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V I E T N A M D E V E L O P M E N T R E P O RT 2 0 1 2

MARKET ECONOMYFOR A MIDDLE-INCOME VIETNAM

Joint Donor Report to the Vietnam Consultative Group MeetingDecember 06, 2011

Consultation Draft

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Joint Donor Report to the Vietnam Consultative Group MeetingDecember 06, 2011

Vietnam Development Report 2012

MARKET ECONOMYFOR A MIDDLE-INCOME VIETNAM

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ADB Asian Development Bank

ASEAN Association of Southeast AsianNations

BIDV Bank for Investment andDevelopment of Vietnam

CAMS Changing Attitudes toward Marketand State

CEOs Chief Executive Officers

CIEM Central Institute for EconomicManagement

CPSEs Central Public Sector Enterprises

CPI Consumer Price Index

CPV Communist Party of Vietnam

EGs Economic Groups

EVN Electricity of Vietnam

EZ Economic Zone

FDI Foreign Direct Investment

GCs General Corporations

GDP Gross Domestic Product

GSO General Statistics Office

IMF International Monetary Fund

IP Industrial Park

IPO Initial Public Offering

JSB Joint Stock Bank

JSC Joint Stock Company

MOT Ministry of Transport

MOU Memorandum of Understanding

MPI Ministry of Planning and Investment

PFM Public Finance Management

PIM Public Investment management

PMB Provincial Management Board

PMS Performance Monitoring Systems

PPC Provincial People Committee

ODA Official Development Assistance

SCIC State Capital InvestmentCorporation

SEDP Socio-Economic Development Plan

SEDS Socio-Economic Development Strategy

SEG State Economic Group

SOCB State-Owned Commercial Bank

SOE State-Owned Enterprise

TEU Twenty-foot Equivalent Unit

VCCI Vietnam Chamber of Commerceand Industry

VDR Vietnam Development Report

VND Vietnam Dong

VNPT Vietnam Post and Telecommunication

WTO World Trade Organization

ACRONYMS AND ABBREVIATIONS

VIETNAM GOVERNMENT FISCAL YEARJanuary 1 to December 31

CURRENCY EQUIVALENTS(Exchange rate effective as of November 30, 2011)

Currency Unit US$1.00 = VND21,008

Weights and MeasuresMetric System

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Vietnam Development Report (VDR) 2012 is a Joint Report of Development Partners, prepared to

serve an one of the inputs for the 2011 Consultative Group meeting. It has been prepared by a World

Bank team in close collaboration with the ‘Donor Working Group,’ comprising of the following members:

Dominic Mellor, Dao Viet Dung and Tomoyuki Kimura (ADB), Andy Isbister and Nguyen Quang Anh

(AusAID), Joanne Pindera and Andrew Smith (CIDA), Nguyen Thi Ngoc Minh and Renwick Irvine (DFID),

Bryan Fornari and Sion Morton (EU), Sylvain Fourriere and Nguyen Thi Vinh Ha (French Embassy),

Rainer Stachuletz, Vera Wohlgemuth-Lohse, Nguyen Thanh Hai and Carlos Jahnsen-Gutierrez (GIZ),

Mags Gayor (Irish Aid), Toshio Ngase and Murooka Naomichi (JICA), Steven Collet and Job Runhaar

(Embassy of the Kingdom of the Netherlands) and Adam Ross (US Embassy).

The VDR 2012 partnered with a number of academic and research institutions to prepare several of its

background studies. The valuable contributions of the following researchers and scholars are gratefully

acknowledged: Bill Allan, Prof. Dr. Le Xuan Ba, Mr. Tran Kim Chung, Mr. Tran Tien Cuong, Mr. Nguyen Canh

Nam (CIEM), Mdm. Pham Chi Lan (Economist), Mr. Truong Dinh Tuyen (Advisor to Prime Minister), Mr.

Tran Huu Huynh, Mr. Dau Anh Tuan and Mr. Tran Van Hai (VCCI), Johnathan Pincus and Nguyen Xuan

Thanh (Fulbright Economics Teaching Program), Claudio Dordi (MUTRAP III), Mr. Nguyen Viet Hung,

Mr. Nguyen Huu Hieu, Mr. Nguyen Quang Thuan (Nexus Group). In addition, the preparation of the

report involved consultations with a number of researchers and practitioners including Mr. Le Dang

Doanh (Economist). The team benefitted from discussion with a number of government officials including

Mr. Nguyen Hong Long (SAV), Mr. Le Manh Hung (MPI), Mr. Hoang Hai (MOF), and Mr. Le Long (SCIC).

The World Bank team was led by Deepak Mishra, and comprised of Bo Thi Hong Mai, Chul Ju Kim, Dinh

Tuan Viet, Doan Hong Quang, Habib Rab, Ivailo V. Izvorski, James Anderson, Keiko Kubota, Nguyen Nguyet

Nga, Nguyen Phuong Anh, Nguyen Tam Giang, Pham Minh Duc, Sameer Goyal, Sunita Kikeri, Tran Thi Lan

Huong, Trieu Quoc Viet, Valerie J. Kozel, Vu Hoang Quyen. Nguyen Lan Phuong provided excellent

research support and coordinated the translation and printing of the report. Nguyen Hong Ngan provided

support and advice on the communication strategy. The report was edited by Diane Stamm and peer

reviewed by Mr. Nguyen Dinh Cung (CIEM), Vikram Nehru (Carnegie Endowment for International

Peace), and Ahmad Ahsan (World Bank). It also benefitted from helpful comments and inputs from a

number of colleagues including Christian Bodewig, Cung Van Pham, Douglas Graham, Lan Van Nguyen,

Mel Blunt (Consultant), Myla Taylor Williams and Steven Jaffee. VDR 2012 was prepared under the overall

guidance and direction of Victoria Kwakwa, Country Director of the World Bank in Vietnam.

ACKNOWLEDGMENTS

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Chapter 1

Transition, Transformation, and Tribulations...............................................................................................................................9

I. Context and Key Findings.........................................................................................................................................................10

II. Factors Underpinning the Initial Success..........................................................................................................................11

II.A Different Initial Conditions ........................................................................................................................................................12

II.B A Bottom-up, Gradualist Approach......................................................................................................................................13

II.C Policy Reforms and Incentive Structure .............................................................................................................................14

II.D Using External Commitments to Shape Domestic Reforms................................................................................14

II.E Role of Human Capital, Entrepreneurship, and the Party-State System .......................................................15

III. Changes, Challenges, and Contradictions ........................................................................................................................16

III.A Declining Productivity...................................................................................................................................................................16

III.B Macroeconomic Stability............................................................................................................................................................17

III.C Fragmented Development and Institutional Inertia...................................................................................................18

IV. Organization of the VDR...........................................................................................................................................................19

V. Embracing Markets......................................................................................................................................................................20

Chapter 2

A Level Playing Field:

Reforming the State-Owned Sector..........................................................................................................................................23


II. The State Sector: Size, Importance, and Efficiency.....................................................................................................26

II. A Large but Declining Importance ...........................................................................................................................................26

II. B Is State Ownership Larger Than We Think? A Case Study of the Banking Sector.....................................28

II. C Intensive but Inefficient User of Resources .............................................................................................................31

III. Public Attitude Toward State Ownership in the Enterprise Sector ..................................................................34

IV. Government’s Approach to SOE Reform ......................................................................................................................35

V. Ten Reasons in Favor of Restructuring..............................................................................................................................37

VI. Reform Options .............................................................................................................................................................................42

VI.A More Disclosure..............................................................................................................................................................................44

VI.B Improved Regulation and Corporate Governance.....................................................................................................45

VI.C Accelerating Equitization..........................................................................................................................................................46

TABLE OF CONTENTS

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VI.D Strengthening Monitoring and Oversight........................................................................................................................47

VI.E Making SOEs Accountable......................................................................................................................................................48

VI.F Pace and Sequence of the Reform Program................................................................................................................50

Chapter 3

Doing More for Less: Improving the Effectivness of Public Investment .................................................................53


II. Industrial Parks: Boon or Bane?..............................................................................................................................................59

II.A Build It and They Will Come ....................................................................................................................................................60

II.B What is Driving the IP Boom? ................................................................................................................................................62

III. The Relocation of the HCMC Port System: Why The Gridlock?.......................................................................66

IV. Underutilized Port! The Case of Cai Mep–Thi Vai Port Complex...................................................................69

IV.A What Explains the Underutilization of Port Capacity? ............................................................................................70

V. Policy Options .................................................................................................................................................................................72

Chapter 4

Feeding a Market Economy: Role of Information and Transparency .......................................................................77

I. The Context ...................................................................................................................................................................................78

II. The Importance of Transparency For Market Economies .....................................................................................80

III. Fiscal Transparency in Vietnam................................................................................................................................................82

II.A Current Status ................................................................................................................................................................................82

III.B Areas in Need of Greater Attention....................................................................................................................................83

IV. Making Access to Information Fast and Fair ......................................................................................................................85

V. Conclusion.........................................................................................................................................................................................87

References ................................................................................................................................................................................................88

TRANSITION, TRANSFORMATION, AND TRIBULATIONS


MARKET ECONOMY FOR A MIDDLE-INCOME VIETNAM

Chapter 1

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1. Vietnam’s transition to a market economyhas transformed the country and the lives of itspeople. In 1986, Vietnam launched Àöíi Múái—ahomegrown, political and economic renewalcampaign—that marked the beginning of itstransition from a centrally planned economy to asocialist-oriented market economy. At that time,Vietnam was one of the poorest countries in theworld, and with many problems: hyperinflation,famine, drastic cuts in Soviet aid, and a tradeembargo by the west.1 For most Vietnamese, lifewas harsh and the future looked bleak. Whenmeasured against this backdrop, the economicperformance of the last 20 years has beenimpressive. Between 1990 and 2010, Vietnam’seconomy has grown at an annual average rate of7.3 percent, and the per capita income almostquintupled. The rapid expansion of the economyhas been accompanied by high levels of growthof international trade; large-scale inflows offoreign direct investment; a dramatic reduction inpoverty; and almost universal access to primaryeducation, health care, and life-sustaininginfrastructure such as paved roads, electricity,piped water, and housing. Vietnam’s transitionfrom a centrally planned economy to a marketeconomy and from an extremely poor countryto a lower-middle-income country in less than 20years—is now a case study in developmenttextbooks.2

2. But Vietnam’s other transition—to becomingan industrialized and modern economy—hasbarely begun. According to its recently approvedSocio-Economic Development Strategy for2011–2020, Vietnam aspires to achieve a percapita income level of US$3,000 (in current U.S.dollars) by 2020. This translates into a nearly 10

percent annual growth in per capita income overthe next decade—requiring the country toreplicate and sustain the economic success itachieved in the last 10 years. The Socio-EconomicDevelopment Strategy goes on to identify thecountry’s key priorities to meet this ambitioustarget: stabilize the economy, build world-classinfrastructure, create a skilled labor force, andstrengthen market-based institutions.

3. Meeting these aspirations will not be easy.The country has experienced bouts ofmacroeconomic turbulence in recent years—double-digit inflation, depreciating currency, capitalflight, and loss of international reserves—erodinginvestor confidence. Rapid growth has revealednew structural problems. The quality andsustainability of growth remain a source of concern,given the resource-intensive pattern of growth, highlevels of pollution, lack of diversification and valueaddition in exports, and the declining contribution ofproductivity to growth. Vietnam’s competitiveness isunder threat because power generation has not keptpace with demand, logistical costs and real estateprices have climbed, and skill shortages are becomingmore widespread (National Competitiveness Report2010; SEDS 2011; VDR 2010). The country alsofaces many new social challenges: vulnerability isincreasing, poverty is becoming concentrated amongethnic minorities, rural-urban disparity is growing, andthe pace of job creation is slowing. These problems,taken together, pose a serious threat to Vietnam’smedium-term socioeconomic aspirations.

4. Vietnam has a strong track record offormulating successful policy as a pragmaticresponse to national circumstances. Vietnam’ssuccess of the past 25 years, as discussed below,is due to a number of factors: (a) starting thetransition from a low base and with fewerdistortions, (b) pursuing a gradual and bottom-up reform process, (c) getting the broad policyreforms and incentive structure right, (d)embracing outward-oriented trade andinvestment policies, and (e) the enabling role ofhuman capital, entrepreneurship, and the party-state system. With the low-hanging fruit alreadyharvested, however, the issues that remainunaddressed—the “unfinished agenda” oftransition—deal with the more complex issues ofbuilding market-based institutions and rebalancing

I CONTEXT AND KEYFINDINGS

1 With a per capita gross domestic product of US$98 (in currentU.S. dollars), Vietnam was indeed the poorest country in theworld in 1990. The next two countries with the second- andthird-lowest per capita income were Somalia (US$139) andSierra Leone (US$163). In terms of per capita gross domesticproduct adjusted for purchasing power parity, Vietnam wasamong the 20 poorest countries in the world.

2 See, for example, Growth Commission (2009).

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3 While in the post-global financial crisis of 2008–09 thependulum has swung away from the market to the state in mostadvanced economies, in Vietnam the state has always played theleading role. However, the disappointing economic performanceof the last few years has led many Vietnamese policy makersand national scholars to ask whether, in the case of their country,the pendulum needs to swing away from the state and towardthe market. Interestingly, many International Financial Institutionsin Vietnam have taken a more cautious stand on this issue(preferring gradual change) compared to national scholars, whoseem to be calling for far-reaching changes, including some whohave called for a second Àöíi Múái.

4 The third area, consolidating the financial sector, is beyond thescope of this report. It will however be discussed by otherongoing work including soon to be launched joint World-Bank/IMF Financial Sector Assessment Program

the equilibrium between the state and themarket.3 Can Vietnam face its next set ofchallenges?

5. As the country celebrates the Silver Jubileeof Àöíi Múái, this Vietnam Development Report(VDR 2012) looks ahead at some of the pressingissues Vietnam needs to tackle to build a strongfoundation for its quest to become anindustrialized country by 2020. According to therecently approved five-year plan, three areas thatneed urgent attention are restructuring of thestate-owned enterprises (SOEs), improving theeffectiveness of public expenditure and stabilizingthe financial sector. The analysis undertaken in thisreport focuses on first two of these priorities.First, it shows that the SOEs, which own fixedcapital (land and credit) disproportionate to theirsize, are less efficient at using them than nonstateand foreign enterprises—requiring restructuringof the state-owned sector. Second, the analysisfinds that Vietnam is allocating its public resourcesin a way that is creating a suboptimal andfragmented infrastructure at the local level thatdoes not always contribute to building an effectiveinfrastructure system at the national level, thusjustifying changes to the allocation mechanism.The report then identifies the reasons for SOEinefficiencies and ineffectiveness in publicinvestment and offers some broad policy optionsfor discussion.4

6. Transition is a journey and not a destination.While it is easy to define Vietnam’s initial point inits journey to becoming a market economy, thereis unlikely to be a finish line. Even the most

mature market economies must constantlychange, update, and fine-tune their policies andinstitutions to keep up with the changing times.Therefore, VDR 2012 does not have answers toall the economic challenges facing Vietnam, nordoes it contain an exhaustive list of policysuggestions for successful transition. Rather, itaims to contribute to the ongoing discussion onsome of the most pressing and sensitive issuesinvolving Vietnam’s future.

7. The rest of the Report is organized asfollows. The rest of Chapter 1 discusses thefactors that have contributed to Vietnam’s successand explores the emerging challenges. Chapter2 explores the issue of restructuring SOEs.Chapter 3 examines the challenges of the publicinvestment program and how to raise itseffectiveness. Chapter 4 discusses the low levelof transparency to support Vietnam’s middle-income status—a critical issue that needs to betackled if Vietnam is to achieve its socioeconomicaspirations.

8. Vietnam’s transition to a market economyhas been subject to much research. During thelast two decades, numerous books and reportshave been written documenting Vietnam’stransition to a market economy. Many multilateralorganizations have commissioned reports andseveral national and international scholars havewritten on the topic.5 The discussion in thissection draws lessons from past success to informfuture debate, and is not meant to be anexhaustive exploration of factors explainingVietnam’s transitional success.6

II FACTORSUNDERPINNING THEINITIAL SUCCESS

5 See the list of references at the end of the report.6 For more comprehensive discussion on transition, see Arkadie

and Mallon (2003), IMF (1996) and ADB (2006).

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9. Vietnam stands out as a clear success storyamong the transitional economies. The transitionin Eastern Europe proved to be a complex andproblematic process, with recurrent economiccrises, involving some combination of factorsincluding falling output, declining average incomes,sharp increases in poverty, rising mortality andfalling birthrates, and rapid inflation (figure 1.1)(World Bank 2002). However, Vietnam alsoexperienced high rates of economic growth, risinginvestment, vigorous exports, and a sharp drop ininflation, with a program of limited and gradualreform. Moreover, the changes in Vietnamoccurred in the context of the continuation ofsingle-party rule, high levels of state intervention,and significant direct control of productionthrough the SOEs. Why did Vietnam succeedwhile so many other countries failed?

Figure 1.1Vietnam’s Output Performance Relative to other Transitional Economies

Sources: WDI 2010; http://www.databasece.com/en/gdp-during-transition; WB estimates.

II.A DIFFERENT INITIALCONDITIONS

10. At the start of its transition, Vietnam was thepoorest and the least industrialized of all thetransitional countries—which in hindsightseems to be an advantage.7 Its economy wasnever subjected to the same level of effectivecentralized control as in the Former Soviet Unionand Eastern European transitional economies(Arkadie and Mallon 2003). For example, the listof commodities allocated under plans was alwayslimited compared to the Soviet material balancesystem. Similarly, the SOE sector in Vietnamaccounted for a small part of nonagriculturalproduction, 29 percent, and an even smaller partof employment, 16 percent, unlike othertransitional economies where the share of SOEsin total output was 75 to 95 percent (IMF 1996).While the transitional economies of EasternEurope had achieved a higher level ofindustrialization under the central planning systemwith the development of heavy industry, much ofthe existing capital stock was found to beuncompetitive. Thus, while Vietnam couldcontinue to use a large part of its pre-transitioncapital, other transitional countries often had torebuild new capital stock, thereby experiencing a

7 Given our focus on Vietnam, there is much about other transitioncountries that may have been neglected here. For example, theformer Yugoslavia broke into five (now seven) different countriesand had a war. The Soviet Union broke into 15 countries, each ofwhich had to establish new sets of political institutions and legalframeworks. Some borders remain in dispute to this day. Therewere wars in Caucuses and Tajikstan. Czechoslovakia broke intotwo separate countries. The need to establish new politicalinstitutions and legal frameworks, dealing with international anddomestic security, and addressing the collapse of the socialisttrading system and soviet aid must have posed massive challengesto transition countries in Eastern Eurpoe, much of which Vietnamwas spared.

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significant drop in output, primarily in theindustrial sector, in the initial years.8,9

11. Another important feature was the relativeimportance of the rural sector and thedominant role of household units in Vietnam’sagriculture production. Arkadie and Mallon(2003), Lin (2010), and others have argued thatVietnam, like China, was largely an agrarianeconomy at the time of transition, so itsproduction structure was broadly consistent withits comparative advantage. Therefore, whenVietnam opened its economy to domestic andexternal competition, its agricultural sectorresponded vigorously to changes that incentivizedagriculture—offsetting any contraction in theindustrial sector. For example, Party ResolutionNo. 10, passed in 1988, provided farmers withproperty rights (albeit limited), which the PartySecretary-General, Do Muoi, argued was aturning point in agricultural development. Thelimited property rights, along with price and tradereforms, contributed to sustaining agriculturalgrowth, generated the surplus necessary todiversify into nonagricultural sectors, andstrengthened the resilience of the economy.10

II.B A BOTTOM-UP,GRADUALIST APPROACH

12. Reform in Vietnam, certainly in its earlystages, was bottom-up and gradual, focusingheavily on productive units. The incrementalprocess meant that at each step the effectivenessof new institutions and policies were tested andadjusted to Vietnamese conditions. This processwas particularly evident in the agricultural sector,which was subject to a continuous crisis in theyears prior to the adoption of Àöíi Múái.

13. Agrarian collectivization was an importantpart of socialist strategy. This was particularlytrue in the North, where the cooperatives weredeveloped both as productive units and asproviders of social services. The experience ofthe South, and in particular the Mekong Delta,was somewhat different. There were twosuccessive waves of collectivization in theMekong, in 1979–80 and then in the early 1980s,although collectives never played as decisive arole in the southern rural economy as they hadin the North.11 As has been documented, manyof the agricultural reforms were inspired by theresistance of farmers in the Mekong Delta tocollectivization after reunification. In particular, itrelates to farmers’ refusal to grow rice beyondthe need to satisfy their household requirements.Some senior policy makers witnessed the benefitsof household farming and later formulatedpolicies to encourage similar changes throughoutthe country (Dixon 2003; Rama 2009).12 Theydecollectivized agriculture, established land-userrights, reduced the role of cooperatives, liberalizedagricultural prices, and encouraged farmers toexport—transforming the country from beingchronically food deficient to the third-largestexporter of rice in two years. 13

14. Another example of step-by-step reformcan be seen in the development of marketinstitutions. Unlike many other transitionalcountries, Vietnam did not entirely do away withits pre-reform economic institutions andstructures, but rather adapted and reorientedthem to changing times. Instead of completedestruction of old institutions as a prelude to theinstallation of new mechanisms, many reformswere directed at making existing institutionswork better, while gradually introducing newmarket institutions. It is, therefore, not an accidentthat, among the economies closely linked to the

8 Critics have argued, however, that such an interpretationassumes that the problem was simply an overgrowth of thestate sector and wrong investment in large capital-intensiveprojects. This ignores the deeper incentive problems associatedwith central planning and direct state involvement in production.

9 A possible variant of this hypothesis can be that it was sheerdesperation—famine, hyperinflation, little or no aid—thatpushed Vietnam’s government to reform. In a humorous vein,some call this period reform by the PhDs—the poor, the hungry,and the driven.

10 Other initial conditions that helped Vietnam avoid a sharpdecline in output include the timing of natural resource (mainlyoil) exploration, and its location in one of the most dynamic andfastest growing regions in the world.

11 Even in Northern and Central Vietnam, farm households werean important element of the production system.

12 It has been reported that Mr. Do Muoi, the General Secretaryresponsible for unification, came from Hanoi to visit the farmersand told them that what they had done was correct (Howie2011).

13 Others, however, have cautioned against bottom-up learning,arguing that “references to grass-roots communities are bettertranslated as references to the base of an apparatus,” see Ffordeand Vylder (1996).

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Former Soviet Union, Vietnam was unique for itsswift adjustment with the least disruptions(Dollar 1999).14

II.C POLICY REFORMS ANDINCENTIVE STRUCTURE

15. Perhaps the most fundamental changeduring the first few years of its transition is theslew of policy changes aimed at raising theefficiency of the enterprise sector, boostingproduction in agriculture, opening the economyto foreign trade and investment, and reforming thegovernment. Several of the key policy changes ineach of these areas include (ADB 2006; IMF 1996):

l State-Owned Enterprises: (a) Replacing centralplanning powers with substantial stateenterprise autonomy; (b) giving enterprisesthe authority to set most prices, selectappropriate mixes of inputs and outputs, anddetermine their own investment; (c) givingmanagers the right to lay off excess workersbased on prescribed guidelines; (d) allowingenterprises the freedom to sell their excessproduction (beyond a centrally plannedamount) at market prices for all outputs; and(e) imposing hard budget constraints on SOEs.

l Private Business. (a) Reducing restrictions onprivate enterprises; (b) allowing private sectorenterprises equal access to credit and creatinga legal framework more supportive of theiroperation; (c) subjecting all enterprises touniform rules of taxation; (d) allowing allenterprises to establish direct trade links or touse trade companies of their own choicerather than a specific trade channel; (e)exposing all enterprises to foreign competitionby liberalizing the import regime; and (f)decollectivizing agriculture and establishingland-use rights.

l Price and trade liberalization: (a) Liberalizingmost industrial prices by the end of 1988, andthe few remaining prices that were controlledfor official (state) customers, such as those ofcement, steel, and electricity, were generally setclose to free-market values; (b) devaluing theofficial exchange rate and aligning it closely tothe rate in the parallel market; (c) eliminatingexport subsidies; (d) allowing retention offoreign currency earnings; (e) liberalizing trade,in particular by allowing productionenterprises to trade directly abroad, therebydismantling the tight and bureaucratic grip ofthe trading companies; (f) creating exportprocessing zones and industrial parks; and (g)abolishing internal customs checkpoints (ADB2006; IMF 1996).

l Labor market liberalization. (a) reducingrestrictions on the mobility of labor enabledunderemployed people in rural areas to moveto new jobs in urban and peri-urban areas; and(b) successive modifications to the labor codeformalized labor hiring practices andeliminated obstacles to free labor mobility.

