This paper aims at studying and discussing the Vietnamese equitization program. Our analysis
shows that the number of equitizations has been substantial during the last few years.
However, it is only small SOEs that are targeted and no larger ones have so far been
equitized. As a result, the state’s share of the economy remains very high and stable.
Moreover, SOEs are controlled by a host of different ministries, which is likely to provide an
obstacle to efficient management. The equitization process does also include aspects that,
according to the experience in other countries, lead to a less efficient outcome. For instance,
the state remains a controlling share in most equitized firms. Moreover, management and
employees are other important stakeholders in equitized SOEs, and few SOEs are taken over
by strategic investors and by foreign actors.
The main problem with SOEs is perhaps the difficulties for the owners to discipline the
company. SOEs do not face the disciplinary effect of capital markets and the threat of a
hostile takeover. Moreover, the owners often fail to discipline the firm, partly because most
decisions are based on negotiations, objectives are vaguely defined, and profits and efficiency
are typically of considerably less importance in comparison with capitalist systems (Djankov
and Murrell, 2002, p. 742). The SOEs face “soft budget constraints”, meaning that the owner,
the state, bails them out when they are in financial difficulties (Kornai, 1993). The result is an
increased drain on the public budget and increased inefficiency.
However, in a regulated economy dominated by SOEs, mangers typically have weaker
incentives to maximize efficiency and profits, there is no individual owner with strong
incentives to monitor the performance of managers, and it is harder to find good performance
measures. The incentives for efficient management are particularly weak if mangers are
appointed on the basis of political decisions rather than professional capacity, and if salaries
and job security are not related to economic performance. Lacking individual profit-oriented
owners, the objectives of SOEs are often defined by politicians, and may include a multitude
of specific targets ranging from maximization of employment to regional policy objectives. In
these cases, performance is often very difficult to monitor, both because it may be hard to find
appropriate performance measures for all objectives and because the weights of the different
objectives are seldom specified. Monitoring may be difficult even when profit maximization
is the formal objective. With regulation and limited competition, the SOEs are facing input
prices that do not reflect underlying demand and supply. Moreover, they may hold enough
market power to set their own prices. In these conditions, the nominal profit that is generated
is not a good measure of efficiency. For example, a SOE that has a monopoly in its market
may be able to generate a financial profit even if management and physical production
practices are inefficient. With limited competition and lack of a level playing field for SOEs
and their competitors, it is also hard for decision makers to determine what a reasonable
return on business operations is in any specific industry.
Is Private Ownership Always to Prefer?
The economic benefit of private ownership depends on the context. Whereas privatization can
be expected to result in efficiency improvements in most cases, there are others where it
might lead to welfare losses. Economic theory predicts that private ownership is more
efficient than public ownership given a number of assumptions (e.g. Megginson and Netter,
2001, p. 329):
– No externalities in production or consumption
– Not a public good
– No natural monopoly
– Low information costs
How to privatize
Countries differ in how they implement privatizations, often depending on the institutional
and historical context. Brada (1996) presents a taxonomy of privatization methods.
1. Privatization though restitution.
2. Privatization through sale of state property.
3. Mass or voucher privatization.
4. Privatization from below.
Restitution means that the property or firm is given back to the old owners. It often involves
the transfer of agriculture land to former owners but also buildings and real estate. Restitution
has also been used with some success on small shops and restaurants in many transition
economies (Brada, 1996, p.70). There are few cases of restitution of larger companies.
Moreover, restitution depends on how long the asset has been nationalized. It is, for instance,
no coincidence that there has been almost no restitution in Russia where nationalization took
place already in the early 20th century, whereas restitution has been more common in other
East European countries where private ownership dominated until the end of the WWII.
Most privatization takes the form of direct sales of SOEs to individuals or to other companies.
