Final report on State owned enterprise

REVIEW ON LEGAL AND INSTITUTIONAL FRAMEWORK ON SOEs AND SOE REFORM IN VIETNAM

FINAL REPORTSeptember 2012

Submitted by:

QUANG MINH INVESTMENT AND DEVELOPMENT CONSULTING JSC.

REVIEW ON LEGAL AND INSTITUTIONAL FRAMEWORK ON SOEs AND SOEs REFORM IN VIETNAM - JICA - 2012

List of Abbreviation

BOC Board of Controllers

BOD Board of Directors

BOM Board of Management

CEO Chief Executive Officer

DATC Debt and Asset Trading Corporation

EG Economic Group

FSERR Fund for Supporting Enterprise Rearrangement and Renovation

GAS General Assembly of Shareholders

GOV Government of Vietnam

JSC Joint Stock Company

LLC Limited Liability Company

LOI 2005 Law on Investment 2005

MARD Ministry of Agricultural and Rural Development

MOC Ministry of Construction

MOF Ministry of Finance

MOIT Ministry of Industry and Trade

MOLISA Ministry of Labor, Invalid and Social Affairs

MONRE Ministry of Natural Resources and Environment

MPI Ministry of Planning and Investment

NPL Non-performing loan

PM Prime Minister

PPC Provincial People's Committee

SA State Audit

SBV State Bank of Vietnam

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NNSCERD National Steering Committee of Enterprise Reform and Development

SCIC State Capital Investment Corporation

SOCB State owned Commercial Banks

SOE State owned enterprise

DVB Vietnam Development Bank

VND Vietnam Dong

WTO World Trade Organization

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Table of content

List of Abbreviation..................................................................................................................1

List of Figures............................................................................................................................9

List of Tables...........................................................................................................................10

List of Boxes.............................................................................................................................11

EXECUTIVE SUMMARY.....................................................................................................13

PART I: MAJOR MILESTONES IN REGULATIONS ON STATE OWNED ENTERPRISES (SOEs)..........................................................................................................26

I. The period prior to the Law on SOEs 2003.................................................................26

II. The Law on SOEs (2003 – 2010)...................................................................................26

III.Application of the Law on Enterprises 2005...............................................................29

PART II: GENERALDESCRIPTION OF SOEs, GOVERNANCE OF SOEs AND TWO TYPICAL SOEs (DATC & SCIC).............................................................................31

I. Definition of SOEs and operating models of SOEs....................................................31

II. SOE organization and governance under The Law on Enterprises.........................32

1. 100% state capital one-member LLC...................................................................32

2. State shareholding companies...............................................................................34

III.State Economic Groups (EGs)......................................................................................38

1. The legal basis for the founding of state EGs.......................................................38

2. Basic features of legal framework for state EGs under Decree 101/2009/ND-CP.....................................................................................................40

2.1. Corporations under direct management of the PM........................................40

2.2. Business lines (Article 3)..................................................................................41

2.3. Organization structure (Article 4)....................................................................42

2.4. Governance and organization model of the parent company (Item 2, Decree 101/2009/ND-CP).................................................................................43

2.5. Relation between the parent company and other members in the EG...........45

IV.Debt and Asset Trading Corporation (DATC)...........................................................47

1. General information...............................................................................................47

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2. Objectives................................................................................................................47

3. Tasks of DATC.......................................................................................................48

4. Organization structure...........................................................................................49

5. Operation.................................................................................................................49

6. Development plan...................................................................................................50

7. Short-coming...........................................................................................................50

V. State Capital Investment Corporation (SCIC)...........................................................51

1. General information...............................................................................................51

2. Objectives................................................................................................................52

3. Functions and tasks of SCIC.................................................................................52

4. SCIC and management of Fund for Supporting Enterprise Reform and Rearrangement (FSERR)......................................................................................53

5. Organization structure...........................................................................................53

6. SCIC activities........................................................................................................53

6.1. Achievements of SCIC......................................................................................53

6.2. Advantages of SCIC model...............................................................................54

7. Orientation for future development......................................................................57

8. Short-coming...........................................................................................................57

PART III: RELATIONSHIP BETWEEN SOEs AND THE GOVERNMENT................59

I. State ownership and executing state ownership in SOE............................................59

1. Governmental entities as SOE owners.................................................................59

1.1. For 100% state capital LLCs............................................................................59

1.2. For state JSCs and LLCs of two or more members.........................................59

2. The right of SOE owners.......................................................................................61

2.1. For one-member LLCs.....................................................................................61

2.2. For JSCs and LLCs of two or more members.................................................62

2.3. For State EGs....................................................................................................62

2.4. The inadequacies in regulations on rights of owner of SOEs........................63

II. Administrative relationship between SOE and governments at different level.......64

III.Key government agencies managing SOEs.................................................................64

1. The PM....................................................................................................................64

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1.1. In terms of undertaking the owners’ duties on parent company of EGs.......65

1.2. In terms of reorganization and restructure of the SOEs................................67

1.3. In terms of approval of investment projects of the SOEs under the Law on Investment (2005)........................................................................................67

1.4. In terms of Decision for re-lending of Government’s foreign loans without appraisal and guarantee procedures..................................................68

1.5. In terms of considering proposals, suggestions of SOEs with instruction and managerial documents..............................................................................68

2. Steering Committee of Enterprise Reform and Development and the support for the PM in SOE reform and restructure...........................................69

2.1. Procedures of SOE restructure and reform.....................................................69

2.2. Fund for rearrangement and development of enterprises..............................72

3. The Ministry of Planning and Investment (MPI)................................................72

3.1. Appraisal of SOE investment projects.............................................................73

3.2. Draft guiding documents for Law on Enterprises 2005 relating to SOEs.....73

4. Ministry of Finance (MOF)...................................................................................74

4.1. Financial supervision over SOEs.....................................................................74

4.2. Regulations on mechanism for investment capital management in SOEs and management of state capital via SCIC......................................................74

4.3. On-lending of Government’s foreign loans and Government guarantee......75

4.4. Handling SOEs in difficult situation...............................................................76

4.5. Performing State management functions prescribed in the Ordinance on Prices and Law on Prices 2011 over goods and service exclusively supplied or monopolized by the State...............................................................77

5. Line ministries........................................................................................................78

5.1. Ownership.........................................................................................................79

5.2. The administrative relationship between SOEs and line ministries...............83

5.3. The relationship between line ministries and SOEs via public investment projects..............................................................................................................84

6. PPCs.........................................................................................................................84

6.1. Ownership representation................................................................................85

6.2. Management of land.........................................................................................85

6.3. Management of budget regarding local investment project............................86

I. Investment Management...............................................................................................87

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II. Investment procedures for the SOEs...........................................................................88

1. Capital sources and procedures for approval of State capital investment........88

2. Investment projects and investment decision-making authority to SOEs........88

2.1. Conditions for granting investment certificate to the SOEs under LoI 2005...................................................................................................................89

2.2. Specific regulations applicable to SOEs..........................................................90

III.Management of fund and loans of SOEs.....................................................................91

1. Borrowings from commercial banks....................................................................91

2. Re-borrowing foreign loans of the Government according to Decree 78/2010/ND-CP.......................................................................................................92

3. Corporate bonds.....................................................................................................92

4. Foreign borrowing by SOEs..................................................................................96

5. Investment Credit and Export Credit through Vietnam Development Bank.........................................................................................................................97

6. Government guarantee..........................................................................................99

PART V: FINANCIAL SUPERVISION ON STATE OWNED ENTERPRISES..........103

I. Financial supervision by the owners..........................................................................103

1. Regular supervision..............................................................................................103

1.1. Criteria for regular supervision.....................................................................103

1.2. Evaluation timeline and implementing agencies..........................................104

1.3. Rating SOEs by criteria..................................................................................104

1.4. Rating of SOEs by type...................................................................................106

2. Monitoring of SOEs with poor performance.....................................................108

2.1. SOEs subject to special supervision...............................................................108

2.2. Subjects of special supervision.......................................................................108

2.3. Methods of special supervision......................................................................108

2.4. Post- supervision measures to apply to SOEs................................................109

3. Shortcoming with supervision regulations over SOEs......................................110

II. Financial supervision by elected bodies via State Audit of Vietnam......................110

III.Inspection by Government Inspectorate according to the Law on Inspection......111

PARTVI: REARRANGEMENT AND RESTRUCTURE OF SOEs...............................113

I. Types of restructure and rearrangement of SOEs............................................113

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II. SOE Restructure and Rearrangement policy in the period of 2012-2015.......113

1. Principles for SOEs’ restructure and rearrangement.......................................113

1.1. Priorities in SOEs restructure........................................................................113

1.2. Classification of SOE to be restructured.......................................................114

2. Restructure and rearrangement solutions.........................................................115

3. Tasks of ministries and PPCs in SOE restructure scheme...............................116

3.1. The role of MOF in SOEs restructure scheme..............................................116

3.2. The role for other ministries and PPCs in SOE restructure scheme............116

III. Legal framework for SOE restructure...............................................................117

1. Transformation of SOEs into 100% State capital LLCs, under the Law for Enterprise and Decree 25/2010/ND-CP..............................................................117

2. Equitization of SOEs............................................................................................118

2.1. SOE equitization situation..............................................................................118

2.2. SOE to be equitized in the period of 2011 - 2015..........................................121

2.3. SOE equitization procedure...........................................................................122

2.4. Handling of financial issues in SOEs equitization.......................................123

2.5. Initial Public Offering....................................................................................125

2.6. Cost of Equitization........................................................................................125

2.7. Labor policy toward employees......................................................................126

2.8. Preparation of company charter after equitization.......................................127

3. Selling and assignment of SOEs..........................................................................127

3.1. Selling of SOEs...............................................................................................127

3.1.1 Definition of enterprise selling...................................................................127

3.1.2 Types of 100% State owned enterprises selling and entities entitled to purchase.......................................................................................................127

3.1.3 Condition for enterprise selling.................................................................128

3.1.4 Principles for enterprise selling.................................................................129

3.1.5 Authority to decide on enterprise selling....................................................130

3.1.6 Procedures for selling 100% State owned enterprises...............................130

3.1.7 Methods of selling 100% state owned enterprises......................................131

3.1.8 Responsibilities of sold enterprises and purchasers...................................132

3.1.9 Policies toward sold enterprises and their purchasers...............................134

4. Assignment of SOEs.............................................................................................135

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4.1. Definition of assignment of 100% State capital enterprises.........................135

4.2. Conditions for SOEs assignment...................................................................135

4.3. Principles for assignment of 100% state capital enterprises.........................136

4.4. Principles for handling assets, finance, debts and labor of assigned enterprise.........................................................................................................136

4.5. Authority for enterprise assignment..............................................................137

4.6. The process and procedure of transferring enterprises................................138

4.7. Enterprise ownership after the assignment...................................................139

5. Organizing selling and assignment of enterprises.............................................140

5.1. Responsibility of implementation...................................................................140

5.2. Approval of selling and assignment plan.......................................................140

5.3. Signing contract of selling and assignment of enterprises...........................140

6. Division, split and merging of SOEs...................................................................140

6.1. Division, split and merging of SOEs before 01/07/2005...............................141

6.2. Enterprise division, split and merging under the Law on Enterprises 2005.................................................................................................................142

7. SOE dissolution and bankruptcy........................................................................143

7.1. SOE dissolution..............................................................................................143

7.1.1 Legal framework for SOE dissolution........................................................143

7.1.2 SOE dissolution after 1/7/2010..................................................................144

7.2. Bankruptcy Law 2004 and its application to SOEs.......................................146

PART VII. CONCLUSION AND RECOMMENDATIONS............................................151

I. Conclusion....................................................................................................................151

1. Regarding the transformation of SOEs to enterprises working in accordance with the Law on Enterprises 2005..................................................151

2. Regarding Investment Law application.............................................................153

II. Recommendations by the consultants........................................................................153

1. Improving legal framework for management of SOEs.....................................153

2. Recommendations on capacity building for officers participating in SOEs’ management..........................................................................................................154

3. Recommendations on improving management structure of SOEs..................155

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List of Figures

Figure 1: Relationship between the PM and SOEs................................................................66

Figure 2: Implementation procedures for SOEs restructure plan..........................................71

Figure 3: Relationship between SOEs and Line Ministries...................................................80

Figure 4: Relationship between SOEs and PPCs...................................................................86

Figure 5: Government’s outstanding loans & Government’s guaranteed loans 2006-2010...........................................................................................................101

Figure 6: Procedures for SOEs transformation into 1 member LLCs under EL2005.........120

Figure 7: Situation of SOEs equitization in Vietnam from 1992 to 2012...........................121

Figure 8: Time frame for SOE equitization.........................................................................122

Figure 9: Types of equitization............................................................................................122

Figure 10: Flow-chart of SOEs equitazation procedures according to Decree 59/2011/ND-CP....................................................................................................125

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List of Tables

Table 1: List of EGs andcoresponding supervisory ministries.................................................82

Table 2: SOEs in some sectors with conditions for doing business..........................................84

Table 3: Maximum cost of equitization correlative to enterprise’s value...............................128

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List of Boxes

Box 1: Too much debt by SOEs.............................................................................................25

Box 2: The vague legal status of State-owned EGs................................................................38

Box 3: Lack of an advising unit to assist the PM in direction and supervision of state-owned corporations.....................................................................................................40

Box 4: Status of investment outside the main business..........................................................41

Box 5: The vague status of the governance model of state-owned corporations...................45

Box 6: Mistakes of DATC found by SA................................................................................51

Box 7: The compensation policy at SCIC..............................................................................56

Box 8: Obstacles in the transfer of HABECO and SABECO to SCIC..................................59

Box 9: An example on direct lending to SOEs.......................................................................69

Box 10: Reformation and reorganization plan of Vietnam Rubber Group..............................72

Box 11: MOF fears to lose control over petroleum price.........................................................79

Box 12: Rights and obligations of MOIT (quoted from Vinacomin’s Charter).......................83

Box 13: Becamex IDC Binh Duong – example of an SOE owned by PPC.............................88

Box 14: Borrowing from commercial banks............................................................................94

Box 15: Song Da Group asks to have its foreign debt repaid.................................................101

Box 16: Inspecting and handling violations at Vinacomin.....................................................114

Box 17: Split, consolidate enterprises of VINASHIN under Decision 926/TTg...................143

Box 18: Merging by administrative decisions........................................................................144

Box 19: Merger project of Vinaphone and Mobifone............................................................145

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DEFINITION AND NOTES

1. The State and the Government are used interchangeably.

2. PPC(s) mean Provincial People’s Committee(s) or an equivalent governmental bodies of centrally-run cities including Hanoi, Ho Chi Minh City (HCMC) and Da Nang.

3. State capital and state investment are used interchangeably in some contexts in this report

4. 100% state capital LLC means one-member limited liability company owned by the State and operating under thw Enterprise Law 2005.

5. SOE owners (sometimes “the Owners”) means the governmental agencies (Prime Minister, line ministries, PPCs, parent companies in economic groups, parents companies in general corporations, SCIC) which are assigned to execute state ownership in SOEs.

6. State enterprises/share-holding companies refers to enterprises/companies in which the State holds at least 50% of the shares or charter capital.

7. “Assignment of SOE(s)” means .....

8. Company(ies) and enterprise(s) are used interchangeable in this report.

9. Economic groups (EGs) refer to economic groups established under Decree 101/2009/ND-CP on piloting state EGs.

10. Parent companies refer to parent companies in State EGs or genenal corporations.

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EXECUTIVE SUMMARY

Legal framework for SOEs and forms of SOEs

The legal framework for SOEs in Vietnam has changed a lot during the restructure of economy. Before the effectiveness of The Law on Enterprises 2005, SOEs conduct their business activities in accordance with the amendment of Law on SOEs 1995 and later Law on SOEs 2003. The appearance of The Law on Enterprises 2005 remarks an important milestone in SOE’s rearrangement and renovation in Vietnam as well as the government’s effort to fulfill commitments with WTO by letting enterprises of all economic sectors perform in one play ground.

According to the Law on Enterprises 2005, State-owned Enterprise (SOE) is defined “the enterprise in which the State owns more than 50% of registered capital and acts under the Law on Enterprises”. Thus, SOEs in the Law for Enterprise 2005 include 3 forms: one member LLCs (state-owned), 2-member and more LLCs which the state holds more than 50% of registered capital, Joint Stock Company with more than 50% state shares.

Despite The Law on Enterprises 2005 is in force, some SOEs are still organized and performed in accordance with Law on SOEs 2003. That is why The Law on Enterprises 2005 allows a term of 4 years (before 1st July 2010) to let these enterprises transform into LLCs or JSCs acting under Enterprise 2005. Besides, because SOEs play the key role in the economy, especially in focal sectors, the government enacted Decree 101/2009/ND-CP on the Experimental Establishment, Organization and Activities of SOEs. As a result, there are 13 existing EGs directly under PM’s management and control with typical characteristics such as industrial EGs, SOCBs, state-owned insurance company, SCIC, DATC, etc…

This is the reason why before 1st July 2010, each group of enterprises was regulated by different legal framework. The first is Law on SOEs 2003 and decrees covering SOEs, limited companies or JSCs. The second is legal instructional documents of Law on SOEs 2003 regulating SOEs in the transformation process, though it is ineffective in theory, but it has not been replaced by new legal documents. The third is specialized laws and other legal documents regulating typical SOEs.

SOEs’ organization and management under The Law on Enterprises 2005

According to The Law on Enterprises 2005, one member 100% state capital LLCs can be set in one of 3 following forms: Board of members – Manager (General Manager) – Supervisor, President – Manager (General Manager) – Supervisor, and BOD – Manager (General Manager) – BOC. EGs and state corporations are compelled to organize in the mode of Board of members or BOD. For other SOEs, the owner has the right to select the enterprise’s management form that is suitable with its scale and business nature.

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Management in state JSCs with more than 50% registered capital held by the state are organized in the form of: Shareholder Congress – BOD – Board of Supervisors – General Manager. Maximum 3 state representatives are allowed to participate in shareholder congress as regulated in Decree 139/2007/ND-CP guiding the implementation of The Law on Enterprises 2005; in particular, organizational shareholder holding at least 10% of shares has the right to authorization of 3 people as maximum to participate in the shareholder congress. The number of state members in BOD is always a majority, normally 3 among 5 members or 4 among 7 members.

Economic groups (EGs)

Legal framework for EGs is indicated in the Law on Enterprises 2005 as follow: “EGs are group of big scale companies. The government regulates the criteria, organizes the management and activities of EGs”. Thus, the government issued legal documents covering organization and activities of EGs. This means that, in practice, the highest level in legal framework applying for EGs is Government’s decree, not the law. In fulfillment of Decree 101/2009/ND-CP on pilot establishment, organization, operation and management of state EGs, up to now there are 13 EGs performing in key and strategic sectors of the economy which are hardly done by private sector or other economic sectors due to the limitation of financial ability and management experience. These sectors are post, telecommunication and informatics, vessel manufacture, electricity, petrol, coal and mineral, textile, rubber, chemical fertilizer, real estate, finance, bank, insurance, etc… (Names of those EGs are mentioned in section III, Part II of the Report.)

The organization structure of EGs includes: (1) parent company (level 1 enterprise) is 100% state registered capital enterprise or under PM’s influence and decisions; (2) subsidiary company (subsidiary enterprise, level 2) partially held by level 1 enterprise is organized in the form of JSCs, LLCs, parent – subsidiary corporations, subsidiary company abroad; (3) subsidiary company of level 2 enterprise and lower levels; and (4) enterprises in cooperation with EGs.

Inadequate regulations in the legal framework for the activities of state EGs

Firstly, EGs concentrate too much of their resources to non-core business rather than their main business. This happens not only with EGs but also State corporations.

Secondly, there are vague and inconsistent regulations on legal status and administrative mode of EGs. About legal status, the idea whether EGs having legal entity or not has not been agreed in related regulations (such as Decree 09/2009/ND-CP, Decree 101/2009/ND-CP and other decisions of PM on the transformation of EGs’ parent companies into one member State-owned LLC. Therefore, EGs’ parents companies are sometimes regarded as a part of EGs, which are understood as having no legal status, while sometimes they are defined as the EGs themselves. This means EGs and their parent companies are the same legal entities. Regarding administrative mode, Decree 101/2009/ND-CP specifies the organization mode of the EGs, which is EG’s Board of Management – General Manager – BOC while Decree

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25/2010/ND-CP stipulates that a EGs shall be organized in the mode of Board of members – General Manager – Controllers.

The third is the lack of a supporting system to PM in managing, controlling state EGs. PM has full competence to decide all important issues of EGs, from business vision, activity direction, establishment, senior personnel appointment and etc. without any involvement of concerned ministries, sectors under PM for consultancy on management and supervision of EGs. This is one of the main reasons for long lasting mistakes causing huge and non-stop losses in some EGs in the last years.

Debt and Asset Trading Corporation (DATC)

DATC is a special state enterprise established by the Decision 109/2003/QD-TTg on 5th June 2003 by the PM based on a proposal of MOF. DATC plays an important role in SOE equitization, pre-equitization stage because bad debt and doubtful debt clearance is the most difficult pre-condition for these SOE’s equitization. The organization of DATC is a one member LLC 100% state capital (Decree 1494/QD-BTC dated 30 th June 2010) and the registered capital in 2010 was 2,481 billion VND. MOF requires DATC to use 70% of its investment capital to buy debts and assets of enterprises 100% state registered capital which are in the scheme of enterprise rearrangement, ownership transferring and financial clarity process.

DATC’s report as of 30th April 2012 shows that 114 bad debt purchase plans have been completed by DATC in negotiation with commercial banks with the value of approximate VND8,000 billion. More than 90% of this bad debt’s value is from SOCBs. In the period of 5 years from 2007 to 2011, DATC bought debts for restructuring of 72 enterprise creditors with the record booking value of VND6,256.1 billion, land cost of debt purchase is VND1,640.3 billion VND (debt purchase rate is 26.6% on average), debt collected value is VND1,486.4 billion, collecting rate is 90.6%. At the moment, DATC is focusing on debt purchase and asset treatment in EGs and corporations such as Visericorporation, COMA Corporation, Buon Ma Thuot coffee company, VINASHIN’s subsidiaries. Based on estimation until 2015, DATC will become a corporation by founding new debt trading member companies and its registered capital will increase to VND 5,000 billion and its customers are expanded to non-state enterprises.

However, 8-year operation of DATC shows some weakness and limitation. The legal framework regulating debt trading (Decision 59/2006/QD-TTg by the SBV on 21st December 2006 on the Regulation of debt sale of credit organizations) has been no longer suitable with current context, lack of synchronous cooperation and conflicted with other rules. Besides, the officers’ expertise is still limited and the volume of registered capital is too little in comparison with total bad debts in SOEs which is estimated to reach VND100,000 billion by the SBV as of the end of 2011.

State Capital and Investment Corporation (SCIC)

Similar to DATC, SCIC is a special SOE which was established by the decision of PM in 2005 on the proposal of MOF. The purpose of SCIC establishment is to reduce the state’s

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intervention into enterprises’ business routine via SCIC’s management of state capital remaining in equitized SOE. Therefore, while DATC take a big role in pre-equitization, SCIC’s role is more in post-equitization. SCIC was transformed into one member LLC 100% state capital by Decision 992/QD-TTg dated 30th June 2010 of which organization includes Board of Members, Board of Management, Supervisor, supporting departments, etc… Minister of Finance Vuong Dinh Hue, was appointed to be President of SCIC’s Board of Members since September 2011.

In comparison with other SOEs, SCIC is built in a modern mode of organization and management with special mechanisms approved by the government. Firstly, SCIC’s business is not multi-industrial and only focuses on one field: investment and management of state capital and related services, its activities are similar to a “fund” belonging to the government and business enterprises. Secondly, SCIC is very independent in business activities, as specified in its operational charter. Most of SCIC decisions are made by itself without any intervention from ministries or sectors except in some special tasks. Thirdly, SCIC pays high attention to human resource with good benefits compared to the average benefit of SOEs. Lastly, the management staff of SCIC has sound expertise in enterprise management.

In the period 2006 – 2011, SCIC had taken the state ownership representative’s right in nearly 1,000 enterprises and then undertaken the restructure of state capital by selling capital of SOEs that the state does not need to hold or keep influence. Up to now, SCIC divest in 520 enterprises, among them, SCIC fully divest in 466 enterprises with book value of VND 1,280 billion and attained the market value of VND 2,770 billion. At present, SCIC still holds shares in about 500 enterprises. SOEs that SCIC represents the state capital include giant SOEs such as Vinamilk, Jetstar Pacific Airlines, Constrexim, Vinaconex, VINARE, HauGiang Pharmacy, Binh Minh Plastics and FPT. Through divestment activities, the portfolio of SCIC has decreased in number but total state capital managed by SCIC continuously increased. The total book value of state capital managed by SCIC has increased from VND7.5 trillion to VND15 trillion. It is estimated that the capital volume that SCIC collected through divestment by the end of 2012 is VND 8,000 billion.

In spite of its remarkable contribution to SOE innovation in Vietnam in the last few years, SCIC displays some weaknesses and impasses, for example, dependence on the government’s policies, unclear separation between state management role and business role, many SCIC’s investment projects are led or decided by the government, political tasks beside business function, lack of transparent information, limited ability of managers in investment management.

Relationship between SOEs and the government

Ownership and executing state ownership in SOEs

Previously, SOEs Law 2003 only stipulates generally that state is the owner of SOEs and there are no specific regulations on who will represent state ownership at enterprises. However, The Law on Enterprises 2005 and its guiding documents have clearly pointed out the organizations or individuals to be state ownership representatives who, on behalf of the state, represent state ownership in SOEs.

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Accordingly, for SOEs transformed into one member LLCs 100% state capital, the state ownership representatives are either the organization/individual who previously made decision to establish the enterprise or SCIC, depending on scale and the sector of business of the enterprises. Specifically, for enterprises transformed from the parent companies of state EGs or corporations that the PM had established, the ownership representatives will be the PM or specialized organization assigned by the PM. For enterprises transformed from SOEs that directly serve national defense, security, public tasks, or are parent companies in corporations, and state holding companies (operating in the form of parent-subsidiary companies) or agricultural, forestry, farming and forest farms established under decisions of a ministry or a PPC, the ownership representatives will be that ministry or PPC. SCIC will be the owner of one member LLCs that were transformed from independent SOEs founded by ministries and PPCs which do not belong to the above mentioned categories.

With regards to JSCs, as mentioned in The Law on Enterprises 2005, the appointment of state representatives in a JSC is made by the organization/individual that has authority to do so. Accordingly, EGs, corporations and parent companies take responsibility to appoint their representatives of state capital in their subsidiary equitized enterprises. Meanwhile, the PM decides on appointment of state ownership representatives of fully-equitized EGs and corporations based on reports from ministries, ministerial-level agencies, other government agencies or PPCs. For equitized enterprises of corporations and SOEs of ministries or PPCs, SCIC will take the responsibility to represent and manage the state capital at these enterprises as specified in the Decision 151/2005/QD-TTg of the PM dated 20th June 2005 on the establishment of SCIC). However, regulations of this decision have not been totally complied in practice, firstly because ministries and PPCs are unwilling to transfer or try to delay the transfer of state capital management in SOEs to SCIC due to big benefit those enterprises may bring in to them (for example, FAHASA, HABECO and SABECO cases). Secondly, in some other cases, SCIC, after having taken the right of state ownership representatives in some JSCs, has to hand over it to other organizations due to limitation in their management capacity and lack of expertise in business operation (the case of Jestar Pacific is an example).

In one member LLCs with 100% state capital, the ownership representatives have the right to appoint the company’s BoM or the company’s President, therefore, performance of these positions normally reflects willing of the representatives. Concurrently, the representative also has the right to directly approve the decisions prepared by BoM, President of enterprise. That means the representative will directly involve in approval of decisions related to plan, business strategy, finance, personnel appointment, investment, loan, asset sale and purchase… In JSCs and 2-member and more LLCs, the ownership is executed via performance of members in BOD and BoM. Because of having majority share, the state ownership representative can assign their representatives to Shareholder Congress, BOD to execute voting right by which affect enterprise’s business activities. When The Law on Enterprises 2005 become effective, the government still have no instruction on the operation of ownership of State EGs, State corporations, hence, the Decree 132/2005/ND-CP on “The implementation of right and obligation of the owner to SOEs” has been applied though Law on SOEs 2003 has expired. The Decree also stipulates management levels in EGs, State corporations in compliance with the

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founder’s level. Accordingly, the PM approves charter, registered capital, appoints members of the BOD, GM and projects of EGs established by the PM. And ministries, PPCs decide same issues of EGs founded by ministries and PPCs.

The biggest inadequate point in regulations on the owner’s authority in SOEs is the lack of a mechanism allowing owners to supervise. No detailed instruction, forms and reports, criteria and benchmark has been made for SOEs and the state representatives implement their supervision. Moreover, in the organization of the government, ministries, PPCs, there are neither departments nor specialized officer assisting the representative in supervising and monitoring SOEs. The above matters lead to other consequences, including (i) the responsibility of the representative in business activities and business result of EGs have not been clearly defined; (ii) the mechanism of appointment of key persons is not transparent so that capable people are not recruited or promoted; (iii) the government is always in the passive status in catching up with business activities and trouble raised in EGs because of a lack of management and supervision of professional ministries such as MPI, MOF in terms of investment and finance.

Relationship between SOEs and authorities at all levels

The ownership and administration relationship between SOEs and other administrative bodies performs in 2 levels: national level (PM and ministries, sector belonging to the government) and provincial level (PPCs).

PM and SOEs

Legal documents related to SOE management display an outstanding role and authority of the PM, including:

Firstly, the PM directly represents state ownership to parent company of EGs, State corporations, big scale and important SOEs which are founded by the PM.

Secondly, in the enterprise rearrangement and renovation, the PM is the decision maker in (i) SOE classification: selecting criteria form and business line of SOEs with 100%, more than 50% or fewer than 100% state capital, selling or withdrawing capital; (ii) approval of enterprise rearrangement and renovation plans submitted by ministries, EGs, and PPCs. In order to support SOEs rearrangement and renovation, the PM has set up the National Steering Committee of Enterprise Reform and Development (NSCERD) with the major task of helping the PM in building programs, plans of SOE rearrangement and enterprise development nationwide, monitoring the fulfillment of these programs and plan after approval. At the same time, this NSCERD cooperates with line ministries to undertake researches on organization mode, mechanism, policy for SOE rearrangement and enterprise development under The Law on Enterprises 2005, summaries, reports to the PM about the progress. Accordingly, ministries, sectors and PPCs establish SOE rearrangement and development committees at their level with the same functions of territorial level.

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Thirdly, the PM has the authority to decide the use of Fund for Supporting Enterprise Rearrangement and Renovation (FSERR), which is now managed by SCIC. The source of the Fund is from divestment activities in SOEs of 100% state capital or other rearrangement and other receivable sources after the equitization, division of profit, equity earnings of state shares in equitized enterprises. Beside the purpose of support for 100% state capital SOEs, state agricultural and forestry farms in rearrangement, ownership transfer, compensation policy for redundant labors and other financial treatments as regulated, this fund is also used for (i) capital injection to parent company of EGs, State corporations, 100% state capital SOEs, (ii) investment in important projects or other expenses accepted by the PM.

The forth is that the PM has the authority to decide to provide SOEs a loan from the government’s ODA loan without verification and guarantee.

Fifthly, some SOE’s investment projects related to airports, seaports, petrol, mineral, television and radio broadcast, casino, tobacco, college establishment, or projects with more than VND1,500 billion in scale in the fields of electricity, mineral processing and metallurgy, railway infrastructure construction, road, waterway or brewery, have to be approved by the PM.

Sixthly, the PM can issue guiding documents to allow special and particular policies, solutions in order to solve SOEs’ request and proposal, especially for EGs and sometimes those policies are not in line with laws (for example VINASHIN is lent a loan that exceeds 15% its capital, and this conflicted with Law of Credit Organizations). This is also a reason of inequality in legal frameworks for enterprises.

MPI and SOEs

MPI is the functional agency, which fulfills state management of planning and investment, including: consultancy and summary for strategy, planning, social economic development in general of the country, mechanism, economic management policies and other particular areas. In relation to SOEs’ activities, the MPI plays some roles; which are (i) the window agency for SOE rearrangement and renovation, (ii) verification of SOEs’ investment projects, (ii) drafting guiding documents for the implementation of The Law on Enterprises 2005. Besides, MPI is assigned to study, draft a number of legal documents (for instance, the decree on management and supervision of SOEs, important corporations) or regulations (for instance, the regulation on publicizing information and activities of one member LLC 100% state capital, regulations of these enterprises’ management…)

MOF and SOEs

MOF is the functional agency who fulfills state management of finance, including: state budget, tax, fees and surcharges and other state budget’s revenue, state reservation, state assets, state financial funds, financial investment, enterprise finance, co-operative finance, collective finance, customs, accounting, independent auditing, price, stock, insurance, financial service activities and other services in its management’s scope. In relation to SOEs, besides the function of state ownership representative in SOEs as regulated by laws, the MOF

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also has tasks: (i) financial supervision of SOEs, (ii) regulating the mechanism of investment capital management in SOEs, fulfilling investment capital management via SCIC, (iii) lending foreign loan of the government and issuing the government’s guarantee, (iv) handling with enterprises facing business difficulties, (v) fulfilling functions of state management of price following the Ordinance and Law of Price 2011 for the commodity and service’s prices which are monopoly supplied or influenced by the state.

