PROFITABILITY AND COST MANAGEMENT IN FORMER STATE OWNED ENTERPRISES IN VIETNAM

Luận văn tiến sỹ của tác giã nước ngoài liên quan đến đề tài về kiểm toán

PROFITABILITY AND COST MANAGEMENT IN

FORMER STATE OWNED ENTERPRISES IN VIETNAM

ABSTRACT

We provide evidence on the impact of privatisation and listing of former state owned enterprises (SOEs) in Vietnam, by examining changes in the profitability and cost management practices of a sample of former SOEs now listed on one of the two Vietnamese stock exchanges under the “Doi Moi” reform program This evidence contributes to the literature by examining profit makeup at a component level, rather than on the aggregate basis which has been adopted in prior studies This allows the development of richer insights than have previously been possible into the factors contributing to observed changes in post privatisation profitability

Keywords: privatisation, Vietnam, state owned enterprises, performance measurement

JEL classification: L33, M48

i INTRODUCTION

It has been argued that the antecedents of the phenomenon which has come to be described as New Public Management (NPM) lie in conditions of economic and fiscal adversity (Gruening, 2001) Viewed through this lens, a key goal of new public management reform has been to improve economic efficiency and thus overall welfare by driving change through the public sector, with the result of leaner, more competitive, flexible, responsive and transparent government (OECD, 1994)

In advanced jurisdictions characterised by high levels of private sector participation and integration with the global economy via trade and financing flows, the capacity of governments to wield strong control over the domestic economy is constrained Consequently, the focus of much reform activity lies on that domain capable of being directly and profoundly influenced by government, the public sector (Lapsley, 2008)

By contrast, many developing economies are characterised by low levels of private sector participation and weak integration into the global economic system There, the role of government decision making and the influence of the state sector are typically more profound, particularly in socialist one party states (Chu, 2004)

In jurisdictions characterised by relatively low international openness and high state sector dominance, the impact of public sector reform initiatives has the capacity to be of particular significance However, while a wealth of literature focused on the impact and implications of public management reform

in developed economies exists, comparatively little is known about the process and results of public management reform in lesser developed economies (Pollitt & Bouckaert, 2000)

The literature on public management evidences the application of a wide variety of techniques towards the end of improving cost effectiveness and efficiency in government, including contracting out, commercialization, corporatization and privatization Of these techniques, privatization has been perhaps most consistently employed throughout the world Further, there is evidence to the effect that the application of this technique continues to become more widespread, with much of the growth in the use of the technique exhibited in emerging and lesser developed economies (Megginson & Netter, 2001)

However, it is in relation to the effect of privatisation in these settings that the extant research literature is least clear For example, Boubakri and Cosset (1998) studied a sample of companies from

developing countries which underwent full or partial privatization over the period from 1980 to 1992 Their results suggested that after being privatized, former SOEs increased sales, became more profitable, increased levels of capital spending, improved operating efficiency levels, had lower debt and increased dividend payouts

By contrast, Wei et al (2003) conducted a study of privatized firms in China, covering the period from 1990 to 1997 Their results suggest that after being privatized, the former state owned enterprises in their sample did not exhibit improvements in profitability Studies of privatisation in Latin America (e.g Galal et al, 1994) and Eastern Europe (e.g Brezis & Schnytzer, 2003) have also thrown up inconsistent and inconclusive results in relation to the impact of privatisation

Thus despite the consistent recourse to the notion that privatisation is associated with improved enterprise efficiency and performance with consequential societal welfare benefits (e.g Bortolotti & Fantini, 2001) the empirical evidence on the subject is mixed, particularly as regards the experience of lesser developed and emerging economies

This paper contributes to the literature on public management reform and privatisation in lesser developed and emerging economies by providing detailed empirical evidence in relation to changes in post privatisation profit and cost management performance of a sample of former SOEs in Vietnam The methodology employed draws on detailed firm level data, rather than high level aggregate data Consequently, the paper contributes insights not only into the post privatisation profitability trajectory of former SOEs in Vietnam, but importantly, into the behaviour and changes in key profit driver vectors over the initial post privatisation period

In pursuing this objective, the remainder of the paper is structured as follows Section 2 provides

an overview of the background to the embrace of privatisation as an element of reform in Vietnam Section

