(LUẬN văn THẠC sĩ) restructuring soes in line with new generation free trade agreements of vietnam the case of cptpp and evfta

MINISTRY OF EDUCATION AND TRAINING FOREIGN TRADE UNIVERSITY MASTER THESIS RESTRUCTURING SOEs IN LINE WITH NEW GENERATION FREE TRADE AGREEMENTS OF VIETNAM: THE CASE OF CPTPP AND EVFTA

MINISTRY OF EDUCATION AND TRAINING

FOREIGN TRADE UNIVERSITY

MASTER THESIS

RESTRUCTURING SOEs IN LINE WITH NEW GENERATION FREE TRADE AGREEMENTS OF VIETNAM: THE CASE OF CPTPP AND EVFTA

Specialization: International Trade Policy and Law

FULL NAME: PHAM THI THANH HONG

Hanoi – 2020

MINISTRY OF EDUCATION AND TRAINING

FOREIGN TRADE UNIVERSITY

MASTER THESIS

RESTRUCTURING SOEs IN LINE WITH NEW

GENERATION FREE TRADE AGREEMENTS OF

Major: International Economics Specialization: International Trade Policy and Law

Code: 1706060005

Full name: Pham Thi Thanh Hong Supervisor: Assoc Prof., Dr Nguyen Thi Tuong Anh

Hanoi - 2020

STATEMENT OF ORIGINAL AUTHORSHIP

I hereby declare that this master thesis is my own scientific research which is made under the guidance of my supervisor, Assoc Prof., Dr Nguyen Thi Tuong Anh The contents and results of this research are completely honest The information, data and documents which are collected from various sources for analysis and evaluation have been fully cited in the main content and in the references list of this master thesis as well

Pham Thi Thanh Hong

CONTENTS

LIST OF BOXES, FIGURES, TABLES i

ACKNOWLEDGMENTS ii

LIST OF ABBREVIATIONS iii

ABSTRACT iv

INTRODUCTION 1

1 Research rationale 1

2 Literature review 2

2.1 Evaluating implementation of SOEs’ restructuring 2

2.2 Measures of SOEs’ restructuring 3

2.3 Restructuring SOEs in line with the NGFTAs 4

3 Research objectives 6

4 The scope of the research 6

5 Research approach and methodology 6

5.1 Approach 6

5.2 Research methodology 7

6 Structure of the thesis 7

CHAPTER 1 OVERVIEW OF RESTRUCTURING SOEs IN LINE WITH THE NGFTAs 8

1.1 Overview of NGFTAs 8

1.1.1 Definition of NGFTAs 8

1.1.2 Characteristics of NGFTAs 8

1.1.3 Roles of NGFTAs 10

1.2 Overview of SOEs 11

1.2.1 Definition of SOEs 11

1.2.2 Characteristics of SOEs 12

1.2.3 Rationales of SOEs’ rule on NGFTAs 12

1.3 Impacts of NGFTA on SOE 14

1.3.1 Positive impacts 14

1.3.2 Negative impacts 16

1.4 Restructuring SOEs in line with NGFTAs 17

1.4.1 Definition of SOEs’ restructuring 17

1.4.2 Goals of SOEs’ restructuring in line with NGFTAs 17

1.4.3 Measures of SOEs’ restructuring in line with NGFTAs 18

1.4.4 Factors affecting SOEs’ restructuring in line with NGFTAs 24

CHAPTER 2 CURRENT SITUATION OF RESTRUCTURING SOEs IN LINE WITH VIETNAM’S NGFTAs: THE CASE OF CPTPP AND EVFTA 26 2.1 Overview of Vietnam’s NGFTAs 26

2.1.1 Overview of CPTPP 26

2.1.2 Overview of EVFTA 27

2.1.3 Obligations under the CPTPP and EVFTA Agreements pertaining to SOEs restructuring in Vietnam 28

2.2 Overview of SOEs in Vietnam currently 33

2.2.1 Definition of SOEs on Vietnam's legislation 33

2.2.2 Performance of SOEs in the period of 2011-2020 34

2.3 Implementation of SOEs’ restructuring in the period of 2011-2020 39

2.3.1 Restructuring economic institutions and corporate governance of SOEs 39

2.3.2 Restructuring SOEs' ownership structure 44

2.3.3 Restructuring the monitoring of owner’s representative agency 47

2.4 Evaluating SOEs’ restructuring in line with CPTPP and EVFTA 51

2.4.1 Achievements 51

2.4.2 Limitations and Causes 54

2.5 Some experience from restructuring SOEs in line with CPTPP and EVFTA in the period of 2011-2020 72

CHAPTER 3 RECOMMENDATION FOR VIETNAM IN THE IMPLEMENTATION OF RESTRUCTURING SOEs IN LINE WITH NGFTAs FOR THE PERIOD OF 2021-2030 74

3.1 Context, oppotunities and challenges 74

3.1.1 Context 74

3.1.2 Opportunities and challenges 75

3.2 International experiences in restructuring SOEs in line with NGFTA 77

3.2.1 China 77

3.2.2 Singapore 79

3.2.3 Lessons learned for Vietnam 81

3.3 Objectives and task orientations of SOEs' restructuring in line with CPTPP and EVFTA for the period of 2021-2030 82

3.3.1 Objectives to 2030 82

3.3.2 Task orientations of SOEs' restructuring to 2030 83

3.4 Solutions to restructure SOEs in line with CPTPP and EVFTA for the period of 2021-2030 85

3.4.1 Solutions to restructure economic institutions and corporate governance of SOEs 85

3.4.2 Solutions to restructure SOEs' ownership structure 90

3.4.3 Solutions to restructure the monitoring of owner’s representative agency 91

CONCLUSION 93

LIST OF REFERENCES 94

ANNEX 100

Annex 1 EVFTA and CPTPP: SOEs’ Application and Exemptions 100

Annex 2 List of legal documment on restructuring SOEs 2011 - 2020 103

Annex 3 Preliminary comparison of the OECD Guidelines on Corporate Governance of SOEs (2015) and situation of Corporate Governance of SOEs in Vietnam 109

Annex 4 Performance of SOEs in the period of 2011-2020 123

LIST OF BOXES, FIGURES, TABLES

Box 2.1 Impact of maintaining state ownership in investment attraction

results: Compare 2 equitization cases under the Ministry of Construction

61

FIGURES

Figure 2.3 Adjustment to reduce number of industries, sectors that the

State holds 100% authorized capital or dominant stock

Table 2.1 Financial development index of enterprises in 2010-2017

period

37

Table 2.2 IPO results of equitized enterprises in the period of 2011-2016 46

ACKNOWLEDGMENTS

In order to complete this master thesis, I have been received enthusiastic guidance and support from my lectures, family and friends From the bottom of my heart, I would like to express my thanks to them

Firstly, I would like to express the sincerest thanks to my supervisor, Assoc Prof., Dr Nguyen Thi Tuong Anh who has supported, guided and encouraged me during the completion of this master thesis from choosing the topic, outlining the main ideas, turning those ideas into this thesis to editing this paper Without his enthusiastic and excellent guidance and support, I could not have completed this master thesis

Also, I would like to express my special thanks to all lectures of the Master of International Policy and Law program, Foreign Trade University as well as World Trade Institute who gave me the chance to broaden my humble horizon in the field

of economics and laws

Last but not least, I would like to express my warm thanks to my family, my colleagues and my friends who never stop supporting, encouraging and giving me the favorable conditions to complete this master thesis

LIST OF ABBREVIATIONS

CMSC Committee for Management of State Capital at Enterprises

Partnership

NGFTAs New generation free trade agreements

ABSTRACT

New generation free trade agreement (NGFTA) is an inevitable tendency for members to deeply cooperate in a variety of areas, including SOEs Joining NGFTAs, Vietnam is not out of that tendency, therefore, Vietnam has to fully comply with

commitments regulated in NGFTAs With the topic “Restructuring SOEs in line with

the new generation Free Trade Agreements of Vietnam: the case of CPTPP and EVFTA”, the thesis focuses on Vietnam's legislation, implementation of SOEs’

restructuring and Vietnam's NGFTAs in order to point out the dispositions on restructuring SOEs Not limited to this, the thesis analyzes Vietnam’s policy on restructuring SOEs compared to SOEs' obligation stated in NGFTAs

Following that, the thesis mainly focuses on several issues and gains some achievements as below Firstly, the thesis comprehensively analyzes regulations on restructuring SOEs in Vietnam and NGFTAs of Vietnam As a result, the similarities and differences between them are stated Based on that, the thesis reveals that there

is an incompatibility of the SOEs' definition and disclosure obligations for SOEs under the CPTPP, but not SOEs under Vietnamese law, some information relating to the subsidies for SOEs is still missing (such as the total value of the subsidy, the impact assessment of the subsidy on trade) This is a "gap" that Vietnam must complete to ensure the obligation to enforce regulations on SOEs in the CPTPP and EVFTA

Secondly, the thesis details measures of SOEs’ restructuring that Vietnam implemented from 2011 to 2020, including:(i) Restructuring economic institutions and corporate governance of SOEs; (ii) Restructuring SOEs' ownership structure; (iii) Restructuring the monitoring of owner’s representative agency

