Amid rising pressure on State-owned enterprises to reform and critical problems that hinder the process, Ethiopis Tafara, Vice President and General Counsel of the International Finance Corporation (IFC), a member of the World Bank Group, talked with Vietnam News Agency's English-language daily Vietnam News about this issue.
Q: Over the last two years, only 16 enterprises were equitised, compared to 800 from 2004-05 and 636 from 1997-2002. What do you think about this pace?
A: I think this pace presents opportunities. Having heard the expression of political will from the Prime Minister to accelerate the State-owned sector reforms, we see certain opportunities for progress of the reforms. We understand that they target to restructure 400 companies. This requires a concrete equitisation plan and relevant regulatory reforms, and other factors for implementing the reforms. In short I see these prospects of the large number of companies available for equitisation as opportunities and looking for concrete equitisation plan as a road.
There is a need to improve the governance of many institutions and one of the best ways to do that is to equitise. In our experience, equitisation will bring in private shareholders who will help instil a certain discipline on corporate governance level, and I expect the desire now for the equitisation programme is to accelerate the improvements in corporate governance and risk management, which will allow the economy to grow sustainably. I expect that the design now for the State group equitisation programme or the State-owned enterprises equitisation is accelerate and improve the governance that seems necessary to improve the economic growth of the country.
Q: The Government's expression to pursue the SOE reform is clear, however, the revised Constitution 1992 reaffirms the basic path of the national development, pursuing the socialist-oriented market economy and recognising the significance State economy. What does this scenario tell you? Will SOE reform be difficult to achieve?
A: In my experience, major change is always difficult but we have heard the political will expressed by the Prime Minister to actually tackle problems of SOEs and reform the sector. I don't expect something that can happen overnight, particularly taking into account constraints at the present that you mentioned.
But I think the expression of the political will actually does it. It's pretty significant and in that way, we are intending to support as far as we can because it's a good direction to go ahead.
In terms of the transferring model that has been deployed in the restructuring process, we do agree that SOEs should focus only on their core business and go ahead with divesting from non-core business.
However, there is a need to tackle fundamental problems to make transferring process work effectively.
Q: Regarding the banking reform, it seems there is a massive debt refinancing operation when the Vietnam Asset Management Company (VAMC) has bought bad debt of banks by issuing low-yield bonds, and banks have restructured maturing debts. Do you think that the Government quietly allows to rolling over debt to avoid default or a sharp downturn in growth?
A: In the banking sector, we see there is a need to restructure and to recapitalise, and equitisation is a good opportunity to allow that recapitalisation and restructuring process. The establishment of the VAMC is clearly an important initiative to help address the problems of NPLs and clean the books and balance sheets. I think it's a good idea and a good tool; however, I think, more fundamentally, it's more important to tackle the root of the problems, which has more to do with corporate governance and risk management. That's part of the reason why we encourage the Government to pursue further equitisation, which will introduce more robust corporate governance and some good risk management practices which are really at the root of the NPL problem.
Q: It is said that roll-over debts practices did cause some big problems in some Western economies. So, what are recommended lessons for use before taking roll-over debt policy more seriously?
A: Certainly, my experience in Western countries with regard to bad debts is that it is very important to get it off the book as quickly as possible so the institution can start extending credit again. But equally important for the survival of the institutions is to improve corporate governance and risk management.
So you see even in the Western world, they actually got bad debts off their books, but at the same time they have been pursuing very strong reform in risk management and corporate governance.
Q: What are you specifically advising our Government and the Prime Minister?
A: We are advising the Government to pursue exactly that, to pursue improvements in risk management and corporate governance through equitisation. We do believe that extending the shareholder structure to allow more investors is one of the ways to improve governance and bring in more risk management measures. So that's one thing that we are advising the Government to do in the interests of addressing those two issues.
Equitisation needs to be accompanied and complemented by legal reforms. We have been having conversations with the Government on the necessary reforms that we think should complement equitisation. The Law on Bankruptcy, for example, should be a focus and we are helping the Government improve that framework. That will facilitate companies to announce bankruptcy and help banks to begin the process of recovering collateral.
Looking ahead, I think big changes are likely to come with the Trans-Pacific Partnership, EU free trade agreement and ASEAN+6. These represent huge opportunities for Vietnam and in many of these agreements, Vietnam could be one of the biggest beneficiaries. Those agreements will make Vietnam's economy more competitive as there will be more competition from overseas. More competition means monopolies will dismantle and all of Vietnam's companies stand to benefit. All of these will make SOEs become much more efficient than the way they currently operate. Improving efficiency is about improving accountability, improving transparency and improving corporate governance. So the free trade agreements are a driver of reform to make Vietnam SOEs and the whole economy more efficient and effective to reap the benefits of integration.