Other ministries and SOEs

The relationship between ministries and SOE is divided into two types: state ownership and state management.

The ownership relationship is the right and obligation’s fulfillment of ministries as the state ownership representative in accordance with the government’s assignment and hierarchical for one member LLCs 100% state capital and for the state capital invested in other enterprises under the Law on Enterprises 2005. Besides presenting ownership to enterprises under the ministry, line ministries also consult and assist the PM to manage state EGs as stipulated in the Decree 101/2009/ND-CP on the experimental establishment of EGs. Specifically, 7 ministries implement this function: MOC, MOT, MOIT, MARD, Ministry of Defense, MIC, MOF correlative to 13 state EGs.

State management on SOEs includes guiding and checking the implementation of regulations in sectors, business and services which requires conditions for establishment and doing business as regulated and listed by the government as well as dealing with SOEs’ violation. There is a hidden ask-give mechanism in this relationship between SOEs and related ministries in activities of sector planning, conditions and criteria for sector entry, business operation, etc. which lead to the monopoly position or influence of some SOEs.

Annually ministries decide public investment projects (type B and C) or are assigned by the PM to be the investor of type A investment project from development investment capital, ODA, state credit, etc. There is a trend that ministries give priority to their SOEs so that these SOEs can be the vendors of the projects.

PPCs and SOEs

The relationship between PPCs and SOEs mainly focus on 3 issues: (1) implementing ownership functions to SOEs, (2) land-use management to SOEs in the territory, and (3) oversight of budget and investment in the province. PPCs have authority to hand over the land-use, provide land-use right to SOEs for investment projects in compliance with Law on Land 2003 and other related legal documents. Despite there is no different regulation about procedures, conditions for land-use assignment between SOEs and other types of enterprises, SOEs especially SOEs under PPCs have more advantage of land-use assignment because of this ownership relationship.

Management on investment and capital mobilization of SOEs

Investment management

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The legal framework on SOEs’ investment is same as for other enterprises of different economic entities in general. Investment activities of enterprises in general and SOEs in particular are regulated by Law on Investment 2005 and its instructional documents. Accordingly, definition of investment activity of an enterprise is that the investor puts its capital in form of visible assets or invisible assets in investment activities to create new assets in compliance with laws. Investment activities can be divided into 2 types: direct investment (the investor puts capital into and are involved in investment management), indirect investment (investment via the buying of share, stock, bond, valuable papers, securities funds and other indirect financial institutions without direct management of the investor). In order to undertake investment activities, SOEs can found an economic entity with 100% investor capital, a joint-venture or invest in developing business, purchasing equities or capitalizing investment activities, and invest in mergers and acquisitions of enterprise.

SOEs are allowed to use the following kind of capital for investment: (1) state budget, (2) state credit for development investment, (3) government-guaranteed credit, (4) SOEs’ capital for development investment, (5) SCIC’s capital. Generally, SOEs having investment projects usually abide by the regulations on appraisal and registration for their projects like other investors in accordance with the Law on Investment 2005. However, there is one procedure only applied for SOEs’ investment projects, which is the procedure of verifying and approving the use of state capital for SOEs’ investment. In correlative to the above mentioned types of capital, the respective concerned agencies have authority to verify and approve the use of state capital for investment. Specifically, the project using state budget capital will be appraised and approved by the agency which has authority to use that budget. Similarly, the project using state credit for development investment will be approved by DVB. The project using government-guaranteed credit will be verified and managed by MOF. The project using the SOEs’ capital for development investment will be carried out by BoM (or General Manager, or Manager in the case of no BoM). After verification, these authorized agencies will send a notice in writing to the investor on the decision to approve or refuse the use of state capital for the investment. Verification content includes: (i) project’s compliance with the approved strategies, planning, Socio-economic Development Plans at territorial level or provincial level, (ii) state capital investment’s compliance with the objective, effectiveness and management method, (iii) project’s compliance with investment support policy (if any), (iv) progress and term of investment implementation, (v) feasibility of repayment of invested capital, loan payment and its plan, and (vi) investment rate of return in terms of finance and social economic).

Management of capital and credit of SOEs

The existing regulation shows that SOEs can mobilize capital from some sources, including: (1) credit of domestic credit organizations, (2) foreign loan with or without government’s guarantee, (3) state invested credit or export credit (DVB), (4) enterprise’s bond (with or without government’s guarantee), and (5) ODA capital as the government regulation on on-lending.

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There is no difference between rules for SOEs and other enterprises in loan from credit organizations, especially commercial banks. However, SOEs normally have more advantage in approaching this source of capital because commercial banks have a tendency of appreciating SOEs and consider SOEs’ properties and land-use right more reliable. Besides, the owner of SOEs, especially EGs can get permission letter or agreement letter issued by the government for credit provision. This practice makes the banks understand that the government guarantees the loans.

ODA on-lending is applied for SOEs in two mechanisms: MOF directly on-lend to the enterprise after PM's approval of unappraised projects and guarantee or assign the loan via DVB.

Although bond issuance is an important source of capital mobilization for enterprises because of its high stability, until 2011 the government issued Decree 90/2011/ND-CP dated 14 th Oct 2011 about the enterprise’s bond issuance, the legal framework of this type of capital mobilization has just been detailed and suitable with reality. In order to issue investment bonds for programs/projects, the issuer has to maintain and ensure a part of 20% as minimum of owned capital in total capital of the program/project. However, besides meeting the conditions of operation duration and business performance results to issue bond, SOEs must have bond issuance plan approved by the authorized agency to avoid the extensiveness and inefficiency of SOEs loan which probably leads to insolvency. For domestic bond issuance, the owner of SOEs has the authority to approve the plan, while for foreign bond, the plan must be approved by the PM. Methods of bond issuance include: auction, guarantee issuance via agency, and direct sale to the investor, (this is not applicable to state credit institutions).

For foreign loan, SOEs directly borrow loans and take self-responsibility to repay to the foreign credit organizations without the government’s intervention (except loan guaranteed by the government). In the case the foreign creditors request a guarantee from a commercial bank or a credit institution, SOEs can seek a guarantee from non-resident but have to make sure that it is not illegal or does not violate Vietnam laws. SOEs’ foreign long-term and middle-term loan have to be calculated in the annual overall plan of commercial loan limit approved by the PM and have to meet long-term and middle-term loan conditions as regulated by SBV. SOEs’ short-term loan from foreign credit organizations has to be in the annual overall plan of commercial loan limit approved by the PM and has to meet short-term loan conditions as regulated by the Governor of SBV. SOEs’ credit withdrawal or loan repayment to foreign credit organization has to be made via banks operating in Vietnam and eligible for providing foreign exchange services. In case of direct repayment, the enterprise needs to report and consult with authorized state agencies as in regulation.

At present, SOEs is the group of enterprises which have the highest credit volume in DVB in terms of investment credit and export credit. The source of credit via this channel is ODA on-lending under MOF’s authorization, revolving target funds, or donors’ trust fund such as KfW, EIB, Finland, and development credit from the state budget, government bond, DVB’s bond or valuable papers. If an SOE wants to approach this source of capital, it has to meet some particular regulations in the Decree 75/2011/ND-CP dated 30 th August 2011 on “state investment credit and state development credit”. However, in reality, the support of DVB for SOEs is sometimes over the control of these regulations, because of the government’s interference.

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About the government’s guarantee, though the existing laws state that enterprises of all economic sectors can receive the government’s guarantee, most of them now are for SOEs, including State corporations and EGs in reality. Reports of the MOF as of September 2011 show that total government guaranteed credit of SOEs account for 17.5% of SOEs’ credit balance. The conditions of being guaranteed by the government have been fairly specified in the Law on Public Debt Management 2009 and Decree 15/2011/ND-CP on the Provision and Management of Guarantee by the Government dated 16th February 2011 which is related to loan’s value, bond issuance, the field of the program/ project, borrower, bond issuer. Generally, the list of programs/projects considered to be guaranteed by the government include some fields such as energy and mineral exploitation, construction, infrastructure development and composition, programs/projects of focal mechanic production for replacing imported goods, focal projects decided by the PM or the Congress of all fields. MOF is the window agency of the government to fulfill the state’s management of foreign loans and loan repayment. MOF in cooperation with SBV builds and submits the PM the long-term, middle-term annual program on foreign loan and loan repayment of the government, public organizations and the limit of commercial foreign loans of the nation, simultaneously takes charge of reporting to the PM about the adjustment of limit of commercial foreign loans in the case the limit has been reached and the government guarantee is still requested.

Financial supervision on SOEs

Financial supervision by the owner

Existing laws allow the owner of SOEs to monitor SOEs’ financial standing in two forms: (1) regular supervision and (2) special supervision when the SOE is in difficulty and loss. (SOEs operating in the fields of finance, banking and insurance are regulated by the Law on Credit Organizations).

Regular supervision is done to fully catch up opportunities, difficulties and problems of SOEs for solutions, competitiveness improvement and efficiency of capital use. Based on the annual financial report of the SOE, rating will be done based on each of the following criteria (i) turnover, (ii) profit and profit margin of state capital, (iii) overdue debts and due debt repayment ability, (iv) the abiding laws, policies, mechanism of related issues, and (v) implementation status of public goods and services. The criteria selection depends on types and business objectives of the enterprises and is stipulated in the Regulation on Supervision and Evaluation of SOE’s Effectiveness issued together with Decision 224/2006/QD-TTg dated 6th October 2006 by the PM. The rating includes 3 categories: A, B and C based on evaluation of selected criteria. After the enterprise’s self-assessment and classification, the owner will verify and publicize the result on the website of the SOEs or national newspapers. In particular, the rating result of corporations or parent companies will be publicized after getting comments of MOF. The purpose of special supervision is to find out the reason causing the SOE’s loss and ineffient activities for decision of support or treatment with SOEs or SOEs’ managers. SOEs must be under special supervision if (i) making loss in 2 continuous years, (ii) making loss in one year and losing 30% or more of capital, (iii) making profit in one year between two loss-making years, and (iv) having solvency ratio smaller than 0.5

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After receiving quarterly and annually reports from the SOE, the owner in cooperation with financial agency at the same level conducts supervision of the SOE in order to confirm the accuracy of the report and analize, assess aspects such as manufacture, sale, inventory, supply, material use, the goods, fulfillment of targets, technology, labor, loan volume, loan repayment, ’corporate governance to gives suitable recommendations. Depending on the result of supervision and fulfillment of recommendation of the SOE, the owner will decide the treatment for the SOE. If in two next years the SOE ceases making loss, fulfills all required supervision recommendations, the SOE will be deleted from the special supervision list. If the SOE does not fulfill supervision recommendations, the manager will be blamed and warned and not be given bonus or salary increase. If the SOE does not fulfill supervision recommendations as well as the recommendation directly related to loss ceasing, the SOE’s manager will be dismissed and replaced. If the enterprise fulfills supervision recommendations in 2 continuous years but still makes loss, the SOE will be equitized, or liquidated or bankcrupted as regulated.

In general, legal framework for SOEs still has some loopholes. Related legal documents are inadequate or unclear. For example, criteria for evaluation of business efficiency still applies the provisions provided for by the expired Law on SOEs 2003, thus, EGs are not under regulation of the current law. Besides, the criteria is limited and unable to totally appreciate SOE’s business activities. Other inadequate thing is that is the capital that the parent company of economic groups or state general corporations invested in their subsidiary companies considered as state capital or not, and how this issue should be regulated. Besides, the rating fulfillment for enterprises has been more formal rather than actual, has not brought effects to the assessment and problem determination in administration and management. The use of business result assessment to decide to put or withdraw investment capital of the owner is limited.

Financial supervision by SA

SOEs are subject to supervision of SV in accordance with Law on State Audit 2005. The SV has the right to audit regulation compliance, financial reports and activities of SOEs.

Activities of Government Inspectorate in accordance with Law on Inspection

SOEs are subject to inspection of Government Inspectorate. At territorial level, EGs and enterprises established by the PM will be subject to inspection of government inspectors. SOEs under Ministries/PPCs are under inspection of their owners. Inspectors can conduct annual or sudden investigation when violation signal appears in the enterprise. After the investigation, the inspector will publicize conclusions and recommendations of solution to concerned authorities or request the concerned investigation agency to investigate and prosecute if there is criminal signal.

SOE rearrangement and renovation

Forms of SOE rearrangement and renovation

Existing laws list some different forms of SOE rearrangement and renovation as follow: (1) transformation to 100% state capital LLC under The Law on Enterprises, (2) equitization, (3)

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sale and assignment of enterprise, (4) mergers and acquisitions, division and (5) dissolution and bankruptcy.

Procedures of SOE rearrangement and renovation

SOE rearrangement and renovation is carried out in 5 basic steps. The first is SOE classification in accordance with Decision 14/2011/QD-TTg dated 04th March 2011 by the PM on the criteria and classification of SOEs. Based on the criteria, Ministers, heads of ministerial-level agencies, heads of governmental agencies, chairpersons of PPCs, BoM of EGs and State Corporations 91are responsible for the plan of SOE rearrangement and renovation for their SOEs to submit to the PM. The PM will assign concerned ministries, agencies to comment on the submitted plans (for example, MPI for planning activities and capital structure, MoF for finance and capital and MoLISA for labor, job-related issues…). Upon receiving comments of Ministries, the PM issues a guiding document on approval of plans for SOE rearrangement and renovation for implementation.

The government and ministries will issue guiding documents for almost all forms of SOE rearrangement and renovation on subject, conditions for application, implementation procedure, right and obligation of concerned organizations and other issues. The transformation of SOEs into 100% state capital LLCs is regulated by Decree 25/2010/ND-CP. Sale and Assignment of enterprises is undertaken in accordance with Decree 109/2008/ND-CP. SOEs’ dissolution is stipulated by Decree 180/2004/ND-CP and Circular 04/2005/TT-BKH before 1st July 2010 and under The Law on Enterprises 2005. SOEs’ bankruptcy is subject to regulation of Law on Bankruptcy 2004.

Equitization accounts for major proportion of SOE rearrangement and renovation activities (in the period 1992-2011, about 4,000 enterprises were equitized, accounting for 70% rearranged SOEs). Legal framework has been developed since 2002, as 4 changes are recorded as issuance of Decree 64/2002/ND-CP, Decree 187/2004/ND-CP, Decree 187/2004/ND-CP, Decree 109/2007/ND-CP and the latest is Decree 59/2011/ND-CP. Due to changes in legal framework, the process of SOE equitization is implemented slowly. The main reason is obstacles in calculating value of land-use right with geographical location advantage in assessment of the SOE. SOE equitization of SOE is also subject to many regulations of many governmental agencies, for example Circular 202/2011/TT-BTC of MOF about pre-equitization asset treatment, Circular 196/2011/TT-BTC about initial public offering (IPO), Circular 196/2011/TT-BTC about expenses for equitization, and Decree 91/2010/ND-CP about labor policy in equitized enterprises.

Conclusion and recommendation

The application of The Law on Enterprises on SOEs’ operation has been done smoothly and conveniently. However, some aspects of SOEs’ operation are subject to other specific regulations and this practice creates some inconsistency. Therefore, a completion of legal framework for SOE is needed, including the issuance of guiding documents for The Law on Enterprises in particular for SOE operation to avoid the application of guiding documents of

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expired Law on SOEs, and the issuance a specific rule for state capital management in SOEs or put into the draft of Law on Public Investment as an important part in order to ensure the effective management on state capital.

In rearranged SOEs, the labor force and management do not change much. The application of The Law on Enterprises 2005 will surely raise new matters in organization structure and enterprise management and operation; thus, it is necessary to undertake methods to improve capacity of officials involving in enterprise’s management. At the same time, it is necessary to limit the concurrent and part-time engagement in the Board of Members and BOD of SOEs, especially in big enterprises in order to enhance their business activities and supervision.

Another issue is that many agencies are playing the role of owners for one SOE, including administrative agencies and business enterprise such as the PM, PPCs, sector ministries, parent company in parent-subsidiary enterprise mode, EGs and SCIC. However, there is no supporting system to provide consultancy and summary to help the PM, ministries, PPCs in these agencies’ to fulfill the ownership. Simultaneously, the delay in transferring of some JSCs’ ownership from ministries to SCIC should be tackled to ensure the determination and compliance to legal regulations in effect.

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PART I: MAJOR MILESTONES IN REGULATIONS ON STATE OWNED ENTERPRISES (SOEs)

I. The period prior to the Law on SOEs 2003

Prior to 1995, management of SOEs in Vietnam was regulated by Decision No. 332-HDBT dated 23/10/1991 by the Council of Ministers (which is now the Government) on preservation and development of state capital in SOEs and guidance of the MOF, i.e. the ministry in charge of the sector. However, by this time state regulations on SOE financial management were not comprehensive and completed.

In 1995, to enhance the effectiveness of legal documents on management of SOEs, the National Assembly (NA) issued the Law on SOEs 1995. After that, the Government issued Decree No. 59 dated 3/10/1996 on mechanism for financial management and accounting of SOEs and Decree No. 27/1999 dated 20/4/1999 on amendment and supplementation to Decree 59.

According to the legal documents, SOEs had the rights to manage and use capital, land, natural resources and other resources which was assigned by the State as regulated by law to achieve business targets or perform tasks for public interests as assigned by the State. SOEs were responsible for accounting and monitoring accurately all the asset and capital under its management in accordance with law. SOEs had the right to use capital and funds to serve their business on the principle of capital preservation and development, the right to change the asset and capital structure for production and business, to use the asset and capital within their power for investment outside the enterprises, to mobilize capital in the form of bond issuance, borrowing, joint-ventures, etc...

Management agencies were responsible for checking and comparing debt situation, classifying debts to introduce appropriate measures, and re-evaluating SOE assets. MOF was the agency that managed the asset and capital of the State in SOEs. Ministries and PPCs executed the ownership of the State over their enterprises as delegated by the Government.

However, the implementation of Law on SOEs 1995 and the Decrees of the Government on SOE financial management became to show certain limitations as Vietnam started economic reform to move to a more market economy with socialist orientation; the subsidiary mechanism showed some constraints for the development of SOEs; SOEs needed a more open mechanism to leverage their autonomy in production and business to fully play the key role of the State in the economy.

II. The Law on SOEs (2003 – 2010)

Facing the inadequacy of policies on SOEs in the development of market economy in Vietnam, in 2003, the NA issued the Law on SOEs 2003 to replace the Law on SOEs issued in 1999. To provide guidance for the Law, the Government issued Decree 199/2004 dated 3/12/2004 on regulations for SOE financial management and management of state investment

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in other enterprises1. The PM issued the Regulation on Monitoring and Evaluation of SOE efficiency (attached to Decision No. 271/2003/QD-TTg dated 31/12/2003).

However, during the operation of SOEs, some problems had arisen due to the inappropriateness of the regulation at that time: mobilized capital became many times as much as their equity and investment outside the main business. Therefore, the Government issued Decree No. 09/2009/ND-CP dated 5/2/2009 to replace Decree 199/2004; the PM issued Decision No. 224/2006/QD-TTg dated 6/10/2006 to replace Decision 271 on the Regulation on Monitoring and Evaluation of SOE efficiency.

Box 1: Too much debt of SOEs

Total amount of SOEs’ debt was VND 1,008 trillion while their equity was VND 790 trillion.

On average, the debt-to-equity ratio of SOEs was 1.36. However, up to 30 SOEs had this ratio of more than 3.

Typical examples were Truong Son Construction Corporation, LICOGI, HUD, EVN and VINALINES with the debt-to-equity ratios of 9.19, 4.79, 4, 3.83 and 3.12 respectively.

Compared with the total bank loan balance of SOEs, this amount made up more than half of the total bank loan balance of the whole banking system (about more than VND 2,500 trillion).

Source: Minister of Planning and Investment Bui Quang Vinh on website: www.chinhphu.org.vn on Mar 2012.

According to the above-mentioned documents, management of state investment in SOEs had the following changes:

- When establishing new enterprises or adjusting the charter capital to the size and structure of an SOE, the owner’s representative is to get agreement with MOF on the capital amount and the source of capital. SOEs could receive the charter capital from State budget. The Government and National Assembly have the authority to increase SOEs’ charter capital. The use of fund for enterprise rearrangement for EGs, corporations or parent companies to increase the charter capital of SOEs must be approved by the PM.

- SOEs had the right to actively use state capital, other capital sources and funds under their management for business and production activities. SOEs were responsible for capital preservation, development and efficiency to state-management agencies. SOEs were decision makers of loan contracts with value of up to 3 times as much as the charter capital. If an SOE needed an amount over this limit, it must report to the owner’s representative for consideration and decision based on efficiency of the project. After

1 “Other enterprises” means the enterprises in which state capital makes up less than 50% their charter capital.

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http://www.chinhphu.org/


decision was made, the owner’s representative was responsible for informing MOF for cooperation in monitoring and supervision.

- SOEs had the right to use the asset and capital under their management to invest abroad. SOEs’ capital invested in other enterprises must comply with regulations, in line with the strategy, master plan and development plan of SOEs to ensure the principle of efficiency, capital preservation and development, and profit growth without affecting the delivery of their production and tasks assigned by the State.

- At the same time, to ensure efficient management of investment capital and SOEs’ concentration on their key tasks, the Government regulated that SOEs had to use at least 70% of their total investment capital in main business. The total capital invested in non-core business (including short- and long-term investment) could not exceed the charter capital of the SOE. As for investment in banking, insurance or securities, the SOE could only invest in one enterprise in each area with investment amount of no more than 20% of charter capital of the invested enterprise; capital contribution of a parent company and its subsidiaries could not exceed 30% of charter capital of the invested enterprise. Exceptional cases that exceeded this limit must be reported to the PM for consideration and approval.

- The profit split mechanism in SOEs was decided based on business and production efficiency and SOE rating results. Enterprises with special capital structures had adjusted profit sharing mechanism. For enterprises that do not conduct evaluation and rating according to current regulations, they could not establish a fund for rewards and bonus.

- The right and obligation of the state ownership representative in other enterprises were clearly provided. The full-time representative received an allowance paid to the state ownership representative2 besides the profit sharing from state capital in the enterprise. On top of the salary, responsibility allowance, bonus and other benefits are provided based on the regulation of the enterprise. For a representative who is a part-time member, the salary, responsibility allowance (if any), bonus and other benefits should be paid by the state ownership representative. In addition, the representative had the right to buy additionally-issued securities and/or convertible bonds upon decision of the SOE’s owner.

- Regarding the owner’s representative, the Government issued Decree No. 132/2005/ND-CP dated 20/10/2005 on implementation of the right and obligation of SOE owners and Decree No. 86/2006/ND-CP dated 21/8/2006 on amendment and supplementation to Decree 132. In accordance with the authorization and delegation of the Government, the PM directly performed the right and obligation as owner of critical groups and corporations. Ministries and PPCs were the owner’s representatives of state capital in SOEs under the management of the Ministries and PPCs. MOF performed some rights and obligations of the state ownership in SOEs. The BOD consisted of representatives of the owners in the SOE charter capital as regulated by Law on SOEs. The state investment in shareholding companies was regulated as follows:

2 State ownership representatives are individuals authorized by the State to manage State capital at SOEs, including members of Member Councils of state capital LLCs, members of BOM of JSCs or chairmen of Member Councils of State-owned one-member LLCs.

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In case a JSC had been transformed from a subsidiary of an EG or a corporation, the parent company or the EG/corporation continued to send its owner’s representative in the JSC.

A shareholding company could become an independent SOE under direct management by the Ministry, the sector or the locality, in which the corporation that invested state-owned capital acted as the owner.

For State corporations, the State conducted step-by-step capitalization on a case-by-case basis. The PM assigned the line ministry or the corporation that invested state-owned capital to act as the owner’s representative.

III. Application of the Law on Enterprises 2005

Since the effect of the Law on Enterprises from 1 July 2006, the Law on SOEs 2003 has become ineffective. All SOEs have to become either shareholding companies or 100% state capital one-member LLCs to comply with the Law on Enterprises. This marks an end to the discrimination in the form of economic sectors in the law; thus, whatever economic sector an enterprise belongs to, the enterprise has to operate in a fair play ground under regulation of the Law on Enterprises.

The Law on Enterprises only keeps the most basic legal frame for SOEs. According to the Law, state ownership over SOEs is in accordance with the principle: (1) performing ownership as an investor; (2) state capital preservation and development; (3) separation of the right as SOEs’ owner from the state administrative function; (4) separation of the right as SOEs’ owner from business autonomy of enterprises; (5) respect for business autonomy of enterprises; and (6) concentration and consistency in implementing the owner’s rights and obligations over capital.

To provide the guideline for the conversion of SOEs into other forms of enterprise as required by the Law on Enterprises and completion of the legal framework for management of SOEs, the Government has issued many legal documents such as: Decree 109/2007 on conversion of SOEs into shareholding companies; Decree 111/2007 on organization and management of state corporations and transformation of state corporations, independent SOEs, parent companies in the form of parent - subsidiary companies; Decree 109/2008 on sale or assignment of SOEs; Decree 101/2009 on pilot establishment, organization, operation and management of state EGs; Decree 25/2010 on transformation of SOEs into one-member LLCs and management of state one-member LLCs, and some other legal documents issued by the PM and Ministers to provide guidance for these decrees.

During this period, there have been some important changes in the policies on SOEs. The policies for the management and conversion of SOEs were issued in a rather synchronous manner. Over the past years, although the total number of SOEs decreased, their scale in terms of capital in important sectors/industries increased and their efficiency is improved. SOEs have contributed to setting the direction and played a key role in some economic sectors. However, there remain short-comings with SOE operations. Some SOEs operate in areas that the State does not need to maintain its control. State EGs have not concentrated on their core business activities. The efficiency and competiveness of SOEs in business and

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production do not match the resources assigned to them. Therefore, at present, the policy for management of SOEs is in the process of research and many amendments are being made to the existing legal documents such as Decree 132/2005 and Decree 86/2006 on exercising the right and obligation of the State as SOEs owner, Decree 101/2009 on pilot establishment, organization, operation and management of state EGs, Decision 224/2006 by the PM on the issuance of the regulation on monitoring and evaluating the efficiency of SOEs…

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PART II: GENERALDESCRIPTION OF SOEs, GOVERNANCE OF SOEs AND TWO TYPICAL SOEs (DATC & SCIC)

I. Definition of SOEs and operating models of SOEs

The changes in the legal environment for SOEs mentioned above have, to a certain extent, displayed the movements of SOE reform in Vietnam, one of the key areas for restructuring the economy. The definition of SOEs has been changed accordingly over the period.

The Law on SOEs 1995 defines that an SOE is an economic organization that the State invests in, establishes, organizes and manages to do business or to serve public interests to achieve the socio-economic targets assigned by the State. According to this law, SOEs exist in the form of independent enterprises, corporations, subsidiaries of a corporation. However, according to the Law on SOEs 2003, an SOE is an economic organization with charter capital is owned by the State or in which the State has a share or a dominating capital share; it has a form of an SOE, a shareholding company or an LLC. As compared with the Law on SOEs 1995 this definition is broader with various forms of enterprises; it does not define the objective of SOEs as to achieve the socio-economic objectives assigned by the State and there is no longer the concept of enterprises for public interests.

However, since the The Law on Enterprises 2005 took effect in July 2006, the definition of SOEs is understood as follows: “SOE” is an enterprise in which the State owns more than 50% of the charter capital and operates in accordance with the Law on Enterprises”. (Article 4.22, The Law on Enterprises 2005). The Law on Enterprises 2005 set a timeframe of 4 years its effect date, for SOEs (which were being managed and operating in accordance with Law on SOEs 2003) to be transformed to limited companies or shareholding companies with management and operation in line with current regulations. Therefore, as provided by The Law on Enterprises 2005 and the decrees which provide guidelines for the conversion of SOEs into limited companies or shareholding companies (Decree 25/2010/ND-CP and Decree 109/2007/ND-CP). Accordingly, SOEs consist of the following forms:

(1) State one-member LLC

(2) LLC with two members or more in which the State owns more than 50% of the charter capital. (In reality, the number of these enterprises is very small, the majority of SOEs is in the form of one-member LLC or shareholding companies)

(3) Shareholding company in which the State, an SOE or State ownership representative is one shareholder of more than 50% of the charter capital.

However, in addition to the types of SOEs provided by The Law on Enterprises, there are other forms of SOEs. These enterprises are established and operate based on specialized laws for target investment activities. Specifically:

(4) State EGs

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Actually this is a typical type of SOEs that applies a pilot model provided in Decree 101/2009/ND-CP on pilot establishment, organization, operation and management of state EGs. These SOEs is directly controlled and operated by the PM.

(5) Typical enterprises, including:

a. SOCBs that operate in accordance with the Law on Credit Institutions

b. State-owned insurance companies that operate in accordance with the Law on Insurance Trading

c. Bank of Investment and Development of Vietnam (BIDV), Social Policy Bank of Vietnam (SPBV)

d. State Capital and Investment Corporation (SCIC) under MOF

e. Debt and Asset Trading Corporation (DATC) under MOF.

II. SOE organization and governance under The Law on Enterprises

1. 100% state capital one-member LLC

According to The Law on Enterprises and Article 19 of Decree 25, there are 03 management models for SOEs that are 100% state capital one-member LLCs, including:

(1) Company managed by Board of Members and Director (Chief Executive Officer (CEO)), controllers

(2) Company managed by Chairman and Director (CEO), controllers

(3) Company managed and directed by BOD, and Director (CEO), BOC.

For state EGs, the model with Board of Members or BOD is mandatory; for the rest of the enterprises, the owner has the authority to shape a model for the company to suit its size and activities.

a. Board of Members in LLC model includes Board of Members – CEO

Article 21 of Decree 25 provides that a Board of Members should have 7 members at maximum including full-time and part-time members. The Board of Members of a parent company of a state EG has between 05 and 09 members. The members in the Board of Members are appointed by the owner.

In reality, the Board of Members of a one-member LLC often has 5 people.

The working mechanism and the organization structure of different Boards of Members are also different, depending on the owners, specifically:

For subsidiary companies in the model of holding company or in a state EG, there are often 3-5 members. Full-time members include director, chairman of

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Board of Members, chief accountant (or controller), and 1 or 2 part-time members from the parent company.

For a company directly belonging to the PPC, the Board of Members often has between 3 and 5 people with 2-3 direct managers of the enterprise and at least 1 member appointed by the provincial department in the same sector as the enterprise. For companies belonging to ministries, part-time members are often appointed by the planning – investment unit of the ministry such as the Department of Planning and Finance, the Department of Planning and Investment.

b. Chairman in one-member LLC model includes chairman- CEO

For small companies, the owners tend to select the one-member LLC model that has Chairman-CEO. For this model, Chairman often acts as CEO. Small companies are often organized according to the model of one-member LLC; the function and task of the chairman of Board of Members are similar to those of Board of Members.

c. Controller

Decree 25 provides that state one-member LLC must appoint controllers with the right and obligation provided in Article 71 of the Law on Enterprises. Controller shall have three following authorities:

Appraise the accuracy and validity of the accounting reports and business plans of the company

Check and ensure the legality, honesty and carefulness of the Board of Members, chairman and CEO in the management and operation of the company

Make recommendations to the owner to amend and supplement the regulations on the management and operation of the company.

In reality, most of the companies only appoint one single controller outside the staff of the company. Controllers’ activities are mere formalities due to the following reasons:

Controllers receive salaries from the enterprises, so their independence and objectivity will be affected;

All transformed enterprises have no experience in appointment and maintenance of the activities of controllers in the organization structure

Most of controllers have not been trained enough to really understand and apply their rights and obligations in enterprises.

d. Director (CEO)

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The provisions on the director’s rights and obligations in Decree 25 are rather short. Article 23 of Decree 25 provides that: CEO is the person who directs the daily activities of the company according to the objectives, plans, resolutions and decisions of Board of Members in line with the Regulations of the company; CEO is accountable to Board of Members and the laws for implementing the assigned rights and obligations.

The provisions on CEO’s rights, obligations and benefits are too sparse in guiding documents The Law on Enterprises for SOEs while CEO directly runs the daily business of the enterprise and makes decisions that directly affect its business results.

For SOEs that were transformed in 2010-2011, most of the directors and key officers of the enterprises were retained and this has both pros and cons. On the one hand, the continuity of the director will ensure the continuous operation of the enterprise; on the other hand, the habit and practice of the former model still exist over a certain period after conversion.

2. State shareholding companies

Management of state shareholding companies includes three following major units:

General Assembly of Shareholders (GAS)

The BOD

Board of Controllers

CEO

a. General Assembly of Shareholders (GAS)

According to The Law on Enterprises, GAS has two types (1) Annual GAS and (2) Irregular GAS (Article 97.1).

