Vietnam’s State Capital Investment Corporation (SCIC) is planning to divest its entire capital in 137 state-owned enterprises (SOE) by 2020. Changes in foreign ownership limits, a growing economy, and a strong performing stock market have attracted considerable interest from foreign investors for earlier SOE’s divestments. However, a lack of transparency and the slow progress of divestments are affecting investor sentiment.
For 2017-18, the companies under consideration for divestment are Giang Stone Exploitation & Processing One Member Company, Trang Tien Trading Co. Ltd, Hoang Quan Appraisal Co. Ltd, and the Publishing & Printing company under HCM City’s Publishing Association. However, SCIC will continue investing in SCIC Investment One Member Company Limited, Ha Giang Mineral and Mechanics Joint Stock Company, and FPT Corporation, which are already part of their portfolio. Since its inception in 2006, SCIC has divested in over 900 enterprises. In 2016, SCIC divested from 60 business and in turn achieved an impressive 2.58x return.
Transfer of Ownership Issues
Prior to divesting its stakes in SOEs, the Vietnamese state first transfers ownership of key enterprises from the ministerial or provincial peoples committee level of governance to the SCIC, which then handles the sale of shares to private investors. Over the years, the process of transferring ownership from various ministries and committees has been a slow process. In most cases, ministries hold on to the SOE’s, arguing that the enterprises are necessary for the local economy, while sometimes, ministries only prefer transferring failing enterprises. In few instances, the SCIC has hesitated to acquire ownerships of struggling enterprises. Since 2013, 173 enterprise out of 234 SOEs transferred to the SCIC have failed to complete the transfer due to delays.
For the past few years, foreign investors have shown considerable interest in Vietnamese assets, driven by a growing economy and a surging middle-class. On top of this, the lifting of foreign ownership limits in previously restricted sectors and lack of big-ticket domestic investors have opened up opportunities for foreign investment.
In spite of this, foreign parties have been quick to point to the slow pace of divestments, lack of financial transparency concerning the listed SOEs, and unrealistic SOE valuations as significant dampers on opportunity. As a result of these concerns, strategic investors are increasingly wary of acquiring smaller equity stakes, as it does not offer management control and allows the state to be the controlling stakeholder.
Going forward, SCIC has to offer larger stakes during divestments of its larger and profitable enterprises to attract considerable investment and increase corporate governance transparency.
Changes going forward
Moving ahead, the government needs to speed up the divestment process, increase transparency, and provide higher share for investors to attract foreign investment. Future divestments will provide the country the much-needed capital to address its expanding budget deficit, which has been increasing due to falling oil prices, rising expenditures, and high public debt.
Despite all the challenges and issues, investors ought to look out for big-ticket divestments in sectors driven by the growing domestic demand and rising urban income, such as consumer goods, energy, airlines, and telecom.
This article was first published April 2017.
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