Vietnam’s Equitisation and Divestment: Opportunities and Challenges for Investors
- Vietnam’s divestment and equitisation plans have opened several opportunities for investors while allowing additional funding options for the government.
- To incentivize FDI in the SOEs, the government has been making several regulation changes, creating exciting opportunities for foreign investors.
- While the process has been slow, the government continues to chip away and issue new decisions to further accelerate the divestment process.
For years, Vietnam has aimed to reduce its direct ownership in key state companies and promote private ownership. Nevertheless, equitisation and divestment have not yet taken place as scheduled and have experienced constant delays.
According to the Ministry of Finance (MoF), from 2016 to 2020, 180 state-owned enterprises (SOEs) were equitised. However, this included only 39 out of 128 enterprises on the list approved by the Prime Minister, meeting only 30 percent of the target. In 2021, three SOEs were equitised, but none were on the list approved by the Prime Minister.
Regarding the initial sale of shares, the total selling value was VND22.7 trillion (US$987 million), or 23 percent of the plan. For 2016-2020, the MoF said VND177.4 trillion was collected through divestment, about 6.5 times the book value.
Last year, only three SOEs completed the privatization process, citing the difficult economic environment due to the prolonged pandemic. It was estimated that 18 SOEs divested state capital worth VND4.4 trillion (US$192.4 million) for a combined book value of VND1.66 trillion (US$72.6 million) during the period.
Among the remaining SOEs that are required for privatization, those in Hanoi and Ho Chi Minh City make up 54 percent of the total, including 13 in the capital and 38 in the country’s southern hub. The others include six supervised by the Committee for State Capital Management (CSCM), four under the Ministry of Industry and Trade (MoIT), and two under the Ministry of Construction (MoC).
Most recently on March 18, the Prime Minister signed a decision to deepen the restructuring of SOEs in 2021-2025 as well as target the completion of restructuring SOEs by 2025.
Decision No 360/QĐ-TTg aims to improve the operational efficiency and competitiveness of SOEs on the basis of technology, innovation, and management capacity. The move will facilitate more effective mobilization, allocation, and use of social resources while developing state capital and assets at enterprises.
By 2025, Vietnam expects to complete the restructuring process of SOEs, for which a minimum of US$10.84 billion in proceeds will be used.
Opportunities for foreign investors
The state divestment process is faced with several 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 into Vietnam’s profitable hospitality industry but also tapping into the real estate market in Vietnam.
Particularly now as Vietnam gradually opens up and international flights resume, there may be even further opportunities for business and investment in tourism and hospitality. It is advised that investors take advantage of the privatization of the national brand names to get involved in the industry at this stage.
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 MoF came up with 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 before a transaction. This is particularly helpful when it comes to major auctions involving foreign investors as it raises the efficiency and effectiveness of the first public sales of the enterprises.
Another Circular – No.03/2019/TT-NHNN –was passed in May 2019, 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.
Many SOEs have announced their auction schedule for capital divestment plans, but many of them have been struggling to attract investors.
For example, in 2018, GENCO 3 was the first company of Vietnam’s state-owned electric utility EVN to be converted to a joint-stock company and listed on the Ho Chi Minh City stock exchange. But the company’s IPO that year was not a success as it only managed to draw in US$8 million compared to a total offering of US$290 million.
In 2021, although the stock market grew and investment demand was greater than supply as the pandemic eased, the divestment of State capital was behind expectations. EVNGENCO 2 (Power Generation Corporation 2), for example, was only able to sell less than 1 percent of shares in the initial public offering session in early 2021.
More recently 122 million shares of Lien Viet Post Commercial Joint Stock Bank (LPB) were brought to auction by the Vietnam Post with a starting price of up to US$1.27, which is nearly 15 percent higher than LPB’s market price. Only 800 shares were registered for purchase by a few individual investors.
Another auction of 35 million shares of Binh Duong Trade and Development JSC (TDC) with a starting price of US$1.22 per share was also a slump in terms of sales as only 50,000 shares were sold to four individual investors.
