally planned system on Vietnam's SOEs. Goyernment Decision No. 217 /HDBT (1987) was an important step in paving the way for fundamental changes in planning and accounting in SOEs, and it also proYided a fairly comprehensive and cogent definition of business autonomy for SOEs. Then in 1988 the government issued Decree No. 50/HDBT, which aimed to provide clarity on the rights and obligations of SOEs, and could be regarded as the charter of state enterprises in certain industries. Also in 1988 the government issued Decree No. 98/HDBT, which defines the rights of workers in SOEs. These pieces of legislation - together with a number of related documents issued subsequently, intended to interpret further these decrees and decisions - have together formed a fairly complete regulatory system, which enables and promotes the autonomy of SOEs to make their own business decisions in almost all aspects: planning, supplies, product sales, finance and accounting aspects, monetary and credit matters, labour, wages, and social issues. In particular, Decision No. 217 /HDBT, and its attached documents, has stipulated that SOEs must develop self~initiative in their

Legal Consequences of State-Owned Enterprise Reform

65

economic endeavours. Acting as corporations, SOEs have become economic entities, with member companies. In Decree No. 27 /HDBT (1989), the government issued operational regulations in order to ensure that these corporations enacted production on the basis of the ability and willingness to do so. The old type of SOE organization, structured by administrative means and characterized by inefficiency, as a union of companies under the centrally planned mechanism has been abandoned. The implementation of these government decisions and decrees has led to a substantial reduction in the number of essential products that SOEs must produce, under the plan assigned to them. And similarly, a reduction in the materials and equipment that the government must distribute to SOEs. Under the state plan for SOEs, the number of essential products dropped from 100 in 1987, to 40 in 1988, to 20 in 1989, and to just 6 in 1990. The number of essential materials to be under direct governmental control and distribution was reduced from 100 in 1987, to 30 in 1988, to 20 in 1989, and to just 8 in 1990. To date, Vietnam's SOEs basically operate under the principles of the market economy, albeit with state control at the macro-level. The government has dismissed the system of mandatory state targets that were previouslv applied to production and distribution. At present, the state imposes only a few targets, such as that pertaining to electricity or cement production, and some goods traded under quotas. This reduction in the number of mandatory production targets is an essential step, but must be undertaken gradually in order to avoid sudden changes in the business activities of SOEs. During the early stages of reform, in a bid to ensure the operational autonomy of SOEs in the sale of products not included in the mandatory targets, the state resolved that SOEs could sell their products at market prices. The products with mandatory targets, however, would be sold only to certain buyers at government-set prices, on the principle that SOEs would be able to cover their costs of production and gain some degree of profit. As a result, the dual-price system was formed, where the official price (set by the state) was lower than the market price. But today, the planned pricing system ofthe state has been substantially abolished. At present, the state controls the price of just seven essential commodities, including electricity, petroleum, fertilizer, steel, sugar, and paper. This reduction in the degree of direct intervention by the state- using mandatory targets, orders, and fixed prices - and the adaptation towards market regulations for SOEs are steps in the right direction for the reform of the state sector in Vietnam. As a result, they have provided SOEs with greater autonomy in their business operations across the entire national market, within the broad field of business for which they are registered. A number of fully capable SOEs are also permitted to undertake import and export business activities. After the implementation of the first measures of reform- from 1989 to 1990 - the autonomy of SOEs has been enhanced, and the degree of government intervention in their operations has been reduced. Most notably,

66

Le Dang Doanh

the centrally planned system, mandatory targets, state-set prices, and the direct control of state agencies have all been abolished. Vietnam's SOEs have entered a period in which they must compete in order to survive and develop, although the level of competition is not yet at a particularly high level. As a result of these reform measures, some SOEs have been able to adapt to the new circumstances and operate successfully, whilst others have run up substantial losses and debt, and are finding it difficult to develop. As a result of this situation, the government has implemented measures intended not only to improve management mechanisms within SOEs, but also to restructure the state sector, in a bid to reduce the number of loss-making or inefficient SOEs, whose continued operations are deemed non-essential. Government Decree No. 388/HDBT of November 1991 - and supplementary Decision No. 96/HDBT, which was issued in 1992- provided for the liquidation or merging of those SOEs which were judged to be inefficient or lacking in capital or technology; that did not have sufficient market demand for their output; or which did not meet other conditions. But for those SOEs whose operations were considered adequate, they had to reregister and were allowed to continue operating. Although such decisions were not quite in harmony with the 'rules of the game' under a market economy, in the absence of a bankruptcy law for enterprises- which was subsequently adopted in 1993, and enacted on 1 July 1994- Decree No. 388/HDBT seemed to work well in governing SOEs on this issue. As a result of the restructuring of the state sector under this decree, the cumulative number of SOEs dropped by 49 per cent, as of April 1994. This marked a major change in the past policy of mass development of SOEs, regardless of size, efficiency, and effectiveness, as administered under the centrally planned economic strategy. The implementation of this decree meant that the proportion of loss-making SOEs dropped from around 30-40 per cent of all SOEs in 1990 to just about 10 per cent at present. With regard to the union of state enterprises into large corporations, the revision of their registration could only be enacted after the government issued Decisions No. 90/TTg and 91/TTg, in 1994. Like all other SOEs, such major corporations may only register after they have met all the capital, technology, efficiency, and various other necessary requirements, and can provide evidence to support the claim that they should become state corporations. Therefore, those corporations that cannot meet these requirements must be dissolved, or divided into smaller SOEs. This reregistration process for state corporations has helped reduce the number of corporations and phantom enterprises, and has also brought about the establishment of a number of big state corporations, formed under a pilot scheme to develop large SOE conglomerates. The passing of the Bankruptcy Law by the National Assembly in December 1993 was an important milestone in the reform of Vietnam's SOEs. Since the promulgation of this crucial law, all enterprises (including SOEs) running at a loss, or unable to pay overdue debts will, in principle, be considered for

Legal Consequences of State-Owned Enterprise Reform

67

liquidation, according to the procedures and formalities set out by the law. This puts an end to the previous situation, where the state was obliged to spare no effort in retaining loss-making SOEs. The implementation of the Bankruptcy Law applies to all enterprises- both private and state-run -in all sectors of the economy, and has helped create an equality amongst the country's enterprises in dealing with debt and bankruptcy. The reform of Vietnam's SOEs from 1990 until now has been further complemented in various ways that were not initially anticipated, including the diversification of ownership structures and the corporatization (also known as equitization) of some SOEs. Based on the resolution stemming from the tenth session of the Eighth National Assembly in 1992, the government issued Decisions 202/HDBT and 203/HDBT, to equitize select SOEs. These decisions were augmented by Government Ordinance 84/TTg of March 1993, which aimed to accelerate the pilot programme for the equitization of SOEs. In addition, the relevant ministries - such as the Ministry of Finance, the Ministry of Labour, Invalids, and Social Welfare, and so on - also issued circulars to help guide the implementation of these decisions. The pilot equitization scheme is intended to provide experience, to help expand the corporatization programme for Vietnam's SOEs later. Through this pilot equitization scheme of SOEs, three main aims are intended: 1. 2. 3.

To create a new method of developing the multi-sectoral economy, by diversifying the ownership structures of SOEs. To mobilize available funds into shares of enterprises, for development investment. To restructure SOEs in a bid to improve their performance efficiency, and thereby make them capable of playing a leading role in the economy.

However, this equitization programme for Vietnam's SOEs has been implemented very slowly. Nonetheless, the pilot scheme has confirmed some of the intentions and objectives of, and created the first conditions for, the future equitization programme. To date, only three SOEs have officially been equitized and are now operating as shareholding enterprises, whilst two other SOEs are in the process of issuing shares, and a number of others are in preparation. This slow implementation rate is due to a number of reasons, of which the most important is the lack of a legal basis for equitization, with only the few above-mentioned ordinances to refer to. This has led to hesitation and reluctance by many ministries and state agencies towards equitization, particularly with regard to the lack of a legal basis for the assessment of property and land value, and the benefits and welfare of workers in equitized SOEs. Along with measures to restructure, re-register, liquidate, and equitize SOEs, Vietnam has also implemented macro-economic policies - such as long-term planning, import and export tariffs, institutional finance, accounting systems, monetary and banking policies, exchange rate policy, credit and interest, pricing, etc. -which have helped guide SOEs indirectly.