16. Many of these policies, aimed at boostingsupply, provided the basis for a successfultransition. Vietnam’s physical and human capital wasunderused as a result of controlled prices and anincentive system that discouraged more production.By rapidly liberalizing prices and instituting anincentive system, the market economy succeededwhere central planning had failed.

II.D USING EXTERNALCOMMITMENTS TO SHAPEDOMESTIC REFORMS15

17. The commitments undertaken by Vietnam ina number of regional and multilateral tradeagreements—the Association of Southeast AsianNations (ASEAN) Free Trade Area (FTA) in 1995(including ASEAN FTAs with Australia, China,India, Japan, the Republic of Korea, and New

14 Critics of the gradualist approach to reforms have depicted itas a reflection of a limited understanding of the market,reinforced by inefficiency, corruption, internal opposition, lack ofhuman resources, and the “trial and error” or “groping” approachfollowed by the government.

15 This section draws on a background note prepared by the EU-funded MUTRAP III project.

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Zealand); Bilateral Trade Agreements with theUnited States in 2000 and with Japan in 2008;and becoming a member of the World TradeOrganization (WTO) in 2007—have provided aconsiderable boost to domestic reforms duringthe transition period. Some of the benefits oftrade liberalization include (a) a predictable andtransparent regime for international trade, (b) asubstantial reduction of tariffs for domesticmanufacturers and exporters, (c) elimination ofall export subsidies considered illegal by theWTO, and (d) liberalization of services such asbanking, distribution, construction, health care,tourism, insurance, and business services(auditing, legal, information technology, andresearch and development).

18. Trade liberalization has had a huge positiveimpact on Vietnam’s economy. Some of thevisible benefits of trade liberalization include asignificant boost to foreign direct investment, aresilient export sector, lower prices, and improvedquality of goods and services. Bilateral tradeagreements and WTO commitments have ledVietnam to introduce important modifications inits institutional and administrative systems. Forexample, as part of its WTO commitments,Vietnam publishes an official journal of all the laws,regulations, and administrative procedures ofgeneral application before enforcing them.Moreover, the full texts of the legal acts areposted on a government website at least 60 daysprior to approval so agencies, organizations, andindividuals can submit comments. A studyconducted by the Multilateral Trade AssistanceProject concluded that the impact of ASEAN, plusliberalization on almost all the main trade andeconomic indicators, has been largely positive.

II.E ROLE OF HUMAN CAPITAL,ENTREPRENEURSHIP, ANDTHE PARTY-STATE SYSTEM

19. Vietnam’s transition to a market economyreduced the barriers to the adoption of existingknowledge, which, along with improvedincentives and increased competition, is crucial

in explaining the rapid improvements ineconomic performance over the last twodecades (Arkadie and Mallon 2003). Vietnam’sability to rapidly exploit existing knowledge wasaided by solid performance in promoting literacy,numeracy, and broader human development inthe pre-reform period. In fact, at the beginningof the reform period, Vietnam had much higherliteracy rates, life expectancy, and education thanmost other countries with similar levels of percapita income. The strong human capital basewas complemented by the energy, liveliness, andentrepreneurial skills of the population and thequality of Vietnamese workforce.

20. Some economic historians have argued thatthe Vietnamese party-state system played animportant role in the country’s smoothtransition (Dixon 2003). The pre-reform periodparty-state bureaucracy was a complex systemthat connected the central state to all elementsof society, extending through many layers to theworkplace and small community groupings. Thesesystems enabled decrees, quotas, and policies tobe transmitted through the systems and wereextremely effective in mobilizing people andorganizations at all levels. It is apparent that at alllevels, considerable administrative andorganizational capacity existed, which explainsVietnam’s remarkable achievements in terms ofsuch measures as literacy rates, life expectancy,and infant mortality rates even before the onsetof the transition. Therefore, Vietnam entered thereform period with the ability to focus on long-term national goals, and with considerableadministrative, managerial, and implementationcapacity, which contributed to its initial success.16

But as discussed later, with the expanding privatesector, the party-state system has found itincreasingly difficult to attract and retain talent—causing gradual erosion of its administrative andmanagement capacity.

16 However, there are others—Fforde and Vylder (1996) and Pike2000, for example—who have suggested that post-1990 growthin Vietnam owed little to the state.

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21. Vietnam’s economy has grown so rapidly inrecent years that it is easy to overlook some ofits lingering challenges. In a span of five years,between 2003 and 2008, Vietnam’s economymore than doubled from US$40 billion to US$90billion, and its exports more than tripled fromUS$20 billion to US$63 billion. During this time,Vietnam also became a member of the WTO—triggering an unprecedented flow of privateexternal capital, which reached its peak of 18percent of GDP in 2007. Domestically, this periodcoincided with the establishment of StateEconomic Groups (SEGs)—a loose alliance ofSOEs with similar business interests—anddecentralization of investment decisions to thelocal governments. This period also saw boominginvestment, thriving stock market, escalating realestate prices and rising prosperity all around. It istherefore easy to overlook that this period alsocoincided with declining contribution ofproductivity to growth, increased macroeconomicinstability, fragmented development and inabilityof public institutions to keep pace with a rapidlyglobalizing economy.

III.A DECLININGPRODUCTIVITY

22. If Vietnam’s initial transition years weremarked by “growth with limited resources,” thelast five years can be labeled as “abundantresources with limited growth.” It is welldocumented that the sharp acceleration in growthin Vietnam during the 1990s is not explained by anysharp increase in capital formation. As shown infigure 1.2, nearly 40 to 60 percent of growth duringthe 1990s came through productivity growth andthe rest through factor accumulation. The situationchanged during the 2000s, a period when Vietnamreceived record flow of external capital. During thisperiod, productivity accounted for only 15 percentof growth, with the remaining accounted byaccumulation of physical and human capital. And inthe last four years (2007-10) almost entire growthcame from factor accumulation.

23. Excessive reliance on factor accumulation tosupport rapid growth is bound to be unsustainable.There is a limit to how fast factors can grow tosupport a rapidly growing economy. Though Vietnamhas a large population, people with necessaryeducation and skill to work in industry and servicesare getting increasingly scarce. This has led the SEDPto identify “skills and human capital” as one of thebreakthroughs for the next five years. At the sametime, rapid growth in credit, which is the basis forbrisk growth in capital accumulation, has led tomacroeconomic instability, forcing the government topursue a tighter monetary policy in recent months.

III CHANGES,CHALLENGES, ANDCONTRADICTIONS

Figure 1.2 Growth Has Been Increasingly Based on Factor Accumulation and Not Productivity

Sources: CIEM (2010). Note: The estimates for 2009 and 2010 are done by the World Bank.

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24. The government’s recent decision to slashthe target investment rate for the next fiveyears makes productivity increase an imperative.With no visible improvement in the externalenvironment and continued macroeconomicturbulence at home, Vietnamese leaders reacheda decision that the country has to do more withless, that is, it must maintain its high growth rate,but with a lower investment rate. Therefore, thegovernment slashed the target investment ratefor the next five years from the current 40percent of GDP to 35 percent of GDP whilemaintaining the growth rate of the economy at 6to 6.5 percent (panel A, figure 1.3). This is alsoconsistent with the trend in committed foreigndirect investment (FDI), which has been on adeclining path for some time (panel B, figure 1.3).Raising productivity will require a paradigm shiftin the way Vietnam’s economy has operated inthe recent past. Fundamental to this newapproach will be the restructuring of SOEs,strengthening the effectiveness of publicinvestment, and reforming the financial sector—the three priorities set out by the Party,Government and the National Assembly in theirrecent announcements. (The first two issues arethe subjects of Chapters 2 and 3, respectively, inthis Report). 17

III.B MACROECONOMICSTABILITY

25. Another sign of weakness in Vietnam’seconomy is its persistent macroeconomicinstability. For four years in a row, Vietnam hashad one of the highest inflation rates in Asia,averaging nearly 16 percent a year between 2008and 2011. Along with high inflation, Vietnam hasalso been coping with persistent pressure on itscurrency, falling levels of foreign exchangereserves, an underperforming stock market, highsovereign spreads and domestic capital flight. Ithas thus become an exception to the broadertrend of the rest of the emerging markets in Asia,which are dealing with appreciating currencies,rising foreign exchange reserves, and increasingcapital inflow.18

26. While Vietnam has addressed the symptomsof its macroeconomic problems, it has yet totackle their root causes. In both 2009 and 2011,the government took bold measures to curbinflationary expectations and to stabilize theeconomy. But those measures have relied almostexclusively on tight monetary policy andwidespread price and interest rate controls. Some

Figure 1.3Vietnam Has Lower Investment Target and Is Receiving Less FDI

Sources: SEDP 2011–15; MPI, WB estimates.

18 See various issues of Taking Stock, December 2010 and June 2011.

Panel A Panel B

17 The third issue, reforming the financial sector, will be dealt withseparately through the Joint World Bank-IMF Financial SectorAssessment Program, to be undertaken in 2012.

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of the root causes of the problems—such asinefficiencies in the SOE sector, less effective publicinfrastructure programs, and the need for greatertransparency and disclosure of information—havegone unaddressed. Consequently, investors’confidence in the ability of government’s economicmanagement has weakened, triggeringconsiderable capital outflow—it is estimated thatthe cumulative errors and omissions (a proxy forcapital flight) in the balance of payments in the lastthree years is equivalent to nearly 30 percent ofGDP (figure 1.4) (IMF, 2011).

III. C FRAGMENTEDDEVELOPMENT ANDINSTITUTIONAL INERTIA

27. Vietnam has historically been a highlydecentralized economy. It has a long tradition ofrelative autonomy of village and communities inmanaging their local economies. This practice wasalso consistent with the immediate requirementof war-time economy. And decentralization hashad many virtues. It was the high degree ofpractical autonomy that led Vietnam to avoid thegigantism of Soviet-style industrialization. Inrecent years, decentralization has beenresponsible for more inclusive development andhealthy inter-provincial competition.

28. While decentralized, Vietnam’s developmentprocess has not been fragmented and localized,as it is now. Common purpose and strongleadership had meant the local and nationalgovernments each contributed in their own waysto common national goals. But overtime its neweconomy has developed under a degree ofindependence from the central system (Probertand Young 1995, 520), where the center’s abilityto direct activity toward national developmentgoals and the means to establish the necessaryinstitutional and regulatory framework forsustained growth has weakened. In combination,the reforms and the associated reduction incentralized control have promoted developmentwithin and closely connected to the SOEs, thelocal administrations, and subsectors of thecentralized system. The resulting networks andlocalized “corporatism” have become majorfactors in economic change (Grabher and Stark1998). Thus, lower echelons of the state haveemerged as a form of new business elite (Forsyth1997, 245, 257). While the majority of the neweconomic elite may neither wish for nor be in aposition to demand political change, they havehad a significant impact on decision making andpolicy (Dixon 2003). The localization ofdevelopment and control in Vietnam contrastssharply with the highly centralized systems thatcharacterized such economies as Korea and Taiwan.19

Figure 1.4Vietnam Has Seen Sharp Increase in the Level of Capital Flight in Recent Years

Sources: WDI 2010; http://www.databasece.com/en/gdp-during-transition; WB estimates.

19 Dapice (2008).

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29. The scope and pace of reforms have beeninfluenced by differing views within the partyand the state and the proliferation of interests.The latter includes such broad sections as themilitary, police, trades unions, women, regional andlocal administrations, SOEs, and the variousministries and departments. There have also beensignificant shifts in the importance of thesegroupings, notably the increased representationand influence of local administrations andtechnocrats (Fforde and Goldstone 1995, 105).The major divisions are also variously reinforcedand divided by the proliferation of the neweconomic interests. The result is that there arefewer fixed positions, with, for many individualsand groupings, the attitude to reform reflectingparticular measures rather than the process as awhole (Dixon 2003; Koh 2001, 537–38). Theproliferation of interest groups and the nature ofthe Vietnamese legal and regulatory systems—which operate on the basis of what is permittedrather than what is not—has resulted in theproduction of an enormous volume of decrees,regulations, and legislation. The operation of thesystem has been further hindered by lack ofprofessionals and technocrats at higher levels, theones who provide the cores of the bureaucraciesin such Asian developmental states as Korea;Singapore; and Taiwan, China.

30. The fragmentation of development has alsobeen associated with the weakening of thequality of the country’s economic institutions.The legacy of central planning still weighs heavilyon Vietnam’s economic institutions. Althoughmarkets are now the main mechanism ofresource allocation, they often function poorlybecause the underlying institutions are missing,poorly formed, or incomplete. Its public andprivate sector economic institutions are highlyfragmented. Fragmentation is a problem becauseit increases the costs of coordination, which canresult in a loss of efficiency. A fragmentedregulatory system generates conflicting rules.Fragmentation of public investment results induplication and waste.

31. The government’s effectiveness has alsodeteriorated in recent years relative to itsregional peers. The effectiveness of Vietnam’sgovernment—measured in terms of perceptionof the quality of public services, the quality of

policy formulation and implementation, and thecredibility of the government’s commitment tosuch policies—is relatively low compared to someof the better-performing countries in Asia. Andits effectiveness has taken a slight dip in recentyears, while government effectiveness has risen inother countries (The Worldwide GovernanceIndicators, 2011).

32. One way to understand Vietnam’s deeperstructural problems is to begin with a simpleanalysis of ownership, allocation, and executionof capital. Is Vietnam’s capital owned by thosewho are most efficient at using it? Are the ownersof capital allocating it to the sectors where thesocial and economic returns are the highest?Once capital is deployed to a sector or a firm, isit being executed efficiently? These questions areexamined in the next three chapters of VietnamDevelopment Report 2012 (VDR 2012). Three ofits key findings are:

l Ownership. Vietnam’s state-owned enterprises(SOEs) are one of the least efficient users ofcapital, but they are its largest owner (Chapter 2).

l Allocation. The public investment program isbecoming increasingly unaffordable andinefficient since allocation is based onadministrative considerations rather thanstrategic needs and market-basedmechanisms—creating excess supply in someareas and causing severe shortages in others(Chapter 3).

l Efficiency. Because of both the widespread useof administrative measures to control prices,and limited access to basic information,Vietnam’s economy is being deprived of the“oxygen” that keeps a market economyfunctioning efficiently (Chapter 4).

33. It then explores the factors underpinningthe inefficient ownership, allocation andefficiency of capital. Among the several

IV ORGANIZATION OF THE VDR

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explanations, it focuses on ones that are commonto all, namely weak institutions, distortedincentives and inadequate information—labeledas the three “I’s” of a market economy. Someof the key institutions that are found to be missingin Vietnam’s economy include an agency to clearlyspecify property rights and a market in which totrade those rights, an autonomous agency to dealwith the state management of SOEs, andimpartial regulators for infrastructure sectors suchas ports and industrial parks. Creating the rightincentives includes valuing land at market pricesfor all transactions involving government andcorporations, bringing an end to privileged accessof SOEs to factor inputs, aligning localgovernment interests with national priorities,providing public finance incentives for regionalcoordination, and making cash transfers to poorhouseholds directly rather than throughsubsidized prices. Measures also need to be takento lower the cost and improve the availability ofinformation, including a new disclosure policy forSOEs; improving budget transparency, especiallywith regard to large public infrastructure projects;and creating awareness among users ofinformation to demand credible information fromthe government.

34. Vietnam turned the crisis of the late-1980sinto one of the greatest development successesof our time. The country has shown itself to beremarkably adaptable and has made impressiveprogress during the initial transition years underextremely difficult conditions. It was the decisionto embrace market-based reforms and to changethe incentive structures to conform to marketprinciples that played a critical role in its success.

35. Vietnam can use the power of the marketand the facilitating role of the state to chart anew course to create a more efficient economyand a more productive society. While Vietnamhas embraced many policies of a marketeconomy, it has so far neglected the difficult taskof creating and strengthening market-supportinginstitutions. But the old forms of control areweakening and new activities are emerging thatthe system is not accustomed to or effective atregulating are rapidly emerging. These changeshave to be matched by development of newinstitutions, new incentive structures and a moretransparent and open society to support thestrong and healthy market economy that hasalready evolved. With a new Congress, a newNational Assembly and a new Administration inplace, this is the ideal time for Vietnam to embarkon its journey to developing a mature marketeconomy that befits its status of a dynamic,emerging middle-income country in Asia. Such ajourney is necessary, desirable and perhapsalready underway.

V EMBRACING MARKETS

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A LEVEL PLAYING FIELD: REFORMING THE STATE-OWNED SECTOR20



Chapter 2

20 Ivailo V. Izvorski, Sunita Kikeri, and Chul Ju Kim provided written inputsfor this chapter. The chapter also draws on two background studiesprepared by CIEM and a third study prepared by Nexus Consulting.For details, see the list of references at the end of the report.

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1. Few issues have evoked more passionatedebate in Vietnam in recent years than the issueof state ownership. Twenty-five years into thetransition to become a market economy, onewould think the country would have reachedclosure on this issue. And for a while it seemedit had. During the 1990s and the early 2000s,Vietnam equitized thousands of small andmedium-size state-owned enterprises (SOEs),and consolidated others into larger entities, calledthe General Corporations. But keen to emulatethe experience of Japan’s Keiretsus and theRepublic of Korea’s Chaebols, in 2005, Vietnamaccelerated the process of creating StateEconomic Groups (SEGs)—a loose alliance ofseveral SOEs with similar business interests21—before the country’s accession to the WorldTrade Organization. The SEGs initially did well,but their weaknesses were revealed when one oftheir members, the state-owned shipbuilderVinashin, failed to pay its international lenders andthe state inspectorate found widespread financialirregularities and mismanagement in the company.It also brought to light Vinashin’s hundreds ofsubsidiaries and affiliated companies thatoperated across a wide range of sectors—oftenfar removed from the parent company’s corebusiness—with size and influence much biggerthan ever imagined. This spurred a nationwidedebate about the role of the state and the futureof SOEs in Vietnam’s economy.

2. This chapter tries to understand why, 25years after Àöíi Múái, state ownership remains adominant feature of Vietnam’s economy.Vietnam aspires to become a market economywith a socialist orientation. A reading of thevarious resolutions of the Party Congress and the

Party Central Committee suggests that its leadersdid not necessarily see a contradiction betweenthe existence of a large state economic sectorand a market-oriented economy. But in recentyears, as the country apprears to have veeredtoward a model of state capitalism in which theSEGs have enjoyed privileged access to factorinputs and a high level of operational autonomy,more questions have been raised about theirusefulness. The situation was exacerbated whena few SOEs, taking advantage of weak oversightand transparency in the system, expanded theiroperation into areas beyond their corecompetency, mismanaged their finances, andconcealed information from the government—thereby tarnishing the reputation of the entiresector. As a result, the National Assembly in oneof its resolutions indicated that restructuring theSOEs will be a top priority of the government inthe next Socio-Economic Development Plan,spanning 2011 to 2015.

3. What will emerge from the current debateis unclear; possibilities range from cosmeticrestructuring to radical equitization (includingprivatization). With sharp deterioration in thehealth of some SOEs, the status quo is no longerviable. Several options are being discussed by thegovernment, although such discussions in the pasthave not always produced concrete actions. Thekey government agencies have been asked todevise a restructuring plan for the enterprise andbanking sectors. This is an important initiative, but,since state ownership is not just an economicissue but also a political choice, majorrestructuring of SOEs is unlikely without strongpolitical support. Any restructuring plan shouldbe firmly based on a clear consensus on the roleof the state in the economy and the desirableinstitutional arrangement to achieve that goal. Itwould have to involve a number of measuresincluding what we call a “DREAM” framework—Disclose, Regulate, Equitize, Account(able), andMonitor—a description of which follows.


21 An SEG is held together through a pyramid ownership structurein which the parent company is at the top of the pyramid witha controlling stake in a number of subsidiaries (the second layerof the pyramid). The parent company and the subsidiariestogether control the affiliated enterprises that form the bottomlayer of the pyramid. In certain cases, the affiliated enterprisesassociate themselves with the SEG to take advantage of thelatter’s brand value, technology, market reach, and variousintangible assets.

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l Disclose. A new information disclosure policythat requires SOEs, starting with the SEGs, toreport their financial stakes in all theirsubsidiaries and affiliated members and to timelyand accurately disclose their annual reports,audit reports, and earning statements throughprint and electronic media or the internet.

l Regulate. A modern corporate governancesystem that separates state ownership rightsfrom regulatory functions and implements anobjective and transparent mechanism for theselection of Chief Executive Officers (CEOs)and board members. There is also a need toput an end to SOEs’ privilege access to factorinputs and to value land at market price for allgovernment and corporate transactions.

l Equitize. There is no more certain way toimprove the internal functioning of SOEs thanto subject them to the discipline of the marketand oversight of the government. This wouldrequire accelerating the equitization of SOEs,including selling up to 49 percent of chartercapital of the SEG parent company.

l Accountable. Holding the SOEs accountablefor their actions, including a reward for greatertransparency and timely reporting of data andinformation and a penalty for noncompliance.

l Monitor. Overhauling the monitoring systemwith a provision for mandatory, independentannual audits and timely submission of financialdata to the relevant ministries and agencies.

4. The rest of the chapter is organized asfollows. Section II begins with a discussion onthe economic importance of SOEs and state-owned commercial banks (SOCBs) to thenational economy and their relativeperformance vis-à-vis their domestic private andforeign counterparts. Section III presents theresults of the survey “Changing Attitudes towardsMarket and State (CAMS 2011).” Section IVdiscusses the government’s ambivalent approachtoward SOE reform. Section V makes the case forlaunching a new policy to restructure SOEs. SectionVI discusses policy options and suggests a wayforward. (Box 2.1 provides a glossary of the termsused in this report.)

Box 2.1 The “Transition” Vocabulary

Following is a glossary of the terms used in this report, the definitions of which have evolved asVietnam has gone through its economic transition process.

Equitization. A process of selling part of the equity of an SOE or SOCB to the public or a strategicinvestor. In recent years, equitization has mostly taken place through an Initial Public Offering(IPO) followed by listing of the company in the stock exchange.

Divestment. A process by which the government sells a part of or all of its equity to the public orto the private sector after the initial equitization. In Vietnam, most SOEs are first equitized andthen gradually divested by the State Capital Investment Corporation (SCIC).

Joint Stock Company (JSC). A company with a diversified ownership structure and listed on thestock exchange. In theory, a JSC can be 100 percent privately owned or less than 99 percentgovernment owned, though in practice state ownership in a JSC rarely exceeds 80 percent.

Joint Stock Bank (JSB). The banking sector counterpart of a JSC.

State Sector. The part of the economy that is owned by the state (the government). For thepurpose of this report, the state sector comprises the following: (a) SOEs with 100 percent stateownership, (b) JSCs with more than 50 percent state ownership, (c) SOCBs with 100 percentstate ownership, and (d) JSBs with at least 80 percent state ownership. In this report, we also usestate economic sector, state-owned sector, and state-owned entities as synonymous with state sector.

Nonstate Sector. The part of the domestic economy in which the state is not the dominant owner.For the purpose of this report, the nonstate sector comprises domestic enterprises with 100percent private ownership and JSCs with less than 50 percent state ownership.

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5. Vietnam’s state sector has become smallerbut is still relatively large and inefficient. Theimportance of the state sector in the economyhas steadily declined as the domestic private andforeign sectors have rapidly grown over the lasttwo decades.23 However, the state sector still hasa sizable presence in the economy. It is also highlyinefficient in its use of factor inputs such as landand capital relative to its counterparts in thenonstate sector.

II.A LARGE BUT DECLININGIMPORTANCE

6. While the number of SOEs has steadilydeclined, their absolute number remains very

high.24 Between 1989 and 1992, thousands ofsmall, loss-making and inefficient SOEs wereclosed or merged reducing their numbers from12,084 to some 6000 (Griffen, 1998; World Bank,1999, Dixon, 2003). The number of SOEs did notchange much between 1992 and 1999—a periodthat was used to consolidate the sector by endingthe system of direct subsidies, revising the incentivestructures for workers and managers and increasingthe level of autonomy. So in 2000, Vietnam had5,759 SOEs of which 3,692 were owned by thelocal governments and 2,067 were owned by thecentral government (see panel A, figure 2.1).Through equitization, divestment, mergers,acquisitions, and liquidation, the number of SOEsrapidly declined between 2002 and 2005 and moreslowly between 2006 and 2008.25 In fact, in 2009,the trend was reversed and 175 new SOEs wereadded at the central level—a pattern that is likelyto have persisted during 2010 and 2011.