Thirdly, based on the analysis above, the thesis recommends solutions for SOEs’ restructuring in line with CPTPP and EVFTA in the coming period, contributing to perfecting the market economy institution, improving the performance of businesses, the efficiency of using social resources, efficiency and competitiveness of the economy, avoiding risks of violating commitments in NGFTAs

INTRODUCTION

1 Research rationale

State-owned enterprise (SOE) is a specific kind of enterprise with specific characteristics and inherent competitive advantages It often exists for several reasons, including a mixture of social, economic and strategic interests Contrary to what might

be expected, SOEs still play a role in twenty-first-century trade More importantly, the (possibly) competition distortive behavior of SOEs is no longer only affecting the domestic markets but has expanded to international trade While fewer economies are relying on SOEs to provide goods and services, those SOEs that still exist increasingly affect international trade Because of global value chains, globalization, and the opening

up of WTO Members’ markets, the possible trade and investment distorting effects of SOEs participation in international trade have entered the limelight

In the context of globalization, countries tend to extensively and comprehensively cooperate in a variety of areas, therefore, the number of NGFTAs has increased significantly and gradually replaced traditional free trade agreements (FTAs) NGFTA

is an inevitable tendency for members to deeply cooperate in a variety of areas, including SOEs Joining NGFTAs, Vietnam is not out of that tendency, therefore, has to fully comply with commitments regulated in NGFTAs EVFTA and CPTPP are two of the largest NGFTAs that Vietnam's largest-ever negotiated Not only containing traditional market access issues in goods, trade services, and investment, both agreements also cover new areas either not covered by or going much deeper than the WTO Moreover, the new agreements set international rules that will have stronger impacts on Vietnam’s domestic policies and institutions than any FTAs in the past The country’s enthusiasm for these agreements has been motivated by the fact that while Vietnam has gained much from trade liberalization and international integration, there remains a long way to go Participation in the CPTPP and EVFTA provides Vietnam an opportunity to continue its rapid growth and to enhance national competitiveness However, these agreements also carry significant risks that need to be mitigated The integration and implementation

of international commitments require constant innovation in the structure of the economy Restructuring SOEs will help to free up resources and economic space for the private sector

In Vietnam, the practice has shown that the resource utilization efficiency of SOEs

is still low and they reduce the efficiency and overall competitiveness of the economy Many SOEs become a burden to society and the cost is much higher than the SOEs maintenance benefit Therefore, restructuring the SOEs is both a requirement to improve the SOEs’ performance, promote the development of market economy, improve efficiency and overall competitiveness of a transition economy as well as compliance with signed international commitments

Many SOEs’ reforms have been implemented in Vietnam since the late 1980s such

as reorganization, organizational restructuring, equitization, sale, delivery, transfer of

enterprises, the innovation of management mechanism, etc Through the implementation stages, besides the positive results, restructuring SOEs revealed many limitations, it is necessary to have new solutions or new ways to achieve better goals and higher efficiency In addition, the new context requires a more comprehensive and in-depth assessment of policies and practices of SOEs’ restructuring in Vietnam in line with NGFTAs

For the reasons mentioned above, the topic “Restructuring SOEs in line with the

new generation Free Trade Agreements of Vietnam: the case of CPTPP and EVFTA"

is chosen to evaluate SOE's restructuring process from 2011 to 2020 and propose solutions for the period of 2021-2030

2 Literature review

2.1 Evaluating implementation of SOEs’ restructuring

From 2011 to 2019, many doctoral theses were published related to restructuring SOEs Some studies analyzed a specific solution of SOEs’ restructuring And some theses recommended comprehensive solutions of SOEs’ restructuring on the scope of specific localities or sectors

Nguyen Dinh Cung (2014) reviewed the SOEs’ restructuring measures implemented in the world before 2013 and said that Vietnam implemented all of them, however, the mode of implementation is "cautious", at a slow pace, not yet reaching the goals and requirements

For the state agency, the Government's Report (2011, 2012, 2013, 2014, 2015,

2016, 2017, 2018 and 2019) which was chaired by the Ministry of Finance, evaluated the annual implementation results of restructuring, innovating and improving the efficiency of SOEs, pointed out the achievements and limitations according to the Socio-economic Development Plans and proposed solutions for the following year

CIEM (2017) evaluated the results of SOEs’ restructuring associated with the restructuring of the economy on the principle of resource allocation under the market mechanism The research identified that in order to implement SOEs’ restructuring, it is necessary to determine correctly the role of state capital and the function of SOEs in the overall renovation of the role of the State by the requirements of developing the market economy, thereby conducting synchronous solutions: i) Restructuring list of state-invested assets by centering on equitisation and divestment; ii) SOEs’ governance restructuring by centering on renovating mechanism of the state asset management; iii) Restructuring technology, products and services of SOEs to improve their efficiency and competitiveness

World Bank (2012) assessed that “Vietnam’s state sector has become smaller but

is still relatively large and inefficient”, and clarified the reasons for reforming the SOEs, including: (i) SOEs are less efficient than nonstate and foreign firms; (ii) Equitization has been good for SOEs; (iii) Industrial policy can be carried out without the presence

of a large SOEs’ sector; (iv) SOEs have become too big to fail and too big to save; (v)

The role of the state in the economy has been changing and an inefficient and weak SOEs’ sector gives a bad name to the state; (vi) A large SOEs’ sector is the source of an uneven playing field; (vii) SOEs have been slow to embrace modern corporate governance and transparency; (viii) The corporate framework for SOEs remain weak and incomplete; (ix) There is lack of vision and clarity regarding the role of SOEs in development; (x) The SOEs' reforms can be leveraged to develop a healthier private sector World Bank (2012) recommended 5 key solutions to restructure SOEs called D-R-E-A-M: Disclose; Regulate; Equitize; Accountable and Monitor

Regarding the reasonable size of SOEs in the economy, the paper of Nguyen Minh Phong (2013) compared Vietnam's situation with the international situation and made recommendations: In the outlook, it is possible and necessary to reduce the proportion

of SOEs in GDP from the current level of about 30% of GDP to about 10-15% of GDP According to world statistics, the Government only holds 20% of capital in SOEs and the SOEs sector only accounts for 5-20% of GDP

Kunmin Kim and Nguyen Anh Tru (2019) aimed to examine the reform of SOEs

in Viet Nam It found that the net revenue positively affects the profit before taxes of SOEs, while sales expenses exerted a negative impact on the profit before taxes The article recommended policies to the government and SOEs to enhance performance and fostered the achievement of the reform, including the enhancement of the roles of the state in SOEs, the transparency procedure of the reform, the improvement of the government’s control and inspection in the equitization and divestment of SOEs, the selection of appropriate methods for equitization and divestment, the exact assessment

of SOEs’ value, and the consideration of the particular characteristics of different sectors

2.2 Measures of SOEs’ restructuring

World Bank (1996) listed the basic and specific measure groups of SOEs restructuring in the late 1980s and early 1990s Basic content included: (i) Corporatization and restructuring of SOEs governance; (ii) Dissolution, bankruptcy of SOEs; (iii) Divestment and sale of SOEs Specific contents include: (i) Identifying owner functions with SOEs management functions; (ii) Identifying the economic and social goals of SOEs such as separating the social security system, ensuring employee benefits through various tools, not investing directly from the state budget for SOEs; (iii) Employing members of the Board of Directors other than civil servants and public employees; (iv) Hiring a CEO to operate under the market mechanism; (v) Operating a market mechanism on wages and salaries; (vi) Restricting companies holding large scale capital; (vii) Developing a competitive market; (viii) Strengthening financial discipline, operating hard budget constraint mechanism; (ix) Valuation of share market of SOEs; (x) Labor market development; (xi) Reforming policy framework, bankruptcy mechanism, applying independent audit, etc

UNIDO (2003) proposed actions to address the problems of SOEs, including: privatization; external reforms of SOEs; corporate governance reforms; change of SOEs’ structure; liquidation

2.3 Restructuring SOEs in line with the NGFTAs

Prof Jacques Pelkmans, Dr Weinian Hu, Federica Mustilli, Mattia Di Salvo (2016) provided an in-depth contribution to the status of bilateral economic exchanges and persistent trade barriers that exist between the European Union and China The study analyzed the SOEs’ problem in China, reviewed SOEs reform process, barriers to market access and distortion caused by SOEs After decades of SOEs’ reforms, China still exists discriminatory policy and easy access to bank loans with preferential rates and terms leading towards a distorted market, with an unlevel playing field and diminished effects of principles in international trade agreements, such as national treatment, most-favored-nation treatment and transparency China’s Government established a State-owned Asset Supervision and Administration Commission (SASAC)

to implement the function of state owner at the enterprise and supervise state assets The study offers many lessons for SOEs’ governance reform

World Bank (2016) synthesized many studies on: i) Willingness among all stakeholders to embrace the CPTPP and EVFTA can only be translated to readiness if efforts are made to improve the regulatory framework, strengthen institutions, and streamline administrative and organizational processes; ii) Capacity building, including human resource development, and the provision of support services should help progressive restructuring of supply chains to capture more value-added; iii) Levelling the playing field between SOEs and private enterprises through major reforms and better trade facilitation of trade should motivate entrepreneurship and create the needed environment for Vietnamese businesses to compete under the Agreements; iv) Measures

to minimize the risks associated with the implementation of these Agreements are needed These risks include adverse impacts on inclusive growth, degradation of social protection and environmental damage; v) Other risks like dispute settlement challenges and protecting intellectual property rights need to be dealt with through accelerating domestic reforms