68

Le Dang Doanh

The state has also abolished the previous policy on SOEs making direct contributions to the state budget, by bringing such payments within the national system of taxes, which is levied on all enterprises (both private and state-run), as dictated by the laws on taxation. In other words, past direct contributions by SOEs have been replaced by the revenue collection system, which pertains to all enterprises, regardless of ownership structure. The tax system has also been developed, in order to differentiate better the various forms of production and the various sources of investment, both domestic and foreign. Gradually implemented since 1990, a simpler tax regime than before helps ensure that the revenue system is broadly market-oriented and treats all enterprises on an equal footing. Along with the reform of the tax policy, the organization of tax collection has been consolidated and restructured, from the highest level down to the local level. As a result, tax revenues collected have increased year to year. In 1991 tax revenues increased by 64 per cent on 1990, and 1992 recorded a rise of 67.7 per cent on the previous year. Today, taxes and fees account for 85-90 per cent of total budget revenues. Nonetheless, although renovated, the tax system remains unduly complicated and overlapping, and thus cannot effectively protect the domestic production of some goods. There are still too many fees and charges imposed by different authorities at different levels, and part of these fees collected are not being contributed to the state budget. Tax evasion, exemption, and smuggling are popular. Measures to respect, control, and obey the tax laws have not been wholly effective. The budget structure has also changed in that expenditure has been refocused towards greater investment in national development, particularly with regard to construction and infrastructure, where the rates of return tend to be low. All economic entities, including SOEs, must raise investment capital unaided. As a result, SOE financing has been separated from the state budget. And with the exception of certain social welfare sectors, SOE subsidies and price allowances have largely been abolished. Financial regulations pertaining to Vietnam's SOEs are becoming more and more clearly defined. However, due to the greater degree of autonomy extended to SOEs, and the lack of strict monitoring of banking and finance, a number of SOEs have abused their new-found autonomy: using their capital inefficiently; borrowing excessively; carelessly entering into joint ventures and co-operative agreements; and going bankrupt. Their wasteful spending has led to high production costs, wrongful use of salary funds, etc. To eliminate this phenomenon, the government and its agencies have released a series of decisions and circulars that state: 1.

SOEs are entrusted with state capital, but are not the owners of such capital. Consequently, any use of capital for joint ventures, business cooperation (with either domestic or foreign partners), share acquisition, establishment of shareholding companies, etc., must be approved by the relevant representatives of the government and financial authorities.

Legal Consequences of State-Owned Enterprise Reform

2. 3. 4.

5.

6.

7.

69

There is also to be more rigorous and regular reporting on, and inspection of, co-operation and joint-venture agreements by SOEs. SOE revenue derived from selling or liquidating fixed assets may only be used for re-investment and the development of the enterprises. Clear and consistent provision is to be made on the use of bank loans and the interest rate to be paid, and interest on deposits held by SOEs. Changes in the depreciation funds at SOEs have been made. At present, the whole of the depreciation fund is left within the enterprise, for use in re-investment, upgrading technology and machinery, and expansion of production. Reducing the cost of production, stricter bookkeeping, more formal bidding for and procurement of large assets, and limits on overhead expenditure are to be aimed for, under a unified system of documents issued by the Ministry of Finance. Close observation of the principles of accounting and bookkeeping is to be exercised, with strong control over the process of estimating, auditing, and finalizing accounts. The government has issued a unified system for accounting and statistical work. Financial, accounting, and auditing consultancy services are to be promoted. The results of financial and other business activities shall have to be accounted for and reported publicly.

The system of financial management has also changed, in order to monitor SOEs more closely in their utilization and development of state capital. At present, the accounting management systems of the Ministry of Finance, the relevant line ministries, and the relevant provincial authorities are unified, from the top (central government) down (local level), all coming under the General Department of State Capital and Assets Management. The reform of the banking system in Vietnam has also had an impact on the reform of the country's SOEs. The ordinance on the banking system, enacted in 1988, has helped greatly in the financial operations of the state sector. A dual banking system was established, consisting of the State Bank and the various commercial banks (both state-run and private). For the four state-run commercial banks, they have become business enterprises dealing within Vietnam's monetary market and, like the SOEs, have their own autonomy, within the rule of law. The banks have applied broadly similar interest rates for loans to SOEs and non-state enterprises. This policy of granting business autonomy to the state-run commercial banks is in harmony with the aim of clearly separating SOE financing from state budget expenditure, so that all enterprises in Vietnam must borrow capital for their investment and development needs. The banks have gradually reduced their credit interest rates in order to encourage greater production (through investment), and have begun to control credit, by providing loans only to those enterprises that are efficient. The state-run commercial banks have also organized the settlement of bad debts among various economic entities in

70

Le Dang Doanh

Vietnam, including SOEs, thereby relieving SOEs of their bad debts and allowing them to concentrate all their efforts on business activities. In recent years research has been conducted to prepare a new stage in the reform of SOEs - examining ways to enact new legislation and ordinances pertaining to the state sector, and at the same time improving the consistency of implementing such legal measures. The relationship between SOE employees and employers, and their rights and obligations, is an issue that was first addressed in the August 1990 ordinance on the employment contract. Following experience gained in the implementation of this ordinance, the National Assembly approved a full Labour Law in June 1994. Under the provisions of this labour law, employers (including SOEs) have the right to select and employ workers as required by their business activities, and may award or punish employees as provided under the law. The obligations and rights of employees are defined in the contract between workers and employers, as agreed in the employment contract between the enterprise and individual workers or group of workers. The relationship between employees and SOEs, as defined by the Labour Law, has enabled state enterprises to exercise their rights and obligations towards workers in a manner congruent with the market.

Ill.

Law on State Enterprises

Up until April 1995, SOEs' operations were governed under the various legal instructions (ordinances, decrees, etc.) stemming from the government, but without the rule of a full law (as passed by the National Assembly), even though a corporate law and a private enterprise law had been passed and promulgated. However, the approval of the law on SOEs by the National Assembly in April 1995 has since formed the legal basis for state enterprises to operate in equality with business enterprises under different forms of ownership. This law marked an important step in establishing a unified legislative background for Vietnam's SOEs, defining their rights and civil obligations as 'legal persons'. (In other words, SOEs - and their managers - became fully responsible for their actions.) The law confirmed SOEs' limited liabilities, within the amount of capital managed by the enterprises. In addition, the law also confirmed that SOEs are economic entities entrusted with state capital, are organized and managed by the state in their broad business operations, for either commercial objectives (that is profit) or social objectives (such as providing public utilities), in order to achieve the roles assigned to them by the state. Those SOEs operating to achieve commercial objectives are granted autonomy, like those enterprises of the private sector, so that they can compete with the non-state sector in the market. Those SOEs serving social objectives are largely assigned duties by the state, so as to provide public utilities or services, national defence or security, etc. For this latter grouping of SOEs- those serving social objectives- special treatment is given by the state to help them perform these roles.

Legal Consequences of State-Owned Enterprise Reform

71

The law pertaining to SOEs in Vietnam does not only confirm the autonomy of state enterprises, but also empowers them, in that they have the right to use and manage their properties. They may also transfer or mortgage their properties, with the exception of large buildings and machinery that require the approval of the relevant authority, provided that the capital granted to them by the state is maintained. SOEs may also enter into joint ventures, contribute equity, re-invest (using profits and depreciation), and broadly determine the scale of business deemed most appropriate to their objectives, organize production, and upgrade technology. But the law also clearly defines the obligations pertaining to SOEs: to effectively use capital and other resources entrusted to them by the state, so that they may achieve the objectives given to them by the state. The law also provides strict procedures to limit the number of SOEs in specific industries and enable the development of other, non-state enterprises. The SOE law has a separate chapter devoted to state control, and the implementation of state ownership, and on the management of state enterprises. These are very important provisions that have prompted debate on different options. The law provides that the government- and its agencies -is the sole body able to exercise state control over SOEs, according to both the law and the division of work stipulated by the government. State ownership of SOEs is directly exercised by the government, or may be delegated to the relevant mini~try or provincial People's Committee, and the board of management of an SOE is the tool by which the state exercises its ownership of the state enterprise. The rights of ownership include those related to such important issues as: establishment, liquidation, restructuring, determination of business objectives, direction of operations, location of capital, investment, joint ventures, changes in investment strategy, changes in ownership structure, profits distribution, salaries and management awards, mode of management, inspection and monitoring of performance, and so on. According to the provisions of the law, the Ministry of Finance is granted the mandate to control state capital and assets in Vietnam's SOEs. The law also requires the transparency of annual financial statements of SOEs, like auditing of financial activities. The law on SOEs also determines the appropriate organizational model for state enterprise management, in a bid to ensure that the rights of both SOEs and the state are exercised fully. Depending on the type of SOE, a state enterprise may or may not have a board of management. Those SOEs with a board of management have a mechanism that also includes a board of inspectors (set up by the board of management), a general director, and supporting staff. The general director is responsible to the board of management for the operation and performance of an SOE. A separate chapter of the state enterprise law pertains to state corporations and the management of the state's share in SOEs. State corporations are also SOEs, and therefore have basically all the rights and obligations of any other state enterprise. However, state corporations may consist of various member companies or enterprises, and so their obligations and rights are adjusted

Le Dang Doanh

slightly in accordance with the binding relations that exist between state corporations and their members.

IV.

