After decades of preferential treatment, incentives, and subsidies, state-owned enterprises (SOEs) in Viet Nam failed to compete effectively, and their financial problems created significant fiscal risks. Having virtually no access to private capital markets, general corporations had relied on extensive borrowing from the government and state-owned commercial banks to finance their operations. Most of the large SOEs and general corporations had very high debt, with debt-to-equity ratios frequently exceeding 100%. This severely constrained their ability to service their debts and contributed to the many nonperforming loans in the banking system.
To address the situation, the government's socioeconomic development plan for 2006–2010 called for diversifying ownership to improve the efficiency and competitiveness of SOEs, and for narrowing or eliminating the role of ministries and other state entities in SOE governance and management. It requested for assistance from the Asian Development Bank (ADB) to achieve this thrust, and in response, ADB approved a $630 million multitranche financing facility (MFF) for the State-owned Enterprise Reform and Corporate Governance Facilitation Program in November 2009. The program was to be implemented during 2009–2015, with MFF support comprising $600 million in ordinary capital resources (OCR) and $30 million in Asian Development Fund (ADF) support. Following the government’s first periodic financing request, a $120 million OCR loan and $10 million ADF loan were approved for the MFF tranche 1 project, this report’s subject, in January 2010.
The project’s envisaged impact was improved profitability and transparency of equitized and restructured SOEs, including large general corporations and their subsidiaries. Its expected outcome was the transformation of the Song Da Corporation and the Southern Waterborne Transport Corporation (Sowatco) into focused, efficient businesses with strong balance sheets and improved corporate governance. It had three planned outputs: (i) debt restructuring implemented, combining financial and corporate restructuring; (ii) increased operational efficiency and improved corporate governance of the target corporations; and (iii) institutions supporting key aspects of SOE reform, particularly, the Debt Asset Trading Company (DATC) strengthened and their governance improved.
Delivery of output 1 enabled the Song Da and Sowatco to improve their current ratio and debt-service coverage ratio in excess of targets, and streamline their subsidiaries. Because of output 2 deliveries, Song Da was able to refocus from five business lines to two, and Sowatco, from four to one. Both general corporations revised their board structures, board committees, and risk management practices; enhanced their budgeting and other financial management processes; and introduced a code of governance/ethics into their management systems. Employees affected by restructuring were redeployed internally or retrained for external redeployment/potential employment outside the corporations.
DATC, a special enterprise responsible for supporting the restructuring, reorganization, and transformation of SOEs, withdrew from the project because there were legal impediments to its participation in the envisaged pilot financing for restructuring selected SOEs. ADB agreed with the government on the withdrawal of DATC with the understanding that the envisaged outputs related to legal, institutional, and capacity development would be implemented outside the scope of ADB support but in parallel with Japan International Cooperation Agency assistance.
Developments in the legal framework that resulted from the project benefited not only the participating general corporations but the entire SOE sector. The design—which provided a comprehensive restructuring approach—could and should be replicated, as it gives SOEs the tools, techniques, and enhanced capacity to restructure in a planned and controlled manner.
Overall, this was an innovative pilot project that steered the participating general corporations towards new concepts and ideas while expanding SOE reform. By project completion, the intended outcome had been substantially achieved, output targets were met, and the financial targets and covenants had been achieved. The project’s significant success in restructuring two general corporations into more streamlined entities with a focus on core competencies and business activities, set the benchmarks for reforming other SOEs under the succeeding MFF tranches.
As with the entire MFF, Viet Nam’s Ministry of Finance (MOF) was the executing agency for this project. The participating SOEs, the Song Da and Sowatco, were the implementing agencies.
