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THE STATE CAPITAL INVESTMENT CORPORATION:
how will it achieve its mandate?
The reform of State-Owned Enterprises (SOEs) has been a top priority
in Vietnam's socio-economic development agenda over the last two
decades. Much of the recent SOE reform effort has focused on
disentanglement of regulatory and ownership functions of state
agencies. The key objective of these efforts is to make SOEs
accountable for their own profits and losses through reorganization,
corporatization and limited ownership diversification, including
equitization. Despite all these efforts, the state sector in Vietnam
remains relatively inefficient and less competitive than the private
sector. The major governance issue the dual role of the State as
owner and regulator has not yet been satisfactorily resolved.
The establishment of the State Capital Investment Corporation (SCIC)
is the most recent initiative of the Government of Vietnam to reform
the state sector. According to its charter, SCIC is responsible for
exercising the state's ownership function in all equitized and
transformed enterprises and further divesting from assets
transferred to its portfolio.1 Most observers agree that
the creation of the SCIC is a step in the right direction as it
helps separate the ownership and regulatory functions of state
agencies, thus reducing the scope for political interference in
business operations while enhancing the process of privatization.
SCIC is a newly established entity, and, to date, Vietnam does not
have the experience of running such a specialized and complex
corporation. The key question that will need to be resolved is how
the SCIC will achieve the mandate set for it. This bulletin
discusses a number of issues and challenges that SCIC is likely to
encounter and presents suggestions on how they might be addressed.
Managing
a large diversified portfolio with controlling stakes
By acting as the owner of
equitized SOEs on behalf of the Government, the SCIC is expected to
help ease the current owner-regulator conflicts and increase
transparency with regard to the state's use of resources. According
to plan, more than 3,000 equitized and transformed SOEs are to be
transferred to SCIC over the next three years.2 A
difficulty facing the SCIC will be to manage a portfolio of
"controlling stakes" in a large number of companies from many
different industries. As a controlling stakeholder, SCIC does not
have an option to be a silent investor because doing so would create
a vacuum of governance for its investee companies. The management of
those companies would be left unaccountable for their performance,
defeating the original purpose of creating the SCIC to better manage
State assets. To achieve its purpose, SCIC would need to actively
participate in the governance of investee companies and restructure
them to enhance the value. But doing so for thousands of companies
in many sectors at same time is practically impossible. Therefore,
it is highly recommended that the SCIC set a specific target for
numbers of either non-strategic or well-performing SOEs to be let
go, and develop clear criteria for the classification of enterprises
in its portfolio for that purpose.
An additional challenge
arising out of the diverse portfolio, if it consists of banks and
non-banks, may lie in the temptation to influence portfolio banks
lend to high-risk non-bank companies. If SCIC is mandated to manage
both bank and non-bank assets, there is the need to establish an
effective “Chinese wall” between the units managing these assets to
ensure that conflicts of interest do not arise.
Potential
conflicting objectives and priorities
With a chartered capital
base of about VND 5 trillion (US$315 million), SCIC has the
authorization to make direct and indirect investments, which could
include investment in “risky projects” or “projects in unprofitable
branches which need the State preferential policies or financial
support” (approval by the Prime Minister is required), according to
the current charter.3 This raises two issues of concern
among some experts. The first concern is that due to SCIC's
investment activities, there may be an increase in the state sector
rather than the decreased state engagement. The second concern
relates to potentially conflicting commercial or social objectives,
and how SCIC may manage these.
SCIC should, at least in
its initial years of operation, focus on the management of the
existing portfolio, e.g., improve corporate governance practices and
shareholder value in its member enterprises, and further divest
non-strategic enterprises. Towards this end, SCIC should set out
clear objectives and criteria for investments so that their new
investment activities, if any, initially be used to enhance the
existing assets and facilitate the participation of, rather than
crowd out, the private sector. In the medium-term, SCIC, could
consider partially investing social sectors such as health and
education, which initially may be unprofitable and need some state
support in early stages.
Unclear
corporate governance and reporting
According to its current
charter, the SCIC is a special type of SOE, reporting directly to
the Prime Minister and is supervised by the Ministry of Finance (MOF).
The Managing Board is appointed by the Prime Minister, who has the
authority to decide on all aspects of the SCIC, including its
objectives, strategy, and orientation, as well as some of its
investments. The MOF, other ministries and provincial authorities
can also “perform state management” over SCIC. This may potentially
create a confusing corporate governance structure and allow for
significant interference in SCIC's operations.
With SCIC being
responsible for most of the state capital, there is a particular
need for it to be accountable to the National Assembly and the
public its ultimate shareholders. This means that SCIC should follow
a clear disclosure and reporting system to ensure its transparency
and accountability, at least equivalent to the level of transparency
required of publicly-owned companies.
Developing a capable workforce
The SCIC is pursuing a
very ambitious agenda. It aims to become: (i) a dynamic shareholder
able to fully exercise the ownership role and actively engage in the
corporate governance of its portfolio companies; (ii) a strategic
investor; (iii) a professional financial consultant; and (iv) a
corporation that is run in accordance with international corporate
governance standards. In order to achieve this vision, SCIC will
need, besides financial resources, strong human capacity. To operate
commercially, SCIC will need to develop a pool of investment
professionals with extensive experience in investment portfolio
management. Attracting and retaining talent from the private sector
will require SCIC to implement modern and commercial human resource
policies, including competitive compensation and benefit packages,
which can be very challenging for a state organization.
Most of former planned
economies which have gone through the transition to a market economy
have faced similar challenges in commercializing their large numbers
of SOEs. There are many lessons of both successful and failed
attempts from around the world that Vietnam can learn from. The SCIC
charter and strategies should be revised to reflect these lessons,
adhere to sound corporate governances practice with high
transparency and accountability and be compliant with international
best practice so that state capital be managed in the most effective
and efficient way.
(1) This is a role that has previously
been exercised by line ministries, provincial governments, and other
state or quasi-state entities.
(2) This figure does not include state-owned commercial banks,
economic groups, general corporations (90, 91). It is envisaged that
these entities, once equitized - will also be transferred to SCIC.
(3) SCIC can enter into joint ventures, and mobilize funds to expand
investments. It is also allowed to mobilize domestic and foreign
capital sources through capital borrowing, issuing corporate bonds
or project bonds, and/or setting up of investment trust funds. |
