Which model will replace line ministry of state-owned enterprises?

Wednesday, 2016-08-31 16:12:14
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NDO - In September the Ministry of Planning and Investment (MPI) will submit a proposal to the government concerning the formation of an agency responsible for managing and overseeing state capital and assets in enterprises.

The motion is expected to separate the ministry’s regulatory role from the state ownership role at state-owned enterprises (SOEs).

Commission or line ministry?

For now the MPI is still proposing a government agency. Under the draft that the MPI has announced to collect feedback and seek counselling, the agency is to be named Commission for Managing and Overseeing State Capital and Assets in Enterprises. This commission will be a special government agency to help the government administer and supervise state capital and assets in enterprises, implement the Party and State’s policies on restructuring SOEs and enhancing their performance, focusing state resources in enterprises on strategic sectors to drive their growth and the economy as a whole.

Specifically, this agency will offer advice to the government and the prime minister on policies on state ownership, restructuring, divestment, SOE reform as well as investment, management and use of state capital in enterprises. The commission is also responsible for the effectiveness of using state assets and capital in enterprises before the government and the prime minister. To ensure these functions, the commission will be given rights and duties in accordance with the law on management and use of state capital in enterprises, which are similar to those assigned to ministries responsible for being representative owners of state capital.

However, the agreement has yet to be reached on the feasibility of this model as well as whether it can be truly independent from the regulatory function. It is even worried that a “super ministry” will be formed to replace line ministries when all SOEs and state capital in enterprises currently managed by these ministries will be transferred to this commission.

Although under the draft proposal, the commission has not taken charge of local public utilities and enterprises belonging to the Ministry of Public Security and Ministry of Defence, total state assets in enterprises where the government holds a 50% stake or higher add up to VND5.4 quadrillion (US$240 billion). The worry about a super ministry is not groundless.

While studying this model, some World Bank experts have raised questions about what is expected to be a significant reform to deal with dispersed rights to exercise corporate management at SOEs. How can the state ownership role and regulatory role be separated when other state management agencies can still intervene if no changes to relevant legal documents are made? Is maximising state assets this agency’s goal? If this is the case, the state can invest in non-core businesses where the private sector is doing well.

Experts are concerned that this agency could become a cumbersome and bureaucratic apparatus, intervening into the daily operation of enterprises. China’s State-owned Assets Supervision and Administration Commission is now entrapped in this downside. As such, a mechanism is needed so that this agency can recruit corporate management professionals, hire external consultants to exercise its state ownership role. An investment fund may be the answer to these concerns because the fund will operate in accordance with market principles, completely separate from the state regulatory function. However, the failure of the State Capital and Investment Corporation to meet expectations also makes the idea of an investment fund less appealing.

Some experts hold the view that the same legal framework must be applied to both the state and private sectors in accordance with international practices, which means employment of international accounting standards, independent auditing by world-renowned auditors and making SOEs transparent like listed companies. Only when state assets and capital come under public scrutiny can their management be effective. With the model of a capital management agency, accountability is the key.

Super ministry not a possibility

MPI Deputy Minister Dang Huy Dong said the misunderstanding that all functions of ministries would be transferred to a single agency or commission resulted in concerns over a super ministry. He emphasised that there was no way that such a super ministry would be formed.

Under this model, the relationship between an SOE with its former line ministry, which is responsible for formulating policies in its area of business, will be the same as the one between a private enterprise and that ministry. A state-owned mining company, for example, will be subject to the management of the Ministry of Industry and Trade (MOIT) and will face similar sanctions as a private one if it is found to be in violation of the law instead of being spared punishment because it belongs to the MOIT as currently doubted. This change will create a fair business environment in Vietnam. Moreover, SOEs would only have to report their operation to a single agency instead of sending many reports to various ministries representing the state ownership, Deputy Minister Dong added.

It should be noted that the agency under the MPI’s draft is not charged with issuing legal documents and other administrative management roles, which means the regulatory role will be separated from the commission’s function. Head of the Enterprise Reform and Development Committee of the Central Institute of Economic Management Pham Duc Trung said this was the reason why the commission’s legal status has been defined as a government agency instead of a ministry. There is clearly no dispute over the establishment of a specialised agency to represent state capital in enterprises, but which model will work best is a hard choice.

"I still think that people are the most important factor. Whether the agency is a commission or follows the SCIC model, if we cannot recruit talented people experienced in corporate management, it will still be an administrative agency. Its name is not as important as its operation mechanism. Can we pay the salary by market principles, hold the managers accountable and fire them if the enterprises they run incur losses?"

Dr Can Van Luc, Economic expert

"Because this agency will take charge of all state-owned capital in enterprises, we suggest the Commission for Managing and Overseeing State Capital and Assets in Enterprises have the function of investing and managing all portfolios of state assets and capital in enterprises to maximise their value. Of course this model will fully exercise all state ownership rights under its jurisdiction, excluding rights of the government and the prime minister under the law on the management and use of state capital in enterprises and relevant laws."

Pham Duc Trung, CIEM