Conclusion

The reform ofVietnam's SOEs towards a greater degree of market orientation is closely linked to the overall economic reform in the country since 1986, with SOEs playing a leading role in the new multi-sectoral economy and market mechanism. The state enterprises have also advocated for reform in the legislation pertaining to the state sector and the multi-sectoral economy as a whole. Since the Sixth Congress of the Vietnamese Communist Party in late 1986, the doi moi economic reform policy has attempted to develop an economy with different forms of ownership, in addition to the two forms state ownership and collective ownership- which existed previously. Following this aim, the Eighth National Assembly passed several important laws confirmed in the country's 1992 Constitution - to pave the way for the development of this multi-sectoral approach, including:

1. 2. 3. 4.

the Foreign Investment Law, passed in 1987; the Private Enterprise Law, passed in 1990; the Corporate Law (covering limited and share holding companies), passed in 1990; and the State Enterprise Law, passed in 1995.

The 1992 Constitution of the Socialist Republic of Vietnam confirmed that the country should develop a multi-sectoral market economy, with state control and a socialist orientation. A multi-sectoral economy is one that has a diversity of ownership forms, and its three basic sectors are: state sector, collective sector, and private capitalist sector. All sectors are encouraged to develop. The state sector, of course, is to be greatly strengthened and encouraged. The collective sector is to be provided with favourable conditions for it to develop and diversifY its business activities, in a bid to ensure the effective operation of the co-operatives, under the principles of the market economy. As for the private sector it is no longer limited in the scale and type of business it conducts, provided it conducts operations in a way that will bring benefit to the whole country as well. Family businesses are also encouraged, under a policy that ensures that all enterprises are equal before the law and that their capital and properties are protected by the state. The reform of Vietnam's SOEs is being implemented in tandem with the right of ownership for all business sectors, as provided by the Constitution and the law. This is a necessary condition in achieving the following three developmental goals:

1. 2.

Promote competition and hence improve the efficiency of SOEs. Create an environment of co-operation and promote jomt ventures between enterprises in different sectors of the economy (that is both

Legal Consequences of State-Owned Enterprise Reform

3.

73

state and non-state firms). Also, establish joint ventures between SOEs and foreign companies, and thereby improve business efficiency and upgrade technology and managerial skills of SOEs. Attract resources for investment in the state sector, in the form of shares, and promote equitization and other elements of SOE reform.

Looking ahead, both the development of the private sector and attracting foreign investment in (and further reform of) the state sector require further amendments to the country's economics and business legislation as well as completion of the laws pertaining to the enterprises themselves. Since being promulgated in late 1987, the foreign investment law has been amended continuously over the subsequent years. Both the law on private enterprise and the company law were passed by the National Assembly in 1990, and were amended in 1994, but are still in need of further amendments. In the three years since the enactment of the law on private enterprise and the company law, over 22,000 private, limited, and shareholding companies have commenced operation. In addition, over 800,000 individual families or groups of families have been registered as running businesses. In the last two years the number of private businesses has doubled, whilst the number of limited companies has increased eightfold. Yet the collective sector has decreased markedly. Generally, the rate of economic growth within the nonstate sector is still lower than that of the state sector. The state sector grew by 11.2 per cent in 1993 and 11 per cent in 1994. In comparison, the non-state sector grew by 5.6 per cent in 1993 and 7 per cent in 1994. The share of the state sector in the total gross domestic product (GDP) figures grew from 36 per cent in 1991 to 46 per cent in 1994. Nonetheless, the non-state sector will make an increasingly important contribution to the economy, in providing employment and income for a substantial number of workers, many of whom will move from the state sector as it goes through further restructuring. The issuance of the laws profiled above has led to a far larger number of enterprises being established, but it has also led to a number of bankruptcies, largely due to a lack of competitiveness in some enterprises. Many SOEs fall into financial difficulties because they are not granted a competitive environment with the non-state sector, and even with other SOEs. The weak points of SOEs in their competition with non-state enterprises include: the smuggling and tax evasion of the latter, and the heavy bureaucracy of the former. However SOEs also enjoy some competitive advantages over the nonstate sector, such as: land use and location advantages, investment and bank credit advantages, monopoly positions, etc. To date, these features have not been adequately dealt with in the legal provisions concerning fair competition, and Vietnam lacks an anti-monopoly law. To ensure the continued reform of Vietnam's SOEs, the reform of the relevant legal system should be a focal point. Although the legal system has seen positive improvements in recent years, there is a need to work on some legislative issues, including the following:

74

Le Dang Doanh

1.

There is a need for laws to regulate a future stock market and capital market. There is a lack oflegal provisions regarding property and the obligations and rights related to the transfer of such property, particularly with regard to SOE property. There is insufficient legislation concerning equitization of SOEs and changes in the ownership structure of state enterprises. Whilst the autonomy of SOEs has been enhanced by recent reforms and laws pertaining to the state sector, SOEs are still not treated equally in business. Therefore, revisions to the company law are required.

2.

3. 4.

The process of ownership diversification in SOEs has helped change purely state-owned enterprises into enterprises of mixed ownership. An important condition required in order to expand this development of shareholding companies is the promotion of equitization and the establishment of a stock market (and the laws governing the operation of a securities market). It is also important that laws are issued on competition and monopolies, in order to create a level playing field of fair competition for all enterprises, including SOEs. Finally, there is also a need to ensure the full implementation of such laws, and eliminate poor observation and effectiveness of legislation when implemented. In addition to educating people on these laws, there must be adequate training oflawyers, so that competent application oflaws pertaining to the market economy can be achieved. There is a need to enhance the spirit of law observance by business people and employees in general, and by SOEs in particular. The management mechanism is gradually being reformed at all levels, so as to build a state governed by the law, which means that the completion of the legal system - and its observance - remains a high priority.

SECTION 11

ASIAN EXPERIENCE

5

State-Owned Enterprise Reform: Lessons from Japan Kiyoshi Nakamura

I.

Introduction

Japan implemented a far-reaching privatization policy of public enterprises in the mid-1980s. Nippon Telegraph and Telephone Public Corporation (NTTPC) was privatized in 1985 and Japan National Railways (JNR) was reorganized as a private company in 1987. Since these public enterprises provide the basic infrastructure for economic and social development, privatization of these giant public entities symbolizes a drastic alteration in the traditional thinking of how to deal with monopolies. The Japanese experiment of privatization is an acid test to determine whether these public services could be supplied efficiently by private organizations. The Japanese privatization policy indicates that privatization is essentially a political issue. Since privatization and deregulation may destroy the vested interests, how to create a favourable political climate for change and who takes the initiatives are the key elements which ensure that the difficult regulatory reforms proceed smoothly. Japan's privatization policy has not been successful in all respects. Many unresolved questions remain. Moreover, Japan's privatization policy reflects the peculiar economic and social characteristics of the Japanese traditional setting. Japan's experience could not be directly transferable to other countries because of the differences in the development stage and traditional economic system. However, it is also true that there are various economic rationales behind the Japanese privatization policy that are common in any economy. Although Japan's privatization has not been completed, the experience of privatizing Japanese public enterprises could provide many interesting lessons to Vietnam in its attempt to reform its state-owned enterprises (SOEs). This chapter is organized as follows. Section 11 explains the major reasons why Japan's public enterprises were privatized. The next sections focus on two case studies of Japan's privatization policy. Section Ill examines a case study of NTTPC - it discusses the main characteristics of the NTTPC privatization policy and assesses the results of privatization. Section IV considers a case study of JNR - it discusses the major features of JNR privatization practices and evaluates the economic effects on its performance after

78

Kiyoshi Nakamura

privatization. Section V outlines some of the political and economic implications of the Japanese experience and applicability for Vietnam.

11.

Background to Japan's Privatization of Public Enterprises

JNR and NTTPC, which were once SOEs, were converted into self- supporting public enterprise systems after World War II. There were two major reasons why the government had controlled them. First, to secure such public services as railways and telecommunications, there is a great need for the government to take full control of supply, especially when Japan was in a devastated condition after the war. Second, nation-wide railway and telecommunications networks require large-scale facilities in which a major portion of the cost is fixed. When the investment is sunk and cost is not recoverable, large-scale production is the only way to make the operations viable. To enjoy the economies of scale in these public enterprises, they must be protected from competition and new entry. However, it gradually became clear that state involvement in public enterprises hampered structural adjustment, diminished work incentive of the employees, and failed to enhance productivity and efficiency. The government ownership has naturally become an object of scepticism and lost favour among economists, policy makers, and the public. Privatization and deregulation were considered solutions to the allocative and productive inefficiency of these public organizations. The following factors in the early 1980s promoted the privatization policy of Japan's public enterprises. First, the Japanese Government faced serious financial difficulty from the mid-1970s. To cope with the recession caused by the sudden appreciation of the yen's exchange rate in 1971 and the subsequent oil crisis in 1973-74, which caused a sharp decline in business profits and investment - leading to lower tax revenues - the government began to depend heavily on issuing public bonds in order to increase public investment and social security. Issues of deficit-financing public bonds more than tripled from 2.3 trillion yen in 1975 to 7.3 trillion yen in 1980. Snowballing government deficits and huge subsidies for public enterprises created inflexibility in the financial structure. As a result, to streamline the governmental budget became the most pressing item on the agenda in the 1980s. At that time there were three m~or public institutions requiring huge government subsidies: the Foodstuff Control System to secure self-sufficiency in rice (KomeinJapanese), the National Health Insurance Scheme (Kenko hoken), and the JNR (commonly abbreviated to Kokutetsu in Japanese). The term san-K (the three Ks) was coined by combining the initial letters of the Japanese words representing the three government-subsidized institutions. Since subsidies for these public organizations made up about 10 per cent of the total budget, it was imperative that the government reduce the subsidies for these enterpri»es. In March 1981 the Second Provisional Commission on Administrative Reform (SPCAR)