3 sets out details of the data drawn upon for the purposes of analysis and the research methodology employed Section 4 comprises a discussion and analysis of the results of the study, whilst Section 5 sets out conclusions and incorporates suggestions for further research

ii REFORM AND PRIVATISATION IN VIETNAM

In 1954, in the wake of the defeat of French forces at Dien Bien Phu, Vietnam was divided at the

17th

The stresses already evident by the mid 1970s were compounded by the decision to invade Cambodia in December 1978 (Vo 1990; Klintworth 1991; Fforde and Vylder 1996; Harvie and Tran 1997; Chu 2004) Along with the human casualties, the involvement in Cambodia cost substantially more in financial and material terms than had been anticipated (Klintworth 1991; Harvie and Tran 1997) These unanticipated costs included the resources necessary for maintaining troops in Cambodia and the need for

parallel The northern regime, which fell under the Soviet and Chinese sphere of influence, adopted a single party socialist mode of government, characterised by central planning, collectivization and nationalization The southern regime, capitalist and nominally democratic, was a client state of the United States and its allies (Vo, 1990)

With the defeat of U.S backed forces the south by northern forces in 1975, national reunification commenced By late in that year, the united Politburo decided that Vietnam should move directly to the consistent application of a fully socialist model Consequently, the centrally-planned economic mechanism which had previously applied in the North began to be implemented in the South The task for economic development in this period was described as "…involving continued socialist construction in the North and transforming the South's capitalist economy to a socialist one" (Harvie and Tran 1997, p.34) This already complex task was rendered more difficult by the near collapsed state of the South Vietnamese economy by

1975 (Vo, 1990)

Policy settings adopted in the immediate wake of reunification gave particular prominence to the ideal of rapid socialization and industrialisation This soon resulted in the emergence of substantial distortions in the structure and functioning of the economy (Harvie and Tran 1997) Socialisation of ownership led directly to diminishing production levels in the agricultural sector Simultaneously, most government investment funding was directed to industrial development Set in the context of very high population growth rates, episodic food shortages emerged throughout the country (Fforde and Vylder 1996)

troop deployments to the northern border region to fight against Chinese forces which invaded as a means

of "punishment" by China in retribution for Vietnam’s decision to invade Cambodia

Losses also included the loss of substantial foreign aid from the international community as a form

of sanction consequential upon the decision to embark upon the Cambodian campaign (Fforde and Vylder 1996; Harvie and Tran 1997) Vietnam also suffered substantially as a result of the enforcement by the United States of a trade embargo which prevented Vietnam penetrating into international goods and capital markets

The generally weak economic conditions, combined with the impact of a series of material shocks caused substantial fiscal distress For example, Vietnam suffered a sharp reduction in foreign loan and aid funding between 1975 and 1979, with receipts from these sources falling from 60 per cent of total funding

in 1975 to 32 per cent in 1978 Over the same period, domestic source revenues did not grow at anywhere close to a sufficient pace to close the gap which resulted in the sudden fall in external source revenue (Harvie and Tran 1997)

This triggered the onset of substantial fiscal stress, a matter of particularly high significance in a centrally planned economy in which the state plays a highly material role (Fforde and Vylder 1996) Resource shortages became endemic throughout the economy

Chronic shortages of resources in turn led economic entities to look for better ways to do business This kind of spontaneous bottom-up pressure was described as "fence breaking" or "pha rao" in Vietnamese In effect, this represented the emergence of widespread disobedience in the face of government issued economic edicts This placed increasing stress on the government to conduct reform to avoid the collapse of the economy or having its authority substantially undermined (Fforde and Vylder 1996; Harvie and Tran 1997)

Responses to this situation were evident in the edicts of both the Fourth Congress of the Communist Party of Vietnam (1979) and the Fifth Congress of the Communist Party of Vietnam (1982) However, the policy responses offered at the conclusion of both of these gatherings were minimalist and incrementalist in their orientation and had little impact on the worsening economic and fiscal situation (Le, Doanh D 1991)

However, the Communist Party of Vietnam’s Sixth Congress yielded a very different result At the conclusion of proceedings, the following assessment of the state of the nation and its prior policy settings was offered by the Communist Party:

“There has been a lacuna in assessing the economic situation, in determining objectives and setting the pathway of socialist development In the five years from 1976 to 1980, we conducted an industrialization process without the presence of necessary supporting conditions; policy initiatives were marred by haste, relaxation in the degree of socialist transformation; and inadequate reconfiguration of obsolete economic mechanism In a further five-year period from 1981 to 1985 there has been no serious implementation of the edicts of the Fifth Congress in relation to economic strategy […], new and serious mistakes have emerged in distribution and trade circulation […] There have been serious mistakes in guidelines, in macro policies, in steering and in implementation”1

Undoubtedly, the Sixth Congress marked an important milestone and major turning point in the history of economic development of Vietnam (Harvie and Tran 1997; Chu 2004) Arguably, the most important element of the reformist agenda advanced during the sixth congress was the acceptance of non-socialist economic components besides state and collective ownership (Le, Doanh D 1991; Harvie and Tran 1997)

This self-assessment of the Communist Party of Vietnam has been seen as the main achievement

of the Congress (Le, Doanh D 1991) At the congress, a new team of leaders was elected with responsibility

to steer the economy to overcome problems such as chronic food shortages, hyperinflation, and structural imbalances in the economy

After the Sixth National Congress a comprehensive reform program, titled "Doi Moi" or Renovation was introduced The objectives of this reform program were to liberalize and deregulate the centrally-planned economic mechanism (Harvie and Tran 1997)

During the congress, the General Secretary of the Communist Party of Vietnam, Truong Chinh, commented on the problems faced by Vietnam and some of the factors which were perceived to have caused them, stating that: "… the state apparatus and those of the party and mass organization were left to grow too big, overlapping and dispersed" (Thayer, 1991, p.24)

1 (Cited from the Resolution of the Sixth Congress: http://www.cpv.org.vn)

So much was clearly stated in the Resolution of the Fourth Plenum of December 1987: "The state encourages and accepts the long-term existence and positive effects of the family, individual and private economies active in production and services; it guarantees the rights to property, to inherit and to legal income for people active in these sectors; it accepts their legal incorporation/identity and equality before the law in their production and business activities" (cited from Harvie and Tran (1997, p.49))

Thus, the decisions of the Sixth Congress cleared the path for the adoption of privatisation as a legitimate element of a sweeping set of economic reforms implemented from the mid 1980s onwards in Vietnam At the beginning of “Doi Moi” in 1986, Vietnam had around 12,300 SOEs many of which were unprofitable and exhibited signs of substantial inefficiency

A concerted effort to attack this problem commenced in 1989 with the dissolution of many unprofitable SOEs and rearrangement of others through mergers or liquidation As a result, by the beginning of 1992, the number of SOEs in Vietnam had declined to around 6,500 enterprises (CIEM 2002;

The privatization of SOEs began to be brought into effect via the implementation of a pilot program which called for the transformation of a limited number of viable or potentially viable small scale, non strategic SOEs into private companies subject to Enterprise Law This program was undertaken through share issues sold to employees at preferential prices, to private owners, and to foreign investors on

a limited basis However, because of gaps in the legal framework and the lack of a sense of urgency about the process, only five SOEs had been privatized by the end of 1995 (Webster and Amin 1998; Truong, Lanjouw et al 2006)

To increase the pace of privatization, the government promulgated Decree No 28/CP in May,

1996 This disbanded pilot privatisation programs and defined a comprehensive set of policies relating to

the privatisation of SOEs This Decree maintained the general principles of the pilot program and expanded the scope of privatization to all non-strategic small and medium-sized SOEs It also required the agencies controlling SOEs such as ministries and people’s committees to select candidate enterprises for privatization (Truong, Lanjouw et al 2006) This resulted in a measurable acceleration of the pace of privatisation, a process which continues to the present

However, despite this, there exists very little evidence in relation to the impact of privatisation in Vietnam which would assist in evaluating the effectiveness of the policy in that setting Section 3 sets out details of the data and methodology employed within this study towards the end of partly filling that gap in the extant literature

The objective of this study is to provide detailed evidence pertaining to the impact on a key dimension of financial performance, profitability, of the transition from State-Owned enterprises to private venture Thus, it was a necessary precondition for inclusion in the research sample that firms studied had originally been configured as SOEs and were subsequently privatised

A second qualifying criterion for inclusion in the research sample was the availability of financial statement data2

Previous studies have documented the very poor levels of compliance among companies with their obligations in relation to the preparation and disclosure of financial statements, even though this is required