Furthermore, World Bank (2016) explained why SOEs are problematic in the international trade context A state distorting the market to benefit its SOEs to the detriment of its competitors, the argument goes, is unfair and sub-optimal The notion

of so-called “competitive neutrality” has formed the undercurrent of the movement toward SOEs’ reform and/or regulation The proponents of a new rule have largely focused on the benefits and preferential treatment that the SOEs receive and, consequentially, the uneven playing field that their privately-owned competitors face

An oft-quoted list of this preferential treatment includes: outright subsidization, concessionary financing and guarantees by the government and/or governmental financial institutions, preferential treatment in the application of regulations,

monopolies and advantages of incumbency, captive equity, exemption from bankruptcy rules, and information advantages The CPTPP’s new SOEs’ rule is an understandable but incomplete response to the rise of visible hands It reflects both the qualitative transformation of the SOEs’ issue in the context of international transactions and the frustration with the pre-existing rule It intends to supplement the latter, mainly by introducing a bright-line definition of SOEs as well as updating the legal obligations to

be attached This prophylactic approach in effect breathes new life into the rules that could have regulated the SOEs but had largely remained dormant for the past few decades The rule is intended to enhance the enforceability and administration of the legal framework It is also structured to increase the cost associated with establishing and maintaining SOEs, affecting the parties’ incentive structure to abide by their policy preference for SOEs

Topic on “Restructuring SOEs” has been researched by many domestic and international agencies, academics, experts and organizations These studies have basically clarified the methodology and situation of SOEs’ restructuring and have proposed solutions to promote SOEs’ restructuring according to international practice and based on the unique view of each study

To conclude, there are several points which are not mentioned in the previous

papers Firstly, there are papers on obligations under the CPTPP and EVFTA

agreements pertaining to SOEs restructuring in Vietnam, and there is no paper deeply conducting the compliance of Vietnam’s legislation with SOEs provisions regulated by

two NGFTAs of Vietnam (CPTPP and EVFTA) Secondly, papers only focus on general

situation of SOEs’ restructuring in Vietnam It lacks of papers which analyze and synthesize whether restructuring SOE in Vietnam has been in line with the NGFTAs or

not, specifically CPTPP and EVFTA Thirdly, it lacks paper on detailed

recommendations for Vietnam in the implementation of SOEs restructuring in line with NGFTAs

As a result, surplus above mentioned reasons, this paper will solve those issues

For the first issue, all provisions of SOE chapter of two NGFTAs of Vietnam (CPTPP and EVFTA) will be comprehensively analyzed and compared with economic institutions on SOEs restructuring of Vietnam including: institutions on corporate governance of SOEs, on restructuring SOEs' ownership structure and on the monitoring

of owner's representative agency For the second issue, current situation of SOEs restructuring of Vietnam in line with CPTPP and EVFTA, international and domestic contexts, international experiences in restructuring SOEs in line with NGFTAs will be evaluated so as to synthesize the level of compliance of Vietnam’s legislation with SOEs commitments in CPTPP and EVFTA Based on all analysis above, the third issue will

be addressed with the detailed recommendations for Vietnam in the implementation of SOEs restructuring in line with CPTPP and EVFTA for the period of 2021 - 2030, including but not limited to objectives and task orientations for SOEs restructuring to

2030

3 Research objectives

- The general objective of the paper is to propose solutions to restructure Vietnam’s SOEs in line with NGFTA's commitments for the period of 2021-2030, contributing to perfecting the market economy institution, improve the performance of businesses, the efficiency of using social resources, efficiency and competitiveness of the economy, avoiding risks of violating commitments in NGFTA

- Specific objectives are to:

(i) Clarify obligations under the CPTPP and EVFTA agreements pertaining to SOEs restructuring in Vietnam

(ii) Analyze overview of SOEs in Vietnam currently and implementation of SOEs' restructuring in the period of 2011-2020

(iii) Evaluate achievements, limitations and draw some experience from SOE's restructuring in line with CPTPP and EVFTA in the period of 2011-2020

(iv) Propose recommendations for Vietnam in the implementation of restructuring SOEs in line with CPTPP and EVFTA for the period of 2021-2030

4 The scope of the research

- In terms of space: Vietnam's entire economy, SOEs reform experience of Eastern European countries, China, Singapore

- Time: The assement of restructuring SOEs in Vietnam in line with NGFTAs is limited to the period from 2011 to 2020 Proposal of viewpoints, objectives and solutions for restructuring SOEs in line with NGFTAs is applied for the period of 2021-2030

5 Research approach and methodology

- With the research questions mentioned above, the thesis approaches to the

research problem from the following angles:

+ Approach from the theoretical basis for restructuring SOEs mainly under perspective of the institutional economics, property rights theory

+ Approach from reality, studying documents on the situation of restructuring SOEs in line with NGFTA in Vietnam and in the world under the perspective of economic institutions, including research on guidelines and policies, laws, implementing organizations, commitments on NGFTAs and related entities

+ Approach from the orientations, objectives, viewpoints, policies and laws of the Party and the State on restructuring SOEs in Vietnam in the coming period under the perspective of inheritance and development

5.2 Research methodology

During the research of this thesis, different research methods are applied

The thesis performs research methods including: collection, review, synthesis, statistics, comparison, description, analysis of information and data sources for theoretical basis, international experience and situation of SOEs restructuring in Vietnam for the period of 2011-2020

Sources for theoretical basis and international experience are extracted from the book and syllabus of the training institutions; Reports and publications have been published or posted on the website of State agencies and related international organizations such as the World Bank, OECD, UNIDO, ADBI, etc

Sources for the situation of SOEs’ restructuring in Vietnam for the period of

2011-2020, commitments on SOEs in NGFTAs, specially CPTPP and EVFTA are mainly compiled from published reports and official data systems of state agencies (National Assembly, Government, ministries, People's Committees at all levels, General Statistics Office)

6 Structure of the thesis

Besides introduction, conclusion and list of references, the thesis consists of three chapters as follow:

Chapter 1: Overview of restructuring SOEs in line with NGFTAs

Chapter 2: Current situation of restructuring SOEs in line with Vietnam’s NGFTAs: the case of CPTPP and EVFTA

Chapter 3: Recommendation for Vietnam in the implementation of restructuring SOEs in line with NGFTAsfor the period of 2021-2030

CHAPTER 1 OVERVIEW OF RESTRUCTURING SOEs IN LINE WITH THE

NGFTAs 1.1 Overview of NGFTAs

1.1.1 Definition of NGFTAs

About the concept of traditional FTAs, the term FTA is firstly shown in GATT

1947 In detail, the definition of free trade area has been revealed that “A free – trade

area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce […] are eliminated on substantially all the trade between the constituent territories in products originating in such territories” Also, GATT 1947 states that “the provisions of this agreement shall not prevent the formation of a customs union or of a free – trade area or the adoption

of an interim agreement necessary for the formation of a customs union or of a free trade area” In general, Article XXIV of GATT 1947 only shows the definition of free

trade area, but through that definition, the GATT 1947’s concept about FTAs could be seen as follows

Firstly, contracting parties join FTAs to reduce tariff and other trade regulations Secondly, the goods originated from contracting parties receive benefits from tariff and trade regulation reduction Thirdly, the concept of traditional FTAs is suitable with the time of GATT 1947 when contracting parties mainly traded with each other in tangible goods, so that GATT 1947 focuses on trade in goods To conclude, the concept of traditional FTAs is mainly about trade in goods The level of commitment between parties is about reduction of duty and trade regulations

Regarding the concept of NGFTAs, since 1990s, the concept of traditional FTAs

is not suitable with the development of economic integration NGFTAs with broad scope

of commitments and high level of liberalization with commitments being beyond the trade in tangible goods gradually replace traditional FTAs NGFTAs include not only tariff reduction but also other issues under GATT/WTO and new issues which are beyond the WTO’s regulation Compared to traditional FTAs, NGFTAs cover new issues like labor, sustainable development and the environment It also covers some other issues such as human rights, counter – terrorism and democracy

To sum up, NGFTAs are treaties between contracting parties that agree on not only tariff reduction but also other issues such as labor, the environment, human rights and democracy NGFTAs have broader scope of commitments and higher level of liberalization than traditional FTAs

1.1.2 Characteristics of NGFTAs

With development of international trade, scope of commitments and level of liberalization of traditional FTAs seem not to be suitable Therefore, traditional FTAs are gradually replaced by NGFTAs which differ from traditional FTAs in some characteristics

1.1.2.1 High level of liberalization

NGFTAs have higher level of liberalization than traditional FTAs The main purpose of traditional FTAs is tariff and trade regulations reduction on goods traded, but tariff and trade regulations reduction is applied for some lines of products only, while NGFTAs, which have higher level of liberalization, have tariff reduction on most lines

of goods According to NGFTAs, tariff on about 95 percent of lines of products is eliminated immediately after FTAs come into force (Vietnamese Logistics Association, 2015) As a result, goods are more freely and easily traded between members in free trade area