Regarding the participation of the owner’s representatives at a GAS, Article 14.1.b Decree 139/2007/ND-CO guiding the implementation of The Law on Enterprises provides that an organization shareholder owning at least 10% of the total popular shares has the authority to send three people to the GAS. Therefore, a shareholder that is a state-owned agency owning more than 50% of the total popular shares has the authority to send only three people to attend GAS. We can see that Article 96.3 of the Law on Enterprises 2005 does not limit the number that a shareholder has authority to send; however, the limit of authorized people is provided in Article 14 Decree 139 on guiding the implementation of the Law on Enterprises 2005. From the viewpoint of a shareholder’s rights, this limit also means the limit of the authority of a state organization shareholder. However, from the viewpoint of management, to a certain extent, this limit is necessary to avoid difficulties or even a stuck in the proceeding of

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a GAS due to too big number of participants causing huge costs and difficulty in finding an appropriate GAS venue …

b. The Board of Directors (BOD)

In a shareholding company, because the State holds more than 50% of charter capital, members of the BOD who are appointed by the State (or the Owner) always account for the majority of the BOD.

The BOD of these companies often includes 5 or 7 members, out of which at least 3 members (in case BOD has 5 people) or 4 members (in case BOD has 7 people) of the BOD are always assigned by the State.

The representatives assigned by the State often hold the following positions:

CEO

BOD Chairman

Part-time representatives from the ministry or parent company (in case the shareholding company owns more than 50% of shares of its parent company).

The provision of The Law on Enterprises 2005 shows that power of BOD is considerably shared with the GAS. BOD has little financial power because a part of it power is held by the GAS. Its role of supervision is decreased due to the existence of an independent BOC. In general, the rights and tasks of BOD can be classified into the following groups:

The rights to make recommendations:

- Recommendations on the type of shares and total number of shares for each type;

- Recommendations on the re-organization, dispersal or request for bankruptcy of the company;

- Recommendations on dividends, dividend payment deadline and procedures, or loss handling in the business.

The rights to make recommendations of BOD come from the need to prevent inaccurate voted decisions made in the GAS due to insufficient information about the company and the market for the sake of the company and shareholders. In the meantime, BOD members are normally businessmen who have access to various flows of information about the business market, so they can make analysis to make valuable recommendations for shareholders’ reference as the basis voting.

The rights to make decisions:

- On business:

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o Decisions on the medium-term strategy and plans and annual business plans of the company

o Decisions on investment plans and investment projects within the authority and limits as provided by the Law on Enterprises or the regulations of the company

o Decisions on the solutions for market development, marketing and technologies.

- On the finance:

o Decisions to offer new shares within the limit for shares offered for sale of each type; decisions on additional fund mobilization in other forms.

Here it is necessary to distinguish between the authorities of the GAS and those of BOD. If the GAS has the right to make decisions on the total number of shares offered for sale for each type without directly deciding how to sell, at which price and when to sell… which are within the authorities of BOD, i.e. BOD has the rights to offer new shares within the limit (total) of shares offered for sale defined by the GAS. This split of authorities proves to be reasonable because only the BOD has enough conditions to decide when to sell shares for the best interests of the company and the shareholders.

o Decision on the prices of the shares and bonds offered by the company.o The BOD has the right to buy back not more than 10% of the total number

of shares for each type that have been offered for sale every twelve months (in other cases, the re-buying of shares is decided by the GAS)

o To approve contracts on buying, selling, borrowing, loans and other contracts with the value of 50% or more of the total asset recorded in the most recent financial statement of the company or a lower rate provided at the Regulations of the company, except for the contracts and transactions provided at Terms 1 and 3 of Article 120 of the Law on Enterprises.

What should be noticed is that among the rights on finance, according to the Law on Enterprises 1999 (Article 80.2.k), BOD had the right to evaluate capital contribution which is not in VND, foreign currencies and gold, but the Law on Enterprises 2005 has removed this right of BOD; the valuation accordingly is made by the founding shareholders or professional valuation organizations as provided by Article 30.

o Submitting the annual accounting reports to the GAS (i.e. a responsibility of BOD).

- On the organization and management of the company:

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o Appointment, dismissal, demotion, contract signing, contract termination for the Director or CEO and other important managers as provided by the Regulations of the company; decisions on the salary and other benefits for these managers; appointment of representatives who are authorized to execute the ownership of shares or capital contribution in other companies, decision on the pay and other benefits for such people;

o Supervision and directions for Director or CEO and other managers in the daily business operations of the company;

o Decisions on the organization structure and the internal management regulations of the company; decisions to establish subsidiaries, branches, representative offices and capital contribution or share buying at other enterprises.

It can be seen that the authorities of BOD are mainly limited to the management and internal organization of the company.

c. Chief Executive Officer (CEO)

With the function to run the daily business of the company, Director also has a list of his/her own authorities provided at term 3 of Article 116 of the Law on Enterprises. Also by this function, Director is considered a manager of an enterprise, and so he/she has the common obligations of enterprise managers and holds responsibilities in that role. The responsibilities of Director is considered by the Annual GAS on the basis of the report on the management and operation of the company

Director or CEO has the following rights and obligations:

Decide on daily business-related matters of the company without the decisions by the BOD;

Implement the decisions of the BOD;

Implement the business plans and investment options of the company;

Recommend options for the organization structure and internal management regulations of the company;

Appoint, dismiss, demote managers in the company, except for the roles within the authority of the BOD;

Decide on salaries and allowances (if any) for the employees of the company including managers under the appointment authority of Director or CEO;

Recruitment;

Recommend options for dividend payment or loss handling in business;

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Other rights and obligations as provided by the law, the regulations of the company and the decisions by the BOD.

d. Board of Controllers (BOC)

BOC is established with the authorities provided at Article 123 of the Law on Enterprises.

BOC has two-folded functions, i.e. (i) monitoring the management and direction of the company by BOD and Director (term 1 of Article 123) and (ii) appraising the mandatory reports of the company (term 3 of Article 123). With that function, BOC is not a management unit of the company; the members of BOC are not “enterprise managers” either (Article 4.13).However, the members of BOC also have similar obligations as those of enterprise managers (Article 126 and Article 119).

With the function to monitor the management and direction of the company by BOD and Director, BOC is independent from these roles. Therefore, different from Director, Controllers are appointed by the GAS. BOC is accountable to the GAS for the implementation of the assigned tasks. The relation between BOC and BOD is that between a supervisor and a supervisee. To ensure that BOC can conduct that function, the law provides details of the right of BOC to provide information (Article 124). However, the checking by BOC at the request of shareholders or shareholder groups provided at Article 79.2 should not interfere with the normal work of BOD or interrupt the business operations of the company (Article 116.3).

With the above-mentioned function, BOC has a rather long list of tasks and authorities (Articles 123 & 124). However, the law provides the obligation of BOC to inform BOD immediately and assigns BOC with the right to request for an end to a violation or/and solutions when they find out a manager violates the laws, the regulations of the company or the decisions of the GAS in the management and direction of the company, or violates the obligations for managers of the company. This request does not automatically leads to an end of the violations. BOC does not have the authority to interfere by any form of suspension of such behaviors. Therefore, BOC according to the Law on Enterprises 2005 is still a unit without real authorities3. As provided by the Law on Enterprises, the documents issued by BOC on the supervision and monitoring are only warnings. Even when violations of the management obligations by BOD or Executive Committee are found, BOC can only request the individuals to stop those behaviors and introduce solutions to address the consequences. BOC does not have the right to fire the violating employees.

3 The Law on Enterprises 2005 and Company Charters assigns extensive authority to the Boards of Controllers (BOC). However, necessary conditions for their performance including requirement on information provision or incentives are not sufficient. Besides, members of BOC often work on part-time basis and do not have in-depth expertise on corporate finance significantly affect the effectiveness of this unit.

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The fact is that, in Vietnam, the state agencies or the third party only care about the legal representative of the company rather than the members or head of BOC of the company.

III. State Economic Groups (EGs)

1. The legal basis for the founding of state EGs

The highest legal basis for EGs is provided at chapter VII on the group of companies in the Law on Enterprises 2005, in which the most relevant is Article 149 on EGs. According to the law, “EGs are a group of large scale companies. The Government provides the guidelines for the criteria, organization, operations and activities of EGs”. On that basis, the Government issues legal documents on the organization and activities of state EGs. Therefore, the legal framework that directly affects the management and operation of EGs is actually at the level of the government decrees as the highest.

On 05/11/2009, the Government issued Decree No. 101/2009/ND-CP on “Pilot establishment, organization, operation and management of state EGs” that provides rather comprehensive principles and typical provisions, from objectives of establishment, process of establishment, management to supervision of state EGs, providing the premises for overcoming difficulties and limitations during the initial pilot phase.

Currently Vietnam has 13 state EGs:

1. Vietnam Post and Telecommunication Group (VNPT)

2. VINASHIN Shipbuilding Industry Group (VINASHIN)

3. Vietnam National Oil and Gas Group (Petro Vietnam)

4. Vietnam Electricity (EVN)

5. Vietnam National Coal-Mineral Industries Holding Corporation (VINACOMIN)

6. Vietnam National Textile and Garment Group (Vinatex)

7. Bao Viet Finance Insurance Group

8. Vietnam Rubber Group (VRG)

9. Vietnam National Chemical Group (Vinachem)

10. Viettel Group (VIETTEL)

11. Housing and Urban Development Holdings (HUD)

12. Vietnam Construction and Import-Export Corporation

13. Vietnam National Petroleum Group (Petrolimex).

According to the Government, these groups are operating in key economic sectors and strategic areas of the economy where other economic sectors can hardly operate due to

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limitations in terms of financial capacity and management experience. Besides, state EGs serve as a tool for macroeconomic stabilization of the Government.

Box 2: The vague legal status of State EGs

Although there are some specific regulations on the organization and operation of state EGs, their legal status is inconsistent. Specifically, in Decree No. 09/2009/ND-CP dated 05/02/2009 of the Government, Term 2 of Article 2 “The regulations on financial management of SOEs and management of state investment capital in other enterprises” states that “State EG is a group of companies with dependent legal status, satisfying the conditions as regulated by the laws. EGs do not have an independent legal status”. Though the regulations are clear, the establishment of state EGs and transformation of SOEs into other forms in accordance with the Law on Enterprises 2005 shows the inconsistency in regulations on the structure of EGs.

Therefore, in practice, EGs do have a legal status. Specifically, at Term 2, Article 4 of Decree 101/2009/ND-CP on State EGs, it is clearly provided that State EGs include:

a) The parent company (called tier-1 enterprise) is an enterprise in which the State owns 100% of charter capital or holds the dominating authority under the decision of the PM;

b) Subsidiaries of tier-1 enterprises (tier-2 enterprises) are enterprises held by tier-1 enterprises, organized as shareholding companies, one-or two-member LLCs, corporations in the model of parent company – subsidiaries, joint-ventures (in case the corporation have not registered in accordance with the Law on Enterprises), and overseas subsidiaries;

c) Subsidiaries of tier-2 enterprises and the lower level enterprises.

In the mean time, according to the recent decisions of the PM4, when a parent company of a state EG is transformed to a one-member LLC that operates in accordance with the Law on Enterprises 2005, the concept of Egs is different from that provided in Decree 101/2009/ND-CP, i.e. Most of the decrees on the conversion models equate a parent company of an EG with that EG. For example, Decision 984/QĐ-TTg dated 25/6/2010 on the conversion of VINASHIN, a parent company, to a state one-member LLC. In this decision, after conversion, the parent company of VINASHIN is named “VINASHIN”.

Term 3, Article 1 of the above-mentioned Decision even confirms “VINASHIN has a legal status under the law of Vietnam”. Decisions of the PM on conversion of parent companies of EGs such as Vinacomin, VRG, “Song Da”, EVN, Vinatex are all similar to the case of VINASHIN. Therefore, according to the decisions by

4 In 2010, the Government started to transform many holding companies of EGs into one-member LLCs. The PM issues decisions on each transformed company. For example, the transformation of the holding company of Petro Vietnam (PVN) was formalized under Decision 924/QD-TTg. Decision on transformation of other EGs are similar.

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the PM, parent companies of EGs are understood as state EGs with legal status. Therefore, there are completely different concepts of the EG model, shown in the conflict among different legal documents of the Government and the PM. Those issues show inconsistency and poor cooperation among ministries in the implementation of the The Law on Enterprises and other legal documents.

2. Basic features of legal framework for state EGs under Decree 101/2009/ND-CP

2.1. Corporations under direct management of the PM

Decree 101/2009/ND-CP continues to confirm the management of the PM on state EGs. Specifically, the PM has the following authorities:

Make decisions on the compilation of proposals for establishing state EGs and approve the proposals (Article 11)

Make decisions on the establishment of state EGs (Article 9)

Appoint and dismiss the member of the BOD of parent companies of state EGs (Article 21)

Approve of appointments and dismissals of CEO of corporations (Article 27)

Box 3: Lack of an advising unit to assist the PM in management and supervision of state EGs

The PM has the authority to decide on all the most important issues of EGs, from identification of business, direction setting, proposals for corporation establishment to appointment and dismissal of high-ranking managers of the corporation. However, no ministry or sector or any specialized unit/organization is assigned by the Government to assist and advise the PM in the direction and supervision of EGs on a routine basis. This is one of the major reasons that lead to prolonging problems which creat great losses in some EGs over the past period.

2.2. Business lines (Article 3)

According to Decree 101/2009/ND-CP, state EGs are established in the following industries:

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1. Postal, telecommunication and information technology;2. Ship building and repairs;3. Power generation, transmission, distribution and trading;4. Oil and gas survey, exploration, exploitation, processing and distribution;5. Coal and mineral survey, exploration, exploitation and processing;6. Textile;7. Rubber planting, exploitation and processing;8. Fertilizer and chemical production and trading;9. Real estate investment and trading;10. Construction and mechanics;11. Finance, banking and insurance;12. Other industries according to decisions of the PM.

Specifically, for the business line of each corporation, the definition of “business” is explained more clearly in Article 6 as follows:

"Main business of an enterprise" is the business which the enterprise was established and strategically developed for, provided and assigned to the enterprise by the owner at the founding date and throughout the operations of enterprise.

"Business related to the main business of an enterprise" (called related business) is a secondary business or one derived from the main business, based on the condition and advantage of the main business or leveraging the advantage of the main business and directly serving the main business.

"Business unrelated to the main business of an enterprise" (called unrelated business) is a business that is not derived from or developed from the main business or related business.

Box 4: The situation of investment outside the main business

Most of the EGs make investment outside their main business. According to MOF, by the end of 2007, the total investment outside the main business of 70 state corporations was nearly VND117 trillion, of which more than VND23.4 trillion was invested in finance, banking and real estates. A typical case of investment in non-core business is EVN. On 22/6/2006, the PM issued Decision 147/2006/QD-TTg to approve the proposal for pilot establishment of EVN. Accordingly, EVN operates in power generation and trading, power mechanics and telecommunication as its main business. At the same time, EVN was “allowed to do multiple businesses”. Other businesses that EVN was allowed to invest in included waterway and road transportation to serve its production and trading; non-ore material exploitation; IT services; finance, securities, banking and insurance. Following EVN, a series of other EGs has been established in the model of “multiple businesses” This was the basis for the EGs to expand their investment in non-core business during 2006 – 2008.

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2.3. Organization structure (Article 4)

As provided by Decree 101/2009/ND-CP, EGs consist of the following types of enterprises:

1. Parent company (called tier-1 enterprise) is an enterprise in which the State holds 100% of charter capital or has the dominating authority according to the decision by the PM;

2. Tier-2 enterprise: Subsidiaries of tier-1 enterprises. Tier-2 enterprises are enterprises dominated by tier-1 enterprises, organized as shareholding companies, one- or two-member LLCs, corporations in the parent company – subsidiary model, joint-ventures (in case they have not registered in accordance with the Law on Enterprises) and overseas subsidiaries;

3. Subsidiaries of tier-2 enterprises and the lowers;4. Allied enterprises of corporations include: enterprises with capital contribution

under the dominating level in the parent company and subsidiaries; enterprises without capital contribution in the parent company and subsidiaries, enterprises volunteering to ally in the form of alliance contract or without an alliance contract but having long-term economic, technological, market interests and other trading interests with the parent company or subsidiaries of the EG.

Parent company and subsidiaries of an EG have a legal status, have their own capital and assets, and have the right to own, use and decide on their assets as provided by the law and at the agreements of the EG. The State is the owner of state capital invested in the parent company. The parent company is the owner of state capital invested in subsidiaries and allied enterprises.

2.4. Governance and organization model of the parent company (Item 2, Decree 101/2009/ND-CP)

Parent company is governed in a model including 3 bodies: Board of Directors (BOD), Chief Executive Officer (CEO) and Board of Controllers (BOC).

BOD

- Is the direct representative of the state ownership at the parent company, executing the rights and obligations of the owner over enterprises whose entire charter capital is the investment by the parent company charter capitals well as the rights and obligations of the owner for the capital invested by the parent companies at other enterprises.

- Has the right to make decisions, on behalf of the parent company, on setting the objectives, tasks and benefits of the parent company, except for the matters under the authority and responsibility of the Government, the PM or other delegated agencies or organizations that represent the State ownership as specified in this Decree.

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- Is accountable to the PM and the law for all the activities of the parent company.

- BOD has from 05 to 09 members who are appointed, re-appointed, dismissed, replaced, rewarded or disciplined by the PM based on the recommendation of the line Minister. The term of members of the BOD is 05 years. Members of the BOD can be re-appointed. The PM decides the membership structure of the BOD, and numbers of full-time or part-time members for each state EG.

Chairman of the BOD of the parent company

- BOD Chairman does not take the role of CEO of the parent company.

- BOD Chairman has the following rights and tasks:

o On behalf of the BOD, sign to receive capital, land, natural resources and other resources invested by the owner in the parent company and the state EG; manage the parent company in accordance with the resolutions and decisions of the BOD.

o Develop the action plan of the BOD; make decisions on the agenda, contents and documents for meetings; convene and chair the meetings of the BOD;

o On behalf of the BOD or other authorized members of the BOD to sign the resolution and decision of the BOD.

o Organize the monitoring and supervision of the implementation of resolutions and decisions of the BOD; have the right to cancel CEO’s decisions that contradict with resolutions and decisions of the BOD;

o Organize the research and development of the draft for strategies, long-term plans, big investment projects under the authority of the BOD in order for the BOD to submit to the PM for approval; options of key human resource renewal for the parent company to submit to the BOD;

o Other rights delegated and authorized by the BOD and the PM;o Make an authorization letter for some members of the BOD to execute the

functions and tasks of BOD Chairman when BOD Chairman is absent;o On behalf of the BOD of the parent company, develop the relation with the

third party in case the parent company represents the state EG to conduct shared activities or others on behalf of the EG as agreed among its subsidiaries.

CEO

- CEO is the legal representative of the parent company, except when the PM has other decision as requested by the BOD; runs the daily business of the parent company according to the objective, plans, resolutions and decisions of the BOD; is accountable to the BOD and to the law for implementing the assigned rights and obligations.

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- CEO is appointed, re-appointed, dismissed, contracted, rewarded or disciplined after the PM approves in written document. The regulation of the parent company provides specific criteria and conditions for a person to become the CEO.

- CEO is appointed or has a contract of 05 years. The BOD decides on the re-appointment or contract renewal with CEO after the PM approves.

BOC

BOC is set up by the BOD with 03 to 05 members, in which Head of BOC is a member of the BOD and appointed by the BOD; other members of BOC are selected, appointed, re-appointed and dismissed by the BOD. BOD Chairman and CEO cannot simultaneously perform as Head of BOC.

- A term of Controllers is 05 years. Controllers can be re-appointed. Controllers’ salaries, bonus or allowances are determined by the BOD as provided by Decree 101/2009/ND-CP and the law on salaries and pays.

- BOC operates in accordance with the regulation approved by the BOD, with the following tasks, authorities and responsibilities:

o Check and monitor the legality and honesty in business management and operation, in accounting books, financial statements and the compliance to the regulation of the parent company, the resolution and decision of the BOD, decisions of BOD Chairman on the parent company and subsidiaries; be accountable to the BOD for implementing the assigned rights and obligations;

o Fulfill the task assigned by the BOD, report to the BOD on a monthly, quarterly and yearly basis and by specific monitoring activities; discover and report to the BOD timely on abnormal occurrences that are contradictory with the regulation on enterprise governance or signs of violation against the laws in the parent company and subsidiaries where the parent company hold all the charter capital;

o Not reveal the monitoring and supervision result before permitted to do so by the BOD; be accountable to the BOD and to the law for neglecting or shielding the violations.

2.5. Relation between the parent company and other members in the EG

a. Subsidiaries (tier-2 company) wholly owned by the parent company

BOD of the parent company executes the right of the owner in a subsidiary. CEO of the parent company shall have the authority to:

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Receive, check and appraise the document that tier-2 enterprises submit to the parent company for submitting to the BOD for consideration, approval or decision;

Organize the implementation of the resolution and decision of the BOD for tier-2 enterprises;

Check, urge and monitor the implementation of production and business plans of tier-2 enterprises.

b. Subsidiaries (tier-2 companies) where the parent company holds the dominating share

Parent company has the right and obligation of a shareholder, an investor, a joint-venture of a tier-2 enterprise according to the law. The BOD of the parent company directly executes the right and obligation of a dominating shareholder in the subsidiaries.

c. Allied companies

The parent company executes its rights and obligations in allied enterprises as provided by the law, the regulation of the allied enterprises and the alliance agreement.

d. Voluntary allied companies

Without shareholding or capital contribution in the parent company, the relation between this company and the parent company is based on specific alliance agreement.

Box 5: The vague status of governance model of state EGs

The governance model of state EGs currently has many vague areas. According to Decree 101/2009/ND-CP, a parent company (tier-1 enterprise) is an enterprise in which the state holds 100% its charter capital or has the dominating authority. However, the Decree does not define clearly the applied organizational structure of a parent company. Besides, according to the classification of enterprises in The Law on Enterprises 2005, parent company of an EG can be considered as a one-member LLC which the State is the main owner. However, Article 20 of Decree 101/2009/ND-CP states that, “a parent company has a BOD, CEO, and BOC”. This reflects the governance model of a shareholding company. Perhaps the law maker intends to apply the governance model of a shareholding company to the parent company because the parent company manages and directs a great

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number of subsidiaries of very big capital amount to have a similar governance model of a shareholding company. In the meantime, subsidiaries (tier-2 enterprises and the lowers) of an EG are definitely not the shareholder, and capital of the parent company invested in its subsidiaries is not divided into shares. Hence, this governance model is only suitable for state management rather than corporate governance.

Additionally, there is another decree regulating the management model of parent companies of EGs: Decree 25/2010/ND-CP dated 19/3/2010 of the Government on conversion of SOEs to one-member LLCs and organizations managing state one-member LLCs. According to Decree 25/2010/ND-CP, parent companies of EGs, parent companies transformed from state-owned corporations apply the management model comprising of Board of Members, CEO and Controllers. This contradicts to Decree 101/2009/ND-CP which is in effect. Based on Decree 25/2010/ND-CP, a series of decisions by the PM on conversion of parent companies of state EG into state one-member LLCs appoints such leader roles as: Group Chairman, the member of the BOD to be Chairman, and members of the Board of Members of the Group.

IV. Debt and Asset Trading Corporation (DATC)

1. General information

DATC was established at the proposal of the MOF to carry a mission of promoting the re-structuring of SOEs before equitization. On 05/06/2003, the PM issued Decision No. 109/2003/QD - TTg on the establishment of DATC under MOF, with charter capital of VND2 trillion from the State Budget. DATC plays a critical role in SOE equitization by handling and solving NPLs in SOEs, the most challenging and prerequisite task before an enterprise is equitized. DATC has officially been into operation since 01/1/2004 with the goal to handle outstanding debt and assets, helping to create healthy finance and promoting the re-arrangement and conversion of SOEs. With its functions and tasks, DATC is categorized as a special SOE according to Decision No. 55/2004/QĐ-TTg dated 06/04/2004 of the PM.

Implementing SOE re-arrangement, and based on Decree No. 25/2010/ND-CP of the Government dated 19/03/2010 on SOE conversion, MOF issued Decision No. 1494/QD-BTC dated 30/06/2010 to approve of the conversion of DATC to a one-member LLC which is owned by the State.

Since 2010 the charter capital of DATC has been increased from VND2 trillion to VND 2.481 trillion. MOF requires DATC to use at least 70% of its total capital to buy loans and assets of 100% state capital SOEs to re-arrange, convert and make SOEs’ financial status healthy.

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2. Objectives

To help enterprises and commercial banks to make their financial status healthy through buying and selling of outstanding debt assets;

To help solve financial problems to promote the arrangement, equitization, assignment, selling and leasing enterprises through handling outstanding assets and loans before converting the enterprises; to handle loans and assets that are excluded when enterprises are valuated;

To promote the formation and development of loan market, creating more goods for the financial market, through which to push the synchronous development of the market factors in the national economy while creating the legal framework to ensure the management and supervision of the State.

To develop the model and set the direction for the formation and development of some intermediary financial institutions such as debt buying and selling companies, debt collection services, financial consulting companies, etc. On that basis, to transfer some case-handling responsibility from State management agencies to specialized independent economic organizations.

3. Tasks of DATC

According to Circular No. 79/2011/TT-BTC dated 08/06/2011 on issuance of the regulations on the organization and operations of DATC, DATC is assigned with the following tasks:

Buy loans and assets of creditors and asset owners (including both assets and land use rights used as collaterals).

Receive to handle loans and assets which are excluded from the valuation of enterprises when the re-arrangement and conversion of SOEs are done.

Receive and handle loans and assets as appointed by the PM: The reception and processing of loans and assets as appointed by the PM are conducted according to the principles provided in Term 2, Article 8 of this Circular. In case of difficulties arising during the reception and processing of appointed loans and assets, the company should report to MOF to consider, address or report to the PM for decisions.

Handle loans and purchased assets by the following methods:

- Collection of debt directly or indirectly via lawful debt collection organizations in Vietnam.

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- Selling the received loans and purchased assets through direct negotiation, competitive offerings or public auctioning in compliance with regulations of law. Direct negotiation method also can be used after public auctioning or failure of competitive offering.

- Maintenance, fixing and upgrading of the bought and received assets for re-selling, leasing, investment, business, production and joint-ventures to exploit the assets.

Provide consultation and brokerage of processing loans, assets and related services:

- Consult and provide brokerage to organizations and individuals that buy and sell loans and assets, recover loans, handle loans and assets; buy and sell, merge and restructure enterprises;

- Conduct valuation and bidding as provided by law.

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Make investment (including external investment) on the principle of efficiency, preservation and development of state-owned capital.

It’s noteworthy that MOF allows DATC to use following methods to buy loans and assets of creditors and other asset owners:

- Direct negotiation with creditors and other asset owners.

- Participation in bidding to buy loans and outstanding assets.

- Execute purchase of assets appointed by the PM.

4. Organization structure

After the PM issued Decision No. 1494/QD-BTC dated 30/06/2010 on approval of the proposal for conversion of DATC into 100% state capital one-member LLC operating in accordance with The Law on Enterprises, management structure of DATC includes:

Board of Members

Controller

CEO and Deputy CEO

Chief accountant

Assistant team

MOF executes the rights and obligations of the owner over DATC as assigned by the Government; MOF authorizes Board of Members of DATC to execute some rights and obligations as the owner of DATC.

5. Operation

With the capital of VND2 trillion provided by the State in 2003, after more than 8 years operation, DATC has become an active organization in the process of SOE re-arrangement and conversion as well as implementation of socio-economic policies of Vietnam.

According to reports of DATC, by 30/4/2012, DATC had implemented 114 NPL purchases through negotiations with commercial banks with a total value of about VND8 trillion. Among them, more than 90% of the value is from SOCBs.

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Within 5 years from 2007 to 2011, DATC bought loans to restructure 72 enterprises with the total book value of VND6.2561 trillion at the price of VND1.6403 trillion (the average loan buying rate is 26.2%); recovering VND1.4864 trillion, i.e. the recovery rate is 90.6%.

At present, DATC is concentrating on trading of loans and processing assets of enterprises in corporations such as Vietnam Silk Corporation, COMA, Buon Ma Thuot Coffee Company, enterprises of VINASHIN, etc.

In addition to processing SOEs’ NPLs, DATC also buys loans from private enterprises, e.g. negotiating to buy the loan of Bianfisco from commercial banks in early 2012.

6. Development plan

DATC is planning to upgrade itself to a group in 2015 and establish more subordinate debt trading shareholding companies. According to this plan, DATC will become a national loan trading corporation to double the current charter capital of VND2.481 trillion to VND5 trillion in 2015. Besides prioritizing SOEs, DATC will expand loan trading services to non-state enterprises.

7. Short-coming

In the past 8 years of operation, DATC has faced the following problems caused by both subjective and objective factors:

Firstly, regarding the legal framework for loan trading, this activity currently is only regulated by Decision No. 59/2006/QD-NHNN of SBV dated 21/12/2006 on issuance of the regulation on loan buying and selling from backward credit organizations. This legal document has many shortcomings, limitation and contains inconsistency with other regulations. The amendments or issuance of a new legal document to replace Decision 59/2006/QD-NHNN and related legal documents in a synchronous manner is very necessary for the operation of DATC and the loan trading market in Vietnam.

Secondly, the capacity of DATC personnel is still limited. The influence of bureaucratic management style is rather strong because most of the key roles of DATC are transferred from MOF, specifically from Department of Corporate Finance. Together with insufficient legal framework, this limitation seriously slows down the NPL processing.

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Thirdly, the size of DATC’s charter capital, though it has been increased to VND2.841 trillion, is still too small to process a big amount of loans of the existing SOEs. DATC can only process a tiny amount of NPLs in the total NPLs of SOEs that could reach to VND100 trillion as valuated by SBV at the end of December 2011.

DATC has rather limited professional capacity due to the lack of credit experience, leading to its focus on only some small-sized deals such as Kontum sugar factory project, Can Tho Tracodi project, processing only loans of less than VND50 billion.

Box 6: Mistakes of DATC found by SA

In addition, DATC has found to make serious mistakes in the use of its charter capital that leading to the capital loss as pointed out in SA’s report in July 2012. For instance, the company lent to ALCII of Agribank, and may lose VND70 billion, or mis-valuate the asset of Bac Kan cement project, causing a loss of nearly VND40 billion.

Source: http://vietnamnet.vn/vn/kinh-te/vef/81186/sai-pham-hon-1-200-ty--cong-ty-mua-ban-no-mat-von.html

V. State Capital Investment Corporation (SCIC)

1. General information

Similar to DATC, SCIC was set up by the proposal of MOF and the Decision of the PM in 2005. SCIC was established with the aim to decrease the intervention of the State in daily business of SOEs. SCIC was given the tasks to manage state capital in SOEs that has been equitized. Therefore, while DATC plays an important role in the period prior to equitization, SCIC has a role in the post-equitization period.

With its typical functions and tasks, SCIC is categorized as a special SOE according to Decision No. 55/2004/QD-TTg dated 06/04/2004 of the PM.

SCIC is evaluated as one of the biggest state corporations and is planned to become a mega state corporations with the greatest power in the coming future.

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2. Objectives

Since its establishment by Decision No. 151/2005/QD-TTg, SCIC has got 4 objectives as follows:

(1) A strategic investor of the Government;

(2) An active shareholder of enterprises;

(3) A professional financial consultant;

(4) An enterprise which is governed by international standards.

3. Functions and tasks of SCIC

The function and task of SCIC are provided in Decision No. 152/2005/QD-TTg dated 20/06/2005 regulating the organization and operation of SCIC, including:

(1) Receive and execute the right of the owner’s representative for the state capital in state one-member LLCs, two-or-more-member LLCs, and shareholding companies that are transformed from SOEs or newly established5.

(2) Invest state capital in domestic and overseas economic sectors to achieve the following objectives:

Preserve and develop state capital and use the funding sources efficiently.

Create the motivation for developing and upgrading operation capacity and competitiveness of enterprises that have state capital.

(3) Make investment and manage invested capital of the corporation in economic sectors as assigned by the State.

(4) Mobilize fund domestically and overseas in accordance with the Law on Enterprise.

(5) Provide financial services and consultation on: investment, finance, equitization and enterprise conversion; be authorized to receive investment capital sources from domestic and international organizations and individuals.

(6) Execute international cooperation in the capital investment and trading area.

(7) Provide support services to enterprises according to the law.

5 SCIC has managed a number of un-equitized SOEs. SCIC’s Charter does not limit its investment to equitized SOEs.

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4. SCIC and management of Fund for Supporting Enterprise Reform and Rearrangement (FSERR)

According to Decision 21/2012/QD-TTg of the PM dated 10/5/2012, from 1/7/2012 the Central Support Fund for Enterprise Arrangement will become the FSERR. This Decision assigns SCIC to manage this fund under MOF. The income sources of the Fund include: Income from equitization of 100% state capital SOEs as provided by the Decisions on transformation of 100% state capital SOEs to shareholding companies; income from other arrangements such as transfer, selling, dissolution and bankruptcy of 100% state capital enterprises; income from equitization; dividend profits, dividends from state capital contribution at transformed enterprises in which ministries, ministerial agencies, PPCs act as the owner’s representative as assigned by the PM.

