When Sebeco, Vietnam’s second largest brewing company, sold over half of its shares to a foreign investor in late 2017, it seemed as though the ruling Communist Party’s long-thwarted drive to shed state-owned enterprises (SOEs) was finally moving ahead.

At the time, the US$4.8 billion transaction was widely cheered by investors, bankers and analysts who had called for wholesale privatization to increase efficiencies, trim state losses and redirect the country’s scarce bank capital towards more profitable economic uses.

But that market optimism has turned to pessimism a year later as privatization stalls again. Of the $7 billion raised by state enterprise share sales in the last three years, most was generated in 2017. The Ministry of Finance recently reported that 12 SOEs were sold last year, raising $1.29 billion, when it had previously planned to privatize 64 state firms.

In late 2016, the government said it would reduce the number of SOEs from 583 to 103 by 2020. At the end of 2018, however, there were still more than 500, though this is considerably less than the 12,000 maintained in 1996, a decade after the Party tentatively launched its so-called Doi Moi market reform drive.

Last month, Prime Minister Nguyen Xuan Phuc promised “stronger commitments to restructuring public investment and state-owned enterprises” in 2019 but there are no indications yet that he government is considering big new SOE sales any time soon.

Vietnam has a long history dating back to the 1990s of promising mass privatization but delivering very little. Miguel Chanco, senior Asia economist at Pantheon Macroeconomics, a research consultancy, says that it “won’t be the first time” that the government misses its “equitization” target, as privatization is known in Vietnam.

A Vietnamese factory worker. Photo by iStock.
A Vietnamese factory worker. Photo by iStock.

Bureaucratic hurdles contribute to the chronic lag. Vietnam’s SOEs are part or wholly-owned by many different government ministries, making it difficult to implement a unified approach to privatization. Moreover, many of these state firms have effectively grown into sprawling conglomerates, making it difficult to dissect them on a business sector basis. Some own state land that must be returned before privatization.

Years of mismanagement and endemic corruption means that the books of many SOEs are in shambolic order, analysts say. That’ makes asset valuation an arduous, risky business, with many investors concerned that what they see is not necessarily what they would get through privatization.

VTV Cable, one of Vietnam’s largest state-owned television companies, was forced to suspend its initial public offering (IPO) last year when only one bidder registered interest in its shares. Many others SOEs have asked authorities to delay their IPOs over similar concerns of poor market response.

A bigger problem is the government’s tendency of selling off only minority stakes while the state keeps majority control. For its most profitable SOEs, such as Vietnam Electricity, a utility, and PetroVietnam, an energy firm, there are no plans to sell even minority stakes.

Some commentators reckon that by selling only limited stakes in SOEs, the government aims to give the appearance to investors that it is committed to privatization while still maintaining strong state control over the economy. The government has maintained that it won’t divest state firms in strategic sectors, including in defense and energy.

The mismatch in government and investor perceptions has been glaringly apparent in recent issues. When the Vietnam National Shipping Lines (Vinalines), a major maritime logistics supplier, launched its IPO last September, state officials expected to raise at least $200 million. In the end it only raised 1% of that amount.

Stacks of the Vietnamese currency, the dong, are counted out by a bank employee in a file photo. Photo: AFP/Hoang Dinh Nam
Stacks of the Vietnamese currency, the dong, are counted out by a bank employee in a file photo. Photo: AFP/Hoang Dinh Nam

Timing has also been an issue. The government missed an opportunity by not offloading more SOE shares when the Vietnamese stock market peaked in early 2018, says Chanco. The Vietnam Stock Index rose by almost 19% in the first three months of 2018, one of the fastest upticks in the world at the time, before falling by nearly the same percentage by year’s end, ostensibly due to fears of ripple effects from the US-China trade war.

Still, the government has maintained its rhetorical commitment to privatization. In February 2018, it created a new Committee for State Capital Management at Enterprises with the proviso of selling off at least $220 billion worth of SOE assets in the coming years. The committee, the government hopes, will streamline collaboration among the ministries and also act as an inspectorate on wayward SOE executives.

