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Technical Assistance Consultant’s Report

This consultant’s report does not necessarily reflect the views of ADB or the Government concerned, and ADB and the Government cannot be held liable for its contents.

Project Number: 39538-034 December 2012

Socialist Republic of Viet Nam: Strengthening Support for State-Owned Enterprise Reform and Corporate Governance Facilitation Program KNOWLEDGE PRODUCT 1

INPUT SUBMITTED TO MINISTRY OF FINANCE ON LEGAL FRAMEWORK FOR

MANAGEMENT OF STATE CAPITAL AT SOES

Prepared by UNICON (UK) Limited

For Ministry of Finance Socialist Republic of Viet Nam

UNICON (UK) Limited ADB TA-8016 VIE

Strengthening Support for SOE Reform and Corporate Governance Facilitation Program

KNOWLEDGE PRODUCT 1

INPUT SUBMITTED TO MINISTRY OF FINANCE ON

LEGAL FRAMEWORK FOR MANAGEMENT OF STATE CAPITAL AT SOES

PREPARED FOR: THE ASIAN DEVELOPMENT BANK & MINISTRY OF FINANCE SOCIALIST REPUBLIC OF VIET NAM

24 December 2012

TA-8016 VIE: STRENGTHENING SUPPORT FOR STATE-OWNED

ENTERPRISE REFORM AND CORPORATE GOVERNANCE

FACILITATION PROGRAM (39538-034)



I. Introduction .................................................................................................................... 1

Importance of Management of State Capital and Investment in Vietnam ........................... 2

II. Approaching Development of Legal Framework for Management of State Capital in

SOEs .................................................................................................................................... 3

Understanding - Purposes and Context ............................................................................. 3

Legal Framework for Managing State Capital Internationally and Vietnam ........................ 3

Developing SOE Performance Monitoring Systems ........................................................... 6

SOE Corporate Governance: Some Examples of Recent Developments from Various

Countries ........................................................................................................................... 8

Implementing Machinery ................................................................................................. 10

Analysis of Compatibility and Effectiveness in Context of Existing Laws .......................... 11

Avoiding Legal Optimism ................................................................................................. 12

Road-map to Develop Legal Framework for Management of State Capital in SOEs ........ 12

State Capital and State Investment ................................................................................. 12

Assessing SOE role and Participation by State in Enterprises ......................................... 16

III. Review and Assessment of Legal Framework .......................................................... 17

Review of Vietnam Legal Instruments.............................................................................. 17

Gap between Law and Practice ....................................................................................... 18

Overview of Enterprise and SOE legal framework ........................................................... 19

Considering the Structure of content of Law on Enterprises, Management of State Capital

in SOEs and Law on Public Investment ........................................................................... 20

Objectives of SOEs ......................................................................................................... 20

State and Owner of SOE ................................................................................................. 21

State and Representative owner of entire people ............................................................ 21

State capital .................................................................................................................... 23

Investment ....................................................................................................................... 23

Enterprise investment ...................................................................................................... 24

Legal status of State after investment .............................................................................. 26

Governance Model .......................................................................................................... 27

Review of Existing Legal Framework ............................................................................... 27

Title and objectives of Law .............................................................................................. 28

Management of State Investment Activities ..................................................................... 28

Management of State Investment Capital ........................................................................ 29



Abbreviations / Glossary

ADB Asian Development Bank

EG Economic Group

GC General Corporation

JSC Joint Stock Company

MOF Ministry of Finance

PIM Public Investment Management

PMS Performance Management System

SOE State-owned Enterprise (includes an equitised enterprise where the state retains >50% ownership)

SRCGFP State-Owned Enterprise Reform and Corporate Governance Facilitation Program

VDR 2012 Vietnam Development Report 2012 Market Economy for A Middle-Income Vietnam Joint Donor Report to the Vietnam Consultative Group Meeting December 06, 2011



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I. Introduction 1. At the request of the Government of Vietnam ADB is funding technical assistance

(TA) to support implementation of the State-Owned Enterprise (SOE) Reform and Corporate Governance Facilitation Program (SRCGFP). The TA is being implemented by Unicon (UK) Limited (Unicon). Part of the TA is the development of knowledge products and related capacity to update the institutional and policy framework for SOE reform.

2. The Ministry of Finance (MOF), ADB and Unicon agreed that the first knowledge product to be provided is a document on the legal framework for the management of State capital in SOEs. The purpose of this document is to provide input to MoF regarding the legal framework on the management of state capital at SOEs with a view to influencing amendments to the law1. The document addresses issues that include: Advice on how best to approach new law development. A review of existing laws and legal documents (legal framework) concerning

investment and management of state capital within SOEs; Comments on the legal framework, noting major weaknesses; Recommendations on the need for a separate law on investment and

management of state capital within SOEs and the main content of law to address weaknesses in SOE management of state capital;

3. The evolution and status of the legal framework for State Owned Enterprises in Vietnam is described in detail and reviewed in the JICA report2. That review remains valid, although there have been developments3 since the July 2012 date of the report. This Unicon document does not repeat material contained in the JICA report but seeks to build on that work when considering State capital and SOEs.

4. Unicon is available to discuss the issues raised in this document in order to assist MOF efforts to develop the legal framework for management of State capital in SOEs.

5. The importance and urgency of improving the legal framework for management of State capital in SOEs can be seen in the text box extract from the Vietnam Development Report 2012.

1 Concept Framework for Knowledge Products to September 2013

2 Review on Legal and Institutional Framework on SOEs and SOE Reform in Vietnam Final Report

(Draft) July 2012 Submitted by Quang Minh Investment and Development Consulting JSC funded by Japan International Cooperation Agency (JICA) 3 Since the July 2012 date of the JICA report the legal framework has undergone further development

through for example, Prime Minister Decision No. 929/QD-TTg Hanoi, July 17, 2012 , and Government Decree No. 99/2012/ND-CP November 15, 2012 (to take effect from 30 December 2012).



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Importance of Management of State Capital and Investment in Vietnam ―One way to understand Vietnam’s deeper structural problems is to begin with a simple analysis of ownership, allocation, and execution of capital. Is Vietnam’s capital owned by those who are most efficient at using it? Are the owners of capital allocating it to the sectors where the social and economic returns are the highest? Once capital is deployed to a sector or a firm, is it being executed efficiently?‖ Three of the key findings in the Report are: Ownership: Vietnam’s SOEs are one of the least efficient users of capital, but they are the largest owner of capital. Allocation: The public investment programme is becoming increasingly unaffordable and inefficient since allocation is based on administrative considerations rather than strategic needs and market-based mechanisms — creating excess supply in some areas and causing severe shortages in others. Efficiency: Because of both the widespread use of administrative measures to control prices, and limited access to basic information, Vietnam’s economy is being deprived of the ―oxygen‖ that keeps a market economy functioning efficiently. The Report explores the factors underpinning the inefficient ownership, allocation and efficiency of capital. Among the several explanations, it focuses on ones that are common to all, namely weak institutions, distorted incentives and inadequate information—labelled as the three ―I’s‖ of a market economy. Some of the key institutions that are found to be missing in Vietnam’s economy include an agency to clearly specify property rights and a market in which to trade those rights, an autonomous agency to deal with the state management of SOEs, and impartial regulators for infrastructure sectors such as ports and industrial parks. Source: Vietnam Development Report 2012 (VDR 2012) Market Economy for A Middle-Income Vietnam Joint Donor Report to the Vietnam Consultative Group Meeting December 06, 2011 http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2011/12/13/000333037_20111213003843/Rendered/PDF/659800AR00PUBL0elopment0Report02012.pdf

http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2011/12/13/000333037_20111213003843/Rendered/PDF/659800AR00PUBL0elopment0Report02012.pdf





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II. Approaching Development of Legal Framework for

Management of State Capital in SOEs 6. Experience in many countries shows that the process of drafting a legal framework is

critical to (a) the effectiveness of the legal framework in achieving its objective, and (b) promoting acceptance and understanding of the legal framework among people directly and indirectly affected by it.

7. The process of developing a legal framework for the management of State capital should move through a number of stages. The legal framework for the management of State capital has to fit alongside existing laws, practices and the institutional system and must be seen as being capable of working by those people who are affected by it and those people with responsibility for implementing it. The benefits gained from the building of understanding of the issues involved during the process of developing an effective legal framework explains why countries do not simply copy the legal framework on a particular subject which already exists in some other country.

Understanding - Purposes and Context

8. To prepare an effective legal framework it is essential to deeply understand the purposes for which the legal framework is required and the context in which the legal framework will exist. It is not enough to know that a legal framework is desired. An understanding of the spirit and intent of the proposals underlying the required legal framework has to be discussed and developed by those who are preparing the framework. The principal objectives of the legal framework must be clearly understood by Government, legislators and policy-makers and fully stated in the draft legal documents made available for debate and discussion before being brought into effect.

9. Unless that understanding of the purpose of the legal framework is accurate and complete, the draft legal framework will lack balance and emphasis and will fail to meet the objectives and requirements of those who see the need for the legal framework.

10. Drafting a legal framework to avoid the results of existing poor decision-making processes, or to help change existing behaviour by SOEs, will not succeed unless there is acceptance that systemic changes in understanding, attitudes and behaviour are necessary. Otherwise the reality is that the legal framework will not be accepted or implemented with commitment and good faith.

