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Since the collapse of the socialist block several Eastern European countries such as the former Czech and Slovak Federal Republic, the Republic of Poland
Chapter 1 Introduction 1.1. Statement of the Problem The 1980s were considered the era of privatization and the process still is ongoing with the involvement of more and more governments and business communities around the world. In developed and developing countries alike, privatization is one of the most revolutionary innovations in the recent history of economic policy. It was recorded that, at least 83 countries selected privatization as " the introduction of market forces in to the economy" between 1980 and 1989 1 with a view to eliminate the major sources of the poor performance of public sector enterprises: failure to cope with the changing business environments, lack of autonomy, tight control and intervention by government, and little emphasis on efficiency and profitability. In such a context, privatization free from these weaknesses has been considered an effective instrument for improving the productivity, profitability, and dynamism of a national economy. Since the collapse of the socialist block several Eastern European countries such as the former Czech and Slovak Federal Republic, the Republic of Poland, the Eastern Germany of the Federal Republic of Germany have been committed to privatization not only for improving efficiency reasons but also for ideological and social reasons. However, the ultimate objective of the governments of Eastern Europe in undertaking privatization is to create a market economy. In addition, by undertaking privatization they are seeking: • the reduction of the power of the state in exercising control and influence over enterprises; • the creation of a class of managers who will run enterprises as commercial business; • the introduction of share ownership (i.e. private property ownership) among the population at large; • increased efficiency in the utilization of the resources of enterprises; • revenues for the government from the sale of assets. The question increasingly has become not only whether to privatize, but also how to overcome or deal with the numerous difficulties associated with the process. Although considered as the only solution to the ineffectiveness of state-owned enterprises (SOEs) in many cases, the privatization process can expect opposition not only from workers or labor unions but also from political, industrial and financial communities or the public at large due to a number of industrial relations problems, such as employment, job security, dismissal and retrenchment, income, workers status, collective bargaining, labor disputes, and participation in decision making. The mentioned issues have more important significance for Vietnam because the country has just come out of the years of continuous wars and a weak economy of command type. The 1 CHARLES VUYLSTEKE, 1989, Techniques of Privatization of State-Owned Enterprises, United Nations Publication, New York. -2- Vietnamese economy, relying mainly on more than 7000 SOEs, is facing with the chronic ineffectiveness of these enterprises. There have been many attempts to improve the performance of state sector by reorganization of production and service management. A number of policies, which are in favor of the development of private sector, have been adopted. At the same time, there has been also a growing concern towards a privatization program in Vietnam as the country now is strongly committed to a free-market economy and the total integration to the rest of the world. Several privatization projects were planned and implemented. None, however, has been completely successful due to different reasons and obstacles such as: the disagreements over the concept of privatization, the debates on implementation methods, and the lack of necessary conditions for privatization (current status of accounting, legal infrastructure, stock exchange, foreign investors' trading rights of shares bought, etc.). 1.2. Objectives The objectives of this research are to give an overview on the major issues and problems associated with the performance of public enterprises in Vietnam, related government policies and administrative procedures, and, to anticipate future trends with a view to assess the prospects of privatization in Vietnam. The specific objectives are to: 1) Summarize and introduce lessons on theoretical and practical issues in privatization in several developing countries such as the former socialist countries in Eastern Europe and Russia, Malaysia, Thailand, and Singapore. The major issues to be concerned with are: • rationale for privatization, • the governments' policies, • conditions for privatization (legal issues, market conditions), • barriers to privatization, • types of privatization, • alternative strategies for improving the performance of SOEs 2) Provide an overview of the performance of state enterprise sector in Vietnam. 3) Assess the conditions for privatization options in Vietnam with regard to the lessons abroad. 4) Discuss the prospects of privatization in Vietnam in the future. 