Last October, it also withdraw a law that previously restricted foreign companies to a maximum 49% stake in Vietnamese companies. The lack of majority control was a deterrent for many investors who were loath to work alongside state ministries or local subsidiaries, which often came with headaches over how to divvy up collateral, capital and shares.

Yet it doesn’t take much these days to interest investors in Vietnam. Actual foreign direct investment (FDI) surged by 9% last year, buoyed by rising productivity, better infrastructure and continually high economic growth rates, according to the Foreign Investment Agency, a department of the Ministry of Planning and Investment.

Annual GDP is projected to continue growing at around 6.5% over the next few years, one of the highest rates in Asia. At the same time, Hanoi is keen to boost trade relations with an ever greater number of nations and is now actively pursuing various new free trade deals.

The Comprehensive and Progressive Trans Pacific Partnership (CPTPP), an 11-member trade bloc which came into effect for Vietnam last month, imposes new international rules on its SOE, subjecting them to unfair competition restrictions, greater transparency requirements and reduced tariff protection. A free trade deal with the European Union, expected to be ratified later this year, will also restrict many of the advantages that now protect Vietnam’s SOEs from foreign competition.

All of this means the Vietnamese government must soon treat its state-owned firms the same as privately owned businesses, a significant problem considering that many SOEs have been hemorrhaging money for years and only stay afloat through preferential government treatment. Analysts say it no longer makes financial or economic sense for the communist government to continue to bail them out.

Newly re-elected Vietnam Communist Party (VCP) Secretary General Nguyen Phu Trong speaks as a press conference after the closing ceremony on the final day of the 12th National Congress of Vietnam's Communist Party in Hanoi on January 28, 2016. Vietnam's top communist leader Nguyen Phu Trong was re-elected on January 27 in a victory for the party's old guard which some fear could slow crucial economic reforms in the fast-growing country. AFP PHOTO / POOL / LUONG THAI LINH / AFP PHOTO / POOL / Luong Thai Linh
Vietnam Communist Party Secretary General Nguyen Phu Trong at the party’s 12th National Congress, January 28, 2016. Photo: AFP/Luong Thai Linh

In 2017, 1.2 million people were employed by SOEs, which altogether accounted for roughly 30% of the nation’s GDP. That percentage has been declining for years, and is expected to dwindle further as the private sector proliferates.

SOEs have played an important political role in Vietnam for decades, not least because they were the first firms developed after the Communist Party reunified the country in revolutionary fashion in 1975. Private businesses were not allowed to operate as late as 1986 and didn’t start to proliferate until the late 1990s.

But even as the private sector bloomed, SOEs were still prioritized by the Communist Party, with provincial communist bosses often giving lucrative executive SOE positions to cronies expecting payback in kind. Senior politicians would play eminence grise by choosing which state firms would receive investment, buying up the loyalty of executives in the process.

Some senior Party officials even got to the top by rising through the ranks of SOEs, not the party machine. Former Prime Minister Nguyen Tan Dung was thought to have wielded so much power because of his close ties to SOE executives, on whom he lavished patronage jobs and often allowed to get away with widespread corruption, critics say.

But Dung’s bid to become Party chief at the 2016 Party Congress was frustrated by the incumbent General Secretary Nguyen Phu Trong, who has since launched a massive corruption crackdown on state firms that has brought down senior executives and party officials, including a Politburo member. Mismanagement and corruption at PetroVietnam, the state-owned oil and gas giant, is estimated to have racked up hundreds of millions of dollars in losses and debts.

Restricting the power and autonomy of SOEs thus makes some political sense for Trong, as he bids to cut both corruption and independent thinking from the party ranks. But politicized purges and foreign-led privatization are separate paths to modernizing and rationalizing Vietnam’s many hidebound state firms – and Trong is now more clearly prioritizing the former over the latter.