II THE STATE SECTOR:SIZE, IMPORTANCE, AND EFFICIENCY

23 See Fforde (2004) for an interesting account of the nature ofproperty rights in SOEs in Vietnam. Fforde argues thatVietnamese SOEs are best viewed as “virtual share companies,”with many SOEs being de facto privatized. His study isanecdotal; so when it comes to examining the importance ofSOEs in the economy, there is no substitute for official statistics,even if the statistics may not fully capture the reality.

24 The government defines an SOE as an enterprise with 100percent state ownership; the General Statistics Office, however,uses a broader (internationally accepted) definition to includeany enterprise in which the government has a controlling stake,that is, 51 percent or more of the charter capital. At the end of2010, according to the government, there were 1,200 SOEs inVietnam. The General Statistics Office puts the number at3,364. All the analysis involving the SOEs in this chapter is basedon the broader definition.

25 Vietnam’s experience is similar to that of China, where thenumber of SOEs also declined after the late 1990s, but manywere reorganized as subsidiaries of large SOEs rather than“equitized” or “divested.”

Figure 2.1 Number of SOEs Relative to Nonstate and Foreign Enterprises

Sources: GSO Enterprise Survey 2009; World Bank estimates.

Panel A Panel B

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7. The importance of SOEs in Vietnam’s economyhas steadily decreased due to the rapid expansionof privately owned enterprises. There has been adramatic growth in the number new enterprises inthe nonstate and foreign sectors in the countryduring the last decade. Between 2000 and 2009,there was a sevenfold increase in the number ofnonstate enterprises and over a fourfold increase inforeign enterprises, while the number of SOEs

declined by 40 percent during the same period (seepanel B, figure 2.1). As can be seen in table 2.1,except for a few subsectors such as constructionand insurance, the number of enterprises understate ownership is fairly small relative to the numberof firms operating in the nonstate and foreignsectors. As shown later, however, it is not thenumber but the size that matters when it comes tocompeting in the marketplace.

8. The decline in the importance of SOEs canalso be seen through their steadily diminishingshare in factor inputs. In 2000, SOEsaccounted for nearly 68 percent of capital, 55percent of fixed assets (such as land), 45percent of bank credit, and 59 percent of thejobs in the enterprise sector (figure 2.2). Sincethen, these numbers have steadily fallen, albeitat different speeds. The steepest decline has

been in the employment share of SOEs—from59 percent to 19 percent—as labor-intensiveSOEs have been equitized and the domesticprivate and foreign enterprises have expandedtheir labor force rapidly. As shown in figure 2.2,by 2009, the share of SOEs in capital, fixedassets, bank credit, and the employment in theenterprise sector had fallen to 39, 45, 27, and19 percent, respectively.

Table 2.1 Number of Enterprises at the Subsector Level (2009)

Unit (Enterprise) Share of Total (%)

Wearing Apparel 32 2,697 547 1.0 82.3 16.7

Chemicals 31 1,216 268 0.9 80.3 17.7

Rubber and Plastics 22 2,080 447 1.5 81.6 17.5

Electricity 80 1,919 5 3.1 95.8 0.2

Construction 388 24,022 129 19.4 97.9 0.5

Water transport 35 869 3 3.9 95.8 0.3

Telecommunication 30 776 10 3.7 95.1 1.2

Insurance 16 43 20 20.3 54.4 25.3

634 33,622 1,429 6.7 85.4 9.9

SOEs Nonstate Foreign SOEs Nonstate Foreign


Figure 2.2 Share of SOEs in Selected Indicators for the Enterprise Sector

Sources: General Statistics Office Handbook” 2010; State Bank of Vietnam; WB estimates.Note: LT = long term.

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9. Notwithstanding shrinking state ownership,the state not only controls all the criticalsectors, but also has considerable presence invarious commercial activities. As shown in figure2.3, the state sector enjoys near-monopoly statusin the production of several goods and servicesincluding fer tilizer (99 percent), coal (97percent), electricity and gas (94 percent),telecommunications (91 percent), water supply(90 percent), and insurance (88 percent).Though some of these sectors can beconsidered as critical and this has been used as

the basis to justify a large state presence, Vietnamis unusual in not allowing its own domestic privatesector to invest in them. More surprisingly, thestate has also maintained its presence in severalconsumer goods such as cement (51 percent),beer (41 percent), refined sugar (37 percent),textiles (21 percent), and chemicals (21 percent).Why does the state continue to invest in sectorswhere there are no market failures and the privatesector has the resources and expertise to performas well as the state sector? We look for theanswers in section IV.

II.B IS STATE OWNERSHIPLARGER THAN WE THINK?A CASE STUDY OF THEBANKING SECTOR

10. The diminished role of the state in theenterprise sector is paralleled in the bankingsector. The number of SOCBs has progressivelydeclined and the number of JSBs has steadilyincreased. Currently, there are only two bankswith 100 percent state ownership (Agribank andBank for Investment and Development ofVietnam) and three banks with state ownershipbetween 80 and 100 percent (Mekong HousingBank, Vietcombank, and Vietinbank). The rest are

JSBs.26 The share of SOCBs in credit allocationand deposit mobilization was between 70 and80 percent at the beginning of the last decade(figure 2.4). With increased equitization andgrowth of domestic private banks and foreignbanks, these numbers decreased to 45 to 50percent by 2010. At the level of individualbanks, the SOCBs are actually doing quite welland their business is growing at a healthy pace.Collectively, however, their share is fallingbecause their numbers are declining as more ofthem get converted into JSBs.

Figure 2.3 Share of SOEs in Output/Revenue for the Enterprise Sector (2009 or 2010)


26 For the purpose of this study, we count the recently equitizedbanks, Mekong Housing Bank, Vietcombank, and Vietinbank, alongwith Agribank and BIDV, as the five SOCBs. The rest arecounted as part of JSBs.

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11. The number of JSBs with state ownership hassteadily increased during the last five years. Asshown in panel A of figure 2.5, in 2005, of the 14banks for which ownership data are available, five hadcharter capital from the state. The number of JSBswith state capital progressively increased to 22 by2010, implying that nearly 60 percent of JSBs had

some charter capital from the state. As shown inpanel B of figure 2.5, the amount of state capital inthe JSBs has steadily increased from nearly VND 1trillion in 2005 to VND 15 trillion by 2010. So bothin terms of number of banks and the absoluteamount of charter capital, the state sector’s presencein the banking sector has increased.

12. The state continues to exerciseconsiderable ownership over a large numberof commercial banks. The size of stateownership in individual banks is reported infigure 2.6. It shows that the government hasdirect ownership in only nine banks—fiveSOCBs and four JSBs. Similarly, SOCBs havesome ownership in six JSBs. The large majorityof state ownership in the banking sector,however, comes through the SOEs, which hold

charter capital in as many as 19 JSBs. This ispartly the result of government policy toencourage SOEs and SOCBs to subscribe to thecharter capital of the JSBs to make theequitization process successful. The state,however, has a controlling stake in only one JSB(that is, Bao Viet Bank). Thus, while the statepresence is large in terms of number of banks, itis relatively small in terms of the share of thecharter capital in individual banks.

Figure 2.5 Number of JSBs with State Charter Capital and Amounts Involved (2005–10)

Figure 2.4 Share of SOCBs in Selected Indicators for the Banking Sector

Sources: “General Statistics Office Handbook” 2010; State Bank of Vietnam; World Bank estimates.

Sources: State Bank of Vietnam; Nexus Consulting; World Bank estimates.

Panel A Panel B

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13. But the share of state capital is relativelysmall and declining. State ownership in thebanking sector—measured by share of statecapital to total charter capital—has beenprogressively falling. As shown in panel A of figure2.7, the share of state capital in the total bankingsystem was 87 percent in 2005. It has rapidlydeclined since then and was 34 percent at theend of 2010. For the JSBs, the state share wasmuch smaller to start with—only 19 percent in2005. This number further declined to 10 percentby 2010, as shown in panel B of figure 2.7.

14. The dilution of state ownership, however, isnot the result of an intentional policy; rather, itis largely due to the poor financial health of theSOEs. Following State Bank of Vietnam’s

regulation, many small JSBs have been forced toincrease their equity capital in recent years. Someof the SOEs that hold equity in these JSBs havebeen unable to subscribe to additional equitybecause of their weak financial position, resultingin a gradual reduction in the state’s share of totalcharter capital. Moreover, with the ongoing stockmarket slump, those who had invested in theequity of JSBs have earned negative returns,further discouraging SOEs from buying newequity in the JSBs. However, when the financialsituation of SOEs improves, state ownership inthe banking sector will start to increase again,underscoring the need to have a clear policy onstate ownership that is independent of thewhims of stock market performance or SOEbalance sheets.

Figure 2.6 Size of State Ownership in Joint Stock Banks (2010)

Figure 2.7 Share of Charter Capital Held by the State Compared to Nonstate Sectors (2010)


Panel A Panel B


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15. If the overall share of state capital in JSBs issmall and declining, why has the number of JSBswith state capital been increasing? In otherwords, why do SOEs prefer to spread theirownership capital so thin across so many JSBs?Because ownership seems to carry benefits, evenwhen the SOEs do not have a controlling stake.As shown in figure 2.8, there is a positivecorrelation between the ownership structure ofthe banks and their loan exposure to the SOE

II.C INTENSIVE BUTINEFFICIENT USER OFRESOURCES

16. SOEs use certain factors of production—especially capital and land—more intensivelythan their peers in the private sector. One ofthe most intriguing features of the last few yearshas been the dramatic acceleration in the capitaland fixed asset base of SOEs. As shown in figure2.9, the average capital per SOE increased fromVND 130 billion to VND 768 billion in 2008—anumber that must have increased to even higherlevel in 2009 and 2010 because of rapid creditgrowth during those years. During the sameperiod, fixed assets (such as real estate andmachinery) and investment in an average SOEincreased six fold—from VND 110 billion to VND677 billion. The corresponding numbers forforeign enterprises remained stable during this

period. In the nonstate sector, average capital andfixed assets grew rapidly, albeit from a very lowbase. Since SOEs tend to operate in morecapital-intensive sectors (such as petrochemicals,energy, and telecommunications), it is notsurprising that their average capital and fixed assetusages are higher than their nonstate and foreigncounterparts. As shown in panel A of figure 2.10,the capital-to-employee ratio of SOEs in 2000was 0.4, which was not significantly different fromthe industry average of 0.3. However, by 2008,the capital intensity between the SOEs and therest of the industry had widened considerably.What is surprising is that this rapid growth offactor accumulation has not been accompaniedby a proportionate increase in output or higherlabor productivity.

sector, implying that SOEs do not always requirea controlling stake (that is, charter capitalexceeding 51 percent or more) in the JSB toinfluence lending activities in favor of their sector.27

It is, however, important to reiterate that this is anaverage relationship and there are many exceptions.In fact, there are a large number of JSBs with 30 to40 percent state ownership but with less than 2percent exposure to the SOE sector.

Figure 2.8 Banks with Greater State Ownership also have Greater Exposure to SOEs (2010)


27 What are the channels through which SOEs owning JSBs couldinfluence the latter’s lending decision is a critical question, butgoes well beyond the scope of our report.

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17. SOEs use several times more capital toproduce one unit of output than the industryaverage. In 2000, the average ratio of turnoverto capital (a proxy for the productivity of capital)in SOEs was 1.6 compared to 8.8 for theenterprise sector as a whole (panel A, figure 2.10).This implies that an average SOE required nearlynine units of capital to produce one unit of output(turnover) compared to the industry average. Thisis not entirely unexpected since SOEs specialize inmore capital-intensive products. What is quitealarming, however, is that by 2009 the average ratioof turnover to capital for the SOEs fell to 1.1 whileit increased to 21.0 for the industry. So while theenterprise sector as a whole was getting better atusing capital more economically, the SOEs wereusing it more extravagantly.

18. The growth of labor productivity in SOEshas not kept pace with the rest of the industry.Since SOEs have higher capital intensity than therest of the industry, and since this intensity hasrapidly increased in recent years, one wouldexpect SOEs to experience higher and risinglabor productivity relative to the rest of theenterprise sector. The evidence, however, showsthe opposite. As shown in panel C of figure 2.10,between 2000 and 2008, the turnover-to-employee ratio in SOEs increased from 0.6 to 1.7.During the same period, the turnover-to-employee ratio for the overall enterprise sectorincreased from 2.7 to 16.3, indicating that laborproductivity between SOEs and the rest of theenterprise sector widened from 1:4 in 2000 to1:10 in 2008!

Figure 2.9 Comparing Economic Performance of SOEs with the Rest of the Enterprise Sector

Figure 2.10 Economic Performance of SOEs Compared with the Rest of the Enterprise Sector

Panel A Panel B


Panel A Panel B

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19. SOEs are also less efficient in their use offixed assets such as land and machinery. Aspanel D of figure 2.10 shows, the turnover-to-fixed asset ratio—a proxy for the productivity ofland and machinery—fell for SOEs between 2000and 2008, while it remained unchanged for theenterprise sector during the same period. Thus,the SOEs have not only used factors inefficiently,but their level of inefficiency has greatlyaccelerated in recent years.

20. Along with being operationally less efficient,SOEs are also found to be financially lessprudent. As shown in figure 2.11, between 2007

and 2009, the debt-to-equity ratio of SOEsaveraged 307 percent relative to 183 percent fornonstate firms and 145 percent for foreign firms.The SOEs also had the highest debt-to-assetratio among the three groups. Though the SOEsregistered relatively healthy returns on theirequity (17 percent), they were below thenominal growth rate of the economy (19percent) and well below the return on equity offoreign firms (27 percent) achieved during 2007–09. Subsequently, the profitability of SOEs—which were more leveraged relative to the restof the enterprise sector—has deterioratedsignificantly due to high interest rates.28

Figure 2.11 Financial Performance of SOEs Compared to the Rest of the Sector (2007–09; in %)

Sources: GSO Enterprise Survey (2009); World Bank estimates.

Sources: GSO Enterprise Survey (2009); WB estimates.

Figure 2.10 (contd.) Economic Performance of SOEs Compared with the Rest of the Enterprise Sector

Panel C Panel D

28 There are increasing signs of deterioration in the financial healthof the SOEs. Vinashin has gone from defaulting on its externalloans to restructuring its local currency debt. EVN has incurredlosses for three consecutive years and has accumulatedconsiderable arrears against a number of other SOEs. Recently,

several SOEs in the cement sector failed to make payment ontheir bank loans, forcing the government to bail them out. Arecent study by the Communist Party found that total SOElosses have been climbing rapidly in recent years and called forurgent attention.

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21. The large state ownership in the Vietnameseeconomy seems to be at odds with theoverwhelming majority of people who prefergreater private ownership in the enterprisesector. In the World Bank-Vietnam Chamber ofCommerce and Industry (VCCI) survey on“Changing Attitudes toward Market and State”

(CAMS 2011), to which 967 people from a broadcross-section of society responded, anoverwhelming majority—7 out of 10respondents—preferred private ownership as thedominant ownership structure for the enterprisesector (see figure 2.12). Of the 967 respondents,666—fully 69 percent—said “private ownershipof enterprises is preferable to any other form ofownership,” 120 (13 percent) said “stateownership of enterprises is preferable to anyother form of ownership,” and 181 (19 percent)said that the ownership structure did not matterto them.29

III PUBLIC ATTITUDETOWARD STATEOWNERSHIP IN THEENTERPRISE SECTOR

29 It is ironic that the largest percentage of respondents who preferstate over private ownership of business work for privatedomestic firms. For an explanation and detailed results of thesurvey, see CAMS (2011).

Figure 2.12 Overwhelmingly, Respondents Prefer Private over State Ownership of Enterprises

Figure 2.13 Many Respondents Believe that the State Remains the Dominant Owner of Enterprises

Sources: CAMS 2011.

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22. Despite two decades of equitization, there isa strong perception among the people that stateownership remains the dominant ownershipstructure in the enterprise sector. In section II wehave discussed the declining importance of SOEsin the enterprise sector. However, in our survey,nearly 24 percent disagreed or strongly disagreedthat private ownership remains the dominant formof ownership structure in the enterprise sector,while 19 percent agreed or strongly agreed withthe statement (figure 2.13). There is, however,considerable diversity in the views among therespondents on this issue; fewer respondentsworking in the National Assembly, the CommunistParty of Vietnam (CPV), and the provincialgovernments agree that state ownership is thedominant ownership structure compared with therespondents from donors, civil societyorganizations, and the national government. Itseems that those working for the state feel that thestate has already relinquished considerableownership power over time, while those workingin nonstate sectors feel that is not enough andmore ownership needs to be transferred to theprivate sector.

12,000 in 1991 to 1,200 in 2010 (and to 3,400 inwhich the government had 51 percent or moreownership). At the same time, however,preservation (and expansion) has been thepreferred approach toward the large SOEs thatform the core of the state economic sector—theleading force of the economy. In fact, a closereading of the various resolutions of the PartyCongress and the Party Central Committeemakes it clear that since the early 1990s, the Partyhas been unequivocal in its stance on theestablishment of large economic groups.

24. Some may see a contradiction between theexistence of a large state economic sector anda market economy, but in Vietnam the two goalswere seen to be compatible.30 Since the early1990s, along with developing a multisectoralownership structure and moving toward amarket economy, the resolutions of the PartyCongress have always emphasized the leadingrole of the state economic sector (see table 2.2).In 1991, the VII Party Congress asked torearrange the enterprise unions and GeneralCorporations (GCs) along a market-orientedeconomy and to build some big enterpriseunions in order to attain sufficient prestige andcompetitiveness in foreign markets.31 In 1996,the VIII Party Congress gave clear direction toconcentrate state economic developmentresources on essential industries, such as socialand economic infrastructure; the financial,banking, and insurance system; importantbusiness production and service units; andenterprises in the national defense and securitysectors. In 2001, the resolutions of the XI PartyCongress and the third plenum of the PartyCentral Committee issued instructions for theestablishment SEGs, by selecting some of thegeneral corporations that are strong enough toplay a more catalytic role.

IV GOVERNMENT’SAPPROACH TO SOEREFORM

23. SOE reform in Vietnam can best becharacterized as one of simultaneous renovationand preservation. The renovation approach hasbeen applied to the small and medium-size SOEsthat were dissolved or merged with another “if theywere inefficient or lacked capital or technology ordid not have sufficient demand for their outputs”(Vu 2002, 7). As a result, the number of SOEs with100 percent government ownership fell from

30 This view is perhaps best captured by a senior policymaker whoonce remarked that “we equitize SOEs to make the state sectorstronger.”

31 Enterprise union is a way of grouping SOEs with similarproduction profiles into a big one which had legal status (unlikeSEGs) and completely controlled the union members.

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Table 2.2 Timeline of Selected Critical Pronouncements and Decisions Involving SOEs

l "... to rearrange enterprise groups in consistent manner with productionand business requirements of the new market mechanism ... to build somebig companies and enterprises with sufficient prestige and competitivenessto participate in international economic relations."

l 18 general corporations, so-called general corporations 91, were establishedl Aimed at reducing "the power of line agencies to interfere in business

management and capture profits and rents of SOEs."

l "To make a summary on state general corporations model, thereby, to buildmeasures for developing general corporations as strong economic groupswith good performance, high competitiveness, and acting as the backboneof the national economy ..."

l "... forming some strong economic groups consisting of state generalcorporations and others economic sectors, involving a multi-business model,in which a core business is defined for specialization, and the group playsdominating role in the national economy, holding large-scale capital, …establishing, on a pilot basis, some economic groups in some industries,which will have significant advantages, and are of development capacity forinternational competitiveness and integration…."

l 2005: Vietnam Post and Telecommunications, Vietnam National Coal-MineralIndustries, and Vietnam National Textile and Garment

l 2006: PetroVietnam, Vietnam Electricity, Vietnam Shipbuilding Industry,Vietnam Rubber

l 2007: Baoviet;l 2009: Vietnam National Chemical p, Industrial Construction;l 2010: Vietnam Housing and Urban Development.

Sources: CIEM (2011a)

1991: VII PartyCongress

1994: Decisions91 and 94 ofthe PrimeMinister

1996: VIII PartyCongress

2001: 3rdplenum of theParty CentralCom. (IX PartyCongress).

2005-10:Establishmentof pilot StateEconomicGroups

25. The government’s decision to create SEGsseems to have been hastened by its desire toachieve competitiveness in an increasinglyglobalized world. When Vietnam was preparingto join the World Trade Organization, officialsrealized that most domestic companies, includingthe GCs, were too weak to withstandcompetition from foreign investors. Thegovernment, therefore, moved decisively toestablish SEGs and provide them with privilegedaccess and autonomy to enable them to competewith foreign firms on an even footing. This movewas further strengthened by the idea that with acalibrated industrial policy in which the SEGs willplay a catalytic role, Vietnam can transform itself

into a modern and prosperous country. LikeKorea; Singapore; and Taiwan, China, in order forVietnam to catch up and be competitive, it wasbelieved that Vietnam needs to develop strategicindustries—cement, oil, power, steel,telecommunications, and so forth—and this canbe done only by large business groups withenough resources, capital, and technical capacityunder close state control, given the absence of astrong private sector.

26. The presence of SEGs has also been justifiedas a tool for macroeconomic adjustment and toperform social functions. During periods of highinflation, the government has controlled the price

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of commodities and services provided by SEGs—such as by EVN (electricity), Petro Vietnam(petroleum products), and VINACOMIN (coal)—and instructed the SEGs to reduce theirinvestment in order to curb excessive demand.32

The charter of all parent companies of the SEGslists a number of welfare and social responsibilitiesthat have been assigned to them by the state. Forexample, the Vietnam Post andTelecommunication Group is responsible forproviding telephone and i nternet services toisolated and remote areas, thereby facilitating localand national socioeconomic development (VNPT2010). Similarly, Decree 101/2009/ND-CP hasset several developmental goals for SEGs,including introducing new and advancedtechnologies in the country and facilitating thedevelopment of other industries and sectors.

27. As shown, instead of being the driving forcefor the economy, SOEs have struggled to keeppace with domestic private and foreignenterprises. In recent months, the number ofSOEs experiencing financial difficulties hasincreased.34 There is a growing consensus thatsome restructuring is now necessary. Opinion isdivided, however, about the nature and extent ofrestructuring.35 There are some who believe thatonly minor restructuring (such as trimming capitalexpenditure) is enough to restore the health ofSOEs and they can then go back to playing theirleading role in the economy. There are otherswho think that a more radical restructuring,including equitization of SEGs, is in the country’slong-term interest. If the problems that led to thefall of Vinashin reflect some of the generic issuesaffecting the state sector, then SOEs do faceserious challenges that can be addressed onlythrough a comprehensive reform program (seebox 2.2). We present below 10 reasons whyrestructuring of SOEs is an imperative.

V TEN REASONS INFAVOR OFRESTRUCTURING33

32 See Resolution No. 11/NQ-CP dated 24/02/2011 andResolution No. 08/2008/NQ-CP dated 31/3/2008.

33 The term “restructuring” has a very specific connotation, whichdoes not necessarily include equitization, divesture, andprivatization. In Vietnam, however, during the ongoing debate,this term has been increasingly used more broadly to imply“state enterprise reforms.” We too, therefore, use the word“restructuring” loosely to include all forms of SOE reform.

34 See footnote 8.35 One of the reviewers of this report—a national scholar—

said in his written comments that “currently, there is aconsensus that restructuring of SOEs including SEGs andcorporations is a must.”

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Box 2.2 The Rise and Fall of the Vinashin Shipbuilding Industry Group

Until recently, the Vietnam Shipbuilding Industry Group (Vinashin) was one of the largest SEGs inVietnam, with over 160 subsidiaries, including 39 shipyards offering shipbuilding, ship repair, shipping,heavy industries, and other services. It accounted for approximately 70 to 80 percent of ship-building capacity in the country and had nearly 70,000 employees. According to a report by theOffice of Government, the mother company of Vinashin had grown 35 to 40 percent annuallyduring 1997–2007 and consistently posted high profits. Reports indicate that Vinashin’s grossrevenue was nearly US$1.5 billion in 2008.

From 2006 to 2010, Vinashin signed 85 contracts worth US$2.84 billion, but completed only 15of them. It ran into financial difficulties in 2008 because several of its clients cancelled their ordersfollowing the global financial and economic crisis. Terminated contracts accounted for about halfof the group’s accumulated debt and interest, and fines further compounded the problem. It wasonly in mid-2010 that the extent of the problem became evident when more than 5,000 Vinashinworkers lost their jobs and the company failed to pay US$12 million in salaries and social insurance.The total Vinashin debt was reported to be US$4.4 billion in July 2010–more than 300 percentof its annual sales and as much as 10 times its equity base.