State-Owned Enterprise Reform: Lessons from Japan

79

was inaugurated to rationalize administrative organizations for the restoration of financial health. In 1982 the commission proposed the privatization ofJNR and NTTPC as part of the government administrative reform. Second, in the 1980s privatization became a buzz-word in the industrialized countries. For example, the Thatcher government in the United Kingdom was very keen on introducing privatization programmes for public enterprises. The British privatization policy had a strong influence on economic policy in Japan as well as elsewhere. Deregulation policy in the United States also had a great impact on the attitude towards natural monopoly in Japan. The experiences of the United Kingdom and the United States indicate that in a competitive environment private ownership is superior to state ownership in most cases. Since the subsidies for the Japanese public enterprises had become one of the major causes of the government deficits, Japan had no choice but to adopt the privatization policy. Third, a serious decline in managerial efficiency appeared in these public enterprises by the mid-l960s. These public enterprises were not given managerial freedom. On top of it they were strictly supervised by the government and the Diet. For example, the appointment of directors, budgets, and operation and investment plans required the approval of the government. Since capital was channelled by the government based on the annual budget which was submitted to the Diet, political intervention was unavoidable. This kind of political interference aggravated the financial situation of public enterprises. Fourth, due to the inherent characteristics of public enterprises, both management and labour unions lacked a sense of crisis. These gigantic and monopolistic public enterprises faced various serious problems, such as outdated management style, deterioration of morale, and extremely limited interest in restructuring of operations, all of which seemed to be caused by so-called X-inefficiency. Obviously, a lack of incentives and rewards system, conflict of economic and social objectives, as well as susceptibility to political pressures of interest groups, contributed to the higher costs and huge deficits of these public enterprises. To sum up, the financial deterioration of the government, political interference, managerial inefficiency, and a lack of sense of crisis in both management and labour unions were responsible for the financial deterioration and dependency on government subsidies of the public enterprises, which in turn produced huge government deficits. It was gradually recognized among the general public that reforming these public enterprises would be essential to reduce government debt, enhance efficiency, and lessen political interference. To initiate the drastic privatization policy, the government inaugurated the SPCAR, an autonomous advisory organization under the Prime Minister. The advisory group was given full authority to draft the drastic reform plans because then Prime Minister Yasuhiro Nakasone strongly supported it as a political campaign. Since drastic reform plans were often subject to being

80

Kiyoshi Nakamura

watered down in the process of building a consensus among several vested-interest groups and natural rivalries among ministries in the past, the establishment of an independent commission was essential to initiate the privatization policy. As expected, the SPCAR advised the Prime Minister to privatize the two gigantic public enterprises, NTTPC andJNR. The following sections summarize the privatization plans and the main results.

Ill. 1.

Privatization Policy of NTTPC

Problems NTTPC Faced before Privatization

In the case ofNTTPC, several major problems existed in the pre-privatization era. First, it became apparent that technology and the quality of service of NTTPC either deteriorated or did not meet increasingly more sophisticated user needs. It is especially true when telecommunications technology is rapidly changing. In fact, the monolithic NTTPC was unable to meet the diversified needs of the new telecommunications technology. Because NTTPC was insensitive to changing innovation and consumer preference, the force of competition was recognized to be a particularly important stimulus to enhance the technological advance and improve managerial efficiency in the telecommunications sector. Second, the closed, exclusive family-like business group was organized with suppliers of equipment and materials clustering around NTTPC for mutual benefits. This close business link was called the 'Den-Den Family', which was coined from the Japanese name of NTTPC, Den-Den Kosha, which was perceived to be responsible for NTTPC's higher procurement costs and technological delay and resulting higher telephone tariffs. Third, since NTTPC had been entrusted to cope with the increasing demand for telephones during the high-growth period of the 1960s, it became a very labour-intensive organization, especially in the employment of maintenance workers and telephone operators. Moreover, although NTTPC had established a nation-wide automatic direct dialing system and had reduced the long waiting period for new telephone lines by the late 1970s, it faced a sharp rise in labour costs, because wages for employees were basically linked to their age and not based on the enterprise's financial performance. The continually increasing labour costs became a heavy burden for NTTPC. However, NTTPC was forced to maintain this large number of employees, partly because it was difficult for NTTPC as a huge public enterprise to reduce its employees due to the opposition of the NTTPC labour union, and partly because the government would always foot the bill. It deprived NTTPC of a sense of crisis and work incentive. Fourth, there were a number of unreasonable labour practices, such as underhanded dealings, the casual day off, and work-place negotiation systems which became a serious barrier to efficient daily operations. In 1980, for

State-Owned Enterprise Reform: Lessons from japan

81

example, the loose accounting in a regional NTTPC branch office gave rise to a scandal which forced the president of NTTPC to resign. It was a sign of the deterioration of NTTPC as a public enterprise. (See Takano 1992 for details.) Fifth, the breakup of AT&T and privatization of British Telecom had promoted a change of policy towards NTTPC. From the standpoint of international competition in telecommunications, how to maintain Japan's international competitiveness became an urgent issue in industrial policy. Since technological advance is extraordinarily remarkable in this area, the liberalization of telecommunications markets and the privatization ofNTTPC were considered to be necessary steps to enhance efficiency and innovation.

2.

Framework at Privatization of NTTPC

The original proposal of the SPCAR for NTTPC reform was not only to privatize NTTPC but also for it, within five years after privatization, to be partitioned into a national company which owns the basic networks and regional companies which offer the services. The purpose of this recommendation was clear: the privatization of NTTPC should not be a simple transfer from a public monopoly to a private monopoly. Since it was obvious that a privatized NTT would dominate the market, splitting it into regional companies as AT&T was in the United States was considered to be essential for reducing its monopolistic power and to enhance new entry into the telecommunications market. In 1985 NTTPC was finally reorganized as a private company, called Nippon (japan) Telegraph and Telephone Company (NTT), with a total market value of 24.06 trillion yen (US$250 billion) and more than 300,000 workers. However, it was not accompanied by any vertical or horizontal divisions, partly because there was a conflict of opinions among the members of the then-ruling Liberal Democratic Party, NTTPC management, and the Ministry of Posts and Telecommunications (MPT), and partly because privatization through listing NTT shares in the stock market was given top priority. The plan for regional division was shelved at the initial phase of privatization and put off to the second phase. However, it was postponed again in the 1990 review for the next five years to 1997 due to the conflict of interests within the government. At the time of this writing, the Advisory Council of Telecommunications finally decided to recommend the regional breakup plan to the government. As Table 5.1 summarizes, the main features of the NTT privatization scheme are as follows: First, to promote competition and technological advance, the telecommunications business was liberalized and divided into two kinds of business field: Type-I common carriers, which consist of companies that provide service by installing and operating their own telecommunications networks; and Type-II common carriers, which offer telecommunications

82

Kiyoshi Nakamura TABLE 5.1 Privatization and Reorganization of NTTPC Before Privatization (NTTPC)

After Privatization (NTT)

Organization

Public enterprise

Joint-stock company

Service Areas

Domestic long-distance and local calls Monopoly Universal services Financed by the government Approval by MPT and Diet

Domestic long-distance and local calls One of Type-I carriers Universal services More than one-third held by the government Approval by MPT

Restricted and required approval of MPT Financed by the government Controlled by the government budget as civil servants Appointed by the government

No restrictions

Status Obligation Shares Tariffs and Operation Plan Investment Finance Wages

Directors and Management

No restrictions and no public support Wage negotiations

Approval by MPT and the government

services such as VANs (Value-added Area Networks) without installing their own physical networks. Type-11 is also classified into two categories: Special Type-11 and General Type-II. The latter contains carriers which provide value-added telecommunications services to general users. The peculiar characteristics of the reform plan would be the classification ofType-1 common carriers by the ability to construct an infrastructure network. This classification was designed to make it easy for MPT to control the reliable supply of basic telecommunications services. The new NTT, as a Type-1 carrier, is allowed to engage in domestic telecommunications and other affiliated businesses, but it is also obliged to provide a universal telephone service without discrimination from a social point of view. In contrast with NTT, new common carriers (NCCs) are not subject to this requirement. Because of NTT's advantages as the dominant integrated company, MPT considered that it might be desirable to assist NCCs in order to enhance competition in the telecommunications market. As a way to do this, NCCs are allowed to interconnect with NTT's local network by paying an access fee. Second, entry and exit of Type-I carriers as well as changes in their tariffs and services require the approval of MPT, but there is no barrier to entry into Type-11 business, except the obligation to notifY and register with MPT and also no regulation on its services and tariffs. Competition in Type-1 market is still confined within the framework of the government policy because MPT as

State-Owned Enterprise Reform: Lessons from japan

83

a regulatory authority is required to ensure that all reasonable demands for telecommunications services are met without discrimination and is also responsible for enforcing price control. Since MPT wants to stimulate competition between gigantic NTT and NCCs, regulation becomes asymmetric between them. For example, NTT's tariffs are kept about 20 per cent higher than those for NCCs and also NTT currently is not allowed to introduce the cost-based re balancing tariff policy. Third, NTT's shares are supposed to be sold in stages to the general public. Since the government retains at least one-third of the total outstanding shares which is stipulated by new NTT corporate laws, MPT has a strong voice in the management of privatized NTT. As a private company, the financial and investment plans and the budget of NTT do not require the approval of MPT. However, changes in tariffs, the issuing of new shares, and the appointment and removal of its executives do require MPT's approval. Disposal of government-owned shares is also determined by the Diet, based on the annual budget. In that sense MPT is expanding its discretionary power in the telecommunications sector.