, the key source of data relied upon for the purposes of the study This was required because the research question addressed relates not just to the degree of observable change in profitability over time, but also the development of an understanding of the changes in key profit drivers Only firm financial statements contain a sufficiently rich dataset to facilitate such a form of analysis

By the conclusion of 2007, Vietnam had completed the privatisation of approximately 3,800 SOEs (Nguyen 2007) Ostensibly, this suggests the existence of a potentially very large data set upon which to construct a study of the financial performance of former SOEs However, in the context of Vietnam,

obtaining reliable financial data relating to firms is difficult and often impossible

2 Under Vietnam Accounting law, all financial statements have to be prepared in unified formats

by law (Pham 2004; Truong, Lanjouw et al 2006) This inconsistency in mode of presentation and availability of financial statements makes the execution of a research methodology based on a study of detailed financial disclosures challenging

Therefore, a further narrowing of the scope of the research sample was to limit the study to the inclusion of former SOEs which had obtained a listing on one of Vietnam’s stock exchanges These firms face stricter disclosure standards and scrutiny of their compliance with reporting obligations, and are required to produce and make available audited financial statements in a standard format on an annualised basis (National Assembly of Vietnam 2006)

The first stock exchange to come into existence in Vietnam was opened in Ho Chi Minh City in

2000 and is generally referred to by the acronym HOSE Vietnam’s second public equity capital market opened in Hanoi in 2005 and is referred to as the Hanoi Securities Trading Centre - or HASTC The listing eligibility criteria and rules applying to these two equity markets are essentially the same and there is evidence to suggest that the spread of firms in terms of size, industry and geography is comparable across both markets (NDCP 2007) Therefore, it was judged appropriate to include firms listed on both markets in the final research sample, where they met all stipulated sample selection criteria

By the end of 2007 there were total of 244 firms listed on HOSE and HASTC Of these, 133 firms were listed on HOSE and 111 on HASTC Among this group 213 firms had been SOEs prior to undergoing privatisation and listing The remaining 31 firms had originated in the private sector These were not eligible for inclusion in the research sample Thus the potential research population consisted of the 213 market listed former SOEs in existence by the conclusion of 2007

In Vietnam, the accounting and reporting rules pertaining to financial services firms (e.g banks, insurers, investment firms, securities firms) differ substantially from those applicable to other types of organisation This raised the prospect of data incompatability problems, and given the small number of such organisations in the context of the total potential research population, and the lack of viability of deriving a meaningful data subsample from these firms (given their small numbers), these too were excluded from the final research sample There were 13 such listed firms by the conclusion of 2007 This left a total researchable population of 200 listed former SOEs, 104 of which were listed on HOSE and the remaining 96 on HASTC

However, not all of these firms could be included in the final research sample This is due to the nature of the research question being investigated In short, the research focuses on evidence of change in financial performance (if any) associated with privatisation However, given that it is unlikely that change

in performance will be evident in the immediate wake of an entity’s transformation to a private firm, prosecution of the research question requires the existence of multiyear datasets Further, given that according to the Vietnamese process, privatisation precedes listing (that is, the two events are not usually simultaneous, though they are typically broadly contemporaneous3

Consequently, without 2006- and 2007-listing firms in the research sample, the remaining dataset consists of 6 listing year cohorts, including 5 firms listed in 2000; 4 firms listed in 2001; 10 firms listed in 2002; 2 firms listed in 2003; 3 firms listed in 2004 and 9 firms listed in 2005 None of these represent viable datasets to study in their own right Consequently, for the purposes of data analysis, it was necessary

to adopt a data pooling methodology In essence, this approach obviates the problems inherent in small

), and the desirability of establishing performance baselines from which to gather evidence of change, the availability of pre listing financial statements was a necessary pre-condition for inclusion in the final research sample

Specifically, it in order to be incorporated into the final research sample, it was necessary that financial statement data for the two years prior to listing were able to be obtained In the case of one of the

200 firms adverted to above, this was not possible, reducing the potential researchable sample to 199 firms

In examining this group of firms it is notable that the greatest majority of listings occurred in 2006 and 2007 In combination, these two years account for 166 of 199 potentially researchable firms However, given the emphasis on the study of change over time, it was also necessary to exclude these firms from the analysis, given the lack of post listing year data for the 2007 listing cohort, and the very limited (1 year) post listing track record of the 2006 cohort Ultimately, the minimum criteria required for inclusion in the research sample were the availability of 2 years of pre and post listing financial statement data