5) Present conclusions and recommendations 1.3. Scope and Limitations The number of studies on privatization in Vietnam has been very limited so far. The reasons are the political regulations which reflect some skeptical thinking on the positive effect of privatization at least in this development stage of the country and, the bureaucracy of the administrative system. The most challenging reason is the newness of privatization and its political and social aspects, which make it difficult for respondents or interviewees to give the right answers or opinions on the issues in consideration. -3- The lack of reliable statistical data of economic development is another obstacle for the research. As Vietnam is starting to build up a market economy, it is well understood that accounting systems employed under the former planning mechanisms are unsatisfactory, in that they do not give a reliable picture of enterprise financial positions. Given the limitation of time and geographically separated location of Vietnam' major development centers (Hanoi - Hai Phong - Ha Long and Ho Chi Minh City - Bien Hoa - Vung Tau), the research will focus on state enterprises in the area of Hanoi. Although not considered the economic capital of the country at present, Hanoi is the right place for the research in that it is the capital of development policies and a large number of SOEs of different industries is located there. The biggest industrial enterprises in Hanoi along with other enterprises in the northern growth triangle Hanoi - Hai Phong - Ha Long are expected to form the backbone of heavy industries of Vietnam in future. The results of the research, therefore, will have its importance for the privatization in the whole of the country. 1.4. Research Methodology The research framework is presented on Figure 1.1. It consists of the following determinants: 1.4.1. Literature review The review involves related literature published abroad as well as in Vietnam. Information will be collected from UN publications, journals, newspapers as well as reports of government and related ministries, organizations and firms in Vietnam. 1.4.2. Field research in Vietnam • Objectives On the basic of experience abroad, especially, the initial achievements of privatization in Czech and Slovak Federal Republic, East Germany, Hungary, Poland and Thailand, the field research in Vietnam will concentrate on the following issues: -4- CRITICAL ISSUES OF PRIVATIZATION LITERATURE REVIEW FIELD RESEARCH IN VIETNAM SITUATION ABROAD ANALYSIS AND DISCUSSIONS CONCLUSIONS AND RECOMMENDATIONS FURTHER RESEARCH RECOMMENDATIONS SITUATION IN VIETNAM RESEARCH FRAMEWORK Figure 1.1: Research Methodology Framework -5- • Policy options for the state enterprise sector • Alternative strategies to privatization • Criteria for selecting candidates for privatization • Conditions/barriers for privatization • Privatization planning and implementing • Methodology of the Field Research The field research in Vietnam is the centerpiece of this research study. The mentioned situation suggests the objectives of the field research can be achieved based on qualitative analysis of the data as received from interview and literature review. Direct Interview As much as possible officials, managers and experts at all levels of management were tried for the interview as permitted by the time given to this research. Indirect Interview With a target number of 100 responses , the questionnaire was developed along the stated objectives of the survey and mailed to selected respondents from a list of organizations and firms in Vietnam (see Appendix A). The questionnaire (see Appendix B) consists of 13 different topics concerning: • Measures for improving the efficiency of SOEs; • Option for dealing with the ineffectiveness of SOEs; • Recognition of the ineffectiveness SOEs; • Barriers to analyzing state enterprises' performance; • State enterprises, privatization and corruption; • Measures for fighting corruption; • Benefits of privatization; • Major barriers to privatization in Vietnam; • Legal preconditions for privatization; • Administrative body; • Management team of privatization; • Criteria for selection of privatization candidates; • Preparatory measures for privatization; Each topic (question) consists of a number of sub-questions, each of which offers the respondents an opportunity to share their experiences and opinions regarding all aspects of the mentioned issues. To ensure the respondents' freedom for selecting the most suitable answer, questions of importance-scale type were designed and anonymous answers were accepted. Possible answers for each question range from the least support level to the highest support level, namely SD: strongly disagree, DA: disagree , U: undecided or uncertain, A: agree, and, SA: strongly agree; the scores of which are 1, 2, 3, 4, 5 respectively. The responses to each question are evaluated on the basis of both score mean and the ratio of the support, opposition, or uncertainty. -6- 1.4.3. Data Analysis and Discussion On the basis of collected information from the field research, analysis will be made to summarize the opinions of respondents on the issues in consideration and identify the differences between the situations in Vietnam and abroad which deal with the privatization of state owned enterprises. The purpose of the analysis is to combine suitable experience abroad into specific context of Vietnam in order to describe prospects of privatization as a solution for improving efficiency of state enterprises in Vietnam. The next step is to make recommendations and suggestions for further research in this field of economic policy. 