3.

Effects of Privatization on NIT's Performance

Mter the privatization of NTTPC, the market structure and environment in the telecommunications industry have been transforming dramatically. The following are the main effects of the privatization policy on the performance of NTT. First of all, thanks to liberalization and privatization, new entrants into both domestic and international telecommunications markets have remarkably increased and technological advance has proceeded at a rapid pace. Since application procedures have been liberalized and foreign capital restrictions relaxed, competition has been intensifYing among common carriers. For example, 75 Type-1 carriers and 1,751 Type-11 carriers were competing head-to-head in 1994. Competition in the long-distance call market especially has stiffened because it is the most profitable business area in telecommunications. Three entrants- DDI Inc. (organized around Kyocera Electronics Co.) ,Japan Telecom Co. (clustered around Japan Railways groups), and Teleway Japan Corp. (centred around Toyota Motors Co.) -were licensed to operate the long-distance telecommunications businesses in 1986. In the cases ofJapan Telecom and Teleway Japan the assets of public sector networks such as railways and highways were used to provide fixed-linked services. As a result of fierce competition between the incumbent NTT and these three NCCs in the long-distance call market, NTT's market share has been falling sharply (see Table 5.2). As expected, competition has contributed greatly to the introduction of sophisticated technologies and a diversification of the services. It is amazing that fifty-seven companies competed in Japan's cellular telephone market in 1994, which brought tariffs down drastically. Obviously benefits have been passed on to users. However, on an international scale the

84

Kiyoshi Nakamura TABLE 5.2 NTT and Its Market Share (In billion yen)

1985

1986

1987

1988

1989

1990

1991

1992

1993

NTT 49,313 50,901 53,457 53,675 54,822 56,553 57,459 55,739 54,955 NTT and 49,313 50,901 53,457 53,675 54,822 56,553 57,459 59,019 60,695 DCM NCCs 7 942 2,160 3,950 5,674 7,103 9,259 204 (0.4) (1.7) (3.8) (6.5) (9.0) (10.7) (13.2) NCCs (%) (0.01) Total

49,313 50,908 53,661 54,617 56,982 60,503 63,133 66,122 69,954

NOTE: DCM stands for NTT DoCoMo, which is an affiliated company of NTT specializing in cellular telephone communications.

level of Japan's tariffs is still higher than those for the United States and European countries. Second, as a result of liberalization, NTT's market share measured in operating revenues has been decreasing, even though the split-ofT of NTT's most profitable data communications sector in 1992 was taken into consideration. In sharp contrast to NTT, NCCs' market share expanded rapidly from 6.5 per cent in 1990 to 13.2 per cent in 1993 in the Type-1 market, and from 10.8 per cent to 26.2 per cent in the Type-II market over the same period. NTT's operating expenses have been increasing due to rising labour costs, even though the number of employees has been reduced every year since privatization. Among others, a series of price wars between NTT and NCCs ha~ led to remarkable reductions in tariff rate and the decline in operating revenues of NTT. It is estimated that the total value of tariff rate reductions since NTT's privatization amounts to 1,040 billion yen (US$10.4 billion), which is equivalent to 14,900 yen per subscriber from 1985 to 1993. Third, privatization has had a great impact on productivity. Since NTT began reducing the number of its employees and introducing new technologies to rationalize operations, its productivity and managerial efficiency have improved rapidly. As shown in Table 5.3, there was large-scale reduction of workers, which was carried out in the most labour-intensive sections, such as maintenance, which used to account for about 35 per cent of the total employees, and operations, including the telephone directory service and telegram operations. To further reduce labour costs, NTT has been using various methods, such as the transfer or relocation of its employees to subsidiaries and cutting down temporarily on recruits. Management functions have also been rationalized by introducing the divisionalized organization system and the drastic closure or integration of regional headquarters and branch offices.

85

State-Owned Enterprise Reform: Lessons from japan TABLE 5.3 NTT: Reduction of Employment after Privatization

Year

Employment

Reduction

1979 (Peak year)

328,770

B1985

313,600

E1985 1986 1987 1988 1989 1990 1991 1992 1993

304,000 297,600 291,100 276,600 266,000 257,600 249,900 232,200 215,600

113,100 when compared to 1993 98,000 when compared to 1993 9,600 6,400 6,500 14,500 10,600 8,400 7,700 17,700 16,600

B1985 =Beginning offiscal1985; E1985 =End offiscal1985

According to Oniki, Oum, and Stevenson (1993), NTT's total factor productivity grew l l to 14 per cent for four years from 1983 to 1987 due to liberalization and privatization. In particular, the improvement in labour productivity was remarkable after 1983 when the government had decided on the privatization of NTTPC and the liberalization of the telecommunications market. The interesting aspect is that the announcement of the reforms had a great impact on the efficiency growth of NTT, as in the case of the JNR privatization. The reduction in the work force began, in fact, before privatization in 1985, partly because some employees wanted to retire before losing the benefits of a favourable pension system that was due for reYision, and partly because a great number of aged employees happened to reach retirement age simultaneously. Fourth, wider share ownership has resulted from the priyatization policy. There were about l. 7 million shareholders in 1994, among which the individuals accounted for a little more than 20 per cent. Apart from the Ministry of Finance (which holds 65.63 per cent of the total shares), the major shareholders currently are the NTT Employees' Shareholding Group (0.98 per cent) and financial institutions such as Nippon Life Insurance Co. (0.53 per cent), Mitsubishi Trust Bank (0.51 per cent), Daiichi Life Insurance Co. (0.48 per cent), and other similar banks and insurance companies. The institutional investors, including financial institutions, owned 11.38 per cent of the total stocks in 1994. The mutual shareholding is considered the most common strategy to protect the firm from take-over bids and to pursue the long-term growth policy in Japan.

86

4.

Kiyoshi Nakamura

Unsolved Problems after Privatization

The drastic restructuring of NTTPC was obviously a necessary step towards making NTT more efficient, technologically advanced, and ready to meet the rapid changes in consumer demand. However, since the privatization scheme was a compromise between the demands of the various interest groups and the public aspect of NTT's business, there remain a number of problems to be solved. First, one of the important purposes of the privatization of NTTPC was to raise revenue through the sale of 15.6 million shares, each with a face value of 50,000 yen. As mentioned above, while the government must retain at least one-third of the total shares, the remaining two- thirds were to be sold off in stages from 1986 onwards. In the first stage of sales, due to the lack of experience for sales of such a huge national property, the government had to depend on two methods of sale, competitive bidding and sales through securities houses. To determine the initial share price, competitive bidding for 200,000 shares was used in the first stage. Mter obtaining the base price for NTT shares, 175,000 of the shares were sold to the general public by lottery in 1986. In fiscal 1987, 1.95 million shares were sold, and in the next fiscal year 1.5 million shares. The weighted average per share up to 1994 was about 1.85 million yen (US$18,500), although it varied from the highest bid price of 3.18 million yen (US$31,800) in April 1987 to the lowest bid of 453,000 yen (US$4,530) in August 1992. Of the original 15.6 million shares, only 35 per cent (5.4 million shares) were sold by September 1995. There are still millions of shares scheduled to be listed on the stock exchange. However, the sudden decline in the stock market caused by the so-called 'melt-down' in the New York stock market of October 1987 se-riously affected the NTT share price. To make matters worse, the stocks-for-favours scandal involving NTT executives and politicians led to the collapse of NTT stock prices in 1989. Unfortunately, Japan has entered into the longest recession in its post-war history after the burst of the assetinflated bubble economy in spring 1991. The government was forced to postpone the sales plan for five consecutive years from fiscal 1989 to the present, because it was feared that the large quantity of listing NTT shares would lead to a further decline of stock market prices in general, which might in turn affect the price of NTT shares. During the last three years, the average price ofNTT shares has fluctuated from a high of one million yen (US$10,000) to a low of 565,000 yen (US$5,650). At the time of this writing, the government announced the postponement again of the sales of NTT stocks by the end of the fiscal 1995, 31 March 1996. Second, the most controversial problem has been the question of the charges for the interconnection oflong-distance NCCs to NTT's local network. Since easing entry restrictions for Type-I has promoted new competition only in the more profitable long- distance markets, new entrants have gone for the 'cream' and left the 'milk', that is the less profitable markets such as local