Also, NGFTAs include trade not only in goods but also in services Most types of services in NGFTAs are under commitments between members It means that based on NGFTAs, members open up most types of services In summary, NGFTAs have higher level of liberalization than traditional FTAs because NGFTAs allow members to cut down tariff for most lines of goods and open up most types of services

1.1.2.2 Broad scope of commitments with strict requirements

The main difference between traditional FTAs and NGFTAs is that NGFTAs have broad scope of commitments which are not limited by trade in goods Compared to traditional FTAs which cover trade in goods and mainly focus on tariff reduction, NGFTAs mention not only trade in goods but also other areas such as labor, sustainable development and environment (Nguyen Thanh Tam, 2016) Also, NGFTAs cover some other issues such as human rights, counter – terrorism and democracy

In the context of globalization, requirements of members about all areas are higher, especially in subjects like the environment, human health and life and sustainable development Therefore, most members pay attention to those areas because besides economic growth, members, especially developed ones mainly focus on sustainable development Although NGFTAs have broad scope of commitments than traditional FTAs, they have strict technical requirements and high standards in implementing the commitments (Vu Van Ha, 2017)

1.1.2.3 Flexible schedule to comply with commitments

Although NGFTAs have broad scope of commitments and depth of liberalization, this is not a barrier for developing or least developed members Compared to traditional FTAs, timeline to apply commitments in NGFTAs is flexible but within the limits provided by WTO It means that NGFTAs create opportunities for developing members and least developed ones to adapt the commitments in NGFTAs The timeline depends

on the level of development and regulatory capacity of each member (O’Callaghan and Nicolas, 2008), but it is within the limits provided by WTO

1.1.2.4 More impacts on domestic law

Traditional FTAs mainly focus on trade in goods, therefore, they have effects on the border issues like tariff polices Unlike traditional FTAs, NGFTAs have commitments on other issues such as labor and the environment which are issues after border So NGFTAs have more impacts on domestic law and policies of members (Vu Van Ha, 2017)

NGFTAs require each member to review its legal system, not only tariff policy, but also policy in other areas like trade facilitation, government procurement, competition policy, non – tariff measures, investment, dispute settlement mechanism, intellectual property rights, services, labor and the environment Therefore, for example,

in investment aspect, foreign and domestic investors are protected from unlawful interferences because of the transparent investment environment

1.1.2.5 Contracting parties of NGFTAs with high level of economic development

Compared to traditional FTAs, NGFTAs have the participation of contracting parties with high level of economic development (Vu Van Ha, 2017) For example, the ASEAN Free Trade Area (AFTA), which is a traditional FTA, includes developing parties, while in some NGFTAs which Vietnam has recently signed, the partner is developed parties such as Korea (Vietnam – Korea FTA); EU members (Vietnam – EU FTA) or Australia, Canada, Japan, Mexico, New Zealand, Peru, Singapore (CPTPP) The participation of developed members in NGFTAs is a driving force for cooperation and extensive commitments within NGFTAs

1.1.3 Roles of NGFTAs

1.1.3.1 Boosting trade liberalization

NGFTAs are an alternative strategy for members if they want to cooperate in trade and other areas WTO has so many members and each member has its own strategy, therefore, WTO negotiation rounds are difficult to come to final agreement As analyzed, the characteristics of NGFTAs are depth of liberalization and broad scope of commitments, so NGFTAs boost trade liberalization and contribute to the economic growth of members

NGFTAs significantly affect each member’s economy Firstly, when members sign NGFTAs, they take advantages from tariff reduction and elimination It boosts regional trade among them Compared to traditional FTAs, NGFTAs have tariff elimination in most lines of products When tariff on goods dramatically decreases, price

of imported products is lower than before because it does not include import tax in the final price As a result, trade grows significantly and trade turnover among members also increases

Secondly, each member in free trade area could specialize in the production of goods which it has a comparative advantage due to tariff reduction and the free movement of goods among members Thus, each member can take advantage of efficiencies created from economic scales and increased output (Vu Van Ha, 2017)

Also, each member’s specialization in one area, which it has comparative advantage, results in lower average cost and increase in productivity In other words, NGFTAs could lead to each member’s increased production

Thirdly, NGFTAs with high level of liberalization and broad scope of commitments bring about production efficiencies On the one hand, high level of liberalization improves the efficiency of resource allocation between members, which leads to higher productivity and the increase in the total domestic output of goods and services On the other hand, NGFTAs with liberalization increase the competition among producers, not only within one member, but also within the free trade area Competition could encourage domestic producers use innovative methods and new technology to increase productivity This could improve the quality of goods and bring advantages to customers Customers have a greater variety of goods, services with high standard and lower price In other words, NGFTAs lead to the rising living standard, rising real income and higher rates of economic growth for each member

1.2 Overview of SOEs

1.2.1 Definition of SOEs

In the world, SOEs have many different names1 and definitions However, in terms of corporate governance, SOEs are entities controlled by the State rather than by private actors

According to OECD (2015), SOEs are business enterprises where the government or state has significant control through full, majority, or significant minority ownership Control is ownership of majority of voting share Control is ownership of majority of voting share or implementing an equivalent level of control Equivalent levels of control include cases in which the law or the charter of the enterprise provides for continued state control over an enterprise or its board of directors The World Bank defines SOEs as government-owned or government-controlled economic entities that generate the bulk of their revenues from selling goods and services (Mary Shirley, 1995)

At the national level, according to Subsection 83 of Financial Administration Act

of Canada's government, SOE is a corporation that is wholly owned, directly or indirectly, by the government It tends to operate under a private-sector model but has both commercial and public policy objectives, such as providing essential goods or services to Canadian consumers that would otherwise be unavailable or undersupplied (alcohol) and developing certain types of industries or regions In contrast, the term

SOEs is not used in United States law However, a range of entities linked to the federal

government exists with varying degrees of government ownership, control and participation in governance and funding (OECD, 2009) There are federal government

1 State owned enterprise, government-owned corporation, state-owned company, state-owned entity, state enterprise, publicly owned corporation, etc

enterprises, including federal government corporations as government agencies that are established by Congress to provide a market-oriented product or service and to produce revenues that meet or approximate its expenditures In the United States, Section 103, Chapter 1, Part 1, Title 5 of the United States Code states that “Government corporation” means a corporation owned or controlled by the Government of the United States In the Federal Republic of Germany, the Regulation on SOE Governance defines SOEs as enterprises with the most voting rights by the Government According to Article 5 of Law of the People's Republic of China on the State-Owned Assets of Enterprises, “state-invested enterprise” is a wholly SOE or company with the state being the sole investor,

or a company in which the state has a stake, whether controlling or non-controlling

1.2.2 Characteristics of SOEs

Three main differences in characteristics between SOEs and POEs can be identified Firstly, POEs and SOEs often have different guiding objectives Where private companies are mainly focused on profit maximization, state ownership is seen

as a way of correcting market failures Governments depart from the principle of competitive neutrality with the purpose of remedying market failures Examples can be found in cases where natural monopolies exist or where SOEs are used as agents for developmental policies Secondly, SOEs are characterized by their inherent competitive advantages As will be explained below, the need for specific rules is created by the competitive advantages that are enjoyed by enterprises solely because of their state ownership, financial participation by the state, government control through rules or practices on the functioning of the enterprise, or because they are a government-designated monopoly As a last element in this comparison, reference can be made to the differences in decision-making and regarding accountability SOEs, especially those that are uncorporatized, are often burdened with unincentivized top management, with very limited accountability but with decision-making concentrated in a limited amount

of hands However, it should be taken into account that SOEs exist in a wide range of different corporate forms and with different characteristics and that especially this last characteristic can vary immensely between different types of SOE, influencing the potential for trade distortion

These characteristics help explain why SOEs often inhibit a competitively neutral market Where governments pursue their objectives through SOEs, trade and investment can be significantly impaired Therefore, the need for specific rules is created, in order for SOEs to exist without distorting international trade

1.2.3 Rationales of SOEs’ rule on NGFTAs

Special rules with regard to SOEs are necessary because of the inherent differences between SOEs and POEs Especially the different guiding objectives of SOEs warrant for specific disciplines This can be illustrated by the fact that the rules of the GATT

1994 are enacted on the assumption that they apply to enterprises that are driven by

economic incentives, arguably not covering several activities of SOEs.The GATT and the WTO have succeeded greatly at reducing tariff barriers in both developed and developing countries Therefore, the barriers to trade are increasingly situated behind the border, some of them related to state ownership All of the above elements help to explain the inadequacy of the current rules with regard to SOEs in the GATT 1994 Because Article XVII GATT 1994 was enacted in a time where the focus of trade liberalization lay elsewhere (lowering of tariffs), the rules no longer suffice, taking into account the position of SOEs in our globalized world Trade distortions through SOEs

on the international market entail a higher welfare cost than distortions caused by SOEs

in a closed domestic market Evidently, firms that are exposed to international competition are often more efficient, cost-effective, and advanced

Moreover, it is important to ensure competitive neutrality in order for enhanced allocative efficiency in the economy When different players in the market do not operate under the same competitive terms, goods and services may no longer be produced by those that are most efficient at it, ultimately to the detriment of the consumer The competitive advantages of SOEs allow for a distortion of trade and investment It is, therefore, deemed necessary to ensure a level playing field through specific legislation

