Information about Asia and the Pacific Asia y el Pacífico
Chapter

III State-Owned Enterprise Performance

Author(s):
Krishna Srinivasan, Erich Spitäller, M. Braulke, Christian Mulder, Hisanobu Shishido, Kenneth M. Miranda, John Dodsworth, and Keon Lee
Published Date:
March 1996
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Information about Asia and the Pacific Asia y el Pacífico
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An unwieldy and loss-making state-owned enterprise sector has often been cited as playing a major role in impairing the performance of transition economies. Vietnam appears to be different. Indeed, with economic activity generally buoyant, the performance of the SOE sector has surpassed the non-state sector in several respects, and its share in the overall recorded economy has increased markedly. To a significant extent, SOEs have been transformed into commercially operated companies with increasing foreign participation.

In terms of financial performance, the SOE sector has ceased to receive large budgetary subsidies and bank support and to operate under a soft budget constraint, and has become a significant net contributor to the state budget. The improvement in budget contributions (tax payments after budget support) amounted to 12 percent of GDP between 1988 and 1994. Although relatively modest arrears persist, both between enterprises and to the state-owned banks, the government has generally refrained from bailing out insolvent enterprises or from canceling their debt.1

The broadly favorable performance of the SOE sector can be attributed primarily to sound policies. State-owned enterprises were given greater authority in managing their affairs, including the authority to make decisions on pricing and production; over-staffing was substantially reduced; and enterprises were subjected to a hard budget constraint and increased competition. Specific factors, such as the coming onstream of oil during the transition period and the growing output of joint ventures with foreign enterprises—which are included in SOEs’ output statistics—also contributed to the sector’s performance.

Output

The SOE sector generally performed well in the areas of industry, construction, and services, with the total output share of these sectors, excluding cooperatives, rising from 25 percent of GDP in 1989 to 27 percent in 1992 and 30 percent in 1994 (Table 3.1 and Box 3.2).2

Table 3.1.Share of State-Owned Enterprises by Sector(In percent)
19891984
SectorOutputEmploymentOutputEmployment
Total24.811.929.68.0
Agriculture3.42.42.91.3
Industry and construction63.033.765.722.1
Services25.444.522.533.4
Sources: General Statistical Office; and IMF staff estimates.
Sources: General Statistical Office; and IMF staff estimates.

Box 3.1.Arrears

During the transition, interenterprise arrears were mostly avoided, except for the early part of the period. On April 1, 1992, interenterprise arrears were frozen. The stock of uncleared arrears amounted to about D 8.2 trillion or 7 percent of 1992 GDP. This amount has since declined to less than D 7 trillion, or 3 percent of 1995 GDP, through the retrieval of some assets and absorption of the interest costs by creditors. The main outstanding problem is that the arrears are owed by firms that have collapsed. With land reverting back to the state after bankruptcy, few salable assets remain. Most nonrecoverable assets are owed to central government-owned enterprises by collapsed municipally owned enterprises. State-owned commercial banks are owed about D 2 trillion. Despite the drain on resources of non-interest-earning arrears, most SOEs, including the state-owned banks, have been able to become profitable.

Initially, industrial SOEs performed well only because oil production came onstream. Excluding oil, industrial SOE value added fell by 7 percent during 1989-91 (Table A9). Particularly in 1989, SOEs faced problems as a shakeout of the weaker enterprises took place following price liberalization, interest, and exchange rate measures. Output rebounded, however, and has since registered rapid growth (10-17 percent a year). Indications are that in recent years SOEs have increasingly benefited from foreign technology and capital, primarily through foreign direct investment, but also through imports financed domestically and from abroad. Within the state-owned sector, the locally managed SOEs fared considerably worse, with output falling by 22 percent before recovering.

In the services sector, SOEs have been able to improve performance after severe difficulties in 1989-90, when trading companies lost about one-third of their business to private retailers and traders. Since then, their output, driven by companies in air transport and communications and, more recently, the financial sector, has increased at a steady rate of 8-9 percent.

