Learn how the World Bank Group is helping countries with COVID-19 (coronavirus). Find Out


A level playing field: Reforming the stated-owned sector

January 12, 2012

The theme of this VDR is market economy for a middle-income Vietnam. The report focuses on weak institutions, distorted incentives and inadequate information - labled as the three "I's" of the market economy - as the explanation for Vietnam's current tribulations.

January 13, 2012 - A reading of the various resolutions of the Party Congress and the Party Central Committee suggests that its leaders did not necessarily see a contradiction between the existence of a large state economic sector and a market-oriented economy. But in recent years, as the country appears to have veered toward a model of state capitalism in which the SEGs have enjoyed privileged access to factor inputs and a high level of operational autonomy, more questions have been raised about their usefulness. As a result, the National Assembly in one of its resolutions indicated that restructuring the SOEs will be a top priority of the government in the next Socio-Economic Development Plan, spanning 2011 to 2015.

Vietnam’s state sector has become smaller but is still relatively large and inefficient

The importance of the state sector in the economy has steadily declined as the domestic private and foreign sectors have rapidly grown over the last two decades. Between 2000 and 2009, there was a sevenfold increase in the number of nonstate enterprises and over a fourfold increase in foreign enterprises, while the number of SOEs declined by 40 percent during the same period.

The decline in the importance of SOEs can also be seen through their steadily diminishing share in factor inputs. In 2000, SOEs accounted for nearly 68 percent of capital, 55 percent of fixed assets (such as land), 45 percent of bank credit, and 59 percent of the jobs in the enterprise sector (see figure 2.2).

SOEs use several times more capital to produce one unit of output than the industry average. In 2000, the average ratio of turnover to capital (a proxy for the productivity of capital) in SOEs was 1.6 compared to 8.8 for the enterprise sector as a whole. This implies that an average SOE required nearly nine units of capital to produce one unit of output (turnover) compared to the industry average. By 2009 the average ratio of turnover to capital for the SOEs fell to 1.1 while it increased to 21.0 for the industry (see figure 2.10).SOEs are also less efficient in their use of fixed assets such as land and machinery. Along with being operationally less efficient, SOEs are also found to be financially less prudent.

Ten reasons for reforming the SOEs:

  • SOEs are less efficient than nonstate and foreign firms;
  • Equitization has been good for SOEs;
  • Industrial policy can be carried out without the presence of a large SOE sector;
  • SOEs have become too big to fail and too big to save;
  • The role of the state in the economy has been changing and an inefficient and weak SOE sector gives bad name to the state;
  • A large SOE sector is the source of an uneven playing field;
  • SOEs have been slow to embrace modern corporate governance and transparency.
  • The corporate framework for SOEs remain weak and incomplete;
  • There is lack of vision and clarity regarding the role of SOEs in development;
  • The SOE reforms can be leveraged to develop a healthier private sector.

Remedies: The DREAM framework

Since state ownership is not just an economic issue but also a political choice, major restructuring of SOEs is unlikely without strong political support. Any restructuring plan should be firmly based on a clear consensus on the role of the state in the economy and the desirable institutional arrangement to achieve that goal. It would have to involve a number of measures including what we call a “DREAM” framework— Disclose, Regulate, Equitize, Account(able), and Monitor—a description of which follows.

  • Disclose. A new information disclosure policy that requires SOEs, starting with the SEGs, to report their financial stakes in all their subsidiaries and affiliated members and to timely and accurately disclose their annual reports, audit reports, and earning statements through print and electronic media or the internet.
  • Regulate. A modern corporate governance system that separates state ownership rights from regulatory functions and implements an objective and transparent mechanism for the selection of Chief Executive Officers (CEOs) and board members. There is also a need to put an end to SOEs’ privilege access to factor inputs and to value land at market price for all government and corporate transactions.
  • Equitize. There is no more certain way to improve the internal functioning of SOEs than to subject them to the discipline of the market and oversight of the government. This would require accelerating the equitization of SOEs, including selling up to 49 percent of charter capital of the SEG parent company.
  • Accountable. Holding the SOEs accountable for their actions, including a reward for greater transparency and timely reporting of data and information and a penalty for noncompliance.
  • Monitor. Overhauling the monitoring system with a provision for mandatory, independent annual audits and timely submission of financial data to the relevant ministries and agencies.