14. Conclusions and recommendations
The Government of Viet Nam has made progress in recent years to improve its frameworks for the ownership and corporate governance of its state-owned enterprises (SOEs). This chapter puts forward policy recommendations to help the Vietnamese authorities address remaining challenges and further professionalise the state ownership function.
The Government of Viet Nam has made progress in recent years to improve its frameworks for ownership and corporate governance of SOEs. In particular, it established CMSC – a ministry-level entity – in 2018, with a view to enhancing efficiency, facilitating equitisation and separating ownership of the country’s largest 19 SOEs and state corporate groups from the state’s regulatory function. It has enacted a new Enterprise Law, subsequent Decrees and circulars to guide the streamlining of the SOE sector. The government has developed and implemented a form of regular aggregate reporting for the information of the Prime Minister and cabinet members. Furthermore, the number of SOEs has been reduced from 12 000 in 1990s to around 2 100 today thanks to the government’s extensive divestment and equitisation programmes. In terms of next steps, the government recently announced its plan to revise the Law No. 69/2014/QH13 69 on Management and Utilisation of State Capital to make it more aligned with the OECD SOE Guidelines as well as a five-year roadmap to adopt IFRS.
However, important challenges remain. Viet Nam has yet to develop a concrete and unified ownership policy. The legal and institutional framework for state ownership builds on a number of documents specifying policy priorities in the area of state ownership and management. To varying degrees, these normative documents have delineated the rights and responsibilities of state ownership across government representatives including Prime Minister, sectoral ministries representing the owner, and the BoM/Chair/representative of state capital at SOEs.
The powers of the new state ownership entity CMSC place it, in OECD vernacular, somewhere in between being a state ownership agency or a state co-ordination agency. It has a co-ordination power over SOEs in its portfolio, but a number of important decisions can be taken only in concert with other government bodies. Also, it does not have a comprehensive data collection and reporting mechanism which allows for having a comprehensive view over key financial and non-financial data of companies in its portfolio. Moreover, due to the CMSC’s relatively limited resourcing and lack of in-depth sectoral knowledge across its portfolio of SOEs, line ministries in practice continue to play an important role in the control of the companies that are in the portfolio of the CMSC. In some cases, the CMSC may even be seen by SOEs as adding just another bureaucratic, including when they are involved in equitisation or large investment projects.
For this and other reasons, state ownership and market regulatory functions are in practice still exercised in concert in many cases. In addition to the institutional placement of oversight roles, a second complication arises from regulations on the management and use of state capital vested with SOEs. These are often so closely aligned with the government’s public policy objectives that they allow only a limited distinction between production and business activities of SOEs and the state’s exercise of political powers.
On the issue of competitive neutrality, no formal statutory discrimination between SOEs and private firms is detected. However, the proximity of SOEs to policy makers, continued conflation of the exercise of ownership rights, the government’s explicit use of SOEs as a main vehicle for the implementation of the State’s industrial or sectoral policies, policy formulation and regulatory responsibilities within the same government ministries/agencies have led to a perception of discrimination and discrepancy while distorting the playing field.
The degree of disclosure and quality of information (both financial and non-financial) vary depending on the responsible line ministry or controlling stakeholder, with many SOE websites appearing non-compliant. SOEs’ compliance with the requirements to populate the new publicly-available “Business Information Portal” on a six-month and annual basis should provide greater transparency on the finances of all SOEs, but its success will require greater monitoring of compliance than is provided currently.
The state ownership representative body is mandated to issue decisions on assigning annual production/business plans to SOEs, which include expected return on equity (ROE). However, this is done on an ad-hoc basis in practice. There is no legal regulatory framework in place to ensure market consistent costs of equity financing from the state and capital injections from the state are subject to a minimum expected rate-of-return on equity. These same deficiencies apply with regard to equity investments made by SOEs.
While the government submits the aggregate report to the Prime Minister and the cabinet member, the state does not have in place a dedicated website which publishes the information contained therein and on individual SOEs. The state suggests that by preparing the report and disclosing it in period meetings and conferences that they are making publicly available information about SOE’s financial and non-financial performance.
More remains to be done to assure a strong, autonomous role for SOE boards of directors. The top management is often closely linked to the national executive powers, and in some cases important corporate decisions are made directly by the government bypassing the corporate decision chain. At a minimum, the state approves the appointment of CEOs in all SOEs – including JSCs or directly appoints the CEO in the case of company groups (by the Prime Minister directly).
The existing mix of in-company state and Party control procedures with business practices aspiring to meet international standards creates substantial challenges to effective internal control of SOEs – particularly but not only in those 100% owned by the state. The roles and responsibilities for internal control are formally and informally dispersed between the SOE Board of Members/Directors, the Board of Controllers, the Party Organisation or Committee sitting in the company, the “Internal Control Board” reporting to the Board and the internal audit function which reports in turn to the Internal Control Board. In practice it appears that one of the most effective corporate ‘checks and balances’ is the Party Committee, which may be providing disincentive for the true adoption of international practices in internal audit and corruption-risk management.
Finally, and perhaps most importantly, a key concern remains the implementation of existent rules. Viet Nam has put in place legal, regulatory and institutional structures that in principle compare favourably with many other countries, including OECD members, but the problem is that formal procedures are often not adhered to. The existence of power structures based on personal connections as well as Party affiliation in practice mean that high-level ministerial and SOE officials may feel at liberty to act autonomously with impunity. As this feature of the political landscape is unlikely to go away in the foreseeable future, the strongest options for ensuring a better governance of SOEs involve a further strengthening and professionalisation of the ownership function and a higher degree of disclosure and transparency around corporate and ministerial actions.