According to a report by the Government Inspection Committee, which was submitted to theNational Assembly in July 2010, Vinashin’s problems can be traced to the following factors: (a)violating regulations on project formulation, approval, and bidding, and incurring huge debt; (b)falsifying financial reports; (c) establishing as many as 200 subsidiaries and expanding outside itscore business operations (such as securities, real estate, and tourism); and (d) the Chairmancommitting serious violations and infringing regulations on the mobilization, management, and useof state capital. Key elements that led to the fall of Vinshin include weak corporate governance(including ineffective internal controls, limited transparency and disclosure, no independent externalaudits), lack of effective oversight and monitoring, and limited accountability and the excessivepower of senior management to operate and expand the business without clear accountability.

The day after the Government Inspection Committee report was submitted to the NationalAssembly, the Chairman of Vinashin was suspended and detained on mismanagement charges.Several other senior Vinashin officials were also subsequently arrested. A Steering Committee,chaired by the Deputy Prime Minister, was set up to restructure Vinashin. The Steering Committeehas asked Vinashin to sell or transfer its stake in noncore businesses to other SOEs such as PetroVietnam. The government said that it does not intend to make any debt repayments to thecreditors on behalf of Vinashin, although it will help creditors recover and regain financially viability.Later, KPMG, Vinashin’s auditor, was appointed as the restructuring adviser. Although more than18 months have passed since Vinashin’s problem first became public, Vinashin’s restructuring planremains tentative and its future uncertain.

Sources: Newspaper reports; meeting with Vinashin officials.

(i) SOEs are less efficient than nonstate andforeign firms. Evidence presented in sectionII.B shows that SOEs are inefficient users ofinputs such as land, bank credit, labor, andother fixed assets relative to nonstate andforeign enterprises. This has a significanteconomic cost. For example, during the lastdecade, if capital usage by SOEs had grown atthe same pace as that of foreign enterprises,

all else being equal, the country’s totaloutstanding bank credit at the end of 2010would have been 102 percent of grossdomestic product instead of 125 percent—which would have meant less rapid growth ofcredit in recent years. Similarly, moreeconomical usage of land by SOEs could havesignificantly increased the availability of landand kept real estate prices more affordable for

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the rest of the economy. Vietnam, still being apoor country from a global perspective, needsto use its precious resources such as land andcredit more efficiently.

(ii) Equitization has been good for SOEs. Studieshave shown that SOE performance haschanged positively after equitization. The paceof equitization was slow until 1997, with only17 SOEs equitized, mostly through sellingstakes at deeply discounted prices to workersand management in small SOEs. However, theequitization process gained speed after 2000,with a series of legislative and administrativemeasures including a five-year SOE reformplan adopted in 2001. As a result, the number

of firms equitized increased significantly—to856 in 2003 and 813 in 2004 (panel A, figure2.14). Two studies show that indicators, suchas turnover, profit, value added, and laborers’income increased rapidly after equitization(CIEM 2002, 2005). The 2002 study alsoinferred that “if the entire SOE sector wasreformed and grew as the equitizedenterprises did, Vietnam’s growth rate couldbe 0.6–0.7 percentage points per year higher.And if this higher growth rate could bemaintained for 11 years, the per capita incomeof the Vietnamese people would be doubled.”Similarly, the disinvestment process after someinitial problems has shown encouraging results(see box 2.3)

(iii) Rethinking industrial policy. While industrialpolicy can potentially be a powerful tool fordeveloping an economy, carrying out anindustrial policy does not necessarily meanusing SEGs as a tool. Indeed, it will involve adifferent set of policies from simplyaggregating companies under a singleumbrella. The Japanese Keiretsus and theKorean Chaebols that Vietnam has tried to

emulate were privately owned, were largelythe result of business activities rather thanadministrative measures, were internationalmarket-oriented and, most important,functioned in different times. Furthermore,industrial policy loses relevance when SEGsare asked to accumulate an increasingnumber of unrelated affiliated enterprises andfinancial institutions.

Figure 2.14 Equitization Has Slowed in Recent Years

Sources: Department of Enterprise Reform and Development, Office of the Government of Vietnam.

Panel A Panel B

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Box 2.3 State Capital Investment Corporation (SCIC)

Officially established in August 2006 as a 100 percent state-owned, for-profit company, the SCICis tasked with taking over the state capital in already equitized companies from line ministries andlocal governments, functioning as a government investor in charge of the state capital, and fullydivesting nonstrategic SOEs. The SCIC also invests in projects outside its portfolio, purchasescorporate equity and bonds, and manages a fund from the proceeds of divested enterprises underthe instructions of the Prime Minister.

After five years in operation, the SCIC have taken over the state stake in 933 equitized enterpriseswith a book value of VND 7,400 billion, representing 30 percent of SOEs but only 1.2 percent ofthe value of state capital in the economy. Of these, 466 have been divested, and the SCIC currentportfolio consists of 461 companies, most of which are expected to be sold in the next few years.The SCIC intends to keep only a small number of companies categorized as “strategic investments.”

The effectiveness of the SCIC has been limited by the lack of explicit criteria for handing overstate shares in large enterprises (for example, GCs), which is done on a case-by-case basis by thePrime Minister’s Office, and an inadequate regulatory framework for financial management in theSCIC. To strengthen the SCIC, the Party Politburo apparently has decided that by 2015 the SCICwould take over the state shares of equitized GCs, and by 2020 of equitized SEGs. It is expectedthat by then, the management of equitized state capital will be done by only the SCIC.

(iv) Too big to fail, too big to save. The everincreasing size of SEGs and the complexcross-holding of charter capital across andwithin enterprises makes it difficult for thestate to assess inherent risks involved in theiractivities and the contingent liabilities arisingfrom them.36 The financial risks from theSOEs can easily spill over to the broadereconomy, given the strong links betweenthem and some of the JSBs (see thediscussion in section III.A). At the same time,the total liabilities of the SOEs exceed thegovernment’s own debt, thereby posingenormous fiscal risk for the government.Thus, on one hand, the SEGs have becometoo big to fail, while on the other hand, theyare now too big to save. This poses both aconsiderable risk to the macroeconomic andfinancial stability of the country and acontingent burden on future taxpayers.

(v) The changing role of the state in theeconomy. The involvement of the state inthe production of goods and services isgenerally justified on three grounds: (a)market failure, that is, the market fails toprovide the goods or services because theprivate return is lower than the socialreturn;37 (b) the private sector isunderdeveloped and lacks capital or skill todeliver certain goods or services;38 and (c)during periods of unprecedented economicor financial crises, the government issometimes forced to temporarily bail outinsolvent or illiquid enterprises or banks inthe national interest. In the case of Vietnam,as the discussion in section II shows, theSOEs are producing goods such as beer, milk,sugar, and textiles, and services such as

36 Currently, the total liabilities of SOEs far exceed the total debtof the Government of Vietnam.

37 Primary education, space research, and developing greentechnologies are some of the activities where the returns onprivate investment may be lower than social returns, justifyinggovernment involvement.

38 The private sector in Vietnam is rather new and has limitedcapacity and capital. Therefore, it may not be able to handledemanding infrastructure projects such as big hydropower damsor operating railways, providing the basis for governmentinvolvement in the early stages.

Sources: Meeting with SCIC officials.

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brokerage firms, hotels, and real estatecompanies, that are in direct competitionwith privately owned companies. There islittle justification for the state to remaininvolved in these areas, especially given itsinability to monitor SOE activities andimprove their corporate governance.

(vi) An uneven playing field. The SOEs tend toget preferential access to banking credit,procurement contracts, and research anddevelopment compared to their peers in theprivate sector. For instance, the governmenton-lent nearly US$2 billion from aninternational bond issuance and overseasdevelopment assistance to SOEs during2010. The research and analysis undertakenby more than 300 research institutes underthe control of government ministries areexclusively used by the SOEs. Some evenaccuse the SEGs of influencing and interferingwith important government policy decisions.Unlike the private sector, the SOEs face asoft budget constraint, meaning that the statebails them out when they are in financialstress. Under these circumstances, SOEs,despite their operational inefficiencies, canout-compete and crowd out the privatesector (USAID 2010). Since no country hasbecome a modern, industrialized countrywithout the private sector playing adominant role, Vietnam’s long-term goal isbest served by creating a level playing fieldfor both state and privately ownedenterprises.

(vii) Slow to embrace modern corporategovernance and transparency. Vietnam’sSOEs cannot become industry leaders if theydo not adopt sound corporate governancepractices. SEGs and SOEs are subject to the2005 Law on Enterprises, but for many, theadministrative re-registration of type ofenterprise is yet to be accompanied byadherence to the provisions of the law,including those that mandate corporategovernance (for example, a Control Boardand a Board of Management), improvedtransparency (for example, disclosure of

timely operational and financial information,including their ownership structure, financialstatements, and audit reports), andprotection of minority shareholders.

(viii) Weak and incomplete corporateframework. The initial legal framework forthe establishment and operation of SEGscan be traced to Article 149 of the 2005Law on Enterprises. Detailed instructions onimplementing the law are described inDecree 139/2007/ND-CP, promulgatednearly two years after the first pilot SEG wasestablished; and Decree 102/2010/ND-CP,promulgated nearly five years after the firstpilot SEG was established. The legalframework provided by these threeregulations, however, is inadequate. Decree139 defines SEGs as being of “big scale”without defining “big.” Similarly, Decree 102says SEGs will have a “parent-subsidiarymodel,” but by that definition, many moreSOEs, and not just the 12 established so far,should have been characterized as SEGs.Starting July 1, 2010, all SEGs have beenregistered as one-member limited liabilitycompanies (except Bao Viet) and aresupposed to operate under the 2005 Lawon Enterprises. However, there isconsiderable confusion in interpretingvarious articles in the Law on Enterprisesand their applicability to the SOEs.

(ix) Lack of vision and clarity regarding theirroles. It is often said that SOEs have multipleobjectives and missions as: (a) an instrumentof industrial policy, (b) a tool for regulatingand stabilizing the macro economy, (c) a toolfor meeting the social objectives of thegovernment, (d) a source of competitionagainst foreign enterprises, and (e) thefoundation of the economic mechanism ofthe socialist-oriented market economy.However, in reality, SEGs and GCs do nothave a clear vision and do not identify howtheir mission is consistent with thedevelopment goals of the country. They areexpected to perform social functions, yetthey do not show their social responsibilities

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and values in their business strategy andoperation. They are required to be a tool forstabilizing the macro economy, yet they areamong the factors that have contributed tomacroeconomic instability in recent years.They are required to concentrate on solvingstrategic problems of development, yet theytend to pursue short-term interests, seekingfinancial gains and rent, where available.

(x) Leveraging SOE reform to develop theprivate sector. If the government iscommitted to private sector growth, thenthe SOE portfolio can be used as a powerfultool to support this policy. SOE reformcreates both market and investmentopportunities for the private sector. WhenSOEs that compete with the private sectorare divested, a more level competitive playingfield is often the result. Where fullprivatization is not feasible or desirable, thecontracting out of selected services by SOEsto the private sector can enable smaller localfirms, either on their own or in a jointventure with offshore parties, to bid for thenew services. Similarly, equitization andpublic-private partnerships can helpaccelerate commercialization and increaseefficiency, provided there are robustgovernance arrangements, full transparency,and arms-length relationships withgovernment shareholders.

28. There are, of course, a number of reasonsagainst radical restructuring, one of them beingthe impact on employment. During the early2000s, when Vietnam equitized a number of itsSOEs, the economy was booming and the privatesector could absorb the retrenched workers fromthe state sector easily. Given the current economicuncertainty and the weak safety net in Vietnam,there are reasons to pursue a restructuring policythat is pro-cyclical in nature (more restructuringwhen times are good and vice-versa) and one thatdoes not result in mass layoffs.

29. Successful restructuring of SOEs ispredicated on finding appropriate technicalsolutions that can foster a political consensus.As discussed in Chapter 1, Vietnam hastraditionally chosen a step-by-step, gradualistapproach to reform rather than “big bang”solutions to address its economic problems. Thisapproach is unlikely to change when it comes toreforming the SOEs, especially given the superiorstatus granted to the state sector in theconstitution. Therefore, reaching consensus onextreme positions such as equitizing all SOEs willbe difficult. At the same time, trimming the capitalspending of SOEs is not a solution, either. Belowwe present several ideas that try to balance theeconomic imperative of restructuring the SOEswith the social and political imperatives ofmaintaining a dominant role for the state sector.

30. The government has announced severalinitiatives in recent months. It has established aSteering Committee for restructuring SOEs,headed by the Finance Minister (November 21,2011), improved the legal framework forequitization (Decree 59/2011/ND-CP, July 18,2011), and is in the process of formulating adecree to separate the state regulation functionfrom state ownership rights.39 The recentlyapproved Socio-Economic Development Planand the annual plan have identified three mainareas for SOE reform, including strengtheningcorporate governance, stepping up equitization,and developing the legal framework for SOEs.

VI REFORM OPTIONS

39 Decree 59 overcomes several rigid provisions of its predecessor,Decree 109/2007, and introduces more flexibility in selectionof strategic investors, in determining share prices, and insequence of equitization and IPOs.

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31.While such ad-hoc initiatives are welcome,agreement on the “broad principles” that willdefine the restructuring plan is needed. Thereare three major issues on which up-frontagreement is necessary. First, should SEGs beincluded in the restructuring plan? In our view, theyshould be, given that SEGs have been the sourceof many of the problems described in section V, andthe ongoing restructuring of Vinashin has not gonewell. Second, should the state continue to runbusinesses in nonstrategic, commercial-oriented

sectors? In our view, it should not, given that it isstifling the emergence of a strong private sector inthe country (see box 2.4 on Korea’s experience).Third, who should be given the responsibility forpreparing the restructuring plan? There are twocontenders for this job: line ministries and anautonomous agency. We believe that anautonomous agency with the right technicalexpertise and one with strong support from thegovernment, Party, and National Assembly will bebetter placed to carry out such an exercise.

32. Constituting a commission with themandate to prepare a roadmap for restructuringSOEs could be a useful starting point. Somehave suggested appointing an autonomousbody—to be named the National EconomicRestructuring Commission (NERC)—composedof technical experts with the mandate to identifyand classify SOEs into three groups (irrespectiveof the status of the SOE as a parent orsubsidiary):40 (a) those that need to beimmediately equitized, with the government stake

reduced to under 51 percent; (b) those that needto be restructured first and equitized later, withgovernment ownership kept at 51 percent; and(c) those that will always remain under 100percent state ownership but that still need to berestructured and their corporate governancestrengthened. The commission could also be giventhe mandate to recommend a time-bound planof equitization, divestment, privatization, mergers,acquisitions, liquidation, and restructuring of SOEsaccording to the above classifications.41

40 Such an idea was discussed at a conference organized by theNational Financial Supervision Commission on October 17,2011, where a National Assembly Delegate made this proposaland several national scholars and experts seconded the idea.

41 The National Steering Committee for Enterprise Reform andDevelopment (NSCERD) comes closest to having a mandatesimilar to one being envisaged for NERC, but it does not enjoythe autonomy that NERC would need to be successful.

Box 2.4 Korean Experience of SOE Reform

Like in many other developing countries, SOEs were important in the Korean economy, especiallyin network industries and the banking sector. But even a country like Korea, whose approach toSOE reform could be characterized as “managerial efficiency first, privatization later,” adopted amore aggressive approach to reform its SOE sector than Vietnam.

In the initial years, the government sought to improve the performance of public enterprises whileretaining majority control. A major reform came in 1983 (when Korea was still a low incomecountry) with passage of the Government-Owned Enterprise Act, which sharply reduced politicalappointments at SOEs, gave managers greater autonomy, and introduced incentives linked to arigorous system of performance evaluation. With the line ministries involved in management toa limited extent, the Korean SOEs managed to achieve the highest level of operating efficiency inindustries such as telecommunications, electricity, natural gas, constructing expressways, and steel.

With the increasing liberalization of the economy since the mid-1980s, Korea took the next stepand began to draft a full-fledged privatization program. The financial crisis in 1997 furtheraccelerated this process. Under the 1997 Act on the Managerial Structure Improvement andPrivatization of SOEs, the government fully privatized large commercially run SOEs such as KoreaTelecom, POSCO (an iron and steel company), Korea Tobacco & Ginseng, and many other SOEs.Studies show that in most of the privatized SOEs, managerial performance improved significantlyafter privatization.

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33. Restructuring SOEs is not only technicallythe correct thing to do, but also enjoys strongpopular support. In our CAMS 2011 survey, weasked respondents to rate different measures thatcould improve the functioning and efficiency ofSOEs on a scale that goes from being highlyeffective to being highly ineffective. Theresponse of the 967 respondents is summarizedin figure 2.15. It shows that 88 percent ofrespondents felt that improving the transparencyof SOEs can be a highly or moderately effectivetool, while 86 percent believed that a more

independent audit of SOEs would be helpful.There seems to be equally strong support foraccelerating the equitization program and forstrengthening regulation of SOEs. Evenmeasures such as reducing financial supportfrom the government and ending privilegedaccess to bank credit and guarantees to SOEsseem to enjoy the support of more than half therespondents. While economic policies shouldnot always be based on popular sentiment, inthis particular case, good economics and goodpolitics seem to go hand in hand.

34. The SOE reform efforts, therefore, need tobe more comprehensive. To date, thegovernment has focused largely on equitization.Equitization is an important step in a successfultransformation of SOEs and needs to becomplemented, by a host of other steps, includingstrategic and business planning, corporate andfinancial restructuring, forming value-addingbusiness partnerships or alliances, andimplementing more transparent governance.Enhancing the market education of managementand staff, modernizing management informationsystems and human resource developmentsystems, and listing on the stock exchange areadditional steps and challenges that need to beaddressed for effective and comprehensivetransformation.

35. We propose a framework, referred to as the“DREAM” framework—an acronym for

Disclose, Regulate, Equitize, Accountable, andMonitor—that provides a broad range of ideasto address various weaknesses in the currentregime governing SOEs. SOEs cannot becomethe leading sector of the economy byadministrative fiat; they must earn it. And to earnsuch status they need to operate on a levelplaying field, which would involve the elements ofthe DREAM framework, discussed below.

VI.A MORE DISCLOSURE

36. Many of Vinashin’s problems could have beennipped in the bud had more information aboutthe company been publicly available (see box2.2). The creditors would have been lessgenerous in lending money to Vinashin, and thegovernment could have taken preemptivemeasures to limit Vinashin’s dizzy growth into

Figure 2.15 Strong Support from Respondents to Various Measures to Restructure the SOEs

Sources: CAMS 2011.

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noncore activities. The same story applies tomany other SOEs in similarly difficult situations.Therefore, it is necessary to adopt a newinformation policy that makes it mandatory forSOEs (including SEGs) to provide the samelevel information that listed companies inVietnam are required to disclose to the public.Below is a list of some of the information thatshould be published by economic groups in atimely manner :

l Audited half-yearly consolidated financialstatements and annual financial statements,and annual reports of the parent companyand of the overall group (if the SOE is an SEG)

l Decisions of ownership agencies; resolutions,decisions of Boards of Management, andminutes of these decision meetings,

l Investment portfolio and progress of currentinvestment projects,

l Large-scale transactions, large loans or debts,and other contingent transactions,

l Long-term targets, detailed annual targets, andearning guidance

l Information about the members of Boards ofManagement and other core personnel ofgroups (personal information, professionalqualification, experience, previous posts,management area, salary payment method,and other benefits; kin and their positions,curriculum vitae, their annual evaluation asbusiness managers, and other relevantinformation),

l Market information, forecasts on productmarkets, and related market risks, and

l Information on related stakeholders, andtransactions with involved stakeholders.

37. Some would argue that asking SOEs todisclose more information is easier said thandone, since many of them do not have thenecessary systems and practices in place togenerate credible data that the marketdemands. Therefore, it is important to determinethe requirements of SEG transparency; establishand issue detailed guidelines on SEGtransparency; determine the organization and

persons that have responsibility for SEGtransparency, and establish and issue sanctions.These sanctions should not only be applied toSEGs and managerial positions, but also to theagencies, organizations, and persons in charge ofmanaging and supervising SEGs, corporategovernance in SEGs, SEG transparency, and SEGmonopoly.

VI.B IMPROVED REGULATIONAND CORPORATEGOVERNANCE

38. A more comprehensive approach to SOEreform is needed that accelerates thecommercialization process through thedevelopment and implementation of soundlegal and regulatory frameworks. Thisframework needs to provide SOEs with anoperating environment and performanceincentives similar to those of private sectorfirms, protect them from inappropriate politicalinterference, and ensure that they are fullyaccountable for their financial results. Keyelements of the process include (a)strengthening corporate governance—SOEsshould be managed by skilled and experienceddirectors who make decisions that are clearly inthe best commercial interests of the SOE, itsowners, and key stakeholders; (b) implementingrobust frameworks for “public serviceobligations”—these should be delivered only ona full cost-recovery basis, which requires thatnoncommercial services are identified, costed,contracted, monitored, and transparentlyfinanced. Where feasible the contract may betendered to the private sector ; and (c) imposinghard budget constraints—commercialized SOEsshould operate under the same hard budgetconstraints as private sector firms.Strengthened governance practices and hardbudget constraints will increase thetransparency and independence of SOEs,allowing governments to better assess theircontributions and hold them accountable forperformance. Some of the key guiding principlesof a corporate governance framework for SOEsare presented in box 2.5.

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39. Most of the SOEs equitized to date aresmall; about 50 percent have capital of less thanVND 5 billion. The challenge ahead is to equitizeand transform the General Corporations andSEGs into efficient and profitable entities, in orderto fully unleash the potential value of their assets,including their constituent companies.

40. There is no surer way to improve corporategovernance of SOEs than to subject them tomarket discipline and government oversight.

SOEs can generally be categorized into twogroups:(a) purely commercial SOEs that are apoor use of public funds (they provide low ratesof return while crowding out the private sector);and (b) infrastructure service SOEs that areinefficient and produce disappointing financialresults, in part because “public service obligations”are not well managed. Purely commercial SOEsshould be equitized, and infrastructure serviceSOEs should be carefully restructured so thatcommercial discipline can be introduced into theirgovernance structures and management systemsand incentive mechanisms can be established.This process may require further analysis of large,

Box 2.5 OECD Guidelines on Corporate Governance of SOEs

Ensuring an Effective Legal and Regulatory Framework for State-Owned Enterprises: The legal andregulatory framework for SOEs should ensure a level playing field in markets where SOEs andprivate sector companies compete in order to avoid market distortions. This implies clearseparation between the state’s ownership function, simplified operational practices for SOEs,uniform application of general laws and regulations to all enterprises including SOEs, and noprivileged access to SOEs for factor of production, including finance.

The State Acting as an Owner: The state should act as an informed and active owner and establisha clear and consistent ownership policy, ensuring that the governance of SOEs is carried out in atransparent and accountable manner, with the necessary degree of professionalism andeffectiveness (for example, no involvement of government in the day-to-day management of SOEs;the state should let SOE boards exercise their responsibilities and respect their independence).

Equitable Treatment of Shareholders: The state and SOEs should recognize the rights of allshareholders and ensure their equitable treatment and equal access to corporate information(for example, SOEs should observe a high degree of transparency toward all shareholders, developan active policy of communication and consultation with all shareholders, and protect the rightsof minority shareholders).

Relations with Stakeholders: The state ownership policy should fully recognize the SOEs’responsibilities toward stakeholders and request that they report on their relations withstakeholders (for example, large SOEs, and SOEs pursuing important public policy objectives,should report on stakeholder relations).

Transparency and Disclosure: SOEs should observe high standards of transparency such asdeveloping consistent and aggregate reporting and an annual independent external audit basedon international standards.

Responsibilities of SOE Boards: SOE boards should have the necessary authority, competencies, andobjectivity to carry out their function of strategic guidance and monitoring of management. Theyshould act with integrity and be held accountable for their actions (for example, SOE boardsshould be assigned a clear mandate, responsibility for the company’s performance, and be fullyaccountable to the owners; they should be constituted in such a way that they can exerciseobjective and independent judgment).

Sources: OECD Guidelines on Corporate Governance of State-Owned Enterprises 2005.

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complex SOEs to prepare them for financialrestructuring, and subsequent reforms toregulatory framework governing SOEs.