There are many factors that need to be in order before a sale can take place, or which at least
will make such a sale easier to carry through. Important factors include a legal framework
with well-defined property rights and the provision of adequate performance records for the
Another important issue is the choice of sale method: a direct sale of the SOE or privatization
through share issue privatization. The latter method means that the public is offered to buy
shares and it is often conducted for political reasons; as a way of getting public support for
privatization programs. There does not seem to be any evidence of one method being better
than another and the choice between these two alternatives is often determined by institutional
and other country specific characteristics (Megginson and Netter, 2001).
Another issue concerns the pricing of the SOE. It might sound trivial but can be difficult in a
situation where it is hard to evaluate the performance of the SOE. This situation is not
uncommon in transition economies where good accounting standards is lacking and where
privatization is typically accompanied by several other market reforms. The latter aspect
means that the SOE’s performance during the old economic regime – with various market
distortions such as price controls, monopolies, tariffs, and quotas – might be of little guidance
on how this firm will perform in a very different economic environment.
Moreover, the government might choose to privatize the whole company at once or through a
series of partial sales, and it may also favor one sort of buyers over another. The first issue
can depend on how large the privatization program is and if the financial and administrative
capital is sufficient to carry through a large privatization program. An example on the latter aspect is if employees in the SOEs should be given the opportunity to buy shares in the
company and whether there should be restrictions on foreign purchase of SOEs.
Voucher privatization is another type of privatization that has been of importance in Eastern
Europe. It means that citizens can utilize vouchers to bid for shares in assets that are being
privatized. The vouchers are typically distributed free of charge or at a nominal cost. The
main reason for voucher programs has been politically but such programs can, if they work,
bring with them economic benefits in the form of free and efficient markets and good
Germany is perhaps the country that relied most on privatization through the sale of stateowned
enterprises (Brada, 1996, p.71). There are two interesting aspects of the German
privatization program that is worth emphasizing. First, the privatization came at a great cost:
revenues collected amounted to about $50 billion but the costs of the program amounted to
about $249 billion. Hence, revenue collection was clearly not the aim of the privatization of
East German assets but it was rather conducted from ideological and efficiency perspectives.
Second, Germany is special in the sense that a large domestic pool of buyers existed who
were ready to purchase the SOEs. Few countries are in such a fortunate position. Most are
instead facing a constraint on the availability of domestic funds.
The Chinese experience of privatization is perhaps of special interest to Vietnam, considering
the geographic proximity and political similarities between the two countries. The special
construction of the Chinese welfare system makes privatization relatively difficult. In China,
state owned firms, rather than the government, provide various social benefits, like pensions,
which makes them both difficult to sell to private investors and difficult to liquidate because
of the risk of social turmoil….
There are a few lessons that can be drawn from the Chinese experience (see Garnaut et al.
2005, Chapter 1). First, insiders, in particular the old management, control most privatized
companies. However, outside investors have a much stronger positive impact on firm
performance, partly by providing a better check and balance on management discretion.
Outside investors do also tend to reduce the role of traditional stakeholders such as the Party
and the labor union.
Moreover, the stock exchange has been important in transforming Chinese SOEs since the
authorities are using the stock exchange to divest state assets. Around 1,400 large SOEs have
been listed over the last decade and their market capitalization amounts to about 40 percent of
The three problems are
summarized by Megginson and Netter (2001, p.365) who note that:
Only one-third of the stock in China’s publicly listed former SOEs can be owned by
individuals; the remaining two-thirds of a company’s shares must be owned by the
state and by domestic (usually financial) institutions-which are invariably state-owned.
So-called A-shares may be owned and traded only by Chinese citizens, while B-shares
are stocks listed in Shanghai or Shenzen that may be owned and traded only by
foreigners. Other shares are listed in Hong Kong (H-shares) or New York (N-shares),
and these are also restricted to foreigners. The net effect of this fractionalization of
ownership is that, even in publicly listed former SOEs, control is never really
contestable, and the long-term financial performance of “privatized” Chinese
companies has been quite poor.