Legal Framework for Managing State Capital Internationally and Vietnam

11. There are good and bad experiences from other countries that can contribute to the process of preparing the legal framework for management of State capital in SOEs in Vietnam. In considering international experience, it is necessary to understand that the size of the SOE sector in terms of share of Gross Domestic Product, capital and employment and other indicators and the number of SOEs in Vietnam is far greater than in almost all other countries4. As a result care and caution is needed in relating the legal and institutional framework for SOEs and the management of State capital in SOEs in other countries to Vietnam.

4 There is considerable variation in data on SOEs between different sources. The Vietnam

Development Report states that there were 1,200 SOEs in Vietnam using the definition of 100% state ownership and 3,364 using the definition of 50%+ state ownership (of which 1,805 are under central government and 1,559 are under local government). SOEs are thought to account for up to 40% of capital and 20% of employment.



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12. In view of the number of SOEs VDR 2012 states ―In Vietnam, efforts to develop a Performance Monitoring System (PMS) for SOEs will face two immediate challenges. First, given the sheer number of SOEs (nearly 3,400 in 2010), developing such a system for each SOE will be time-consuming and laborious. Local governments, which own nearly 60% of the SOEs, may not have the manpower and capacity to undertake such an exercise. Second, this may require SOEs to invest in establishing management and supervision information systems consisting of information on finance, business performance, and related risks and changes, which can be both expensive and time-consuming. Vietnam, therefore, may not be able to develop a meaningful and effective PMS for SOEs unless the number of SOEs is drastically reduced. Therefore, in our view, developing PMS should begin with a pilot phase involving all 12 SEGs, which have better information systems, the necessary manpower, and account for more than half of the SOE sector (after taking into account their subsidiaries and affiliates), to undertake such an exercise‖.

13. The following paragraphs are designed to give an international perspective on some specific questions relating to SOE management that arise in Vietnam.

How is the management of State shareholding in 100% state-owned enterprises and joint-stock companies carried out?

14. In Anglo-phone countries there is generally a Board of non-executive members or a majority of non-executive members (usually called Directors but this term should not be confused with the different meaning that the same term Director has in some countries of a senior executive manager in an enterprise). Board members are often appointed by the line Ministry with responsibility for the subject matter of the SOE activity or by the Ministry of Finance (often this depends on which Ministry or agency holds shares in the enterprise on behalf of the Government / State). In some countries Ministry officials are not permitted to serve on boards of State enterprises, in other countries having a Ministry official as a member of a board is seen as a useful co-ordinating mechanism. Members will be persons experienced in activities or disciplines related to the activity of the SOE. Where the entity is a company the duties of members of the Board of Directors are set out in company legislation and are primarily to safeguard the interests of the company while being conscious of the interests of the shareholder.

15. If the SOE is a special form of entity established under its own law or a general State enterprise law (e.g. a statutory corporation) then the duties of the members of the board may be owed primarily to the appointing Minister. In other jurisdictions e.g. Germany there may be a supervisory board as well as a board of directors – somewhat similar to the two boards found in SOEs in Vietnam.

16. Senior managers / executives are usually identified by the Board through an open recruitment process based on merit and objective criteria often with the assistance of external recruiting agencies. In some cases the Board may appoint senior management, and in other cases the Board may appoint with the approval of Ministry / Government. Salaries and conditions of employment of senior management are often subject to rules or guidelines.

Which State entity / entities are responsible for managing and investing State capital?

17. The decision to invest in a SOE is usually a Government decision that is taken within the context of the public investment cycle / public financial management system / budget law. The proposal to establish or invest in a SOE will generally emerge from



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the line Ministry responsible for the subject matter of the activity of the enterprise. The funds will come from the Ministry of Finance as many countries operate a Central Account or Exchequer into which all Government funds are deemed to be paid. The relationship between Government and SOE varies between countries but usually the purpose is to minimise interference in management decision-making while safeguarding the public interest – this balance between autonomy in business decisions and accountability for public investment is difficult and delicate to achieve in practice.

Which other State entities are involved and how does coordination and cooperation take place between different entities in the whole process of managing and implementing investment of State capital?

18. Accounts are subject to external audit carried out under international accounting standards by or on behalf of the Supreme Audit Institution (SAI) known by various terms including Auditor General / Court of Auditors / State Auditor. The SAI is often a body established by the Constitution that reports to the legislative arm of government (National Assembly / Parliament) and not to the executive arm (the ―Government‖). (see http://www.intosai.org/news.html International Organisation of Supreme Audit Institutions – the Office of State Audit of Vietnam is a member)

19. There are codes of conduct regarding corporate governance usually based on the work of the OECD including Guidelines for Corporate Governance of SOEs (see http://www.oecd.org/daf/corporateaffairs/oecdguidelinesoncorporategovernanceofstate-ownedenterprises.htm). Reports from the IFC project on corporate governance in Vietnam can be accessed at http://www.ifc.org/ifcext/mekongpsdf.nsf/Content/CG-Pubs

20. Internal audit may be subject to the Internal Auditing (International Standards) of the Institute of Internal Auditors (https://global.theiia.org/standards-guidance/Pages/Standards-and-Guidance-IPPF.aspx - there is no chapter of the Institute of Internal Auditors in Vietnam).

21. Policy issues are usually in the domain of the line Ministry. Finance issues are usually in the domain of both the line Ministry and Ministry of Finance. The entity is usually subject to public procurement laws and guidelines. Where the SOE is engaged in commercial activities that are subject to competition there may be more autonomy in day to day management than where it is engaged in providing public utility facilities or services often under natural or administrative monopoly conditions.

Which entity monitors / supervises State holdings of capital in SOEs and how is monitoring / supervision conducted?

22. Monitoring and supervision varies enormously from the line Ministry, to the Finance Ministry, to a Ministry or an agency responsible for SOEs, or a combination of line Ministry and Finance Ministry, or a specialised body established for the purpose. The line Ministry is generally accountable for performance on policy issues. Financial performance is best reviewed by an entity other than the line Ministry. The SOE Board, and persons or agencies responsible for the conduct of external audit, internal audit, public procurement etc. all play a role.

http://www.intosai.org/news.html

http://www.oecd.org/daf/corporateaffairs/oecdguidelinesoncorporategovernanceofstate-ownedenterprises.htm

http://www.oecd.org/daf/corporateaffairs/oecdguidelinesoncorporategovernanceofstate-ownedenterprises.htm

http://www.ifc.org/ifcext/mekongpsdf.nsf/Content/CG-Pubs

http://www.ifc.org/ifcext/mekongpsdf.nsf/Content/CG-Pubs

https://global.theiia.org/standards-guidance/Pages/Standards-and-Guidance-IPPF.aspx

https://global.theiia.org/standards-guidance/Pages/Standards-and-Guidance-IPPF.aspx



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Developing SOE Performance Monitoring Systems Developing monitoring systems involves several steps. A first step is to clearly define the strategy and objectives of the company. Often, SOEs have multiple and conflicting objectives, making it difficult to measure and monitor performance. For example, an SOE must operate in a commercial manner and be profitable, but at the same time it is often required, either formally or informally, to provide social services and maintain employment, usually without compensation from the government. Such non-commercial objectives may not be easy to eliminate, but a first step is to define and acknowledge such 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 to measure performance against expected results. Experience suggests several key principles in selecting and designing appropriate indicators: (a) indicators should be specific, measurable, and achievable; (b) they should not distort incentive structures; (c) they should facilitate benchmarking against other companies, including international companies, while recognizing country differences in accounting rules, taxation policies, and cost structures; and (d) they should be simple to begin with and improved over time with increased experience and capacity. Good indicators are both financial and nonfinancial. Financial indicators typically include profitability, efficiency, solvency, and budgetary 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. Non-financial indicators include strategy development, corporate governance, innovation, and learning and development. One way to assess overall performance is to use a ―balanced score card‖ approach, which is more comprehensive and aims to strike a better balance between financial and nonfinancial indicators. Once objectives, indicators, and targets are agreed between owners and SOEs, they are typically formalized in an agreement document such as a Statement of Corporate Intent, a Performance Contract, a Memorandum of Understanding, or a Shareholders’ Agreement. Developing such a document is usually a collaborative process between owners and SOEs. In most cases, a regulation or 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 skills on the part of both boards and owners. To be an informed owner, SOE ownership entities sometimes bring in external experts to help draft the agreement. In most cases, agreements are developed 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 problems detected. This can be done through on-going monitoring through information disclosure, an annual performance review, or both. A performance review includes an assessment of financial and nonfinancial results against the key performance indicators, and could also include a more general assessment of operating results, the company’s commitment to good corporate governance, and the performance of the board. Auditing and disclosure of key performance indicators is gaining traction as a way to ensure the reliability of the process. The assessment would also identify steps to be taken by SOEs and owners and provide the basis for discussing objectives for the coming year. Increasingly, countries are linking an annual review to performance-based compensation systems for SOE management. Sources: ―Toolkit on State Enterprise Corporate Governance,‖ Finance and Private Sector Development, World Bank, forthcoming.

Text Box Extract from Vietnam Development Report 2012



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Is there transparency of information regarding the management and investment of State capital and how is provided?