41. If the idea is to promote competition andcreate a truly level playing field, the governmentmight consider a more aggressive option ofequitizing many of the GCs and SEGs. Exceptfor the BaoViet group, which has completedequitization, 100 percent of the charter capital ofthe other 11 SEGs is held by the state. Instead ofequitizing only the member companies, equitizingthe parent companies might also be considered.With some groups, like Vinatex; Housing andUrban Development and Investment; theIndustrial Construction Group; and SOEsproducing beer, sugar, and similar goods forcommercial purpose, for instance, the statecould reduce its share in these industries tobelow 50 percent in the near term and to zeroin the long term. With other groups, the statemay hold a dominating share of capital (51percent) instead of 100 percent of capital inparent companies. Finally, only in SEGs involvedin national defense and security should the stateshare remain at 100 percent.

VI.D STRENGTHENINGMONITORING ANDOVERSIGHT

42. Giving more operational autonomy to SOEsdoes not mean an end to monitoring andoversight on the part of the government, as

some have interpreted it in the Vietnam context.Implementing sound performance monitoringsystems (PMS) is in fact central to enhancing thetransparency and accountability of SOEs. Ingeneral, a PMS includes (a) development ofstrategies and objectives for each company, (b)creation of key performance indicators (tomeasure the implementation of their strategy andobjectives), and (c) preparation of a “performanceagreement” that presents the high-level objectivesand establishes the targets for each indicator (seebox 2.6).

43. In Vietnam, efforts to develop a PMS forSOEs will face two immediate challenges. First,given the sheer number of SOEs (nearly 3,400in 2010), developing such a system for each SOEwill be time-consuming and laborious. Localgovernments, which own nearly 60 percent of theSOEs, may not have the manpower and capacityto undertake such an exercise. Second, this mayrequire SOEs to invest in establishing managementand supervision information systems consisting ofinformation on finance, business performance, andrelated risks and changes, which can be bothexpensive and time-consuming. Vietnam, therefore,may not be able to develop a meaningful andeffective PMS for SOEs unless the number of SOEsis drastically reduced. Therefore, in our view,developing PMS should begin with a pilot phaseinvolving all 12 SEGs, which have better informationsystems, the necessary manpower, and account formore than half of the SOE sector (after taking intoaccount their subsidiaries and affiliates), toundertake such an exercise.

Box 2.6 Developing SOE Performance Monitoring Systems

Developing monitoring systems involves several steps. A first step is to clearly define the strategyand objectives of the company. Often, SOEs have multiple and conflicting objectives, making it difficultto measure and monitor performance. For example, an SOE must operate in a commercial mannerand be profitable, but at the same time it is often required, either formally or informally, to providesocial services and maintain employment, usually without compensation from the government. Suchnoncommercial objectives may not be easy to eliminate, but a first step is to define and acknowledgesuch objectives explicitly so that they are transparent and more easily monitorable.

Once objectives are clearly defined, the next step is to develop key performance indicators tomeasure performance against expected results. Experience suggests several key principles in

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44. Establishing clear accountability requiresowners and boards to benchmark performanceagainst clear objectives. Therefore establishing amonitoring system is key to holding SOEsaccountable. As discussed in box 2.7, somecountries have developed performancemanagement systems and use it to reward SOEswith good performance and penalize SOEs that

function poorly. This creates competition amongthe SOEs and helps them produce better results.

45. Accountability needs to be developed atboth the organizational and individual level. Inaddition, the process through whichperformance is evaluated and accountabilitydetermined should be transparent and objective.Therefore, along with proper monitoring,transparency is key to holding SOEs accountable(as discussed in section VI.A).

selecting and designing appropriate indicators: (a) indicators should be specific, measurable, andachievable; (b) they should not distort incentive structures; (c) they should facilitate benchmarkingagainst other companies, including international companies, while recognizing country differencesin accounting rules, taxation policies, and cost structures; and (d) they should be simple to beginwith and improved over time with increased experience and capacity. Good indicators are bothfinancial and nonfinancial. Financial indicators typically include profitability, efficiency, solvency, andbudgetary support. Many countries are beginning to use the concept of “economic value added”to measure the true economic profit produced by a company by accounting for the cost of capital.Nonfinancial indicators include strategy development, corporate governance, innovation, andlearning and development. One way to assess overall performance is to use a “balanced scorecard” approach, which is more comprehensive and aims to strike a better balance between financialand nonfinancial indicators.

Once objectives, indicators, and targets are agreed between owners and SOEs, they are typicallyformalized in an agreement document such as a Statement of Corporate Intent, a PerformanceContract, a Memorandum of Understanding, or a Shareholders’ Agreement. Developing such adocument is usually a collaborative process between owners and SOEs. In most cases, a regulationor a protocol specifies the process and the roles and responsibilities of the various parties.Developing agreements can be a complex task that requires the right industry and financial skillson the part of both boards and owners. To be an informed owner, SOE ownership entitiessometimes bring in external experts to help draft the agreement. In most cases, agreements aredeveloped on a yearly basis, although they may also cover longer time periods.

Finally, SOE owners review and evaluate performance and take action based on any problemsdetected. This can be done through ongoing monitoring through information disclosure, an annualperformance review, or both. A performance review includes an assessment of financial andnonfinancial results against the key performance indicators, and could also include a more generalassessment of operating results, the company’s commitment to good corporate governance, andthe performance of the board. Auditing and disclosure of key performance indicators is gainingtraction as a way to ensure the reliability of the process. The assessment would also identify stepsto be taken by SOEs and owners and provide the basis for discussing objectives for the comingyear. Increasingly, countries are linking an annual review to performance-based compensationsystems for SOE management.

Sources: “Toolkit on State Enterprise Corporate Governance,” Finance and Private Sector Development, World Bank, forthcoming.

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Box 2.7 Using PMS to Hold SOEs Accountable—An Example from India

In India, Central Public Sector Enterprises (CPSEs) are monitored and evaluated through theMemorandum of Understanding (MOU) process, a performance agreement negotiated and signedbetween a CPSE and its administrative ministry. Established in 1986, the main goal was to improveCPSE performance by providing greater autonomy to the enterprises while holding themaccountable for results through the MOU, which set out objectives, targets, and incentive-basedrewards. The MOU system has steadily evolved and improved over the past 20-plus years, andhas become a key tool for ensuring accountability of CPSEs and their directors.

The MOU’s contents are set by government guidelines and include (a) a mission statement, (b)CPSE objectives, (c) areas where power has been delegated to the CPSE, (d) performance targets,and (e) commitments from the government to the CPSE.

In practice, the primary focus of each MOU is the performance targets. Department of PublicEnterprises guidelines specify particular financial and nonfinancial or dynamic targets, with differentweights assigned to each, based on the broad sector the CPSE operates in (loss-making companiesand those under construction have their own formats). A balanced scorecard approach is used,with 50 percent of the weight given to financial targets and 50 percent to nonfinancial targets.

MOU negotiations are arranged by the Department of Public Enterprises and facilitated by 11“Task Force Syndicates,” organized by sector. Each CPSE is assigned to a particular Task Force,which approves the MOU and evaluates how well the enterprise did in meeting the targets. EachTask Force consists of the convener, six members, and the Task Force members. The six membersconsist of retired civil servants, public sector executives, management professionals, andindependent members with relevant experience. Task Forces were formed to bring technicalexpertise that was considered lacking in the government and the CPSE, and to bring independenceto the process (no current government member can serve on the Task Force). Final MOUs mustbe approved by the High Powered Committee, which also assesses the performance of bothCPSEs and administrative ministries in meeting their commitments.

Performance is evaluated based on a comparison between actual achievements and the agreedannual targets. It is measured on a five-point scale, ranging from excellent (1) to poor (5) foreach target area. Typically, a majority of CPSEs receive scores between 1 and 2, indicating thatthey are top performers. Performance incentives are monetary and nonmonetary. Monetarypayments are based on MOU scores. Nonmonetary incentives include Excellence Awards forthe best-performing CPSEs, and Excellence Certificates for CPSEs with a final rank of 1.5 or better.The score is also taken into account in the evaluation of and bonuses for managing directors andother senior officers. (Companies are rated by their score, with high-scoring companies accordedthe status of Navratna [royal jewel] and Miniratna [mini-jewel]). If high-status companies do notshow consistent performance for three consecutive years, they can lose their status.

The World Bank (2009) identified room for further improvement, including improving thecapability of the task forces, including corporate governance, social objectives, and service deliverytargets in the MOU, clarifying ownership obligations, and providing more disclosure.

Sources: India: “Corporate Governance of Central Public Sector Enterprises,” World Bank, June 2010.

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VI.F PACE AND SEQUENCE OFTHE REFORM PROGRAM

46. For effective results, the pace and sequenceof the SOE reform program should becalibrated to the urgency of the situation andthe capacity of the implementing agencies. Inthe case of Vietnam, many of the ideas mentionedabove have been under discussion for a long timeand their implications are well understood.Nevertheless, it is important that adequatethought be given to the implementationarrangements. One possibility is to adopt a two-pronged approach of kick-starting the equitizationprocess of enterprises operating in noncriticalsectors (irrespective of size) and restructuring theones operating in the critical sector. For those

operating in the critical sector, the key is to startwith a pilot exercise to develop a performancemonitoring system for each of the 12 SEGs,facilitate more disclosure about their operationalactivities, hold them accountable to the mutuallyagreed performance goals, and work on amodern corporate governance code. If a moreaggressive equitization and restructuring policy ispursued, it should be complemented withadequate investment in social safety net programsto avoid a sharp displacement of workers. Thereis little doubt that once the political consensus onthe nature and extent of restructuring of SOEshas been reached, the government will movequickly to implement arrangements that willdefine the appropriate pace and sequencing ofthe reform program.

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DOING MORE FOR LESS:IMPROVING THE EFFECTIVENESS

OF PUBLIC INVESTMENT42



Chapter 3

42 This chapter draws on a number of background studies commissionedas part of the Vietnam Development Report 2012, including CIEM(2011), Thanh and Pincus (2011), and Tuyen (2011). For details, seethe list of references at the end of the report.

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1. Vietnam has been highly successful inmobilizing huge investment to support its rapidgrowth. During the past two decades, itseconomy has grown at an annual average rate ofaround 7.5 percent, making Vietnam one of thefastest growing countries in the world. Thissuccessful growth story has been driven primarilyby rapid factor accumulation—physical andhuman capital—with productivity growth playinga secondary role.43,44 Its track record in mobilizinginvestment—both at home and abroad and fromprivate and official sources—has been impressive.As shown in panel A of figure 3.1, Vietnam has thehighest investment rate after China among theselect group of large emerging markets in theworld. It is also one of the highest recipients offoreign direct investment, which averaged over 7percent of gross domestic product (GDP) during2005–10 (panel B of figure 3.1). At the same time,Vietnam remains the highest recipient of netOfficial Development Assistance (panel C offigure 3.1) outside the group of low-incomecountries. Undoubtedly, the country’s ability toattract considerable capital from diverse sourceshas been a key part of its development success.

2. Equally important has been Vietnam’s abilityto translate the high level of investment intobasic infrastructure services, making thedevelopment process extraordinarily inclusive.Consider the following facts. The ratio of ruralhouseholds connected to electricity gridsincreased from 14 percent in 1993 to almostuniversal access by 2010. From a mere 8.8 billionkilowatt hours of electricity production in 1990,output soared to 80 billion kilowatt hours in2009—a remarkable annual average growth rateof 13 percent. Between 2000 and 2010, the total

length of paved roads in Vietnam quadrupledfrom 30,000 kilometers (km) to almost 120,000km, connecting farms and firms with the marketand lowering transaction costs. The number ofhouseholds with access to a piped water networkrose from 12 percent in 2002 to 76 percent in2009. Similarly, container throughput (a measureof volume of international trade) grew by morethan 20 percent per year on average between2000 and 2009—the fastest container volumegrowth rate in Asia during the period. It is thesesuccesses that partly underpin Vietnam’s ability tosimultaneously achieve impressive growth andextraordinary poverty reduction.

3. But Vietnam’s investment regime, especiallyits public investment component, is beingincreasingly viewed in the last few years asunaffordable, inefficient and, therefore,unsustainable. There are three commonly citedconcerns against the current investment regime:45

l Affordability. Because the strategy has reliedalmost exclusively on raising the “level” ofinvestment rather than improving its“efficiency,” the amount of financial resourcesrequired to meet Vietnam’s futureinfrastructure needs has reached anunaffordable level. For example, according tothe Ministry of Planning and Investment (MPI),Vietnam needs around US$25 billion a year toinvest in infrastructure (more than 20 percentof GDP), while the annual funds available fromboth the public and private sectors are lessthan US$16 billion—creating an annualshortfall of US$9 billion (Thanh and Dapice2008). With government debt at 57 percentof GDP and domestic credit at 120 percentof GDP, there are concerns that continuing thecurrent trend in public investment, often usingborrowed funds from expensive sources, willbe fiscally unsustainable and add tomacroeconomic vulnerability.46


43 Vietnam’s growth experience mirrors the experience of othercountries in the region that have achieved similar growth recordsin the past. See Young (1995), who described the sources ofgrowth for East Asia’s then Newly Industrialized Countries—Hong Kong SAR, China; the Republic of Korea; Singapore; andTaiwan—as “99 percent perspiration (factor accumulation) and1 percent inspiration (total factor productivity).” Also see WorldBank (1993) and World Bank (2006).

44 See CIEM (2010) and Porter (2011) on the calculation of totalfactor productivity for Vietnam.

45 A fourth concern is its environmental sustainability, which wasdiscussed in Vietnam Development Report 2011.

46 There are affordability issues at the micro level, as well. First, thedebt-to-equity ratio of most enterprises, especially the SOEs, hasincreased rapidly in recent years, and a further increase in theirdebt level is not advisable. Second, following Vinashin’s default,the cost of borrowing for Vietnamese firms has risen considerably,making it prohibitively expensive for them to borrow in theinternational markets. Third, the user fees associated with manyinfrastructure projects are below cost, making them financiallyunsustainable without government support.

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l Impact. Despite huge investment, Vietnam’sinfrastructure bottleneck remains asignificant constraint to future growth. Alongwith macroeconomic stability, other factorscited by investors as some of the mainconstraints to operating in Vietnam are lackof adequate and reliable electricity,congestion on the roads and at seaports and

airports, and poor quality of infrastructure inindustrial areas.47 While critics concede thatthe infrastructure problem could havebecome worse without the higherinvestment, they also point to the high costand time delay in building infrastructure as

Panel A

Figure 3.1 Vietnam’s Success in Mobilizing Investment from Various Sources (2005–10)

Sources: World Development Indicators, World Bank (2011).

Panel B

Panel C

47 See Japanese External Trade Organization, 2007 Survey ofJapanese-Affiliated Firms.

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more binding constraints than availability offinancial resources.

l Link to growth. A strong positive correlationbetween investment rate and growth over asustained period is one of the well-knownstylized facts in the literature on growth (Levineand Renelt,1992). This relationship appears tohave weakened in Vietnam in recent years.Figure 3.2 shows the actual and four-yearmoving average of the ratio of investment toGDP and the real GDP growth rate.48 It showsthat during the last five years, there has been asteady increase in the investment rate, initiallyfueled by a sharp increase in foreign directinvestment (a dividend from joining the WorldTrade Organization) and later by the stimulusspending (in the wake of the global economiccrisis). But this is also the period when growthstarted to decelerate. A significant part of thegrowth deceleration, at least initially, was due toa sharp drop in exports and a slowdown inglobal demand. Since then, exports haverebounded, but not growth. In fact, even underoptimistic assumptions, Vietnam’s growth isexpected to remain at around 6 percent in theforeseeable future. The fact that growth isbecoming less responsive to investment,especially to public investment—whichaccounts for as much as 30-40 percent of totalinvestment—has, therefore, emerged as a keyconcern for policy makers.

4. While the unsustainability of the investmentregime has long been recognized, it is onlyrecently that the government seems determinedto make the effectiveness of public investmentits top priority. With no visible improvement inthe external environment and continuedmacroeconomic turbulence at home, therealization has dawned that Vietnam must domore with less, that is, it must maintain its highgrowth rate, but with a lower investment rate.Therefore, the government has shifted theparadigm: it has slashed the target investment ratefor the next five years from the current 40percent of GDP to 35 percent of GDP whilemaintaining the growth rate of the economy at 6to 6.5 percent—signaling that a larger part ofgrowth will now have to come from higherefficiency. This sentiment was echoed by theCentral Party Committee, which in one of itsrecent communications said:

“To renew the thinking on investment, graduallyadjust the public investment structure in the directionof reducing the proportion of public investment andimproving the efficiency; resolutely overcoming thewidespread investment and promoting the capitalmobilization for development. In 2012, to strictlyimplement the conclusion of the third CentralConference and the instruction of Prime Minister on

48 Given the lag between investment and growth and the annualfluctuations in data, the comparison using the four-year movingaverage is perhaps more meaningful.

Figure 3.2 Recent Investment Boom Has Not Delivered Proportionate Growth( variables are in %))

Sources: World Development Indicators, World Bank (2011)

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strengthening the management of investment fromthe state budget, public bond, strictly controllinginvestment of state enterprises. To renew themechanism of investment allocation; focus capital onurgent projects to finish soon, quickly putting into useto promote the efficiency. Put priority on funding theproject already completed and put into use, theprojects planned to be completed in 2012 andreciprocal capital for ODA [Official DevelopmentAssistance] projects. The new projects andconstruction must be strictly controlled; the capitalresources must be clearly identified, ensuringefficiency and investment procedures.”

5. Vietnam’s existing public investment regimecan be best described as one in which the partsdo not add up to the whole. In Vietnam’s highlydecentralized administrative structure, developinginfrastructure is the responsibility of localgovernments. By putting its 62 provincialgovernments and two city administrations incharge of screening, appraising, selecting, andexecuting their own infrastructure projects,Vietnam has unleashed tremendous energy andcompetition among its local governments—certainly a positive move. But as discussed laterin this chapter, this has been done withoutconnecting the infrastructure to the strategicpriorities of the country (such as improvingcompetitiveness) or using the market as a meansof allocating resources. Consequently, eachprovince has worked in isolation to createfragmented, suboptimal infrastructure projects,many of which have become idle.

6. If all the approved projects in Vietnam werebuilt, the country would have one of the highestnumbers of deep-sea ports, internationalairports and industrial parks in the world

relative to the size of its economy. Building moreinfrastructure is often a virtue, especially in aninterdependent, globalized world, where acountry like Vietnam can use its low-costadvantages to transact goods and (tradable)services many times higher than its GDP—astrategy that has been deployed in the past bysmaller economies in the region such as HongKong SAR (China) and Singapore. But Vietnam’sproblem is that, while it is thinking “big,” it isbuilding “small.” Consider the following facts.

l There are nearly 260 industrial parks (IPs)that have been built or are under constructionin Vietnam and 239 more have been approvedto be built in the next 10 years (panel A, figure3.3). Of these 260 IPs, nearly 50 have a zerooccupancy rate, accounting for 20 percent ofthe total land area occupied by IPs. Theaverage nationwide IP occupancy rate is only46 percent.

l There are 18 economic zones (EZs) inVietnam, occupying about 765,000 hectares(ha). In contrast, all 260 IPs occupy lessthan 72,000 ha (panel B, figure 3.3). Whilethe EZs have a slightly higher occupancyrate than the IPs, many EZs are finding itdifficult to attract enough investors to befinancially sustainable.

l Vietnam has 24 deep-sea ports and manymore are planned (panel B, figure 3.3). Someof the new ports being built are actuallyclusters of ports such as the Cai Mep–Thi VaiPort complex, which consists of nine portswith a combined realized capacity of 8.1million twenty-foot equivalent units (TEU).However, the current utilization rate in the CaiMep–Thi Vai port is less than 30 percent.

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Figure 3.3 Location of Existing and Under-Development Infrastructure in Vietnam

Sources: Authors’ compilation from Vietnam government development plans for port location, the Vietnam Economic Times, and Thanhand Pincus (2011)

l There are 20 airports operating in Vietnamand a few more on the drawing boards. Themedian capacity of these airports is around 1million to 1.5 million passengers. Ensuring

adequate air traffic to these airports and keepingthem operational will be much more expensivein the long-run than building and maintaining afew large airports in strategic locations.

Panel AIndustrial Parks

Panel CDeep-sea Ports

Panel BEconomic Zones

Panel DGrowth Poles

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7. While the decision to build life-sustaininginfrastructure throughout the country—electricity, roads, drinking water supply—was abrilliant move, the logic behind building growth-sustaining infrastructure in every province—airports, seaports, IPs, EZs, and soforth—appears less persuasive. Experience ofcountries shows that “economic growth isunbalanced, but development can still beinclusive” (World Development Report 2009).Vietnam, knowingly or unknowingly, pursued thisapproach during the 1990s and early 2000s whenit invested heavily in building basic infrastructurefor its population, making development inclusive.But in recent years, especially after approval ofLaw on Investment (2005), which devolved allinvestment-related decisions to localgovernments, the logic of building life-sustaininginfrastructure was extended to build growth-enhancing infrastructure. But such a move hadtwo limitations. First, as shown in panel D offigure 3.3, nearly 70 percent of Vietnam’s outputis generated around two growth poles—the RedRiver Delta region and the area surrounding theMekong Delta, including Ho Chi Minh City(HCMC). Second, with an average size of200,000 households and a GDP of less thanUS$1 billion per province, most provinces haveneither the financial capacity to build globallycompetitive infrastructure nor enough internaldemand to ensure their full utilization. There isno doubt that as Vietnam becomes moreprosperous and a bigger economy, all of itsinfrastructure will be fully utilized,49 but in themedium term it will suffer from the opportunitycost of building infrastructure that the marketcurrently does not need.

8. We use three case studies—one onindustrial parks and two from the port sector—to identify the problems that have contributedto an inefficient public investment regime andwhat can be done to address them. These casestudies were chosen because they illustrate thegeneric nature of the problem facing manyinfrastructure projects in Vietnam, namely (a) use

of nonmarket means to allocate resources,especially land; (b) poorly specified and enforcedproperty rights; (c) weak coordination amonggovernments, line agencies, and state-ownedenterprises (SOEs); (d) lack of impartial regulatingagencies; and (e) weak implementation of existinglaws. These case studies also reflect the problemsassociated at different stages of the publicinvestment cycle—strategic planning, screening,appraisal, selection, implementation, andevaluation—and discusses potential ways toaddress them.50

9. IPs have played a critical role in Vietnam’stransformation from an agriculture-basedeconomy to a low-cost exporter of manufacturedproducts. Political stability, a young and educatedlabor force, the relatively low cost of doing business,and strategic location are some of the factors thathave made Vietnam a magnet for foreign directinvestment.51 Many of these foreign investors, anda large number of domestic investors, have found ahome in the ubiquitous IPs that dot the length andbreadth of the country. At the end of 2010,Vietnam’s 261 IPs (see table 3.1) occupied 71,394ha in 57 of its 62 provinces. Of these, 173 IPs arefully operational and 88 are at various stages ofconstruction. In recent years, these IPs haveattracted nearly 8,350 projects with a registeredcapital of US$74 billion, of which US$24 billion hasbeen disbursed. In 2010, the enterprises operatingin the IPs produced nearly US$34 billion worth ofproducts, of which US$19 billion was exported (40percent of total manufacturing exports fromVietnam). There are more than 1.6 million workersemployed in these IPs. By most criteria, the IPs inVietnam should be considered a huge success.

49 The current flooding in Thailand has forced some investors tolook for alternative sites, and Vietnam, with its underutilized IPsand EZs, may be an attractive alternative. However, Vietnam’sinfrastructure policy should not be driven by providence, but bymarket forces.

50 Also see MPI (2009).51 The net foreign direct investment in Vietnam during 2006–10

exceeded the cumulative net foreign direct investment inIndonesia, Malaysia, the Philippines, and Thailand combined(World Development Indicators 2011).

II INDUSTRIAL PARKS:BOON OR BANE?

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10. Yet, instead of being a source of pride, the IPsare increasingly viewed as a symptom of aproblem, namely, excessive investment that is notyielding commensurate growth. As discussed insection I, the country is now scattered withfragmented, suboptimal-size infrastructure projectswith low utilization rates. This problem is mostacute with the IPs where the average occupancyrate is only 46 percent. To add to the problem,nearly 239 new IPs have been approved forconstruction during the next 10 years! What ledVietnam to build so many IPs that it cannot affordor does not need in the foreseeable future?

