Monday, February 10, 2014

Part 7: Vietnam State Capital Investment Corporation--Reimaging the State in the Global Sphere: An Inventory of Sovereign Wealth Funds as Regulator and Participant in Global Markets

(Pix (C) Larry Catá Backer 2014)

This Blog Essay site devotes every February to a series of integrated but short essays on a single theme. For 2014 this site introduces a new theme:  Reimaging the State in the Global Sphere: An Inventory of Sovereign Wealth Fund as Regulator and Participant in Global Markets.

There have been a number of studies that have sought to provide an overarching structure for understanding SWFs. The easiest way to to this is to find the largest and most influential funds and then extrapolate universal behaviors or characteristics from them.  This is a useful enterprise, it may erase substantial nuance that itself might provide the basis for a deeper understanding of SWFs within globalization and in the context of a state system in which not all states are created equal.  In this sense, while the large SWFs are better known, they do not define the entire field of emerging SWF activity. This study provides a brief critical inventory of the emerging communities of sovereign wealth funds. Each post will consider a different and less well known SWF.  Taken together, these brief studies might suggest the character and nature of the emerging universe of SWFs, and their possible rationalization.

This Post considers the Vietnam State Capital Investment Corporation.

(SCIC charter capital likely to be increased, Vietnam News, Sept. 18, 2013)

The Vietnam State Capital Investment Corporation (SCIC) (in Vietnamese Tong congty dauy tu va kinh doanh von uha nuoc ) represents a distinct form of sovereign wealth fund.  The VSCIC represents an effort buy a Marxist Leninist State to better organize the state sector along market principles while retaining  a Marxist element to ownership.  While most SWFs turn outward even as they seek inward fiscal discipline, the VSCIC turns inward for the better management of the state intervention within its own economy.  It is in that sense both forward looking and quite traditional exercise of a blended European and emerging modern Chinese Marxist approaches to economic policy.  Dr. Le Thi Bang Tam,
Chairwoman of the State Capital Investment Corporation recently explained the official position:
It’s my great honour to be here today to speak on behalf of the State Capital Investment Corporation (SCIC for short) to both domestic and foreign senior representatives from numerous agencies, enterprises and investors at the 2nd Annual Vietnam Investment Forum organised by Euromoney Conferences and supported by SCIC. I would like to take this opportunity to share with you some
highlights of the role of SCIC in the process of SOE reform.
As you may know, the year 2006 witnessed significant achievements Vietnam has successfully obtained in many areas, particularly in international integration and economic development. This is the result of the all faceted reform that Vienam has been strongly committed to. In that context, the establishment of SCIC is seen as a pivotal breakthrough.
SCIC is a special financial institution of the Governemnt that is created with a view to reforming the relationship between the State and its invested enterprises, changing from a purely administrative management undertaken by the line ministries and local authorities to commercially viable and professional financial organisation operating in conformity with market rules and contributing to
enhancement of effectiveness and autonomy of SOEs in accordance with the new unified Enterprise Law.
SCIC’s missions and main functions include:
1. Taking over and exercising State shareholder rights in state invested enterprises (including join-stock companies, one member limited liability companies or limited liability companies with two members and more). It is planned that by the end of 2007 and 2010, approximately 1,300 and 3,000 state invested enterprises respectively will be transferred to SCIC.
2. Managing state invested capital, generating added value and maximizing capital efficiency, raising more funds from internal and external sources to strengthen state investment capacity instead of granting preferential and free credits from State budget.
3. Investing State capital in key industries inside and outside Vietnam with a view to preserving and maximizing the value of state capital; and thus facilitating socio-economic development and enhancing the competitiveness of enterprises and the economy as a whole.
4. Providing financial services such as investment consultancy, equitization consultancy, corporate restructuring, divesture consultancy and business support services; managing entrusted funds.
SCIC has officially begun its operations since August 1st, 2006 with a strong focus on professionalism, young and talented staffs who are fully qualified, experienced and well educated in the fields of financial investment and capital market.
As of 07 February 2007, SCIC has taken over the state interest in 294 enterprises in different sectors and industries with a total book value of VND 2,961 billion and estimated market value of approximatively VND 29,251 billion.
SCIC’s objectives and visions can be briefly summarized as follows:
1. To fulfill its role as a dynamic and active state shareholder without intervening into daily management of SCIC-linked enterprises; to improve the way to select and appoint representatives for the state interests in enterprises; strengthen the relationship between managers, representatives and SCIC in properly handling challenges facing the enterprises; exchange information and share experience in corporate governance; focus on sustainable development and create added value for SCIC-linked enterprises through its flexible investments, restructuring investments with emphasis on reducing the number and raising quality, efficiency and scale of investment.
2. To play as a strategic investor; mobilize and concentrate resources on key sectors, thereby contributing to sustainable growth and development, enhancing the economy’s competitiveness and maximizing investment returns. In that spirit, SCIC will focus its efforts on attracting domestic and foreign investors to projects that are of national significance and investing in highly potential sectors both at home and abroad through joint ventures, issuance of bonds and exchangeable bonds.
3. To act as a professional financial consultant; facilitate both domestic and foreign investors to access to potential sources of funding; assist enterprises in selecting strategic investors, accessing to the capital market and applying the best practices of corporate governance. In that capacity, SCIC would advise the government in policy making, promoting businesses, developing capital market,
and selecting the most efficient investment projects.
4. To build SCIC’s image as a professional financial institution with good corporate governance, strong leadership, highly competent staff, advanced management and the much needed transparency.
Ladies and gentlemen,
SCIC is a very new business model that is closely associated with the strong reform programme of the Government. We all well know that reform is not an easy and rosy process. However, it is our firm belief that with strong determination of the Government in promoting reform and economic development, Vietnam will continue to be an attractive destination for investors worldwide and SCIC will make its best efforts to assert its roles and fulfill its mandate in that reform process. (Le Thi Bang Tam, KEYNOTE ADDRESS, Role of the State Capital Investment Corporation and the SOE reform, 2007 ).
SCIC was founded on June 20, 2005 by decision of the Prime Minister of Vietnam. SCIC's operations began in August 2006 (Vietnam State Capital Investment Corp., Taighde, 2010). As of 2012 the SCIC had  reported assets of US $315 million with about 416 firms linked to their portfolio (Sovereign Wealth Fund Institute, Vietnam).  "By 2015, the SCIC plans to privatize or equitize more than 1000 state-owned enterprises, but as of 2012 progress had ground to a halt. The SCIC is also charged with accelerating SOE reform and improving management in companies in its portfolio." (U.S. Department of State, 2013 Investment Climate Statement - Vietnam, Feb. 2013)