IV.SOEs and Privatization in Vietnam
A cautious beginning: 1992-2000
A pilot privatization program was initiated in 1992. The interest in reforming SOEs was
caused by their poor performance. Most SOEs operated with obsolete machinery and
equipment, and surveys of the sector indicated that perhaps one-third of the capital stock was
useless (Le Dang Doanh, 1996). Moreover, the financial performance of the SOEs were weak;
most SOEs were running at a loss and only 300 enterprises accounted for 80 percent of the
SOE sector’s contribution to the state budget. Due to their low profitability, many SOEs were
forced to borrow capital from other state enterprises, the banking sector, and other capital
sources, which created a complex maze of cross-subsidization and indebtedness. At the end of
1995, the aggregate debt of the SOE sector was reported to exceed the sector’s aggregate
turnover the same year (Kokko and Sjöholm, 1997).
The poor performance of the SOEs was caused by a host of different factors. For instance,
unclear objectives, poor management, and soft budget constraint all contributed to the
deteriorating situation. The former factor was perhaps the main constraint on improved
efficiency, and the government kept on bailing out SOEs in financial distress and even
encouraged the banks to lend them money without collaterals.
The pilot scheme was extended in 1996, with the issuance of a formal decree on equitization.
The decreed allowed the transformation of non-strategic SOEs into join-stock companies. The
first steps were very cautious and the equitization was initially restricted to a few SOEs: only
18 SOEs were equitized as late as in early 1998 (MPDF, 1998). The slow process was
explained both by a resistance towards equitization among many interest groups and because
of administrative difficulties. For instance, managers were often obstructing or at least
opposed to equitization. A major concern for the SOE managers was the loss of various privileges associated with managing a state enterprise. For individual managers, it was clear
that equitization could be perceived as a serious threat. Since neither the pay nor the job
security of SOE managers was strictly related to economic performance, it is understandable
that some mangers tended to resist changes that made them accountable to new owners with
As an example, in 1994, the government established 18 General Corporations (GC) and 64
Special Corporations, which were large conglomerates incorporating SOEs operating in what
was considered to be various strategic industries or specific geographical areas. Taken
together, these General and Special Corporations absorbed approximately 2,000 of the 6,300
SOEs that existed at the end of 1994. Moreover, they accounted for about half of the SOE
Slowly gaining speed: 2000-present
Although the equitisation process started already in 1992, it took considerable time for it to
take off. Around 2,600 firms were equitized in the first 13 years of the equitisation program.
Out of these, around 2,000 have been equitized in the last five years (2000-05).
The main reason why equitization took off around year 2000 was an increased interest of the
issue within the central authorities. Official sources argue that enough experience from the
first years of equitization had been gathered to provide a solid foundation for continued
liberalization of the Vietnamese economy.
One should not interpret the recent waves of equitization as a sign of a diminishing role of the
state in Vietnam. On the contrary, the state’s role in the Vietnamese economy remains
dominant and is not declining. Table 1 shows the structure of the Vietnamese economy by
ownership. The state’s share is large and has remained stable at around 39 percent over the
period. It is interesting to note that this development stands in sharp contrast to the Chinese
development where the state’s share has fallen significantly during the same time (see
It should also be noted that the figures in Table 1 underestimates the real share of the state
since the Foreign Investment Sector includes a substantial share of joint ventures between
foreign and state actors.1
How can one explain the stable share of the state despite the substantial number of firms that
have been equitized since 2000? One explanation is that many existing SOEs have been doing
very well over the last years. Gainsborough (2002a) describes how state actors have been well
placed to take advantage of the opportunities that emerge after reforms of the economy. The
growth of production in non-equitized SOEs has therefore balanced the shrinking number of
Another explanation can be found in Table 2, which shows the number of firms with different
ownership for two years where such figures are available, 2001 and 2003. The number of
SOEs has decreased from 5,355 in 2001 to 4,845 in 2003. The decrease is caused by both
equitization and liquidization. Around 80 percent of the total decline is accounted for by the
decline in the number of local owned SOEs. Moreover, all decline is found in the small
categories of SOEs. For instance, the number of SOEs with less than 50 employees declined
from 1,063 in 2001 to 799 in 2003. On the other hand, the number of large SOEs increased:
SOEs with above 500 employees increased from 940 in 2001 to 1,042 in 2003. Accordingly,
the number of SOEs with above 5,000 employees increased with 40 percent over the two
As previously said, state interest is also hidden in other firm categories such as foreign joint
ventures and local Stock companies. The latter group with state shares has increased from 470
to 669 enterprises with most of the increases taking place among large entities.2 The
conclusion is that the equitization has primarily targeted small SOEs and that the number of
large SOEs has increased, leaving the state’s share of the economy unchanged.
