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SOE VALUATION
An Ongoing Challenge for Equitization
Although Vietnam's state-owned enterprise (SOE) reform program began
almost a decade ago, only in the last few years–as the country moves
towards WTO accession–has the pace of reform really picked up. The
Vietnamese government recently outlined bolder policy measures for
SOE reform; however, the program still lags behind schedule.1
A major and ongoing reason for the delay has been the challenge that
SOE managers and government officials alike face in valuing the
assets of SOEs earmarked for 'equitization'–a Vietnamese government
term for partial privatization, through which investors may purchase
shares of these companies from the State. This Bulletin explores the
issue of SOE valuation (including the legal framework, its practical
implementation, and international practice), in a bid to provide
some suggestions for accelerating the SOE reform process.
Limitations of existing valuation mechanisms and methods
Under current regulations,
two valuation mechanisms are allowed: 1) by valuation committee, or
2) by an independent valuation consultant.2 Valuation
committees are made up of various management authorities, including
the Department of Finance, the Department of Science and Technology,
the local People's Committee, etc. Consequently, the opinions of the
valuation committee members can sometimes be influenced by their
agency's concerns and priorities. As a result, these valuations do
not necessarily reflect the "real" value of an SOE. Furthermore,
conflicts of interest between the SOE management board and
government authorities can lead to delays in completing the
valuation exercise. Although independent valuation consultants tend
to be more efficient in this regard, they also face difficulties
when valuing intangible assets such as trademarks, brand reputation,
etc. Also, most local independent valuation consultants lack the
requisite expertise and experience to value the larger and more
sophisticated SOEs.
While several standard
valuation methods exist, only two valuation methods are currently
allowed in Vietnam: 1) Net Tangible Assets and 2) Discounted Cash
Flow.3 A fixed set of formulae are stipulated for these
two valuation methods, which some observers have suggested can
hinder the application of more appropriate methods.
Debate on
whether to include Land Use Rights (LUR) in valuing SOEs
For quite a large number
of SOEs, the market value of their LUR is a very significant part of
their total assets. Indeed, sometimes the LUR exceeds the value of
all other assets. Therefore, if an SOE is valued without
consideration of the LUR value, its total valuation can be too low.
Consequently, the government has set out a policy to include the LUR
in the asset valuation of SOEs preparing to equitize. However, the
actual enactment of this policy is not so easy, as there is a lack
of detailed guidelines and implementing regulations, as well as a
lack of professional valuers.
The managers of SOEs
earmarked for equitization are sometimes opposed to the policy of
including the value of the LUR in the asset valuation. This is
because it tends to push up the total value of the SOE–and thus the
price of its shares–putting them at a disadvantage in attracting
investors when compared with private companies that lease land, as
private companies are not required to include the LUR value when
calculating the price of their company shares and thus tend to have
lower share prices.
Difficulties in valuing intangible assets
Well-performing and large
SOEs that are earmarked for full or partial equitization in the near
future include: Vinamilk, Bao Minh Insurance, and Vietcombank. All
these SOEs have well-known trademarks and brand names, and as a
consequence, their intangible assets could be valued as highly as
their tangible assets. Although the Ministry of Finance has provided
regulations and formulae for valuing SOEs' intangible assets (based
on the net book assets and average profit ratio), some valuation
experts and SOE managers argue that using these formulae alone are
not enough. This issue is particularly pertinent for service sector
SOEs, such as banks, finance, insurance, and consulting companies.
Some people have argued that the best way to value these types of
companies is through a public auction of their shares. But SOEs have
expressed concern that a public auction may just attract numerous
individual investors, rather than strategic institutional investors
that could bring in valuable managerial and business expertise. The
debate on how best to value intangible assets remains ongoing.
Valuing
an SOE's capital contribution in a joint venture
Many SOEs have made
capital contributions to joint venture (JV) projects with foreign
partners, and now face difficulties in appropriately valuing this
capital contribution. In many such cases, the SOEs' contribution to
the JV was the LUR, and some SOEs now concede that the LUR was
valued too high at the time of establishing the JV.
A second issue is that
many JVs in Vietnam are still in the early years of operation, and
are still incurring losses. As a consequence, the current value of
an SOE's capital contribution, when calculated by the current book
value, can be much lower than the initial value. Consequently, the
financial authorities will often not accept the valuation of an SOE
at current book value, because it may be too low. But, thus far,
they are unable to provide a suitable solution.
For these reasons,
numerous SOEs that have capital contributions in JVs have not been
able to equitize.
Other
regulations that can cause problems for SOE valuation
Numerous SOEs claim that
the current regulations on non-recoverable debts are too rigid. For
example, bad debts can only be written off if an SOE can prove that
the debtor has either died or been formally declared bankrupt. As a
result, at the time of valuation, SOEs are obliged to include what
are effectively non-recoverable receivables as assets.
Simultaneously, their own debts to state-owned commercial banks
cannot be written off. Such problems, which can cause the value of
some SOEs to be inflated, make it difficult for them to attract
investors.
As a consequence of
current regulations, which prevent employees of SOEs from selling
their shares for three years after the date of equitization, many
SOEs are effectively equitized 'internally,' with very few shares
available to outside investors. As a result, only about 10% of
shares in equitized SOEs have been sold to outside investors to
date.4
(1) The total number of reformed SOEs
(including those that have been either equitized, completely sold
off, leased out, liquidated and declared bankrupt) during 2002-2003
was 1,766. Of those, 905 were equitized, which represents 80% of the
State's planned number. See 'Report by the National Steering
Committee on SOE Renovation' presented at the National Workshop on
SOE Reform, 15-16 March 2004.
(2) See Decree 64/CP dated 19 June 2002, and related guiding
circulars.
(3) See Circular 79/2002/TT-BTC, issued by the Ministry of Finance.
(4) Report by the Ministry of Finance, presented at the National
Workshop on SOE Reform, 15-16 March 2004 |
