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Moving on shifting sands
While observing Prime Minister Nguyen Tan Dung’s recent official visit to the United States, where he met former Federal Reserve Board chairman Alan Greenspan, Professor Nguyen Mai* believes much needs to be drawn and considered from Greenspan’s advice to the Vietnamese premier.
During talks with Prime Minister Nguyen Tan Dung, veteran economist Federal Reserve Board chairman Alan Greenspan, the man considered to have the midas touch, noted the quality of the measures being applied by the Vietnamese government to control inflation.
The policies have shown dividends underscored by macro-economic improvements in June, including narrowed trade deficit, better monetary management, more flexible foreign exchange rates and a consumer price index slowdown.
Notably, the former Fed chairman said there should be measures put in place to control large state-owned economic groups’ massive investment outside their core businesses, which dampened the creativity and dynamics of medium- and small-sized enterprises and the whole economy.
The advice appears to be an authentication of the measures being undertaken by the Vietnamese government to fight inflation, which include limiting public and state-owned enterprises’ (SOEs) investment.
Efficiency prioritised
Since Dung issued a directive recently forbidding SOEs from putting over 30 per cent of their investment in activities outside their core businesses, some government officials and economic groups’ executives have tried to prove that such non-core investments are low, just 4.7 per cent at the shipbuilding giant Vinashin for example.
The 30 per cent cap on large economic groups’ non-core investments is necessary given each individual group’s capital is still not abundant and their technological advance and human resources remain inadequate for
development, although they are expected to play the steering role in their respective industries. The recent wave of investing extensively in real estate, securities, banking and insurance dispersed their already limited resources and created potential risks for the economy. Lessons from other countries have proven that the consequences of such expansions are unpredictable.
Still, the more important issue that economic groups’ leaders must consider is the efficiency of the investments. In 2007, Vietnam’s total social investment reached nearly 43 per cent of gross domestic product (GDP), but the incremental capital-output ratio (ICOR) [used to measure the output generating capacity of incremental capital] was almost 4.6 compared with China’s 3.7. This explains while Vietnam’s investment to GDP ratio was about the same level to China, the former’s economic growth rate was about 2 per cent lower than the latter.
Although private and foreign investments accounted for 53 to 54 per cent of Vietnam’s total social investment and their efficiency needs to be scrutinised, it is not a matter of the government's concern because project developers are the ones taking responsibility for their own profitability. Meanwhile, what concerns the government about capital use efficiency are state-owned enterprises and state-financed projects which are responsible for 43-44 per cent of the total national investment.
Theoretically and practically, capital losses associated with waste and corruption are inevitable unless transparent bidding, appraisal and monitoring procedures are put in place. However, no state-owned economic group has yet issued an annual report showing its growth rate and cost and profit analyses audited by an independent auditing company.
The only source of information for reference, which normally illustrates a cloudy picture of state-owned enterprises’ performance in a certain number of industries, has been the annual surveys conducted by General Statistics Office. Most recently, the state auditor announced a plan to audit the Electricity Vietnam (EVN), with about 100 auditors involved. It should be an encouraging news concerning people’ right to be informed about SOEs’ performance, which closely relates to the people’s daily lives.
Yet, we believe Vietnam will have to increasingly apply international practices as it is integrating deeper into the world economy. That means SOEs must annually undergo independent auditing and publicise the information to shareholders and customers.
Investment size is only one factor reflecting an enterprise’s strength and growth rate. Its efficiency is even more important, reflected by comparing the costs and profits with project identification, technology application, location, input materials, products and consumption markets being crucial factors to be taken into account.
In normal conditions, where inflation does not add much to lending interest rates, the post-tax profit to capital ratio should be 14-15 per cent so investment could be considered as efficient. Nevertheless, most economic groups’ executives, in answering the press, have only noted the investment sizes and the projects’ significance, while neglecting the key indicators showing the investment efficiency which correlate with financing arrangement, loan interest rates, break-even points and profit ratios.