One likely reason why the government has been slow in equitizing larger SOEs is that they
tend to be profitable and bring home revenues to the government. For instance, Painter (2003,
p.26) claims that about one-quarter of state revenues comes from SOEs, and about two-thirds
of these revenues comes from the 200 largest SOEs.
A closer look at the SOEs
It seems clear from the figures above that SOEs continue to dominate the Vietnamese
economy. It should be stressed that the SOE sector is not homogenous but consists of firms
with very different ownership arrangements. The definition of a SOE is according to the State
Owned Enterprises Law 2003 an economic organization in which the state keeps the whole
charter capital or some shares, or contributes controlling capital, and it is established in the
form of a state company or a joint-stock company or a limited liability company. The core of
SOEs consists of the around 100 General Corporations (sometimes referred to as State
Corporations). More precisely, there are eighty three so called Corporations 90 and eighteen
Corporations 91. These are large organizations, each consisting of many different firms, and
accounts for around 2,000 of the total number of SOEs. They are not, however, any
corporations in a traditional sense since there are no cross ownership arrangement or a
holding company that is controlling the included SOEs. The government has also decided to
approve a pilot project of forming 5 economic groups: Post and Telecommunication, Textile,
Ship Building, Coal and Minerals, and Bao Viet Financial Group.
There have been suggestions that the presence of GC limits the degree of competition in the
Vietnamese economy. This might be the case for GCs were the included firms are
complementing each other rather than competing. There are other GC’s however, were the
degree of competition is higher between included firms, such as in the Sugar Cane Corporation and in the Construction Corporation. There does not seem to be any price
collaboration between firms in these sectors.
There is typically one ministry that has the main
responsibility for the SOE. However, other ministries are involved in various aspects of the
same SOE. For instance, Ministry of Finance is typically responsible for the capital and its
utilization, Ministry of Social Affairs for employment issues, and different line ministries for
the management. The large number of involved actors complicates matter and puts large
requirements on the ability to coordinate and cooperate, and it is said, even among the actors
themselves, to result in large inefficiencies. For instance, Ministry of Finance has typically no
formal control right on management and the business plan, although such factors have
obvious effects on the return to capital, which is the responsibility of the Ministry of Finance.
As seen in Table 2, most equitizations have been of locally controlled SOEs. Up until the late
1990s, the funds from equitization were controlled by the central authorities, bringing little
incentives and willingness to local authorities to equitize firms under their control. However,
in the late 1990s there was a change in control of the equitized funds from central to local
authorities. More precisely, the local people’s committees were controlling the equitization
funds and could use the means in local development projects. However, there were frequent
complaints on how the local authorities were using the funds; local authorities were often
accused of making “inefficient investments”. As of late 2005, the arrangement has changed
once again and the local authorities now need the permission of the central authorities before
the funds can be used. This has reportedly led to large complaints from local authorities and it
seems likely that diminishing local incentives will provide an obstacle for further equitization,
as it did in the early 1990s. Central authority sources claim that the problem is minor because
remaining local SOEs tend to be small in size and often loss making. While this might be true
for local SOEs in rural provinces, it is not necessarily the case for local SOEs in urban areas.