Box 3.2.Share and Size of State-Owned Enterprises in the Economy

At the start of the transition in 1988, about 75 percent of the economy was collectively organized. In contrast to other transition economies, the SOE sector in Vietnam accounted for a relatively small part of production, 29 percent, and an even smaller part of employment, 16 percent. In industry and services, the state was responsible for about one-half of output. The predominant agricultural sector was mainly organized as a cooperative sector.

In 1988, about 12,000 SOEs were in existence, one-fourth of which were in industry. Close to 80 percent of the 3,100 industrial SOEs were owned and managed by local government bodies (notably the provincial and district authorities). The centrally run SOEs were much larger, with over 500 employees on average (compared with 135 for the locally managed firms), and produced about 35 percent more per employee.

Of the 12,000 SOEs, about 6,500 remain after the shakeout of the transition period and after a policy of merging state enterprises was implemented. Only a handful of state enterprises have been privatized in an experimental program.

Employment

One of the key features of the transition in Vietnam was the shedding of over 1 million public sector employees (Table A12). Public sector employment dropped from over 4 million in 1988 to less than 3 million in 1992. About 85 percent of the decline was due to reductions in employment in the state enterprise sector.3 Both absolute and relative declines in employment were particularly pronounced in the locally managed SOEs. Employment in such enterprises was reduced by half, from nearly 1.5 million in 1988 to 0.75 million in 1994. As a result of increased output and declining employment, average productivity in the SOE sector climbed steeply, by nearly 70 percent from 1989 to 1992 and by 30 percent from 1992 to 1994.

Financial Performance

Although data on profits are scant, those on the overall cash flow of the state-owned enterprise sector describe an impressive improvement in financial performance. At the start of the transition, budgetary subsidies, at over 8 percent of GDP in 1988 (Table 3.2), outweighed SOEs’ tax payments: tax contributions had dwindled while subsidies for food, exports, and capital investment had increased. During 1989-91, subsidies were drastically cut, reducing the amount of transfers to less than 1 percent of GDP from 1991 onward. Tax payments by SOEs declined during this period because of diminished profitability, with the cost of laying off employees, reduced subsidies, and the CMEA collapse all weighing heavily. Tax losses were, however, offset by rapidly increasing revenues from oil during 1989-91. There-after, revenue from SOEs increased, to about 12 percent of GDP in 1994 (from 8 percent in 1988); the bulk of the difference over 1992-94 was accounted for by increased payments from the non-oil sector. Net SOE contribution to the budget thus improved from -0.6 percent of GDP in 1988 to 11.6 percent in 1994.

Table 3.2.Bank and Budget Support of State Enterprises
198719881989199019911992199319941
In billions of dong
Transfers to the budget2931,1462,2443,6206,18911,91316,08520,557
Taxes5,3059,10612,68515,557
Transfers2931,1462,2443,6208842,8073,4005,000
Operating surplus2781,0642,0293,112
Depreciation allowance15822155086222,2772,5943,826
Capital user fee2625308061,174
Transfers from the budget2131,2301,2751,0938011,019880816
Subsidies12971513742200200250
Food83389
Production851
Exports38275
Working capital1488128110220819680566
Capital transfers2694271,010983539
Net transfers to the budget80−849692,5275,38811,89415,20519,741
Growth in bank credit to state enterprises2591,3331,8981,7013,8213,3103,0724,141
Net bank and budget support of state enterprises1791,417929−826−1,567−7,584−12,133−15,600
As percent of GDP
Transfers to the budget10.87.98.48.68.110.811.812.1
Of which: oil-related1.12.02.83.83.83.1
Transfers from the budget7.98.54.82.61.00.90.60.5
Net transfers to the budget3.0−0.63.66.07.09.911.211.6
Growth in bank credit to state enterprises9.69.27.14.15.03.02.22.4
Net bank and budget support of state enterprises6.69.73.5−2.0−2.0−6.9−8.9−9.2
Sources: Ministry of Finance; State Bank of Vietnam; and IMF staff estimates.

Preliminary data.

Capital transfers to most state-owned enterprises were terminated in 1991.

Sources: Ministry of Finance; State Bank of Vietnam; and IMF staff estimates.

Preliminary data.

Capital transfers to most state-owned enterprises were terminated in 1991.