State-Owned Enterprise Reform: Lessons from japan

87

calls, from the viewpoint of NIT. It is said that this creaming off of long-distance markets could force NTT into cross-subsidizing the local-call markets, which would result in a rise in local-call charges. According to NTT's Annual Report, ordinary profit from long-distance calls was 511 billion yen in fiscal 1993, but local-call services showed a deficit of 23 billion yen. In the face of fierce competition from NCCs, NTT has continued to reduce its rates for long-distance calls, which further erodes its worsening financial situation. However, it should be noted that the calculation of the deficit is sensitive to the accounting conventions which are used by NTT. Although NTT is losing its competitiveness in the long-distance markets, it still dwarfs NCCs in terms of integrated infrastructure network, as well as research and development activities which NTT inherited from NTTPC. Since NIT has been keeping local networks, NCCs have to obtain its permission to link up local networks in return for payment of access charges. There have been some disputes between NIT and NCCs over the terms of interconnection. The basic question lies in the difficulties in establishing fair access charges for the use of the NTT networks. On the one hand, interconnection imposes a burden on NTT in providing local network services such as installation, maintenance, and operations. On the other hand, the higher level of interconnection payments make it difficult for NCCs to engage in new businesses such as Virtual Private Network (VPN) service. Recently NTT decided to lower access charges from 12.57 yen to 10.5 yen per three minutes in 1995, which would amount to about 120 billion yen less than what the three NCCs were paying NTT. The essence of the problem is how to enhance competition through interconnection between NTT and NCCs or how to open local networks for NCCs. The third question is whether NTT should be allowed to re balance tariffs between long-distance and local calls based on their costs. Since the distribution of the common costs between long-distance and local calls is necessarily arbitrary, each tariff does not reflect the actual cost of specific services. Moreover, because NTT is required to supply a universal service for social purpose and tariffs have to be affordable, prices cannot be determined solely on the basis of costs. To make the tariff system flexible and promote competition between NTT and NCCs, there is a need to introduce incentive regulation on pricing, such as a price cap. Fourth, it is time to complete the liberalization of Japan's telecommunications industry. New entry and interconnection require NTT to pursue cross-subsidy between the long-distance and local-call markets. However, if NTT were regionally divided, it is expected to make cross-subsidization difficult due to the small size and it may help check against anti-competitive conduct of NTT. It is also anticipated that yardstick competition among regional NTTs may reduce the possibility of predatory behaviour and help diversify operations to meet local demand. At the time of this writing, NTT announced the opening up of its local networks by providing rivals full

88

Kiyoshi Nakamura

access, which was considered to be a defensive move aimed at preventing NTT from being forcibly dismantled. However, it gave no timetable or other details. In spite of these remaining problems, the privatization of NTTPC has greatly contributed to enhancing efficiency and improving service quality. Levelling the playing field in the telecommunications market is the essential part in the first stage of the liberalization and privatization policy. Now is the time to deliberate on how to reduce government control and to provide incentives for efficiency.

IV. 1.

Privatization Policy of JNR

Problems JNR Faced before Privatization

The first railways were built and operated by the Japanese Government in 1872. The laws regulatingJNR were enacted in 1906 for building the netw-ork of railways. The major railways linking the cities were constructed by the government as well as the private sector. However, most of the private railways were taken over by the government in the early 1900s for military purposes, although the private railways in Tokyo and Osaka, as well as other big cities, survived even in wartime in the 1930s and 1940s. After World War II JNR, once the largest SOE in Japan, was reorganized as a public corporation in 1949 in order to pursue two different objectives: to achieve financial independence and to assume the substantial social obligation of providing a nation-wide railway service. AlthoughJNR played a key role in providing basic transportation services for both the passenger and freight markets, its importance gradually faded away with increasing motorization and income in the 1960s. The following reasons provide the major background as to why JNR had to be privatized in the mid-1980s. First, althoughJNR had dominated the passenger and freight transportation markets in the 1950s, it began to lose its competitive edge against cars and trucks, and later air transportation. For example, JNR accounted for 45 per cent of the total passenger-kilometres in 1965, but its share declined sharply to about 23 per cent in 1985. In the freight business JNR's market share decreased from about 30 per cent of the total ton-kilometres in 1960 to less than 5 per cent in 1985. In spite of its shrinking market share, JNR operated at a profit until1963, shortly before the inauguration of its first Bullet Train Service (Shinkansen) between Tokyo and Osaka in 1964. The irony is that the success of the high-speed Shinkansen promoted unrealistic expectations among people about the financial prospects for JNR. JNR began to generate huge debts from 1964 onwards. Deficits continued to grow rapidly and the interest payments on accumulated debt became a heavy burden on the government. Second, there was the political interference withJNR management.JNR as

State-Owned Enterprise Reform: Lessons from .Japan

89

a public corporation in theory was supposed to be operated by its own manager, but in fact JNR was strictly controlled by the government. For example, the governor ofJNR was appointed by the government, and he was often summoned to appear before the Diet, since the budget and the financial account settlement ofJNR required the approval of the Diet and the Ministry of Transport (MT) respectively. While JNR was forced to construct and maintain unprofitable local lines, Diet approval to raise fares was delayed and sometimes put off. Since a uniform nation-wide fare system was adopted in order to share equally the cost of providing universal railway services, fare adjustment often became a political issue in the Diet and was sometimes delayed or cancelled in the name of public services. However, investment plans to construct new lines were determined by the government budget, leaving much room for political intervention. In fact, investment for constructing the local lines did not decline even after JNR went into bankruptcy in 1964. The Japanese phrase gaden-intetsu became a buzz-word in the media, which was a play on gaden-insui, which means literally 'drawing water to one's own rice fields'. By replacing the last word of the original phrase sui (water) with tetsu (iron, which symbolizes railways), the new coinage neatly described the desire of politicians to construct railway lines in their own constituencies. The construction of deficit-ridden local railways was promoted under the name of public interest, which resulted in a vicious cycle of easy reliance on government subsidies and the financial deterioration ofJNR. Third,JNR failed to implement ref()rms from the inside due to the strong opposition from the labour unions and the political parties. There was a great need for JNR to streamline redundant employees in order to survive in difficult times, since JNR had employed around 430,000 workers from 1950 to 1980, which far exceeded its optimum size. JNR had attempted on several occasions to reform itself in the decade from 1969 to 1979. For example, a large-scale reduction of redundant employees was planned a few times during the period. JNR also tried to stop new construction of unprofitable local lines, and close or transfer about 3,000 kilometres ( 1,800 miles) of deficit-ridden lines to private railways or the third sector (public and private joint participation). Unfortunately, these plans did not materialize due to political interference, lack of a sense of crisis, and the antagonistic relationship betw·een management and the labour unions. The JNR management planned to implement the Productivity Improvement Movement in 1969, but failed to win the co-operation of the labour unions. The failure of this plan had a profoundly negative effect on the morale in the work-place and simply intensified the sectional quarrels among the politicized labour unions. The unsuccessful attempts at restructuring JNR from the inside further aggravated its financial problem and caused the accumulation of huge deficits for the subsequent twenty years. Fourth, the deterioration of JNR's service quality accelerated in the mid-l970s, when its workers carried out a series of strikes to demand the right

90

Kiyoshi Nakamura

to strike. The JNR labour unions, which were divided into several sects and were the most powerful and politicized unions in japan, were strongly opposed to any reduction in the work-force and went on a series of strikes. As a result, the relationship between the management and labour unions became very hostile and the work ethic faded away. The repeated strikes paralyzed the nation-wide railway system and greatly disrupted the everyday life of the people. The public became critical over the decline in the service quality of JNR. The insensitivity ofJNR to changes in the surrounding environment had significantly diminished its domain. All of these events in turn provoked a public distrust ofJNR and paved the road to privatization.

2.

