As the government’s targets in privatization of state-owned enterprises (SOEs) remain far behind schedule, experts have urged fresh changes to the determination of the enterprises’ value, foreign ownership limit as well as corporate governance to speed up the process.

Foreign ownership limit distracts foreign investors from privatizing local firms.

According to the Ministry of Finance, of the 18 SOEs subject to privatization in 2019, only nine SOEs have changed to private hands. So as to meet the government target of privatizing 128 SOEs by 2020, another 92  SOEs must be sold by the end of next year.

Nguyen Viet Ha, managing director of the Hanoi Office at US-backed law firm BowerGroupAsia Inc., attributed the sluggishness to big difficulties in the calculation of the SOEs’ value, which has hindered their privatization.

Since most of the SOEs have a diversified portfolio, including real estate, it is challenging and complicated to measure their value, Ha said. Many SOEs have low or even negative book value, but significant asset value, especially those who invest in real estate or have access to the land use rights of prime locations.

“It is questionable as to whether those SOEs should be valued or priced based on the book value, actual asset value, or market price. Different valuation methods bring different results,” Ha noted.

In addition, Ha said, the restriction of foreign ownership in certain sectors is preventing potential capable investors from participating in the privatization process.

As most of the strategic investors seriously interested in bringing in finance, technology, and business know-how wish to acquire majority shares in the invested company, the cap on foreign ownership at 49-50% would distract them from the process, she explained.

Sharing the same view, Tran Thi Thanh Huyen, partner at law firm NHQuang & Associates, explained that according to the current regulations, international investors can own 100% of enterprises with unconditional business lines, but in fact, enterprises still meet obstacles in attracting foreign investment as they usually register more business lines than their actual areas of operation to avoid the complicated procedures to add business lines to their licenses in the future, and those additional lines may be subject to business conditions.

Besides, experts said that weak corporate governance in SOEs is also hindering their privatization. There has been slow progress in corporate governance reform in general and in applying quality standards of book-keeping in particular, causing serious concerns from investors, especially strategic overseas ones.

Streamlined rules

Ha suggested that the methods to determine the value of the SOEs must be standardized, while giving the flexibility for them to apply the appropriate methods based on their actual value.

For instance, the value of the privatized or divested company and the offered price should be determined based on the actual value of the company instead of the stock market price. It is because the market price only represents a small number of shares or stocks which are traded, and is subject to various market factors.

Furthermore, she said, the selling price should be determined independently by experts with international experience based on global practices. Information about the privatized companies should be also made public and transparent.

Besides that, there should also be funding into improving the corporate governance of SOEs before the privatization or divestment process. Corporate books, records, and rules need to be reviewed and follow universal standards.

Meanwhile, Huyen said that it is necessary to amend the Law on Securities for clarifying the definition and principles of determining the ownership ratio of foreign investors in the listing companies on Vietnam’s stock market so as not to overlap with the Law on Investment, and ensure the transparency of legal provisions and ease of implementation.

It is expected that revisions of such laws will help attract foreign funding into SOEs, open up opportunities for innovation in business administration, and make divestment in SOEs more transparent. Moreover, increasing the foreign ownership in privatized SOEs will help such enterprises access overseas securities markets.