In addition to the task of supporting 100% state capital SOEs, state-owned forestry and agricultural farms, FSERR handle ownership transfer to deal with excessive labor and address financial issues in accordance with the law. The PM has the authority to use the Fund at the proposals of MOF or the owner’s representative to serve the following purposes:

To increase charter capital to parent companies of EGs, state corporations, and 100% state capital SOEs

To add investment to maintain or increase the ratio of state capital in other enterprises

To invest in important projects or to make other payments according to the decisions of the PM.

5. Organization structure

After converting from a state corporation to a state one-member LLC according to Decision No. 992/QD-TTg dated 30/06/2010, and operating in accordance with the Law on Enterprises, the organization structure of SCIC is typical of a one-member LLC, including Board of Members, Executive Committee, controllers and assistant teams, etc.

The PM has made the decision to appoint Minister of Finance Vuong Dinh Hue as Chairman of Board of Members of SCIC since September 2011.

6. SCIC activities

6.1. Achievements of SCIC

Since its operation from 01/08/2006, after almost 06 years of development, SCIC has made some significant achievements and contributions to the reform and renewal of SOEs in Vietnam.

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During the period of 2006-2011, SCIC has taken over the right of the owner’s representative for state capital in nearly 1,000 enterprises. It has been restructuring the enterprises through selling state capital in SOEs that the State does not need to control or dominate. Up to now, SCIC divested in 520 enterprises and full divestment has been implemented in 466 enterprises of book value of VND 1,280 billion with market value of VND 2,770 billion.

Currently, SCIC is still holding shares in about 500 enterprises. SCIC acts as the owner’s representative in big SOEs such as Vinamilk, Constrexim, Vinaconex, VINARE, Hau Giang Pharmacy, Binh Minh Plastic and FPT.

Through capital selling, the number of enterprises in SCIC’s portfolio has decreased but their capital has increased from VND 7.5 trillion to VND15 trillion. Estimated income from divestment by the end of 2012 is around VND 8 trillion. The income will be used by SCIC to make investment in key industries and areas, big projects or flexible investment to increase state capital.

6.2. Advantages of SCIC model

At the time of its establishment, the organization and management model of SCIC was completely new among SOEs in Vietnam, so the Government provided SCIC certain preferential policies to develop SCIC with a modern governance model. These advantages of SCIC are clearly provided in the regulation of SCIC which was approved by the PM in Decision 152/2005/QD-TTg dated 20/6/2005, with the following features:

Firstly, different from ordinary State corporations in the same period with “multiple business lines”, the tasks of SCIC are very concentrated, which are investment and management of state capital and related services.

Article 6 of the Regulation of SCIC lists 7 tasks, which are also the main business of SCIC, all of them are directly related to investment and investment management; helping to turn SCIC into one “investment fund” of the Government in enterprises. The sectors include:

Take over and execute the right of the owner’s representative of the state capital in state one-member LLCs, two-or-more-member LLCs, and shareholding companies that are transformed from SOEs or newly established.

Invest and trade state capital domestically and overseas to achieve the objectives to preserve state capital and increase competitiveness for enterprises

Make investment and manage the invested capital of the corporation in the sectors as assigned by the State

Mobilize domestic and international funding sources as provided by the Law Enterprises.

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Provide financial services and consultancy in: investment, finance, equitization and enterprise conversion; be authorized to receive investment capital sources from domestic and international organizations and individuals.

Execute international cooperation in the capital investment and trading area.

Provide support services to enterprises according to the law.

Secondly, SCIC has rather high autonomy in its business operation (Article 7 in the Regulation of SCIC). Most of the authority of SCIC, except for some tasks, is executed by the corporation without mandatory collaboration or consultation with ministries or other government agencies.

SCIC has significant sovereign assigned by the Government in the assigned sectors/industries. Within the assigned capital and fund, SCIC has the right to independently operate the enterprise in which SCIC has state ownership; the right to act on behalf of the owner to use and manage (buy, sell, transfer and invest) the asset of the enterprise.

In practice, SCIC tends to be rather “conservative” in its investment. It usually invests in equitized SOEs rather than newly-established companies or private ones. In some cases, due to requirements of professionalism in specific enterprises such as airlines (e.g.: Jetstar Pacific Airlines), or banking (Vietcombank), SCIC transferred them to other agencies. Therefore, there are few collapses or capital losses from SCIC investment.

Thirdly, the function and task of SCIC managers or management structure are clearly provided

The task and authority of CEO, BOD Chairman, BOD members, and BOC are described in details to ensure transparency and accountability in management and operation. The Regulation of SCIC provides 19 items under the authority of BOD (Article 10), 10 items under the authority of CEO (Article 18), and 4 principles to identify the relation between CEO and BOD (Article 20). All these provisions together with financial regulations and the mechanism for SCIC representatives are issued in details, and this creates good foundation for SCIC’s operation.

Fourthly, SCIC pays significant attention to human resource development with a very good compensation policy for high-ranking managers and SCIC representatives as compared with the average level of other SOEs.

Since its establishment, one of priorities of SCIC is to recruit capable staff from various sources, not necessarily from state agencies. Therefore, salaries of SCIC personnel are rather high as compared with of other SOEs. In reality, SCIC has managed to attract capable managers from non-state sectors such as commercial banks, audit, and financial consultation to appoint to management positions of the company.

For the position of SCIC representatives in BOD of 500 enterprises under its portfolio, SCIC also pays very high salaries and allowances on top of other benefits such as the right to buy

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shares in the enterprises where they represent state ownership, cash award and bonus.

However, recent criticisms have been raised against the compensation policy of SCIC; the PM also requests SCIC to re-consider its compensation policy. If this challenge is not overcome, SCIC will face difficulties in talent attraction.

Box 7: The compensation policy at SCIC

Since its establishment, one of SCIC’s priorities is to recruit capable personnel. Therefore, the salaries in SCIC are rather high as compared with those of other SOEs. In 2009, as SA found out in SCIC’s plan submitted to MOLISA and MOF, SCIC planned to increase the average income of SCIC’s leader to VND40 million per month. However, in reality, an SCIC’s leader could receive up to VND78.5 million per month. The approved salary fund for SCIC leaders was nearly VND1.5 billion, but actual paid amount was more than VND2.6 billion by the end of 2008. This has caught criticisms by the public.

The PM issued Document No. 03/TB - VPCP dated 5/1/2010 on the financial status and audit results of SCIC which addressed the compensation policy of SCIC. Accordingly, the PM requested MOF to chair, review and evaluate the efficiency in operation and implementation of financial management, accounting mechanism, labor management and salary and income policies of SCIC.

For example, Jetstar Pacific Airlines (in SCIC’s portfolio) had to report on the rationale and conditions for salaries and incomes for its employees; allowances for part-time members. At the same time, it had to explain clearly the reasons for the gap of average incomes between full-time members of the BOD and CEO that was pointed out by SA.

The PM also assigned MOLISA to chair and cooperate with Ministry of Internal Affairs and MOF to provide the rationale, analyze the legality and appropriateness of salary calculation in 2008 plan and actual implementation of SCIC, actual incomes of members of the BOD and CEO to follow up with the conclusions of SA on salary and income policy of SCIC leaders.

Finally, SCIC has introduced good practice with corporate governance, particularly for public companies. SCIC manages state capital in more than 500 companies. Most of companies in SCIC’s portfolio have been equitized many of them have been listed in the stock market. Some of big companies in SCIC’s portfolio which have been listed in the stock

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market are FPT, VINACONEX, VCB, etc.

SCIC mainly manages the enterprises by sending its “representatives”. At present, SCIC has been assigning its representatives to BODs of about 20 companies, and contract people to be SCIC representatives in companies which SCIC contributes capital. SCIC has the Regulation which provides clear criteria on responsibilities and authorities of its representatives in the enterprises. The compensation policy and reporting system for the representatives are provided specifically in the Regulation on SCIC representatives which is attached to Decision No. 20/QD-DTKDV-BOD dated 09/6/2009 by the BOD of SCIC.

7. Orientation for future development

Orientation for future development of SCIC until 2020 is “To become a strategic investment corporation of the Government to make investment in important areas with the goal to preserve and develop state capital, to promote competitiveness and sustainable growth of Vietnam’s economy”. Accordingly, immediate objectives of SCIC are not merely to invest and trade in state capital in enterprises but also to become a tool and a capital channel for the State to take initiative in promoting enterprise restructuring and more focus on investment in really key sectors and industries of the economy.

Based on the above-mentioned orientation, SCIC has set some specific directions:

Separate and avoid overlapping between state management function and business function. Accordingly, SCIC will establish SCIC investment companies as its subsidiaries to focus on investment to ensure its efficiency. This direction is approved by the Government in Official Document No. 680/TTg-DMDN dated 23/05/2012 which allows the establishment of SCIC Investment one-member LLC under SCIC

Continue to increase its charter capital from VND19 trillion to VND50 trillion

Continue divestment

SCIC classifies its enterprises into 3 groups:

- Group A (Strategic investment group): 14 enterprises

- Group B (Flexible investment group): 84 enterprises

- Group C (Divestment group): 318 enterprises

Accordingly, all the 318 enterprises in Group C will be divested during the period of 2012-2015 based on the list of divested enterprises that has been publicized. The sale of capital will be conducted in the form of public bidding.

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8. Short-coming

Besides significant achievements and contributions to SOE reforms in Vietnam since its operation in 2006, SCIC also shows some limitation as follows:

Firstly, the operation of SCIC is not yet pro-active due to its dependency on many policies and direction of the Government. The role of state management and business function are not clearly separated. Many investment decisions of SCIC are still appointed and directed by the Government. Similar to other SOEs in Vietnam, in addition to its business function, SCIC takes over political tasks. This is also the greatest difference between SCIC model and companies of this type in the world such as Future Fund of Australia or Temasek of Singapore. While those companies of this type abroad operate merely for profits and do not have to cope with intervention from the Government, i.e. having no political tasks,

Secondly, information transparency is not fully assured.

Thirdly, SCIC leaders’ capacity and investment management process are still limited. This leads to poor and loose investment decisions and investment capital management, low efficiency or capital loss.

Another important factor is an unclear direction for SCIC whether it continues to grow as a financial investor and the single representative of the Government for state capital in future.

Box 8: Delay in the transfer of HABECO and SABECO to SCIC

Some corporations 90-91, including two big equitized companies in soft drink and beer producing, Hanoi Alcohol Beer and Beverage Company (Habeco) and Sai Gon Alcohol Beer and Beverage Company (Sabeco) need to be transferred to SCIC. However, the decisions of the PM on equitization of these two enterprises allow MOIT to “temporarily” manage these two enterprises in the period following their equitization. Until now, MOIT maintains its opinion to directly manage these companies although the equitization was completed. As the biggest share-holder and state ownership representative of SABECO and HABECO, MOIT has the authority to appoint members of the BOD of these two companies which enables MOIT’s influences on their business directions.

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PART III: RELATIONSHIP BETWEEN SOEs AND THE GOVERNMENT

I. State ownership and executing state ownership in SOE

1. Governmental entities as SOE owners

A fundamental change in the management of SOEs after 01 July 2010 is in the concept of "ownership" over SOEs. If the Law on State Enterprise 2003 provided only a general concept of "the State is the owner" in SOEs, the Law on Enterprises 2005 and guiding documents specify the organizations on behalf of the State to execute "state ownership" over SOEs.

1.1. For 100% state capital LLCs

Decree 25/2010/ND-CP on transformation of SOEs and the Law on Enterprises 2005 stipulate a number of organizations executing "state ownership" in SOEs. For example, Article 3, Decree 25 specifies:

PM or responsible organizations are assigned by the Government to execute the right and obligation of owner of 1 member LLC which is transformed from parent companies of state companies, corporations, and important and big SOEs established by PM.

Ministries and PPCs are assigned to execute the right and obligation of owner of one-member LLCs which were transformed from:

- SOEs which were established by ministries and PPC to directly serve for national defense and security and implement public tasks;

- Parent companies of state corporations, state enterprises in the parent-subsidiary business model and independent agricultural companies, forestry companies, farms and forestry farms which were established by ministries and PPCs subject to equitization and the conversion is not completed before 1 July 2010.

Parent companies in the parent – subsidiary business model6, parent companies of State EGs are owners of one-member LLCs which were transformed from independent SOEs of state corporations; subsidiaries of parent companies; and LLCs established by the parent company.

SCIC is the owner of LLCs that were transformed from SOEs under ministries and PPCs.

6 “Parent companies in the parent – subsidiary” is the business model for 90 or 91 corporations that is not transformed into EGs, or business model applied to “downgraded” EGs ( the case of HUD and Song Da Construction Economic Group).

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1.2. For state JSCs and LLCs of two or more members

Owners of state JSCs and LLCs of two or more members are determined based on the authority to appoint representatives of state capital in JSCs under the provision of Article 49, The Law on Enterprises 2005 as follows:

Ministries, ministerial-level agencies, governmental agencies and PPCs executing state ownership in SOEs will:

- Report to the PM on the decision to appoint state ownership representatives in SOEs;

- Appoint a representative for management in JSCs. In case of equitized enterprises which were transferred to SCIC, the ministries, ministerial-level agencies, governmental agencies and the PPCs in collaboration with SCIC to decide the appointment of the representative in the enterprises.

Parent companies of State EGs and state corporation shall appoint representative in equitized enterprises which are members of EGs or corporation

Based on Article 3, paragraph 1 of Decision 151/2005/QD-TTg dated 20/6/2005 of the PM on establishment of SCIC, SCIC will exercise management of state capital in JSCs, LLCs of two or more members which were transformed from independent state companies and corporations under PPCs and lines ministries. MOF issued Circular 47/2007/TT-BTC dated 15/5/2007 guiding on the conditions and procedure for transferring the right to represent state capital to SCIC. However, in practice, the regulation has not been thoroughly implemented because of the following reasons:

Ministries and PPCs are unwilling or try to delay transferring ownership of large SOEs to SCIC because those enterprises bring in significant benefit to the ministries and PPCs. Examples of the delayed transferring are the cases of FAHASA under HCMC People's Committee, and SABECO and HABECO under MOIT.

In some cases, even after taking over the management of state capital in JSCs, SCIC still has to transfer shares to other organizations for various reasons, like the case of transferring Jetstar Pacific Airlines back to Vietnam Airlines or Vietcombank back to SBV.

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2. The right of SOE owners

2.1. For one-member LLCs

a. Activities of the Board of Members or the company president

The owners execute their rights of ownership through the Board Members or the company president (in case the enterprise does not have the Board of Members.) The owner shall have the right to appoint board members, the chairman. Function of Board of Members7 and the chairman is quite broad in their scope which is provided in Articles 20 and 27, Decree 25/2010/ND-CP. Main functions are as the following:

Approve annual financial statements, annual and long-term business plan of the company;

Appoint key management personnel of the company (general manager and chief accountant); appointment of representatives of the company in other companies to manage its capital at the request of the general manager;

Decide on investment projects, establishment of subsidiaries, joint ventures, branches and representative offices of the company;

Decide on the loan, or purchase or sale of the company’s assets when the assets have value compared with its charter capital;

Decide on organizational structure, personnel policy, operation rules, charter of the company’s subsidiaries or enterprises in which the company owns shares.

Be responsible for business performance and development of the company and report to the owner

b. Ratification of decisions of the Board of Members or the company president

The owner also has authority to approve decisions of board members and chairman of the company as provided in Article 20 and 27, Decree 25/2010/ND-CP as follows:

Approval of development strategy, long and medium-term and annual plans of the company; decision on the investment portfolio of the company, the main business lines and non-core business; decision on supplementation or revision of the main business of the company; and decision on company’s engagement in industries, sectors, geographical areas and projects with high risk;

Approval of investment projects; approval of contracts for sale, borrowing, lending and other big contracts which the company engages in;

7 According to Enterprise Law, the state ownership representative is named “Council of Member” in LLCs and BOD in JSCs.

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Investment decisions on establishment subsidiaries, contribution of capital for investment in other companies; decision on the change of ownership structure of the subsidiary which may result in the loss of major stake position of company in the subsidiary;

Decision on adjustment of charter capital of the company; transfer of a part or all of the company's charter capital to other organizations and individuals;

Approval of financial statement; approval of the use of the company’s after-tax profits and other financial obligations; approval of the plan to deal with loss incurred from business activities;

Decision on supplementation and amendment to the company’s charter;

Decision on appointment, hiring, dismissal, resignation, contracting and termination of the contract with General Manager;

2.2. For JSCs and LLCs of two or more members

For JSCs, LLCs of two or more members, the right of the owners is implemented through their representatives in the Board of Members. Being major shareholder, the owners may appoint representatives to participate in the shareholders' meeting, Board of Members and perform voting rights, through that to influence business performance by the companies.

2.3. For State EGs

Implementation of state ownership in State companies and State corporations still applies under the provisions of Decree 132/2005/ND-CP dated 20/10/2005 on "The rights and obligations of the owner to state companies " though this Decree, in principle has been ceased the effect after termination of the Law on State Enterprise 2003. The reason for this prolonged effect is that the Government has yet to finish drafting the new Decree to replace Decree 132/2005/ND-CP for guiding the implementation of rights and obligations of the state owned companies operating under the EL 2005.

For state EG and state general corporations, the owners will have rights as stipulated in Article 3, Decree 132/2005/ND-CP as follows:

Decision on establishment of new corporation, EG; approval of rearrangement, dissolution or change of ownership of state owned companies.

Decision on the long term business strategies and business lines of business of the company.

Approval of the charter, amendments and supplements to the charters of state companies.

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Decision to invest capital to the charter capital, adjustment of the charter capital of state companies.

Decision to invest, invest capital, joint ventures according to their jurisdiction approval of borrowing, lending, renting, leasing of state companies.

Regulations for the financial state companies, income distribution, setting up and using the funds of the state companies.

Appointment, dismissal, demotion, reward and discipline of the Board Chairman, members of the Board, CEO or director of state companies.

Term of salary, allowances and bonuses in state companies and decide on the salaries and allowances for the Chairman of the Board, Board Member, CEO or Director state companies.

Regulation Order regime, or the task of bidding, the price level to compensate for the difference of the production and supply of products and public services.

To examine and supervise the implementation of goals, tasks, and decisions of the owners as well as assess the performance of state companies.

The decentralization exercise is also the owner of Decree 132 provides for the decentralization of management of corporations, state general corporations established under the grant, namely:

The PM decided to ratify the charter, the charter capital, the appointment of Board members, CEO and investment projects of the EG led by PM decided to establish.

Line ministries, provincial People's Committee decided to ratify the charter, the charter capital, the appointment of Board members, CEO and investment projects of an EG or by the provincial People's Committee decision establishment.

2.4. The inadequacies in regulations on rights of owner of SOEs

In prevailing regulations, agencies executing the rights of owner of SOEs are given much power in monitoring and supervising those enterprises. However, there exist a number of problems regarding the mechanisms for the owner to conduct monitoring and supervision activities that needs to be clarified. The problems as found by the consultants include:

First, while current legal provisions on the issue are general and brief, there is a lack of requirements on reporting forms and indicators, information to be reported, and the reporting period from the Government and line agencies to guide enterprises and its owners on monitoring and supervision. Businesses said they are still confused about reporting requirements and request for owners’ approval due to lack of detailed guidance on this issue.

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Second, the organizational structure of the Government, ministries, and provincial lacks departments in charge of advising and assisting enterprise owners on monitoring enterprises owned by the State. Meanwhile, Decree 25 does not allow specialized management agencies to manage enterprises under the authorization of the enterprise owners but areas under their technical expertise. The lack of a general advisory body to the owners at all levels makes it difficult for owners in the implementation of enterprise management functions.

Third, although the State The Law on Enterprises 2003 was terminated, regulations on the exercise of the owners’ rights and obligations on State EGs are not adequately provided for in EL 2005, posing the following challenges:

- Unclear responsibility of the owner over performance and business results of State EGs;

- Non-transparent mechanism for the appointment of key personnel such as Chairman and CEO, thus disconnecting responsibility of managers and the business results of enterprises and making it difficult to recruit qualified persons to management position.

- There is a loop-hole in terms of management and supervision of the professional management agencies such as the MPI and MOF over investment activities and financial status of EGs, leading to untimely advice for the Government. Therefore, the government is not able to keeps up with business situation and handle issues arising from the operation of State EGs.

II. Administrative relationship between SOE and governments at different level

Based on current legal framework on SOE, the ownership – administration relationship between SOEs and administrative agencies has yet been split up. Two levels of governments are involved in this type of relationship with SOEs are:

- Central Government: including The PM and line ministries who manage and administer EGs, corporations and other SOEs

- Local government: including PPCs who manage and administer other SOEs

III. Key government agencies managing SOEs

1. The PM

Article 20, 21 of Law on Organization of the Government dated December 25 2001 only specifies general rights and obligations of the PM. Specific function and rights related to management and administration of SOEs are not indicated. However, in other legal documents on management and administration of SOEs, the role of the PM is prominent and important. These documents include:

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Law on Enterprises (2005), Law on Investment (2005) and instruction documents;

Decree 101/2009/ND-CP on the pilot establishment, organization, operation and management of State EG;

Guiding documents on State credit, management of state capital and assets in companies, SOE restructure, etc.

Relationships between the PM and SOEs are shown in the below figure:

Figure 1: Relationship between the PM and SOEs

1.1. In terms of undertaking the owners’ duties on parent company of EGs

Article 39, Decree 101/2009/ND-CP says that “the Government shall undertake the owners’ rights and obligations on the parent company”. However, Section 1, Article 3 of Decree 25/2010/ND-CP specifically regulates the PM’s duties on EGs that “the PM or a specialized agency which is assigned by the Government shall undertake the owners’ rights and obligations on the one-member LLCs transformed from the parent companies of EGs, state owned corporations, large- scale and important SOEs established under Decisions of the PM.” Therefore, it means that the PM is responsible

SOE restructure Business

restructuring support fund

Regulations Approval of

investment project Steering committee

on Business restructure and development

Others SOE

Economic GroupsThe

Prime Minister

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for undertaking owners’ rights and obligations on parent companies of State EGs as stipulated in Article 38 of Decree 101, including:

To reestablish, restructure, reorganize, dissolve and change the ownership pattern of the company;

To decide the business goals, strategy, long-term plans and business areas to engage ;

To approve company charter, charter amendments and complements;

To decide the capitalization for charter capital and adjustment of charter capital;

To make decision on investment, joint investment, participation in joint-venture(s); to approve the plan of borrowing, lending, leasing and being leased of the company;

To regulate financial rules, revenue allocation, establishment and utilization of fund within company;

To make decision on appointment, re-appointment, dismissal, rewards and disciplines of the Chairperson/members of BOD and General Manager;

To regulate salary policy, allowances, bonuses, salary rate of the Chairperson and members of the BOD;

To regulate the procurement policy, bidding or assigning, selling price, subsidy rate for the production and provision of public goods and services;

To monitor and supervise the implementation of business goals, duties and decisions of the owners and to evaluate the performance of the parent company.

Besides, the State ownership representative is to fulfill the following duties to the parent company:

To provide sufficient charter capital for parent company;

To comply with regulations related to the owner stated in the company charter;

To be responsible to debts and other asset liability of the parent company within its charter capital;

To be legally responsible for the decisions on investment projects and approval of procurement, selling, borrowings, lendings, leasing and being leased;

To ensure the right of self-controlled business, and legally responsible of the parent company; not to illegally interfere in the business activities of the parent company;

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1.2. In terms of reorganization and restructure of the SOEs

The PM has the following rights on reorganization and restructure of the SOEs:

To decide the SOE classification: defining the criteria, typology, and business lines of enterprise, including the 100%, over 50%, under 100% of state-owned-capital or sselling and divestment of capital.

To approve reorganization and restructure plans of SOEs prepared by ministries’ EGs, PPCs on the basis of assessments of the line ministries, MPI, MOLISA and proposals of the NSCERD with the following details:

- The list of SOEs, by type of ownership, with 100% and over 50% state owned capital enterprises

- The list of enterprises to be equitized and state capital divestment

1.3. In terms of approval of investment projects of the SOEs under the Law on Investment (2005)

Article 37 of Decree 108/2006/ND-CP guiding the implementation of a number of articles of Law on Investment shows that the following investment projects of the SOEs are to be approved by the PM:

Construction and commercial operation of airports and aviation transportation;

Construction and commercial operation of national sea ports;

Exploration, production and processing of petroleum; exploration and mining of minerals;

Radio and television broadcasting;

Commercial operation of casinos;

Production of cigarettes;

Establishment of university training establishments;

Establishment of industrial zones, export processing zones, high-tech zones and economic zones.

Projects with invested capital of no less than VND 1,500 billion in the following fields are to be approved by written documents by the PM:

Commercial operation of electricity [facilities]; processing of minerals; metallurgy;

Construction of railway, road and internal waterway infrastructure facilities;

Production and trading of alcohol [and/or] beer.

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1.4. In terms of Decision for re-lending of Government’s foreign loans without appraisal and guarantee procedures

Article 18.1 of Decree 78/2010/ND-CP dated 14/7/2010 on on-lending Government’s foreign loans lists out some particular projects of SOEs, the loan granting of which is delegated to MOF for without appraisal and guarantee procedures by the PM.

Box 9: An example on direct lending of foreign loans to SOEs

PM’s Document No.1248 dated 6/9/2007 allows VINASHIN to be granted preferential loans from Poland:

- Maximum loans would be EUR 16.47 million,

- Annual interest rate is 0.15%, the preferential percentage is over 40%,

- Duration of the loans is 17 years, including a 5-year grace period,

- Loans utilization is in 2-3 years since the effective date of the Agreement.

- Polish originated commodities and services in each contract are not less than 70%.

1.5. In terms of considering proposals, suggestions of SOEs with instruction and managerial documents

Direct management and instruction documents by PM on the implementation of specific policies and solutions toward SOEs, especially toward State EGs have become popular since 2005.

These documents were timely in addressing SOEs’ problems but created inequality among enterprises, or in some cases even surpassed Laws. For example, specifically preferential policies have been issued by the PM when Document 264/TB-VPCP dated 22/9/2008 allowed commercial banks to provide loans for VINASHIN exceeding 15% of its equity capital that is incompliant with the Law on Credit Institutions).

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2. Steering Committee of Enterprise Reform and Development and the support for the PM in SOE reform and restructure.

Apart from activities of Ministries and Central agencies, the NSCERD was launched in 2000 by the PM for the SOE reform and restructure. Decision 2092/QĐ-TTg dated 23/11/2011 issued by the PM defines duties of NSCERD as follows:

To support the PM developing the restructure programs and plans of enterprises which are registered under the Law on Enterprises in the whole country and to support the steering, guiding and monitoring process of these program and plan implementation.

To work with other agencies for well understanding models, policies and mechanism for the SOE restructure and development of Law on Enterprises -regulated-enterprises.

To periodically and ad-hoc submit the PM reports on the situation of SOE restructure and development of Law on Enterprises -regulated-enterprises.

To monitor the pilot of reforming state entities into EL-regulated-enterprises.

The Steering Committee consists of the Vice Prime Minister as the Head, Vice Chairman of the Government Office as the Deputy Head, specialized deputy heads and representatives of leaders from MPI, MOF, MOLISA, Ministry of Internal Affairs, Ministry of Justice, MARD, MONRE, State Bank, Central Communist Party Office, Party Committee of the Central Enterprises and Vietnam General Confederation of Labor. The main supporting unit for the Steering Committee is the Department of Enterprise Transformation under the Government Office. The Committee mainly works on facilitation and monitoring the implementation of the Decision 38/2007/QĐ-TTg dated 20/3/2007 on criteria, and classification of 100% state owned enterprises by localities and sectors and co-ordinates other government bodies for consideration of sectoral and provincial enterprise reforming programs and plans to submit for PM’s approval.

The sectoral and ministerial, provincial Steering Committee are also established in Ministries and Provincial People’s Committees with the same functions as the Central Steering Committee.

2.1. Procedures of SOE restructure and reform

The SOE reformation and restructure is the one key task of the Government in SOE management, especially in the context of invalidity of Law on State Owned Enterprises (2003) with the replacement of the Law on Enterprises (2005) for all types of enterprises. SOE reform and restructure, cover, but not limited to equitization and handling loss-making enterprises, the transformation of SOE into EL-regulated enterprise and perfection of SOE management in compliance with EL 2005.

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Figure 2: Procedures for implementation of SOE restructure plan

Step 1: SOE classification.

The classification is decided by the PM and is currently regulated in the Decision 14/2011/QD-TTg dated 4/ 3/ 2011 of the PM on criteria and lists of SOE classification. Of which, sectors with 100% or over 50% of capital held by the State are also specified.

Owner

5

41

3

2

Divestment SOE

MOF

MPI

MOLISA

Line Ministries

ThePM

Transform into One-member liability Company

Equitization

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Step 2: Submission of the SOE reorganization plan

Based on the above mentioned criteria, ministers, heads of mistrial-level agencies, chairpersons of provincial People’s Committees, Board of Directors of EGs, and Corporations 91 are responsible for planning the reformation and reorganization of SOEs under their management and submitting to the PM. Current plans are for the period of 2012-2015.

Step 2&3: Consultation of ministries and agencies on SOE reformation and reorganization plans

The PM shall assign ministries and agencies for consultation on SOE reformation and reorganization plans submitted by the SOE management units

- MOLISA is consulted on labor and employment issues

- MPI is consulted on planning and enterprise capital structure

- MoF is consulted on financial and capital issues

- Other ministries and agencies are consulted on

Step 4: Approval of the SOE reformation and reorganization plans

On the basis of consultation of ministries and agencies, the PM issues the document to approve the SOE reformation and reorganization plan with the following highlighting:

- The enterprise is 100% state owned

- The enterprise is to be equitized

- The enterprise is over 50% state owned

- The enterprise is under 50% state owned or about to be divested.

Step 5: Implementation of the SOE reformation and reorganization plans

Ministries, agencies, EGs and provincial People’s Committees are responsible for implementation of the SOE reformation and reorganization plans which have been approved by the PM.

Box 10: Reformation and reorganization plan of the Vietnam Rubber Group

Document 399/TTg-DMDN dated 22/3/2012 of the PM which approves the Reformation and Reorganization Plan of the Vietnam Rubber Group in 2012-2015 states to maintain 100% state own capital in the parent company and its 22 subsidiaries of rubber planting and processing. It is also required to divest the stated own capital from 6 subsidiaries and 12 associated companies (working in securities, investment fund, joint business on steel and electricity, etc.) to be consistent with the policy that restrict SOEs’ expansion into areas out of their expertise.

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2.2. Fund for rearrangement and development of enterprises

According to Decision 21/2012/QĐ-TTg of the PM dated 10/5/2012, as of 1/7/2012, Central Fund for Rearrangement of Enterprises will be transformed into Funds for rearrangement and development of enterprises, and managed by SCIC of Ministry of Finance

Income sources of the Fund include: income from equitization of enterprises with 100% state capital in accordance with provisions of law on transformation of enterprises with 100% state capital into JSCs; income from other mode of rearrangement and transformation such as assignment, sale, divestment and bankruptcy of enterprises with 100% state capital; post equitization income; divided profits and dividend of state capital shares at transformed enterprises conducted by ministries, ministerial level agencies, PPCs during their execution of state ownership representative’s rights as assigned by the PM.

In addition to supporting enterprises with 100% state capital, State Forest and State farms in terms of undertaking the reorganization and transformation of ownership to address labor redundancy and financial issues in accordance with laws, the PM has the authority to decide on the use of the Fund based on proposal of Ministry of Finance or ownership representatives for the following purposes:

To supplement the charter capital of parent companies of EGs, State corporations and enterprises with 100% state capital;

To supplement capital contribution in order to increase the proportion of state capital in other enterprises;

To invest in important projects or other expenditures as decided by the PM.

3. The Ministry of Planning and Investment (MPI)

MPI is the Government agency that performs state management on planning and investment, including: advising on the strategy, planning and socio - economic development plans of the whole country, advising on the mechanisms and policies for general economic management and for some specific areas, making investment in the country and abroad, industrial parks, export processing zones, managing official development assistance (ODA), procurement, business registration in the country and exercising state management over public services in areas under its management as prescribed by laws.

Basing on the Law on Enterprises 2005 and Decree 116/2008/NĐ-CP dated 14/11/2008 regulating functions, duties, power and organization structure of MPI, the MPI has the following management tasks relating to operation of SOEs:

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Being the focal point to cocoordinate SOE rearrangement and reform.

Taking lead and cooperating with other ministries to formulate SOE rearrangement, reform and development strategy program and plan as well as management machenism and supporting policy for SOE rearrangement.

Together with other ministries and PPCs, involving in appraising SOE rearrangement and reorganization schemes to submit to the Government for approval and report to the Government on the SOE rearrangement.

