By Oliver Massmann, Partner, Duane Morris Vietnam LLC
AS Vietnam is one of Asia’s fastest-growing and most stable markets in relation to execution, construction and mining, there is huge potential for its mining industry. In recent years the exploitation of solid minerals and fossil coal has grown rapidly while Vietnam has rich reserves of bauxite, gold, vonfram and rare earth elements yet to be widely exploited.
The mining industry plays a very important role in Vietnam’s economy as mineral trade accounts for a large share of the overall trade - between 11% and 15% of GDP. The industry is exploiting about 38 kinds of minerals used for production of more than 54 commodities.
With regulatory framework, Vietnam promulgated a new Law on Minerals in 2010, which took effect on July 1, 2011 and issued the Decree 15/2012/ND-CP in March 2012 with effect from late April 2012 to guide implementation of this Law. In December 2011 Vietnam also adopted a new Minerals Strategy for 2011 to 2020 with the target of economical, effective and sustainable management, protection and exploitation of minerals to harmonize with the country’s modernization and industrialization. The passing of regulatory framework for mining has increased the interest of foreign investors and multi-national mining groups and provided assurance in the long-term prospective development of the industry.
At present, the industry is being dominated by Vinacomin, the state-owned Coal & Minerals Industries Corporation which has two main divisions – coal and minerals. Vinacomin was founded by the merger of Vietnam Coal Corporation and Vietnam Mineral Corporation in 2005. It now accounts for about 95% of Vietnam’s coal production with 54 operating mines of which 30 are underground mines. Another state-owned company, Vietnam Chemical National Corporation (Vinachem), operates in the exploitation of phosphate rock.
Recently, Vietnam has been seeking the equitization (privatization) of state-owned enterprises (SOEs) due to the Government’s restructure of the economy toward more effective and sustainable development, and inefficient operation of SOEs. The SOEs hold 70% of the total real property in Vietnam’s economy but account for just 20% of investment capital throughout society, and notably the SOEs devour 60% credit in the commercial banking system, 50% of state investment capital and 70% of official development aid capital.
The SOEs have been treated more favourably in terms of policies and access to credit compared to the private sector, which creates an unfair playground between the two and hampers development of the private sector. The public sector is inefficient and does not offer good products or services, which further impairs the competitiveness of Vietnamese company’s goods and services when entering regional and global markets.
Vietnam has also been engaging in international free trade agreements, such as the negotiation process of the Free Trade Agreement with the European Union and the Trans-Pacific Partnership agreement, and has also participated in establishment of economic communities, such as the ASEAN Economic Community, which would like to see more Vietnamese SOE equitization and less priority for SOEs in order to equalize the playing field between the private and state sectors. The privatization of SOEs would remove this impairment.
Another reason for boosting SOE equitization is the increase of the State budget deficit of Vietnam from 4.8% to 5.3% of GDP in the previous year. Selling part of the state-owned shares in these SOEs could significantly resolve the budget deficit. Currently, the gross market value of the 12 top SOEs among the top 20 largest companies listed on the Ho Chi Minh City Stock Exchange is said to be approximately US$18.5 billion in market capitalization, accounting for 41% of the value of the entire stock exchange (as at May 23, 2014) and accordingly the ownership of 50% alone in these 12 companies is worth US$6.3 billion.
Under the SOE equitization plan, Vietnam targets to restructure 432 SOEs by 2015 and as of July 2014, the Government of Vietnam had approved 20 restructure projects of State-owned groups and corporations under the authority of the Prime Minister.
With respect to restructuring the mining industry in general and Vinacomin in particular, Vinacomin’s equitization is highly important to the government’s overall national restructuring plan and the Prime Minister issued Decision 314/QD-TTg dated February 7, 2013, approving Vinacomin’s restructuring for the period of 2012-2015. Under this Decision, Vinacomin will restructure its business activities and only focus on four main business lines - the coal industry, mineral-metallurgy industry, industrial explosives and electrical industry - and these groups will operate under the form of a parent company with 16 dependent entities.
However, according to a recent report of the National Steering Committee for Enterprise Reform and Development of Vietnam, Vinacomin is listed in the group of SOEs with the slowest equitization progress and this group has not yet carried out a single initial public offering (IPO) of any of its’ eight entities which were supposed to be complete in the 2012-2015 period.
Vinacomin has not even published its equitization plans despite having less than a year to carry out the restructuring under this Decision. It is likely that Vinacomin is delaying restructuring.
As outlined, the privatization of SOEs could significantly boost Vietnam’s economy and prove that Vietnam is carrying out its’ commitment to international trade integration. However, we have seen that the privatization process of not only Vinacomin but also other SOEs, is being slowed down and this is likely to create more negative impacts on Vietnam’s economy and make the country less attractive in the eye of the foreign investors.
Should you have any questions, please contact Oliver Massmann by emailing him at [email protected]