23. Annual reports on performance and audited accounts are published and may be the subject of examination by members of the National Assembly. Periodic reviews may be carried out and published. In some countries a comprehensive report on all SOEs is published on a regular basis.

What are the rights and responsibilities of a representative of a State owner / shareholder in an enterprise?

24. Where the SOE is a company, the Board members are subject to the duties of directors that are set out in company legislation. If the SOE is established by its own law or by a general law on SOEs, the duties of the member of the board will be set out in that law. Members of the board are subject to codes of conduct and other requirements based on OECD Guidelines on SOE Corporate Governance, adaptation of those guidelines, or principles similar to those guidelines.

How is the performance of a representative of a State owner / shareholder assessed? Is performance related to the SOE performance e.g. profit, sales turn-over or fulfilment of company assigned tasks? What are the rewards and sanctions in the event major gains or losses?

25. The members of boards that are appointed as representatives of the Government are usually part-time, non-executive members who would typically meet at most on a monthly basis. The reward for a board member is generally more from the honour of being appointed to the board than the monetary benefit and board members do not receive bonuses. Managers responsible for the day to day management of the enterprise may receive bonuses related to success measured by various criteria. Failures / losses may not always be the fault of the management or the Board members. If there is negligence or fraud or wrong-doing this is generally the subject of company law or criminal law and adjudication by the courts.

How to manage capital / investment where there is a parent enterprise with subsidiary enterprises and where a subsidiary enterprise may in turn have affiliated enterprises? Are there examples of regulations on managing parent – subsidiary relationships to illustrate this issue?

26. There are not many countries that have the number of subsidiary and affiliate entities attaching to a parent SOE in Vietnam.

Which issues are provided for in a Law which contains obligations and which issues are contained in documents such as a Code of Corporate Governance where there may be more flexibility or options in compliance?

27. There are mutually reinforcing measures that are expressed in a combination of laws, guidelines, codes etc. which provides a balance between checks and balances while not stifling initiative.



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SOE Corporate Governance: Some Examples of Recent Developments from Various Countries

- Statutory obligations under Companies / Enterprise Law and other laws relating to corporate governance in SOEs are enforced, or if found to be inadequate or ineffective, the causes to be addressed to make the laws effective and enforced.

- Principles of corporate governance are given concrete expressions in written Codes of Business Conduct for Board members and Employees. The codes are clear in terms of standards so breaches of the code are identifiable. A breach has clear and automatic consequences for the person breaching the code and the code is rigorously enforced.

- A copy of the code for employees is given to every employee and covers matters such as duty to the SOE, avoidance of conflict of interest, limits on outside activities, acceptance of gifts and honesty in dealings. Up to date codes of conduct should be available upon request and accessible through the websites of the SOE.

- The Secretary to the Board of a SOE is obliged to ensure that the Board members of that SOE are informed as to their responsibilities and that they are familiar with the requirements of company law and other statutory provisions which have relevance for them in the exercise of their functions as Board members.

- Chairman of the Board should affirm that Codes of Business Conduct for Board members and Employees have been put in place and complied with by the SOE.

- Board members of PEs and managers and employees who hold designated positions of employment make an annual statement or declaration of interests which could materially influence them in the performance of their functions and restrain them from exercising such functions. The annual statement, which shall be updated during the course of the year if interests change, is made to the Secretary of the SOE and a copy forwarded to Government.

- Special programmes on corporate governance and ethics in business provided for Ministers, civil servants, board members and managers to ensure that there is a common understanding of the standards of behaviour that Government expects should prevail when stating support for improved corporate governance.

- Each SOE should be obliged to have a properly constituted internal audit function or to engage appropriate external expertise which should operate in accordance with a Framework Code of Best Practice for Internal Audit that Government issues (often based on standards of International Internal Auditors).

- Each SOE, within the first six months of each year, produces an annual rolling business and financial plans encompassing strategy (taking account of general sector policy), planned investment and appropriate financial targets. The Board considers and approves the plan which should reflect the Government shareholder objectives in terms of dividend policy, capital value and, where relevant, economic and social objectives. The plans set appropriate objectives and goals and relevant indicators and targets against which performance can be clearly measured. This is important in the context of assessing effectiveness and objectively evaluating achievement of targets. A copy of the corporate plans should be sent to the line Ministry / Ministry of Finance / supervising authority. In some countries SOEs are required to



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develop a Statement of Corporate Intent (SCI) / Performance Agreement / Management Agreement between the SOE and Government and performance can be monitored against the agreed performance indicators.

- There is a balance to be achieved (a) in safe-guarding day to day commercially sensitive information while being transparent about the performance and activities of the SOE, (b) between SOE autonomy and ability to respond to market developments and accountability, (c) the extent to which the SOE is subject to ―monitoring‖, ―reporting‖, ―control‖ and other forms of relationship with the legislative arm of Government as compared with these relationships with the executive arm of Government.

- Existing laws, practices and procedures governing procurement by SOEs to be implemented effectively and if inadequate should be improved. The Chairman should, in the annual report affirm compliance with the procurement procedures and that procurement staff are familiar with procurement procedures.

- Guidelines on disposals should be provided including how to identify assets that are under-utilised and that can be disposed or commercialised. The Chairman, in the annual report, should affirm that the disposal procedures have been complied with and that staff are familiar with the procedures.

- Guidelines, procedures and practices that SOEs should apply in capital investment appraisal and approvals to be obtained and should be provided to ensure consistency for all SOEs.

- Procedures and approvals by different parts of Government for matters such as - the establishment or acquisition of subsidiaries, participation in joint

ventures; - acquisition of shares by any SOE, by its subsidiaries or by joint ventures; - SOE borrowings and Government guarantees on behalf of SOEs; - extending or changing significantly the nature, scope or scale of the

activities in which a SOE or subsidiary or joint venture engages - remuneration of board members and senior management

- existing reporting requirements by SOEs should be examined and discussed with relevant parts of Government, including the Supreme Audit Institution (Auditor General / Court of Auditors), with a view to achieving over a period of time a reporting timetable and appropriate accounting standards are in place under a modernised public financial management system.

- A SOE should be submitting interim unaudited accounts for the first half of that year not later than the end of the [eighth month] of the financial year,;

- Draft unaudited annual accounts for each SOE should be furnished not later than [two months] after the end of the relevant financial year. Draft unaudited accounts are draft financial statements and notes (in accordance with generally accepted accounting principles) and not management accounts.

- The annual report and accounts of each SOE should be published not later than [four months] after the end of the relevant financial year.

- The Supreme Audit Institution submits a report and audited accounts of SOE to legislative arm of Government (National Assembly)

- Chairman’s statement in the report to the relevant line Ministry and Ministry of Finance regarding the system of internal financial control should be included in the annual report of the SOE. The statement should be reviewed by the external auditor to confirm that it reflects the audited SOE’s compliance. The external auditor should consider if the statement is inconsistent with the



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information of which it is aware from the audit work on the financial statements. The external auditor should report its findings accordingly.

- Where SOEs are required by Government to engage in non-commercial activities of a social or community nature, the cost should be made explicit and paid for by Government.

Implementing Machinery 28. This document, building on the review in the JICA report, refers to various laws,

decrees, decisions, circulars, and resolutions on SOEs that provide insights on the implementing machinery for a new law on management of state capital in SOEs. In advising on the legal framework for management of State capital in SOEs, there is a need for a clear understanding of how the law will work in practice and a precise specification of responsibility that is to be allocated to individual State entities.

29. There is a need to move beyond a general desire to improve the management of State capital towards developing a deep and comprehensive understanding of the details and issues that will flow from the draft legal framework. This requires more than stating the duties, powers and functions of different parts of Government that are required for the legal framework to work.

30. The draft legal framework must reflect the administrative machinery that will drive successful implementation. It is important that this aspect be specified in detail to identify areas of possible conflict between different parts of Government. If these potential disputes between different parts of Government are not resolved during the drafting process there will be unnecessary discussion, wasteful duplication of effort and failures to act after the legal framework is brought into effect. In addition, there will be confusion and uncertainty among those that are seeking to make the legal framework operate effectively.

31. Avoiding clarification in precisely specifying responsibility during the drafting process will have a negative impact on prospects for achieving the objectives of the proposed legal framework. Allocating similar responsibilities to different parts of Government or ambiguity through failing to specify allocation of a responsibility to a particular entity, may avoid debate in preparing a legal framework, but will cause problems in implementing the legal framework.

32. This question of the implementing machinery needs to be addressed given the number of State entities that currently have an involvement with SOEs and State capital in Vietnam. For example, Article 35 of Government Decree No 99/2012/ND-CP November 15 2012 provides that responsibility for implementation of that Decree is spread among the following entities:

The Ministry of Finance promulgates the Regulation on activities of the authorised representative for the state capital invested in the enterprise.

The Ministry of Planning and Investment annually reports to the Government on the implementation of the rights, responsibilities and obligations of the state owner for the state enterprise.

The Governmental Inspectorate presides over and coordinates with the Ministry of Planning and Investment, Ministry of Finance to submit to the Government for promulgating the Regulation on supervision, examination and inspection of the enterprises in the observance of law and compliance with the decisions of the owner.