Major Features of JNR Privatization Policy

Following the SPCAR proposal, the Supervisory Committee for JNR Reform was established in 1983 to deliberate on the plans for privatizing JNR. The Committee, which was strongly supported by then Prime Minister Yasuhiro Nakasone, submitted a report proposing the privatization and regional breakup of JNR. The Committee played an extremely important role in skilfully manipulating public opinion, drawing up the drastic reform plan, and building consensus in favour of the privatization plan. The establishment of the independent committee was essential for it to be immune from political influence. The chairman of t11e Committee, Toshimitsu Doko, who was well known as a stoic personality, was drafted from the business field as Nakasone's choice. The deputy chairman and one member of the Committee were selected from the academic field, thus emphasizing the authority and autonomy of the Committee. The privatization plan was formulated as a joint product of energetic members of the Committee, pro-privatization management inside JNR, and academicians. The following are the main features of the JNR privatization policy. First, JNR was not only privatized, but also broken up into six regional passenger railway companies and one nation-wide freight railway company. The regional division of passenger companies was based on the geographical distribution of demand in order to ensure a sound managerial base. Two distinct regional Japan Railways (]Rs) ,JR East and.JR West, were established in the Tokyo and Osaka metropolitan regions respectively. Since they were the most profitable markets owing to their large populations, they amalgamated with unprofitable adjoining rural areas in order to balance the financial obligation among the .JRs. The profitable line between Tokyo and Osaka, including trunk-line Shinkansen, was reorganized as an independent company called JR Central. These three passenger companies are usually referred to as the three Honshu (main island) passenger JRs. Three other 'island' companies (.JR Hokkaido, JR Kyushu, and JR Shikoku) were established on the basis of geographical characteristics. These regional breakups match actual passenger demand in a

State-Owned Enterprise Reform: Lessons from japan

91

TABLE 5.4 Reorganization of JNR before and after Privatization

Organization Service areas

Rail service Fare system Scope of business

Investment

Before Privatization (JNR)

Mter Privatization (JR)

Public corporation (national government) One nation-wide corporation

Special corporation

Mixed passenger and freight services Approved by the Diet Rail-related services only; side-business not permitted Capital invested by the government; investment plans approved by the Diet

Six regional passenger corporations and one nationwide freight corporation Separate passenger and freight services Approved by Transport Minister Side-business (e.g. real estate development, tourism) permitted Capital invested by JR; investment plans do not need approval of the Diet

SOURCE: Mizutani and Nakamura (1994).

sense that 95 per cent of all trips would be completed within the borders of these regions. Table 5.4 gives a summary of the JNR reorganization. Second, the JNR Settlement Corporation (SC) was set up to supervise the transfer of 37.2 trillion yen (about US$372 billion) ofliabilities and redundant employees. se took on about 70 per cent of the total debt (25.5 trillion yen, equivalent to about US$255 billion). SC was expected to liquidate this liability by selling JNR-owned real estate (7. 7 trillion yen; US$77 billion) and selling stocks (1.2 trillion yen; US$12 billion). The remaining 30 per cent of the long-term debt was allocated equally to the Shinkansen Holding Company (5. 7 trillion yen; US$57 billion), the three main-island passenger JRs, and the freight railway company (5.9 trillion yen; US$59 billion). The three islandJR companies were exempted from liability because their profitability was very uncertain due to the small size of each of their markets. The taxpayers were forced to bear the huge burden of over 13.8 trillion yen (US$138 billion). Table 5.5 shows the trends inJR's long-term liabilities. Due to the delay in the sale of stocks and real estate, SC's liabilities have been increasing with the interest payment. At the time of this writing, the total amount of long-term debt had reached 26. 9 trillion yen (US$269 billion) and SC had to pay about 1 trillion yen (US$10 billion) in interest payment every year.

92

Kiyoshi Nakamura

TABLE 5.5 Trends in JRs' Long-Term Liabilities (In US$ billions; US$1=100 yen) B1987

E1987

1988

1989

1990

1991

JRs JRH

227 144 46

232 141 44

241 134 39

251 129 37

243 126 35

245 126 34

Total

371

373

375

380

369

371

se

NOTES: l. B1987 =beginning offiscal1987; E1987 =end offiscal 1987. 2. JRH stands for the three Honshu JR passenger companies.

Third, the Shinkansen Holding Companv was organized to own and lease infrastructure properties and allocate the resulting profits to the three Honshu JRs. The measure was prompted in order to balance the burdens of capital costs am on?: the Honshu JRs which would have been caused by the regional differences in profitability of the Shinkansen lines. However, the Shinkansen Holding Company was reorganized as the Railway Development Fund in 1991, partly becc..use it would cause a problem when Shinkansen assets would be disposed of at the end of the leasing perioQ, and partly because JR Central, which operates the main trunk line of the Shinkansen between Tokyo and Osaka, relies heavily on the Shinkansen business. The Shinkansen assets were sold to the three Honshu JRs at a replacement price of 9, 176.7 billion yen (US$91 billion) through an instalment selling plan. The Railway Development Fund was set up to take the responsibility for repayment of liabilities and to provide subsidies for the completion of a planned nation-wide Shinkansen network and the improvement of railways, such as the Tokyo metropolitan commuter lines and subways. Fourth, the establishment of the Management Stabilization Fund to channel lump-sum funds amounting to 1,278 billion yen (US$12.78 billion) to the three island JRs which were handicapped by geographical locations with relatively small populations. The fund took the form of a ten-year debt owed by SC. The three island JRs were expected to earn an interest of about 7 per cent. However, due to the collapse of the bubble economy, it has become diflicult to maintain this level of principal-interest yield in recent years.

3.

Effects of Privatization on JRs' Performance

Ever since the management of the new JRs was given the freedom to get on with the job, financial performance has improved significantly. Thanks to favourable economic conditions in the late 1980s, the performance of JRs improved dramatically between 1987 (the year of privatization) and 1990.

93

State-Owned Enterprise Reform: Lessons from .Japan

The average annual increase in passengers and cargoes rose from 5 per cent in 1987 to 10 per cent in 1990.JRs have been actively diversifYing their lines of businesses, which were once strictly regulated. Improved labourmanagement relations have also contributed to the improvement of service quality. The following are the major effects of the JNR privatization policy. First, labour productivity greatly improved. When compared with the productivity growth oflarge private railways, privatization has provided strong incentives for JRs to improve productivity. Table 5.6 shows the comparative growth rates of labour productivity. Labour productivity in JRs has increased dramatically during and after the privatization of JNR. Productivity growth rates of JRs after privatization were several times higher than those of large private railways, whereas the productivity level ofJRs is still about 20 per cent lower than that of large private railways. The lower level ofJRs' productivity would reflect the structural difference between JRs and the private railways, such as the longer network ofJRs, the inter-city link and Shinkansen network, and employment practices. However, the employment structure of JRs is more similar to that of private railways. See Mizutani and Nakamura (1994) for details. Second, reducing the fiscal debt of the government, the most important aim of the JNR privatization, has been gradually realized. The huge subsidies, which once increased rapidly every year (for example, from about 360 billion yen [US$3.6 billion] in 1976 to 700 billion yen [US$7 billion] in 1982), have been not only reduced drastically, but also JRs have now become taxpayers. Table 5. 7 shows the changes in subsidies and taxes before and after the privatization ofJNR. As of 1995 the JRs had still not raised their fares for eight consecutive years. However, the JRs did announce that fares would be raised in 1996 due to the sharp decline in fare revenues. There is a possibility that the JRs would not abide by the uniform fare system in the very near future. TABLE 5.6 Comparison of Labour Productivity Growth Average Annual Change in Labour Productivity Passenger-km per Employee

Car-km per Employee

Period

JR

1980-84

6.4%

1.4%

4.6

4.5%

1.8%

2 .;)-

1985-89

16.7%

2.1%

8.0

15.5%

2.1%

7.4

1987-91

8.3%

2.0%

4.2

7.8%

3.1%

2.5

:-.JOT£:

Private JR/Private

Privatization

ofJ~R

JR

Private JR/Private

was carried out in 1987.

SOURCE: Nakamura and :Mizntani (1995a).

Train-km per Employee JR

Private JR/PriYate

0.3%

21.0

18.3% 0.7%

26.1

6.3%

8.5%

1.4%

6.1

94

Kiyoshi Nakamura TABLE 5.7 Taxes and Subsidies before and after JNR Privatization (In US$ millions)

Fiscal Year

Taxes and Contributions

Subsidies

Balance

1982 1983 1984 1985 1986

320 348 421 435 455

6,631 6,380 5,885 5,455 3,433

-6,311 -6,032 -5,465 -5,021 -2,977

1987 1988 1989 1990 1991

2,006 2,234 2,092 2,722 4,039

1,761 1,918 5,755 1,428 984

245 315 -3,664 1,294 3,055

NOTE: Due to special pension-related adjustment, after privatization subsidies exceeded taxes and contributions only in 1989. SOURCE: Fukui, Nakamura, Ozaki, Sakamaki, and Mizutani (1994).

Third, the regional division of the JRs has proved to be a blessing because it has enhanced direct and indirect competition between the JRs and private railways and among the JRs. It has provided strong incentives for each JR to commit to improving service quality, as users are now in a position to make a direct comparison of quality of service. It is true that the eagerness of individualJRs to be listed on the stock market promotes the improvement in the service quality. The introduction of new types of car and through-train services to meet local demand are examples. The JRs have clearly set the level of service quality based on that of the large private railways as a benchmark. This kind of benchmark competition can be observed particularly in the urban commuter markets where both the JRs and rival private railways operate. It is evident in increased frequency and speed and reduction in load factors. However, since both sides cannot afford to wage a price war and fares are regulated, the only strategy the JRs can adopt in order to increase their share of passengers is to enhance their service quality. The JRs are keen to increase their train frequency to expand their market share. (See Nakamura and Mizutani [l995b] and Nakamura [l995a] for details.) Since the benefits of competition are transferred to the passengers, the privatization of JNR, generally speaking, can be assessed as having been successful.

