New approach to management of State investments in enterprises

1. New approach to management of State investments in enterprises Pham Phan Dzung Director General Banking and Financial Institutions Department Ministry of Finance

2. content Actual situation of State investments in enterprises management International experience in State investments in enterprises management New approach to management of State investments in enterprises

3. Part IActual situation of State investments in enterprises management

4. SOEs figures

5. SOEs restructuring outcome • By end of July 2004, 2.224 SOEs completed restructuring. Of which: • Equitization: 1.412 • Allotment, sale, lease: 199 • Merger, consolidation: 362 • Liquidation, bankruptcy: 102 • Other: 149 • Restructuring outcome: • Additional funds mobilized: VND 3.300 billions (USD 2 bill). • Annual dividend: 10-15% on average. • Provide instruments for capital market.

6. SOEs’ contributions • Play a key role in many important economic sectors: infrastructure, oil, cement etc. • Contribute considerably to export revenues (SOEs exports account for more than 50% total export revenues). • Modernize technology, expand market shares. • Promote economic development. • Contribute principally to the State Budget ( 40% of total Budget revenues )

7. SOEs weakness • Moderate growth rate, inefficient use of capital. • Small in size ( 60% of SOEs with less than VND 5 bil ~ USD 300.000 in capital), inappropriate capital structure. • Weak competition capability. • Failure of many SOEs to preserve State investments, sometimes loss of State owned assets. • Bad debt reduced but still remain high (about VND 4.900 bill. ~ USD 300 mil). • Low technological capability, outdated machines, equipments.

8. Regime for management of State investments in enterprises • Ownership representative of State investment in enterprises: • The Government. • Ministries, line ministries, cities and provincial people committees. • Ministry of Finance. • Board of Management • Some limitations: • Ownership and management not separated. • Discouragement of enterprise’s independence and responsibility. • Inconsistent management, involvement by various authorities in investment decision • Inefficient, overlapping and stretching investments.

9. Principles of corporate governance • Promote transparent and efficient markets, consistent with the rule of law • Clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities . • Protect and facilitate the exercise of shareholders’ rights, encourage active co-operation between corporations and stakeholders . • Disclose timely and accurately all corporate matters. • Ensure the strategic guidance of the company, the effective monitoring of management and board’s accountability to the company and the shareholders.

10. Part IIInternational experience in managing State investments in enterprises

11. China experience • Establish a State owned assets investment enterprise. • Functions: • Act, on behalf of the Government, as the owner of State investments in enterprises • Appointment and removal of enterprise’s key leaders • Participation in enterprises’ important solutions. • Management of revenues generated by the investment to reinvest into the same enterprise or invest elsewhere. • Supervision of enterprises’ performance and financial situation.

12. SINGAPORE experience • Temasek was created in 1974 to manage State investments in enterprises. • Directly under control of Singaporean Ministry of Finance and not influenced by line ministries except State Administration. • Management through appointment of removal of enterprises’ director. • Approval of business plan, evaluation of business and financial reports. • Investment in 21 enterprises (called first layer enterprises) of which 7 have already been listed in the Stock Market. • Enterprises invested by Temasek account for 10.3% of Singapore GDP.

13. SINGAPORE experience (cont.) • Operating capital: • Initial funds allocated by the State, added by State investments in enterprises. • Reception and management of State shares in equitized enterprises. • Investment fields: • Group A: important sectors or sections (infrastructure, electricity, airport, seaport): 100% State owned or controlling shareholding by the State. • Group B: domestic and foreign enterprises with promising perspectives.

14. TEMASEK’s assets Infrastructure and techniques SGD 4 bil. Energy and natural resources SGD 6 bil. Technology and other SGD 12 bil. Media and telecommunication SGD 32 bil. Temasek’s investment portfolio • Transportation and logistic • SGD 12 bil. Real estate SGD 5 bil. Financial services SGD 19 bil.

15. SOEs 8.7% Other sectors (including SMEs and enterprises in promising sections) 33.5% Enterprises in alignment with government 2.4% Enterprises invested by Temasek 10.3% MNC 45.1% Contribution of enterprises invested by TEMASEK to GDP Contribution to Singapore GDP = 10.3%

16. Part IIINew approach to management of State investments in enterprises

17. New approach • Establish a State Financial Investment Corporation (SFIC) to exercise ownership representative of State investments in enterprises. • Legal base: Law on State Enterprises. • Objectives: • To switch over from administration based regime to investment based regime, • To collectively manage State investments in enterprises, hence improve capital use efficiency, preserve and increase State investments in value term, • To separate State Administration from business management, • To speed up SOEs restructuring process, • To facilitate stock market as well capital market development.

18. SfiC's Role • As an investor, maximize State investments value. • Active shareholder of enterprises partly or wholly invested by SFIC • Facilitation of a sound corporate management to sustainably bring value to shareholders.

19. Establishment direction • Organizational structure : • SOE with Board of Management, regulated by Law on State Enterprises. • Establishment upon Prime Minister’s decision. • Investment principles: • To develop strategically important sectors of the economy which have great impact on economic development. • To develop highly efficient and profitable economic sectors. • To modernize enterprises’ technology and enhance its competition capability.

20. Establishment direction (Cont.) • Investment form: • Direct investment: investment into restructured SOEs or capital contribution to create new enterprises. • Indirect investment: purchasing of stocks or bonds in Stock market. • Investment methods: • Maintain State ownership in enterprises operating in important sectors. • Disinvest from enterprises no longer appropriate or no longer of strategic importance through sale or assignment of shares. • Sell out all of its shares or liquidate unprofitable enterprises.

21. Establishment direction (Cont.) • Capital management procedure: • Investment list construction • Investment management decentralization (between board of Management and General Director) • Risk analysis • Investment decision • Disinvestment decision

22. Governance/Supervision Sectorial analysis Macro- economic analysis Detail Examination Corporate Analysis Investment decision Investment procedure and decision making

23. Main risks Credit risk Market risk Liquidity risk Operational risk Other risk Risk analysis

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