Like the Chinese sovereign wealth fund, SCIC has been organized in corporate form. and is funded by the state. SCIC revenues come from three main sources: selling state capital in enterprises, dividends from businesses, and bank deposit interest. (How State Capital Investment Corp uses its money, Tuoitrenews,  03/07/2013). This suggests, and quite rightly, the SCIC is meant to serve as a vehicle for privatization with residual state control, with income from the sale of enterprises and from interest income from its financial accounts.

Thus, unlike most SWFs, SCIC is a multipurpose corporation with a significant focus on management/development of the internal economic operations of the state. To that extent it is not merely a facility for coordinating state financial wealth through investment abroad, but also an institutional means for focusing development.  More importantly, the development role has a political dimension--it is meant to preserve the dominant role of the state sector in Vietnam even as a larger space is opened for private sector enterprises. (Doanh Nhan, SCIC charter capital likely to be increased, Vietnam News, Sept. 18, 2013 "SCIC's primary objectives are to represent the interest of State capital in enterprises and invest in key sectors and essential industries in order to strengthen the dominant role of the State sector. ")

That focus tends to play a critical role in the SCIC's operations, and has been a cause for controversy.  "The state once put a high hope on SCIC when it made its debut in 2005. However, the business performance of the “super corporation” has been disappointing. What SCIC has been focusing on since its establishment is selling the state’s capital contribution in the enterprises and business fields where the state’s investment is not necessary. " (State’s “super-corporation” also bears competition pressure,, May 21, 2013). That controversy tends to revolve around the fear that the SCIC will not be able to recover its investment in Vietnamese SOEs.
Many economic experts have recently suggested that there are many aspects of SCIC’s operations that need reviewing.

