SEG is an economic model that has been implemented in the state-owned sector since 2005. Under this model, companies that have relations in terms of capital or cooperation grouped up to create mega-companies that rule the entire industry in which the mega-companies operate in.

SEGs play the role of leaders in Vietnam’s key industries, including rubber, shipbuilding, coal-mineral mining, oil and gas, electricity, textile and garment, insurance, chemistry, construction and housing and urban development.

According to the Ministry of Planning and Investment’s report, 12 SEGs have been established in Vietnam, of which 11 were established under the Prime Minister’s decision and one was approved by the Prime Minister.

Eleven out of 12 SEGs are occupied up to 30 percent of the total assets, 51 percent of the total capital and nearly 40 percent of the labor force of the state-owned sector. These SEGs also hold up to 10 percent of the total assets, over 14 percent of the total capital and 7.6 percent of workers with long-term labor contracts of the whole number of enterprises in Vietnam, according to the report.

The report also reveals that the total capital that the 11 SEGs have invested in the fields that are not their fortes is more than VND19.5 trillion ($975 million), mainly in securities, real estate, insurance and banking, which has caused state capital losses and disordered business environment.

SEGs have remarkably contributed to the state-owned sector’s huge debt, which is said 12 folds more than that of the non-state sector.

In 2009, the debt of 81 out of 91 state-owned groups and corporations (not including the Vietnam Shipbuilding Industry Group or Vinashin) was estimated at VND813.4 trillion ($45.1 billion). If Vinashin’s debt of VND86 trillion ($4.7 billion) is added, the state-owned sector’s debt by 2009 accounted up to 54.2 percent of Vietnam’s gross domestic product (GDP) in 2009.

Even state-owned groups that are granted with a lot of preferences like the Electricity of Vietnam (EVN) Group and the Vietnam Petroleum Import-Export Corporation (Petrolimex) also burden huge debts.

Despite the huge debt, the scale of SEGs keeps increasing, thanks to banking capital, according to the Ministry of Planning and Investment’s report. Some SEGs that are said to do business at profit earn little profit, which is not worthy to preferences and assistance that they have received from the government. Notably, SEGs’ profit tends to reducing gradually.

For SEGs that earns high profit, their return on sales (ROS) is only 12-13 percent, for instance the cases of the Vietnam Oil and Gas Group (PetroVietnam) and the telecom group Viettel. At these rates, their profit rate is lower than interest rates offered by banks.

So what are the problems of SEGs? 

The biggest problem, according to the Ministry of Planning and Investment, is the shortage of a complete legal framework for the operation of SEGs. The reason for this situation is the unclear separation of the function of SEGs, particularly the ownership and state management. In addition, there is no agency that is in charge of supervising and taking responsibility for the operation effect of SEGs.

To solve this matter, the Ministry of Planning and Investment has suggested that SEGs must be listed on the stock market in order to improve their transparency and governance. The Ministry also proposed that the National Assembly to supervise the state’s ownership at SEGs.

The second problem is SEGs’ rampant investment in the fields that are not their fortes, which has resulted in huge debt.

At the meeting in December 2011, Prime Minister Nguyen Tan Dung asked SEGs to withdraw their capital from the business fields that are not their fortes and to build their own financial regulations to avoid similar cases like Vinashin.

The Prime Minister instructed relevant ministries to finalize the restructuring of SEGs in the first quarter of 2012 in two categories: the SEGs that the state needs to hold 100 percent of capital and the SEGs that the state does not need to hold 100 percent of capital. For the later kind, equitisation must be speeded up.

Officials of SEGs think differently, as businessmen. They said that SEGs need a more flexible organization and structure to not miss business opportunities. Opportunities are understood as doing business in the fields that are not SEGs’ fortes when SEGs have fully explored the potential of their main fields.

However, the above explanation cannot convene management bodies because 11 SEGs’ total investment in the fields that are not their fortes has reached more than VND19.5 billion (nearly $1 billion), including VND6.708 billion of PetroVietnam, VND3.848 billion of the Vietnam Rubber Industry Group and VND2.017 billion of EVN. When the country needs a lot of capital for major projects in key industries, investing huge amount of capital in other industries is unacceptable.

The way-out for SEGs is unclear because of the concept of interest. At the meeting in December 2011, Prime Minister Dung said that it is necessary to look deeper into the SEG model.

Controversy over the SEG model in recent years shows that the state confuses between two options. 

The first is SEGs are set up under the former USSR’s economic management model, in which the state controls key areas of the national economy in order to hold the country’s resources. The existence of SEGs helps the state to ensure a socialist oriented market economy.

The second is Vietnam to establish economic groups following the economic developing model in successful economies in Asia, for example Japan, South Korea or Singapore. Under this model, the state is the representative for the country’s long-run interest, which plays the role to orient and promote the industrialization process.

Both economic developing models show the state’s orienting role and intervention into the national economy but their natures are completely different.

The model used by the former USSR aims to the political goal, which is combined with preserving the institution. The state’s power is mainly based on holding industries and the close relations among individuals in the cabinet and state-owned enterprises. In this model, the state’s investment policy is ruled by some interest groups.

In successful Asian countries, the economy is under the supervision of powerful state bodies, in which the state’s policies are not controlled much by personal relations or corruption but based on state bodies’ management capability.

The state’s intervention plays the role of orienting the change of economic structure towards modernization and increasing the technological content in domestic products. Specifically, in the government’s economic policies, investment is usually given priority to the fields that can help transfer economic structure towards industrialization, raising labor productivity and competitiveness of enterprises and the entire economy.

Another basic difference between the two models is in the model of the former USSR, the state cannot and is not willing to punish SEGs and state-owned enterprises in particular when they do business at loss. Meanwhile, the model applied by developed Asian countries forces enterprises to do business at profit, otherwise they must accept bankrupt. Competition is the most important driving force for renewing technology, increasing labor productivity and resource performance.

Researching the difference of these economic models in various aspects will help find out a model of SEGs that is appropriate to Vietnam’s social and economic conditions.