Ministers, heads of ministerial-level agencies, the heads of the Governmental agencies, Presidents of the People's Committees of provinces and cities directly under the Central Government, the Council of Members or the chairman of the company that the State holds 100% of the charter capital to



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be one member limited liability companies and the authorised representatives for the State capital invested in the enterprises. Government, the Council of Members or the chairman of the company that the State holds 100% of the charter capital to be one member limited liability companies and the authorised representatives for the State capital invested in the enterprises are responsible for the implementation of this Decree.

33. Unnecessary bureaucracy in how the legal framework will operate should be avoided. Otherwise, instead of promoting better management of State capital in SOEs, the proposed legal framework will be an additional burden on making decisions and taking action.

Analysis of Compatibility and Effectiveness in Context of Existing Laws 34. The legal framework for SOEs and management of State capital will have to be

compatible with the Constitution of SRV which refers to (i) the State sector and to the State capitalist sector in various forms (Article 165), (ii) funds and property invested by the State in enterprises (Article 176), and (iii) the role of the State sector (Article 197).

35. The proposed legal framework when brought into effect will be interpreted alongside other laws and practices. The interface of the proposed legal framework with existing laws and practices has to be identified and addressed to ensure consistency, to avoid unintended consequences and to enable intended consequences to occur. The draft legal framework for management of State capital in SOEs has to be considered alongside relevant existing laws with a view to identifying problems and issues to be resolved and to ensuring the aims of the proposed legal framework can be achieved.

36. The extent of changes that may be required to the existing legal framework governing SOEs and State capital raises the question of whether there should be revision and amendments to the existing legal framework as well as the introduction of a new legal framework in a stand-alone law or through additional chapters being added to existing laws. Given the number of legal instruments that now form the legal framework for SOEs and management of State capital, the question of whether some degree of consolidation of legal instruments might be desirable should be considered while being conscious of the nature of Vietnam’s legal and regulatory system8.

5 Article 16 ―The aim of the State's economic policy is to make the people rich and the country strong,

satisfy to an ever greater extent the people's material and spiritual needs by releasing all productive potential, developing all latent possibilities of all components of the economy - the State sector, the collective sector, the private individual sector, the private capitalist sector, and the State capitalist sector in various forms - pushing on with the construction of material and technical bases, broadening economic, scientific, technical cooperation and expanding intercourse with world markets.‖ 6 Article 17 ―The land, forests, rivers and lakes, water supplies, wealth lying underground or coming

from the sea, the continental shelf and the air, the funds and property invested by the State in enterprises and works in all branches and fields - the economy, culture, society, science, technology, external relations, national defence, security - and all other property determined by law as belonging to the State, come under ownership by the entire people.‖ 7

Article 19 The State sector shall be consolidated and developed, especially in key branches and areas, and play the leading role in the national economy. The State-run enterprises enjoy autonomy in production and trading and shall guarantee that production and trading are to yield effective results. 8 ―The proliferation of interest groups and the nature of the Vietnamese legal and regulatory systems — which operate on the basis of what is permitted rather than what is not — has resulted in the production of an enormous volume of decrees, regulations, and legislation.‖ VDR 2012



12

Avoiding Legal Optimism 37. The practical aspects of the proposed legal framework are critical to effectiveness.

To ensure that the legal framework for management of State capital that is being drafted is capable of being effective, these questions should be continually asked throughout the drafting and consultation process:

Will the approach work? Is the machinery for implementation adequate? Will the legal framework win respect? Is the legal framework capable of being implemented and enforced?

38. To bring a legal framework into effect to address a problem does not, of itself, solve

the problem. The legal framework provides the opportunity for action that will address a problem. It is the practicability and robust nature of the framework and the competence, efficiency and motivation of those given powers, duties and functions under the legal framework that will determine results.

Road-map to Develop Legal Framework for Management of State Capital in SOEs

39. This input emphasises that the process of preparing the legal framework for management of State capital in SOEs is critical to a successful legal framework. There should be a public consultation process during the preparation of the draft legal framework for management of State capital because it is a subject that is of interest and importance to people in the private sector and among the general public. By building support for achieving the purposes of the legal framework makes it less acceptable for those opposed to changing the legal framework or implementing the new legal framework to create obstructions.

State Capital and State Investment

40. In many countries decisions on choices of investment expenditure by the State take place within a public investment management (PIM) cycle that is linked with the budget process and public financial management. The budget-making and implementation process, public financial management system and public investment cycle are usually governed by the Constitution, laws on public finance and budget laws.

41. There are typically eight stages in the PIM cycle9 (a) strategic guidance and screening, (b) formal project appraisal, (c) appraisal review, (d) project selection and budgeting, (e) implementation, (f) project changes, (g) service delivery, and (h) project evaluation. During the PIM cycle tools and techniques such as cost benefit analysis are used to help establish objective criteria for identifying priorities while the final expenditure decisions reflect negotiations within Government and political inputs. VDR 2012 applied the Rajaram et al approach to Vietnam and observed that the stages of the PIM cycle that need strengthening in Vietnam are the early stages of strategic guidance and screening, formal project appraisal, appraisal review, and project selection and budgeting.

42. A modern public financial management system strengthens capacity to plan, execute and report on budgets and to improve the transparency and accountability of the budgetary systems and processes. Vietnam is currently implementing a project to

9 Anand Rajaram, Tuan Minh Le, Nataliya Biletska, Jim Brumby A Diagnostic Framework for

Assessing Public Investment Management Policy Research Working Paper 5397 World Bank 2010 https://openknowledge.worldbank.org/bitstream/handle/10986/3881/WPS5397.pdf?sequence=1

https://openknowledge.worldbank.org/bitstream/handle/10986/3881/WPS5397.pdf?sequence=1



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improve the public financial management system10. The legal framework for taking decisions on investment by the State, including investment in SOEs, and the management of State capital should be compatible with the changes taking place in the public financial management system and PIM cycle. The draft law on public investment and the legal framework for public private partnership (PPP) arrangements (Decree on investment on the basis of Build-Operate-Transfer, Build-Transfer-Operate and Build-Transfer Contracts (No. 108-2009-ND-CP) and Decision No.71/2010/QD-TTg of the Prime Minister dated 9 November 2010 approving the regulations on pilot investment under the form of public-private partnership) are to be considered in developing the legal framework for management of State capital.

43. The diagram on the next page shows the connections between public investment management, fiscal resources and other sources of financing, SOEs (public corporations in diagram), PPP and private sector in the context of investment in infrastructure projects.

44. A typical law on investment provides for investment by individuals and enterprises from within a country and from outside the country. In most countries, the making of decisions on investment by the State is not included in the law governing investment in business activities but instead this subject is addressed through the legal framework for the public financial management system. The law governing investment in business activities is only one component of the legal framework for investment in a country. Other components include the Civil Code and legal instruments and practices on contract e.g. Law on Construction 2003, securities, taxation, land, employment, banking and finance, company / enterprises, intellectual property, competition, environment, health and safety, dispute resolution, procurement and budget.

45. The equivalent law on investment business activities in Vietnam is Law No: 59/2005/QH11 Ha Noi, 29 November 2005 Investment Law. That law includes provisions relating to state management of investment, State capital, and the establishment of a State Investment and Business Corporation. The Investment Law provides for ―investment activities for business purposes; rights and obligations of investors; assurance of legitimate rights and interests of investors; investment encouragement and preferences; state management of investment in Vietnam and offshore investment from Vietnam‖. ―State capital‖ is defined in the Law as ―the state budget's development investment capital, State-guaranteed credit capital, the State's development investment credit capital and other investment capital of the State‖.

10 World Bank Activities on Public Investment in Vietnam Public Financial Management Reform Project (additional financing, 2011 -2013): to strengthen capacity to plan, execute and report on its budget and to improve the transparency and accountability of the budgetary systems and processes. PFMRP has three main components implementation of an integrated Treasury and Budget Management Information System (TABMIS); strengthening of state budget and investment planning; and strengthening of the Government's ability to manage Vietnam's public debt and to begin monitoring fiscal risks that emanate from SOE liabilities. Project Preparation Technical Assistance Facility Project (2010-2015): The objective is to increase the capacity of Government entities to plan and prepare public investments efficiently up to international quality standards. See also World Bank Report No: ICR 2115 Implementation Completion and Results Report (Loan No. 78380 and Loan No. 80530 and Credit No. 49490) for a Public Investment Reform Development Policy Operation 1 and 2 June 26, 2012 http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2012/07/26/000386194_20120726014325/Rendered/PDF/ICR21150P117720C0disclosed070240120.pdf

http://www-wds.worldbank.org/external/default/WDSContentServer/WDSP/IB/2012/07/26/000386194_20120726014325/Rendered/PDF/ICR21150P117720C0disclosed070240120.pdf





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46. Decisions on making an investment in a SOE should be considered within the PIM cycle as the investment should demonstrate a better rate of return and benefits than alternative uses of the investment resources. Strategic considerations and industrial policy objectives can be taken into account in considering the relative merits of different uses of funds. These investment decisions should include contribution of funds to individual SOEs including financial support for re-financing, mergers, divestment and restructure, subsidies and investment in projects that may be managed and financed through SOEs.

47. Diagram showing connections between public investment management, SOEs and the private sector in infrastructure provision.