Professionalising state ownership function
Professionalise CMSC. Vietnamese authorities should empower and resource the new state ownership entity CMSC so that it can perform its function as a professional and independent body. To mitigate concerns that the CMSC is de facto acting at par with traditional line ministries for its portfolio SOEs, adding another bureaucratic layer to the operation of SOEs, CMSC’s management and staff should be recruited through an open and competitive recruitment procedure. It can be staffed with professionals who have an extensive knowledge on business management and/or state ownership function. Government should also allocate necessary financial and human resources to the Commission to effectively undertake its various functions as the owner’s representative agency with regard to overseeing performance of its portfolio of SOEs. CMSC can also considerably benefit from having a comprehensive data collection and reporting mechanism that will enable the entity to have a comprehensive view over financial and non-financial performance of SOEs.
Further centralise the state ownership function. Despite the establishment of the CMSC which oversees portfolio of up to 200 individual SOEs that account for two-thirds of the state-owned equity, there is still a room for the government to further centralise its current ownership arrangements – in which 14 ministries and agencies oversee the rest of the country’s central SOE portfolio consisting of 1 909 companies. CMSC or SCIC can broaden their portfolio to include all central SOEs which can enable a larger degree of separation of ownership and regulatory functions. This can inter alia facilitate exercising state ownership rights on a whole of government basis.
Corporate governance arrangements of SOEs should further evolve so that respective roles of the ownership entity, SOE boards of directors and executive management are clarified and clearly delineated. The owner’s representative agencies including the CMSC should act as an informed and active owner, ensuring that the governance of SOEs is carried out in a transparent and accountable manner. They should allow SOEs in their portfolio full operational autonomy to achieve their defined objectives and refrain from intervening in SOE management. In particular, they should enable SOE boards to exercise their responsibilities and should respect their independence. The exercise of ownership rights should be clearly identified within the state administration.
Ensuring a level playing field with private companies
Establish an encompassing policy framework for ensuring competitive neutrality. When SOEs access debt financing from the marketplace, Vietnamese authorities could consider put in place mechanisms to ensure market consistency of financing terms or to neutralise preferential financing. This should include ensuring that state-owned financial institutions charge SOEs market-based interest rates on loans. It could also adopt accounting separation between commercial and non-commercial activities of SOEs and align rate-of-return requirements with those achieved by competing private enterprises. The government is also recommended to include information on debt obligations and contingent liabilities of SOEs and financial assistance including guarantees, grants, subsidised loans and equity in each SOE’s individual audit as well as in the aggregate report on SOEs.
Empower competition authority. Competition Authority should be empowered by the government to effectively undertake enforcement actions against anti-competitive behaviours of SOEs. These powers should concern not only traditional powers to curb abuse of market powers and collusive behaviour; they should extend to overseeing “competitive neutrality” between SOEs and private companies in like circumstances.
Enhancing transparency and disclosure
Develop and implement a comprehensive and unified disclosure policy for SOEs. To enhance clarity over supervision and accountability in corporate governance of SOEs, enforcement of SOE disclosure is paramount. Vietnamese SOEs, and those involved in exercise of state ownership, would benefit from developing a unified disclosure policy that aggregates and elaborates on disclosure requirements in one place, outlining all relevant roles and responsibilities of relevant institutions across the administration with regards to monitoring and overseeing SOE disclosure and performance. Additionally, new requirements concerning the role of audit committees in SOEs, clarifications regarding the role of the state in selecting audit firms could be considered.
Improve the quality of aggregate report for SOEs. The state should make its aggregate report to the Prime Minister and the cabinet member available on a dedicated website for public access. The coverage of the report should be extended to fully or majority-owned at the central level of government. It should include information of individual SOEs’ implementation or non-implementation of applicable rules.
Adhering to international practice in internal control and risk management
Improve internal control and risk management in SOEs. The state should ensure that SOEs adopt integrated internal control and risk management systems. This would involve streamlining the roles and responsibilities of different state and corporate bodies involved in the control of an SOE, and introducing a system for risk management, for which roles within the company are also clearly delineated.
Provide greater protection for the autonomy of internal audit. The state should provide more guidance to SOEs on mechanisms to protect the independence of internal audit units, including at minimum ensuring that they report administratively to executive management and functionally to the Board and, particularly, to independent board members whenever possible. Confidential reporting channels should be offered to representatives of SOEs and employees including internal auditors to report concerns about irregular activities within the company to a body external to the SOE (for instance, the State Audit Office or Government Inspectorate; and provide education around this option).
Improving board independence and autonomy
Ensure professional boards. Board composition framework should ensure that SOE boards are able to exercise independent and apolitical judgement in the interest of the enterprise and its shareholders. This entails establishing clear rules for the inclusion of state representatives, other individuals charged with pursuing the public interest, and independent directors. It is recommended to solicit greater involvement of independent directors. Qualification criteria for board members could relate to candidates’ professional experience and skills. Board composition can be further balanced by limitations on the number of board appointments/directorships and/or affirmative action targeting gender and minority groups. Requiring disclosure of information on the identity and the number of boards candidates on all websites of major SOEs, and/or requiring disclosure of AGM voting percentage results can enhance transparency around board practices.
Establish clear rules and procedure for the competitive nomination and appointment of boards. Competence-based board nomination rules applicable to both wholly owned and majority-owned SOEs should be established. The ownership function could manage a “directors’ pool” of candidates pre-selected according to a formal evaluation and can serve as a kind of clearing house for applications to SOE boards. The recruiting methods could include public advertisement of recruitment and/or head-hunter agencies. The Ministry of Home Affairs, which is in charge of regulating board nomination and composition process, could develop and implement performance indicators on board nomination and composition for evaluation of state representative agencies including CMSC, to incentivise them to mobilise more external experts into boards and executive management of SOEs. Compliance to performance indicators by state representatives can be supervised by a state function on a whole-of-government basis.