On auction day, TDC’s market price was 10 percent lower than the starting price of the auction, not to mention the lengthy procedure for shares transfer.
Other auctions of companies with the capital portion of the State Capital Investment Corporation (SCIC) have been even canceled due to not having any investors participate.
The major investment hurdles faced by foreign investors include the inability to acquire a controlling stake and delays in the transfer of ownership.
In addition, the lack of transparency in the divestment process, unreasonable evaluation of enterprises, poor management, existing company liabilities, and incompetent staff were highlighted as the other factors affecting investors’ sentiments.
Factors behind slow equitisation
The first factor that causes delay would be internal issues. Some firms may need more time to tackle internal issues prior to equitisation while others face difficulties in administrative procedures.
Another major obstacle to the equitisation process is the issue related to corporate valuation, bidding consultancy, and 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.
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 equitisation, the government may remove the requirement of 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 as enterprises and local authorities had to perform mandatory requirements on pandemic prevention and control.
As a result, revenue from divestment and equitisation to the Enterprise Development and Arrangement Support Fund only reached US$16 million, which did not meet the requirements of revenue from the divestment of state capital in 2021 as per Decision 1950/QD-TTg.
Government’s response and support
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 cutting state ownership under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and European Union – Vietnam Free Trade Agreement (EVFTA).
In addition, at the request to speed up the restructuring of SOEs, the MoF has developed a draft project aiming to restructure SOEs, focusing on corporations in 2021-2025.
At the same time, the Prime Minister ordered a simplified administrative procedure for local equitisation, without losing brand and corporate identity.
The Ministry of Planning and Investment (MPI) also said that in 2022, it would focus on implementing the draft project on the restructuring of SOEs once approved. This includes the divestment of 17 large SOEs in key industries and fields for the development of the economy such as energy, industry, finance, agriculture, telecommunications, and infrastructure.
Further, in an effort to attract additional foreign investment, the Commission for Management of State Capital at Enterprises (CMSC) has been assigned to create a scheme to encourage foreign investment in the purchase of shares in SOEs. This was done under Resolution No. 58-NQ-CP issued in April 2020.
Plans for 2022
According to the MoF for the 2022 plan, the ministry is expected to remit US$440 million to the local budget from revenue from equitisation and divestment that has not been paid to the state previously.
It is estimated that the remittance to the local budget in 2022 is about US$440 million. Of which the amount collected from equitisation and divestment of state capital of the enterprises in Hanoi is about US$310 million, Ho Chi Minh City is at US$74.6 million, and another US$74.6 million for other localities.
For centrally-managed enterprises, the revenue from the equitisation and divestment in 2022 will depend on the divestment in enterprises managed by the State Capital and Investment Corporation (SCIC). The SCIC is a state-owned holding company formed as part of a range of reforms by the Vietnamese government.
Given the circumstances, the MoF has developed a plan to divest capital from six enterprises on the list according to Notice 281/TB-VPCP and is expected to remit US$880 million to the central budget from the divestment.
The MoF has also requested the SCIC to divest state capital in five enterprises including FPT Corporation, Bao Minh Joint Stock Corporation, Tien Phong Plastic Joint Stock Company, Vietnam Infrastructure, and Real Estate Joint Stock Company, and Bao Viet Group with the value of State capital at par value of US$81.2 million and expected revenue of US$370 million.
The MoF also plans for divestment of Hanoi Beer – Alcohol – Beverage Corporation (Habeco) with the value of State capital at a par value of nearly US$80 million and expected revenue of more than US$530 million.
As per the government source, it is expected that the revenue from equitisation and divestment to the central budget will reach about US$840 million by 2022 if the divestment of the above enterprises is successful.
The government understands the challenges it has to deal with for more successful divestment projects to take place.
SOE equitisation has brought positive changes. But there are several challenges, especially when the target investor is a foreign company. The government will need to continue to examine its approach, take more market-friendly measures to attract more investors to SOE equitisation such as increasing the limits on foreign ownership or application of tax preferences.
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