1.5. Organization of the Report The report includes 5 chapters the contents of which are as follows: Chapter I introduces the statement of the problem , objectives, scope and limitations as well as the research methodology and the organization of the final report for the research studyhe study in research sample' title='scope and limitation of the study in research sample'>scope and limitations as well as the research methodology and the organization of the final report for the research studyon of the study in research paper example' title='scope and limitation of the study in research paper example'>scope and limitations as well as the research methodology and the organization of the final report for the research study. Chapter II contains the literature review of the most critical issues of privatization in and outside Vietnam. The objectives of the literature review, as already mentioned, is to provide theoretical and practical basis of privatization which are needed for this research study. Chapter III highlights the salient features of Vietnam, the overall economic performance of the country, especially, the performance of state-owned enterprises. The chapter also describes policies and measures which have been adopted and applied so far by the government of Vietnam in dealing with the ineffectiveness of state sector enterprises. Chapter IV introduces the process of undertaking the survey in Vietnam and its results. The chapter also presents the analysis of collected information from the survey and discussion. Chapter V introduces the conclusions drawn from the research study and recommendations for accelerating the privatization process of SOEs in Vietnam , and, suggestions and recommendations for further research in this field. References and appendices included in the report offer readers opportunites for a better understanding of the material presented in the previous chapters of the report. -7- Chapter 2 Literature Review 2.1. Why Privatize? 2.1.1. Definition of Privatization Privatization as defined by the United Nations is the process of "transferring the ownership of the business or assets of state-owned enterprises to private sector", [UN. ECE, 1992] 2 . The transfer of ownership from the public sector to the private sector could take place wholly or partially. The Organization for Economic Cooperation and Development (OECD) regards privatization as part of the process of regulating, where deregulation includes "the removal or reduction of direct regulations governing entry to the sector, the type of products/services that can be offered, pricing and exposure to competition. Deregulation can also mean limiting the administrative burden of complying with statutory controls and regulations". Privatization does not, of course, requires a majority stake to be held by any private owner or group of owners. The state could even retain a majority stake, or some form of "golden share" allowing it to control subsequent ownership transfer if it relinquishes effective management control to one or more private owners [Hans J. Blommestein, 1993]. The state could also retain the power to regulate certain, limited aspects of the firm's activity. 2.1.2. Rationale for Privatization Salvatore Zecchini, the Director of OECD Centre for Cooperation with European Economies in Transition (CCEET), 1993 3 , noted that privatization can serve multiple objectives, which can be divided into five main categories: systemic, macroeconomic, sectorial (microeconomic), political and social. Systemic Objectives • to create competition among enterprises in the market place • to promote entrepreneurship and risk taking in economic activities • to spur innovation in production and management • to favor the development of new managerial class who is strongly committed to achieving cost efficiency Macroeconomic Objectives In undertaking privatization governments are seeking: 2 UNITED NATIONS PUBLICATION, 1992, Legal Aspects of Privatization in Industry, Economic Commission for Europe (ECE),Geneva. 3 SALVATORE ZECCHINI, 1993, Methods of Privatizing Large Enterprises, p 79, UN OECD, Paris -8- • solutions to the major macroeconomic imbalances ( external currents accounts deficits, public budget deficits and inflation) • draining the excess liquidity which was accumulated in the household and enterprises • freeing the public budget from the responsibility of subsidizing a vast array of loss- making enterprises Sectorial Objectives • to a more flexible use of labor and reallocation of labor forces • liquidation of unviable firms and reallocation of their capital assets to other enterprises • instrument for mobilizing capital and labor alike according to markets signals • restructuring large monopolies by splitting them up in units or enterprises that would compete each other • import superior foreign know-how, management skills, foreign capital and new market opportunities • mean