New approach to management New approach to management of State investments in of State investments in

enterprisesenterprises

Pham Phan DzungPham Phan Dzung

Director GeneralDirector General

Banking and Financial Institutions Banking and Financial Institutions DepartmentDepartment

Ministry of FinanceMinistry of Finance

contentcontentcontentcontent

International experience International experience in State investments in enterprises in State investments in enterprises

managementmanagement

International experience International experience in State investments in enterprises in State investments in enterprises

managementmanagement

Actual situation Actual situation of State investments in enterprises of State investments in enterprises

managementmanagement

Actual situation Actual situation of State investments in enterprises of State investments in enterprises

managementmanagement

New approach to management New approach to management of State investments in enterprisesof State investments in enterprises

New approach to management New approach to management of State investments in enterprisesof State investments in enterprises

Part IPart I

Actual situation of State investments Actual situation of State investments in enterprises management in enterprises management

SOESOEss figures figures

3.805 3.8154.258

4.0363.696

5.435 5.450 5.5305.175

4.800

0

1.000

2.000

3.000

4.000

5.000

6.000

1999 2000 2001 2002 2003

Profitable SOEs

Total SOEs

SOESOEss restructuring outcome restructuring outcome

By end of July 2004, 2.224 SOEs completed By end of July 2004, 2.224 SOEs completed restructuring. Of which:restructuring. Of which:• Equitization:Equitization: 1.4121.412

• Allotment, sale, lease:Allotment, sale, lease: 199 199

• Merger, consolidation: Merger, consolidation: 362 362

• Liquidation, bankruptcy:Liquidation, bankruptcy: 102 102

• Other:Other: 149 149

Restructuring outcome:Restructuring outcome:• Additional funds mobilized: VND 3.300 billions (USD Additional funds mobilized: VND 3.300 billions (USD

2 bill).2 bill).

• Annual dividend: 10-15% on average.Annual dividend: 10-15% on average.

• Provide instruments for capital market.Provide instruments for capital market.

SOESOEs’s’ contributions contributions

Play a key role in many important economic Play a key role in many important economic sectors: infrastructure, oil, cement etc.sectors: infrastructure, oil, cement etc.

Contribute considerably to export revenues Contribute considerably to export revenues (SOEs exports account for more than 50% total (SOEs exports account for more than 50% total export revenues).export revenues).

Modernize technology, expand market shares.Modernize technology, expand market shares.

Promote economic development.Promote economic development.

Contribute principally to the State Budget ( 40% Contribute principally to the State Budget ( 40% of total Budget revenues )of total Budget revenues )

SOESOEss weakness weakness

Moderate growth rate, inefficient use of capitalModerate growth rate, inefficient use of capital..

Small in size ( 60% of SOEs with less than VND 5 bil Small in size ( 60% of SOEs with less than VND 5 bil ~ USD 300.000 in capital), ~ USD 300.000 in capital), inappropriate capital inappropriate capital structure.structure.

Weak competition capability.Weak competition capability.

Failure of many SOEs to preserve State Failure of many SOEs to preserve State investments, sometimes loss of State owned assets.investments, sometimes loss of State owned assets.

Bad debt reduced but still remain high (about VND Bad debt reduced but still remain high (about VND 4.900 bill. ~ USD 300 mil).4.900 bill. ~ USD 300 mil).

Low technological capability, outdated machines, Low technological capability, outdated machines, equipments.equipments.

Regime for management of State Regime for management of State investments in enterprisesinvestments in enterprises

Ownership representative of State investment Ownership representative of State investment in enterprises:in enterprises:• The Government.The Government.• Ministries, line ministries, cities and provincial Ministries, line ministries, cities and provincial

people committees.people committees.• Ministry of Finance.Ministry of Finance.• Board of ManagementBoard of Management

Some limitations:Some limitations:• Ownership and management not separated.Ownership and management not separated.• Discouragement of enterprise’s independence and Discouragement of enterprise’s independence and

responsibility. responsibility. • Inconsistent management, involvement by various Inconsistent management, involvement by various

authorities in investment decision authorities in investment decision • Inefficient, overlapping and stretching investments.Inefficient, overlapping and stretching investments.

Principles of corporate governancePrinciples of corporate governance

Promote transparent and efficient markets, Promote transparent and efficient markets, consistent with the rule of lawconsistent with the rule of law

Clearly articulate the division of responsibilities Clearly articulate the division of responsibilities among different supervisory, regulatory and among different supervisory, regulatory and enforcement authorities .enforcement authorities .

Protect and facilitate the exercise of shareholders’ Protect and facilitate the exercise of shareholders’ rights, rights, encourage active co-operation between encourage active co-operation between corporations and stakeholders .corporations and stakeholders .

Disclose timely and accurately all corporate matters.Disclose timely and accurately all corporate matters. Ensure the strategic guidance of the company, the Ensure the strategic guidance of the company, the

effective monitoring of management and board’s effective monitoring of management and board’s accountability to the company and the shareholders.accountability to the company and the shareholders.

Part IIPart II

International experience in International experience in managing State investments in managing State investments in

enterprisesenterprises

China experienceChina experience

Establish a State owned assets investment Establish a State owned assets investment enterprise.enterprise.

Functions:Functions:• Act, on behalf of the Government, as the owner of Act, on behalf of the Government, as the owner of

State investments in enterprisesState investments in enterprises

• Appointment and removal of enterprise’s key Appointment and removal of enterprise’s key leadersleaders

• Participation in enterprises’ important solutions.Participation in enterprises’ important solutions.

• Management of revenues generated by the Management of revenues generated by the investment to reinvest into the same enterprise or investment to reinvest into the same enterprise or invest elsewhere.invest elsewhere.