However, this need for specific disciplines must be nuanced in various ways: SOEs exist in a wide spectrum of government involvement On the one hand, there are the enterprises fully owned and controlled by the government, and on the other hand, there are enterprises that seem to act completely separately and distinctly from the government Additionally, the corporate form of SOEs differs widely across countries and sectors This will significantly impact their characteristics For example, a listed company that has the state as its majority shareholder will have much less scope to pursue non-commercial objectives than a fully state-owned enterprise that is not listed

on the stock exchange The ‘corporatization of SOEs’ in some (OECD) countries has already led to more competitive neutrality (Capobianco and Christiansen, 2011) Moreover, only where SOEs compete (or potentially compete, if competition is being prevented through regulation or restrictive business practices of the SOE itself) with POEs, does the issue of competitive neutrality come into play It is not the existence of SOEs in themselves that causes the call for more specific regulation, but rather their distortive practices when engaging in commercial competition Regarding the performance of both POEs and SOEs, ownership does not matter as long as the trading happens in competitive environments (Mohammed Omran, 2004)

Trade negotiations are concerned with trade and investment distorting effects of SOEs, not with their motives or guiding objectives It is, however, the behavior of the government that enables the competitive advantages of SOEs, mostly through (indirect) subsidization Therefore, international, intergovernmental, plurilateral regulation of these matters does make sense In order to regulate SOEs sensibly, five main elements must be reflected in the provisions: (i) a clear definition and well-defined scope; (ii)

clear general obligations and rights; (iii) specific disciplines on trade-distortive practices

by SOEs and specific exceptions; (iv) provisions to improve transparency; and (v) rules regarding enforceability and dispute settlement Existing rules on SOEs in international economic law will be examined, taking into account these five elements

1.3 Impacts of NGFTA on SOE

1.3.1 Positive impacts

The NGFTAs will almost immediately open the market for foreign businesses to enter the certain market but are also considered as a "pass ticket" for enterprises to go deeper into the big markets NGFTAs membership will allow access to a vast market conducive to investment in technological renovation to increase productivity and reduce cost It helps attract foreign investment, import advanced technologies, restructure production, take advantage of scientific and technological advances and information resources to narrow the gap with developed countries Given the indispensable trend of international economic integration, early accession to the NGFTA requires urgent restructuring of the SOEs if they are to improve and establish their strong foothold in the global competitive environment

As market access increases and tariff commitments come into effect, industries such as textiles, footwear, electronics, and equipment have an opportunity to increase their exports to the member countries As exports increase and the industries expand, the income growth generated from domestic production will continue to grow, leading

to an increase in overall demand However, with strict rules of origin conditions, domestic firms and investors will have to develop the sourcing industries to benefit from the free trade agreement

In addition to exports, NGFTAs can also lead to an increase in FDI It’s not only the domestic sector which needs to reform under the NGFTAs, but also the government institutions and administrative systems The non-tariff measures of NGFTAs focus on market reforms, transparency, and labor reforms, and countries has an opportunity to make institutional changes to further align itself with member countries

The NGFTAs could support the creation of a more competitive and innovative economy Over the longer term, it is not just the growth rate of exports that matters, but also the composition of exports, and in particular the level of technology they embody The NGFTAs could strongly motivate and accelerate domestic reforms, which go

beyond the scope of the “trade” issues in the agreement The NGFTAs reflects the

contents: competition, cooperation, and capacity building; services, including financial services, telecommunications, and temporary entry of service providers; customs; e-commerce; environment; government procurement; intellectual property; investment; labor standards; legal issues; market access for goods; rules of origin; non-tariff measures including sanitary and phytosanitary and Technical Barriers to Trade measures; and trade remedies The SOE’s rule under the NGFTAs is expected to sustain structural adjustments toward perfecting a market-based economy and a level playing

field The NGFTAs would see the powers of state enterprises reduced, and improve efficiency and transparency in the activities of SOEs The cost is that in areas in which SOEs are supposed to provide public goods, they may come up against foreign competition, and the government control over these SOEs would be loosened because adjudication is outside countries Many NGFTAs will also stimulate institutional reforms to strengthen and standardize rules and transparency and support the creation of modern institutions That means the operation of SOEs will have to be more transparent

In addition, SOEs can meet conflicts or gap between treaty provisions and domestic legislation

NGFTAs aim to ensure a level playing field between state-owned or controlled companies engaged in commercial activities and their private competitors It does this

by addressing the potentially distortive effect that preferential treatment for SOEs can have on international trade and investment SOEs from all over the world increasingly compete internationally with private firms, through exports of goods and services, through investment in other markets, and in competition with private companies in their domestic markets The NGFTAs consider it necessary to negotiate rules regarding SOEs, designated monopolies (public and private) and enterprises granted special rights

or privileges Such rules are needed in order to ensure that trade liberalization achieved

by the Agreement is not undermined by the unfair behavior of such companies

The objective of these rules is to put private enterprises on an equal footing with enterprises where the governments are involved The trade-distorting activities of SOEs and monopolies are already addressed to some extent through existing international trade rules and through provisions in NGFTAs This is mainly through rules that do not distinguish between state-owned and private entities, such as the requirements not to discriminate against overseas imports and traders, and to regulate impartially

The NGFTA provisions build on these existing rules and focus more specifically

on SOEs and monopolies SOEs under the application scope of NGFTA must comply

with the following rules:

 Commercial considerations: SOEs are to act in accordance with commercial considerations except when providing a public service This rule would only apply when the SOE is engaged in commercial activities SOEs would be taken into account in the commercial decisions of a privately owned at price, quality, availability, marketability, transportation, or other factors and other terms and conditions of purchase or sale as enterprises in the relevant business or industry

 Non-discrimination: SOEs are to buy and sell goods and services in a discriminatory manner This rule would apply only when the SOEs are engaged in commercial activities which an enterprise undertakes with an orientation toward profit-making and which result in the production of a good or supply of a service that will be sold to a consumer in the relevant market in quantities and at prices determined by the enterprise

non- Regulatory neutrality: State administrative agencies must behave objectively in management and administration of SOEs Under this commitment, the administrative agencies managing SOEs must ensure their performance in a fair and impartial manner

to enterprises, including non-SOEs

 Non-commercial assistance: No country is to cause harm to another country through the use of non-commercial assistance provided to its SOEs On the other hand, under this commitment, the State must not directly or indirectly provide such a non-commercial assistance for SOEs that it may have a negative impact on benefits of other members

 Transparency: countries are required to disclose certain information regarding their SOEs This obligation consists of two groups: one is the obligation to disclose, provide general information, and the other is the obligation to provide information at the request of another member These transparency rules are designed to encourage good corporate governance

1.3.2 Negative impacts

There are seven negative impacts:

 Increased job outsourcing: Reducing tariffs on imports allows companies to expand to other countries Without tariffs, imports from countries with a low cost of living cost less It makes it difficult for companies in those same industries to compete,

so they may reduce their workforce (M Angeles Villarreal and Ian F Fergusson, 2017)

 Amendment and supplement of domestic laws: In the NGFTAs, many institutions are in place for member countries Commitments in the NGFTAs mainly require member countries to adjust, amend and supplement domestic laws in the relevant fields

in accordance with the common commitments, and at the same time improve capacity and resources of enforcement In fact, difficulties in modifying and adjusting existing institutions according to new requirements on procedures in commitments of NGFTAs

In addition to the traditional commitments, there are also regular and significant commitments that bind the parties' policy behaviors which are very large, spread across many fields related to trade and business Most of these commitments must be implemented right after the FTA takes effect or in a short time thereafter

 Crowd out domestic industries: Many emerging markets are traditional economies that rely on farming for most employment These small family farms can't compete with subsidized agri-businesses in the developed countries As a result, they lose their farms and must look for work in the cities This aggravates unemployment, crime, and poverty (Yuan Zhang and Guanghua Wan, 2017)

 Poor working conditions: Multi-national companies may outsource jobs to emerging market countries without adequate labor protections As a result, women and children are often subjected to grueling factory jobs in sub-standard conditions (Gary Burtless, 2001)

 Degradation of natural resources: Emerging market countries often don’t have many environmental protections Free trade leads to depletion of timber, minerals, and other natural resources Deforestation and strip-mining reduce their jungles and fields

to wastelands (World Trade Organization, 2010)

 Destruction of native cultures: As development moves into isolated areas, indigenous cultures can be destroyed Local peoples are uprooted Many suffer disease and death when their resources are polluted (Keith Sealing, 2003)

 Reduced tax revenue: Many smaller countries struggle to replace revenue lost from import tariffs and fees (Isabella Massa and Christopher Stevens, 2017)

1.4 Restructuring SOEs in line with NGFTAs

1.4.1 Definition of SOEs’ restructuring

Restructuring means the act of organizing a company, business, or system in a new way to make it operate more effectively (Cambridge Dictionary) In business administration, corporate restructuring is the process of organizing and rearranging enterprises to create a better state for enterprises to achieve the set goals A comprehensive restructuring program will cover almost all areas such as organizational structure, human resources, management mechanisms, governance, activities and processes, and other resources of the business (Tran Hoang Ngan and Pham Quoc Viet (2015))