Q: Turn back to IFC's risk management practices, it sounds like the IFC is getting into trouble with risk mismanagement, including non-financial risks in investments in palm oil plantations in Honduras. What are you going to do to improve your non-financial risk management and keep World Bank's social and environmental safeguards?
A: These environmental and social standards that we have developed and that we administered together with our clients are considered to be the best. And our objects are to help our clients raise their standards with regards to environmental and social performance. And we have done this with clients around the world. We have done it successfully in many instances.
That is not to suggest that things never go wrong from environmental and social standpoint. There are a number of investments in which we identify the risks and put in place plans but nevertheless things go wrong. The idea there is to learn from those and take those lessons to apply them in next investments with the next clients.
So you'll find enough portfolios. There are some successful environmental and social performances in which plans are put in place. And there are some instant things that don't go according to the plans, where things have gone wrong at some level. And what we learn from those is to take them and apply them in our next investments.
In terms of particular case you refer to in Honduras, one of those didn't go according to plan. And actually, we are taking those lessons, review and consider them and apply them as better as we can and going forward.
Q: Would you cite a specific lesson that you've learnt from Honduras case?
A: Sure. We invested in a processing plan owned by a large agribusiness, and we invested at the time when there was relative peace in the country. At some point after we actually made our investment, there was trouble violations in the region. And the client that we had had a security force and apparently there was a land invasion. There were some fights between other clients and some local peasants, and there were deaths on both sides.
What we've learnt from that is if working with clients that have security forces, importantly it must be sure that these forces are trained appropriately with respect how they engage in some certain circumstances when violence breaks out. We expect that in next investments that involve clients with security forces, we spend a lot of time to talk about the training of those forces to be sure that the things happened in that particular investment would not replicate themselves elsewhere.
Q: Regarding what happened with your investment in Honduras, what are you going to do to have your clients in Vietnam comply with your performance standards? For example, the Nam Long Housing Project in Ho Chi Minh City?
A: All projects that we involve must comply with or achieve performance standards. We don't expect them to achieve that on the day one of the investment but we do expect to have a plan in place with all about plans how we are going to achieve and when we are going to achieve.
When we are working on a project, we are looking for sponsors that have ability and willingness to work with us to achieve performance standards.-VNA
Q: Over the last two years, only 16 enterprises were equitised, compared to 800 from 2004-05 and 636 from 1997-2002. What do you think about this pace?
A: I think this pace presents opportunities. Having heard the expression of political will from the Prime Minister to accelerate the State-owned sector reforms, we see certain opportunities for progress of the reforms. We understand that they target to restructure 400 companies. This requires a concrete equitisation plan and relevant regulatory reforms, and other factors for implementing the reforms. In short I see these prospects of the large number of companies available for equitisation as opportunities and looking for concrete equitisation plan as a road.
There is a need to improve the governance of many institutions and one of the best ways to do that is to equitise. In our experience, equitisation will bring in private shareholders who will help instil a certain discipline on corporate governance level, and I expect the desire now for the equitisation programme is to accelerate the improvements in corporate governance and risk management, which will allow the economy to grow sustainably. I expect that the design now for the State group equitisation programme or the State-owned enterprises equitisation is accelerate and improve the governance that seems necessary to improve the economic growth of the country.
Q: The Government's expression to pursue the SOE reform is clear, however, the revised Constitution 1992 reaffirms the basic path of the national development, pursuing the socialist-oriented market economy and recognising the significance State economy. What does this scenario tell you? Will SOE reform be difficult to achieve?
A: In my experience, major change is always difficult but we have heard the political will expressed by the Prime Minister to actually tackle problems of SOEs and reform the sector. I don't expect something that can happen overnight, particularly taking into account constraints at the present that you mentioned.
But I think the expression of the political will actually does it. It's pretty significant and in that way, we are intending to support as far as we can because it's a good direction to go ahead.
In terms of the transferring model that has been deployed in the restructuring process, we do agree that SOEs should focus only on their core business and go ahead with divesting from non-core business.
However, there is a need to tackle fundamental problems to make transferring process work effectively.
Q: Regarding the banking reform, it seems there is a massive debt refinancing operation when the Vietnam Asset Management Company (VAMC) has bought bad debt of banks by issuing low-yield bonds, and banks have restructured maturing debts. Do you think that the Government quietly allows to rolling over debt to avoid default or a sharp downturn in growth?
