New SOE Equitisation Push

New State Enterprise "Equitisation" Push

by Michael Karadjis

June 2005

http://www.aseanfocus.com/asiananalysis/article.cfm?articleID=854

Last December, the Vietnamese government passed Decree 187 on 'equitisation' of State Owned Enterprises (SOEs). To date, the 2000 SOEs equitised have been only the smallest, accounting for 7 per cent of SOE capital. This is in line with Party policy of shedding smaller SOEs in areas which the State did not consider strategic, such as the local ice cream parlour.

However, the new regulations call for equitisation of the majority of subsidiary companies of major state corporations, in the areas key to state economic ownership - heavy machinery, electricity, telecommunications, aviation, oil, steel, coal, cement, fertiliser, paper and the like. As the theory goes, since the parent corporation remains state-owned, it can continue to control the overall direction of these sectors. While this is debatable, it is also less than unanimous - one report suggested that 'when these (equitised) subsidiaries have proven to be business efficient, the Government (should) then equitise the parent companies.' (Vietnam News, 23 Mar. 2005)

Such an eventuality would not only herald a breakthrough in the most major of all 'reforms' demanded of Vietnam by international lenders, but would also abolish the most fundamental pillar of the ruling party's claim to a 'socialist orientation' - a state sector dominant in key areas.
Whether it happens in any hurry is another question. If the process has been considered slow with small enterprises, the stakes are much bigger with key firms, and resistance from workers, some managers, sections of the party and various state bodies will be greater. With the threat of large-scale redundancies, it is hardly surprising that the World Bank reports that one reason for the slow pace is resistance by SOE workers, as it 'is difficult to implement without the consent of the enterprise director and a majority of the workforce.' (Vietnam: Delivering on its Promises, 2002)

For all the catastrophist talk from international agencies that a major crisis is around the corner unless Vietnam follows through with ever more 'reforms', the country's pragmatic mixed economy approach, since leaving behind the 'everything state-owned' doctrine, has resulted in a mixture of economic growth and poverty reduction - both of record levels - with social indicators typical of a middle income country; the disaster forever waits in the wings. Yet it is now expected to follow an 'everything privatised' doctrine, the purpose of which is questionable.
Last year, when world oil prices shot through the roof, sending coal, cement, fertiliser and electricity prices skyward, the State prevented its oil, coal, cement, fertiliser and electricity SOE's from raising prices, thus wearing the cost themselves and lowering their profits, to keep down the cost of products which flow throughout the economy (VDC, 21 May 2004). When an oil price rise was eventually allowed in the face of relentless international rises, it was still so far below the 'market' prices in neighbouring countries that there has been a serious smuggling problem.

Some years ago, international wisdom advocated a removal of protection for cement and fertiliser SOEs as the import price was lower. At the time, this would have crippled them. Yet today the prices of locally produced cement and fertiliser are lower than import prices, as a result of doggedly pursuing such relatively unprofitable production. Vietnamese cement prices are now the lowest in the region.

To stabilise the local market, since it still relies partly on expensive imports and private distributors, the government told cement SOEs earlier this year to keep prices down while expanding distribution in remote regions and taking a cut in profits (Vietnam Business Forum, 7 Jan. 2005) - a message that could hardly be delivered to a private company. Such examples should be kept in mind when discussing the 'unprofitable' state sector.

Meanwhile, in the State's highly successful Hunger Eradication and Poverty Reduction Program, the 17 major state corporations are assigned provinces where they have to assist the poorest districts, thus being treated as arms of state social policy.

Private firms are creating more employment than SOEs, but this is more related to the types of areas they dominate. SOEs dominate in heavy industry; the employment argument amounts to advocating the demolition of heavy industry, not SOEs, which in areas such as the garment industry also create jobs. The state sector's employment share has actually grown slightly since 1995, from 8.7 to 10.4 per cent, whereas that of the domestic private sector declined from 90.9 to 88.3 per cent in 2003. Foreign firms employ a smallish 1.3 per cent of the workforce. (P. Taylor (ed.), Social Inequality in Vietnam and the Challenges to Reform, 2004, p.79)
Moreover, nearly all those working in the 'private' sector are employed by the traditional small, technically backward, household sector. While the numbers employed by real private business have risen, they remain small, and to the extent that these firms invest in technology and improve 'efficiency', they cease being the best job creators. Some years ago it was widely believed that if the state industrial sector collapsed, there would be more than enough private firms in 'dynamic' light export industries to absorb the laid off workers.

Yet this illusion that the only thing restricting unlimited expansion were petty restrictions on business ignored precisely & the market! Garment exports to the US exploded after the signing of the Bilateral Trade Agreement - until the US imposed quotas; and in the first two months of 2005, with the end of world garment quotas, Chinese garment exports have shot up by 30 per cent (65 per cent to the US), while those of Vietnam only crept up 1.4 per cent - stagnant on the US market and falling 10 per cent in the EU (Viet Nam News, 22 Mar. 2005). Also, US protectionist measures against Vietnamese shrimp exports have driven the price of black shrimp to an all-time low, threatening massive bankruptcy (Thoi Bao Kinh Te, 13 May 2005).
Surveys show that most equitised firms have not shed workers and some may have even increased employment. What all this means is anybody's guess, given that the problem of mass redundancy is always cited as a key problem slowing equitisation: the World Bank speaks of hundreds of thousands of redundancies.

One possible meaning is that the only firms equitised so far have been small, non-key firms in good shape that thus did not need to shed labour; whereas the equitisation of those small firms in bad shape, whose profitable revival requires lay-offs, have been held up by worker resistance. That's without even touching the large firms - the idea that new private owners of 'inefficient' steel, coal, cement and fertiliser plants would launch into employment creation is questionable to say the least.

The other possible meaning is that making firms profitable requires shedding workers who have traditionally enjoyed decent conditions and replacing them with new workers willing to work faster for less. Yet as Chu Hoang Anh from MoLISA explains, 'if an enterprise wants to make big changes, they have to convince workers to change or nullify their labour contracts. This is not easily accepted by employees.' (Vietnam Investment Review, 9-15 Sept. 2002).

WATCHPOINT: Will the new SOE equitisation regulation become reality without provoking social upheaval?

Michael Karadjis
Department of Political and Social Change
Research School of Pacific and Asian Studies
Australian National University, Canberra