January 12, 2017 12:00 pm JST

Corporate reform in Vietnam is slow going

Investors are excited about opportunities, but wary of obstacles

ATSUSHI TOMIYAMA, Nikkei staff writer

A vegetable vendor walks past a VinMart+ shop in Hanoi. (Photo by Shinya Sawai)

HANOI As Vietnam marks its 10th anniversary as a member of the World Trade Organization in January, the one-party state has finally begun showing progress on promises to make the country's state-run enterprises more compliant with market principles and less dependent on government largesse.

There are plenty of investment opportunities in Vietnam's rapidly growing market. The government in September announced plans to divest its entire interest in Vietnam Dairy Products, or Vinamilk, Saigon Beer Alcohol Beverage, Tien Phong Plastic, Bao Minh Insurance and eight other state-backed companies by the end of 2017. Authorities began by floating Saigon Beer -- also known as Sabeco -- on the Ho Chi Minh Stock Exchange on Dec. 6.

Against the opportunities, however, investors must weigh the endemic corruption that plagues business in Vietnam and red tape that strangles potentially profitable deals and hinders the country's development.

IN THE MONEY Fraser and Neave, the Singaporean drink maker owned by Thai Beverage on Dec. 13 bought 5.4% of Vinamilk, lifting its total stake in the company to 16%.

Hanoi also registered Vietnam Airlines and Vietnam National Textile and Garment Group, or Vinatex, as unlisted public companies on Jan. 3, allowing investors access to shares.

"I believe in the future there will be increasing interest from international investors to invest in large Vietnamese companies," said Daryl Liew, senior portfolio manager at Reyl Singapore.

Vietnam has two stock exchanges -- the Hanoi Stock Exchange and the Ho Chi Minh Stock Exchange -- and they are expected to merge, possibly this year. In an effort to smoothly combine the two, Vietnam launched a new share index in October called the VNX Allshare, which comprises issues from both exchanges.

State-run enterprises are cash cows for the government. Dividends are its second-biggest source of revenue, after taxes. Vinamilk alone reportedly generates roughly $86 million a year in payments. State companies often employ former government bureaucrats in top positions and provide platforms for shady deals.

Prime Minister Nguyen Xuan Phuc is trying to tackle these problems by cracking down on executives at state-run companies as part of a broader anti-corruption campaign. The government has targeted more than 100 current and former businesspeople, including Trinh Xuan Thanh, the onetime chairman of PetroVietnam Construction. Thanh left Vietnam in July, ostensibly on vacation, but has not returned. Dozens more suspects appear to have fled the country.

The prime minister is going after Thanh to hold him accountable for massive losses at PetroVietnam. But there is also speculation the ex-chairman is suspected of bribing his way into a government post.

Combating corporate malfeasance is not the only reason Hanoi is selling off assets. The government is also trying to raise money for infrastructure spending using its own resources, along with official development assistance and other international lending vehicles. Vietnam's public debt in 2016 was equivalent to 65% of gross domestic product, up from 50% in 2010 and 41% in 2005.

Tax revenue is eroding, with receipts from the petroleum sector plunging 42% on the year for the first 10 months of 2016. New free trade agreements, particularly Vietnam's membership in the Association of Southeast Asian Nations Economic Community, shrank tariff revenue by 4.3% on the year over the same period.

RULES ARE FOR BENDING December 2016 also marks 30 years since Vietnam enacted its Doi Moi economic reforms, which allowed foreign capital into the country. Although opacity and corruption at state-run companies are the biggest obstacles to economic progress, there are many others that are less visible and make it difficult for global companies to do business in Vietnam.

"If you want to expand in Vietnam, you first have to pass their economic needs test," said a 48-year-old executive at a Japanese retailer looking to set up shop in Vietnam. The tests are designed to protect small and midsize stores, which make up 90% of the domestic retail market. If a foreign investor seeks to build more than one outlet, local authorities determine how that would affect domestic competitors.

Regulations governing the retail sector are vague, and the companies subject to them say the conclusions drawn by those who enforce them are arbitrary. The government claims regulations were eased last year but offers no specifics.

Convenience stores have mushroomed recently in Ho Chi Minh City, which lends support to the government's position, but VinMart+, run by local property developer Vingroup, appears to have benefited most. VinMart+ is Vietnam's largest convenience store chain by far, with over 900 locations. U.S.-based Circle K ranks second with just 170 stores. Japan's Seven-Eleven will enter the market, possibly this year. Foreign players will have to deal with these restrictions to succeed in Vietnam.

Other vague rules plague business, including those governing customs, transportation and permitting. A Vietnamese person working in media in the central city of Danang said the government purposely leaves the rules unclear. This gives officials a great deal of discretion and opens the door to bribery.

Asia300

Vietnam Dairy Products Corp.

Vietnam

Market(Ticker): STC(VNM)
Sector:
Industry:
Consumer Non-Durables
Food: Meat/Fish/Dairy
Market cap(USD): 9,694.81M
Shares: 1,451.34M
Asia300

Thai Beverage Public Co., Ltd.

Thailand

Market(Ticker): SES(Y92)
Sector:
Industry:
Consumer Non-Durables
Beverages: Alcoholic
Market cap(USD): 15,548.24M
Shares: 25,110.02M
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