3.1. Appraisal of SOE investment projects

MPI is the standing member of State Appraisal Council for nationally important investment projects, national target programs and other projects assigned by the PM. Regarding other projects, MPI also has the authority to appraise and advise the PM on approval of SOE investment projects under his authority, in accordance with LOI 2005.

3.2. Draft guiding documents for Law on Enterprises 2005 relating to SOEs

Being the state management agency in investment licensing, MPI has the responsibility to draft guiding documents for the implementation of Law on Enterprise 2005 and to interpret provisions of laws related to SOE transformation.

Besides, according to Decision 704/TTg dated 11/6/2012 on approval of Scheme to Reform Corporate Governance in accordance with common practice of market economy, MPI is also authorized by the PM to:

Research on approaches to the implementation of rights and obligations of owners towards SOEs; take lead and cooperate with other agencies in drafting the Decree on Management and Supervision of Egs and critically important State corporations in accordance with the Government working agenda in 2012.

Submit for PM’s issuance of the Regulations on Publicizing Information on the Operation of one member State-owned LLCs in Quarter III of 2013.

Submit for PM’s issuance of the Regulation on Management of one member State-owned LLCs in Quarter IV of 2013.

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4. Ministry of Finance (MOF)

MOF is an agency of the Government that performs the state management over finance issues (including the state budget, taxes, fees and other revenues of the state budget, the State reserves, state property, state financial funds, financial investment, corporate finance, financial cooperatives and collective economy); customs; accounting; independent audit; pricing, securities; insurance; financial services and other services under its state management functions and represent the State ownership at enterprises according to the laws.

The rights and obligations of MOF to SOEs are specified in the provisions of Decree 118/2008/ND-CP dated November 27, 2008 stipulating the functions, duties, power and organization structure of MOF. Relating to the organization and operation of SOEs, MOF has the following management tasks:

4.1. Financial supervision over SOEs

Point d of Article 2.10 of Decree 118 specifies that MOF has the responsibility to monitor, supervise and evaluate the preservation and development of state capital contribution in SOEs throughout the country, and to cooperate in applying the regulations on supervision and evaluation of SOEs’ performance.

Accordingly, MOF drafted and submitted two documents on financial supervision over SOEs to the PM for issuance:

Decision No. 224/2006/QD-TTg dated 10/06/2006 issuing the Regulation on Supervision and Appraisal of SOEs' efficiency.

Decision No. 169/2007/QD-TTg dated 11/08/2007 issuing the Regulation on Supervision of State-owned loss-making and inefficient enterprises.

These two documents initially specify the involvement of financial agencies in the supervision and evaluation the efficiency of SOEs as well as indicators and report system that SOEs have to submit to relevant financial agencies.

4.2. Regulations on mechanism for investment capital management in SOEs and management of state capital via SCIC

Article 2.10 of Decree 118 specifies the tasks of MOF regarding management of state capital at enterprises as follows:

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To formulate and submit to the Government or the PM for issuance of corporate finance management regime and financial supervision mechanisms applicable to enterprises of all economic sectors; and financial mechanisms and policies for the transformation of ownership and reorganization of state enterprises;

To act as the key agency in exercising the right to represent State ownership at enterprises according to the laws; to handle state capital-related matters at enterprises as delegated by the Government; to exercise the right and fulfill the obligation to represent state ownership at enterprises under its management, the SCIC and other financial funds as prescribed by law or assigned by the Government.

To consolidate, analyze, assess, elaborate and submit to the PM for making decision on plans to balance funding sources and capital for state general corporations and state EGs;

The Ministry of Finance also drafted and submitted to the Government for issuance of Decree 09/2009/NĐ-CP dated 05/02/2009 promulgating the Regulation on Financial Management of SOEs and Management of State Capital Investment in other enterprises. Since its issuance, Decree 09 helped to address some urgent issues relating to SOEs, contributing to the transfer from Law on SOEs 2003 to the Law on Enterprises 2005. Specifically:

Distribution of after-tax profit of state companies, including the reward and welfare fund: According to Decree 119, the ratio for fund distribution is defined basing on the rate of return on self-raised capital.This means companies which have no or a little loans will not have this fund no matter how much profit they make. Decree 09 solves this issue since it specifies that the volume of reward and welfare fund will be based on the classification of the enterprise.

Decree 09 also helps limit extensive investment in non-core business areas of SOEs by specifying that the maximum rate of investment capital in these areas is not to exceed 30% of SOE’s total investment capital. This is the legal basis for management agencies to regulate financial investment actitivies by SOEs.

The Decree also strictly regulates the representation of state capital investment in other enterprises, including the right to buy additionally issued shares in JSCs that they participate in.

MOF exercise the regulation and management of fund, fund for the SOE reforms and the execution of the owners’ rights and obligations over enterprises with state capital via SCIC, which was established in 2005. Decision 21/2012/QD-TTg dated 10/05/2012 of the PM transformed the Central Fund for SOE Rearrangement into the FSERR. As of 1/7/2012, this Fund has been assigned to and managed by SCIC.

4.3. On-lending of Government’s foreign loans and Government guarantee

According to Decree 78/2010/ND-CP dated 14/7/2010 on On-lending of Government’s Foreign Loans and Article 2.11 of Decree 118, the MOF will:

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Organize the on-lending for programs and projects in accordance with Government’s approved list; guide, inspect and control the disbursement, management and use of forein loans of the Government.

Conduct the on-lending of ODA to SOEs via authorized credit institutions and Vietnam Development Bank.

Decree 15/2011/NĐ-CP indicates that MOF is the lead Government agency to perform State management of borrowing and repayment of foreign loans; and is responsible for coordinating with the MPI and the SBV to develop and submit for PM’s approval medium-term debt management plans and annual plan on borrowing and repayment of foreign loans of the Government, the organizations of public sector as well as the limit on the total commercial borrowing of the country.

In case the yearly Government guarantee limits have been approved and granted but there remain applications for Government guarantee for key projects/works or urgent and specially important large projects approved by the National Assembly or the PM MOF shall request PM to adjust the yearly level of Government guarantees within allowable national debt limit.

4.4. Handling SOEs in difficult situation

Article 2.110.c of Decree 118 specifies that the MOF is responsible for taking lead or participating in the appraisal of capital investment or financial support of the State for enterprises. MOF also supervises and monitors the investment activities of the State in enterprises which have been approved by competent authorities and handles SOE rearrangement policy in accordance with provisions of law.

MOF performs this task through the operation of DATC which is responsible for handling and purchasing bad debts of SOEs. Post- enterprise rearrangement issues including labor and compensation are handled by FSERR.

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4.5. Performing State management functions prescribed in the Ordinance on Prices and Law on Prices 2011 over goods and service exclusively supplied or monopolized by the State

Decree 118 states that MOF has the following rights in relation to pricing management:

To assume the prime responsibility for and coordinate with concerned agencies in elaborating and submitting for PM’s decision the list of goods and services subject to price valorization and the list of goods and services subject to state pricing and price management

To assume the prime responsibility for and coordinate with concerned agencies in working out, announcing or requesting to the PM to announce the application of price valorization measures when there are abnormal fluctuations with prices of goods and services experience; and to provide guidance on conditions for applying taking price valorization measures;

To evaluate pricing schemes developed by ministries, agencies and State enterprises and submit to the Government, the PM or ministries to make decision on; to direct and guide the implementation of pricing policies as well as measures and decisions on asset, goods and service prices issued or approved by the Government or the PM;

MOF is the State management agency on prices who involves with elaborating and supervising the elaboration and application of state prices for essential goods and services as prescribed in Decree 75/2008/ND-CP dated 9/6/2008 on guiding the implementation of Pricing Ordinance. Some of these goods and services are monopolized by State corporations and companies such as:

Petroleum: MOF supervises the establishment of Petroleum Price Stabilization Fund and the marks up pertroleum price in compliance with Decree 84/2009/ND-CP on Petroleum trading.

Electricity: MOF supervises the establishment of prices, pricing expenses and increase/decrease of electricity price in accordance with Decision 24/2011/QĐ-TTg dated 15/04/2011 on adjustment of electricity selling price upon market mechanism.

Airway transportation: MOF supervises airport transportation charges in cooperation with Ministry of Transportation

Telecommunication services: MOF supervises charges and fees in cooperation with Ministry of Information and Communication

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Box 11: MOF fears to lose control over petroleum price

The most prominent feature of Decree 84/2009/ND-CP on Petroleum is to determine the price mechanism for these "sensitive" goods based on international market prices. Focal enterprises in petroleum trading are allowed to self-determine the prices based on unit price (the cost of importing and import prices of petroleum) as well as the margin and frequency for adjustment as specified in Decree 84. Although Decree 84 was issued in 10/2009, during the three following consecutive years MOF and Ministry of Industry and Trade (MOIT) still directly administered instead of letting enterprises to self-determine petroleum prices as regulated in Decree 84.

Until June 21, 2012, the new Minister of Finance issued Document No. 8412/BTC-QLG allowing the enterprises to do price adjustment in accordance with Decree 84. According to many economic experts, MOF’s reservation of the right over price adjustment on petroleum is not necessary, because in the end domestic price will have to be adjusted in accordance with the international market. Moreover, the retaining of one price level for long will restrict the timely adjustment and cause negative psychological effect on the market, thus adversely influencing prices of other goods and services.

5. Line ministries

The relationship between SOEs and the line ministries are regulated in Decree 36/2012/ND-CP dated 18/4/2012 of the Government on defining the functions, tasks and organizational structures of ministries and ministerial-level agencies. Article 9 of the Decree state that there are two types of relationship as follow:

Ownership relationship: Line ministries exercise rights and obligations of state ownership of one member LLCs owned by the State and of state capital investment in other enterprises that are operating under Law on Enterprise, as assigned or delegated by the Government.

State management relationship: Line ministries guide and oversee SOEs’ compliance with regulations on conditional business lines and services listed by the Government and deals with violations under their authority.

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5.1. Ownership

Line ministries have ownership relationship with 2 groups of SOEs, including:

Group 1; SOEs under the line ministries which have been transformed following the rearrangement and reform plans approved by the PM.

Group 2: EGs that line ministries are assigned to advise and assist the PM with their management in accordance with Article 40.3 of Decree 101/2009/ND-CP on pilot establishment of EGs

Figure 3: The Relationship between SOEs and Line Ministries

Decide

Decide

Supervise, advise

Sector management Planning Investment licensing Business conditions Other SOEs

SOEs under line

ministries

Line Ministries

Ownership

Public investment

ThePrime Minister

EGs

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a. Exercising ownership right over affiliated SOEs

Rights of ministries over their affiliatedaffiliated SOEs are specified in Decrees that guide the Law on Government Organization, such as Decree 51/2008/NĐ-CP (replacing Decree 34/2004/NĐ-CP) on function, obligation and rights of Ministry of Transportation; Decree 189/2007/NĐ-CP dated 27/12/2007 on function, obligation and rights of Ministry of Commerce and Industry, etc.

Accordingly, ministries will exercise the rights of state ownership representatives at state capital enterprises in sectors and fields within their purview, including:

Developing the scheme of rearrangement, reorganization and transformation of ownership to submit to the PM for approval and implementation guidance;

Submitting for PM’s approval on appointment, dismissal or appointing, dismissing within their authorities, key personnel of SOEs such as leaders, managers, and chief accountant.

Approving, within their authority or submit to the PM for approval the charter on organization and operation of the state capital enterprises in sectors and fields under their management.

b. Executing ownership right with EGs

Point 3, Article 40 of Decree 101 specifies the rights and obligations of line ministries who are assigned to manage the EGs, which include:

To propose to the PM for decision the establishment, reorganization, dissolution or ownership transformation of parent companies; the appointment, re-appointment, dismissal, demotion, rewarding and disciplining of chairpersons of the BOD of parent companies;

To comment on charters of parent companies or amendments and supplements thereto; appointment, re-appointment, dismissal, rewarding or disciplining and contracting of with general directors to inform PM’s approval; or comment on objectives, strategies, long-term plans, business lines, charter capital and charter capital adjustment of parent companies to inform PM’s decision;

To direct and oversee the realization of objectives, strategies and implementation of long-term plans of parent companies;

To be responsible for the evaluating the processes, procedures, standards, qualities and capacity of BOD’s members and general directors of parent companies to inform the PM’s decision on appointment.

Seven line ministries responsible for performing the functions specified in Article 40 of Decree 101 are Ministry of Construction, Ministry of Transportation, MOIT,

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Ministry of Agriculture and Rural Development, Ministry of Defense, Ministry of Information and Communication, andMOF. These ministries manage thirteen EGs:

Table 1: List of EGs and their supervisory ministry (as specified in their Charters)

No. EGs Ministries

1 HUD Ministry of Construction

2 PetroVietnam (PVN) MOIT

3 Electricity of Vietnam (EVN) MOIT

4 VINACOMIN MOIT

5 Viettel Ministry of Defense

6 Vietnam Rubber Group (VRG) Ministry of Agriculture and Rural Development

7 VINASHIN Ministry of Transportation

8 Vinachem MOIT

9 Petrolimex MOIT

10 Bao Viet MOF

11 Song Da group Ministry of Construction

12 Vinatex MOIT

13 VNPT Ministry of Information and Communication

The obligations and rights of line ministries over EGs are specified in details in Charters of parents companies of those EGs. For example, rights and obligations of MOIT are indicated in VINACOMIN’s charter as follows:

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Box 12: Rights and obligations of MOIT (quoted from VINACOMIN Charter)

- To submit to the PM for decisions on the establishment, reorganization, dissolution and ownership transform of VINACOMIN; and to appoint, re-appoint, dismiss, reward or discipline president and members of Member’s Council.

- To appraise, revise or supplement VINACOMIN charter, goal, strategy, long term plan, production and business plan, 5-year investment and development plan, business lines; and appointment, re-appointment, dismissal, contract signing, contract termination, rewarding, or disciplining of VINCOMIN General Director proposed by VINACOMIN Member’s Council to the PM

- To give opinions on Member’s Council’s submission to the PM, including decision on contribution to charter capital, or adjustment of charter capital. To approve Member’s Council’s decision on: the establishment, reorganization, disposal and ownership transformation of member companies who are one member LLCs with up to 50% of charter capital owned by VINACOMIN according to the latest financial report; one member LLCs owned by member companies that VINACOMIN holds 100% of charter capital; VINACOMIN’s dependent units, centers for production control, branches and domestic or overseas representative offices; the acceptance of new members, change in the ownership structure that remove VINACOMIN’s dominant power and the inclusion of lever II enterprises in the Corporation in the form of parent-holding company in accordance with provisions of law.

- To decide on the appointment, re-appointment, dismissal, rewarding and disciplining of VINACOMIN’s controllers.

- To be responsible for implementing processes and procedures and evaluating qualification and capacities of member of Member’s Council and General Director of VINACOMIN to inform PM’s appointment decision or approval.

- To decide on salary and increase in salary and allowance for President and member of Member’s Council.

- In cooperation with MOF and MPI, to take lead in the appraisal of the annual plans on production, business and investment development; to assign to VINACOMIN annual target rate of return on equity; and to comments on VINACOMIN’s lending oversea to inform MOF’s approval.

- To organize the monitoring and evaluation of VINACOMIN’s business activities.

- To direct the implementation, monitoring, inspection and supervision on the achievement of goals, strategies, plans and tasks; the implementation of owner’s decisions and evaluation of VINACOMIN performance

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- To monitor, inspect, supervise and report to the PM on annual basis on the implementation of this Charter; to promptly identify and report to the PM issues need to be amended and supplemented to meet the needs of enterprise development and state management over VINACOMIN.

- To decide on other issues within the authorities of the line ministry as prescribed by law; and to exercise other rights as prescribed by law on ownership decentralization and assignment.

5.2. The administrative relationship between SOEs and line ministries

Besides the ownership relationship, EGs and SOEs under line ministries are also involved in administrative relationship with line ministries. This relationship enables SOEs to take advantage from their line ministries- the state ownership representative, in terms of sector planning or conditions for doing business as prescribed in Decree 59/2006/NĐ-CP dated 12/06/2006 on conditioned or restricted goods and services. Consequently, SOEs are able to retain their monopoly or predominant position in the market since it is easier for them to obtain business license or permission to do business in conditioned or restricted sectors than other enterprises.

Table 2: SOEs in some sectors with conditions for doing business

No. Sector Line ministries SOEs

1 Tobacco, Alcohol and Beer

MOIT Vinataba, Sabeco

2 Internet services (OSP, IPX, ISP)

Ministry of Information and Communication

VNPT

3 Mobile telecommunication

Ministry of Information and Communication

Vinaphone, Mobile Phone

4 Petroleum Import and Export

MOIT Petrolimex

5 Airway transportation Ministry of Transportation

Vietnam Airline

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No. Sector Line ministries SOEs

6 Sale and purchase of Electricity

MOIT EVN

7 Medicines (import and sale)

Ministry of Health Pharmaceutical companies under Ministry of Health

8 Railway transportation Ministry of Transportation

Vietnam Railway

5.3. The relationship between line ministries and SOEs via public investment projects

Annually, ministries and ministerial level agencies are authorized to decide on investment of projects in Group B and C or assigned by the PM as investors of Group A projects, ODA funded or state credited projects. It is a common practice that line ministries give priority to their affiliated SOEs during contractor selection. Projects using state budget have been an important income source for SOE over the past years.

6. PPCs

Figure 4: Relationship between SOEs and PPCs

Investor of public investment projects

of local agencies

Land grant and allocation

Other SOEs

Local SOEs

PPCs

Ownership

ECs

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The relationship between SOE and PPCs mainly focus on following issues:

6.1. Ownership representation

Article 3, Decree 25/2010/ND-CP on transformation of state companies into one member LLCs states that PPCs are authorized to perform owners’ rights over one member LLCs which were transferred from:

State companies directly serving national defense and security or public-utility tasks, which are established under decisions of ministries or PPCs;

Parent companies in State corporations and state companies organized under parent-subsidy company model; independent state companies; state-owned agricultural companies, forestry companies, agricultural farms and forestry farms established under decisions of PPCs and eligible for equitization but not yet transformed before July 1. 2010.

Article 31 of this Decree also indicates that PPCs, the State ownership representative, will manage their affiliated SOEs on three aspects:

Deciding on the charter, goals, operational direction, mid-term and long- term plan of the companies;

Deciding on charter capital and adjustment of charter capital of the companies;

Assigning and deciding on compensation plan for members ofMember’s Councils, the president, members of BOC, and the General Director.

Additionally, through provincial Departments of Finance, PPCs also involve in the management of state capital contribution in JSCs equitized from SOEs during the period when the state shares in these companies have not been transferred to SCIC.

6.2. Management of land

PPCs are the authorized agency to allocate and lease land to SOEs for their investment projects in accordance with regulations of Land Law 2003 and Article 27 of Decree 69/2009/ND-CP dated 13/08/2009 on Providing Additional Regulations on Land Use Planning, Land Pricing, Land Reclamation, Compensation and Resettlement.

Although there is no difference in the regulations on procedures and criteria of land allocation and lease for SOEs and other enterprises, the former particularly SOEs under PPCs’ direction management usually have special advantages over the latter in terms of

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land allocation thanks to the ownership relationship with PPCs. Examples include the land allocating preferences for SOEs in Binh Duong (for Becamex) or Dong Nai (for Sonadezi).

The available land resources and authority to allocate land are the reasons why the PPCs try to delay the transfer of locally equitized SOEs to SCIC .

6.3. Management of budget regarding local investment project8

PPCs are independent funding agencies that have their own budget in accordance with the Law on State Budget 2002. PPCs are also the state agencies assigned to be investors or authorized the right of investors of public projects in their locality. Public projects funded by local budget are important income sources of SOEs operating in construction, transport infrastructure and irrigation areas.

Generally, although provincial SOEs are now decreasing in terms of number, most of them still have advantages thanks to large capital volume and land and business infrastructure that have been accumulated since the period of command planned economy. Thanks to the ownership – administrative mixed relationship with PPCs, SOEs are often given priority with investment certification and land allocation for implementation of public projects in the provincial area. Some SOEs are given even more priority when they are considered “engine” of the provincial economy, such as Satra in Hochiminh City, Hapro in Hanoi, Sonadezi in Dong Nai, or Becamex IDC in Binh Duong.

Box 13: Becamex IDC Binh Duong – an example of Provincial Level Corporation

Becamex IDC was formerly a trading enterprise of Ben Cat district, which was then upgraded into Song Be Exporting and Importing Company (BECAMEX). After the split of Song Be Province into Binh Duong and Binh Phuoc Provinces, on April 28 2006, BECAMEX IDC was established under Decision 106/2006/QÐ-UBND of Binh Duong PPC on the rearrangement and reorganization of BECAMEX. Later, the PM, in Document No. 151/TTg-ĐMDN dated 19/01/2010, approved the transformation of BECAMEX IDC into Investment and Industrial Development Corporation. It operates as a holding company, of which the parent company is a one member LLC.

8 According to Article 33 of the State Budget Law 2002, capitalization investment for local SOEs is an item in the “Spending for Investment and Development” of the provincial budget. This spending will be estimated by the PPCs and submitted to Provincial People’s Councils for approval. In principle, the Central Government will not have “intervene” in this estimation if the province can ensure a balance of revenue-spending within the decentralized revenue. Otherwise (i.e.: the Central Government has to allocate budget to the province), the provincial budget estimation, including the investment and development spending is to be agreed with MPI and MOF before its submission to the National Assembly for approval.

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Becamex IDC has been given a lot of priorities in terms of land access and infrastructure in the province’s industrial zone to develop into the biggest multi-sector SOE of Binh Duong. Up to now, the corporation has 28 member companies operating in fields of securities, finance, insurance, banking, construction, trading, real estate, telecommunication services, information technology, and production of concrete, construction material, mining, pharmaceutical, healthcare and education.

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PART IV: INVESTMENT MANAGEMENT AND CAPITAL MOBILIZATION

I. Investment Management

Investment activities by SOEs are governed by different legal documents, of which the key documents are:

LOI 2005;

Decree No.108/2006/ND-CP dated 22/09/2006 of the Government on Guiding the Implementation of LOI;

Decree No. 09/2009/ND-CP dated 05/02/2009 of the Government on Promulgation of Financial Management Regulations of SOEs and on Management of State Investment in Other Enterprises;

Decree No. 199/2004/ND-CP dated 03 December 2004 of the Government on the Promulgation of Financial Management Regulations of SOEs and on Management of State Investment in other Enterprises (replaced by Decree No. 09/2009/ND-CP)

Together with LOI 2005, commercially oriented investment activities by the SOEs are also considered one of investment activities governed by LOI. SOEs’ “investment” is now consistently defined in Point 1, Article 3 of LOI 2005 that says: “Investment means the use of capital in the form of tangible or intangible assets by investors to carry out investment activities for the purposes of forming assets in accordance with the provisions of this Law and other provisions of the relevant laws”.

LOI 2005 also clarifies two forms of investment that SOEs are allowed to conduct:

Direct investment: means a form of investment whereby the investor invests its capital and participates in the management of the investment activity.

Indirect investment: means a form of investment through the purchase of shares, share certificates, bonds, other valuable papers or through a securities investment fund and other intermediary financial institutions, whereby the investor does not participate directly in the management of the investment activities.

LOI 2005 and Decree 108 allow SOEs to carry out diverse forms of investment such as establishing economic organizations with 100% capital by the investor, establishing joint venture economic organizations, investing in the contractual forms of Business Cooperation Contracts, Build-Operate-Transfer, Build-Transfer, investing in business development, purchasing shares or contributing capital in order to participate in management of investment activities, and investing through merger and acquisition of an enterprise.

As such, the legal forms for investment activities by SOEs, according to the LOI, are the same as those applied to other types of enterprises and are clearer than what were provided for in the Law on SOEs 2003.

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In principle, LOI 2005 does not differentiate the conditioned and restricted investment sectors applied to SOEs and other types of enterprises. With regards to the conditioned investment sectors stipulated in LOI 2005 and Decree 108, the investors are required to meet only “market entry” conditions (vs. business operation conditions). Investment in these conditioned sectors must adhere to conditions set out for each specific sector as stipulated in Article 29 of LOI 2005 and other requirements of the laws such as respect for social order and safety, financial safety, provisions on Government committed market opening-up roadmap and particular requirements for sectors having broad impacts on the community. The List of sectors and the List of geographical areas entitled for investment incentives are the primary basis for applying the incentive policies in the investment activities.

II. Investment procedures for the SOEs

1. Capital sources and procedures for approval of State capital investment

Capital sources:

SOEs are allowed to use the following sources of capital to carry out investment according to Article 58 of Decree 108:

State budget capital;

State development investment credit capital;

State-guaranteed credit capital;

Development investment capital of SOEs;

Investment capital from SCIC.

2. Investment projects and investment decision-making authority to SOEs

LOI 2005 is considered providing an “open” policy toward licensing investment activities, as the licensing authority is largely delegated to provincial authorities. Within its scope, the LOI 2005 also covers the investment activities by SOEs.

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2.1. Conditions for granting investment certificate to the SOEs under LoI 2005

According to LOI 2005SOEs are considered investors, which are equal to the investors from other economic sectors. Internal or external investment projects conducted by SOEs must comply with appraisal or registration procedures for investment certification as follows:

Group 1. Investment projects with investment capital of less than 15 billion VND and not under the list of conditioned investment sectors are not required to follow the registration or appraisal process for investment certification.

Group 2: Domestic investment projects having investment capital from 15 billion VND to less than 300 billion VND and not under the list of conditioned investment sectors are subject to registration procedures.

Group 3: Investment projects under the list of conditioned investment sectors or having investment capital of more than VND 300 billion are subject to appraisal procedures.

The appraisal process only covers the following issues:

Compliance with master planning on technical infrastructure, master planning on land use, master planning on construction, and master planning on the utilization of minerals and other natural resources;

Land use requirements;

Project implementation schedule;

Environment solutions.

With regards to the investment projects under the list of conditioned investment sectors, only conditions relevant to the project will be appraised.

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2.2. Specific regulations applicable to SOEs

According to LOI 2005, there is only one unified procedure applied to the SOEs regarding the appraisal and approval of State capital use in investment projects of enterprises.

a. Competent authorities for appraising and approving State capital utilization

The competent authorities on State capital utilization shall organize the appraisal and approve State capital investment in projects using State capital.

DVB shall organize the appraisal and decide on the projects utilizing State development investment credit.

MoF will organize the appraisal and decide on State guarantee for investment projects using credit capital that are in the list of investment projects entitled to State guarantee.

BOM of EGs, State Corporations and other SOEs or general director/director of SOEs having no BOM shall organize the appraisal and decide on the use of State development investment capital for investment.

The decision-making authority on the approval of using of State capital for investment by SCIC shall be performed according to decisions of the PM.

The appraisal body has the responsibility to organize the appraisal and inform in writing to the investors on the approval or rejection on the use of State capital for investment.

b. Appraisal dossiers:

Name of project, purpose and investment scale;

Project location;

Investment capital, investment source and State capital in the project;

Explanation on project relevance to socio-economic development strategy and plan as approved by State competent agencies and explanation on the relevance in using investment capital;

Investment efficiency, including financial and socio-economic efficiency;

Explanation on investment capital recovery, loan repayment and loan repayment scheme (if any);

Project duration;

Project implementation schedule

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c. Appraisal contents

The relevance of the investment project to the national or regional socio-economic development strategy and plan in each period as approved by the competent agencies.

The relevance of the State investment, investment purpose, efficiency, appropriate management methods for each type of capital source and investment.

The relevance of investment incentive policies (if any).

Investment implementation schedule and duration.

Investment recovery, loan repayment and repayment scheme (if any)

Investment efficiency, including financial and socio-economic efficiency.

III. Management of fund and loans of SOEs

Fund mobilization methods:

Under the current laws, State enterprises are permitted to mobilize capital in the following methods:

- Borrowings from domestic credit institutions in accordance with the Law on Credit Institutions 2010 and other relevant legal documents.

- Borrowings from abroad with or without State guarantee.

- Borrowings from investment credit and export credit from the State (e.g. borrowing from DVB).

- Borrowings from corporate bonds (with or without State guarantee).

- Borrowing ODA loans based on State re-lending regulations.

1. Borrowings from commercial banks

As for the normal commercial term loans, there are no legal discrimination on loans made to SOE and to other types of enterprises since the SBV Governor’s issuance of Decision No. 1627/QD-NHNN dated 31 December 2001 on “Regulations on Lending from Credit Institutions to Customers”, and subsequent documents such as Decision No. 127/2005/QD-NHNN dated 03 February 2005, Decision No. 783/2005/QD-NHNN on revising the afore-mentioned regulations..

Loan conditions set out in the credit contracts applied to the SOEs are the same with those on the contracts with enterprises from other economic sectors in terms of:

Borrowing conditions (Article 7 – Decision 1627)

Loan term (Article 8 – Decision 1627)

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Loan-making method (Article 16 – Decision 1627)

Prohibited loans, loan restriction, lending limits (Articles 18, 19 – Decision 1627)

Box 14: Borrowings from commercial banks

Legally, the procedures for borrowing from commercial banks applied to the SOEs and enterprises from other economic sectors are not different, but the SOEs usually have more advantages in the borrowing thanks to the following factors:

As a psychological preference, commercial banks prefer the SOEs to other enterprises because their available assets and land are a reliable guarantee.

SOEs, particularly the State EGs, usually have “supporting documents” from the Government serving as permission or guarantee to loans. For instant, when VINASHIN was in financial difficulty in 2008, the PM, via Notice No. 264/TB-VPCF dated 22 September 2008, allowed VINASHIN to borrow loans of 10,000 billion VND from commercial banks to implement its projects. The commercial banks understood that this was the guarantee from the Government against any risks that might happen to these loans.

2. Re-borrowing foreign loans of the Government according to Decree 78/2010/ND-CP

SOEs are also entitled to re-borrowing foreign loans of the Government according to Decree 78/2010/ND-CP dated 14 July 2010 of the Government on on-lending of foreign loans from the Government. There are two ways through that SOE can approach the loans:

MoF grants credits according to the PM decision for SOEs’ projects without the appraisal process or guarantee.

MoF authorizes the lending or on-lending to the SOEs through DVB.

3. Corporate bonds

a. General information

Bonds are important capital for all the enterprises, including the SOEs, beside the capital formed from issuing shares, contribution from the investors and borrowing from commercial banks. Bond-originated capital has relatively high stability since bonds’ terms are usually medium and long.

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Vietnamese bond market is still very nascent as it has been established since the 1990s. As of 2000 when Vietnam started to launch the Stock market and many legal documents on bond issuance have been issued, the bond market has been moving.

Regarding corporate bonds, according to Decree 120/CP dated 17 September 1994 of the Government on Issuance of shares and Bonds of SOEs, only SOEs had the right to issue bond but the targets, the procedures for approval and issuance plan appeared to be so complicated and restricted.

The bond market has not really started off until 1996 when Refrigeration Electrical Engineering Corporation (REE) mobilized US$5 million from bond issuance. In 1998, EIS was able to mobilize 10 billion VND. In 2003, Petro Vietnam, Vietnam Cement Corporation and EVN mobilized 300 billion VND, 200 billion and 300 billion VND, respectively. However, the mobilization of capital for the enterprises in the bond market in this period was still modest.

Corporate bond issuance made a great advance when the Government issued Decree No. 52/2006/ND-CP dated 19 May 2006 on Corporate Bond Issuance. Accordingly, all types of enterprises including JSCs, SOEs during the transformation into one member State LLCs or JSCs governed by the Law on Enterprises and foreign invested enterprises in Vietnam were allowed to issue bonds. These enterprises issued bonds based on the principle of self-borrowing, self-repayment and self-responsibility for the debts and information transparency. In 2009, the Government issued Decree No. 53/2009/ND-CP dated 04 June 2009 on issuing international bonds.

After a period of implementation, due to changes resulted from socio-economic development of the country, both Decree No. 52/2006/ND-CP and Decree No. 53/2009/ND-CP demonstrated many short-coming and obstacles and proved no longer compatible with other legal documents and international practices. Therefore, the Government issued Decree No. 90/2011/ND-CP dated 14 October 2011 on Corporate Bond Issuance, which regulates both corporate bond issuance in the domestic market and international market. Decree No. 90/2011/ND-CP provided very detailed and concrete provisions on approval authority on corporate bond issuance plan of SOEs.

Upton 2011, Vietnam’s bond market value including government bonds, local municipal bonds and corporate bonds amounted to approximately US$ 17 billion, equivalent to 17% GDP of the country. Corporate bonds accounted for roughly 9.1% total value.

b. Conditions for issuing corporate bonds in Vietnam

The conditions for issuing corporate bonds in Vietnam are stipulated in Decree No. 90/2011/ND-CP and other related legal documents such as the Law on Enterprises and the Law on Public Debts Management.

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According to Point 4, Article 4 of this Decree, to be able to issue bond for investment in projects and programs, issuing enterprises must ensure a minimum ratio of equity capital of twenty per cent (20%) in the total investment capital of the projects and programs.