A: In the banking sector, we see there is a need to restructure and to recapitalise, and equitisation is a good opportunity to allow that recapitalisation and restructuring process. The establishment of the VAMC is clearly an important initiative to help address the problems of NPLs and clean the books and balance sheets. I think it's a good idea and a good tool; however, I think, more fundamentally, it's more important to tackle the root of the problems, which has more to do with corporate governance and risk management. That's part of the reason why we encourage the Government to pursue further equitisation, which will introduce more robust corporate governance and some good risk management practices which are really at the root of the NPL problem.
Q: It is said that roll-over debts practices did cause some big problems in some Western economies. So, what are recommended lessons for use before taking roll-over debt policy more seriously?
A: Certainly, my experience in Western countries with regard to bad debts is that it is very important to get it off the book as quickly as possible so the institution can start extending credit again. But equally important for the survival of the institutions is to improve corporate governance and risk management.
So you see even in the Western world, they actually got bad debts off their books, but at the same time they have been pursuing very strong reform in risk management and corporate governance.
Q: What are you specifically advising our Government and the Prime Minister?
A: We are advising the Government to pursue exactly that, to pursue improvements in risk management and corporate governance through equitisation. We do believe that extending the shareholder structure to allow more investors is one of the ways to improve governance and bring in more risk management measures. So that's one thing that we are advising the Government to do in the interests of addressing those two issues.
Equitisation needs to be accompanied and complemented by legal reforms. We have been having conversations with the Government on the necessary reforms that we think should complement equitisation. The Law on Bankruptcy, for example, should be a focus and we are helping the Government improve that framework. That will facilitate companies to announce bankruptcy and help banks to begin the process of recovering collateral.
Looking ahead, I think big changes are likely to come with the Trans-Pacific Partnership, EU free trade agreement and ASEAN+6. These represent huge opportunities for Vietnam and in many of these agreements, Vietnam could be one of the biggest beneficiaries. Those agreements will make Vietnam's economy more competitive as there will be more competition from overseas. More competition means monopolies will dismantle and all of Vietnam's companies stand to benefit. All of these will make SOEs become much more efficient than the way they currently operate. Improving efficiency is about improving accountability, improving transparency and improving corporate governance. So the free trade agreements are a driver of reform to make Vietnam SOEs and the whole economy more efficient and effective to reap the benefits of integration.
Q: Turn back to IFC's risk management practices, it sounds like the IFC is getting into trouble with risk mismanagement, including non-financial risks in investments in palm oil plantations in Honduras. What are you going to do to improve your non-financial risk management and keep World Bank's social and environmental safeguards?
A: These environmental and social standards that we have developed and that we administered together with our clients are considered to be the best. And our objects are to help our clients raise their standards with regards to environmental and social performance. And we have done this with clients around the world. We have done it successfully in many instances.
That is not to suggest that things never go wrong from environmental and social standpoint. There are a number of investments in which we identify the risks and put in place plans but nevertheless things go wrong. The idea there is to learn from those and take those lessons to apply them in next investments with the next clients.
So you'll find enough portfolios. There are some successful environmental and social performances in which plans are put in place. And there are some instant things that don't go according to the plans, where things have gone wrong at some level. And what we learn from those is to take them and apply them in our next investments.
In terms of particular case you refer to in Honduras, one of those didn't go according to plan. And actually, we are taking those lessons, review and consider them and apply them as better as we can and going forward.
Q: Would you cite a specific lesson that you've learnt from Honduras case?
A: Sure. We invested in a processing plan owned by a large agribusiness, and we invested at the time when there was relative peace in the country. At some point after we actually made our investment, there was trouble violations in the region. And the client that we had had a security force and apparently there was a land invasion. There were some fights between other clients and some local peasants, and there were deaths on both sides.
What we've learnt from that is if working with clients that have security forces, importantly it must be sure that these forces are trained appropriately with respect how they engage in some certain circumstances when violence breaks out. We expect that in next investments that involve clients with security forces, we spend a lot of time to talk about the training of those forces to be sure that the things happened in that particular investment would not replicate themselves elsewhere.
Q: Regarding what happened with your investment in Honduras, what are you going to do to have your clients in Vietnam comply with your performance standards? For example, the Nam Long Housing Project in Ho Chi Minh City?
A: All projects that we involve must comply with or achieve performance standards. We don't expect them to achieve that on the day one of the investment but we do expect to have a plan in place with all about plans how we are going to achieve and when we are going to achieve.
When we are working on a project, we are looking for sponsors that have ability and willingness to work with us to achieve performance standards.-VNA