For the overall SOEs in the economy, there is currently no unified definition of SOEs’ restructuring However, from the above mentioned corporate restructuring concepts, within the scope of this thesis, restructuring SOEs is understood as all acts to reorganize in a new ways to improve the SOEs performance In other words, restructuring SOEs is the process of reorganizing, innovating and reforming to improve the SOEs performance in the economy

1.4.2 Goals of SOEs’ restructuring in line with NGFTAs

Restructuring SOEs in line with NGFTA towards many objectives depends on the context of each country In particular, there are the following goals:

 Improving the performance of SOEs, thereby improving the overall efficiency of

the economy, contributing to economic growth and development: According to the

World Bank (1996), after 1945, many countries established SOEs with the aim of promoting economic growth through the implementation of trade activities that the private sector has not implemented or is unable to implement Over time, SOEs have a mechanism to operate as a state agency, leading to a sharp decrease in business efficiency, becoming a burden of the budget and the economy Therefore, from the 1980s to the present, countries have implemented reform and restructuring programs with the aim of improving the efficiency of SOEs

 Promoting transformation and develop a market economy This is a specific goal

of SOEs‘ restructuring in countries with transition economies changing from a centrally

planned economy to a market economy, first of all Eastern European countries in the late 1980s and early 1990s and some countries like China and Vietnam, etc

 Creating fair competitiveness environment for all types of businesses, inhibiting

the intervention of government, attracting foreign investors and avoid the risk of lawsuit for non-compliance

1.4.3 Measures of SOEs’ restructuring in line with NGFTAs

The theory of business administration divides enterprise restructuring including 3 contents (portfolio restructuring, financial restructuring, organizational restructuring) and 4 transactions (consolidation and merger; reduction of scale and scope; ownership transfer; internationalization and partialization) Tran Hoang Ngan & Pham Quoc Viet (2015) quoted from Bowman and Singh (1993), in which: Portfolio restructuring is the process of reshaping the main business channels through mergers (M&A) and divestments, often leading to changes in internal governance to fit the new activity scope

of business Financial restructuring often involves changes in capital structure and ownership structure Organizational restructuring is a parallel product of portfolio restructuring and financial restructuring

For the SOEs’ sector, the restructuring measures is basically similar to the restructuring of a specific enterprise, but is implemented within the overall economy: World Bank (1996) listed the basic and specific measure groups of SOEs’ restructuring in the late 1980s and early 1990s Basic measures included: (i) Restructuring of SOEs’ governance; (ii) Dissolution, bankruptcy of SOEs; (iii) Divestment and sale of SOEs Specific measures include: (i) Identifying owner functions with SOEs’ management functions; (ii) Identifying the economic and social goals of SOEs such as separating the social security system, ensuring employee benefits through various tools, not investing directly from the state budget for SOEs; (iii) Employing members of the Board of Directors other than civil servants and public employees; (iv) Hiring a CEO to operate under the market mechanism; (v) Operating a market mechanism on wages and salaries; (vi) Restricting companies holding large scale capital; (vii) Developing a competitive market; (viii) Strengthening financial discipline, operating hard budget constraint mechanism; (ix) Valuation of share market of SOEs; (x) Labor market development; (xi) Reforming policy framework, bankruptcy mechanism, applying independent audit, etc

- UNIDO (2003) summarized the plans for restructuring SOEs, including: Changing the ownership structure through privatization and diversification of SOEs’ ownership; The external environment can be changed to provide stronger incentives for the SOEs to be efficient; The way the government supervises the SOEs can be improved; Changes can be made to the SOEs’ structure, organization, or operations; Some aspects

of privatization can be introduced without changing SOEs ownership; SOEs can also be

closed with their assets sold or transferred to other uses

From the theoretical and practical basis mentioned above, this thesis summarizes the measures of restructuring the SOEs’ sector into the following three main groups of contents: (i) Restructuring economic institutions and corporate governance of SOEs; (ii) Restructuring SOEs’ ownership structure; (iii) Restructuring the monitoring of owner’s representative agency

Figure 1.1 Measures of SOEs’ restructuring

Source: Author’s synthesis

1.4.3.1 Restructuring economic institutions and corporate governance of SOEs

The nature of restructuring is reallocating resources to improve the resource efficiency Based on the economics that the market system is the best mechanism for allocating resource, many modern economic views have determined that the imposition

of SOEs operating under the market mechanism is central content of SOEs’ restructuring According to OECD (2005 and 2015), the main principles to ensure SOEs’ operation under the market mechanism and fair competition include:

+ There should be a clear distinction between the ownership function and management function of the State to avoid discrimination and ensure equality

+ When SOEs have economic and socio-political tasks, they must meet high standards of openness and transparency The cost and revenue from those tasks should

be clearly separated

+ Business activities of SOEs should not be exempted from regulations on tax and business The law should not discriminate between SOEs and other enterprises The legal form of SOEs should allow creditors to put pressure on opening bankruptcy procedures

- SOEs’ economic activities should face market consistent conditions regarding access to debt and equity finance, in particular: (i) SOEs’ relations with all financial institutions, as well as non-financial SOEs, should be based on purely commercial grounds; (ii) SOE’s business activities should not benefit from any indirect financial support that confers an advantage over private competitors, such as preferential

RESTRUCTURING SOEs

Restructuring the monitoring of owner’s representative agency

SOEs

financing, tax arrears or preferential trade credit from other SOEs SOEs should not receive inputs (such as energy, water or land) at prices or conditions more favorable than those available to private competitors (iii) SOEs’ economic activities should be required

to earn rates of return that are, taking into account their operational conditions, consistent with those obtained by competing private enterprises

In terms of renovating SOEs’ management mechanisms in transition economies, one of the contents of the institutional reforms for SOEs is to establish financial discipline on the basis of forming a hard budget constraint mechanism, eliminate soft budgets for SOEs

Corporate governance has been interested in research since the appearance of organizational models of enterprises with the separation between owners and managers and executives of enterprise, first of all at joint stock companies

In a narrow sense, corporate governance is understood as the supervision and control of owners over managers and businesses (World Bank, 1996)

Approach in a broad sense and from problems arising in practice, especially after the 1997 financial crisis, modern economic views have defined corporate governance as combination of relationships between the management and administration apparatus of the enterprise, the owner and related parties in order to set the goals of the enterprise, determine the means to achieve the target and effectively monitor the goal implementation (OECD, 2005) Corporate governance is also related to the operation of the control mechanism and the balance of power; environmental issues, anti-corruption

or business ethics Good corporate governance contributes to creating trust that is fundamental to the functioning of a market economy As a result, capital costs are lower and the company is encouraged to use resources more efficiently, and thus promote the development of the economy

The State owner should govern SOEs under 39 principles (see Annex 3), grouped into 7 groups of issues, in particular:

(i) Rationables for state ownership: The state maintains its ownership in the enterprise for public purposes It is necessary to carefully evaluate and publicize the objectives of the state ownership when investing capital in the enterprise

(ii) The state’s role as an owner: The state should act as an informed and active owner, ensuring that the governance of SOEs is carried out in a transparent and accountable manner, with a high degree of professionalism and effectiveness

(iii) SOEs in the marketplace: Consistent with the rationale for state ownership, the legal and regulatory framework for SOEs should ensure a level playing field and fair competition in the marketplace when SOEs undertake economic activities

(iv) Equitable treatment of shareholders and other investors: Where SOEs are listed or otherwise include non-state investors among their owners, the state and the enterprises should recognize the rights of all shareholders and ensure shareholders’ equitable treatment and equal access to corporate information

(v) Stakeholder relations and responsible business: The state ownership policy should fully recognize SOEs’ responsibilities towards stakeholders and request that SOEs report on their relations with stakeholders It should make clear any expectations the state has in respect of responsible business conduct by SOEs

(vi) Disclosure and transparency: SOEs should observe high standards of transparency and be subject to the same high quality accounting, disclosure, compliance and auditing standards as listed companies

(vii) The responsibilities of the boards of SOEs: The boards of SOEs should have the necessary authority, competencies and objectivity to carry out their functions of strategic guidance and monitoring of management They should act with integrity and

be held accountable for their actions

1.4.3.2 Restructuring SOE’s ownership structure

Restructuring of SOEs’ ownership structure in the narrow sense means the transformation from SOEs to multi-ownership or non-state-owned enterprises (also called SOEs privatization or equitization) The intervention of the government to SOEs’ operation is attenuated significantly in association with the increasing restructuring and equitization of SOEs’ It facilitates a complete market economy and force SOEs operation to comply with international practices

The rationale for SOEs privatization solutions lies in the role of private ownership

in classical economic theory From an institutional economic perspective, “Private property ownership is fundamental to the functioning of a market economy; the scope and extent of the private sector's involvement in the economy often reflect the economy's level of market operation”

From a theoretical perspective on property rights, SOEs’ ownership restructuring

is understood as restructuring the investment portfolio in production and business activities (M Grubišić, M Nušinović and G Roje, 2009) Following this approach, the transfer of state ownership in the enterprise to the private sector aims to allocate and reallocate state assets to increase the efficiency of the property The most common way

to restructure the list of state assets is that the State transfers a part or the entire property right2 to another owner

Some views argue that SOEs’ ownership restructuring includes transfer of ownership of SOEs or SOEs assets to private owners and other forms of public-private partnership, for example: entrusting the private sector to comprehensively manage a SOEs; and therefore, not only aims to divest state capital, but also aims to improve the competitiveness of enterprises through attracting private investment, technological innovation and management skills (UNIDO, 2003)

