Reducing discrimination against businesses

Published: 02/06/2011 05:00


A production line at Ba Huan, a private entities nominally have the right to do business in several fields; but in fact, their room for development has been restricted.

A production line at Ba Huan, a private entities nominally have the right to do business in several fields; but in fact, their room for development has been restricted.

In both the legal framework and business practices, private enterprises are no longer completely disadvantageous to their State-owned counterparts. But have they been treated on equal terms as opposed to the State sector?

Participants in a recent meeting still remembered Dr. Pham Tat Thang’s story of disadvantages and inequality tolerated by private concerns in doing business.

Thang, who is an expert with the Commerce Research Institute under the Ministry of Industry and Trade, exemplified the private sector’s arduous access to bank loans. Aside from bearing exorbitantly high interest rates, private businesses have had to experience the ordeal of capital access.

“You have to produce a healthy balance sheet, have valuable collateral, be a trustworthy client and have feasible projects as appraised by the lending bank,” said Thang. “And you know well that those criteria are set so high that they are often way above the borrower’s capabilities.”

Many feasible projects applying for loans have been rejected because the applicants are small businesses, are not faithful customers or fail to prove their collateral is valuable enough.

As hard as the access to bank loans is, the State-funded capital in public investment programs is even tougher to tap. “It is almost untouchable!” Thang claimed.

He said a quite opposite attitude has been taken towards State-owned enterprises (SOEs) to make loans so easy to them. In 2002, a DAP fertilizer project was initiated by the Vietnam Chemical Corporation—now Vietnam National Chemical Group (Vinachem).

It was not until seven years later that the project turned out its first batch of products. In the meantime, it took the Cai Lan Steel Mill—another project funded by the State—eight years from 2006 to 2010 to be commissioned. And yet, the project was still incomplete.

“If a private company utilizes its own capital to invest in such a project, it will not be able to shoulder the loan burden in seven or eight years. Many SOEs have implemented projects regardless of their efficiency,” Thang said.

Meanwhile, private firms have played the role of on-lookers and watched SOEs absorbing official development aid (ODA). This has happened in spite of the fact that there exist no official barriers to this source of capital.

Statistics obtained from the Ministry of Planning and Investment (MPI) show that during the 2006-2010 period, ODA pledges for Vietnam reached US$23.85 billion and the disbursement neared US$13 billion. Yet the only way for private companies to access this huge source of capital is to become subcontractors for SOEs that are the direct recipients of the disbursement.

In mid-April, the Government sent an official letter to the MPI, the Ministry of Finance and the central bank, requesting them to compile a new decree to replace Decree 131/2006/CP on management and use of ODA.

The revisions are expected to help redistribute ODA capital, and allow the private sector to tap ODA as well as other overseas sources to use them in government priority projects. This decree will be promulgated by the end of this year at the latest and the private sector’s access to ODA will be facilitated.

It’s not quite right to say that ODA loans for private companies are unprecedented. Late in March, Hoa Phat Energy Joint Stock Company in Kinh Mon, Hai Duong Province, was given VND319 billion from Japanese ODA through the appraisal of the Japan International Cooperation Agency (JICA) and disbursement from the Vietnam Development Bank.

Hoa Phat’s project relates to clean technology and energy recycling. At a 9.6% interest rate spanning a 15-year duration, the loan is idealistic to many private concerns. The problem is now how to make the case no longer exceptional.

In the commercial sector, equality in business is still a goal to achieve. Five years ago, the Ministry of Trade—now the Ministry of Industry and Trade—issued Decree 12/2006 giving detailed implementation of international trading and foreign agentry of the Commerce Law.

This document has paved the way for private companies to be on the same footing with other economic sectors in import-export activities, except for the list of forbidden goods and two special items subject to State monopoly being fuel and cigarettes. As such, no restrictions to the private sector’s participation in this field are in force.

Reality tells a different story, though. Take the rice market, for example. A recent research ordered by the Central Institute for Economic Management (CIEM) in January shows that this market had been distorted by policies.

Hundreds of private rice businesses have to be endorsed by the Vietnam Food Association to be eligible for exporting rice in State-sponsored programs. The head of the association is also the boss of the Southern Food Corporation—one of the two dominating State enterprises under whose umbrella are numerous affiliates prevailing on the market.

The Development and Policies Research Center, which conducted the CIEM-ordered research, remarks, “Non-State enterprises are ready to commit financial sources and relationships to earn the right to export rice as long as this kind of monopoly exists.”

A business’ advantages achieved at the expense of another’s

Speaking on economic restructuring, CIEM Vice Director Nguyen Dinh Cung reminded of the inequality suffered by the private sector. He maintained that in the last three years, businesses in general, particularly private companies, have had to defend themselves against high inflation and macroeconomic instability as well as its adverse impacts.

Their oft-seen responses have been scaling down production, halting medium- and long-term expansion, and holding out to sustain jobs as their profits dwindle. To curb inflation and raise the efficiency of public investment, Cung insisted that SOEs’ investment crunch be stringently enforced.

“The financial leverage of SOEs must have been very high and be on the rise. Failing to put it under control will wreck havoc on the entire economy.”

One of the conditions for improvement involves a healthy competition environment sparing no situation in which advantages of a business is achieved at the expense of another’s. For instance, the development strategy of a specific industry should not become implicitly the strategic development of SOEs working in the industry.

What follows may be that in legal terms, private entities nominally have the right to do business; but in fact, their room for development has been restricted.

“Such a reality is the result of many factors. Of these, the most detrimental are the distortion, obsolescence and absurdity of the investment promotion mechanism, and the mindset discriminating against economic sectors in economic management,” said Cung.

Source: SGT

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