II.A BUILD IT AND THEY WILLCOME

11. Encouraged by the initial success, Vietnamwent into overdrive to build IPs during the mid-

2000s. On January 25, 1991, the Prime Ministerissued a permit to establish the Tan ThuanProcessing and Expor t Zone, which isconsidered to be the first modern IP inVietnam, following which more IPs were built,though the pace of expansion was interruptedby the East Asian Crisis in the late 1990s. Asfigure 3.4 shows, the rate of approval andconstruction of IPs increased in 2002 and wentinto overdrive after the approval of the Lawon Investment in 2005. In 2008 alone, theamount of land approved for IPs exceeded thecumulative land allocated for IPs between1991 and 2003. Even at the height of theglobal economic crisis in 2009, 30 new IPswere approved. The deluge of foreigninvestment, signing of various tradeagreements, and incentives provided by thegovernment created a feeling that if you build anIP, the investors are sure to come.

Table 3.1 Selected Statistics on Vietnam’s IPs (at the end of 2010)

Foreign Invested Domestic Invested TotalIndicator

Number of IPs 40 221 261

IPs currently operational 23 150 173

Number of projects (enterprises) 3,962 4,377 8,339

Amount of registered capital US$53.6 billion VND 336,078 billion US$74 billion

Amount of disbursed capital US$17.1 billion VND 135,950 billion US$24 billion

Production turnover US$30.5 billion VND 57,251 billion US$34 billion

Exports n.a. n.a. US$19 billion

Imports n.a. n.a. US$18.5 billion

Number of employees n.a. n.a. 1.6 million

Sources: Department for Economic Zones Management, MPI.Note: n.a. = not applicable.

Figure 3.4 Approval of New Industrial Parks in Vietnam (1991–2010)

Sources: Authors’ estimates based on data published by the Department for Economic Zones Management, MPI.

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12. The speed at which industrial parks are beingbuilt exceeds any reasonable demand for them,with the global economic crisis in 2009exacerbating the problem. According to theMinistry of Planning and Investment (MPI), at theend of 2010, the nationwide vacancy rate inexisting IPs was less than 50 percent. Data availablefrom the Department for Economic ZonesManagement in MPI show that the fully operationalIPs have an occupancy rate of 63 percent, while forthose under construction, the occupancy rate is 15percent. The overall nationwide occupancy rate isestimated to be 46 percent (figure 3.5).International experience shows that a 75 percentoccupancy rate is required for an IP to beeconomically sustainable in the long run.

13. The occupancy rate is not only low, it hassteadily declined. For example, nationwideutilization rate peaked at 62 percent in 2007 butthen fell rapidly to 46 percent by 2010. The overalllow occupancy rate has been adversely affected bythe large number of non-performing IPs. Among260 IPs, about 50 IPs have zero occupancy rate,accounting for 20 percent of the total IP land areas.The decline in the occupancy rate has been uniformacross most provinces. For example, between 2007and 2010, the utilization rate in Hai Duong fell from66 to 35 percent, in Hung Yen from 60 to 25percent, in Long An from 53 to 31 percent, and inTien Giang from 34 percent (in 2006) to 31percent. A large part of this decline can beattributed to a boom in the approval of IPsbetween 2006 and 2009, the construction ofwhich has since slowed due to weaker demand.

14. But some IPs are doing much better thanothers, especially ones closer to the growthpoles. Location of the IPs appears to be asignificant factor behind their performance. IPsin the two economic hubs of the country(Hanoi and HCMC) and some of thesurrounding provinces (Hai Phong, Hai Duongand Hung Yen in the North and Dong Nai, BinhDuong and Ba Ria Vung Tau in the South)outperform their counterpar ts in the otherlocations in terms of turnover and exportrevenues (table 3.2). While these 8 cities andprovinces accounting for less than half thenumber of IPs, they contribute 84 percent ofexport turnover in 2010.

15. The problem of underutilized IPs willcertainly worsen if all the IPs included in themaster plan are built. Despite the low utilizationrate of current IPs, nearly 239 more, amountingto 54,882 ha of land, have been approved forimplementation during 2011–20. In addition, theapproved master plans of national and localgovernments include construction of 3 nationaleconomic zones with the combined area of265,000 ha and 1,643 provincial-level industrialclusters with a land area of 73,000 ha. It isestimated by MPI that the country would requirenearly US$40 billion in investment in the next 10years just to construct the infrastructure for theseapproved IPs and economic zones.52

Figure 3.5 Utilization Rate of Existing IPs (at the end of 2010)

Sources: Authors’ estimates based on data published by the Department for Economic Zones Management, MPI.

52 MPI estimates that the investment rate for IP infrastructure isUS$300,000 per hectare.

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II.B WHAT IS DRIVING THE IPBOOM?

16. While the proliferation of IPs has had manyinfluences, institutional factors and theincentives they generate have contributed to it.In particular, the system of intergovernmentalfiscal relations provides incentives for provincesto prefer industrial production, and the system ofland management provides a further (invisible)subsidy to the cost of IPs (see Box 3.1). In thecurrent decentralized environment, the MPI,which is responsible for approving IPs, does nothave enough political capital to reject proposalsmade by the provinces. And even if the centralgovernment promulgates regulations to slow newIP development, those regulations have beencreatively sidestepped.

(A) Incentives for the Provinces

17. Vietnam's system of taxation provides thatvirtually all land related tax revenue accrue tothe local governments, including 100 percent ofland and housing taxes, tax on the transfer ofland use rights, tax on the use of agriculturalland, land rent and the fees from the use of land(see box 3.1). Since agricultural land is valued,rented, and taxed at lower rates than industrial

land, converting the land to industrial use canbring added revenues to the province. In addition,corporate income tax and VAT (for goods boundfor the domestic market) are shared taxes,meaning the province gets to keep some of the taxrevenue collected from firms. Indeed, regardless ofwhere the good are sold in Vietnam, the provincewhere the firm is headquartered collects the VATand all of the shared revenues associated with thosecollections accrue to that province. [PER 2005, p.89] In Long An province, with 24 industrial zones,48 percent of revenues come from the sharedrevenues and those that are designated for localgovernments, including the land-related revenues.In contrast, only 22 percent of revenues from arefrom such sources in Bac Lieu, a province with onlya single IP.53 While many of the fiscal benefits fromindustrializing accrue to the provinces, many of thecosts of building associated infrastructure aresubsidized by an allocation from the centralgovernment. Taken together, it is clear to see whyIPs are attractive from the perspective of theprovinces.

Table 3.2 Successful IPs in terms of export turnover (2010)

Export turnover inleasable industrial land Rate of occupancy Export turnover

ProvincesNumber

of IPs Export turnover(USD mil./ha) Ranking Rate

(%)Ranking (USD mil.) Ranking

Hanoi 11 1.83 1 64.6 16 2,118 3

HCMC 18 1.24 2 48.4 30 3,100 2

Hai Phong 5 1.13 3 39.2 38 717 7

Dong Nai 30 0.86 4 58.6 22 5,476 1

Can Tho 6 0.85 5 50.1 27 515 9

Hai Duong 10 0.78 6 35.0 44 980 5

Phu Tho 2 0.69 7 73.7 11 211 11

Hung Yen 9 0.61 8 25.3 50 757 6

Dong Thap 3 0.60 9 73.0 12 119 19

Binh Duong 25 0.38 10 58.7 21 2,020 4

Sources: Department for Economic Zones Management, MPI

53 While there has been little research conducted into therelationship between land/property taxation and governmentfinances in Vietnam, studies have shown that local governmentsare operating in an unsustainable manner by converting andselling valuable agricultural land to underpin their operationbudget needs (WB study, 2008).

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(B)Land-Use Planning and Property Rights

18. The system for land management indirectlyprovides incentives favoring industrial parks. AsIPs are large projects, they qualify for compulsoryland acquisition, meaning that the state acquiresthe land, with compensation, from those withexisting land use rights, and then converts the landto industrial use for the IP, renting it to the newusers. The level of compensation for those wholose their land is in general based on the marketprice of the land's former use (usually agriculture),rather than being based on the value of industrialland. Moreover, the level of compensation doesnot reflect the loss of livelihoods experienced byfarmers whose primary skill is farming. All this forprojects those are essentially private in nature. Asthe land is taken in a compulsory way, it is likelythat the value of the land to those who lose it ishigher than the value of the land to those whoacquire it, generating an economic efficiency. Italso means that a key input for the creation of IPs,land, is implicitly subsized by those who lose theland, usually farmers.

(C) Strategic Guidance for Investment

19. The current IP policy lacks credible strategicguidance that anchors government decisionsand guides sector-level and province-leveldecision makers. While Vietnam has Five YearPlans and separate Master Plan for IPs and forEconomic Zones, that establish economywidebroad development priorities and action plans toimplement those priorities, there seems to belimited connection between them (see box 3.2).A simple, back-of-the envelope calculation showsthat the IP approval process has little bearing onthe rest of the economy. For example, with140,000 ha planned for industrial parks, the statewill be required to invest approximately US$40billion to build supporting infrastructure such aswastewater treatment plants, hazardous wastedisposal systems, emission treatment facilities, androads connecting the IPs to the nearest highwaysor ports. In addition, the IPs will need to attractaround US$300 billion in investment projects and

Box 3.1 Inter-Governmental Fiscal Transfers in Vietnam

The level of fiscal decentralization in Vietnam, which has been historically high, has continued toincrease in recent years. In 2000, nearly 40 percent of investment from the state budget wasexecuted by the local government; by 2010 this number has increased to 51 percent.

Revenue assignment between central and local governments is currently stipulated by the BudgetLaw 2002. According to the Law, all revenues collected from taxes and fees related to internationaltrade must be transferred to the central budget. On the other hand, local governments retain100 percent of the revenues they collected from land (e.g., renting, tax on land use transfers, landuse tax), from natural resource tax, registration fees and from lottery. Specific land price bracketswill be determined by provincial People’s Committee.

Another source of revenue for provinces is part of the revenues collected from VAT, corporateincome tax, personal income tax, and gasoline fee. There exists a sharing mechanism betweencentral and provincial government for these revenues, but the majority of provinces can retain100 percent for their own budget. Richer provinces (HCMC, Hanoi, Quang Ninh etc) have totransfer a part of these revenues to the central budget. The sharing mechanism is kept stable for3-5 years.

Overall, the central government keeps about 60 percent of total revenues collected from feesand taxes, and provinces received about 40 percent of these revenues. However, the centralgovernment transfers about half of its tax revenues to provinces. So the final share of central-provincial tax and fee revenues after the transfers is around 30:70.

Sources: Budget Law and The State Budget Budget Accounts for 2010 (MOF Website).

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hire 9 million industrial workers to be financiallysustainable in the long term. Even less thoughthas gone into issues such as accommodations forthe workers; equipping the labor force with basictraining; or developing supporting infrastructure,such as wastewater treatment plants, emissiontreatment systems, hazardous waste and solidwaste disposal systems, and connectivity with thenearest urban center or port. There is a need tolink the IP approval process with the annualbudget preparation process so that the planningand financing part of IPs are jointly determined.

(D) Inconsistent Laws, Weak Implementation

20. The authority to develop and manage IPs hasundergone several changes in recent years. Aselection of the key regulations involvingestablishment and management of IPs between1997 and 2010 are presented in table 3.3. In

1997, management of IPs was the responsibilityof the Vietnam Management Board, whichreported directly to the Prime Minister. In 2000,the Vietnam Management Board came under theauthority of the MPI. In 2003, the MPI was givena greater mandate to oversee the statemanagement functions of IPs. But such acentralized arrangement appeared infeasible,forcing MPI to gradually assign greater statemanagement functions to the IP ProvincialManagement Boards (PMBs). Following approvalof the Law on Investment (2005), whichdramatically accelerated the decentralization ofinvestment to local governments, PMBs becamealmost entirely responsible for the managementof IPs and for Export Processing Zones and Hi-tech Zones. Decree No. 29/2008/ND-CPintroduced further decentralization and the one-stop shop, and outlined procedures for handlingissues such as environmental and labor standards.

Box 3.2 China’s Experience with Industrial Zones

China has more than 1,000 industrial zones (IZs) following a central government policyencouraging the development of such zones. Most cities and counties have followed the modelsset by the large zones developed by the central and provincial governments. The localgovernments are motivated to develop industrial zones to get tax revenues and revenues fromselling land, as well as nice records of administrative performance. These industrial zones haveplayed a critical role in facilitating the growth of Chinese SMEs from family operations catering tothe local market to global powerhouses. These zones not only provided Chinese SMEs with goodbasic infrastructure (e.g. roads, energy, water and sewage), security, streamlined governmentregulations (e.g. government service centers) and affordable industrial land, they also providedtechnical training, low cost standardized factory shells allowing Chinese entrepreneurs to "Plugand Play" as well as Chinese workers with free and decent housing accommodations.

But not all Chinese industrial zones have been successful. The better ones were built on existing orpotential industrial strengths, in other words, local comparative advantages. Most of these zonesspecialize in particular industries, letting market forces drive the organic development of specializedclusters. China's success also relied a great deal on intense competition (domestic producers aswell as export markets), its decentralized implementation and ensuing competition between localgovernments as well as with the key role devoted to the banks and private sector developers.

By contrast, most of Vietnam’s IPs are not specialized clusters. There are limited linkages between IPsand the vast majority of small, informal SMEs which focus on the domestic market and remain small.Export growth in Vietnam does not bring about as much value addition as one finds in China (20percent vs 33 percent in China from manufacturing value added) as the large firms also suffer fromnot being plugged into local clusters and value chains—they import most of their inputs.

Sources: http://blogs.worldbank.org/developmenttalk/blogs/vandana-chandra.

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21. While regulations have been constantlyrevised, their implementation has been unevenand weak. For example, although Decree29/2008/ND-CP was approved in 2008, manyauthorized ministries had not provided detailedinstructions to the local governments as late asmid-2011. Thus, some PPCs have hesitated todelegate certain tasks to PMBs, causing an unevenmandate for PMBs across provinces.

22. Regulations concerning the setting up of IPsare not always consistent with each other. Takefor example Decree No. 29/2008/ND-CP, whichstates that one of the conditions for establishingnew or expanding existing IPs is that the averageoccupancy rate of IPs in a province reaches 60percent.54 This is a sensible regulation intended tomaintain an appropriate balance between demandand supply of IPs within a province. But there areother regulations that help provinces sidestep thisrestriction. If the occupancy rate of existing IPs isless than 60 percent, provinces need to “find aniche” to overcome such regulation. PPCs can alsoask for “special approval” to allow them to establish

new IPs even when the occupancy rate of existingIPs is lower than 60 percent, or they can phase landtransfer to existing IPs into different periods, andcalculate the occupancy rate based on thetransferred area rather than the total area of the IPs.

23. The legal document guiding the masterplanning process for spatial development lacksenforcement power. The main strategicdocument for the nation-wide development ofIPs is the Master Plan for IPs development, whichis supposed to be reviewed by a NationalAppraisal Committee and then approved by thePM. There is another master plan for economiczones and a number of other related master planssuch as Land Use Master Plan, UrbanDevelopment Plan, Transport Master Plan andPower Master Plan. The inter-linkages betweenthem are vague and the current consultationprocess for achieving coherence remains aformality rather than a strategic tool. The onlylegal document guiding the master planningprocess for spatial development is Decree92/2006,55 which clearly lacks enforcement power

Table 3.3 Selected Key Regulations Involving Establishment and Management of IPs, 1997–2010

Issuing Authorityand Year Issued

Key ProvisionsName of the Regulating Instrument

Decree No. 36/ND-CP/1997

Decision No. 99/QD-TTgDecree No. 61/ND-CP/2003

Law on Investment 2005Decision No. 1107/ 2006/QD-TTgDecree No.29/2008/ ND-CP

Central Government, 1997

Central Govern-ment, Sept.2000GovernmentJune 6, 2003

National Assembly, 2005Prime Minister, August 21, 2006GovernmentMarch 14, 2008

Development and management of IPs rested withthe Vietnam Management Board, which reported tothe Prime MinisterVietnam Management Board for IPs came underthe authorization of MPIMPI was put in charge of strict management of IPs,but by applying the decentralization mechanism, itgradually assigned most of its function to theProvincial Management BoardsDramatically accelerated decentralization ofinvestmentPlan for IP development in Vietnam to 2015 and2020 visionEstablishment, operation, regulation, and statemanagement of IPs and Export Zones consistentwith World Trade Organization regulations

Sources: MPI; MOF; various sources.

54 This provision applies to all provinces and top-tier cities undercentral management in the country.

55 Some of the articles of Decree 92 were amended by Decree04/2008.

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to deal with other closely related laws such asConstruction Law or Land Law. As a result, thecurrent spatial planning has largely been driven byinfrastructure development plans with inadequateattention given to the overall efficiency.56

24. The HCMC port system shares many of thecharacteristics of a typical infrastructure projectthat are unique to Vietnam: multiple owners,large presence of state enterprises, andsuboptimal scale. The HCMC port is not a singleport but a cluster of numerous port terminals

56 The on-going formulation of a Spatial Planning Law is expectedto reduce the inconsistency among different laws for spatialdevelopment and improve the coherence and efficiency.

III THE RELOCATION OFTHE HCMC PORTSYSTEM: WHY THEGRIDLOCK?

Table 3.4 Ho Chi Minh City Ports

Port OperatorsNumber of

BerthsTotal BerthLength (m)

Area (ha) Vessel Size(DWT)Port Terminal

Sai Gon Port (Nha Rongand Khanh Hoi terminal)Sai Gon Port (Tan Thuan terminal)Ben Nghe port

Vietnam InternationalContainer Terminal

Sai Gon New Port Ba Son Shipyard (ship building facility)

Tan Thuan Dong Port

Vegeport (Rau Qua)Lotus Port

Vinalines (SOE)

Vinalines (SOE)

People’s Committee of HCMC

Southern Waterborne TransportCo (SOE), NOL Group(Singapore) and Mitsui & Co(Japan)People’s NavyMinistry of Defense’s GeneralDepartment of Military Industry

Sai Gon Transport Services(SOE)

Viettrans (SOE), Vosa, and(Blassco) Ukraine

10

5

4

4

46

1

12

1,750

995

816

678

733754

149

222275

32.2

13.6

32.0

28.3

31.926.4

2.9

7.26.0

10,000–30,00010,000–30,00010,000–30,00015,000–20,000

5,0006,000–10,000

15,000

20,00030,000

Sources: Thanh and Pincus 2011; Note: DWT = pennyweight.

operated by different companies. As shown intable 3.4, there are nine port operators, eachoperated by a state agency (a total of four SOEs,the People’s Committee of HCMC, the People’sNavy, and the Ministry of Defense), and in twocases there are joint ventures with foreigncompanies. While there are 37 berths spanningover 6,000 meters, they are scattered across nineoperators, with four berths and less than 500meters berth length per operator—quite modestby global standards.

25. Relocating the HCMC port system to a newlocation makes perfect sense. All the ports inHCMC are river ports, occupying riverfront landin the central business district and nearby areas.The rapid growth of exports and imports and theshift toward containerization in ocean shipping inthe early 2000s have created critical challengesfor HCMC ports. Draft and length limits prevent

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large vessels from calling at these ports. As aresult, export and import goods have to betransshipped on feeder ships via ports inSingapore and other Asian countries, raising thecost of shipping to and from Vietnam in terms oftime and money. Furthermore, the location ofthe ports deep inside the city center causes majortraffic problems since trucks have to traverse busyurban districts to get to the ports. The city is alsoundertaking large urban development projects onthe eastern side of the Saigon River at Thu Thiem.When bridges are built across the river, it will beeffectively impossible for large vessels to passunder them. Perhaps most important, the landunder the existing ports has risen in value overthe last decade. The failure to redevelop this landfor commercial and residential use represents amissed opportunity for the city in terms ofrevenue generation and positive externalities inthe form of demand for complementaryinvestment and services.

26. The relocation of the port system was firstproposed in the late 1990s, with the consent ofkey stakeholders. With container handlingfacilities operating close to full capacity and littleroom for expansion at existing sites, it hadbecome increasingly clear that sustaining rapidgrowth in trade required the development of anew port complex with modern facilities, and thatthe new ports would be located outside of thecity center (APL 2007, 49).57 In 2005, a decisionwas taken by the central government to identifyBa Son Shipyard and four ports—Saigon NewPort, Sai Gon Port (Nha Rong and Khanh Hoiterminals), Tan Thuan Dong Port, and Vegeport—as the specific facilities that were to be moved outof the city by 2010 at the latest. At the sametime, the Cai Mep–Thi Vai River in Ba Ria–VungTau (BRVT) was identified as the preferred sitefor Vietnam’s main international gateway port.The HCMC port relocation policy had the strongsupport of both the business community and allthe state agencies involved.

27. But one year after the deadline, all but oneport in HCMC remain at their original location.Why? Sai Gon New Port is the only facility thatmoved further downstream from the city centerwhen the relocation deadline passed. Reasonscited by other port operators for not relocatinginclude the need to receive assurances that newsites are economically viable, and financialconstraints on new investments. As the discussionbelow shows, the absence of coordination amongagencies, clear lines of authority and accountability,and well-defined property rights have resulted in asituation in which firms and government agenciesact in accordance with short-term interests thatoften generate socially suboptimal outcomes.

(A) Land Use Planning and Property Rights

28. Lack of well-defined property rights and theinability to transfer land-use rights are majorcauses for the current stalemate. Port operatorshold land-use rights that give them authorizationto use state land for the specific purpose ofoperating a port. They do not own the land inthe sense of having the right to sell, lease, ormortgage it, or to develop the land for otherpurposes, such as commercial and residential use.The current operators, therefore, have anincentive to maintain some nominal maritimeactivities at their existing locations in order tocontrol the land. Sai Gon Port already has a“land-conversion” plan to redevelop its port areaso that revenue generated can be used to financeits new port in Hiep Phuoc. Similarly, the HCMCPeople’s Committee in 2009 decided to developthe cruise ship terminal further downstream inthe Phu Thuan Park Project. But getting approvalof the land conversion plan has been complicated.

29. The HCMC People’s Committee is both oneof the port operators and the agency thatapproves the land-use plan—mixing its interestas a player and its responsibility as a regulator.

57 Globally, ports have been moving out of cities because of theneed to accommodate larger vessels, the rising opportunity costof inner-city land, and traffic congestion caused by portoperations. Recent examples of port relocation and new portdevelopments in Asia include Busan Port to Busan New Port inKorea; Waigaoqiao to Yangshan Port in Shanghai, China; Bangkokto Laem Chabang Port in Thailand; and Mumbai to Nhava ShevaPort in India.

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In order for Sai Gon Port to proceed with itsproject, a detailed land-use plan must be inplace.58 As of mid-2011, the HCMC People’sCommittee had not approved the plan. Onlyin 2009 did the City’s Department of Planningand Architecture star t the land-use planningprocess covering the port area in the citycenter. Like many government effor ts toimplement policies, a steering committeeinvolving all relevant agencies was set up in April2008 to “direct and coordinate the activities ofcentral and local agencies in carrying out theimplementation of the port relocation plan.”59

The land-use planning issue was raised in everymeeting of the steering committee during2008–11. Table 3.5 shows the series of deputyprime ministerial/prime ministerial directivessetting deadlines for HCMC to finalize its land-use planning of the city center. However, aseach deadline was missed, a new directive wasannounced setting a new one.

(B)Distorted Incentives for Local Governments

30. The relocation of the HCMC port systemposes two major concerns for HCMC

58 By law, local government authorities are responsible forpreparing, ratifying, and enforcing detailed land-use plans at the1:2,000 scale. Only with the completion of these land-use planscan investors prepare detailed land-use plans at the 1:500 scaleand make investment proposals.