In 2012 the company disbursed VND1.25 trillion for investment, more than VND1 trillion of which went to increase capital at the debt-ridden Vietnam Construction and Import – Export JSC (Vinaconex).

The disbursement has become controversial as it remains to be seen whether SCIC can recoup the investment given the troubled financial state of Vinaconex.

The massive profits in 2012 do not reflect the effectiveness of SCIC in managing its capital because 96 percent of profits are from deposit interest and dividends, economic experts said.

Only a few successful businesses contribute to the profits, while SCIC’s investment in a number of other companies may fail to produce profits, or even result in huge losses, the experts said. (How State Capital Investment Corp uses its money, Tuoitrenews,  03/07/2013).
See also (SCIC charter capital likely to be increased, Vietnam News, Sept. 18, 2013 ("Previously, SCIC raised concern when it reported that bank deposits accounted for 40 per cent of its revenue in 2012. Out of VND3.89 trillion ($185.7 million) in revenue, VND2.151 trillion ($102.4 million), or 55 per cent, came from dividends. Interest from the corporation's deposits accounted for up to 40 per cent. Meanwhile, the sale of State capital, supposedly SCIC's main business area, accounted for just 4 per cent of revenue.")).

It is in its role as a mechanism for the management of Vietnam's economy that the SCIC has been the recipient of aid from foreign states, and notably the United States.  "Identifying the financial and information communication technology systems necessary to manage Vietnam’s state-owned assets is the goal of a USTDA grant awarded today to the State Capital Investment Corporation (SCIC). The grant will help the SCIC to manage and equitize state enterprises in Vietnam’s growing market. . . .  USTDA’s strategic use of foreign assistance funds to support sound investment policy and decision-making in host countries creates an enabling environment for trade, investment and sustainable economic development. In carrying out its mission, USTDA gives emphasis to economic sectors that may benefit from U.S. exports of goods and services." (U.S. Trade and Development Agency, USTA Grant Supports State Capital Investments Corporation of Vietnam, New Release, Aug. 3, 2007 "At present, the SCIC lacks the systems necessary to carry out its mission. To address this issue, the USTDA grant awarded today will help the SCIC to identify the financial and technology systems necessary to enable it to continue to promote market reform and economic growth in the country. The USTDA-funded work will assess SCIC’s business needs, identify the corresponding specifications to support those requirements, and prepare the bidding documents for the procurement of the recommended systems and services." Ibid).

Ultimately, the tension in the mission of the SCIC may doom the project. "The State Capital Investment Corporation (SCIC)'s charter capital will likely be increased eightfold to VND40 trillion (US$1.81 billion), but the corporation will be dissolved if it loses money for a long time or fails to meet tasks assigned by the State, according to a draft Ministry of Finance regulation." (SCIC charter capital likely to be increased, Vietnam News, Sept. 18, 2013).  For the moment, however, it appears that Vietnam will continue to use SCIC as a vehicle for the indirect management of the economy and the preservation of a state role in the elaboration of a market sector in Vietnam. The resulting interventions int he Vietnamese economy are likely to be far more important than the possible effects of SCIC investment abroad.  Thus, for example, a restructuring of SCIC holding at the end of 2013 changed the investment universe of SCIC significantly.  "SCIC will continue to hold controlling stakes in 26 companies dealing in roads, waterways, tourism, minerals, trade, investment and services; and withdraw capital from 376 firms, including Viet Nam Construction and Import-Export Corp (Vinaconex), FPT Group, Bao Viet Holdings, Binh Minh Plastic and Tien Phong Plastic." (SCIC holds on to long-term investment in key businesses, Vietnam News, Dec. 6, 2013 ("This was stated in a restructuring plan approved by Prime Minister Nguyen Tan Dung on Monday with the aim of distributing State capital into key industries more reasonably and enhancing financial efficiency in enterprises until 2015.")). It has been noted that "These four, which account for 80 percent of SCIC’s portfolio investments, act as leading firms in their industries and earn the corporation several thousand billion dong (1 thousand billion dongs equals $47.4 million) a year." (Vietnam openness to equitization loss a positive development: analysts, Thanhnien News,  Dec. 11, 2013).

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