Digging into typical cases
Electricity distribution monopoly is one of the first cases to consider. Power cuts, alongside inflation, have turned into a hot topic in people’s everyday conversations. Every five year, the government endorses a National Electricity Development master plan, with the latest approved for 2006-2015 with a vision to 2025. However, how serious those master plans are executed and who is responsible before consumers for power shortage remain unanswered questions.
If the power distribution monopoly continues, power shortages will certainly continue, as EVN, the sole electricity distributor, can plead dozens of reasons such as capital shortages, unreasonable pricing, difficult borrowing from banks and site clearance delays.
Electricity should not be viewed and treated as a normal commodity, but rather an infrastructure for the economy. Experiences from opening the telecommunications market have shown that once competition is promoted, telecom charges are continuously reduced to average regional levels compared to the much higher prices Vietnamese users had to pay a few years ago under the Vietnam Post and Telecommunication Group’s monopoly. Market competition has also set forth more diversified services and products for customers’ choices. So why is this approach not applicable to the power distribution sector?
Once EVN’s power distribution monopoly is removed, it remains difficult to reach the target of an annual power generation growth of 15-20 per cent as specified in prime ministerial Decision 110/2007/QD-TTg. Opening the power distribution market is aimed at attracting investment, particularly the foreign capital inflows given the Vietnamese market potential is large in the medium and long term view for power plant investors. In this regard, EVN should no more function as an extraordinary business. Instead, it should play on the same ground with other firms operating in the power industry.
[Given its monopolistic status] EVN continually requests for the government approval to increase electricity prices based on arguments that it needs capital to invest in new power projects. Assuming such arguments are also raised by other industries, who knows how high the consumer price index can go up?
Vietnam now depends on hydro, thermo- and gas-petrol electricity power generation sources. Disappointingly we cannot access the information about production costs of individual generation types. Therefore, we have to infer the cost effectiveness of power production from existing power plants’ situations.
Many large hydropower plants throughout the country have been operating for 10 to 20 years, meaning their asset depreciation rates have reduced to zero. The plants now only have to incur repair costs and enjoy the native low costs of hydropower production. Several thermopower plants are also in the same conditions. So we can assume that at least 30 per cent of Vietnam’s power output is subject to pretty low production costs. As a result, the overall average production cost for the three generation types is likely not high. And with the current electricity prices, EVN still enjoys attractive profits.
[In response to EVN’s requests for electricity price hike,] the government should base on the group’s production costs and profit ratio, as well as consider the possible production cost reduction to make any decisions, because any price increases will negatively affect the whole country’s production activities and consumption.
Ironically, while EVN sees power cuts as inevitable, the local media reported that in the middle of May, the group had bought just a limited amount from PetroVietnam’s Ca Mau 1 power plant based on arguments that the plant sold electricity at a high price and EVN would have to suffer higher losses if it purchased more from the generator. As the consequence, Ca Mau 1 is only running at 70 per cent of its designed generation capacity of 720 megawatts per hour (MW/h). This situation might have not happened if some other power distributors had joined the market.
The shipbuilding giant Vinashin is another example. The good news is Vinashin is able to build large vessels of over 10,000 dead weight tonnages (DWTs) capacity and manufacture sophisticated engines to gain more value from each ship built. Vinashin is also on the right track when it decided to stop and delay 49 projects totally capitalised at VND6,500 billion ($393 million), and withdrew from a steel joint venture with South Korea’s Posco in Van Phong Bay, Khanh Hoa province.
However, Vinashin’s plan to invest heavily in a fleet of ships to transport passengers and goods on the north-south route came as a surprise considering the group’s target to become the world’s fourth largest shipbuilder.
In recent years, Vinashin has received many incentives, including the government-guaranteed international bond issuance.