59 Prime Minister’s Decision 458/QD-Ttg dated 28 April 2008establishing the HCMC port relocation steering committee.

Table 3.5 Timeline of Central Government Directives to HCMC Involving Land-Use PlanningSpecific DirectiveDate

28 Apr 2008

12 May 2008

01 Apr 2009

18 Jun 2009

13 Jan 2010

10 Aug 2010

29 Mar 2011

29 Mar 2011

Port Relocation Steering Committee was established

First Steering Committee Meeting with the Transport Minister stressed the importance

of land-use planning for future inner-city ports

Transport Minister officially requested that the Prime Minister order HCMC People’s

Committee to approve inner-city port land-use plans soon

DPM directive set the land-use planning deadline for Sept. 2009

DPM directive set the land-use planning deadline for Feb. 2010

DPM directive set the land-use planning deadline for Q4 2010

DPM directive set the land-use planning deadline for June 2011

PM directive reiterated the land-use planning deadline as Jun 2011

Sources: Official documents 219/TB-BCD dated 27 May 2008, 1949/BGTVT-KHDT dated 1 September 2009, 178/TB-VPCP dated 18 June2009, 11/TB-VPCP dated 13 January 2010, 217/TB-VPCP dated 10 August 2010, 70/TB-VPCP dated 29 March 2011, and 132/TB-VPCP dated2 June 2011.

authorities. First, logistics firms and other port-supporting businesses will move out of HCMC tobe nearer to the new container terminals. Havingdeclared that its future development will relymore heavily on services than on manufacturing,HCMC is keen to maintain its status as thecountry’s center of logistics services.60 Second, thelarge revenues from trade taxes generated byimports through HCMC’s ports are at risk. In2010, HCMC collected VND 57 trillion (US$2.8billion) in export and import duties, accountingfor 40 percent of its total budget revenue. And,since 2005, this ratio has been around 40 to 46percent.61,62 While it is true that a substantialportion of the trade taxes goes to Ha Noi,HCMC People’s Committee relies on using itslarge trade tax base to keep more tax revenuesin the city.

31. The case study shows that moststakeholders are acting in their own self-interest, while the national interest iscompromised. Facing the prospect of not beingable to control the land after relocation, Sai GonPort’s best strategy is to stay put. At the sametime, HCMC has every incentive to proceed

60 HCMC People’s Committee, Five-year Socio-economicDevelopment Plan 2011–2015.

61 HCMC Statistics Office, HCMC Statistical Yearbook 2010.62 The total revenue does not include nontax sources such as

revenue of crude oil export or transfers.

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slowly and cautiously with its detailed land-useplanning. The city does not have an alternativerevenue stream to replace the loss in trade taxesand fees that would result from relocation of theports. Their decision, however, is not only delayingthe much-needed relocation of the port systemfrom the central business district, but is alsoresulting in poor utilization of the new port beingbuilt in the vicinity, which we discuss next.

32. Located in the vicinity of HCMC, the CaiMep–Thi Vai River in Ba Ria–Vung Tau (BRVT)has been identified as the preferred site forVietnam’s main international gateway port. Witha depth of 14 meters and the absence ofsignificant sedimentation, the site couldaccommodate dedicated deep-sea containerterminals to handle post-Panamax vessels63 fordirect shipment to North America and Europe.64

However, it needs supporting infrastructure,particularly connecting roads, from HCMC.

33.The number of ports planned in the BRVTport complex has gradually increased. In the late1980s, the Ministry of Transport (MOT) startedto look for new port locations in the greaterHCMC area. In 1991, Tedi South consultants65

produced the first study of the Thi Vai–Vung TauDeepwater Port System, which led to the firstmaster plan of the port complex in 1992.66 Inearly 1998, the port master plan was adjusted,

regrouping the complex into four port areas andidentifying sites for several general cargo andcontainer terminals.67 In 2001 and 2002, the JapanInternational Cooperation Agency conducted its PortDevelopment Study in the South, which proposed aplan of general cargo and container ports withmoderate capacities in Cai Mep–Thi Vai. Six generalcargo berths with 3.3 million to 6 million tonsthroughput were planned for the Thi Vai section. The2005 master plan for port development in theSoutheast, covering HCMC, Dong Nai, and BRVT,significantly increased the number of ports in thecomplex. There are now 19 ports in the plan, ofwhich four are dedicated container terminals with 18berths. As shown in table 3.6, the port has managedto attract some of the best-known port operatorsin the world, and in all but one, the port terminals’Vietnamese partner is an SOE. In short, thefragmented port ownership structure in the HCMCport group appears to have been replicated in theBRVT port complex.

34. Despite significant investment, the containervolume in the port has fallen well short ofexpectations. The Official Development Assistanceproject proved to be pivotal in attracting privateinvestors to the location. Within a very short timespan—from October 2006 to February 2007—five investment licenses were issued for thedevelopment of dedicated container terminals.Domestic port operators in HCMC, underpressure to relocate, were also quick to secure landin the port area. As soon as the terminals wereopened, 16 post-Panamax vessels started directservice to the ports. But the container volume hasremained abysmally low. As reported by the portoperators, actual container throughput was 28percent of total capacity in 2010 and only 12.9percent in the first eight months of 2011 (see table3.6).68 In May and June 2011, four shipping lineservices (out of the original 16) were cancelled dueto insufficient demand. 69

63 Panamax is the term used to describe the size limits for shipstraveling through the Panama Canal. The term post-Panamax isthe term used to describe ships that do not fall within thePanamax sizes.

64 Container terminals in the area can be constructed to receive“mother ships” capable of carrying 8,000 TEU to 10,000 TEU(100,000 DWT to 120,000 DWT).

65 The port unit within Tedi South, which undertook the study, laterbecame the independent Portcoast Consultant Corporation.

66 Decision 55/Ttg of the Prime Minister on the approval of theMaster Plan of the Thi Vai–Vung Tau Deepwater Port System, 5November 1992.

67 Decision 50/Ttg/1998/QD-Ttg of the Prime Minister on theapproval of the adjustment and addition to the Master Plan of theThi Vai–Vung Tau Deepwater Port System, 28 February 1998.

68 Data reported by the ports to the Vietnam Port Association.69 Cosco, Kline, Yangming, and Hanjin announced the Cai Mep

suspension for their Asia-Europe route in May 2011, and CSAVwithdrew from its Cai Mep–U.S. West Coast direct route inJune 2011.

IV UNDERUTILIZED PORT!THE CASE OF THE CAIMEP–THI VAI PORTCOMPLEX

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IV.A WHAT EXPLAINS THEUNDERUTILIZATION OFPORT CAPACITY?

(A) Lack of a Market Mechanism to FosterCompetition

35. Critical decisions like total port capacity werecontinuously altered with little regard to marketsupply and demand.As the Cai Mep–Thi Vai detailedplan was repeatedly updated, more ports wereadded and almost all of the harbor-front land wasallocated. As illustrated in figure 3.6, the original plancalled for four container terminals with a totalcapacity of only 3.3 million TEU by 2015.70 Over time,the number of investment licenses granted exceededthe initial plan. By early 2011, the four containerterminals under operation (CMIT, SITC, and SP–PSA,TCCT–TCIT) had a combined capacity of 5.2 millionTEU (see table 3.5). The construction of SSIT is dueto be finished in early 2012, increasing the totalcapacity of the complex to 6.4 million TEU. The two

Official Development Assistance terminals areexpected to be completed in 2013. Another joint-venture container terminal between Gemadept andFrance-based CMA–CGM, which currently has thelargest land area and longest berth length, is still underconstruction.71

Table 3.6 Dedicated Container Terminals at BRVT Port ComplexOpening

YearVietnamese

PartnerInternational Partner Capacity (mil TEU)

Planned 2010 Aug 2011Terminal

SP-PSA International

Port (SP-PSA)

SP-SSA International

Terminal (SSIT)

Cai Mep International

Terminal (CMIT)

Tan Cang–Cai Mep

Container Terminal

(TCCT)

Tan Cang–Cai Mep

International Terminal

(TCIT)

Sai Gon International

Terminals Vietnam

(SITV)

Cai Mep International

Container Terminal

Terminal Link Cai Mep

(Gemalink)

PSA International

Port (Singapore)

SSA Holdings

International (U.S.)

APM Terminals

(Denmark)

—

Wanhai Lines, MOL

and Hanjin Shipping

Hutchison Port

Holdings

(Hong Kong)

JBIC

(Japanese ODA)

CMA-CGM

May 09

2012

March 11

Jun 09

Jan 11

Aug. 10

2013

—

1.1

1.2

1.1

0.6

1.2

1.2

0.75

1.2

0.182

—

—

0.295

—

0.025

—

—

0.114

—

0.032

0.204

0.084

0.045

—

—

Sai Gon Port

(Vinalines)

Sai Gon New Port

(People’s Navy)

Sai Gon

Investment

Construction and

Commerce (JSC)

PMU 85

(MOT)

Gemadept

Sources: Thanh and Pincus 2011.Note: According to the latest plan, six more container-dedicated and multipurpose terminals will be built.— = not available

70 In the final report on the detailed plan made by Portcoast in April2011, there was only one reserve area left in the entire complex,and this was designated as a maritime services base. In August2011, when the plan was approved, even this reserve area hadbeen turned into another general cargo port. Therefore, accordingto the detailed plan of 2011, the Cai Mep–Thi Vai Complex nowhas 34 ports in total, of which 14 are already under operation,including container terminals, multipurpose terminals, generalcargo ports, and specialized ports.

71 A comparison of port capacity at BRVT with Thailand and Indiaillustrates the extent of excess capacity that has been plannedin the former. When Thailand started developing its new deep-sea seaport in Laem Chabang to replace the Klong Toey Port inBangkok in the late 1980s, only one container terminal was built,with a capacity of 0.6 million TEU. Over time, more terminalswere added, and the port complex now has seven containerterminals and one multipurpose port. It is now ranked 22ndamong the world top container ports, and handled 5.2 millionTEU in 2010. Nhava Sheva Port, developed to relieve pressureon Mumbai Port in 1989, currently has only three terminals withfive berths. It handled 4.3 million TEU in 2010.

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36. The license to develop multiple containerterminals was allocated on administrativegrounds, divorced from market principles. Thegovernment’s decision to segment the port intoseveral terminals, and then award developmentand operation rights to different investors, wasjustified on both theoretical and practical grounds.The existence of multiple operators would fostercompetition, which would ensure good servicesand low costs (World Bank 2007, 24). Theproblem in this case was not one of not using themarket to promote competition. Rather, it is theability of numerous state agencies and state-owned companies to extract favors from thegovernment, and the absence of coordinationamong these entities. Unable to achieve greaterefficiency, the ports are forced to engage indestructive pricing to survive, particularly in acontext of slow growth in world and regionaltrade. As reported by the Vietnam PortAssociation, the operators are pricing theirservices so low that they are unable to covercosts.72 To generate revenue, some of thecontainer terminals even used their underutilizedcontainer terminals for general cargo handling andcruise ship docking (Thanh and Pincus 2011).

(B) Provision for Supporting Infrastructure

37. The problem of capacity underutilization hasbeen exacerbated by the government’s failureto complete the necessary supportinginfrastructure. The BVRT port complex is 50 kmfrom Bien Hoa, Dong Nai, and 80 km fromHCMC. Although the construction of containerterminals in BVRT began in early 2007, it was notuntil late 2009 that the project improvingNational Highway (NH) 51 was launched. Evenwhen completed, widened NH51 will still beinadequate. The HCMC–Long Thanh–Dau GiayExpressway, which promises to cut traveldistances and increase speed, was scheduled tobe completed at the end of 2012. However, thiswill likely be pushed back to late 2013 or early2014. The Bien Hoa–Vung Tau Expressway alsomust be started soon to complete the roadnetwork. Not only the expressways are behindschedule; so is the connecting infrastructure.Nothing could be more obvious than the needto finish a connecting road between the Cai MepPort complex and NH51 (so-called Road 965) intime for the operation of the container terminals.As of October 2011, this 8.5-km road was stillseveral months from completion. The existenceof many terminals in the complex points to theneed to build a high-capacity interport road. Thiswas also recognized by the government andfinanced by government bonds, but constructionhas been delayed. A freight rail line between BienHoa and Cai Mep–Thi Vai has been proposed, but

Figure 3.4 Development of Container Terminals: Original Planned CapacityCompared to Realized Capacity

Sources: The original plan’s capacity is from the Vietnam Maritime Administration (Vinamarine); realized capacity is from table 3.6.

72 At the Annual General Meeting of the Vietnam Port Associationin September 2011, it was revealed to the media that theservice fee charged by the container terminal operators in CaiMep–Thi Vai to shipping lines was only US$32 per TEU, whilethe terminals needed to collect US$88 per TEU to break even(Tuoi Tre Newspaper, “Caãng biïín löî nùång” (Sea ports sufferingheavy losses), 21 September 2011.

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the economic and financial viability of the projectis open to question because of its short distance(less than 80 km).

38. The relocation of the HCMC port groupand underutilization of the BVRT port complexare part of the same problem. While only afraction of the new container terminals boastingstate-of-the-art facilities at the BVRT portcomplex is being used, most of the containercargo remains with existing HCMC portsoperated by the same domestic investors. Thedecision to continue operating ports in HCMC isrational from the perspective of the individualinvestors, since these ports were profitable evenduring the slow growth years of 2009–10.73

However, this is costly from a societal perspectivedue to negative externalities such as trafficcongestion and pollution, which is theopportunity cost of using prime urban land forports rather than commercial and residentialdevelopment. If some of the 4 million TEUcurrently transported through HCMC ports wereto be moved to Cai Mep–Thi Vai, theundercapacity problem would be reduced. 74

39. Vietnam has overstretched its publicinvestment budget by starting too manyfragmented, suboptimal infrastructure projectsthat lack market demand. Fortunately, thegovernment and National Assembly have alreadystarted taking several corrective actions in recentmonths: (i) initiating the process of formulating anew law to improve the legal framework forpublic investment and public procurement; (ii)tightening the oversight and supervisionprocedures for existing projects, giving MPI a

larger role in screening the projects, especially onthe availability of resources (Directive 1792/2011issued in October 2011); (iii) substantiallyreducing the level of public investment in SEDP2011-15; (iv) issuing a Resolution on Land UseMaster Plan to 2020 and Land Use Plan to 2015,which aims to tighten the land use for sustainabledevelopment, including fix area for rice growing(3.8 million ha now), and list of eight major tasksand solutions that the central and provincialgovernments have to implement, including: theirland use master plans must follow NationalAssembly’s one, clearly identifying the borders ofland reserved for different purposes, and publiclyreleasing the information;75 and (v) recentlyputting a ban on approval of new IPs.

40. These steps constitute a good beginning, butmore needs to be done, especially putting inplace institutions, incentives and informationthat will ensure repeat of the past problem. Inthis section we propose four such ideas tostrengthen the effectiveness of public investment:(a) clarifying and strengthening property rights toforce competition for land into the market andout of the political arena, (b) creating impartialagencies in key sectors to regulate infrastructuredevelopment, (c) creating a mechanism to sharerevenues among local authorities to encouragedevelopment of regional and nationalinfrastructure, and (d).strengthening the publicinvestment management cycle.

(A) Clarifying and strengthening property rights

41. Land is the most important asset in Vietnam.Studies in Vietnam have shown that state agenciesand SOEs enjoy an advantage over privatecompanies and individuals in gaining control overland. However, even these state entities do not haveclearly specified property rights to the land. Land-use rights generally allow use of the land for a specificpurpose, such as for residential use, manufacturing,mining, or agriculture. Maintaining control over theland while transferring the right of use from onesector to another is an important means of creatingand transferring wealth in Vietnam.

73 After-tax profits of Sai Gon Port and Cat Lai New Port in 2010were VND 64 billion and VND 73 billion, respectively. (Source:2010 financial statements of the port companies.)

74 Laem Chabang Port in Thailand took off only when Thaiauthorities imposed a cap of 1 million TEU on the Klong ToeyPort in 1996, so that shipping lines were forced to switch to thenew container terminals (ADB 2009, 17).

75 Any adjustment of land use must be reported and get approvedby the National Assembly, and the government must report tothe National Assembly every year about the implementation ofthe Land Use Master Plan.

V POLICY OPTIONS

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42. Because land-use rights are administrativein nature, the solution to the problem is soughtby the government through administrativemeans rather than through market mechanisms.One way to address the problem is to create anagency that will be responsible for specifying andawarding property rights to businesses andenterprises, starting with the ones involvingdisputes between state agencies. This needs tobe accompanied by (a) allowing more flexibilitywith land-use planning and letting buyers covertland use after paying an appropriate fee to thestate, and (b) creating a market for trading land-use rights among the existing users.76 This wouldtransform the competition for land from a zero-sum political contest into a market transaction inwhich the various parties would be compensatedfor surrendering their control over land. Such apolicy will increase the supply of land in themarket, resulting in lower prices, and ultimatelylower the cost of creating new infrastructure inthe country.

(B) Creating impartial regulators for keyinfrastructure sectors

43. A second cause of institutionalfragmentation is the absence of clear boundaries

between regulators and market participants,central government ministries and localauthorities, and even among units of one agency.Under these conditions, the rules of the gameare unclear and unenforceable. The imposition ofsimple, enforceable rules would go a long waytoward reducing fragmentation. This problem couldbe addressed through the creation of a national orregional Infrastructure Regulatory Authority for keysectors such as the Port Authority of the Southeast,with responsibility for regulating the port system inthe region. Many countries have establishedgovernmental or quasi-governmental authorities forairports, seaports, and Economic Zones toadminister and regulate infrastructure systems thatserve more than one province or region (see box3.3 for the experience of Singapore with thecorporatization of its port and creation of the PortAuthority). In Vietnam, such regulatory agenciesexist, but they often are part of a line ministry,blurring the line between ownership and regulation.Such agencies need to be upgraded to the statusof authority, with powers equivalent to those of acentral ministry and given sufficient financialresources and operational autonomy. Their mainresponsibilities would be to approve new projects,set industry standards, create a level playing field toensure fair competition among operators, protectcitizens’ interest, and set user fees.

76 Selling land use certificates is permissible as long as land is usedfor the same purpose. But such transactions are less frequentand often take place in private. A market along the lines ofcarbon trading, if created, would lower the transaction costconsiderably for the buyers and sellers of land use certificates.

Box 3.3 Maritime and Port Authority of Singapore

The Port of Singapore is a very successful container port and, since 1986, the busiest port in theworld in terms of shipping tonnage, most of it containerized transshipment cargo. Singapore wasa service port, combining land ownership, statutory functions and cargo operations within oneorganization, and one of the few successful public service ports in the world. In 1996, however,the Government of Singapore decided to fundamentally change the management structure ofthe port.

The Government changed the port’s structure by creating a corporatized entity (PSACorporation) whose structure would be sufficiently flexible to permit it to operate and invest inthe region, especially in container terminals located on major shipping lanes. Corporatization ofpart of the Port Authority’s business meant increased financial autonomy and generated greatercash flows. It also enhanced Singapore’s position as a hub port and was expected to contributeto the economic development of Singapore and the surrounding region.

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Since the PSA Corporation has a monopoly position in Singapore, it is regulated. The Maritimeand Port Authority of Singapore was established by an Act of Parliament (The Maritime and PortAuthority of Singapore Act 1996) to provide that oversight. The main tasks of the new Authorityare to promote the use, improvement and development of the port, to control vessel movementsand ensure navigational safety, to license and regulate marine services and facilities includingconventional cargo terminals, and to regulate the port industry’s economic behavior. The Actstates that no person shall provide marine or port facilities without a public license or exemptionfrom MPA. The Authority may control and fix the tariffs charged by licensees for handling andstorage of origin-destination cargo (i.e., non-transshipment cargo).

(C) Public finance incentives for regionalcoordination

44. Many local governments are keen to buildinfrastructure since it becomes a source of afuture revenue stream. The absence of a regionalrevenue sharing mechanism creates competitionamong local authorities to attract infrastructureprojects to their locality, sometimes at a cost tothe national or regional economy. A regional ornational Infrastructure Regulatory Authority, ifestablished, would collect relevant taxes from theinfrastructure projects and reinvest them insupporting infrastructure to overcome thecoordination failure within the government. Allrevenue not invested in supporting infrastructurewould be distributed among the provinces in sucha way that it strikes a balance between preservingthe provinces’ incentive to create infrastructureand reducing unhealthy inter-provincialcompetition. Similarly, the national government’s

investment budget allocation should give priorityto national projects, followed by those that involvemultiple provinces and city administrations, andonly then to single-province projects, as a way toencourage local authorities to work together tobuild infrastructure that enables Vietnam to beglobally competitive.

(D) Strengthening the Public InvestmentManagement Cycle

45. A more rigorous public investmentmanagement (PIM) cycle, synchronized with thebudget process, will help Vietnam avoid approvinginefficient and cost-ineffective public investmentprojects. A typical PIM cycle involves eight stages:(a) strategic guidance and screening, (b) formalproject appraisal, (c) appraisal review, (d) projectselection and budgeting, (e) implementation, (f)project changes, (g) service delivery, and (h) projectevaluation (see figure 3.7).

Figure 3.7 The Eight “Must-Have” Core Public Investment Management Features

Sources: Rajaram et al (2010)

1

Guidance &

Screening

2

FormalProject

Appraisal

4

ProjectSelection &Budgeting

5

Impementation

6

ProjectChanges

7

ServiceDelivery

8

ProjectEvaluation

3

AppraisalReview

Sources: World Bank (2009) “Port Reform Tool Kit.”

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46. In Vietnam, the stages that needstrengthening seem to be the initial stages of thePIM cycle, namely, strategic guidance andscreening, formal project appraisal, appraisalreview, and project selection and budgeting.Local governments and line ministries initiatingprojects for public investment should prepare aproject profile with basic project information,including relevant strategic priority and sub-program or program, specific problem to beaddressed, project objective, main activities,expected results, and estimated budget. Inaddition, it is important at this stage that optionsfor addressing the problem with and without aproject are considered, and demand, supply, andgap analysis is undertaken. First-level screening ofproject proposals should be undertaken toensure that they meet both the minimum criteriaof consistency with the strategic goals ofgovernment, and the budget classification tests forinclusion as a project rather than as a recurrentspending item. An appropriate institutionalarrangement to ensure that all major projectproposals (exceeding, say, VND 1,000 billion, orUS$50 million) are screened so that resourcesare not wasted on more detailed project

appraisal. For this function, on occasion, theresponsibilities can be delegated to line ministriesand local governments.

47. Projects or programs that meet the firstscreening test should be subject to appraisal oftheir viability, which requires a feasibility analysis.This requires a regulated set of projectpreparation steps, such as a pre-feasibility studyand a feasibility study, including preliminary designand environmental and social impact assessmentsthat must be completed before a project can beapproved for funding. It is always sound practiceto subject project appraisals to an independentreview. This can be performed by the Ministry ofFinance, a planning ministry, or another specializedagency. Finally, it is essential that the process ofappraising and selecting public investmentprojects is linked in an appropriate way to thebudget cycle, even though the project evaluationcycle may run on a different timetable. Withoutadequate skill and manpower in the government,implementing the above steps can be onerous, soits application should be tailored to Vietnam’scontext and can start with a pilot in one of thekey sectors, such as ports.

FEEDING A MARKET ECONOMY:THE ROLE OF INFORMATION AND

TRANSPARENCY77



Chapter 4

77 This chapter draws on background policy notes prepared by Bill Allan,Nga Nguyet Nguyen and Habib Rab.

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1. Vietnam has come a long way in the last 15years in promoting the public availability ofeconomic data and information. The preparationand release of macroeconomic data in Vietnamhas gradually become more systematic.Information available on the State Budget in thepublic domain has also improved. Increasingnumbers of government agencies are using theirwebsites to communicate information.78 As figure4.1 shows, most respondents to the World Bank-Vietnam Chamber of Commerce and Industry(VCCI) 2011 survey on “Changing Attitudes towardMarket and State” (CAMS 2011) agree with suchan assessment. Of the 967 respondents, 53 percentfelt that the level of transparency has increased inthe past five years compared to 4 percent whothought it has decreased. While those affiliated withthe provincial and national governments seem tohold a more positive view than those who work inmedia, the donor community, and civil societyorganizations, there is little doubt that Vietnam ismaking progress toward becoming a more openand transparent nation.

2. However, progress has been slower thanexpected due to the absence of a generalizedlaw on access to information. VietnamDevelopment Report 2010 – Modern Institutionscatalogued some 30 laws, decrees, and other legalnormative documents that call for certain kindsof information to be made public. Yet, many ofthose provisions have not been implemented. A2010 study on land transparency found that forsome pieces of land-related information, as fewas 9 percent of provinces had made theinformation available, as mandated by law(Nguyen et al. 2010). There were several reasonsfor the poor implementation of transparencyprovisions, ranging from organizational culture andpoor record keeping, to the simple fact that manyofficials did not know that the law required thatthey make the information available. Without ageneralized access to information law, whichwould make access to information the defaultrather than the rule and would establishmonitoring and enforcement mechanisms, there

I THE CONTEXT

78 See 2010 Vietnam Development Report for an in-depth discussion ofsome of the achievements in promoting transparency across a widerange of public policy areas.

Figure 4.1 Level of Transparency Has Increased in Vietnam in Recent Years

Sources: CAMS 2011.

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is insufficient motivation for offices and officials tofreely provide that information. Indeed, Vietnam’slow score (zero) for access to informationaccording to the Global Integrity Index stemsdirectly from the fact that there is no generalizedlaw on access to information in Vietnam.