to retire foreign debts or can swap directly domestic equity against foreign debt Political and Social Goals • to terminate command-type economic and political system by curtailing or eliminating the possibility of direct state intervention and interference into enterprises' management • to deprive political parties of the base for active support, including financing which state enterprises often represent • to make redundant the large state bureaucracy 2.2. What to Privatize? The choice of what to privatize or not, is a political issue in which economic considerations are equally important as political and social ones. In the light of the economic objectives, Governments should draw a few domain criteria for selection: • First, governments should aim at improving the structure of domestic markets not only by lowering barriers to entry but by actively favouring the proliferation of enterprises so as to generate the maximum of competition in the market-place. The focus of privatization, therefore, should be establishing proper market conditions by breaking up monopolies, splitting up huge conglomerates in order to foster the emergence of viable units, expanding capital and labor markets while making them more flexible, and eliminating an oppressive regulatory environment which includes control prices, high taxes on firms and unwarranted restrictions etc. • The second criterion to be followed is furthering the diffusion of private entrepreneurship and good management. Both of them are less scarce than assumed but find it difficult to manifest themselves because of the hard constraint of lack of capital or financing. • The third criterion concerns the degree of operational difficulty that is encountered in implementing privatization and in creating the surrounding economic conditions which can make it successful. The absence of clarity in the legal framework, insufficient financing mechanisms, rigidities in the use of the labor force and lack of other habitat condition can discourage demand for public assets. -9- • The fourth criterion pertains to achieving the highest possible cost efficiency in the production of public goods or services regardless whether they are marketable or not. (Salvator Zecchini, 1993). 2.3. How to Privatize? 2.3.1. Types of Privatization Privatization consist of a range of possibilities where progressively more aspects of business enterprise is operated in private sector lines until and ultimately the ownership of that enterprise totally becomes private ownership. It is possible to distinguish four types of privatization: • Ownership and management exclusively in the hands of the private sector • Majority of shares held by the state and the management is divided according to the basis of equity • Majority of shares held by the state and the management is with the private sector • Management of the enterprise is handled by the private sector to manage the enterprise or the state-owned assets are to leased out to the private sector to manage the enterprise. Several authors [Asher, 1985; Low, 1984; Steel & Heald, 1984; Wettenhall, 1983; Wiltshire, 1987; and Thynne, 1989] used another approach to distinguish the four basic forms of privatization, which involve changes, in whole or in part, in: • the ownership of the organizational means, or of assets associated with those means, by which particular functions are performed; • the actual performance arrangements themselves, with no accompanying changes in ownership or in sources of finance; • the financial bases on which the performance of the functions is dependent, again with no accompanying changes in ownership; and • the extent to which the performance of the functions is open to competition from the private sector organizations as a result of a deregulation and/or demonopolisation initiative This review is presented in Figure 2.1 . All these forms can relate to some, or all, of the functions of either a ministerial organization, a statutory body, and/or a government company - with the exception that, in the case of changes in ownership, a ministerial organization and a statutory body, or those parts of these organization that are to be sold-off, have first to be reconstituted as a government company before the transfer of ownership from the public to the private sector can be facilitated. 2.3.2. Basic Methods of Privatization Each from the above approaches of privatization can be implemented through a variety of techniques which are not perfect substitutes for each other and involve different levels of complexity. The most commonly used methods of privatization are: -10- • Public offering of shares • Private sale of shares • New private investment in an state enterprise (SOE) • Sale of government or SOE assets • Reorganization (or break-up) into component parts • Management/employee buyout • Lease and management contract The choice of a particular method will be dictated by the objectives being sought and other factors, and will generally be based on an evaluation of alternative methods. The search for the approach that best meets the social and political goals of the country is often tantamount inimical to the approach that is good for the development of the economy. Hence, " a combination of the main approaches might be the solution that is less disadvantageous for the economy as whole, given insufficient knowledge and experience about this process in these countries." 