At the start of the transition, SOEs were receiving nearly all nongovernment bank credit. The SOEs’ share in nongovernment credit, however, declined rapidly from 90 percent at the end of 1990 to 80 percent at the end of 1992 and 63 percent at the end of 1994, with corresponding increases in credit to the private sector and joint ventures. Net SOE credit fell from 9 percent of GDP in 1988 to 2-3 percent in 1992-94.

These declines in budget and bank support of SOEs imply that the cash flow generated by the state-owned sector improved massively during 1988-94. This is especially true considering that investment by the state-owned sector (excluding foreign direct investment) increased modestly as a percentage of GDP over the entire period, while the sector’s access to foreign funds was limited. Data on the profit taxes SOEs paid during 1991-94 indicate that profits (excluding oil-related profits) almost doubled in relation to GDP over this period, confirming the picture painted by cash-flow trends.

Reforms in the State Enterprise Sector

Against a background of sound overall market policies (see Section II), the Vietnamese authorities pursued a number of specific policies to reform the state enterprises.

Enterprise Autonomy

A cornerstone of this reform was the recision of central planning powers in 1988-89 and their replacement with substantial state enterprise autonomy. Enterprises were given the authority to set most prices and to select appropriate mixes of inputs and outputs. In addition, managers were given the right to lay off excess workers as long as they followed the guidelines for compensatory payments. Further downsizing resulted partly on account of de facto bankruptcies and partly because employees left voluntarily when effective pay declined (see section on hard budget constraints below). State-owned enterprises also acquired greater power to determine investments. Finally, whereas before the reforms enterprises had already been given the freedom to generate production in excess of the centrally planned amount and to sell the excess at market prices (known as “jumping the fence”), the reforms extended this discretion to all output.

Increased Competition

The authorities pursued a two-pronged strategy in obliging the SOEs to pursue greater efficiency, profitability, and more market-oriented behavior in general. The first element in the strategy consisted in increasing competition. The second involved hardening the budget constraints on state enterprises and strengthening their accountability. Measures that contributed to increased competition included (1) allowing private sector enterprises equal access to credit and creating a legal framework more supportive of their operation; (2) subjecting all enterprises to uniform rules of taxation; (3) allowing all enterprises to establish direct trade links or to use trade companies of their own choice rather than a specific trade channel; and (4) exposing all enterprises to foreign competition by liberalizing the import regime (see Section VII for details). In addition, central and local SOEs have now increased management autonomy and compete with each other and with cooperatives, some quite large, in the new market environment. In response to this new business environment, an additional 130,000 private households started industrial businesses, and the number of private industrial companies increased tenfold during 1988-93, albeit from a very low level.

Hard Budget Constraints

The second element of the strategy to induce profit-maximizing behavior in the more autonomous state enterprises consisted of several core measures to harden their budget constraints. First, most subsidies to enterprises were cut.4 The previously ample budgetary funding of working and other capital was eliminated for all but a small group of SOEs experiencing shocks following the CMEA collapse in 1990-91. Food and export subsidies were abolished with the price liberalization and unification of the exchange rate in early 1989, and implicit interest subsidies were removed by gradually raising lending rates vis-à-vis deposit rates, most particularly in 1990 and the second half of 1992. However, SOEs generally have easier access to bank credit in foreign currency and hence face lower effective borrowing rates than private enterprises. With the dissolution of the CMEA trading arrangements, large-scale extra-budgetary subsidies in the form of cheap imported inputs were no longer available.5 Second, bank credit was limited to profit-making enterprises, and this measure was backed up by restrictions on bonus and welfare fund payments by enterprises in arrears.6 After the reform of the banking sector in 1988, state enterprises could no longer rely on directed credit but had to compete for access to bank loans.

Third, in 1990 several tax laws were passed that provided a more solid foundation for the taxes assessed on state enterprises and thereby limited the prevailing ex post negotiation of tax liabilities, which was a main element in the earlier softening of budget constraints. Fourth, monitoring of SOEs was simplified and strengthened and their performance began to be measured by the size of their profits and tax contribution. Yet, progress in introducing coherent, transparent, and independently audited accounts has been slow and remains an important target. To spur progress in this area, the Vietnamese authorities have made several recent improvements in the institutional infrastructure, establishing an interagency SOE reform committee, instituting a department in the Ministry of Finance to manage SOEs’ assets, and approving the State-Owned Enterprise Law, obliging SOEs to submit annual reports on their activities and finances. In addition, a new accounting procedure was adopted in early 1996 for all enterprises.