The conditions for issuing corporate bonds in the domestic market are provided in Article 13 of Decree 90/2011/ND-CP, whereby an issuing enterprise must meet the following conditions:

The enterprise must have the minimum business operation period of one year since the date of official operation commencement.

The business results of the year proceeding the year of issuance must be profitable, according to the financial statement audited by State Audit or independent auditors licensed to practice in Vietnam. The audited financial statements of the issuing enterprise must have the total acceptance (unqualified) opinion. In case the issuance is carried out before 01 April annually without the available audited financial statement of the year before, the following conditions are to be met:

- The audited financial statement of the year preceding the previous year shows profitable results;

- Most recent quarterly audited financial statement reports profitable business results (if any);

- Financial statements of the year preceding the year of issuance show profitable results and approval by the BOD, Board of Members or Chairman in accordance with the company’s charter.

The enterprise meets the requirement of capital safety ratio and other requirements on business safety as stipulated by relevant regulations on conditioned business areas.

A plan for corporate bond issuance is approved and accepted by competent body as required by the laws. The power for approval and acceptance for the SOEs are described in the below section.

The conditions for issuing bonds in the international market are stricter than that applied to bond issuance in the domestic bond market in order to ensure national foreign debt security and foreign exchange control. According to Article 23 of Decree 90/2011/ND-CP, an issuing enterprise must meet the following conditions:

The issuing enterprise must have at least three years in business operation since the date of official operation commencement;

The business operation results of the last consecutive three years before the year of issuance must report profit, according to the financial statement audited by State Audit or independent auditors licensed to practice in Vietnam. The audited financial statements for the three consecutive years must have the total acceptance (unqualified) opinion from the auditors;

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The enterprise meets the requirement of capital safety ratio and other requirements on business safety as stipulated by relevant provisions in conditioned business areas;

The value of the international bond issuance must be certified by the SBV as within the total foreign commercial borrowing quota approved by the PM;

The enterprise must meet the requirements of international market on credit rating for the purpose of bond issuance. The SOEs must have the credit rating ratio not lower than the equivalent national credit rating ratio.

The bond issuance plan must be approved and accepted by competent body; and

The issuing enterprise must complete the issuance dossier as required by the laws of the issuance market, applicable for each batch and each method of issuance.

c. Decision-making authority on the bond issuance in the SOEs

Normally, enterprises will decide on the bond issuance plan and will be responsible for its bond issuance. For SOEs, in order to closely manage borrowing through the bond issuance and to avoid uncontrolled borrowing that may result in the inability to pay back, Decree 90/2011/ND-CP is rather specific about on the approval power over the corporate bond issuance plans of the SOEs.

For domestic bond issuance, the issuance plan in the SOEs must be considered and accepted by the owners before conducting the issuance. Particularly:

For the 100% State capital SOEs established according to the PM’s decision, the issuance plan must be considered and approved by the line ministry administering their main business sector.

For the 100% State capital SOEs established and owned by Ministries, Government-level agencies or PPCs, the issuance plan must be considered and approved by the Ministry, the Government-level agency or the PPC.

For the SOEs which are JSCs, two-or-more member LLCs, the issuance plan must be considered and approved by the body which is assigned the tasks of representing the State ownership in that enterprise (Article 15).

In case of issuing bonds in the international market, the issuance plan of the SOEs must be appraised by the owners and submitted to the PM for consideration and approval.

d. Bond issuance methods

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According to Decree No. 52/2006/ND-CP, bond issuance must be conducted through three methods as follows:

Bond bidding;

Bond issuance underwriting;

Bond issuance via agency

Bond issuance underwriting consists of partial underwriting, co-underwriting, syndicate underwriting and whole underwriting.

Since the promulgation of Decree No. 90/2011/ND-CP, in order to stimulate the development of bond market and capital flow, apart from the three above-mentioned methods, issuing enterprises now can use another method which is direct selling to investors but this only applies to the issuers which are credit institutions.

4. Foreign borrowing by SOEs


Foreign borrowings are also an important source of capital for the enterprises. Foreign borrowing refers to the loans that enterprises and economic organizations established and operating lawfully in Vietnam, directly sign with foreign lenders based on the principle of self-borrowing, self-responsibility for repayment or borrowing via international bond issuance or foreign financial leasing.

Currently, the borrowing and repayment of the foreign loans are stipulated in Decree No. 134/2005/ND-CP dated 01 November 2005 of the Government Issuing the Regulation on Control of Foreign Loans and Loan Repayment. The Decree dedicates one separate section on the principles, methods for loan management, repayment as well as guarantee methods for SOEs.

b. Principles and methods of management and repayment of foreign loan of SOEs

SOEs are allowed to directly borrow from overseas based on the principles of self-borrowing and self-repayment to the foreign lenders according to the provisions of the loan agreements.

The government is not responsible for the SOEs’ loans with foreign lenders, except the loans guaranteed by the Government as described in the bellow section on Government Guarantee.

Medium- and long-term foreign loans of SOEs must 1) fit in the general plan of annual total commercial foreign loans quota approved by the PM and must meet all conditions on medium and long term loans stipulated by the SBV Governor in each

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period 2) must be registered and granted the certification from the SBV and 3) must have periodic report to the SBV on capital withdrawal, utility and repayment according to reporting regime issued by SBV Governor.

In case SOEs borrow foreign loans via issuance of international bonds, the process is governed by the Decree No. 90/2011/ND-CP dated 14 October 2011.

The short term foreign loans must be in the annual general plan of foreign commercial loans approved by the PM and must meet all conditions on short term loans stipulated by the SBV Governor in each period.

The withdrawal and remittance for repayment of SOE’s foreign loans must be done through banks with foreign exchange functions operating in Vietnam, except for the withdrawal for direct payment to foreign suppliers. In case the withdrawal for repayment in assets and in kinds (intangible or tangible) is not done via the banks, the enterprise must report to SBV and if required, obtain the endorsement from relevant State management agencies.

For the medium and long-term loans of the SOEs, the banks are only permitted to withdraw capital and transfer to the foreign lenders if the loan is already registered as required by the laws.

c. Guarantee for borrowings of the SOEs

With regard to the government guarantee for SOE’s borrowings, see the Section on Government Guarantee of this report.

In case foreign lenders require the guarantee from commercial banks or financial/ credit institutions, the guarantee will be done according to the Regulations on Guarantee and Re-guarantee for Foreign Loans issued by the SBV Governor.

SOEs borrowing foreign loans can seek guarantee from non-resident parties (banks, financial and credit institutions or foreign companies, etc.) but must ensure that the guarantee conditions are not against Vietnamese laws.

The banks or credit institutions permitted to provide the guarantee will decide and take final responsibility on guarantee for foreign loans to SOEs. In case the guaranteed enterprises cannot repay the due loans, the guaranteeing party must take the responsibility to repay the loans for the SOE. It has the right to apply necessary and appropriate measures allowed by regulations on credit and other related regulations of Vietnam to recover the amount already paid for such SOE.

SOEs can use assets generated from the loans or other sources in accordance with Vietnam laws to guarantee for the foreign loans.

For the unguaranteed or unsecured foreign loans, the involved parties can negotiate and agree with each other on the responsibilities to the risks.

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5. Investment Credit and Export Credit through Vietnam Development Bank

The regulations on investment credit and export credit from the Government through DVB are currently regulated by Decree No. 75/2011/ND-CP dated 30 August 2011 on “State Investment Credit and Development credit”. There is no specific provision in Decree 75 on SOEs’ borrowings of these investment credit and development credit. Presently, SOEs are the biggest group of enterprises in terms of outstanding credit amounts at DVB. SOEs having rater high level of credit loans with DVB include EVN, PVN, Vietnam Airlines and some SOEs from Ministry of Transport and Ministry of Construction, etc.

a. Main financing sources for SOEs from DVB

Relending of ODA loans as authorized by the MoF;

Lending of revolving fund with purposes or at the authorization of donors like KfW, EIB, Finland, etc.

Development credits from State budget (State budget, national target program fund)

Government bonds, bonds or valuable papers from DVB.

b. Conditions for borrowing from DVB:

Eligible borrower (Article 6): The eligible projects must be in the list of projects eligible for investment credit of DVB issued by the Government. Most of the loans to SOEs at DVB are in the group of infrastructure projects (Part 1) and projects using government treaty loans (Part 5). Each eligible project must have the project document and repayment plan appraised and accepted by DVB.

Interest rate (Article 10, Decree 75): will be equal to the average interest rate for the capital sources plus operating expenses of the DVB. In case the loans come from ODA source, the interest rate is determined based on the loan treaty.

Loan amount (Article 7, Decree 75): not exceeding 70% at most of the project’s total investment (excluding working capital) while the maximum loan amount for each investor is 15% of the actual charter capital of the DVB.

Loan term (Article 8, Decree 75): The loan term shall be determined based on a project’s capital-recovery but must not exceed 12 years.

Besides, the SOEs can also borrow DVB loans from export credit source for some commodities like agro-products (sugarcane, tea, seafood, coffee, etc.) and industrial products for export as per contracts signed with foreign partners. However, the

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proportion of these loans in total outstanding DVB loans for export support is not high, as SOEs are not strong and dominating players in the market for these export products.

In fact, supports from DVB to SOEs sometimes go beyond the aforementioned legal limit due to the interference from the Government. A typical example is the case of VINASHIN when this EG plunged into difficulty.

6. Government guarantee


Government guarantee is the guarantee of the highest legality in Vietnam. A government guarantee commitment shall be made in the form of a letter of guarantee, a guarantee contract or a guarantee decision.

Figure 5: Government’s outstanding loans and Government guaranteed loans 2006-2010

Source: MoF

Currently, Government guarantee is specified in Decree No. 01/2011/ND-CP dated 05 January 2011 on Issuance of Government Bonds, Government Guaranteed Bonds and

Year

Millions USD

Borrowings with Government guarantee

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Local Government Bonds, and Decree No. 15/2011/ND-CP dated 16 February 2011 on Issuance and Management of Government Guarantee.

Government guarantee is granted to the enterprises of all economic sectors, financial and credit institutions, Vietnam Social Policy Bank, DVB. However, in reality, most of the government guarantee is given to SOEs, including State corporations and EGs such as VINASHIN, VINALINES, EVN, VEC, Song Da group, etc. Under a recent statistical report of MOF, by September 2011, total Government guaranteed loans of SOEs accounts for about 17.5% total outstanding debts of this group.

Box 15: Song Da Group asks to have its foreign debts repaid

Ha Long Cement Project was owned by Ha Long Cement Joint Stock Company, in which Song Da Group is the biggest shareholder (59%). Song Da group borrowed most of the capital from foreign banks with guarantee from MOF. Ha Long Cement JSC made a loss of more than 580 billion VND in 2011 and is projected to incur loss of 495 billion VND in 2012.

According to loan repayment schedule 2012, Ha Long Cement JSC has to repay foreign loans guaranteed by the MOF with the amount up to more than 450 billion VND to main foreign partners, namely Natixis (France) and North Investment Bank (NIB). The total amount that Song Da Group has supported to repay the debts to the foreign banks for Ha Long Cement JSC from 2009 to 31 March 2012 is more than 1,200 billion VND.

Up to now, the amount receivable for Song Da Group has exceeded 10,000 billion VND and it cannot continue to support Ha Long Cement JSC in repaying the loans to foreign banks.

Song Da Group requested the Ministry of Construction (MOC) to support its borrowing from Foreign Debt Repayment Fund of the MOF to repay the loans for Ha Long Cement JSC. Therefore, MOC requested MOF to submit a proposal for PM’s approval of borrowing by Song Da Group from MOF’s Foreign Debts Repayment Fund to repay the banks. MOC will direct Song Da Group to use the loans in the right purposes and have the schedule to repay the loans in due time.

b. Conditions for issuing Government guarantee

According to Point 3, Article 34 of the Law on Public Debts Management 2009, the conditions for granting Government guarantee on loans and bond issuance are as follows:

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The foreign loans obtained through a borrowing agreement must have the value of at least USD 50 million. The value of international bond issuance must be at least USD100 million. The amount under both types must be under the quota of foreign commercial loans and international bond issuance approved annually by the GoV, minus the loans as stipulated in Point 4, Article 33 of Law on Public Debts Management 2009. The minimum duration of the loan must be minimum ten years and the terms and conditions of the loan or bond issuance must be in line with market terms and international practices;

The domestic loans and bond issuance in foreign currency must have the value of at least US$30 million, with at least 05 year terms. In the case of bond issuance in domestic currency, the value must be at least VND 500 billion, with minimum one- year term.

In addition to the above conditions, in the Decree No. 15/2011/ND-CP provides some other specific regulations on the requirements for granting government guarantee as follows:

For programs and projects:

- Must be under the list of programs and projects entitled to Government guarantee approved by the Government in each period;

- For special programs and projects not under the above-mentioned list, there must be approval by the PM for each program, project.

For the borrowers and bond issuers:

- Must be the enterprise that carries out the programs/projects, established and operating under the laws of Vietnam. The enterprise must comply with existing regulations on operation, financial management, accounting and auditing.

- The State policy banks and financial and credit institutions are assigned by the PM on implementing the policy credit programs and national target credit programs.

- The financial and credit institutions must achieve minimum capital safety ratio according to the regulations of the Government or as required by the SBV.

For the loans and bond issuance:

- Must be under the Government guarantee limit approved by the Government according to Article 5 of Decree No. 15/2011/ND-CP;

- For the foreign loans and international bond issuance:

o Must be under the foreign commercial loan quota registered with the SBV;

o Must be in freely convertible currency;

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o Must meet all conditions on international bond issuance according to legislations on international bond issuance;

The list of programs/projects that can be considered for Government guarantee includes programs/projects in some sectors such as energy and mineral exploitation, construction, infrastructure development, programs and projects on key import-replacing mechanical products, and key and urgent programs/ projects for which the National Assembly or the PM decide the investment policy. Detailed guidance on programs/projects entitled to Government’s guarantee are provided for in Decision No. 44/2011/QD-TTg dated 18 August 2011 Issuing the List of Programs and Projects to Be Prioritized for Government Guarantee Consideration.

c. State management on Government guarantee

Decree No. 15/2011/ND-CP stipulates that MoF is the focal Government agency in implementing State management on foreign borrowing and repayment, having the tasks to coordinate with MPI and SBV in developing and submitting to the Government for approval the medium loan management program, annual plan on borrowing and repayment of foreign debts of the Government and public sector institutions and the total foreign commercial loans quota of the country.

In case the approved Government guarantee quota reaches its yearly limit, but there are still requests for Government guarantee for key national projects, national works, large-scale urgent projects with special socio-economic importance decided by the NA and PM in terms of investment policy, MOF will have the responsibility to report to the PM to adjust the quota of that year within but must ensure national debts security requirements.

Other competent agencies involved in the issuance of Government guarantee include the following ministries:

Ministry of Justice provides legal opinions on foreign borrowing agreements, international bond issuance agreements, guarantee letters, guaranteeing party and the guaranteed party in case of foreign borrowing and international bond issuance.

Ministry of Foreign Affairs cooperates with MOF in nominating an authorized representative agency of Vietnam abroad or approving an organization to act as the representative to receive litigation dossiers for litigation cases related to foreign borrowing agreements or international bond issuance agreements.

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PART V: FINANCIAL SUPERVISION ON STATE OWNED ENTERPRISES

I. Financial supervision by the owners

This part reviews legal stipulations on supervision and evaluation on SOEs, focusing on financial supervision, in two scenarios: regular supervision and special monitoring when the SOEs are in difficulty or making losses.

The legal framework on financial supervision on the SOEs is established via in two Decisions of the PM and some guiding circulars as follows:

Decision No. 224/2006/QD-TTg dated 10/06/2006 Issuing the Regulation on Supervision and Appraisal of SOE efficiency;

Circular No. 115/2007/TT-BTC dated 25/9/2007 of MOF Guiding on Supervision and Appraisal of SOEs’ the Efficiency;

Decision No. 169/2007/QD-TTg dated 11/08/2007 Issuing the Regulation on Supervision of Loss-making and Inefficient SOEs; and

Circular No. 42/2008/TT-BTC dated 22 May 2008 of the MOF Detailing some Articles on the Regulation on Supervising Loss-making and Inefficient SOEs issued under PM’s Decision No. 169/2007/QD-TTg dated on 8 November 2007.

It is noted that SOEs operating in financial, banking, insurance and securities field are not subject to these regulations.

1. Regular supervision

1.1. Criteria for regular supervision

In general, regular supervision will cover evaluation of five different criteria on SOE efficiency which are specified in Article 12, Paragraph 1 of Decision 224:

(1) Revenues and other incomes.

(2) Earned profits and the ratio between earned profits and State capital;

(3) Overdue debts and the current ratio (Current asset/short term debts: the ability of an enterprise to meet its current obligation).

(4) The abiding by policies and laws regarding taxes and budget remittances, credit, insurance, environmental protection, labor, wages, financial, accounting and auditing regimes, financial reporting and other reporting requirements;

(5) The supply of public-utility products or public-utility services

However, different types of SOEs will be evaluated by different groups of criteria. Specifically, for enterprises operating for business purposes, criteria 1, 2, 3 and 4 will

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be used for evaluation and rating. Meanwhile, to evaluate and rate enterprises that provide public utility products and services, criteria 3, 4 and 5 will be applied. With regards to State corporations, rating will be based on the evaluation of member companies and companies with dominant state capital contribution. (See point I.4 of this section for more detail)

1.2. Evaluation timeline and implementing agencies

SOEs are responsible for reporting on five above-mentioned criteria by the end of each fiscal year, based on their annual financial statements.

Line ministries, PPCs, BOM, and Board of members of SOEs are responsible for rating SOEs under their management and announce the result no later than second quarter of the next fiscal year.

1.3. Rating SOEs by criteria

According to Article 13 of Decision 224 and Article 5 of Circular 115, SOEs will be rated as A, B or C depending on their annual growth rate in revenue and other incomes. However, there are two rating scales applied for two groups of SOEs, classified by their sector of operation. Specifically:

a. Criterion 1: Change in revenues and other incomes for each sector in comparison with the previous year

SOEs in agriculture, forestry, fisheries, mining industry (excluding oil and gas), and manufacturing industry (production of metal products, manufacturing machinery and equipment) will be rated as:

- Grade A: income increases by 5% or more in comparison with previous year.

- Grade B: income either increases or decreases less than 5%.

- Grade C: income decreases by 5% or more.

SOEs in processing industry, production and distribution of electricity, gas, water, construction, oil exploration, transportation, warehousing, communications, commerce, tourism, hotel and other sectors will be rated as:

- Grade A: income increases by 7% or more.

- Grade B: income increases less than 7% or decreases less than 3%

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- Grade C: income decreases by 3% or more: Grade C

b. Criterion 2: Earned profits and the ratio of earned profits and State capital

- SOEs will be graded as A for this criteria if they meet one of the following criteria:

o making profit and the ratio of earned profits and State capital higher than that of the previous year;

o having projected loss and the actual loss lower than the planned.

- SOEs will be graded as B if they meet one of the following criteria:

o making profit and the ratio of earned profits and State capital equal to or lower than that of the previous year;

o having projected loss and the actual loss equal to the planned.

- SOE will be graded as C if they fall into one of the following criteria:

o making loss;

o having projected loss and the actual loss higher than the planned.

c. Criterion 3: Overdue debts and the current ratio

Grade A is for enterprises which have no overdue debts and the current ratio is greater than 1

Grade B is for enterprises which have no overdue debts and the current ratio varies from 0.5 to 1

Grade C is for enterprises which have overdue debts and the current ratio is lower than 0.5

The current ratio which reflects the current payment capability of the enterprise is determined by the total value of liquid assets and short-term investments against total liabilities including long-term debts due.

d. Criterion 4: The observance of current provisions of law

Grade A is for enterprises which do not violate the laws.

Grade B is for enterprises which are concluded by competent authorities as violating the laws but are not yet sanctioned for administrative violations.

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Grade C is for enterprises sanctioned for administrative violations or having their management prosecuted for criminal liability due to violation against laws their task implementation.

e. Criterion 5: Supply of public-utility products or public-utility services

Grade A is for enterprises which exceed the projected output with the quality of products or services up to the defined standards.

Grade B is for enterprises which meet projected output with the quality products or services up to the defined standards.

Grade C is for enterprises which do not meet projected output or the quality of products/services do not meet defined standards.

1.4. Rating of SOEs by type

a. SOEs operating for business purposes

As mentioned above, this group of SOEs will be evaluated basing on their grades for criteria 1, 2, 3 and 4. Final rating of enterprises will be:

Grade A if they receive “A” for criteria 2 and 4 and no “C” for criteria 1 and 3;

Grade C if they receive “C” for criteria 2 or the remaining 3 criteria 1, 3 and 4

Grade B if they do not belong to one of the two above cases.

b. SOEs providing public utility products/services

This group of SOEs will be evaluated basing on their rating for criteria 3, 4 and 5. Final rating of enterprises will be:

Grade A if they receive “A” for criteria 5 and no “C” for criteria 3 and 4

Grade C if they receive either “C” for criteria 5 or “B” for criteria 5 and “C” for criteria 3 and 4

Grade B if they do not belong to one of the two above cases.

c. State corporations

State corporations will be rated based upon grades of their member companies and companies with dominant State capital contribution. Specifically:

A corporation is graded as “A” if it meets 2 following criteria: (i) 50% or more of its total consolidated revenue comes from A-rated member companies and A-

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rated companies with dominant state capital contribution; and (ii) the corporation is making profit.

A corporation is graded as “C” if 50% or more of its total consolidated revenue comes from C-rated member companies and C-rated companies with dominant state capital contribution.

A corporation is graded as “B” if it does not belong to the two afore-mentioned cases.

d. Rating for SOEs’ Board of Management (BOM) and BOD

Decision 224 also takes the rating over the performance of SOEs’ BOM and BOD as one aspect of evaluating the efficiency of SOEs. Accordingly, there are 3 grading levels with specific criteria as follows:

BOM and BOD of a SOE will be evaluated as “successful performance” if:

- The enterprise has the actual ratio of earned profit and State capital meeting or exceeding the projected ratio set by the State.

- The enterprise is A-rated.

BOM and BOD of a SOE will be evaluated as “poor performance” if one of the following situations happen:

- The actual ratio of earned profit and State capital of the enterprise does not meet the projected ratio set by the State.

- BOM does not fully comply with the resolutions and decisions of owners and the company’s charter; and BOD does not fully comply with resolutions, decisions of owners and BOM does not comply with the company’s charter.

- The enterprise is C-rated.

For the remaining cases, BOM and BOD of SOEs will be evaluated as “acceptable performance”.

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2. Monitoring of SOEs with poor performance

According to Decision 169/2007/QD-TTg, enterprises with 100% State owned charter capital (excluding enterprises in finance, banking, insurance and security sectors) will be placed under special supervision if they are business difficulties and make loss. The purposes of this supervision are to identify the causes of loss and inefficient operations and to find out appropriate solutions to improve the efficiency and effective use of State capital. Special supervision over these SOEs also helps to sort out and apply proper and timely interventions on the enterprise and its management.

2.1. SOEs subject to special supervision

Decision 169/2007/QD-TTg also specifies how to determine an enterprise in business difficulties and subject to special supervision as follows:

Making loss in 2 consecutive years; or

Making loss in one year and losing 30% or more of owner’s capital; or

Making profit in one year between two loss-making years; or

Having current ratio smaller than 0.5.

2.2. Subjects of special supervision

Production, sales and inventories

Revenues and other income sources

Expenses of business and other activities, salaries, depreciation of fixed assets, payment of loan interest and business administration expenses

Profit and profit – State capital ratio

Use of State capital and assets

Bad debts and the ability to pay due debts

Performance of the BOM, General Directors and Directors of the enterprises.

2.3. Methods of special supervision

SOEs subject to special supervision are required to make quarterly and annual reports covering above-mentioned issues for submission to State ownership representative and financial management agency at the same level.

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Basing on the submitted reports, the State ownership representative, in collaboration with the financial agency at the same level, will evaluate and analyze the enterprise’s operation and management in order to provide them guidelines and recommendations.

Main focus of analyzing, evaluation and recommendation are:

Increase/decrease of production, sales and inventories of the enterprise in comparison with previous year;

Implementation of economic - technical norms and labor norms in business operation;

Loans, loan use and ability to pay due debts;

Performance of BOM (if any), General Directors and Directors.

At the same time, the owner representatives and the financial agency at the same level will (i) verify the truthfulness and accuracy of the reports (ii) examine the performance of enterprise’s General Directors and Directors; and (iii) assess the management of the enterprise’s production, sales, workforce and finance. The assessment will take place annually and in accordance with legal regulations on inspection and examination and is to provide report covering conclusions on the assessed issues and recommendations for enterprises to improve business performance.

2.4. Post- supervision measures to apply to SOEs

Depending on the performance of specially supervised SOEs after taking owner’s recommendations, the owner could take different measures as follows:

Remove the specially supervised SOEs from the special supervision list if they stop making loss in 2 consecutive years and fulfill required reporting task under the supervision period.

In the event that the SOE does not implement the requirement on reporting and supervision, the enterprise’s managers will be warned and criticized and will not be entitled to salary rise, reward and bonus. In case the managers repeat the offense, they will be dismissed from their positions.

If the SOE does not implement the requirement on reporting and supervision fail to and follow the State capital ownerships recommendations, the enterprise continues making loss, and the managers will be dismissed or replaced.

In the event that after two years under supervision, the SOE continues to make loss, the management organization will consider a scheme for transforming the ownership, dissolution or bankruptcy.

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3. Shortcoming with supervision regulations over SOEs

The application process of Decision 224 and Decision 169 have revealed a lot of shortcomings of financial supervision regulations over SOEs. Specifically:

Firstly, as of 01 July 2010, Law on State Enterprises 2003 expired and all enterprises operate under the Law on Enterprises. Enterprises in which the State holds 100% of charter capital are transformed in to one-member LLCs while some State corporations have been transformed into EGs. However, current regulations on criteria for evaluating efficiency of SOEs only cover State companies, independent state companies and general corporations instead of EGs.

Secondly, according to the Law on Enterprises, SOEs are defined as enterprises that 50% or more of charter capital is owned by the State. State capital contribution or state owned share are funded from State budget and other State’s sources, being represented by a state agencies or economic organization as the owner. However, at present, capital of the parent company of EGs, State corporations investment in subsidiaries and joint ventures are also regarded as State capital. This is inconsistent with the rights and responsibilities of the State towards capital invested into SOEs. In fact, capital contribution of EGs and corporations to their member companies are generally much larger than the amount that the State initially invested into the parent companies. Therefore, it is not yet specified if enterprises having capital contribution from EGs and corporations can be considered SOEs or not.

Thirdly, the four current basic criteria for evaluating SOEs include: 1) sales or product volume, 2) profit and ratio on profit earned and capital state, 3) overdue debt and the current ratio and 4) the observance of the law. However, realities show that those criteria are limited and unable to cover a comprehensive assessment of enterprises’ activities. For example, for a JSC that has other shareholders’ capital in addition to the State capital, the use of ratio of profit earned and state capital to assess the efficiency of the enterprise is not appropriate. These criteria cannot indicate the financial independence or dependence of the enterprises as well as other criteria do, such as total assets to payable debt ratio, ratio on efficiency in asset utility (gross income/total assets), ratio on efficiency in capital utility at shareholding companies (dividends/share price or share capital, earnings per share (EPS).

In addition, the criteria for evaluating the performance of public SOEs are still too generic rather than being specific. These criteria seem to be useful for completing the evaluation task and are not yet able to assess quality of products/goods or customer satisfaction.

Last but not the least, the conduct of enterprise grading sometimes seems “to be symbolic rather than practical. The use of assessment results in business decision making process is still limited and has limited impacts on the management and administration of SOEs.

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II. Financial supervision by elected bodies via State Audit of Vietnam

The operations of SOEs are subject to inspection and supervision of elected bodies through State Audit (SV), which operates in accordance with the Law on State Audit 2005 dated 14 July 2005.

Position of SA (Article 13): SA is a body established by the National Assembly, operating independently and only complying with the laws. SA can be considered as a body under the National Assembly.

Activities of SA (Article 63): to conduct audits on SOEs including (1) compliance audit; (2) financial statement audit; and (3) operational audit.

Annually, SOE audits play an important role in150-200 audits carried out by the State Audit.

III. Inspection by Government Inspectorate according to the Law on Inspection

According to the Law on Inspection 2010, SOEs are subject to the inspection at two levels:

National level: Government inspection applies to EGs and enterprises established by the PM.

Ministerial, sectoral and local level: The inspection will be done on the enterprises established and managed by the ministries, sectors and local governments.

There are some inspection methods, including: (1) Inspection according to the annual inspection plan; and (2) Irregular administrative inspection to be conducted upon the detection of violation signal at the enterprises.

When carrying out inspection on the SOEs, according to Article 34 to Article 41 of Decree No. 86/2011/ND-CP dated 22 September 2011 Guiding the Implementation of the Law on Inspection, the inspection body shall have the following power:

To request the inspected organizations and individuals to provide documents, information and explanation reports.

To seal the documents, list assets or seize money, assets and papers, etc.

To solicit investigation experts ‘opinions.

To temporary halt the violating action.

To request credit institution(s) to block the account of the violating party.

To confiscate illegal assets, money, papers.

After completing the inspection, the inspection body will disclose the inspection conclusions, except for those relating to the State secrets. The inspection body has the power to request competent authorities (State authorities or enterprises’ owners) to take measures to solve the

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detected issues during the inspection process. If there is any criminal signal, the inspection body will also request the investigation bodies to prosecute the criminal case on the concerned individuals.

Box 16: Inspection and handling of violations at VINACOMIN

In 2010, the Government Inspectorate conducted an inspection on VINACOMIN’s business operation for the 2005-2009 period. After the inspection, the Government Inspectorate requested the retroactive collection of nearly 202 billion VND, including the natural resources tax, corporate income tax, value added tax and export duties of VINACOMIN. It also handed over to the Ministry of Public Security to continue to review the untrue declaration of the more than 2.8 million tons of coal for export by Indevco Group and assigned Quang Ninh PPC to clarify the origin of more than 1 million tons of coal of Hai Dang Co., Ltd.

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PARTVI: REARRANGEMENT AND RESTRUCTURE OF SOEs

I. Types of restructure and rearrangement of SOEs

According to the existing laws, SOEs can be rearranged via the following methods:

- Transformation into 100% State capital LLCs and operating under the Law for Enterprises 2005;

- Equitization;

- Selling out;

- Merger and acquisition or split;

- Dissolution or bankruptcy under the Law on Bankruptcy 2004.

According to the Government’s report to the National Assembly in June 2012, the number of 100% State capital enterprises is 1,309. The 98/101 Scheme on SOE Rearrangement and renovation in the period from 2011 to 2015 for PPCs and sectors has been approved by the PM. An overall plan for SOE restructure which focus on State-owned groups and State corporations for the period from 2012 to 2015 are under the review.

In the period of 2012 – 2015, the State shall maintain 100% of its registered capital in 692 enterprises out of 1,309 100% State capital enterprises. 573 SOEs shall be equitized among which the State will keep over 75% registered capital in 30 enterprises and over 65% registered capital in the other 499. 44 enterprises are expected to be restructured by other methods such as selling, divestment, debt restructure to change to JSC, transformation to two and more member LLC, selling out to employees).

II. SOE Restructure and Rearrangement policy in the period of 2012-2015

SOE restructure and rearrangement activities in the period 2012- 2015 are based on the PM’s Decision 929/TTg dated 17th July 2012 Approving the Scheme on “SOE Restructure with Focus on State EGs and Corporations in the period of 2012-2015”. Main contents of this document can be summarized as follow:

1. Principles for SOEs’ restructure and rearrangement

1.1. Priorities in SOEs restructure

SOE restructure will be undertaken over all sectors and fields regardless of the hierarchical system or management bodies. The current focus is to restructure State groups and corporation in the fields of construction, commerce, telecommunication, publication, lottery, water supply and drainage, agricultural water management, road

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renovation and management, railway and waterway. State EGs and corporations will be comprehensively restructured in the aspects of organization, management, human resources, business lines, strategy, investment, market and product. Some groups and corporations will be reorganized to comply with their status and task requirements.

1.2. Classification of SOE to be restructured

a. 100% state capital enterprises

The existing 100% state capital enterprises are categorized by the Government by the following groups:

Group 1: Enterprises that the State continue holding 100% registered capital are in State monopolized fields such as military, national security, publication, agricultural water use, transportation safety, lottery, electricity production and distribution. These are often large-scale and multi-objective enterprises of significantly socio-economic importance on social economy.

Group 2: Equitized enterprises in which the State keeps more than 65% registered capital are in sectors and fields regulated in Decision 14/2011/QD-TTg dated 4th March 2011 by the PM on SOE Criteria and Categorization. These enterprises are divided into two sub-groups:

Sub-group 1: The State maintain more than 75% registered capital when the equitization are undertaken with State EGs, corporations and large-scale State companies in the fields of natural resource and mineral resource exploitation and processing, and equipment of communication and information infrastructure network.