4 Divestiture is the most complete form of privatization, where the ownership, control and operating authority of the organization are legally transferred to private entity 5 . Divestiture may take place in several forms. The enterprises may be sold as ongoing business, either through a stock sell to dispersed ownership or as a sell to one acquiring firm. Alternatively, the divestiture may take the form of asset sales, where the business as the operating unit is broken down into various assets, which are sold off separately. 4 SALVATORE ZECCHINI, 1993, Methods of Privatizing Large Enterprises, p 79, UN OECD, Paris. 5 H. RICKE, Telecommunication Journal, Vol. 58, pp. 711-715, March 1991 [...]... transactions It also requires the presence of competent and skilled management and a committed and stable workforce 6 LANCE BLACKSTONE and DAVID FRANCKC, 1986-1987, Guide to Management Buy-Outs -15- Management/employee buy-outs are a relevant means of transferring ownership to management and employees with little wealth or knowledge of share ownership and may be a solution for SOEs not otherwise saleable... control and the authority to manage and are paid by the government for their management or other skills They have no financial exposure and receive its fee regardless of the profitability of the enterprise Under management contract, SOE -16- continues to bear the full commercial risk and is responsible for all working capital and debt financing There are, however, some advantages for the government and. .. extent, scope, and appropriate form of change in individual cases The key financial decisions and forms of privatization are presented in Figure 2.2 and explained below • The Market Value for Private Performance (e.g., Contracting-Out) Arrangements The first main form of privatization concerns the private sector performance of particular public functions in accordance with service standards and fees... questions and issues: • • • • • • • What types of interest may be held by businesses and/ or individuals- Leasehold or Freehold? Whether companies and/ or individuals are to be allowed to hold interests in real property? Can foreigners or foreign controlled companies own property and if so to what extent? Provision should be made for the enforcement of both positive and negative rights between adjoining and. .. These rights can include: the right to veto any transfer of substantial shareholdings; rights in regard to changes in the company's memorandum and articles of association; and rights concerning management decisions and business policy • Restrictions in the memorandum and articles of association The government when privatizing a government-linked company can put in articles that restrict the rights of... their strength and weaknesses, and the process of renovation of SOEs' performance The information used in this chapter has been taken from different survey reports conducted by concerned institutions and organizations, government papers and writings of leading experts in this field Sources of the information also come from the interviews with experts and managers at all managerial levels and business... national economy and depth of the local capital market Donald Roth (1993) noted: "Evidence has shown that political will and political decisiveness alone have not supported attaintment of long term capital investment and successful privatization" Political Aspect of The Privatization Process Economic, financial, and technical analyses alone are inadequate to explain the direction and outcome of these... an agreed period and compensation Several common points to be noticed regarding this form of privatization are: • • • • Normally, there are no transfer of ownership and, therefore, no divestiture of state assets This method can be used to "privatize" management and operations The method possibly increases the efficiency and effective use of state assets It is considered an important and effective non-sale... is the enactment of laws, and, the second one involves training people to implement and interpret the new laws and to work in the newly created institutions Property Laws Clearly defined property rights are the central to the operation of any market economy, and are an essential precondition of privatization Property Laws, first of all concerns guaranteeing private property and committing the state... reaching the general investing public, and where the size of the enterprise may not justify a public offering -13- • • • Another principal advantage of a private sale of shares is that the prospective owner is known in advance and can be evaluated, and may be selected based on ability to bring a number of benefits such as management, technology, market access and the like In some cases, a partial sale . privatization and the process still is ongoing with the involvement of more and more governments and business communities around the world. In developed and. privatization in Vietnam in the future. 5) Present conclusions and recommendations 1.3. Scope and Limitations The number of studies on privatization in Vietnam