Particular to Vietnam’s experience is that the hardening of budget constraints was not undone through the buildup of large arrears to other state enterprises and bailouts by the budget (see Box 3.1). When nearly all credit cooperatives went bankrupt in 1989-90, the government did not bail out the enterprises, a position that shows the relatively strong credibility of reform policies. This credibility is based not only on political continuity under a national leadership committed to staying the course of reform, but also on the lessons learned in 1986-89 when relatively soft budget constraints contributed to severe inflation.

In addition to the credibility of enforcement, another crucial factor in hardening budget constraints was that the Vietnamese authorities have also enforced their “ownership” rights. In some countries a “lack of ownership” or accountability emerged during the transition to a market-based system, leading to widespread asset stripping and to nonsustainable bonus payments and other abuses. In Vietnam, few such doubts about ownership have arisen: the exercise of ownership rights through monitoring and setting of targets was actually strengthened, and substantial efforts have been made in fighting corruption.

Further Reform

Impressive progress notwithstanding, the Vietnamese authorities are aware that the performance of SOEs, still weak in some areas, needs to be further improved. Weaknesses include the continued lack of comprehensive, independently audited accounts, which complicates plans for divestiture and the introduction of a stock exchange. In addition, recent action to form SOE conglomerates in different sectors may not be consistent with increasing efficiency and competitiveness. Implementing regulations for the recent SOE law also remain to be issued.

The authorities are working in collaboration with the World Bank on a comprehensive plan for restructuring state enterprise. The plan is likely to include gradual privatization, separation of regulatory and ownership functions, and a less discriminatory land regime. A crucial point that needs to be factored into the decision about how much and how fast to privatize is that government revenue continues to depend heavily on the performance of SOEs. Currently, SOEs other than those in the oil sector contribute about four times as much as the private sector in taxes, excluding excises, in terms of value added (Table 3.3). Care needs to be taken that tax collection is not harmed by reform efforts.

Table 3.3.Government Revenue Yield by Sector(As a percentage of sectoral GDP)
Sector1992199319941
State enterprises
Profit tax5.17.58.2
Turnover tax5.46.26.4
Special consumption tax (excises)3.33.63.1
Total13.717.317.7
State enterprises (excluding oil)
Profit tax5.66.48.4
Turnover tax9.010.310.2
Special consumption tax (excises)5.55.94.9
Total20.122.723.5
Nonagricultural private sector
Profit tax1.21.41.7
Personal income tax0.40.40.6
Turnover tax1.72.02.4
Commodity tax0.10.00.0
License tax0.20.30.3
Total3.74.15.0
Agriculture3.43.32.3
Sources: Ministry of Finance; General Statistical Office; and IMF staff estimates.Note: Figures may not add to totals owing to rounding.

Preliminary data.

Sources: Ministry of Finance; General Statistical Office; and IMF staff estimates.Note: Figures may not add to totals owing to rounding.

Preliminary data.

Most of the enterprise arrears that are uncollectible are owed by bankrupt enterprises whose operations have ceased. See Box 3.1 for details.

Most of the increase in the overall share is because of high overall growth in the nonagricultural sectors, in which state enterprises have large shares.

Employment data are subject to large margins of uncertainty. While informal accounts also refer to substantial labor shedding, other evidence, including industrial SOE surveys, do not show such a large decline in employment. Also, older statistical year-books contain several different definitions of employment. It is possible that part of the downsizing has involved the transfer of disabled and other retirees from the employment ranks to the list of welfare recipients.

The budget transfers do not include the budgetary cost of sharing (reportedly half) the cost of laying off SOE employees.

Sectoral differences in tax rates continue to exist. Sectoral differences in interest rates were removed in mid-1993.

Also, loss-making firms could not spend any discretionary funds on housing and other perks. Because wages were a relatively small part of remuneration, a substantial part of SOE labor costs was profit related.

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