• Supervision of enterprises’ performance and Supervision of enterprises’ performance and financial situation.financial situation.

SINGAPORE experienceSINGAPORE experience

Temasek was created in 1974 to manage State Temasek was created in 1974 to manage State investments in enterprises.investments in enterprises.

Directly under control of Singaporean Ministry of Directly under control of Singaporean Ministry of FinanceFinance and and not influenced by line ministries not influenced by line ministries except State Administration.except State Administration.

Management through appointment of removal of Management through appointment of removal of enterprises’ director.enterprises’ director.

Approval of business plan, evaluation of business Approval of business plan, evaluation of business and financial reports.and financial reports.

Investment in 21 enterprises (called first layer Investment in 21 enterprises (called first layer enterprises) enterprises) of which 7 have already been listed of which 7 have already been listed in the Stock Market.in the Stock Market.

Enterprises invested by Temasek account for Enterprises invested by Temasek account for 10.3% of Singapore GDP10.3% of Singapore GDP..

SINGAPORE experience (cont.)SINGAPORE experience (cont.)

Operating capital:Operating capital:• Initial funds allocated by the State, added by State Initial funds allocated by the State, added by State

investments in enterprises.investments in enterprises.

• Reception and management of State shares in Reception and management of State shares in equitized enterprises.equitized enterprises.

Investment fields:Investment fields:• Group A: important sectors or sections Group A: important sectors or sections

(infrastructure, electricity, airport, seaport): 100% (infrastructure, electricity, airport, seaport): 100% State owned or controlling shareholding by the State owned or controlling shareholding by the State.State.

• Group B: domestic and foreign enterprises with Group B: domestic and foreign enterprises with promising perspectives.promising perspectives.

TEMASEK’s assetsTEMASEK’s assets

Financial services

SGD 19 bil.

Transportation and logisticSGD 12 bil.

Energy and natural resourcesSGD 6 bil.

Temasek’s investment

portfolio

Real estateSGD 5 bil.

Media and telecommunic

ationSGD 32 bil.

Technology and other

SGD 12 bil.

Infrastructure and techniquesSGD 4 bil.

Contribution of enterprises invested by TEMASEK to GDP

Contribution to Singapore GDP = 10.3%

Other sectors (including SMEs and enterprises in promising

sections)33.5%

SOEs8.7%

MNC45.1%

Enterprises invested by Temasek

10.3%

Enterprises in alignment with government

2.4%

Part IIIPart III

New approach to management New approach to management of State investments in of State investments in

enterprisesenterprises

New approachNew approach

Establish Establish a State Financial Investment Corporation a State Financial Investment Corporation (SFIC)(SFIC) to exercise ownership representative of to exercise ownership representative of State investments in enterprises.State investments in enterprises.

Legal base: Law on State Enterprises.Legal base: Law on State Enterprises. Objectives:Objectives:

• To switch over from administration based regime to To switch over from administration based regime to investment based regime,investment based regime,

• To collectively manage State investments in To collectively manage State investments in enterprises, hence improve capital use efficiency, enterprises, hence improve capital use efficiency, preserve and increase State investments in value term,preserve and increase State investments in value term,

• To separate State Administration from business To separate State Administration from business management,management,

• To speed up SOEs restructuring process,To speed up SOEs restructuring process,• To facilitate stock market as well capital market To facilitate stock market as well capital market

development.development.

SfiC's RoleSfiC'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.

Establishment directionEstablishment direction

Organizational structureOrganizational structure : :

• SOE with Board of Management, regulated by Law on SOE with Board of Management, regulated by Law on State Enterprises.State Enterprises.

• Establishment upon Prime Minister’s decisionEstablishment upon Prime Minister’s decision..

Investment principles:Investment principles:

• To develop strategically important sectors of the To develop strategically important sectors of the economy which have great impact on economic economy which have great impact on economic developmentdevelopment..

• To develop To develop highly efficient and profitable economic highly efficient and profitable economic sectors.sectors.

• To modernize enterprises’ technology and enhance its To modernize enterprises’ technology and enhance its competition capability.competition capability.

Establishment direction (Cont.)Establishment direction (Cont.)

Investment form:Investment form:

• Direct investment: investment into restructured SOEs or Direct investment: investment into restructured SOEs or capital contribution to create new enterprisescapital contribution to create new enterprises..

• Indirect investment: purchasing of stocks or bonds in Indirect investment: purchasing of stocks or bonds in Stock market.Stock market.

Investment methods:Investment methods:

• Maintain State ownership in enterprises operating in Maintain State ownership in enterprises operating in important sectors.important sectors.

• Disinvest from enterprises no longer appropriate or no Disinvest from enterprises no longer appropriate or no longer of strategic importance through sale or longer of strategic importance through sale or assignment of shares.assignment of shares.

• Sell out all of its shares or liquidate unprofitable Sell out all of its shares or liquidate unprofitable enterprises.enterprises.

Establishment direction (Cont.)Establishment direction (Cont.)

Capital management procedure:Capital management procedure:

• Investment list constructionInvestment list construction

• Investment management decentralization Investment management decentralization (between board of Management and General (between board of Management and General Director)Director)

• Risk analysisRisk analysis

• Investment decisionInvestment decision

• Disinvestment decisionDisinvestment decision

Investment procedure and decision Investment procedure and decision makingmaking

Sectorialanalysis

Macro-economic analysis

CorporateAnalysis

DetailExamination

Governance/Supervision

Investmentdecision

Risk analysisRisk analysis

Main risks

Operationalrisk

Liquidityrisk

Marketrisk

Credit risk

Otherrisk

Thank you Thank you

for your attention!for your attention!