According to an overseas Vietnamese analyst, this big debt will likely turn into a burden if the funds raised from the issuance are not used efficiently. Another foreign analyst has also rung the alarm bell over a Vinashin’s project, which needs an investment of 1.5 times higher than a similar one in India. These observations are worthy for Vinashin’s executives to consider in view of targeting high efficiency rather than trying to become a world’s leading shipbuilder at any cost.
One might wonder why Vinashin received many large orders worth billions of dollars in recent years, and whether its profits are relevant to its capital and the labour of thousands of workers. Our information shows that the added value rate gained from each delivered ship is less than 20 per cent [Vinashin’s website states 30 per cent] and the profit to capital ratio is pretty low. Definitely the group needs time to build its position. Yet, investment efficiency is always the core of any business. If a business is not based on results to build its strategy, but rather on random ideas, it will come up with difficulties.
Vietnam Coal and Mineral Industries Group (Vinacomin) is the third typical case of concern, as this powerful entity holds the monopolistic position in coal exploitation, export and domestic trading. Managing the whole Quang Ninh coal mining area, Vinacomin has the right to propose the sale price to the Ministry of Finance’s Pricing Management Department, which is then submitted to the prime minister for approval.
In 2000, Vinacomin developed the Coal Industry General Mapping and Development Strategy to 2020 and forecast to 2030. The thoroughly prepared blueprint has set out a clear development orientation for the coal industry, stating that “there needs to sustainably develop domestic energy sources on the basis of harmonising the sources and viewing the development of these sources as the development of the national economy’s infrastructure”.
Based on the calculated coal demand for electricity and cement productions and other industries’ consumption needs, Vinacomin has suggested three growth scenes - high, basic and low - respectively forecasting the coal supply-demand balance for 2010 at 23.4, 21.89 and 20.1 million tonnes. The group also anticipated that 3-3.2 million tonnes of coal would be exported annually during the 2000-2009 period, which would then reduce to 2.5 million tonnes per year during 2010-2014 and two million tonnes yearly in the five years to 2019.
Notably, the group has increasingly moved towards electricity production to “shift Vinacomin’s business focus from export to balancing the country’s fuel-energy sources”. Consequently, in the 2000-2007 period, Vinacomin has invested in seven thermopower projects with An Hoa Power plant having the lowest capacity of 25MW. The three Cam Pha, Hon Gai and Tien Dung plants are designed at capacities of between 300-600MW. The three others, An Duong, Cao Nhan and Son Dong, have the same capacity of 100MW.
The 2000-devised General Mapping and Development Strategy, though likely needs to be amended in the objectives and orientation due to reality changes in the last eight years, has set a proper guideline for coal exploitation and Vinacomin’s involvement in electricity production, as well as export limit. This guideline should be seriously followed.
But in fact, Vinacomin exploited 30-40 million tonnes of coal annually during 2005-2007 with 15-22 million tonnes exported each year. These figures far exceed Vinacomin’s forecast. Moreover, while the coal export revenue is five times higher than projected, this is a big matter of concern considering the national energy security.
A few years ago, the government looked to limit coal exports. Yet, the group has appeared to care for its own interest much than the nation’s. Recent news also unveiled that Vinacomin has signed contracts to import 3.5 million tonnes of coal via Indonesia’s PT Berau company and Hong Kong’s Maintime company.
According to recent Vinacomin’s calculation, in 2012 the coal demand for electricity production alone will reach 32.5 million, resulting in Vietnam’s shortage of 7.9 million tonnes of coal that have to be offset by import. In 2015, the respective figures are anticipated at 44 million tonnes and 11.4 million tonnes. Northern Quang Ninh province’s authorities also surprised the public with the announced estimated figure of 10 million tonnes of coal illegally exploited and exported in 2007, about the same amount of the cargo passing Haiphong port in the same year.
Hopefully, this serious case can provide some lessons, so that the ‘black gold’ resources can be exploited more efficiently with new production approaches and anti-trust measures are put in place.
Professor Mai* was a member of Prime Minister Nguyen Tan Dung’s former research team and vice chairman of the former State Committee for Cooperation and Investment.
VNN
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