Sub-group 2: The State keeps from 65% to 75% registered capital when the equitization are undertaken with large-scale enterprises in the fields of basic chemical processing, chemical fertilizer, food wholesales, medicine wholesales, chemical pharmacy, production and reservation of plant’s and husbandry animal’s breed, production of vaccines, road maintenance and management, domestic waterway, seaport exploitation and management, large-scale electricity production, railway and airway transportation.

Group 3: Enterprises that the State holds from 50% to 65% share or disposes its share

Except for the above-mentioned enterprises, the State will maintain 50%-60% registered capital or will not keep any share according to the enterprise and market situation upon enterprise equitization.

Group 4: SOEs reported loss for a long time and impossible to recover. Those enterprises will be sold, transferred, debt restructured to turn into JSCs or multi-member LLCs, liquidated or bankrupted.

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b. State shareholding enterprises

The State will divest its share in the sectors or industries that are not main business or not directly related to enterprises’ main business or sell off State capital in JSCs that do not require the maintaining of State influence.

2. Restructure and rearrangement solutions

PM’s Decision 929 provides intensive solutions for the implementation of SOE Restructure and Rearrangement Scheme. Specifically:

a. For the Government

Speeding up the approval of SOE Rearrangement and Renovation Scheme up to 2015 submitted by ministries, sectors, provinces, EGs and State corporations.

Completing the inventory and categorization of enterprises with 100%, more than 75%, from 65-75%, from 50-65% State capital and others. Equitization should be based on the real situation and accelerated during the implementation of the Scheme.

Committing to achieve rearrangement and equitization goals set out in approved plans and regarding this a critical task for the period from 2012 to 2015.

b. For State EGs and corporations

Submitting of restructure/re-arrangement plans by EGs and corporation established under PM’s decisions to the PM or by corporations and enterprises founded by minister or PPCs to line ministries or PPC no later than Quarter 3, 2012. Such plans need to cover the following major contents:

- Reviewing and specifying the main tasks and businesses as EGs and corporations are to engage with their main business and sub-business directly related to and serving the main business.

- Building development strategy to 2015, vision to 2010 which complies with sector’s development strategy, market demand, capital capacity and management ability and level.

- Making plan for re-organization, business and production. Restructuring member enterprises by the principle of specialization, delegation, cooperation and not distracting resources. Reducing internal competition by avoiding mergers and acquisition in the same industry.

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- Preparing financial plans to undertake major tasks assigned and addressing financial matters revealed during the restructuring.

Withdrawing investment in non-core businesses by 2015. EGs and corporations working in the field of banking, finance, stock trading, real estate, insurance, divesture will be implemented in the following directions:

- Selling the shares of parent companies, State groups and corporations to external organizations and individuals. Intra-enterprise capital transfer is not permitted.

- Transferring capital to other groups, corporations and enterprises, which have more appropriate major business. Capital transfer can be done through assignment or share selling.

- Handing over the entire group or corporation to other groups and corporations in the same industry. This is carried out by selling out or handing over the entire existing enterprise.

State groups and corporations in financial difficulties clarifying the responsibility of concerned managers and restructure capital and assets, including the following steps: situation analysis, assess capital demand to set a mechanism for capitalizing urgent projects, limiting capital leak due to prolonged projects, restructuring assets by transferring or merging ineffective projects and investments in order to concentrate resources for main business.

Being determined to rearrange, restructure, dissolve and declare bankrupt ineffective enterprises which are made loss for a long time and have no ability to pay due debts.

3. Tasks of ministries and PPCs in SOE restructure scheme

3.1. The role of MOF in SOEs restructure scheme

One new point in the Enterprise Restructure Scheme under Decision 919/TTg is that MOF is officially assigned to implement this Scheme, instead of NSCERD which lacks a supporting system for scheme implementation.

3.2. The role for other ministries and PPCs in SOE restructure scheme

Decision 919/TTg also requests ministries, sectoral management agencies, State EGs and PPCs to cooperate with and report to MOF on the implementation of SOE restructure scheme within their scope of management.

Line ministries of economic and technical sectors, including construction, commerce and industry, information and communication, finance, agriculture and rural

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development, transportation, have to review and update the plan for restructuring enterprises under their management to submit to the PM for his approval and guidance by quarter III of 2012.

III. Legal framework for SOE restructure

1. Transformation of SOEs into 100% State capital LLCs, under the Law for Enterprise and Decree 25/2010/ND-CP

Each SOE appoints a team named “Enterprise Transformation Committee” (ETC) to present its ownership in the transformation process. According to Article 9 of Decree 25, the majority of ETC is made up by enterprise’s representatives such as director, chief of accountant, managers and trade union leader. The entire transformation process is supported by NSCERD which was established in 2001 and has a lot of experiences in supporting enterprise transformation.

The detailed procedure for SOE transformation changes over times, however the general process is still the same. The procedure for transformating an SOE into a one member LLC, based on various related legal doccuments on SOE transformation, is as follows:

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Figure 6: Procedures for transform SOEs into 1 member LLC under the Law on Enterprises 2005

2. Equitization of SOEs

2.1. SOE equitization situation

Step 1: Notice on transformation road map

Step 2: Set up the transformation committee

Step 3: Reporting to the company’s employees about transformation

Step 4: Prepare transformation plan

Step 5:Defining the organization and management organs of

the company, preparing the Company Charter

Step 6:Appraise, approval and implementation of the

transformation plan

Step 7: Appoint management positions

Step 8: Bussiness Registration for the transformed company

Step 9: Report about company’s transformation to the

competent authorities

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From the start of SOE equitization in 1992 to 2011, according to NSCERD approximately 4000 SOE have been equitized, accounting for 70% of rearranged enterprises through all methods.

Figure 7: SOE equitization situation in Vietnam from 1992 to 2012

1992-2000

2000-202 2003 2004 2005 2006 2007 2008-2011

First 4 months of 2012

0

100

200

300

400

500

600

700

800

900

588.000

506.000

621.000

856.000813.000

359.000

116.000 117.0004.000

Source: Dept. of Enterprise Finance/MOF

However, the pace of equitization has not been the same throughout this period. The program moved was very slowly in the initial years, accelerated in early 2000s and saw its peak in the period of 2003-2006. From 2008 to 2011, the program has gradually slowed down with only 117 SOEs equitized. In the first four months of 2012, only 4 SOEs were equitized. As found in a survey by the Central Institute for Economic Management in 2004, time duration to equitize a SOE is fairly long, that is 554 days for a State corporation and 437 days for a SOE in general. However, this it has been remarkably shortened according to a SOE equitization survey conducted by MOF in collaboration with PPCs. Accordingly, it took less than 1 year to complete equitization for 367 SOEs in 2011 (87%) and more than 2 years with only 4 others.

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Figure 8: Time to complete an SOE equitization

87%

12%01%

Less than 1 year

1 year to 2 years

greater than 2 years

Source: Survey on SOE equitization by MOF/UNDP in 2011

This report also described 3 equitization methods which have been applied, namely:

Keeping the State capital unchanged and issuing new shares

Equitizing the entire State capital

Partially equitizing the State capital and issuing new shares

59.1% of SOEs chose to keep the State capital unchanged and issue new shares and only 7% opted to equitize the entire State capital. This shows that shareholders still prefer State’ participation to continue to get priorities and advantages for the enterprise.

Figure 9: Methods of equitization

33%

08%

59%

keeping the state capital unchanged and issue new shares

sales/ transfer of the whole state capital

sales/transfer part of the state capital unchanged and issue new shares

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Source: Survey on SOE equitization by MOF/UNDP in 2011

Over the last 20 years, the National Assembly and Government have issued a variety of legal documents related to equitization. In 1992, the Chairman of the Ministerial Committee issued Instruction 202/CT dated 8th June 1992 on the Experimenting SOE Transformation into JSCs. This was replaced by a number of the Government’s Decrees on equitization, including Decree 28/CP dated 7th May 1996, Decree 44/CP dated 29th June 1998, Decree 187/2004/ND-CP dated 16th November 2004, Decree 109/2007/ND-CP on 16th June 2007 and Decree 59/2011/ND-CP dated 18/07/2011 on the Transformation of 100% State Capital Enterprises into JSCs.

In addition, SOE equitization is regulated by guiding documents such as Circular 196/2011/TT-BTC issued by MOF on 26th December 2011 Instructing Selling of First Shares upon IPO and Management and Use of Fund from Equitization of SOEs; Circular 202/2011/TT-BTC issued by MOF on 30th December 2012 Guiding Financial Issue Handling and Asset Valuation during the Transformation of 100% State capital enterprises into JSCs.

2.2. SOE to be equitized in the period of 2011 - 2015

Based on Decree 59/2011/ND-CP, SOEs can be equitized into:

100% State registered capital LLCs which are the parent companies of EGs and corporations (including State commercial banks);

100% State registered capital LLCs under ministries, ministry-level agencies, other Government agencies and PPCs;

100% State capital SOEs which have not been transformed to one member LLC.

Enterprises to be equitized will be decided based on Government’s direction in Decision 919/TTg and SOE rearrangement and renovation plans developed by ministries, EGs, PPCs and approved by the PM.

As reported as by MOF by consolidating opinions of 4 ministries, 9 EGs, 10 State corporations and 57 PPCs, 899 SOEs are planned for equitization and rearrangement in the period of 2011-2015, of which 367 enterprises will be privatized and the remaining 532 will be transferred, sold, liquidated or declared bankrupt.

In 2012, 93 SOE will be equitized. Examples include Binh Son Refining and Petrochemical one member LLC (under Petro Vietnam), parent company of VINATEX group, parent company of VICEM Cement Corporation and 3 affiliated companies VICEM Hoang Thang, VICEM Haiphong, VICEM Tam Diep, 3 affiliated companies of VINALINES corporation: VINALINES Hai Phong, VINALINES Nha Trang and

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Khuyen Luong Port LLC, 9 member companies of Song Da Construction and Industry group, 10 State companies under Ministry of Agriculture and Rural development and 12 State companies under MOIT.

2.3. SOE equitization procedure

SOE equitization process usually starts from the issuance of a decision on equitization until a JSC is established.

According to decree 59/2011/ND-CP, SOE equitization process is made up of 03 major steps:

Step 1: Building equitization plan

Step 2: Implementing equitization plan

Step 3: Completing the transformation of the enterprise into a JSC.

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Figure 10: Flow-chart of SOEs equitization process according to Decree 59/2011/NĐ-CP

Source Decree 59/2011/NĐ-CP

2.4. Handling of financial issues in SOEs equitization

Handling financial issues of enterprises before equitization is a very important task that has a strong impact on SOE equitization process. This covers asset classification and inventory, handling of outstanding financial obligations, leased assets, joint venture capital, unnecessary properties, assets invested by bonus fund, welfare fund, borrowings, lending, back-up fund for loss and profit and matters related to SOE long-term investment in other enterprises.

Circular 202/2011/TT-BTC regulates that upon receiving the equitization decision from competent bodies, the enterprise will take the responsibility to classify and make an

Step 3: Finalization of procedures for transforming the company into JSC.

Organization of the 1st shareholder assembly Implementation financial finalization between company and the new joint strock company

Step 2: Implementation of Equitization planIPO implementation in

accordance with the approved equitization plan

Transfer of the preferential stocks to company’s

employees and trade union

Transfer the money from stock sales to the Equitization Fund

The Equitazation Steering Committee report the

nomination of the owner capital ‘s representatives to

the competent authority

Step 1: Preparation of equitization planEstablishment of

company’s Equitization Steering

Committee

Preparation of necessary

documents and data

Implementation of financial check and

finalization

Decision on and announcement of the company valuation

Finalization of the equitization plan and

submission to the competent authority

for approval

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inventory of its asset, capital and funds which are managed and used by the enterprise during the valuation stage.

Circular 202/2011/TT-BTC also specifies that enterprises having more than 30 billion VND of total asset or more than 10 billion VND of State capital in book value are to hire professional valuation consulting organizations.

A particular procedure is applied to enterprises whose equitization is regulated by Article 27 of Decree 59/2011/ND-CP and which are to be audited by SA. The relevant decision-making agency, based on the enterprise rearrangement and renovation plan approved by the PM will send a notice on schedule and roadmap for equitization to SA so that SA can schedule for an audit of the valuation and financial handling results of the consulting organization before the announcement of enterprise valuation.

Similar to the terminated Decree 109/2011/ND-CP, Decree 59/2011/ND-CP allows enterprises to apply several enterprise valuation methods including net asset value method and discount cash flow.

Net Asset Value (NAV)

Under NAV method, the total enterprise record value is the one in the balance statement sheet.

The equitized enterprise’s real value is the total existing asset value at the equitization time already counted with potential profit making ability accepted by both the buyer and the seller.

This value excludes the items that are decided not to be equitized by the competent body that has the right to decide enterprise valuation and bear full legal responsibility to his/her decision according to Article 29 of Decree 59/2011/ND-CP. At present, enterprise’s land-use right and business advantages are included in the valuation thank to Article 31 and Article 32 respectively of Decree 59/2011/ND-CP.

For financial and credit institutions who choose to apply NVA method, the audited results from the financial report can be used to valuate money, assets and debts. It also requires the assessment and inventory of fixed assets, long-term investments and uncompleted expenditures, taking into account land use right value after deducting compensation and clearance costs.

Discount Cash Flow (DCF)

The condition for an equitized enterprise to apply DCF method is that the enterprise’s minimal operating time must be 5 years and the average net profit per State capital in the 5 years preceding the valuation is higher than the nearest Government’s 5-year bond interest rate to the date of valuation.

DFC is a valuing method which bases on the enterprise’s profit making ability in the

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future rather than its asset value to calculate the enterprise’s value in a comparison with the State’s financial regulation of profit and records of State capital for equitized enterprises.

In case the equitized enterprise has investment in other companies, the profit derived from this investment is accounted into the enterprise’s value.

Future net profit and its application to other indicators such as profit/ capital ratio, equity growth rate, equity value conversion, and future capital to present estimated value are applied as follow:

Based on the average growth rate of net profit in the past, the enterprise estimates the net profit in the future. If the enterprise uses the net profit in business plan as the net profit in the future, it has to show proof of feasibility.

Net profit allocation in future years is assumed to cover 50% for equity division and 30% for capital addition regardless of whether past profit or plan profit is used to estimate future profit.

2.5. Initial Public Offering

Initial Public Offering (IPO) upon SOE equitization is stipulated in Circular 196/2011/TT-BTC issued by MOF on 26th December 2011.

The IPO share’s structure is to be complied with the method of equitization in consideration of the sold share proportion for the State, the strategic investors, trade union and employees.

The selling of priority share to employees is stipulated as follow:

In case IPO is done for strategic investors, the price of priority shares for employees is set at 60% of the lowest successful price in the bids.

In case the selling to the strategic investors has been done before public opened bids, the price of priority shares for employees is set at 60% of the lowest price successfully negotiated with strategic investors (in the case of negotiation) or the lowest successful price bid between investors (in the case of bidding).

2.6. Cost of Equitization

Circular 196/2011/TT-BTC regulates adequate cost of SOE equitization. Accordingly, cost of equitization is the expenses related enterprise’s equitization from the equitization decision stage to the handing over of the enterprise and the JSC. These expenses must be appropriately documented and comply with the laws.

Examples of allowable expenses are cost of training on enterprise equitization, cost of

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inventory and asset valuation, cost of plan development, cost of developing company charter, cost of employee general assembly meetings to discuss equitization and the first stakeholder congress, and cost of hiring auditors and consulting companies for enterprise valuation., etc.

Table 3: Maximal equitization expenses correlative to enterprise’s value

No Value of enterprise Maximal cost

1 Under 30 billion VND Not exceeding 200 million VND

2 From 30 to 50 billion VND Not exceeding 300 million VND

3 From 50 to100 billion. VND Not exceeding 400 million VND

4 Over 100 billion VND Not exceeding 500 million VND

Source: Circular 196/2011/TT-BTC

2.7. Labor policy toward employees

All the legal documents on equitization issued since 1992 emphasize the objective of harmonizing the benefits of the State, the enterprise, the investors and the employees. Addressing outstanding issues related to the policy for employees is mandatory in all SOE equitization.

Based on the labor rearrangement article in equitization plan and the real situation, the enterprise will make a plan for arranging its redundant, retained and additional labor as well as preparing retraining plan budget as regulated by the Government.

At present, handling of redundant labor resulting from the rearrangement and equitization of one member 100% state capital LLC is specified under Decree 91/2010/ND-CP dated 20th August 2010 on Policy for Redundant Labor from the Rearrangement of State-owned one member LLC.

As a regulatory requirement, the enterprise has to arrange and negotiate with redundant labor on the basis of labor contract.

For non-term labor contract, 55-year-old male employees and 50-year-old employees who have contributed social insurance for at least 20 years will be entitled to pension in accordance with Point 1, Article 50 of the Law on Social Insurance. For male employees aged from 55 to 60 and female employees aged from 50 to 55 who have contributed social insurance for at least 20 years will be paid an additional 3 month

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salary and allowance (if any) for each year ahead of their retirement schedule, 5 month salary and allowance (if any) for the 20th years of social insurance contribution and ½ month salary and allowance from the 21st year of social insurances. In case the employee needs to work 6 months more (at maximum) to be eligible for pension, the State will pay for the lacking months to complete his/her retirement arrangement.

For other types of labor contract, the contract will be terminated and the labor will be given 1 month salary and allowance (if any) for each working year in the State sector except for the time used for receiving discharge subsidy and unemployment insurance as regulated but equal to at least 2 month salary and allowance (if any). Additionally, the employee will be provided with 1 month salary and allowance (if any) for each working year in the State sector and an amount of 6 month salary and allowance (if any) to look for a new job. In case the employee voluntarily participates in re-training, he/ she will be trained for 6 months at maximum at a vocational school appointed by the provincial/ municipal Labor Management Department.

For the employees who are under the labor contract of 12 to 36 months, the contract will be terminated and the employees will be given 1 month salary and allowance (if any) for each working year in the State sector except for the time used for receiving discharge subsidy and unemployment insurance as regulated. Additionally, the labor will be granted 70% of salary and allowance (if any) stated in labor contract for the remaining uncompleted contract time but not exceeding 12 months. In case this subsidy is less than the minimum salary at the contract termination, it will be raised to equal to minimum salary.

2.8. Preparation of company charter after equitization

According to Decree 59/2011/ND-CP, JSCs’ charter will be drafted and announced by Steering Committee on Enterprise Equitization in cooperation with consulting organization(s) to investors before the selling of share. The charter should have a provision on the selling of State-owned shares after equitization.

3. Selling and assignment of SOEs

3.1. Selling of SOEs

3.1.1 Definition of enterprise selling

Enterprise selling means the transfer of ownership to collect selling proceeds, of the whole or a division of an enterprise to another collective, individual or legal entity.

Selling of 100% State-owned enterprise covers the selling of the whole or a division of an enterprise with 100% State capital, an independent cost-accounting member company, or a dependent unit.

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3.1.2 Types of 100% State owned enterprises selling and entities entitled to purchase

a. Type of selling

According to Article 1 of Decree 109/2008/NĐ – CP on Selling and Assignment of 100% State owned enterprises, selling of SOEs could be divided into 2 groups which are: complete selling of SOEs (of 100% State owned enterprises or independent cost-accounting member company) and partial selling (of a dependent unit).

b. Entities entitled to purchase

The labor collective of the enterprise;

Individual employees of the enterprise;

Enterprises with 100% State capital and enterprises of all economic sectors including foreign-invested enterprises in Vietnam, other than intermediary financial institutions providing enterprise valuation or auction consultancy;

Vietnamese citizens who have the full civil act capacity, except those who are not allowed to establish and manage enterprises such as State officials, security and defense officers, members of NSCERD, individuals of intermediary financial institutions providing enterprise valuation or auction consultancy

Economic or financial institutions established under foreign laws and conducting business activities overseas or in Vietnam and foreigners, except for intermediary economic or financial institutions and individuals of these institutions, which providing enterprise valuation or auction consultancy. Foreign investors may join with other Vietnamese enterprises and citizens to purchase part of the enterprise at a proportion not exceeding what is provided for in Vietnam's international commitments on business-rights of foreign investors in specified domains or sectors. With regards to domains or sectors otherwise specified, foreign investors may purchase the whole enterprise.

3.1.3 Condition for enterprise selling

According to Article 2 of Decree 109/2008/NĐ – CP, conditions for application of enterprise selling are as follows:

a. Enterprises with 100% State capital and independent cost-accounting member companies may be sold, regardless of the State capital share, in the following cases:

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Their selling are approved by the PM in the general scheme on reorganization of enterprises with 100% State capital;

They are subject to equitization in the general scheme on reorganization of enterprises with 100% State capital but cannot be equitized.

b. Dependent units of enterprises with 100% State capital, including dependent cost- accounting units of State corporations, parent companies, enterprises with 100% State capital or independent cost-accounting member companies may be sold in the following cases:

Their selling is approved by the PM in the general scheme on reorganization of enterprises with 100% State capital and such selling does not affect the operation of other enterprise divisions and their capability to fulfill debt payment obligations,

They are subject to equitization in the general scheme on reorganization of enterprises with 100% state capital but cannot be equitized.

3.1.4 Principles for enterprise selling

The selling of 100% State owned enterprises is to follow 6 basic principles as specified in Article 5 of Decree 109/2008/NĐ – CP. Specifically:

The purchaser or assignee of an enterprise may not resell the enterprise within the period stated in the selling contract.

Upon selling of an enterprise, its assets shall be calculated by their value. The value of an enterprise to be sold shall be calculated at actual market prices.

The priority order for selection of enterprise selling methods:

- Auction with inheritance of debts;

- Auction without inheritance of debts;

- Selling under direct agreement with inheritance of debts;

- Selling under direct agreement without inheritance of debts.

The labor collective of an enterprise is given priority to purchase the enterprise if they offer a bid equal to that of other purchaser in the last auction call.

The enterprise is to publicize the completion of enterprise selling.

Payment for enterprise purchase shall be made in Vietnam dong. Foreign investors wishing to purchase an enterprise has to open deposit accounts with

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payment service providers operating in the Vietnam territory and effect the payment for the purchase via these accounts.

Actual, reasonable and necessary expenses for the enterprise selling may be deducted from the State capital in the enterprise or proceeds from enterprise selling. Deficit can be made up for with support from the Enterprise Reorganization Support Fund. The MOF shall provide guidance on types and level of expenses related to enterprise selling. .

3.1.5 Authority to decide on enterprise selling

Decision to sell an enterprise is made basing on the overall scheme on restructuring of 100% SOEs approved by competent authority and the afore-mentioned conditions for enterprise selling.

According to Decree 109/2008, power to decide on enterprise selling belongs to the individual or agency that issued enterprise establishment decision. Specifically:

The PM authorizes BOD of enterprises to decide on the selling of independent cost-accounting member companies, dependent cost-accounting member units of State corporations, parent companies, dependent divisions of independent cost-accounting member companies having asset value exceeding 50% of the total residual asset value stated in their financial statements publicized in the most recent quarter.

Ministers, heads of ministerial-level agencies, heads of other government agencies or chairs of PPCs:

- Decide on the selling of enterprises established under their decisions, including independent cost-accounting member enterprises, dependent cost-accounting member units of State corporations or one-member LLCs which have not yet transferred the owner representation right to SCIC;

- Decide on the selling of divisions of enterprises established under their decisions which have not yet transferred the owner representation right to SCIC, on the condition that the residual asset value of these enterprise divisions exceed 30% and 50% of the total residual asset value stated in financial statements of enterprises publicized in the most recent quarter for enterprises without and with BOD), respectively.

BOD of State corporations or parent companies decides or authorizes the general directors to make decision on the selling of enterprise divisions, of which the residual asset value does not exceed 50% of the total residual asset value stated in financial statements of enterprises publicized in the most recent quarter.

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Directors of companies without BOD decide on the selling of enterprise divisions, of which the residual asset value does not exceed 30% of the total residual asset value stated in financial statements of enterprises publicized in the most recent quarter

3.1.6 Procedures for selling 100% State owned enterprises

The procedure for selling 100% State owned enterprise, as specified in Article 8 of Decree 109/ 2008/NĐ – CP, covers the following steps:

Step 1: Preparation for enterprise selling including selling notification and preparation of legal dossiers and papers of the enterprise.

Step 2: Elaboration and approval of an enterprise selling plan, including:

- Making inventory, verifying and classifying assets and debts;

- Preparing financial statements and plans on handling of assets, financial issues and debts;

- Working out plans on labor arrangement:

- Planning for enterprise valuation;

- Elaborating selling plans, the minimum selling price and methods, and estimated cost for implementing enterprise selling;

- Approving plans on selling or handling of assets, financial issues, debts and labor.

In case the estimated proceeds from the enterprise selling are not enough to cover selling expenses (in case the purchasers inherit enterprise’s debts) or not enough to cover expenses and debt payment (in case purchasers do not inherit debts), selling will be shifted to other methods such as enterprise assignment, dissolution or bankruptcy.

Step 3: Handling of assets, finance, debts and labor

Step 4: Organization of the enterprise selling.

Step 5: Approval of selling results which cover financial statements of the enterprise at the time of enterprise handover to the purchaser; contract finalization; payment; handover of assets, documents and relevant dossiers to the purchaser; and notification of enterprise selling completion.

Step 6: Business registration for the enterprise after sale.

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3.1.7 Methods of selling 100% state owned enterprises

Current legal provision legalizes two methods of selling 100% State owned enterprises, which are auction and direct sale.

a. Selling via auction:

Selling of 100% State owned enterprises via auction refers to the selection of a purchaser of an enterprise or enterprise division out of two or more purchase registrants who place competitive bids at a public auction (Point 10, Article 3 of Decree 109/2008/NĐ – CP).

Auction methods:

- Auction with inheritance of all remaining labor, which is applicable to cases where only some employees need to be re-arranged in accordance with the labor law and policies toward redundant labor due to reorganization of state.

- Auction without inheritance of labor, which is applicable to cases where all employees have been re-arranged or planned to be re-arranged in accordance with the Labor Law and policies toward redundant labor due to the reorganization of the enterprise.

b. Selling via direct sale

Selling via direct sale refers to the direct negotiation, agreement and conclusion of a contract between the seller and the purchaser of an enterprise or enterprise division. This applies to cases where only one organization or the labor collective in the enterprise or a group of persons or an individual register for the purchase (Point 9 Article 3 Decree 109/2008/NĐ – CP).

The Enterprise Renovation and Development Board and the enterprise director directly negotiate with the purchaser on the selling price and labor employment plan and reach agreement on the terms and conditions of the sale and purchase contract.

3.1.8 Responsibilities of sold enterprises and purchasers

a. Sold enterprises

Upon receiving a notice of its sale, an enterprise has to conduct the following tasks:

Preparing a complete set of legal dossiers and papers, liquidated contracts, certificates of ownership or rights to use its assets and land;

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Making an inventory and determining the number of its or its to-be-sold division's existing assets, assessing the actual state of assets and classifying them into “further used”, “liquidated”, “transferred” or “sold” groups;

Comparing and classifying receivable and payable debts, drawing up a list of creditors and payable debts, and a list of debtors and receivable debts split by recoverable debts and irrecoverable debts, and proposing measures for their handling;

Preparing the financial statement for the most recent quarter; working out a plan on handling of assets, finance and debts by the principles required by the laws;

Elaborating a plan on rearrangement of its existing labor with the following contents:

- A list of all employees at the time of notification of the priority price for enterprise selling, broken down into group of employees who are currently working, remunerated and contribute or do not contribute social insurance and group of employees those who have quit their jobs, and contribute or do not contribute social insurance but are on the enterprise’s list of labor;

- Estimated number of employees to be continued to be employed by the purchaser(s) and shall further employs and employees to be dealt with as redundant labor handled in accordance with the Labor Law or policies for redundant labor due to reorganization of state companies.

Facilitating registered purchasers’ access to and examination of required documents.

Handling assets, finance, debts and labor in accordance with the approved plan and the enterprise sale and purchase contract.

Entering into contracts for hiring of valuation consulting and enterprise auction-holding organizations.

Preparing a financial statement at the time of enterprise handover to the purchaser and handling financial matters arising from the time of enterprise valuation to the time of handover.

Handing over assets, books and relevant dossiers to the purchaser as agreed upon in the enterprise sale and purchase contract.

b. Purchaser(s):

Rights and obligations of purchasers of 100% State owned enterprises are specified in Article 7 of 109/2008/NĐ – CP, which varies by purchase stages. Specifically:

Purchase registrants:

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- may survey the actual state of enterprises they wish to purchase, study dossiers, financial statements, asset lists and certificates of ownership or rights to use assets and land, and contracts related to the enterprises;

- shall be responsible for keeping confidential information collected from the survey of the actual state and examination of documents of enterprises and are not to disclose or use such information to the detriment of enterprises or enterprise divisions.

Enterprise purchasers.

- may change the legal status of enterprises after purchase; continue renting land or receiving land assigned with collection of land use tax under the Land Law;

- shall inherit lawful rights and interests and obligations of state enterprises stated in enterprise sale and purchase contracts and other signed contracts.

- shall pay for enterprise purchase under signed contracts.

3.1.9 Policies toward sold enterprises and their purchasers

a. Policies toward sold enterprises

Sold enterprises, as specified in Article 50 of Decree 109/2007/NĐ – CP, shall:

Be exempt from registration fees for transferring the management and use of assets from the 100% State owned enterprises to purchasers.

Be exempt from the fee issuing business registration certificate upon the transformation from a 100% State capital enterprise into other forms.

Re-sign the contracts on lease of land, buildings and architectural work of State agencies under similar terms as previously applied to pre-equitization enterprise or to have the pre-emptive right to purchase them at the market prices at the time of equitization to ensure stable production and business activities.

Exercise the land use rights as prescribed by the Land Law.

Maintain and develop in-kind welfare fund such as cultural facilities, clubs, health stations, sanatoria and nurseries, to ensure welfare for employees of the JSC. These assets shall be placed under the laborers' collective ownership and the JSC’s management.

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b. Policies toward purchasers

Policies for purchasers who pay for the purchase in lump sums.

- Policies for purchasers who pay for the purchase in lump sums are specified in Article 27 of Decree 109/2008/NĐ – CP: “If enterprise or enterprise division purchasers make lump-sum payment immediately after the purchase, they are entitled to a maximum reduction equal to 5% of the land use right value exclusive selling price but not exceeding the existing owner’s capital amount in the purchased enterprises or enterprise divisions”.

Policies for labor collective purchasing enterprises

- Policies for labor collective purchasing enterprises are stipulated in Article 28 of Decree 109/2008/NĐ – CP: “In case the labor collective in an enterprise win the enterprise selling auction or are the only registered purchaser, they are entitled to a reduction equal to 15% of the land use right value-exclusive selling price but not exceeding the existing owner’s capital amount in the purchased enterprises or enterprise divisions

4. Assignment of SOEs

4.1. Definition of assignment of 100% State capital enterprises

Assignment of 100% State capital enterprises is the ownership transfer without collection of payment of 100% State capital enterprise and independent cost-accounting member company to the ownership of employee collective, which specifies the separate individual’s ownership.

4.2. Conditions for SOEs assignment

a. Enterprises subject to assignment

According to Article 2 of Decree 109/2008/ND-CP, enterprises satisfying the following criteria can be subject to assignment:

Having total record asset value less than 15 billion VND.

Having no land-use right advantage. This is understood as having land-use right of less than 20 square meters and having market transfer price of land-use right or land lease price calculated in a normal condition not exceeding 20% of the price regulated by the PPCs.

Being subject to selling approved by the PM in the general scheme on rearrangement of 100% state capital enterprise but not yet sold.

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b. Assignees of the enterprise

Voluntarily registering to be assigned with the enterprises.

Committing to maintain and develop business, guarantee work for employees for at least 3 years from the assignment, fully pay for social insurance for retained employees in accordance with labor regulations.

Inheriting debts and other enterprise’s properties as specified in Decree 109. Inheriting legal rights and obligations to enterprise employees as indicated in the Labor Law.

Not selling, leasing or liquidating enterprise at least 3 years after the assignment, except when the enterprise is in bankruptcy situation.

4.3. Principles for assignment of 100% state capital enterprises

The assignment of 100% state capital enterprises is based on the following principles:

The assignee may not re-sell enterprise within the time period agreed in assignment contract.

Assigned enterprise assets are to be specified- in value. The value of the assigned enterprise its audited record value.

The completion of the enterprise assignment is to be publicized.

Allowable and necessary costs and expenses for assignment, if not sufficient, may be deducted into State capital or backup fund for enterprise rearrangement. MOF instructs on the types and level of expenses related to enterprise assignment.

