Vietnam should study Temasek model to boost state firms

“It could be very interesting to look at successful stories that Malaysia and Singapore had,” Marco Breu, McKinsey’s chief executive officer in Vietnam, said in an interview. “They created this arms-length view between the government and the SOEs, this entity which then started managing them professionally with only business incentives in mind.”

Singapore created Temasek in 1974 to nurture the development of state corporations including the national phone company and airline. Khazanah was set up in 1993 with a similar mandate. Temasek managed S$215 billion ($169 billion) in investments as of March 31, while Khazanah’s net asset value reached 86.9 billion ringgit ($27 billion) at the end of 2012.

Vietnam is trying to raise competitiveness and efficiency at state companies as economic growth slows after the Communist Party said in 2011 that unprofitable government-controlled firms had become a burden. Prime Minister Nguyen Tan Dung approved a master plan in February to spur its companies to focus on core businesses and accelerate public share sales.

The Singapore and Malaysia models allowed the state investment firms to introduce common corporate governance practices and impose higher management standards. They have successively sold shares in former state companies and then reinvested the proceeds outside their home countries.

Role models

Temasek’s biggest holdings now include shares in Singapore Telecommunications Ltd., Southeast Asia’s biggest phone company; DBS Group Holdings Ltd., the region’s biggest bank; U.K. lender Standard Chartered Plc; and Industrial & Commercial Bank of China Ltd., the nation’s largest bank.

Khazanah owns stakes in some of Malaysia’s biggest listed companies, including electricity producer Tenaga Nasional Bhd., mobile-phone company Axiata Group Bhd., lender CIMB Group Holdings Bhd. and hospital operator IHH Healthcare Bhd. The investment firm sold Proton Holdings Bhd., the national carmaker and owner of luxury sports-car maker Lotus, last year.

Breu also mentioned Kazakhstan’s Samruk-Kazyna, the sovereign wealth fund that controls assets accounting for about half of the country’s economic output, as a model.

Hidden inefficiencies

Vietnam’s sovereign credit rating was cut one step to B1 in December 2010 by Moody’s Investors Service, which cited concerns including “debt distress at Vietnam Shipbuilding Industry Group,” or Vinashin. Standard & Poor’s followed the same month, placing Vietnam three levels below investment grade.

The country targets 5.5 percent economic growth this year, which would be its first period of three straight years of growth below 6 percent since 1988, according to International Monetary Fund data. The government is trying to fix a banking sector weighed down by bad debt, which the central bank said was 7.8 percent of outstanding loans at the end of 2012.

Governments have difficulty giving state-owned companies more independence because they often serve as vehicles for state policies, Breu said.

“In SOEs, you will find a lot of hidden inefficiencies because they might not have been managed according to business principles,” Breu said in the July 2 interview. “Many times they function as a way to keep unemployment down.”

Without mechanisms to retrain workers, “it is very hard to all of a sudden say cut it 30, 40 percent,” he said. Breu declined to say whether McKinsey is advising Vietnam’s government, saying the company has a policy not to comment on its clients.

Small steps

Vietnam has taken small steps to replicate entities like Temasek with its State Capital Investment Corp., which was formed in 2006 to manage government shareholdings and operates under the Ministry of Finance, said Alan Pham, chief economist at VinaCapital Group. SCIC’s role should be expanded, he said.

A Temasek-like organization would have difficulty functioning within the fragmented power structure in Vietnam, said Jonathan Pincus, an economist with the Harvard Kennedy School’s Vietnam Program in Ho Chi Minh City.

“The problem is every level of government controls entities that are commercial in nature.” he said in a phone interview. “You have SCIC and the Ministry of Finance trying to be Temasek, but nobody wants to give them any assets.”

Vinashin, the state-run firm that had planned to build and export $1 billion of ships in 2009, almost collapsed in 2010 because it over-diversified and failed to manage its cash flow and debt properly, according to the Ministry of Transport.

Prime Minister Dung faced a call for a confidence vote in the National Assembly in late 2010 for his handling of Vinashin. Dung, who apologized for the shortcomings in a televised broadcast in October 2012, eventually faced the vote last month and passed with 67 percent support from lawmakers.

Market volatility

A stock market slump has slowed down Vietnam’s equitization process, Dominic Scriven, the CEO of Ho Chi Minh City-based fund manager Dragon Capital, said on behalf of the Capital Market Working Group at a conference last month.

The Ho Chi Minh City Stock Exchange’s benchmark VN-Index (VNINDEX) has lost 7.7 percent from this year’s June 7 high. The gauge has rallied 18 percent this year, at least 7 percentage points more than any other Southeast Asian benchmark tracked by Bloomberg.

Vietnam Airlines Co., the national carrier, has selected banks to manage an initial public offering, CEO Pham Ngoc Minh said April 9. He didn’t give a time frame for the sale.

One in five publicly traded companies may post losses this year, State Securities Commission Chairman Vu Bang said last month. Investors are awaiting the results of the government’s plans to resolve non-performing loans and restructure banks and state-owned enterprises, he said.

Productivity improvements

Productivity in manufacturing and services must improve by 50 percent for Vietnam’s economic growth to return to more than 6 percent, Breu said, citing a McKinsey report published last year. Vietnam can’t rely on the two other drivers of economic expansion – the labor force and urbanization – for growth, he said. South Korea achieved such productivity improvements during the 1970s, as did China more recently, he said.

“Unless you fundamentally change SOEs, reform these things, you will end up more at 4.5 percent to 5 percent growth,” Breu said.