Source: Strengthening Public Investment Management James Brumby Washington, DC PREM Public Sector & Governance June 22-23 2011 http://siteresources.worldbank.org/INTEASTASIAPACIFIC/Resources/226262-1309540769401/Session2_Brumby.pdf

http://siteresources.worldbank.org/INTEASTASIAPACIFIC/Resources/226262-1309540769401/Session2_Brumby.pdf

http://siteresources.worldbank.org/INTEASTASIAPACIFIC/Resources/226262-1309540769401/Session2_Brumby.pdf



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48. The management of State capital invested in SOEs should be considered as one element of the relationship between Government and SOEs. That relationship should be based on the principles of governance and not the emphasis on administration and control which underlies the current legal framework for Government-SOE relationships. In the existing SOE legal framework and Government-SOE relationship there is an over-emphasis on form and institutions and not enough emphasis on substance and objectives.

49. The objective of the legal framework for SOEs should be to maximise the value of the enterprises to investors and in so doing reduce the cost of capital. The objective of the legal framework for the management of the Government-SOE relationship should be to optimise the achievement of the objectives of investing in the SOE and return on investment but with the passage of time may lead to a decision to divest. Where Government holds a minority interest in an enterprise it should act in the same way as a private investor. At regular intervals the Government should reconsider whether it should continue to hold its ownership interest in individual SOEs (see textbox for the type of question to be considered).

50. There is a need to distinguish various types of enterprises in which the State participates in Vietnam:

Enterprises that are considered ―strategic‖ - this term needs to be defined precisely so that the essential elements of what constitutes being strategic are readily identifiable. Where a strategic element or interest is identified as existing in an enterprise or activity, the question to be considered is whether state ownership is necessary to protect that strategic element or interest. Classification of SOEs based on percentage ownership by the State of itself is not helpful to policy-making decisions or to devising a legal framework for appropriate State-SOE governance relationships.

Enterprises engaged in providing utilities or activities where an element necessary for competition is absent for reasons other than administrative monopoly which prevents private sector participation in the activity.

Enterprises engaged in commercial business activities which are or should be subject to competition from investors and operators within Vietnam and from international trade and investment.

51. Where competition or potential competition exists the need for regulation of key business decisions is minimised. Where there is an absence of competition regulation may be necessary but the regulator should be separate from the SOE or line Ministry that owns or controls the SOE.



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Assessing SOE role and Participation by State in Enterprises • What economic and social objectives, including economic growth, employment,

poverty reduction, delivery of essential services does the SOE have? • Are the roles and objectives for which the SOE was established still relevant

given that it is most probable that circumstances and policies will have substantially changed with the passing of time?

• Is there a public interest dimension or concern that some activities are in some way too important, sensitive or high risk for the private sector or market forces? If there are these concerns does Government ownership and control of activities of itself eliminate or manage the risks or are there safeguards that can be put in place while permitting private sector participation in the activity?

• Is the SOE achieving the objectives for which it was established and at what cost?

• Does the SOE have the financial and operational capacity, proven management capability, skills and experience to achieve its objectives?

• If the SOE is not achieving the objectives for which it was established or is not doing so efficiently and effectively, what is going to change to make the SOE operate differently within State ownership in the future?

• What are the objectives for the SOE and the economy that should now exist for the sector and activity in which the SOE is engaged?

• What impact will different forms of SOE restructuring have on the economy in terms of cost competitiveness and attractiveness as a location for private investment?

• What impact will restructuring options have on Government’s fiscal position? • Evaluate alternatives to the SOE as a means of achieving policy objectives.

How does the best alternative method compare in terms of direct and indirect costs and benefits with the prospects for restructuring the SOE in terms of achieving the economic and social objectives?

• Is the SOE commercially viable or financially distressed – what are the issues? • Removing problems that have arisen in a SOE e.g. over-staffing or financial

losses does not of itself address the causes of those problems because removing problems is different from finding solutions.

• Why will the causes and outcomes of problems in a SOE not happen again? • If private sector participation is to take place what special factors need to be

considered e.g. environment issues, employee matters, suppliers, customers, creditors and how can these be dealt with in a fair and humane way?

• Are there sensitive issues to be addressed such as obligations to continue specified activities or to maintain specified standards? If there are, when private sector participation in the enterprise takes place, how can these issues be addressed with minimal restrictions on the transaction or minimal interference with normal market conditions?

• In the light of this thorough assessment decide on a comprehensive approach to implementing the most efficient and effective way of achieving economic and social objectives while safeguarding the public interest and recognising that special interests have to be addressed.

• Ensure that the public and special interests are well informed throughout the assessment and implementation of change and restructure by communicating imaginatively and effectively.



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III. Review and Assessment of Legal Framework (Note this section has been translated from Vietnamese into English. In the event of conflict between the two versions, the Vietnamese version is likely to be expressed with more clarity).

52. In this part Unicon reviews and assesses the legal framework for management of state capital in SOEs. Later in the document suggestions are made for consideration in preparing a Law on State capital investment in enterprises11. The review seeks to reflect the complexity of the legal system where there are differences between legal instruments and the practice of administration by the Government of SOEs. It also seeks to define the governing scope and subject of Law on State capital investment in enterprises within the wider legal system.

53. As mentioned earlier this document does not repeat the review and findings of JICA but concentrates on issues which are new or not already available to Government.

Review of Vietnam Legal Instruments 54. The legal instruments listed below are relevant to the legal framework for managing

State capital in SOEs and State investment. No. Document Review focus

1 Law on Investment in 2005 Specified in Chapter VII ―State capital investment and business‖

2 Law on Enterprises in 2005 Regulations related to Limited Company, joint Stock Company, Article 168 ―Exercise of owner’s rights of State capital in enterprises‖, Chapter IV ―State management on enterprises‖.

3 Decree 102/2010 providing detail guidance on a number of articles of Law on Enterprises (―Decree 102‖)

This Decree provides detail regulations on establishment and organisation, management and dissolution of enterprise, adding to unspecific regulations in Law on Enterprises.

4 Decree 25/2010 on converting SOEs into One-member State-owned Company Limited (―Decree 25‖)

This Decree defines persons, organisations having SOE owner’s rights, including Prime Minister, Ministry, Provincial People’s Committee, Holding Company in holding company model (State Corporation) and State Economic Group.

5 Decree 101/2009 on piloting establishment, organisation and management State Economic Groups (―Decree 101‖)

Determine the model of large-sized State Economic Groups in some certain sectors, having big impact on the economy and the direct administration of Prime Minister on these Economic Groups.

6 Decree 99/2012 on assignment, decentralisation of the implementation of the rights, responsibilities and obligations of state owner for the state-owned enterprises and state capital invested in the enterprises (―Decree 99‖)

Redefine and replace related regulations of Decree 25 and Decree 101 on the implementation of SOE owner’s rights of the Government, Prime minister, Ministry and Provincial People’s Committee; determine the representative of State capital owner in the enterprises; define roles and functions of Ministry of Finance, Ministry of Planning and Investment, Ministry of Interior and Ministry of Labour,

11

In Decree No.499/NQ-UBTVQH 13 dated July 20, 2012 of National Assembly Standing Committee on establishment of laws and ordinances in 2013 named ―Law on management and use of State capital invested in business‖; however, Drafting Committee chaired by Ministry of Finance proposes to change into ―Law on State capital investment in enterprises‖.



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Invalids and Social Affairs in SOE management. 7 Decree 09/2009 on financial management

in SOEs (―Decree 09‖) Review the existing model and method of managing State capital investment in enterprises and SOE financial management.

8 Decision 224/TTg/2006 promulgating the Regulation on supervision and appraisal of operation effectiveness of SOEs (―Decision 24‖)

Review tools and method of supervising SOEs’ operation.

9 Decision 992/TTg/2010 converting SCIC into One-member State-owned Limited Company (―Decision 992‖)

Review organisation structure, functions, and duties of SCIC.

10 Decision 929/TTg/2012 approving Project on ―Restructure of State-owned Enterprises with focus on State Economic Groups, State Corporations during 2011-2015‖ (―Project on Restructure‖)

Consider orientation of policy on SOE reform and restructure of Vietnam Government in coming period.

11 Law on State Budget 2002 Consider the relationship between State capital investment and management in enterprises in the light of State budget management.

12 Draft Law on Public Investment12

Consider to identify the governing scope, subject between Law on Public Investment and Law on State capital Investment in enterprises.

13 Decree No 59/2011 ND-CP of July 18 2011 on Transformation of enterprises with 100% state capital into joint stock companies

13 Law on Procurement 2005 14 Law on Construction 2003 15 Decree and Regulations on PPP 16 Law on Management of State Assets 17 Civil Code 18 Constitution

Gap between Law and Practice

55. Although a Law on State capital Investment in enterprises and a Law on Public Investment are under development, the matters to be addressed in these laws have been discussed for many years as policy towards SOEs has evolved. The Law on Enterprises and the Law in Investment came into force in 2006 and the steps being taken to develop a Law on Public Investment and a Law on State capital Investment in enterprises reflects: SOEs have obtained substantial State capital investment and special preferential

policies but performance has not lived up to expectations. Repealing the Law on State-owned Enterprises and replacing it with the Law on

Investment and the Law on Enterprises to create a level playing field for all types of businesses, and limit the exposure of the Government to SOE risks, has not overcome problems with SOEs. The absence of regulations on investment and management of State capital in SOEs contributed to these problems.