2 Full ownership, or merely possession, disposition, or use right

Table 1.1 Methods and objectives of SOEs privatization

Objective (Positive: +; Negative: -; Unclear: ?) Better

corporate governance

Speed and feasibility

Better access

to capital and skills

More government revenue

Greater fairness

Source: World Bank (1996)

Regarding privatization methods, Eastern European countries in the late 1980s chose the following methods: i) Sale to outside owners; ii) Management-employee buyout; iii) Equal-access voucher privatization; iv) Spontaneous privatization

1.4.3.3 Restructuring the monitoring of owner’s representative agency

SOEs’ monitoring is the supervision, review and evaluation of SOE’s performance

in implementing the assigned objectives and tasks

As the owner, most countries have established mechanisms for the Government and the State ownership agencies to be accountable to Congress for the state investment management The monitoring SOEs is both a task and a basis for the owner to exercise accountability to the Government and the National Assembly

SOEs’ monitoring is a regular, consecutive task of owner’s representative agency According to OECD (2010), SOEs’ monitoring and evaluation must meet the following requirements:

- Sufficient and accurate information: SOEs must prepare and submit reports on time to the State ownership agency Any difference between commitment objectives and performance outcomes must be recorded and reported to the Owners, the Government and the National Assembly

- Accountability: If the perfomance results failed to commitment objectives, Board

of Directors will directly account to the Owner

- Disclosure and Transparency: SOEs and the owner have to disclose periodic information on SOEs’ performance against commitment targets or relavant standards

Figure 1.2 Monitoring of SOEs’ performance

Source: OECD (2010)

 Setting objectives, mandates:

The most important issue to implement the periodical monitoring framework is setting objectives and mandates suitable with each of SOEs Clear objectives are basis for monitoring and assessing

The objectives of the State are diverse with not only purely economic goals, but also related to many relevant objects As a result, setting objectives should cover the following tasks:

- Developing a mutual ownership policy

- Setting specific targets for the ownership agency

- Defining SOEs’ long- term mandates

- Defining SOEs’ specific objectives and targets

- Clearly identifying SOEs’ community service and social obliagations

- Developing effective performance indicators system

 Reviewing SOE's performance

The second part of monitoring is SOEs' performance supervision and review The process of reviewing performance has 3 important elements:

- Assessing periodically

- Developing robust systems to review yearly performance

- Benchmaking SOEs’ performance

 Auditing SOEs’ performance:

A tool to verify the reliability of the assessment process, usually is audit report, consisting of three lines:

- Internal audit

- External audit

- State audit (Not necessarily apply to all SOEs)

 Reporting on SOEs’ performance:

Setting objectives

Reviewing Performance

Auditing Performance Reporting on

performance

Disclosing the supervisionoutcomes

The report on the performance of the State ownership agency may include the following tasks:

- Publish aggregate reports of SOEs’ performance monitoring and evaluating, and make active use of them

- Disclosure and timely update websites

- Report and account to Parliament

 Disclosing the supervision outcomes:

Disclosure and transparency play key role in supervision process SOEs’ supervision is the responsibility of not only the ownership agency and government but also investors, people and public opinion Sound practices for corperate governance of OECD recommended high standards of disclosure and transparency to minimize information asymmetry and support the oversight of other stakeholders, media and society to SOEs The disclosure and transparency must comply with legal transaction and should strictly implementing in practice

1.4.4 Factors affecting SOEs’ restructuring in line with NGFTAs

to have the following factors: i) Basic institutions of the market economy; ii) Political determination; iii) Measures of SOEs’ restructuring must be feasible; iv) The SOEs’ restructuring programs must be reliable, guaranteed by the State's commitment

- Economic environment: Level of development, capital supply, GDP growth, inflation, bank interest, financial policies, the level of development of market types, economic institutions, commitments of FTAs, etc have a great influence on the positioning of role, investment or divestment of state capital and other SOEs’ restructuring solutions For example, the divestment of state capital or the sale of SOEs

or the sale of state shares will depend on the purchasing power of the private sector and the development of the financial market

- Science and technology environment: The factors of the scientific and technological environment are firstly the level of scientific and technological development which has a direct impact on production and business activities as well as development orientations of SOEs in general, solutions to restructure SOEs in particular

- Socio-cultural environment: Changes in living viewpoints, living standards, consumption habits, population growth rate, education level, social awareness, psychology, etc are factors that have a profound impact on production and business In transition economies, SOEs are images (positive or negative) that are ingrained in thinking, attitudes, consumption habits, jobs and life These are factors that strongly

influence the results of SOEs’ restructuring, especially when applying the solutions of SOEs’ ownership transformation or restructuring of public utility enterprises (World Bank, 1996)

- Natural environment: The natural factors that influence business decisions of the enterprises, can cause impacts for both customers and businesses Regarding the restructuring of SOEs, the natural environment factor has many impacts on restructuring portfolio, business profession, technologies, first of all SOEs in industries related to land, agriculture and forestry, etc

1.4.4.2 Internal factors

There are many methods of determining internal business factors, such as determining by the function of the enterprise, by the resources of the enterprise, etc In which, the modern internal analysis models of enterprises rely on value chain model of Michael Porter (2008), including: primary activities and support activities In terms of subjects affecting the restructuring of SOEs, it can be divided into the following factors: Enterprise owners, managers, business executives, employees and stakeholders

Similarly, internal factors affecting SOEs’ restructuring in the economy include:

- The role and mission of the SOEs in the economy

- Factors related to business profession, product, scope and scale

- Factors related to ownership and finance

- Factors related to organizational management, production and business organization such as technology, labor, etc

- The entities that affect the restructuring of SOEs: Owners, leaders, employees, customers, creditors, state management agencies, etc

CHAPTER 2 CURRENT SITUATION OF RESTRUCTURING SOEs IN LINE WITH VIETNAM’S NGFTAs: THE CASE OF CPTPP AND EVFTA

2.1 Overview of Vietnam’s NGFTAs

Vietnam has officially signed and implemented ten FTAs, finished negotiating two FTAs and has four FTAs under negotiation (WTO Center (2019)) In general, in recent years, Vietnam tends to join NGFTAs which have broader scope of commitments and higher level of liberalization, for example, EU – Vietnam FTA (EVFTA), Comprehensive and Progressive Agreement for Trans – Pacific Partnership (CPTPP), Vietnam – Korea FTA (VKFTA) and Vietnam – the Eurasian Economic Union FTA (EAEUFTA)

2.1.1 Overview of CPTPP

TPP is a FTA among twelve country members, including United States, Canada, Mexico, Peru, Chile, New Zealand, Australia, Japan, Singapore, Brunei, Malaysia and Vietnam On February 4th, 2016, TPP was officially signed and was expected to come into force in 2018 After the US’s withdrawal in January 2017, TPP can not meet enough requirements for enforcement as expected

In November 2017, Trade ministers from 11 member countries of the TPP have agreed on core elements of the pact, which is from now on called CPTPP In March

2018, CPTPP was officially signed by 11 country members (excluding United States) This Agreement was approved by 7 country members including Australia, Canada, Japan, Mexico, Singapore, New Zealand, Vietnam, and officially came into force on 30 December 2018 (Ministry of Industry and Trade of Vietnam, 2019) CPTPP came into force in Vietnam since 14 January 2019 CPTPP has all characteristics of a NGFTA Firstly, CPTPP has comprehensive market access and high level of liberalization The CPTPP reduces almost all tariffs and non – tariff barriers on trade in goods and trade in services Members cut most tariff lines immediately or after a very short time at which CPTPP comes into force In detail, members eliminate nearly 95 percent of tariff lines once the CPTPP comes into effect Also, those members will remove tariffs on the remaining goods in 5 to 10 years Vietnam commits to remove almost all tariff lines on goods in the agreement (Financial Journal, 2015) Due to the tariff removal and reduction, CPTPP brings comprehensive market access for both Vietnam and EU They not only freely trade goods, but they also focus on the goods which they have comparative advantage Regarding services, CPTPP gives the opportunity to increase the openness of services sectors between Vietnam and EU

Secondly, CPTPP has broad scope of commitments Apart from tariff reduction on almost all goods traded between two markets, CPTPP which has 30 chapters and 4 annexes covers trade and other issues such as services, investment, intellectual property rights, SPS measures, competition policy, labor issues and environment

Thirdly, as CPTPP’s scope is not limited to issues in the border like tariff, it expands to other areas behind the border, so that CPTPP significantly impacts domestic laws of each member This requires each member to review its legal system and amend laws and policies in accordance with commitments in CPTPP Fourthly, CPTPP has eleven members and the majority of them participating in CPTPP are developed ones such as Canada, Mexico, New Zealand, Australia and Japan Therefore, developing member like Vietnam could receive technical supports and driving force to improve legal system when becoming a member of CPTPP