4.

Unsolved Problems

The JRs today are private railway compames which as a whole employ

State-Owned Enterprise Reform: Lessons from japan

95

191,000 people (which accounts for two-thirds of the total employment in the Japanese railway industry), operate a little over 20,000 km of track with annual fare revenues of 3.8 trillion yen (US$38 billion), and carry about 8.8 billion passengers annually. The JRs are the key suppliers of commuter services in major cities such as Tokyo, Osaka, and Nagoya, and also long-distance city-to-city services. However, the JRs must overcome a number of problems before privatization is completed. Obviously, how to liquidate the huge deficit is the most pressing problem. About 8.9 trillion yen (US$89 billion) out of the total liability is expected to be repaid by the sale of real estate and shares. So far, only 62.5 per cent ofJR East's shares were sold to the public in September 1993. Since SC still owns all the shares of the other JRs, JNR privatization still goes only halfWay. Although the three Honshu JRs (JR East, JR Central, and JR West) had already met all the requirements for listing on the Tokyo Stock Exchange Market by April 1992, the listing did not occur because the stock market was deeply depressed throughout 1992 after the collapse of the bubble economy. The government feared that the listing ofJR stocks on a massive scale would further damage the stock market. The initial sale of shares had to be postponed until September 1993. Due to the continued weakness of the stock market, the sale ofJR shares has been delayed further, and it is still uncertain when the remaining 1.5 million shares ofJR East, 2.24 million shares ofJR Central, and 4 million shares of JR West are to be listed on the stock market. The prospects for sellingJR West stocks have become very doubtful because of the severe damage it suffered in the great earthquake ofJanuary 1995. As far as real estate sales are concerned, the government missed the best time to sell land. Land prices began to soar and greatly appreciated during 1987 and 1988, but the government feared that bidding for the former JNR's real estate now owned by SC might push land prices further up. As a result the land sales had been carried out at a much slower pace than initially planned. To make matters worse, land prices declined sharply due to the burst of the bubble economy, and the recent severe recession hindered the sales of land. Second, the prolonged serious recession has had an adverse effect on the financial performance of the JRs. In 1991 the number of.JR passengers as a whole increased by 4.9 per cent, but in the following year the increase slowed to only 1.0 per cent. JR Central, which has business passengers as its main market, is very vulnerable to recession. In 1994 the total passenger growth was only 0.1 per cent. On top of it the earthquake which hit the Hanshin (Osaka-Kobe) area early in 1995 has further affected the listing of JR West stocks. Third, while the three island JRs have depended on additional revenue from the Management Stabilization Fund, the yield of the Fund has been lower during the past two years due to the long recession and resulting low interest rates.JR Shikoku faces tough competition from highways which were built recently. The continued recession has seriously affected two island JRs,

96

Kiyoshi Nakamum

JR Hokkaido and JR Kyushu, which have experienced a sharp decline in passenger growth. AlthoughJR Shikoku has met the required profit standard for listing on the stock market, JR Kyushu and JR Hokkaido have still not done so. Fourth, JR Freight's demand showed a decline of 4.5 per cent in 1993, because JR Freight faces increasing competition from trucks. In addition to this poor performance, it depends heavily on cross-subsidization from JR passenger companies through the leasing fee system for the use of tracks which eachJR owns. AlthoughJR Freight pays leasing fees, these seem not to cover the truly avoidable costs. In competing with the trucking industry, JR Freight has little experience in dealing with the end customers and cannot afford to assume the heavy burden of new investments such as high-speed freight cars and power stations even if it wants to improve the quality of service and gain a competitive edge. Because of the declining demand, the profit ofJR Freight is below the required level for listing on the stock market. How to reorganize JR Freight is one of the serious questions. Table 5.8 summarizes the financial situations of the JRs after privatization in 1987. TABLE 5.8 Financial Condition of the JRs, 1987-93 (In billion yxplicitly provides the technical definition of liquidity, solvency, and profitability. The decree was also aimed at improving the asst>ssment procedure in which, in addition to the above three main indicators, three additional indicators are incorporated. The three additional indicators could include profit margin, operating ratio, manpower productivity, and/ or other factor(s) unique to a specific industry. 17. Pangestu, Indonesian Quarterly 1, pp. 35-37. 18. Kompas (Jakarta), 13 November 1989. 19. I. Ketut Mardjana, "Indonesian Public Enterprises: A Role in the Deregulated Environment" (Paper presented at the international conference, Building on Success: Maximizing the Gains from Deregulation, organized by the "'orld Bank, the University of Indonesia, and the Indonesian Economists Association (ISEI), in Jakarta, Indonesia, 26-28 April 1995), p. 14. 20. Some of the obstacles to privatization will be addressed later in the chapter. 21. Economist Intelligence Unit, Country Report: Indonesia (1st Qtr 1995): 35-36 and (2nd Qtr 1995): 17-18. 22. Data for Figure 6.1 are from the Ministry of Finance, Indonesia, as quoted in Mardjana, "Indonesian Public Enterprises: A Role in the Deregulated Environr;tent", p. 16. 23. For a discussion of the obstacles towards SOE din·stment, see Mari Pangestu and Ahmad D. Habir, "Trends and Prospects in Privatization and Deregulation in Indonesia", AS.ELLV Economic Bulletin 5, no. 3 (March 1989): 234. 24. These measures were suggested and defined in I. Ketut Marcljana, "Autonomy and Political Control in Indonesian Public Enterprises: A Principal-Agent Approach" (Ph.D. diss .. Monash University, 1993), pp. 146-49. 25 . .Jakarta Post (Jakarta), 18 August 1995. 26. Soesastro, op. cit., p. 3.

REFERE:-.JCES Anwar, Moh. Arsjad. "Kondisi Ekonomi Menuju PJPT 11". In Stmtegi Pernbiayaan dan Regrouping BUM1V, edited by Toto Pranoto, Yuli Setiano, and Ferdi Nggao.Jakarta: Lembaga Management FEUI, 1994. Bank Indonesia. Indonesian Financial Statistics 7 (July 1994). Economist Intelligence Unit. Country Report: IndonPsia (1st Qtr 1995): 30-36 and (2nd Qtr 1995): 17-18.

State-Owned Enterprise Reform in Indonesia: An Oven1iew

121

Hanna, Donald P. Indonesian Experience with Financial Sector Reform. \'\'ashington, D.C.: World Bank, 1994. Heald, David. "Privatization: Policies, Methods and Procedures''. In Privatization: Policies, 1\!J.ethods and Procedures, pp. 57-107. Manila: Asian Den~lopment Bank. 1985. Jakarta Post (Jakarta), 18 August 1995. Kikeri, Sunita, John Nellis, and :Yiary Shirley. Privatization: The Lessons of Experience. Washington, D.C.: World Bank, 1992. Kornpas (Jakarta), 13 November 1989, 2 March 1991. Mardjana, I. Ketut T. "Autonomy and Political Control in Indonesian Public Enterprises: A Principal-Agent Approach". Ph.D. dissertation, Monash Universitv, 1993. - - - . "Indonesian Public Enterprises: A Role in the Deregulated Environment". Paper presented at the international conference Building on Success: Maximizing the Gains from Deregulation, organi,ed by the \'\'orld Bank, the Universitv of Indonesia, and the Indonesian Economists Association (ISEI), 26-28 April 1995, in Jakarta, Indonesia. Milne, R.S. 'The Politics of Privatization in the ASEAN States". ASE-\.S Ecunumi1 Bulletin 7, no. 3 (March 1991): 322-34. Ng Chee Yuen and ~orbert \\'agner. "Privatization and Deregulation in ASEA~: An Oveniew". ASE-\.S Ewnomic Bulletin 5, no. 3 (March 19R9): 209-23. Pangestu, Mari. "The Role of the Private Sector in Indonesia: Deregulation and Privatisation". Indonesian Quarterly 1 (lst Qtr 1991): 27-51. - - - . "The Role of the State and Economic Development in Indonesia''. Indonesian QuartPTl)' 3 ( 3rd Qtr 1993): 253-83. Pangestu, Mari and Ahmad D. Habir. "Trends and Prospects in Privrmance-

Deregulation

Reiatnl lnrrotive.\

The removal of government-imposed restrictions on the form or type of economic activit)' which the firms can engage in.

i\!lrm()'randum (~{ A.grmnent (MO!\) Agreements between SOEs and gm'ernment fixing objectives and other aspects of an SOE or group of SOEs.

Frap;rnmtation The breaking up of a firm into a number of separate entities.

Demonopolization The removal of rules ensuring monopoly or quasi-monopoly market by tightening conditions of budgetary support to SOEs, while allowing private sector firms to enter the industry.

;:s

l'l..

;:;:. "'

;;?

"":::;-, ~ ;l,

";:,

"'

~.., ~

"-l

;:,-

"' ;,..

~

~ t'1

s

~­ ~

R

,..... 1'-0