3. The impact of weak transparency has beencostly for Vietnam’s development. A 2011 studyof corruption in land management (Embassy ofDenmark, World Bank, and the Embassy ofSweden 2011) identified lack of transparency asone of the core drivers of corruption in Vietnam,a finding that is borne out by the data. Whilecorruption has many causes, it is clear thatprovinces with lower levels of transparency whenit comes to a range of land-related documentsalso have, on average, higher levels of corruption(figure 4.2.) The value of information can also beseen from the results of a survey of land officerscarried out by the Government Inspectorate: 76percent of land officers said that a key reason theylike their job is that they have early access toinformation on land (GIRI and T&C Consulting2010). The same study found that citizens often useintermediaries in dealing with land-related issues,and half of the time the intermediaries are landofficials themselves. While the public would gainfrom freer access to information, there are privatebenefits to keeping information closely held.

4. Given its current low level of transparency,the marginal benefit to the Vietnamese economyfrom increased transparency can be huge. Theamount of fiscal, financial, and economicinformation that the Government of Vietnamcurrently collects and releases to the public isinadequate for the smooth functioning of amiddle-income country. Even basic statistics suchas sectoral composition of state spending, off-budget expenditure, international reserves, andbalance sheets of state-owned enterprises areeither not collected, not disclosed, or disclosedonly after a considerable lag. But marketparticipants such as equity investors, exporters,importers, foreign exchange dealers,bondholders, banks, enterprises, and evenfarmers need information on almost a daily basisto operate in a market economy. And if suchinformation is not available, market participantsresort to speculation, rumors, and evenunscrupulous means to obtain information. Thatis why it has been argued that one of thesources of the current economic turbulence inVietnam can be traced to lack of credible andtimely availability of economic data and poorcommunication of policy changes to the market(see Taking Stock, various issues). Therefore, inour view, improving transparency is one of the“low-hanging fruit of transition” that has yet tobe fully harvested in Vietnam.

Figure 4.2 Provinces with More Transparency Have Lower Levels of Corruption

Sources: PCI 2010; World Bank Land Transparency Database 2010.

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5. There is overwhelming support amongVietnamese for increased transparency in thedecision-making process. In the World Bank-VCCI2011 survey on “Changing Attitudes toward Marketand State” (CAMS 2011), 92 percent of the 967respondents agreed with the statement that a “highlevel of transparency in the state decision andpolicy-making process is essential fordevelopment.” As shown in figure 4.3, the benefitof transparency for development is widely sharedamong all sections of the society, including the 84percent of respondents of the National Assemblyand Party and the 97 percent in the media andprovincial governments. The survey results indicatethat Vietnamese throughout society seem ready tomove to a more open and transparent society.

6. This chapter looks at the importance oftransparency and focuses specifically on thebudget and release of financial information. Itprovides an overview of the importance oftransparency for market economies, particularlythe need to ensure the systematic release ofeconomic data to build credibility of andconfidence in economic policies. It then looks atthe current state of budget and fiscal transparencyin Vietnam and ways to improve it. It alsoexamines the information being made available tosome of the important stakeholders such as theNational Assembly and media and explores waysto strengthen the demand side of information.The final section summarizes several ongoingreforms and key areas of focus to further improve

8. Information is the lifeblood of markets. Theimportance of information flows for thefunctioning of markets has been well documented(Stigler 1961; Stiglitz and Weiss 1981, among others).Improvements in information can reduce the

Figure 4.3 Overwhelming Support for Transparency in State Decisions-making Process

Sources: CAMS 2011.

II THE IMPORTANCE OFTRANSPARENCY FORMARKET ECONOMIES

the comprehensiveness, reliability, and timelinessof information, and suggest some next steps.

7. There are several important aspects ofinformation and transparency that are notdiscussed in this chapter, which constitute a workprogram for the future. These are: (a) theimportance of acting on information once it ismade available. The capacity of users to analyzeinformation is currently low in Vietnam andrequires strengthening; (b) the role and capacityof the media to effectively and accurately reporton information; (c) the role of audits anddisclosure of audit reports, although this is brieflydiscussed in Chapter 2 in relation to reform ofthe SOEs; (d) some of the transparency issuesinvolving the land market are analyzed inChapter 3; and (e) the critical issue of whyinformation is not disclosed—an area thatrequires deeper analysis than was possible whilepreparing this report.

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magnitude and consequences of principal-agentproblems, leading to more efficiency in the allocationof resources in economic and financial markets.

9. Public disclosure of information can mitigatemarket inefficiencies. Transparency reducesmarket uncertainty about policy makers’preferences, resulting in more predictablemonetary policy and more efficient financialmarkets (Bellver and Kaufmann 2005). Lack oftransparency in policy making and limitingdisclosure of information that otherwise helps toset rational expectations, adversely impacts assetprices, consumption, and investment, increasing therisk of investment. This translates into higher riskpremiums and thereby the cost of investments.Public disclosure of information can, therefore,mitigate market inefficiencies and provide easieraccess to capital markets and better terms forgovernment financing. This is highly relevant inVietnam’s context: despite its high growth rate andstrong economic fundamentals, it consistentlyreceives lower sovereign ratings and faces higherrisk premia in the international market thancountries that exhibit similar characteristics (seefigure 4.4). A more transparent regime would helpVietnam mobilize significantly higher resources inthe international market and at a much lower costthan currently.

10. Transparency and accountability can also playa big role in reducing macroeconomic instability.The economic crises of the late 1990s and early2000s in emerging market and transitioneconomies were in part caused by a lack oftransparency (Rahman 1998). Mehrez andKaufmann (1999) show that an increase intransparency of fiscal and monetary policy ormacroeconomic data reduces the probability of acrisis following financial liberalization. These providea strong impetus for establishing internationalstandards for fiscal, financial, and monetary

transparency as a means of both strengthening theinternational financial architecture and enhancingindividual country performance.79 Improvedtransparency in a number of East Asian and LatinAmerican countries has enabled them to managethe current global economic crisis from a positionof relative strength. Vietnamese policymakers sawfirst-hand the benefit of transparency when theState Bank of Vietnam in 2008 made itsinternational reserves position known to themarket, thereby significantly reducing the speculativepressure against its currency.

11. Cross-country evidence on the benefits offiscal transparency is growing. Good transparencypractices, as defined in the IMF Fiscal TransparencyCode, should confer direct benefits to countriesby giving them greater access to capital marketsand lowering debt servicing costs. Published fiscalReports on Observance of Standards and Codesdata provide some evidence to support this view.Hameed (2005) showed that countries that weremore transparent according to these indexes hadbetter credit ratings, better fiscal discipline, and lesscorruption after allowing for other socioeconomicvariables. In a study that focused particularly ondisclosure of fiscal risks, Cebotari et al. (2009) findthat countries improving disclosure of fiscal risks onall four disclosure attributes could improve creditratings by a significant margin.

12. More transparent countries also seem to bemore competitive in the global market. A moretransparent institutional environment can contributeto higher rates of return on investments. Whenpolicies and administrative procedures that guideinvestment decisions are clear and transparent,uncertainty and business costs are lower, leading tomore efficient investment decisions. Figure 4.4 showsthat the global competitiveness index published bythe World Economic Forum for 104 countries isstrongly correlated with the overall transparencyindex constructed by Bellver and Kaufmann (2005).

79 The Standards and Codes Initiative was launched in 1999 bythe IMF, the World Bank, the Organization for Economic Co-operation and Development, and other international financialorganizations. Under the Standards and Codes Initiative, theIMF aimed to promote fiscal, monetary, and statistical standardsamong its member countries in line with its surveillancemandate.

80 The Fiscal Transparency Code was produced in 1998, and theCode and the Manual on Fiscal Transparency were published in2001 and updated in 2007. Country compliance has beenassessed through fiscal transparency modules of the Reports onObservance of Standards and Codes. Seehttp://www.imf.org/external/np/sec/pn/2011/pn1138.htm forupdated Board review.

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13. Fiscal transparency plays a particularlycritical role in Vietnam’s economic transition,given the public sector’s relatively big role in theeconomy. Fiscal management reforms initiated inthe late 1990s have enabled the government totake important steps toward internationalstandards for fiscal transparency. Early reformswere based on technical advice, initially from ajoint IMF-World Bank review in 1999 (IMF-WorldBank 1999), a Public Expenditure Review in 2004(GoV and World Bank 2004), and then a CountryFinancial Accountability Assessment in 2007 (GoVand World Bank 2008). Recognizing that itstarted from a very low base against internationalPublic Financial Management (PFM) standards, thegovernment has approached the application ofthese standards cautiously and within its owninstitutional context.

14. Fiscal management in Vietnam has becomemore complex. The evolution of the PFM systemhas involved a great deal more than establishinga stable, transparent, and accountable nationalPFM system. As described in VietnamDevelopment Report 2010, institutionaldevelopment has emphasized increasing relianceon market mechanisms and, more recently,devolution of authority not only to economicactors but to lower levels of government, service

delivery units, the courts, and the media and civilsociety. The pace of PFM reform thus needs tobe assessed in the context of these objectives,some of which are complementary but others ofwhich are potentially competitive. A realistic PFMreform strategy must take into account linksbetween PFM reform and other relevant nationalobjectives as explicitly as possible.

III.A CURRENT STATUS

15. The government has made a good start inestablishing the legal and institutionalframework for fiscal transparency. The StateBudget Law (2002), which came into effect in2004, stipulates that “budget plans, budget finalaccounts, and auditing results of the centralbudget, local budget, budget planners, andorganizations financed by state budget, must bemade public.” While the government is planningto amend the State Budget Law (2002) in thecoming period to address a number of pendingissues, the law does provide clarity ontransparency issues. The government furtherbroadened and deepened the scope of financialdisclosure requirements through a PrimeMinisterial Decision (192) and guiding circularsissued between 2004 and 2006.81The institutionalframework is clear on who is responsible for

Figure 4.4 Transparency and Competitiveness Are Positively Correlated

Sources: Bellver and Kaufmann 2005; World Economic Forum 2004.

III FISCAL TRANSPARENCY INVIETNAM

81 PM’s Decision 192/2004/QD-TTg, November 16, 2004, andguiding circulars 03, 10, 19, 21, 29 (2005) and 54 (2006), Ministryof Finance.

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reporting what information, including reportingformats and frequency. Although the quality ofreporting varies, the 2007 Country FinancialAccountability Assessment noted goodcompliance with reporting requirements acrossall agencies and units.

16.Information available on the State Budget inthe public domain has improved. The StateBudget is published on the Ministry of Financewebsite just before the start of the fiscal year ; itpresents the economic background and showskey budget aggregates but not details. Thewebsite also publishes summary quarterly budgetexecution reports, which include information onspending at the central, provincial, and districtlevel, and estimated revenue collection.82 Auditedfinancial statements are published within 18months of the end of the fiscal year.

17. Vietnam’s State Budget has a detailedclassification structure, but it has yet tosystematically publish information using theGovernment Finance Statistics standards.83 Thebudget released to the public is presented at arelatively aggregate level by functional andadministrative categories, not economiccategories, although it is broken down by centraland subnational governments. Budget executionreports provide detailed reports on spendingacross economic, functional, and programcategories. The absence of a clear connectionbetween budgeting and accounting data makes itdifficult to assess the execution of budget policiesin detail. The government has, however, integratedthe Chart of Accounts for budget and treasury,and is upgrading its Management InformationSystems, which should help strengthen accountingand reporting.

18. With increased decentralization in recentyears, the transparency of intergovernmentalfiscal relations has gradually been strengthened.

Expenditure and revenue assignments across allfour tiers of government (center, province, district,and commune) are clearly set out in the StateBudget Law (2002). The Provincial People’sCouncils also have the authority to decide onspecific tax assignments at the subnational level.To promote equitable distribution of resources,the Prime Minister issued Decisions 59 and 60 in2010 with allocation norms based onsocioeconomic criteria for the transfer ofresources from the national to subnationalgovernments. There are detailed provisions onreporting requirements for spending and revenuemobilization at all levels of government. The StateTreasury is responsible for compiling andpublishing all budget execution reports. While theState Budget Law defines the role of the NationalAssembly, given it limited oversight role,supplementary budgets (e.g. recent stimuluspackage) are not approved by the NationalAssembly. As discussed later, strengthening thecapacity of National Assembly to fulfill itsoversight role for domestic accountability is animportant issue for Vietnam.

II. B AREAS IN NEED OF GREATERATTENTION

19. Greater compliance with fiscal transparencyprinciples could further improve fiscalmanagement and analysis. The budget alreadyembodies a number of transparencyimprovements; for example, carryovers fromunderspending in the previous fiscal year arereported in budget outturn data and included inthe next year’s budget. Some importantmanagement issues that could be betteraddressed by applying the principles of the fiscaltransparency code are as follows:

l The separation of the capital and recurrentbudgets makes it difficult to estimate medium-term recurrent implications of capital spendingand to establish a sound long-term balancebetween the creation of public assets and theiroperations and maintenance.

l A number of off-budget expenditures are notaccounted for in the aggregate budget or deficitcalculations. For instance, there are over 20

82 Seehttp://www.mof.gov.vn/portal/page/portal/mof_en/sbd?p_pers_id=2421305&p_recurrent_new_id=24736364

82 The IMF’s “Government Finance Statistics Manual 2001” is aninternationally accepted methodology for compiling fiscal data.It provides “economic and accounting principles to be used incompiling the statistics and guidelines for the presentation offiscal statistics within an analytic framework that includesappropriate balancing items”.

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extra-budgetary funds that carry outgovernment functions in infrastructure, socialsectors, SOE restructuring and other areas. Buttheir non-inclusion in the budget makes it difficultto obtain a consolidated picture of fiscal risks.

l With regard to assessment of broader fiscalrisks, although there are detailed provisions onfinancial reporting by state enterprises,84 thecapacity to analyze this information and informgovernment responses is still limited.

l As one would expect with such high levels ofdecentralization, the quality of reporting ismixed. Sector agencies at each tier ofgovernment provide regular financial reportsto the Treasury Office at that level ofgovernment, which are then aggregated upthrough the Treasury structures. A formalrequirement for upward financial reportingwithin sectors should facilitate setting prioritieson sector resource allocation.

20. Improved data quality through technicalreforms should allow much more openness inthe release of detailed budget data. For example,even though Vietnam’s Open Budget Index scorehas increased in recent years, it remains very lowat 14 out of 100 in the most recent Open BudgetSurvey.85 Areas where Vietnam falls particularlyshort in relation to the Open Budget Indexinclude publication of the Pre-Budget Statementand the Executive Budget Proposal, andpreparation of A Citizens’ Budget Mid-YearReview. As discussed above, however, if the dataare improved to give a reliable fiscal and financialpicture, publication of data should present fewrisks. In the case of Open Budget Index criteria,Vietnam can make important gains at little costthrough publication of the Pre-Budget Statementand the Executive Budget Proposal.

21. The government is implementing PFMreforms to address these challenges and tofurther improve the comprehensiveness,reliability, and timeliness of fiscal information.

These reform measures are set out in thegovernment’s PFM Single Strategy Documentapproved in early 2008 for the period throughend-2010. An updated Financial DevelopmentStrategy is being finalized for 2011–20. Examplesof important reforms to improve fiscaltransparency include:

l Treasury and Budget Management InformationSystem: This is an integrated computerizedfinancial management information system. Itwill be rolled out to all budget units across thegovernment so that there is a commonsystem for loading budget appropriations,standardized budget execution procedures,and standardized accounting and reportingarrangements. This will be a major steptoward ensuring a more timely and reliablepicture of the government’s budget andbudget implementation.

l International Public Sector Accounting Standards:Although an accounting law was passed in 2004,the accounting system across the governmentis quite fragmented. A new State AccountingGeneral System is being developed, and aroadmap is being prepared for the adoption ofInternational Public Sector AccountingStandards. This should improve the accuracyand integrity of accounting and reporting.

l Disclosure of public debt information: On April27, 2011, the government issued Decree 53expanding the scope of the Debt Bulletin,which at present covers only external debt. Itwill now include actual borrowing and debtservice payments and annual projections ofborrowing and debt-servicing flows for thecentral government including guarantees,subnationals, on-lending, and total public andprivate external debt.

l Monitoring State Enterprises: The governmenthas stepped up its efforts to monitor theperformance of state enterprises throughindependent audits and stricter enforcementof financial reporting to the Ministry ofFinance. The Ministry is now looking to takestock of the financial situation of stateenterprises, establish a database to reportfinancial information, develop indicators offinancial vulnerability and fiscal risk, train staff

84 PM Decision 224/2006/QD-TTG (October 6, 2006) and Circular115/2007/TT-BTC (September 25, 2007) on supervision andassessment of SOE performance.

85 Open Budget Index 2010: Vietnam.

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to compile and analyze these indicators; andpublish reports on the Ministry of Financewebsite. The indicators will be set out in a lawto be issued by the Prime Minister.

22. Another area that needs improvement isstrengthening the capacity of the oversightinstitutions.Transparency is key to developing theoversight systems. Even those officially entrustedwith oversight duties, such as the NationalAssembly, lament that they often do not have theinformation they need to do their jobs. Ironically,they also feel they have too much information.The need to strengthen the system of supportstaff and research institutions under the NationalAssembly, noted in Vietnam Development Report2010 - Modern Institutions - remains true nowthat a new National Assembly has been elected.At the same time, oversight bodies would havepotentially millions of allies in sorting throughinformation if it were made publicly available. Civilsociety organizations, the media, and citizens canbe adept at managing such tasks includingmonitoring public investment and developing ascore card for basic service providers, if theinformation is available to them.

23. A transparent and rules-based system forreleasing macroeconomic data acrossgovernment can help minimize market volatilityand economic shocks. Ensuring predictability bycontrolling when and how data are released helpsto set and manage expectations. A state agencythat releases economic data at fixed times and infixed formats projects an image of credibility andreliability. Numbers released in an ad-hoc fashionor leaked by unidentified sources fuel speculationand create uncertainty. Being systematic aboutreleasing data is also a good way to help ensurethat the information is kept secure until thegovernment wants it to be made public, andreduces the likelihood of mistakes and confusion.

24. The release of macroeconomic data inVietnam has gradually become more systematic.Most agencies use their websites tocommunicate information. The State Bank ofVietnam provides regular and timely informationon exchange rate adjustments on a daily basis.However, the publication of interest rate decisionsis less predictable now than it was a year ago. TheMinistry of Finance systematically announcesweekly bond auctions. Release of ConsumerPrice Index (CPI) data by the GovernmentStatistics Office provides another good example.The data are e-mailed to the foreign media witha 30-minute embargo time. This allows reporterssufficient time to prepare stories, which arereleased at the same time to the market. Intheory, there is a penalty for breaking theembargo. More recently, the GovernmentStatistics Office has started e-mailing the CPI datawith a 10-minute embargo prior to publicationon its website, but this leaves less time forreporters to prepare their analysis.

25. Further improvement of the predictabilityof macroeconomic data release by key agenciesin Vietnam could easily be achieved, and with abeneficial impact. The release of much othereconomic information is on a more ad-hoc basisand does not follow a set timetable. The Officeof the Government uses its website tocommunicate economic information. It holds amonthly press conference attended by localmedia. The Government Statistics Office couldalso take steps to further strengthen the way itreleases CPI data by (a) fixing the time and dayof the month when the information is released(currently, it takes place during the same weekeach month), and (b) preventing leaks to the localmedia ahead of the official release.

26. A range of options is available tostrengthen the arrangements for sharingmacroeconomic data. At one extreme, agenciescan adopt “lockup” arrangements where dataare shared electronically with journalists behindclosed doors with no external communicationallowed until a specified time. A variation on thiswould be to have a simple in-room embargocontrolled by officials who hand out hard copiesof data reports simultaneously to all journalistspresent, who then communicate the information

IV FASTER AND FAIRERACCESS TOINFORMATION86

86 This section was prepared with assistance from Reuters newsagency.

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to their offices by phone for publication. Otheragencies electronically communicate informationat a fixed time by e-mail, fax, or through theirwebsites, which is a predictable and low-costway of sharing economic information. The

Box 4.1 Different Ways to Release Data to the Mass Media

The U.S. Department of Labor’s “Lockup” System

This system is the most air-tight method for releasing data. In a lockup, journalists are invited tothe government agency, locked in a room with the data, and only allowed to communicate withthe outside world at a predetermined time, after the embargo time. Here’s how the systemworks at the U.S. Department of Labor.

In the lockup room, each news outfit has an assigned desk with a permanent company computer.Journalists are allowed to arrive a few minutes before the data release to set up their system.Then the door is closed, nobody is allowed in or out, and the reporters are required to switchoff their mobile phones and hand them in. Internet connections to the computers in the roomare cut by a master switch controlled by a Department of Labor official and then a press releaseand CD containing the data are distributed.

The journalists have a half hour to prepare their stories and the department has at least one economiston hand to answer questions. When the embargo time has expired, the labor department officialflips the Internet switch back on and everyone is allowed to send their news story.

In some cases, agencies do not control the Internet connection or the use of personal phones ina lockup, but they enforce the embargo with the threat of a severe penalty for breaking it. (A fewyears ago, a news agency broke an embargo at the Federal Reserve in Washington and that agencywas banned from receiving embargoed data for six months.) A modification of the lockup is asimple in-room embargo controlled by officials.

Simultaneous Physical Delivery of Data (Australia and the Philippines)

At the Australian Statistics Office in the mid-1990s, for instance, journalists in a designated pressroom were allowed to call an editor and keep the phone line open ahead of the end of theembargo, and then when the embargo expired, an official standing behind them handed over thedata report. The Philippines uses this method today, passing reporters hard copies of theinformation simultaneously and considering it live.

This method is secure in that it ensures that the data are never in the hands of anyone other thanan official until it is allowed to go public, and thus reduces the risk of leaks. On the downside,though, releases like this are highly stressful for the reporters involved. Reporters are underpressure to locate the key data in the report as quickly as possible and then read it over thephone to a colleague who will publish it instantly.

By email, fax, and website

Many government agencies around the world e-mail or fax data at a fixed time with no embargo.This increases predictability, because the information reaches the market at roughly the same timeeach month. However, it, too, leaves reporters scrambling to pluck out the key numbers. Moreover,emails do not always land in inboxes simultaneously, which may disadvantage one or more of thejournalists reporting the information.

Some government offices post information on their website at regular times or hold pressconferences at set times each month with no embargo. This is predictable (and better than doingso randomly), but, again, forces reporters to scramble, which can lead to errors.

preferred method will, of course, vary accordingto the type of information and market sensitivity.The key, however, is to ensure that theinformation flows are systematic, equitable, andtransparent (see box 4.1).

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27. Vietnam has made steady progress ontransparency in the last 10 years, but furtheradvances in transparency should confersignificant benefits for economicmanagement. A clear commitment by theGovernment of Vietnam to provide moreeconomic information more systematically,more in depth, and in a fast and fair mannerwould both help address some keymacroeconomic challenges facing the countryand send strong signals to the financialmarkets. Explaining the rationale for key policychanges through regular press briefings byprofessional spokesperson will also help.Providing more information to the public in aneasily understood form would gain support forgovernment reform program and improvemarket perceptions. For example, addressinghidden fiscal risks associated with state-ownedenterprises is of direct benefit to policymaking, will lead to a more sustainable fiscalpolicy and greater public suppor t for suchreforms.

28. Ongoing reforms should further strengthenfiscal transparency. More sophisticatedinformation is needed today to accurately assessthe government’s financial position than 10 yearsago. Some of the examples highlighted above

target high-priority areas for transparency inVietnam, including public debt and stateenterprises. A genuine commitment to reform(and practical ownership) should involvedevelopment of a clear strategy to improveobjectively assessed good practice standardswhile giving priority to addressing basicweaknesses and environmental factors specific tothe country system.

29. The Financial Development Strategy (2011-20) offers a real opportunity to regainmomentum on the PFM reform agenda ingeneral, and fiscal transparency in particular. Asthe PFM landscape becomes increasinglycomplex, it will be important set clear prioritiesfor transparency, including managing competingobjectives around: (a) devolution of authority; (b)application of technical controls and assurance ofdata quality by all levels of government; (c)increasing openness and distribution of fiscal datato the public and the international community; (d)increasing public participation in the budgetprocess; and (e) establishing strong, independentand open oversight of PFM processes. Asevidenced in other transition economies, carefulsequencing of these measures can have majorpayoffs in terms of the cost of borrowing andaccess to financial markets; fiscal discipline andmacroeconomic stability, and the efficiency ofspending and the quality of public service delivery.

V CONCLUSION

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