The use of State management tools for SOEs through legal instruments issued by the Government and Ministries, results in conflicts and overlap between

12

Draft Law on Public Investment obtained from the website of the National Assembly [email protected]

http://[email protected]/



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different legal instrument and fosters uncertainty. Together with ineffective enforcement the authority and effectiveness of State management of SOEs has been undermined. It is difficult for the National Assembly to control and monitor the use of State resources in SOEs, as well as ensuring that political and policy priorities are addressed by SOEs.

Many SOEs have a monopoly or dominant position in the market so that competition is absent or limited and there is limited regulation or supervision of these dominant enterprises.

There are many exceptions and exemptions in the law on matters relating to capital investment and management, debt elimination and rescheduling as it is applied to Economic Groups and State Corporations and there are differences between legal instruments and reality. These entities benefit from special advantages in access to capital, land and new investment projects.

The State as owner has a right to appoint people to the key management positions, but there is a lack of transparency because the exercise of this right is not set out in a legal instrument, the decisions are not published and criteria or explanations for the choice of people are not given.

56. To review existing laws and objectives or focus as the JICA report did on weaknesses in the existing framework will not be sufficient to bring about an effective legal framework for management of State capital or improvements to the draft law on Public Investment that is currently being discussed13. This document seeks to go further drawing on practical experience of how SOEs operate in practice and the issues and weaknesses that exist in reality. It is only by addressing these key issues that a Law on Investment of State capital in enterprises and a Law on Public Investment can be implemented effectively and bring about improved SOE performance.

57. The process of developing the law is an opportunity to implement changes that will have long-term impact on SOE problems and a stable environment for SOEs in the future.

Overview of Enterprise and SOE legal framework 58. The provisions in the Law on Investment do not discriminate between foreign and

domestic investment and do not distinguish between enterprises on the basis of domestic, foreign or state ownership.

59. A critical issue in considering the legal framework for enterprises is that the distinction between ―investment‖ and ―enterprise‖ activities is not clear or certain. There is confusion as to who is the investor and confusion as to which comes first between investment and enterprise investment14.

60. In many countries, this issue is addressed by ―public law‖ (administrative relationship or state management such as law on investment management) and ―private law‖ (including freedom to trade and establish enterprises as expressed in company / enterprise law) in which the private law is considered the default position. This implies that enterprises are established with legal entity status before implementation of investment and business activities.

13

Review on each specific mechanism and policy has been implemented by JICA with specific complete assessments and recommendations as stated in Section 1. 2. 14

Corollaries of this situation is the confusion in assignment to apply the law to ―Investors‖ (who invest in a project) and ―Enterprises (who are owner and legal ownership entities responsible for project implementation) and the return in legal execution of discrimination between foreign investment (a project is required when establishing enterprise) and local investment (establishing enterprise without investment project).



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61. It appears that current policy thinking reflects: An over-emphasis on putting investment before enterprises and on investing as

much as possible without paying attention to establishing and improving the enterprise’s organisation and governance. For example, the ambition to implement large investment projects has led to Economic Groups taking on these responsibilities without having management capacity and failing as a result. At the same time, due to desire to create and develop Economic Groups, Decree No.101 has resulted in duplication, gaps and contradiction of the general framework of the Law on Enterprises.

The State, with natural characteristics of a bureaucratic public administration system, is not suited to the management of business operations and corporate organisations. Over the years, the State has retained too many SOEs and appears to consider SOEs as the main means to bring about investment. There is limited attention given to good corporate governance and the State has not been able to take on the role or use the tools of a modern capital investor.

Considering the Structure of content of Law on Enterprises, Management of State Capital in SOEs and Law on Public Investment

62. Consideration might be given to supplementing the Law on Enterprises, perhaps through a special chapter on SOEs. The supplementary provisions could confirm characteristics of investment, use of state capital in enterprises and affirm the corporate organisation and management principles. Government and authorised agencies would be limited to issuing written guidelines on implementation based on the Law on Enterprises.

63. For the Law on Investment, the public law elements of inspection, approval and supervision processes of the State for private and state investment projects or foreign investment projects may require separate laws15 on Private Investment, Public Investment and Investment of State capital in enterprises. After deciding on the substance to be included in the legal framework, the choice of form of legal instrument can be decided.

Objectives of SOEs 64. The State objectives to maintain and develop SOEs in Vietnam include:

implement economic regulation and macroeconomic stabilisation; increase competitiveness and profitable business investment; and ensure provision of essential public services for society, public security and

national defence. 65. The relative importance or priority between these objectives and the means of

implementation are not specified. The objectives are different in nature and instead of being supportive and complementary are more likely to be in conflict.

66. The draft Law on Public Investment, Article 3, defines Public investment as ―the use of State capital to make investment without aim at profits in programmes and projects for socio-economic development‖. According to this definition, the scope of the Law is focused on an objective but not the mechanism for State capital investment. If investment is made in ―programmes and projects‖, who is to be responsible for management? Is there overlap in terms of objectives and methods between ―public investment‖ and ―investment of state capital in enterprises‖?

15

For example, the massive implementation of devolution to approve investment projects regardless of local and foreign investment based on Law on Investment in recent time has resulted in many negative consequences in localities due to insufficient capacity, qualification and national responsibilities for licensing foreign investment projects.



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67. Under the Government SOE restructuring programme there is a classification of SOEs based on size and operation areas without reference to the three objectives of SOEs mentioned above. There will be activities reserved for the State e.g. publication, traffic safety ensuring, money printing and minting coins. Competition among SOEs to ensure efficiency of trading and profitability is emphasised.

68. Any enterprise doing business under Enterprise Law, regardless of the extent of State participation in the capital of the enterprise, should aim to make profit. Other objectives, although they play an important role for economy in general, should be considered secondary to this aim. Additional functions should be implemented in line with implementation of activities under specific policy and legally specified features16 and the State should pay compensation from the State Budget for the impact of non-profit activities on SOE performance.

State and Owner of SOE 69. Article 17 of Constitution 1992, ―…funds and property invested by the State in

enterprises and works in all branches and fields - the economy, culture, society, science, technology, external relations, national defence, security - and all other property determined by law as belonging to the State, come under ownership by the entire people‖. ―Entire people‖ is a subject that cannot be determined by law.

70. Article 4, Clause 18 of Enterprise Law: ―State owned shares mean shares for which payment is made with capital from the State Budget or other State capital sources of which a State body or economic organisation acts as the representative of the owner‖.

71. On definition of State Own Enterprise, Law on Enterprise (Clause 22, Article 4) defines: ―State owned enterprise means an enterprise in which the State owns over fifty (50) per cent of the charter capital‖.

72. On this basis State does not own the SOE but is owner of one part of charter capital (or

joint venture) of the SOE contributed by State; State is the representative owner on behalf of the entire people for funds and

property invested into State Own Enterprise; and According to scope and content of Enterprise Law, a Limited Company and

Joint Stock Company do not have an enterprise owner but have owners of charter capital (or shares).

73. Enterprise Law does not distinguish ownership of charter capital raised at the time of the initial investment or obtained at a later time. The contributed capital amount (money or property) is that of the enterprise and a member owns rights and interest in the charter capital17.

State and Representative owner of entire people 74. Decree No. 09/2009 and Decree No. 99/2012 and Decision No. 992/TTg (on SCIC)

give various interpretations. 75. Article 1 of Decree No. 99 (issued on 15 November 2012 and takes effect 30

December 2012), provides that

16

For example, when EVN is required by Government to offer preferential power price for rural area, Petrolimex is required to reduce petrol price, or Economic Groups are required to invest and support nationwide poor districts. 17

Enterprise law in many countries clearly specify that a shareholder does not have ownership rights in the assets of a company. A shareholder’s rights and interest arise from the ownership of shares issued by the company.



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―The State invests capital, assets in the enterprises operating in the industries, sectors, key stages, providing products, essential public services for society, national defence and security, as the core for the state economy to perform the leading role, as an important material force for the State to orient, to regulate the economy and to stabilise macro‐economy. The Government is the highest state administrative agency, unifies in management and implementation of the function of state‐owner for the state‐own enterprises and the state capital invested in the enterprises. This Decree provides for the assignment, decentralisation of the implementation of the rights, responsibilities and obligations of state owner for the state‐own enterprises and state capital invested in the enterprises.‖

76. Article 3 contains definitions and states that ―The state‐contributed capital is the capital which is invested by the state in an enterprise and is represented as owner by a state agency or an economic organisation assigned by the state.‖ ―Authorised representatives of the state‐own capital in the enterprises (hereinafter referred to as the representatives) are the individuals who are authorised by the owner in writing to exercise their rights, responsibilities and obligations of the owner in the enterprises.‖ ―The Companies under the Ministries, the provincial‐level People's Committees, including: The state corporations, the one member limited liability companies decided on establishment or assigned to manage by the Ministries, the provincial‐level People's Committees.‖

77. Article 4 of Decree 99 of 2012 provides for the assignment, decentralisation of the implementation of the rights, responsibilities and obligations of state owner. ―The Government directly implements or assigns the Prime Minister, ministries, ministerial level agencies, the Governmental agencies (hereinafter referred to as the Ministries); decentralises the People’s Committees of provinces and cities directly under the Central Government (hereinafter referred to as the provincial‐level People's Committees); assigns the Members’ Councils or chairmen of the companies, the representatives to exercise the rights, responsibilities and obligations of state owner. The State Capital Investment Corporation is the enterprise decided on the establishment by the Prime Minister, invested charter capital by the State and managing state capital in the enterprises transferred by the Ministries, the provincial level People's Committees has the following rights, responsibilities and obligations....‖

78. Decree 99 lists the powers and obligations of the State owner in respect of 100% SOE including the right to approve the charter, appoint the management and decide on the development strategy of the enterprise. Decree 99 sets out the rights and responsibilities of the Government, Prime Minister, line Ministry, and Provincial‐level People's Committee, Ministry of Finance, Ministry of Planning and Investment, Ministry of Home Affairs, Ministry of Labour, War Invalids and Social Affairs, Members Council, and Chairmen of enterprises in respect of different forms of enterprise. It also provides for the assignment and decentralisation of the obligations, rights and responsibilities of State owner including the rights and responsibilities where the State owns less than 50% of the charter capital in the enterprise.

