Vietnam’s Equitization Plans: Opportunities and Challenges for Investors

On June 29, the Prime Minister issued Decision No. 908/QD-TTg, approving a new list of state-owned enterprises (SOEs) that should be equitized by the end of 2020. The list comprises of 124 SOEs, includes four enterprises with divestment deadlines of November 30, 2020.

Decision overview

Among 124 SOEs listed, 96 enterprises are set to carry out complete equitization (state ownership is zero after divestment) by the end of 2020. Notably, there are four enterprises under the Ministry of Construction that are required to complete their divestment before November 30, 2020, namely Song Hong Corp, the Hanoi Construction Corporation – JSC, the Construction Corporation No.1 – JSC, and the Vietnam Urban and Industrial Zone Development Investment Corporation.

In case the divestment process is not completed by the deadline, then the four SOEs will be transferred to the State Capital Investment Corporation (SCIC) before December 31, 2020. The SCIC is a state-owned holding company formed as part of a range of reforms by the Vietnamese government.

Besides, the decision also named 14 other enterprises to be transferred to the SCIC before August 31, 2020. Notable companies include Vietnam Industrial Construction Corporation, and Saigon Beer, Alcohol and Beverage Corporation (Sabeco).

Appendix III of the Decision lists 69 other SOEs that will have their divestment on hold until the end of this year for further review and restructure. These SOEs will be added to the SOE equitization plan of 2021-2025. They include 54 enterprises in the water supply sector with others under the Ministry of Defense, Ministry of Public Security, the People’s Committee of Ho Chi Minh City.

Enterprises not listed in the decision will be carried under plans approved by the respective authorities.

Major divestments in 2020

Major divestments planned for the second half of 2020 include a 29 percent divestment in Vietnam Pharmaceutical Corporation – JSC (Vinapharm), 46.88 percent in Vietnam Machinery Installation Corporation – JSC (LILAMA), and 97.93 percent in Hanel Co Ltd.

Another 18 enterprises that require specific divestment plans include Vietnam National Petroleum Corporation (Petrolimex), Vietnam Airlines, Vietnam Waterway Construction Corporation (Vinawaco), Vietnam Engine and Agricultural Machinery Corporation (VEAM), Viglacera Corporation.

Under this decision, ministers and chairpersons of provincial people’s committees and council members of the SOEs will be responsible for designing equitization plans. The progress will be reported to the Ministry of Planning and Investment (MPI), the Ministry of Finance (MoF) and the Steering Committee for Enterprise Innovation and Development before submission to the Prime Minister.

Opportunities for foreign investors

The state divestment process is faced with a number of challenges but could be an exciting opportunity for foreign investors, especially as large banks and corporations are also on the list of government divestment plans.

For example, as large agriculture and forestry corporations are beginning their divestment projects, investors may consider investing in these sectors considering Vietnam’s comparative advantage in this industry in terms of market scale and growth, low labor cost, and stable political environment.

Besides the agriculture and water sectors, investors may also be interested in large, profitable SOEs in the tourism sector.  The new list includes three leading travel businesses that own a range of luxury hotels, namely Saigontourist, Ben Thanh Group, and Hanoitourist.

Most of these businesses hold impressive property portfolios, with iconic hotels such as the Continental, Rex, and Majestic, as well as modern properties like the Caravelle Saigon. Investing in these enterprises may not only mean tapping in Vietnam’s profitable hospitality industry but also tapping into the real estate market of Vietnam.

Regulations facilitating the sale of SOEs

The government is working to strengthen the supervision and accountability of state firms as well as monitoring representatives at certain state corporations to create a healthy investment environment for foreign investors.
To facilitate the sale of SOEs, especially to foreign investors, the Ministry of Finance came up with some new supportive rules in the first half of 2019. Circular No.21/2019/TT-BTC provides a framework for book building, which is the process in which an underwriter attempts to determine the price at which an initial public offering will be offered.

This helps enterprises determine market interest and purchase power prior to a transaction. This is particularly helpful when it comes to major auctions that involve foreign investors as it essentially raises the efficiency and effectiveness of the first public sales of the enterprises.

Another Circular – No.03/2019/TT-NHNN –was passed in May, allowing overseas investors to make deposits in foreign currencies when they sign up for SOE auctions. This applies to both first-time sales of SOEs and state ­divestments, with transactions allowed to be carried out at all approved banks.

Factors behind slow equitization

The new decision excludes some entities that were formerly scheduled to be equitized under Decision 58 by 2020. Some of these SOEs include:

• The Vietnam Bank for Agriculture and Rural Development (Agribank); and

• Vietnam National Coal-Mineral Industries Holding Corporation Limited (Vinacomin).

The equitization of the excluded SOEs may take place at a later stage, allowing firms to be better prepared for the equitization process. Some of these firms may need more time to tackle internal issues to allow the equitization to take place while others face difficulties in administrative procedures such as acquiring land use approvals. 

More broadly, privatizing SOEs is considered the main driver behind the restructuring of Vietnam’s economy. The goal of these divestment plans is to reallocate resources, and create a fair business environment while enhancing the competitiveness and improving the domestic power.

However, delays in the divestment processes not only generate state budget loss but have also hampered the business efficiency of enterprises. The slow divestment process also limits the investors’ incentives: by the time some projects are approved, the price of assets has already changed due to market conditions, making it difficult for investors to go ahead with their investment plans.

Another major obstacle to the equitization process is the issue related to land use rights. Land use rights are a decisive factor that makes SOEs valuable to investors. However, conflicts and overlap among legal documents on land use right certificates have added to further delays.

SOEs are required to acquire provincial confirmation of their land use before equitization plans proceed, however, this at times can take months, often exceeding the regulated time period for the equitization process.

For example, Agribank and Vinacomin face common obstacles in getting their real estate assets approved by the MoF due to their large size. To speed up equitization, the government may remove the requirement on evaluating the firm’s annual land lease fee so that conflicts and overlap between legal documents can be avoided.

The government’s anti-corruption campaign has also delayed the process with several divestments projects between 2011 and 2016 under investigation.

Subsequently, since the beginning of 2020, state privatization moved at a slow pace due to the COVID-19 pandemic.

Government addresses slow divestment

The government understands the challenges it has to deal with for more successful divestment projects to take place.

Vietnam has also committed to creating a level playing field for all businesses under its free trade agreements. In particular, Vietnam has committed to cut state ownership under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the newly-ratified European Union – Vietnam Free Trade Agreement (EVFTA).

In addition, government leaders realize that divestment is needed to fund infrastructure projects which require capital. Such projects are critical to Vietnam’s economic growth and accelerating the divestment process will be key to funding such projects.

Note: This article was first published in October 2019 and has been updated to include the latest developments.
This article was first published by Vietnam Briefing, which is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in in China, Hong Kong, Vietnam, Singapore, India, and Russia. Readers may write to info@dezshira.com for more support.