The NGFTA could also create greater access to foreign markets, leading to larger export opportunities for Vietnam As agreed by all NGFTA parties, most tariffs and non-tariff barriers on industrial goods will be eliminated and reduced immediately, and tariffs and other restrictive policies on agricultural goods will be eliminated or reduced over time As estimated in table 1, both exports and imports are projected to rise under the impact of the CPTPP agreement (though the trade balance would decline) Market access, especially to the European and Japan, is of particular importance to Vietnam as

it leverages external engagement for development

2.1.2 Overview of EVFTA

EU-Vietnam Free Trade Agreement (EVFTA) is a new generation FTA between Vietnam and twenty – eight European Union member states EVFTA and Trans-Pacific Partnership (CTPP) are two of the largest new generation free trade agreements that Vietnam's largest ever negotiated On December 1st, 2015, the negotiation rounds of EVFTA was officially announced to be concluded, and its official full text was published on February 1st, 2016 On 26 June 2018, EVFTA was divided into two Agreements in terms of trade and investment At the same time, the legal review of Investment Protection Agreement (IPA) and EVFTA’s final text was formally concluded Both Agreements were signed on 30 June 2019

EVFTA has all characteristics of a NGFTA Firstly, EVFTA has higher level of

liberalization compared to traditional FTAs Vietnam and EU agree to eliminate tariffs

on more than 99 percent of tariff lines on goods traded between them Vietnam and EU remove almost all tariff lines on goods traded between two markets For very few remaining tariff lines, Vietnam and EU agree to apply tariff quota or tariff reduction (Cam An, 2015) The reduction of most tariff lines will boost the trade of goods between two economies Secondly, EVFTA is a NGFTA which balances the interest of both economies and is suitable with regulations of WTO The scope of commitments of EVFTA is not limited to trade in goods and tariff reduction, it expands to other areas such as sustainable development, and the environment (Ministry of Industry and Trade

of Vietnam, 2015) In addition, issues related to environment and SPS measures are regulated with strict requirements and high standards Thirdly, due to broad scope of commitments, especially behind the border issues, EVFTA significantly impacts on domestic law of Vietnam Vietnam has to review legal system and documents to comply

with commitments in EVFTA Fourthly, EU is a customs union with 28 members which are industrialized ones Therefore, cooperation with EU members could help Vietnam develop economy and improve other aspects with the assistance of developed members

in EU

2.1.3 Obligations under the CPTPP and EVFTA Agreements pertaining to SOEs restructuring in Vietnam

CPTPP Agreement affirms in its Preamble “that SOEs can play a legitimate role

in the diverse economies of the Parties” The Preamble recognizes, however, “that the provision of unfair advantages to SOEs undermines fair and open trade and investment” Non-market-based decisions on the production, sale or purchase of goods or services, related investment and financing could result in misallocations of capital, labor, and land that would – over the long-term – diminish overall social welfare The CPTPP Agreement emphasizes that each Party is free to establish or maintain SOEs CPTPP Parties, however, “resolve to establish rules for SOEs that promote a level playing field with privately owned businesses, transparency, and sound business practices” Similarly, the EVFTA notes the advantages of “a predictable legal framework for their trade and investment relations” These agreements provide an occasion for Vietnam to improve SOEs’ corporate governance and performance Disputes with EVFTA/CPTPP partners may also arise Partners may place close scrutiny because of perceptions that Vietnam’s SOEs have received non-commercial support from the Government of Vietnam While adherence to the letter of these agreements will bolster Vietnam’s position in any dispute, adherence to their spirit will benefit Vietnam’s long-term economic development

Important obligations relate to: definition, non-discriminatory treatment and commercial considerations; regulatory neutrality; non-commercial assistance; transparency and application;

2.1.3.1 Definition of SOEs in CPTPP and EVFTA

- CPTPP represents a dramatic shift away from the extension of a state action theory championed by the governmental authority approach and largely followed by the earlier bilateral agreements The CPTPP rule basically uses three proxies to determine whether an entity is a SOE: (1) the commercial nature of its activities; (2) the ownership and/or control by the state of the entity; and (3) the size of the enterprise

The CPTPP first requires that an SOE be an enterprise that is “principally engaged

in commercial activities” The treaty’s definition of commercial activities requires three elements to be present: (1) the activities must be carried out for profit-making, not on a cost-recovery or not-for-profit basis; (2) the activities must result in production of a good or supply of a service that will be sold to a consumer in the relevant market in quantities; and (3) the enterprise must be able to determine the price on its own

The CPTPP rule also requires that an SOE be an enterprise in which the state directly owns more than 50% of the share capital, or controls the exercise of more than

50% of the voting rights through ownership interests, or holds power to appoint more than 50% of board members

Even when an enterprise meets both of these proxies, it must have an annual revenue derived from commercial activities of more than 200 million Special Drawing Rights (“SDRs”) (equivalent to VND 6.400 billion) in any one of the three previous consecutive fiscal years, adjusted for inflation SDRs are a monetary unit set by the International Monetary Fund (“IMF”)

It is equally important to note that the rule excludes a substantial list of entities that would otherwise have fallen into the rule’s scope: a central bank or monetary authority performing regulatory or supervisory activities or conducting monetary and related credit policy and exchange rate policy; a financial regulatory body such as a securities and futures exchange or market, clearing agency, or other organization or association exercising regulatory or supervisory authority over financial services suppliers; SOEs undertaking activities for the purpose of resolving matters for failing or failed financial institutions or any other failing or failed enterprises principally engaged in the supply of financial services

According to EVFTA’s definition, SOE means an enterprise, including any subsidiary, in which a Party, directly or indirectly: (i) owns more than 50 per cent of the enterprise's subscribed capital or controls more than 50 per cent of the votes attached to the shares issued by the enterprise; (ii) can appoint more than half of the members of the enterprise's board of directors or an equivalent body; or (iii) can exercise control over the strategic decisions of the enterprise

2.1.3.2 Regulatory neutrality

• Both CPTPP and EVFTA include substantive requirements for regulatory neutrality Per EVFTA, GOV regulators shall not be accountable to any regulated enterprise Regulatory treatment of all enterprises in like circumstances should be impartial Impartiality is to be assessed by reference to a general pattern or practice of that regulatory body Likewise, GOV should ensure that laws and regulations are enforced in a consistent and non-discriminatory manner Lastly, GOV “shall endeavor

to ensure” that SOEs et al “observe internationally recognized standards of corporate governance” This could be taken to refer to Organization for Economic Cooperation and Development, “OECD Guidelines on Corporate Governance of State-Owned Enterprises.”

• While generally similar, CPTPP specifies additional details Examples of regulatory, administrative, or other governmental authority include the power to expropriate, grant licenses, approve commercial transactions, or impose quotas, fees, or other charges This suggests that fees could include, for example, road tolls and seaport charges CPTPP does not address SOEs’ corporate governance as a component of regulatory neutrality, but rather as a Supplemental Measure

These requirements for regulatory neutrality are especially relevant for the financial, telecommunications, transportation, and electricity sectors

2.1.3.3 Non-discriminatory treatment and commercial considerations

Both CPTPP and EVFTA include substantive requirements on non-discrimination

by SOEs in their purchase or sale of goods or services Per EVFTA, when engaging in Commercial Activities, SOEs shall (a) act in accordance with Commercial Considerations in their purchase or sale of goods or services, and (b) accord to EU enterprises, goods, or services treatment that is no less favorable than that accorded – in like situations – to Vietnamese enterprises, goods, or services This does not preclude Vietnam’s SOEs from purchasing/supplying goods/services, or refusing to do so, provided that such differences or refusal is based on Commercial Considerations While its rules are similar, CPTPP explicitly extends these to foreign direct investment enterprises (Covered Instruments) operating in Vietnam or Vietnam Covered Instruments operating in another CPTPP Party’s territory

Thus it appears that the main initiatives are to extend Vietnam’s existing trade obligations – e.g., World Trade Organization (WTO) – to SOEs practices

2.1.3.4 Non-commercial assistance (NCA)

Unlike EVFTA, CPTPP includes explicit limitations on NCA to SOEs CPTPP prohibits NCA that results have Adverse Effects or causes Injury to the Domestic Industry of another CPTPP Party, as summarized later NCA is “assistance to an SOE

by virtue of that [SOE’s] government ownership or control” Itwould mean that that the GOV or any of its SOEs (i) explicitly limit NCA access to Vietnam’s SOEs; (ii) provides NCA that is predominately used by Vietnam’s SOEs; (iii) provides a disproportionately large amount of the NCA to Vietnam’s SOEs; or (iv) otherwise favors Vietnam’s SOEs through its discretion in the provision of NCA NCA includes the following:

• Direct transfers of funds or potential direct transfers of funds or liabilities This may include:

- Grants or debt forgiveness;

- Loans, loan guarantees, or other types of financing “on terms more favorable than those commercially available to that enterprise;” or

- Equity capital “inconsistent with the usual investment practice, including for the provision of risk capital, of private investors.”

CPTPP’s use of the term “general infrastructure” suggests a distinction vis-à-vis

“specific infrastructure”

- General infrastructure could include, for example, kilowatt-hours of electricity or cubic meters of water CPTPP excludes such general infrastructure as a form of NCA

- Specific infrastructure could be interpreted to include, for example, a plot of land

or a purpose-built road Hence, the conveyance of land at a below-market price to an SOE or multiple conveyances in the absence of an efficient land market could be construed as a form of NCA

NCA does not include (a) transactions within a corporate group that includes SOEs, when normal business practices require reporting the financial position of the group