79. Responsibility for implementation of Decree 99 is allocated to: The Ministry of Finance promulgates the Regulation on activities of the

authorised representative for the state capital invested in the enterprise. The Ministry of Planning and Investment annually reports to the Government

on the implementation of the rights, responsibilities and obligations of the state owner for the state enterprise.



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The Government inspectorate presides over and coordinates with the Ministry of Planning and Investment, Ministry of Finance to submit to the Government for promulgating the Regulation on supervision, examination and inspection of the enterprises in the observance of law and compliance with the decisions of the owner.

Ministers, heads of ministerial‐level agencies, the heads of the Governmental agencies, Presidents of the People's Committees of provinces and cities directly under the Central Government, the Council of Members or the chairman of the company that the State holds 100% of the charter capital to be one member limited liability companies and the authorised representatives for the State capital invested in the enterprises.

80. The concepts of representative owner of entire people, State Owner and State owner representative need to be distinguished and understood. Government may issue policies and be responsible for implementation and be the State Owner Representative while National Assembly plays the role of supreme agency representing entire people. Government is ultimately responsible to the National Assembly for capital contributed by the State.

State capital 81. State capital may be classified as capital invested in enterprises under the Enterprise

Law and property and assets under the Civil Code. 82. Both Investment Law and Enterprise Law provide that one investor can contribute to

a project in different forms of cash, property and property rights (e.g. land use right certificate, natural resource exploitation rights, intellectual right). All capital contributed is converted into cash, determined at time of contributing capital and is recognised in the accounts of the enterprise. When the State contributes land use right certificate or natural resources exploitation rights to an enterprise as contributing capital, the value of these rights is reflected as a portion of the enterprise’s charter capital that is allotted to the State. Should the value of the rights increase, the charter capital or share ownership of the State does not increase. When State capital is contributed to an enterprise and is reflected in charter capital, the SOE does not possess property that is owned by the State18.

83. State capital can include credit capital secured by State or development investment credit capital of State in investment projects. This type of investment must be distinguished from capital contribution to an enterprise.

84. Another issue to be determined is whether capital that an SOE invests in a subsidiary or another enterprise is to be considered as State capital. The fungible nature of capital needs to be considered as well as the distinction between the rights of an owner of charter capital or shares and the rights of the enterprise.

Investment

85. Law on Investment 2005 Article 3 defines investment as ―use of capital in the form of tangible or intangible assets for the purposes of forming assets in accordance with the provisions of this Law and other provisions of the relevant laws‖. Investment may be direct or indirect – distinguished by participation in management of the enterprise.

86. The State invests in SOEs by: Using a portion of budget to allocate capital to SOEs (at the time of establishment

or to supplement charter capital);

18

It is assumed that issues related to state asset protection from intentional harm or corruption are a separate and independent category to be settled by other laws including Law on Corruption Prevention and Penal Code.



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Contributing assets or property rights (for example, land use rights, rights to exploit natural resources and technical infrastructures) to an SOE to be included in the charter capital; and

Providing loans, finance or support to an SOE, directly or indirectly, e.g. by requesting a bank to lend at preferential interest rates, give state guarantee for loan, request bank to postpone or extend debt repayment, write off bad debts, reduce or exempt from tax or amounts payable to budget and pay debt on behalf of SOEs, etc.

87. Under State Budget Law 2002, Article 3119 there are seven central budget expenditure items of which development investment expenditure includes item 1(b) see footnote. Under regular expenditure and supplementary revenue to local budgets, there is much expenditure that can be used to support SOEs under national target programmes or expenditures for educational, cultural, social, security and defence activities.

88. There is a lack of transparency in State investment and expenditure on SOEs and it is difficult to establish the value of the investment and support. Under the Law on Enterprise the State should make investment in SOEs through charter capital contribution. The Law on Investment provides for various other forms of investment. There should be an explicit record of all forms of direct or indirect support to SOEs.

Enterprise investment 89. Chapter VII of 2005 Law on Investment allows the State to invest in economic

organisations (see textbox). Under the framework of Law on Enterprises, Law on

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Article 31 The spending tasks of the central budget shall comprise: 1. Spending on development investment:

(a) Investment in construction of socio-economic infrastructure projects managed by the central level without possibility of capital recovery;

(b) Investment and capital support for State enterprises; State economic organisations, and State financial organisations; contribution of share capital and equity capital to joint ventures with enterprises in areas that require the participation of the State;

(c) Addition to the State reserve fund; and (d) Other expenditures in accordance with provisions of laws.

2. Regular spending on: (a) Non-productive activities in the fields of education, training, health-care, social affairs, culture,

information, arts and literature, physical training and sports, science, technology and environment and other operations managed by the central agencies;

(b) Non-business and economic operations managed by the central agencies; (c) National defence, security and social order and safety, excluding the portion allocated to the

locality; (d) Operations of the central agencies of the State and the Communist Party of Vietnam and

socio-political organisations; (e) Price subsidies in accordance with the State policies; (f) National programs implemented by the central Government; (g) Support for the social insurance fund as stipulated by the Government; (h) Subsidies to people eligible for the social policies managed by the central Government; (i) Support for political-social-professional organisations, social organisations and socio-

professional organisations at the central level in accordance with provisions of law; and (j) Other expenditures in accordance with provisions of laws.

3. Payment of principals of and interests on Government’s borrowings; 4. Aids; 5. Other expenditures as stipulated by laws; 6. Additions to the central financial reserve fund; and 7. Supplementary revenue to the local budgets.



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Cooperatives, Law on Credit Institutions, Securities Law and Commercial Law, economic organisations include Limited Liability Companies, Joint Stock Company, Corporations, Private Enterprises, branches of foreign companies operating in Vietnam, the Vietnamese commercial banks and foreign bank branches operating in Vietnam as well as Securities Investment Funds, economic households, and cooperative groups.

Law on Investment 2005 Chapter VII State Capital Investment and Business

Article 67 Management of state capital investment and business 1. State capital investment and business must comply with socio-economic strategies, planning and plans in each period. 2. State capital investment and business must comply with the set objectives and be efficient, ensuring that the management mode is suitable to each capital source, each kind of investment project and that the investment process is conducted publicly and transparently. 3. The use of state capital for investment or joint venture or association with other economic sectors under the provisions of law must be appraised and approved by state agencies competent to decide on investment. 4. To clearly define the responsibilities and powers of agencies, organisations and individuals in every stage of the investment process; to effect the assignment and decentralization of state management over state capital investment and business. 5. Investment must be carried out according to law, comply with the set schedule, ensuring quality and avoiding scatter, waste, losses and self-containment. Article 68 State capital investment and business in economic organisations 1. State budget capital shall be invested in economic organisations via the State Capital Investment and Business Corporation. 2. The State Capital Investment and Business Corporation shall operate according to the provisions of law on state enterprises and relevant provisions of law; exercise the right to represent the state capital owners at one-member limited liability companies, limited companies with two or more members and joint-stock companies converted from independent state companies or newly established. 3. The Government shall provide for the organisation and operation of the State Capital Investment and Business Corporation Article 69 State investment in public-utility activities

1. The State shall invest in production and supply of public-utility products and services in the form of assigning plans, placing orders or bidding. 2. Organisations and individuals of all economic sectors shall participate on an equal footing in the production and supply of public-utility products and services, except for special cases stipulated by the Government. The Government shall promulgate policies to support public-utility activities and lists of public-utility products and services. Article 70 Investment with the State's development investment credit capital 1. Objects funded with the State's development investment credit capital shall be investment projects in a number of important branches or domains, major economic programs with socio-economic efficiency, which are capable of refunding borrowed capital. Projects funded with the State's development investment credit capital must be appraised by lending organisations which must also approve the financial or debt-payment plans before deciding on investment. 2. The Government shall specify policies on investment support from the State's development investment credit capital sources, promulgate list of subjects entitled to borrow capital and credit conditions in each period. Article 71 Organisations and individuals assigned to manage state capital-funded investment projects Organisations and individuals assigned to represent state capital owners shall take responsibility for the preservation, development and use of capital in an efficient manner. Organisations and individuals directly representing owners of state capital or state equities at enterprises shall perform their obligations and operate in accordance with the provisions of law on management and use of state capital and the Enterprise Law. Article 72 Modification of contents, postponement, suspension and cancellation of investment projects 1. In case of modification of contents of an investment project, the investor must explain the reasons therefor and the modified contents to be submitted to the state agency competent to decide on investment for consideration and decision; if the project is being executed, the investor must make a report on assessment of the project.