There are also areas in Vietnam with strong local leadership that might oppose central
directives. Indeed, VIE (2000, p.31) find that resistance from local people’s committees is one
of the main obstacles for equitization in Vietnam.5 Taken together, it is likely that the number
of local SOEs will continue to decrease over the next few years but the change might not turn
out to be as smooth as predicted by central authorities.
The equitized firms can be divided in three different categories according to the state’s
remaining degree of control: no control; minority share; and a majority share.
In those enterprises that have been equitized so far, the state holds on average around 46
percent of the equity, workers 29 percent and outside investors around 24 percent.
Around 30 percent of the firms being equitized belongs to the group with no remaining state
equity, were, hence, neither the central nor the local authorities keep any shares in the firm
being equitized. These firms are the ones that are most similar to privatized firms in other
The state remains a majority share of the equity in around 30 percent of the equitized
companies. In the remaining 40 percent the state holds a minority share where the exact share
varies from case to case. The average state share in this latter group is a substantial 40
VI. Concluding Discussion
Equitization has been one of the major policy issues in Vietnam over the last decade. Despite
this interest in equitization, the progress has been modest. The number of firms that have been
equitized in the last few years is truly impressive but these firms tend to be small in size.
There has been basically no equitization of large SOEs. As a result, the share of the state in
the economy has not decreased despite the equitization programs. It was decided by
authorities in 2004 that the policy would change and that larger and more important SOEs are
going to be equitized. This would be a fortunate development but the policy remains to be
A cautious interpretation is that the government proceeds in a typical gradual fashion, starting
with the easier, smaller, SOEs and progressing towards the more difficult and larger ones. The
situation can be compared to, for instance, China where larger SOEs are already privatized
and where the share of the state is declining rapidly. Hence, it seems fair to say that Vietnam
is lagging behind its large and important neighbor in terms of privatization.
Moreover, the equitization process has not meant that the state withdraws from the firms in
question: the state remains ownership in 70 percent of the firms being equitized and in a
disproportional large share of the larger firms being equitized. Hence, the perception of
declining state interests in the overall economy is wrong
The remaining state interest in equitized firms suggests that the equitization process is a way
to attract capital to the firms, or to ease pressure on the public budget, or for political-business
interest groups to get access to various resources (e.g. Gainsborough, 2002a, Painter, 2005),
but the equitization process has not addressed the important efficiency issue. In other words,
privatization is often leading to large efficiency gains, but it requires that the state gives up
the control to new private owners.
Economic theory suggests a few guidelines on how to enhance the efficiency in the economy.
More precisely, concentrated ownership, a well functioning stock market, and a proper legal
system, improves upon the discipline of managers and thereby on the performance of firms,
private- as well as state-owned. Some of these aspects are discussed in other chapters in this
volume. It is here sufficient to say that the legal system is relatively weak in Vietnam with
little ability for firm owners to use it for control purposes.
Moreover, and as discussed in this paper, the development of the stock market has been a
disappointment and the ownership of Vietnamese firms is therefore not contestable. Finally,
the equitization program is typically leading to a relatively diffused ownership, since shares
are allocated to many actors and with an upper limit the share of the firm one single investor
Experience from other countries provides other suggestions on how Vietnam might design its
policy towards SOEs and equitization. For instance, the Swedish experience of centralizing
management of SOEs to one ministry has been positive and stands in stark contrast to the
Vietnamese situation. In Vietnam, ownership is non-transparent and includes a host of
different state actors. The situation makes an efficient state management difficult to pursue
and is providing an opportunity for various state-business groups to take over the real control
of the SOE.
Moreover, experience from other transition economies confirm that diffused ownership might
be a problem and do also suggest that one should avoid selling SOEs to management and
employees but instead try to attract strategic investors. Djankov and Murrell (2002, p. 741)
claim that privatization to outsiders is associated with 50 percent more restructuring and
improvements than privatization to insiders. It is particularly beneficial if one can convince
foreign investors to take over SOEs, since they bring with them superior technology and
access to foreign markets. These are aspects worth considering in Vietnam where hardly any
SOEs have been sold to foreign investors