3

By scanning the privatizing years and listing years for all of 200 firms in both securities trading centres, it shows that almost all firms privatized one or two years before listing It is understandable in the context of Vietnam where the privatization process is gradual, cautious process and the stock market is very young However, this led to the fact that it is impossible to capture the data in relation to the before-and-after privatizing point This difficulty continues driving us to study the changes of financial performance of privatized firms caused by the listing event In other words, instead of comparing the financial performance before and after privatizing we compare the financial performance of divested firms before and after listing year

calendar year listing cohorts by changing the focus of attention from listing year to year relative to listing point

As a simple example of the manner in which pooled datasets were produced, if a firm listed in

2000, then financial data relating to that firm for 2000 would be coded as falling within the t=0 dataset If a firm listed in 2003, then financial data relating to that firm for 2003 would be coded as falling within the t=0 dataset Thus, the t=0 dataset comprises observations pertaining to the year of listing, irrespective of which calendar year the year of listing was The same pooling procedure was used to generate the t -2, t-1, t+1, t+2 and t+3 datasets

For the purposes of analysis, the pooled data observations generated through the application of the above process was divided into two subsamples The first of these contained data sets in which performance was tracked from t-2 through t+3 This included all firms which listed between 2000 and 2004 (inclusive) There were 24 such firms Consequently, given that for each of these firms 6 observations were available, the first data subsample consisted of 144 firm year observations for each financial variable of interest

The second subsample contained data sets in which performance was tracked from t-2 through t+2 This included all firms which listed between 2000 and 2005 (inclusive) There were 33 such firms Consequently, given that for each of these firms 5 observations were available, the second data subsample consisted of 165 firm year observations for each financial variable of interest

Performing analysis on both a two and three year horizon post listing increases the quantum of data available for analysis, and increases the degree of potential statistical and econometric robustness of the analysis undertaken In the case of the three year post listing data set, a greater period of time post listing allows observations of more seasoned organisations which have had a longer period to adapt to the realities of existence in private rather than public form

A fundamental premise of the pooling methodology is that there is no systematic variation in the characteristics of firms listed in each successive annual listing cohort, or the nature of each cohort’s post listing experience It is on this assumption that each firm’s base year data is treated as being comparable, irrespective of whether the base year occurred in 2000 or at some later point

There is the possibility however, that this assumption is not adequately descriptive of the underlying empirical reality and that as a result, bias has been induced into the results Several factors mitigate against this possibility First, during the period studied there was no political fluctuation which changed or redirected the privatization program or firms’ operating environment Thus, the institutional and regulatory climate faced by each successive annual listing cohort was essentially static, a factor which obviates against the likelihood of systemic bias characteristics between years in the research dataset

Secondly, it is notable that over the entire time span covered by the study, Vietnam’s real GDP growth rate, a broad proxy for economic conditions, was at all time within a band between 6 and 8% (Asian Development Bank 2008), with growth rates slowly accelerating as time advanced This suggests the existence of a stable economic climate and suggests that no particular listing year cohort would have been subjected to exogenous shocks which would have been likely to induce bias into the dataset and hence results of analysis

Thirdly, as suggested in section 2, in pursuing privatisation, Vietnam adopted a slow, cautious, and gradual approach (Vu 2005) In consequence firms which were subjected to privatization during the period studied were similar in their capital size, performance levels and endemic inefficiency factors, and were not viewed as holding systemically strategic roles within the economic system

From a technical perspective the application of a pooling approach yields some significant benefits The first and most important advantage is that it makes the data sample large enough to support the conduct of meaningful and robust statistical and econometric testing From a statistical perspective, larger sample size will tend to minimize the standard error of any predicted variable, for example the sample mean, resulting in greater robustness Furthermore, results from larger samples can be more readily used for the purpose of developing generalisable propositions or insights (Black 1999; Swift and Piff 2005)

The second benefit which is brought by this technique is the ability to have insight the performance of firms in different industries Of 33 firms in the two-year post listing subsample there were

21 manufacturing firms with the remaining 11 firms falling into the category of trading and services organisations And among the 24 firms in the three-year post listing subsample there were 16