2. Only after getting the competent state agency's approval of the modification of contents of an investment project shall the investor formulate, organise the examination and submission of the project for approval under regulations. 3. An investment project shall be postponed, suspended or cancelled in the following cases:

a/ Twelve months after obtaining the investment decision, the investor fails to execute the project without written approval of the competent agency; b/ The project's objectives have changed without written permission of the competent agency.

4. Agencies competent to decide on the postponement, suspension or cancellation of investment projects must clearly identify the reasons therefor and take responsibility before law for their decisions. Article 73 Selection of contractors for execution of projects Investment projects funded with the state capital must go through bidding for selection of suppliers of consultancy services or goods or construction and installation contractors in accordance with the provisions of bidding law.



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90. In addition to direct and indirect investment as defined in Article 3 of Law on Investment, there are other State financial investment activities that may be considered as investment in enterprises. The purpose of these activities is not only profitability but economic regulation and macro-economic stability or provision of public services, public security and national defence.

Legal status of State after investment

91. Article 16820 of Law on Enterprises sets down the principles by which the State shall exercise owner’s rights of State owned capital in enterprises. The principles of separating ownership from administrative management and ownership from business autonomy of the enterprise have existed through the SOE reform process but have not been successfully applied.

92. Generally, the State can play three roles: Agency implementing state management function for entire economy, including

economic regulation and macro-economic stability; Representative of public owner (in terms of principle), or specifically, the State is

an Owner for contributed capital or capital formed through State investment in enterprises; and

The State as an owner or shareholder in an enterprise. 93. Achieving balance between these roles has proved difficult in many countries21.

Decree No. 101/2009 (State economic groups), Decree No. 09/2009 (Financial management for SOEs), and Decree No. 99/2012 do not provide for transparency and separation between these functions.

94. The ownership and management in private owned companies as well as in SOEs is complex and has been the subject of analysis and debate over many years22. It is a classic principal - agent relationship where the principal (owner) can achieve better

20 Article 168 Exercise of owner’s rights of State owned capital in enterprises 1. The State shall exercise owner’s rights of State owned capital in enterprises on the following principles:

(a) Exercising owner’s rights in the capacity of a capital investor; (b) Maintaining and developing State owned capital; (c) Separating the function of exercise of owner’s rights from the function of State administrative management; (d) Separating the exercise of owner’s rights from the right to business autonomy of enterprises; respecting business rights of enterprises; (dd) Exercising uniformly and centrally owner’s rights and obligations with respect to capital.

2. Functions, duties and powers of the representative organisation of the State owner; the regime of exercise of owner’s rights of State owned capital; method and criteria for evaluation of efficiency and the actual status of maintenance and development of State owned capital; the regime of co-ordination, inspection and assessment with respect to the representative organisation of the State owner; guidelines, measures to arrange, restructure, reform and enhance the efficiency of operation of enterprises with State owned capital shall be implemented in accordance with law. 3. The Government shall submit general reports on the current status of business of State owned capital, of the maintenance and development of the value of investment capital and assets under State ownership in enterprises on an annual basis. Article 169 Establishment of State owned enterprises Enterprises which are established by the State as from the date on which this Law becomes effective must be registered, organise management and operate in accordance with this Law and relevant law. 21

For example, in many countries, the State has right to intervene in the purchase or sale of private enterprises under certain conditions. 22

See for example, The Modern Corporation and Private Property by Adolf A Berle and Gardiner C Means published in 1932 emphasised the separation of ownership from control of corporations in the USA.



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results by acting through an agent (the managers of the company), the agent has more information than the principal (the owner), and the principal is seeking to encourage the agent to act in the interests of the principal23.

95. Various methods of seeking to manage this issue in SOEs have been applied including the holding company format of Temasek in Singapore and the Shareholder Executive in the UK.

Governance Model 96. In the legal framework for investment in SOEs and management of state capital in

SOEs it is governance, and not public administration, that is the key to the relationships between Government and the SOE.

97. In considering investment by the State the distinction in the draft Public Investment Law envisaged investment which is aimed at earning profit and that which is aimed at socio-economic development may not be helpful. Investment should earn a rate of return and wider social and economic costs and benefits that may not be measured by profit can be considered and projects and use of funds can be compared.

98. The relationship between Government and enterprises in which it has an ownership interest will vary depending on whether the enterprise is wholly State owned, majority State owned or where there is minority State participation.

99. Central Institute for Economic Management has proposed a model for establishment of the unit for management of SOE and examined other issues that should be considered in the context of developing the legal framework for management of State capital in SOEs and State investment24.

Review of Existing Legal Framework

100. It is necessary to consider following matters: State management objectives on registration, verification and approval of each

specific investment project according to political, economic, social, technological and environmental criteria, without differentiating between sources of capital;

State management objective as owner of projects or investments using State capital;

State management is intended to regulate economy and ensure stability of macro-economy, other unexpected demands of national defence and public security by using State capital to intervene, influence finance and operation of economic organisations and enterprises in economy; and

To distinguish State investment and public funding / spending; To invest State capital in enterprises;

Decision the basis and criteria for investment decisions; It is not necessary to only invest State capital in existing enterprises. For example, if investment is based on classification of SOEs under the Government project of re-structuring SOEs (Prime Minister’s Decision 929/TTg/2012 approving Project on Restructure of State-owned Enterprises with focus on State Economic Groups, State Corporations during 2011-2015), investment of State capital will not depend on percentage of capital held by Government after classification, but to achieve objectives:

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Origin of the Theory of Agency: An Account by One of the Theory’s Originators Barry M. Mitnick Professor of Business Administration Katz Graduate School of Business University of Pittsburgh Rev. July 2012 http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1020378 24

http://vneconomy.vn/20121210043332289P0C9920/de-xuat-mo-hinh-moi-ve-quan-ly-doanh-nghiep-nha-nuoc.htm

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1020378





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To add direct sources of revenue to the State Budget: State Investment is aimed at doing business and gaining profit under the principle of maximising rate of returns of invested capital. Any enterprises receiving State capital shall commit and ensure to implement this objective.

To ensure provision of public services: Government invests in public services which are necessary but which may not attract adequate private investment and may invite bids for State contract for providing public services.

To build technical infrastructure project to support socio-economic development: Government invests in necessary projects to be implemented by SOEs or other entities if adequate private investment is not available.

To regulate and stabilise macro-economy: Government uses State capital to implement policies for regulating macro-economy such as financial package for supporting enterprises to stabilise price and quantity of essential goods, reducing taxes or exempting SOEs from taxes as financial compensation for pursuing this objective.

Government’s supervision on investment using State capital shall focus on: (a) Investment of State capital should not have a negative impact on the

development of private sector and operation of market principles with an emphasis on moving in the direction of democracy, transparency and fair competition25;

(b) Impact of investments in achieving the aims set out above; and (c) Impact of business performance in achieving the aims set out above with

transparency in reporting. Title and objectives of Law

101. After the draft law on public investment was considered by the Standing Committee of the National Assembly, the Ministry of Planning and Investment amended the draft to bring public procurement of assets in accordance with Law on Tendering. In the opinion of Drafting Committee of Law on public investment, public investment should be investment or support of investment under State budget, for socio-economic development rather than for business purposes.

102. Government invests in the economy to achieve objectives and results and classification of investment into business and non-business is not helpful. Investment should be evaluated based on economic return and considering various means of obtaining facilities and services should be considered including direct provision by a Government contractor, construction by a private contractor, and public private partnership arrangements. The title of the Law on Managing and Using State Capital Invested in Production and Business as stated in Decree No. 499/NQ-UBTVQH13 does not reflect that investment of State capital should be evaluated according to common criteria and should not be evaluated in separate categories of business and non-business.

Management of State Investment Activities

Different levels of management need to be decided to take into consideration the roles of Legislative Bodies: the National Assembly (NA), the Central Standing Committee of the National Assembly and Local People’s Councils, Executive Bodies:

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It is necessary to focus on Vietnam’s 12-year route after joining WTO to transfer to market-driven economy under internationally recognised standards.



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the Government and Local People’s Committees, Regulatory Bodies: Ministries, Local Departments and Divisions; agencies in charge of investment management and State capital use at the Ministerial level and People Committees (―Specialised Agency‖) to separate the State Management activities in general (as State Agencies) and the State Investment Management (as Representatives of the Owner of State Capital)

Management of State Investment Capital

There is a need to clarify and define the roles of Owners of State Capital: the National Assembly (NA), the Central NA Standing Committee and Local People’s Council, Representatives of the Owner of State Capital: the government (represented by Prime Minister) and local People’s Committees (represented by People’s Committee Chairmen), Organisations and individuals who execute the duties of Representatives of the Owner of State Capital Ministries and Relevant Agencies under the ministerial and local PC authority in charge of investment management and state capital and persons who are legally authorised to manage the State Capital: the individual assigned by the entity who executes the duties of Representatives of the Owner of State Capital to directly manage or participate in the management of State-owned enterprises. The legal framework for State investment and the management of State capital in SOEs must fit in with Vietnam’s Public Investment Management (PIM) process and the role of different parts of Government in that process.

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