4.4. Principles for handling assets, finance, debts and labor of assigned enterprise

The Enterprise Renovation Board will carry out inventory and confirm quantity and assess actual state of assets, long term and short term investments, leasing or leased assets, borrowing or lending, trusted assets, occupied assets, list of debtors and debt receivable broken down into recoverable debts and irrecoverable debts, classify assets and propose measures for their handling.

a. Principles for handling assets

As for assets contributed to cooperation or received assets, leased assets and leased finance, borrowed assets, deposited assets and other assets which are not

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owned by the enterprise, the enterprise assigner, assignee and assets owners will agree on inheritance via new contract signing or liquidation;

As for occupied asset, the enterprise shall notify the owner(s) to return the assets or sign renting/borrowing contract. In case the owner(s) are unidentified, the enterprise will raises State capital equal to actual asset value;

Public welfare assets, including: nursery schools, kindergartens, clinics and other welfare properties formed by reward fund and welfare fund shall be transferred to enterprise assignee for management and use to serve the employees of the enterprise. As for residence of officials and employees, including residence invested by State budget shall be transferred to local land management agencies for managing or selling to current users according to current regulations;

Assets used for production and business invested by enterprise reward fund and welfare fund shall be transferred to enterprise assignee to use for production and business;

Cash balance of reward fund, welfare fund shall be divided to among employees based on their actual working years at the enterprise before the assignment.

b. Principles for handling debts:

Tax obligation and other payment to the State budget, loans to State Commercial Bank and DVB to which the assigned enterprise fails to pay shall be handled under the guidance of MOF;

Social insurance obligation under the responsibility of the enterprise and employees of assigned enterprise shall be transferred to the enterprise assignee and raised from State capital in the enterprise for payment. In case there is no available State fund, payment will be supported from Enterprise Reorganization Supporting Fund in accordance with the guidance of MOF;

The enterprise assignee has responsibility to inherit payable debts after debt handling.

The value of remaining assets, after deducting necessary expenses for enterprise assignment, shall be entirely transferred to the employees of the enterprise.

In case the Director, Deputy Directors and Chief Accountant do not continue to involve with the assigned enterprises assignment, decision-making authority shall study each specific case and handle in accordance with State labor reduction policy.

4.5. Authority for enterprise assignment

Similar to enterprise selling, the decision on enterprises assignment is to be based on the

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overall scheme on 100% state capital enterprise restructure which has been approved by competence authority and aforementioned conditions for enterprises assignment.

According to Decree 109/2008/ND-CP, competent authorities for enterprise assignment are regulated as follows:

The PM authorizes BOD of State cooperation or parent company which was established by PM’s decision to decide the assignment of their independent accounting member companies.

Ministers, heads of ministerial agencies, heads of other government agencies, and chairs of PPC will make assignment decision on enterprises which were established under their decision.

4.6. The process and procedure of transferring enterprises.

Based on the overall scheme on 100% State capital enterprise restructure which was approved by competence authorities, agencies and organizations entitled to decide enterprise assignment shall inform the enterprise and announce in mass media of enterprise assignment implementation.

The executive committee of the enterprise Trade Union in collaboration with and the enterprise director will organize a general employee meeting to vote for voluntary enterprise assignment; develop and approve enterprise assignment plan; oversee the implementation of assignment conditions, including commitment to retaining all employees of enterprises (except for employees who voluntarily terminate labor contract); appoint a representative to implement enterprise assignment procedure. In case the enterprises do not have a Trade Union, the enterprise reform committee shall cooperate with the enterprise director to hold the general meeting of employees.

The enterprise reform committee will classify assets, identify and classify debts, prepare financial report, and estimate cost for enterprise assignment. Based on financial data and result of inventory, classification and handling of assets, finance and debts, the enterprise director and reform committee will prepare a plan for enterprise valuation. In case the cost for enterprise assignment is greater than the remaining State capital in the enterprise, the assignment shall be change into dissolution or bankruptcy.

The executive committee of the Trade Union or the representatives selected through the general meeting of employees shall make an inventory of and categorize enterprise labor and set up related files for employees, and develop plan and committee to accept enterprise assignment.

The representatives of employees will send application for acceptance of enterprise assignment to the NSCERD, which covers:

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Application for acceptance of enterprise assignment;

Business plan;

Plan for using and re-training employees;

Expected type of new enterprise organization;

Commitment of employees in the enterprise.

Competent authority shall approve the application for acceptance of enterprise assignment and make decision on transferring enterprise to employees. This decision will be sent to the agencies related to enterprise finance, tax, business registration, planning and investment, labor - invalids and social affairs, provincial statistics and NSCERD.

Enterprise assignment contract signing will be organized between representatives of employees and representative authorized by ministers, chairs of PPPC and general director of the State owned/parent company. An enterprise assignment contract covering the following main issues shall be announced in the enterprise, via 3 consecutive written or electronic newsletters:

Name and address of the enterprise which have been transferred to employees;

Name and address of the representative of employees;

Value of assigned enterprise, and model of assignment;

Commitment of the enterprise employees;

Rights and responsibility of employees when accepting enterprise assignment.

(Attachment to the contract) The statement of assets with specified value and list of transferred employees.

NSCERD together with the enterprise director will hand over the enterprise according to approved plan to employees represented by president of the Trade Union or representatives selected by the general meeting of employees in the witness of competence authority and enterprise finance agency.

After the handover, representatives of employees shall organize general meeting of shareholders, general meeting of members or general meeting of cooperative members depending on the type of enterprise (JSCs, LLCs or cooperatives). The meeting will discuss and agree on legal status and business registration for the enterprise. Business registration dossier shall include decision of enterprise assignment, hand-over and acceptance contract and hand-over minutes.

Representatives of enterprise will announce on mass media, as required by the laws, about the handover of the enterprise and the change in the legal status of the enterprise within 30 days since the date of business registration issuance.

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4.7. Enterprise ownership after the assignment

The entire remaining value of the enterprise after assignment as specified in Article 22 of this Decree shall be owned by the collective of employees and divided into shares or capital contribution and allocated to each employee participating in the acceptance of the enterprise assignment.

Each employee participating in the acceptance of enterprise assignment is entitled to own a part of remaining value in form of shares or capital contribution based on the number of the years working for the state sector. They shall receive dividends, profits and have rights to pass on but not to transfer the shares or capital contribution within 3 years after the assignment.

5. Organizing selling and assignment of enterprises

5.1. Responsibility of implementation

NSCERD shall assist ministers, chairs of PPC, and BOD of State owned corporation/parent company in organizing the implementation of selling and assignment of enterprises. Depending on characteristics of the enterprises, selling or assignment methods and their financial status, NSCERD will involve the participation of representative of banks, enterprises, employees of the enterprise and other related agencies.

5.2. Approval of selling and assignment plan

Based on the request of NSCERD, ministers, chairs of PPC, BOD of State owned corporation/parent company will make decision for approval of selling plan and price; ad plan of assignment.

5.3. Signing contract of selling and assignment of enterprises

Ministers or representatives authorized by ministers shall sign contract of selling and assignment of enterprise for 100% State capital enterprises for which ministries are State ownership representative.

Chairs of PPCs or representatives authorized by chairs of PPCs shall sign contract of selling and assignment of enterprises for 100% State capital enterprises for PPCs are

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State ownership representative.

General Director of State corporation/ parent company shall sign contract of selling and assignment of enterprise for State corporation/ parent company.

6. Division, split and merging of SOEs

6.1. Division, split and merging of SOEs before 01/07/2005

The division, split, merging and consolidation of SOEs have their legal foundation under provisions of Civil Law about dividing, splitting, merging and consolidating an entity. The division, split and merging of SOE as regulated in Article 73, Law on SOE year 2003 is other enterprise restructuring forms in addition to selling, assignment and dissolution, etc. The merging or consolidation of SOEs is applied by management authorities as a solution to handle loss-making SOEs. A common method is to split and merge poor-performing enterprises to stronger ones. In fact, along with equitization, these are a frequently- used methods for SOE reforming as compared to dissolution, selling or bankruptcy declaration which have posed many adverse financial and legal challenges to management agencies and enterprise managing board.

Box 17: Enterprise split and consolidation of VINASHIN under Decision 926/TTg

Since VINASHIN faced difficulties, the PM issued Decision 926/TTg on restructuring this corporation, which requires transfer a number of VINASHIN enterprises and projects to PVN and VINALINES:

VINASHIN had to transfer to PVN intact enterprises/ projects including Nghi Son Ship-building Industrial Zone (Thanh Hoa), Nhon Trach Factory for Building Special Ships and Manufacturing Ship Equipment (Dong Nai), contributed capital of VINASHIN Corporation to Hoang Anh Shipbuilding Industry Jsc., (Nam Dinh),Dung Quat Shipyard, Soai Rap Shipbuilding Industrial Zone (Tien Giang), Lai Vu Shipbuilding Industrial Zone (Hai Duong) including Lai Vu Shipbuilding Company.

VINASHIN also transferred to VINALINES: Hau Giang Shipyards and Industrial Zone, Nam Cam Shipyards and Port (Ca Mau), Bien Dong Transportation Company, Hai Ha Port and Industrial Zone (Quang Ninh), VINASHIN Dinh Vu Port (Hai Phong), Vien Duong VINASHIN one member LLC and the contributed capital of VINASHIN in other sea transportation enterprises.

Hand over time was from July 01 to the end of quarter 3, 2010.

Point 1 of Article 74 of the Law on SOEs 2003 specifies that: "Conditions for

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restructuring SOEs under the form of division, splitting, merging and consolidation, shall be regulated by the Government." However, until the termination of the Law, the Government had not issued any specific instruction on this procedure. Meanwhile, the merging, consolidation and splitting of SOEs occurred frequently during the period from 2003 to 2010 as the effort to restructure loss-making and distressed SOEs. This has been implemented under administrative decisions of the ministries and sectoral management agencies for enterprises under their management or under the approval of the PM (for Corporations 90-91). The merging and splitting of SOEs can also be executed under the scheme of rearrangement and reform of SOEs of ministries, sectoral management agencies, PPCs or State corporations approved by the PM for the period of 2005-2010 and period of 2010 -2015. In both cases, NSCERD at all levels will be the focal point for reviewing the plan for enterprise division, splitting, merging, and consolidation and submit to competent authorities for approval.

Box 18: Merging under administrative decisions

Due to losses for several years, Salt Corporation under the Ministry of Agriculture and Rural Development (MARD) was unable to pay debt and wages to employees. MARD, its managing agency has requested the PM to approve the merging of Salt Corporation into Northern Food Corporation (Vinafood 1) which was a large-scale enterprise under MARD and was making profits at the time of the merger. On 13/11/2009, the PM issued document No.2248/TTg-DMDN to approve the merger.

6.2. Enterprise division, split and merging under the Law on Enterprises 2005

The replacement of the Law on SOEs by the Law on Enterprises 2005 from 1/7/2010 has resulted in the changes to stipulation on division, split and merging. The Law on Enterprises 2005 provides the following articles related to general enterprise division, split and merging applied to:

Article 150, 151: Stipulations on enterprise division and split

Article 152: Stipulation on enterprise consolidation

Article 153: Stipulation on enterprise merging

Stipulations in the above articles are relatively scattered, reflecting the low level of mergers and acquisitions in Vietnam in general. Consequently, the application of these stipulations will cause challenges to SOEs as the Government has not provided detailed instructions for the execution of these procedures. Particularly, the consolidation and merging of large- scale enterprises may lead to economic concentration that infringes stipulations of the Competition Law.

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Box 19: Merging projects of Vinaphone and Mobifone

VinaPhone and MobiFone are two enterprises providing telecommunication services, making up most of VNPT group’s profits. Instead of equitization, VNPT recently proposed for Government’s approval on the merging of these two enterprises. This merger, however, is facing some legal challenges, including:

Government has not issued detailed instructions on SOE merging procedures in accordance with the Law on Enterprises 2005. Therefore, VNPT is unable to a draft detailed merging plan for Government’s approval.

The merger of VinaPhone and MobiFone may constitute a violation of the Competition Law. Specifically, Article 18 of the Competition Law says economic concentration is prohibited if the market shares of the enterprises participating in the economic concentration make up more than 50% share of the related market. In fact, if VinaPhone and MobiFone merged, their market share would go up to over 50%, thus going against the law.

7. SOE dissolution and bankruptcy

7.1. SOE dissolution

7.1.1 Legal framework for SOE dissolution

After the SOE Law 2003 came into effect, the Government issued Decree No. 180/2004/NĐ-CP on 28/10/2004 on Opening, Re-organizing and Dissolving SOEs. To provide instructions for this Decree, MPI issued Circular No. 04/2005/TT-BKH dated 17/8/2005 on the Procedures for Opening, Re-organizing, Business Registration and dissolution of SOEs. This set up the legal foundation for SOE dissolution.

The issuance of the Law on Enterprises 2005, created a unified legal framework for enterprises of all economic sectors, by stating: “Enterprises founded by the State from the date of effect of this must register, being managed and operate in accordance with this Law and other related laws” (Article 169). It also sets 1/7/2010 as the starting time for SOEs to conduct transformation. Hence, before 1/7/2010, SOE dissolution is implemented in accordance with provisions of Decree No. 180/2004/NĐ-CP and Circular No. 04/2005/TT-BKH and after this time, follows stipulations of the Law on Enterprises 2005.

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7.1.2 SOE dissolution after 1/7/2010

In reality, the application of SOE dissolution stipulations after the termination of the Law on SOEs 2003 is not clear. First, there is a lack of Government’s guidance on SOE dissolution after the termination of the Law on SOEs. Second, there has been no precedent of SOE dissolution in accordance with the Law on Enterprises 2005.

This study describes the procedure and steps of SOE dissolution according to the Law on Enterprises 2005.

a. Enterprise dissolution cases

Business operation duration specified Company Charter ends without any decision on extension;

The dissolution is decided by the LLCs’ board of members and company owners or by JSCs’ general stakeholders;

The company misses the minimum member requirement according to this Law for 6 continuous months;

Certificate of business registration is revoked.

b. Procedure for enterprise dissolution

The dissolution will be executed through the following steps:

Step 1: Approval of enterprise dissolution. The approval decision must include:

Name, address of head office of the enterprise

Reason for dissolution

Procedure and time-limit for contract liquidation and debt clearance, which must not exceed 6 months since the approval of dissolution decision.

Solutions for responsibilities arising from labor contracts;

Full name and signature of enterprise’s legal representative;

Board of members or company owners, BOD will directly be responsible for organizing the liquidation of enterprise assets, except for cases where the company regulations require a separate liquidation organization.

Step 2: Notification to business registration authority.

Within 7 working days since approval date, the decision of dissolution must be sent to authority of business registration, all creditors, all people having related rights,

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responsibilities and benefits and employees and must be posted in public places at the enterprise’s head office and branches.

Cases that the laws require publication on newspapers must have the dissolution decision posted in 3 consecutive publications of at least 1 print or online newspaper.

The decision of dissolution must be sent to creditors with a clearance plan. The plan must include name, address of creditors, time-limit, place and modes of payment and modes and time-limit for creditors’ appeal.

Enterprise’s obligations must be cleared by the following order:

Salary, unemployment allowance, social insurance regulated by law and other employees’ rights according to labor agreement and signed labor contracts.

Tax and other debts.

After the clearance of all debts and dissolution expenses, the remaining asset will belong to owners of private enterprises or members, stakeholders or owners of the company.

Step 3: Revoking of business registration of dissolved enterprises

Within 7 working days since all debts and financial obligations are cleared, the enterprise’s legal representative must send dissolution documents to the relevant business registration authority. Within 7 working days since receiving the valid documents, the business registration authority will delete the name of the enterprise from the business registry.

In case the enterprise’s business registration is revoked, the enterprise must dissolve within 6 months since the date of registration certificate revoking.

Step 4: Dissolution completion

Within 6 months since the dissolution, if the business registration authority does not receive enterprise’s dissolution documents, the enterprise is considered dissolved and business registration authority will delete the name of the enterprise from the business registry. In this case, legal representative, company owners of one-member LLCs, members of BOD of joint-stock companies are jointly responsible for unpaid debts and other asset responsibilities.

Prohibiting activities since the issuance of the dissolution

Since the dissolution decision is issued, the enterprise and its managers are prohibited from:

Concealing and hiding assets;

Renouncing or limiting rights to request payment;

Shifting unguaranteed debts to guaranteed ones by the enterprise’s assets;

Signing new contracts to redo the dissolution of the enterprise;

Mortgaging, pledging, giving, or leasing assets;

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Terminating valid contracts; and

Mobilizing capital in any form.

7.2. Bankruptcy Law 2004 and its application to SOEs

According to the Bankruptcy Law 2004, SOEs can go bankrupt after meeting 2 conditions stated in Article 3:

Being unable to clear due debts,

Receiving creditors’ request to pay due debts.

a. Bankruptcy procedure

To complete a bankruptcy, an enterprise will have to go through the following process:

Step 1. Enterprise bankruptcy initiation

Procedure for enterprise going bankrupt includes:- Submitting application and initiating

bankruptcy procedure;- Rehabilitating business activities;- Liquidating assets and debts- Announcing enterprise bankruptcy.

Step 2. Submission of request for bankruptcy

Creditors for partly guaranteed or unguaranteed debts, representatives of employees or of trade union, stakeholders or group of stakeholders, collective members of collective companies, enterprise owners, and enterprise’s legal representatives in cases permitted by the laws have the right to request the court to open bankruptcy procedure when the company is going bankrupt.

Step 3. Conduct of bankruptcy procedure

District people’s court is authorized to conduct bankruptcy procedure to enterprises registered in that district business registration authority. Provincial people’s court is in charge of other related cases.A judge of district people’s court is responsible for conducting the bankruptcy procedure For provincial people’s court, a judge or a group of 3

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judges are responsible for this procedure.

Step 4. Acceptance of the application and court procedure

Within thirty (30) days after the application is accepted, the court will decide whether to process bankrupt procedure after considering all evidences for the enterprise’s bankruptcy. After issuing decision of initiating bankruptcy procedure, based on specific stipulations of the Bankruptcy Law, the judge will decide to apply either of the two procedures: decision on shifting business recovery to asset liquidation, or announcement of the bankrupt state of the enterprise.Within seven (07) days since decision of bankrupt process is made, the court will send the decision to the enterprise and form a management team to manage and liquidate enterprise’s assets.

Step 5. Asset management and liquidation

A management team, responsible to the judge, is formed to manage and supervise the use of enterprise’s assets after the issuance of bankrupt process decision.

Step 6. Business activities allowed during bankrupt process

During the bankrupt process, all business activities can be conducted normally but must be under supervision of the judge and asset management team.

Step 7. Creditor meeting and business recovery

Creditor meeting is summoned and chaired by the judge to solve issues on asset inventory, approval of business recovery plan, asset liquidation and other related issues.The judge makes the decision on business recovery when 1st creditor meeting approves business recovery plan. Time-limit for implementing this plan is three (03) years.When the enterprise accomplishes business recovery, the judge make a decision on business recover completion and the bankrupt enterprise

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are no longer considered as in bankrupt state.

Step 8. Liquidation In the below cases, the judge will decide to liquidate assets of the enterprise that is requested for bankrupt processes:

- Enterprises conducting business recovery but are unable to recover and clear debts when creditors request payment;- Creditor meeting is unsuccessful as enterprise’s owners or legal representatives do not show up or not all creditors participate;- Creditor meeting approves business recovery solutions but the enterprise is unable to work out an implementation plan or does not follow the approved plan

After clearing guaranteed debts by pledged or mortgaged assets, the liquidation of remained assets will follow judge’s decision by the following order:

- Enterprise’s bankrupt process fees;- Salary, allowances, social insurance of employees;- Unguaranteed debts which must paid for creditors by the list of creditors as regulated by law.

Step 9. Announcement of enterprise bankrupt

After conducting asset distribution, the judge makes the decision to announce enterprise’s bankruptcy and decision on assets liquidation completion.

b. Issues arising from the application of the Bankrupt Law to SOEs

The Bankruptcy Law was approved by National Assembly of Social Republic of Vietnam on 15/6/2004, effected on 15/10/2004 and replaced Enterprise Bankrupt Law 1993. This is the legal basis for the People’s Courts to handle enterprises and co-operatives’ legal legacy. The Bankruptcy Law 2004 is also considered as a solution for SOEs facing difficulties and suffering long-term and unrecoverable

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losses. The application of the Bankruptcy Law is challenging due to following reasons:

Challenge with collection debts from bankrupt enterprises: Collecting debts of enterprises requested to announce bankrupt is very challenging because some in-debt companies may have already dissolved themselves or in-debt individuals do not have clear addresses, particularly when they move to other provinces. Some companies and individuals have address but no longer live there or already leave for business in other areas with new addresses unknown. Some enterprises acknowledge the debts but have no payment plan or keep asking for deferred payment for the reason of being in difficult economic situation. Some companies, who are both debtor and creditor, ask for debt swap, but there has been a lack of instructions for implementation.

Duplicated and inconsistent stipulations on the application of Bankruptcy. Point 3, Article 8 of the Bankruptcy Law states: “Judges are responsible and authorized to supervise and conduct bankruptcy process. During the process, if criminal are suspected, judges will provide materials for People’s Procuracy at same level to consider criminal prosecution and still conduct bankrupt process regulated by this Law”. However, there has not been a stipulation on jurisdiction of the judges in dealing with appeals and applying sanctions related to the implementation of in bankruptcy process decision. Point 21 of Decree No. 67/2006/NÐ-CP on 11/7/2006 by the Government on Duties, Rights and Responsibilities of Team Leader of Asset Management and Liquidation team is applied to enforcement practice to conduct judges’ decisions according to Civil Judgment Execution law. But Point 1, Article 138 of the Civil Judgment Execution Law states: “Heads of civil enforcement agencies do not make decisions on implementation of civil judges’ decisions on bankrupt process, including decisions on application of temporary emergency measures”. Hence, team leaders, as the implementer, are unable to conduct activities out of their legal duties and unable to implement judges’ decisions on bankrupt enterprises and co-operatives.

Difficulties with using assets liquidation to clear debts, especially when production workshops are closely connected with land use right. In reality, enterprises often pledge real estates which are the workshops associating with land use right when borrowing from creditors. However, land use right of enterprises have time-limit and cannot be sold by management and liquidation team at auction. There are cases where the PPC already consider the enterprise bankrupt and revoke its land use right, making it hardly possible for the sale of the associated workshops. Even when possible, the workshops can only be sold at low price of building materials.

According to Article 9 of the Bankruptcy Law and Article 15 of Decree 67/CP, members of the management and liquidation team include one implementer of Judgment Execution Agency at the same level as the team leader, one court’s officer, one representative of creditors, one legal representative of the bankrupt

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enterprise/ co-operative and one representative of trade union (in case of an enterprise). In case the bankrupt enterprises/co-operatives work in banking, financing, or insurance, there must be participation of a representative of a state office in these areas. In fact, members of management and liquidation team are working on several positions, making it difficult for them to focus on this work, particularly when it is not their main task. In addition, many enterprises have their assets throughout the country, making it difficult to manage and liquidate their assets.

According to Article 85, 86 Bankruptcy Law, decision and announcement of asset liquidation of bankrupt enterprises/ co-operatives can only be made by the court when all debts are cleared, assets are liquidated and asset division plan is conducted. But in fact, it is often unable to completely sell assets of bankrupt enterprises and clear all debts as aforesaid. This makes it impossible to make decisions on asset liquidation procedure suspension and bankrupt announcement.

There has been no instruction on the provision of social and health insurance for enterprise members who continue to participate in the management and liquidation team. The directors, accountants and presidents of the trade union of bankrupt enterprises who continue to participate in management and liquidation team do not have their social and health issuances paid as enterprises stop their business and have no budget to cover these contribution.

While waiting for amendments of the Bankruptcy Law on these issues, a possible proposed short-term solution is the issuance of guiding document that allows the court to make the decision on bankrupt announcement even when there remain uncollected debts after the selling of all enterprise’s assets. In the decision, the court can state clearly the remained unrevoked debts. The Judgment Execution Agency will continue to collect debt according to the decision on bankruptcy announcement and divide it among creditors based on the initially decided rate.

For debtors have assets and are able to clear their debts to the enterprise, the Government should provide instruction to collect debts for the enterprise. On the contrary, for debtors who are in really in difficulty and unable to pay debts or have no clear address, there should be an instruction to complete and not lengthen the bankruptcy process as loans are unable to be collected. This may help to remove the duplication and inappropriateness of legal documents and harmonize stipulations of the Bankruptcy Law and Execution of Civil Judgments with regards to enterprises/ co-operatives bankruptcy procedures.

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PART VII. CONCLUSION AND RECOMMENDATIONS

I. Conclusion

Reviewing one year application of the Law on Enterprises 2005 which replaces SOE Law 2003 and five year application of Investment Law 2005 for SOEs, the consultant group has the following comments on the legal framework on SOE organization and operation:

1. Regarding the transformation of SOEs to enterprises working in accordance with the Law on Enterprises 2005

Out of various categories of SOEs’ operation models according to Article 22 of the EL, JSCs in which State or representatives of State own over 50% of the charter capital have operated for a significant period under the Law on Enterprises 2000 and the Law on Enterprises 2005. These SOEs have been transformed into enterprises operating under the Law on Enterprises as soon as the equitization was completed. Enterprises’ organization and management structure such as Company charter, the Board of Management, General Shareholders, Board of Directors, and Board of Supervision were immediately set up after enterprises’ registration. The participation of outside shareholders also “put pressure” on enterprises’ management team that they have to comply with laws at their best in business activities. The consultants realized that JSCs well and effectively abide by the Law on Enterprises, contributing to enhance enterprises’ efficiency and effectiveness. This has also be acknowledged by the public when many companies meet critical requirements of the Stock Law to register as public companies and are able to be listed in the OTC or stock market.

With regards to SOEs operating as one-member LLCs: As of 1/7/2010, all 100%-State-own enterprises are to be transformed to enterprises in compliance with the Law on Enterprises 2005 in the form of one-member LLCs. This puts an end to a long-term transition towards building an organization and management model for SOEs in compliance with international practice with equality among enterprises of all economic sectors. In that context, the issuance of Decree 25/2010/NĐ-CP is timely and necessary to adjust the management and organization of SOEs to the new situation.

A short time after the transition, enterprise management structures under the new model such as Board of members, supervisors, directors and chair of the company have been appointed and put into operation. Most surveyed enterprises highly evaluate the advantages of having more “independence” and “autonomy” when the enterprises operate under the Law on Enterprises.

“Human” element has not really changed. Positions in the Board of Directors, Board of Members and supervisors are still enterprises’ staff or State officers who only

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have experiences in enterprise management following the Law on SOEs. There needs be more time, guidance and training from State management agencies for them to full understand and apply the Law on Enterprises stipulations in enterprise management.

After a lot of adjustment, the current the Law on Enterprises stipulations seems to be adequate and appropriate to guide SOEs operation in compliance with international practice on enterprise management. The survey found that, current problems that need solutions come from owners rather than enterprises.

According to Decree 25, currently there are still many agencies playing the role of “owners” of SOEs comprising both administration agencies and business enterprises such as PM, PPCs, ministries, parent companies in holding–subsidiaries model, State EGs, State capital and asset management companies.

Item 3, Article 6, Decree 25 does not allow specialized management agencies participate in SOEs general management but only in specialized areas. Therefore, enterprise management functions only rest with authorized administration agencies (PM, PPCs, ministries) and delegation to advisory agencies and affiliates is not allowed in terms of making decisions relating to enterprises.

Meanwhile, the current structure of State administration agencies under Government Organization Law and People’s Committee and People’ Council Organization Law does not include departments in charge of SOEs monitoring and management.

The mechanism for appointing part-time members of the Board of Members and Board of Management are not yet complete. SOEs’ owners at ministry and provincial level and even the PM usually appoint State officers to the Board of Members and Board of Management of SOEs beside enterprise management positions by their own agencies conducting rights and responsibilities of owners on behalf of the State. These officers are having a position with the Government and at the same time participate on a part-time basis in the enterprises, thus tending to lack in-depth understanding of enterprises’ internal issues. This appointment method may result in SOEs being an entity independent from the owners, lacking effective and timely monitoring and supervision to prevent violations against the law in SOEs’ business management.

The content of management and supervision of the owners of one-member LLCs owned by the state are listed in Article 31, Decree 25 are relatively clear in terms of business orientations, investment-development plan, finance and accounting and personnel, etc. However, except for the financial - accounting section which has been established through the work of the Enterprise Finance Sub-Department, Enterprise Finance office of Department of Finance and Planning of ministries, these stipulations does not provide detailed guidance on monitoring procedures, reporting forms, monitoring indicators and criteria as well as agencies and individuals who are responsible for monitoring activities.

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2. Regarding Investment Law application

Some issues have been recognized and discovered during the review of stipulations of Investment Law 2005 and the survey on application of stipulations of Investment Law 2005 in SOEs as follow:

Current stipulations of Investment Law 2005 and guiding documents on investment activities by SOEs are few and inadequate to create a legal framework for concerned authorities and owners to supervise, and appraise investment projects.

Decree 108 guiding the Investment Law 2005 provides for the process and procedure on “approval of using state capital for investment”. However, as for the most important SOEs’ capital investment which is “SOEs’ development and investment capital”, Article 59 of Decree 108 regulates that “The Board of Management of EGs, State corporations and other state enterprises or general director, director of state enterprises without Board of Management are to appraise and make decision on investment”. This turns the investment appraisal to an internal process which lacks outside monitoring and supervision from enterprise owners or authorities, reducing the effectiveness of this stipulation.

There has been not good discipline with investment law application among in some surveyed localities and enterprises. Some SOE investment projects were not registered and did apply for certificates of investment though their value and investment sectors require investment registration or appraisal under the Investment Law. Local investment management offices also tend to loosen investment management of SOEs due to the perception that investment registration is needed if other specialized laws (e.g.: Law on Real estate business, Land Law) require project investment certification.

II. Recommendations by the consultants

Recommendations proposed by consultant group are as follows:

1. Improving legal framework for management of SOEs

EL 2005 and Decree 25 have established a legal framework that is consistent with common international business practice on the organization and operation of the LLCs with 100% state-owned capital and JSCs with over 50% of charter capital owned by the state. However, since these enterprises use public fund for business purposes and individuals who involve in the execution of state ownership’s rights and obligations and manage the enterprises from the positions of “employees “rather “owners”, we recommends the supplement of additional provisions to the current legal framework,

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which are different from what is applied to common LLCs or JSCs. Suggestion for those additional regulations include:

To issue specific guidance on monitoring forms and indicators, as well as responsibility for reporting and processing of reports for SOEs’ owner representatives to conduct monitoring and supervision over SOEs as specified in Articles 31, 32 of Decree 25 as for one member LLCs) and provisions of EL 2005 on management and monitoring on JSCs with over 50% capital owned by the state. With regards to holding companies and EGs, scope of information to be monitored and managed by owner representatives should be extended to subsidiary level rather than only covering parents companies’ activities

To complete the regulations on registration and appraisal of investment projects by SOEs toward tightening investment activities of these enterprises and ensuring the investment efficiency. The authority to verify and issue the investment approval document of owners under Article 59 should be adjusted in the way that the agency executing the rights and obligations of the owners must directly involve with the verification and approval.

To issue guiding documents on the implementation of the EL 2005 regarding SOEs and eliminate the situation where the State the Law on Enterprises 2003 has already expired but decrees guiding this law are still applied due to the slow process of drafting new guidelines. Priority should be given to the amendment of two decrees: Decree 132 on implementation of the ownership of SOEs and Decree 109 on the financial management of SOEs and state capital management in other enterprises.

The Government and the National Assembly to consider to either issue a separate Law on State capital management in SOEs, or to include state capital investment in SOEs as an important component of the upcoming Law on Public Investment to ensure effective management of the state capital.

2. Recommendations on capacity building for officers participating in SOEs’ management

The transformation of SOEs into LLCs owned by the state and other forms to operate under the EL 2005 poses new challenges to their management personnel (e.g.: managers, members of Member’s Council and supervisors). A training program to build capacity on corporate management for peoples holding those positions at enterprises in compliance with the Law on Enterprises is needed to ensure the improvement of management efficiency of state enterprises.

The non-specialized and part-time engagement of personnel in the Member’s Council and BOM of SOEs should be limited. For large-scaled companies having an important role in SOE system, full-time and specialized working status should be applied to personnel of the Board of members and BOM in order to improve the

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operational, monitoring and supervision efficiency of these bodies in the enterprise management structure.

3. Recommendations on improving management structure of SOEs

To limit the drawbacks of having too many agencies executing rights and obligations of the owners of enterprises, in addition to SCIC, a system of back-up and advisory units should be designated or established in every office of the PM, ministries and PPCs. Functions of those units include:

Providing advice to the provincial leaders, ministerial leaders and the PM during the process of supervision and management of SOEs under Article 31 of Decree 25 and provisions of the EL 2005.

Supporting these agencies in the implementation of other functions and duties of SOE owners

Besides, the operation mode of SCIC should also be reconsidered in terms of executing investment and management of state investments in SOEs, especially in equitized SOEs. The Government should clearly define and consistently maintain the role of SCIC to manage all capital contribution/share of the State in equitized SOEs, except for the enterprises under the parent company of the EG. This is to deal with ministries, sectorial agencies and localities ‘delay or non-transfer of management rights on shares of equitized SOEs to SCIC. Otherwise, there are so many agencies involve in management of state capital invested in SOEs, that reduces the investment efficiency.

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Documents

Final report on State owned enterprise