The planning period was not particularly successful. Most SOEs were forced to go outside of the plan for inputs and customers, yet still retained ‘social’ responsibilities42. By the beginning of the 1990s most firms were poorly equipped. A 1992 survey found that there was a direct relationship between the date of an enterprises’ establishment and the vintage of its equipment (Beresford and Dang Phong 2000). Many firms continued to use machinery originally purchased in the 1960s and 1970s. One textile mill used second
42. Many firms were expected to provide a range of services to employees and local communities, and were discouraged from firing workers. Well into the 2000s firms employed, mostly elderly, workers who had no hope of adapting to modern production methods.
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hand equipment originally used in 1930s England. Melanie Beresford recounts a conversation in the mid-1990s:
‘About a decade ago, many of the SOEs were described to me by a retired senior Communist as ‘deformed’ – a textile mill, for example, may have spinning and weaving plants, but be ‘missing a leg’, namely, the dyeing plant. Others had been cobbled together from a range of different (Soviet, Chinese, East European) sources and could not operate as an integrated plant. Further, in explaining why the state was unwilling to privatise, dissolve or break up the SOEs, he argued that ‘they are our children and we cannot eat our children.”
(Beresford 2008, p. 226)
SOEs also suffered from their subordination to state planning. Although the strict planning system had broken down by the late 1980s, firms remained constrained in other ways. Investment was channelled to the establishment of new SOEs, rather than supporting existing ones, which were expected to succeed on their own (Beresford 2008). As late as 1992 firms were still returning their depreciation fund to the state, and submitting applications for new funds (ibid.). Over half of SOE’s fixed assets were depreciated by more than 50 percent and a quarter had fixed assets depreciated by less than 30 percent. Only fifteen percent of output was estimated to be suitable for export, although seventy percent was apparently good enough for domestic consumption (Beresford 2008). The remaining fifteen percent, absorbing approximately ten percent of working capital, could not even be sold on the domestic market (Phan Van Tiem and Thanh 1996). The reform programme was a response to the profound undercapitalisation of state owned companies and an acknowledgement that what capital there was was spread too thin (Beresford 2008). There were three aspects to SOE reform. Firms were liquidated, restructured through a programme of merger, or equitised (a form of privatisation in which a proportion of state assets was sold to enterprise managers and workers). Equitisation would serve to reallocate state capital from ‘sectors and branches of the state sector which are not important to the national economy, do not necessarily
need state capital, or require an element of share ownership to be held by the state’ (Phan Van Tiem and Thanh 1996). Equitisation was also designed to break the hold of line ministries on SOEs43. The reform process proceeded in fits and bursts. Between 1991 and 1994 the total number of SOEs fell from over 12,000 to 6,000. Of these around half were liquidated, two thousand combined with other state firms and the rest sold off. Between 2001 and 2005 another three thousand firms were restructured, and two thousand equitised (World Bank 2009).
Another plank of the reform programme was the formation of General Corporations (GCs) in 1994. They were an attempt to consolidate firms in the same or related industries. Firms were brought together under the command of a Head Quarters, which essentially became the head of a holding company. They also had a social objective. General Corporations were expected to turn around failing companies that still employed a significant numbers of working age people. They were also an attempt by the GoV to retain control over the economy’s ‘commanding heights’ and drive the industrialisation process forward. State owned enterprises were increasingly asked to operate on the same terms as private and foreign owned firms. Although firms were not expected to abide by the same legislation until 2010 successive ‘enterprise laws’ (culminating in the 2005 Unified Enterprise Law) and SOE laws dismantled the barriers between them. The objective was to force SOEs to respond to market pressures and was also a response to donor pressure and trade agreement commitments. State owned enterprise reform and restructuring did result in increases in productivity, although this was associated more with reductions of the labour force and consolidation. In 1990 and 1991 for example, approximately 750,000 people lost their jobs. In 2000 and 2001 many more were made redundant following a further round of redundancies. The ability of SOEs to derive productivity gains from more progressive sources has proved more difficult. Explanations as to why have largely focussed on the investment decisions of SOEs, and the efficiency of those decisions. Since the 1980s SOEs have appeared to shun their ‘core business’, preferring instead to pursue side lines in other areas, particularly, and most
43. As a response to the shortages of the 1970s and early 1980s line ministries and provincial authorities relied on SOEs as a source of revenue.
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controversially real estate, and more recently financial activities. Beresford saw the strategy as a consequence of the poor quality of firms’ primary assets:
‘Since rent-free access to high-value urban land has been one of the few marketable assets that SOEs could use as a source of revenue, there was much participation by industrial SOEs in the real estate and hotel boom of the early 1990s.’
(Beresford 2008, p. 231)
Beresford (2008) and Phan Van Tiem and Thanh (1996) argued that as most SOEs had limited access to capital many abandoned their main business lines. Instead opting for ‘trading activities, tourism and transport services’. Many even resorted to selling off fixed capital for cash in order to meet short term requirements. Even so:
‘Some of those SOEs with relatively large capital bases have shifted their investment into restaurants, hotels and joint ventures. Yet at present, the government is unable to regulate such shifts in investment and business operations by SOEs.’
(Phan Van Tiem and Nguyen Van Thanh 1996, p. 25)
Given the ease of entry into these areas SOEs faced increasing levels of competition from non-state enterprises, many of which were actually SOEs ‘penetrated’ by private capital:
‘Surveys have shown that many state owned retail commercial centres, transport companies, and tourism enterprises are state- owned in name only with private persons operating the businesses, having rented the premises, equipment, facilities, and even the legal status of the SOEs.’
(Phan Van Tiem and Thanh 1996, p. 28)
Other profitable lines were trading activities, where firms were able to benefit from short term credit. Chi Do Pham and Duc Viet Le (2003) suggest that SOEs had little choice as their primary activities were always bound to be uncompetitive. By the late 1990s, they argue, firms found themselves producing goods for which global and domestic demand
was saturated, leading to difficulties exporting, stock piling of inventories and deflation. More recent surveys have demonstrated similar patterns. Cheshier and Penrose (2007), for example, found that SOEs felt duty bound to maintain their core business, but were increasingly seeking to diversify into other apparently non-productive investments. Managers cited the profitability of alternative activities, difficulties mastering advanced technologies and breaking into new markets as the main reasons (Cheshier and Penrose 2007). Such strategies have attracted much hand wringing by senior government and party officials as well as the media. A string of articles have called attention to firms’ speculative practices, asking whether the interests of Vietnam are being well served.